Patriot Coal, looking to dismember itself in bankruptcy, on July 13 filed with the U.S. Bankruptcy Court for the Eastern District of Virginia a reorganization plan and accompanying disclosure statement that outlines the plan to sell assets and provides details about company operations and finances.
Patriot filed for Chapter 11 protection with the court on May 12, following a round of bankruptcy reorganization earlier this decade that created a company with new finances but apparently no ongoing ability to survive in a relentlessly distressed coal market. Notable is that while this is a “reorganization” plan, about the only thing that is to be reorganized are certain company finances, with the company itself not intended to survive this process.
Said the disclosure statement: “The Debtors believe that the compromises and transactions contemplated by the Plan are fair and equitable, maximize the value of the Debtors’ chapter 11 estates (collectively, the ‘Estates’), and provide the best recovery to claimholders. Accordingly, the Debtors now seek the Bankruptcy Court’s approval of the Plan. Before soliciting acceptances of a proposed chapter 11 plan, however, section 1125 of the Bankruptcy Code requires a debtor to prepare a disclosure statement containing information of a kind, and in sufficient detail, to enable a hypothetical reasonable investor to make an informed judgment regarding acceptance of that chapter 11 plan. The Debtors submit this Disclosure Statement in accordance with such requirements.”
The statement later added: “The Debtors have eight active mining complexes located in West Virginia, which include company-operated mines, a contractor-operated mine, and coal preparation and loading facilities. In 2014, the Debtors sold approximately 22.4 million tons of coal, of which approximately 68 percent was sold to domestic and global electricity generators and industrial customers and approximately 32 percent was sold to domestic and global steel and coke producers. Export sales were approximately 44 percent of the Debtors’ total volume in 2014. The Debtors ship coal to electricity generators, industrial users, steel mills, and independent coke producers, as well as brokers that ultimately sell the coal to these same types of customers. The coal is shipped via various company-owned and third-party loading facilities, multiple rail and river transportation routes and oceangoing vessels.
“As of December 31, 2014, the Debtors had an estimated 1.4 billion tons of proven and probable coal reserves—including owned and leased assets in the Northern and Central Appalachia basin (in West Virginia and Ohio) and Illinois basin (in Kentucky and Illinois)—approximately 36 percent of which the Debtors own and approximately 64 percent of which the Debtors control through leases.
“The Debtors employ approximately 2,870 individuals on a full-time basis and approximately 6 individuals on a part-time basis (collectively, the ‘Employees’), of which approximately 900 are represented by the United Mine Workers of America (the ‘UMWA’) through collective bargaining agreements (collectively, the ‘UMWA Employees’). The Employees include miners, engineers, truck drivers, mechanics, electricians, administrative support staff, managers, directors, and executives. Approximately 58 percent of the Debtors’ non-union Employees are paid on an hourly basis (collectively, the ‘Hourly Employees’) and approximately 42 percent receive a salary (collectively, the ‘Salaried Employees,’ and together with the Hourly Employees, the ‘Non-Union Employees’). The Debtors additionally supplement their Employees by hiring certain temporary mine workers, operational labor, mail clerks, receptionists, and accountants (collectively, the ‘Independent Contractors’).”
Company engaged in some asset sale talks prior to bankruptcy
“In the months leading up to the Petition Date, the Debtors’ management had to address increasingly severe pressures on its financial condition due to continued weakened demand for coal. In the first quarter of 2015, it became apparent that Patriot would have difficulty obtaining an unqualified audit opinion by March 31, 2015, which would have been an event of default under its secured debt instruments. And unless cured 30 days thereafter, this default would have accelerated (and cross-accelerated) Patriot’s approximately $797 million secured capital structure. Additionally, Patriot was in jeopardy of not satisfying certain financial covenants. Accordingly, the Debtors and their advisers negotiated and obtained on March 31, 2015 requisite amendments from their lenders that provided further time to explore options to secure additional liquidity and/or effectuate a going-concern sale and/or restructuring transaction (collectively, the ‘March 31 Amendments’). Also over the months leading up to the Petition Date, the Debtors explored numerous strategic alternatives and engaged in multiple efforts to sell assets.”
As part of those efforts:
- First, Patriot engaged in extensive negotiations with purchasers interested in an underground mining complexes known as Federal (based around the Federal No. 2 longwall mine in the Pittsburgh coal seam in northern West Virginia). These discussions led to significant indications of interest for a sale of Federal. As part of the March 31 Amendments, however, the debtors and their lenders agreed to postpone this transaction until it could be confirmed whether a sale outside of a chapter 11 case would obtain the greatest possible value for the asset.
- Second, Patriot had extensive negotiations regarding the sale of certain reserves at its Huff Creek mine in southern West Virginia. These discussions led to an agreement in principle for a transaction slated to close by April 30. As part of the March 31 Amendments, it was agreed that Patriot could retain 50% of the Huff Creek asset-sale proceeds for general corporate purposes, and the other 50% would be used to collateralize a debt service reserve. In the last week of April, however, a series of complications arose that precluded consummation of this transaction, and Patriot’s consequent inability to utilize these expected sale proceeds was a further material strain on liquidity.
- Finally, and most significantly, in the weeks leading up to the petition date, the debtors began extensive negotiations with Blackhawk Mining with regard to a transaction acquiring essentially all of the debtors’ operating assets (excluding, among other assets, Federal) and many of their reserves (including Huff Creek). Discussions with Blackhawk ultimately resulted in the Blackhawk Asset Purchase Agreement (APA). The court has approved Blackhawk as a stalking horse bidder for those assets at an upcoming auction. The Blackhawk transaction, if consummated, would deliver to the debtors’ secured creditors approximately $650 million of debt securities plus 30% of the pro forma Blackhawk equity, and provide for the assumption of certain other liabilities.
“The Blackhawk Transaction represents the highest and best transaction presently available for the Blackhawk Assets,” said the disclosure statement. “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 and, if necessary, by conducting an auction (the ‘Auction’). Under the Blackhawk APA, Blackhawk will acquire certain assets associated with the Panther, Rocklick, 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 certain associated reserves, certain controlled river docks, and certain other assets (collectively, the ‘Blackhawk Purchased Assets’). Blackhawk will not acquire the Federal Complex, Corridor G, Jupiter, all other Logan County assets, and certain other assets (collectively called the ‘Blackhawk Excluded Assets’).”
Patriot has lately been seeking a stalking horse bidder for the Federal Complex as part of a second auction 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 and/or an important source of funding for the Liquidating Trust,” said the statement. “Accordingly, contemporaneous with the marketing process for the assets to be sold in connection with the Blackhawk Transaction, the Debtors intend to market and obtain the highest or otherwise best bid for the Federal mining 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 Auction, collectively, the ‘Auctions’). At this stage, the Debtors have not identified a stalking horse bidder with respect to the Federal Complex (a ‘Federal Stalking Horse Bidder’).”