Patriot Coal filed a first amended reorganization plan and disclosure statement with its bankruptcy court on Oct. 9, is headed for a Nov. 6 court hearing on that plan, and hopes, with creditor support, to emerge from bankruptcy by the end of this year.
Patriot said in the disclosure statement that it has settled issues with Arch Coal (NYSE: ACI), Peabody Energy (NYSE: BTU) and the United Mine Workers of America (UMWA) union. Major parts of what is now Patriot Coal are former unionized operations of Arch and Peabody. Notable is that the disclosure statement said a court action was recently launched against ArcLight, from which Patriot bought Magnum Coal in 2008. Magnum was made up of non-union operations in southern West Virginia formed by coal operator Chris Cline and then sold to ArcLight, and the unionized mines in southern West Virginia that had been held by Arch Coal.
“The Debtors and the Creditors’ Committee have also initiated an investigation into ArcLight Capital Partners, LLC (‘ArcLight’) with respect to potential Estate Causes of Action, including in connection with the Debtors’ July 2008 acquisition of Magnum,” said the disclosure statement. “In furtherance of this investigation, the Debtors and the Creditors’ Committee moved the Bankruptcy Court for leave to conduct discovery on ArcLight pursuant to Bankruptcy Rule 2004. The Bankruptcy Court entered a stipulated order granting Patriot leave to take such discovery on ArcLight on September 20, 2013 and Patriot served a subpoena on ArcLight on September 23, 2013. Neither the Debtors, nor the UMWA, have reached a settlement with ArcLight.”
The reorganization plan doesn’t indicate any major plan to sell assets, so what would potentially emerge from bankruptcy is a company with a reworked financial structure, not an operational one.
Patriot’s coal sales tumble in the last couple of years
In 2012, Patriot sold a total of 24.9 million tons of coal, selling 75% of this coal to domestic and global electricity generators and industrial customers and the remaining 25% to domestic and global steel and coke producers. In 2012, 45% of the total sales volume was comprised of export sales. In the first six months of 2013, it sold 11.2 million tons of coal, with 51% of total volume in export sales.
The company is projecting coal sales in 2013 of 22.1 million tons, growing to 24.2 million tons in 2014, and ending a six-year projection period (2013-2018) at 24.3 million tons in 2018.
Collectively, the bankrupt Patriot companies employ about 4,000 people in active status, working in both full- and part-time positions. Approximately 41% of these employees are unionized and represented by the UMWA.
The disclosure statement was heavy with warnings about the recent soft coal market, both on the thermal and met coal fronts, in the last couple of years, which helped drive Patriot into Chapter 11 protection. Patriot also noted how some of those adverse market conditions, while improving lately, could linger into the future.
“Over the last several years, coal’s share of the U.S. energy market and prices for thermal coal have both markedly declined,” Patriot wrote. “Coal’s share of total electricity generation, for example, declined from 45% in the first quarter of 2011 to 36% in the first quarter of 2012. Vast resources of natural gas have been unlocked through the discovery of shale deposits and technological advancements in drilling, causing the price of natural gas in the United States to fall. In 2012, the price of natural gas fell to a ten-year low. Moreover, the mild winter in 2012 resulted in lower coal burn for electricity generation. Heating degree days were 21% below normal in the first quarter of 2012. These factors, in turn, caused coal inventories at U.S. electricity producers to expand to over 200 million tons at the end of March 2012. Rail car loadings for the first quarter of 2012 were consequently down 10% year-over-year, with the lowest loadings since the beginning of 1994. As a result, the coal industry as a whole has been forced to reduce production, idle mines and lay off workers.”
During the first half of 2012, Patriot was approached by certain customers seeking to cancel or delay shipments of coal contracted for delivery under their coal supply agreements. In addition, two Patriot customers, Bridgehouse Commodities Trading Ltd. and Keystone Industries LLC, defaulted on their contractual obligations to purchase hundreds of thousands of tons of coal from Patriot, the disclosure statement said. On April 3, 2012, and June 1, 2012, Patriot filed actions for damages against Bridgehouse and Keystone, respectively.
With depressed demand for both thermal and metallurgical coal, it became uneconomical to operate certain of the Patriot debtors’ mining complexes, and the debtors took steps to reduce coal production to match expected sales volumes. In January 2012, Patriot announced the idling of four metallurgical coal mines and production curtailment at one additional metallurgical coal mine. Note that all of Patriot’s met mines are in southern West Virginia. In February and April 2012, the debtors announced the closure of additional mines due to reduced thermal coal demand. With the idling of operations during 2012, about 1,000 employee and contractor positions were eliminated.
From the beginning of 2012 to the bankruptcy petition date in July of that year, the debtors decreased their annual thermal coal production by just under five million tons compared to 2011.
Patriot cut its coal output, rejected uneconomic agreements
Prior to and during the Chapter 11 cases, the debtors and their advisors identified many changes that have led to and will continue to lead to substantial cash savings. Among other actions, the debtors have implemented or are in the process of implementing the following initiatives:
- Reduction of Thermal Coal Production – During 2012, the debtors reduced their thermal coal production by around 3.9 million tons. In 2013, thermal coal production has been further reduced. These reductions were accomplished by closing or idling multiple mines, including mines located at the Big Mountain (southern West Virginia), Bluegrass (western Kentucky) and Kanawha Eagle (southern West Virginia) complexes.
- Reduction of Metallurgical Coal Production – During 2012, the debtors decreased production from then unprofitable metallurgical mines and delayed expansion of their plan to increase the production of higher-margin met coal, in efforts to better align production with market demand. In total, the debtors reduced their projected metallurgical coal production in 2012 by about 1.9 million tons. In 2013, met coal production has been further reduced. These reductions were accomplished by idling multiple mines, including mines located at the Rocklick and Wells complexes in southern West Virginia.
- Decrease in Planned Capital Expenditures – Capital spend amounted to $121.9m in 2010 and $163m in 2011. The debtors decreased planned capital spending by $144m for 2012 and planned capital spending by over $620m during the course of the debtors’ five-year plan covering 2013-2016.
- Discontinuation of Contractors – During 2012, the debtors lowered their cost of production by taking control of labor at several mines and facilities formerly operated by contractors, including mines located at the Kanawha Eagle, Wells and Rocklick complexes in southern West Virginia. The savings generated by assuming operations from contractors totaled $9.5m in 2012 and the debtors project that such efforts will continue to result in substantial savings between 2013 and 2016.
- Elimination of Unprofitable Contracts – The debtors were party to numerous burdensome agreements, including, but not limited to, certain coal supply agreements acquired via the 2007 spin-off from Peabody Energy and the 2008 acquisition of Magnum Coal, which resulted in hundreds of millions of dollars in lost revenue. The debtors also had other unfavorable agreements, such as equipment leases, property leases and royalty agreements. During the Chapter 11 cases, the debtors have rejected over 265 executory contracts and renegotiated certain other unprofitable commercial agreements and property leases. The elimination or renegotiation of these contracts resulted in savings of $32.1m in 2012, and the debtors project that such rejections will result in hundreds of millions of dollars in savings between 2013 and 2016.
- Sale of Surplus Assets – In calendar 2012, the debtors realized $3.1m from the sale of nonstrategic assets.