Teck Sells 33% Of Waneta Dam For $825M

VANCOUVER — In its latest debt-reduction move, Teck (TCK. B-T, TCK-N) is selling a 33% stake in its Waneta hydroelectric dam in southeastern British Columbia to BC Hydro for $825 million.

Teck and BC Hydro have signed a non-binding memorandum of understanding setting the terms of the deal. Teck says available tax pools will shelter the proceeds from cash taxes, which means they should generate a pretax gain of $625 million. For BC Hydro, a 33% stake in Waneta provides enough electricity to power roughly 100,000 homes.

The Waneta Dam powers Teck’s zinc-lead smelter in Trail. Since the smelter only requires two-thirds of the electricity generated at Waneta, Teck has for years sold the excess electricity, primarily to American customers. According to National Energy Board records, in 2008, Teck grossed $7.9 million from power exports to the U. S. And at certain times, electricity sales have proven extremely profitable for Teck — during the 1999-2000 California electricity crisis, Teck shut down its Trail smelter because it could make more selling power into the California market.

The sale was widely expected as Teck is selling all non-core assets to wrestle down the US$9.8-billion debt it took on to buy Fording Canadian Coal Trust. The price is somewhat higher than most analysts predicted. But with the extra cash, Teck now expects to be able to completely retire the US$5.8-billion bridge loan due in late 2011.

The rest of the bridge loan repayment money came from a US$4.22- billion bond offering that the company closed in early May. Teck’s interest costs will total more than 11% on the bonds, which it sold in three tranches of five, seven, and 10- year notes.

So provided the Waneta deal closes, Teck will have eliminated its bridge loan but it still will not be in the clear. The rest of the money to buy Fording came from a US$4-billion term loan that is still outstanding. Repayments are spread out over the next few years.

Teck hopes to glean most of the cash to cover the term loan by selling a 20% stake in its Elk Valley metallurgical coal deposits. The company is reportedly considering three options for the sale: finding a strategic partner that is also a key customer, taking on a partner that has coal assets in Australia, or securing a long-term financing deal with a large financial institution.

Teck’s CEO, Don Lindsay, has said the company is looking for between $3 billion and $5 billion for the 20% interest in Elk Valley. Most analysts, though, think Lindsay is aiming somewhat high. Tony Robson of BMO Capital Markets, for example, says to validate that cost requires a long-term coal price near US$190 per tonne. Metallurgical coal currently sells for US$125 per tonne, though it rocketed up to US$300 per tonne in 2008.

On the day the Waneta deal was announced, Teck’s share price fell 95¢ to $17.32; the next day it gained $1.12 to close at $18.44. The company’s share price plummeted to just $3.35 in early March amid serious concerns over Teck’s ability to meet loan repayment obligations but has climbed fairly steadily since. Teck has 480 million shares outstanding.