Judge outlines plans for sale process for Walter Energy’s Canadian assets

The judge handling the Canadian bankruptcy case for the assets in that country of U.S.-based coal producer Walter Energy on Jan. 26 issued a memo detailing why she decided on Jan. 5 to give the company more time to pursue an asset sale process.

The petitioners in this December 2015 case before the British Columbia Supreme Court comprise part of the Canadian arm of Walter Energy and are known as the “Walter Canada Group.” Walter Energy’s U.S. assets in Alabama and West Virginia are currently being sold off at the U.S. Bankruptcy Court for the Northern District of Alabama, with Canadian assets being handled out of the British Columbia court.

The Canadian entities were acquired by Walter Energy in 2011. The Canadian operations principally include the Brule and Willow Creek coal mines, located near Chetwynd, B.C., and the Wolverine coal mine, near Tumbler Ridge, B.C. The petitioners include the Canadian parent holding company and the general partners of various partnerships.

Judge Shelley Fitzpatrick wrote in the Jan. 26 memo: “The timing of the Canadian acquisition could not have been worse. Since 2011, the market for metallurgical coal has fallen dramatically. This in turn led to financial difficulties in all three jurisdictions in which the Walter Group operated. The three Canadian mines were placed in care and maintenance between April 2013 and June 2014. The mines remain in this state today, at an estimated annual cost in excess of [C]$16 million. Similarly, the U.K. mines were idled in 2015. In July 2015, the U.S. companies in the Walter Group filed and sought creditor protection by filing a proceeding under Chapter 11 of the U.S. Bankruptcy Code.”

It was apparent that the outcome of the U.S. proceedings would have a substantial impact on the Walter Canada Group, the judge added. A sales process completed in the U.S. proceeding is anticipated to result in a transfer of certain U.S. assets to a stalking horse bidder, Coal Acquisition LLC, made up of Walter Energy creditors, sometime early this year. This is significant because the U.S. companies have historically supported the Canadian operations with funding and provided essential management services, the judge noted.

The Walter Canada Group faces various significant contingent liabilities. The various entities are liable under a 2011 credit agreement of approximately C$22.6 million in undrawn letters of credit for post-mining reclamation obligations. Estimated reclamation costs for all three mines exceed this amount. Further obligations potentially arise with respect to the now laid-off employees of the Wolverine mine, who are represented by the United Steelworkers, Local 1-424. If these employees are not recalled before April 2016, the Wolverine partnership faces an estimated claim of C$11.3 million.

Walter is hoping to complete a going concern sale of the Canadian operations as soon as possible. Fortunately, as of early December 2015, the Walter Canada Group has slightly in excess of US$40.5 million in cash resources to fund the restructuring efforts, the judge wrote. However, ongoing operating costs remain high and are now compounded by the restructuring costs.

Plans in the works for restructuring and/or asset sale

The petitioners now seek relief that will set them on a path to a potential restructuring; essentially, an equity and/or debt restructuring or alternatively, a sale and liquidation of their assets, the judge added. That relief includes approving a sale and solicitation process and the appointment of further professionals to manage that process and complete other necessary management functions.

The stakeholders appearing on this application are largely supportive of the relief sought, save for two.

Firstly, the United Mine Workers of America 1974 Pension Plan and Trust (the “1974 Pension Plan”) opposes certain aspects of the relief sought as to who should be appointed to conduct the sales process. The status of the 1974 Pension Plan arises from somewhat unusual circumstances, the judge noted. One of the U.S. entities, Jim Walter Resources (JWR) is a party to a collective bargaining agreement related to the 1974 Pension Plan (the “CBA”). In late December 2015, the U.S. bankruptcy court issued a decision that allowed JWR to reject the CBA. The court also ordered that the sale of the U.S. assets would be free and clear of any liabilities under the CBA. As a result, the 1974 Pension Plan has filed a proof of claim in the U.S. proceedings advancing a contingent claim against JWR with respect to a potential “withdrawal liability” under U.S. law of approximately US$900 million. The U.S. law in question is the Employee Retirement Income Security Act (ERISA).

The 1974 Pension Plan alleges that it is only a matter of time before JWR formally rejects the CBA. In that event, the 1974 Pension Plan contends that ERISA provides that all companies under common control with JWR are jointly and severally liable for this withdrawal liability, and that some of the entities in the Walter Canada Group come within this provision.

“It is apparent at this time that neither the Walter Canada Group nor the Monitor has had an opportunity to assess the 1974 Pension Plan’s contingent claim,” said the Jan. 26 memo. “No claims process has even been contemplated at this time. Nevertheless, the standing of the 1974 Pension Plan to make submissions on this application is not seriously contested.”

Secondly, the union only opposes an extension of the stay of certain proceedings underway in this court and the Labour Relations Board in relation to some of its employee claims, which it wishes to continue to litigate.

At the conclusion of the Jan. 5 hearing, the judge granted the order sought by the petitioners, with reasons to follow. Hence, the reasons laid out in the Jan. 26 memo.

The judge also addressed the Sale and Investment Solicitation Process (SISP), which has been developed by the Walter Canada Group in consultation with its bankruptcy monitor. By this process, bidders may submit a letter of intent or bid for a restructuring, recapitalization or other form of reorganization of the business and affairs of the Walter Canada Group as a going concern, or a purchase of any or all equity interests held by Walter Energy Canada. Alternatively, any bid may relate to a purchase of all or substantially all, or any portion of the Walter Canada Group assets (including the Brule, Willow Creek and Wolverine mines).

In this case, the proposed timelines would see a deadline of March 18 for letters of intent, due diligence thereafter with a bid deadline of May 27 and a target closing date of June 30, 2016. “In my view, the timeline is reasonable, particularly with regard to the need to move as quickly as possible to preserve cash resources pending a sale or investment; or, in the worst case scenario, to allow the Walter Canada Group to close the mines permanently,” the judge wrote. “There is sufficient flexibility built into the SISP to allow the person conducting it to amend these deadlines if the circumstances justify it.”

In order to implement the SISP, and further its restructuring efforts in general, the Walter Canada Group sought an extension of a stay on certain legal matters in this case until April 5, 2016. That is what the judge granted on Jan. 5 and explained in the Jan. 26 memo.

The judge said in the memo that there is nothing to elevate the union’s claims such that it is imperative that they be determined now. “If it should come to pass that monies will be distributed to creditors, such as the Union, then I expect that the usual claims process will be implemented to decide the validity of those claims,” said the judge. “In the meantime, if it becomes necessary to determine the validity of these claims quickly (such as to clarify potential successor claims for a purchaser), the Union will be at liberty to renew its application to lift the stay for that purpose.”

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.