Patriot Coal Corp. (PCX:US), the bankrupt coal producer, won permission to borrow part of an $802 million loan to fund operations while it tries to reorganize by cutting labor costs.
The company can borrow $677 million on an interim basis, U.S. Bankruptcy Judge Allan Gropper said today in Manhattan. Patriot, based in St. Louis, sought bankruptcy protection yesterday after milder winters, stricter clean-air rules, and a shift to natural gas by power producers sent U.S. coal demand to a 24-year low.
“We believe we have a strong and re-organizable company,” Damian Schaible, a lawyer for Patriot, told Gropper in court today.
Gropper approved the financing after first sending the company back to negotiate with lenders over a part of the loan that includes $302 million in prior loans that have been rolled over. Gropper said Patriot hadn’t shown that it needed to structure the loan that way.
Lawyers for Patriot said they couldn’t get the loan without that provision, and the company would suffer “immediate and irreparable harm” if it wasn’t able to immediately access the loan. Flip Huffard, a managing director at the company’s restructuring adviser, Blackstone Group LP, told Gropper that the company wasn’t able to get other loans after trying for three weeks, and the loan is needed to show customers and business partners that the company is viable.
“It’s a big billboard we’re trying to put in front of the world: We’re open for business,” Huffard said.
The company intends to “emerge as a viable and strong competitor in the coal industry,” Chief Financial Officer Mark Schroeder said yesterday in court papers. Patriot needs to trim labor costs because of declining prices and demand for coal, along with regulations that will require the company to spend hundreds of millions of dollars on water-treatment facilities and pension benefits in coming years, he said.
A new Environmental Protection Agency rule controlling toxic emissions from coal-fired generators will “limit the future development” of such plants as the U.S. government offers incentives to developers of cleaner energy sources, like natural gas, Schroeder said.
Patriot has said it expects its mining operations and customer shipments to continue during the bankruptcy case. The company won court approval today to pay about 4,000 full-and part-time employees. Other routine motions, such as one to pay its most important vendors, were deferred because Gropper was filling in for Judge Shelley Chapman, who will hear those issues at a July 16 hearing.
Pension and health-care obligations to unionized employees will cost the company about $100 million this year and more than $1.3 billion in total, Schroeder said. About 42 percent of Patriot’s employees are represented by the United Mine Workers of America under collective-bargaining agreements, which put the company at a disadvantage to non-union competitors, Schroeder said.
In addition, Patriot has a liability for $696.8 million in pension and medical benefits for retired employees stemming from its 2007 spinoff from Peabody Energy Corp. (BTU:US) As a result of the spinoff and the 2008 purchase of Magnum Coal Co., Patriot now pays benefits to more than three times as many retirees and dependents as active employees, Schroeder said.
Other obligations to former employees include $186 million tied to the “Black Lung Benefits Act,” a 1969 law that requires compensation to former coal miners with black lung disease, caused by breathing coal dust. Patriot separately had workers-compensation liabilities of $73 million as of Jan. 1.
Of the $802 million loan, $377 million will go to repay current debt, leaving $425 million to fund operations. Citigroup Inc. (C:US) is an agent for lenders that will be repaid first under the loan, and Bank of America Corp. (BAC:US) is an agent for those who will be repaid second. Citigroup, Barclays Plc and Bank of America’s Merrill Lynch are also acting as agents to themselves and lenders under the syndicated loan.
The financing consists of a $375 million term loan, $125 million revolving loan, and $302 million in letters of credit from prior loans that have been rolled over.
Fees for the loan will total $33.5 million, according to court papers. Patriot had asked to keep the structure of the fees and details about the loan’s syndication confidential, saying the information needed to be kept from competing financial institutions. Gropper deferred that issue to Chapman.
Patriot has identified 34 contracts it can end to cut costs. Canceling a 2005 agreement with units of Alpha Natural Resources Inc. (ANR:US) could save $80 million in the next five years, Patriot said in court papers. The company also seeks to end a 2009 contract requiring it to pay $7 million to American Freedom Innovations LLC for lobbying and consulting and to reject equipment leases to save $5 million.
Patriot’s Chapter 11 petition listed $3.57 billion in assets and $3.07 billion in debts. BlackRock Inc. (BLK:US), State Street Corp. (STT:US) and Vanguard Group Inc. each control (PCXCQ:US) 5 percent or more of Patriot’s voting stock, according to court papers.
Patriot shares (PCXCQ:US), delisted today from the New York Stock Exchange, fell 65 percent to about 22 cents in over-the-counter trading. They declined 90 percent in the year before yesterday’s bankruptcy filing.
Coal Demand Falls
The company’s $250 million in 8.25 percent notes due in 2018 traded at 37 cents on the dollar today, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Patriot’s $200 million in 3.25 percent notes due in 2013 traded at 7 cents, according to Trace.
Patriot has 12 active mining complexes in Appalachia and the Illinois Basin and controls an estimated 1.9 billion tons of coal reserves, according to court papers. It sells thermal coal to electricity generators and metallurgical coal to steel and coke producers.
U.S. coal use in the first quarter was the lowest for that period since 1988, according to the Energy Information Administration. Utilities have switched some power plants to cheaper natural gas, which fell to a decade low in April amid a surplus of the fuel.
Patriot got 87 percent of its 2011 revenue from coal mined in the Central Appalachian region of the U.S., which includes Kentucky and West Virginia. Its operating costs in Appalachia were $71.06 a ton last year, while the average price of Central Appalachian coal futures was $75.86.
The case is In re Patriot Coal Corp., 12-bk-12900, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
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