Central Appalachia coal producer Trinity Coal, which is producing little coal these days, has made various moves lately at its bankruptcy court, including a June 6 motion to allow it to sell unnamed “surplus” assets without prior court approval.
The company has been since Feb. 19 in Chapter 11 protection at the U.S. Bankruptcy Court for the Eastern District of Kentucky. One of the first moves by the various Trinity Coal companies that sought bankruptcy protection was to arrange a debtor-in-possession (DIP) loan facility that allowed them to continue limited mining operations.
“Since the DIP Facility was put into place in early March 2013, the Debtors have engaged in a robust sales process to maximize the value of their assets for the benefit of their respective estates,” said the June 6 asset sale motion. “None of the Surplus Assets is needed for any of the sales that are contemplated under the DIP Facility. The Debtors believe that they can sell such Surplus Assets profitably for the benefit of their estates and creditors and thereby generate cash for such assets, which assets are not needed or used by the Debtors or otherwise necessary for their operations or contemplated sales of larger assets. Doing so would also eliminate the costs of maintaining the Surplus Assets.”
The Trinity companies have coal mining assets in eastern Kentucky and southern West Virginia. Those operations are organized into six distinct coal mining complexes. Three of the complexes are in Kentucky and referred to as Prater Branch Resources, Little Elk Mining, and Levisa Fork. The other three complexes are located in West Virginia and referred to as Deep Water Resources, North Springs Resources and Falcon Resources. The West Virginia operations produce compliance, low-sulfur steam coal and mid-to high-vol metallurgical coal.
In 2010, Trinity Coal Holdings was purchased by and became a wholly owned subsidiary of Essar Minerals out of India in a $600m transaction. Since then, however, coal has experienced a precipitous decline in demand due to cheaper alternative sources of energy. This has adversely impacted the entire coal industry, including the debtors’ business operations and financial condition, which have been in steady decline since 2011. Consequently, since the 2010 transaction, the debtors have closed five of the six coal mining complexes. They are currently operating and mining coal only at Deep Water and related operations in West Virginia.
Also in this case, on June 10, the judge approved an application from the Official Committee of Unsecured Creditors to hire John T. Boyd Co. as the mining and geological consultants to the committee.
Arch Coal units say Trinity motion endangers mining of 28 million tons of coal
Also on June 10, saying it would mess up their future mining plans on certain properties, two subsidiaries of Arch Coal (NYSE: ACI) filed a protest with the court over Trinity’s request to reject existing property agreements. Those Arch units, acquired in a June 2011 buy of International Coal Group, are ICG Hazard LLC and ICG Natural Resources LLC.
The Trinity companies are seeking to reject: a June 2008 Disposal Agreement between debtor Little Elk Mining Co. LLC, ICG Hazard and ICG Natural; and a June 2008 Easement Agreement between Little Elk and ICG Hazard.
“As part of a comprehensive real estate exchange, the Agreements conveyed to ICG interests in real estate permitting it to use Little Elk’s haul roads and to use Little Elk’s property for the purposes of disposing of spoil generated by ICG in connection with its mining activities,” said the ICG filing. “The property rights granted by the Agreements are indispensable to ICG’s mining operations in the area, without which ICG would have no choice but to close its Talcum Mine complex and cease development of other operations in the area, resulting in millions of dollars in losses to ICG. By their Rejection Motion, Little Elk and the other Debtors seek to take back, or undo, these vested rights. Section 365 of the Bankruptcy Code cannot be used to strip away ICG’s vested property rights conveyed to ICG nearly six years ago.”
Moreover, even if the agreements did not create property rights, they are not executory contracts that are subject to Section 365(a) of the Bankruptcy Code, the ICG companies added.
ICG and Little Elk collectively own or control, among other things, thousands of adjacent acres of real property situated in Breathitt, Knott, and Perry counties, Ky., that are currently or have in the past been utilized for coal mining activities. All of the subject Starfire Area was previously owned or controlled by Horizon Natural Resources, which went bankrupt in this same court early last decade, or one of its subsidiaries. ICG and Little Elk are, directly or indirectly, Horizon’s successors to the Starfire Area. Little Elk controls the bulk of the area in the center of the Starfire Area; ICG controls the bulk of the surrounding area.
Little Elk terminated its mining operations here prior to filing its order for relief. On the other hand, ICG currently has active mining operations in the Starfire Area, as well as plans to expand its operations to additional coal reserves it controls in the Starfire Area.
Focus of the problem is ICG’s Talcum strip mine
ICG is operating what it refers to as its Talcum surface mine in Knott County, comprising approximately 2 million tons of ICG-controlled reserves in the Starfire Area. The Talcum mine employs 76 people and has a projected life of 30 months. The operation of the Talcum mine depends on the rights granted in the Disposal Agreement, ICG said. ICG deposits spoil from the Talcum mine on both the ICG property and, pursuant to the Disposal Agreement, on the debtors’ property within the Starfire Area.
Under the Disposal Agreement, in July 2008, ICG Hazard caused Permit No. 860-0429 to be issued by the Kentucky Department for Natural Resources. The permit allows for the deposit of spoil and originally covered 547.2 acres, including some Trinity property. In March 2012, ICG caused Permit No. 860-0429 to be amended by expanding its scope by 179.7 acres to an aggregate of 726.9 acres, including approximately 179 acres of Trinity property. Further revisions have brought the total permitted area to 728.3 acres.
Without the rights to deposit spoil generated by the Talcum mine in accordance with the Disposal Agreement, ICG said it would have grossly insufficient acreage to deposit spoil, and the mine would have to be shuttered prior to the end of its projected life. Moreover, without the rights granted to ICG by the Disposal Agreement, ICG would be unable to mine the more than 28 million tons of additional coal reserves within the Starfire Area that are adjacent to Little Elk-controlled property without millions of dollars in engineering, permitting, and construction costs for new roads and associated delays.
The operation of the Talcum mine also depends on the rights granted in the Easement Agreement. To access the Talcum Mine and potentially other mine areas, ICG has acquired permits for the use and maintenance of a substantial portion of the debtors’ haul roads on the Trinity property. These permits overlap existing Little Elk permits, and ICG has spent in excess of $500,000 on permitting, moving, and improving the roadways in accordance with the Easement Agreement.
Said Arch Coal’s March 1 annual Form 10-K report about the ICG Hazard operations: “Hazard is a mining complex that consists of four surface mines, a preparation plant, a unit train loadout and other support facilities located on approximately 122,000 acres in eastern Kentucky. The coal from Hazard’s mines is being extracted from the Hazard 10, Hazard 9, Hazard 8, Hazard 7 and Hazard 5A seams. Nearly all of the surface-mined coal is marketed as a blend of shipped direct product with the remainder being processed at the Flint Ridge preparation plant. Coal is transported by on-highway trucks from the mines to the rail loadout, which is served by CSX. Some coal is direct shipped to the customer by truck. A majority of the coal reserves are owned; the remainder are held through private leases. The mining complex had approximately 44.4 million tons of proven and probable reserves at December 31, 2012, which could sustain current production levels until at least 2030. The loadout facility can load a 12,500-ton train in less than 4 hours.”