October 9, 2018
In our April piece entitled "🌑Trouble Brews in Coal Country🌑," we noted how Westmoreland Coal Company ($WLB) was headed towards a bankruptcy filing. Subsequently, in May, the company obtained a small round of financing ($90mm) to bridge itself to a chapter 11 bankruptcy filing. Alas, we're upon that filing — a “Chapter 33,” of sorts, for good measure.
And it’s an…interesting…one. The company’s First Day Declaration leads with “What is Coal” and then goes on to mansplain what coal is. It’s beautiful. It’s educational. It’s…odd. Per the Declaration:
Coal is a fossil fuel that forms from the remains of vegetation as long as 400 million years ago. The plants from eons ago captured energy through photosynthesis to create compounds (carbon) in plant tissue. When those plants and trees died, they ultimately sank to the bottom of swamps and formed a dense material called peat, which progressively carbonized under the earth’s pressure and changing temperatures and eventually became a combustible sedimentary and metamorphic rock, which is referred to as coal.
There are at least four ranks of coal, depending on the carbon content: lignite; subbituminous; bituminous; and anthracite. Some estimate that 90 percent of the coal in America is bituminous (i.e., soft) coal, which is primarily used to make electricity through combustion in boilers to make steam that is used to generate power (called steam or thermal coal) and coke for the steel industry (metallurgical or coking coal). The Debtors mine lignite, subbituminous, and bituminous coal.
We are thankful for the explanation. After all, there haven’t been many opportunities over the last decade to explore the intersection of coal and bankruptcy. Oh…wait. Hang on. Right. Ok, sure, there was Peabody Energy. Ah, yeah, and Alpha Natural Resources. And Edison Mission Energy, Patriot Coal (x2), Walter Energy, Arch Coal, Xinergy, Armstrong Energy and James River Coal. To name a few. But we digress.
Anyway, THIS bankruptcy implicates Westmoreland (with affiliates, “WLB”), a thermal coal producer that sells coal to “investment grade power plants under long-term cost-protected contracts, as well as to industrial customers and barbeque charcoal manufacturers.” The company’s mines are located in Montana, North Dakota, Texas, Ohio and New Mexico, of which only 4 of a total of 23 are active. The company’s strategy generally revolves around focusing on coal markets where the company can leverage geographic proximity to power plants, some of which were specifically designed to use the company’s coal. Close proximity also permits the company to avoid onerous transportation costs, which, in turn, provides the company with flexibility to be a low(er) cost provider. There is a bit of an export business as well.
The problem is that “[t]he American coal industry is intensely competitive.” The company adds:
In addition to competition from other coal producers, the Debtors compete with producers of alternative fuels used for electrical power generation, such as nuclear energy, natural gas, hydropower, petroleum, solar, and wind. Costs and other factors such as safety, environmental, and regulatory considerations related to alternative fuels affect the overall demand for coal as a fuel. Political dynamics in the United States and Canada have additionally resulted in a reduction of the market demand for coal-based energy solutions.
Tack on a hefty chunk of debt:
And then mix in that the company is (i) subject to 7 collective bargaining agreements and, (ii) in addition to a multi-employer pension plan, that it also provides defined benefit pension plans to qualified employees — which, naturally, are underfunded by approximately $29mm and carry a termination liability of approximately $77.3mm. But wait, there’s more. The company also has, among other things, approximately (i) $1.3mm in retiree medical obligations, (ii) $18.2mm in federal regulatory Black Lung Act obligations, (iii) $334mm of “other post-employment benefit” obligations and (iv) asset retirement obligations of approximately $474.5mm. Why anyone would want to get into the coal business is beyond us. That all sounds outright depressing.
The company blames the following for its bankruptcy filing: (a) a challenging macro environment (⬇️ production and ⬇️demand); (b) a capital intensive business model; (c) the rise of natural gas as a lower cost alternative to coal (score one for the frackers!); and (d) regulation which, as you can see from the panoply of liabilities noted above, helps create a quite a heavy hitter lineup of economic obligations. Per the company:
When coupled with the external pricing pressure, increased regulation, political opposition to coal in the United States and Canada, and other costs associated with WLB’s businesses, these liabilities have hindered WLB’s ability to operate competitively in the current market environment.
And so the company has filed its chapter 11 bankruptcy with the consent of 76% of its term lenders, 57.9% of its senior secured noteholders and 79.1% of its bridge lenders to pursue a dual-track sale of its core assets to an entity to be formed on behalf of the senior secured noteholders and term lenders, subject to highest or best offers for the core assets at an auction. The sale will be consummated through a plan to, among other things, preserve tax benefits. The company will also continue to market its non-core assets. Likewise, the master limited partnership 94% owned by the company (“WMLP”) is for sale. Notably, with no prospect of a restructuring on the horizon, there is no deal in place with the unions and retirees and WLB may have to proceed on a non-consensual basis.
The company marched in to court with a commitment for a $110mm DIP. It will roll-up the bridge loan and fund the cases while the sale processes progress.
Update: In “Grocery Workers, Miners, and Who Ain’t Getting Paid (Short #MAGA),” we noted how coal miners employed by Westmoreland Coal Company were, due to a recent decision by Judge Jones in the Southern District of Texas, in for a world of hurt. Now the company has officially filed its motion seeking to reject certain collective bargaining agreements and modify certain retiree benefits pursuant to sections 1113 and 1114 of the Bankruptcy Code. #MAGA!!
Update: On January 21, 2019, the company filed a “Notice of Cancellation of Auction and Designation of Successful Bidder” after the company didn’t receive any qualified bids for its core assets other than the original stalking horse bid. The company’s Buckingham Mine, a non-core asset, did, in contrast, receive some interest and the company, therefore, will seek to sell that mine in due time.
Jurisdiction: S.D of Texas (Judge Jones)
Capital Structure: See above.
Legal: Kirkland & Ellis LLP (James Sprayragen, Edward Sassower, Stephen Hessler, Michael Slade, Greg Pesce, Anna Rotman, Christopher Koenig, Gerardo Mijares-Shafai, Timothy Bow) & (local) Jackson Walker LLP (Patricia Tomasco, Matthew Cavenaugh)
Legal Conflicts Counsel to Westmoreland Resource Partners LP and the Conflicts Committee of the Board of Directors of Westmoreland Resources GP LLC: Jones Day (Heather Lennox, Timothy Hoffman, Oliver Zeltner)
Financial Advisor to Westmoreland Resource Partners LP and the Conflicts Committee of the Board of Directors of Westmoreland Resources GP LLC: Lazard Freres & Co. LLC (Tyler Cowan)
Financial Advisor: Alvarez & Marsal North America LLC (Robert Campagna)
Investment Banker: Centerview Partners LLC (Marc Puntus)
Claims Agent: Donlin Recano & Co. (*click on company name above for free docket access)
Other Parties in Interest:
WMLP Ad Hoc Group
Legal: Schulte Roth & Zabel LLP (David Hillman, Kristine Manoukian, Lucy Kweskin, Kelly Knight) & (local) Jones Walker LLP (Joseph Bain, Mark Mintz)
Financial Advisor: Houlihan Lokey Capital, Inc.
Administrative Agent under Bridge Loan & DIP Agreements: Wilmington Savings Fund Society FSB
Legal: Wilmer Cutler Pickering Hale and Dorr LLP (Andrew Goldman, Benjamin Loveland) & (local) Okin Adams LLP (Matthew Okin, David Curry Jr.)
WMB Ad Hoc Group of Term Lenders
Legal: Kramer Levin Naftalis & Frankel LLP (Thomas Mayer, Stephen Zide)
Official Committee of Unsecured Creditors
Legal: Morrison & Foerster LLP (Lorenzo Marinuzzi, Todd Goren, Jennifer Marines, Dimitra Doufekias) & (local) Cole Schotz PC (Michael Warner, Felice Yudkin, Nicholas Brannick, Benjamin Wallen)
United States Trustee
Legal: Debevoise & Plimpton LLP (M. Natasha Labovitz, Erica Weisgerber) & (local) Zach Clement PLLC