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The Dealmakers - Terence O'Hara

As Energy Spikes, Coal Company Considers IPO

By Terence O'Hara
Monday, November 22, 2004; Page E01

Foundation Coal Holdings Inc., a coal producer headquartered in an office park near Baltimore-Washington International Airport, has filed to go public. If the offering proceeds as envisioned by its owners, they could make roughly $600 million on a company they have only held since July.

The Linthicum Heightscompany is the fourth-largest coal producer in the country. Interest in coal producers has surged as energy companies, faced with rising natural gas prices and stepped-up demand for electricity, plan a number of new coal-fired power plants.

Piles of Profit Coal prices are rising, mainly because of growing consumption in China and increasing U.S. demand triggered by economic growth and new coal-fired power plants.
_____Column Archive_____
Carlyle Increases Its Interest in Debt Deals (The Washington Post, Nov 8, 2004)
The Buyout Business Has Changed, and So Has Frederic Malek (The Washington Post, Oct 25, 2004)
CapitalSource's Especially Warm Reception (The Washington Post, Oct 11, 2004)
Bass Family Still Fiddling With Fieldstone (The Washington Post, Sep 27, 2004)

The story of Foundation Coal started last year, when German coal and energy conglomerate RAG AG decided to get out of the United States and focus on its core European operations. It put its 13 mines in the United States, most of which were in Appalachia, up for sale.

First Reserve Corp. wanted the mines, to expand its coal operations. The Connecticut buyout shop is the largest private equity player in North American energy companies, with nearly $5 billion under management for its investors.

First Reserve already owns Alpha Natural Resources LLC of Abingdon, Va., which it created last year by combining various coal assets it bought from Pittston Coal Co., American Metals & Coal International (AMCI) and El Paso Corp.

First Reserve began negotiating to buy RAG's U.S. mines in February and closed the deal July 30. First Reserve and its partners in the deal, New York's Blackstone Group LP and Connecticut's AMCI, paid $975 million to RAG, the German energy company, according to filings with the Securities and Exchange Commission.

Together the three investors put up $200 million and borrowed the rest. First Reserve and Blackstone each own 42 percent of Foundation, the company they created to operate the mines. AMCI owns 15 percent. Foundation's senior managers own about 1 percent.

First Reserve and AMCI probably could have done the deal on their own, but they brought in Blackstone to avoid any antitrust concerns, according to an individual with one of the Foundation's owners who agreed to talk on condition of anonymity because of the pending initial public offering. Blackstone spokesman John Ford declined to comment.

Foundation is now the largest privately held coal mining company in the United States, and First Reserve's Alpha is the second-largest private coal mining company.

Between the time First Reserve began negotiating the deal last winter and closed on it five months later, coal prices, especially eastern U.S. coal prices, had surged. First Reserve generally spends four to five years developing a new company before selling its shares. But this time, First Reserve decided to take the company public almost immediately. Thus 20 days after they bought Foundation Coal, the new owners filed to take it public. There is no indication yet when the IPO might occur.

According to the SEC filing, Foundation plans to sell 23.6 million shares at between $17 and $19, although that price could change before the offering.

After fees and underwriter discounts are deducted, that plan would net the company about $396 million in proceeds. Of that, $350 million is set to pay a special dividend to First Reserve, Blackstone and AMCI. That means in return for their original $200 million investment, the three owners will get $350 million, without selling any of their stock. The shares the three investors would hold would be worth $323 million.

Coal is hot right now for many reasons, said Richard Bonskowski, a geologist at the federal Energy Information Agency.

One is that China began importing coal (it had long been an exporter) last year as its industrial economy surged. Another is that because of financial turmoil in the U.S. coal industry, a number of large producers had supply disruptions. And one of the biggest reasons is that domestic demand for coal has increased as the U.S. economy has improved and more coal-fired power plants come on line.

Bonskowski said just about all the factors that affect coal markets -- transportation costs and disruptions, labor and raw material availability and costs, shifts in global demand and supply -- have converged to push the price of Appalachian bituminous coal through the roof. It just so happens that is mostly what Foundation produces.

The risks for Foundation and producers like it, Bonskowski said, are mostly regulatory in nature. "The pitfalls would be, just as they have been, if the government put stricter regulations on coal use, and under the current administration that's very unlikely to happen," he said.

Foundation chief executive James F. Roberts is 54 and has been in the coal industry for nearly all of his career. RAG hired him to run its U.S. operations in 1999. Foundation had $994 million in revenue last year.

A Foundation Coal spokeswoman declined to comment for this column, citing restrictions on ad-hoc statements by a company while an IPO is pending.

InPhonic Investments Bear Fruit

InPhonic Inc.'s initial stock offering last week provided some welcome returns for several local venture capital firms.

Riggs Capital Management (the venture arm of the battered Riggs National Corp.), Core Capital Partners and Mid-Atlantic Venture Partners, Mount Washington Associates, Davidson Capital Group LLC, Draper Atlantic and Spring Capital Partners LP all were investors in InPhonic's many rounds of venture capital since 1999. And all sold stock in last week's offering. InPhonic raised more than $80 million in private equity since its founding to cover its losses while it expanded its marketing and distribution channels and bought other companies. InPhonic sells wireless phones and service plans, mostly over Web portals.

Mid-Atlantic sold the most stock in the offering of any of the local VC investors: about 114,000 shares, reaping more than $2 million. Mid-Atlantic still owns more than 860,000 shares.

InPhonic sold 7.5 million shares at $19 a share in the deal. One million of the shares were sold by insiders, mostly the company's venture backers.

Terence O'Hara's e-mail address is oharat@washpost.com.

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