By Taylor Kuykendall

DECLARATION OF PHILIP J. CAVATONI, EXECUTIVE VICE PRESIDENT & CHIEF FINANCIAL AND STRATEGY OFFICER OF DEBTOR ALPHA NATURAL RESOURCES, INC., IN SUPPORT OF FIRST DAY PLEADINGS OF DEBTORS AND DEBTORS IN POSSESSION

Alpha Natural Resources Inc. became the largest U.S. coal company yet to file for Chapter 11 bankruptcy protection on Aug. 3, and while the executives hold a bleak outlook for the near-term market, the company says it still sees a future for the industry.

In a company news release on the restructuring, Alpha Chairman and CEO Kevin Crutchfield warned the public not to think of coal — or Alpha for that matter — in the "past tense." In declarations filed with the U.S. Bankruptcy Court for the Eastern District of Virginia in Richmond, Crutchfield and Executive Vice President, Chief Financial and Strategy Officer Philip Cavatoni spelled out their support for certain first-day requests of the bankruptcy court and explained the events of recent years leading to Alpha's downfall.

"The unprecedented changes facing the coal industry run deep and are occurring at a frenetic and unpredictable pace," Crutchfield said in his declaration. "… The U.S. coal industry as currently structured is unsustainable."

Multiple major coal producers as well as dozens of smaller coal companies have been driven to the "brink of insolvency," Crutchfield notes, and he said more will continue to be under the pressures of a precipitous decline in demand and pricing due to regulatory constraints, low natural gas prices, legacy costs, environmental obligations and reclamation bonding demands. Alpha plans to continue business-as-usual while it hopes to restructure both its balance sheet and operations in hopes of "weathering the storm that has beset the coal industry."

“ The unprecedented changes facing the coal industry run deep and are occurring at a frenetic and unpredictable pace. … The U.S. coal industry as currently structured is unsustainable. ”

 Kevin Crutchfield, chairman and CEO, Alpha Natural Resources

"The malaise experienced in the coal industry over the past few years has only worsened," Crutchfield said. "The fall has been precipitous and the effect on the debtors has been extreme — more so than anyone could have anticipated even a year ago. But there can be no question that coal will remain a critical commodity in the United States and abroad and that, while the industry may currently suffer from economic and political forces that have resulted in significant oversupply and concomitantly plummeting prices, the metrics necessary for profitable coal mining and production will ultimately materialize."

With $10.1 billion in total assets and $7.1 billion in liabilities, the company is the largest of U.S. coal producers to file for bankruptcy in recent years, trumping both Patriot Coal Corp.and Walter Energy Inc.

In an Aug. 3 statement, United Mine Workers of America President Cecil Roberts said union delegates recently voted to provide the UMWA with "significant resources to fight to uphold our collective bargaining agreements and the promises made to our retirees in these bankruptcy fights." The union is already fighting both Patriot and Walter and Roberts said the UMWA was prepared to not only discuss mutual solutions with the company, but also to do "whatever we need to do to maintain decent jobs with the pension and health care benefits our retirees were promised and have earned."

"Today's Chapter 11 bankruptcy filing by Alpha Natural Resources appears to follow the same script as others we've seen this year: pay off the big banks and other Wall Street investors at the expense of workers, retirees and their communities," Roberts said.

Alpha's way out

According to Cavatoni's declaration to the bankruptcy court, Alpha is seeking approval for a $300 million term loan facility to provide new liquidity, including the issuance of letters of credit to terminate an existing accounts receivables facility. It also wants the ability to add a new revolving credit facility of up to $200 million at Alpha's option, a $192 million facility that will allow letters of credit already issued to continue without being cash collateralized, and a bonding accommodation facility to provide up to $100 million to address state bonding requests.

"The debtors intend to use their time in Chapter 11 to develop and implement a business plan to address the challenges faced by the debtors, de-leverage their balance sheet and reorganize in a manner that maximizes value for stakeholders," Cavatoni wrote. "The debtors believe they have certain business strengths and can position themselves advantageously as coal markets ultimately stabilize and improve."

Cavatoni said he believes coal will remain a critical commodity in the United States and abroad and believes the industry eventually will stabilize. He said following the "adoption of necessary structural changes within the industry, there will be survivors once pricing again turns favorable."

Cavatoni said Alpha is not commencing an immediate sale process for its assets. He said the company has significant liquidity and the ability to maximize value during the "breathing spell of bankruptcy."

Alpha: Coal sector changes coming

Crutchfield noted the industry is currently taking a hit on multiple fronts. Some of the adverse trends the company notes include low coal and gas prices, weak international demand due to slower economic growth, global subsidies for renewable energy technology, and the imposition of federal and state regulations on coal producers and coal-fired power generators. Crutchfield said the current situation is structural and added it will take "the entire industry time to reorient."

“ The malaise experienced in the coal industry over the past few years has only worsened. ”

 Kevin Crutchfield, chairman and CEO, Alpha Natural Resources

"Global coal prices generally correlate to the overall economic condition of the world's leading industrial and developing economies," Crutchfield said. "As the United States has struggled to recover from the Great Recession and many other leading coal-consuming countries have suffered economic downturns or constrained growth in recent years, coal prices have not come close to reaching pre-recession levels. After briefly spiking in 2011 (immediately after the Japanese Fukushima nuclear disaster and multiple typhoons striking Australia), global coal prices have been mired in a trend of steady decline."

While the economy may spring back and again offer coal potential for a larger seat at the table that may be eclipsed by tightening regulatory constraints and policies favoring the development of renewable energy. The pressures on Alpha, a company heavily invested in the struggling Central Appalachia region, are compounded from within the sector itself as well.

"With respect to their domestic customers, the debtors compete with numerous coal producers based in the Appalachian region and Illinois Basin and with a significant number of western coal producers," Crutchfield said. "Moreover, the recent strength of the U.S. dollar has made domestic coal more expensive relative to foreign coal production from Australia, Indonesia, South Africa and Colombia. Long-expected consolidation in the coal industry has yet to materialize, resulting in excess production capacity and, thus, depressed prices for the debtors' coal."

Adjustments and diversification

Alpha took on a large amount of debt to acquire Massey Energy near the height of the recent metallurgical coal market boom, making it one of the world's largest suppliers of steelmaking coal. That market quickly tanked and while thermal coal markets on the domestic and international front slipped, weak met coal pricing further pressured producers such as Alpha, Walter and Patriot who bet big on that market.

The legal fees of former Massey CEO Don Blankenship are also included in Alpha's list of creditors and total an estimated $3.5 million. Blankenship faces three felony charges related to conspiracy to violate mine safety laws. The charges follow the investigation of the explosion of the Upper Big Branch mine that killed 29 coal miners in West Virginia in 2010.

In its release, Alpha touts diversity within the coal sector and notes a recent expansion into natural gas. On July 1, Alpha's Pennsylvania Services Corp. acquired the 50% of Pennsylvania Land Resources Holding Co. LLC not previously held for $126 million in cash. Alpha said it is currently engaged in efforts to prove and develop natural gas within that acreage.

"The debtors' acquisition of PLR allows them to exert sole control over natural gas operations in approximately 25,000 acres in the Marcellus Shale natural gas field of southwestern Pennsylvania, the most profitable and productive region of one of the largest and most concentrated natural gas fields in the United States," Cavatoni said.

Alpha noted in one filing it also controls rights to develop natural gas at depths below the Marcellus, including the Utica Shale. Crutchfield wrote that the company is "actively seeking further opportunities" to diversify its energy portfolio.

Alpha also listed recent divestitures. The company exchanged a 50% interest in its Rice Drilling C LLC natural gas joint venture to Rice Energy Inc. for $100 million in cash and 9.5 million shares of common stock in Rice Energy. In late 2014, the company sold substantially all of AMFIRE Mining Co. LLC's assets to Rosebud Mining Co. for $75.1 million in cash. Other small divestitures, the company noted, have netted about $40 million in cash proceeds over the past three years as the company has slimmed down.

"It is the debtors' belief that the relief provided by Chapter 11 will enable them to continue to restructure their operations and debt structure while riding out the storm that has beset the coal industry," Cavatoni wrote. "The debtors believe that, with an appropriately de-leveraged balance sheet and a focused business plan, their valuable core operations will position them to participate — profitably — in the coal and broader energy industry going forward, providing thousands of jobs for their employees and necessary natural resources to their customers."

Over the last four years, Alpha said it has "engaged in optimal downsizing strategies" and has largely done so through eliminating positions and production in Central Appalachia. The company said it has idled or closed more than 80 mines since July 2011, reducing the workforce from 14,500 to fewer than 8,000. In a frequently asked questions document on the company's restructuring site, it warns more cuts could be coming.

"Over the last few years, we have undertaken monumental efforts to improve cost structure, stabilize our affiliated operations, and match supply with demand," the document states. "In the current environment, we will continue to evaluate the viability and profitability of each mine."

Bonding issue threatens future

A relatively new threat to the industry — the notion their finances have become so poor they cannot be relied upon to cover potential environmental obligations on their own — also could prove "detrimental" to Alpha's restructuring effort. At issue is that a part of Alpha's obligations for reclaiming mined lands and insuring the property where it mines is subject to certain federal and state laws, and the company's ability to self-bond against those obligations have recently come into question.

Alpha's accrued reclamation obligations, Cavatoni said, are approximately $683 million with approximately $99 million coming due within one year. Alpha said it is currently self-bonded for 96% of their reclamation obligations in Wyoming and approximately 77% of such obligations in West Virginia.

In a May 26 letter, the Wyoming Department of Environmental Quality told Alpha it no longer qualified under the state's self-bonding program. Alpha appealed the decision and have asked the court to stay the appeal pending an informal conference and to also stay the deadline for complying with Wyoming's requirements.

Currently, if Alpha does not comply by Aug. 24, a temporary permit block will automatically go into effect and prohibit the state agency from issuing Alpha any new permits or to allow renewal or transfer of existing permits. This could also lead to a permanent permit block and other enforcement actions.

"While the debtors remain hopeful that a resolution with Wyoming can be achieved that will help preserve their contributions to the coal industry and, thus, a critical portion of that state's revenue, the debtors further believe that simply posting or causing to be posted $400 million in replacement bonds (which will carry their own substantial collateral requirements) will be detrimental to their restructuring efforts and, therefore, detrimental to their creditors and stakeholders without promoting the health of the environment (as the debtors are, and intend to remain, in compliance with applicable environmental and reclamation regulations)," Cavatoni said.

According to the filing, the bankruptcy proceedings were commenced "in part" to provide a forum for addressing Wyoming's bonding requests "in a manner that is fair and equitable to all of the debtors' creditors and stakeholders." The company also mentioned a July 24 letter from the West Virginia Department of Environmental Protection informing Alpha that it intended to transition the company from self-bonding to other acceptable forms of bond.