Westmoreland Coal will soon announce re-fi plans as part of Oxford deal

By Paul Deckelman

New York, Oct. 23 – Westmoreland Coal Co. is “pretty happy about” its liquidity position at the end of its 2014 third quarter, its chief executive officer said Thursday on the Englewood, Colo.-based coal producer and power generating company’s conference call following the release of its results.

And CEO Keith E. Alessi told analysts that Westmoreland plans to soon unveil its plans for refinancing its existing debt – a necessary condition to permit it to go forward with its recently announced planned acquisition of coal sector peer Oxford Resource Partners, LP, a transaction that is expected to close by the end of the year.

That planned combination of the two companies, via Westmoreland’s acquisition of Oxford’s general partner, Oxford Resources GP, LLC, was announced just last Thursday.

Details expected soon

Alessi said that right now, Columbus, Ohio-based master limited partnership Oxford is in the process of preparing proxy materials for its unitholders for submission to the Securities and Exchange Commission, which will then have a 30-to-45-day timeframe to comment on the proxy. Assuming everything goes according to schedule, he said “that trajectory takes Oxford into an early December timeframe where they would go to a vote of their unitholders to approve the transaction.”

He said that “during that same period of time, we will be announcing how we plan on refinancing the debt at Westmoreland. I would expect that to be occurring in the November timeframe.”

During the question-and-answer portion of the conference call that followed the formal presentations by Alessi and by Westmoreland’s chief financial officer, Kevin A. Paprzycki, an analyst inquired whether the company might consider pushing any refinancing moves back past the beginning of the new year, noting that the end of the year is frequently a difficult time to get junk bond and other debt deals done.

The CEO said that in order to do the Oxford transaction, Westmoreland has to either amend its existing bond indentures and the credit agreement on its $60 million revolving credit facility, which would otherwise prohibit consummation of the contemplated transactions, or else it must refinance those obligations.

“So whether we pull the trigger on a full re-fi or just went for an amendment, that’s being discussed internally here and also being discussed with our financial experts,” Alessi said.

He said that “certainly, market conditions are going to factor into all of this. But we’ll be very clear on this once we have a finalized plan. There are several paths we’re looking at, and we’re fully vetting those. And I think sooner than later, we’ll be letting people know what that looks like.”

Alessi said that “we obviously have to get in front of the rating agencies, [but] first of all, of course, we have to come up with the structure” for such a refinancing, which he called “our priority right now, and we see that going hopefully smoothly as we move through the end of the month here into the November timeframe.”

After that, Westmoreland would then “get in front of the rating agencies ... the bondholders and lenders and explain what it is we’re doing and get that all done.”

Bonds dominate debt structure

At the end of the third quarter on Sept. 30, Westmoreland’s balance sheet showed total debt of $818.93 million, up from $339.84 million at the end of its previous fiscal year on Dec. 31, 2013. A major portion of the increased debt load is the $425 million of 10¾% senior secured notes due 2018 that the company sold at the beginning of the year to finance its acquisition of Sherritt International Corp.’s Canadian coal mining operations, a purchase that closed on April 28.

That bond deal – structured as an add-on to Westmoreland’s existing $250 million of those notes that it had sold in two tranches in 2011 and 2012 – priced at 106.875 on Jan. 29 to yield 6.975% after having been upsized from the originally planned $400 million.

According to the company’s most recent 10-Q filing with the SEC covering the period through the end of its second quarter on June 30, apart from that total $675 million face amount of those notes, which become callable this coming Feb. 1 at 103.583, the company’s capital structure also included $133 million of capital lease obligations and small amounts of miscellaneous other debt.

Alessi said that the company has been actively whittling down that capital lease debt, “specifically capital leases in Canada that we inherited” from its acquisition of Sherritt’s seven producing thermal coal mines in the provinces of Alberta and Saskatchewan, “to the tune of about $800,000 to $900,000 a week.”

The company’s liquidity position at the quarter’s end included borrowing capacity available under the undrawn $60 million revolver as well as $123.7 million of cash and cash equivalents, around double the $61.1 million of cash and equivalents Westmoreland had at the end of last year.

Alessi said that “we’re projecting that [cash] number to grow to probably $150 million by year-end.” Free cash flow for the year, he said, would be about $100 million after figuring in the ongoing capital lease debt retirement campaign.

CFO Paprzycki noted that the company’s cash generation for the quarter was largely driven by two sizable transactions. In July, Westmoreland sold about 1.47 million common shares via an underwritten public offering for $35.30 per share, or $51.7 million gross proceeds, and sold an additional nearly 220,000 shares to its underwriters, raising another $7.8 million. In August, the company said that its Coal Valley Resources, Inc. subsidiary had agreed to ship all of the output of its Coal Valley Mine in Alberta via Ridley Terminals in British Columbia beginning in January of next year, terminating its prior agreement to ship that coal via another British Columbia shipping facility, Westshore Terminals, and it turned around and sold its capacity rights at the fully utilized Westshore port to Cloud Peak Energy Inc. for $37 million.

He said that cash accumulation “leaves us pretty well-positioned should we go into a re-fi here in the near future.”

Oxford debt refinanced also

As part of the Oxford deal, that company – to be renamed Westmoreland Resource Partners, LP and be 77% owned by Westmoreland – will enter into a new credit agreement with some of its lenders to replace Oxford’s existing $175 million of credit facilities, which consist of a $75 million first-lien term loan, a $25 million revolver and a $75 million second-lien term loan.

The new credit agreement will provide for up to $295 million of senior secured first lien term loans – a $175 million four-year loan to be funded at the close, and the remaining $120 million available in the form of delayed-draw term loans, which can be used to fund acquisitions up to 12 months after closing. Additionally, there is an accordion feature that takes effect when the delayed-draw feature expires, which makes a further $150 million available for use to fund acquisitions during the remaining three loan years.

An analyst characterized that Oxford refinancing, announced at the time the overall acquisition was announced, as “a high-cost piece of debt,” wondering about the rationale for such a debt transaction.

Paprzycki asserted that “it’s something we needed to do to close the deal, because we couldn’t close the deal without refinancing.”

He said that going forward, “we’ll look at what’s out there in the market and evaluate – does it make sense to keep this instrument in place? Or does it make sense as we go forward and grow the MLP to go [back] to the market?”

Alessi defended the Oxford refinancing as “[not] much different than what we've done here. Keep in mind, the debt down at the MLP is not going to be parental-guaranteed debt – it’s not Westmoreland debt. It’s a separate standalone company, and based on the leverage we’ll come out of the blocks at,” it will be “appropriate for the capital structure that’s there today.”

He also noted that the agreement between Westmoreland and Oxford – which calls for Westmoreland to contribute certain royalty-bearing coal reserves it owns in Wyoming to Oxford in return for a controlling stake of Oxford common units – contains provisions for potential future further asset drop-downs from Westmoreland to its new MLP subsidiary. With the drop-downs, he continued, “the ability to refinance at more favorable rates, of course, will increase.”

While he said that the interest rates the refinanced Oxford debt will carry would be “appropriate for where it is on Day One, we have no expectation that it would continue to operate at that high level of interest over the long term.”

The Westmoreland executives declined to be specific about the kind of leverage targets they are looking to achieve for either the parent company or its new MLP unit.

Alessi told an analyst who asked about that, “I think that you could expect us to be pretty much in line with what most public MLPs are trading at, in terms of their leverage ratios.”

While he acknowledged that “we’ve always been very aggressive in our parent company on the use of leverage” – he said that typically, “we’ve levered up and delevered” – with the new MLP unit, “we’ll be prudent and in line with where other folks are.”

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