James River Coal cut production, but other things caught up with it

James River Coal (NASDAQ: JRCC), caught in a tightening vice of heavy debt, poor coal markets and increased government regulation, sought Chapter 11 protection on April 7 at the U.S. Bankruptcy Court for the Eastern District of Virginia.

Peter Socha, Chairman, President and CEO of James River Coal, said in first-day testimony about company operations: “As of the Petition Date, the Debtors conduct mining operations at eight mining complexes (six of which are active) consisting of 16 active surface and underground mines and six active preparation plants in Indiana, Kentucky and West Virginia. The Debtors’ operations include company-operated mines, contractor-operated mines and coal preparation facilities.”

Through active and idled operations, the debtors control about 340 million tons of proven and probable coal reserves available for mining projects. The debtors’ mining methods include room and pillar underground mining and contour and highwall mining.

The debtors ship coal to domestic and international electricity generators, industrial users and steel companies via rail and barge transportation routes, ocean-going vessels and trucks. In 2013, the debtors sold a total of 8.7 million tons of coal.

Georgia Power is one of the company’s top customers

Georgia Power, Indianapolis Power and Light and Steel Authority of India were the debtors’ largest customers in 2013, representing approximately 11%, 11% and 10% of total revenues respectively. The debtors estimate that about 38% of total sales revenue in 2013 was comprised of export sales.

For the fiscal year ending Dec. 31, 2013, the debtors estimate revenues of about $660m and Adjusted EBITDA of approximately negative $30m from the sale of around 8.4 million tons of coal. The debtors estimate that their net loss during the same period was approximately $16.4m.

In addition to the debtors’ mining operations, debtor Logan & Kanawha Coal markets the metallurgical and PCI coal produced by the debtors’ Central Appalachia (CAPP) operations, and also purchases and blends coal to sell to domestic and international customers under the L&K brand. Founded in 1915, it is the oldest independent coal sales and marketing platform in the U.S.

“The Debtors’ businesses have reached the point of unsustainability absent utilization of the tools presented by chapter 11,” Socha wrote. “The Debtors have a highly levered capital structure that cannot be sustained in light of their declining operating performance resulting from the competitive and challenging macroeconomic environment. In the three years since the Debtors acquired [International Resource Partners] IRP, domestic demand for coal has decreased dramatically, in large part because alternative sources of energy have become increasingly attractive to electricity generators in light of declining natural gas prices and more burdensome environmental and other governmental regulations. Similarly, the seaborne markets have experienced an oversupply of coal products, primarily in response to slow economic growth in key international markets.

“At the same time, the costs associated with mining and processing coal have increased as the Debtors face sharply rising costs due to the regulatory environment in which they operate. The Debtors have made a number of strategic and operating changes to adapt to the new industry models, and the thermal markets are showing clear signs of improved demand. James River is a strong company. However, the Debtors’ capital structure needs to be addressed.”

As utility customers shift coal supplies, James River has cut production

The majority of the debtors’ production comes from the CAPP region and has traditionally been sold to southeastern utilities. These utilities are now purchasing a significant portion of their coal from lower cost coal producing regions, such as the Illinois Basin. To the extent this trend continues, there will be less demand for the debtors’ CAAP coal, Socha wrote.

In total, since the beginning of 2013, the debtors have decreased their annual non-specialty thermal coal production by approximately two million tons compared to 2012. The debtors have also made the decision to avoid selling incremental production into a low price environment.

“The news of the Debtors’ exploration of strategic alternatives and worsening financial condition spread, and pressure from suppliers for cash on delivery or cash in advance have increased cash requirements and tightened liquidity in the recent weeks,” Socha noted. “In light of certain capital constraints and to preserve liquidity, the Debtors did not make an interest payment to the holders of the 3.125% Convertible Senior Notes due on March 15, 2014.”

The James River Coal companies have been and continue to be focused on developing a restructuring solution that maximizes value for all of their stakeholders. The debtors anticipate that their post-petition marketing efforts will build on and will be able to proceed more rapidly because of the prepetition efforts of Deutsche Bank, which already canvassed the market and is engaging with potentially interested parties in buying assets and/or engaging in restructuring alternatives.

The companies on April 7 filed with the court a first-day motion to approve bidding procedures to allow entities with a potential interest in sponsoring a plan of reorganization for the debtors or purchasing the debtors’ assets the opportunity to submit bids.

The various James River companies that are also in bankruptcy include James River Coal Sales, Bell County Coal, Bledsoe Coal, Jellico Mining LLC, Blue Diamond Coal, Johns Creek Coal and Buck Branch Resources LLC.

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.