Alpha lines up ‘stalking horse’ bidder for many of its main coal assets

Alpha Natural Resources on Feb. 8 filed with its bankruptcy court a plan to auction some of its assets under a “stalking horse” bid procedure, with that sale process underpinning a plan by this coal producer to emerge from Chapter 11 protection with remaining assets in place.

In August 2015, Alpha and subsidiaries sought Chapter 11 protection at the U.S. Bankruptcy Court for the Eastern District of Virginia. The company is one of the top U.S. coal producers, with two big surface mines in the Powder River Basin of Wyoming, and various assets in other states, including longwall mining operations in Pennsylvania. It became a dominant Central Appalachia coal producer with a 2011 buy of Massey Energy.

In October 2015, Alpha filed an initial motion for approval of bidding procedures for various coal mines that were shut or about to be shut, with that motion approved by the court on Nov. 6.

“Since the outset of these chapter 11 cases, the Debtors have been diligently working to formulate a strategy for a successful restructuring of their businesses in the face of historically challenging conditions in the coal industry,” said the Feb. 8 motion. “To that end, the Debtors, with the help of their advisors, have devoted significant time and effort to preparing and refining a business plan to address both current and projected future market conditions. In the meantime, the Debtors previously initiated a sale process under the Prior Bidding Procedures for assets that were determined early in the process to be non-core and, therefore not central to the Debtors’ go-forward businesses. The Debtors commenced this prior sale process as the Debtors continued to refine and update their business and restructuring plans.

“Through these efforts, the Debtors now have reached agreement with the [Debtor-in-Possession] Lenders on an Agreed Business Plan, as called for by the DIP Credit Agreement. The Agreed Business Plan formed the basis of further agreements with requisite majorities of the DIP Lenders and the Pre-Petition Lenders on the terms of an overall restructuring approach that will permit the Debtors to file a chapter 11 plan (the ‘Chapter 11 Plan’) in the near term and then seek to move these cases promptly to conclusion.”

DIP lenders are parties that offer financing after a company goes into bankruptcy, which, because the risks of such lending are more certain, means they get priority rights over company assets that pre-bankruptcy lenders don’t get.

As a result of a Plan Structure Agreement (PSA), Alpha and subsidiaries now have a clear path forward to formulate the Chapter 11 Plan and pursue an expeditious plan confirmation and emergence from chapter 11. “Given the continued adverse market conditions and ongoing cash losses of the Debtors’ businesses, it is important that the Debtors move to conclude these cases without delay.”

Central to the PSA and these restructuring efforts is a credit bid made by the Pre-Petition Lenders to serve as the Stalking Horse Bid for a core group of assets comprised of:

  • all assets (including, but not limited to, all mineral rights, fixed and mobile equipment and logistics assets) used or held for use primarily in connection with the Alpha Coal West mine complexes (Belle Ayr and Eagle Butte) in Wyoming, the business of Pennsylvania Land Resources Holding Co. LLC (PLR), Alpha’s natural gas business in the Marcellus Shale in southwestern Pennsylvania, and the McClure, Nicholas and Toms Creek mine complexes in West Virginia and Virginia;
  • all coal operations and reserves located in Pennsylvania, including the Cumberland longwall mine complex, the Emerald longwall mine complex, the undeveloped Freeport seam reserves, the undeveloped Sewickley seam reserves and all assets used or held for use primarily in connection therewith, including all logistics-related assets;
  • Alpha’s interest in Dominion Terminal Associates, a coal export facility in Virginia; and
  • certain other designated assets, including certain working capital (all of which together make up the Reserve Price Assets).

The Pre-Petition Lenders have agreed to provide a Stalking Horse Bid for the Reserve Price Assets in the amount of $500 million as a credit bid (called the “Stalking Horse Reserve Price”), plus the assumption of related liabilities, to provide a floor value for these assets. The Stalking Horse Bid will be further documented in an Asset Purchase Agreement that is expected to be filed prior to the hearing on the Bidding Procedures described in this Feb. 8 motion.

Notable is that a credit bidder is almost always the winner in a bankruptcy auction, since all other bidders will have to offer cash, while the credit bidder can use the credit amount, plus cash if that is needed to top any competing bid.

“Notably, the Stalking Horse Bid does not include any bid protections (such as break-up fees or expense reimbursement) for the benefit of the Pre-Petition Lenders, and therefore merely sets a floor to begin a bidding process on a level playing field,” Alpha wrote. “Ultimately, the Bidding Procedures will provide an appropriate market test for the Reserve Price Assets, as well as other Assets not included in the Stalking Horse Bid (collectively, the ‘Remaining Assets’), which also may be sold if appropriate value can be achieved. Any proceeds of Assets sold, and Assets that are not sold and any other value that may be contributed by the DIP Lenders or the Pre-Petition Lenders will form the basis for the reorganized debtors under the Chapter 11 Plan.

“In connection with the PSA and the Stalking Horse Bid, the Debtors and Pre-Petition Lenders also have reached (a) the Unencumbered Assets Settlement to identify property that will be deemed to have been unencumbered or unperfected as of the Petition Date with respect to debt under the Pre-Petition Credit Agreement and (b) the Diminution Claim Allowance Settlement with respect to the proper means to calculate the Pre-Petition Lenders’ Diminution Claim and to cap and allow such Diminution Claim for settlement purposes. These Settlements are critical to determining the encumbered assets subject to the Pre-Petition Lenders’ right to credit bid their prepetition debt and to establish the amount of a Diminution Claim that may be used to credit bid on assets otherwise unencumbered under the Pre-Petition Credit Agreement (but that are encumbered by the Senior Lender Adequate Protection Liens). These Settlements also will promote the resolution of issues that must be addressed in connection with confirmation of any Chapter 11 Plan.

“As such, the Debtors will seek to have the Settlements approved either (a) as part of any Sale Order approving the sale of some or all of the Reserve Price Assets to the Pre-Petition Lenders through their credit bid; or (b) if the Stalking Horse Bidder (on behalf of the Pre-Petition Lenders) is not the winning bidder for any Reserve Price Assets, in a separate Settlement Order provided that the Stalking Horse APA has not been terminated as a result of a breach by the Stalking Horse Bidder. In either case, these Settlements will be incorporated into the Chapter 11 Plan.

“The Pre-Petition Lenders and Debtors engaged in good faith negotiations with respect to these Settlements and submit that they reflect a sound exercise of the Debtors’ business judgment and are in the best interests of the Debtors’ estates.

“The Debtors intend to pursue the sale process and the plan process in parallel, along with their other restructuring activities, with the goal of emerging from chapter 11 at or before the end of June 2016. Consistent with this goal, the Debtors and the DIP Lenders have agreed to a revised set of plan milestones to complete the chapter 11 plan process as set forth in DIP Amendment No. 5 (the ‘New Case Milestones’). The Debtors believe that these New Case Milestones are reasonable, achievable and justified under the circumstances. Moving these cases along as promptly as possible is in the best interests of all stakeholders to preserve and maximize the value of the Debtors’ assets. These New Case Milestones address a handful of key actions and activities necessary to emerging from chapter 11 by the end of June 2016, including (a) filing a Chapter 11 Plan and related Disclosure Statement, (b) filing a motion to approve a Disclosure Statement and plan solicitation process, (c) filing any motions for relief under sections 1113 and 1114 of the Bankruptcy Code, (d) completing the Sale Hearing for the Assets and the hearing on the Settlements and (e) obtaining any orders needed under sections 1113 and 1114 of the Bankruptcy Code. The New Case Milestones were critical to obtain the DIP Lenders’ agreement to support the restructuring process and the Pre-Petition Lenders’ willingness to commit to the Stalking Horse Bid to set an appropriate floor value for the Reserve Price Assets.

“With the assistance of their investment banker, Rothschild Inc. (“Rothschild”), the Debtors anticipate completing a comprehensive marketing process in an effort to sell the Assets on the best terms possible. The Debtors will market the Assets to financial and strategic buyers, many of whom already have been contacted (including in connection with the Prior Bidding Procedures). The proposed Bidding Procedures are designed to provide the Debtors with the flexibility necessary to allow the Debtors to maximize the value of the Assets.

“To date, the Debtors have identified the Assets on the Asset Schedule attached to this Motion for potential disposition, including the Reserve Price Assets. Any Prior Assets not sold under the Prior Bidding Procedures Order also may be included as Assets subject to the Bidding Procedures hereunder. The Debtors reserve the right to amend the Asset Schedule as part of the proposed Bidding Procedures to include additional assets. Likewise, the Debtors may remove any Assets from the Asset Schedule if they determine that a sale of such Assets ultimately will not be pursued under the Bidding Procedures. Moreover, the Stalking Horse Bid includes a ‘fiduciary out’ to permit the Debtors to terminate (and no longer pursue) the Stalking Horse Bid, consistent with the Bidding Procedures and the Stalking Horse APA, if an alternative value-maximizing transaction is identified through the Bidding Procedures.”

This asset sale process would mean divestment of the major coal mining operations of Alpha, with the company left primarily with a number of smaller operations in Central Appalachia.

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.