October 22, 2018
Amidst concerns of nationwide pipeline shortages and, strangely, corresponding fears over too much pipeline capacity, it seems even more strange that a pipeline construction company would file for bankruptcy. Alas, on Monday, Welded Construction L.P., a Perrysburg Ohio-based pipeline construction contractor filed for bankruptcy in the district of Delaware despite slightly more than $1b in consolidated gross revenue in the twelve months ended 9/30/18.
We have to hand the company and its professionals some credit: they appear to be paying attention to what PETITION has been saying about the need for more efficiency in the restructuring profession as this case features one of the shortest First Day Declarations we’ve seen in recent memory. They cut right to it. No surplus. Which seems only right: surplus is definitely not something a pipeline construction contractor wants.
Sadly, that is apparently what it appears to have. Just not surplus liquidity, unfortunately. Rather they are alleged by some of their clients to have a surplus of cost overruns. And by alleged we don’t mean threatening emails or letters. We mean litigation. And then litigation has cooled the market for Welded and fed into liquidity issues.
The company is currently working on five pipeline construction projects for its various customers, a list that includes the likes of Sunoco (as affiliates of Energy Transfer Partners LP or “ETP”), Consumers Energy Company, and Williams Companies. The latter, upon completion of Welded’s construction work, is alleged to have withheld $23.5mm from a payment owed to the company and filed a lawsuit against the company alleging breach of contract. According to the company, this “created acute liquidity issues for the Debtors and concerns in the market about their viability as a going concern.” When there is a ton of pipeline construction business to be won, this timing couldn’t possibly be any worse.
Compounding matters is the fact that the company has sizable potential surety bond obligations to its insurers. The insurers, in turn, were granted security interests in the company’s assets but…uh…maybe didn’t perfect them? Whoops. Popping popcorn for this inevitable fight. There is no secured debt here other than some potential equipment financing.
Bored yet? Yeah, us too. But there is a lesson here about managing litigation risk. The lawsuit by Williams spooked other potential customers and enhanced the company’s already pressing liquidity concerns. The company states:
The Debtors vigorously dispute the allegations contained in the Williams Complaint. Since the filing of the Williams Complaint, the Debtors have engaged in dialogue with Williams and its other Customers in an attempt to consensually resolve the dispute and avert the need for the filing of these chapter 11 cases. However, the filing of the Williams Complaint was quickly made public to the market and Customers became increasingly concerned about how the payment of receivables would be utilized by the Debtors. In particular, Customers sought assurance that any new payables would be solely deployed toward expenses related to their particular Projects. As such, these discussions were unsuccessful, depriving the Debtors of the necessary liquidity to sustain their business operations outside of chapter 11 and absent negotiated arrangements with their Customers….
Subsequently, and just a few days ago, ETP sent a letter to the company purporting to terminate the company’s engagement on the ETP project. Crikey! The dominoes are falling.
That last bit of the above quote is key here. Armed with a $20mm DIP credit facility, the company intends to use the “breathing spell” afforded by the chapter 11 automatic stay to:
…negotiate arrangements to finalize the Debtors’ ongoing Projects with [customers], all with the overarching goal of maximizing the value of the Debtors’ estates for the benefit of the Debtors’ creditors and other stakeholders.
Sounds like the next few weeks are going to be riddled with intense negotiations. Sure sounds like the company’s survival depends upon it.
Jurisdiction: D. of Delaware (Judge Gross)
Capital Structure: No secured debt. $240mm of accrued liabilities.
Legal: Young Conaway Stargatt & Taylor LLP (M. Blake Cleary, Sean Beach, Justin Rucki, Tara Pakrouh, Betsy Feldman)
Financial Advisor: Zolfo Cooper LLC (Frank Pometti)
Claims Agent: KCC (*click on company name above for free docket access)
Other Parties in Interest:
North American Pipeline Equipment Company, LLC, Bechtel Oil, Gas & Chemicals, Inc., and Ohio Welded Company LLC
Legal: Gibson Dunn & Crutcher LLP (Michael Rosenthal, Matthew Kelsey, J. Eric Wise, Daniel Denny, Jason Friedman) & (local) Ashby & Geddes PA (William Bowden, Karen Skomorucha Owens, Katharina Earle)
Berkshire Hathaway Specialty Insurance Company
Legal: Chiesa Shahinian & Giantomasi PC (Scott Zuber, Jonathan Bondy) & (local) Burr & Forman LLP (Richard Robinson, J. Cory Falgowski)