Patriot Coal approved for procedure to sign new coal supply contracts

The bankruptcy court for Patriot Coal on July 16 approved on an interim basis the company’s request for a procedure where parties to the bankruptcy case will be able to review and possibly object to new coal contracts the company enters into following its July 9 Chapter 11 petition.

The U.S. Bankruptcy Court for the Southern District of New York said that any objection to this approval must be filed at least two days prior to an Aug. 2 hearing on this contract review plan.

Because year-long and multi-year coal sale contracts often cover the delivery of hundreds of thousands of tons of coal and hundreds of millions of dollars in total purchase price, counterparties may be unwilling to transact with Patriot and its affiliates in bankruptcy without specific authorization from the court, Patriot told the court in its July 9 motion. If the debtors had to seek court approval every time they wished to enter into a contract, they believe that they would be at a competitive disadvantage to their “more-nimble competitors,” resulting in a loss of customers and revenues, thus endangering their chances of successfully reorganizing, Patriot noted.

In the relatively high-priced metallurgical coal market, which accounts for about one quarter of Patriot’s sales volume and a substantial portion of its profits, deals are primarily priced annually. In the domestic met coal market, such prices reset on Jan. 1 of each year and met coal purchasers typically begin the process of contracting for their coal supplies early in the third quarter of the year. “The Debtors’ preparations for the start of this Met Coal sales process are already underway,” Patriot added. “The Debtors’ ability to successfully enter into these Met Coal contracts depends in large part on the counterparties’ confidence in the Debtors’ authority to enter into and perform under the applicable Coal Sale Contracts and will affect the Debtors’ operations, revenues, profitability and workforce during all of 2013.”

The Patriot companies got the court to approve on an interim basis a tiered procedure for coal contracts. The contract amount mentioned is the gross revenue expected over the contract term.

Tier 1 Coal Sale Contracts: These are contracts where the amount is less than or equal to $125m. In these cases, the Patriot companies may enter into and perform under such contracts without review and approval.

Tier 2 Coal Sale Contracts: These are contracts where the amount is between $125m and $200m. In this case, the debtors send via email a confidential notice about the terms of the contract to the Office of the U.S. Trustee, the attorneys for any official committee of unsecured creditors appointed in these cases and the administrative agents for the debtors’ proposed postpetition lenders via their attorneys. The deadline for submitting an objection to the proposed contract would be 72 hours from that point. If no objections are timely received by the deadline, the debtors may immediately enter into and perform under the contracts. Any objections that can’t be settled will need a court decision.

Tier 3 Coal Sale Contracts: This tier, for contracts worth over $200m, would have Patriot filing a confidential notice on the same parties as in Tier 2, and also with the court itself. Again, there is a 72-hour objection period. If there are no objections, Patriot can immediately sign the contract. Objections would be resolved by the court.

St. Louis-based Patriot, with mines in western Kentucky and West Virginia, sold 31.1 million tons of coal in 2011, of which 76% was sold to domestic and global electricity generators and industrial customers, and 24% was sold to domestic and global steel and coke producers. Export sales were 29% of total volume in 2011.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.