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December 17, 2019 – The Debtors notified the Court [Docket No. 889] that their Chapter 11 Plan had become effective as of December 17, 2019. The Court had previously confirmed the Debtors’ Plan on December 4, 2019 [Docket No. 868].
On May 10, 2019, Cloud Peak Energy and 27 affiliated Debtors (formerly, OTC:CLDP, “Cloud Peak” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 19-11047. In their lead Petition, the Debtors, one of the largest U.S. coal producers, noted estimated assets of $928.7mn and estimated liabilities of $635.0mn.
The Debtors were represented by Daniel J. DeFranceschi of Richards Layton & Finger. Further board-authorized engagements included (i) Vinson & Elkins as general bankruptcy counsel, (ii) Centerview Partners as investment banker, (iii) FTI Consulting as financial advisor, and (iv) Prime Clerk as claims agent.
The Court's confirmation order was predicated on the Debtors' deletion from the Plan of requirements that creditors affirmatively opt-out of the Plan's third-party releases. The opt-out mechanism in respect of third-party releases had drawn objections from the both U.S. Trustee assigned to the Debtors' cases and the SEC, with particular scorn saved for the application of the opt-out mechanism to classes comprised of publicly traded securities who would have been deemed to have released third parties, notwithstanding that they had not expressly consented to do so…and, in the case of Class 7 equity holders, had not even been entitled to vote on the Plan (see "SEC Objection" below).
The Debtors Memorandum of Law in support of Plan confirmation [Docket No. 852] noted, “The Debtors are poised to emerge from Chapter 11 following a restructuring process highlighted by the successful closing of the sale of substantially all operating assets to Navajo Transitional Energy Company, LLC (such party, ‘NTEC’ or the ‘Purchaser,’ and such transaction, the ‘Sale’).
The Plan, among other things, effectuates the distribution of the consideration provided in the Sale (including the Purchaser Take-Back Notes) to Holders of Class 3 – Prepetition 2021 Notes Secured Claims, who will serve as the new owners of the Reorganized Debtors and will be entitled to recover on account of, among other things:
- a $0.15/ton royalty, payable quarterly for a period of five years, on all tons produced and sold at the Antelope and Spring Creek mines and on all tons produced and sold in excess of 10 million tons per year at the Cordero Rojo mine (the ‘Royalty Interest’);
- the amendment, reinstatement, issuance, and delivery under the Plan of the Amended Prepetition Notes; and
- new equity in Cloud Peak Energy Inc., as reorganized on the Effective Date (such equity, the ‘New Parent Equity’ and such reorganized entity, ‘Reorganized Parent’).
Further, the Plan embodies a global settlement with the Committee and the Prepetition Secured Noteholder Group, that maximizes value for all stakeholders. This Committee Plan Settlement provides for a cash distribution of up to $1.25 million to Class 4 – Holders of Allowed General Unsecured Claims. Critically, this settlement eliminates any uncertainty regarding whether Holders of Allowed General Unsecured Claims will receive a recovery under the Unsecured Creditor Sharing Agreement in the SAPSA.”
The Disclosure Statement [Docket No. 744] adds, “The Plan embodies a global settlement between the Debtors, the Prepetition Secured Noteholder Group, and the Committee that provides for the reinstatement of the Prepetition 2021 Notes in the aggregate principal amount of $34,500,000, as amended by the Amended Prepetition Notes Indenture, and distribution of the Purchaser TakeBack Notes, the New Parent Equity, and certain cash distributions to Allowed Holders of Prepetition 2021 Notes Secured Claims and Allowed General Unsecured Claims. The Plan and the related Sale Transaction preserve the jobs of hundreds of employees, addresses potential environmental risks, maximizes value for all stakeholders, and ensures that the Debtors’ assets remain operating as part of a going concern business. The Debtors believe that implementing the transactions under the Plan on the timeline proposed will maximize value for all stakeholders and provide for the best opportunity for success going forward.”
The following is a summary of classes, claims, voting rights and expected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement):
- Class 1 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated amount of claims is $2,346,305 – $2,992,697 and the expected recovery is 100%.
- Class 2 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated amount of claims is $881,534 and the expected recovery is 100%.
- Class 3 (“Prepetition 2021 Notes Secured Claims”) is impaired and entitled to vote on the Plan. The estimated amount of claims is $280,755,847 and the expected recovery is 42-46%. Holders’ recovery assumes a 10% discount rate. Treatment: "On the Effective Date, the Reorganized Debtors shall be deemed to have reinstated the Prepetition 2021 Notes in the aggregate principal amount of $60.0mn [revised from $35.0mn] as amended by the Amended Prepetition Notes Indenture, as further described in Article IV.B.3 of the Plan. In addition, on the Effective Date, each Holder of an Allowed Prepetition 2021 Notes Claim shall receive its Pro Rata share, based on the Allowed amount of its Prepetition 2021 Notes Claim, of the following: i. the Purchaser Take-Back Notes; ii. the New Parent Equity; and iii. the Prepetition 2021 Notes Secured Claim Cash Distribution."
- Class 4 (“General Unsecured Claims”) is impaired and entitled to vote on the Plan. The estimated amount of claims is $62,500,000- $125,000,000 [this was clearly quite far off, see "Voting Results," below] and the expected recovery is 1-2%.
- Class 5 (“Intercompany Claims”) is impaired and deemed to reject. The estimated amount of claims is $0 and expected recovery is 0%.
- Class 6 (“Intercompany Interests”) is impaired and deemed to reject. The estimated amount of claims is $0 and expected recovery is 0%.
- Class 7 (“Parent Interests”) is impaired and deemed to reject. The estimated amount of claims is $0 and expected recovery is 0%.
On October 2, 2019, the Court hearing the Cloud Peak Energy cases approved a $55.7mn sale of substantially all of the Debtors’ assets to Navajo Transitional Energy Company, LLC, a Navajo Nation limited liability company (“Purchaser”) [Docket No. 674]. The asset purchase agreement ("APA") memorializing the terms of the sale is attached to the order as Exhibit A.
The APA provides the following as to purchase price:
"Consideration. The aggregate consideration for the Purchased Assets (the “Purchase Price”) will be:
- $15,700,000 in cash (the “Cash Amount”);
- a senior secured note (the “Note”), in a form to be mutually agreed upon by the parties, in an amount of Forty Million Dollars ($40,000,000), incorporating the terms set forth in the term sheet attached hereto as Exhibit E;
- a five-year term production royalty interest on certain tons of coal produced and sold from certain of the Purchased Assets (the “Royalty Interest”), in a form to be mutually agreed upon by the parties, incorporating the terms set forth in the term sheet attached hereto as Exhibit F; and
- the assumption of the Assumed Liabilities."
The Disclosure Statement breaks this down further: " The specific components of the total distributable value provided by NTEC in connection with the Sale Transaction are set forth below:
- $15,700,000 in cash;
- $40 million notes secured by a first lien on all assets of the Debtors and NTEC, but subordinated to collateral for certain permitted senior lien debt (not to exceed $120 million); additionally, the collateral for the $40 million notes shall exclude any collateral pledged to a certain Arizona Public Service Company promissory note, as long as this note remains outstanding (the 'Purchaser Take-Back Notes');
- a $0.15/ton royalty, payable quarterly for a period of five years, on all tons produced and sold at the Antelope and Spring Creek mines and on all tons produced and sold in excess of 10 million tons per year at the Cordero Rojo mine (the 'Royalty Interest');
- assumption of pre- and post-petition non-income tax liabilities and coal-production related royalties projected to be approximately $91.01 million as of October 31, 2019;
- assumption of $20 million of post-petition accounts payable;
- agreement that the Debtors will retain all pre-closing cash on hand, accounts receivable, cash collateral securing letters of credit, and future AMT tax refunds; and
- cash to fund approximately $1.018 million in cure costs."
On September 26, 2019, the U.S. Securities and Exchange Commission (the “SEC” or “Commission”) objected to the Debtors’ Plan, citing its non-consensual third party releases were in violation of the Bankruptcy Code, specifically in respect of several debtor classes which were made up of public investors [Docket No. 825].
The objection stated, “The Commission objects to confirmation of the Plan because it would release the liability of, and permanently enjoin actions against, non-debtor third parties in contravention of Section 524(e) of 11 U.S.C. §§ 101, et seq. As a general matter, non-debtor third party releases contravene Section 524(e) of the Bankruptcy Code, which provides that only debts of the debtor are affected by Chapter 11 discharge provisions. Such releases have special significance for public investors, such as Cloud Peak’s Class 7 public shareholders and Class 3 and Class 4 noteholders, because they may enable non-debtors to benefit from a debtor’s bankruptcy by obtaining their own releases with respect to past misconduct, including violations of the federal securities laws or breaches of fiduciary duty under state law.
While such releases may be allowed if parties expressly consent to them in exchange for consideration from each released party, those circumstances are not present here. Nor are there exceptional circumstances that would support non-consensual releases. The Commission has similar concerns regarding an exculpation clause in the Plan that provides that the exculpated parties shall have no liability for any acts or omissions taken in connection with the restructuring, including certain prepetition conduct, but excluding actual fraud, gross negligence, or willful misconduct. Thus, the release and exculpation provisions should be deleted from the Plan or the Plan should be amended to provide: (i) that class 7 shareholders, class 3 2021 Notes Secured Claims (‘Secured Notes’), and class 4 Unsecured Notes Claims (‘Unsecured Notes’) either be carved out of the release or be required to ‘opt in’ to the release rather than having to affirmatively ‘opt out’ of the release; and (ii) that the exculpation clause will be narrowly tailored to cover only estate fiduciaries and to exclude prepetition conduct.”
On December 3, 2019, the Debtors’ claims agent notified the Court of Plan voting results [Docket No. 849]. Two classes were entitled to vote on the Plan and each of those classes voted overwhelmingly to accept.
The voting results were as follows:
- Class 3 (“Prepetition 2021 Notes Secured Claims against all Debtors”) – 152 claims holders, representing $227,664,000 (or 99.75%) in amount and 94.41% in number, accepted the Plan. 9 claims holders, representing $570,000 (or 0.25%) in amount and 5.59% in number, rejected the Plan.
- Class 4 (“General Unsecured Claims against all Debtors”) – 2636 claims holders, representing $861,646,266.43 (or 95.76%) in amount and 89.84% in number, accepted the Plan. 298 claims holders, representing $38,173,973.29 (or 4.24%) in amount and 10.16% in number, rejected the Plan.
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Hill Declaration”), Heath A. Hill, Cloud Peak's Executive Vice President and Chief Financial Officer, detailed the events leading to the Debtors' Chapter 11 filing. The Hill declaration states, "The Company actively deployed a number of strategies and transactions prepetition in an effort to deleverage its balance sheet, bolster liquidity, and maximize value for stakeholders. The Company’s chapter 11 filing, however, was precipitated by (i) general distress affecting the domestic U.S. thermal coal industry that produced a sustained low price environment that could not support profit margins to allow the Company to satisfy its funded debt obligations; (ii) export market price volatility that caused decreased demand from the Company’s customers in Asia; (iii) particularly challenging weather conditions in the second quarter of 2018 that caused spoil failure and significant delays in coal production through the remainder of 2018 and into 2019, which reduced cash inflows from coal sales and limited credit availability; and (iv) recent flooding in the Midwestern United States that has significantly disrupted rail service, further reducing coal sales."
About the Pre-petition Debtors
Cloud Peak Energy Inc. (OTC:CLDP) was formerly one of the largest U.S. coal producers and the only pure-play Powder River Basin (PRB) coal company. As of December 31, 2018, the Company owned and operated three surface coal mines in the PRB: the Antelope and Cordero Rojo mines in Wyoming, and the Spring Creek Mine in Montana. On May 10, 2019, the Company and substantially all of its wholly owned domestic subsidiaries (collectively, the Debtors) filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. On October 24, 2019, pursuant to an Asset Purchase Agreement dated August 19, 2019, Navajo Transitional Energy Company, LLC (NTEC) acquired substantially all of the Debtors’ operating assets. In connection with the closing of the sale, the Company terminated substantially all of its employees, and NTEC made offers of employment to substantially all of the terminated employees. Following the sale, the Company retained certain non-mining assets.
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