In response to lower coal demand, St. Louis-based Patriot Coal, which sought Chapter 11 bankruptcy protection on July 9, has cuts production volume by approximately 6 million tons annually, the company said in an Oct. 30 Form 10-Q quarterly report filed with the SEC.
These production decreases included:
- Patriot closed the Big Mountain mining complex and reducing production of metallurgical coal at the Rocklick and Wells mining complexes, all located in southern West Virginia, in the first quarter of 2012. Prior to the closure, the Big Mountain complex had two active mines and one preparation plant. The complex produced 1.8 million tons of thermal coal in 2011.
- In the first half of 2012, Patriot closed and idled certain mines at the Kanawha Eagle mining complex in southern West Virginia due to reaching the end of the reserve life as well as decreased market demand.
- It also idled the Freedom deep mine at the Bluegrass mining complex in western Kentucky and a mine at its Corridor G mining complex in southern West Virginia in the second quarter of 2012. The idled Freedom mine produced approximately 1.2 million tons of thermal coal in 2011.
- In the third quarter of 2012, Patriot reduced metallurgical coal production at the Rocklick, Wells and Kanawha Eagle mining complexes in response to further weakened demand.
Tough coal markets, big liabilities factor into Chapter 11 need
“In recent years, the demand for coal has decreased, in large part because alternative sources of energy have become increasingly attractive to electricity generators due to declining natural gas prices and more burdensome environmental and other governmental regulations for the use of coal,” said the Patriot Form 10-Q about some of the reasons it sought bankruptcy protection. “At the same time, our liabilities have been increasing as we face sharply rising costs to comply with such regulations, the costs associated with our labor-related legacy liabilities, and the increasing burden of selenium water treatment.”
Also, the demand for metallurgical coal is dependent on the global economy, and in particular on steel production in countries like China and India, as well as Europe, Brazil and the U.S. In response to the recent global economic downturn, the demand for steel declined and, as a result, the demand and price for met coal also fell, Patriot noted. Patriot is a major producer of met coal out of some of its southern West Virginia mines.
“This declining demand has had a material impact on our business,” the Form 10-Q noted. “Because we sell substantial quantities of coal products to domestic and international electricity generators and steel producers, our business and results of operations are linked closely to global demand for coal-fueled electricity and steel production. During the first half of this year, we were approached by certain customers seeking to cancel or delay shipments of coal contracted for delivery under their coal supply agreements. In addition, two of our customers, Bridgehouse Commodities Trading Limited (Bridgehouse) and Keystone Industries LLC (Keystone), defaulted on their contractual obligations to purchase coal from us. On April 3, 2012 and June 1, 2012, we filed actions for damages against Bridgehouse and Keystone, respectively, resulting from these breaches of contract. In light of the decreased demand for both thermal and metallurgical coal, it has become uneconomical to operate certain of our mining complexes, and we have taken steps to reduce coal production to match expected sales volumes.”
Beginning early in 2012, Patriot said it explored various options to refinance existing debt, and engaged The Blackstone Group on May 22 to further assist in these efforts. On May 23, Patriot’s credit rating was downgraded to “CCC” by Standard & Poor’s, due to uncertainty associated with the refinancing of debt because of uncertain market conditions.
To improve its operating and financial structure, on May 29, a new Chief Executive Officer was appointed and the role of the Chief Operating Officer (COO) was expanded to President and COO. During this period, the Board of Directors and the board’s Finance Committee met frequently to explore options and consider alternatives to improve the financial condition of Patriot.
After the July 9 bankruptcy filing, effective July 10, the New York Stock Exchange (NYSE) suspended trading of Patriot’s common stock and commenced proceedings to delist that common stock. On Aug. 6, the common stock was delisted from the NYSE. The stock is now traded under the ticker symbol “PCXCQ” on the OTCQB marketplace, operated by OTC Markets Group.
Company slowly working its way through uneconomic agreements
The various Patriot companies in bankruptcy are currently operating as “debtors-in-possession” under the jurisdiction of the bankruptcy court. In general, they are authorized to, and continue to, operate as an ongoing business, but may not engage in transactions outside of the ordinary course of business without the approval of the bankruptcy court.
“Under Section 365 and other relevant sections of the Bankruptcy Code, we may assume, assume and assign, or reject certain executory contracts and unexpired leases, including leases of real property and equipment, subject to the approval of the Bankruptcy Court and certain other conditions,” Patriot noted. “In this context, ‘assumption’ means that the Company agrees to perform its obligations and cure all existing defaults under the contract or lease, and ‘rejection’ means that it is relieved from its obligations to perform further under the contract or lease, but is subject to a pre-petition claim for damages for the breach thereof subject to certain limitations. Any damages resulting from rejection of executory contracts that are permitted to be recovered under the Bankruptcy Code will be treated as liabilities subject to compromise unless such claims were secured prior to the Petition Date.”
Since the July 9 filing, Patriot has received approval from the court to reject a number of equipment leases and other executory contracts of various types. The company is continuing to review all of its executory contracts and unexpired leases to see which it may want to reject.
On Oct. 18, the court entered an order establishing Dec. 14 (General Bar Date) as the bar date for potential creditors, other than governmental units, to file claims. For governmental units to file claims, the bar date was established as Jan. 21, 2013 (Governmental Bar Date). The bar date is the date by which certain claims against the company must be filed if the claimants wish to receive any distribution in the bankruptcy cases. Differences between liability amounts estimated by the company and claims filed by creditors will be investigated and, if necessary, the court will make a final determination of the allowable claim. The determination of how liabilities will ultimately be treated cannot be made until the court approves a plan of reorganization.
Patriot has the exclusive right for 120 days after the filing of the July 9 Chapter 11 petitions to file a plan of reorganization. “We will likely file one or more motions to request extensions of this exclusivity period, which are routinely granted up to 18 months in bankruptcy cases of this size and complexity,” Patriot noted. “On October 18, 2012, we filed a motion to extend this exclusivity period to May 5, 2013. If our exclusivity period lapses, any party-in-interest would be able to file a plan of reorganization. In addition to being voted on by holders of impaired claims and equity interests, a plan of reorganization must satisfy certain requirements of the Bankruptcy Code and must be approved, or confirmed, by the Bankruptcy Court in order to become effective.”
Patriot operations to be found in West Virginia, western Kentucky
Patriot’s operations consist of twelve active mining complexes, which include company-operated mines, contractor-operated mines and coal preparation facilities. The Appalachia and Illinois Basin segments consist of operations in West Virginia and western Kentucky, respectively. Patriot controls about 1.9 billion tons of proven and probable coal reserves.
The company ships coal to electricity generators, industrial users, steel mills and independent coke producers. In the first nine months of 2012, it sold 19 million tons of coal, of which 75% was sold to domestic and global electricity generators and industrial customers and 25% was sold to domestic and global steel and coke producers. Its export sales accounted for 45% of total tons sold during the nine months ended Sept. 30. In the first nine months of 2011, Patriot sold 23.5 million tons of coal, of which 76% was sold to domestic 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.
The mining operations and coal reserves are as follows:
- Appalachia – In southern West Virginia, Patriot has eight mining complexes located in Boone, Lincoln, Logan, Kanawha and Raleigh counties. In northern West Virginia, it has one complex, the Federal No. 2 longwall mine in the Pittsburgh seam, located in Monongalia County. In Appalachia, Patriot sold 14 million and 23.9 million tons of coal in the nine months ended Sept. 30, 2012, and the year ended Dec. 31, 2011, respectively. As of Dec. 31, 2011, it controlled 1.2 billion tons of proven and probable coal reserves in Appalachia, of which 491 million tons were assigned to current operations. In the first nine months of 2012, it closed or idled various mines or curtailed coal production at Appalachian mining complexes.
- Illinois Basin – In the Illinois Basin, Patriot has three mining complexes located in Union and Henderson counties in western Kentucky. These operations sold 5 million and 7.3 million tons of coal in the nine months ended Sept. 30, 2012, and the year ended Dec. 31, 2011, respectively. As of Dec. 31, 2011, Patriot controlled 722 million tons of proven and probable coal reserves in the Illinois Basin, of which 175 million tons were assigned to current operations. In June, it idled the Freedom mine in the Bluegrass mining complex in response to continued weakness in thermal coal demand.
On Nov. 1, right after the Form 10-Q was filed, Patriot announced that the entire Bluegrass complex will be closed by the end of 2012. The complex currently employs about 89 people and includes the Patriot surface mine, which is expected to produce about 1.2 million tons of thermal coal in 2012, and the Grand Eagle Prep Plant, both located near Henderson, Ky. The U.S. Mine Safety and Health Administration database shows Freedom, the mine shut earlier this year, as “nonproducing,” with no output in the third quarter of this year, 504,708 tons produced in the first half of this year and 1.2 million tons in all of 2011. MSHA data shows that the to-be-shut Patriot surface mine produced 791,522 tons in the first nine months of this year and 1.2 million tons in all of 2011. The Bluegrass customers have included Kentucky Utilities, Big Rivers Electric and Duke Energy Kentucky.