February 17, 2020 − Hartshorne Holdings, LLC and three affiliated Debtors ("Hartshorne” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Western District of Kentucky, lead case number 20-40133. The Debtors, Western Kentucky miners of thermal coal, are represented by Edward M. King of Frost Brown Todd LLC. Further board-authorized engagements include (i) Squire Paton Boggs (US) LLP (“SPB”) as general bankruptcy counsel, (ii) FTI Consulting, Inc. (“FTI”) as financial advisors (with FTI's Bertrand Troiano to serve as CRO), (iii) Perella Weinberg Partners LP (“Perella”) as investment banker and (iv) Stretto as claims agent.
The Debtors’ lead petition notes between 1 and 50 creditors; estimated assets between $50.0mn and $100.0mn; and estimated liabilities between $50.0mn and $100.0mn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Fricke Management & Contracting, Inc. ($696k trade debt), (ii) Minova USA, Inc. ($508k trade debt) and (iii) Envision Contractors, LLC ($507k trade debt).
In a press release announcing the filing, the Debtors advised that “to facilitate a value-maximizing sale of its operating Poplar Grove coal mine, undeveloped Cypress coal project and other business assets, it filed voluntary Chapter 11 petitions in the United States Bankruptcy Court for the Western District of Kentucky (the 'Court'). The Company intends to continue mining operations during the bankruptcy and sale process, after transitioning from two mining units to one mining unit."
A company spokesman added, "Despite our best efforts and progress, operational and technical challenges continue to prevent us from achieving anticipated volumes. After a thorough evaluation of our near-term financial outlook and operational performance, Hartshorne's management team, Board of Managers, and advisors have determined that additional financing is needed to continue our efforts. Accordingly, we are pursuing an accelerated sale process to identify potential new owners who can continue this work while optimizing value for all stakeholders including our lenders, employees, customers, and suppliers."
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Declaration”), David Gay, the Debtors' President, detailed the events leading to Hartshorne's Chapter 11 filing. The Declaration states: "While the Debtors continue to believe in the Western Kentucky region and the high quality coal produced from the Poplar Grove Mine, they have not been able to produce coal in the volumes necessary to generate a positive cash flow and stave off a liquidity crisis that ultimately necessitated the filing of these chapter 11 cases. The Debtors’ inability to meet production targets is the result of (i) ongoing operational and technical issues, and (ii) the same regulatory and cost pressures that have led to an industry-wide downturn among coal companies."
Taking the now familiar coal sector issues first, the Declaration provides the following on declining demand for coal and its regulatory environment: "Dating back to 2012, the coal industry has been under intense pressure by a combination of declining commodity prices, reduced domestic demand for both thermal and metallurgical coal, and increased oversight and costs associated with regulatory compliance. As a result, the industry as a whole has been operating in a generally higher cost environment than prior periods.
A combination of an abundant, cheap and reliable alternative fuel in the form of natural gas, increased usage of renewable sources of energy, and the shutting down of coal fired power generation largely due to increased regulatory pressure and costs has severely impacted demand for thermal coal domestically. In this period of declining demand, increased federal and state regulatory scrutiny has significantly increased the overall industry cost of compliance. Changes to regulations surrounding health and safety, permitting and licensing requirements, environmental protection and the reclamation and restoration of mining properties along with increased enforcement of existing laws has had a significant impact, reducing mine productivity and increasing the cost of maintaining compliance."
Fair enough. It is the "operational and technical issues," however that leave one wondering whether the Debtors would find themselves in trouble even in boom times. The Declaration covers a series of operational disappointments relating to the geologically challenged Poplar Grove Mine (which is the Debtors' only operating mine, the "Cypress Mine" not yet constructed) which include:
- unexpected geological soil issues discovered in 2018 requiring a redesign of the slope and the resubmission of plans to the Mine Safety and Health Administration (“MSHA”);
- the dicovery by the "first unit" of a "paleochannel" (ie sandstone displacement) which required extensive drilling and blasting and delayed productive mining. It also caused water ingress, which softened the mine roadways and slowed haulage;
- an encounter by the "second unit" of a geological fault which was not where it was expected to be, resulting in delays, diminished production and ultimately the requirement that the second unit be moved away from the geological fault;
- floor conditions at the Poplar Grove Mine much softer than anticipated, slowing the movement of mine cars and increasing the frequency of battery changes required by the mine cars;
- processing yields negatively impacted by out of seam dilution caused by several factors, including floor conditions and penetrating faults; and
- a Q4 2019 encounter by the first mining unit of a geological fault that was previously unidentified, in this instance a coal seam displaced approximately twelve feet and through which the Debtors continued to mine, albeit with significantly reduced production and processing yields.
The Declaration continues: "After it became clear the Debtors were facing liquidity challenges, FTI Consulting, Inc. ('FTI') was engaged in late-December 2019 to analyze the Debtors’ financial condition and make recommendations regarding a path forward. Squire Patton Boggs (US) LLP ('Squire') was retained as restructuring counsel in mid-January 2020 and PWP was re-engaged shortly thereafter. The Debtors and their advisors immediately commenced discussions with the agent for the senior secured lender, Tribeca Global Resources Credit Pty Ltd ('Tribeca'), regarding a consensual path forward.
Tribeca indicated that it was unwilling to continue funding the Debtors’ regular operations outside of chapter 11 case and the commencement of a sale process. Given the lack of viable alternatives, the Debtors, in an exercise of their reasonable business judgment, determined that the best means of maximizing value was to commence these chapter 11 cases and seek to sell substantially all of their assets pursuant to section 363 of the Bankruptcy Code."
About the Debtors
The Debtors are engaged in the production and sale of high quality thermal coal through the operation of the Poplar Grove Mine, which is part of the Buck Creek Complex located in the Illinois Coal Basin in Western Kentucky. The Buck Creek Complex includes two mines – (i) the operating Poplar Grove Mine, and (ii) the permitted, but not constructed, Cypress Mine. The projected production capacities of the Poplar Grove Mine and the Cypress Mine are 2.8 Mtpa and 3.8 Mtpa, respectively. 6.As of February 20, 2020 (the “Petition Date”), the Debtors controlled 40,114 gross acres (16,234 hectares) of reserves in Kentucky through 331 individual coal leases with private mineral owners. The Western Kentucky area is among the best mining jurisdictions in the United States due to its proximity to utility companies and access to low cost power, transportation and a non-union labor pool. Mining conditions at the Poplar Grove Mine are generally similar to those encountered in neighboring mines, which rank as some of the most productive room-and-pillar thermal coal operations in the United States.
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