Walter Energy wants to clear way for sale of coal assets by rejecting labor contracts

Walter Energy on Nov. 23 asked its bankruptcy court to reject the labor contracts for workers at its Jim Walter Resources and Walter Coke subsidiaries in Alabama, saying that creditors who are backing a stalking horse bid for its U.S. assets won’t make that buy with the existing labor contracts in place.

The U.S. Bankruptcy Court for the Northern District of Alabama has set the motion for a Dec. 15 hearing.

Said the Nov. 23 motion to reject: “The Debtors are a leading producer and exporter of metallurgical coal (‘met coal’) for the global steel industry with roots in Alabama dating back to the 1800s. For generations, they have proudly paid fair wages and provided first-class benefits to their mine workers and other employees in this community. As hailed by UMWA International President Cecil E. Roberts in 2011 – a time when met coal prices were near their peak – the coal industry’s current contract with the United Mine Workers of America (‘UMWA’), the contract under which the Debtors operate today, incorporates ‘the largest wage increase in dollar terms over the life of a single agreement [that] UMWA members have ever received in [their] 121-year history.’

“But times have changed dramatically. Coal prices have plummeted. The price of met coal in particular has dropped by more than 70% since 2011. A significant amount of global supply, including at the Debtors’ mines, has become unprofitable. Walter Energy and other industry leaders like Patriot Coal Corporation, James River Coal Company, and Alpha Natural Resources have all been forced into bankruptcy.

“Before filing for chapter 11 relief, the Debtors aggressively confronted the turning coal markets. In 2013, the Debtors and their non-Debtor affiliates (the ‘Company’) reduced the cash cost of met coal sales per metric ton by 14% and slashed SG&A and capital expenditures by $271 million. In 2014, the Company further reduced the cash cost of met coal sales per metric ton by 13%, and further cut SG&A and capital expenditures by $89 million. In 2015, the Company suspended all cash dividends. The Debtors idled or closed many of their mines to reduce operating costs and right-size their businesses relative to declining global demand.

“The Debtors’ cost reduction and liquidity initiatives, however, were not enough. The Company has not generated positive net income since 2011. Today, the Debtors remain operating cash flow negative before any debt service. According to their financial projections, the Debtors will run out of cash to operate in less than three months. In short, the Debtors have reached the point where they have only one option to avoid outright liquidation and the loss of all of their employees’ jobs: they must sell substantially all of their assets as a going-concern pursuant to section 363 of the Bankruptcy Code. Towards that end, the Debtors negotiated with an ad hoc group (the ‘Steering Committee’) of certain unaffiliated lenders and holders (the ‘First Lien Creditors’) of the majority in amount of the Debtors’ first lien secured obligations (the ‘First Lien Obligations’) a going-concern sale of substantially all of their Alabama coal operations (the ‘Alabama Coal Operations’ and such sale, the ‘363 Sale’) and other assets to Coal Acquisition LLC, an entity owned by holders of first lien secured debt (the ‘Proposed Buyer’) pursuant to a stalking horse purchase agreement (the ‘Stalking Horse APA’).

“The Proposed Buyer will not buy the Alabama Coal Operations burdened by the Debtors’ existing collective bargaining agreements (as amended and supplemented from time to time, the ‘CBAs’ and each, a ‘CBA’) and their retiree benefit obligations (as defined in section 1114 of the Bankruptcy Code, the ‘Retiree Benefits’). Thus, the Stalking Horse APA requires as a closing condition that the Debtors obtain relief from all successorship clauses (and similar provisions) in the CBAs that would purport to require the CBAs be binding on the Proposed Buyer. That comes as no surprise: the CBAs impose onerous financial obligations on the Debtors’ operations that market conditions simply cannot support, either now or in the foreseeable future. The stark financial realities in which the Debtors operate – not the sale process or the Proposed Buyer – dictate this result.”

Walter defends proposed stalking horse bid process

Also on Nov. 23, Walter Energy filed a response with the court to critics of its pending motion for the ‘stalking horse’ sale process for these assets. Citing the spectre of running out of cash to operate in three months, the company said this sale process is the only path available to enable its core Alabama operations to be sold as a going concern, which is the best hope for future employment for the debtors’ employees.

“The Debtors are making every reasonable effort under the circumstances to create a robust sale process,” Walter wrote. “They believe, in the exercise of their sound business judgment, that the proposed Bidding Procedures and other Bidding Procedures Relief, including the Bid Protections, will accomplish that goal. The Bidding Procedures, which are principally procedural in nature and set forth in detail in the Sale Motion, are customary and standard for a section 363 sale of this magnitude and are consistent with market practice. They also accomplish the Debtors’ goal of maximizing the chances for a robust sale process for several reasons. First, the Bidding Procedures afford prospective bidders who execute a confidentiality agreement with access to information related to the Debtors and a method for submitting bid(s) on all of the Debtors’ assets, or on one or more of the designed lots identified on Exhibit A to the Bidding Procedures, including the Alabama coal operations, the Blue Creek Assets, the West Virginia Assets, the Walter Coke Assets and certain miscellaneous real property assets. The Bidding Procedures also set forth the ground rules by which the Debtors will conduct an open and fair auction process. Tellingly, with limited exception, the Objections barely touch on the Bidding Procedures, and none of the Objectors question the Debtors’ decision to pursue a section 363 sale. Nevertheless, the Debtors have agreed to modify the proposed Bidding Procedures to address certain procedural concerns raised in the Objections.

“The overwhelming majority of the Objections are directed to issues relevant to the Sale(s), themselves, or the section 1113 and 1114 processes in these cases, rather than the Bidding Procedures themselves. As such, these Objections should be overruled, or reserved as premature or outside the scope of the narrow relief sought from this Court today – that is, approval of the Bidding Procedures Relief. As to the only issues currently before the Court for determination, the Debtors submit that they have exercised sound business judgment in structuring the Sale(s) and auction process as reflected in the Motion, the Bidding Procedures and the Bid Protections, and therefore respectfully request that they be approved.”

Under the proposed stalking horse auction process, the group of creditors can “credit bid” what they are owed during the bidding, which is likely to effectively box out all other bidders, since no outside party is likely to top a credit bid with outright cash.

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.