🍊Coal's Salvation is Fake News🍊

The Powder River Basin, Sun Capital Partners & Casual Dining & More

🌑The Powder River Basin Capitulates. New Chapter 11 Bankruptcy Filing - Blackjewel LLC (Short #MAGA).🌑

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For coal country, the macro environment has been largely unforgiving.

Blackjewel LLC and three affiliates are the latest in a long string of coal companies to file for bankruptcy. The debtors mine and process metallurgical, thermal and other specialty and industrial coals; they operate 32 properties and hold over 500 mining permits — “more than any other enterprise in the country.” Their operations are in the Central Appalachian Basin in Virginia, Kentucky and West Virginia and the Powder River Basin in Wyoming; they employee 1,700 people (1,100 in the east and 600 in the west).

The debtors blame the usual macro factors for their descent into bankruptcy court: (i) declining commodity prices, (ii) reduced domestic demand for met and thermal coal, (iii) compliance costs, (iv) the rise of natural gas, (v) the increased adoption of renewables, and (vi) decreased coal-fired power generation. This is a telling stat, per the debtors:

Thermal coal demand in the domestic electric power sector has declined from 935 million tons in 2011 to 636 million tons in 2018 and coal has seen its share of the domestic electricity generation market reduce from 43% in 2011 to 31% in 2017.

On a micro level, the debtors suffered from company-specific issues including (a) the termination of a major contract with Nobel Group, (b) a major roof collapse at a particular mine that shut down production, (c) changes to Kentucky’s workers’ compensation laws that increased insurance rates, (d) poorly timed hedging agreements, and (e) interestingly, bad weather. Yes, that’s right: it isn’t just retailers who blame weather for poor performance. Per the debtors:

Various flooding events across the midwest in 2019 have severely impacted rail shipments from the Debtors’ Western Division mining operations. Starting in March 2019, the Debtor started to experience a material reduction in shipments by rail due to severe damage to the rail lines used to move the Debtors’ coal. The impact from the flooding is ongoing, with an estimated $30 million in lost sales directly attributable to it.

PETITION Note: There’s no way to know whether these “flooding events” are the result of man-made global warming but, if so…well, you know where we’re going with this. Irony to the utmost!

All of these factors — and some recent mine acquisitions from previously bankrupted coal companies — combined to seriously constrain liquidity and, after a little refinancing foreplay, term lender Riverstone Credit Partners decided it wanted out and pulled the plug from discussions. The debtors had no choice but to file for bankruptcy.

We were on a brief July 4-related break at the time of the debtors’ filing but suffice it to say that the filing was a sh*tshow. The company filed with a $20mm DIP commitment from company CEO Jeff A. Hoops Sr. and Clearwater Investment Holdings LLC, at an interest rate of LIBOR + 6% per annum, but that DIP fell apart prior to the debtors’ first day hearing putting the company on the brink of liquidation. Per The Wall Street Journal:

But the company learned before its debut appearance in West Virginia bankruptcy court that his bank froze funds Mr. Hoops believed would provide the necessary credit for the proposed financing, according to Blackjewel lawyer Stephen Lerner.

“It’s frankly a disaster,” Mr. Lerner said during the hearing in the U.S. Bankruptcy Court in Charleston, W.Va.

While this surely sucked for the professionals involved, we especially feel for the 1,700 employees whose lives were altered over night — right on the eve of July 4th. Compounding matters is the fact that, apparently, the debtors cut checks to their employees prior to the filing that are not being accepted or are being dishonored by Commonwealth banks. WHAT. A. SH*TSHOW. 🙈The court held a separate hearing on this subject on Saturday, July 6.

Ultimately, Riverstone jumped in and — oddly enough considering its role in precipitating this whole bankruptcy dance to begin with — offered a lifeline. In what may be the shortest interim DIP financing order we’ve seen ever (3 pages), the bankruptcy court approved a $5mm super-priority senior secured DIP facility ($4.25mm from Riverstone, $750k from United Bank) at LIBOR + 8.5%. The use of proceeds? To ensure security measures are in place at the mines to preserve and protect property and equipment; to pay firefighting personnel needed to extinguish active fires at the mines; to fund a $500k professional fee escrow; and to pay for other essential emergency expenses. We presume the latter would include making sure employees — who, to be clear, were abruptly sent home — get paid. Other conditions of the DIP facility? Mr. Hoops got the heave-ho and FTI’s David Beckman was appointed Chief Restructuring Officer with CEO-esque authority. Savage move by Riverstone but we all know that old adage about money talking.

But why though?

Among other things coming to light, the Hoops-controlled debtors apparently floated cashier’s checks to their 600 Wyoming employees rather than follow typical direct deposit practices. Per the Gillette News Record, the bankruptcy court judge was pissed:

“I know this may be interfering with the holiday plans for some of you, but I’m sure you’d agree it’s minimal (compared) to what these employees are dealing with,” Volk scolded during an emergency hearing he called on the Fourth of July after he began hearing reports of people not being paid.

To make matters worse, in a liquidity exercise to the extreme, the debtors apparently also deducted $1.2mm of employee money from paychecks for 401(k) contributions but those amounts were never deposited into the appropriate accounts.* SHEESH.

The human element of this cannot be overstated. More from the Gillette News Record (which you ought to read — it really puts this bankruptcy filing in perspective):

“I just hope these people can find jobs here and don’t have to leave,” said [Mayor Louise Carter-King], referring to the 2016 bust that saw the city’s population dip by about 2,000 as people left for work elsewhere. “That’s a big concern, but I also realize they’ve got to go where they can get jobs.”

She’s also worried for the small, local businesses and contractors that rely on performing work at the mines, especially those that might have to cut staff or shut their doors because they haven’t been paid by Blackjewel.

“Losing 600, 700 jobs has quite a trickle-down effect,” she said.

Shockingly, Fortune notes that coal mining jobs have actually “held steady under Trump”:

…per the Bureau of Labor Statistics: the number of coal workers rose from 50,500 in Nov. 2016 to 52,900 (preliminary) in May 2019. The rise has largely been attributed to demand from Europe and Asia—though overall demand has been steadily falling with exports down 7.4% in first quarter of 2019 year-over-year.

But in the long term, the trend of falling coal jobs expected to continue as the commodity comes under pressure against cheaper options such as natural gas.

“I can’t overstate the extreme competition between coal and natural gas,”  Hans Daniels, CEO of Doyle Trading Consultants said last year.

Indeed, take a look at the BLS numbers:

This is, despite the fact that, per the Wall Street Journal:

Blackjewel is at least the fifth coal company to file for bankruptcy within the past 12 months and third to file chapter 11 since May. Cloud Peak Energy Inc. and Cambrian Holding Co. filed for chapter 11 protection in the previous two months. Westmoreland Coal Co. and Mission Coal Co. filed for bankruptcy last fall.

Curious.

As for the Powder River Basin, generally? Things aren’t so peachy. Per E&E News, the Blackjewel bankruptcy portends more pain to come:

"To me, it's a real sign there is something fundamentally wrong with the economics of PRB coal," said Clark Williams-Derry, an analyst who tracks the coal industry at the Sightline Institute, which advocates for a transition to clean energy. "The new normal is not stasis. It is contraction and disappointment."

It wasn't always that way. In the 1970s, a newly strengthened Clean Air Act prompted a westward expansion of the U.S. coal industry. The coal found in the Powder River Basin of Montana and Wyoming does not pack as much energy as the varieties buried in Appalachia. But its low sulphur content made it popular with power companies searching for ways to comply with America's new air quality laws.

Today, the Powder River Basin accounts for roughly 40% of U.S. coal output, by far the most of any basin. Yet production there has plunged, falling from 462 million tons in 2011 to 324 million tons last year, according to federal figures.

What is the cause of this decline?

The decline has been driven by stiff competition from natural gas and renewable energy. Wind, in particular, has eroded the Powder River Basin's market in the Great Plains, a major outlet for the basin's coal.

"Wind power has caused a lot of these coal plants to be uneconomical and be shut down," said John Hanou, a coal consultant who produces an annual study on the Powder River Basin. "Then on top of that you have the cheap natural gas from fracking."

The fact that PRB coal’s primary use is electricity had largely insulated it from the coal downturn a few years ago. The bankruptcies of Arch Coal Inc. ($ARCH), Peabody Energy ($BTU) and Alpha Natural Resources largely revolved around over-expansion and too much debt as these companies dove into met coal for purposes of steal production. Electricity-producing coal of the sort produced in the PRB wasn’t as affected. Until now.

The problem: U.S. power companies consumed 687 million tons of coal in 2018, the lowest amount since 1978.

The decline has prompted upheaval in a region that long prided itself on stability. Cloud Peak Energy Inc., which operates three mines in the region, declared bankruptcy in May….

Last month, Arch and Peabody announced plans to form a joint venture, effectively combining their mining operations in the Powder River Basin in an attempt to cut costs. 

President Trump promised to save coal.

In reality, the cancer has spread farther than it had ever before.

Pour one out for the PRB.

*Kentucky officials are reportedly investigating claims of unpaid wages. Meanwhile, an employee filed a class-action complaint alleging that the petition date termination of the Wyoming employees constitutes a Worker Adjustment and Retraining Notification violation.

🍤Casual Dining is a Hot Mess. Part VIII. New Chapter 11 Bankruptcy Filing - RUI Holding Corp.🍤

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Back in October 2016, in the context of Sun Capital Partners’-owned Garden Fresh Restaurant Intermediate Holdings bankruptcy filing, we asked, “Are Progressives Bankrupting Restaurants?”* We wrote:

Morberg's explanation for the bankruptcy went a step farther. He noted that cash flow pressures also came from increased workers' compensation costs, annual rent increases, minimum wage increases in the markets they serve, and higher health benefit costs -- a damning assessment of popular progressive initiatives making the rounds this campaign season. And certainly not a minor statement to make in a sworn declaration.  

It's unlikely that this is the last restaurant bankruptcy in the near term. Will the next one also delineate progressive policies as a root cause? It seems likely.

There have been a plethora of restaurant-related bankruptcy filings between then and now and many of them have raised rising costs as an issue. Perhaps none as blatantly, however, than Sun Capital Partners’ portfolio companies: enter RUI Holding Corp and its affiliated debtors, Restaurants Unlimited Inc. and Restaurants Unlimited Texas Inc. (the “Debtors”).**

On July 7, 2019, the Sun Capital-owned Debtors filed for bankruptcy in the District of Delaware. The Debtors opened their first restaurant in 1969 and now own and operate 35 restaurants in 6 states under, among 14 others, the trade names “Clinkerdagger,” “Cutters Crabhouse,” “Maggie Bluffs,” and ”Horatio’s.” The Debtors note that each of their restaurants offer “fine dining” and “polished casual dining” “situated in iconic, scenic, high-traffic locations.” Who knew that if you want something to scream “iconic” you ought to name it Clinkerdagger?

As we’ve said time and time again, casual dining is a hot mess. Per the Debtors:

…the Company's revenue for the twelve months ended May 31, 2019, was $176 million, down 1% from the prior year. As of the Petition Date, the Company has approximately $150,000 of cash on hand and lacks access to needed liquidity other than cash flow from operations.

The Debtors have over $37.7mm of secured debt; they also owe trade $7.6mm. There are over 2000 employees, of which 168 are full-time and 50 are salaried at corporate HQ in Seattle Washington.

But enough about that stuff. Back to those damn progressives. Per the Debtors:

Over the past several years, certain changes to wage laws in the Debtors’ primary geographic locations coupled with two expansion decisions that utilized cash flow from operations resulted in increased use of cash flow from operations and borrowings and restricted liquidity. These challenges coupled with additional state-mandates that will result in an additional extraordinary wage hike in FYE 2020 in certain locations before all further wage increases are subject to increases in the CPI and the general national trend away from casual dining, led to the need to commence these chapter 11 cases.

They continue:

Over the past three years, the Company’s profitability has been significantly impacted by progressive wage laws along the Pacific coast that have increased the minimum wage as follows: Seattle $9.47 to $16.00 (69%), San Francisco $11.05 to $15.59 (41%), Portland $9.25 to $12.50 (35%). As a large employer in the Seattle metro market, for instance, the Company was one of the first in the market to be forced to institute wage hikes. Currently in Seattle, smaller employers enjoy a statutory advantage of a lesser minimum wage of $1 or more through 2021, which is not available to the Company. The result of these cumulative increases was to increase the Company’s annual wage expenses by an aggregate of $10.6 million through fiscal year end 2019.

For a second we had to do a double-take just to make sure Andy Puzder wasn’t the first day declarant!

Interestingly, despite these seemingly OBVIOUS wage headwinds and the EVEN-MORE-OBVIOUS-CASUAL-DINING-CHALLENGES, these genius operators nevertheless concluded that it was prudent to open two new restaurants in Washington state “in the second half of 2017” — at a cost of $10mm. Sadly, “[s]ince opening, the anticipated foot traffic and projected sales at these locations did not materialize….” Well, hot damn! Who could’ve seen that coming?? Coupled with the wage increases, this was the death knell. PETITION Note: this really sounds like two parents on the verge of divorce deciding a baby would make everything better. Sure, macro headwinds abound but let’s siphon off cash and open up two new restaurants!! GREAT IDEA HEFE!!

The Debtors have therefore been in a perpetual state of marketing since 2016. The Debtors’ investment banker contacted 170 parties but not one entity expressed interested past basic due diligence. Clearly, they didn’t quite like what they saw. PETITION Note: we wonder whether they saw that Sun Capital extracted millions of dollars by way of dividends, leaving a carcass behind?? There’s no mention of this in the bankruptcy papers but….well…inquiring minds want to know.

The purpose of the filing is to provide a breathing spell, gain the Debtors access to liquidity (by way of a $10mm new money DIP financing commitment from their prepetition lender), and pursue a sale of the business. To prevent additional unnecessary cash burn in the meantime, the Debtors closed six unprofitable restaurants: Palomino in Indianapolis, Indiana, and Bellevue, Washington; Prime Rib & Chocolate Cake in Portland, OR; Henry’s Tavern in Plano, Texas; Stanford’s in Walnut Creek, California; and Portland Seafood Co. in Tigard, Oregon. PETITION Note: curiously, only one of these closures was in an “iconic” location that also has the progressive rate increases the Debtors took pains to highlight.

It’s worth revisiting the press release at the time of the 2007 acquisition:

Steve Stoddard, President and CEO, Restaurants Unlimited, Inc., said, “This transaction represents an exciting partnership with a skilled and experienced restauranteur that has the requisite financial resources and deep operating experience to be instrumental in strengthening our brands and building out our footprint in suitable locations.”

Riiiiight. Stoddard’s tenure with Sun Capital lasted all of two years. His successor, Norman Abdallah, lasted a year before being replaced by Scott Smith. Smith lasted a year before being replaced by Chris Harter. Harter lasted four years and was replaced by now-CEO, Jim Eschweiler.

A growing track record of bankruptcy and a revolving door in the C-suite. One might think this may be a cautionary tale to those operators in the market for PE partners.

******

Speaking of geniuses, it’s almost as if Sun Capital Partners thinks that things disappear on the internets. Google “sun capital restaurant unlimited” and you’ll see this:

Click through the first link and this is what you get:

HAHAHAHAHA. WHOOPS INDEED!

THEY DELETED THAT SH*T FASTER THAN WE COULD SAY “DIVIDEND RECAP.”

*Turns out that Congressional Budget Office is of the view that $15/hour federal minimum wage may, in fact, have widespread repercussions that include significant job losses.
**Sun Capital is having a tough go of things in the restaurant space of late. This week, Restaurant Business reported that Boston Market, a Sun portfolio company, closed 45 locations over the past week as part of an operational restructuring. The company blames shifting consumer preferences and rising costs for its issues.

⚡️Notice of Appearance: Scott Chabina, Director at Marathon Capital⚡️

This week we welcome Scott Chabina, a Director at Marathon Capital, an investment bank focused on the global power and infrastructure markets, to talk with us about interesting energy trends that we haven’t paid enough attention to in our a$$-kicking briefings. This dialogue is edited slightly for length and clarity.

PETITION: As you know, Scott, PETITION is primarily about disruption. What are some things that you're seeing in the alternative energy space that ought to have incumbents quaking in their boots? Have you seen any recent M&A that had you nodding your head thinking "yes, that is the future"?  

Absolutely!  One of the more “disruptive” and rapidly-developing segments that I cover is renewable natural gas (“RNG”), also known as biomethane.  As opposed to natural gas produced by the petroleum industry, RNG is derived from abundant, organic waste resources (ag-waste, food waste, wastewater treatment facilities, etc.).  RNG is interchangeable with traditional natural gas and can be directly injected into the existing interstate utility natural gas lines.  Critically, when used specifically in transportation fuels, RNG is eligible for key environmental attributes through federal and state programs (RINs and LCFS credits, respectively) and, as a result, generates tremendous value above the prevailing commodity price of natural gas (in some instances 20-30x on a MMBTU basis).  The continued de-carbonization of the transportation sector, as well as the need to materially reduce harmful methane emissions, will continue to support the need for these types of environmentally-impactful projects.  While the transportation sector is clearly the most valuable end market for RNG today, further out on the horizon we anticipate broader applications of RNG to a wider range of industries.  For example, RNG for use in the renewable electricity markets is a particularly compelling proposition (electric vehicle charging stations powered by truly renewable energy resources doesn’t sound so crazy these days).

PETITION: Narrowing in on solar, specifically, there was a period a few years ago when a number of solar-based companies were filing for bankruptcy. Lately, not so much. Have solar companies figured out their business model or is there trouble on the horizon?

Broadly speaking, a major historical challenge with public YieldCo or IPP business models is they exposed the solar sponsor to capital markets financing risk.  Sponsors, such as SunEdison, were unable to continuously raise the required corporate equity from the public markets to fund all of their new projects.  Large solar sponsors have since pivoted from the public to the private markets to reduce capital markets financing risk.

PETITION: The International Maritime Organization will, come 2020, start enforcing limits on the sulfur content in marine fuels for ocean vessels. By volume, sulfur content will need to decrease from 3.5% to 0.5%. In addition to tariffs potentially curtailing demand, is this a headwind for the shipping industry? What other effects might arise out of this? Increased prices for diesel and constrained US gasoline supply? 

Great question.  In a nutshell, we are facing the most significant fuel specifications shift since the phaseout of lead additives in the 1970’s.  Notably, this regulation is global in nature and binds the shipping industry to these lower-carbon fuel commitments.  This has left ship owners with a number of options ranging from installing scrubbers to switching to compliant fuels.  While there is no “one size fits all” solution, refiners have publicly indicated that they are prepared for IMO 2020 and are ramping up production of low-sulphur fuels in the second half of 2019 ahead of implementation.  However, we anticipate second-order effects to impact the refining, chemicals, mining and industrials sectors.  In fact, Goldman Sachs recently estimated that if the entire shipping industry were to follow the rules (100% compliance) consumer wallets could be hit by around $240 billion by 2020 – clearly, this transition needs to be closely monitored and the effects of such a transformative shift are yet to be fully understood.

PETITION: Unlike more recent participants in this segment, you're a younger guy. As you look out on top of you, what growth opportunity do you see for folks of your vintage in distressed/restructuring/banking? What is the best piece of advice that's helped guide your career?

Well, thank you very much for that…I think.  I am very fortunate to have had a diverse background in the restructuring and investment banking sectors, having advised clients across the capital structure in more than 20+ industries over 13 years, prior to joining Marathon Capital two years ago and deepening my focus within the renewable fuels and renewable chemicals sectors.  In terms of advice, let me offer two lessons I’ve learned that I hope will be valuable to others, particularly professionals in the earlier stages of their careers: (i) be open to new opportunities and try to recognize that each engagement is a chance to learn more about what you are passionate about (equally as important to know where you are NOT passionate).  This can take time and isn’t always obvious in the moment, but reflection is a powerful thing when you have a diverse range of experiences upon which to form a perspective; and (ii) consider every engagement an opportunity to audition both your firm and yourself for the future.  Some of the best relationships I have made in my career are with other professionals (yes, even competitors) that were on the “opposite side of the table” in one engagement or another.  These are the folks that ultimately will rise to decision-making capabilities for future business on similar timelines as yourselves.   

PETITION: Lastly, if you had to recommend one book to folks interested in banking, what would it be? 

For a lighter, quicker read, I strongly suggest “The Madhouse Effect: How Climate Change Denial is Threatening Our Planet, Destroying Our Politics, and Driving Us Crazy” by award-winning climate scientist Michael E. Mann and Pulitzer Prize–winning political cartoonist Tom Toles.  As Amazon will tell you, the book “aims to address the manipulation of the media by business and political interests and the unconscionable play to partisanship on issues that affect the well-being of billions,” which I found to be done in a very approachable and humorous manner. 

For a longer read, I always find myself recommending Daniel Yergin’s “The Prize” and “The Quest”, both of which are tremendously insightful accounts of the global energy landscape and how energy impacts all spheres of our daily lives – political, social, etc.

PETITION: Thanks Scott.


📚Resources📚

We have compiled a list of a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. 💥You can find it here💥. We’ve recently added the latest Ben Mezrich book, “Bitcoin Billionaires: a True Story of Genius, Betrayal, and Redemption” and the new Mark Manson book, “Everything Is F*cked: A Book About Hope.” 


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