United States: Distressed Coal—Will The Cycle Ever Turn?

An Introduction to Legal Issues Confronting Coal Companies

Unprecedented Challenges for the Coal Industry

As evidenced by the recent spate of coal mining companies filing for bankruptcy protection (e.g., Alpha Natural Resources Inc., Patriot Coal, Walter Energy Inc., James River Coal Co., Trinity Coal Corp., Americas Energy Co., Clearwater Resources LP and Consolidated Energy), the coal mining industry is facing a period of historic stress. Although coal's preeminence as a fuel source has been declining for more than 150 years, a confluence of recent factors has contributed to a likely unprecedented level of difficulty in this industry. These factors include: (i) increasing competition from energy sources that can be used as an alternative to coal;1 (ii) implementation of new environmental regulations;2 (iii) decreasing global demand for coal caused, in part, by the economic slowdown in China;3 (iv) decreasing institutional investment in the coal industry due to corporate responsibility initiatives relating to environmental concerns;4 and (v) legacy employee and retiree pension and healthcare costs. Considering the forgoing factors, it is not surprising that the price of coal has dropped dramatically, falling more than 70 percent in the past four years.5

However, it may be too soon to write the final obituary for coal mining companies. Coal, even in long-term decline, will almost certainly continue to supply a critical component of the world's energy needs for many years to come. Therefore, there are reasons to be relatively optimistic that distressed coal mining companies can be successfully restructured and possibly even provide interesting investment opportunities. That being said, the futures of coal companies are particularly difficult to predict given the uncertainty as to where the price of coal and commodities in general will be over the next couple of years. Given the challenges surrounding the coal industry, it is particularly important that lenders to and investors in coal companies are familiar with both the common bankruptcy and restructuring issues as well as issues specific to the coal industry, as outlined below.

Specific Employee Health Issues

In addition to the employee and retiree obligations and regulations that need to be considered when dealing with the restructuring of any corporation, coal mining companies are subject to additional healthcare obligations and regulations that may add additional costs to a coal company's restructuring. The Coal Industry Retiree Health Benefits Act of 1992 (the Coal Act) requires most coal companies to contribute to a national health benefit fund which provides financial support to cover certain retired employees' health costs.6 The Federal Mine Safety and Health Act of 1977 (the Black Lung Act) permits certain coal miners affected by pneumoconiosis (black lung disease) to file claims with the Division of Coal Mine Worker's Compensation of the Department of Labor. If the Department of Labor determines that the claim is valid it will attempt to hold the respective coal company responsible. If the company is in bankruptcy, a trust established by the Treasury Department will pay the benefits and costs to the employee and will seek reimbursement from the company's bankruptcy estate.7 Whether or not a court authorizes a coal company to reject or modify its Coal Act and/or Black Lung Act obligations is a fact-driven question that will vary on a case by case basis. 8 Obligations under these statutes can be sizeable and have the potential to dwarf other unsecured claims which may jeopardize a coal company's ability to reorganize. Additionally, these obligations may complicate a restructuring by adding a number of additional constituencies to the process.

Effect of Environmental Regulations on Coal Bankruptcies

Restructuring coal mining companies often gives rise to conflicts between the goals of the Bankruptcy Code and the enforcement of numerous environmental laws which are applicable to these companies. While a key purpose of bankruptcy and restructuring is to provide the debtor company with the opportunity for a fresh start by leaving many of its prior obligations behind, modern environmental law aims to prevent and remediate environmental harms often by holding companies accountable for prior acts.9 The federal government's interest in environmental remediation has resulted in the promulgation of provisions in the Bankruptcy Code exempting government-mandated environmental cleanup actions from the automatic stay, thereby excusing certain environmental liabilities from being discharged.10 This creates uncertainty as to whether a mining company in bankruptcy can sell assets free and clear of environmental and other potential successor liabilities.11 Since the actual coal mines often require enormously costly environmental cleanup, it is imperative to understand what, if any, of these liabilities remain attached to the mines after a restructuring.

One area of environmental regulation of significant concern to coal mining companies is bonding and self-reclamation. Pursuant to federal, state and local laws, a company engaged in coal mining must restore its mined land to its natural or economically usable state (a Reclamation Obligation). Individual state laws typically require coal companies to post collateral to secure their Reclamation Obligations. Some states permit companies to forgo the requirement to post collateral necessary to satisfy their Reclamation Obligations if the company is able to meet certain financial and liquidity tests.12 The rationale for this exception, referred to as "self-bonding," is that a healthy coal company does not present a significant risk that it will fail to satisfy its Reclamation Obligations. While a company's ability to self-bond will increase its liquidity and profitability during positive economic circumstances, when a company becomes distressed, it is likely no longer able to satisfy the applicable state's self-bonding requirements. Furthermore, states with significant mining activities may take defensive actions to limit self-bonding even before a bankruptcy filing. While potentially important to protect the environment, the inability to self-bond will put increased pressure on the balance sheet of already stressed coal companies by forcing them to purchase a bond from an outside source.

Security Interest and Lien Analysis

The perfection of security in a coal company's natural resources can be complicated, and perfection documentation is often extensive. Financing of coal companies often includes complex and detailed mortgages on the various mining and commodity operations. Furthermore, a coal company will often have mines across multiple states, each of which has its own local laws pertaining to the perfection of a security interest. Lenders to a coal company should be sure to conduct satisfactory diligence relating to the forgoing matters. Additional diligence of collateral may also include determining (i) whether the lender has a lien on the borrower's cash prior to an occurrence of an event of default (i.e., a deposit account control agreement); and (ii) whether the borrower's debt is subject to springing liens upon the occurrence of an event of default.

Springing liens are a component of security interests worthy of particular diligence since they provide that the lender will be entitled to a lien on certain collateral upon the occurrence of a specific triggering event. For example, a loan agreement may include a springing lien that causes a lien to be placed on the borrower's assets if certain events of default occur (e.g., a credit rating falls below a specified level or a leverage ratio rises above a certain level). Springing liens have the ability to change the lien coverage of a loan obligation radically by either increasing the related security package if the loan receives the benefit of the new lien or inversely causing the loan to only have a second lien behind other obligations benefiting from the new lien.13 Note that a springing lien that is implemented in close proximity to the date of a bankruptcy filing risks being challenged as a preference and potentially as a fraudulent conveyance.

Another related concern is springing maturities which contributed to Quicksilver Resources' (Quicksilver) filing for bankruptcy protection. Quicksilver's combined credit agreements provided that the company had to refinance its senior subordinated notes by January 2016 to avoid triggering the early maturity of its second-lien term loans which were otherwise due in 2019. The combined credit agreements additionally provided that if the second lien term loans were to mature, a springing maturity on senior revolving loans would mature as well.14 After unsuccessfully trying to restructure outside of court, Quicksilver filed for Chapter 11 bankruptcy protection on March 17, 2015.15

Debt-for-Equity Conversions

Another consideration for coal company lenders to contemplate is the complication of potential debt-for-equity conversions as the outcome of a restructuring. Both a bankruptcy process as well as an out of court restructuring often result in the debt of the debtor being converted into equity of the debtor or that of a new company holding the prior company's assets, resulting in the creditors functionally owning the company.

Although control of the equity may be an investor's desired outcome, there are potential pitfalls to such an arrangement, particularly with regard to a coal mining company. Given the highly regulated nature of the coal mining industry, lenders need to be familiar with all regulatory approvals relating to ownership of a coal company.

Additionally, lenders in a potential debt-for-equity conversion scenario should be aware that even if the bankruptcy process successfully expunges all liabilities associated with the company, new liabilities (including those that are specific to the coal industry) are likely to accrue starting immediately after the bankruptcy plan becomes effective. It is therefore vital that significant equity holders of a coal company utilize limited liability vehicles that are effectively structured to shield the investors from liability.

Master Limited Partnerships

Although not very common in the coal industry, many energy companies, including some coal companies, utilize master limited partnerships (MLPs) in their corporate structure. MLPs are publicly traded investment vehicles that provide certain tax benefits and generally a high yield to their investors. A company's utilization of the MLP structure may implicate various additional restructuring issues, such as ascertaining that the assets were properly transferred to the MLP and potential claims of MLP shareholders. For further information on this topic, please see Kaye Scholer's " The Price of Oil and the Potential for MLP Restructurings and Insolvencies."

Other Considerations

The distressed trading of a coal company's debt on documentation published by the Loan Syndications and Trading Association may involve the buyer's reliance on its seller's predecessor purchase agreement (an "upstream agreement"). While not unique to the coal industry, properly reviewing the terms of upstream agreements, particularly when purchasing from potential insiders, is an important consideration for buyers of distressed coal company loans.

Some companies involved in the coal industry are privately held. Privately held companies generally are not subject to many of the reporting requirements mandated by the Securities and Exchange Commission resulting in less publicly available information. Consideration should be given to what level of additional diligence is required when engaging in transactions with privately held companies given the probable lack of publicly available information.

Over the past few years, across all industries, many new credit agreements have tended to return to the type of borrower friendly and lighter covenant protections that were common before 2009.16 These covenant-light credit agreements may allow the borrower to incur additional secured and unsecured debt that would otherwise be prohibited by a credit agreement with more robust covenant obligations. A company's ability to incur and layer additional debt is an important concern that should be closely examined by potential investors prior to investing into a particular tranche of an issuer's debt.

Conclusion—The Future of the Coal Mining Industry

Coal companies seeking to restructure their business, either under the protections afforded by the Bankruptcy Code or out of court, face a series of specific employment, environmental, regulatory and financing issues. Lenders and investors in the coal industry should also take into account the various regulatory issues that are unique to the coal industry.

Although the coal industry is in decline and facing multiple challenges, coal still accounts for approximately 39 percent of US electricity production and even more than that worldwide and will remain a significant economic driver for many years to come.17 It should be noted that many of the issues facing the coal mining industry today were previously successfully dealt with in other sectors such as airlines, chemicals and auto parts. However, before that will happen, many of these companies and their lenders will need to go through a potentially painful restructuring process. Through careful analysis and well-executed restructurings there is likely to be some light for coal companies and their investors at the end of this seemingly dark tunnel.

Footnotes

1. See http://www.nytimes.com/2015/07/18/business/energy-environment/coal-miners-struggle-to-survive-in-an-industry-battered-by-layoffs-and-bankruptcy.html?_r=0.

2. Recent environmental regulations include: (i) a final rule regulating coal combustion residues which establishes a comprehensive set of requirements for the disposal of coal combustion residuals (aka coal ash) in landfills and surface impoundments; (ii) the Maximum Achievable Control Technology standard (MACT) (which established a more severe set of emission regulations for certain large industrial facilities that are considered "major" sources of hazardous material emissions); (iii) the Cross-State Air Pollution Rule (which requires states to reduce power plant emissions that contribute to ozone and/or fine particle pollution in other states); and (iv) the Clean Power Plan. (President Obama also recently announced plans to reduce carbon dioxide emissions from existing fossil fuel power plants to 68 percent of their 2005 levels by 2030.) See http://www2.epa.gov/coalash/coal-ash-rule;http://www3.epa.gov/airtoxics/112g/112gpg.html; http://www.epa.gov/airtransport/CSAPR/; http://www.washingtonpost.com/news/energy-environment/wp/2015/08/01/what-you-need-to-know-about-obamas-biggest-global-warming-move-yet-the-clean-power-plan/.

3. See http://www.businessinsider.com/global-coal-demand-is-slowing-fast-2015-6.

4. For example, Norway's parliament voted to have its $890 billion government pension fund divest many of its fossil fuel investments. See http://www.nytimes.com/2015/06/06/science/norway-in-push-against-climate-change-will-divest-from-coal.html.

5. See http://www.wsj.com/articles/met-coal-hits-lowest-price-in-a-decade-1434577741.

6. See 26 U. S. C. §9702(a), available at https://www.law.cornell.edu/uscode/text/26/9702.

7. See The Federal Mine Safety and Health Act of 1977 (Public Law 91-173, as amended by Public Law 95-164), available at http://www.msha.gov/REGS/ACT/ACTTC.HTM; 26 U. S. C. §9501 available at https://www.law.cornell.edu/uscode/text/26/9501 

8. For example, a bankruptcy court in Kentucky allowed a coal company to renegotiate its collective bargaining agreement and Coal Act obligations and, authorized the company to reject its collective bargaining agreement obligations and modify its Coal Act obligations. See In re Horizon Natural Res. Co., 316 B.R. 268 (E.D. Ky. 2004). A West Virginia bankruptcy court, also tasked with deciding if a coal mining company could reject its collective bargaining agreement, however, denied the coal company's request to be authorized to reject its collective bargaining agreement. See Lady H Coal Co., 193 B.R. 233 (Bankr. S.D.W.Va. 1996). The court in Kentucky had found that the coal company's proposed modification of its obligations satisfied section 1113's requirements to negotiate with the union in good faith; the court in West Virginia found that the debtor failed to meet the substantive requirements of section 1113 of the Bankruptcy Code and that it was unclear if the proposal made by the debtor to its employees was fair and equitable or negotiated in good faith.

9. See In re Distrigas Corp., 66 B.R. 382, 384 (Bankr. D. Mass. 1986) ("On the one hand, bankruptcy's interest in reorganization and a fresh start .... On the other side is a strong and growing recognition of society's interest in protecting the environment...").

10. Under section 362 of the Bankruptcy Code, the moment a bankruptcy petition is filed, the automatic stay operates to stay acts to collect any debt owed by the debtor including actions by creditors, collection agencies, and government entities.

11. See 11 U.S.C. § 362(b)(4); U.S. v. Nicolet, Inc., 857 F.2d 202, 207 (1990) (finding that the Bankruptcy Code's automatic stay exclusions provisions "embody Congress' recognition that enforcement of the environmental protection laws merits a higher priority than the debtor's rights to a 'cease fire' or the creditors' rights to an orderly administration of the estate."). See In re General Motors Corp., 407 B.R. 463, 504 (Bankr. S.D.N.Y. 2009) ("Viewed nationally, the case law is split in this area, both at the Circuit Court level and in the bankruptcy courts. Some courts have held that section 363(f) provides a basis for selling free and clear of successor liability claims, and others have held that it does not.").

12. Alabama, Arkansas, Colorado, Illinois, Indiana, Louisiana, Mississippi, New Mexico, North Dakota, Ohio, Pennsylvania, Texas, Utah, West Virginia, and Wyoming all permit self-bonding. See http://imcc.isa.us/Self%20Bonding%20Survey.pdf

13. In re MPM Silicones, LLC, 2014 WL 4436335 (Bankr. S.D.N.Y. Sept. 9, 2014).

14. See Quicksilver Resources Inc., SEC Form 10Q filing (filed May 12, 2014).

http://investors.qrinc.com/secfiling.cfm?filingID=1060990-14-95&CIK=1060990#KWK10-Q20140331_HTM_S7F56F9135C5C152E3C7F2E65ADBB40E0; http://www.bloomberg.com/news/articles/2014-07-25/quicksilver-faces-cascade-of-maturities-distressed-debt

15. The Chapter 11 filing, automatically accelerated Quicksilver's obligations under its combined credit agreements but also stayed all collection actions during the pendency of the bankruptcy. See Quicksilver Resources Inc., SEC Form 10Q filing (filed Aug. 10, 2015); In re Quicksilver Resources Inc., Case No. 15-10585.

16. See http://www.federalreserve.gov/aboutthefed/fac-20150903.pdf

17. See http://www.eia.gov/tools/faqs/faq.cfm?id=427&t=3; http://www.worldcoal.org/resources/coal-statistics/.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
The Brattle Group, Inc.
Fox Rothschild LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
The Brattle Group, Inc.
Fox Rothschild LLP
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions