Two lawyers who specialize in Chapter 11 restructuring see differing paths for Westmoreland Coal Co.: shedding debt and coming back as a leaner company with lenders in control or breaking up by selling most of its assets.
Pending bankruptcy court approval, the company plans to sell its core assets, which includes its San Juan operations in New Mexico as well as its Rosebud mine in Montana, to the highest bidder. Its lenders would act as a stalking horse bidder and take the assets in exchange for the company's debt if there are no higher offers.
Steven Abramowitz, a partner with the law firm Vinson & Elkins LLP who focuses on restructuring and bankruptcy, said the lenders usually buy the assets in these sorts of cases, noting that the lenders probably know there's little chance of another entity paying more than the value of Westmoreland's debt.
If the market turns, someone may purchase the assets, he said, "but this is typically where the stalking horse bidder is the successful one."
"They probably would have tested the market by now," Abramowitz said.
Westmoreland also intends to sell some of its noncore assets, which include the Absaloka and Savage mines in Montana; the Beulah mine in North Dakota; the Buckingham mine in Ohio; the Haystack mine in Wyoming; and the Jewett mine in Texas.
Peter Morgan, senior attorney with the Sierra Club focusing on issues related to coal, including bankruptcies, said the company's bankruptcy is taking "a very different form" than the recent Chapter 11 proceedings of other coal producers, such as Peabody Energy Corp., Alpha Natural Resources Inc. and Arch Coal Inc.
While those companies' restructuring plans helped them shed some debt while continuing normal operations throughout their proceedings, he said, "Westmoreland really seems like it's just being split up and sold for parts."
Some of the larger coal companies that declared bankruptcy in recent years were able to make a few changes to their balance sheets and assets and then emerge, while smaller companies struggled more, said Chiza Vitta, director of S&P Global Ratings' natural resources group.
The length of time a company takes to restructure and emerge tends to be correlated with its potential to become a more profitable company going forward, he said, with stronger companies emerging more quickly. Westmoreland, which filed on Oct. 9, plans to emerge by the end of February, which Vitta called "relatively quick."
"There's always a possibility that as opposed to restructuring they just sell off their assets," Vitta said. "That seems to be a possibility [for Westmoreland] from what I have read."
Morgan questioned the value of the company's core assets — minemouth operations that service coal-fired power plants with units that are scheduled to retire within a decade. Rosebud sells its coal to Colstrip, a plant that will shutter its two older units by 2022 and may close down the remaining two units in 2027. The San Juan mine sells to the San Juan plant, which is slated to retire after its existing coal contract expires in 2022.
"When your crown jewels, when your most valuable assets are mines that are inextricably tied to power plants that are in the process of closing," Morgan said, "that suggests that there's very little value left in that company."
More than 70% of the coal Westmoreland produced and delivered in 2017 came from minemouth operations, according to an analysis conducted by S&P Global Market Intelligence. In the first half of 2018, more than 65% of its production and deliveries came from minemouth operations.
The company's reliance on the minemouth model may have contributed to its financial woes. The model works well when the coal producer has strong relationships and long-standing contracts with neighboring power plants, Vitta said, but can be detrimental when the plant starts to struggle and the coal producer does not have or may not be able to reach other customers.
"Westmoreland was unique in the sense that it had some mines away from the major basins," he said.
In addition to the scheduled retirements at the Colstrip and San Juan plants, Westmoreland's other top coal destinations may also have units come offline in the next few years. The Naughton plant in Wyoming, which is served by the Kemmerer mine, may retire unit 3 in 2019. The Sherburne County Plant (Sherco) in Minnesota, a major buyer of the Absaloka mine's coal, is expected to replace two of its three coal-fired units, slated for retirement in 2023 and 2026, with natural gas capacity.
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.