Joy sues Consultants Group over failed financing for White Oak coal mine project

Mining equipment maker Joy Technologies, d/b/a Joy Mining Machinery, filed suit Aug. 8 in federal court against Consultants Group Commercial Funding Corp., d/b/a CG Commercial Finance, over a failed deal to finance equipment for the first Illinois coal mine of White Oak Resources LLC.

The lawsuit was filed in the U.S. District Court for the Western District of Pennsylvania. Joy Technologies has a principal place of business in Warrendale, Pa. Consultants Group Commercial Funding (CG) has a principal place of business in Irvine, Calif.

In early 2012, Joy Mining and White Oak Resources were engaged in negotiations for a transaction in which White Oak would purchase about $100m of mining equipment from Joy Mining for use at a new longwall mining operation to be operated by White Oak near McLeansboro, Ill. CG offered to provide financing to White Oak for this transaction. The lawsuit said that in late March, CG and Joy discussed three financing structures for the transaction between Joy Mining and White Oak: a proposal in which White Oak would obtain financing without any guarantor; a proposal in which Joy Global would provide a limited guarantee that would remain in place until White Oak achieved full production; and a proposal in which Joy Global would fully guarantee White Oak.

At this time, CG represented that the purpose of a limited (or full) guarantee was to reduce the interest rate that White Oak would pay, the lawsuit said. CG did not state that a guarantee was necessary in order to provide financing to White Oak or that a guarantee would be tied to White Oak’s satisfaction of any financial covenants, it added.

Representatives of CG were scheduled to meet with representatives of Joy at Joy’s Warrendale offices on April 2 in order to discuss the terms of the proposed limited guarantee. CG, however, did not attend that and subsequently refused to provide any draft documents or engage in any negotiations until Joy and White Oak executed a letter of intent, the lawsuit said. On May 9, White Oak and Joy Global presented CG with a letter of intent to memorialize the terms of the proposed financing. The letter incorporated a provision for a limited guarantee.

“As CG was aware, White Oak faced a tight deadline for completion of this transaction in order to avoid use of its backstop financing,” said the lawsuit. “In fact, White Oak and Joy repeatedly told CG that the transaction needed to be completed by the end of May, 2012, and no later than June 15, 2012. CG, however, repeatedly delayed the negotiations. CG’s ultimate proposals, furthermore, eviscerated the limited nature of the guarantee contemplated by the Letter of Intent. For example, during a conference call on May 14, 2012, CG stated that it would provide a draft of the limited guarantee by May 16 or May 17. When CG failed to provide a draft by May 17, CG stated that a draft would be forthcoming the following day. In response to an inquiry from Joy on the afternoon of May 18, however, CG stated that the draft would not be ready until the following Monday, May 21.”

During a conference call on May 21, CG initially stated that the draft guarantee would not be ready for another day or two, but finally agreed to provide a “template” draft of the guarantee, the lawsuit said. Joy received that draft at the end of the day on May 21. “CG thus delayed providing a draft of the limited guarantee for nearly two weeks following execution of the Letter of Intent, despite its knowledge that time was of the essence for White Oak and Joy,” the lawsuit added. “CG’s proposed terms, moreover, did not reflect the limited guarantee previously discussed among the parties, as CG included requirements that (1) the guarantee extend beyond the debt incurred by White Oak as part of its transaction with Joy Mining and (2) the guarantee not be released until White Oak satisfied certain financial covenants (the draft omitted the actual financial ratio numbers for the covenants). Despite these significant and unacceptable changes, Joy continued to negotiate with CG.”

During a conference call on May 22, Joy reiterated its objections and sought information from CG regarding the actual financial ratio numbers to be used in the covenants, which CG promised to provide the next day. During this call, CG also represented, for the first time, that the guarantee must include the financial covenants because White Oak was otherwise not a financeable entity, the lawsuit said. Later in the day on May 22, Joy also provided a redline markup of CG’s draft guarantee. CG did not provide the requested financial ratios or respond to Joy’s markup of the draft guarantee, however, on May 23 or May 24. On the evening of May 25, CG provided a revised draft of the guarantee—which required for the first time that White Oak meet the financial covenants for a period of one year—but this draft still lacked the financial ratios for the covenants, the lawsuit stated.

Parties failed to agree, so Joy offered direct financing to White Oak

The parties then wrangled on these points for a few days. Following two additional conference calls on June 5 and June 7, the parties were unable to come to an agreement because CG continued to insist that the guarantee not be released until White Oak satisfied the financial covenants, which CG again contended were necessary because White Oak was not a financeable entity.

Joy Global said it was unwilling to maintain the guarantee for the lengthy period of time contemplated by CG’s financial covenants. Under the limited guarantee as originally proposed, Joy Global would have been released from the guarantee upon White Oak’s achievement of full production, which was anticipated to occur in 2014. On the other hand, if the limited guarantee incorporated the financial covenants, including the requirement that White Oak satisfy the covenants for two years, as demanded by CG, Joy Global would have remained subject to the guarantee until at least 2016, and likely would have remained subject to the guarantee until White Oak completed repayment in 2019. Joy Global thus informed CG during a June 7 conference call that it would not enter into the guarantee.

On June 18, Joy Mining and White Oak completed their transaction. In the absence of an agreement with CG, Joy Mining was forced at the last minute to develop and execute an agreement to provide direct vendor financing in order to save the transaction with White Oak—thereby incurring significant transaction costs. The direct vendor financing to White Oak, furthermore, was a significant, unplanned commitment of Joy Mining’s financial resources that will cause Joy Mining to forgo business opportunities otherwise available to it, the company noted.

By letter dated June 11, CG asserted that Joy has breached the letter of intent because, according to CG, Joy was obligated to execute a guarantee and close on the financing proposed by the letter of intent. By letter dated June 20, Joy denied the allegations of CG’s June 11 letter. CG, through outside counsel, sent Joy a second letter dated July 26 which again asserted that Joy breached the letter of intent and further asserted that CG had suffered nearly $9m in damages as a result of that alleged breach. In its July 26 letter, CG further threatened to file a civil action should Joy refuse to pay its $9m demand.

In its Aug. 8 lawsuit, Joy is asking for declaratory judgment that it negotiated in good faith with CG and that it had no obligation to complete the financing covered by the letter of intent. It also wants the court to find that CG breached its contract to negotiate in good faith. “Joy, moreover, has suffered damages in excess of $10,000,000 as a result of CG’s breach, including the expenses associated with its fruitless negotiations with CG, expenses to negotiate and structure an alternative, direct vendor financing arrangement with White Oak, and lost opportunities arising from the substantial commitment of Joy Mining’s financial resources to provide the direct vendor financing to White Oak,” Joy added.

CG had not replied to the lawsuit as of Aug. 10 and the court docket as of that date showed no attorney or attorneys assigned to the case by CG.

Alliance invests in White Oak, and gets refund on equipment financing

Coal producer Alliance Resource Partners LP (NASDAQ: ARLP) in September 2011 entered into a series of transactions with White Oak Resources and related entities to support development of a longwall mining operation currently under construction. Among other things, Alliance subsidiary Alliance WOR Properties LLC acquired from White Oak the rights to about 204.9 million tons of proven and probable high-sulfur coal reserves, of which 105.2 million tons are currently being developed for future mining by White Oak and certain surface properties and rights in Hamilton County, Ill., which is adjacent to White County, Ill., where Alliance’s White County Coal LLC Pattiki mine is located.

Concurrent with the reserve acquisition, Alliance WOR Processing LLC made an equity investment of $35.7m in White Oak to purchase Series A Units representing ownership in White Oak. WOR Processing also purchased $7m of additional Series A Units between that transaction date and Dec. 31, 2011. During the six months ended June 30, 2012, WOR Processing purchased $30.6m of additional Series A Units, said Alliance’s Aug. 8 Form 10-Q report.

WOR Processing’s ownership and member’s voting interest in White Oak at June 30 was 10.9% based upon currently outstanding voting units. The remainder of the equity ownership in White Oak, represented by Series B Units, is held by other investors and members of White Oak management.

Simultaneous with the closing of the reserve acquisition, WOR Processing entered into a Coal Handling and Preparation Agreement with White Oak pursuant to which WOR Processing committed to construct and operate a coal preparation plant and related facilities and a rail loop and loadout facility to service the White Oak longwall Mine No. 1. The expected cost to construct the facilities contemplated by this services agreement is approximately $99.5m and will be expended by WOR Processing over the next three years.

Also on the transaction date, the Intermediate Partnership for Alliance committed to provide $100m of fully collateralized equipment financing with a five-year term to White Oak for the purchase of coal mining equipment should other third-party funding sources not be available. During the second quarter of 2012, White Oak obtained third-party financing for the purchase of coal mining equipment, and on June 18, repaid the Intermediate Partnership the outstanding amount of $2.2m for previous advances and interest due, said the Form 10-Q. White Oak also terminated early the equipment financing agreement with the Intermediate Partnership, and as part of the termination, paid the Intermediate Partnership a $2m cancellation fee on June 18.

Alliance is predicting first sales out of the White Oak No. 1 mine in 2013 and that this mine will eventually produce up to 6.5 million tons per year. This is a high-sulfur coal headed primarily to scrubber-equipped power plants in the eastern U.S.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.