Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 1 of 144 Stephen E. Hessler (admitted pro hac vice) Patrick Evans (admitted pro hac vice) KIRKLAND & ELLIS LLP 601 Lexington Avenue New York, New York 10022 Telephone: (212) 446-4800 Facsimile: (212) 446-4900 - and - Desc Main Michael A. Condyles (VA 27807) Peter J. Barrett (VA 46179) Jeremy S. Williams (VA 77469) KUTAK ROCK LLP Bank of America Center 1111 East Main Street, Suite 800 Richmond, Virginia 23219-3500 Telephone: (804) 644-1700 Facsimile: (804) 783-6192 James H.M. Sprayregen, P.C. Ross M. Kwasteniet (admitted pro hac vice) KIRKLAND & ELLIS LLP 300 North LaSalle Chicago, Illinois 60654 Telephone: (312) 862-2000 Facsimile: (312) 862-2200 Counsel for the Debtors and Debtors in Possession IN THE UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF VIRGINIA RICHMOND DIVISION In re: PATRIOT COAL CORPORATION, et al., Debtors. ) ) Chapter 11 ) ) Case No. 15-32450 (KLP) ) ) (Jointly Administered) ) DEBTORS’ MOTION FOR ENTRY OF AN ORDER (I) AUTHORIZING, BUT NOT DIRECTING, THE DEBTORS TO (A) REJECT THEIR COLLECTIVE BARGAINING AGREEMENTS, (B) MODIFY CERTAIN UNION-RELATED RETIREE BENEFITS, AND (C) IMPLEMENT TERMS OF THEIR SECTION 1113 AND SECTION 1114 PROPOSAL, AND (II) GRANTING RELATED RELIEF Patriot Coal Corporation and certain of its affiliates, as debtors and debtors in possession (collectively, the “Debtors”), file this motion (this “Motion”) seeking entry of an order, substantially in the form attached hereto as Exhibit A: (i) authorizing, but not directing, the Debtors to (a) reject collective bargaining agreements (the “CBAs”)1 entered into between 1 Although this Motion refers to the CBAs out of convenience, nine of the ten agreements between the Debtors and the UMWA are structured as coal wage agreements, or “CWAs.” KE 36708318 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 2 of 144 Desc Main certain of the Debtors2 and the United Mine Workers of America (the “UMWA”) for the Debtors’ unionized workforce, (b) modify certain retiree benefits (as described herein, the “Retiree Benefits”) for the Debtors’ retired UMWA employees,3 and (c) implement the terms of their section 1113 and section 1114 proposal attached hereto as Exhibit B (collectively, the “Proposal”);4 and (ii) granting related relief. In support of this Motion, the Debtors submit the declaration of Ray Dombrowski, attached hereto as Exhibit C (the “Dombrowski Declaration”), the declaration of Marc Puntus, attached hereto as Exhibit D (the “Puntus Declaration”), and the declaration of Dale Lucha, attached hereto as Exhibit E (the “Lucha Declaration”). In further support of this Motion, the Debtors respectfully state as follows: Introduction 1. The Debtors seek authority to reject their CBAs and modify certain of their retiree healthcare benefits because, absent an agreement with the UMWA, they have no other choice. The Debtors are not viable as a going concern and must promptly sell substantially all of their operating assets. If the Debtors do not reject their CBAs and modify their retiree benefits, satisfying their DIP covenants and the conditions to closure of the Blackhawk transaction, the Debtors will run out of cash and will be forced to liquidate in a matter of weeks. This grim 2 In particular: (a) each of (i) Heritage Coal Company LLC, (ii) Colony Bay Coal Company LLC, (iii) Eastern Associated Coal, LLC, (iv) Mountain View Coal Company, LLC, (v) Pine Ridge Coal Company, LLC, (vi) Rivers Edge Mining LLC, (vii) Apogee Coal Company, LLC, and (viii) Hobet Mining, LLC are parties to a coal wage agreement with the UMWA on identical terms (although each are separate CBAs, the Motion collectively refers to each of these agreements herein as the “Master CBAs”); (b) Highland Mining Company, LLC, who is party to a separate CBA with the UMWA (the “Highland CBA”); and (c) Gateway Eagle Coal Company, LLC (“Gateway”), who is party to a separate CBA with the UMWA (the “Gateway CBA,” and together with the Master CBAs and the Highland CBA, the “CBAs”). 3 As described in further detail below, the Debtors do not seek at this time to modify non-union related retiree benefits. The Debtors reserve all rights to seek such relief at a later time. 4 The UMWA has agreed pursuant to 11 U.S.C. § 1114(c)(1) to serve as the authorized representative for the Debtor’s UMWA-affiliated retirees. 2 KE 36708318 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 3 of 144 Desc Main reality requires the filing of this Motion and the prosecution of this Motion on the timetable provided by 11 U.S.C. § 1113. 2. As the Court is well aware, the Debtors, who manage one of the largest coal-producing enterprises in the United States, are operating in treacherous market conditions— the price of coal having recently dropped to levels not seen in more than a decade—and are simultaneously facing a barrage of ever-increasing regulatory and environmental burdens. Faced with dramatically increasing costs and decreasing revenues, the Debtors’ losses have mounted. In 2014 alone, the Debtors lost nearly $165 million, and would have had to cease operations and liquidate earlier this year had they not received emergency DIP financing to bridge them to a potential sale transaction. Recognizing the increasingly difficult market conditions, in October 2014, the Debtors engaged Centerview Partners, LLC (“Centerview”) to assist with exploration of a merger or similar strategic transaction with a potential strategic partner. 3. The only viable bidder identified to date for substantially all of the Debtors’ operating assets (the “Assets”), Blackhawk Mining LLC (“Blackhawk”), has insisted— understandably—upon the Debtors’ having either reaching an agreement with the UMWA with regard to certain concessions or rejecting certain of the Debtors’ CBAs5 as a condition to closing the sale (the “Transaction”). 4. As the Court is well aware, the Debtors and their advisors concluded that the proposed sale to Blackhawk provides the best option for maximizing value for the benefit of the 5 Specifically: (a) the Gateway CBA; and (b) the Master CBAs with Eastern Associated Coal, LLC and Apogee Coal Company, LLC. These CBAs cover substantially all of the Debtors’ operating assets. Other than the Hobet Mining, LLC CBA (the “Hobet CBA”), each of the Debtors’ other CBAs cover operations which have no employees or have been shut down entirely. As will be discussed in further detail below, the Debtors seek to reject the Hobet CBA because they cannot continue to maintain or sell operations covered by the Hobet CBA without certain modifications which have been rejected by the UMWA without good cause. 3 KE 36708318 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 4 of 144 Desc Main Debtors’ stakeholders and preserving as many of the Debtors’ operations as possible as going concerns. The Debtors have since entered into an asset purchase agreement with Blackhawk, dated June 22, 2015 (the “Blackhawk APA”) and obtained entry of an order approving bidding procedures pursuant to which the Debtors are conducting an open auction and sale process in the hopes of generating additional interest from other bidders. The Debtors are fully committed to running a thorough sale process to maximize value for their estates. But the Blackhawk Transaction cannot be consummated unless either: (a) Blackhawk enters into new collective bargaining agreements that have been ratified by the UMWA on terms and conditions acceptable to Blackhawk in its sole discretion; or (b) the Debtors obtain the relief they are seeking today. (See APA § 10.02(i).) The Debtors’ DIP funding is also tied to their ability to negotiate a consensual resolution with the UMWA on terms of new CBAs that would satisfy the Blackhawk APA closing conditions, or file a motion seeking rejection of their CBAs pursuant to section 1113 of the Bankruptcy Code by August 1, 2015. (See Final DIP Order, Ex. C.)6 The Blackhawk APA also does not provide for the assumption of the Debtors’ retiree health obligations—and the Debtors do not have the means to continue paying such benefits—so this Motion seeks rejection of such obligations pursuant to section 1114 of the Bankruptcy Code. 5. The Debtors have engaged in extensive discussions with both the UMWA and Blackhawk trying to facilitate an agreement on a new CBA, but no agreement has been reached and negotiations appear to be at impasse.7 As will be discussed in further detail below, the 6 “Final DIP Order” means Final Order Authorizing (A) Authorizing The Debtors To Obtain Postpetition Financing, (B) Authorizing Use Of Cash Collateral, (C) Granting Liens And Superpriority Claims, (D) Granting Adequate Protection, (E) Modifying The Automatic Stay, (F) Scheduling a Final Hearing, And (G) Granting Related Relief [Docket No. 230]. 7 To be clear, Blackhawk has never negotiated directly with the UMWA. Rather, the Debtors have always made proposals, after consultation with Blackhawk, based on terms that would satisfy closing conditions under the Blackhawk APA. 4 KE 36708318 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 5 of 144 Desc Main Debtors and their advisors attended four in-person meetings with the UMWA, engaged in several telephonic conferences, presented six different possible settlement frameworks, and spent countless hours with Blackhawk and the UMWA trying to negotiate a resolution acceptable to both parties. 6. Unfortunately, the UMWA and the Debtors were not able to reach agreement on several key items, notably including the elimination of the obligation to participate in the UMWA 1974 Pension Plan (the “UMWA 1974 Pension Plan”). Blackhawk has been clear from the beginning, and understandably so, that under no circumstances would it agree to become an employer under and make contributions to the UMWA 1974 Pension Plan, a multi-employer plan that provides defined benefits to a majority of the hourly coal production workers represented by the UMWA. The Debtors are required to make significant contributions to the UMWA 1974 Pension Plan under their CBAs. For the last three years, the Debtors’ contributions to the UMWA 1974 Pension Plan have been $20.8 million, $20.6 million, and $16.8 million, respectively. The UMWA 1974 Pension Plan, which is massively underfunded and in “critical” status (in ERISA parlance), has estimated the Debtors’ portion of its underfunding to be over $600 million. If anything, this amount is likely to increase in the future as other coal companies go through bankruptcy and shed their pension obligations, spreading the plan’s shortfall among an ever-shrinking group of employers. Blackhawk’s unwillingness to take the UMWA 1974 Pension Plan, its significant annual funding obligations, and its massive underfunded liability, which could be triggered at any time, is not going to change. In fact, the Debtors do not believe that any buyer or operator of the Debtors’ assets would be willing to assume the UMWA 1974 Pension Plan. 5 KE 36708318 Case 15-32450-KLP 7. Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 6 of 144 Desc Main In the face of the UMWA’s insistence on terms and conditions that Blackhawk was unwilling to agree to (and that no buyer is likely to agree to), following discussions with Blackhawk, the Debtors presented a last proposal to the UMWA which expired on Wednesday, July 8, 2015. Following the expiration of this proposal—in light of the fact that the UMWA was not going to agree to modifications that would be acceptable to Blackhawk—the Debtors made another proposal to the UMWA on July 10, 2015. The Debtors’ proposal with respect to all facilities proposed to be acquired by Blackhawk was simple: the applicable CBAs must be rejected and, following the closing of the Transaction, the rights of Blackhawk and the UMWA would be subject to applicable labor law. The Debtors similarly proposed to terminate the CBAs applicable to the facilities that are not proposed to be acquired by Blackhawk,8 and, in addition, proposed terms and conditions under which the Debtors would offer employment following rejection or modification of the applicable CBAs. 8. The UMWA has repeatedly rejected the Debtors’ proposals without good cause and has offered only one counterproposal. The Debtors understand that the UMWA will continue to insist on terms (such as assumption of the UMWA 1974 Pension Plan) that neither Blackhawk nor the Debtors will agree to—nor would any potential buyer or operator of any of the Debtors’ facilities likely agree to. It is settled law that a union lacks good reason for rejecting a proposal when it insists on terms that it knows the Debtor cannot offer or that a prospective buyer will not agree to. See, e.g., In re National Forge Co., 289 B.R. 803, 812 (Bankr. W.D. Pa. 2003) (“[T]he Union’s insistence that the Debtor provide something which was 8 As noted above, the only CBA covering active operations which does not need to be rejected for purposes of the Transaction is the Hobet CBA. Rather, the Hobet CBA needs to be rejected because the Debtors cannot otherwise operate and are unlikely to be able to sell their remaining assets without the requested modifications. 6 KE 36708318 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 7 of 144 Desc Main not within its control indicates that the Union’s refusal to accept Debtor's proposal was without good cause.”). 9. If the Motion is not granted, the Debtors have every reason to expect that Blackhawk will not close on the Transaction, and the Debtors will default under their DIP facility, will run out of money, and will be forced to liquidate. The results for the Debtors’ employees and their families would be tragic. The fact that the Debtors are back in bankruptcy less than 18 months after emerging from their last reorganization—and that the only DIP financing available to the Debtors requires timely pursuit of a sale process—is proof positive that the Debtors are no longer viable as a stand-alone business and must pursue the Transaction. The Debtors must reject most of their CBAs to be able to effectuate the Transaction. And the Debtors must reject their CBAs that apply to operations not being acquired by Blackhawk in the Transaction or the pending sale process to reduce costs for their estates and to position those assets for sale. The Debtors simply have no choice but to seek and obtain the order attached to this Motion. 10. The Debtors recognize the hardships associated with any modification to an employee’s wages or retiree benefits. Sections 1113 and 1114 of the Bankruptcy Code, however, require consideration of the tragic alternative: liquidation, the loss of all jobs, and the Debtors’ inability to provide any benefits to their employees or retirees. Thus, while the Debtors come to this Court for relief, they do so knowing that despite extensive good faith negotiations on the part of Blackhawk, and despite good faith proposals by the Debtors, the UMWA has refused to reach an agreement without good cause. Further delay threatens the Debtors’ survival and will eliminate the possibility of a result far preferable to liquidation. 7 KE 36708318 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 8 of 144 Desc Main Jurisdiction 11. The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334. This matter is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2). 12. Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409. 13. The statutory bases for the relief requested herein are sections 1113 and 1114 of chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) and rule 6004 of the Federal Rules of Bankruptcy Procedures (the “Federal Rules”). Relief Requested 14. By this Motion, the Debtors seek entry of an order, attached hereto as Exhibit A: (i) authorizing, but not directing, the Debtors to (a) reject the CBAs, (b) modify certain retiree benefits, and (c) implement the terms of their Proposal; and (ii) granting related relief. Background9 A. Procedural History 15. On May 12, 2015 (the “Petition Date”), each of the Debtors filed a petition with this Court under chapter 11 of the Bankruptcy Code. The Debtors continue to operate their business and manage their properties as debtors in possession. The Debtors’ chapter 11 cases have been consolidated for procedural purposes only and are being jointly administered pursuant to Bankruptcy Rule 1015(b). No party has requested the appointment of a trustee or examiner in these chapter 11 cases. On May 21, 2015, the Office of the United States Trustee for the Eastern District of Virginia (the “U.S. Trustee”) appointed the official committee of unsecured creditors in these chapter 11 cases (the “Committee”). 9 A description of the Debtors’ business operations, history, corporate and capital structures, and reasons for commencing these chapter 11 cases are set forth in the Declaration of Ray Dombrowski in Support of Chapter 11 Petitions and First Day Pleadings [Docket No. 22] (the “First Day Declaration”). 8 KE 36708318 Case 15-32450-KLP 16. Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 9 of 144 Desc Main On June 4, 2015, the Court entered the DIP Order approving the Debtors’ entry into a $100 million senior secured postpetition financing facility (the “DIP Facility”). As set forth in Exhibit C to the DIP Order, the Debtors agreed to comply with certain case milestones as a condition to receiving DIP funding including: (a) entering into a binding stalking horse purchase agreement for the sale of certain assets through a chapter 11 plan by June 30, 2015; and (b) reaching an agreement with the UMWA for modification of the CBAs necessary to implement such sale or, alternatively, filing a motion for relief under sections 1113 and 1114 of the Bankruptcy Code necessary to implement such sale by August 1, 2015. 17. On June 23, 2015, the Court entered an order [Docket No. 406] (the “Bidding Procedures Order”) approving bidding procedures and an open auction process for the sale of substantially all of the Debtors’ operating assets to Blackhawk pursuant to the Blackhawk APA. 18. On June 25, 2015, the Court entered an order [Docket No. 399] directing the appointment of a committee of retirees pursuant to section 1114(d) of the Bankruptcy Code (the “1114(d) Committee”). The United States Trustee appointed the members of the 1114(d) Committee includes (which a UMWA representative) on July 7, 2015 [Docket No. 468].10 B. The Debtors’ History 19. As set forth more fully in the First Day Declaration, prior to October 31, 2007, Patriot Coal Corporation (“Patriot”) and a number of its subsidiaries were wholly-owned subsidiaries of Peabody Energy Corporation (“Peabody”), which at the time was the world’s 10 The Debtors have already begun to engage the advisors to the 1114(d) Committee and similarly expect to make a proposal to modify, reduce, or eliminate non-union retiree benefits. For the avoidance of doubt, the Debtors do not seek through this Motion the authority to modify, reduce, or eliminate non-union retiree benefits. 9 KE 36708318 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 10 of 144 Desc Main largest privately-owned coal company. On October 31, 2007, Peabody spun off Patriot through a dividend of all outstanding shares of Patriot, and Patriot became a separate, public company, listed on the New York Stock Exchange. 20. On July 23, 2008, Patriot acquired Magnum Coal Company (“Magnum”). At the time of this acquisition, Magnum (which had on its balance sheet substantial assets and liabilities previously acquired from Arch Coal, Inc. (“Arch Coal”)) was one of the largest coal producers in Appalachia, controlling more than 600 million tons of proven and probable coal reserves. C. The Debtors’ Employee Obligations i. 21. Active Workforce The Debtors employ approximately 2,760 miners, engineers, administrative support staff, managers, directors, and executives. At present, approximately 31% of active employees are unionized and represented by the UMWA under the Debtors’ CBAs. 22. The CBAs address all aspects of the employer and employee relationship including, among other things, wage rates, work rules, paid time off, and health and welfare benefits. Importantly, the Debtors employ hundreds of non-union employees who do the exact same work as UMWA employees, but at market wages. The CBAs include provisions that govern hourly wages and lock in wage increases, typically at rates that are substantially higher than competitive wages paid to non-union workers serving in the same capacity. Key differences between the wages and benefits afforded active union employees and those provided to active non-union employees generally include: • union employees make higher wages than non-union employees—up to 41% higher at surface mines and 30% higher at underground mines; • union employees are subject to lower out-of-pocket health insurance maximums than non-union employees and union employees are not required to pay healthcare premiums; 10 KE 36708318 Case 15-32450-KLP Desc Main • non-union employees receive a dollar-for-dollar matching contribution up to 6%, but, for union employees, the Debtors contribute to the UMWA 1974 Pension Plan (other than with respect to the Gateway CBA), make a 3% contribution to a company-sponsored “Union Savings Plan” in lieu of pension contributions for new inexperienced miners, and also make a contribution of 3% of earnings to a Union Savings Plan (as defined in and described more fully below) for all represented employees in lieu of providing retiree healthcare; • the CBAs provide for scheduled wage increases and wage reopeners for union employees but wage increases for non-union employees are entirely at the Debtors’ discretion; • the Debtors’ union employees receive additional time off as compared to non-union employees in the form of floating vacation days, greater personal and sick leave, and graduated vacation days; • union employees benefit from more favorable work rules; and • union employees are entitled to several job security benefits not available to non-union employees, including panel rights, preferential hiring rights to other operations, and extensive grievance procedures. ii. 23. Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 11 of 144 Retirees and Retiree Healthcare Benefits The Debtors also provide certain retiree healthcare benefits to retired union employees pursuant to the Coal Industry Retiree Health Benefit Act of 1992 (the “Coal Act”), and make certain contributions to a UMWA-administered VEBA that provides health benefits to certain non-Coal Act retirees. As noted above, as a result of the spin-off from Peabody and the acquisition of Magnum, the Debtors became responsible for liabilities relating to thousands of former union employees and retirees of Peabody and Arch Coal who retired prior to the formation of Patriot. 24. Accordingly, the Debtors have nearly twice as many retirees as active employees. At present, the Debtors pay for or administer retiree healthcare benefits to approximately 4,607 retirees and 1,836 dependents, for a total of 6,433 beneficiaries. Of that total, 5,464 beneficiaries 11 KE 36708318 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 12 of 144 Desc Main are associated with the UMWA (the “UMWA Retiree Beneficiaries”).11 Certain of the Debtors’ obligations to the UMWA Retiree Beneficiaries—such as contributing to the UMWA VEBA (as defined herein)—stem from the Debtors’ CBAs,12 whereas others—such as obligations under the Coal Act—are statutory. The Debtors UMWA retiree healthcare benefits generally fall into three categories: • UMWA VEBA (Debtors): Certain UMWA Retiree Beneficiaries13 receive benefits under a Voluntary Employee Beneficiary Association trust formed by the UMWA in the Debtors’ prior bankruptcy (the “UMWA VEBA”), which assumed the Debtors’ obligations to provide retiree healthcare benefits to certain union retirees, effective June 30, 2013.14 In general, these are former UMWA employees who retired under the 1993 National Bituminous Coal Wage Agreement (“NBCWA”) and subsequent NBCWAs, and who qualify for retiree health benefits under these NBCWAs, not under the Coal Act. In 2014, the Debtors contributed approximately $8.2 million on account of the UMWA VEBA. By this Motion, the Debtors seek to modify their obligations to the UMWA VEBA as provided in their Proposal. • Coal Act (Debtors): The Coal Act requires employers to provide health benefits to retirees who were age and service eligible as of February 1, 1993 11 The Debtors also have approximately 969 retirees not affiliated with the UMWA (the “Non-Union Retirees”). As noted above, the U.S. Trustee appointed the members of the 1114(d) Committee on July 7, 2015. The Debtors have already begun to engage the advisors to the 1114(d) Committee and similarly expect to make a proposal to modify, reduce, or eliminate non-union retiree benefits. For the avoidance of doubt, the Debtors do not seek through this Motion the authority to modify, reduce, or eliminate non-union retiree benefits. 12 The Debtors’ obligation to contribute to the UMWA VEBA is also set forth in: (a) that certain settlement agreement between Patriot, Peabody, and the UMWA, dated as of October 24, 2013 (the “Patriot-Peabody-UMWA Settlement Agreement”); and (b) that certain funding agreement, dated as of August 26, 2013 (as amended by that certain amendment dated November 4, 2013, and as may have been further amended or modified from time to time, the “VEBA Funding Agreement”)). By this Motion, the Debtors seek the termination or modification of their obligations to the UMWA VEBA as set forth in their CBAs, the Patriot-Peabody-UMWA Settlement Agreement, the VEBA Funding Agreement, and any other ancillary agreements where such obligations were set forth. 13 Although the Debtors are not privy to the specific number of UMWA Retiree Beneficiaries who receive benefits from the UMWA VEBA, effective June 30, 2013, the UMWA VEBA assumed health care obligations for 6,142 of the Debtors’ retirees (including dependents, a total of 11,370 UMWA Retiree Beneficiaries). 14 Funding for the VEBA under the VEBA Funding Agreement included: (a) a 35% ownership stake in the common stock issued upon emergence of the reorganized company; (b) profit sharing contributions up to a maximum of $300 million, subject to certain financial conditions that have never been satisfied; (c) a royalty contribution of $0.20 to $1.00 per ton for every ton produced at all existing mining complexes; (d) cash contributions of up to $75 million to be paid over the four years following emergence, subject to certain financial conditions that have never been satisfied; and (e) $10 million paid at emergence. 12 KE 36708318 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 13 of 144 Desc Main and who retired by September 30, 1994. The Debtors administer a health benefit plan that provides benefits to approximately 5,254 UMWA Retiree Beneficiaries pursuant to the Coal Act. The Debtors are responsible for paying benefits to approximately 1,108 of these UMWA Retiree Beneficiaries, and Peabody is responsible for paying for the remaining 4,236 UMWA Retiree Beneficiaries. The Debtors’ liabilities under the Coal Act also include payments to two multi-employer funds, the UMWA Combined Benefit Fund and the UMWA 1992 Benefit Plan, which provide certain healthcare benefits to certain eligible retirees. At present, the Debtors estimate the present value of their Coal Act liabilities to be approximately $43.7 million. These liabilities are subject to modification through section 1114 of the Bankruptcy Code. See generally Horizon Natural, 316 B.R. 268 (holding Coal Act benefits are “retiree benefits” within the meaning of section 1114 of the Bankruptcy Code and may be modified pursuant to section 1114). By this Motion, the Debtors seek to eliminate all obligations under the Coal Act. • Coal Act (Peabody): Peabody is contractually responsible for paying for approximately 4,236 UMWA Retiree Beneficiaries (the “Peabody Assumed Retirees”) pursuant to that certain Section 9711 Coal Act Liabilities Assumption Agreement between the Debtors and Peabody. Although Peabody pays these health benefits directly, the Debtors administer these retiree health benefits through that certain Administrative Services Agreement between the Debtors and Peabody. By this Motion, the Debtors seek to eliminate their obligations under the Administrative Services Agreement and for any obligations under the Coal Act with respect to the Peabody Assumed Retirees.15 • NBCWA (Alcoa): Approximately 210 UMWA Retiree Beneficiaries receive retiree health benefits under the 1993 National Bituminous Coal Wage Agreement of 2011, which the Debtors pay for but are reimbursed by Alcoa Co. (“Alcoa”) under the Debtors’ joint venture agreement (the “Squaw Creek JV Agreement”) with Alcoa for the Squaw Creek Coal Company (the “Alcoa Assumed Retirees”).16 By this Motion, the Debtors seek to eliminate their 15 To be clear, the Debtors seek to eliminate all Coal Act obligations with respect to the Peabody Assumed Retirees, including without limitation in the event the Section 9711 Coal Act Liabilities Assumption Agreement is rejected or otherwise terminated. 16 The Debtors’ NBCWA retiree health care obligations were largely eliminated through their 2012–13 Restructuring in connection with establishment of the UMWA VEBA. Alcoa, however—unlike Peabody—did not wish to contribute to the UMWA VEBA, and instead agreed to keep reimbursing the Debtors for these obligations. By this Motion, the Debtors are only seeking to terminate any obligations they may have with respect to the Alcoa Assumed Retirees, including the administration of such obligations, and are not seeking to affect Alcoa’s continuing obligations with respect to the Alcoa Assumed Retirees. 13 KE 36708318 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 14 of 144 Desc Main obligations to administer benefits for the Alcoa Assumed Retirees and any obligations they have with respect to the Alcoa Assumed Retirees.17 25. To be clear, the Debtors do not believe any of the UMWA Retiree Beneficiaries will be negatively affected by termination of the Debtors’ Coal Act obligations. If the Debtors terminate their Coal Act obligations, it is the Debtors’ understanding that the Peabody Assumed Retirees would continue to receive their retiree benefits from Peabody. It is also the Debtors’ understanding that the only retiree benefits for which the Debtors are currently paying and not being reimbursed—related to the 1,018 beneficiaries receiving benefits pursuant to the Coal Act—would transition to Arch Coal (990 retirees) and Peabody (28 retirees) as “related persons” under the Coal Act. See 26 U.S.C. 9701(c)(2). iii. 26. Pension Obligations The Debtors also have additional payment obligations to the UMWA 1974 Pension Plan under their CBAs (other than the Gateway CBA). The Debtors spent approximately $16.8 million in 2014 on contributions under the UMWA 1974 Pension Plan. Because the UMWA 1974 Pension Plan is a multiemployer plan, it is the Debtors’ understanding that beneficiaries of the UMWA 1974 Pension Plan would continue to receive pension benefits from the Plan if the Debtors’ obligations were terminated. D. The Debtors’ CBAs 27. The Debtors are parties to three “groups” of CBAs: (a) eight Master CBAs; (b) the Gateway CBA; and (c) the Highland CBA. These obligations are discussed in turn. 28. Eight of the Debtors are signatories to Master CBAs with substantially identical terms: (a) Heritage Coal Company LLC (“Heritage”); (b) Colony Bay Coal Company LLC 17 To be clear, the Debtors seek to eliminate all obligations with respect to the Alcoa Assumed Retirees, including without limitation in the event the Squaw Creek JV Agreement is rejected or otherwise terminated. 14 KE 36708318 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 15 of 144 Desc Main (“Colony”); (c) Eastern Associated Coal, LLC (“Eastern”); (d) Mountain View Coal Company, LLC (“Mountain View”); (e) Pine Ridge Coal Company, LLC (“Pine Ridge”); (f) Rivers Edge Mining LLC (“Rivers Edge”); (g) Apogee Coal Company, LLC (“Apogee”); and (h) Hobet Mining, LLC (“Hobet”). Approximately 725 current employees receive benefits under the Master CBAs. 29. First, five of the eight Master CBAs (Heritage, Colony, Mountain View, Pine Ridge, and Rivers Edge) cover operations that have been shut down (in some cases, for up to 30 years). In addition, although the transaction has not yet closed, the Debtors entered into an asset purchase agreement prepetition to sell the Heritage assets. 30. Two of the remaining three Master CBAs cover both assets that are to be acquired by Blackhawk and other mining complexes or groups of assets that are not being acquired by Blackhawk (i.e., the Federal assets, the Apogee assets, and the Heritage assets, and together with any other assets Blackhawk is not proposing to acquire, the “Remaining Assets”). The Master CBA with Eastern covers the Black Oak Underground Mine, the Rocklick Preparation Plant, the Wells Preparation Plant, and certain related coal lands and operations, which are being acquired by Blackhawk, and the Federal assets (i.e., the Federal #2 Underground Mine and the Federal #2 Preparation Plant), which are not being acquired by Blackhawk. The Apogee CBA covers the Fanco Preparation Plant and Loadout, which is being acquired by Blackhawk, and the Guyan Surface Mine, which is not being acquired by Blackhawk. The Debtors seek to reject the Eastern and Apogee CBAs in their entirety because doing so is a requirement under the Blackhawk Transaction, and the Debtors cannot “cherry-pick” which features of an executory contract they wish to assume and which features they wish to reject. See, e.g., Sharon Steel Corp. v. Nat’l Fuel Gas Distribution Corp., 872 F.2d 36, 41 (3d Cir. 1989). 15 KE 36708318 Case 15-32450-KLP 31. Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 16 of 144 Desc Main The remaining Master CBA is the Hobet CBA. The Hobet CBA only covers assets which Blackhawk is not acquiring. As will be discussed in further detail below, the Debtors seek to reject the Hobet CBA because they cannot continue to operate and are unlikely to be able to sell the Hobet assets without the Debtors’ requested modifications, and the Debtors cannot be in a position whereby failure to reject will leave their liquidating estates with significant administrative expenses. See In re Adventure Resources, Inc., 137 F.3d 786, 793 (4th Cir. 1998) (holding that any claims arising from a collective bargaining agreement that has not been rejected are entitled to first priority as administrative expenses of the bankruptcy estate). 32. Second, Debtor Gateway Eagle Coal Company, LLC is a signatory to the Gateway CBA, which was negotiated in connection with the 2012–13 Restructuring. The Gateway CBA covers four mines: (a) Gateway Eagle; (b) Farley Eagle; (c) Campbells Creek No. 10; and (d) Sugar Maple. The Debtors permanently closed operations at the Sugar Maple and Farley Branch underground mines in November 2012 and neither operation has any remaining employees. The remaining two Gateway operations, Campbells Creek No. 10 and Gateway Eagle underground mines, are part of the Wells and Rocklick mining complexes subject to the Blackhawk APA. The major difference between the Gateway CBA and the Master CBAs is that there is no requirement to contribute to the UMWA 1974 Pension Plan. Approximately 166 current union employees receive benefits under the Gateway CBA. 33. The Debtors seek to reject the Gateway CBA because, with respect to the Debtors’ active operations, it is a requirement to consummate the Blackhawk Transaction, and with respect to the Debtors’ remaining operations, the mines have been shut down, there are no employees, and the Gateway CBA must be rejected in toto. Sharon Steel Corp. 872 F.2d at 41. 16 KE 36708318 Case 15-32450-KLP 34. Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 17 of 144 Desc Main Finally, Debtor Highland Mining Company, LLC is a signatory to the Highland CBA. The Debtors permanently closed and sealed the Highland mine and laid off all of their employees. In addition, although the transaction has not yet closed, the Debtors entered into an asset purchase agreement prepetition to sell the Highland assets. Accordingly, the Debtors seek to reject the Highland CBA both because there are no operations or employees associated with the Highland CBA, and out of an abundance of caution so the Debtors are not deemed to have assumed the Highland CBA through operation of law. See Adventure Resources, 137 F.3d at 798. E. The Debtors’ Prepetition Struggles i. 35. 2012–2013 Restructuring On July 9, 2012, the Debtors filed voluntary chapter 11 petitions in the U.S. Bankruptcy Court for the Southern District of New York on account of, among other things, the decrease in demand for coal, increasing costs associated with burdensome government regulations, and increasing labor-related liabilities. Following a venue challenge by, among other parties, the UMWA, the cases were transferred on November 27, 2012 to the U.S. Bankruptcy Court for the Eastern District of Missouri (the “Missouri Bankruptcy Court”). 36. On May 29, 2013, following the failure of extensive negotiations between the Debtors and the UMWA and a motion filed by the Debtors to reject their collective bargaining agreements under sections 1113 and 1114 of the Bankruptcy Code, the Missouri Bankruptcy Court issued a 102-page ruling authorizing, but not directing, the Debtors to implement proposed changes to their existing collective bargaining agreements and to their related retiree benefits. While an appeal of that order was pending, in August 2013, the parties agreed upon new collective bargaining agreements that included the following key changes with regard to the Debtors’ union employees: 17 KE 36708318 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 18 of 144 Desc Main • various adjustments were made to wages, including future changes; • shift differential payments and premium overtime pay were eliminated, but union employees continued to receive 1.5 times their regular pay for any hours worked over 40 hours per week and holidays; • paid time off was reduced and adjustments were made to work rules; • union employees agreed to a healthcare plan more closely matching that of the Debtors’ non-union employees, but with lower out-of-pocket maximums and without healthcare premiums; • the Debtors agreed to contribute three percent of union employees’ gross wages into a 401(k) or similar plan in lieu of the obligation to provide retiree healthcare in the future; and • the Debtors agreed that the entities participating in and contributing to the UMWA 1974 Pension Plan would continue to do so. The following key changes were made with regard to the Debtors’ union retirees: 37. • the UMWA established the UMWA VEBA; and • Patriot, on behalf of itself and certain Patriot subsidiaries, entered into the VEBA Funding Agreement. Similarly, following negotiations between the Debtors and a committee comprised of their non-union retirees, the Missouri Bankruptcy Court entered a negotiated order on April 26, 2013 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 employees. 38. The Debtors also entered into the Patriot-Peabody-UMWA Settlement Agreement whereby, among other things, Peabody agreed to: (a) provide $310 million in cash contributions ultimately to be funded to the UMWA VEBA; and (b) provide $141 million in credit support for letters of credit and cash collateral previously posted by the Debtors for, among other things, UMWA retiree healthcare obligations and obligations under the Coal Act. 18 KE 36708318 Case 15-32450-KLP ii. 39. Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 19 of 144 Desc Main Post-Restructuring Struggles The Debtors’ business depends on global demand for coal-fueled electricity and steel production. Since the 2012–13 Restructuring, thermal and metallurgical coal markets and pricing have become increasingly challenged with oversupply and coal prices have reached lows not seen in more than a decade. The lethargic economic environment, lack of energy demand generally, and a large number of coal-fired plant retirements have precipitated this decline. Competition from other energy sources has also increased pricing pressures: as of December 31, 2014, natural gas pricing was 46% lower compared with the previous year and stood at $2.95/MBtu, a price at which it is difficult for any coal basin to compete. 40. The regulatory environment has also contributed to the Debtors’ current financial situation. Federal and state regulatory authorities impose obligations on the coal mining industry with respect to employee health and safety, permitting and licensing requirements, environmental protection, the reclamation and restoration of mining properties, and the effect of mining on surface and groundwater quality. Several citizen lawsuits brought by non-governmental organizations have also stressed the Debtors’ financial condition. The Debtors have incurred significant costs to comply with these laws and regulations. 41. As discussed above, the Debtors’ obligations to contribute to the UMWA 1974 Pension Plan and to make payments pursuant to the Coal Act continue today, notwithstanding the 2012–13 Restructuring. When coupled with the external pricing pressure, increased regulation, and other costs associated with the Debtors’ businesses, these legacy liabilities have crippled the Debtors’ ability to operate profitably. Each of these challenges contributed to the Debtors’ decision to pursue a sale process and file these chapter 11 cases. 19 KE 36708318 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 20 of 144 Desc Main F. The Debtors’ Sale Process 42. As noted in the First Day Declaration, the Debtors’ feasibility upon emergence from the 2012–13 Restructuring was predicated on assumptions about coal prices and operating performance that ultimately did not materialize. The Debtors’ management and advisers thereafter pursued certain strategic mergers and similar strategic transactions, but these efforts did not yield a meaningful or transformative transaction. 43. In the months prior to filing petitions for relief under chapter 11, due to continued weakened demand for coal, the Debtors’ management had to address increasingly severe pressures on its financial condition that threatened to cause an event of default under their secured debt instruments. Accordingly, the Debtors and their advisers negotiated and obtained on March 31, 2015 requisite amendments from their lenders that provided further time to explore options to secure additional liquidity and/or effectuate a sale and/or restructuring transaction. 44. As detailed more fully in the Debtors’ motion for entry of the Bidding Procedures Order, before and after the Petition Date, the Debtors and their advisors engaged in negotiations or discussions with two entities regarding a transaction that would result in the going concern sale of substantially all of the Debtors’ operating assets. One of the entities was not interested in acquiring union-affiliated assets, and the other was Blackhawk. After analysis and review, the Debtors and their advisors concluded that the proposed Blackhawk sale provided the best option for maximizing value for the benefit of the Debtors’ stakeholders. 45. Pursuant to the Blackhawk APA, Blackhawk has agreed to purchase certain assets and assume certain liabilities and will be capitalized with a combination of debt, equity, and cash. Importantly, Blackhawk is not assuming liabilities: (a) under any of the Debtors’ CBAs; (b) for retiree medical or other welfare benefits for any of the Debtors’ employees, including liabilities under or in relation to the Coal Act; or (c) for or associated with contributions to or 20 KE 36708318 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 21 of 144 Desc Main successorship obligations in relation to the UMWA 1974 Pension Plan (See Blackhawk APA § 2.04(d)). In addition, the Blackhawk APA has certain conditions to consummation of the Transaction, including requirements that: 46. • the Court enter an order providing for the sale of the Assets free and clear of any Encumbrances (as defined in the Blackhawk APA) and explicitly providing there are no successorship obligations of Blackhawk under the CBAs, Coal Act, and UMWA 1974 Pension Plan (See Blackhawk APA § 10.02(g)); and • either (i) Blackhawk shall have entered into new collective bargaining agreements on terms and conditions acceptable to Blackhawk that have been ratified by the UMWA or (ii) the Court shall have entered one or more orders in form and substance acceptable to Blackhawk rejecting the CBAs and associated retiree benefits pursuant to sections 1113 and 1114 of the Bankruptcy Code (See Blackhawk APA § 10.02(i)). Under the Bid Procedures Order, the Court set a bid deadline of September 4, 2015 and, if necessary, an auction date of September 9, 2015. Since entry of the Bid Procedures Order, the Debtors, with their advisors, launched an extensive marketing and sale process for substantially all of the Debtors’ operating assets, canvassing the marketplace to identify potential financial or strategic purchasers. In total, the Debtors’ investment banker, Centerview, in consultation with the Committee and the UMWA, contacted approximately 65 potential purchasers and sent “teaser” materials to 29 such parties to solicit interest. The Debtors ultimately entered into nondisclosure agreements with 17 potential purchasers and provided them with additional information and offered them access to an electronic data room containing diligence materials related to the Debtors’ assets. The Debtors have conducted management calls and/or presentations for three potential purchasers of the Federal assets and one potential purchaser of the assets Blackhawk seeks to acquire. The Debtors have received two non-binding letters of intent—one for the Federal assets and one for the assets Blackhawk seeks to acquire. The potential purchaser interested in the Federal assets has also conducted one site visit. No 21 KE 36708318 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 22 of 144 Desc Main entity (other than Blackhawk) has conducted site visits to date for the assets Blackhawk seeks to acquire. 47. At present, despite the Debtors’ ongoing sale process, no potential purchaser has indicating a willingness to acquire any of the Debtors’ assets without union concessions similar to those required by Blackhawk. The Debtors’ Need to Reject the CBAs 48. As described above, five of the eight Master CBAs and the Highland CBA have no active operations and no remaining employees. Indeed, certain of these CBAs only cover operations which have been dormant for years (and in some cases, decades). The Debtors need to reject these CBAs both because there are no operations or employees associated with such CBAs, and out of an abundance of caution so the Debtors are not deemed to have assumed these CBAs through operation of law. See, e.g., Adventure Resources, 137 F.3d at 798 (holding that a collective bargaining agreement between mine workers union and debtor-coal mining operators was assumed in bankruptcy as a result of latter’s failure to reject it). Nor can the Debtors expose their liquidating estate to massive administrative claims in the event they are deemed to assume such CBAs because they failed to reject them. See Adventure Resources, 137 F.3d at 793 (holding that any claims arising from a collective bargaining agreement that has not been rejected are entitled to first priority as administrative expenses of the bankruptcy estate). 49. Two of the remaining three Master CBAs are with Debtors who own assets that are to be acquired by Blackhawk—specifically, the Master CBAs with Eastern and Apogee. The Gateway CBA covers both operations to be acquired by Blackhawk and other groups of assets that have been shut down and have no employees. The Debtors need to reject the Eastern, Apogee, and Gateway CBAs because, in addition to the administrative liabilities noted above, rejection of these CBAs is required to consummate the Blackhawk Transaction, and the Debtors 22 KE 36708318 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 23 of 144 Desc Main cannot “cherry-pick” which features of an executory contract they wish to assume and which features they wish to reject. See, e.g., Sharon Steel, 872 F.2d at 41. In addition, the Debtors must reject the Gateway CBA because after the Transaction closes, all facilities operated by Gateway employees will have been either sold or shut down, and Gateway will have no need for employees, nor can the Debtors expose their liquidating estate to administrative claims by failing to reject the Gateway CBA. 50. The Federal and Apogee CBAs also cover certain assets that are not being acquired by Blackhawk—and the Debtors have made good faith proposals with respect to replacement terms and conditions for those assets and operations following rejection of the CBAs, which the UMWA has rejected without good cause. Specifically, the Debtors have proposed, among other things, removing the UMWA 1974 Pension Plan contribution requirements—which, absent such modification, would likely prevent any future sale of these assets—but the UMWA has refused to accept such changes. Accordingly, while the Debtors are required to reject the Eastern and Apogee CBAs entirely as a condition to consummating the Blackhawk Transaction, they have made a proposal to the UMWA on the terms and conditions of a new CBA that could be applied to these Remaining Assets—which the UMWA rejected without good cause. 51. The last CBA—the Hobet CBA—covers only the Hobet assets, which Blackhawk is not seeking to acquire. As with the Federal and Apogee assets, the Debtors made a proposal to the UMWA on the terms and conditions of a new CBA that would govern the Hobet assets until such time as the Debtors were able to sell the Hobet assets. The UMWA rejected this proposal. Accordingly, the Debtors need to reject the Hobet CBA. 23 KE 36708318 Case 15-32450-KLP 52. Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 24 of 144 Desc Main First, the Debtors operate Hobet at significantly above-market costs. As noted above, certain of the Debtors’ Hobet employees make significantly higher wages than the Debtors’ non-union employees. In addition, non-union wage rates and benefits have declined in recent years as coal companies have had to cut costs and as there has generally been a drop in demand for coal mining employees. For example, the Debtors’ non-union wage rates at their Samples mine have fallen an average of approximately 7.5% per hour since the conclusion of the 2012–13 Restructuring. Union wage rates at the Debtors’ Hobet mine, however, have continued to increase in accordance with the terms of the Debtors’ CBAs. Presently, non-union employees at Samples earn approximately $5.45 less per hour, on average, than their union counterparts at Hobet. If not corrected, this imbalance will likely continue to increase in light of the weak job market and the mandatory rate increases provided by the Hobet CBA. 53. This imbalance in wage expenses has severely crippled Hobet’s cash flow, and Hobet can no longer continue to operate profitably as a result. Rejection of the Hobet CBA is thus necessary to Hobet’s ability to continue operating and help fund these chapter 11 cases and the Debtors’ post-confirmation liquidating trust. See, e.g., In re Mesaba Aviation, Inc., 341 B.R. 693, 731 (Bankr. D. Minn. 2006) (holding that the “necessity” factor under section 1113 requires the Court to determine what costs must be cut to “improve the [d]ebtor’s cash flow that it could emerge from chapter 11, financially stable and viably competitive . . . .”). At the same time, the Debtors are liquidating and their estates will need every dollar available to help fund the Debtors’ liabilities post-confirmation. In a scenario where the Debtors’ creditors are going to receive only a fraction of their claims (if that) and the Debtors’ non-union employees are performing the exact same jobs as the Debtors’ Hobet employees for significantly less, it is only 24 KE 36708318 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 25 of 144 Desc Main fair and equitable that the Debtors’ remaining union employees share each other constituent’s sacrifice. 54. Second, as with each of the Debtors’ other CBAs, the Debtors need to reject the Hobet CBA so that: (a) they are not deemed to have assumed these CBAs through operation of law; (b) they may avoid exposing the Debtors’ remaining liquidating estate to administrative claims; and (c) they may effectuate a complete withdrawal under the UMWA 1974 Pension Plan. The Debtors’ estates simply cannot afford to have any entity exposed to the risk of withdrawal liability under the UMWA 1974 Pension Plan on a post-effective date basis. UMWA Negotiations and the Debtors’ Proposals 55. The Debtors have negotiated diligently and in good faith with the UMWA since their first meeting two days after the Petition Date. Throughout this process, the Debtors have demonstrated a commitment to negotiating a consensual resolution with the UMWA that will satisfy the conditions of the Blackhawk APA, and the Debtors will continue to seek a consensual resolution during the pendency of this Motion (and, if necessary, thereafter). 56. The Debtors have engaged in regular communication with the UMWA since they commenced these chapter 11 cases. On May 14, 2015, the Debtors met with the UMWA to provide the UMWA with an overview of market conditions, the Debtors’ historical financial performance, the reasons and goals for the Debtors’ restructuring, including the sale of their assets, and their DIP milestones. Over the next two months, the Debtors formally met with the UMWA another four times, and the Debtors and their advisors participated in multiple conference calls and exchanged numerous e-mails with the UMWA and its advisors—contacts that often took place multiple times per day. 57. The Debtors provided a significant amount of data to enable the UMWA to evaluate their proposals. To that end, the Debtors and the UMWA entered into a stipulated 25 KE 36708318 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 26 of 144 Desc Main protective order (See Docket No. 232) to govern the sharing of confidential data, and the Debtors set up a web-based data room to facilitate information sharing on a confidential basis. The Debtors made the data room available to the UMWA on May 19, 2015. 58. On May 29, 2015, the Debtors presented the First Proposal for a set of terms and conditions on which they believed both Blackhawk and the UMWA could agree, but the UMWA had rejected a significant number of proposed modifications, including with respect to the UMWA 1974 Pension Plan. The Debtors next met with the UMWA on June 3, 2015 in Morgantown, West Virginia. During the meeting, the Debtors explained that, while Blackhawk had expressed some willingness to enter into CBAs with the UMWA (subject to certain terms and conditions), Blackhawk had indicated that it would not consider any CBA with the following obligations: (a) successorship obligations limiting future asset sales; and (b) UMWA 1974 Pension Plan contributions or other pension related liabilities. Accordingly, the Debtors provided the UMWA with a Second Proposal that the Debtors believed would be acceptable to Blackhawk. 59. The UMWA provided its first (and only) counterproposal on June 12, 2015 (the “UMWA Counterproposal”). The UMWA Counterproposal responded to a limited number of the Debtors’ proposed modifications, but rejected the majority of the Debtors’ proposals, and flatly insisted on maintaining the status quo with respect to paid time off, health and retirement benefits, contributions to the UMWA 1974 Pension Plan, work rules, and job opportunity programs. The UMWA Counterproposal was a nonstarter. 60. After consultation with Blackhawk, the Debtors delivered the Third Proposal on June 13, 2015 in response to the UMWA’s stated concerns. Among other things, the Third Proposal provided for an increase in the Debtors’ proposed wage levels, additional job security 26 KE 36708318 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 27 of 144 Desc Main protections, and offered employer contributions to a 401(k)-type savings plan. After delivering the Third Proposal, the Debtors and the UMWA engaged in discussions about the substance of the Third Proposal. Following these discussions, after consultation with Blackhawk, the Debtors delivered a Fourth Proposal to the UMWA later in the day on June 13, 2015, which provided additional job security protections and job opportunities for laid-off employees. Notwithstanding the additional concessions proposed by the Debtors in the Fourth Proposal, the UMWA rejected the proposed modifications, including with respect to the UMWA 1974 Pension Plan contributions. 61. On June 18th, 2015, after consultation with Blackhawk, the Debtors met with the UMWA via telephone and provided a Fifth Proposal. Although there was consensus on several issues, the UMWA nevertheless refused to accept certain necessary aspects of the Fifth Proposal—chief among them the elimination of the UMWA 1974 Pension Plan contributions. Notwithstanding the UMWA’s repeated insistence on terms and conditions that Blackhawk was unwilling to agree to (and that no buyer is likely to agree to), in an effort to avoid litigation, on June 22, 2015, after consultation with Blackhawk, the Debtors made a Sixth Proposal to the UMWA that expired on Wednesday, July 8, 2015. The UMWA did not respond to the Sixth Proposal. 62. Below is a table comparing the first proposal and last proposal the Debtors made that would have satisfied the conditions of the Blackhawk APA, demonstrating the significant movement in the proposals’ terms made in response to the UMWA’s stated concerns: Subject and CBA Article First Proposal Sixth Proposal Enabling Clause (See Art. I of Master CBA) Eliminate successorship obligations entirely in new contract. Retain successorship obligations in new contract. Scope and Coverage (See Art. IA of Master CBA) New contract will apply only to geographic boundaries of the mine as defined by the mining permit. New contract will apply to all represented operations and coal lands acquired by Blackhawk. 27 KE 36708318 Case 15-32450-KLP Contracting and Subcontracting (See Art. IA(g) of Master CBA) Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 28 of 144 Non-bargaining unit employees may produce coal at the mining face. Job Opportunities and Benefit Security Program Eliminate entirely. (See Art. II of Master CBA) Wage Increase (See Art. X of Master CBA) Hourly Wage Rates (See Appendices to Master CBA) Sickness and Accident Benefits (See Art. XI of Master CBA) • Eliminate all wage increases. • Establish wage reopener to set wages for years 2018–2021. Desc Main Non-bargaining unit employees may not produce coal the mining face. • Maintain job opportunities and benefit security program. • Provide 3 of 5 new job opening at non-represented underground mines to laid-off represented employees. • Provide a $0.65 per hour raise in year 2016 if the metallurgical coal benchmark index reaches $150. • Provide a $0.65 per hour raise in year 2017 if the metallurgical coal benchmark index reaches $120. • Provide annual $0.65 per hour raises beginning in year 2018 regardless of the metallurgical coal benchmark index. • Reduce underground wage rates by $2.00. • Reduce underground wage rates by $1.25. • Reduce preparation plant wage rates by $3.00 • Reduce preparation plant wage rates by $1.25. Provide a maximum of 26 weeks of S&A benefits. Provide a maximum of 52 weeks of S&A benefits. • Provide up to five graduated vacations per year with pay. Provide up to nine additional graduated vacation days that are paid but may not be used as time off. Graduated Vacation (See Art. XIV of Master CBA) Provide up to five graduated vacations per year with pay. • Seniority (See Art. XVII of Master CBA) Assure that only the signatory company is obligated to make job offers to laid-off employees. Provide job opportunities for employees of different signatory companies, including Hobet and Apogee (which are not being acquired by Blackhawk). Eliminate requirement to fund the VEBA. Provide for a $0.20 per ton royalty on clean tons produced at acquired operations and coal lands through December 31, 2018, unless legislation provides funding or health care benefits for VEBA participants. Health, Retirement and Other Benefits (See Art. XX of Master CBA) 28 KE 36708318 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 29 of 144 Desc Main Eliminate contribution of 3% of wages into the Union Savings Plan that are made in lieu of providing retiree health care and in lieu of pension eligibility. Provide up to a 6% contribution into the Union Savings Plan (3% with no employee contribution required and an additional matching contribution up to 3%). Health, Retirement and Other Benefits (See Art. XX of Master CBA) Provide the same health care plan as non-union employees. Make no changes to the current UMWAbargained for health care plan. Miscellaneous (See Art. XXII of Master CBA) Make current attendance policy more restrictive. Maintain current attendance control policy. Ratification and Termination of Agreement (See Art. XXIX of Master CBA) Seven year term. Five year term. Health, Retirement and Other Benefits (See Art. XX of Master CBA) • Alternative Schedules (See Memorandum of Understanding Regarding Alternative Schedules attached to Master CBA) Memorandum of Understanding Regarding Job Opportunities 63. • Provide a 6 day on / 3 day off schedule with 10 hour rotating shifts. Provide a 5 day on / 2 day off schedule with 10 hour shifts. Provide a 6 day on / 3 day off schedule with 10 hour non-rotating shifts. Eliminate, but provide 3 of 5 job offers at underground mines to certified employees of Hobet and Apogee (operations not being acquired by Blackhawk), and provide 3 of 5 job offers at new underground mines (including Flying Eagle and Eagle 3). Eliminate. Although the Debtors tirelessly worked to come to terms with the UMWA on a resolution that would satisfy the conditions under the Blackhawk APA, a deal has not come together and the Debtors cannot simply wait around in hopes of an agreement. Despite being clear from the very beginning of negotiations that Blackhawk could not accept any agreement that required contributions to the UMWA 1974 Pension Plan, the UMWA has stubbornly refused to compromise on this point—even when faced with the very real risk that the Debtors could liquidate, and all of their union employees could lose their jobs, if the sale to Blackhawk is not consummated. 29 KE 36708318 Case 15-32450-KLP 64. Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 30 of 144 Desc Main While the UMWA may be willing to “play chicken” with Blackhawk, the Debtors cannot afford to. The Debtors are fiduciaries and must look out for the best interests of all parties in interest. The Debtors’ only viable path towards saving the going concern value of their assets for the benefit of their estates and all parties in interest is through a consummation of either a sale to Blackhawk or through a higher and better offer via the Debtors’ auction process. Meanwhile, the Debtors’ DIP funding is expressly tied toward satisfying certain milestones, one of which is either having reached a consensual resolution with the UMWA necessary to satisfy the conditions under the Blackhawk APA by August 1, 2015, or having filed a motion seeking relief under sections 1113 and 1114 of the Bankruptcy Code. 65. Accordingly, in light of the fact that the UMWA was not willing to agree to any consensual modifications of the CBAs necessary to consummate the Blackhawk Transaction, the Debtors made another Proposal to the UMWA on July 10, 2015. With respect to all facilities proposed to be acquired by Blackhawk, the Proposal stated that the applicable CBAs must be rejected, and, following the closing of the Transaction, the rights of Blackhawk and the UMWA would be subject to applicable labor law. The Debtors similarly proposed to terminate the CBAs applicable to the facilities that are not proposed to be acquired by Blackhawk, and, in addition, proposed market terms and conditions under which the Debtors were willing to offer employment following rejection of the applicable CBAs. The UMWA, in turn, rejected the Debtors’ proposals without good cause, again insisting on terms (such as assumption of the UMWA 1974 Pension Plan) that the UMWA knows neither the Debtors nor Blackhawk will ever agree to. 66. As set forth more fully on Exhibit B attached hereto, the Debtors’ Proposal would, among other things: 30 KE 36708318 Case 15-32450-KLP 67. Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 31 of 144 Desc Main • authorize, but not direct, the Debtors to reject each of their CBAs; • solely with respect to the bargaining unit employees of Eastern employed at the Federal #2 Underground Mine and the Federal #2 Preparation Plant, offer a new Eastern CBA with certain modifications, including the elimination of the successorship clause and contributions to the UMWA 1974 Pension Plan, and an automatic termination of the CBA upon a cessation or sale of the Debtors’ operations at the Federal assets; • solely with respect to bargaining unit employees of Apogee employed at the Guyan Surface Mine, offer a new Apogee CBA with certain modifications, including wage reductions, the elimination of the successorship clause and contributions to the UMWA 1974 Pension Plan, and an automatic termination of the CBA upon a cessation or sale of the Debtors’ operations in connection with the Apogee assets; • solely with respect to the bargaining unit employees of Hobet employed at the Beth Station Preparation Plant and the Job #21 Surface Mine, reinstate the Hobet CBA with certain modifications, including wage reductions, the elimination of the successorship clause and contributions to the UMWA 1974 Pension Plan, and an automatic termination of the CBA upon a cessation or sale of the Debtors’ operations in connection with the Hobet assets; and • eliminate any and all future contributions or obligations under the Coal Act and any and all obligations to pay for or administer any retiree healthcare benefits for the Alcoa Assumed Retirees and the Peabody Assumed Retirees. As set forth in more detail below, the Debtors respectfully submit that the Proposal is necessary to permit confirmation of the Debtors’ chapter 11 plan, is based on the most complete and reliable information at the time the Proposal was made, does not treat the Debtors or their creditors unfairly or inequitably, and has been rejected by the UMWA without good cause. Basis For Relief 68. A debtor is permitted to reject its collective bargaining agreements and modify its retiree benefits if the proposed modifications comply with section 1113 and section 1114 of the 31 KE 36708318 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 32 of 144 Desc Main Bankruptcy Code. 11 U.S.C. §§ 1113(c), 1114(g).18 As a threshold matter, a proposal must be “necessary to permit the reorganization of the debtor.” 11 U.S.C. §§ 1113(b)(1)(A), 1114(f)(1)(A); Family Snacks, 257 B.R. at 892–93. A proposal must be “based on the most complete and reliable information available,” 11 U.S.C. §§ 1113(b)(1)(A), 1114(f)(1)(A); the debtor must have supplied the union with “such relevant information as is necessary to evaluate the proposal,” 11 U.S.C. §§ 1113(b)(1)(A), 1114(f)(1)(B); and the debtor must meet with the union “at reasonable times” and “confer in good faith” in an attempt to agree on modifications to the collective bargaining agreements. 11 U.S.C. §§ 1113(b)(2), 1114(f)(2). Finally, the proposal must satisfy certain equitable requirements: it must treat all parties “fairly and equitably,” 11 U.S.C. §§ 1113(b)(1)(A), 1114(f)(1)(A); the union must have rejected the proposal without “good cause,” 11 U.S.C. §§ 1113(c)(2), 1114(g)(2); and the “balance of the equities” must favor rejection. 11 U.S.C. §§ 1113(c)(2), 1114(g)(2); see also Family Snacks, 257 B.R. at 892 (citing In re Am. Provision Co., 44 B.R. 907, 909 (Bankr. D. Minn. 1984)). 69. Because the Debtors have satisfied each of the applicable requirements—both as to their proposed rejection of the CBAs and as to their proposed termination and modification of retiree benefits—the Motion should be granted. 18 It is well-settled that the requirements of Section 1113 apply with equal force to a debtor’s effort to modify retiree benefits under Section 1114. See, e.g., Horizon Natural, 316 B.R. at 281 (noting that the “requirements for modification of retiree benefits are . . . substantially the same as the requirements for rejection of collective bargaining agreements” and applying the same standard); see also United Food & Commercial Workers Union, Local 211 v. Family Snacks, Inc. (In re Family Snacks, Inc.), 257 B.R. 884, 896–97 (8th Cir. B.A.P. 2001) (relying on § 1114 cases to interpret § 1113); In re Ionosphere Clubs, Inc., 134 B.R. 515, 520 (Bankr. S.D.N.Y. 1991) (“When Congress enacted § 1114, it used the same procedures and standards as existed for modification or rejection of collective bargaining agreements under § 1113.”); S. Rep. No. 119, 100th Cong., 1st Sess. 1987, 1988 U.S.C.C.A.N. 683, 687 (standards for modifying benefits under § 1114 “are intended to be identical to those contained in Section 1113 [because] . . . it is important to use a standard with which the courts are already familiar”). As a result, courts consistently analyze motions for relief under Section 1113 and 1114 in tandem. See, e.g., Horizon Natural, 316 B.R. at 279-83; In re Horsehead Indus., Inc., 300 B.R. 573, 583 (Bankr. S.D.N.Y. 2003). 32 KE 36708318 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 33 of 144 Desc Main A. The Debtors’ Proposal Is Necessary To Their Reorganization 70. Sections 1113 and 1114 provide that proposed modifications must be “necessary to permit the reorganization of the debtor.” 11 U.S.C. §§ 1113(b)(1)(A), 1114(f)(1)(A). This element is “[t]he most fundamental requirement for rejection of a collective bargaining agreement,” In re Northwest Airlines Corp., 346 B.R. 307, 321 (Bankr. S.D.N.Y. 2006), and it is clearly satisfied here. 71. In construing the necessity requirement, courts have determined that a proposal must contain “necessary, but not absolutely minimal, changes that will enable the debtor to complete the reorganization process successfully.” Truck Drivers Local 807 v. Carey Transp., Inc., 816 F.2d 82, 90 (2d Cir. 1987). Otherwise stated, the debtor’s proposal “need not be limited to the bare bones relief that will keep it going.” N.Y. Typographical Union No. 6 v. Royal Composing Room, Inc. (In re Royal Composing Room, Inc.), 848 F.2d 345, 350 (2d Cir. 1988), cert. denied, 489 U.S. 1078 (1989). 72. In determining whether modifications are “necessary,” the Debtors “need only make a showing as to the overall necessity of the proposal, rather than prove that each element of the proposal is necessary to reorganization.” Northwest Airlines, 346 B.R. at 321 (citing Royal Composing Room, 848 F.2d at 348). The court must focus on “the total impact of the changes [o]n the debtor’s ability to reorganize, not on whether any single proposed change will achieve that result.” In re Appletree Mkts., 155 B.R. 431, 441 (S.D. Tex. 1993). In fact, if a debtor were required to justify each element of its proposal, “no proposal could ever be truly ‘necessary,’ since any single vital element of a proposal can hardly be ‘necessary’ if it can be replaced by some alternative not included in the package which would achieve the same dollar savings for the debtor.” Royal Composing, 848 F.2d at 348; see generally In re Falcon Prods., Inc., 354 33 KE 36708318 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 34 of 144 Desc Main B.R. 889, 894 (E.D. Mo. 2006) (holding that a debtor’s request for distress termination of multiple pension plans must be evaluated in the aggregate and not on a plan-by-plan basis). 73. Modifications of the non-economic provisions of an agreement—such as provisions concerning work rules, vacation days, and overtime—may satisfy the necessity requirement. See, e.g., Carey Transp., 816 F.2d at 86 (proposal that included changes to overtime, sick days, workers’ compensation, and scheduling rules was “necessary”); In re Valley Steel Prods. Co., Inc., 142 B.R. 337, 340 (Bankr. E.D. Mo. 1992) (changes to a collective bargaining agreement that increased “flexibility in layoffs, improve[ed] the [d]ebtors’ dispatch procedures and relax[ed] work rules” were necessary). Indeed, there is “no legal or logical impediment to including” non-economic changes “intended to have a direct economic effect.” Appletree, 155 B.R. at 441. 74. In construing the necessity requirement in cases involving debtors seeking to sell its assets, the requirement that a proposal reflect modifications to collective bargaining agreements or retiree benefits that are ‘“necessary to permit the reorganization’” must be interpreted to mean ‘“necessary to accommodate confirmation of a Chapter 11 plan.’” See, e.g., Horizon Natural, 316 B.R. at 281 (“in this liquidating case, ‘necessary to permit the reorganization’ must be interpreted to mean ‘necessary to accommodate confirmation of a Chapter 11 plan.’”); see also In re Ionosphere Clubs, Inc., 134 B.R. 515, 525 (Bankr. S.D.N.Y. 1991) (“[T]he only meaningful interpretation of ‘necessary to permit the reorganization’ that is consistent with the fair and equitable treatment of retirees and all other creditors is one that does not encourage the Trustee to seek to convert the case from Chapter 11 to Chapter 7 solely to preserve the possibility of some recovery for general unsecured creditors.”). Applying sections 1113 and 1114 to liquidating chapter 11 cases serves the underlying goals of sections 1113 and 34 KE 36708318 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 35 of 144 Desc Main 1114, i.e. preserving the protections Congress intended for employees and retirees, protections not available under chapter 7 liquidation. See Ionosphere, 134 B.R. at 525; see also Family Snacks, 257 B.R. at 893 (“each court that has addressed the meaning of the phrase ‘reorganization of the debtor,’ as found in § 1113(b)(1)(A), has held or assumed that § 1113 applies in a case where the debtor will not be engaged in business because it is selling its assets.”). 75. As the court in National Forge noted—and as is the case here—if “[t]he only way for the Debtor to accomplish a reorganization is through the sale of assets [and] [t]he Debtor’s lender set forth strict deadlines for negotiations and consummation of a sale in order to allow the Debtor continued use of cash collateral [and where] [n]o buyer was willing to assume the CBA [and] [p]otential ongoing disputes over the CBA threatened to chill the bidding in the absence of rejection,” a final proposed modification in the form of a voluntary termination (i.e., rejection) of the collective bargaining agreement is necessary to permit reorganization of the debtor. National Forge, 289 B.R. at 810–11 (authorizing rejection when buyer of debtor’s assets refused to assume CBAs, sale was only way to maximize value for the estate). 76. The modifications requested here are necessary to sustain the Debtors’ assets as a going concern. First, the Blackhawk Transaction is currently the only viable path forward for a sale of substantially all of the Debtors’ operating assets as a going concern, and is thus a necessary step towards an ultimate exit from chapter 11. Second, the Blackhawk Transaction is expressly conditioned on consensual modifications to the CBAs (which has not occurred) or rejection of the CBAs via a section 1113/1114 process. If the Debtors are denied the relief requested herein, the Blackhawk Transaction would likely fail, the Debtors could be in violation of their DIP milestones, and the Debtors would face a very real risk of wholesale and immediate 35 KE 36708318 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 36 of 144 Desc Main liquidation. Third, although the Debtors are running an open, thorough, and fair auction process, there is no evidence that any potential bidder is willing to purchase the Debtors’ assets without substantially similar concessions as set forth in the Proposal. Fourth, with respect to the Remaining Assets, the Debtors’ CBAs must be eliminated: (a) in certain cases, because they are covered under CBAs that must be eliminated in connection with the Blackhawk Transaction; (b) so that the Debtors may confirm a feasible chapter 11 liquidating plan by not being burdened with significant administrative liabilities related to dormant operations; and (c) so that the Debtors can continue to operate, market, and potentially sell their Federal, Apogee, and Hobet assets, which will be difficult if not impossible without implementation of the Debtors’ Proposal. A rejection of the CBAs and implementation of the Proposal is thus necessary to the Debtors’ reorganization. i. 77. The Blackhawk Transaction Is Currently the Only Viable Option for a Sale of Substantially All of the Debtors’ Operating Assets As this Court is well aware, the Debtors had effectively run out of cash by the time they filed for protection under the Bankruptcy Code. Despite several significant steps taken to increase liquidity following their 2012–13 restructuring, including through idling and reducing activity at certain mining complexes and selling rights to certain coal supply agreements, the Debtors entered these chapter 11 cases with insufficient funds to continue operating as a going concern. As noted above, the Debtors were at risk of being unable to obtain an unqualified audit opinion in March 2015 and of satisfying certain financial covenants in their prepetition debt documents. Indeed, even as recently as the Debtors’ second day hearing on June 3, 2015, this Court recognized the substantial risk to the Debtors had they not been able to access the incremental $20 million of liquidity provided through entry of a final DIP order. (See Hr’g Tr. at 36 KE 36708318 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 37 of 144 Desc Main 131:22–3 (Phillips, K.) (June 3, 2015) (“The alternative to not approving the proposed DIP financing appears to be dire consequences for the debtor.”).) 78. In short, given the Debtors’ capital structure and existing legacy liabilities, the Debtors are effectively unable to operate as a going concern and must sell their assets to maximize the value of their estates. As noted above, both thermal and metallurgical coal prices have continued to plummet since the Debtors’ emergence from the prior chapter 11 process in 2013, due to, among other things, weakened global demand in the face of low natural gas prices and slowing global economic growth. Benchmark prices for metallurgical coal, for example, have fallen more than 70% from just four years ago, representing the lowest prices in a decade, and “aren’t likely to recover[] substantially through at least 2016.”19 Likewise, international thermal coal prices have decreased 55% over the same four year period, and are now at their lowest level since early 2009. The Debtors also emerged from the 2012–13 restructuring with a highly leveraged capital structure of approximately $800 million in secured debt, the structure of which was premised on assumptions about coal prices and operating performance that ultimately did not materialize. The Debtors are simply not able to exist indefinitely in the worst coal market in a decade. 79. The Debtors retained Centerview in October 2014 to assist with the exploration of a merger or similar strategic transaction with a potential strategic partner. By early 2015, it became clear that such a transaction would not materialize. Since that time, the Debtors engaged in discussions or negotiations with two additional entities regarding a transaction that would result in a going-concern sale of significantly all of the Debtors’ assets. One of the entities was not interested in acquiring union-affiliated assets, and the other was Blackhawk. After analysis 19 Timothy Puko, “Met Coal Hits Lowest Price in a Decade,” The Wall Street Journal, June 17, 2015. 37 KE 36708318 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 38 of 144 Desc Main and review, the Debtors and their advisors concluded that the proposed Transaction provided the best option for maximizing value for the benefit of the Debtors’ stakeholders. 80. The only avenue for avoiding a wholesale value-destructive liquidation of the Debtors’ estates is through a sale of substantially all of the Debtors’ operating assets as a going concern. And while the Debtors are running a thorough and open auction process in the hopes of soliciting additional interest, Blackhawk is the only entity to date who has provided a viable bid to acquire substantially all of the Debtors’ operating assets and save hundreds, if not thousands, of jobs in the process.20 ii. 81. The Blackhawk Transaction Cannot be Consummated Absent Implementation of the Debtors’ Proposal Having been unable to negotiate a consensual agreement, the Debtors’ Proposal is necessary to satisfy a key condition of the Blackhawk Transaction. Section 10.02(i) of the Blackhawk APA sets forth the following closing condition: either (i) Blackhawk shall have entered into new collective bargaining agreements on terms and conditions acceptable to Blackhawk that have been ratified by the UMWA or (ii) the Court shall have entered one or more orders in form and substance acceptable to Blackhawk rejecting the applicable CBAs and the Debtors’ retiree benefit plans pursuant to sections 1113 and 1114 of the Bankruptcy Code. 82. These conditions were not agreed to lightly. The Debtors readily acknowledge their fiduciary duties to all of their creditors, and the Debtors have continued to faithfully discharge these duties. Accordingly, the Debtors have been involved in extensive good faith negotiations with Blackhawk and the UMWA. Through numerous meetings, conference calls, and exchanges of proposals, the Debtors have pushed Blackhawk on the terms it would accept 20 Indeed, the only indication of interest the Debtors have received with respect to these assets since commencing these chapter 11 cases, other than from Blackhawk, proposed to acquire the Debtors’ assets with the same union- and retiree-related concessions required by Blackhawk and on a stricter timeline. 38 KE 36708318 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 39 of 144 Desc Main and the UMWA on what concessions it would be willing to make to ensure the survival of its members’ jobs. Despite these efforts, the Debtors have been unable to reach agreement with the UMWA on terms that would satisfy conditions under the Blackhawk APA. 83. The Debtors wish these negotiations had turned out differently. But the Debtors cannot force Blackhawk to assume union and retiree obligations it does not want to assume, and Blackhawk is presently the only viable party who is willing to purchase substantially all of the Debtors’ operating assets and continue the employment of the Debtors’ unionized workforce. 84. The Debtors, meanwhile, are not surprised Blackhawk does not want to pursue a sale of the Debtors’ assets without prior rejection of the CBAs, and the Debtors agree with Blackhawk in this regard. See National Forge, 289 B.R. at 808 (“Because of the successor language, Debtor and its advisors were compelled to seek rejection of the CBA prior to confirmation of the sale to eliminate a potential claim by the Union under the successor[ship] clause. Leaving open the possibility of such a claim would be detrimental and unfair to non-Union employees, retirees, and unsecured creditors”). At the same time, the Debtors are obligated under the terms of their DIP Facility to reach a consensual resolution with the UMWA or file a motion seeking rejection of the CBAs. (See DIP Order, Ex. C.) Absent implementation of the Proposal, the Debtors have no viable buyer for their assets; absent a buyer, the Debtors will be unable to fully draw down their DIP—and in fact will default under their DIP Facility by failing to reach critical milestones—and will face the very real prospect of an immediate and wholesale liquidation in the short term. The Proposal is therefore absolutely “necessary to permit the reorganization of the Debtors.” 11 U.S.C. §§ 1113(b)(1)(A), 1114(f)(1)(A). 39 KE 36708318 Case 15-32450-KLP iii. 85. Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 40 of 144 Desc Main No Potential Purchaser Is Likely to Purchase the Debtors’ Assets Without Similar Concessions As described above, the retiree and union obligations the Debtors seek to eliminate through the Proposal are off-market and are a deterrent for any potential purchaser of the Debtors’ assets. For example, and most importantly, the Debtors’ obligations with respect to the UMWA 1974 Pension Plan have been a critical sticking point in the negotiations between the UMWA and the Debtors. The Debtors are required to make significant contributions to the UMWA 1974 Pension Plan under their CBAs. Worse still, the UMWA 1974 Pension Plan is heavily underfunded and is likely to face further decreases in assets as other participating employers continue to go into bankruptcy. Indeed, on September 28, 2014, the actuary for the UMWA 1974 Pension Plan certified to the U.S. Department of the Treasury that the UMWA 1974 Pension Plan is in “critical status” for the plan year beginning July 1, 2014 on account of funding and/or liquidity concerns.21 Furthermore, of the 37 current contributing employers, the majority of contributions come from six controlled groups of companies. Among these contributing entities are companies who are publicly struggling to reorganize and/or survive, such as Walter Energy, Inc. and Alpha Natural Resources, Inc.22 86. In other words, the retiree and union obligations that are the focus of the Proposal are only going to get worse. It is unlikely that any party interested in the Debtors’ assets is going to submit a bid that assumes such obligations. In light of both the current coal environment and the extent and nature of these liabilities, the Debtors submit that the CBAs would “chill the 21 See Notice of Zone Status, United Mine Workers of America UMWA 1974 Pension Plan, http://www.dol.gov/ebsa/pdf/c-notice121014069.pdf (last accessed July 16, 2015). 22 On July 15, 2015, Walter Energy, Inc. filed for bankruptcy. restructuring advisors. 40 KE 36708318 Alpha Natural Resources, Inc. has hired Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 41 of 144 Desc Main bidding” for the Debtors’ assets, and implementation of the Proposal is necessary to a sale—and thus reorganization—of the Debtors’ estates. National Forge, 289 B.R. at 811. iv. 87. The CBAs Governing the Remaining Assets Must Be Rejected With respect to the Remaining Assets (i.e., the assets not being acquired by Blackhawk), rejection of the Debtors’ CBAs is necessary for a successful chapter 11 process. First, the Debtors need to reject CBAs which cover both assets to be acquired by Blackhawk as well as Remaining Assets (i.e., Federal assets and Apogee assets) because, in addition to the administrative liabilities noted above, it is a requirement under the Blackhawk Transaction, and the Debtors cannot “cherry-pick” which features of an executory contract they wish to assume and which features they wish to reject. See, e.g., Sharon Steel Corp., 872 F.2d at 41. 88. Second, the Debtors must effectuate a complete withdrawal from their UMWA 1974 Pension Plan prior to exiting chapter 11 or else each of the Debtors could be burdened by significant post-bankruptcy expenses on a joint-and-several basis—expenses that could potentially wipe out any ability for the Debtors to pay obligations of their liquidating estate (e.g., administrative and priority claims, reclamation obligations, and plan distributions) and render them administratively insolvent. See Horizon Natural, 316 B.R. at 281 (“in this liquidating case, ‘necessary to permit the reorganization’ must be interpreted to mean ‘necessary to accommodate confirmation of a Chapter 11 plan.’”). The Debtors believe they can effectuate a complete withdrawal from their UMWA 1974 Pension Plan prior to exiting chapter 11 in only two ways: (a) rejecting their CBAs or otherwise modifying them to strip out contributions to the UMWA 1974 Pension Plan, which the Debtors are seeking hereunder; or (b) terminating all of their employees and ceasing all of their operations, which the Debtors and their estates don’t want to do, and which presumably the UMWA does not want them to do. 41 KE 36708318 Case 15-32450-KLP 89. Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 42 of 144 Desc Main Third, as described above, the Debtors do not believe they will be able to sell their Federal, Apogee, and Hobet assets absent implementation of the Proposal. The successorship clause and the UMWA 1974 Pension Plan are particular problems. In addition, the Debtors are simply unable to operate their Hobet operations in a competitive manner if the Debtors cannot achieve the savings set forth in their Proposal. As courts have noted, the goal of modification is a “successful reorganization . . . from which the debtor emerges as an economically viable operation,” In re Mile Hi Sys., Inc., 899 F.2d 887, 893 (10th Cir. 1990), and the necessity inquiry requires a court to determine what “must be extracted by way of wage and benefit reductions and other employee concessions to so improve the [d]ebtor’s cash flow that it could emerge from chapter 11, financially stable and viably competitive . . . .” Mesaba Aviation, 341 B.R. at 731. Similarly, as the Court is well aware, the Debtors may have significant liabilities associated with their liquidating estate at the conclusion of these chapter 11 cases. By bringing Hobet’s expenses closer to market now, the Debtors will have additional funds to make required distributions under the Bankruptcy Code and ensure a successful chapter 11 process. Accordingly, to facilitate the sale of their Remaining Assets and the prosecution of a successful plan, it is necessary for the Debtors to be authorized to reject the applicable CBAs and implement the Debtors’ Proposal. B. The Debtors Have Utilized Complete and Reliable Information, Have Supplied Necessary Information to the UMWA, and Have Bargained In Good Faith 90. Pursuant to Sections 1113 and 1114, a debtor’s proposal must be “based on the most complete and reliable information available,” 11 U.S.C. §§ 1113(b)(1)(A), 1114(f)(1)(A), a debtor must provide the union with “such relevant information as is necessary to evaluate proposal,” 11 U.S.C. §§ 1113(b)(1)(A), 1114(f)(1)(B), and a debtor must meet with the union “at 42 KE 36708318 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 43 of 144 Desc Main reasonable times” and must “confer in good faith.” 11 U.S.C. §§ 1113(b)(2), 1114(f)(2). The Debtors have satisfied each of these elements. i. 91. The Debtors’ Proposal Is Based on the Most Complete and Reliable Information Available It is well-settled that proposals to reject collective bargaining agreements and to modify retiree benefits must be “based on the most complete and reliable information available at the time of the proposal.” In re Am. Provision Co., 44 B.R. 907, 909 (Bankr. D. Minn. 1984) (citing 11 U.S.C. § 1113); see also 11 U.S.C. § 1114(f)(1)(A). 92. As described in detail above, the Debtors are unable to exist as a going concern and must sell their assets. Without the $30 million of interim DIP relief the Debtors obtained at their first day hearing, for example, they would have been forced to liquidate within a week. The Debtors’ day-to-day survival is entirely predicated on having the most complete and reliable information at all times. 93. The Debtors determined their state of affairs by relying on extensive financial, business, and industry data routinely utilized and maintained in the ordinary course of their businesses. This information includes, among other things, the Debtors’ income statements, balance sheets, statements of cash flows, capital expenditure summaries, independent economic forecasts, and sales forecasts. The Debtors also relied upon certain coal industry projections relating to the demand for the Debtors’ various products and the projected prices for those products in the future. The Debtors’ reliance on such data and consultants satisfies their obligations to base their proposals upon the most complete and reliable information available. See, e.g., In re Amherst Sparkle Market, Inc., 75 B.R. 847, 851 (Bankr. N.D. Ohio 1987) (granting motion to reject collective bargaining agreement based upon the debtor’s use of expense projections and monthly operating reports which revealed successive financial losses). 43 KE 36708318 Case 15-32450-KLP 94. Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 44 of 144 Desc Main That the Debtors do not currently know what their liquidating estate might look like or how it may be funded, or how long the Debtors anticipate being able to continue their remaining operations before such operations are sold or liquidated, is beside the point. Although the Debtors anticipate finalizing such plans in the near future (to the extent they can), sections 1113 and 1114 do not require (or even permit) this sort of guesswork. Rather, they require only that a debtor’s proposal be “based on the most complete and reliable information available at the time of the proposal.” Am. Provision, 44 B.R. at 909; 11 U.S.C. §§ 1113(b)(1)(A), 1114(f)(1)(A). Because motions to modify wages and benefits “will almost always be filed before an overall reorganization plan can be prepared,” a debtor cannot be expected to know the details of its post-emergence finances before it makes its proposals. Carey Transp., 816 F.2d at 91 (citing In re Ky. Truck Sales, 52 B.R. 797, 802 (Bankr. W.D. Ky. 1985)); see also Northwest Airlines, 346 B.R. at 326 (uncertainty about burden to be borne by unsecured creditors not a bar to deciding fairness of section 1113 proposal). 95. Accordingly, the Debtors have based their Proposal on the most complete and reliable information available. ii. 96. The Debtors Have Provided the UMWA with the Information Necessary to Evaluate Their Proposals The Debtors have also supplied the UMWA with “such relevant information as is necessary to evaluate” the Proposal, as required under sections 1113 and 1114. See 11 U.S.C. §§ 1113(b)(1)(A), 1114(f)(1)(B). As described above, the Debtors entered into a stipulated protective agreement with the UMWA, set up a data room, proactively included more than 630 documents, made that information available to the UMWA and its advisors over a month ago, and have continuously updated their data room since the delivery of their proposals. The Debtors have also responded to each and every request for information from the UMWA. 44 KE 36708318 Case 15-32450-KLP 97. Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 45 of 144 Desc Main The Debtors have thus satisfied their information-sharing burden in this regard. See, e.g., In re AMR Corp., 477 B.R. 384, 439–43 (Bankr. S.D.N.Y. 2012) (airline debtor supplied necessary information by giving high priority to union requests, facilitating sharing of additional information through a web-based data room, and sharing its valuations of proposed work rule changes, even though it did not perform new analyses at union’s request or provide a live business plan model); In re Pinnacle Airlines Corp., No. 12-11343 (REG), 2012 WL 5828779 (Bankr. S.D.N.Y. Nov. 16, 2012), as corrected (Nov. 29, 2012) (airline debtor supplied necessary information by providing business plan model, financial reports, and costing information, notwithstanding the fact that it was unable to respond to certain of the union’s requests); Appletree Mkts., 155 B.R. at 438 (debtor, then Houston’s third largest supermarket chain, supplied necessary information when it “opened its books” to the unions and furnished “reports and other information”); Valley Steel, 142 B.R. at 338 (debtors, a steel manufacturer and freight service with 240 employees, supplied necessary information when they disclosed four years of operating statements, three years of consolidated balance sheets, and one monthly bankruptcy operating report). 98. Perhaps most importantly, however, the “relevant information” that is necessary to evaluate the Proposal is public for all to see: the Debtors cannot survive absent a sale, and the only viable bidder to have emerged for the assets which Blackhawk seeks to acquire has required that a deal is reached with the UMWA or that the Debtors reject their applicable CBAs. Nor do the Debtors believe they can conduct a sale for their Remaining Assets without the concessions set forth in the Proposal. Under these facts and circumstances, the UMWA has received all the relevant information available that the Debtors can provide, and the Debtors have thus satisfied this element of sections 1113 and 1114 of the Bankruptcy Code. 45 KE 36708318 Case 15-32450-KLP iii. 99. Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 46 of 144 Desc Main The Debtors Have Made Themselves Available for Meetings and Have Acted In Good Faith “Between the time of the making of the proposal and the time of the hearing . . . the debtor must meet at reasonable times with the [u]nion . . . [and] [a]t the meetings the debtor must confer in good faith in attempt to meet mutually satisfactory modifications. . . .” Am. Provision, 44 B.R. at 909; see also 11 U.S.C. §§ 1113(b)(2), 1114(f)(2). “[O]nce the debtor has shown that it has met with the [u]nion representatives, it is incumbent upon the [u]nion to produce evidence that the debtor did not confer in good faith.” Am. Provision, 44 B.R. at 909. As described in greater detail above, since their first meeting with the UMWA on May 14, 2015, the Debtors and their advisors have done everything reasonably within their power to reach an agreement with the UMWA on terms of new CBAs that would satisfy conditions under the Blackhawk APA. 100. The negotiation process started with a multi-hour meeting and a detailed presentation to the UMWA. Following the initial meeting, the Debtors have actively engaged in negotiations with both Blackhawk and the UMWA, including through four additional formal meetings, dozens of conference calls and e-mail exchanges, and continual responses to UMWA, Blackhawk, and their advisors. These contacts—between and among the Debtors, Blackhawk, the UMWA, and their respective advisors—have taken place regularly (sometimes multiple times per day) over a period of months. The Debtors have consistently agreed to meeting requests and have repeatedly communicated that they stood willing to meet at any time and in any location. 101. The Debtors have not been able to reach an agreement with the UMWA, but not for lack of trying. The Debtors listened to the UMWA’s concerns and pushed Blackhawk to develop creative solutions to address those concerns, including by introducing provisions 46 KE 36708318 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 47 of 144 Desc Main intended to provide job security for union employees, reducing proposed wage cuts, preserving current health plans, and providing contributions for retiree benefits. These represented significant concessions, but were rejected by the UMWA. The Debtors would of course be happy if Blackhawk had agreed to assume the Debtors’ CBAs in their entirety—but the Debtors cannot force Blackhawk to accept obligations it does not want, and cannot blame Blackhawk for refusing certain of the UMWA’s demands. 102. With respect to the Debtors’ proposals for their Remaining Assets, the Debtors have also sought to effectively reinstate the terms and conditions of their Master CBAs, with certain modifications to increase the chances that the Debtors may be able to sell their Remaining Assets (or in some cases, possibly continue to operate for the benefit of the Debtors’ liquidating estate). In other words, the Debtors have proposed necessary changes but have otherwise agreed to keep a significant part of the UMWA’s employment as “status quo” for as long as the Debtors continue operating their Remaining Assets. Faced with the very real prospect of liquidation, this is the best the Debtors can do. Accordingly, the Debtors have fulfilled their obligations to bargain in good faith. C. The Debtors’ Proposal Satisfies the Equitable Factors of Sections 1113 and 1114 103. The remaining inquiry under sections 1113 and 1114 focuses on the equities. Here, the Debtors’ Proposal treats all parties “fairly and equitably,” 11 U.S.C. §§ 1113(b)(1)(A), 1114(f)(1)(A), the UMWA rejected the proposal without “good cause,” 11 U.S.C. §§ 1113(c)(2), 1114(g)(2), and the “balance of the equities” clearly favor rejection, 11 U.S.C. §§ 1113(c)(2), 1114(g)(2). For these reasons, the Motion should be granted. 47 KE 36708318 Case 15-32450-KLP i. 104. Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 48 of 144 Desc Main The Debtors’ Proposal Treats All Parties Fairly and Equitably The Debtors’ Proposal “assure[s] that all creditors, the debtor, and all other affected parties are treated fairly and equitably.” Family Snacks, 257 B.R. at 892 (citing In re Am. Provision Co., 44 B.R. at 909). “[E]quity means fairness under the circumstances,” and does not require the proposal to give every constituency the very same treatment. Mesaba Aviation, 341 B.R. at 749 (quoting In re Ind. Grocery Co., Inc., 138 B.R. 40, 48 (Bankr. S.D. Ind. 1990); In re Walway Co., 69 B.R. 967, 974 (Bankr. E.D. Mich. 1987) (“a comparative dollar-for-dollar concession” is not mandated by the fairness-and-equity requirement)); Amherst Sparkle Market, 75 B.R. at 851. 105. All constituents are bearing a heavy burden to support the Debtors’ efforts to maximize value for their estates. The Debtors’ employees may not all be able to find jobs with future purchasers of the Debtors’ assets and the Debtors will be unable to employ their workforce indefinitely. Benefits, such as healthcare and workers’ compensation programs, will cease. The Debtors’ creditors, meanwhile, will be heavily impacted by the Debtors’ chapter 11 cases. The Debtors’ Plan is designed to treat all parties fairly and equitably and maximize the potential return to all of their constituencies, but the Debtors’ assets are simply not valuable enough to pay off all of their creditors in full. Furthermore, the relief requested herein represents the only viable means of maximizing distributions for the Debtors’ stakeholders. Every dollar earned or saved today— whether via a sale of the assets Blackhawk seeks to acquire, the Debtors’ Remaining Assets, the reduction of above-market expenses at Hobet, or the elimination of certain contributions under the CBAs—is a dollar that will fund creditor recoveries in these chapter 11 cases. The Debtors are seeking to sell their assets for the benefit of their chapter 11 estates—they do not stand to profit from these changes. In contrast, absent rejection of the CBAs, the Debtors’ alternative is a value-destructive chapter 7 liquidation process. 48 KE 36708318 Case 15-32450-KLP 106. Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 49 of 144 Desc Main Furthermore, certain of the relief requested herein will result in no harm to the Debtors’ current and retired employees who are beneficiaries of the UMWA 1974 Pension Plan and the Coal Act because these retirees will continue receiving benefits under such programs regardless of the Debtors’ participation or contributions. For example, because it is a multiemployer plan, the UMWA 1974 Pension Plan will continue to receive contributions from other participating employers and beneficiaries will likely continue to receive the same level of pension benefits. Similarly, retirees will continue to receive health benefits because, as provided in Section 9701(c)(2) of the Coal Act, the Debtors’ obligations will automatically transfer to a company that, as of July 20,1992, was a “related person ” to Debtor entities with Coal Act obligations—in this case Peabody or Arch Coal. See 26 U.S.C. 9701(c)(2). Indeed, in light of these statutory requirements, Peabody is already paying certain of these obligations directly or is reimbursing the Debtors for these payments pursuant to certain contracts that survived the Debtors’ first chapter 11 process. Accordingly, the Debtors’ retirees will incur limited, if any near-term harm if such relief is granted. ii. 107. The UMWA Has Rejected the Proposal Without Good Cause “[O]nce the debtor has shown that the [u]nion has refused to accept its proposal the [u]nion must produce evidence that it was not without good cause.” Am. Provision, 44 B.R. at 910; see also Mesaba Aviation, 341 B.R. at 755 (finding that the debtor has a “minimal” burden under this requirement of showing that the unions rejected its proposal); Valley Steel, 142 B.R. at 342 (holding that union refused to accept the proposals without good cause because, in part, it failed to offer any evidence or examples to substantiate its assertion of good cause). A lack of good cause also may be demonstrated by the union’s adherence to demands that are impossible for the debtor to meet and failure to offer alternatives that take into account the 49 KE 36708318 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 50 of 144 Desc Main debtor’s reorganization plan. See In re Maxwell Newspapers, Inc., 981 F.2d 85, 90 (2d Cir. 1992). 108. The UMWA refused to accept the Debtors’ proposals and such refusal was without “good cause.” During the negotiations between the Debtors and the UMWA, the Debtors shared data and delivered six different proposals to the UMWA proposing consensual modifications necessary to satisfy conditions under the Blackhawk APA (plus the additional Proposal), most of which were specifically tailored to address the UMWA’s stated concerns, and each of which were rejected by the UMWA. Most importantly, Blackhawk has been clear from the beginning of these chapter 11 cases it was not willing to accept participation in the UMWA 1974 Pension Plan, and the Debtors have, in turn, repeatedly expressed this eminently logical, reasonable position in every meeting, e-mail, and conference call with the UMWA. The UMWA has simply refused to concede with respect to several key conditions of the Blackhawk Transaction—concessions that are not only fair and equitable given the alternative of a wholesale liquidation and no jobs, but that are ultimately required by Blackhawk as a condition to consummation of the Blackhawk APA. Insisting that Blackhawk agree to assume a CBA that includes participation in the UMWA 1974 Pension Plan places a demand on the Debtors beyond their control and is impossible for them to satisfy. 109. Similarly, the UMWA has rejected the Proposal regarding the Remaining Assets, at first insisting that the UMWA won’t bargain over the terms and conditions of any CBAs that don’t cover the assets Blackhawk seeks to acquire. After the negotiations with the UMWA stalled following the delivery of the six proposals, and after the Debtors delivered the Proposal, the UMWA simply told the Debtors that there was nothing to discuss—again, despite the fact that certain of these CBAs cover operations long dormant or sold, and that concessions for the 50 KE 36708318 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 51 of 144 Desc Main Debtors’ other CBA was necessary to both run the Hobet Assets profitably and maximize the chances for the Debtors to sell the Hobet assets. 110. The UMWA has failed to articulate any reasons for rejecting each and every proposal offered. This by itself is proof the UMWA has rejected the proposals without good cause. See Royal Composing Room, 848 F.2d at 345 (“When the union fails to articulate its reasons for rejection of a debtor’s proposal during prehearing negotiations, rejection is without good cause”); Horsehead, 300 B.R. at 371 (“Where the union rejects a proposal that is necessary, fair, and equitable, it must explain the reasons for its opposition”). Given that no entity is likely to buy the Debtors’ assets with the terms of the existing CBAs in effect, the six proposals were (and the Proposal is) essential to realizing any value for such assets. They contained terms necessary to allow a sale of the Debtors’ assets to go forward. In this regard, “a union will not have good cause to reject an employer’s proposal that contains only those modifications essential for the debtor’s reorganization.” Maxwell, 981 F.2d at 90. 111. The UMWA has not disputed the dire consequences for the Debtors if they cannot sell their assets in a timely fashion. Nor has the UMWA offered an alternative to maintain the status quo with respect to the Debtors’ CBAs. In light of these circumstances, for the UMWA to play “chicken” with Blackhawk is simply inappropriate—a game the Debtors, their creditors, and their chapter 11 estates cannot afford to play. In short, “the Union's insistence that the Debtor provide something which was not within its control indicates that the Union’s refusal to accept Debtor's proposal was without good cause.” National Forge, 289 B.R. at 812. iii. 112. The Balances of the Equities Favors Implementing the Proposal “The balance of the equities favors rejection when the debtor is in need of substantial relief from a collective bargaining agreement and the bargaining process has failed to produce any results and is unlikely to produce any in the foreseeable future.” In re Bowen 51 KE 36708318 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 52 of 144 Desc Main Enterprises, Inc., 196 B.R. 734, 747 (Bankr. W.D. Pa. 1996) (citing Royal Composing Room, 62 B.R. at 408). Here, for the very reasons discussed above, the equities weigh in the Debtors’ favor. The alternative to the requested modifications will be far worse for all: the Debtors will be unable to satisfy the closing conditions under the Blackhawk APA and will be unable to sell their assets to Blackhawk; the Debtors will trip the milestones set forth in their DIP Facility and will run out of cash; the Debtors will be forced to shut down their operations and terminate their employees; the value of these chapter 11 estates will plummet, all of the Debtors’ creditors will suffer, all of the Debtors’ employees will lose their jobs, all of the Debtors’ retirees will lose their healthcare, and there is the potential of a multiplier effect across the regions in which the Debtors operate.23 Furthermore, the modifications in the Debtors’ Proposal related to the Remaining Assets are necessary to bring the CBAs in line with what the Debtors pay non-union employees for doing the same work in the same market—which is an inequitable result. 113. As the Court in National Forge noted: The balance of the equities in the instant matter demands rejection of the CBA. The Debtor is under the mandate of its major secured lender to complete an expedited sale process, in default of which the Debtor faces liquidation. The sacrifices that the Union will make upon rejection of the CBA are not disproportionate to the sacrifices the non-Union employees, retirees, and creditors will make. A sale at the highest possible price is clearly best for all concerned. Achievement of the highest possible price requires that the CBA be rejected. National Forge, 289 B.R. at 813. 23 The effect of a liquidation would not be limited to jobs lost at the Debtors’ operations. Pricewaterhouse Coopers (“PwC”), the UMWA’s own advisor, concluded that in 2010 the coal industry generated approximately 555,000 jobs, including “indirect” and “induced” jobs, such as contractors and suppliers that provide goods and services to mining companies. In short, PwC estimated a national employment multiplier of 3.61 for the coal mining industry. See PricewaterhouseCoopers, The Economic Contributions of U.S. Mining in 2008 3-5 (2010), available at http://www nwma.org/pdf/economic_contributions.pdf (the “PwC Report”); see also ENVIRON Int’l Corp., Economic Analysis of Proposed Stream Protection Rule Stage 1 Report 3-11 (Mar. 5, 2012), available at http://www nma.org/pdf/tmp/030612_ENVIRON_study.pdf (citing the PwC Report). Based on these and similar studies, one could conclude that if thousands of the Debtors’ employees’ jobs were lost, there would be a ripple effect throughout Appalachia. 52 KE 36708318 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 53 of 144 Desc Main Notice 114. The Debtors will provide notice of this Motion to: (a) the U.S. Trustee; (b) the administrative agents for the Debtors’ prepetition credit facilities; (c) the indenture trustee for the Debtors’ prepetition notes; (d) counsel for each of the foregoing referenced in clauses (b) and (c); (e) counsel to lenders for the debtor in possession facility; (f) those creditors holding the 30 largest unsecured claims against the Debtors’ estates on a consolidated basis; (g) the Internal Revenue Service; (h) the United States Environmental Protection Agency, (i) the state attorneys general for states in which the Debtors conduct business; (j) the Office of the United States Attorney for the Eastern District of Virginia; (k) the UMWA; (l) Peabody; (m) Arch; (n) Alcoa; and (o) any party that has requested notice pursuant to Bankruptcy Rule 2002. The Debtors submit that, in light of the nature of the relief requested, no other of further notice need be given. Waiver of Bankruptcy Rule 6004(h) 115. To implement the foregoing successfully, the Debtors seek a waiver of the 14-day stay of an order authorizing the use, sale, or lease of property under Bankruptcy Rule 6004(h). No Prior Request 116. No prior request for the relief sought in this Motion has been made to this or any other court. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 53 KE 36708318 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 54 of 144 Desc Main WHEREFORE, the Debtors respectfully request that the Court enter an order granting the relief requested herein and such other and further relief as is just and proper. Dated: July 16, 2015 Richmond, Virginia /s/ Michael A. Condyles Michael A. Condyles (VA 27807) Peter J. Barrett (VA 46179) Jeremy S. Williams (VA 77469) KUTAK ROCK LLP Bank of America Center 1111 East Main Street, Suite 800 Richmond, Virginia 23219-3500 Telephone: (804) 644-1700 Facsimile: (804) 783-6192 - and Stephen E. Hessler (admitted pro hac vice) Patrick Evans (admitted pro hac vice) KIRKLAND & ELLIS LLP 601 Lexington Avenue New York, New York 10022 Telephone: (212) 446-4800 Facsimile: (212) 446-4900 - and James H.M. Sprayregen, P.C. Ross M. Kwasteniet (admitted pro hac vice) KIRKLAND & ELLIS LLP 300 North LaSalle Chicago, Illinois 60654 Telephone: (312) 862-2000 Facsimile: (312) 862-2200 Counsel for the Debtors and Debtors in Possession 54 KE 36708318 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 55 of 144 EXHIBIT A Proposed Order 55 KE 36708318 Desc Main Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 56 of 144 Stephen E. Hessler (admitted pro hac vice) Patrick Evans (admitted pro hac vice) KIRKLAND & ELLIS LLP 601 Lexington Avenue New York, New York 10022 Telephone: (212) 446-4800 Facsimile: (212) 446-4900 - and - Desc Main Michael A. Condyles (VA 27807) Peter J. Barrett (VA 46179) Jeremy S. Williams (VA 77469) KUTAK ROCK LLP Bank of America Center 1111 East Main Street, Suite 800 Richmond, Virginia 23219-3500 Telephone: (804) 644-1700 Facsimile: (804) 783-6192 James H.M. Sprayregen, P.C. Ross M. Kwasteniet (admitted pro hac vice) KIRKLAND & ELLIS LLP 300 North LaSalle Chicago, Illinois 60654 Telephone: (312) 862-2000 Facsimile: (312) 862-2200 Counsel for the Debtors and Debtors in Possession IN THE UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF VIRGINIA RICHMOND DIVISION In re: PATRIOT COAL CORPORATION, et al., Debtors. ) ) Chapter 11 ) ) Case No. 15-32450 (KLP) ) ) (Jointly Administered) ) ORDER (I) AUTHORIZING, BUT NOT DIRECTING, THE DEBTORS TO (A) REJECT COLLECTIVE BARGAINING AGREEMENTS, (B) MODIFY CERTAIN UNION-RELATED RETIREE BENEFITS, (C) IMPLEMENT THE TERMS OF THEIR SECTION 1113 AND SECTION 1114 PROPOSAL, AND (II) GRANTING RELATED RELIEF Upon the motion (the “Motion”)1 of Patriot Coal Corporation and certain of its affiliates, as debtors and debtors in possession (collectively, the “Debtors”), for the entry of an order (this “Order”), under sections 1113 and 1114 of the Bankruptcy Code, (i) authorizing, but not directing, the Debtors to (a) reject the UMWA CBAs, (b) terminate and modify certain 1 Capitalized terms used but otherwise not defined herein shall have the meanings set forth in the Motion. KE 36708318 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 57 of 144 Desc Main union-related retiree benefits, and (c) implement the terms of their Proposal, and (ii) granting related relief; all as more fully set forth in the Motion; and the Court having considered the Dombrowski Declaration, the Puntus Declaration, and the Lucha Declaration, and the Court having jurisdiction to consider this Motion and the relief requested therein in accordance with 28 U.S.C. §§ 157 and 1334; and consideration of the Motion and the relief requested therein being a core proceeding pursuant to 28 U.S.C. § 157(b)(2); and venue being proper in this district pursuant to 28 U.S.C. §§ 1408 and 1409; and due and proper notice of the Motion being adequate and appropriate under the particular circumstances; and a hearing having been held to consider the relief requested in the Motion (the “Hearing”); and upon consideration of the record of the Hearing, and all proceedings had before the Court; and the Court having found and determined that the relief sought in the Motion is in the best interests of the Debtors’ estates, their creditors, and other parties in interest, and that the legal and factual bases set forth in the Motion, the Dombrowski Declaration, the Puntus Declaration, and the Lucha Declaration, and at the Hearing establish just cause for the relief granted herein; and upon all of the proceedings had before the Court; and any objections to the relief requested herein having been withdrawn or overruled on the merits; and after due deliberation and sufficient cause appearing therefor, it is HEREBY ORDERED THAT: 1. The Motion is granted. 2. The Debtors are authorized, but not directed, to reject the CBAs and terminate the related memoranda of understanding set forth in the Proposal. Upon the Debtors’ filing of a notice with this Court indicating that the CBAs have been rejected and the memoranda have been terminated, such CBAs shall be deemed immediately rejected and such memoranda shall be 2 KE 36708318 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 58 of 144 Desc Main deemed immediately terminated as of the date of such notice without any further action by or order of the Court. 3. The terms of the Proposal are approved in its entirety. The Debtors are authorized, but not directed, to take all actions necessary to implement the Proposal attached to the Motion as Exhibit B. 4. As of the date hereof, the Debtors shall have no obligations with respect to, and shall not be held responsible for, any payments arising under or related to: (a) the UMWA VEBA, regardless of whether such obligations are set forth in any document or agreement other than the CBAs, including without limitation in the Patriot-Peabody-UMWA Settlement or the VEBA Funding Agreement; (b) the Coal Act, regardless of whether a claim under the Coal Act has arisen prior to the date hereof and regardless of whether such obligations are set forth in any document or agreement other than the CBAs; and (c) paying for or administering benefits to the Peabody Assumed Retirees and/or the Alcoa Assumed Retirees, regardless of which agreement or document contains such obligations. 5. Nothing herein shall eliminate or affect in any way any obligations of third parties with respect to any retiree benefits paid or administered by the Debtors, including without limitation: (a) those retiree benefits paid directly or indirectly, via reimbursement to the Debtors, by Alcoa or Peabody for the Alcoa Assumed Retirees and the Peabody Assumed Retirees, respectively; and (b) any third party obligations, including that of Peabody, arising under the Patriot-Peabody-UMWA Settlement and the VEBA Funding Agreement. 6. Notice of the Motion as provided therein shall be deemed good and sufficient notice of such motion, and the requirements of Bankruptcy Rule 6004(a) and the Local Bankruptcy Rules for the Eastern District of Virginia are satisfied by such notice. 3 KE 36708318 Case 15-32450-KLP 7. Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 59 of 144 Desc Main Notwithstanding Bankruptcy Rule 6004(h), the terms and conditions of this Order shall be immediately effective and enforceable upon its entry. 8. The Court retains exclusive jurisdiction with respect to all matters arising from or related to the implementation of this Order. Dated: Richmond, Virginia UNITED STATES BANKRUPTCY JUDGE 4 KE 36708318 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 60 of 144 WE ASK FOR THIS: /s/ Michael A. Condyles Michael A. Condyles (VA 27807) Peter J. Barrett (VA 46179) Jeremy S. Williams (VA 77469) KUTAK ROCK LLP Bank of America Center 1111 East Main Street, Suite 800 Richmond, Virginia 23219-3500 Telephone: (804) 644-1700 Facsimile: (804) 783-6192 - and Stephen E. Hessler (admitted pro hac vice) Patrick Evans (admitted pro hac vice) KIRKLAND & ELLIS LLP 601 Lexington Avenue New York, New York 10022 Telephone: (212) 446-4800 Facsimile: (212) 446-4900 - and James H.M. Sprayregen, P.C. Ross M. Kwasteniet (admitted pro hac vice) KIRKLAND & ELLIS LLP 300 North LaSalle Chicago, Illinois 60654 Telephone: (312) 862-2000 Facsimile: (312) 862-2200 Counsel for the Debtors and Debtors in Possession CERTIFICATION OF ENDORSEMENT UNDER LOCAL BANKRUPTCY RULE 9022-1(C) Pursuant to Local Bankruptcy Rule 9022-1(C), I hereby certify that the foregoing proposed order has been endorsed by or served upon all necessary parties. /s/Michael A. Condyles KE 36708318 Desc Main Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 61 of 144 Exhibit B Proposal Desc Main Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 62 of 144 Desc Main Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 63 of 144 Desc Main Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 64 of 144 Desc Main Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 65 of 144 Desc Main Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 66 of 144 Desc Main Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 67 of 144 Desc Main Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 68 of 144 Desc Main Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 69 of 144 Desc Main Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 70 of 144 Desc Main Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 71 of 144 Desc Main Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 72 of 144 Desc Main Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 73 of 144 Desc Main Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 74 of 144 Exhibit C Dombrowski Declaration Desc Main Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 75 of 144 Stephen E. Hessler (admitted pro hac vice) Patrick Evans (admitted pro hac vice) KIRKLAND & ELLIS LLP 601 Lexington Avenue New York, New York 10022 Telephone: (212) 446-4800 Facsimile: (212) 446-4900 - and - Desc Main Michael A. Condyles (VA 27807) Peter J. Barrett (VA 46179) Jeremy S. Williams (VA 77469) KUTAK ROCK LLP Bank of America Center 1111 East Main Street, Suite 800 Richmond, Virginia 23219-3500 Telephone: (804) 644-1700 Facsimile: (804) 783-6192 James H.M. Sprayregen, P.C. Ross M. Kwasteniet (admitted pro hac vice) KIRKLAND & ELLIS LLP 300 North LaSalle Chicago, Illinois 60654 Telephone: (312) 862-2000 Facsimile: (312) 862-2200 Counsel for the Debtors and Debtors in Possession IN THE UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF VIRGINIA RICHMOND DIVISION In re: PATRIOT COAL CORPORATION, et al., Debtors. ) ) ) ) ) ) ) Chapter 11 Case No. 15-32450 (KLP) (Jointly Administered) DECLARATION OF RAYMOND EDWARD DOMBROWSKI, JR. IN SUPPORT OF THE DEBTORS’ MOTION FOR ENTRY OF AN ORDER (I) AUTHORIZING, BUT NOT DIRECTING, THE DEBTORS TO (A) REJECT THEIR COLLECTIVE BARGAINING AGREEMENTS, (B) MODIFY CERTAIN UNION-RELATED RETIREE BENEFITS, AND (C) IMPLEMENT TERMS OF THEIR SECTION 1113 AND SECTION 1114 PROPOSAL, AND (II) GRANTING RELATED RELIEF Raymond Edward Dombrowski, Jr., hereby declares, under penalty of perjury, as follows: 1. I am the Chief Restructuring Officer of the above-captioned debtors and debtors in possession (collectively, the “Debtors”). I have served in this position since April 1, 2015. In such capacity, I am generally familiar with the Debtors’ day-to-day Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 76 of 144 Desc Main operations, business and financial affairs, and books and records. I am above 18 years of age and am competent to testify. 2. I submit this supplemental declaration in support of the Debtors’ Motion for Entry of an Order (I) Authorizing, But Not Directing, the Debtors to (A) Reject Their Collective Bargaining Agreements, (B) Modify Certain Union-Related Retiree Benefits, and (C) Implement Terms of Their Section 1113 and Section 1114 Proposal, and (II) Granting Related Relief (the “Motion”).1 I am authorized to submit this Declaration on behalf of the Debtors. Except as otherwise noted, all facts set forth herein are based on my personal knowledge of the Debtors’ operations and finances, information learned from my review of relevant documents, and information I have received from other members of the Debtors’ management or advisers. I have reviewed the Motion, and it is my belief that the relief sought in the Motion is essential to the reorganization of the Debtors and the maximizing of value of these chapter 11 cases. If called upon to do so, I could and would testify competently to the facts set forth herein on that basis. The Debtors’ Prepetition Struggles 3. Prior to October 31, 2007, Patriot and a number of its subsidiaries were wholly-owned subsidiaries of Peabody, which spun off Patriot through a dividend of all outstanding shares of Patriot. On July 23, 2008, Patriot acquired Magnum. Through these transactions, the Debtors became responsible for liabilities relating to thousands of former union employees and retirees of Peabody and Arch who retired prior to the formation of Patriot. Although the 2012–13 Restructuring eliminated the direct payment of retiree medical benefits under the Debtors’ CBAs to UMWA retirees, the Debtors are still 1 Capitalized terms used but not otherwise defined herein shall have the meaning ascribed to such terms in the Motion. 2 KE 36825225 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 77 of 144 Desc Main responsible for approximately 6,433 UMWA Retiree Beneficiaries through: (a) payments to the UMWA VEBA; (b) payments on behalf of UMWA retirees in connection with the Coal Act; (c) administration of retiree medical benefits to the Peabody Assumed Retirees and the Alcoa Assumed Retirees; and (d) contributions to the UMWA 1974 Pension Plan. 4. The Debtors’ business and results of operations are linked closely to global demand for coal-fueled electricity and steel production. Since the 2012–13 Restructuring, thermal and metallurgical coal markets and pricing have become increasingly challenged with oversupply conditions and coal prices have recently reached lows not seen in more than a decade. The lethargic economic environment, lack of energy demand generally, and a large number of coal-fired plant retirements have precipitated this decline. Moreover, competition from other energy sources (particularly natural gas) has increased pricing pressures to the point where it is difficult for any coal company to compete. 5. In response to these increasingly difficult market conditions, it is my understanding that non-union wage rates and benefits have declined in recent years generally (and they certainly have for the Debtors specifically) as coal companies have had to cut costs and as there has generally been a drop in demand for coal mining employees. For example, the Debtors’ non-union wage rates at their Samples surface mine have fallen an average of approximately 7.5% per hour since the conclusion of the 2012–13 Restructuring. Union wage rates at the Debtors’ Hobet mine, however, have continued to increase in accordance with the terms of the Debtors’ CBAs. Presently, non-union employees at the Samples surface mine earn approximately $5.45 less per hour, on average, than their union counterparts at Hobet. If not corrected, this imbalance will likely continue to increase in light of the weak job market and the mandatory rate increases provided by the Hobet CBA. 3 KE 36825225 Case 15-32450-KLP 6. Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 78 of 144 Desc Main The regulatory environment has also contributed to the Debtors’ current financial situation. Federal and state regulatory authorities impose obligations on the coal mining industry with respect to employee health and safety, permitting and licensing requirements, environmental protection, the reclamation and restoration of mining properties after mining has been completed, and the effect of mining on surface and groundwater quality. Moreover, several citizen lawsuits brought by non-governmental organizations have also stressed the Debtors’ financial condition. The Debtors have incurred significant costs to comply with these laws and regulations. 7. As noted in the Motion, the Debtors’ obligations to contribute to the UMWA 1974 Pension Plan and to make payments pursuant to the Coal Act continue today, notwithstanding the 2012–13 Restructuring. When coupled with the external pricing pressure, increased regulation, and other costs associated with the Debtors’ businesses, these legacy liabilities have crippled the Debtors’ ability to operate competitively in the current market environment. Each of these challenges contributed to the Debtors’ decision to pursue a sale process and file these chapter 11 cases. 8. Indeed, given the Debtors’ capital structure and existing legacy liabilities, the Debtors are effectively unable to operate as a going concern and must sell their assets to maximize the value of their estates. As noted above, both thermal and metallurgical coal prices have continued to plummet since the Debtors’ emergence from the prior chapter 11 process in 2013, due to, among other things, weakened domestic and global demand in the face of low natural gas prices and slowing global economic growth. Benchmark prices for metallurgical coal, for example, have fallen more than 70% from just four years ago, representing the lowest prices in a decade. Likewise, international thermal coal prices have 4 KE 36825225 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 79 of 144 Desc Main decreased 55% over the same four year period, and are now at their lowest level since early 2009. The Debtors also emerged from the 2012–13 restructuring with a highly leveraged capital structure of approximately $800 million in secured debt, the structure of which was premised on assumptions about coal prices and operating performance that ultimately did not materialize. Necessity of the Proposed Modifications 9. Over the past many months, the Debtors and their advisors have worked to revise their business plan and identify potential savings or liquidity transactions. Prepetition, the Debtors pursued certain strategic M&A and sale transactions, but these efforts did not yield a meaningful or transformative transaction. The Debtors reduced their cost structure by idling and reducing activity at certain mining complexes. The Debtors also entered into asset purchase agreements to sell several of their mining complexes, undeveloped coal reserves, and associated property rights. However, these efforts have not been enough, and as the Court is well aware, the Debtors have not been able to generate enough liquidity to operate as a going concern. Thus, the only avenue for avoiding a piecemeal, value-destructive liquidation of the Debtors’ estates is through a sale of substantially all of the Debtors’ operating assets as a going concern and the eventual wind-down of the remainder of their estates. 10. The Blackhawk Transaction is currently the only viable path forward for a sale of substantially all of the Debtors’ operating assets as a going concern, and is thus a necessary step towards an ultimate exit from chapter 11. The Debtors retained advisors to explore a strategic merger and/or sale of their business in 2014 and Blackhawk emerged as the most value-maximizing alternative for a sale of substantially all of the Debtors’ assets. The Blackhawk Transaction, in turn, is expressly conditioned on consensual modifications to 5 KE 36825225 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 80 of 144 Desc Main the CBAs (which has not occurred) or rejection of the CBAs via a section 1113/1114 process. If the Debtors are denied the relief requested in the Motion, the Blackhawk Transaction would likely fail, the Debtors would be in violation of their DIP milestones, and the Debtors would face a very real risk of wholesale and immediate liquidation. 11. In addition, as set forth in the Motion, with respect to the Remaining Assets, the Debtors’ CBAs must be eliminated: (a) in certain cases, because they are covered under CBAs that must be eliminated in connection with the Blackhawk Transaction; (b) so that the Debtors may confirm a feasible chapter 11 liquidating plan by not being burdened with significant liabilities related to dormant operations through, among other things, preventing the Debtors from effectuating a complete withdrawal from the UMWA 1974 Pension Plan; and (c) so that the Debtors can continue to operate, market, and potentially sell their Federal, Apogee, and Hobet assets, which I understand will be difficult if not impossible to do without implementation of the Debtors’ Proposal. 12. In particular, the Debtors must conserve resources to fund their liquidating estate’s obligations and ensure their ability to confirm a chapter 11 plan to the benefit of all of their creditor constituents. In light of the Debtors’ situation and the facts and circumstances of these chapter 11 cases, it is not equitable to continue paying above-market wages with respect to the Debtors’ Remaining Assets, and the Debtors simply cannot afford to do so. The Debtors are seeking to sell all of their assets for the benefit of their chapter 11 estates—they do not stand to profit from these changes. In contrast, absent rejection of the CBAs, the Debtors’ alternative is a value-destructive chapter 7 liquidation process. 13. If the Debtors are unable to implement their Proposal, the Debtors will be forced to liquidate and jobs, wages, and benefits for their retirees and employees will be lost. 6 KE 36825225 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 81 of 144 Desc Main Accordingly, it is my belief that a rejection of the CBAs and implementation of the Proposal is necessary to the Debtors’ reorganization. 14. I declare under penalty of perjury that the foregoing is true and correct to the best of my belief. Dated: July 16, 2015 By: /s/_Raymond Edward Dombrowski, Jr. Raymond Edward Dombrowski, Jr. Chief Restructuring Officer 7 KE 36825225 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 82 of 144 Exhibit D Puntus Declaration Desc Main Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 83 of 144 Stephen E. Hessler (admitted pro hac vice) Patrick Evans (admitted pro hac vice) KIRKLAND & ELLIS LLP 601 Lexington Avenue New York, New York 10022 Telephone: (212) 446-4800 Facsimile: (212) 446-4900 Desc Main Michael A. Condyles (VA 27807) Peter J. Barrett (VA 46179) Jeremy S. Williams (VA 77469) KUTAK ROCK LLP Bank of America Center 1111 East Main Street, Suite 800 Richmond, Virginia 23219-3500 Telephone: (804) 644-1700 Facsimile: (804) 783-6192 - and James H.M. Sprayregen, P.C. Ross M. Kwasteniet (admitted pro hac vice) KIRKLAND & ELLIS LLP 300 North LaSalle Chicago, Illinois 60654 Telephone: (312) 862-2000 Facsimile: (312) 862-2200 Counsel for the Debtors and Debtors in Possession IN THE UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF VIRGINIA RICHMOND DIVISION ) ) Chapter 11 ) ) Case No. 15-32450 (KLP) ) ) (Jointly Administered) ) In re: PATRIOT COAL CORPORATION, et al., Debtors. DECLARATION OF MARC D. PUNTUS IN SUPPORT OF THE DEBTORS’ MOTION FOR ENTRY OF AN ORDER (I) AUTHORIZING, BUT NOT DIRECTING, THE DEBTORS TO (A) REJECT THEIR COLLECTIVE BARGAINING AGREEMENTS, (B) MODIFY CERTAIN UNION-RELATED RETIREE BENEFITS, AND (C) IMPLEMENT TERMS OF THEIR SECTION 1113 AND SECTION 1114 PROPOSAL, AND (II) GRANTING RELATED RELIEF Pursuant to 28 U.S.C. § 1746, I, Marc D. Puntus, hereby declare as follows: 1. I submit this declaration (the “Declaration”) in support of the Debtors’ Motion for Entry of an Order (I) Authorizing, But Not Directing, the Debtors to (A) Reject Their Collective Bargaining Agreements, (B) Modify Certain Union-Related Retiree Benefits, and (C) Implement Terms of Their Section 1113 and Section 1114 Proposal, and (II) Granting Related Relief 1 KE 36825749 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 84 of 144 Desc Main (the “Motion”).1 Except as otherwise indicated, all facts set forth in this Declaration are based upon my personal knowledge of the Debtors’ operations and finances, information learned from my review of relevant documents, and information I have received from other members of the Debtors’ management team and the Debtors’ advisors. If called upon to testify, I could and would testify competently to the facts set forth herein. Professional Qualifications 2. I am a Partner and co-head of the Debt Advisory and Restructuring Group of Centerview Partners LLC (“Centerview”). Centerview is a full-service independent investment banking firm providing financial advisory services, including mergers and acquisitions, debt financing, and restructuring advice across a broad range of industries. Centerview and its senior professionals have extensive experience in the reorganization and restructuring of distressed companies, both out-of-court and in chapter 11 proceedings. As noted in the Motion, the Debtors retained Centerview in October 2014 to assist with the exploration of certain strategic M&A and sale transactions, and Centerview has worked with the Debtors since then. 3. Prior to and since joining Centerview in 2011, I have advised companies, creditors, shareholders, and other stakeholders in numerous in-court and out-of-court restructurings, recapitalizations, and reorganizations. I am experienced in procuring, structuring, and negotiating merger and acquisition and asset sale transactions. Prior to joining Centerview, I was a Managing Director of Miller Buckfire & Co., an investment bank and advisory firm that provided financial advisory services to constituents in a broad range of restructuring and corporate finance transactions. Prior to that, I was a member of the financial restructuring group of Dresdner Kleinwort Wasserstein (“DrKW”), and prior to joining DrKW, I was a Partner in the 1 Capitalized terms used but not defined herein shall have the meaning ascribed to such terms in the Motion. 2 KE 36825749 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 85 of 144 Desc Main Business, Finance, and Restructuring department of Weil, Gotshal & Manges LLP. I received my B.S.B.A. magna cum laude from Georgetown University and my J.D. cum laude from Boston University School of Law. The Debtors’ Sale Process 4. For a number of reasons, including the extremely challenging coal market environment and the Debtors’ significant secured indebtedness (approximately $900 million including the Debtors’ debtor-in-possession financing), the Debtors, in consultation with their advisors, determined that a transaction or series of transactions whereby the Debtors would sell substantially all of their assets is the Debtors’ only realistic option. To that end, prior to and subsequent to the Petition Date, the Debtors and their advisors engaged in extensive negotiations with Blackhawk regarding a structured transaction that would result in the going concern sale of substantially all of the Debtors’ operating assets (the “Blackhawk Assets”). The transaction excludes certain assets of the Debtors, such as the Federal Complex (the “Federal Assets”) and other mine complexes and idled properties. 5. The Blackhawk APA is the result of substantial efforts on behalf of the Debtors and their advisors to negotiate and consummate a strategic transaction that will maximize the value of the Debtors’ estates. In late 2014, the Debtors and their advisors began exploring an out-of-court sale or merger transaction with a potential strategic partner. By early 2015, it became clear that such a transaction would not materialize. Since that time, the Debtors and their advisors have engaged in discussions or negotiations with two additional entities, one of which is Blackhawk. Both entities insisted that they would only consummate a transaction through a chapter 11 process and delivered preliminary bids. After analysis and review, the Debtors and their advisors concluded that the proposed Blackhawk Transaction provided the most value-maximizing alternative for a sale of substantially all of the Debtors’ assets. 3 KE 36825749 Case 15-32450-KLP 6. Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 86 of 144 Desc Main Upon entry of the Bid Procedures Order, the Debtors, with their advisors, launched an extensive marketing and sale process for the the Debtors’ assets, canvassing the marketplace to identify potential financial or strategic purchasers. In total, Centerview, in consultation with the Committee and the UMWA, contacted approximately 65 potential purchasers and sent “teaser” materials to 29 such parties to solicit interest. The Debtors ultimately entered into nondisclosure agreements with 17 potential purchasers and provided them with additional information and offered them access to an electronic data room containing diligence materials related to the Debtors’ assets. The Debtors have conducted management calls and/or presentations for three potential purchasers of the Federal Assets and one potential purchaser of the Blackhawk Assets. The Debtors have received two non-binding letters of intent—one for the Federal Assets and one for the Blackhawk Assets. The potential purchaser who submitted a non-binding letter of intent for the Federal Assets has also conducted one site visit. No entity (other than Blackhawk) has conducted a site visit to date for the Blackhawk Assets. 7. At present, despite the Debtors’ ongoing sale process, no potential purchaser has indicated any willingness to acquire any of the Debtors’ assets subject to the terms of the Debtors’ current CBAs. The Necessity of the Blackhawk Transaction 8. The Blackhawk Transaction is currently the only viable transaction for the sale of substantially all of the Debtors’ assets. As this Court is well aware, the Debtors had effectively run out of cash by the time they filed for protection under the Bankruptcy Code and do not have sufficient funds to continue operating as a going concern. 9. The only avenue for avoiding a piecemeal value-destructive liquidation of the Debtors’ estates is through a sale of substantially all the Debtors’ operating assets as a going 4 KE 36825749 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 87 of 144 Desc Main concern. Although the Debtors have been running an open auction process in the hopes of soliciting additional interest in this regard, Blackhawk is the only entity to date who has provided a viable bid to acquire substantially all of the Debtors’ assets.2 10. Consummation of the Blackhawk APA is expressly conditioned on either consensual and implemented modifications to the applicable CBAs (which has not occurred) or rejection of the applicable CBAs following a successful section 1113/1114 motion. The Debtors are also obligated under the terms of their DIP Facility to broker a consensual resolution or file a motion seeking rejection of the CBAs with respect to the Blackhawk Assets by August 1, 2015. Thus, the Debtors have no choice but to file, and ultimately receive the relief requested by, the Motion. Absent consensual modification or rejection of the CBAs governing the Blackhawk Assets (or the emergence of another viable bidder through the sale process), the Debtors have no buyer for their assets, and absent a buyer, the Debtors will be unable to fully draw down their DIP—and in fact will default under their DIP facility by failing to reach a crucial milestone. If this occurs, the Debtors will face the very real prospect of an immediate and wholesale liquidation in the short term. 11. Nor do I believe that the Debtors’ auction process, or any future sale process for the Remaining Assets, will elicit bids that would assume the CBAs on their current terms. The retiree and union obligations under the CBAs in particular are a deterrent for any potential purchaser of the Debtors’ assets. Importantly, the Debtors’ obligations with respect to the UMWA 1974 Pension Plan represent substantial liabilities that are likely going to get worse as 2 The only indication of interest the Debtors have received with respect to these assets since commencing these chapter 11 cases, other than from Blackhawk, proposed to acquire the Debtors’ assets with the same union- and retiree-related concessions required by Blackhawk and on a stricter timeline. 5 KE 36825749 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 88 of 144 Desc Main more contributing employers are unable to survive in today’s coal market.3 I do not believe any party interested in the Debtors’ assets would conceivably submit a bid that assumes obligations to contribute to the UMWA 1974 Pension Plan, because such bidder would be exposing itself to significant annual funding costs as well as massive withdrawal or termination liabilities that appear inevitable. 12. There is no question that the terms of the current CBAs would chill bidding for the Debtors’ assets if not rejected. From the beginning, Blackhawk has required either: (a) a consensual resolution with the UMWA on modifications to the applicable CBAs necessary to satisfy the conditions under the Blackhawk APA; or (b) the Debtors reject the applicable CBAs. The Debtors fully expect that any other buyer would issue the same demands. If the Debtors are unable to implement their Proposal, the Debtors will be forced to liquidate and jobs, wages, and benefits for their retirees will be lost. Rejection of the CBAs is thus necessary for both consummation of the Blackhawk Transaction and for the ability of the Debtors to conduct any future sales of their Remaining Assets. 13. I declare under penalty of perjury that the foregoing is true and correct to the best of my knowledge and belief. Respectfully submitted, Dated: July 16, 2015 3 /s/ Marc D. Puntus Marc D. Puntus Partner of Centerview Partners LLC, financial advisor and investment banker to the Debtors For example, Walter Energy, Inc. (“Walter Energy”) and Alpha Natural Resources, Inc. (“Alpha Resources”) are contributing employers to the 1974 Pension Plan. On July 15, 2015, Walter Energy filed for chapter 11 protection. Alpha Resources has hired restructuring advisors. 6 KE 36825749 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 89 of 144 Exhibit E Lucha Declaration Desc Main Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 90 of 144 Stephen E. Hessler (admitted pro hac vice) Patrick Evans (admitted pro hac vice) KIRKLAND & ELLIS LLP 601 Lexington Avenue New York, New York 10022 Telephone: (212) 446-4800 Facsimile: (212) 446-4900 Desc Main Michael A. Condyles KUTAK ROCK LLP Bank of America Center 1111 East Main Street, 8th Floor Richmond, Virginia 23219 Telephone: (804) 343-5227 Facsimile: (804) 783-6192 - and James H.M. Sprayregen, P.C. Ross M. Kwasteniet (admitted pro hac vice) KIRKLAND & ELLIS LLP 300 North LaSalle Chicago, Illinois 60654 Telephone: (312) 862-2000 Facsimile: (312) 862-2200 Counsel for the Debtors and Debtors in Possession UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF VIRGINIA RICHMOND DIVISION In re: PATRIOT COAL CORPORATION, et al., Debtors. ) ) Chapter 11 ) ) Case No. 15-32450 (KLP) ) ) (Jointly Administered) ) DECLARATION OF DALE F. LUCHA, IN SUPPORT OF THE DEBTORS’ MOTION FOR ENTRY OF AN ORDER (I) AUTHORIZING BUT NOT DIRECTING THE DEBTORS TO (A) REJECT THEIR COLLECTIVE BARGAINING AGREEMENTS, (B) MODIFY CERTAIN UNION-RELATED RETIREE BENEFITS, AND (C) IMPLEMENT TERMS OF THEIR SECTION 1113 AND SECTION 1114 PROPOSAL, AND (II) GRANTING RELATED RELIEF Pursuant to 28 U.S.C. § 1746, I, Dale F. Lucha declare as follows: 1. I submit this declaration the in support of the Debtors’ Motion for Entry of an Order (I) Authorizing but not Directing the Debtors to (A) Reject Their Collective Bargaining Agreements, (B) Modify Certain Union-Related Retiree Benefits, and (C) Implement Terms of Their Section 1113 and Section 1114 Proposal, and (II) Granting Related Relief (the Case 15-32450-KLP “Motion”).1 Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 91 of 144 Desc Main I have been actively involved in the development of the proposals and the negotiations with the UMWA concerning the Debtors’ proposals in the months following the Petition Date. I have also been actively involved in the Debtors’ provision of relevant information to the UMWA. The purpose of this declaration is to describe the details of negotiations with the UMWA and the Debtors’ need to reject the CBAs. Professional Qualifications 2. I am Vice President of Human Resources of Patriot Coal Services, LLC. I have held this position since July 2008. Prior to this role, I had extensive experience in the coal industry, including serving as Vice President of Human Resources of Magnum Coal Company, Manager of Human Resources of Arch Coal of West Virginia, Manager of Safety and Labor Relations of Ashland Coal, Inc., and Safety and Labor Relations Specialist of Hobet Mining Inc. I have a B.A. from Marshall University. My responsibilities include the areas of recruiting, employment compliance, benefits, compensation administration, and employee and labor relations at Patriot Coal Corporation and its affiliated debtors (collectively, the “Debtors”). 3. Except as otherwise indicated, all facts set forth in this declaration are based upon my personal knowledge, my review of relevant documents, my opinion based upon experience, knowledge, and information concerning the operations of the Debtors, and information provided to me by employees working under my supervision. If called upon to testify, I would testify competently to the facts set forth in this declaration. Background 4. As described more fully in the Motion, in discussions regarding a potential sale, Blackhawk has repeatedly expressed unwillingness to enter into a transaction that would 1 Capitalized terms used but not otherwise defined herein shall have the meaning ascribed to such terms in the Motion. 2 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 92 of 144 Desc Main involve assumption of certain liabilities. Among other things, Blackhawk has indicated it will not assume liabilities associated with: (a) Patriot’s employees not hired by Blackhawk; (b) Patriot’s CBAs; (c) Patriot’s employee benefit plans; (d) Patriot’s retiree medical or other retiree welfare benefits; and (e) the UMWA 1974 Pension Plan (including withdrawal liabilities). 5. In the face of the condition in the Blackhawk APA that Blackhawk will not assume these liabilities, the Debtors engaged in active, direct, and comprehensive negotiations with the UMWA to seek a consensual outcome for all affected parties. However, an agreement has not been reached and the Debtors cannot avoid commencing proceedings under section 1113 and section 1114 of the Bankruptcy Code. Accordingly, the Debtors must reject the CBAs related to the Blackhawk Assets in order to close the Blackhawk Transaction. In addition, the Debtors must re-set to market the terms of their CBAs related to the Debtors’ Remaining Assets in order to continue operating those Remaining Assets, make them attractive to potential purchasers, and avoid exposing the Debtors’ estates to massive amounts of potential pension withdrawal liability on a post-effective date basis. 6. As described in the Motion, the Debtors have been working hard for the past nine weeks to broker a deal with the UMWA that would satisfy the conditions of the Blackhawk APA.2 As will be discussed in further detail below, the Debtors and their advisors have had four in-person meetings with the UMWA, several telephone conference calls, presented six different possible settlement frameworks, and have spent numerous hours trying to negotiate a resolution acceptable to both parties. 2 To be clear, Blackhawk has never negotiated directly with the UMWA. Rather, the Debtors have always made proposals based upon what they believed Blackhawk would agree to. 3 Case 15-32450-KLP 7. Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 93 of 144 Desc Main Unfortunately, negotiations to date have not resulted in final agreement with the UMWA on terms that would satisfy the conditions of the Blackhawk APA. The Debtors, on behalf of Blackhawk, have exchanged various counter-proposals with the UMWA and have found common ground on several issues; but the UMWA Counterproposal falls materially short of the necessary modifications required to consummate the sale of assets to Blackhawk and to continue operating the Debtors’ Remaining Assets. Despite the Debtors’ best efforts, the UMWA has rejected the offered proposals without good cause and the relief the Debtors seek should therefore be approved. A. 8. The Debtors’ Active Employees and CBAs with the UMWA The Debtors employ approximately 2,760 individuals on a full-time basis. These individuals include miners, engineers, administrative support staff, managers, directors, and executives. The Debtors employ both unionized and non-unionized workers. At present, approximately 31% of active employees are unionized and represented by the UMWA under the Debtors’ CBAs. 9. The Debtors are subject to three “groups” of CBAs: (a) eight Master CBAs; (b) the Gateway CBA; and (c) the Highland CBA. These obligations are discussed in turn. 10. Eight of the Debtors are signatories to Master CBAs with identical terms: (a) Heritage Coal Company, LLC (“Heritage”); (b) Colony Bay Coal Company, LLC (“Colony”); (c) Eastern Associated Coal, LLC (“Eastern”); (d) Mountain View Coal Company, LLC (“Mountain View”); (e) Pine Ridge Coal Company, LLC (“Pine Ridge”); (f) Rivers Edge Mining, LLC (“Rivers Edge”); (g) Apogee Coal Company, LLC (“Apogee”); and (h) Hobet Mining, LLC (“Hobet”). Approximately 725 current union employees receive benefits under the Master CBAs. 4 Case 15-32450-KLP 11. Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 94 of 144 Desc Main First, five of the eight Master CBAs cover operations that have no remaining employees and have been shut down (in some cases, for up to 30 years)—specifically, the Master CBAs with Heritage, Colony, Mountain View, Pine Ridge, and Rivers Edge. In addition, although the transaction has not yet closed, the Debtors entered into an asset purchase agreement prepetition to sell the Heritage assets. 12. Two of the remaining three Master CBAs cover both assets that are to be acquired by Blackhawk and other mining complexes or groups of assets that are not being acquired by Blackhawk (i.e., the Federal assets, the Apogee assets, and the Heritage assets, and together with any other assets Blackhawk is not proposing to acquire, the “Remaining Assets”). The Master CBA with Eastern covers the Black Oak Underground Mine, the Rocklick Preparation Plant, the Wells Preparation Plant, and certain related coal lands and operations, which are being acquired by Blackhawk, and the Federal assets (i.e., the Federal #2 Underground Mine and the Federal #2 Preparation Plant), which are not being acquired by Blackhawk. The Apogee CBA covers the Fanco Preparation Plant and Loadout, which is being acquired by Blackhawk, and the Guyan Surface Mine, which is not being acquired by Blackhawk. 13. The remaining Master CBA is the Hobet CBA. The Hobet CBA only covers the Hobet assets, which Blackhawk is not acquiring. 14. Second, Debtor Gateway Eagle Coal Company, LLC is a signatory to the Gateway CBA, which was negotiated in connection with the 2012–13 Restructuring. The Gateway CBA covers four mines: (a) Gateway Eagle; (b) Farley Eagle; (c) Campbells Creek No. 10; and (d) Sugar Maple. The Debtors permanently closed operations at the Sugar Maple and Farley Branch underground mines in November 2012 and neither operation has any remaining employees. The remaining two Gateway operations, Campbells Creek No. 10 and 5 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 95 of 144 Desc Main Gateway Eagle underground mines, are part of the Wells and Rocklick mining complexes subject to the Blackhawk APA. The major difference between the Gateway CBA and the Master CBAs is that there is no requirement to contribute to the UMWA 1974 Pension Plan. Approximately 166 current union employees receive benefits under the Gateway CBA. 15. Finally, Debtor Highland Mining Company, LLC is a signatory to the Highland CBA. The Debtor permanently closed and sealed the Highland mine and laid off all of its employees. In addition, although the transaction has not yet closed, the Debtor entered into an asset purchase agreement prepetition to sell the Highland assets. 16. The CBAs address all aspects of the employer and employee relationship including, among other things, wage rates, work rules, paid time off, and health and welfare benefits. Importantly, the Debtors employ hundreds of non-union employees who do the exact same work as UMWA employees, but at substantially lower wages and benefits that are consistent with the market. The CBAs include provisions that govern hourly wages and lock in wage increases, typically at rates that are substantially higher than competitive wages paid to non-union workers serving in the same capacity. Key differences between the wages and benefits afforded active union employees and those provided to active non-union employees generally include: • union employees make higher wages than non-union employees–up to 41% higher at surface mines and up to 30% higher at underground mines; • union employees are subject to lower out-of-pocket health insurance maximums than non-union employees and union employees are not required to pay healthcare premiums; • non-union employees receive a dollar-for-dollar matching contribution up to 6%, but, for union employees, the Debtors contribute to the UMWA 1974 Pension Plan (other than with respect to the Gateway CBA), make a 3% contribution to a company-sponsored “Union Savings Plan” in lieu of pension contributions for new inexperienced miners, and also make a contribution of 3% of earnings to a Union Savings Plan (as defined in and described more 6 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 96 of 144 Desc Main fully below) for all represented employees in lieu of providing retiree healthcare; B. 17. • the CBAs provide for scheduled wage increases and wage reopeners for union employees but wage increases for non-union employees are entirely at the Debtors’ discretion; • the Debtors’ union employees receive additional paid time off as compared to non-union employees in the form of floating vacation days, greater personal and sick leave, and graduated vacation days; • union employees benefit from more favorable work rules; and • union employees are entitled to several job security benefits not available to non-union employees including panel rights, preferential hiring rights to other operations and extensive grievance procedures. Patriots’ Retirees and Retiree Healthcare Obligations The Debtors also provide certain retiree healthcare benefits to retired union employees pursuant to the Coal Industry Retiree Health Benefit Act of 1992 (the “Coal Act”), and make certain contributions to a UMWA-administered VEBA that provides health benefits to certain non-Coal Act retirees. As noted above, as a result of the spin-off from Peabody and the acquisition of Magnum, the Debtors became responsible for liabilities relating to thousands of former union employees and retirees of Peabody and Arch Coal who retired prior to the formation of Patriot. 18. Accordingly, the Debtors have close to twice as many retirees as they have active employees. At present, the Debtors pay for or administer retiree healthcare benefits to approximately 4,607 retirees and 1,836 dependents, for a total of 6,433 beneficiaries.3 Of that total, 5,464 beneficiaries are associated with the UMWA (the “UMWA Retiree Beneficiaries”). Certain of the Debtors’ obligations to the UMWA Retiree Beneficiaries—such as contributing to the UMWA VEBA—stem from the Debtors’ CBAs, whereas others—such as obligations 3 The Debtors also have approximately 969 retirees not affiliated with the UMWA. 7 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 97 of 144 Desc Main under the Coal Act—are statutory. The Debtors UMWA retiree healthcare benefits generally fall into three categories: • UMWA VEBA (Debtors): Certain UMWA Retiree Beneficiaries4 receive benefits under a Voluntary Employee Beneficiary Association trust formed by the UMWA in the Debtors’ prior bankruptcy (the “UMWA VEBA”), which assumed the Debtors’ obligations to provide retiree healthcare benefits to certain union retirees, effective June 30, 2013.5 In general, these are former UMWA employees who retired under the 1993 National Bituminous Coal Wage Agreement (“NBCWA”) and subsequent NBCWAs, and who qualify for retiree health benefits under these NBCWAs, not under the Coal Act. In 2014, the Debtors contributed approximately $8.2 million on account of the UMWA VEBA. • Coal Act (Debtors): The Coal Act requires employers to provide health benefits to retirees who were age and service eligible as of February 1, 1993 and who retired by September 30, 1994. The Debtors administer a health benefit plan that provides benefits to approximately 5,254 UMWA Retiree Beneficiaries pursuant to the Coal Act. The Debtors are responsible for paying benefits to approximately 1,108 of these UMWA Retiree Beneficiaries, and Peabody is responsible for paying for the remaining 4,236 UMWA Retiree Beneficiaries. The Debtors’ liabilities under the Coal Act also include payments to two multi-employer funds, the UMWA Combined Benefit Fund and the UMWA 1992 Benefit Plan, which provide certain healthcare benefits to certain eligible retirees. At present, the Debtors estimate the present value of their Coal Act liabilities to be approximately $43.7 million. • Coal Act (Peabody): Peabody is contractually responsible for paying for approximately 4,236 UMWA Retiree Beneficiaries (the “Peabody Assumed Retirees”) pursuant to that certain Section 9711 Coal Act Liabilities Assumption Agreement between the Debtors and Peabody. Although Peabody pays these health benefits directly, the Debtors administer these retiree health benefits through that certain Administrative Services Agreement between the Debtors and Peabody. 4 Although the Debtors are not privy to the specific number of UMWA Retiree Beneficiaries who receive benefits from the UMWA VEBA, effective June 30, 2013, the UMWA VEBA assumed health care obligations for 6,142 of the Debtors’ retirees (including dependents, a total of 11,370 UMWA Retiree Beneficiaries). 5 Funding for the VEBA under the VEBA Funding Agreement included: (a) a 35% ownership stake in the common stock issued upon emergence of the reorganized company; (b) profit sharing contributions up to a maximum of $300 million, subject to certain financial conditions that have never been satisfied; (c) a royalty contribution of $0.20 to $1.00 per ton for every ton produced at all existing mining complexes; (d) cash contributions of up to $75 million to be paid over the four years following emergence, subject to certain financial conditions that have never been satisfied; and (e) $10 million paid at emergence. 8 Case 15-32450-KLP • 19. Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 98 of 144 Desc Main NBCWA (Alcoa): Approximately 210 UMWA Retiree Beneficiaries receive health benefits under the 1993 National Bituminous Coal Wage Agreement of 2011, which the Debtors pay for but are reimbursed by Alcoa Co. (“Alcoa”) under the Debtors’ joint venture agreement with Alcoa for Squaw Creek Coal Company (the “Alcoa Assumed Retirees”).6 It is my belief that none of the UMWA Retiree Beneficiaries will be negatively affected by termination of the Debtors’ Coal Act obligations. If the Debtors terminate their Coal Act obligations, I understand that the Peabody Assumed Retirees would continue to receive their retiree benefits from Peabody. I also understand that the only retiree benefits for which the Debtors are currently paying and not being reimbursed—related to the 1,018 beneficiaries receiving benefits pursuant to the Coal Act—would transition to Arch Coal (990 retirees) and Peabody (28 retirees). C. 20. Patriot’s Pension Obligations The Debtors also have additional payment obligations to the UMWA 1974 Pension Plan under their CBAs (other than the Gateway CBA). The Debtors spent approximately $16.8 million in 2014 on contributions under the UMWA 1974 Pension Plan. Moreover, the UMWA 1974 Pension Plan is massively underfunded and is in “critical” status. The Debtors cannot possibly pay the withdrawal liability that could conceivably be foist upon them if the Debtors’ obligations to the UMWA 1974 Pension Plan were not eliminated (and the withdrawal liability not treated as an unsecured claim), and no buyer would realistically agree to take on this exposure. 21. Because the UMWA 1974 Pension Plan is a multiemployer plan, it is my understanding that beneficiaries of the UMWA 1974 Pension Plan would, at least for the near 6 The Debtors’ NBCWA retiree health care obligations were largely eliminated through their 2012–13 Restructuring in connection with establishment of the UMWA VEBA. Alcoa, however—unlike Peabody—did not wish to contribute to the UMWA VEBA, and instead agreed to keep reimbursing the Debtors for these obligations. 9 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 99 of 144 Desc Main term, continue to receive pension benefits from the Plan if the Debtors’ obligations were terminated. The Debtors’ Good Faith Negotiations with the UMWA 22. The Debtors have worked diligently and in good faith over the last two months to broker a deal with the UMWA that would satisfy the conditions of the Blackhawk APA, and to negotiate consensual go-forward terms for the Debtors’ Remaining Assets. These proposals were frequently presented in face-to-face negotiation sessions, and have been the subject of numerous conference calls and e-mail exchanges. The UMWA has rejected each of these proposals without good cause. A. 23. The First Meeting The Debtors’ communication with the UMWA began two days after the Petition Date and has continued in the subsequent weeks in an effort to keep the UMWA informed about the Debtors’ restructuring. On May 14, 2015, the Debtors’ management team, outside labor counsel, and Centerview Partners, LLC, the Debtors’ investment banker, met with the UMWA at the UMWA’s headquarters in Triangle, Virginia. At that meeting, the Debtors discussed the bankruptcy filing, and presented on the Debtors’ financial condition. The Debtors also discussed potential strategic alternatives, including the sale of substantially all of the Debtors’ assets (excluding Federal) to a strategic partner. During the first meeting, the Debtors provided an overview of: (1) coal market conditions, (2) Patriot’s recent financial performance, (3) the Debtors’ restructuring, and (4) the proposed DIP financing and related milestones (including a timeline for addressing Section 1113/1114 issues). To facilitate this discussion, the Debtors and their advisors prepared a PowerPoint presentation, copies of which were distributed at the meeting. 10 Case 15-32450-KLP B. 24. Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 100 of 144 Desc Main The First Proposal Following the first meeting, the Debtors provided copies of the first proposal (the “First Proposal”), a copy of which is attached hereto as Exhibit 1, to the UMWA at a meeting on May 29, 2015. In the First Proposal, the Debtors proposed modifications they thought Blackhawk would approve of and, most importantly, were consistent with benefits available to Patriot’s non-union workforce. The First Proposal put forth several changes to provisions of each of the Debtors’ CBAs including changes relating to job opportunity programs, paid time off, wage increases and rates, scheduling, and contributions to the UMWA 1974 Pension Plan. 25. The UMWA indicated on May 29, 2015 that it would act as the bargaining representative for Coal Act retirees. The UMWA was otherwise silent with respect to the First Proposal. C. 26. The Second Proposal A third meeting took place on June 3, 2015 in Morgantown, West Virginia. Cecil Roberts, President of the UMWA and Brian Sanson, Director of Research for the UMWA attended the meeting on behalf of the UMWA. Bob Bennett, Patriot’s President and Chief Executive Officer, and I attended the meeting on behalf of the Debtors. John Woodrum, the Debtors’ outside labor counsel and Grant Crandall, the UMWA’s General Counsel participated by telephone. 27. During the meeting, the Debtors explained that, while Blackhawk had expressed some willingness to enter into CBAs with the UMWA (subject to certain terms and conditions), Blackhawk had indicated that it would not consider any CBA with the following obligations: (a) successor liability for Blackhawk under the Debtors’ CBAs; and (b) pension contributions or other pension related liabilities. Despite these conditions, the Debtors provided the UMWA 11 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 101 of 144 Desc Main with a second proposal (the “Second Proposal”), a copy of which is attached hereto as Exhibit 2, that they believed would be acceptable to Blackhawk. The Debtors’ representatives clarified that the Second Proposal had not been reviewed and/or approved by Blackhawk but that the Debtors believed they could persuade Blackhawk to accept the terms of the Second Proposal. 28. The Debtors’ representatives walked the UMWA through the Second Proposal and also provided a spreadsheet that contrasted key contract terms under the Master CBA and the Gateway CBA, non-union wage and benefits, wage and benefit terms modifications approved by the Missouri Bankruptcy Court, and the terms of the Second Proposal. 29. The Second Proposal modified several aspects of the First Proposal including with respect to the term of a new agreement including, among other things, offering concessions regarding wages in the form of wage reopeners, making various modifications to work rules regarding absences, and making changes to employer contributions for retirement benefits. 30. During the Second Meeting, Mr. Roberts asked several specific questions regarding wages and changes to retirement benefits. He also asked about Blackhawk’s stated intention with respect to the union assets—in particular, whether Blackhawk intended to operate the assets. The Debtors’ representatives indicated that Blackhawk’s stated intention was to operate the assets and noted that Blackhawk’s aggressive closing deadline was driven by the need to have time to market the coal for delivery in 2016. Following a short break allowing the UMWA to convene in private, the Second Meeting recommenced. At that time, Mr. Roberts thanked the Debtors for the Second Proposal and stated that the UMWA would promptly provide a counterproposal. 31. Shortly following the Second Meeting, Mr. Sanson called me to confirm a meeting scheduled for June 9, 2015. During that call, Mr. Sanson commented on progress thus 12 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 102 of 144 Desc Main far and indicated a belief that negotiations could result in a consensual resolution. He also stated that the UMWA would provide a counterproposal shortly, but did not provide specific details. D. 32. The UMWA Counterproposal A fourth meeting took place on June 9, 2015 at UMWA headquarters in Triangle, Virginia. The UMWA was represented by Mr. Roberts, Mr. Crandall, and Mr. Sanson. The Debtors’ representatives included myself, Mr. Bennett, and Caryn Merton, Senior Manager of Compensation and Benefits at Patriot. 33. The meeting began with a written counterproposal by the UMWA (the “UMWA Counterproposal”). Before reviewing the details, Mr. Roberts discussed particular concerns with respect to successorship and pension obligations. He also clearly expressed the UMWA’s intention to negotiate solely with respect to assets to be acquired by Blackhawk at that time and that he would not negotiate with respect to the Debtors’ Remaining Assets. 34. The UMWA Counterproposal made requests with respect to the some aspects of the CBAs–in particular, the UMWA Counterproposal asked for an expanded scope and coverage of a new agreement than that offered by the Debtors, that wage increases be delayed but not eliminated, and that the Debtors continue contributions to the UMWA VEBA. 35. Notably, the UMWA Counterproposal sought to maintain current terms and conditions with respect to paid time off, job security, health benefits, retirement benefits, work rules, job opportunities, and the UMWA 1974 Pension Plan. 36. In response to the UMWA Counterproposal, the Debtors’ representatives indicated that Blackhawk would likely be unwilling to enter into a CBA on the same terms and conditions set forth in the current CBA. We explained that the Debtors had experienced significant losses and severe financial strain under the wage and benefit levels provided in the 13 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 103 of 144 Desc Main current CBAs, and thus that Blackhawk was unlikely to agree to those terms. The meeting ended with the Debtors’ promise to prepare another proposal and a plan that I speak with Mr. Crandall by phone to close the gap between the competing proposals. 37. Following this meeting, the Debtors and their advisors, and the UMWA and its advisors participated in conference calls and e-mail exchanges concerning termination of pension contributions. The parties also discussed consensual resolution of certain other outstanding issues. E. 38. The Third Proposal After consultation with Blackhawk, the Debtors delivered a third proposal (the “Third Proposal”), a copy of which is attached hereto as Exhibit 3, on June 13, 2015 in response to the UMWA’s stated concerns. Among other things, the Third Proposal provided for an increase in the Debtors’ formerly proposed wage levels, additional job rights and job security protections, and offered employer contributions to a 401(k)-type savings plan. F. 39. The Fourth Proposal After delivering the Third Proposal, the Debtors and the UMWA engaged in discussions about the substance of the Third Proposal. Following these discussions, the Debtors made further revisions to the Third Proposal that they thought Blackhawk might accept, such as proposing additional job security protections and job opportunities for laid-off employees, and delivered a fourth proposal (the “Fourth Proposal”), a copy of which is attached hereto as Exhibit 4, later in the day on June 13, 2015. Notwithstanding the additional concessions proposed by the Debtors in the Fourth Proposal, the UMWA rejected the proposed modifications, including with respect to the UMWA 1974 Pension Plan contributions. 40. During the June 13th call, Patriot and the UMWA also discussed the necessity of reducing hourly wage rates, wage increases, and paid time off. I specifically requested that the 14 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 104 of 144 Desc Main UMWA consider the economics of assets that Blackhawk seeks to acquire, which are in bankruptcy for the second time since 2012, have production costs that exceed selling prices, and are operating at a loss. G. 41. The Fifth Proposal On June 18th, 2015, the Debtors met with the UMWA by phone for approximately 90 minutes and provided a fifth proposal (the “Fifth Proposal”), a copy of which is attached hereto as Exhibit 5. I represented the Debtors and the UMWA was represented by Messrs. Roberts, Crandall, and Sanson. Although there was consensus on several issues, such as the scope of an agreement and job opportunities, the UMWA nevertheless refused to accept certain necessary aspects of the Fifth Proposal—chief among them the elimination of the UMWA 1974 Pension Plan contributions. H. 42. The Sixth Proposal Notwithstanding the UMWA’s repeated insistence on terms and conditions that Blackhawk was unwilling to agree to, in an effort to avoid litigation, on June 22, 2015, after consultation with Blackhawk, the Debtors made a sixth proposal (the “Sixth Proposal”) , a copy of which is attached hereto as Exhibit 6, to the UMWA that expired on Wednesday, July 8, 2015. The UMWA did not respond to the Sixth Proposal. 43. Below is a table comparing the first and last proposal the Debtors made that would have satisfied the conditions of the Blackhawk APA, demonstrating the significant movement in the proposals’ terms made in response to the UMWA’s stated concerns: Subject and CBA Article First Proposal Sixth Proposal Enabling Clause (See Art. I of Master CBA) Eliminate successorship obligations entirely in new contract. Retain successorship obligations in new contract. Scope and Coverage (See Art. IA of Master CBA) New contract will apply only to geographic boundaries of the mine as defined by the mining permit. New contract will apply to all represented operations and coal lands acquired by Blackhawk. 15 Case 15-32450-KLP Contracting and Subcontracting (See Art. IA(g) of Master CBA) Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 105 of 144 Non-bargaining unit employees may produce coal at the mining face. Job Opportunities and Benefit Security Program Eliminate entirely. (See Art. II of Master CBA) Wage Increase (See Art. X of Master CBA) Hourly Wage Rates (See Appendices to Master CBA) Sickness and Accident Benefits (See Art. XI of Master CBA) • Eliminate all wage increases. • Establish wage reopener to set wages for years 2018–2021. Desc Main Non-bargaining unit employees may not produce coal the mining face. • Maintain job opportunities and benefit security program. • Provide 3 of 5 new job opening at non-represented underground mines to laid-off represented employees. • Provide a $0.65 per hour raise in year 2016 if the metallurgical coal benchmark index reaches $150. • Provide a $0.65 per hour raise in year 2017 if the metallurgical coal benchmark index reaches $120. • Provide annual $0.65 per hour raises beginning in year 2018 regardless of the metallurgical coal benchmark index. • Reduce underground wage rates by $2.00. • Reduce underground wage rates by $1.25. • Reduce preparation plant wage rates by $3.00 • Reduce preparation plant wage rates by $1.25. Provide a maximum of 26 weeks of S&A benefits. Provide a maximum of 52 weeks of S&A benefits. • Provide up to five graduated vacations per year with pay. Provide up to nine additional graduated vacation days that are paid but may not be used as time off. Graduated Vacation (See Art. XIV of Master CBA) Provide up to five graduated vacations per year with pay. • Seniority (See Art. XVII of Master CBA) Assure that only the signatory company is obligated to make job offers to laid-off employees. Provide job opportunities for employees of different signatory companies, including Hobet and Apogee (which are not being acquired by Blackhawk). Health, Retirement and Other Benefits (See Art. XX of Master CBA) Eliminate requirement to fund the VEBA. Provide for a $0.20 per ton royalty on clean tons produced at acquired operations and coal lands through December 31, 2018, unless legislation provides funding or health care benefits for VEBA participants. Health, Retirement and Other Benefits (See Art. XX of Master CBA) Eliminate contribution of 3% of wages into the Union Savings Plan that are made in lieu of providing retiree health Provide up to a 6% contribution into the Union Savings Plan (3% with no employee contribution required and an additional 16 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 106 of 144 Desc Main care and in lieu of pension eligibility. matching contribution up to 3%). Health, Retirement and Other Benefits (See Art. XX of Master CBA) Provide the same health care plan as non-union employees. Make no changes to the current UMWAbargained for health care plan. Miscellaneous (See Art. XXII of Master CBA) Make current attendance policy more restrictive. Maintain current attendance control policy. Miscellaneous (See Art. XXII of Master CBA) Eliminate union-controlled Memorial Days. Provide for ten Memorial Days. Settlement of Disputes (See Art. XXIII of Master CBA) Eliminate all grievances filed but not resolved prior to the effective date of a new contract. Process all grievances. Ratification and Termination of Agreement (See Art. XXIX of Master CBA) Seven year term. Five year term. • Alternative Schedules (See Memorandum of Understanding Regarding Alternative Schedules attached to Master CBA) Memorandum of Understanding Regarding Job Opportunities I. 44. • Provide a 6 day on / 3 day off schedule with 10 hour rotating shifts. Provide a 5 day on / 2 day off schedule with 10 hour shifts. Provide a 6 day on / 3 day off schedule with 10 hour non-rotating shifts. Eliminate, but provide 3 of 5 job offers at underground mines to certified employees of Hobet and Apogee (operations not being acquired by Blackhawk), and provide 3 of 5 job offers at new underground mines (including Flying Eagle and Eagle 3). Eliminate. The Proposal In light of the of the fact that the UMWA was not willing to agree to any consensual modifications of the CBAs necessary to consummate the Blackhawk Transaction, the Debtors made another proposal (the “Proposal”) to the UMWA on July 10, 2015. With respect to all facilities proposed to be acquired by Blackhawk, the Proposal stated that the applicable CBAs must be rejected, and, following the closing of the Transaction, the rights of Blackhawk and the UMWA would be subject to applicable labor law. The Debtors similarly 17 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 107 of 144 Desc Main proposed to terminate the CBAs applicable to the facilities that are not proposed to be acquired by Blackhawk, and, in addition, proposed market terms and conditions under which the Debtors were willing to offer employment following rejection of the applicable CBAs. 45. As set forth more fully on Exhibit B attached to the Motion, the Debtors’ Proposal would, among other things: • authorize, but not direct, the Debtors to reject each of their CBAs; • solely with respect to the bargaining unit employees of Eastern employed at the Federal #2 Underground Mine and the Federal #2 Preparation Plant, offer a new Eastern CBA with certain modifications, including the elimination of the successorship clause and contributions to the UMWA 1974 Pension Plan, and an automatic termination of the CBA upon a cessation or sale of the Debtors’ operations at the Federal assets; • solely with respect to bargaining unit employees of Apogee employed at the Guyan Surface Mine, offer a new Apogee CBA with certain modifications, including wage reductions, elimination of the successorship clause, and contributions to the UMWA 1974 Pension Plan, and an automatic termination of the CBA upon a cessation or sale of the Debtors’ operations in connection with the Apogee assets; • solely with respect to the bargaining unit employees of Hobet employed at the Beth Station Preparation Plant and the Job #21 Surface Mine, reinstate the Hobet CBA with certain modifications, including wage reductions, elimination of the successorship clause, and contributions to the UMWA 1974 Pension Plan, and an automatic termination of the CBA upon a cessation or sale of the Debtors’ operations in connection with the Hobet assets; and • eliminate all future contributions or obligations under the Coal Act and any obligations to pay for or administer any retiree healthcare benefits for the Alcoa Assumed Retirees and/or the Peabody Assumed Retirees. 46. The UMWA has rejected the Proposal without offering any counterproposal. 47. Although I, along with certain of the Debtors’ other representatives, have worked tirelessly to broker a deal with the UMWA on terms that would satisfy the conditions of the Blackhawk APA, a deal has not come together and the Debtors cannot simply wait any longer in hopes of an agreement. Although the Debtors have been clear from the very beginning of 18 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 108 of 144 Desc Main negotiations with the UMWA that Blackhawk would not accept any agreement that required contributions to the UMWA 1974 Pension Plan, the UMWA has refused to compromise on this point—even when faced with the very real risk that the Debtors could liquidate, and all of their union employees could lose their jobs, if the sale to Blackhawk is not consummated. The Debtors Supplied Relevant Information to the UMWA in a Timely Fashion 48. Throughout this process, the Debtors understood the need to share information with the UMWA, to develop tailored and reasonable proposals for modifications to the CBAs and retiree health benefits, and to engage with frequent dialogue with the UMWA. 49. During these chapter 11 cases, the Debtors have provided a significant amount of data to enable the UMWA to evaluate their proposals. To that end, the Debtors and the UMWA entered into a stipulated protective order (See Docket No. 232) to govern the sharing of confidential data, and the Debtors set up a web-based data room to facilitate information sharing on a confidential basis. The Debtors made the data room available to the UMWA on May 19, 2015. The information the Debtors made available to the UMWA includes information concerning, among other things, the Debtors’ liquidity, capital expenditures, general business information, such as coal supply agreements and coal transportation agreements, environmental obligations, pre- and post-petition debt, and healthcare benefit plans and other employee obligations. The UMWA Has Rejected the Debtors’ Proposals Without Good Cause 50. The UMWA refused to accept the Debtors’ proposals and such refusal was without “good cause.” During the negotiations between the Debtors and the UMWA, the Debtors shared data and delivered six different proposals to the UMWA proposing consensual modifications necessary to satisfy conditions under the Blackhawk APA (plus the additional Proposal), most of which were specifically tailored to address the UMWA’s stated concerns, 19 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 109 of 144 Desc Main and each of which were rejected by the UMWA. Most importantly, Blackhawk has been clear from the beginning of these chapter 11 cases it was not willing to accept successorship liability or participation in the UMWA 1974 Pension Plan (and reasonably so), and the Debtors have, in turn, repeatedly expressed this position in each of its meetings, e-mails, and conference calls with the UMWA. The UMWA Counterproposal simply refused to concede with respect to several key conditions of the Blackhawk Transaction and the Debtors—concessions that are not only fair and equitable given the alternative of a wholesale liquidation and no jobs, but that are ultimately required by Blackhawk as a condition to consummation of the Blackhawk APA. Insisting that Blackhawk agree to assume a CBA that includes participation in the UMWA 1974 Pension Plan places a demand on the Debtors that is beyond their control and that is impossible for them to satisfy. 51. Similarly, the UMWA has rejected the Proposal regarding the Remaining Assets, at first insisting that the UMWA won’t bargain over the terms and conditions of any CBAs that don’t cover the assets Blackhawk seeks to acquire. After the negotiations with the UMWA stalled following the delivery of the six proposals, and after the Debtors delivered the Proposal, the UMWA simply told the Debtors that there was nothing to discuss—again, despite the fact that certain of these CBAs cover operations long dormant or sold, and that concessions for the Debtors’ other CBA was necessary to both run the Hobet assets profitably and maximize the chances for the Debtors to sell the Hobet assets. The Debtors’ Need to Reject the CBAs 52. The Debtors need to reject their CBAs because: (a) certain of their CBAs cover operations that have shut down and do not utilize any employees; (b) certain of their CBAs cover operations to be sold to Blackhawk; and (c) one of their CBAs covers operations that 20 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 110 of 144 Desc Main cannot be conducted profitably absent rejection of the CBA and implementation of the Debtors’ Proposal. 53. First, as noted in the Motion, for five of the eight Master CBAs and the Highland CBA, the Debtors have no active operations and no remaining employees and cannot be in a position where the Debtors are deemed to have assumed these CBAs through operation of law. The Debtors must effectuate a complete withdrawal from their UMWA 1974 Pension Plan prior to exiting chapter 11 or else each of the Debtors could be burdened by significant post-bankruptcy expenses on a joint-and-several basis—expenses that could potentially wipe out any ability for the Debtors to pay the obligations of their liquidating estate (e.g., administrative and priority claims, reclamation obligations, and plan distributions) and render them administratively insolvent. To the best of my knowledge, the Debtors can effectuate a complete withdrawal from their UMWA 1974 Pension Plan prior to exiting chapter 11 in only two ways: (a) rejecting their CBAs or otherwise modifying them to completely eliminate the Debtors’ obligations to contribute to the UMWA 1974 Pension Plan, which the Debtors are seeking through the Motion; or (b) terminating all of their employees and ceasing all of their operations, which the Debtors and their estates would prefer not to have to do. 54. In addition, I do not believe the Debtors will be able to sell their Federal, Apogee, and Hobet assets absent implementation of the Proposal on account of, in particular, the obligations associated with the UMWA 1974 Pension Plan. I also believe that including successorship provisions in the new CBAs for the Federal, Apogee, and Hobet assets will make those assets unattractive to potential purchasers and therefore make it more difficult if not impossible to sell those assets. 21 Case 15-32450-KLP 55. Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 111 of 144 Desc Main Second, two of the remaining three Master CBAs are with Debtors who own assets that are to be acquired by Blackhawk—specifically, the Master CBAs with Eastern and Apogee. The Gateway CBA covers both operations to be acquired by Blackhawk and other groups of assets that have been shut down and have no employees. The Debtors need to reject the Eastern, Apogee, and Gateway CBAs because, in addition to the administrative liabilities noted above, rejection is required under the Blackhawk Transaction. In addition, the Debtors must reject the Gateway CBA because after the Transaction closes, all facilities operated by Gateway employees will have been either sold or shut down, and Gateway will have no need for employees, nor can the Debtors expose their liquidating estate to administrative claims or pension withdrawal liability claims by failing to reject the Gateway CBA. 56. Third, the Eastern and Apogee CBAs also cover certain assets that are not being acquired by Blackhawk—and the Debtors have made good faith proposals with respect to replacement terms and conditions for those assets and operations following rejection of the CBAs, which the UMWA has rejected without good cause. Specifically, the Debtors have proposed, among other things, terminating the UMWA 1974 Pension Plan contributions requirements, but the UMWA has refused to accept such change. The Debtors do not believe they will be able to sell their Federal and Apogee assets absent implementation of the Proposal. 57. Finally, the Debtors need to reject the Hobet CBA because the Debtors operate Hobet at significantly above-market costs and the Debtors are simply unable to operate their Hobet operations in a competitive manner if the Debtors cannot achieve the savings set forth in their Proposal. With such modifications, the Debtors could operate Hobet at a cost more in line with the market, helping to fund administrative obligations of the Debtors’ liquidating estate as well as providing jobs and benefits to over 160 families in the Debtors’ communities. As 22 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 112 of 144 Desc Main previously noted, the Debtors’ pay their union-represented employees at higher rates (up to 41% at surface mines and up to 30% at underground mines) than non-union employees as compared to their non-union employees. 58. In addition, non-union wage rates have declined in recent years as coal companies have had to cut costs and as there has generally been a drop in demand for coal mining employees. For example, the Debtors’ non-union wage rates at their Samples mine have fallen an average of approximately 7.5% per hour since the conclusion of the 2012–13 Restructuring. Union wage rates at the Debtors’ Hobet mine, however, have continued to increase in accordance with the terms of the Debtors’ CBAs. Presently, non-union employees at the Samples mine earn approximately $5.45 less per hour, on average, than their union counterparts at Hobet. If not corrected, this imbalance will likely continue to increase in light of the weak job market and the mandatory rate increases provided by the Hobet CBA. 59. This imbalance in wage expenses has severely crippled Hobet’s cash flow, and Hobet can no longer continue to operate profitably as a result. At the same time, the Debtors are liquidating and their estates will need every dollar available to help fund the Debtors’ liabilities post-confirmation. I understand that the Debtors may have significant liabilities associated with their liquidating estate at the conclusion of these chapter 11 cases. By bringing Hobet’s expenses closer to market now, the Debtors will have additional funds to make required distributions under the Bankruptcy Code and ensure a successful chapter 11 process. 60. Similarly, as with each of the Debtors’ other CBAs, the Debtors need to reject the Hobet CBA so that: (a) the Debtors may maximize their chances of selling the Hobet assets for the benefit of their estates; (b) the Debtors are not deemed to have assumed these CBAs through operation of law; (c) they may avoid exposing the Debtors’ remaining liquidating estate to 23 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 113 of 144 Desc Main administrative claims; and (d) they may effectuate a complete withdrawal under the UMWA 1974 Pension Plan. 61. For all of the above reasons, I respectfully submit that: (a) the relief requested in the Motion is necessary to the reorganization of the Debtors and in the best interests of their estates, creditors, and all parties in interest; (b) the Debtors have met their obligation to negotiate with the UMWA in good faith; (c) each of the Debtors’ proposals were based on the most complete and reliable information at the time they were made; and (d) that the UMWA has rejected the Proposal without good cause. 62. I declare under penalty of perjury that the foregoing is true and correct to the best of my knowledge and belief. Respectfully submitted, Dated: July 16, 2015 /s/ Dale F. Lucha Dale F. Lucha Vice President, Human Resources of Patriot Coal Services, LLC 24 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 114 of 144 Exhibit 1 First Proposal Desc Main Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 115 of 144 PROPOSED CHANGES TO 2013 COAL WAGE AGREEMENTS BETWEEN THE UNITED MINE WORKERS OF AMERICA AND HERITAGE COAL COMPANY, LLC EASTERN ASSOCIATED COAL, LLC APOGEE COAL COMPANY, LLC HOBET MINING, LLC COLONY BAY COAL COMPANY MOUNTAIN VIEW COAL COMPANY, LLC RIVERS EDGE COAL COMPANY, INC HIGHLAND MINING, LLC PINE RIDGE COAL COMPANY, LLC GATEWAY EAGLE COAL COMPANY, LLC Desc Main Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 116 of 144 Desc Main Terminate contracts of Heritage Coal Company, Colony Bay Coal Company, Mountain View Coal Company, Rivers Edge Coal Company and Pine Ridge Coal Company The operations/assets of these companies have been sold or permanently closed, and they have no employees. The following changes are proposed to the labor agreement for each remaining signatory company. Article I – Enabling Clause Eliminate successorship provision Article II – Job Opportunity and Benefit Security (JOBS) Eliminate Article IX – Allowances Maintain the number of Personal and Sick Leave days during a calendar year at the current 2015 level Article X - Wage Increase Eliminate wage increase for 2016-2018 Article XII – Holidays Maintain the number of holidays at current the current 2015 level Article XIII – Regular Vacation Maintain the number of Floating Vacation Days during a calendar year at the current 2015 level Article XIV – Graduated Vacation Limit the maximum number of Graduated Vacation Days during a calendar year to five (5) Article XX – Health, Retirement and Other Benefits 1 – Terminate participation in 1974 Pension Plan and Trust 2 – Terminate requirement to fund the Patriot Retirees’ VEBA if (i) the CARE Act or similar legislation is enacted that provides funding for participants in the VEBA, or (ii) Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 117 of 144 Desc Main with respect to any mine or facility or coal reserves sold or otherwise conveyed to an unrelated third party. 3 -Terminate requirement to contribute 3% of wages into USP for 2012 NIMS 4 - Provide a Health Care Plan that conforms to the Company’s Salaried and NonUnion Health Care Plan (HSA Plan), including monthly medical premiums Article XXIII – Settlement of Disputes Eliminate all grievances filed but not resolved prior to the effective date of a new contract Article XXIX – Ratification and Termination of This Agreement Term of the agreement shall be six years Memorandum of Understanding Regarding Job Opportunities Eliminate Appendix A – Wage Rates 1- Reduce Wage Rates to the level of Patriot’s non-union hourly rates 2- Terminate Wage Reopener Memorandum of Understanding Regarding Alternative Schedules Incorporate an additional Alternative Schedule of 5 days-on / 2 days-off, 10 hour shifts Memorandum of Understanding between the UMWA and Patriot Coal Company, on behalf of itself and the Signatory Companies Terminate the August 26, 2013 Memorandum of Understanding (Master MOU), and replace with a new Memorandum of Understanding, as may be necessary and appropriate. Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 118 of 144 Exhibit 2 Second Proposal Desc Main Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 119 of 144 Desc Main June 5, 2015 SECOND PROPOSAL OF CHANGES TO 2013 COAL WAGE AGREEMENTS BETWEEN THE UNITED MINE WORKERS OF AMERICA AND HERITAGE COAL COMPANY, LLC EASTERN ASSOCIATED COAL, LLC APOGEE COAL COMPANY, LLC HOBET MINING, LLC COLONY BAY COAL COMPANY MOUNTAIN VIEW COAL COMPANY, LLC RIVERS EDGE COAL COMPANY, INC HIGHLAND MINING, LLC PINE RIDGE COAL COMPANY, LLC GATEWAY EAGLE COAL COMPANY, LLC Page 1 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 120 of 144 Desc Main June 5, 2015 SECOND PROPOSAL I. Terminate contracts of Heritage Coal Company, Colony Bay Coal Company, Mountain View Coal Company, Rivers Edge Coal Company, Highland Mining Company, Pine Ridge Coal Company, Gateway Eagle Coal Company’s Sugar Maple Mine, and Gateway Eagle Coal Company’s Farley Eagle The operations/assets of these companies have been permanently closed, and they have no employees. II. The following changes are proposed to the labor agreement for each remaining signatory company. Articles may vary in the Gateway Agreement. Article I – Enabling Clause Retain successorship provision but include language that allows purchaser to sign a new, agreement that is identical in terms and conditions and all other aspects, but without language that requires they assume the obligations of the selling Employer Article IA – Scope and Coverage Incorporate that the agreement applies only within the geographic boundaries and coal reserves that constitute each mine Article II – Job Opportunity and Benefit Security (JOBS) Eliminate Article IX – Allowances Freeze the number of Personal and Sick Leave days during a calendar year to two (2) during the term of the agreement Article X - Wage Increase Eliminate wage increases for years 2016 - 2018 Establish wage reopener to set wages for years 2018 -2021 based on then current market Page 2 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 121 of 144 Desc Main June 5, 2015 Article XII – Holidays No Snap-back of Birthday Holiday in 2016 Article XIII – Regular Vacation Section (e) – No Change to Regular Vacation days or vacation schedule Section (d) – Eliminate Floating Vacation Days Article XIV – Graduated Vacation Provide five (5) days of Graduated Vacation after five years of service, with no additional days earned Article XVII – Seniority Section (h) – Assure that only the signatory company shall be obligated to panel rights Article XX – Health, Retirement and Other Benefits 1 - Terminate participation in 1974 Pension Plan and Trust 2 - Provide a contribution of 4% of gross wages into a Union Savings Plan (USP) 3 - Eliminate 3% contribution into USP in lieu of Retiree Health Care 4 - Eliminate 3% contribution into USP in lieu of 1974 Pension participation 5 - No change to Health Care, Dental and Vision Coverage 6 - No change to extended Health Care Coverage Article XXII – Miscellaneous Section (i) - Change current attendance control program to limit two (2) unexcused absences in 180 days or three (3) unexcused absences in 365 days Section (j) – Eliminate Memorial Days Article XXIII – Settlement of Disputes Eliminate all grievances filed but not resolved prior to the effective date of a new contract Article XXIX – Ratification and Termination of This Agreement Term of the agreement shall be seven years Page 3 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 122 of 144 Desc Main June 5, 2015 Memorandum of Understanding Regarding Job Opportunities Eliminate Appendix A – Wage Rates 1- Reduce Underground Wage Rates by $2.00 per hour 2- Reduce Preparation Plan Wage Rates by $2.50 per hour 3- Reduce Surface Mine Wage Rates by $3.00 per hour Memorandum of Understanding Regarding Alternative Schedules Incorporate an additional Alternative Schedule of 5 days-on / 2 days-off, 10 hour shifts Incorporate an additional Alternative Schedule of 6 days-on / 3 days-off, 10 hour shifts Memorandum of Understanding between the UMWA and Patriot Coal Company, on behalf of itself and the Signatory Companies Terminate the August 26, 2013 Memorandum of Understanding (Master MOU) VEBA Funding Agreement Eliminate Page 4 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 123 of 144 Exhibit 3 Third Proposal Desc Main Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Desc Main Document Page 124 of 144 June 12, 2015 THIRD PROPOSAL OF CHANGES TO 2013 COAL WAGE AGREEMENTS BETWEEN THE UNITED MINE WORKERS OF AMERICA AND HERITAGE COAL COMPANY, LLC EASTERN ASSOCIATED COAL, LLC APOGEE COAL COMPANY, LLC HOBET MINING, LLC COLONY BAY COAL COMPANY MOUNTAIN VIEW COAL COMPANY, LLC RIVERS EDGE COAL COMPANY, INC HIGHLAND MINING, LLC PINE RIDGE COAL COMPANY, LLC GATEWAY EAGLE COAL COMPANY, LLC Page 1 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Desc Main Document Page 125 of 144 June 12, 2015 THIRD PROPOSAL I. Terminate contracts of Heritage Coal Company, Colony Bay Coal Company, Mountain View Coal Company, Rivers Edge Coal Company, Highland Mining Company, Pine Ridge Coal Company, Gateway Eagle Coal Company’s Sugar Maple Mine, and Gateway Eagle Coal Company’s Farley Eagle Mine The operations/assets of these companies have been permanently closed, and they have no employees II. The following changes are proposed to the labor agreement for each remaining signatory company. Article and section numbers refer to 2013 Coal Wage Agreements and may vary in the 2013 Gateway Collective Bargaining Agreement Article I – Enabling Clause Retain successorship provision in a new contract but include language that allows purchaser, at its sole option, to sign a new contract that is substantially similar in terms and conditions to the 2013 Gateway Collective Bargaining Agreement as modified by this proposal, with language that makes clear the purchaser is not assuming or bound by any obligations of the selling Employer, including any of the selling Employer’s labor agreement obligations Article IA – Scope and Coverage Agreement applies only within the geographic boundaries and coal reserves that constitute each mine as defined by the mining permit Article II – Job Opportunity and Benefit Security (JOBS) Eliminate Article IX – Allowances Establish the number of Personal and Sick Leave days during a calendar year at two (2) during the term of the agreement Article X - Wage Increase Provide $0.25 per hour wage increase on July 1, 2017, July 1, 2019, and July 1, 2021 Page 2 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Desc Main Document Page 126 of 144 June 12, 2015 Article XII – Holidays Maintain holidays at eight per year, but parties may jointly agree to make the employee’s birthday a holiday that replaces either Memorial Day or Labor Day Article XIII – Regular Vacation Section (e) – No Change to Regular Vacation days or vacation schedule Section (d) – Eliminate Floating Vacation Days Article XIV – Graduated Vacation Provide five (5) days of Graduated Vacation to be used as Paid Time Off or to be paid in lieu of time off (employee’s choice) to employees with five years of seniority at the operation (not five years with the purchaser’s company), with no additional days earned Article XVII – Seniority Section (h) – Provide “Mother Mine” recall rights to Employees who are laid off from an operation by the purchaser Fill three (3) of five (5) new openings at Rocklick Plant, Fanco Plant and Loadout, Wells Plant, Black Oak Mine, Gateway Eagle Mine and CC10 Mine by providing panel rights at and among those facilities so long as they are owned by the purchaser or an affiliate of the purchaser Patriot’s subsidiaries will honor the panel rights of any Employee who is currently on a panel and eligible for recall to a Patriot subsidiary even if the mining operation where the Employee is employed is sold or otherwise conveyed to an unrelated third party, so long as such Patriot subsidiary remains owned by or affiliated with Patriot. Article XX – Health, Retirement and Other Benefits 1 - Terminate participation in 1974 Pension Plan and Trust 2 - Provide a contribution of 4% of gross wages into a 401(k) type savings plan 3 - Eliminate 3% contribution into USP in lieu of Retiree Health Care 4 - Eliminate 3% contribution into USP in lieu of 1974 Pension participation 5 - No change to Health Care, Dental and Vision Coverage 6 - No change to extended Health Care Coverage Page 3 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Desc Main Document Page 127 of 144 June 12, 2015 Article XXII – Miscellaneous Section (i) - Maintain current attendance control program Section (j) – Eliminate Memorial Days Article XXIII – Settlement of Disputes Grievances filed prior to or arising during the Employer’s ownership or operation of the mine remain with the Employer, and do not become the responsibility of a new owner of the operation Article XXIX – Ratification and Termination of This Agreement Term of the agreement shall be seven years Memorandum of Understanding Regarding Job Opportunities Eliminate Appendix A – Wage Rates 1- Reduce Underground Wage Rates by $1.50 per hour 2- Reduce Preparation Plan Wage Rates by $2.00 per hour 3- Reduce Surface Mine Wage Rates by $3.00 per hour Memorandum of Understanding Regarding Alternative Schedules Incorporate an additional Alternative Schedule of 6 days-on / 3 days-off, 10 hour rotating shifts Memorandum of Understanding between the UMWA and Patriot Coal Company, on behalf of itself and the Signatory Companies Purchaser assumes no obligations under the MOU VEBA Funding Agreement Royalty payments of $0.20 per ton will be made to the VEBA on all clean tons processed through Rocklick Plant and Wells Plant through December 31, 2018, unless there is legislation that provides other funding sources to the VEBA. Page 4 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 128 of 144 Exhibit 4 Fourth Proposal Desc Main Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 129 of 144 Desc Main From: "Lucha, Dale" Date: June 14, 2015 at 1:16:49 PM EDT To: Cecil Roberts Cc: "Bennett, Bob" , "Woodrum, John" Subject: 4th Proposal June 14, 2015 Fourth Proposal Cecil, This email is a general summary of the phone conversation we had yesterday regarding the status of our ongoing negotiations for a consensual labor agreement. Relative to the company’s Third Proposal of Changes to 2013 Coal Wage Agreements which we provided to the union on June 12th, Blackhawk has confirmed to Patriot that it is willing to provide additional job security and job opportunities to the represented operations it intends to acquire from Patriot. Accordingly, Patriot provides the union this Fourth Proposal, which amends its Third Proposal as follows, subject to defining language: Scope and Coverage Withdraw the current proposal that the agreement will apply only within the geographic boundaries and coal reserves that constitute each mine as defined by the mining permit, and instead recognize the concept that the contract will cover the operation of the coal lands, coal producing and coal preparation facilities that a new signatory employer acquires from Patriot; and further agree that the labor contract will apply to any relocation of an existing operation, and will apply to new operations of the Employer upon the union’s recognition, certification, or otherwise obtaining bargaining rights. Provide that the contract will apply to the Flying Eagle underground mine if it opens for coal production during the term of a new agreement, and that it will apply to other new operations of acquired coal lands upon the union’s recognition, certification, or otherwise obtaining bargaining rights during the term of this agreement. Job Opportunity Provide that three (3) of five (5) new classified job openings at the non-represented Black Stallion and Eagle 3 underground mines will be offered to current and future laid off panel members qualified to do the work who were employed at any UMWA-represented mining operation acquired from a Patriot subsidiary by Blackhawk. Seniority Provide panel rights at and among the UMWA-represented operations acquired from Patriot subsidiaries by Blackhawk, including recognition of panel rights for currently laid off employees 1 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 130 of 144 Desc Main of those operations Make job offers to senior qualified panel members to fill all new openings at Rocklick Plant, Fanco Plant and Loadout, Wells Plant, Black Oak Mine, Gateway Eagle Mine and CC10 Mine that are not filled by the active work force We also discussed that the reduction of hourly wage rates and scheduled hourly wage rate increases, and the amount of paid time off (i.e. Floating Vacation Days, Graduated Vacation Days and Personal and Sick Leave Days) are critical concerns of Blackhawk. I request that you consider the economics of the operations to be acquired and that those operations, which are for the second time in bankruptcy status, have production costs that exceed selling prices, and as such are operating at a loss. Blackhawk needs to run these operations profitably, which will require a reduction in labor cost and an increase in production and efficiency that can be aided by increased attendance. The Memorial Days the Union has scheduled at Patriot operations for Tuesday and Wednesday will not only cause our employees and your members to lose two days of income, it will cause economic hardship to Patriot at a time when income is critical for the payment of wages, providing of benefits, and procurement of safety and operating materials and supplies. I trust that you recognize Patriot is working with the Union in good faith to achieve the best possible results for both parties in our contract negotiations. UMWA closure of the mines next week will, of course, have no adverse financial impact on a potential purchaser, but will damage Patriot’s ability to maintain cash flow during this critical period. By addressing the union’s requests for job security and job opportunities, I hope the observance the Memorial Days may be avoided. Thanks for your prompt consideration of this proposal. We would appreciate a quick response. Dale _____________________________________________________________________________ 2 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 131 of 144 Exhibit 5 Fifth Proposal Desc Main Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 132 of 144 Desc Main FIFTH PROPOSAL OF CHANGES TO 2013 COAL WAGE AGREEMENTS BETWEEN THE UNITED MINE WORKERS OF AMERICA AND HERITAGE COAL COMPANY, LLC EASTERN ASSOCIATED COAL, LLC APOGEE COAL COMPANY, LLC HOBET MINING, LLC COLONY BAY COAL COMPANY MOUNTAIN VIEW COAL COMPANY, LLC RIVERS EDGE COAL COMPANY, INC HIGHLAND MINING, LLC PINE RIDGE COAL COMPANY, LLC GATEWAY EAGLE COAL COMPANY, LLC June 22, 2015 Page 1 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 133 of 144 Desc Main FIFTH PROPOSAL The following changes are proposed to the labor agreements that cover Black Oak mine, Gateway Eagle mine, CC10 mine, Rocklick Plant, Wells Plant, and Fanco Plant and Loadout. Article and section numbers refer to 2013 Coal Wage Agreements and may vary between the 2013 Coal Wage Agreement and the 2013 Gateway Collective Bargaining Agreement Article I – Enabling Clause Retain successorship provision in new contract but make it clear that Blackhawk does not assume the obligations of Patriot and that Blackhawk is not bound by any obligations of the selling Employer, including any of the selling Employer’s labor agreement obligations Article IA – Scope and Coverage The Valley (“Valley”) means coal lands being acquired by Blackhawk or a Blackhawk subsidiary that are currently controlled or owned by Eastern Associated Coal, LLC or another Patriot owned signatory entity and assigned to the Rocklick Plant or Wells Plant, and other coal lands controlled or owned by non-signatory Patriot subsidiaries which are assigned to the Rocklick Plant and Wells Plant, and also means the Fanco Preparation Plant and Loadout. A specific list of coal lands that comprise the Valley will be provided by Blackhawk. New contracts will cover these represented Valley Operations upon their acquisition by Blackhawk subsidiaries: Black Oak Mine Gateway Eagle Mine CC10 Mine Rocklick Plant Wells Plant Fanco Plant The new Agreement will cover Flying Eagle Underground Mine when it opens for coal production, and will cover any relocation of an existing operation, and will cover new operations in the Valley opened on coal lands acquired from Patriot or a Patriot Page 2 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 134 of 144 Desc Main subsidiary upon the union’s recognition, certification, or otherwise obtaining bargaining rights. Article II – Job Opportunity and Benefit Security (JOBS) Three (3) of five (5) new job openings at the current non-represented mining operations of Black Stallion and Eagle 3, and at all new underground non-represented mining operations in the Valley which are opened on coal lands acquired by Blackhawk or a Blackhawk subsidiary from a Patriot subsidiary, will be offered to qualified laid-off miners on the panels of: Black Oak Mine Gateway Eagle Mine CC10 Mine Wells Plant Rocklick Plant Fanco Plant If new openings at underground mines and preparation plants are not filled by job offers to panel members as listed above, then the senior laid-off miners on the panels of Apogee Coal Company LLC and Hobet Mining LLC who are certified, if required, and qualified to step in and perform the work of the job will be offered be offered three (3) of five (5) new openings at all non-represented underground mines in the Valley. Leasing, subleasing, or licensing out of coal lands or operations in the Valley shall be permitted where the lessee-licensee agrees in writing that all offers of employment shall first be made in accordance with paragraph 6 and paragraph 7 above. In the event a lessee-licensee has an existing UMWA panel obligation, it shall first recognize such obligation. Article IX – Allowances Provide three (3) Personal and Sick Leave days per calendar year during the term of the contract Article X - Wage Increase If the quarterly met coal benchmark index reaches $150 any time during 2016, then a $0.50 per hour raise will be provided at the beginning of the following quarter. If the quarterly met coal benchmark index is maintained or reaches $120 any time during 2017, then a $0.50 raise will be provided at the beginning of the following quarter. A guaranteed $0.50 per hour increase will be provided annually during the term of the agreement beginning on January 1, 2018. Article XII – Holidays Page 3 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 135 of 144 Desc Main Maintain holidays at eight per year Article XIII – Regular Vacation Section (e) – No Change to Regular Vacation days or vacation schedule Section (d) – Provide two (2) Floating Vacation Days per calendar year during the term of the contract Article XIV – Graduated Vacation Employees may take up to five (5) earned Graduated Vacation Days as leave time and will be paid for up to nine (9) additional days for which the employee may be eligible Article XVII – Seniority Panel rights for all new job openings will exist at and among represented underground and preparation plant operations in the Valley. Blackhawk represented subsidiaries will recognize the panel rights of laid-off miners who are properly paneled to underground mines and preparation plants in the Valley prior to a change of ownership and will recognize the panel rights of miners who properly panel to underground mines and preparation plants in the Valley if laid-off after a change of ownership from a Patriot subsidiary to a Blackhawk subsidiary. If new openings at underground mines and preparation plants are not filled by job offers made in accordance with the paragraph above, then the senior laid-off miners on the panels of Apogee Coal Company LLC and Hobet Mining LLC who are certified, if required, and qualified to step in and perform the work of the job will be offered all new openings at represented operations in The Valley. Article XX – Health, Retirement and Other Benefits 1 - Terminate participation in 1974 Pension Plan and Trust 2 - Provide an Employer contribution into a 401(k) type savings plan on the following basis: If Employee Contributes Then Employer Will Contribute Total of Employee and Employer Contributions 1% 2% 3% 2% 4% 6% 3% 6% 9% Page 4 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 136 of 144 Desc Main 3 - Eliminate 3% contribution into USP in lieu of Retiree Health Care 4 - Eliminate 3% contribution into USP in lieu of 1974 Pension participation 5 - No change to Health Care, Dental and Vision Coverage. Blackhawk will have its own UMWA Health Care, Dental and Vision plans in place at the time of acquisition. Copays, deductibles, maximum out of pocket expenses and other applicable allowances or requirements of the Health Care plan will transition at the time of the change of control without interruption. As an example, if an employee has an annual $250 deductible and has paid $200 of the deductible requirement prior to moving to Blackhawk’s Health Care plan, he will be required to pay only $50 during the balance of 2015 6 - No change to extended Health Care Coverage Article XXII – Miscellaneous Section (i) - Maintain current attendance control program Section (j) – Provide ten (10) Memorial Days that may be observed during the term of the new contract if the reason for the observance is national in scope and if the observance applies to signatory operations located in West Virginia and Pennsylvania controlled by signatory of employers whose contract contains Memorial Day provisions as well as to Blackhawk’s signatory operations. Article XXIII – Settlement of Disputes Blackhawk subsidiaries will honor non-monetary grievance settlements for grievances filed before the effective date of the Asset Purchase Agreement (APA). Article XXIX – Ratification and Termination of This Agreement The agreement shall terminate on December 31, 2022. Memorandum of Understanding Regarding Job Opportunities Eliminate the JOBS MOU. The job opportunities will be provided in Article II Appendix A – Wage Rates 1- Reduce Underground Wage Rates by $1.50 per hour, with the exception of Underground Rate 5. 2- Reduce Preparation Plan Wage Rates by $1.50 per hour Memorandum of Understanding Regarding Alternative Schedules Incorporate an additional Alternative Schedule of 6 days-on / 3 days-off, 10 hour shifts Page 5 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 137 of 144 Desc Main Memorandum of Understanding between the UMWA and Patriot Coal Company, on behalf of itself and the Signatory Companies Purchaser assumes no obligations under the MOU. Company will recognize this contract at Flying Eagle underground mine when it opens for coal production, and will recognize this contract at any operations where the union gains recognition, certification, or otherwise obtains bargaining rights. VEBA Funding Royalty payments of $0.20 per ton will be made to a trust which will then convey the payments to the VEBA on all clean tons processed through Rocklick Plant and Wells Plant through December 31, 2018, and on clean tons produced from Stanley Fork mine and Buffalo Mountain mine if processed through a Valley preparation plant, including Fanco, prior to December 31, 2018, unless there is legislation that provides other funding sources to the VEBA, at which time the obligation to make royalty payments will cease. Page 6 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 138 of 144 Exhibit 6 Sixth Proposal Desc Main Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 139 of 144 Desc Main SIXTH PROPOSAL OF CHANGES TO 2013 COAL WAGE AGREEMENTS BETWEEN THE UNITED MINE WORKERS OF AMERICA AND HERITAGE COAL COMPANY, LLC EASTERN ASSOCIATED COAL, LLC APOGEE COAL COMPANY, LLC HOBET MINING, LLC COLONY BAY COAL COMPANY MOUNTAIN VIEW COAL COMPANY, LLC RIVERS EDGE COAL COMPANY, INC HIGHLAND MINING, LLC PINE RIDGE COAL COMPANY, LLC GATEWAY EAGLE COAL COMPANY, LLC June 22, 2015 Page 1 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 140 of 144 Desc Main SIXTH PROPOSAL The following changes are proposed to the labor agreements that cover Black Oak mine, Gateway Eagle mine, CC10 mine, Rocklick Plant, Wells Plant, and Fanco Plant and Loadout. Article and section numbers refer to 2013 Coal Wage Agreements and may vary between the 2013 Coal Wage Agreement and the 2013 Gateway Collective Bargaining Agreement Article I – Enabling Clause Retain successorship provision in new contract but make it clear that Blackhawk does not assume the obligations of Patriot and that Blackhawk is not bound by any obligations of the selling Employer, including any of the selling Employer’s labor agreement obligations Article IA – Scope and Coverage The Valley (“Valley”) means coal lands being acquired by Blackhawk or a Blackhawk subsidiary that are currently controlled or owned by Eastern Associated Coal, LLC or another Patriot owned signatory entity and assigned to the Rocklick Plant or Wells Plant, and other coal lands controlled or owned by non-signatory Patriot subsidiaries which are assigned to the Rocklick Plant and Wells Plant, and also means the Fanco Preparation Plant and Loadout. A specific list of coal lands that comprise the Valley will be provided by Blackhawk. New contracts will cover these represented Valley Operations upon their acquisition by Blackhawk subsidiaries: Black Oak Mine Gateway Eagle Mine CC10 Mine Rocklick Plant Wells Plant Fanco Plant The new Agreement will cover Flying Eagle Underground Mine when it opens for coal production, and will cover any relocation of an existing operation, and will cover new operations in the Valley opened on coal lands acquired from Patriot or a Patriot Page 2 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 141 of 144 Desc Main subsidiary upon the union’s recognition, certification, or otherwise obtaining bargaining rights. Article II – Job Opportunity and Benefit Security (JOBS) Three (3) of five (5) new job openings at the current non-represented underground mining operations of Black Stallion and Eagle 3, and at all new underground nonrepresented mining operations in the Valley which are opened on coal lands acquired by Blackhawk or a Blackhawk subsidiary from a Patriot subsidiary, will be offered to qualified laid-off miners on the panels of: Black Oak Mine Gateway Eagle Mine CC10 Mine Wells Plant Rocklick Plant Fanco Plant If new openings at underground mines and preparation plants are not filled by job offers to panel members as listed above, then the senior laid-off miners on the panels of Apogee Coal Company LLC and Hobet Mining LLC who are certified, if required, and qualified to step in and perform the work of the job will be offered be offered three (3) of five (5) new openings at all non-represented underground mines in the Valley. Leasing, subleasing, or licensing out of coal lands or operations in the Valley shall be permitted where the lessee-licensee agrees in writing that all offers of employment shall first be made in qualified, certified panel members, as defined in Article XVII of this proposal, who have the ability to step in and perform the work of the job. In the event a lessee-licensee has an existing UMWA panel obligation, it shall first recognize such obligation. Article IX – Allowances Provide three (3) Personal and Sick Leave days per calendar year during the term of the contract Article X - Wage Increase If the quarterly met coal benchmark index reaches $150 any time during 2016, then a $0.65 per hour raise will be provided at the beginning of the following quarter. If the quarterly met coal benchmark index is $120 any time during 2017, then a $0.65 raise will be provided at the beginning of the following quarter. A guaranteed $0.65 per hour increase will be provided annually during the term of the agreement beginning on January 1, 2018. Page 3 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 142 of 144 Desc Main Article XII – Holidays Maintain holidays at eight per year Article XIII – Regular Vacation Section (e) – No Change to Regular Vacation days or vacation schedule Section (d) – Provide two (2) Floating Vacation Days per calendar year during the term of the contract Article XIV – Graduated Vacation Employees may take up to five (5) earned Graduated Vacation Days as leave time and will be paid for up to nine (9) additional days for which the employee may be eligible Article XVII – Seniority Panel rights for all new job openings will exist at and among represented underground and preparation plant operations in the Valley. Blackhawk represented subsidiaries will recognize the panel rights of laid-off miners who are properly paneled to underground mines and preparation plants in the Valley prior to a change of ownership and will recognize the panel rights of miners who properly panel to underground mines and preparation plants in the Valley if laid-off after a change of ownership from a Patriot subsidiary to a Blackhawk subsidiary. If new openings at underground mines and preparation plants are not filled by job offers made in accordance with the paragraph above, then the senior laid-off miners on the panels of Apogee Coal Company LLC and Hobet Mining LLC who are certified, if required, and qualified to step in and perform the work of the job will be offered all new openings at represented operations in The Valley. Article XX – Health, Retirement and Other Benefits 1 - Terminate participation in 1974 Pension Plan and Trust 2 - Provide an Employer contribution into a 401(k) type savings plan on the following basis: If Employee Contributes Then Employer Will Contribute Total of Employee and Employer Contributions 0% 1% 2% 3% 3% 4% 5% 6% 3% 5% 7% 9% Page 4 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 143 of 144 Desc Main 3 - Eliminate 3% contribution into USP in lieu of Retiree Health Care 4 - Eliminate 3% contribution into USP in lieu of 1974 Pension participation 5 - No change to Health Care, Dental and Vision Coverage. Blackhawk will have its own UMWA Health Care, Dental and Vision plans in place at the time of acquisition. Copays, deductibles, maximum out of pocket expenses and other applicable allowances or requirements of the Health Care plan will transition at the time of the change of control without interruption. As an example, if an employee has an annual $250 deductible and has paid $200 of the deductible requirement prior to moving to Blackhawk’s Health Care plan, he will be required to pay only $50 during the balance of 2015 6 - No change to extended Health Care Coverage Article XXII – Miscellaneous Section (i) - Maintain current attendance control program Section (j) – Provide ten (10) Memorial Days that may be observed during the term of the new contract if the reason for the observance is national in scope and if the observance also applies to signatory operations located in West Virginia and Pennsylvania which are controlled by signatory of employers other than Blackhawk whose contracts contains Memorial Day provisions. Article XXIII – Settlement of Disputes Blackhawk subsidiaries will honor non-monetary grievance settlements for grievances filed before the effective date of the Asset Purchase Agreement (APA). Article XXIX – Ratification and Termination of This Agreement The agreement shall terminate on December 31, 2020. Memorandum of Understanding Regarding Job Opportunities Eliminate the JOBS MOU. The job opportunities will be provided in Article II Appendix A – Wage Rates 1- Reduce Underground Wage Rates by $1.25per hour, with the exception of Underground Rate 5. 2- Reduce Preparation Plan Wage Rates by $1.25 per hour Memorandum of Understanding Regarding Alternative Schedules Incorporate an additional Alternative Schedule of 6 days-on / 3 days-off, 10 hour shifts Page 5 Case 15-32450-KLP Doc 524 Filed 07/16/15 Entered 07/16/15 21:48:35 Document Page 144 of 144 Desc Main Memorandum of Understanding between the UMWA and Patriot Coal Company, on behalf of itself and the Signatory Companies Purchaser assumes no obligations under the MOU. Company will recognize this contract at Flying Eagle underground mine when it opens for coal production, and will recognize this contract at any operation where the union gains recognition, certification, or otherwise obtains bargaining rights. VEBA Funding A royalty of $0.20 per ton will be paid on clean tons produced from coal lands and operations acquired in this transaction from Patriot or a Patriot subsidiary if processed through a Valley preparation plant, including Fanco, prior to December 31, 2018; unless there is legislation that provides other funding sources to the VEBA, at which time the obligation to make royalty payments will cease. The payments will be made to a trust which will then convey the royalty payment to the VEBA. Page 6