Saying that without approval of this deal it may have to close two Wyoming coal mines that shipped a combined 36.5 million tons in 2014, Alpha Natural Resources on Sept. 8 asked its bankruptcy court for approval of a deal on reclamation bonding with the Wyoming Department of Environmental Quality (WDEQ).
An early sign, prior to Aug. 3 petition for bankruptcy protection, of Alpha’s financial problems was a WDEQ decision to revoke the company’s ability to self-bond its reclamation bonding for the Belle Ayr and Eagle Butte mines in the Wyoming end of the Powder River Basin. Bonds are basically a form of insurance that puts up money for post-mining reclamation if the coal producer goes out of business.
Alpha Coal West Inc. (ACW) – a wholly-owned subsidiary of Aalpha – has operated coal mines in Wyoming (through its predecessors, subsidiaries and affiliates) since the 1970s. ACW’s present Wyoming operations consist of two surface mines, Belle Ayr and Eagle Butte. ACW’s Wyoming operations employ approximately 580 people, and the mines shipped 36.5 million tons of coal in 2014. The Belle Ayr operation consists of one mine that extracts coal from a 75-feet thick coal seam. Eagle Butte consists of one mine that extracts coal from coal seams of approximately 100 feet in thickness. Coal from the Wyoming Mines is shipped principally by rail to power plants throughout the western, midwestern and southern United States.
Notably, ACW has never been cited for improperly performing its reclamation obligations, Alpha told the court. During the last five years (since ACW began self-bonding), ACW has received only two minor citations, one of which was self-reported. Neither of these citations was related to reclamation, and both were immediately corrected by the company. Alpha said it believes that ACW currently is in compliance with, and is continuing to fulfill, its ongoing obligations to perform reclamation and is anticipated to keep doing so for the duration of the chapter 11 reorganization process.
Alpha currently self-bonds approximately 96% of ACW’s Wyoming reclamation obligations. In that regard, ACW and ANR, as its parent-guarantor, have made yearly financial showings to the WDEQ (specifically, that Alpha meets required financial ratios as set forth in applicable Wyoming regulations). On a yearly basis, Alpha and ACW have sought renewal of their self-bonding arrangement by submitting updated financial information (including their most recent Forms 10-K and 10-Q). The WDEQ issued its last annual renewal to ACW on December 19, 2014, which ACW and ANR understood would authorize them to continue their self-bonding program in Wyoming for a one-year period. For the year ending December 2014, the WDEQ set ACW’s self-bonding obligations for its two Wyoming mines, in the aggregate, at approximately $411 million.
On May 26, 2015, following approximately one month of discussions and the provision of information from ACW and Alpha to the WDEQ at its request, the WDEQ issued a demand to ACW (referred to as the “Wyoming Substitution Demand”). The Wyoming Substitution Demand asserted that: ACW’s right to self-bond with respect to its reclamation obligations in Wyoming (supported by Alpha’s guarantee) would terminate as of August 24, 2015 (the “Posting Deadline”); and on or before the Posting Deadline, ACW was required to post a commercial surety bond or substitute collateral in the amount of approximately $411 million as a condition to being allowed to continue mining operations in Wyoming.
ACW and parent Alpha disagreed with the determination made by the WDEQ in the Wyoming Substitution Demand and pursued both administrative and judicial appeals. On July 24, 2015, with Wyoming’s concurrence, the Alpha debtors filed an unopposed motion (the “Stay Motion”) before the Sixth Judicial District Court of Campbell County, Wyoming (the “Wyoming Court”), seeking a stay of, among other things, the Posting Deadline until after a final conference with WDEQ is held. On July 29, 2015, the Wyoming Court entered an order granting the Stay Motion and imposing the stay.
Alpha says this deal prevents shutdown or ‘fire sale’ of the Wyoming mines
Although the final conference before WDEQ has not yet been convened, representatives of Alpha and Wyoming have engaged in confidential settlement discussions (both before and after the Aug. 3 bankruptcy petition date) about a potential resolution. Alpha has limited ability to satisfy the Wyoming Substitution Demand. The posting of more than $400 million in collateral would impose a significant burden on liquidity and is not authorized under the terms of Alpha’s debtor in possession credit agreement dated as of August 6, 2015 (the “Credit Agreement”), which was approved on an interim basis by an order of this court entered on August 4, 2015.
Moreover, the option of providing a commercial surety bond in the required amount provides no viable alternative because, in addition to the expense of posting such a surety bond in terms of premiums and administrative fees, the debtors would be required to provide collateral to support their obligations under any such bond. The debtors believe that the ability of Wyoming to require ACW to post of $411 million in collateral or bond as a condition to ACW’s continued operation in Wyoming is stayed under, or otherwise prohibited by, the Bankruptcy Code. Wyoming, however, does not agree that such actions are stayed or otherwise prohibited. Absent a resolution of this dispute, upon the expiration of the Stay, an automatic permit block would take effect with respect to ACW, and the WDEQ would be authorized to seek to permanently block the issuance of new or amended permits to ACW. The WDEQ also could take actions to revoke ACW’s license to mine in Wyoming, which could, in turn, lead to permitting issues in other states.
After extensive negotiations, however, the debtors and Wyoming have reached a resolution of this dispute. This deal, in part, provides for a carve-out from the Term Facility Collateral in the amount of $100 million (the “Bonding Carve Out”) to allow governmental authorities making a demand for any surety bond, letter of credit or other financial assurance, pursuant to applicable law, to obtain a claim (a “Bonding Superpriority Claim”) against the Term Facility Collateral having priority over any or all administrative expenses of the kind specified in section 503(b) of the Bankruptcy Code.
The parties have agreed that, commencing on the date this deal is approved by the court, through the Compliance Plan Period:
- the debtors may satisfy the bonding requirements for their reclamation obligations without complying with the Wyoming Substitution Demand;
- Wyoming shall have, pursuant to, as applicable, sections 105, 364 and 503 of the Bankruptcy Code, and solely in the manner and to the extent permitted as a Bonding Superpriority Claim under the DIP Order, an allowed superpriority claim having priority over any or all administrative expenses of the kind specified in section 503(b) of the Bankruptcy Code in the amount of $61 million (the “Superpriority Claim”) against each of Alpha and ACW to secure the debtors’ reclamation obligations (provided that under no circumstances will Wyoming recover more than $61 million on account of the Superpriority Claim); and
- the Bonding Carve Out (and thus the Superpriority Claim) will not be terminated, as permitted under the DIP Order or otherwise, except in accordance with the the approval of this deal.
Said Alpha: “If the Debtors were to litigate this dispute and fail, they would be faced with the limited options of closure or fire sale of the Wyoming Mines – if such a sale would be possible in the current environment – which could potentially impact the Debtors’ operations in other states and would, at a minimum, be very disruptive to their restructuring efforts and the livelihood of the approximately 600 employees who work at the Wyoming Mines.”