Arch Coal, one of the nation's top coal producers, on May 5 filed with its bankruptcy court a reorganization plan and accompanying disclosure statement that would see it emerge, pending creditor and court approvals, as an intact company.
On Jan. 11, Arch Coal filed for Chapter 11 protection at the U.S. Bankruptcy Court for the Eastern District of Missouri. Also in Chapter 11, at a time of unprecedented turmoil for the U.S. coal business, are top competitors Alpha Natural Resources and Peabody Energy. Both Patriot Coal and Walter Energy have had their assets sold off in bankruptcy within the past year.
For the year ended Dec. 31, 2015, Arch sold an estimated 128 million tons of coal, including approximately 1.4 million tons of coal it purchased from third parties.
Said the May 5 disclosure statement from Arch: "The Plan that the Debtors have filed embodies the terms set forth in the Restructuring Support Agreement, dated as of January 10, 2016, between the Debtors and holders of more than 50% of their First Lien Credit Facility debt (as has been amended from time to time in accordance the terms thereof, the “RSA”). Beginning on the Petition Date, the Debtors sought to obtain support for the plan contemplated by the original RSA from the holders of General Unsecured Claims, to whom the RSA offered the option of what the parties to the RSA expected to be viewed as an enhanced distribution in the form of common stock and warrants issued by Reorganized Arch Coal.
"In the weeks prior to the filing of this Plan, it become clear that this proposed distribution would not currently meet with wide acceptance among holders of General Unsecured Claims. Accordingly, prior to filing this Plan, the RSA was amended to remove this proposed distribution, and the Plan provides that holders of General Unsecured Claims will receive the distribution they are entitled to under the Bankruptcy Code. The Debtors remain focused on reaching consensus on a plan of reorganization among their creditors, and the Debtors will modify the Plan and this Disclosure Statement as necessary during this process."
Arch said the commencement of the Chapter 11 cases for it and subsidiaries was precipitated by the convergence of several dramatic changes in the market and regulatory environment for coal. "Prior to the Petition Date, the Debtors took numerous actions to adapt to these evolving market conditions and to position themselves for future success," it added. "However, as market headwinds persisted, it became clear that material changes to Arch’s balance sheet were necessary. The Plan that the Debtors are proposing would achieve such a balance sheet restructuring, significantly reducing its debt and further advancing Arch’s efforts to position itself for long-term success.
"The same challenges that have affected Arch have caused the distress of virtually every major U.S. coal company and the commencement of chapter 11 cases by several of the largest companies in the industry. However, despite recent changes in power generation markets, the Company expects there to continue to be a sizable domestic market for U.S. thermal coal for the foreseeable future. Moreover, the Company expects high-quality, low-cost U.S. metallurgical coals to continue to play a significant role in global markets given a positive outlook for steel demand, particularly in the developing world. Arch believes that contraction of U.S. coal supply will lead to a smaller but healthier industry, in which companies with low-cost production in the most strategic market segments and coal supply basins, such as Arch, will be positioned to survive and prosper.
"Arch benefits from a highly competitive metallurgical franchise in Appalachia, a leading thermal position in the Powder River Basin and complementary thermal bituminous assets in the Western Bituminous and Illinois Basin regions. The Company is bolstered by its experienced, highly skilled and well-trained workforce; its established asset base of large, modern and efficient mining complexes; and its lengthy and proven track record of industry leadership in both mine safety and environmental stewardship. These qualities have enabled Arch to move efficiently through these Chapter 11 Cases and will enable a reorganized Arch to operate successfully upon emergence from bankruptcy.
"Today, Arch conducts mining operations at ten active mine complexes. For reporting purposes, the Company organizes its production units into three segments: the Powder River Basin segment, with operations in Wyoming; the Appalachia segment, with active operations in West Virginia, Kentucky, and Virginia; and the Bituminous Thermal segment, with operations in Colorado and Illinois. In 2015, 84% of the coal Arch produced and sold based on volume was from the Powder River Basin. The Appalachia segment accounted for approximately 10% of Arch’s sales by volume in 2015, including all of its metallurgical coal, which typically receives a significant premium to thermal coal in the marketplace. Operations in Colorado and Illinois comprised the remaining 6% of sales by volume.
"Since the Petition Date, Arch has expanded its cost-reduction activities and furthered streamlined its operating portfolio. The Company recently sold its idled Knott County complex in [Kentucky] and has shifted its Vindex operation in Maryland to strictly reclamation status. Additionally, the Company has further reduced its workforce by eliminating 230 positions at the Black Thunder operation in a continued effort to better match production and operating costs to demand."
Black Thunder, located in the Wyoming PRB, is the nation's second largest coal mine. Wyoming, by the way, has lately moved to now allow coal companies to self-bond their reclamation liabilities anymore since those companies don't have the deep financial pockets they used to have. As of Dec. 31, 2015, the debtors had self-bonded an aggregate of approximately $485.5 million of such obligations.
Said Arch about how it has dealt with the self-bonding crunch: "In connection with the commencement of these Chapter 11 Cases, the Debtors sought to secure a means of providing financial assurances to Wyoming without having to obtain additional third-party surety bonds or posting additional collateral, each of which, if achievable at all, could entail significant expense and directly impact the Debtors’ liquidity position. After extensive negotiations, the Debtors and the State of Wyoming, acting through the [Wyoming Department of Environmental Quality], entered into a stipulation that granted Wyoming a $75 million Bonding Super priority Claim to support the self-bonded obligations and agreed to substitute approximately $17 million of the self-bonds with financial assurance in the form of third-party collateral support.
"In exchange, Wyoming agreed to a stay of any proceedings by Wyoming related to the Debtors’ self-bonded status and that, so long as the stipulation is effective, Wyoming will not seek additional collateral in respect of the self-bonds, take certain other adverse actions with respect to the Debtors’ mining permits or licenses in Wyoming or seek to enforce the Debtors’ obligations to make payments in respect of the self-bonds. The stipulation is effective until the earlier of May 1, 2017 and the date upon which a plan of reorganization in the Chapter 11 Cases is approved and becomes effective, subject to certain early termination events. The stipulation was approved by the Bankruptcy Court on February 29, 2016."
This article was republished with permission from Generation Hub.