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PCXCQ > SEC Filings for PCXCQ > Form 10-Q on 9-May-2013All Recent SEC Filings

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Form 10-Q for PATRIOT COAL CORP


9-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Cautionary Notice Regarding Forward-Looking Statements This report and other materials filed or to be filed by Patriot Coal Corporation include statements of our expectations, intentions, plans and beliefs that constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are intended to come within the safe harbor protection provided by those sections. You can identify these forward-looking statements by the use of forward-looking words such as "outlook," "believes," "expects," "potential," "continues," "may," "will," "should," "seeks," "approximately," "predicts," "intends," "plans," "estimates," "anticipates," "foresees" or the negative version of those words or other comparable words and phrases. Any forward-looking statements contained in this report are based upon our historical performance and on current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved.
Without limiting the foregoing, all statements relating to our future outlook, anticipated capital expenditures, future cash flows and borrowings, and sources of funding are forward-looking statements. These forward-looking statements are based on numerous assumptions that we believe are reasonable, but are subject to a wide range of uncertainties and business risks, and actual risks may differ materially from those discussed in the statements. Among the factors that could cause actual results to differ materially are:
• our ability to continue as a going concern;

• our ability to successfully complete a reorganization under Chapter 11 and emerge from bankruptcy, which is dependent upon, among other things, our ability to implement changes to wage and benefit programs and postretirement benefit obligations pursuant to Sections 1113 and 1114 of the Bankruptcy Code, to minimize our liabilities upon emergence and to obtain post-bankruptcy financing;

• negotiation of labor contracts, labor availability and relations, including negotiations with the UMWA related to Sections 1113 and 1114 of the Bankruptcy Code, which could result in labor disruptions, work stoppages or slowdowns;

• our ability to operate within the restrictions and liquidity limitations of the post-petition credit facilities authorized by the Bankruptcy Court in connection with the Bankruptcy Case (the DIP Facilities);

• potential adverse effects of the Bankruptcy Case on our liquidity and results of operations, including failure to comply with the financial covenants and other requirements of the DIP Facilities;

• our ability to obtain timely Bankruptcy Court approval with respect to motions filed in the Bankruptcy Case;

• disagreements between us and the Creditors' Committee that could protract the Chapter 11 proceedings, negatively impact our ability to operate and delay our emergence from the Chapter 11 proceedings;

• objections to the Company's plan of reorganization that could protract the Chapter 11 proceedings;

• employee attrition and our ability to retain senior management and key personnel, including our ability to provide adequate compensation and benefits, due to the distractions and uncertainties of the Chapter 11 proceedings;

• U.S. and international financial, economic and political conditions, including coal, power and steel market conditions;

• coal price volatility and demand, particularly in higher margin products;

• availability and prices of competing energy resources for electricity generation;

• geologic, equipment and operational risks associated with mining;

• our ability to successfully implement solutions to treat the effluent selenium exceedances to meet the limits and timetables stipulated in the various court orders, consent decrees and permits;

• actual costs of complying with selenium effluent limits being materially higher than the costs reflected in our selenium water treatment liability;

• reductions of purchases or deferral of shipments by major customers;


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• the outcome of commercial negotiations involving sales contracts or other transactions;

• changes in the interpretation, enforcement or application of existing and potential laws and regulations affecting the production of our coal;

• environmental laws and regulations, such as the Mercury and Air Toxic Standards, and changes in the interpretation or enforcement thereof, including those affecting our operations and those affecting our customers' coal usage;

• availability and costs of credit, surety bonds and letters of credit;

• weather patterns and conditions affecting energy demand or disrupting supply;

• regulatory and court decisions including, but not limited to, those impacting permits issued pursuant to the Clean Water Act;

• developments in greenhouse gas emission regulation and treatment, including any development of commercially successful carbon capture and storage techniques or market-based mechanisms, such as a cap-and-trade system, for regulating greenhouse gas emissions;

• the outcome of pending or future litigation;

• changes to the costs to provide healthcare to eligible active employees and certain retirees under postretirement benefit obligations;

• increases to contribution requirements to multi-employer retiree healthcare and pension plans;

• customer performance and credit risks;

• inflationary trends, including those impacting materials used in our business;

• downturns in consumer and commercial spending;

• supplier performance, and the availability and cost of key equipment and commodities;

• availability and costs of transportation;

• our ability to respond to changing customer preferences;

• the effects of mergers, acquisitions and divestitures, including our ability to successfully realize assets for amounts similar to those reflected in our condensed consolidated financial statements;

• competition in our industry;

• our ability to replace proven and probable coal reserves;

• interest rate fluctuation;

• wars and acts of terrorism or sabotage;

• impact of pandemic illness; and

• other factors, including those discussed in Legal Proceedings set forth in Part I, Item 3 of our 2012 Annual Report on Form 10-K and Part II, Item 1 of this report.

These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in Part I, Item 1A. Risk Factors of our 2012 Annual Report on Form 10-K. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. Consequently, actual events and results may vary significantly from those included in, contemplated or implied by our forward-looking statements. We do not undertake any obligation (and expressly disclaim any such obligation) to update or revise the forward-looking statements, except as required by federal securities laws.

Overview
We are a producer of coal in the eastern U.S., with operations and coal reserves in the Appalachia and the Illinois Basin coal regions. Our principal business is the mining, preparation and sale of thermal and metallurgical coal. Thermal coal is primarily


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sold to electricity generators, and metallurgical coal is sold to steel mills and independent coke producers. As of March 31, 2013, our operations consisted of eleven active mining complexes, which include company-operated mines, a contractor-operated mine and coal preparation facilities. The Appalachia and Illinois Basin segments consist of our operations in West Virginia and Kentucky, respectively.
We ship coal to electricity generators, industrial users, steel mills and independent coke producers, as well as brokers that ultimately sell the coal to these same types of customers. In the first three months of 2013, we sold 5.1 million tons of coal, of which 72% was sold to domestic and global electricity generators and 28% was sold to domestic and global steel and coke producers. In the first three months of 2012, we sold 6.3 million tons of coal, of which 79% was sold to domestic and global electricity generators and 21% was sold to domestic and global steel and coke producers. Export sales were 52% and 40% of our total volume in the first three months of 2013 and 2012, respectively. Coal is shipped via various company-owned and third-party loading facilities, multiple rail and river transportation routes and ocean-going vessels. Our mining operations and coal reserves are as follows:
•Appalachia. As of March 31, 2013, we had eight active mining complexes located in Boone, Lincoln, Logan, Kanawha, and Raleigh counties in southern West Virginia. In northern West Virginia, we have one mining complex located in Monongalia County. In Appalachia, we sold 4.1 million tons of coal in the three months ended March 31, 2013. As of December 31, 2012, we controlled approximately 1.2 billion tons of proven and probable coal reserves in Appalachia, of which 492 million tons were assigned to current operations.
•Illinois Basin. As of March 31, 2013, we had two active mining complexes located in Union and Henderson counties in western Kentucky. In the Illinois Basin, we sold 1.0 million tons of coal in the three months ended March 31, 2013. As of December 31, 2012, we controlled 658 million tons of proven and probable coal reserves in the Illinois Basin, of which 119 million tons were assigned to current operations.

Bankruptcy Proceedings
On July 9, 2012 (the Petition Date), Patriot Coal Corporation, as a stand-alone entity, and substantially all of its wholly-owned subsidiaries (the Filing Subsidiaries and, together with Patriot Coal Corporation, the Debtors) filed voluntary petitions for reorganization (the Chapter 11 Petitions) under Chapter 11 of Title 11 of the U.S. Code (the Bankruptcy Code) in the U.S. Bankruptcy Court for the Southern District of New York. On December 19, 2012, the U.S. Bankruptcy Court for the Southern District of New York entered an order transferring the bankruptcy cases to the U.S. Bankruptcy Court for the Eastern District of Missouri (the U.S. Bankruptcy Court for the Eastern District of Missouri and/or the U.S. Bankruptcy Court for the Southern District of New York, as applicable, the Bankruptcy Court). The Debtors' Chapter 11 cases are being jointly administered under the caption In re: Patriot Coal Corporation, et al. (Case No. 12-51502) (the Bankruptcy Case). Our joint ventures and certain of our other subsidiaries (collectively, the Non-Debtor Subsidiaries) were not included in the Chapter 11 filing.
The Debtors are currently operating as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. In general, the Debtors are authorized to, and continue to, operate as an ongoing business, but may not engage in transactions outside of the ordinary course of business without the approval of the Bankruptcy Court.
As required by the Bankruptcy Code, the U.S. Trustee for the Southern District of New York appointed an official committee of unsecured creditors (the Creditors' Committee). The Creditors' Committee and its legal representatives have a right to be heard on all matters that come before the Bankruptcy Court. Bankruptcy Initiatives
In the nine months since the Petition Date, we have been working on multiple fronts to stabilize our business, address our unsustainable cost structure and preserve jobs and benefits for thousands of our workers. Significant steps have been taken operationally as discussed in Results of Operations. Additionally, it is critical to the Debtors' successful emergence from bankruptcy that we address excessive cash requirements of the legacy postretirement benefit obligations that have accumulated over the years and restructure wage and benefit programs to create a competitive labor and benefit cost structure. Sections 1113 and 1114
In relation to the bankruptcy process and pursuant to Sections 1113 and 1114 of the Bankruptcy Code, we are seeking to renegotiate the terms of collective bargaining agreements between certain Patriot subsidiaries and the United Mine Workers of America (UMWA), as well as certain postretirement healthcare benefits. In November 2012, the Debtors commenced the Sections 1113 and 1114 process with the UMWA and began negotiating in good faith for consensual agreements that achieve the necessary level of labor cost and postretirement healthcare benefit savings. Given our need to restructure labor costs and postretirement healthcare benefits expeditiously, on March 14, 2013, the Debtors filed a motion with the Bankruptcy Court seeking to modify


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collective bargaining agreements with the UMWA and certain UMWA-related retiree benefits. The proposed modifications include the establishment of a Voluntary Employee Beneficiary Association (VEBA) trust to provide healthcare for UMWA-represented retirees, as well as changes to wages, benefits and work rules for UMWA-represented employees. The Bankruptcy Court hearing on the Debtors' motion began on April 29, 2013 and concluded on May 3, 2013. We expect the Bankruptcy Court will rule on the motion during the second quarter of 2013. In the meantime, we continue to work toward a consensual agreement with the UMWA. The Debtors' Section 1113 proposal seeks to adjust wages, benefits and work rules for their union employees to a level consistent with the regional labor market. As part of the proposal, we intend to offer our union employees the same healthcare benefits we provide to non-union employees.
We are also seeking to modify our payments for UMWA-related retiree healthcare liabilities. The Debtors' Section 1114 proposal would transition certain UMWA-related healthcare obligations to a VEBA trust on January 1, 2014. Funding for the VEBA under the current proposal would consist of: (i) a 35% ownership stake in the reorganized company, (ii) profit sharing contributions up to a maximum of $300 million, (iii) a royalty contribution for every ton produced at all existing mining complexes, and (iv) a portion of future recoveries from litigation. We would also honor retiree medical obligations incurred prior to January 1, 2014 to allow sufficient time for the VEBA to be established. The VEBA trust would be designed and administered by the UMWA or the UMWA Health and Retirement Funds. The liability associated with these obligations totals $1.02 billion as of March 31, 2013 and December 31, 2012 and is classified as "Liabilities subject to compromise" in the condensed consolidated balance sheets.
Under our Section 1113 and 1114 proposals, we would continue to provide healthcare benefits for our entire active workforce and their eligible family members, and for more than 2,300 individuals who receive healthcare benefits pursuant to the Coal Industry Retiree Health Benefit Act of 1992 (Coal Act). We spent approximately $14 million on Coal Act liabilities in 2012. The liabilities associated with these obligations are classified as liabilities not subject to compromise in the condensed consolidated balance sheets.
On March 14, 2013, Patriot filed a lawsuit against Peabody Energy Corporation (Peabody) and one of its subsidiaries. In connection with Patriot's 2007 spinoff from Peabody, Peabody agreed to pay the healthcare costs associated with thousands of retirees and dependents who had been employed by Peabody entities that were transferred to Patriot in the spinoff. Recently, Peabody advised that it may seek to diminish or eliminate these obligations if Patriot obtains relief in bankruptcy. As a result, Patriot has sought a declaration from the Bankruptcy Court that any relief Patriot is able to obtain through the bankruptcy proceedings with respect to the healthcare benefits of its subsidiaries' retirees will not relieve Peabody of its own liabilities with respect to the healthcare benefits of certain retirees. On April 5, 2013, Patriot filed a motion for summary judgment, seeking the above-referenced relief. On April 12, 2013, Peabody filed a motion to dismiss the lawsuit. The Bankruptcy Court hearing on the motions was held on April 29, 2013. We expect the Bankruptcy Court will rule on the lawsuit during the second quarter of 2013. The Debtors are also seeking to avoid expected increases in the contribution rates under the United Mine Workers of America 1974 Pension Plan (the 1974 Pension Plan). In the event the Debtors are unable to avoid the expected increases in the contribution rates, they may withdraw from the 1974 Pension Plan. A withdrawal from the 1974 Pension Plan, or other contemplated modifications, will not affect pensioners' receipt of payments from this multi-employer fund. Withdrawing from the 1974 Pension Plan will result in a liability under the Employee Retirement Security Act of 1974 (ERISA), but we project the long-term impact of such liability will be significantly less than future contributions to the 1974 Pension Plan. Other Wage and Benefit Programs
On February 27, 2013, the Bankruptcy Court directed the appointment of an official committee of non-union retirees (the Retiree Committee), which has limited scope on diligence and cost absent additional Bankruptcy Court approval. The formation of the Retiree Committee was in response to the Debtors' communication during late 2012 of an intent to file one or more motions with the Bankruptcy Court seeking approval to discontinue or modify certain non-union retiree healthcare and life insurance benefits for salaried and hourly, non-union retirees and employees.
On April 26, 2013, the Bankruptcy Court entered an order authorizing the Debtors to discontinue substantially all of their non-union retiree healthcare programs, eliminate retiree life insurance benefits for current non-union employees, and cap life insurance benefits for current non-union retirees. Pursuant to this order, the Debtors will contribute $250,000 in cash to a VEBA trust for the benefit of current non-union retirees, and, upon emergence from bankruptcy, contribute $3.75 million in equity of the reorganized company or cash to the VEBA. The VEBA trust will be designed and administered by the Retiree Committee. The liability associated with our non-union and salaried retiree healthcare and life insurance benefits totaled approximately $63 million as of March 31, 2013 and December 31, 2012 and is classified as "Liabilities subject to compromise" in the condensed consolidated balance sheets. We estimate approximately $14 million of this liability will remain upon the modification or termination of the plans addressed by this court order and will be reclassified to liabilities not subject to compromise in the second quarter of 2013.


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On March 15, 2013, the Bankruptcy Court authorized the Debtors to terminate the Patriot Coal Corporation Supplemental 401(k) Retirement Plan (the Supplemental
401(k) Plan) and on April 1, 2013, Patriot's board of directors approved the termination of the Supplemental 401(k) Plan effective as of March 31, 2013. The Supplemental 401(k) Plan provided for certain salaried employees to defer a specified portion of their compensation until retirement and also provided an employer match and discretionary contribution based on Patriot's performance. The Supplemental 401(k) Plan was unfunded and termination resulted in approximately $2.5 million of compensation deferrals being treated as pre-petition general unsecured claims rather than being paid in cash. As of March 31, 2013 and December 31, 2012, the liability associated with this plan is classified as "Liabilities subject to compromise" in the condensed consolidated balance sheets. Bankruptcy Process
The Bankruptcy Court has authorized us to pay certain of our pre-petition obligations, including payments for employee wages, salaries and certain benefits and payments to certain shippers and critical vendors, subject to certain limitations. The Debtors are required to pay vendors and other providers in the ordinary course for goods and services received after the filing of the Chapter 11 Petitions and to pay certain other business-related payments necessary to maintain the operation of our business. We have retained legal and financial professionals to advise us on the bankruptcy proceedings. From time to time, we may seek the Bankruptcy Court's approval for the retention of additional professionals.
Rejected Contracts
Since the Petition Date, the Debtors have received approval from the Bankruptcy Court to reject a number of equipment leases and other executory contracts of various types. On January 15, 2013, the Debtors filed a motion for authorization to assume or reject all of their unexpired leases of nonresidential real property, including their coal reserve leases. Substantially all of their assumptions and rejections were subsequently approved by the Bankruptcy Court. We are working to resolve differences in cure amounts and certain other discreet issues with counterparties that objected to our motion. In conjunction with the assumption of these leases and payment of cure amounts, Patriot reclassified approximately $14 million of royalty and real estate tax accruals from "Liabilities subject to compromise" to liabilities not subject to compromise in the first quarter of 2013. We paid approximately $5.6 million in lease cure payments in the first quarter of 2013 and expect to make any unpaid cure amounts related to these leases in the second quarter of 2013.
The Debtors continue to review executory contracts and unexpired leases to determine which contracts will be rejected, assumed or renegotiated. We expect additional liabilities subject to compromise will arise due to rejection of executory contracts, including leases, and from the determination of the Bankruptcy Court (or agreement by parties in interest) of allowed claims for contingencies and other disputed amounts. Due to the uncertain nature of many of the potential claims, we cannot project the magnitude of such claims with certainty. We also expect that the assumption of additional executory contracts and unexpired leases will convert certain of the liabilities subject to compromise to liabilities not subject to compromise. Pre-Petition Claims
The Debtors have received approximately 4,000 proofs of claim, a portion of which assert, in part or in whole, unliquidated amounts. In the aggregate, total liquidated proofs of claim of approximately $134.5 billion have been filed against the Debtors. New and amended claims may be filed in the future, including claims amended to assign values to claims originally filed with no designated value. We are now in the process of reconciling such claims to the amounts listed in the Debtors' books and records. Differences between liability amounts estimated by the Debtors and claims filed by creditors are being investigated and, if necessary, the Bankruptcy Court will make a final determination of the allowable claims.
Through the claims resolution process, we expect to identify a substantial number of claims that we believe should be disallowed by the Bankruptcy Court because they are duplicative, have already been satisfied, have been later amended or superseded, are without merit, are overstated or should be disallowed for other reasons. As of March 31, 2013, we estimate that the claims resolution process will reduce the total liquidated proof of claims by approximately $132.9 billion, primarily due to redundant claims. As of May 3, 2013, the Debtors have filed with the Bankruptcy Court objections to claims totaling $28.5 million seeking orders to reduce claims by this amount. We continue to evaluate the filed claims and expect to continue to file claim objections with the Bankruptcy Court.
In addition, as a result of this process, we may identify additional liabilities that need to be recorded or reclassified to liabilities subject to compromise and will adjust amounts as necessary. Such adjustments may be material. The determination of how liabilities will ultimately be treated cannot be made until the Bankruptcy Court approves a plan of reorganization. Accordingly, the ultimate amount or treatment of such liabilities is not determinable at this time.
Plan of Reorganization
In order to successfully exit Chapter 11, the Debtors are required to propose and obtain confirmation by the Bankruptcy Court of a plan of reorganization that satisfies the requirements of the Bankruptcy Code. In addition, a plan of reorganization will be voted on by certain holders of impaired claims. A plan of reorganization, among other things, would resolve the Debtors' pre-


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petition obligations, set forth the revised capital structure of the newly reorganized entity and provide for corporate governance subsequent to emerging from bankruptcy.
On April 26, 2013, the Bankruptcy Court entered an order extending our exclusivity period to file a plan of reorganization to September 2, 2013. Our goal is to develop and propose a plan of reorganization that will receive support from our various constituencies. Additional work is necessary to develop such a plan and its timing is largely dependent on the timing and outcome of numerous other ongoing matters in the Chapter 11 proceedings, including resolution of our labor contracts and legacy labor liabilities.
Under the distribution priorities established by the Bankruptcy Code, unless creditors agree otherwise, pre-petition liabilities and post-petition liabilities must be satisfied in full before stockholders are entitled to receive any distribution or retain any property under a plan of reorganization. The ultimate recovery to creditors and/or stockholders, if any, will not be determined until confirmation of a plan of reorganization. No assurance can be given as to what values, if any, will be ascribed to each of these constituencies or what types or amounts of distributions, if any, they would receive. A plan of reorganization could result in holders of certain liabilities and/or securities, including common stock, receiving no distribution on account of their interests and cancellation of their holdings. Because of such possibilities, there is significant uncertainty regarding the value of our liabilities and securities, including our common stock. At this time, there is no assurance we will be able to restructure as a going concern or successfully propose or implement a plan of reorganization. Going Concern Matters
The accompanying unaudited condensed consolidated financial statements and related notes have been prepared assuming we will continue as a going concern, although the Bankruptcy Case and weak industry conditions raise substantial doubt about our ability to continue as a going concern. The accompanying unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded assets or to the amounts and classification of liabilities or any other adjustments that might be necessary should we be unable to continue as a going concern. Our ability to continue as a going concern is dependent upon, among other things, market conditions and our ability to (i) improve profitability; (ii) negotiate savings or secure court-ordered relief under Sections 1113 and 1114 of the Bankruptcy Code; (iii) meet the financial covenants of the DIP Facilities . . .

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