UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF ALABAMA SOUTHERN DIVISION In re: FM COAL, LLC, et al., Debtors. 1 ) ) ) ) ) ) Chapter 11 Case No. 20-02783 (TOM) Joint Administration Requested DECLARATION OF DAVID BAKER AND TIMOTHY TUREK IN SUPPORT OF CHAPTER 11 PETITIONS AND FIRST DAY MOTIONS David Baker and Timothy Turek 2 each hereby declare under penalty of perjury: Qualifications 1. I, David Baker, am over the age of 21 years. I am the Managing Partner of Aurora Management Partners Inc., a Georgia corporation (“Aurora”). Since November 2019, when FM Coal, LLC (“FM Coal”) and its subsidiaries (each, a “Debtor” and collectively, the “Debtors”) retained Aurora, I have been actively involved in the evaluation of the Debtors’ liquidity, cash management system, financial forecasting and contingency planning. I am familiar with the dayto-day operations of the Debtors, their business and financial affairs, books and records. The Debtors have designated Aurora to serve as the Debtors’ Financial Advisor in these chapter 11 cases. I am a graduate of University of North Carolina at Chapel Hill with a degree in accounting. I have over forty years of diversified business experience in restructuring, financial management and accounting. I have extensive experience in the development of reorganization 1 The Debtors in these cases, along with the last four digits of each Debtor’s federal tax identification number, are: FM Coal, LLC (1768); Cane Creek, LLC (3207); M. S. & R. Equipment Co., Inc. (3487); Cedar Lake Mining, Inc. (6132); Best Coal, Inc. (2487); and Xinergy of Alabama, Inc. (3009). The Debtors’ physical address is 4650 Flat Top Road, Graysville, Alabama 35073 and the mailing address is PO Box 1608, Jasper, Alabama 35502. The Debtors have filed a motion for joint administration with the Court. 2 All references in the singular herein not specifically attributed to Mr. Baker or Mr. Turek can be testified to by each. 4837-1545-5416.18 plans, creditor negotiations, business plan preparation and long-term forecasting, developing and implementing cost reduction programs, and financial management of public and privately held companies. I have advised companies, boards, investors, and lender groups and served in interim management roles and led assignments in numerous industries. 2. I, Timothy Turek, am over the age of 21 years. I am the Senior Managing Director of Aurora Since November 2019, when the Debtors retained Aurora, I have been actively involved in the evaluation of the Debtors’ liquidity, cash management system, financial forecasting and contingency planning. I am familiar with the day-to-day operations of the Debtors, their business and financial affairs, books and records. I am a graduate of Western Illinois, am a registered Certified Public Accountant and a Certified Turnaround Professional. I have over twenty years of diversified business experience in restructuring, financial management and accounting. I have extensive experience in the development of reorganization plans, creditor negotiations, business plan preparation and long-term forecasting, developing and implementing cost reduction programs, and financial management of public and privately held companies. I have advised companies, boards, investors, and lender groups and served in interim management roles and led assignments in numerous industries. 3. I submit this affidavit (this “First Day Declaration”) (i) in support of the Debtors’ voluntary petitions for relief under chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”); (ii) in support of the Debtors’ petitions and contemporaneously filed requests for relief in the form of motions and applications (collectively, the “First Day Motions”); and (iii) to assist the Court and other interested parties in understanding the circumstances giving rise to the commencement of these chapter 11 cases. 2 4. On the date hereof (the “Petition Date”), each of the Debtors filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. The First Day Motions seek relief to allow the Debtors to perform and meet the obligations necessary to fulfill their duties as debtorsin-possession and minimize any adverse effects that filing for bankruptcy protection may have on their businesses. I am familiar with the contents of each First Day Motion (including the exhibits thereto) and believe that the relief sought in each First Day Motion: (i) is necessary to enable the Debtors to operate in chapter 11 with minimum disruption or loss of productivity or value; (ii) constitutes a critical element in achieving a successful chapter 11 process for the Debtors; (iii) best serves the Debtors’ estates and creditors’ interests; and (iv) is, in those instances where the relief seeks immediate payment of prepetition amounts, necessary to avoid immediate and irreparable harm. 5. Except as otherwise indicated herein, all of the facts set forth in this First Day Declaration are based upon my personal knowledge, information supplied to me by other members of the Debtors’ management, professionals and/or advisors, my review of relevant documents or based upon my experience and knowledge of the Debtors’ industry, operations and financial condition. 6. If called upon to testify, I could and would testify competently to the facts set forth in this First Day Declaration. I am authorized to submit this First Day Declaration on behalf of the Debtors. 7. To familiarize the Court with the Debtors, their businesses, the circumstances leading to these chapter 11 cases, and the relief the Debtors are seeking in the First Day Motions, I have organized this First Day Declaration as follows: Part I provides a general overview of the Debtors’ corporate history and business operations; 3 Part II provides an overview of the Debtors’ prepetition capital structure and other liabilities; Part III describes the circumstances leading to these chapter 11 cases; and Part IV sets forth the evidentiary basis for the relief requested in each of the First Day Motions Part I Corporate History and Business Operations A. Corporate History 8. FM Coal was formed on July 28, 2017. Shortly thereafter, on September 1, 2017, FM Coal acquired (the “Acquisition”) from Otis R. “Randy” Robinson and Kendall “Kenny” Robinson (collectively, the “Sellers”) the shares and/or membership interests in the other Debtors. As part of the Acquisition, the Sellers also transferred certain equipment to FM Coal, and FM Coal assumed certain liabilities. The Acquisition was funded by new senior secured financing totaling $70 million, which also included the refinancing of certain existing debt, transaction related expenses and FM Coal’s acquisition of additional equipment. 9. Until August 2019, FM Coal’s operations were managed by Freddy Hunt, who became Chief Operating Officer of FM Coal on or about September 1, 2017, when FM Coal acquired the stock and/or membership interests in the other Debtors. Mr. Hunt was a 50% owner of FM Coal until his separation from FM Coal in July 2019. Since Mr. Hunt’s separation from FM Coal, Michael Costello has owned 100% of FM Coal. Upon Mr. Hunt’s separation from FM Coal, John McNab began leading the day-to-day operations of FM Coal. 4 B. Business Operations 10. The Debtors are engaged in the business of extracting, processing and marketing metallurgical coal and thermal coal from surface mines. The Debtors’ customers include steel and coke producers, industrial customers and electric utilities. 11. The Debtors have four mines that are currently operational, two of which are located in Jefferson County, Alabama (the Flat Top Mine and the Sloan Mountain 3 Mine). The operational mines in Jefferson County account for 71% of the Debtors’ total revenue and 59% of the total tons of coal produced by the Debtors. Further, the mining operations at the Flat Top Mine in Jefferson County (which currently account for 41% of the Debtors’ revenue), will soon increase because the Debtors’ highwall miner was moved from the Dutton Hill Mine in Walker County to the Flat Top Mine in August 2020, and production with the highwall miner is scheduled to begin at the Flat Top Mine in September 2020. The remaining two operational mines are in Walker County (The Choctaw Mine and the Narley Mine No. 3), which combined, account for less than 30% of the Debtors’ total revenue and approximately 40% of the total tons of coal produced by the Debtors. Operations at the Choctaw Mine currently consist of highwall mining performed by a third party mining contractor. This contractor is scheduled to continue mining through September 2020 and could continue through the end of the year. The Narley Mine No. 3 in Walker County accounts for the smallest portion of the Debtors’ total revenue and total coal production of the four active mines. 12. In addition to the four operational mines, the Debtors own or lease sixteen mines that are non-operational — twelve mines at which reclamation is in process, and four mines at which the Debtors have never begun mining activities. Those assets are located in Jefferson, Walker, Marion, Winston and Cullman Counties respectively. The Debtors also own or lease 5 two coal washing plants which are currently in use: the North Pratt Washer in Jefferson County; and the Choctaw Washer in Walker County. The Debtors currently have sufficient bonds in place for the mines in reclamation and are seeking to authorization to maintain, continue and renew, in their sole discretion, their surety bond program. 13. As covered in more detail below and the chart attached hereto as Exhibit A and incorporated herein by reference, the Flat Top Mine, the North Pratt Coal Washing Plant and the Cane Creek mine are all owned by Debtor Cane Creek, LLC (“Cane Creek”). All of the other mines are leased. Flat Top Mine 14. The Flat Top Mine (“Flat Top”) is an active mining operation located in Jefferson County and currently produces 41% of the Debtors’ revenue. Flat Top is owned by Debtor Cane Creek, LLC (“Cane Creek”) but is mined by Cedar Lake. The mining operations at Flat Top will increase when the highwall mining equipment, formerly at the Dutton Hill Mine, is put into use at Flat Top. This equipment was moved to Flat Top in August 2020, and production is scheduled to begin in September 2020. Flat Top is fully staffed with employees working ten hour shifts. Sloan Mountain 3 Mine 15. The Sloan Mountain 3 Mine (“Sloan #3”) is an active mining operation located in Jefferson County and currently produces 31% of the Debtors’ revenue. Sloan #3 is mined by Debtor M. S. & R. Equipment Co., Inc. (“MS&R”). North Pratt Coal Washing Plant 16. The North Pratt Coal Washing Plant (the “North Pratt Washer”) is an active coal prep operation located in Jefferson County. The North Pratt Washer is owned by Debtor Cane 6 Creek but is operated by Debtor Cedar Lake Mining, Inc. (“Cedar Lake”) in connection with the mining activities at Flat Top. Choctaw Mine and Coal Washing Plant 3 17. The Choctaw Mine and Coal Washing Plant (collectively, “Choctaw”) is an active mining and coal prep operation located in Walker County and operated by Debtor Cedar Lake. Choctaw is currently operated by employees of the Debtors and a separate mining subcontractor. The mining subcontractor is scheduled to continue mining through September 2020, with the possibility of continued mining for the remainder of the year, depending on additional bonding requirements. Currently, Choctaw and the Narley Mine No. 3 combined provide less than 30% of the Debtors’ total revenue and approximately 41% of the total tons of coal produced by the Debtors. Narley Mine No. 3 18. The Narley Mine No. 3 (“Narley #3”) is an active mining operation located in Walker County. Narley #3 is mined by Debtor Best Coal, Inc. (“Best Coal”). Narley #3 accounts for the smallest portion of the Debtors’ total revenue and total coal production of the Debtors’ four active mines. Gooden Creek 2 Mine 19. The Gooden Creek 2 Mine (“Gooden Creek #2”) is located in Walker, Marion and Winston Counties. Cedar Lake operated Gooden Creek #2 but has ceased mining operations. Reclamation is currently in process at Gooden Creek #2. 3 The Choctaw Mine and Coal Washing Plant may be referred to in some documents as “Robbins Road”, because that is the name of one of the permits issued at the Choctaw mine. 7 Buttahatchee Mine 20. The Buttahatchee Mine (“Buttahatchee”) is located in Walker County, Alabama. Cedar Lake operated Buttahatchee but ceased mining operations due to unacceptably high overburden ratios and other factors. Reclamation is currently in process at Buttahatchee. Dutton Hill Mine 21. The Dutton Hill Mine (“Dutton Hill”) is located in Walker County, Alabama. Cedar Lake operated Dutton Hill but ceased mining operations in 2020. Reclamation is currently in process at Dutton Hill. Cane Creek Mine 22. Cane Creek Mine is located in Walker County, Alabama. Cane Creek Mine is owned by Debtor Cane Creek but was operated by Cedar Lake. Mining operations have ceased and reclamation is currently in process at Cane Creek Mine. Coal Valley East Mine 23. Alabama. The Coal Valley East Mine (“Coal Valley East”) is located in Walker County, Cedar Lake operated Coal Valley East but has ceased mining operations. Reclamation is currently in process at Coal Valley East. Little Spring Creek Mine 24. The Little Spring Creek Mine (“Little Spring Creek”) is located in Walker County, Alabama. Cedar Lake operated Little Spring Creek but ceased mining operations due to unacceptably high overburden ratios and other factors. Reclamation is currently in process at Little Spring Creek. 8 Reese’s Branch Mine 25. The Reese’s Branch Mine (“Reese’s Branch”) is located in Walker County, Alabama. Cedar Lake operated Reese’s Branch but has ceased mining operations. Reclamation is currently in process at Reese’s Branch. Reid School Mine 26. The Reid School Mine (“Reid School”) is located in Walker County, Alabama. Cedar Lake operated Reid School but has ceased mining operations. The final stages of reclamation are currently in process at Reid School. Coal Valley Mine 27. The Coal Valley Mine (“Coal Valley”) is located in Walker County, Alabama. Debtor Xinergy of Alabama, Inc. (“Xinergy”) operated Coal Valley but has ceased mining operations. Reclamation is currently in process at Coal Valley. Sloan Mountain 1 Mine 28. The Sloan Mountain 1 Mine (“Sloan #1”) is located in Jefferson County, Alabama. MS&R operated Sloan #1 but has ceased mining operations. Reclamation is currently in process at Sloan #1. Sloan Mountain 2 Mine 29. The Sloan Mountain 2 Mine (“Sloan #2”) is located in Jefferson County, Alabama. MS&R operated Sloan #2 but has ceased mining operations. Reclamation is currently in process at Sloan #2. 9 Narley Mine No. 2 30. The Narley Mine No. 2 (“Narley #2”) is located in Walker County, Alabama. Best Coal operated Narley #2 but ceased mining operations due to unacceptably high overburden ratios and other factors. Reclamation is currently in process at Narley #2. Carbon Hill Mine 31. The Carbon Hill Mine (“Carbon Hill”) is located in Walker County, Alabama and is leased by Cedar Lake. However, Cedar Lake has not initiated any mining operations at Carbon Hill. Bremen Mine 32. The Bremen Mine (“Bremen”) is located in Cullman County, Alabama and is leased by Cedar Lake. Cedar Lake assumed reclamation liability at Bremen when Cedar Lake acquired its interest in Bremen. However, Cedar Lake has not initiated any mining operations at Bremen, and it is unlikely that Cedar Lake will ever do so. Gayosa Mine 33. The Gayosa Mine (“Gayosa”) is located in Walker County, Alabama and is leased by Cedar Lake. However, Cedar Lake has not initiated any mining operations at Gayosa. Jagger Mine 34. Jagger Mine (“Jagger”) is located in Walker County, Alabama and is leased by Best Coal. However, Best Coal has not initiated any mining operations at Jagger. 10 Summary Table of Operations 35. The following table shows the Debtors’ operations as explained above and as shown on the Debtors’ organizational and operations chart attached hereto as Exhibit A and incorporated herein by reference: 1. Operation Flat Top Mine 2. 3. Sloan Mountain 3 Mine North Pratt Washer 4. 5. 6. Choctaw Mine and Washer Narley Mine No. 3 Gooden Creek 2 Mine 7. 8. 9. Buttahatchee Mine Dutton Hill Mine Cane Creek Mine 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. Coal Valley East Mine Little Spring Creek Mine Reese’s Branch Mine Reid School Mine Coal Valley Mine Sloan Mountain 1 Mine Sloan Mountain 2 Mine Narley Mine No. 2 Carbon Hill Mine Bremen Mine Gayosa Mine Jagger Mine C. Debtor Cedar Lake (Mine owned by Cane Creek, LLC) MS&R Cedar Lake (washer facility owned by Cane Creek, LLC) Cedar Lake Best Coal Cedar Lake Cedar Lake Cedar Lake Cedar Lake (Mine owned by Cane Creek, LLC) Cedar Lake Cedar Lake Cedar Lake Cedar Lake Xinergy MS&R MS&R Best Coal Cedar Lake Cedar Lake Cedar Lake Best Coal AL County Jefferson Status Active Jefferson Jefferson Active Active Walker Walker Walker / Marion / Winston Walker Walker Walker Active Active In reclamation In reclamation In reclamation In reclamation Walker Walker Walker Walker Walker Jefferson Jefferson Walker Walker Cullman Walker Walker In reclamation In reclamation In reclamation In reclamation In reclamation In reclamation In reclamation In reclamation Not begun Not begun Not begun Not begun Customers 36. The Debtors’ customer base includes steel and coke producers, industrial customers and electric utilities. Currently, approximately 62% of the Debtors’ sales are through 11 Alabama Coal Cooperative which, together with other Alabama coal producers, supplies coal to Alabama Power Company. Debtors Cedar Lake, Cane Creek, LLC and Best Coal are members of Alabama Coal Cooperative. There is an existing contract between Alabama Coal Cooperative and Alabama Power Company (and/or The Southern Company) that unless extended will expire under its terms on December 31, 2022. Approximately 38% of the Debtors’ remaining sales are to seven other customers, which are Southern Coal-Argos, Carmeuse, ABC Coke, Coal Network, Globe Metallurgical, Blue Stone Coke and Javelin. D. Employees 37. The Debtors currently employ approximately 153 individuals on a full-time basis, which number changes from time to time in the ordinary course. The Debtors’ employees include miners, truck and equipment operators, production oversight management, office staff, human resource administration, senior accountant, controller and chief operating officer. All of the Debtors’ employees are paid through payroll and most of the Debtors’ employees are paid on an hourly basis. 38. The Debtors currently intend to, and pursuant to certain of the First Day Motions are seeking authority to, continue making all payments to their current employees and all payments with respect to government wage related regulations, including workers’ compensation programs, among others. Part II Corporate and Capital Structure A. The Debtors’ Organizational Structure 39. The following chart shows the Debtors’ basic organizational structure. The Debtors’ full organizational and operations chart is attached hereto as Exhibit A and incorporated herein by reference. 12 B. Capital Structure 40. As of the Petition Date, FM Coal has approximately $56 million in total aggregate principal amount of funded debt obligations. On September 1, 2017, FM Coal, as “Borrower”, the other Debtors, as “Subsidiary Guarantors”, Key Bank National Association, as “Administrative Agent”, “Swing Line Lender”, “Issuing Agent” and “Collateral Agent” (the “Agent”), and the lenders from time to time thereto (collectively, the “Lenders”), entered into that certain credit agreement, dated as of September 1, 2017 (such credit agreement, together with additional documents and ancillary agreements, as may have been amended, restated, supplemented, or otherwise modified from time to time, the “Credit Agreement”). The Credit Agreement provides for the making of loans to FM Coal and the issuance of letters of credit (collectively, the “Letters of Credit”) for the account of FM Coal (the “Credit Facility”). More specifically, the Credit Agreement provides for loans in the form of a term loan in the maximum principal amount of $70 million (the “Term Loan”) and a revolving loan in the maximum 13 principal amount of $10 million (the “Revolver”). As of the Petition Date, the principal balance under the Term Loan was $50 million and the principal balance under the Revolver was $6 million. 4 Additionally, FM Coal has $4 million securing an unfunded Letter of Credit (in support of reclamation surety bonds) issued under the Revolver. No additional financing is available under the Credit Facility. 41. The Term Loan and the Revolver (collectively, the “Loans”) bear interest at a rate of four hundred twenty five basis points (4.25%) in excess of the London Interbank Offered Rate (“LIBOR”) (and at no time may LIBOR be less than zero), plus a default rate of two hundred basis points (2.00%). The Loans are secured by liens on substantially all of the Debtors’ assets except for certain equipment subject to purchase money security interests and certain operating leases. 42. FM Coal used the proceeds of the Loans (i) to finance a portion of the consideration paid to the Sellers as part of the Acquisition, (ii) to finance the payment of fees and expenses incurred in connection with the Acquisition, (iii) to refinance and replace certain indebtedness of the Debtors and (iv) with respect to the Revolver, to fund $6 million of the $20 million of principal payments made on the Term Loan. C. Additional Obligations Employee Wage and Benefit Obligations 43. The Debtors currently employ approximately 153 individuals on a full-time basis, which number changes from time to time in the ordinary course. The employees include miners, truck and equipment operators, production oversight management, office staff, human resource 4 The maximum principal amount of the Revolver is $10 million, of which, $6 million is funded and $4 million is securing an unfunded Letter of Credit. 14 administration, senior accountant, controller and chief operating officer. All of the Debtors’ employees are paid through payroll and are hourly or salaried employees. 44. The Debtors’ employees are paid every two weeks. Prior to the Petition Date, the Debtors paid approximately $325,000 in the aggregate each pay period on account of employee salary compensation. The last prepetition payroll payment made to the Debtors’ employees occurred on August 28, 2020, and the next payroll payment is due to be made on September 11, 2020. 45. The Debtors also provide their employees (and the families of the Debtors’ employees) with health and welfare benefit plans, including health insurance, dental insurance and vision insurance. The average monthly premium amount paid by the Debtors for the health, dental and vision insurance for the Debtors’ employees and their families is $250,000. Additionally, the Debtors provide their employees with paid time off, and $100 bonuses if no accidents or equipment damage occur in a given month. Other employee compensation and benefits are more specifically set forth in the “Wages Motion” (as defined in Section IV of this First Day Declaration). Insurance Obligations 46. The Debtors maintain multiple insurance policies for workers’ compensation, general liability, commercial automobile, equipment, general liability, site pollution liability and excess liability. The aggregate annual premium for the Debtors’ insurance policies is approximately $1,240,000, plus applicable taxes and surcharges. The Debtors estimate that, as of the Petition Date, approximately $117,806 in premiums will fall due within the first 21 days of these cases. 15 47. Some (but not all), of the Debtors’ insurance policies are financed through premium financing agreements with Intrust Bank, N.A., as more particularly described in the “Insurance Motion” (as defined in Section IV of this First Day Declaration). The combined total monthly payment for the premium financing agreements is approximately $67,806 each month. The next monthly payment for the premium financing agreements is due on September 3, 2020. Tax Obligations 48. In connection with the normal operation of their businesses, the Debtors collect, withhold and/or incur (i) production taxes, (ii) excise taxes, (iii) environmental and safety fees and assessments, (iv) sales taxes and use taxes, (v) employment taxes, (vi) franchise taxes and privilege taxes and (vii) property taxes, together with other taxes, fees and charges described in the “Taxes Motion” (as defined in Section IV of this First Day Declaration). Asset Retirement Obligations 49. The Debtors’ asset retirement obligations include the reclamation of surface land, refuse areas, slurry ponds and support facilities in accordance with reclamation laws as required by each mining permit. As of May 31, 2020, the Debtors’ estimated reclamation liability was $14 million. As set forth in the “Surety Bond Program Motion” (as defined in Section IV of this First Day Declaration), the Debtors have sufficient surety bonds in place to cover these obligations, and the Debtors are seeking to authorization to maintain, continue and renew, in their sole discretion, their surety bond program. Legal Proceedings 50. The Debtors are subject to a number of lawsuits in both state and federal court. With the exception of two (2) cases filed in 2013 and 2014 seeking workers compensation benefits, most of this litigation is still at the early stages. The Debtors may incur costs not only 16 based on the eventual outcome of these proceedings but also through legal and administrative costs incurred throughout the course of these proceedings. As of the Petition Date, the Debtors are subject to the following lawsuits: (i) Amy Cook v. Cedar Lake Mining, Inc., Dyno Nobel, Inc. and Timothy Lemmons, Case No. 64-CV-2020-900142 in the Circuit Court of Walker County, Alabama. This case was filed on May 19, 2020 in connection with the death of Micky Cook, seeking workers compensation benefits and damages for negligence, wantonness and strict liability in amounts not specified. (ii) Intertractor Am. Corp. v. Cedar Lake Mining, Inc., Case No. 6:20-cv- 00358 in the United States District Court in the Northern District of Alabama. This case was filed on March 17, 2020 seeking damages for breach of contract. The amount claimed is $359,800.60 plus attorneys’ fees, court costs and interest. (iii) Thompson Tractor Co., Inc. v. Best Coal, Inc. and FM Coal, LLC, Case No. 01-CV-2020-900975 in the Circuit Court of Jefferson County, Alabama. This case was filed on March 10, 2020 seeking damages for breach of contract. The amount claimed is $184,439.72 plus prejudgment interest, post-judgment interest and court costs. (iv) Thompson Tractor Co., Inc. v. M. S. & R. Equip. Co., Inc. and FM Coal, LLC, Case No. 01-CV-2020-900977 in the Circuit Court of Jefferson County, Alabama. This case was filed on March 10, 2020 seeking damages for breach of contract. The amount claimed is $199,551.47 plus prejudgment interest, post-judgment interest and court costs. (v) Thompson Tractor Co., Inc. v. Cedar Lake Mining, Inc. and FM Coal, LLC, Case No. 01-CV-2020-900978 in the Circuit Court of Jefferson County, Alabama. This 17 case was filed on March 10, 2020 seeking damages for breach of contract. The amount claimed is $957,872.04 plus prejudgment interest, post-judgment interest and court costs. (vi) Pumpelly Oil Acquisition LLC v. FM Coal, LLC, Cedar Lake Mining, Inc., Best Coal, Inc. and M. S. & R. Equip. Co., Inc., Case No. 6:20-cv-00322 in the United States District Court in the Northern District of Alabama. This case was filed on March 9, 2020 alleging a contract dispute. The amount claimed is $957,235.93 plus costs, fees and attorneys’ fees. (vii) Warrior Met Coal Mining, LLC and Warrior Met Coal Land, LLC v. Cedar Lake Mining, Inc., Case No. 63-CV-2020-900154 in the Circuit Court of Tuscaloosa County, Alabama. This case was filed on February 7, 2020 seeking a declaratory judgment for removal of equipment and cost of storage. The amount claimed is compensatory damages in excess of $10,000. (viii) Dymo Nobel, Inc. v. M. S. & R. Equip. Co., Inc. and Cedar Lake Mining, Inc., Case No. 2:10-cv-01782 in the United States District Court in the Northern District of Alabama. This case was filed on October 31, 2019 seeking damages for breach of contract. The amount claimed is $1,242,336.64 plus interest, attorneys’ fees and court costs. (ix) Hugh Darty v. Cedar Lake Mining, Inc. and Otis R. Robinson, Jr., Case No. 01-CV-2017-000408 in the Circuit Court of Jefferson County, Alabama (transferred from the Circuit Court of Walker County, Alabama, Case No: 61-CV-2016-900349). This case was filed on October 6, 2016 seeking unspecified damages for breach of contract. (x) Scott Rigsby v. M. S. & R. Equip. Co., Inc., Case No. 64-CV-2014- 900247 in the Circuit Court of Walker County, Alabama. This case was filed on May 27, 2014 seeking workers compensation benefits in an amount not specified. 18 (xi) Mack Cooper v. Cedar Lake Mining, Inc., Case No. 64-CV-2013-900498 in the Circuit Court of Walker County, Alabama. This case was filed on December 2, 2013 seeking workers compensation benefits in an amount not specified. Part III Circumstances Leading to Chapter 11 A. The State of the Equipment Fleet 51. The single greatest challenge faced by the Debtors is the state of their equipment fleet. Since the Acquisition, the amount of investment in the Debtors’ equipment has lagged behind the needed capital expenditures in light of the Debtors’ continued operations. The current average age of the thirty-five highest value items of equipment is 10 years, and FM Coal has been unable to acquire the needed amount of new equipment since the Acquisition. Further, with FM Coal’s limited liquidity (as discussed below), FM Coal has been limited in its ability to finance critical capitalized repairs such as engine and undercarriage replacements. FM Coal’s current estimate of deferred capital expenditures exceeds $12 million and has reached a state where it threatens basic operations, including meeting the allocations of Alabama Coal Cooperative as detailed below. 52. Prior to the Acquisition, Randy Robinson (one of the two Sellers) had managed operations. Mr. Robinson controlled an equipment company that regularly leased and repaired equipment for the mining operations. However, those equipment rental and repair services ceased with the Acquisition, and FM Coal did not replace the services of Mr. Robinson and his affiliated equipment company. As explained in more detail below, the deferred capital equipment purchases and repairs has caused less efficient operations and lost sales. 19 B. Decreases in Sales Volume and Revenue 53. The Debtors have experienced dramatic decreases in sales volume, from 1,452,302 tons in 2017, to 1,168,717 tons in 2018, to 949,330 tons in 2019. This includes the sales by Cedar Lake, Cane Creek, and Best Coal through Alabama Coal Cooperative. Additionally, the collective allotment of those Debtors with Alabama Coal Cooperative was reduced by 8.5% for 2019 (which remains unchanged for 2020), after those Debtors failed to meet their collective allocation with Alabama Coal Cooperative in 2018. Through the first seven months of 2020, the Debtors sold 362,773 tons, which represents a 35% decrease over the same period in 2019. 54. The Debtors also experienced a significant decrease in revenue in 2018, which dropped to $104 million for that year from $122 million in 2017. 5 That decrease in revenue continued into 2019, with total revenue of $87 million. Additionally, monthly revenue through July 2020 was approximately 37% lower than 2019 monthly revenue. As a result of the termination of the equipment rental and repair services previously provided by Randy Robinson’s companies, repairs and maintenance as a percent of revenue increased from 14.7% in 2016 to 20% for 2019. Further, increased repairs have resulted in field labor inefficiencies and downtime, unscheduled equipment movement and other factors. This is evidenced by increased mining payroll costs, as a percent of revenue (from 13.5% in 2016 to 19.4% in 2019), as well as increased costs of goods sold as a percent of revenue (from 80% in 2016 to 101% in 2019). C. Decreases in Liquidity and Working Capital 55. Since the Acquisition, the Debtors’ liquidity and working capital have decreased significantly. From the closing of the Acquisition on September 1, 2017 through December 31, 5 By way of comparison, the Debtors’ predecessor company averaged approximately $120 million per year of total revenue for the three year period of 2014 through 2016. 20 2019, the Debtors made debt service payments on the Credit Facility totaling approximately $26.7 million, which were partially funded by $6 million of new borrowing on the Revolver. From September 1, 2017 to April 30, 2020, accounts receivable decreased by $7.8 million and accounts payable increased by $6.3 million. As of April 30, 2020, accounts payable was $15.1 million, with $7 million (or 46.4%) aged over 90 days. Most critical vendors currently require cash on delivery or cash in advance. On September 1, 2017, FM Coal had a net working capital of $3 million. As of July 31, 2020, however, FM Coal’s net working capital was at an $11.7 million deficit. D. Debt Service 56. In light of the above-described challenges, a reorganization through these chapter 11 cases is necessary for the Debtors to have the ability to service the Credit Facility. The Credit Agreement calls for Term Loan principal amortization payments of $5.83 million per quarter, beginning on December 17, 2017 and continuing through September 30, 2020. FM Coal’s first payment default under the Credit Facility was in June 2018. From the closing date of the Acquisition and the Credit Facility through April 30, 2020, the Debtors made principal payments on the Term Loan totaling approximately $20 million, which were partially funded by $6 million of borrowings on the Revolver. 57. Despite the challenges described in this First Day Declaration, the Debtors’ situation has become more stabilized in 2020, with the assistance of Aurora and a Paycheck Protection Program loan from the Small Business Administration, among other factors. The Debtors believe there is significant value in the contract between Alabama Coal Cooperative and Southern Company, which currently accounts for 60% of the Debtors’ sales, as Debtors Cedar Lake, Cane Creek, LLC and Best Coal are members of Alabama Coal Cooperative. 21 The Debtors’ businesses could succeed upon a successful reorganization through these chapter 11 cases. Further, the budget attached to the “Cash Collateral Motion” (as defined in Section IV of this First Day Declaration) is reasonable and will provide a framework for a successful reorganization in these chapter 11 cases. Part IV Evidentiary Support for First Day Motions 58. Contemporaneously with the submission of this First Day Declaration, the Debtors have sought relief through a number of First Day Motions, including but not limited to the following First Day Motions, that the Debtors believe are necessary to enable them to efficiently administer their estates with minimal disruption and loss of value during these chapter 11 cases: (i) Motion of the Debtors for Entry of an Order (I) Directing Joint Administration of Chapter 11 Cases and (II) Granting Related Relief (the “Joint Administration Motion”); (ii) Motion of the Debtors for an Order (I) Granting the Debtors an Extension of Time Within Which to File Schedules and Related Documents, and (II) Authorizing the Debtors to File Consolidated Schedules and Statements (the “SOFAs/Schedules Extension Motion”); (iii) Motion of the Debtors for Entry of an Order (I) Authorizing the Debtors to File a Consolidated List of Unsecured Creditors For Giving Notice in Lieu of Submitting a Separate List for Each Debtor, (II) Authorizing the Debtors to Implement Certain Notice and Case Management Procedures, and (III) Granting Related Relief (the “Consolidated Top 40 and Case Management”); (iv) Motion of the Debtors for Entry of Interim and Final Orders (I) Authorizing Postpetition Use of Cash Collateral, (II) Granting Adequate Protection to Prepetition Secured Parties, (III) Scheduling a Final Hearing, and (IV) Granting Related Relief (the “Cash Collateral Motion”); (v) Motion of the Debtors for Entry of Interim and Final Orders Authorizing the Debtors to (I) Continue to Operate Their Existing Cash Management System, (II) Honor Certain Prepetition Obligations Related Thereto, and 22 (III) Maintain and Use Existing Business Forms (the “Cash Management Motion”); (vi) Motion of the Debtors for Entry of Interim and Final Orders (I) Authorizing, the Debtors to Pay Prepetition Wages, Salaries, Other Compensation and Reimbursable Expenses, and (B) Continue Employee Benefits Programs (the “Wages Motion”); (vii) Motion of the Debtors for Entry of An Order (I) Approving the Debtors’ Key Employee Incentive Plan and (II) Granting Other Related Relief (the “KEIP Motion”); (viii) Motion of the Debtors for Entry of Interim and Final Orders (I) Authorizing the Debtors to Pay Prepetition Claims of Certain Critical Vendors, and (II) Authorizing Financial Institutions to Honor and Process Related Checks and Transfers, and (III) Granting Related Relief (the “Critical Vendors Motion”); (ix) Motion of the Debtors for Entry of an Order (I) Authorizing the Debtors to Pay Certain Prepetition Taxes, Governmental Assessments and Fees, (II) Authorizing Financial Institutions to Honor and Process Related Checks and Transfers, and (III) Granting Related Relief (the “Taxes Motion”); (x) Motion of the Debtors for Entry of Interim and Final Orders (I) Approving the Adequate Assurance of Payment for Future Utility Services Proposed by Debtors, (II) Prohibiting Utility Companies from Altering, Refusing, or Discontinuing Services, (III) Approving Procedures By Debtors for Resolving Additional Assurance Requests, and (IV) Setting a Final Hearing Related Thereto (the “Utilities Motion”); (xi) Motion of the Debtors for Entry of Interim and Final Orders (I) Authorizing the Debtors to Continue and Renew Their Surety Bond Program and (II) Granting Related Relief (the “Surety Bond Program Motion”); and (xii) Motion of the Debtors for Entry of Interim and Final Orders Authorizing the Debtors to (I) Continue Certain Existing Insurance Coverage Entered Into Prepetition and Satisfy Payment Obligations Related Thereto, (II) Renew, Amend, Supplement, Extend or Purchase Insurance Coverage in the Ordinary Course of Business, (III) Honoring the Terms of the Premium Financing Agreements, and (IV) Granting Related Relief (the “Insurance Motion”); and (xiii) Application of the Debtors for an Order Authorizing the Employment, Retention and Appointment of Donlin, Recano & Company, Inc. as 23 Claims and Noticing Agent and Administrative Advisor for the Debtors Nunc Pro Tunc to the Petition Date (the “Claims Agent Application”). 59. These First Day Motions seek authority to, among other things, honor employee- related wages and benefit obligations and ensure the continuation of the Debtors’ cash management systems and other business operations without interruption. I believe that the relief requested in each of the First Day Motions is necessary to give the Debtors an opportunity to work towards a successful reorganization in these chapter 11 cases that will benefit all of the Debtors’ stakeholders. 60. Several of these First Day Motions request authority to pay certain prepetition claims. I understand that Rule 6003 of the Federal Rules of Bankruptcy Procedure provides, in relevant part, that the Court shall not consider motions to pay prepetition claims during the first 20 days following the filing of a chapter 11 petition, “except to the extent that relief is necessary to avoid immediate and irreparable harm . . . .” In light of this requirement, the Debtors have narrowly tailored their requests for immediate authority to pay certain prepetition claims to those circumstances where the failure to pay such claims would cause immediate and irreparable harm to the Debtors and their estates. Other relief will be deferred for consideration at a later hearing. 61. I am familiar with the contents and substance of each First Day Motion (including the exhibits thereto), and the statements and facts set forth in each of the First Day Motions are true and correct to the best of my knowledge. I believe that the relief sought in each First Day Motion which has been filed in this case and discussed herein, including this Section IV of this First Day Declaration: (i) is necessary to enable the Debtors to operate in chapter 11 with minimal disruption or loss of value; (ii) is necessary to provide the Debtors with a reasonable opportunity to maximize value in these chapter 11 cases; and (iii) best serves the interests of the Debtors’ stakeholders. 24 62. I have reviewed each of the First Day Motions, or had their contents explained to me, and I believe that the Debtors would suffer immediate and irreparable harm absent the ability to continue their business operations as sought in the First Day Motions. In my opinion, approval of the relief sought in the First Day Motions will be critical to maintaining the stability of the Debtors’ business operations and preserving value. 63. Below is a brief discussion of the Debtors’ operational First Day Motions and an explanation of why, in my belief, such motions are critical to achieving a successful chapter 11 process for the Debtors. More detailed descriptions of the facts regarding the Debtors’ operations and the bases for the relief requested in the operational motions can be found in each respective First Day Motion. Joint Administration Motion 64. The Debtors are seeking joint administration of these chapter 11 cases. I believe that given the nature of the Debtors’ integrated operations, joint administration of these chapter 11 cases will provide significant convenience without harming the substantive rights of any party in interest. The Debtor entities that commenced these chapter 11 cases are “affiliates” as I understand such term is defined in section 101(2) of the Bankruptcy Code. 65. Many of the motions, hearings, and orders in these chapter 11 cases will affect each Debtor entity. I believe that joint administration of these chapter 11 cases will reduce fees and costs by avoiding duplicative filings and objections. Joint administration also would allow all parties in interest to monitor these chapter 11 cases with greater ease and efficiency, in my opinion. 66. Moreover, joint administration will not adversely affect the Debtors’ respective constituencies because the Debtors seek only administrative, not substantive, consolidation of the 25 Debtors’ estates. Parties in interest will not be harmed by the relief requested; instead, parties in interest will benefit from the cost reductions associated with the joint administration of these chapter 11 cases. Accordingly, the joint administration of these chapter 11 cases is in the best interests of the Debtors’ estates, their creditors, and all other parties in interest. Consolidated Top 40 and Case Management 67. In the Consolidated Top 40 and Case Management, the Debtors seek entry of an order authorizing the Debtors to (i) file a consolidated list of unsecured creditors for the Debtors (in lieu of submitting separate lists for each Debtor), and (ii) implement certain notice and case management procedures. 68. The Debtors have numerous creditors and diverse parties in interest. Broad notice and service requirements would be expensive, inefficient, and unduly burdensome on the Debtors. The Debtors propose in the Consolidated Top 40 and Case Management to reduce expenses and administrative burdens by limiting notice and service requirements pursuant to applicable sections of the Bankruptcy Code. Approval of the procedures proposed in the Consolidated Top 40 and Case Management is in the best interests of the Debtors and will reduce the cost of administration of these chapter 11 cases. Cash Collateral Motion 69. In the Cash Collateral Motion, the Debtors seek entry of an interim order and an final order approving the Debtors’ use of the cash collateral of the Lenders. 70. In November 2019, the Debtors retained Aurora. Part of the responsibilities of Aurora is to provide assistance in connection with the Debtors’ evaluation of their cash management system, financial forecasting, and contingency planning. From early in Aurora’s retention, I worked closely with the Debtors’ management and other advisors to assist the 26 management in the evaluation of the Debtors’ liquidity and cash needs, including in the event of a chapter 11 filing. 71. Since being retained, Aurora has assisted the Debtors in evaluating their liquidity position and potential financing needs. Aurora worked closely with the Debtors, their management, and their other advisors to evaluate the Debtors’ cash requirements for their business. As part of Aurora’s evaluation of the Debtors’ liquidity position, Aurora reviewed, analyzed and assisted in the development of the Debtors’ 13-week cash flow forecast, and reviewed and analyzed the Debtors’ long-term cash flow forecasts. These forecasts take into account anticipated cash receipts and disbursements during the projected period and consider a number of factors, including the effect of the chapter 11 filing on the operations of the business, professional fees, and required operational payments. 72. A significant portion of the Debtors’ assets include assets on which the Lenders have liens. The Debtors also rely on the encumbered cash generated from their operations to fund working capital, capital expenditures, and for other general corporate purposes. During the start of these chapter 11 cases, I believe the Debtors will need this generated cash to satisfy payroll, pay suppliers, meet overhead, pay expenses, and make any other payments that are essential for the continued management, operation, and preservation of the Debtors’ businesses. The ability to satisfy these expenses when due is essential to the Debtors’ continued operation of their businesses during the pendency of these cases. I believe the Debtors will have adequate liquidity during this period if allowed to utilize the cash collateral. Absent access to the cash collateral, however, the Debtors will not have adequate unencumbered cash on hand to pay these necessary expenses. The uninterrupted use of the cash collateral is therefore critical. 27 73. Failure to obtain access to the cash collateral would result in immediate and irreparable harm to the Debtors and their stakeholders, and would diminish the value of the Debtors’ estates. Without the approval of the use of the cash collateral, the Debtors will be unable to continue to operate in the ordinary course and preserve and maximize the value of their assets for the benefit of all parties in interest. 74. Accordingly, based on the foregoing, I respectfully submit that the Court should approve immediate access by the Debtors to the cash collateral. If the Debtors are able to reach an agreement with the Agent and the Lenders, the Debtors will seek entry of interim and final orders approving consensual use of cash collateral. Cash Management Motion 75. In the ordinary course of business, the Debtors maintain a cash management system (the “Cash Management System”) that comprises a total of nine (9) active bank accounts (collectively, the “Existing Bank Accounts”). The Existing Bank Accounts are more specifically identified in the Cash Management Motion and the exhibits attached thereto. The Existing Bank Accounts are maintained at ServisFirst Bank (“ServisFirst”) and Regions Bank (“Regions”, and together with ServisFirst, the “Cash Management Banks”). Additionally, the Debtors are in the process of opening an account at Cadence Bank to house the “Professional Fee Escrow” described the Cash Collateral Motion. 76. The Cash Management System consists of a number of operating accounts (the “Operating Accounts”). However, the majority of the Debtors’ outgoing payments originate from Debtor Cedar Lake’s operating account (the “Cedar Lake Operating Account”). The Debtors receive payments to the Operating Accounts and the Cedar Lake Operating Account. Payroll is administered through three separate accounts (the “Payroll Accounts”). 28 77. In my experience, the Debtors’ Cash Management System is a common system utilized by similarly situated companies to manage the cash of operating units in a cost-effective, efficient manner. The Debtors use the Cash Management System in the ordinary course of their businesses to collect, transfer, and disburse funds generated from their operations and to facilitate cash monitoring, forecasting, and reporting. Additionally, the Debtors routinely conduct transactions using debit, wire, and ACH payments. The Debtors’ accounting department maintains daily oversight over the Cash Management System and implements checks and balances for entering, processing, and releasing funds. The Debtors’ controller regularly reconciles the Debtors’ books and records to ensure that all transfers are accounted for properly. Additionally, Aurora reviews the Debtors’ outgoing payments and has taken steps to ensure that no unauthorized prepetition payments are made. 78. The Debtors do not anticipate a need for opening additional accounts except for the account to house the “Professional Fee Escrow” should the Court grant the relief requested in the Cash Collateral Motion. The Debtors will ensure that any such new accounts shall be with a bank (a) insured by the FDIC and (b) organized under the laws of the United States or any State therein, or in the case of accounts that may carry a balance exceeding the insurance limitations set thereby, a financial institution that is sufficiently secure to comply with the requirements of Bankruptcy Code section 345(b), as those requirements have been explained to me. 79. It is my opinion that continued use of the Cash Management System will facilitate the Debtors’ transition into chapter 11 by, among other things, avoiding administrative inefficiencies and expenses associated with disrupting this system and minimizing delays in the payment of postpetition obligations. Creditors will not be prejudiced by continued use of the Existing Cash Management System, including maintenance of the Existing Bank Accounts, 29 because the Debtors, under the guidance of Aurora, have taken steps to prevent unauthorized payments on prepetition obligations. 80. Further, with assistance from Aurora, the Debtors have implemented internal control procedures that prohibit payments on account of prepetition debts without the prior approval of Aurora, as the Debtors’ Financial Advisor, and only as authorized by the Court. Given the benefits to the Debtors and the lack of prejudice to the creditors, maintaining the Cash Management System is in the best interests of the Debtors’ estates and creditors. Wages Motion 81. The Debtors currently employ approximately 153 individuals on a full-time basis, which number changes from time to time in the ordinary course. The employees include miners, truck and equipment operators, production oversight management, office staff, human resource administration, senior accountant, controller and chief operating officer. All of the Debtors’ employees are paid through payroll and are hourly or salaried employees. 82. The Debtors’ employees perform a wide variety of functions critical to the administration of these chapter 11 cases and the Debtors’ successful reorganization. Their skills, knowledge, and understanding of the Debtors’ operations and infrastructure are essential to preserving operational stability and efficiency. 83. In many instances, the Debtors’ employees include highly trained personnel who are not easily replaced. Without the continued, uninterrupted services of their employees, the Debtors’ cannot pursue their reorganization efforts. 84. Pursuant to the Wages Motion, the Debtors request authority to pay prepetition obligations to the Debtors’ employees and to continue the existing benefit programs (including health and welfare programs) for the Debtors’ employees and their families. 30 85. I believe that payment of the employee compensation and benefits as set forth in the Wages Motion, and as described in paragraphs 43-45 of this First Day Declaration, is warranted under the facts of these chapter 11 cases. The majority of the Debtors’ employees rely exclusively on their compensation and benefits from the Debtors to satisfy their daily living expenses. Consequently, the Debtors’ employees and their families will be exposed to significant financial difficulties if the Debtors are not permitted to honor obligations for unpaid employee compensation and benefits. Additionally, continuing ordinary course benefits will help maintain employee morale and minimize the adverse effect of the commencement of these chapter 11 cases on the Debtors’ ongoing business operations. 86. In addition, the employees provide the Debtors with services necessary to conduct the Debtors’ business, and the Debtors believe that, absent the payment of the employee compensation and benefits owed to the employees, the Debtors may experience employee turnover and instability at this critical time in these chapter 11 cases. The coal industry is a highly specialized business that requires unique technical expertise. It is my opinion and the opinion of the Debtors that, without these payments, the employees may become demoralized and unproductive because of the potential significant financial strain and other hardships these employees may face. Such employees may then elect to seek alternative employment opportunities. Additionally, a significant portion of the value of the Debtors’ businesses is tied to their workforce, which cannot be replaced without significant efforts—which efforts may not be successful given the pendency of these chapter 11 cases. Enterprise value may be materially impaired to the detriment of all stakeholders in such a scenario. Therefore, I believe that payment of the prepetition obligations with respect to the employees compensation and benefits is a necessary and critical element of the Debtors’ efforts to preserve value and will give the 31 Debtors the greatest likelihood of retention of their employees as the Debtors seek to operate their businesses in these chapter 11 cases. KEIP Motion 87. The Debtors’ senior level employees will play a crucial role in achieving the goal of maximizing the value of the Debtors’ estates for their stakeholders. In consultation with their restructuring advisors, the Debtors undertook a deliberative process to design effective and appropriate compensation programs for their critical senior level employees. The outcome of that process is a key employee incentive plan (the “KEIP”) for seven (7) critical, non-insider employees (the “KEIP Participants”), the total amount paid under which will not exceed $135,966. The KEIP is designed to retain key non-insider employees whose continued support are critical to the Debtors’ success throughout the pendency of these chapter 11 cases. Importantly, the KEIP aligns the interests of participants in the KEIP with those of the Debtors’ stakeholders—to maximize the value of the Debtors’ estates. 88. Subject to the conditions set forth in the KEIP Motion, each KEIP Participant will be eligible to receive a payment equal to twenty percent (20%) of his or her base salary earned during the time period beginning on the Petition Date and ending upon the confirmation of the Debtors’ plan of reorganization, or upon the entry of an order from the Court approving a sale under section 363 of the Bankruptcy Code, which amount shall not exceed twenty percent (20%) of his or her annual base salary. The total aggregate payout under the KEIP will not exceed $135,966 (which amount is twenty percent (20%) of all of the KEIP Participant’s annual base salaries, combined). 89. The Debtors have determined in their sound business judgment that each of the KEIP Participants is necessary to ensure smooth operations of the Debtors’ business throughout 32 these chapter 11 cases. The KEIP is appropriately tailored to ensure that each KEIP Participant possesses important institutional knowledge, relationships, and familiarity with the Debtors’ operations and infrastructure that would be difficult, costly, and disruptive to replace. Further, the KEIP is structured to ensure that payment is conditioned on staying employed by the Debtors through the sale of substantially all of the Debtors’ assets or the emergence from chapter 11. 90. The cost of the KEIP is reasonable in the context of the Debtors’ assets and liabilities, and consistent with industry standards and chapter 11 cases of similar size and complexity. 91. The KEIP Participants do not include any employee that is a director, officer or person in control of the Debtors. In particular, none of the KEIP Participants: (a) reports directly to the Board of Directors; (b) is appointed directly by the Board of Directors; (c) exercises managerial control over the Debtors’ operations as a whole; (d) controls the Debtors’ company policy; or (e) directs the Debtors’ overall corporate governance. Rather, the KEIP Participants are ordinary rank and file employees focused on the day-to-day operations of the Debtors’ businesses. The KEIP Participants are therefore not “insiders” as such term is defined in the Bankruptcy Code and therefore are not subject to section 503(c)(1) of the Bankruptcy Code, as that provision of the Bankruptcy Code has been explained to me. Critical Vendors Motion 92. To operate their businesses, the Debtors rely heavily on suppliers, vendors and service providers (collectively, the “Critical Vendors”) that provide: (i) safety equipment and material operational supplies; (ii) specialized mining equipment repair, parts and services; and (iii) specialized mining services (collectively, the “Critical Materials and Services”). The Critical Vendors provide supplies, equipment and services that are necessary for the Debtors to 33 ensure the safety of their employees, to satisfy the wide range of federal and state regulations applicable to their businesses and to continue their day-to-day operations. 93. Additionally, and as set forth in detail in the Critical Vendors Motion, the Debtors rely on timely and frequent delivery of these Critical Materials and Services, and any interruption (even if brief) would disrupt the Debtors’ operations, impact their revenue and their ability to safely operate and produce coal, likely causing irreparable harm to their businesses, reputation, goodwill, employees, customer base, and market share. Such harm would likely far outweigh the cost of payment of the prepetition claims of the Critical Vendors. 94. In my determination, the vendors and service providers contained in the Critical Vendors Motion are essential to the continued operations of the Debtors. If the relief requested in the Critical Vendors Motion is not granted, those vendors and service providers may refuse to provide goods or services, causing immediate harm to the Debtors and their estates. Further, the Debtors’ operations depend on close coordination and integration between the Debtors, their customers, and their suppliers. Given the highly technical nature of the equipment used by the Debtors’ vendors, an adequate supply of equipment and timely services from the vendors to the Debtors is vital to continue and maintain efficient operations. I believe that having the authority to pay the Critical Vendor Claims as described herein is critical to the Debtors’ chapter 11 process. Taxes Motion 95. In connection with the normal operation of their businesses, the Debtors collect, withhold and/or incur (i) production taxes, (ii) excise taxes, (iii) environmental and safety fees and assessments, (iv) sales taxes and use taxes, (v) employment taxes, (vi) franchise taxes and privilege taxes and (vii) property taxes, together with other taxes, fees and charges described in 34 the Taxes Motion (collectively, the “Ordinary Course Taxes”). The Debtors remit the Ordinary Course Taxes to various federal, state and local governments, including taxing and licensing authorities (collectively, the “Governmental Authorities”), as more particularly set forth in the Taxes Motion and the exhibits attached thereto. 96. Pursuant to the Taxes Motion, the Debtors request the entry of an order (i) authorizing (but not requiring) the Debtors to pay any Ordinary Course Taxes, whether asserted prior to or after the Petition Date, but only at such time when the Ordinary Course Taxes are due and payable, and (ii) authorizing the banks described in the Taxes Motion to receive, process, honor and pay checks or electronic transfers used by the Debtors to pay such Ordinary Course Taxes. 97. Non-payment of some of the obligations set forth in the Taxes Motion could preclude the receipt or renewal of permits required for the Debtors’ continued operations and thus could interfere with their successful reorganization. 98. In addition, to the extent certain Ordinary Course Taxes were incurred by the Debtors before the Petition Date and are not remitted or paid by the Debtors, certain of the Debtors’ directors, officers and other employees may be subject to lawsuits during the pendency of these chapter 11 cases. Payment of the Ordinary Course Taxes will avoid director and employee loss of focus and morale resulting from the risk of personal liability. A lawsuit and any ensuing liability would distract personnel from important tasks, to the detriment of all parties in interest in these chapter 11 cases. The dedicated and active participation of the Debtors’ directors, officers and other employees is not only integral to the Debtors’ continued, uninterrupted operations, but is also essential to their successful reorganization. 35 99. It is my opinion that the relief requested in the Taxes Motion is essential, appropriate and in the best interest of the Debtors’ estates and creditors. Absent that relief, the value of the Debtors’ estates will suffer, possibly at a rapid pace. Consequently, all of the Debtors’ creditors will benefit if the requested relief is granted. Utilities Motion 100. In the normal course of the Debtors’ businesses, the Debtors purchase electricity, telecommunications, natural gas, water, waste management (including sewer and trash), internet, and other similar services (collectively, the “Utility Services”) from various utility companies identified in the Utilities Motion (collectively, the “Utility Companies”). The relief requested in the Utilities Motion is sought with respect to all Utility Companies providing postpetition Utility Services to the Debtors. 101. To the best of my knowledge, there are no unpaid invoices outstanding for Utility Services. While I recognize that charges for Utility Services have accrued since the last invoice issued by each of the respective Utility Companies, the Debtors have not yet received invoices for those charges. Therefore, unless any unintended payment interruptions caused by the filing of these chapter 11 cases have occurred, each of the Debtors’ accounts for Utility Services are “current.” 102. Through the Utilities Motion, the Debtors seek orders (i) prohibiting the Utility Companies from altering, refusing, or discontinuing Utility Services on account of unpaid prepetition invoices; and (ii) determining that the Debtors have provided each of the Utility Companies with “adequate assurance of payment” in accordance with section 366 of the Bankruptcy Code, based, in part, upon the Debtors’ payment of, in the ordinary course of business, any undisputed, unpaid prepetition and postpetition utility service charges. 36 103. As “adequate assurance of payment,” the Debtors propose to pay all uncontested, unpaid prepetition and postpetition service charges owed respectively to each Utility Company in the ordinary course of business. 104. Uninterrupted Utility Services are essential to the Debtors’ ongoing business operations and thus, the overall success of these chapter 11 cases. Should any Utility Company refuse or discontinue service, even for a brief period, the Debtors’ business operations would be severely disrupted, and such disruption would jeopardize the Debtors’ ability to manage their reorganization efforts. Further, feasible alternative utility providers do not exist for most of the mining facilities, or the Debtors would incur substantial costs in finding alternative providers. Accordingly, it is essential that the Utility Services continue uninterrupted during these chapter 11 cases. Surety Bond Program Motion 105. Maintaining the Debtors’ surety bond program is critical to the Debtors’ operations during these chapter 11 cases. To operate mines on an ongoing and uninterrupted basis in accordance with applicable law, the Debtors will need to renew many of their outstanding surety bonds as and when they come up for annual renewal. The Debtors further anticipate a need to obtain new surety bonds and to modify and increase the amounts of the outstanding surety bonds to satisfy the requirements of federal, state and local laws applicable to the Debtors’ operations. 106. Failing to pay any obligations under the Debtors’ surety bond program could result in the issuer declining to renew the outstanding surety bonds or refusing to enter into surety bonds with the Debtors in the future. Without limitation, the Debtors could default on various obligations to state and local governments if (i) any surety bonds lapse without renewal, 37 (ii) the Debtors are unable to obtain new surety bonds in the future, or (iii) the Debtors are unable to post cash collateral to secure their obligations to such governmental agencies. 107. Given the Debtors’ current financial status, the Debtors likely would not be able to secure new or replacement bonds from sureties other than the current issuer without providing letters of credit or cash collateral to secure the Debtors’ indemnification obligations relating to any such bonds or to find replacement bonds on terms and conditions more favorable than those provided by the issuer under the existing surety bond program. For those reasons, the Debtors need to continue their surety bond program. In the Surety Bond Program Motion, the Debtors seek entry of orders authorizing, but not directing, the Debtors, in their sole discretion, to continue and renew their surety bond programs. Insurance Motion 108. In the ordinary course of business, the Debtors maintain approximately 13 insurance policies that are administered by various third-party insurance carriers (collectively, the “Insurance Carriers”). These policies provide coverage for, among other things, the Debtors’ property, commercial equipment, general commercial liability, business automobile liability, workers’ compensation liability, pollution liability, and commercial umbrella coverage liability (collectively, the “Insurance Policies”). The aggregate annual premium for the Insurance Policies is approximately $1,240,000, plus applicable taxes and surcharges. The Insurance Policies and a description of the broker commissions that the Debtors pay in the normal course are described in greater detail in the Insurance Motion and the exhibits attached thereto. 109. Some, but not all, of the Insurance Policies are financed through premium financing agreements with Intrust Bank, N.A., as more particularly described in the Insurance Motion, which the Debtors seek the authority (but not the direction) to honor. The combined 38 total monthly payment for the premium financing agreements is approximately $67,806 and are due on the 3rd of each month. 110. Continuation of the Debtors’ Insurance Policies, and entry into new insurance policies and premium financing agreements in the ordinary course, are essential to the preservation of the value of the Debtors’ business and operations. Moreover, in many instances, insurance coverage is required by the regulations, laws, and contracts that govern the Debtors’ commercial activities. Accordingly, pursuant to the Insurance Motion, the Debtors are seeking the authority, but not the direction, to honor any amounts owed on the Insurance Policies, including any future amounts owed on account of any “Insurance Policy Audits”, as that term is defined and used in the Insurance Motion. Further, the Debtors’ estates will benefit by maintaining the low-cost financing of the Insurance Policies that are financed through the premium financing agreements. [The Remainder of this Page is Intentionally Blank] [Signature on the Following Page] 39 I certify under penalty of perjury that, based upon my knowledge, information and belief as set forth in this First Day Declaration, the foregoing is true and correct. Date: September L, 2020 xi) WW Name: David Baker Title: Managing Partner, Aurora Management Partners, lnc., As Financial Advisor to the Debtors imothy Turek Senior Managing Director, Aurora Management Partners, lnc., As Financial Advisor to the Debtors Case 20-02783-TOM11 Doc 22 Filed 09/01/20 Entered 09/01/20 17:16:46 Desc Main Document Page 40 of 41 EXHIBIT A - ORGANIZATIONAL OPERATIONS CHART MICHAEL COSTELLO FM COAL, LLC I I CARBON I1ILL 1 CANE CREEK, LLC1 MINE - - CO., INC. SLOAN SLOAN SLOAN MOUNTAIN 1 MOUNTAIN 2 MOUNTAIN 3 MINE3 MINE 3 MINE BREMEN OF MINE 4 ALABAMA, INC. BEST COAL, INC.1 GODDEN CREEK 2 COAL VALLEY MINE3 MARLEY MINE NO. 2 3 MARLEY MINE NO. 3 GAYOSA MINE 4 BUTTAHATCHEE CHOCTAW FLAT TOP CANE CREEK COAL VALLEYS SPRING REID SCHOOL MINES MINE AND MINE 2 8e 3 EAST MINE CREEK MINE3 MINE3 WASHER NORTH PRATT WASHER 2 Page 41 of 41 Case 20-02783-TOM11 Doc 22 Filed 09/01/20 Entered 09/01/20 17:16:46 Desc Main Document 1 Cedar Lake Mining, Inc., Cane Creek, LLC and Best Coal, Inc. are members of Alabama Coal Cooperative. 2 Flat Top Mine, Cane Creek Mine and North Pratt Washer are all owned by Cane Creek, LLC. All other mines are leased. Cedar Lake Mining, Inc. runs these Operations. 3 Mining ceased; currently in reclamaiuh process. Active mining Operations are not shaded.