Deconstructing Blackjewel's New Survival Plan
Three weeks after filing for Chapter 11 reorganization, coal company Blackjewel L.L.C. has a plan to keep operating some of its mines. Contura Energy is willing to put down the money to become the stalking horse bidder and potentially take over and operate several mines including Wyoming's Eagle Butte and Belle Ayr. Contura already holds the mining permits and reclamation bonds for the two mines.
The sale "will ensure that the Western Mines and the Pax Mines are restored to operating status and up to 700 Wyoming residents are able to continue earning regular wages in jobs associated with the mines for an estimated minimum of six to twelve years," writes Blackjewel attorneys in a filing. Pax mines are a surface mining complex in West Virginia.
Pending court approval, the company would put down $8.1 million to finance the expedited sale process ending in an auction by next Thursday, August 1. Blackjewel has agreed to sell specific assets to Contura in exchange for the assumption of hundreds of millions of dollars in liabilities including reclamation costs and pay-roll related bills. If the sale goes through without a superior bidder on August 1, Contura will pay an additional $12.5 million in cash.
Since the reorganization filing on July 1, Blackjewel advisors have searched for a long-term financing plan to avoid a fast-paced sale. Blackjewel's advisor Jefferies LLC wrote in filing 314 it had reached out to 30 potential lenders, but faced an uphill battle. The advisors pointed to:
- Pre-petition secured creditors unwillingness to fund financing
- Expensive to restart operations after shutdown
- $1 million/week cost to simply maintain debtor mines
- Lender concern its financing might not get priority in debt collection
- A potential lien dispute (order-of-debt-collection dispute) between pre-petition secured lenders
Without a long-term financing plan and disappearing funds from its short-term plans, Blackjewel attorneys felt a stalking horse bidder wasn't only the best option, but the only option.
"The Debtors' incremental debtor-in-possession financing liquidity has now been exhausted, and absent approval by the court of the sale process proposed herein and Contura's stalking horse bid, the Debtors will ultimately be forced into chapter 7," the documents stated.
In a hearing today, Blackjewel attorney Stephen Lerner said financing would run out for the company today with bills due tomorrow, July 26.
Contura Energy, based in Tennessee, handed Blackjewel the reins to the two Powder River Basin mines at the end of 2017. But since then, the company has held onto reclamation obligations and mining permits for the company.
Josh Macey, visiting law professor at Cornell University, said that's central to what's underway now. He said Blackjewel's bankruptcy put Contura in a position where continued mining is in their best interest.
"Presumably, Contura is just doing this because they haven't gotten rid of the permits, so they're still on the hook for reclamation and there's a reason to mine coal for a few more weeks or months or years," Macey said.
In a press release from Contura, interim co-chief executive officer Andy Eidson alludes to that, saying, "Contura's divestment of these PRB assets over a year and a half ago was a strategic decision to focus on our met-heavy eastern asset base, and while that remains our strategic focus, our considerations changed when Blackjewel declared bankruptcy."
Macey explains that by taking on Blackjewel, Contura is effectively avoiding having to pay out reclamation costs in excess of $200 million right away. The company has been struggling financially. It's had negative cash flow for three of the past five quarters.
A Speedy Sale
During a hearing to consider Contura's stalking horse bid, Judge Frank Volk of the United States Bankruptcy Court for the Southern District of West Virginia along with a U.S. Government attorney questioned the speedy nature of the sale.
"I never imagined in a million years that I would approve the sale of this nature on such a short time table, at least while sitting on the bench. But this has some very unusual components," said Volk, touching on consolidation in the Powder River Basin already underway.
Volk also questioned Blackjewel's debtors if their advisor, Jefferies, had truly done its due diligence in a search for a long-term debtor-in-possession (DIP) financing plan.
U.S. Government attorney Fred Westfall also took issue with the fast-paced sale schedule. He said there's not even a list of all of Blackjewel's assets or liabilities yet.
"I don't see how that will be sufficient time for potential bidders to be able to look at the situation, do due diligence, be able to look ask the assets and do a determination of what they want to bid on. I think that's a very short time frame," Westfall said.
Debtors'; attorney Stephen Lerner said a list of all assets and liabilities is underway, but Blackjewel will have to push its release past the expected deadline of July 31.
The Royalty Question
Westfall also raised an objection that could throw a wrench in Blackjewel's plan with Contura. He said the current plan makes way for reclamation liabilities, but leaves no room to pay back-taxes and back-royalties.
"What's essentially being asked is to give away these leases and [we';re] going to lose the unpaid royalties and we're going to lose probably the tax lien," Westfall said. "This process defeats the regulatory process for handling coal mines. It's going to create a system in the future that's going to encourage companies not to pay royalties."
Contura attorney Damian Schaibel said his company is absolutely committed to making a deal with the government. But he said, "I can't promise it, your honor, because there's only so much Contura can do."
He added it's unlikely all back-taxes and royalties will be paid in full. A deal can';t go through without the consent of the federal government: it's responsible for a lease transfer.
Clark Williams-Derry, director of energy finance at Sightline Institute, interprets why Contura isn't willing to pay the back-taxes and royalties.
"They could be saying we put in that much money towards all the debt Blackjewel owes including the taxes," he posits. "Why aren't they willing to pay the back taxes? Because [Contura is] only willing to put in $20 million period."
A deal was not reached by the time court adjourned. Without a deal tonight, the conversation will continue tomorrow morning when Campbell County may also raise concerns about unpaid ad valorem taxes. Blackjewel is currently delinquent about $17 million in production taxes to the county.
In the Debtors' motion to designate Contura as the stalking horse bidder, part of the deal was terminating employees' 401(k). That means, if Contura took over operations, retirees and employees would be given the choice to either take a pay-out or roll over the funds into an I.R.A. Anyone under 59 and a half years of age would take a 10 percent penalty in a pay-out.
The U.S. Trustee supervising the case asked why employees didn't get more notice about the 401(k) termination and why it wasn't filed under a separate motion. Debtors' attorney Lerner said a termination provides more flexibility with no significant cost to employees.
"We don't believe there's any downside. Again, the employee will determine whether they receive the money, but unless we do this, the employees will not be able to access the funds," Lerner said.
Cornell's Macey said a 401(k) termination is a sign the company doesn't really want to mine it long-term.
"If they really planned to employ all of these people, the 401(k) would already be set up," Macey said. "My take is if Contura planned to operate the mines, they would cover the 401(k) because they would have to provide some sort of benefits to these employees anyway."
Josh Macey said a Contura take-over could mean many things. It could mean a long-term operational plan, but Macey doubts that. After all, Contura's press release said it was a strategic decision to divest from its western assets in hopes of focusing on its eastern ones. Plus, the company already has significant debt.
Macey said this could end up looking similar to a Chapter 7 liquidation plan.
"I think that Contura realized they didn't have much leeway, and this is faster and simpler than what would have happened in liquidation, but it's a similar result," Macey said.
As for eastern assets, Blackjewel's attorney Lerner said they may have more value than previously thought. But that, too, is up in the air.
"It's possible and quite likely that we won't sell every asset and because we won't have additional financing available to us… we're either going to convert or dismiss the cases at the end of the sale process," Lerner said.
A hearing in consideration of Contura's stalking horse bid continues tomorrow morning at 10:30 MT in West Virginia.