Analysts said they were not surprised by Westmoreland Coal Co.'s plan to sell one Ohio mine and pay a holding company to take several others because the operations have high reclamation costs and shrinking profitability.
The coal producer, which sought Chapter 11 bankruptcy protection in October 2018, presented the bankruptcy court with a plan to sell its Buckingham mine to an as-yet-unformed holding company for $1 million and transfer another 15 mines in Ohio and Kentucky, which it calls the Oxford assets, to that entity along with a payment of between $16 million and $20 million. Westmoreland said all 16 mines are noncore assets.
Industry analysts told S&P Global Market Intelligence that the low price tag on the Buckingham mine is likely a reflection of both the mine's value and its reclamation costs. Westmoreland projects the mine's gross reclamation cost outflows through 2065 to total $6 million, according to a Form 8-K filed Dec. 19, 2018. All of the operation's coal is shipped to the Conesville power plant, whose contract with Westmoreland expired at the end of 2018 and was not renewed.
Moody's vice president and senior credit officer Benjamin Nelson said reclamation liabilities depress valuation.
"I think it's more difficult than it was a few years ago to take a mine that isn't doing all that well and has reclamation liabilities, which are uncertain, and sell it to somebody," Nelson said.
B. Riley FBR analyst Lucas Pipes said the $6 million reclamation cost is a "modest amount," but the new owner may have to deal with the liability sooner rather than later if it can no longer service a power plant. He also noted that the Ohio River Valley is "very competitive" and the buyer may have difficulty competing with Murray Energy Corp. and Alliance Resource Partners LP for deliveries to other generators. Pipes said the holding company may think it can reclaim the mines for a lower price than Westmoreland is estimating and make money from the deal.
Eight of the Oxford assets are in reclamation, while seven are active mines, according to the motion filed Dec. 21 in the U.S. Bankruptcy Court for the Southern District of Texas.
Steven Abramowitz, a partner at law firm Vinson & Elkins who specializes in restructuring and reorganization, said it would not be unusual for a buyer interested in assets with significant reclamation liabilities "to effectively require payment to assume that liability."
"Coal assets are very difficult because of the challenges to the industry," Abramowitz said.
A senior attorney with the Sierra Club said the environmental group was concerned that Westmoreland would not find a buyer for the Ohio mines, leaving the state to bear the reclamation costs if the producer dissolved.
While the Sierra Club is not certain whether the holding company can handle the responsibility, "at least Ohio gets a little breathing room because of this proposed sale," said Peter Morgan, who focuses on issues related to coal. The state's mine reclamation fund is facing long-term insolvency after Gov. John Kasich's administration took $5 million from the fund to help offset a tax revenue shortfall in 2017.
Westmoreland told the court it had attempted to market the Buckingham mine to 37 potential buyers, but the only proposal that offered both the assumption of significant reclamation liabilities and a cash payment to Westmoreland was from CCU Coal and Construction LLC. The holding company would be owned by Charles Ungurean, founder of Oxford Resource Partners LP, whose general partner Westmoreland acquired in 2015.
"I think it's just a testament to the decreased demand for coal from these mines," Morgan said.
Westmoreland has a "pretty diverse portfolio of assets" in Canada and different regions of the U.S., Pipes said, and its operations in Ohio were arguably some of the most challenged in the competitive market and by changes in the sector.
"I think it's difficult to take too much of a read-through from [this sale] process to the rest of the bankruptcy proceedings," Pipes said.