The U.S. Justice Department, on behalf of the U.S. Office of Surface Mining Reclamation and Enforcement, the U.S. Environmental Protection Agency and the U.S. Army Corps of Engineers, on Feb. 19 objected to the bankruptcy court for Alpha Natural Resources about the coal producer’s proposed auction sale of its “crown jewel” mining assets.
Justice said this deal would sell off the “crown jewel” assets, leaving the surviving entity less able to pay for its reclamation and other environmental obligations. It noted that besides obligations under normal mining statutes, Alpha’s mining properties in Kentucky, Pennsylvania, Tennessee, Virginia, and West Virginia are subject to compliance obligations under a clean water Consent Decree entered by the U.S. District Court for the Southern District of West Virginia. “The obligations imposed by the above statutes and Consent Decree are mandatory requirements to maintain regulatory compliance that are not dischargeable in bankruptcy,” Justice said.
Alpha 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.
In October 2015, Alpha filed an initial motion for approval of bidding procedures for various “non-core” 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 said it and its 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,” Alpha said.
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).
Notable is that parties allowed to credit bid in such an auction rarely lose that auction to any other party, since bidding the money they are owed gives them a big advantage over parties bidding entirely new money.
Justice says Alpha trying to ram through a quick sale process with details lacking
In its Feb. 19 objection, Justice said: “Interestingly, a Plan Support Agreement (‘PSA’) with important details about a proposed plan of reorganization has been worked out but, as of the date of the Motion, not signed. Yet the Motion does not describe these details and provides that a Plan will be filed on a Sunday, two days after the deadline for objection to the Motion, and only two days before the hearing on the Motion.”
Justice added: “The United States is concerned that the Motion for a credit bid sale of the Debtors’ crown jewel assets threatens the prospect that the Debtors will render themselves nonviable and unable to comply with their remaining significant environmental compliance obligations under federal and state law including judicial and administrative orders and decrees. Allowing such a sale to go forward without consideration of the impact on Debtors’ overall operations may pose a serious threat to public health and safety in coal mining communities across the United States.
“The United States is likewise concerned that the Motion threatens to make any plan of reorganization patently unconfirmable and infeasible because the sale of crown jewel assets may render the estate unable to deal with its compliance obligations. Moreover, it seems odd to the United States that the Motion is premised on the terms of an unshared Plan Support Agreement whose details are to be disclosed in a Plan to be filed two days after the objection deadline and two days before the hearing.
“Debtors and their secured creditors should not be permitted to use bankruptcy laws to evade compliance with environmental obligations with respect to property of the estate. The Supreme Court has recognized these important concepts. … When the secured creditors, who now want to take possession of the Debtors’ crown jewel properties, entered into their credit arrangements with the Debtors they surely understood that these coal mining debtors had significant compliance obligations that would need to be taken care of in order to protect the public health and safety of coal mining communities. The bankruptcy laws should not now be permitted to be misused to evade compliance with the law and court and agency orders and decrees and shield the secured creditors’ collateral (and to some extent Debtors’ property that is apparently not collateral) from these important obligations to protect public health and safety.
“The bidding process proposed by the Motion will be an expensive process that will deplete the limited assets of the estate. The United States respectfully requests that that process not be set in motion separate and apart from a Plan process that is consistent with the Bankruptcy Code and will be protective of public health and safety. Otherwise significant valuable resources of the estate will be wasted.
“Similarly, the United States is concerned that all bidders understand that prior to the effective date of any sale of a coal mine the purchaser will be required to post fully compliant financial assurance for reclamation liability for the property they are purchasing. The United States requests that this be made an explicit condition to any Stalking Horse bid or any other bids. Likewise, the United States requests that it be an express condition of any Stalking Horse bid or other bid for Debtors’ mining properties in Kentucky, Pennsylvania, Tennessee, Virginia, and West Virginia that any successful bidder assume the applicable liabilities or obligations under Sections VIII and IX of the Consent Decree, pursuant to the transfer provisions of the Consent Decree. The District Court’s Consent Decree expressly requires that such applicable liabilities or obligations be transferred to any purchaser.”