Patriot Coal, which pulled off a successful bankruptcy reorganization earlier this decade, filed on June 3 a plan with its bankruptcy court to sell most of its assets, excluding the big Federal No. 2 longwall mine in northern West Virginia, to Blackhawk Mining LLC.
Patriot Coal on May 12 entered its second round of bankruptcy this decade with a Chapter 11 petition to the U.S. Bankruptcy Court for the Eastern District of Virginia. It has shut its western Kentucky mining operations, with most active operations being in southern West Virginia, with the Federal No. 2 mine being an outpost in northern West Virginia.
Said the June 3 sale motion: “For a number of reasons, including the extremely challenging coal market environment and the Debtors’ significant secured financial indebtedness (approximately $900 million including the Debtors’ debtor-in-possession financing (‘DIP Financing’)), the Debtors, in consultation with their advisors, have determined that a transaction or series of transactions whereby the Debtors sell substantially all of their assets is likely to maximize the value of the Debtors’ estates for their stakeholders. To that end, prior to and subsequent to the Petition Date, the Debtors and their advisors engaged in extensive negotiations with Blackhawk Mining LLC (‘Blackhawk’) regarding a structured transaction that would result in the going concern sale of a substantial majority of the Debtors’ operating assets (the ‘Blackhawk Assets’).
“The transaction excludes certain assets of the Debtors, including the Debtors’ Federal Complex (defined and described in greater detail below) (such assets, the ‘Federal Assets’), as well as certain other mine complexes and idle properties (the ‘Excluded Assets’ and, together with the Blackhawk Assets and Federal Assets, collectively, the ‘Assets’).
“The purpose of this Motion is two-fold: first, to seek approval of the Bidding Procedures, which set forth a comprehensive process for soliciting bids and holding one or more Auctions for the Sales of the Debtors’ Assets, to approve the form and manner of notices to schedule the Auctions and Sale Hearing, if necessary, and to approve procedures for the assumption and assignment of contracts; and second, to approve the Sale or Sales of the Debtors’ Assets pursuant to the Bidding Procedures, to authorize the Sale or Sales of Assets free and clear of liens, claims, encumbrances and interests, and authorizing the assumption and assignment of the Contracts.
“The transaction proposed by Blackhawk is complex and multi-faceted. At a high level, Blackhawk has agreed to purchase certain assets and assume certain liabilities through the creation of a new company (the ‘Combined Company’) that will be capitalized with a combination of debt, equity, and cash (such transaction, the ‘Blackhawk Sale’), as set forth more fully in the Blackhawk Term Sheet. In exchange for the release of liens, if not otherwise refinanced, the Debtors’ prepetition secured lenders will be offered take-back debt in the Combined Company. The Debtors also expect that a significant number of their executory contracts will be assumed by the Combined Company, that the Combined Company will take on significant reclamation and environmental obligations associated with the Blackhawk Assets, and that most of the Debtors’ employees associated with the Blackhawk Assets will be offered jobs in the Combined Company.”
Under this deal:
- Blackhawk will acquire the Panther, Rock Lick, Wells, Kanawha Eagle, Midland Trail/Blue Creek, Paint Creek and Logan County (limited to Stanley Fork, Cub Branch and the Fanco preparation plant and load-out) complexes and all controlled river docks. Additionally, Blackhawk will acquire certain other non-mining assets.
- Blackhawk will not acquire the Federal complex, Corridor G, Jupiter, all other Logan County assets or certain other non-mining assets.
“The Blackhawk Term Sheet is the result of substantial efforts on behalf of the Debtors and their advisors to negotiate and consummate a strategic transaction that will maximize the value of the Debtors’ estates,” Patriot added. “In late 2014, the Debtors and their advisors began exploring an out-of-court sale or merger transaction with a potential strategic partner. By early 2015, it became clear that such a transaction was not going to materialize. Since that time, the Debtors and their advisors have engaged in discussions or negotiations with two additional entities, one of which is Blackhawk. Both entities insisted that they would only consummate a transaction through a chapter 11 process and delivered preliminary bids. After analysis and review, the Debtors and their advisors concluded that the proposed Blackhawk Sale provided the best option for maximizing value for the benefit of the Debtors’ stakeholders. As such, the Debtors and their advisors, joined prior to and after the Petition Date by an ad hoc group of lenders holding a majority of the Debtors’ senior secured term loan facility and second lien PIK notes and their advisors, have engaged in extensive negotiations with Blackhawk and its advisors, and have agreed upon the terms set forth in the Blackhawk Term Sheet.”
Patriot says this deal will deliver value to creditors
“The Blackhawk Sale, if consummated, would deliver to the Debtors’ secured creditors $643 million of debt securities plus 30% of the pro forma Blackhawk equity, and provide for the assumption of certain other liabilities, including certain surety bonds and related obligations. The Blackhawk Sale represents the highest and best transaction presently available for the Blackhawk Assets. Importantly, the Debtors are committed to achieving the highest or otherwise best bid for the all of their assets and operations, including the Blackhawk Assets, by marketing such assets and conducting a competitive bidding process, as set forth in the Bidding Procedures and, if necessary, by conducting an auction (the ‘Blackhawk Auction’).
“In connection with such process, Blackhawk has agreed to serve as the stalking horse bidder (such bid, the ‘Blackhawk Bid’) in exchange for the Debtors’ agreement—subject to Court approval—to provide certain customary bid protections as fully set forth in the Term Sheet (the ‘Blackhawk Bid Protections’), including payment of a break-up fee equal to approximately 3.0% of the $643 million of new debt securities that Blackhawk would issue to the Debtors’ secured lenders in connection with the transaction.
“As set forth in the Blackhawk Term Sheet, the Blackhawk Sale contemplates the acquisition of a substantial majority of the of the Debtors’ operating assets with one notable exception: the Federal No. 2 longwall mine, a 1,350 [tons per hour] preparation plant, and certain related assets (collectively, the ‘Federal Complex’). The Debtors engaged in prepetition marketing of the Federal Complex and determined at that time, in consultation with their lenders and advisors, to defer the sale of the Federal Complex until after the filing of these chapter 11 cases.
“Unlike the Blackhawk Sale, the Debtors do not yet have a stalking horse candidate for the sale of the Federal Complex (the ‘Federal Sale’ and together with the Blackhawk Sale, collectively, the ‘Sales’). But as described in greater detail below, the proposed Bidding Procedures are designed to encourage bids for the Federal Complex and any other Excluded Assets, and would give the Debtors the opportunity, after notice, to appoint a stalking horse bidder later in the sale process.
“In consultation with their advisors, the Debtors have determined that selling the Federal Complex could generate material value for their estates and may provide an additional source of recovery for the Debtors’ stakeholders. Accordingly, contemporaneous with the marketing process for the assets to be sold in connection with the Blackhawk Sale, the Debtors intend to market and obtain the highest or otherwise best bid for the Federal Complex through competitive bidding as set forth in the Bidding Procedures and, if necessary, via an auction (the ‘Federal Complex Auction’ and together with the Blackhawk Auction, collectively, the ‘Auctions’).”
The key milestone dates set forth in the Blackhawk Term Sheet include:
- The court shall enter an order approving the Bid Protections by no later than June 30, 2015.
- The court shall have entered an order approving a Disclosure Statement, in form and substance reasonably acceptable to Blackhawk, by July 21, 2015.
- The court shall have entered a Confirmation Order by no later than Sept. 11, 2015.
- Blackhawk requires that the closing occur no later than Sept. 25, 2015.
Patriot Coal wants the court to establish various dates and deadlines, including:
- Federal Stalking Horse Notice Deadline: July 14, 2015, at 5:00 p.m., prevailing Eastern Time;
- August 7, 2015, at 5:00 p.m., prevailing Eastern Time, as the deadline by which all bids must be actually received pursuant to the Bidding Procedures (the “Bid Deadline”);
- If applicable, 4:00 p.m., prevailing Eastern Time, on the date that is seven days prior to the proposed Sale Hearing, as the deadline to object to a Sale or the Sales;
- Notice of Qualified Bids: August 11, 2015, at 5:00 p.m., prevailing Eastern Time, as the date and time by which Bidders shall be notified whether their Bids are Qualified Bids;
- The Auctions: August 13, 2015, at 10:00 a.m., prevailing Eastern Time, as the date and time by which the Auctions, if needed, would be held at the offices of Kirkland & Ellis LLP, located at: 601 Lexington Avenue, New York, New York 10022;
Patriot Coal, now based in West Virginia after moving from an initial corporate headquarters in St. Louis, has eight active mining complexes in Northern and Central Appalachia. Patriot ships to domestic and international electricity generators, industrial users and metallurgical coal customers, and controls about 1.4 billion tons of proven and probable coal reserves. In 2013, it sold 21.5 million tons of coal, of which 70% was sold to domestic and global electricity generators and industrial customers and 30% was sold to domestic and global steel and coke producers.
Blackhawk Mining has grown lately through other acquisitions
Bob Bennett, President and Chief Executive Officer of Patriot, said in a June 3 public statement: “We feel strongly that the proposed transaction with Blackhawk is in the best interest of Patriot, and its employees and stakeholders. Blackhawk shares our dedication to operational and environmental excellence, and this transaction creates a viable path forward in this challenging market environment, enabling our mining operations to continue serving customers and preserving jobs in the communities in which they operate. As always, we remain committed to operating safely and serving our customers throughout this sale process.”
Blackhawk Mining is a privately-owned coal producer operating in Central Appalachia and the Illinois Basin, with five active mining complexes. Blackhawk mines, processes and sells bituminous thermal, pulverized coal injection (PCI), stoker and industrial grade metallurgical coal to domestic and international electric utilities, steel producers and industrial customers. A June 2 letter of intent attached to the June 3 court filing is signed by Nicholas Glancy as president of Blackhawk.
Marc D. Puntus, a Partner and co-head of the Debt Advisory and Restructuring Group of Centerview Partners LLC, which is advising Patriot, said in June 3 testimony that Blackhawk has conditioned its proposed purchase of the Blackhawk Assets on the achievement of certain milestones, including a transaction closing date by Sept. 23. “I have been advised by Blackhawk that this condition is driven by Blackhawk’s need to begin the negotiation of 2016 coal sales contracts by mid-September,” Puntus explained. “Given the current state of distress in the coal industry and the significant recoveries provided for the Debtors’ creditors pursuant to the Blackhawk Sale, the Debtors have acquiesced to the required timeframe.”
Puntus added: “In my opinion, the Debtors cannot risk losing Blackhawk as a stalking horse bidder in these chapter 11 cases. Should that happen, the risk of a liquidation and a significant reduction in creditor recoveries in these cases will increase markedly. The expedited timeframe also has the important benefit of allowing the Debtors to minimize their costly stay in chapter 11, reducing the risk that additional debtor-in-possession financing will be required.”
The June 2 letter of intent offered by Blackhawk lists various assets it wants to buy, including specific permits for certain southern West Virginia operations like the Harris prep plant and Fanco loadout. But it also lists other assets to be acquired outside of this area, including Broughton in Illinois, Collinsville in Illinois and Sunnyhill in Ohio. No description of those assets is offered. It is well known in the coal business that Peabody Energy (NYSE: BTU), when it spun off Patriot last decade in an IPO, gave it certain undeveloped mining assets in areas where Patriot didn’t then operate. Along those lines, a list of excluded assets from the Blackhawk proposed buy says simply “Other Midwest,” which apparently means any Illinois Basin assets not in the included category.
Blackhawk Mining, based in Lexington, Ky., was formed in 2010 with the acquisition of the Spurlock Complex in Floyd County, Ky. In its first year of full operation, the company produced just over 1 million tons of coal, said the company website. Today, Blackhawk Mining operates five mining complexes across three states and employs over 1,600 men and women in its local communities. The acquisitions were:
- 2010 – Spurlock Complex acquired. Spurlock is located in Floyd and Magoffin counties in eastern Kentucky. It utilizes both surface and underground mining methods and sells PCI, thermal, stoker and specialty coals to domestic and international steel companies, electric utilities and industrial end-users;
- 2012 – Pine Branch Complex acquired. The Pine Branch Complex is located in Perry, Knott, Breathitt and Leslie Counties in eastern Kentucky. It primarily utilizes surface mining methods and sells thermal coal to a variety of southeastern U.S. and international utility customers;
- March 2014 – ICG Hazard acquired from Arch Coal (NYSE: ACI) and combined into Pine Branch Complex;
- August 2014 – Triad, Blue Diamond, and Hampden complexes acquired in sale out of the James River Coal bankruptcy case. The Triad Complex is located in southwestern Indiana and utilizes both surface and underground mining methods and sells thermal coal from the Illinois Basin to a variety of electric utility customers. The Blue Diamond Complex is located in Perry, Knott and Leslie counties in eastern Kentucky. Blue Diamond utilizes both surface and underground mining methods and sells PCI, thermal, stoker and specialty coals to domestic end-users and international thermal and metallurgical customers. The Hampden Complex is located in Mingo and Logan counties, West Virginia. Hampden utilizes both surface and underground mining methods and sells metallurgical and foundry coking coals to the major domestic steal and foundry users and met coal to customers in Europe, South America and India. The complex also produces thermal coal for sale to a variety of electric utilities;
- November 2014 – Spruce Pine Land Co. acquired; and
- December 2014 – Washington reserves acquired for Hampden Complex.
The Blackhawk website lists Mitch Potter as the company’s CEO, Glancy as its President and Danny Moon as its Senior Vice President of Sales & Marketing.