Arch Coal on Feb. 9 asked its bankruptcy court for approval to accept some agreements, including one that it is critical to keep its Leer deep mine in northern West Virginia in operation, and to reject other agreements, including one to supply coal and coal ash removal services to AES Corp.’s (NYSE: AES) Warrior Run power plant in western Maryland.
Arch, one of the nation’s top coal producers, filed on Jan. 11 for Chapter 11 protection at the U.S. Bankruptcy Court for the Eastern District of Missouri. It has worked out a pre-packaged deal with lenders for the restructuring of debt and has said this should allow it to emerge from Chapter 11 largely intact.
The Feb. 9 motion to accept and reject certain agreements is due for a Feb. 23 court hearing. The agreements that the company wants to accept are:
- The North American Drillers Contract – Arch subsidiary ICG Tygart Valley LLC is party to a June 2015 agreement with North American Drillers LLC under which North American Drillers is drilling a bleeder shaft and installing an exhaust fan at the Leer Mining Complex in Grafton, West Virginia. The U.S. Mine Safety and Health Administration has strict regulations on getting rid of excess methane and dust, and the Leer Mine risks falling out of compliance with those regulations if this bleeder shaft is not completed by June 1, 2016. Locating another vendor to take over the bleeder shaft project would take substantial time and would incur significant additional costs, including a mobilization cost similar to the approximately $180,000 that North American Drillers billed to ICG Tygart during the pre bankruptcy petition period. Moreover, taking the time to locate a new vendor and get it up to speed on the project could result in MSHA shutting down the Leer Mine for failure to comply. Finally, of the approximately $2 million contract price for the North American Drillers Contract, only approximately $418,000 remains unpaid. Leer is a relatively new mine that went into production in 2011. MSHA data shows the mine produced 3.4 million tons in 2015 and 2.7 million tons in 2014.
- The Innovative Organics Contract – Arch Coal Sales Co. Inc. is party to a March 2015 agreement with Innovative Organics LLC under which Innovative Organics disposes of coal ash. Arch Coal Sales is party to coal supply agreements whereby it sells coal to certain entities and is required to accept for disposal the coal combustion fly ash generated by the purchasers when they burn the subject coal. Innovative Organics is an industry leader in the disposal and reuse of coal ash, which is subject to significant government regulation. If the Arch companies do not assume the Innovative Organics Contract, they would be forced to restructure their coal sales and ash disposal strategies, which strategies are critically linked, including locating a vendor able to manage the volume of ash that Innovative Organics currently handles for them. The debtors will also be unlikely to find ash disposal services on better terms than those offered in the Innovative Organics Contract. Moreover, Innovative Organics has agreed to provide a discount of 10% off the prepetition cure amount owed under the Innovative Organics Contract, and to accept postpetition payment on terms of net 30 days to Arch Coal Sales.
- The Barber Trust Leases – Arch’s Ark Land Co. is party to two leases with BOKF NA, as Agent for U.S. Bank N.A., as Trustee of the Charles F. Barber Trust, each dated as of Dec. 8, 2015, under which Ark Land leases two plots of land. The leased land is critical to future mining at the Viper underground coal mine in Williamsville, Illinois. The debtors are also in the process of negotiating the lease of additional land from the same lessors, and the assumption of the Barber Trust Leases is vital to those negotiations. Moreover, the Cure Costs for the Barber Trust Leases are minimal. MSHA data shows that Viper produced around 2.1 million tons in each of 2015 and 2014.
As for the agreements that Arch wants the court to let it reject:
- The Frontier Contract – Arch Coal is party to a January 2015 agreement with Frontier Communications of America Inc. under which Frontier provides telecommunication services at an Arch Coal office in Morgantown, West Virginia, that is no longer in use.
- The Petroleum Products Contract – Arch Coal is party to a 2004 agreement with Petroleum Products Inc. under which Petroleum Products provides delivery of diesel fuel and other petroleum products to fuel the debtors’ motor equipment and fixed equipment.
- The Stabilis Contract – Arch’s Thunder Basin Coal Co. LLC is party to a 2013 agreement with Stabilis Energy Services LLC under which Stabilis supplies Thunder Basin with liquid natural gas. Thunder Basin operates coal mines in Wyoming.
- AES Warrior Run Fuel Supply and Ash Disposal Agreement – Arch Coal Sales and Arch’s Hunter Ridge Coal Co. are parties to a 1993 agreement with AES Warrior Run Inc. under which Hunter Ridge supplies AES with coal for, and removes ash from, a cogeneration facility in Allegany, Maryland. “The cost of the AES Contract far exceeds the benefit it provides to the Debtors’ chapter 11 estates,” said the motion. “The Debtors seek to reject the AES Contract to relieve the Debtors’ estates of an unnecessary burden and save approximately $20 million in total.” Warrior Run is a 180-MW plant that uses circulating fluidized-bed combustion technology.
- EnerNOC Energy Management Agreements – Arch Coal is party to a 2014 agreement with EnerNOC Inc. and another 2014 agreement with EnerNOC. Also, Arch’s Coal-Mac Inc. is party to a January 2015 agreement with EnerNOC. Under these three contracts, EnerNOC provides Arch Coal and Coal-Mac with energy efficiency services and manages utility usage. “The cost of the EnerNOC Contracts far exceeds the benefits they provide to the Debtors’ chapter 11 estates,” the company said.