10-Q 1 pcx-9302012x10q.htm 10-Q PCX-9.30.2012-10Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012
or

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _________ to _________

Commission File Number: 001-33466

PATRIOT COAL CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
 
20-5622045
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
12312 Olive Boulevard, Suite 400
St. Louis, Missouri
 
63141
 
(Address of principal executive offices)
 
(Zip Code)
 
 
 
 
 
(314) 275-3600
 
(Registrant's telephone number, including area code)
 
 
Not Applicable
 
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes R No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes R No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer R
 
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
 
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No R

There were 92,592,859 shares of common stock with a par value of $0.01 per share outstanding on October 26, 2012.


Table of Contents                    


INDEX

PART I - FINANCIAL INFORMATION
 
 
 
 
Page
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
PART II - OTHER INFORMATION
 
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 4.
 
 
 
 
 
Item 5.
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 
 



Table of Contents                    

PART I - FINANCIAL INFORMATION

Item 1.
Financial Statements

PATRIOT COAL CORPORATION
(DEBTOR-IN-POSSESSION)
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
 
 
Restated (1)
 
 
 
Restated (1)
 
(Dollars in thousands, except share and per share data)
Revenues
 
 
 
 
 
 
 
Sales
$
442,935

 
$
584,145

 
$
1,445,546

 
$
1,778,425

Other revenues
5,261

 
5,250

 
39,293

 
20,154

Total revenues
448,196

 
589,395

 
1,484,839

 
1,798,579

Costs and expenses
 
 
 
 
 
 
 
Operating costs and expenses
434,599

 
570,850

 
1,367,158

 
1,646,958

Depreciation, depletion and amortization
48,906

 
47,040

 
135,430

 
138,112

Asset retirement obligation expense
19,496

 
13,299

 
377,737

 
100,722

Sales contract accretion

 
(11,380
)
 
(11,628
)
 
(45,805
)
Impairment and restructuring charge
18,434

 
139

 
60,892

 
423

Selling and administrative expenses
12,611

 
12,788

 
42,741

 
39,392

Net gain on disposal or exchange of assets
(457
)
 
(7,389
)
 
(3,125
)
 
(16,804
)
Income from equity affiliates
(1,864
)
 
(1,650
)
 
(3,564
)
 
(4,570
)
Operating loss
(83,529
)
 
(34,302
)
 
(480,802
)
 
(59,849
)
Interest expense and other
13,661

 
16,453

 
46,168

 
55,896

DIP financing fees
42,552

 

 
42,552

 

Interest income
(15
)
 
(73
)
 
(178
)
 
(171
)
Loss before reorganization items, net and income taxes
(139,727
)
 
(50,682
)
 
(569,344
)
 
(115,574
)
Reorganization items, net
76,214

 

 
76,214

 

Loss before income taxes
(215,941
)
 
(50,682
)
 
(645,558
)
 
(115,574
)
Income tax provision (benefit)
(8
)
 
(230
)
 
(8
)
 
383

Net loss
$
(215,933
)
 
$
(50,452
)
 
$
(645,550
)
 
$
(115,957
)
 
 
 
 
 
 
 
 
Weighted average shares outstanding, basic and diluted
92,686,588

 
91,329,096

 
92,462,636

 
91,299,442

 
 
 
 
 
 
 
 
Loss per share, basic and diluted
$
(2.33
)
 
$
(0.55
)
 
$
(6.98
)
 
$
(1.27
)









(1) See Note 21, Restatement of Financial Statements, in the Notes to Unaudited Consolidated Financial Statements.

See accompanying notes to unaudited consolidated financial statements.
1

Table of Contents                    

PATRIOT COAL CORPORATION
(DEBTOR-IN-POSSESSION)
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2012
 
2011
 
2012
 
2011
 
 
 
 
Restated(1)
 
 
 
Restated(1)
 
 
(Dollars in thousands)
Net loss
 
$
(215,933
)
 
$
(50,452
)
 
$
(645,550
)
 
$
(115,957
)
Accumulated actuarial loss and prior service credit realized in net loss
 
13,715

 
10,749

 
41,147

 
32,243

Net change in fair value of diesel fuel hedge
 
2,476

 
(3,958
)
 
1,099

 
(3,608
)
Other comprehensive income
 
16,191

 
6,791

 
42,246

 
28,635

Comprehensive loss
 
$
(199,742
)
 
$
(43,661
)
 
$
(603,304
)
 
$
(87,322
)




































(1) See Note 21, Restatement of Financial Statements, in the Notes to Unaudited Consolidated Financial Statements.

See accompanying notes to unaudited consolidated financial statements.
2

Table of Contents                    

PATRIOT COAL CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
 
 
 
 
 
September 30, 2012
 
December 31, 2011
 
(Unaudited)
 
 
 
(Dollars in thousands)
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
382,784

 
$
194,162

Accounts receivable and other, net of allowance for doubtful accounts of $13 as of September 30, 2012 and $138 as of December 31, 2011
98,558

 
177,695

Inventories
128,535

 
98,366

Prepaid expenses and other current assets
30,350

 
28,191

Total current assets
640,227

 
498,414

Property, plant, equipment and mine development
 
 
 
Land and coal interests
2,901,082

 
2,935,796

Buildings and improvements
554,874

 
504,275

Machinery and equipment
771,300

 
735,207

Less accumulated depreciation, depletion and amortization
(1,087,449
)
 
(973,157
)
Property, plant, equipment and mine development, net
3,139,807

 
3,202,121

Cash collateralization deposits
60,990

 
14,990

Investments and other assets
32,619

 
48,213

Total assets
$
3,873,643

 
$
3,763,738

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
 
 
 
Liabilities not subject to compromise
 
 
 
Current liabilities
 
 
 
Accounts payable and accrued expenses
$
283,641

 
$
513,123

Below market sales contracts acquired

 
44,787

Current maturities of long-term debt
398

 
1,182

Total current liabilities
284,039

 
559,092

Long-term debt, less current maturities
376,872

 
441,064

Asset retirement obligations
743,095

 
424,974

Workers' compensation obligations
239,284

 
231,585

Postretirement benefit obligations
91,344

 
1,387,317

Obligation to industry fund
32,897

 
35,429

Below market sales contracts acquired, noncurrent

 
46,217

Other noncurrent liabilities
24,125

 
45,218

Total liabilities not subject to compromise
1,791,656

 
3,170,896

Liabilities subject to compromise
2,090,743

 

Total liabilities
3,882,399

 
3,170,896

Stockholders' equity (deficit)
 
 
 
Common stock ($0.01 par value; 300,000,000 shares authorized; 92,601,516 and 91,885,338 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively)
926

 
919

Preferred stock ($0.01 par value; 10,000,000 shares authorized; no shares issued and outstanding at September 30, 2012 and December 31, 2011)

 

Series A Junior Participating Preferred Stock ($0.01 par value; 1,000,000 shares authorized; no shares issued and outstanding at September 30, 2012 and December 31, 2011)

 

Additional paid-in capital
978,868

 
977,169

Retained deficit
(645,766
)
 
(216
)
Accumulated other comprehensive loss
(342,784
)
 
(385,030
)
Total stockholders' equity (deficit)
(8,756
)
 
592,842

Total liabilities and stockholders' equity (deficit)
$
3,873,643

 
$
3,763,738


See accompanying notes to unaudited consolidated financial statements.
3

Table of Contents                    

PATRIOT COAL CORPORATION
(DEBTOR-IN-POSSESSION)
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
Nine Months Ended September 30,
 
2012
 
2011
 
 
 
Restated (1)
 
(Dollars in thousands)
Cash Flows From Operating Activities
 
 
 
Net loss
$
(645,550
)
 
$
(115,957
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

Depreciation, depletion and amortization
135,430

 
138,112

Debtor-in-possession debt issuance costs
42,552

 

Amortization of deferred financing costs
3,986

 
5,510

Amortization of debt discount
5,076

 
7,083

Sales contract accretion
(11,628
)
 
(45,805
)
Loss on early repayment of notes receivable

 
5,868

Impairment and restructuring charge
60,892

 

Net gain on disposal or exchange of assets
(3,125
)
 
(16,804
)
Income from equity affiliates
(3,564
)
 
(4,570
)
Distributions from equity affiliates
2,842

 
1,259

Stock-based compensation expense
776

 
9,566

Non-cash reorganization items
56,428

 

Changes in current assets and liabilities:
 
 
 
Accounts receivable
79,137

 
(42,941
)
Inventories
(30,170
)
 
1,213

Other current assets
(1,135
)
 
2,268

Accounts payable and accrued expenses
1,701

 
22,670

Asset retirement obligations
305,375

 
73,811

Workers' compensation obligations
7,157

 
9,573

Postretirement benefit obligations
39,310

 
41,708

Obligation to industry fund
(2,257
)
 
(2,219
)
Cash collateralization deposit
(46,000
)
 
(14,990
)
Other, net
518

 
(4,451
)
Net cash provided by (used in) operating activities
(2,249
)
 
70,904

Cash Flows From Investing Activities
 
 
 
Additions to property, plant, equipment and mine development
(123,174
)
 
(112,133
)
Additions to advance mining royalties
(17,024
)
 
(17,728
)
Acquisition of Coventry Mining Services, LLC
(2,530
)
 

Net cash paid in litigation settlement and asset acquisition

 
(14,787
)
Proceeds from disposal or exchange of assets
3,490

 
6,691

Proceeds from notes receivable

 
115,679

Other
(369
)
 

Net cash used in investing activities
(139,607
)
 
(22,278
)
Cash Flows From Financing Activities
 
 
 
Proceeds from debtor-in-possession debt
375,000

 

Long-term debt payments
(1,305
)
 
(2,894
)
Deferred financing costs
(1,595
)
 
(1,830
)
Debtor-in-possession debt issuance costs
(42,552
)
 

Proceeds from employee stock programs
930

 
2,115

Net cash provided by (used in) financing activities
330,478

 
(2,609
)
Net increase in cash and cash equivalents
188,622

 
46,017

Cash and cash equivalents at beginning of year
194,162

 
193,067

Cash and cash equivalents at end of period
$
382,784

 
$
239,084

(1) See Note 21, Restatement of Financial Statements, in the Notes to Unaudited Consolidated Financial Statements.

See accompanying notes to unaudited consolidated financial statements.
4

PATRIOT COAL CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012



(1) Chapter 11 Reorganization
Description of Business
Patriot Coal Corporation (Patriot, we, our or the Company) is engaged in the mining and preparation of thermal coal, also known as steam coal, for sale primarily to electricity generators, and metallurgical coal, for sale to steel and coke producers. Our mining complexes and coal reserves are located in the eastern and midwestern United States (U.S.), primarily in West Virginia and Kentucky.
Chapter 11 Reorganization Filings
On July 9, 2012 (the Petition Date), Patriot Coal Corporation, as a stand-alone entity, and substantially all of its wholly-owned subsidiaries (the Filing Subsidiaries and, together with Patriot, the Debtors) filed voluntary petitions for reorganization (the Chapter 11 Petitions) under Chapter 11 of Title 11 of the U.S. Code (the Bankruptcy Code) in the U.S. Bankruptcy Court for the Southern District of New York (the Bankruptcy Court). The Debtors' Chapter 11 cases are being jointly administered under the caption In re: Patriot Coal Corporation, et al. (Case No. 12-12900) (the Bankruptcy Case). Our joint ventures and certain of our other subsidiaries (collectively, the Non-Debtor Subsidiaries) were not included in the Chapter 11 filing.
Effective July 10, 2012, the New York Stock Exchange (NYSE) suspended trading of our common stock and commenced proceedings to delist our common stock. On August 6, 2012, our common stock was delisted from the NYSE. Our stock is now traded under the ticker symbol “PCXCQ” on the OTCQB marketplace, operated by OTC Markets Group Inc. (the OTC Markets).
The filing of the Chapter 11 Petitions constituted an event of default under the Company's pre-petition debt obligations, and those debt obligations became automatically and immediately due and payable, although any actions to enforce such payment obligations are stayed as a result of the filing of the Chapter 11 Petitions. Due to the filing of the Chapter 11 Petitions, the Company's pre-petition unsecured long-term debt of $458.5 million is included in "Liabilities subject to compromise" in the accompanying unaudited consolidated balance sheet at September 30, 2012.
The Debtors are currently operating as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. In general, the Debtors are authorized to, and continue to, operate as an ongoing business, but may not engage in transactions outside of the ordinary course of business without the approval of the Bankruptcy Court.
Debtor-In-Possession (DIP) Financing
In connection with filing the Chapter 11 Petitions, the Debtors filed a motion seeking, among other things, Bankruptcy Court authorization to obtain post-petition financing, and for each Filing Subsidiary (other than EACC Camps, Inc.) and for Patriot Ventures LLC (collectively, the DIP Guarantors) to guaranty our obligations in connection with the DIP financing, up to an aggregate principal amount of $802.0 million, consisting of (a) a revolving credit loan in an amount not to exceed $125.0 million (First Out Revolving Credit Loan), (b) a term loan in the amount of $375.0 million (First Out Term Loan, and together with the First Out Revolving Credit Loan, the First Out Facility), and (c) a $302.0 million roll up (the L/C Roll Up) of obligations under the Amended and Restated Credit Agreement, dated May 5, 2010 (the Pre-Petition Credit Agreement) in respect to outstanding letters of credit, inclusive of any obligations as to reimbursement, renewal and extension of the same issued in the aggregate amount of $300.8 million as of the Petition Date (the Second Out Facility and, together with the First Out Facility, the DIP Facilities).
On July 11, 2012, the Bankruptcy Court entered an interim order (the Interim DIP Order) that, among other things, authorized us to borrow money and obtain letters of credit pursuant to the DIP Facilities and to guaranty such borrowings and our obligations with respect to such letters of credit, up to an aggregate principal or face amount of $677.0 million (plus interest, fees and other expenses and amounts), consisting of borrowings of up to an aggregate principal or face amount of $125.0 million under the First Out Revolving Credit Loan, $250.0 million under the First Out Term Loan, and up to $302.0 million under the Second Out Facility, in accordance with the terms of the Interim DIP Order. On August 3, 2012, the Bankruptcy Court entered a final order (the Final DIP Order) that, among other things, authorized us to borrow the full amount under the DIP Facilities in accordance with the terms of the Final DIP Order. The maturity date of the DIP Facilities is October 4, 2013, but may be extended to December 31, 2013 provided certain conditions are met.
For additional information on the DIP Facilities, see Note 13 - Debt and Credit Facilities.
Reorganization Process
The Bankruptcy Court has authorized us to pay certain of our pre-petition obligations, including payments for employee wages, salaries and certain benefits and payments to certain shippers and critical vendors, subject to certain limitations. The

5

PATRIOT COAL CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012


Debtors are required to pay vendors and other providers in the ordinary course for goods and services received after the filing of the Chapter 11 Petitions and to pay certain other business-related payments necessary to maintain the operation of our business. We have retained legal and financial professionals to advise us on the bankruptcy proceedings. From time to time, we may seek the Bankruptcy Court's approval for the retention of additional professionals.
Immediately after filing the Chapter 11 Petitions, we began notifying all known current or potential creditors of the Debtors of the bankruptcy filings. Subject to certain exceptions under the Bankruptcy Code, the filing of the Chapter 11 Petitions automatically enjoined, or stayed, the continuation of any judicial or administrative proceedings or other actions against the Debtors or their property to recover, collect or secure a claim arising prior to the filing of the Chapter 11 Petitions. Thus, for example, most creditor actions to obtain possession of property from us, or to create, perfect or enforce any lien against our property, or to collect on monies owed or otherwise exercise rights or remedies with respect to a pre-petition claim are enjoined unless and until the Bankruptcy Court lifts the automatic stay.
As required by the Bankruptcy Code, the U.S. Trustee for the Southern District of New York appointed an official committee of unsecured creditors (the Creditors' Committee). The Creditors' Committee and its legal representatives have a right to be heard on all matters that come before the Bankruptcy Court.
On July 18, 2012 and August 7, 2012, respectively, the United Mine Workers of America (UMWA) and several surety companies filed motions requesting that the venue for our Chapter 11 filing be transferred to the U.S. Bankruptcy Court for the Southern District of West Virginia. The U.S. Trustee also filed a motion arguing that the venue should be transferred from the Southern District of New York to another district. A hearing was held in September 2012, at which time the Company, the Creditors' Committee and certain other creditors contested these motions. Post-hearing submissions were filed on October 5, 2012.
Under Section 365 and other relevant sections of the Bankruptcy Code, we may assume, assume and assign, or reject certain executory contracts and unexpired leases, including leases of real property and equipment, subject to the approval of the Bankruptcy Court and certain other conditions. In this context, "assumption" means that the Company agrees to perform its obligations and cure all existing defaults under the contract or lease, and "rejection" means that it is relieved from its obligations to perform further under the contract or lease, but is subject to a pre-petition claim for damages for the breach thereof subject to certain limitations. Any damages resulting from rejection of executory contracts that are permitted to be recovered under the Bankruptcy Code will be treated as liabilities subject to compromise unless such claims were secured prior to the Petition Date.
Since the Petition Date, the Company received approval from the Bankruptcy Court to reject a number of equipment leases and other executory contracts of various types. The Company is continuing to review all of its executory contracts and unexpired leases to determine which additional contracts and leases it will reject. The Company expects that additional liabilities subject to compromise will arise due to rejection of executory contracts, including leases, and from the determination of the Bankruptcy Court (or agreement by parties in interest) of allowed claims for contingencies and other disputed amounts. The Company also expects that the assumption of additional executory contracts and unexpired leases will convert certain of the liabilities shown on the accompanying consolidated balance sheet as liabilities subject to compromise to liabilities not subject to compromise. Due to the uncertain nature of many of the potential claims, the Company cannot project the magnitude of such claims with certainty.
On October 18, 2012, the Bankruptcy Court entered an order establishing December 14, 2012 (the General Bar Date) as the bar date for potential creditors, other than governmental units, to file claims. For governmental units to file claims, the bar date was established as January 21, 2013 (the Governmental Bar Date). The bar date is the date by which certain claims against the Company must be filed if the claimants wish to receive any distribution in the bankruptcy cases. Proof of claim forms received after the bar date are typically not eligible for consideration of recovery as part of the Company's bankruptcy cases. All known potential creditors will be notified of the bar date and the requirement to file a claim with the Bankruptcy Court. Patriot will also publish notices in various publications available to the public. Differences between liability amounts estimated by the Company and claims filed by creditors will be investigated and, if necessary, the Bankruptcy Court will make a final determination of the allowable claim. The determination of how liabilities will ultimately be treated cannot be made until the Bankruptcy Court approves a plan of reorganization. Accordingly, the ultimate amount or treatment of such liabilities is not determinable at this time.
In order to successfully exit Chapter 11, we will need to propose and obtain confirmation by the Bankruptcy Court of a plan of reorganization that satisfies the requirements of the Bankruptcy Code. A plan of reorganization, among other things, would resolve our pre-petition obligations, set forth the revised capital structure of the newly reorganized entity and provide for corporate governance subsequent to emerging from bankruptcy.
We have the exclusive right for 120 days after the filing of the Chapter 11 Petitions to file a plan of reorganization. We will likely file one or more motions to request extensions of this exclusivity period, which are routinely granted up to 18 months in bankruptcy cases of this size and complexity. On October 18, 2012, we filed a motion to extend this exclusivity period to May 5,

6

PATRIOT COAL CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012


2013. If our exclusivity period lapses, any party-in-interest would be able to file a plan of reorganization. In addition to being voted on by requisite holders of impaired claims and equity interests, a plan of reorganization must satisfy certain requirements of the Bankruptcy Code and must be approved, or confirmed, by the Bankruptcy Court in order to become effective.
Our timing for filing a plan of reorganization will depend on the timing and outcome of numerous other ongoing matters in the Chapter 11 proceedings. There can be no assurance at this time that a plan of reorganization will be confirmed by the Bankruptcy Court or that any such plan will be implemented successfully.
Under the priority rankings established by the Bankruptcy Code, unless creditors agree otherwise, pre-petition liabilities and post-petition liabilities must be satisfied in full before stockholders are entitled to receive any distribution or retain any property under a plan of reorganization. The ultimate recovery to creditors and/or stockholders, if any, will not be determined until confirmation of a plan of reorganization. No assurance can be given as to what values, if any, will be ascribed to each of these constituencies or what types or amounts of distributions, if any, they would receive. A plan of reorganization could result in holders of certain liabilities and/or securities, including common stock, receiving no distribution on account of their interests and cancellation of their holdings. Because of such possibilities, there is significant uncertainty regarding the value of our liabilities and securities, including our common stock. At this time, there is no assurance we will be able to restructure as a going concern or successfully propose or implement a plan of reorganization.
For periods subsequent to filing the Chapter 11 Petitions, we have applied the Financial Accounting Standards Board Accounting Standards Codification 852, "Reorganizations" (ASC 852), in preparing the unaudited consolidated financial statements. ASC 852 requires that the financial statements distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain revenues, expenses, realized gains and losses and provisions for losses that are realized or incurred in the bankruptcy proceedings have been recorded in "Reorganization items, net" on the unaudited consolidated statements of operations. In addition, pre-petition obligations that may be impacted by the bankruptcy reorganization process have been classified on the unaudited consolidated balance sheet at September 30, 2012 in "Liabilities subject to compromise." These liabilities are reported at the amounts expected to be allowed by the Bankruptcy Court, even if they may be settled for lesser amounts.
Going Concern Matters
The accompanying unaudited consolidated financial statements and related notes have been prepared assuming we will continue as a going concern, although the Bankruptcy Case and weak industry conditions raise substantial doubt about our ability to continue as a going concern. The accompanying unaudited consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded assets or to the amounts and classification of liabilities or any other adjustments that might be necessary should we be unable to continue as a going concern. Our ability to continue as a going concern is dependent upon, among other things, market conditions and our ability to improve profitability, to meet the financial covenants of the DIP Facilities or obtain appropriate waivers, to obtain financing to replace the DIP Facilities upon emergence and to restructure our obligations in a manner that allows us to obtain confirmation of a plan of reorganization by the Bankruptcy Court. In order to improve profitability, we are taking actions to further reduce operating expenses and align our production to meet market demand. As a result of the Bankruptcy Case, the realization of assets and the satisfaction of liabilities are subject to uncertainty. While operating as debtors-in-possession pursuant to the Bankruptcy Code, we may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business (and subject to restrictions contained in the DIP Facilities), for amounts other than those reflected in the accompanying unaudited consolidated financial statements. Further, any plan of reorganization could materially change the amounts and classifications of assets and liabilities reported in the historical consolidated financial statements.
Debtor Financial Statements
The following unaudited condensed combined financial statements represent the financial statements for the Debtors only. The Company's Non-Debtor Subsidiaries are accounted for as non-consolidated subsidiaries in these financial statements and, as such, their net income is included in “Income from non-debtor entities” in the unaudited condensed combined statements of operations, and their net assets are included as “Investments in and advances to non-debtor entities” in the unaudited condensed combined balance sheet. The Debtors' unaudited condensed combined financial statements have been prepared in accordance with the guidance in ASC 852.
Intercompany transactions between the Debtors have been eliminated in the unaudited condensed combined financial statements. Intercompany transactions between the Debtors and Non-Debtor Subsidiaries have not been eliminated in the Debtors' unaudited condensed combined financial statements.


7

PATRIOT COAL CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012



PATRIOT COAL CORPORATION
UNAUDITED CONDENSED COMBINED STATEMENTS OF OPERATIONS - DEBTORS
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2012
 
September 30, 2012
 
(Dollars in thousands)
 
 
 
 
Revenues
 
 
 
Sales
$
442,935

 
$
1,445,546

Other revenues
5,261

 
39,293

Total revenues
448,196

 
1,484,839

Costs and expenses
 
 
 
Operating costs and expenses
434,598

 
1,367,150

Depreciation, depletion and amortization
48,906

 
135,430

Asset retirement obligation expense
19,496

 
377,737

Sales contract accretion

 
(11,628
)
Impairment and restructuring charge
18,434

 
60,892

Selling and administrative expenses
12,611

 
42,741

Net gain on disposal or exchange of assets
(457
)
 
(3,125
)
Income from equity affiliates

 
(130
)
Income from non-debtor entities
(1,863
)
 
(3,491
)
Operating loss
(83,529
)
 
(480,737
)
Interest expense and other
13,661

 
46,168

DIP financing fees
42,552

 
42,552

Interest income
(15
)
 
(113
)
Loss before reorganization items, net and income taxes
(139,727
)
 
(569,344
)
Reorganization items, net
76,214

 
76,214

Loss before income taxes
(215,941
)
 
(645,558
)
Income tax benefit
(8
)
 
(8
)
Net loss
$
(215,933
)
 
$
(645,550
)



8

PATRIOT COAL CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012



PATRIOT COAL CORPORATION
UNAUDITED CONDENSED COMBINED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) - DEBTORS
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2012
 
September 30, 2012
 
 
(Dollars in thousands)
 
 
 
Net loss
 
$
(215,933
)
 
$
(645,550
)
Accumulated actuarial loss and prior service credit realized in net loss
 
13,715

 
41,147

Net change in fair value of diesel fuel hedge
 
2,476

 
1,099

Other comprehensive income
 
16,191

 
42,246

Comprehensive loss
 
$
(199,742
)
 
$
(603,304
)



9

PATRIOT COAL CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012



PATRIOT COAL CORPORATION
UNAUDITED CONDENSED COMBINED BALANCE SHEET - DEBTORS
 
 
 
 
 
September 30, 2012
 
(Dollars in thousands)
ASSETS
 
Current assets
 
Cash and cash equivalents
$
382,784

Accounts receivable and other, net
98,558

Inventories
128,535

Prepaid expenses and other current assets
30,350

Total current assets
640,227

Property, plant, equipment and mine development
 
Land and coal interests
2,901,082

Buildings and improvements
554,874

Machinery and equipment
771,300

Less accumulated depreciation, depletion and amortization
(1,087,449
)
Property, plant, equipment and mine development, net
3,139,807

Cash collateralization deposits
60,990

Investments and other assets
4,516

Investments in and advances to non-debtor entities
28,103

Total assets
$
3,873,643

LIABILITIES AND STOCKHOLDERS' DEFICIT
 
Liabilities not subject to compromise
 
Current liabilities
 
Accounts payable and accrued expenses
$
283,641

Current maturities of long-term debt
398

Total current liabilities
284,039

Long-term debt, less current maturities
376,872

Asset retirement obligations
743,095

Workers' compensation obligations
239,284

Postretirement benefit obligations
91,344

Obligation to industry fund
32,897

Other noncurrent liabilities
24,125

Total liabilities not subject to compromise
1,791,656

Liabilities subject to compromise
2,090,743

Total liabilities
3,882,399

Total stockholders' deficit
(8,756
)
Total liabilities and stockholders' deficit
$
3,873,643




10

PATRIOT COAL CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012



PATRIOT COAL CORPORATION
UNAUDITED CONDENSED COMBINED STATEMENT OF CASH FLOWS - DEBTORS
 
 
 
 
 
Nine Months Ended
 
September 30, 2012
 
(Dollars in thousands)
Cash Flows From Operating Activities
 
Net loss
$
(645,550
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
Depreciation, depletion and amortization
135,430

Debtor-in-possession debt issuance costs
42,552

Amortization of deferred financing costs
3,986

Amortization of debt discount
5,076

Sales contract accretion
(11,628
)
Impairment and restructuring charge
60,892

Net gain on disposal or exchange of assets
(3,125
)
Income from equity affiliates
(130
)
Income from non-debtor entities
(3,491
)
Stock-based compensation expense
776

Non-cash reorganization items
56,428

Changes in current assets and liabilities:
 
Accounts receivable
79,137

Inventories
(30,170
)
Other current assets
(1,135
)
Accounts payable and accrued expenses
1,701

 Advances to non-debtor entities
2,530

Asset retirement obligations
305,375

Workers' compensation obligations
7,157

Postretirement benefit obligations
39,310

Obligation to industry fund
(2,257
)
Cash collateralization deposit
(46,000
)
Other, net
518

Net cash used in operating activities
(2,618
)
Cash Flows From Investing Activities
 
Additions to property, plant, equipment and mine development
(123,174
)
Additions to advance mining royalties
(17,024
)
Acquisition of Coventry Mining Services, LLC
(2,530
)
Proceeds from disposal or exchange of assets
3,490

Net cash used in investing activities
(139,238
)
Cash Flows From Financing Activities
 
Proceeds from debtor-in-possession debt
375,000

Long-term debt payments
(1,305
)
Deferred financing costs
(1,595
)
Debtor-in-possession debt issuance costs
(42,552
)
Proceeds from employee stock programs
930

Net cash provided by financing activities
330,478

Net increase in cash and cash equivalents
188,622

Cash and cash equivalents at beginning of year
194,162

Cash and cash equivalents at end of period
$
382,784




11

PATRIOT COAL CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012


(2) Basis of Presentation
The accompanying unaudited consolidated financial statements include the accounts of Patriot and its subsidiaries. All significant transactions, profits and balances have been eliminated between Patriot and its subsidiaries. Patriot operates in two domestic coal segments: Appalachia and the Illinois Basin. See Note 14 for our segment disclosures.
On May 8, 2012, we amended our Annual Report on Form 10-K for the year ended December 31, 2011. See Note 21, Restatement of Financial Statements, for detailed information on the effect of this restatement on the statements of operations for the three and nine months ended September 30, 2011 and the statement of cash flows for the nine months ended September 30, 2011.
On August 9, 2012, we filed (i) an amendment to our Form 10-K/A for the year ended December 31, 2011 as filed on May 8, 2012 for the purpose of revising Item 9A. Controls and Procedures and (ii) an amendment to our Form 10-Q for the period ended March 31, 2012 as filed on May 9, 2012 for the purpose of revising Item 4. Controls and Procedures, in each case in response to comments received from the staff of the Securities and Exchange Commission (SEC). There was no impact on our previously issued financial statements from these August 2012 amendments.
The accompanying consolidated financial statements as of September 30, 2012 and for the three and nine months ended September 30, 2012 and 2011, and the notes thereto, are unaudited. However, in the opinion of management, these financial statements reflect all normal, recurring adjustments necessary for a fair presentation of the results for the periods presented. Operating results for the three and nine months ended September 30, 2012 may not necessarily be indicative of the results for the year ending December 31, 2012.

(3) New Accounting Pronouncement
In June 2011, the Financial Accounting Standards Board (FASB) issued authoritative guidance which requires entities to report components of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements. We adopted this guidance effective January 1, 2012. This guidance does not affect our results of operations or financial condition.

(4) Reorganization Items and Other Bankruptcy Related Costs

Reorganization Items, Net

ASC 852 requires separate disclosure of reorganization items such as realized gains and losses from the settlement of pre-petition liabilities, provisions for losses resulting from the reorganization of the business, as well as professional fees directly related to the process of reorganizing the Company under Chapter 11. The Company's reorganization items for the three and nine months ended September 30, 2012 consist of the following:
 
Three and Nine
 
Months Ended
 
September 30, 2012
 
(Dollars in thousands)
Provision for rejected executory contracts and leases
$
32,155

Losses from adjusting debt from carrying value to amount of allowed claim
27,021

Professional fees
19,786

Accounts payable settlement gains
(2,748
)
Reorganization items, net
$
76,214


As required by ASC 852, the losses from adjusting debt from carrying value to the amount of allowed claim reflects the recognition of expense related to the unamortized debt discount on the 8.25% Senior Notes and 3.25% Convertible Senior Notes and the unamortized debt issuance costs associated with the unsecured, pre-petition debt at the petition date. Based on this adjustment, all unsecured, pre-petition debt is recorded at its face value, which reflects our estimate of the allowable claim amount, and is included in "Liabilities subject to compromise" on the balance sheet.

12

PATRIOT COAL CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012


Professional fees are directly related to the reorganization and include fees associated with advisors to the Company, the Creditors' Committee and certain secured creditors. Net cash paid for reorganization items for the three and nine months ended September 30, 2012 totaled $6.5 million, all of which related to professional fees.
Reorganization items exclude impairment and other restructuring charges recorded during the three and nine months ended September 30, 2012. See Note 7 for further details on these items.
Other Bankruptcy Related Costs
Debt issuance costs of $42.6 million were incurred and paid in connection with the DIP financing. These amounts were expensed and separately disclosed in the unaudited consolidated statements of operations in the three and nine months ended September 30, 2012.

(5) Liabilities Subject to Compromise

Liabilities subject to compromise represent unsecured obligations that will be accounted for under a plan of reorganization. Generally, actions to enforce or otherwise effect payment of pre-petition liabilities are stayed. ASC 852 requires pre-petition liabilities that are subject to compromise to be reported at the amounts expected to be allowed, even if they may be settled for lesser amounts. These liabilities represent the amounts expected to be allowed on known or potential claims to be resolved through the Chapter 11 process, and remain subject to future adjustments arising from negotiated settlements, actions of the Bankruptcy Court, rejection of executory contracts and unexpired leases, the determination as to the value of collateral securing the claims, proofs of claim, or other events. Liabilities subject to compromise also include certain items that may be assumed under the plan of reorganization, and as such, may be subsequently reclassified to liabilities not subject to compromise.
The Bankruptcy Court has authorized us to pay certain pre-petition obligations, including payment of employee wages, salaries and certain benefits and payments to certain shippers and critical vendors, subject to certain limitations. The Debtors are required to pay vendors and other providers in the ordinary course for goods and services received after the filing of the Chapter 11 Petitions and certain other business related payments necessary to maintain the operations of the Company's business. Obligations associated with these matters are not classified as liabilities subject to compromise.
With the approval of the Bankruptcy Court, the Company has rejected certain pre-petition executory contracts and unexpired leases with respect to the Company's operations and may reject additional ones in the future. Damages resulting from rejection of executory contracts and unexpired leases are generally treated as general unsecured claims and are classified as liabilities subject to compromise. Holders of pre-petition claims are required to file proofs of claims by the General Bar Date or the Governmental Bar Date, as applicable. Differences between liability amounts estimated by the Company and claims filed by creditors will be investigated and, if necessary, the Bankruptcy Court will make a final determination of the allowable claim. The determination of how liabilities will ultimately be treated cannot be made until the Bankruptcy Court approves a plan of reorganization. Accordingly, the ultimate amount or treatment of such liabilities is not determinable at this time.
Liabilities subject to compromise consist of the following:
 
September 30, 2012
 
(Dollars in thousands)
Retiree healthcare liability
$
1,366,958

Unsecured debt
458,500

Interest payable
4,838

Trade payables
101,850

Rejected executory contracts and leases
38,425

Sales related liabilities
68,374

Employee claims
14,434

Other accruals
37,364

 
$
2,090,743

Other accruals primarily include liabilities subject to compromise related to accrued royalty payments, litigation reserves and other operating accruals.


13

PATRIOT COAL CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012


(6) Net Gain on Disposal or Exchange of Assets and Other Transactions
In the normal course of business, we enter into certain asset sales and exchange agreements, which involve swapping non-strategic coal mineral rights or other assets for cash, other assets or coal mineral rights that are strategic to our operations.
In March 2012, we sold certain non-strategic Appalachia gas and oil rights to a third party in exchange for cash resulting in a gain of $1.5 million.
In September 2011, we entered into an agreement to exchange certain non-strategic Appalachia property for cash and coal mineral rights near our Big Mountain mining complex. We recognized a gain of $4.9 million on the transaction. Also, in September 2011, we sold certain non-strategic Appalachia coal mineral rights to another coal producer resulting in a gain of $1.3 million.
In June 2011, we entered into an agreement to exchange certain non-strategic Appalachia coal mineral rights for coal mineral rights contiguous to our Highland mining complex in the Illinois Basin. We recognized a gain of $7.3 million on this transaction. Also in June 2011, we recognized a gain of $2.1 million related to an agreement allowing a right of way at our Kanawha Eagle mining complex to a third party. We have no future obligation related to this agreement.
The exchange transactions above were recorded at fair value. The valuations primarily utilized Level 3 inputs, as defined by authoritative guidance, in a discounted cash flows model including assumptions for future coal sales prices and operating costs. Level 3 inputs were utilized due to the lack of an active, quoted market for coal reserves and due to the inability to use other transaction comparisons because of the unique nature and location of each coal seam.
Other Transactions
In December 2005, Magnum Coal Company (Magnum), which was acquired by Patriot in 2008, entered into a coal sales and services agreement pursuant to which it agreed to sell the coal required to satisfy the buyer's independent obligations under enumerated agreements with third parties. Effective March 27, 2012, Magnum entered into an agreement with the buyer that provides Magnum with a monthly option to make buyout payments in lieu of delivering the coal required for the buyer to satisfy its obligations under one of the enumerated agreements. In aggregate, over the next six years, the maximum potential buyout amount totals approximately $64 million if Magnum makes no deliveries during that period. In September 2012, we filed a motion with the Bankruptcy Court to reject these agreements and are awaiting a ruling. As of September 30, 2012, this sales related liability of $64.1 million reflecting this option has been reclassified to "Liabilities subject to compromise" in our unaudited consolidated balance sheet.
Effective March 1, 2012, we acquired Coventry Mining Services, LLC, and its subsidiaries, which employs the workforce for our Kanawha Eagle mining complex. The purchase price of $2.5 million was recorded as an intangible asset in accordance with asset acquisition authoritative guidance. The intangible asset will be amortized over the life of the mine where the workforce is located, currently expected to be approximately 10 years. In September 2012, we reduced this workforce by 60% in relation to a temporary curtailment of metallurgical coal production in response to further weakening of market demand. Accordingly, we recognized an impairment charge of $1.5 million representing a corresponding portion of the unamortized balance in the third quarter of 2012.
“Other revenues” includes payments from customer settlements, royalties related to coal lease agreements and farm income. During the nine months ended September 30, 2012, certain customers requested to cancel or delay shipment of coal contracted for 2012 and 2013 deliveries. In certain situations, we agreed to release the customers from their commitments in exchange for a cash settlement. In the three and nine months ended September 30, 2012, we recognized revenue of $2.2 million and $22.7 million, respectively, related to these cash settlements. Additionally, in the nine months ended September 30, 2012, we received $8.3 million related to the settlement of a customer contract dispute concerning coal deliveries in prior years that was settled through mediation in the first quarter of 2012. In the three and nine months ended September 30, 2011, we recognized $2.2 million and $7.3 million, respectively, of income as underlying tons were shipped from a coal purchase option sold in a prior year. Additionally, we monetized future coal reserve royalty payments for $2.2 million in the nine months ended September 30, 2011.
We were a defendant in litigation involving Peabody Energy Corporation (Peabody), in relation to their negotiation and June 2005 sale of two properties previously owned by two of our subsidiaries, which was filed prior to our 2007 spin-off from Peabody. In May 2011, this litigation was settled. As part of the settlement, we made a payment of $14.8 million and ownership of the related assets and liabilities reverted back to us. The assets include coal reserves at the former Tygart River Mine site in West Virginia and surface land related to the former Will Scarlet Mine site in Illinois. The liabilities include the reclamation obligations related to these assets. The assets were recorded at the value of the settlement consideration, which included $17.6 million of estimated reclamation liabilities assumed, resulting in no significant impact to our results of operations in the second quarter of 2011.

14

PATRIOT COAL CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012


In February 2011, outstanding notes receivable related to the 2006 and 2007 sales of coal reserves and surface land were repaid for $115.7 million prior to the scheduled maturity date. The early repayment resulted in a loss of $5.9 million, which is reflected in “Interest expense and other” on the unaudited consolidated statements of operations.

(7) Impairment and Restructuring Charges
In the third quarter of 2012, we recorded an impairment charge of $18.4 million for the write-off of coal reserves related to our Bluegrass mining complex located in the Illinois Basin segment. This impairment resulted from the termination of leases providing rights to certain coal reserves through the contract rejection process and related negotiations.
In accordance with ASC 360, "Impairment and Disposal of Long-Lived Assets," long-lived assets held and used by the Company are reviewed for impairment when events or changes in circumstances indicate that their carrying value may not be recoverable. In the second quarter of 2012, as a result of weaker industry fundamentals and coal demand, and the significant decline in value of our equity securities and debt instruments, we performed an impairment review. Recoverability of long-lived assets was assessed based on the carrying value of these assets compared to the sum of the undiscounted cash flows expected to result from the use and eventual disposal of the asset, as well as specific appraisal in certain circumstances. An impairment loss is recognized when the carrying amount is not considered to be recoverable and exceeds fair value. As a result of this impairment review at June 30, 2012, we recorded a $1.4 million impairment charge on certain coal reserves located in our Appalachia segment.
In June 2012, we idled our Freedom Mine at the Bluegrass mining complex, which is reported in our Illinois Basin segment, due to the continued weakened demand for thermal coal. The Freedom Mine produced approximately 1.2 million tons of thermal coal in 2011. We also adjusted certain mining plans at our Kanawha Eagle mining complex which resulted in the early closure of one of our thermal coal mines at this mining complex. The Kanawha Eagle mining complex is reported in our Appalachia segment. In the second quarter of 2012, we recorded an $8.2 million impairment and restructuring charge related to these two mines, which primarily consisted of the write-off of infrastructure, mine development and certain equipment. We also recorded a $4.1 million charge to asset retirement obligation expense to adjust the liability for the accelerated closure and to write-off the related asset.
In February 2012, we closed the Big Mountain mining complex, which is reported in our Appalachia segment, due to the weakened demand for thermal coal experienced in late 2011 and early 2012. Prior to the closure, the complex had two active mines and one preparation plant. The complex produced 1.8 million tons of thermal coal in 2011. In the first quarter of 2012, we recorded a $32.8 million impairment and restructuring charge related to the closure, which mainly consisted of the write-off of infrastructure, mine development and certain equipment. We also recorded a $17.5 million charge to asset retirement obligation expense to adjust the asset retirement obligation liability for the accelerated closure and write-off the related asset.
The Company also maintains a restructuring reserve, which is primarily related to contractual obligations with no future economic benefit associated with a 2010 mine closure and rationalization at our Rocklick mining complex. At September 30, 2012, the restructuring liability totaled $5.9 million and is included in "Liabilities subject to compromise." At December 31, 2011, the restructuring liability totaled $10.1 million, of which $4.5 million was the current portion and included in "Accounts payable and accrued expense." The long-term portion of the restructuring reserves at December 31, 2011 was included in "Other noncurrent liabilities," in the accompanying consolidated balance sheets. We continue to accrete this liability.
The Company continues to review and evaluate various restructuring and other alternatives in response to changes in market demand. Such initiatives may include cost reductions, idling or closing mining operations, consolidating operations and functions, relocating or reducing production and voluntary and involuntary employee separation programs. In addition, such actions may subject the Company to additional asset impairment charges and short-term costs, which may include mine shutdown costs, lease commitment costs, employee severance costs and other closing costs.



15

PATRIOT COAL CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012


(8) Postretirement Benefit Costs
Net periodic postretirement benefit costs included the following components:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
 
(Dollars in thousands)
Service cost for benefits earned
$
1,382

 
$
1,402

 
$
4,147

 
$
4,207

Interest cost on accumulated postretirement benefit obligation
18,208

 
19,269

 
54,623

 
57,807

Amortization of actuarial losses
14,007

 
10,784

 
42,022

 
32,351

Amortization of prior service credit
(202
)
 
(202
)
 
(607
)
 
(607
)
Net periodic postretirement benefit costs
$
33,395

 
$
31,253

 
$
100,185

 
$
93,758

During bankruptcy, we continue to apply the accounting guidance in ASC 715, Compensation - Retirement Benefits, to our postretirement benefits other than pensions.

(9) Multi-Employer Pension Plans
The Company participates in a multi-employer pension plan, the UMWA 1974 Pension Plan (the 1974 Plan), that is considered to be in "Seriously Endangered Status" for the plan year beginning July 1, 2011 (the 2011 Plan Year). That status is the result of the 1974 Plan funded percentage being less than 80% and because the 1974 Plan is projected to have an accumulated deficiency within six plan years after the 2011 Plan Year. As a result, a funding improvement plan was adopted by the 1974 Plan as of May 25, 2012, which would require increased contributions to the 1974 Plan after a UMWA collective bargaining agreement is negotiated in 2016.
In the three and nine months ended September 30, 2012, the Company made contributions to the 1974 Plan and recognized expense of $4.9 million and $16.4 million, respectively, which were based upon an hourly contribution rate of $5.50. Under the funding improvement plan, the hourly contribution rate would increase in stages from a minimum of $12.50 in 2017 to a maximum potential rate of $26.50 as early as 2022.

(10) Income Tax Provision
For the three and nine months ended September 30, 2012, we recorded an insignificant income tax benefit primarily related to certain state taxes. For the three and nine months ended September 30, 2011, we recorded an income tax benefit of $0.2 million and an income tax provision of $0.4 million, respectively, primarily related to certain state taxes. We anticipate a tax net operating loss for the year ending December 31, 2012 for which no income tax benefit will be recognized.

(11) Earnings per Share
Basic earnings per share is computed by dividing net income by the number of weighted average common shares outstanding during the reporting period. Diluted earnings per share is calculated to give effect to all potentially dilutive common shares that were outstanding during the reporting period.
The effect of dilutive securities excludes certain stock options, restricted stock units and convertible debt-related shares because the inclusion of these securities was antidilutive to earnings per share. For the three and nine months ended September 30, 2012 and 2011, no common stock equivalents were included in the computation of the diluted loss per share because we reported a net loss for all periods.
Accordingly, 1.9 million shares for the three and nine months ended September 30, 2012 and 3.3 million shares for the three and nine months ended September 30, 2011 related to stock-based compensation awards were excluded from the diluted loss per share calculation. In addition, 3.0 million common shares related to the convertible notes, for all periods, were excluded from the diluted loss per share calculation.


16

PATRIOT COAL CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012


(12) Inventories
Inventories consisted of the following:
 
September 30, 2012
 
December 31, 2011
 
(Dollars in thousands)
Materials and supplies
$
53,832

 
$
62,474

Saleable coal
51,501

 
23,806

Raw coal
23,202

 
12,086

Total
$
128,535

 
$
98,366

Materials, supplies and coal inventory are valued at the lower of average cost or market. Saleable coal represents coal stockpiles that will be sold in current condition. Raw coal represents coal stockpiles that may be sold in current condition or may be further processed prior to shipment to a customer. Coal inventory costs include labor, supplies, equipment, operating overhead and other related costs. The increase in saleable and raw coal from December 31, 2011 to September 30, 2012 was primarily due to weaker demand for thermal and metallurgical coal driven by low natural gas prices, mild weather and weaker international and domestic economies during the nine months ended September 30, 2012.

(13) Debt and Credit Facilities
At September 30, 2012 and December 31, 2011, our total indebtedness consisted of the following:
 
 
September 30, 2012
 
December 31, 2011
 
 
(Dollars in thousands)
Secured Debt
 
 
 
 
DIP First Out Term Loan, due 2013
 
$
375,000

 
$

Capital leases
 
2,270

 

Total secured debt, not subject to compromise
 
377,270

 

 
 
 
 
 
Unsecured Debt
 
 
 
 
8.25% Senior Notes, due 2018
 
250,000

 
248,573

3.25% Convertible Senior Notes, due 2013
 
200,000

 
185,379

Promissory notes
 
8,500

 
8,294

Total unsecured debt, subject to compromise
 
458,500

 
442,246

Total long-term debt
 
835,770

 
442,246

Less liabilities subject to compromise
 
(458,500
)
 

Less current maturities of long-term debt
 
(398
)
 
(1,182
)
Long-term debt, less current maturities
 
$
376,872

 
$
441,064

Prior to the filing of the Chapter 11 Petitions, the Company had a $427.5 million Pre-Petition Credit Agreement with a maturity date of December 31, 2013. The Pre-Petition Credit Agreement provided for the issuance of letters of credit and direct borrowings. In January 2011 and 2012, we entered into amendments to the Pre-Petition Credit Agreement which, among other things, modified certain limits and minimum requirements of our financial covenants.
Additionally, prior to the filing of the Chapter 11 Petitions, the Company had a $125.0 million accounts receivable securitization program, which provided for the issuance of letters of credit and direct borrowings. This program was terminated on July 11, 2012. Trade accounts receivable were sold, on a revolving basis, to a wholly-owned bankruptcy-remote entity (facilitating entity), which then sold an undivided interest in all of the trade accounts receivable to the creditors as collateral for any borrowings. Available liquidity under the program fluctuated with the balance of our trade accounts receivable. The outstanding trade accounts receivable balance was $171.0 million as of December 31, 2011.
Default of Pre-Petition Financing
The filing of the Chapter 11 Petitions constituted an event of default under the following debt agreements, each of which

17

PATRIOT COAL CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012


provided that, as a result of the event of default, all principal, interest and other amounts due thereunder became immediately due and payable:
the Pre-Petition Credit Agreement, with respect to outstanding letters of credit in an aggregate principal amount of $300.8 million as of the Petition Date, plus accrued and unpaid interest thereon and borrowings in an aggregate principal amount of $25.0 million as of the Petition Date, plus accrued and unpaid interest thereon;
the Indenture dated as of May 28, 2008 with respect to an aggregate principal amount of $200.0 million of 3.25% Convertible Senior Notes due 2013 (the Convertible Notes) plus accrued and unpaid interest thereon;
the Indenture dated as of May 5, 2010 with respect to an aggregate principal amount of $250.0 million of 8.25% Senior Notes due 2018 (the Senior Notes) plus accrued and unpaid interest thereon; and
the $125.0 million accounts receivable securitization program with respect to outstanding letters of credit in an aggregate principal amount of $51.8 million as of the Petition Date, plus accrued and unpaid interest thereon.
The ability of the creditors to seek remedies to enforce their rights under these pre-petition debt agreements was automatically stayed as a result of the filing of the Chapter 11 Petitions, and the creditors' rights of enforcement became subject to the applicable provisions of the Bankruptcy Code. Due to the filing of the Chapter 11 Petitions, the Company's pre-petition unsecured long-term debt of $458.5 million is included in "Liabilities subject to compromise" at September 30, 2012. Since July 9, 2012, the Company has not recorded interest expense on unsecured debt which is subject to compromise. Contractual interest expense on unsecured debt from July 10, 2012 through September 30, 2012 was $10.7 million.
DIP Financing
In connection with filing the Chapter 11 Petitions, the Debtors filed a motion seeking, among other things, Bankruptcy Court authorization for us to obtain the DIP Facilities, and for the DIP Guarantors to guaranty obligations in connection with the DIP Facilities, up to an aggregate principal amount of $802.0 million, consisting of (a) a First Out Revolving Credit Loan in an amount not to exceed $125.0 million, (b) a First Out Term Loan in the amount of $375.0 million, and (c) a $302.0 million roll up of obligations under the Pre-Petition Credit Agreement in respect to outstanding letters of credit, inclusive of any obligations as to reimbursement, renewal and extension of the same issued in the aggregate amount of $300.8 million as of the Petition Date (the Second Out Facility).
On July 11, 2012, the Bankruptcy Court entered the Interim DIP Order that, among other things, authorized us to borrow money and obtain letters of credit pursuant to the DIP Facilities and to guaranty such borrowings and our obligations with respect to such letters of credit, up to an aggregate principal or face amount of $677.0 million (plus interest, fees and other expenses and amounts), consisting of borrowings of up to an aggregate principal or face amount of $125.0 million under the First Out Revolving Credit Loan, $250.0 million under the First Out Term Loan, and up to $302.0 million under the Second Out Facility, in accordance with the terms of the Interim DIP Order and the DIP Facilities. On August 3, 2012, the Bankruptcy Court entered the Final DIP Order that, among other things, authorized us to borrow the full amount under the DIP Facilities in accordance with the terms of the Final DIP Order and the DIP Facilities. The Final DIP Order amended certain provisions of the DIP Facilities, including, among other things, the definition of “Applicable Rate” in the First Out DIP Credit Agreement.
The DIP Facilities, as more fully described below, include financial covenants applicable to Patriot and its subsidiaries, including compliance with requirements relating to minimum consolidated EBITDA, maximum capital expenditures and minimum liquidity. At September 30, 2012, we were in compliance with these financial covenants. Based on continued declines in metallurgical coal demand and prices experienced in the third quarter of 2012 and the related effect on our current internal financial forecasts, we believe there is a substantial likelihood that we may not comply with the minimum consolidated EBITDA financial covenant beginning in the second quarter of 2013. Our financial forecasts are subject to significant variation due to the volatility in the coal markets, including demand and prices for our products, and uncertainties surrounding our restructuring initiatives, so our compliance with the minimum consolidated EBITDA financial covenant remains subject to market conditions and our ability to improve financial performance. Failure to comply with our financial covenants would be an event of default under the terms of our DIP Facilities. If an event of default occurs, we would need to negotiate an amendment or waiver from the lenders; however, there can be no assurances that we would be able to obtain such an amendment or waiver in the future.
First Out Facility
On July 9, 2012, Patriot and the DIP Guarantors entered into a Superpriority Secured Debtor-in-Possession Revolving and Term Loan Credit Agreement (the First Out DIP Credit Agreement). Our obligations under the First Out DIP Credit Agreement are guaranteed by each DIP Guarantor. On July 11, 2012, the conditions precedent to closing and the initial borrowing were

18

PATRIOT COAL CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012


satisfied and the First Out DIP Credit Agreement became effective.
First Out Revolving Credit Loans bear interest at a rate per annum equal to the Eurocurrency Rate (as defined in the First Out DIP Credit Agreement) plus 3.25% or the Base Rate (as defined in the First Out DIP Credit Agreement) plus 2.25%.  First Out Term Loans bear interest at a rate per annum equal to the Eurocurrency Rate plus 7.75% or the Base Rate plus 6.75%.  In addition, a commitment fee of 0.75% per annum is required for unutilized commitments under the First Out Facility. Upon the occurrence and during the continuance of an event of default under the First Out DIP Credit Agreement, the interest rate increases by 2.00% per annum.
On July 11, 2012, we received proceeds of $250.0 million under the First Out Term Loan, and on August 6, 2012, we received the remaining proceeds of $125.0 million. We utilized the funds to repay pre-petition debt of $25.0 million, which was originally borrowed in June 2012, pay DIP Facilities fees of $42.6 million and increase cash for general operating purposes. Letters of credit totaling $53.0 million were issued under the First Out Revolving Credit Loan to replace pre-petition letters of credit outstanding under the accounts receivable securitization program that were canceled. At September 30, 2012, letters of credit totaling $53.0 million were outstanding under the First Out Facility.
Borrowings under the First Out Facility are to be repaid on the earlier of (i) the Initial Maturity Date, which is October 4, 2013 provided that the Initial Maturity Date can be extended until December 31, 2013 subject to certain specified conditions, (ii) prepayment by Patriot of all outstanding principal and accrued but unpaid interest, (iii) the date of termination of the commitment of each lender and of the obligation of the L/C Issuers (as defined in the First Out DIP Credit Agreement) to make letter of credit extensions pursuant to the First Out DIP Credit Agreement, (iv) the date of the substantial consummation of a reorganization plan that is confirmed pursuant to an order of the Bankruptcy Court and (v) the date of dismissal of the Bankruptcy Case by the Bankruptcy Court. An extension fee of 0.25% of the Revolving Credit Commitments and Term Loans is due if we elect to extend the maturity date of the First Out Facility.
The First Out DIP Credit Agreement provides for representations and warranties by Patriot and the DIP Guarantors that are customary for facilities of this type. The First Out DIP Credit Agreement further provides for affirmative and negative covenants applicable to Patriot and its subsidiaries, including affirmative covenants requiring Patriot to provide financial information, 13-week projections and other information including, upon request, environmental or mining site assessments or audit reports to the administrative agent under the First Out DIP Credit Agreement (the First Out DIP Agent), and negative covenants restricting the ability of Patriot and its subsidiaries to incur additional indebtedness, grant liens, dispose of assets, pay dividends or take certain other actions. The First Out DIP Credit Agreement also provides financial covenants applicable to Patriot and its subsidiaries, including compliance with requirements relating to minimum consolidated EBITDA, maximum capital expenditures and minimum liquidity.
The First Out DIP Credit Agreement provides for certain customary events of default, including events of default resulting from non-payment of principal, interest or other amounts when due, material breaches of Patriot's and the DIP Guarantors' representations and warranties, breaches by Patriot or the DIP Guarantors of their covenants in the First Out DIP Credit Agreement or ancillary loan documents, cross-defaults under other agreements or instruments, the entry of material judgments against Patriot or its subsidiaries, or revocation of the intercreditor and priority of payment provisions contained in the Pledge and Security and Intercreditor Agreement (as defined below). The First Out DIP Credit Agreement also includes customary events of default that may arise in connection with the Chapter 11 Petitions, including dismissal or conversion of the Debtors' cases.
Second Out Facility and Second Out Guarantee
We entered into an Amended and Restated Superpriority Secured Debtor-in-Possession Credit Agreement dated as of July 11, 2012 (the Second Out DIP Credit Agreement). Our obligations under the Second Out DIP Credit Agreement are guaranteed by the DIP Guarantors pursuant to the Amended and Restated Guarantee (the Second Out Guarantee) dated as of July 11, 2012, made by Patriot and the DIP Guarantors in favor of the administrative agent under the Second Out DIP Credit Agreement (the Second Out DIP Agent). On July 13, 2012, the conditions precedent to closing were satisfied and the Second Out DIP Credit Agreement and the Second Out Guarantee became effective.
Letter of credit fees under the Second Out Facility will be paid at a rate equal to 4.50% per annum. The letter of credit borrowings under the Second Out Facility will bear interest at a rate per annum equal to the Eurocurrency Rate plus 8.00% or the Base Rate plus 7.00% per annum. Upon the occurrence and during the continuance of an event of default under the Second Out DIP Credit Agreement, the interest rate will increase by 2.00% per annum. On July 13, 2012, letters of credit totaling $300.8 million were issued under the Second Out Facility and used to replace pre-petition letters of credit outstanding under the Pre-Petition Credit Agreement. At September 30, 2012, letters of credit totaling $300.8 million were outstanding under the Second Out Facility.

19

PATRIOT COAL CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012


All letter of credit borrowings under the Second Out Facility are to be repaid on the earlier of (i) the Initial Maturity Date, which is October 4, 2013, provided that the Initial Maturity Date can be extended until December 31, 2013 subject to certain specified conditions, (ii) the date on which the obligation of the letter of credit issuers to permit the extension of the expiry date of any letter of credit is terminated upon direction from the Second Out DIP Agent in the case of an event of default, (iii) the date of the substantial consummation of a reorganization plan that is confirmed pursuant to an order of the Bankruptcy Court and (iv) the date of dismissal of the Bankruptcy Case by the Bankruptcy Court.
The Second Out DIP Credit Agreement provides for representations and warranties by Patriot and the DIP Guarantors, affirmative and negative covenants applicable to Patriot and its subsidiaries and events of default that are substantially similar to the representations, warranties, covenants and events of default under the First Out DIP Credit Agreement.
Pledge and Security and Intercreditor Agreement
On July 11, 2012, Patriot and the DIP Guarantors entered into a Debtor-in-Possession Pledge and Security and Intercreditor Agreement (the Pledge and Security and Intercreditor Agreement) with the First Out DIP Agent and Second Out DIP Agent. The obligations of Patriot and the DIP Guarantors under the DIP Facilities are secured by a lien covering substantially all of the assets, rights and properties of Patriot and the DIP Guarantors, subject to certain exceptions set forth in the Pledge and Security and Intercreditor Agreement. The Pledge and Security and Intercreditor Agreement also sets forth the seniority and priority of the respective liens on Patriot's and the DIP Guarantors' assets for the benefit of the lenders under the First Out Revolving Credit Loan, the First Out Term Loan and the Second Out Facility.
DIP Financing Fees
Debt issuance costs of $42.6 million were incurred and paid in connection with the DIP financing. These amounts were expensed and separately disclosed in the unaudited consolidated statements of operations in the three and nine months ended September 30, 2012.

(14) Segment Information
We report our operations through two reportable operating segments, Appalachia and Illinois Basin. The Appalachia and Illinois Basin segments primarily consist of our mining operations in West Virginia and Kentucky, respectively. The principal business of the Appalachia segment is the mining and preparation of thermal coal, sold primarily to electricity generators, and metallurgical coal, sold to steel and coke producers. The principal business of the Illinois Basin segment is the mining and preparation of thermal coal, sold primarily to electricity generators.
 
Nine Months Ended September 30,
 
2012
 
2011
(% of total sales volume - tons)
 
 
 
  Sales to electricity generators
75
%
 
76
%
  Sales to steel & coke producers
25
%
 
24
%
  Export sales
45
%
 
29
%
 
 
 
 
(Dollars in thousands)
 
 
 
Revenues attributable to foreign countries, based on where product shipped
$
682,700

 
$
657,300

For the nine months ended September 30, 2012 and 2011, there are no material revenues attributable to any individual foreign country for which we can determine the final destination of the shipment. For certain sales made through third-party arrangements, it is impracticable to determine sales by individual foreign country.
We utilize underground and surface mining methods and produce coal with high and medium Btu content. Our operations have relatively short shipping distances from the mine to most of our domestic utility customers and certain metallurgical coal customers. “Corporate and Other” in the tables below includes selling and administrative expenses, net gains on disposal or exchange of assets and costs associated with past mining obligations.
Our chief operating decision makers use Adjusted EBITDA as the primary measure of segment profit and loss. We believe that in our industry such information is a relevant measurement of a company's operating financial performance. Adjusted EBITDA

20

PATRIOT COAL CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012


is defined as net income (loss) before deducting depreciation, depletion and amortization; asset retirement obligation expense; sales contract accretion; impairment and restructuring charge; interest expense and other; DIP financing fees; interest income; reorganization items and income taxes. Segment Adjusted EBITDA is calculated the same as Adjusted EBITDA but excludes “Corporate and Other” as defined above. Because Adjusted EBITDA and Segment Adjusted EBITDA are not calculated identically by all companies, our calculation may not be comparable to similarly titled measures of other companies.
Operating segment results for the three and nine months ended September 30, 2012 and 2011 were as follows:
 
Three Months Ended September 30, 2012
 
Nine Months Ended September 30, 2012
 
Appalachia
 
Illinois Basin
 
Corporate and Other
 
Total
 
Appalachia
 
Illinois Basin
 
Corporate and Other
 
Total
 
(Dollars in thousands)
Revenues
$
375,101

 
$
73,095

 
$

 
$
448,196

 
$
1,234,609

 
$
250,230

 
$

 
$
1,484,839

Adjusted EBITDA
51,381

 
9,011

 
(57,085
)
 
3,307

 
229,415

 
30,748

 
(178,534
)
 
81,629

Additions to property, plant, equipment and mine development
24,308

 
2,105

 

 
26,413

 
107,337

 
15,824

 
13

 
123,174

Income from equity affiliates
1,864

 

 

 
1,864

 
3,564

 

 

 
3,564

 
Three Months Ended September 30, 2011
 
Nine Months Ended September 30, 2011
 
Restated(1)
 
Restated(1)
 
Appalachia
 
Illinois Basin
 
Corporate and Other
 
Total
 
Appalachia
 
Illinois Basin
 
Corporate and Other
 
Total
 
(Dollars in thousands)
Revenues
$
509,200

 
$
80,195

 
$

 
$
589,395

 
$
1,562,918

 
$
235,661

 
$

 
$
1,798,579

Adjusted EBITDA
68,820

 
(2,863
)
 
(51,161
)
 
14,796

 
291,919

 
(1,096
)
 
(157,220
)
 
133,603

Additions to property, plant, equipment and mine development
40,687

 
3,485

 
139

 
44,311

 
99,844

 
11,485

 
804

 
112,133

Income from equity affiliates
1,650

 

 

 
1,650

 
4,570

 

 

 
4,570


A reconciliation of Adjusted EBITDA to net loss follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
 
 
Restated(1)
 
 
 
Restated(1)
 
(Dollars in thousands)
Total Adjusted EBITDA
$
3,307

 
$
14,796

 
$
81,629

 
$
133,603

Depreciation, depletion and amortization
(48,906
)
 
(47,040
)
 
(135,430
)
 
(138,112
)
Asset retirement obligation expense
(19,496
)
 
(13,299
)
 
(377,737
)
 
(100,722
)
Sales contract accretion

 
11,380

 
11,628

 
45,805

Impairment and restructuring charge
(18,434
)
 
(139
)
 
(60,892
)
 
(423
)
Interest expense and other
(13,661
)
 
(16,453
)
 
(46,168
)
 
(55,896
)
DIP financing fees
(42,552
)
 

 
(42,552
)
 

Interest income
15

 
73

 
178

 
171

Reorganization items, net
(76,214
)
 

 
(76,214
)
 

Income tax benefit (provision)
8

 
230

 
8

 
(383
)
Net loss
$
(215,933
)
 
$
(50,452
)
 
$
(645,550
)
 
$
(115,957
)
(1) See Note 21, Restatement of Financial Statements, in the Notes to Unaudited Consolidated Financial Statements.


21

PATRIOT COAL CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012


(15) Derivatives
In connection with the Chapter 11 Petitions, we have been authorized by the Bankruptcy Court to continue performance under our pre-petition derivative contracts and to enter into and perform under post-petition derivative contracts consistent with the ordinary course of business and past practices. We utilize derivative financial instruments to manage exposure to certain commodity prices. We recognize derivative financial instruments at fair value on the consolidated balance sheets. For derivative instruments that are eligible and designated as cash flow hedges, the periodic change in fair value is recorded in “Accumulated other comprehensive loss” until the hedged transaction occurs or the relationship ceases to qualify for hedge accounting. For derivatives that are not designated as hedges, the periodic change in fair value is recorded directly to earnings in “Operating costs and expenses” in the consolidated statements of operations. In addition, if a portion of the change in fair value of a cash flow hedge is deemed ineffective during a reporting period, the ineffective portion of the change in fair value is recorded directly to earnings.
We have commodity price risk related to our diesel fuel purchases. To manage a portion of this risk, we enter into heating oil and ultra low sulfur diesel swap contracts with financial institutions. The changes in diesel fuel prices and the prices of these financial instruments are highly correlated, thus allowing the swap contracts to be designated as cash flow hedges of anticipated diesel fuel purchases. We expect to purchase approximately 24 million gallons of diesel fuel annually across all operations in 2012. As of September 30, 2012, the notional amounts outstanding for the swaps included 2.3 million gallons of heating oil expiring throughout 2012, as well as 3.0 million gallons of ultra low sulfur diesel expiring in 2013. For the three and nine months ended September 30, 2012 we recognized a net gain of $0.3 million and $1.5 million in earnings on settled contracts, respectively. For the three and nine months ended September 30, 2011, we recognized a net gain of $1.1 million and $3.6 million in earnings on settled contracts, respectively. The portion of the fair value for the cash flow hedges deemed ineffective for the three and nine months ended September 30, 2012 and 2011 was immaterial.
The following table presents amounts related to our fuel derivative instruments and hedging activities included in the consolidated balance sheets. See Unaudited Consolidated Statements of Comprehensive Income for the impact of our fuel hedges on comprehensive loss.
 
September 30, 2012
 
December 31, 2011
 
(Dollars in thousands)
 
 
 
 
Fair value of current fuel contracts (Prepaid expenses and other current assets)
$
1,283

 
$
251

Fair value of noncurrent fuel contracts (Investments and other assets)

 
112

Fair value of current fuel contracts (Accounts payable and accrued expenses)

 
168

Fair value of noncurrent fuel contracts (Other noncurrent liabilities)

 
11

We utilized New York Mercantile Exchange (NYMEX) quoted market prices for the fair value measurement of these contracts, which reflect a Level 2 fair value input.

(16) Fair Value of Financial Instruments
Fair value is a market-based measurement that should be determined based on the assumptions that market participants would use in pricing an asset or liability. Authoritative guidance establishes a three-level fair value hierarchy for fair value to be measured based on the observability of the inputs utilized in the valuation. The levels are: Level 1 - inputs from quoted prices in an active market, Level 2 - inputs other than quoted prices that are directly or indirectly observable through market corroborated inputs and Level 3 - inputs that are unobservable and require assumptions about pricing by market participants.
Cash and cash equivalents, accounts receivable, accounts payable and accrued expenses have carrying values which approximate fair value due to the short maturity or the financial nature of these instruments.

22

PATRIOT COAL CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012


The following table summarizes the fair value of our remaining financial instruments:
 
September 30, 2012
 
December 31, 2011
 
(Dollars in thousands)
Assets:
 
 
 
Fuel contracts, cash flow hedges
$
1,283

 
$
363

Liabilities:
 
 
 
Fuel contracts, cash flow hedges

 
179

First Out Term Loan
378,750

 

$200 million of 3.25% Convertible Senior Notes due 2013
30,626

 
183,000

$250 million of 8.25% Senior Notes due 2018
123,875

 
239,468

All of the instruments above were valued using Level 2 inputs. The fair value of the DIP First Out Term Loan, Convertible Notes and the Senior Notes was estimated using the last traded value on the last day of each period, as provided by a third party.

(17) Commitments and Contingencies
The Bankruptcy Case
On July 9, 2012, the Debtors filed voluntary petitions for reorganization under the Bankruptcy Code in the Bankruptcy Court. The Debtors will continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. As a result of the Chapter 11 Petitions, much of the pending litigation against the Debtors is stayed. Subject to certain exceptions and approval by the Bankruptcy Court, during the Chapter 11 process, no party can take further actions to recover pre-petition claims against the Debtors.
Commitments
As of September 30, 2012, purchase commitments for equipment totaled $47.6 million primarily related to longwall equipment replacements, capital rebuilds at our Highland mining complex and our build out of metallurgical coal production. Of this amount, we have equipment totaling $19.0 million scheduled for delivery in the remainder of 2012, with the remainder in subsequent years. We typically finance a significant portion of equipment through leasing arrangements; however, our ability to enter into new agreements during bankruptcy will be more difficult.
Other
On occasion, we become a party to claims, lawsuits, arbitration proceedings and administrative procedures in the ordinary course of business. Our material legal proceedings are discussed below.
Clean Water Act Permit Issues
The federal Clean Water Act (CWA) and corresponding state and local laws and regulations affect coal mining operations by restricting the discharge of pollutants, including dredged or fill materials, into waters of the U.S. In particular, the CWA requires effluent limitations and treatment standards for wastewater discharge through the National Pollutant Discharge Elimination System (NPDES) program. NPDES permits, which we must obtain for both active and historical mining operations, govern the discharge of pollutants into water, require regular monitoring and reporting and set forth performance standards. States are empowered to develop and enforce water quality standards, which are subject to change and must be approved by the Environmental Protection Agency (EPA). Water quality standards vary from state to state.
Environmental claims and litigation in connection with our various NPDES permits, and related CWA requirements that were assumed in the Magnum acquisition, include the following:
Hobet West Virginia Department of Environmental Protection (WVDEP) Action
In 2007, Hobet Mining, LLC (Hobet), one of our subsidiaries, was sued for exceedances of effluent limits contained in four of its NPDES permits in state court in Boone County, West Virginia by the WVDEP. We refer to this case as the Hobet WVDEP Action. The Hobet WVDEP Action was resolved by a settlement and consent order entered in the Boone County Circuit Court on September 5, 2008. The settlement required us, among other things, to complete supplemental environmental projects, to

23

PATRIOT COAL CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012


gradually reduce selenium discharges from our Hobet Job 21 surface mine, to achieve full compliance with our NPDES permits by April 2010 and to study potential treatment alternatives for selenium.
On October 8, 2009, a motion to enter a modified settlement and consent order in the Hobet WVDEP Action was submitted to the Boone County Circuit Court. This motion to modify the settlement and consent order was jointly filed by Patriot and the WVDEP. On December 3, 2009, the Boone County Circuit Court approved and entered a modified settlement and consent order (the December 2009 Consent Order) to, among other things, extend coverage of the September 5, 2008 settlement and consent order to two additional permits and extend the date to achieve full compliance with our NPDES permits from April 2010 to July 2012. One of the two additional permits subject to such extension, Hobet Surface Mine No. 22, was subsequently addressed in the September 1, 2010 U.S. District Court Ruling, as further discussed below.
In May 2012, a draft modification to the December 2009 Consent Order in the Hobet WVDEP Action was submitted to the Boone County Circuit Court. WVDEP and Hobet jointly requested an extension of the July 2012 compliance date while further refinements to the consent decree were discussed. The Boone County Circuit Court has extended the compliance date while those discussions are ongoing.
Selenium Matters
Federal Apogee Case and Federal Hobet Case
In 2007, Apogee Coal Company, LLC (Apogee), one of our subsidiaries, was sued in the U.S. District Court by the Ohio Valley Environmental Coalition, Inc. (OVEC) and another environmental group (pursuant to the citizen suit provisions of the CWA). We refer to this lawsuit as the Federal Apogee Case. This lawsuit alleged that Apogee had violated water effluent limits for selenium set forth in one of its NPDES permits. The lawsuit sought compliance with the effluent limits of the NPDES permit, fines and penalties as well as injunctive relief prohibiting Apogee from further violating laws and its permit.
In 2008, OVEC and another environmental group filed a lawsuit against Hobet and WVDEP in the U.S. District Court (pursuant to the citizen suit provisions of the CWA). We refer to this case as the Federal Hobet Case and it is very similar to the Federal Apogee Case. Additionally, the Federal Hobet Case involved the same four NPDES permits that were the subject of the original Hobet WVDEP Action in state court. However, the Federal Hobet Case focused exclusively on selenium exceedances in permitted water discharges, while the Hobet WVDEP Action addressed all effluent limits, including selenium, established by the permits.
On March 19, 2009, the U.S. District Court approved two separate consent decrees, one between Apogee and the plaintiffs and the other between Hobet and the plaintiffs. The consent decrees extended the deadline to comply with effluent limits for selenium with respect to the permits covered by the Federal Apogee Case and the Federal Hobet Case to April 5, 2010 and added interim reporting requirements up to that date. We agreed to, among other things, undertake pilot projects at Apogee and Hobet involving reverse osmosis technology along with interim reporting obligations and to comply with our NPDES permits' effluent limits for selenium by April 5, 2010. On February 26, 2010, we filed a motion requesting a hearing to discuss the modification of the March 19, 2009 consent decrees to, among other things, extend the compliance deadline to July 2012 in order to continue our efforts to identify viable treatment alternatives. On April 18, 2010, the plaintiffs in the Federal Apogee Case filed a motion asking the court to issue an order to show cause why Apogee should not be found in contempt for its failure to comply with the terms and conditions of the March 19, 2009 consent decree. The remedies sought by the plaintiffs included compliance with the terms of the consent decree, the imposition of fines and an obligation to pay plaintiffs' attorneys fees. A hearing to discuss these motions was held beginning on August 9, 2010. See September 1, 2010 U.S. District Court Ruling below for the outcome of this hearing.
Federal Hobet Surface Mine No. 22 Case
In March 2010, the U.S. District Court permitted a lawsuit to proceed that was filed in October 2009 by OVEC and other environmental groups against Hobet, alleging that Hobet had in the past violated, and continued to violate, effluent limitations for selenium in an NPDES permit and the requirements of a Surface Mining Control and Reclamation Act (SMCRA) permit for Hobet Surface Mine No. 22 and seeking injunctive relief. We refer to this as the Federal Hobet Surface Mine No. 22 Case. In addition to the Federal Apogee Case, the scope and terms of injunctive relief in the Federal Hobet Surface Mine No. 22 Case were discussed at the hearing that began on August 9, 2010. See September 1, 2010 U.S. District Court Ruling below for the outcome of this hearing.
Other WVDEP Actions
On April 23, 2010, WVDEP filed a lawsuit against Catenary Coal Company, LLC (Catenary), one of our subsidiaries, in the Boone County Circuit Court. We refer to this case as the Catenary WVDEP Action. This lawsuit alleged that Catenary had discharged selenium from its surface mining operations in violation of certain of its NPDES and surface mining permits. WVDEP

24

PATRIOT COAL CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012


is seeking fines and penalties as well as injunctions prohibiting Catenary from discharging pollutants, including selenium, in violation of laws and NPDES permits. The Catenary WVDEP Action has been consolidated with the Hobet WVDEP Action, and permits contained in the Catenary WVDEP Action were included in the draft modified settlement and consent order in the Hobet WVDEP Action which was submitted to the Boone County Circuit Court in May 2012. The permits contained in the Catenary WVDEP Action are also included in the February 2011 Litigation discussed below.
On June 11, 2010, WVDEP filed a lawsuit against Apogee in the Logan County Circuit Court, alleging discharge of pollutants, including selenium, in violation of certain of its NPDES and SMCRA permits. We refer to this case as the Apogee WVDEP Action. The permits contained in the Apogee WVDEP Action are also included in the February 2011 Litigation discussed below. WVDEP is seeking fines and penalties as well as injunctions prohibiting Apogee from discharging pollutants, including selenium, in violation of laws and NPDES permits. No trial date is currently scheduled in the Apogee WVDEP Action and we remain engaged with the WVDEP regarding resolution of the Apogee WVDEP Action.
We are unable to predict the likelihood of success of the plaintiffs' claims. Although we intend to defend ourselves vigorously against these allegations, we may consider alternative resolutions to these matters if they would be in the best interest of the Company. The compliance deadline for outfalls covered by these lawsuits was addressed in the comprehensive consent decree entered on March 15, 2012, and we are taking steps to resolve these lawsuits on terms that are not inconsistent with the comprehensive consent decree.
September 1, 2010 U.S. District Court Ruling
On September 1, 2010, the U.S. District Court found Apogee in contempt for failing to comply with the March 19, 2009 consent decree entered in the Federal Apogee Case. Apogee was ordered to install a Fluidized Bed Reactor (FBR) water treatment facility for three outfalls and to come into compliance with applicable selenium discharge limits at these three outfalls by March 1, 2013. In September 2010, we increased the portion of the selenium water treatment liability related to Apogee by $69.5 million ($48.8 million related to installation costs and $20.7 million related to operating costs) for the fair value of the estimated costs related to these three outfalls. This charge was reflected in “Asset retirement obligation expense” in the consolidated statement of operations. As of September 30, 2012, we have spent approximately $35.0 million on the Apogee FBR facility and the total expenditures are estimated to be approximately $55.0 million. We began construction on the Apogee FBR facility in the third quarter of 2011.
Additionally, the U.S. District Court ordered Hobet to submit a proposed schedule to develop a treatment plan for a Hobet Surface Mine No. 22 outfall by October 1, 2010 and to come into compliance with applicable discharge limits under the permit by May 1, 2013. We submitted the required schedule, which included conducting additional pilot projects related to certain technological alternatives. A treatment technology to be utilized at this Hobet Surface Mine No. 22 outfall was filed with the U.S. District Court in June 2011 in accordance with the submitted schedule. In June 2011, we increased the selenium water treatment liability by $60.6 million ($36.6 million related to installation costs and $24.0 million related to operating costs) primarily related to fair value of the estimated costs of an FBR water treatment facility at this outfall. This charge was reflected in “Asset retirement obligation expense” in the consolidated statement of operations.
In December 2011, the Special Master appointed by the U.S. District Court to oversee the Hobet Surface Mine No. 22 project approved Hobet's request to substitute ABMet selenium treatment technology for the FBR technology at this outfall. The U.S. District Court subsequently confirmed this substitution. We began construction on the facility in the second quarter of 2012. The estimated total expenditures for completing the ABMet water treatment facility are approximately $25.0 million, less than the estimated $40.0 million to build the Hobet FBR facility. As of September 30, 2012, we have spent approximately $5.2 million on the Hobet ABMet water treatment facility. In December 2011, we decreased the portion of the selenium water treatment liability related to Hobet Surface Mine No. 22 by $25.6 million ($15.3 million related to installation costs and $10.3 million related to operating costs) due to the change in the technology approved by the Special Master. On July 25, 2012, the U.S. District Court amended the compliance date in the order to May 18, 2013.
FBR technology had not been used to remove selenium or any other minerals discharged at coal mining operations prior to our pilot project performed in 2010, but has been successful in other industrial applications. The FBR water treatment facility required by the September 1, 2010 ruling will be the first facility constructed for selenium removal on a commercial scale. Further, neither FBR nor ABMet technology has been proven effective on a full-scale commercial basis at coal mining operations, and there can be no assurance that either of these technologies will be successful under all variable conditions experienced at our mining operations.
February 2011 Litigation
In February 2011, OVEC and two other environmental groups filed a lawsuit against us, Apogee, Catenary and Hobet, in the

25

PATRIOT COAL CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012


U.S. District Court alleging violations of ten NPDES permits and certain SMCRA permits relating to outfalls created prior to the Magnum acquisition. We refer to this case as the February 2011 Litigation. The February 2011 Litigation involves the same four NPDES permits that are the subject of the Catenary WVDEP Action, the same Apogee permit that is the subject of the Apogee WVDEP Action, the same four NPDES permits that are the subject of the Hobet WVDEP Action and one additional NPDES permit held by Hobet that is not the subject of any action by WVDEP.
In late 2011, we substantially agreed to the terms of a settlement agreement with OVEC and the other environmental groups. On January 18, 2012, we finalized a comprehensive consent decree to resolve the February 2011 Litigation. The comprehensive consent decree was approved by the U.S. District Court and became effective on March 15, 2012. The comprehensive consent decree sets technology selection and compliance dates for the outfalls in the ten permits included in the February 2011 Litigation on a staggered basis, allowing us to continue testing certain technologies as well as to take advantage of technology that is still in the development stage. See our discussion below in relation to the uncertainties experienced in making technology selections.
The comprehensive consent decree separates the outfalls included in these ten NPDES permits into categories based on the average gallons per minute water flow at each outfall. The comprehensive consent decree requires that we select water treatment technology alternatives by category beginning with the first category in September 2012 and ending with the last category in September 2014.
Additionally, we agreed to, among other things, come into compliance with applicable selenium discharge limits at each outfall in the category beginning with the first category by March 15, 2014 and ending with the last category by March 15, 2017. We also agreed to, among other things, waive our rights to mine certain coal reserves and to pay $7.5 million in civil penalties. The plaintiffs agreed to, among other things, refrain from instituting new lawsuits with respect to the permits and outfalls identified in the comprehensive consent decree for certain periods, provided we meet the specified requirements. The comprehensive consent decree also established the following framework under which we will interface with the plaintiffs with respect to the identified permits and outfalls:
Category/Gallons Per Minute
Technology Selection Date
Specified Compliance Date
I / 0-200
September 1, 2012
March 15, 2014
II / 201-400
December 31, 2012
March 15, 2015
III / 401-600
March 31, 2013
December 15, 2015
IV / 601-1000
September 1, 2013
May 15, 2016
V / 1000 +
September 1, 2014
March 15, 2017
The comprehensive consent decree was determined to be a recognized subsequent event and the amounts paid per the agreement of approximately $7.5 million and the write-off of the forfeited coal reserves of approximately $2.3 million were reflected in “Asset retirement obligation expense” in our consolidated statement of operations at December 31, 2011.
Selenium Water Treatment Liability
We increased our selenium water treatment liability during the second quarter of 2012 by $307.4 million to recognize our modification to the selenium compliance plan as described below.

26

PATRIOT COAL CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012


A reconciliation of our liability for asset retirement obligations is as follows:
 
 
September 30, 2012
 
 
Reclamation Obligations
 
Selenium Water Treatment Obligations
 
Total
 
 
(Dollars in thousands)
Balance at December 31, 2011
 
$
292,050

 
$
195,991

 
$
488,041

Liabilities incurred
 
2,695

 

 
2,695

Liabilities settled or disposed
 
(36,994
)
 
(35,368
)
 
(72,362
)
Accretion expense
 
19,843

 
18,580

 
38,423

Revisions to estimate
 
16,326

 
309,739

 
326,065

Total asset retirement obligations
 
293,920

 
488,942

 
782,862

Less current portion (included in Accounts payable and accrued expenses)
 

 
(39,767
)
 
(39,767
)
Asset retirement obligations at September 30, 2012
 
$
293,920

 
$
449,175

 
$
743,095

We estimated the costs to treat our selenium discharges in excess of allowable limits at a fair value of $85.2 million at the Magnum acquisition date. This liability was recorded in the purchase accounting for the Magnum acquisition based on the estimated costs of installing Zero Valent Iron (ZVI) water treatment technology, which was the most successful selenium treatment methodology at the time based on our testing results. At the time we recorded this liability, it reflected the estimated total costs of the planned ZVI water treatment installations to be implemented and maintained in consideration of the requirements of our mining permits, court orders, and consent decrees. This estimate was prepared considering the dynamics of legislation, capabilities of available technology and our planned water treatment strategy.
At the time of the Magnum acquisition, various outfalls across the acquired operations had been tested for selenium discharges. Of the outfalls tested, 88 were identified as potential sites of selenium discharge limit exceedances, of which 78 were identified as having known exceedances. The estimated liability recorded at fair value in the purchase allocation took into consideration the 78 outfalls with known exceedances at the acquisition date. The estimated aggregate undiscounted amount of the initial accrual was $390.7 million at the Magnum acquisition date.
Prior to the second quarter of 2012, the liability to treat selenium discharges at outfalls not addressed in the September 1, 2010 ruling continued to be based on the use of the ZVI technology as there was no other definitive plan to install any technology other than ZVI. During the second quarter of 2012, we modified our selenium water treatment compliance plan from ZVI technology to installing and operating Iron Facilitated Selenium Reduction (IFSeR) technology. Installation and operating costs for the IFSeR technology are materially higher than ZVI technology due in part to the more technologically advanced processing system. IFSeR was developed in response to our need to resolve certain detailed design considerations for ZVI technology. While ZVI water treatment systems decreased selenium discharges, they had not performed consistently in reducing selenium concentrations to compliant levels. IFSeR incorporates various design enhancements including utilizing ZVI media in a different configuration than the original ZVI water treatment technology.
Our comprehensive consent decree with the plaintiffs in the February 2011 Litigation requires that we select water treatment technology by category beginning with the first category in September 2012 and ending with the last category in September 2014. We performed pilot testing on IFSeR technology in early 2012 and concluded the testing in May 2012. In May 2012, related to the comprehensive consent decree for the February 2011 Litigation, we submitted IFSeR technology to the Special Master for his review and approval. The Special Master certified that IFSeR may be considered as a listed technology for Category 1 outfalls, and, on September 1, 2012, Patriot provisionally selected the IFSeR technology for all of its Category 1 outfalls. To date, IFSeR technology has not been proven to achieve effluent selenium limitations for the expected annual water flows at outfalls other than Category 1. There is significant uncertainty as to which technology, if any, could be utilized to achieve compliance at the other four categories, particularly those with higher average water flows. However, IFSeR technology is currently the most successful technology to treat selenium based on our testing.
As a result, we recorded an adjustment to increase our selenium water treatment liability by $307.4 million during the second quarter of 2012 to recognize the modification to our compliance plan from installing and operating ZVI technology to installing and operating IFSeR technology. This adjustment is based upon estimates for the installation and operating costs of IFSeR water treatment systems at the Category 1-5 outfalls.

27

PATRIOT COAL CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012


In October 2012, we, along with Apogee, Hobet and Catenary, requested extensions to the construction schedule and compliance deadline related to the Hobet Surface Mine No. 22 ABMet project as well as an extension of the deadlines related to the comprehensive consent decree for Category 1-5 outfalls. Extensions of these deadlines by 12 to 18 months would assist in maintaining liquidity during the bankruptcy proceedings and provide additional time to continue evaluating treatment solutions.
If IFSeR systems are not ultimately successful in treating the effluent selenium exceedances at the outfalls covered by the Hobet WVDEP Action and the February 2011 Litigation, we may be required to install alternative treatment solutions. Alternative technology solutions that we may ultimately select are still in the early phases of development and their related costs cannot be reasonably estimated at this time. The cost of other water treatment solutions could be materially different than the costs reflected in our liability. Furthermore, costs associated with potential modifications to IFSeR or the scale of our current IFSeR systems could also cause the costs to be materially different than the costs reflected in our liability. We cannot provide an estimate of the possible additional range of costs associated with alternate treatment solutions at this time. Potential installations of selenium treatment alternatives are further complicated by the variable geological, topographical and water flow considerations of each individual outfall.
While we are actively continuing to explore treatment options, there can be no assurance as to if or when a definitive solution will be identified and implemented for outfalls covered by the Hobet WVDEP Action and the February 2011 Litigation. As a result, actual costs may differ from our current estimates. We will make additional adjustments to our liability when it becomes probable that we will utilize a different technology or modify the current technology, whether due to developments in our ongoing research, technology changes or modifications according to the comprehensive consent decree or other legal obligations to do so. Additionally, there are no assurances we will meet the timetable stipulated in the various court orders, consent decrees and permits.
General Clean Water Act Matters
With respect to all outfalls with known exceedances for selenium or any other parameter, including the specific sites discussed above, any failure to meet the deadlines set forth in our consent decrees or established by the federal government, the U.S. District Court or the State of West Virginia or to otherwise comply with our permits could result in further litigation against us, an inability to obtain new permits or to maintain existing permits, which could impact our ability to mine our coal reserves, and the imposition of significant and material fines and penalties or other costs and could otherwise materially adversely affect our results of operations, cash flows and financial condition. The specific sites discussed above were created prior to the Magnum acquisition under legacy permitting standards and resulted in violations of current selenium effluent limits, which were effective beginning in 2006.
In addition to the uncertainties related to technology discussed above, future changes to legislation, compliance with judicial rulings, consent decrees and regulatory requirements, findings from current research initiatives and the pace of future technological progress could result in costs that differ from our current estimates, which could have a material adverse effect on our results of operations, cash flows and financial condition.
We may incur costs relating to the lawsuits discussed above and possible additional costs, including potential fines and penalties relating to selenium matters. Additionally, as a result of these ongoing litigation matters and federal regulatory initiatives related to water quality standards that affect valley fills, impoundments and other mining practices, including the selenium discharge matters described above, the process of applying for new permits has become more time-consuming and complex, the review and approval process is taking longer, and in certain cases, new permits may not be issued.
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)
CERCLA and similar state laws create liability for investigation and remediation in response to releases of hazardous substances in the environment and for damages to natural resources. Under CERCLA and many similar state statutes, joint and several liability may be imposed on waste generators, site owners and operators and others regardless of fault. These laws and related regulations could require us to do some or all of the following: (i) remove or mitigate the effects of the disposal or release of certain substances on the environment at various sites; (ii) perform remediation work at such sites; and (iii) pay damages for loss of use and non-use values.
Although waste substances generated by coal mining and processing are generally not regarded as hazardous substances for the purposes of CERCLA and similar legislation, and are generally covered by SMCRA, some products used by coal companies in operations, such as chemicals, and the disposal of these products are governed by CERCLA. Thus, coal mines currently or previously owned or operated by us, and sites to which we have sent waste materials, may be subject to liability under CERCLA and similar state laws. A predecessor of one of our subsidiaries has been named as a potentially responsible party at a third-party site, but given the large number of entities involved at the site and our anticipated share of expected cleanup costs, we believe that its ultimate liability, if any, will not be material to our financial condition and results of operations.

28

PATRIOT COAL CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012


Flood Litigation
In 2006, Hobet and Catenary were named as defendants along with various other property owners, coal companies, timbering companies and oil and natural gas companies in lawsuits arising from flooding that occurred on May 30, 2004 in various watersheds, primarily located in southern West Virginia. This litigation is pending before two different judges in the Circuit Court of Logan County, West Virginia. In the first action, the plaintiffs have asserted that (i) Hobet failed to maintain an approved drainage control system for a pond on land near, on, and/or contiguous to the sites of flooding; and (ii) Hobet participated in the development of plans to grade, blast, and alter the land near, on, and/or contiguous to the sites of the flooding. Hobet has filed a motion to dismiss both claims based upon the assertion that insufficient facts have been stated to support the claims of the plaintiffs.
In the second action, motions to dismiss have been filed, asserting that the allegations by the plaintiffs are conclusory in nature and likely deficient as a matter of law. Most of the other defendants also filed motions to dismiss. Both actions were stayed during the pendency of the appeals to the West Virginia Supreme Court of Appeals in a similar case which was dismissed in April 2010.
The outcome of the flood litigation is subject to numerous uncertainties. Based on our evaluation of the issues and their potential impact, the amount of any future loss cannot be reasonably estimated. However, based on current information, we believe this matter is likely to be resolved without a material adverse effect on our financial condition, results of operations and cash flows.
Other Litigation and Investigations
Patriot's directors and certain officers have been named as defendants in various lawsuits filed in the U.S. District Court, Eastern Missouri. In June 2012, a shareholder filed a derivative lawsuit for the benefit of Patriot against each of the then directors of Patriot. As a result of the Chapter 11 Petitions, the case has been stayed and administratively closed. In the third quarter of 2012, subsequent to the filing of the Chapter 11 Petitions, two lawsuits were filed against our former Chief Executive Officer, Richard M. Whiting, and former Chief Financial Officer, Mark N. Schroeder. As Patriot was not named as a defendant, these lawsuits can proceed during the duration of the Bankruptcy Case. The lawsuits make similar allegations including that the defendants made or allowed false and misleading statements related to Patriot's selenium water treatment liability and the Company's financial condition.
Apogee has been sued, along with eight other defendants, including Monsanto Company (Monsanto), Pharmacia Corporation and Akzo Nobel Chemicals, Inc., by certain plaintiffs in state court in Putnam County, West Virginia. In total, 243 similar lawsuits have been served on Apogee, which are identical except for the named plaintiff. Of the 243 lawsuits, 75 were served in February 2008, 167 were served in December 2009, and one was served in January 2011. Each lawsuit alleges personal injury occasioned by exposure to dioxin generated by a plant owned and operated by certain of the other defendants during production of a chemical, 2,4,5-T, from 1949-1969. Apogee is alleged to be liable as the successor to the liabilities of a company that owned and/or controlled a dump site known as the Manila Creek landfill, which allegedly received and incinerated dioxin-contaminated waste from the plant. The lawsuits seek compensatory and punitive damages for personal injury. As of September 30, 2012, 47 of the lawsuits have been dismissed. Under the terms of the governing lease, Monsanto has assumed the defense of these lawsuits and has agreed to indemnify Apogee for any related damages. The failure of Monsanto to satisfy its indemnification obligations under the lease could have a material adverse effect on us.
A predecessor of one of our subsidiaries operated the Eagle No. 2 Mine located near Shawneetown, Illinois, from 1969 until closure of the mine in July 1993. In March 1999, the State of Illinois brought a proceeding before the Illinois Pollution Control Board against the subsidiary alleging that groundwater contamination due to leaching from a coal waste pile at the mine site violated state standards. The subsidiary has developed a remediation plan with the State of Illinois and is in litigation before the Illinois Pollution Control Board with the Illinois Attorney General's office with respect to its claim for a civil penalty of $1.3 million.
In late January 2010, the U.S. Attorney's office and the State of West Virginia began investigations relating to one or more of our employees making inaccurate entries in official mine records at our Federal No. 2 Mine. We terminated one employee and two other employees resigned after being placed on administrative leave. The terminated employee subsequently admitted to falsifying inspection records and has been cooperating with the U.S. Attorney's office. In April 2010, we received a federal subpoena requesting methane detection systems equipment used at our Federal No. 2 Mine since July 2008 and the results of tests performed on the equipment since that date. We have provided the equipment and information as required by the subpoena. We have not received any additional requests for information. In January 2012, the terminated employee filed a civil lawsuit against us alleging retaliatory discharge and intentional infliction of emotional distress. Additionally, in January 2012, five employees filed a purported class action lawsuit against us and the terminated employee seeking compensation for lost wages, emotional distress, and punitive damages for the alleged intentional violation of employee safety at the mine. We are vigorously defending both civil lawsuits and the potential impact of these lawsuits cannot be estimated at this time.

29

PATRIOT COAL CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012


The outcome of other litigation and the investigations is subject to numerous uncertainties. Based on our evaluation of the issues and their potential impact, the amount of any future loss cannot be reasonably estimated. However, based on current information, we believe these matters are likely to be resolved without a material adverse effect on our financial condition, results of operations and cash flows.

(18) Guarantees
In 2010, we agreed to provide a limited guaranty of the payment and performance under three loans entered into by one of our joint ventures. The loans were obtained to purchase equipment, which is pledged as collateral for the loans. The maximum term of the three loans is through January 2016. The guaranteed portion of the loan balances at September 30, 2012 totaled $6.3 million. The financial performance of our joint ventures is subject to market risks similar to our coal mining operations. At September 30, 2012 and December 31, 2011, there was no carrying amount of the liability related to these guarantees on our consolidated balance sheets based on the amount of exposure and the likelihood of required performance. At September 30, 2012, one of our joint ventures owed us approximately $1.7 million for royalties and utility usage.
During the third quarter 2012, we posted collateral for letters of credit under the DIP Facilities, resulting in a $46.0 million interest-bearing deposit that was recorded to "Cash collateralization deposits" on the accompanying unaudited consolidated balance sheet at September 30, 2012.
As part of our 2007 spin-off, Peabody guaranteed occupational disease (black lung) workers' compensation obligations related to certain of our subsidiaries with the U.S. Department of Labor (DOL). The DOL subsequently released Peabody from its guarantee when Patriot was granted self-insured status and posted its own surety in the first quarter of 2011, resulting in a $15.0 million interest-bearing deposit that was recorded to "Cash collateralization deposits" on the accompanying consolidated balance sheets.
In the normal course of business, we are party to guarantees and financial instruments with off-balance-sheet risk, such as bank letters of credit, performance or surety bonds and other guarantees and indemnities, which are not reflected in the accompanying consolidated balance sheets. Such financial instruments are valued based on the amount of exposure under the instrument and the likelihood of required performance. We do not expect any material losses to result from these guarantees or off-balance-sheet instruments.
Other Guarantees
We are the lessee or sublessee under numerous equipment and property leases. It is common in such commercial lease transactions for Patriot, as the lessee, to agree to indemnify the lessor for the value of the property or equipment leased, should the property be damaged or lost during the course of our operations. We expect that losses with respect to leased property would be covered by insurance (subject to deductibles). Patriot and certain of our subsidiaries have guaranteed other subsidiaries' performance under their various lease obligations. Aside from indemnification of the lessor for the value of the property leased, our maximum potential obligations under their leases are equal to the respective future minimum lease payments and/or, in certain leases, liquidated damages, assuming no amounts could be recovered from third parties.

(19) Stock-Based Compensation
Effective May 28, 2012, our former Chief Executive Officer, Richard M. Whiting, resigned from his roles as President, CEO and member of the Board of Directors of Patriot and all other offices, employment and directorships with Patriot and its subsidiaries. The former CEO's resignation resulted in the acceleration of the vesting of certain of his non-qualified stock options, restricted stock awards and performance-based restricted stock units, with the remaining unvested awards being forfeited. In the second quarter of 2012, Patriot recorded a credit of $7.0 million for the net impact of the forfeitures and accelerations, of which $6.3 million was included in “Selling and administrative expenses” and $0.7 million was included in “Operating costs and expenses.” Additionally, in the second quarter 2012, we recorded compensation expense of $5.1 million for amounts due to our former CEO for severance, which is included in "Liabilities subject to compromise" on the unaudited consolidated balance sheet at September 30, 2012.




30

PATRIOT COAL CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012


(20) Supplemental Guarantor/Non-Guarantor Financial Information
The following tables present condensed consolidating financial information for: (a) Patriot Coal Corporation (the Parent Company) on a stand-alone basis; (b) the subsidiary guarantors of the 8.25% Senior Notes (the Guarantor Subsidiaries) on a combined basis and; (c) the Non-Guarantor Subsidiary, Patriot Coal Receivables (SPV) Ltd. (the facilitating entity for the pre-petition accounts receivable securitization program), on a stand-alone basis. Each Guarantor Subsidiary is wholly-owned by Patriot Coal Corporation. The guarantees from each of the Guarantor Subsidiaries are full, unconditional, joint and several. Accordingly, separate financial statements of the wholly-owned Guarantor Subsidiaries are not presented because the Guarantor Subsidiaries will be jointly, severally and unconditionally liable under the guarantees, and we believe that separate financial statements and other disclosures regarding the Guarantor Subsidiaries are not material to potential investors.


31

PATRIOT COAL CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012



UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 2012
 
 
 
 
 
 
 
 
 
 
 
Parent Company
 
Guarantor Subsidiaries
 
Non-Guarantor Entity
 
Eliminations
 
Consolidated
 
(Dollars in thousands)
Revenues
 
 
 
 
 
 
 
 
 
Sales
$

 
$
442,935

 
$

 
$

 
$
442,935

Other revenues

 
5,261

 

 

 
5,261

Total revenues

 
448,196

 

 

 
448,196

Costs and expenses
 
 
 
 
 
 
 
 
 
Operating costs and expenses

 
434,599

 

 

 
434,599

Depreciation, depletion and amortization

 
48,906

 

 

 
48,906

Asset retirement obligation expense

 
19,496

 

 

 
19,496

Sales contract accretion

 

 

 

 

Impairment and restructuring charge

 
18,434

 

 

 
18,434

Selling and administrative expenses
3,752

 
8,859

 

 

 
12,611

Net gain on disposal or exchange of assets

 
(457
)
 

 

 
(457
)
Loss (income) from equity affiliates
134,511

 
(1,864
)
 

 
(134,511
)
 
(1,864
)
Operating loss
(138,263
)
 
(79,777
)
 

 
134,511

 
(83,529
)
Interest expense and other
9,262

 
4,399

 
175

 
(175
)
 
13,661

DIP financing fees
42,552

 

 

 

 
42,552

Interest income
(11
)
 
(4
)
 
(175
)
 
175

 
(15
)
Loss before reorganization items, net
   and income taxes
(190,066
)
 
(84,172
)
 

 
134,511

 
(139,727
)
Reorganization items, net
25,867

 
50,347

 

 

 
76,214

Loss before income taxes
(215,933
)
 
(134,519
)
 

 
134,511

 
(215,941
)
Income tax benefit

 
(8
)
 

 

 
(8
)
Net loss
$
(215,933
)
 
$
(134,511
)
 
$

 
$
134,511

 
$
(215,933
)


32

PATRIOT COAL CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012



UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 2011 (Restated(1))
 
 
 
 
 
 
 
 
 
 
 
Parent Company
 
Guarantor Subsidiaries
 
Non-Guarantor Entity
 
Eliminations
 
Consolidated
 
(Dollars in thousands)
Revenues
 
 
 
 
 
 
 
 
 
Sales
$

 
$
584,145

 
$

 
$

 
$
584,145

Other revenues

 
5,250

 

 

 
5,250

Total revenues

 
589,395

 

 

 
589,395

Costs and expenses
 
 
 
 
 
 
 
 
 
Operating costs and expenses

 
570,850

 

 

 
570,850

Depreciation, depletion and amortization

 
47,040

 

 

 
47,040

Asset retirement obligation expense

 
13,299

 

 

 
13,299

Sales contract accretion

 
(11,380
)
 

 

 
(11,380
)
Impairment and restructuring charge

 
139

 

 

 
139

Selling and administrative expenses
4,059

 
8,729

 

 

 
12,788

  Net gain on disposal or exchange of assets

 
(7,389
)
 

 

 
(7,389
)
Loss (income) from equity affiliates
35,156

 
(1,650
)
 

 
(35,156
)
 
(1,650
)
Operating loss
(39,215
)
 
(30,243
)
 

 
35,156

 
(34,302
)
Interest expense and other
11,620

 
4,833

 
357

 
(357
)
 
16,453

DIP financing fees

 

 

 

 

Interest income
(63
)
 
(10
)
 
(357
)
 
357

 
(73
)
Loss before reorganization items, net
   and income taxes
(50,772
)
 
(35,066
)
 

 
35,156

 
(50,682
)
Reorganization items, net

 

 

 

 

Loss before income taxes
(50,772
)
 
(35,066
)
 

 
35,156

 
(50,682
)
Income tax provision (benefit)
(320
)
 
90

 

 

 
(230
)
Net loss
$
(50,452
)
 
$
(35,156
)
 
$

 
$
35,156

 
$
(50,452
)


(1) See Note 21, Restatement of Financial Statements, in the Notes to Unaudited Consolidated Financial Statements.

33

PATRIOT COAL CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012



UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the Nine Months Ended September 30, 2012
 
 
Parent Company
 
Guarantor Subsidiaries
 
Non-Guarantor Entity
 
Eliminations
 
Consolidated
 
(Dollars in thousands)
Revenues
 
 
 
 
 
 
 
 
 
Sales
$

 
$
1,445,546

 
$

 
$

 
$
1,445,546

Other revenues

 
39,293