IPO Report: Foresight Energy Partners LP (FELP)

Foresight Energy Partners LP ($FELP) is a holding company with no independent operations or assets. Distributions to unitholders are dependent on cash flow generated by subsidiaries. It is headquartered in St. Louis, MO.

Eleven other companies are scheduled for the week of June 16, 2014.  The complete IPO calendar is available at IPOpremium.

The manager and joint managers are Barclays, Citigroup, Morgan Stanley, J.P. Morgan, Goldman Sachs, Deutsche Bank Securities.  The co-managers are Stifel, Credit Agricole CIB, PNC Capital Markets, Huntington Investment Company.

FELP scheduled a $350 million IPO with a market capitalization of $2.6 billion at a price range midpoint of $20 for Wednesday, June 18, 2014 on the NYSE.  SEC Filings

Foresight Energy Partners LP IPO Report

Overview

FELP is a holding company with no independent operations or assets. Distributions to unitholders are dependent on cash flow generated by subsidiaries

FELP believes it is the lowest cost and highest margin bituminous thermal coal producer in the United States.

The initial expected payout rate at the price range mid-point of $20 is 6.8%. based on four longwall mines. 

FELP has sufficient assigned reserves to support up to nine longwalls, with a portion of the existing surface infrastructure, slopes and shafts available to be shared among its existing, and most of its future, longwalls.

Valuation

Glossary

Conclusion

The rating on FELP is positive.

Holding company

FELP is a holding company with no independent operations or assets. Distributions to unitholders are dependent on cash flow generated by subsidiaries

Business

FELP believes it is the lowest cost and highest margin bituminous thermal coal producer in the United States.

This statement is based on a comparison of FELP’s cash costs and margins against publicly available information for other bituminous thermal coal producers as of year-end 2013.

FELP operates exclusively in the Illinois Basin, which is the fastest growing coal producing region in the country due to its favorable geology, low costs and growing demand for its coal.

Since its inception, FELP has invested over $2.0 billion to construct a fleet of state-of-the-art, low-cost and high productivity longwall mining operations and related transportation infrastructure.

Customer concentration

For the year ended December 31, 2013, FELP derived approximately 10% of total coal revenues from one customer and 8% from another customer.

Risks incude:

An overall risk is the impact of existing and future environmental and climate change regulations, including those impacting coal-fired power plants;

A number of agreements provide that customers may terminate the agreement in the event a new or amended environmental law or regulation prevents or restricts the customer from utilizing coal supplied by us and/or requires material additional capital or operating expenditures to utilize such coal.

3 billion tons of coal Illinois

FELP controls over 3 billion tons of coal in the state of Illinois, which, in addition to making it one of the largest reserve holders in the United States, provides significant organic growth. FELP’s reserves are comprised principally of three large contiguous blocks of uniform, thick, high heat content (high Btu) thermal coal, which are ideal for high productivity longwall operations.

3 longwall mines, more expected

FELP currently operates three longwall mines and a continuous miner operation. FELP’s fourth longwall began start-up testing and operations in late May, 2014 and is expected to achieve normal run-rate within the next thirty days.

FELP has submitted permits and made preliminary capital expenditures for its fifth and sixth longwalls.

FELP has sufficient assigned reserves to support up to nine longwalls, with a portion of the existing surface infrastructure, slopes and shafts available to be shared among its existing, and most of its future, longwalls.

FELP produced, and expects to produce, 18.0 million tons and 24.1 million tons in 2013 and the twelve months ending June 30, 2015, respectively.

Financing for new longwall mines

FELP estimates that FELP or an affiliate of the sponsor will invest additional capital expenditures of between $240.0 million to $425.0 million in order to achieve full productive capacity at each incremental longwall mining system

Productive capacity & free cash flow

The full productive capacity of FELP’s existing mines, including the longwall that is scheduled to begin operations in 2014, is 32.7 million tons of high Btu coal per year; and the potential future productive capacity of FELP’s operations if all nine longwalls are constructed would be 67.2 million tons of high Btu coal per year.

Growth plan

FELP believes that, relative to estimated production for the twelve months ending June 30, 2015, its excess existing installed capacity, and potential future capacity, will provide it with the opportunity to significantly grow its production, free cash flow and cash available for distributions to its unitholders.

Dividend Policy

According to FELP’s cash distribution policy, within 60 days after the end of each quarter, beginning with the quarter ending June 30, 2014, FELP intends to distribute to the holders of common and subordinated units on a quarterly basis at least the minimum quarterly distribution of $0.3375 per unit, or $1.3500 on an annualized basis, to the extent FELP has sufficient cash after establishment of cash reserves and payment of fees and expenses, including payments to its general partner and its affiliates.

FELP will prorate the distribution for the period after the closing of the offering through June 30, 2014.

A distribution of $1.35 at the price range mid-point of $20 yields 6.8%.

Competition

In the Illinois Basin, FELP competes primarily with coal producers such as Peabody Energy Corporation, Alliance Resource Partners, L.P., Murray Energy Corporation, Patriot Coal Corporation, James River Coal and Oxford Resource Partners.

Outside of the Illinois Basin, FELP competes broadly with other United States based producers of thermal coal and internationally with numerous global coal producers.

5% stockholders

Foresight Reserves      72.5%

Use of proceeds

FELP expects to net $323 million from its IPO. Proceeds are allocated as follows:

to repay $210 million of its Term Facility due 2020 and to distribute the remaining net proceeds to Foresight Reserves and a member of management, pro rata, and will not retain any proceeds from this offering.