Walter files Chapter 11

Trent Ernst, Editor


As expected, Walter Energy has filed for bankruptcy protection.

On July 15, Walter announced that the company had “…entered into an agreement with certain of its senior lenders on the material terms of a restructuring…” in a release. “To implement this pre-negotiated restructuring, Walter Energy and its U.S. subsidiaries have filed for relief under chapter 11 of the U.S. Bankruptcy Code.”

“This restructuring plan provides a roadmap for Walter Energy to establish a sustainable capital structure, make further changes to operational cost drivers, and ensure that the company can continue to operate safely and competitively in the years ahead,” said Walt Scheller, Chief Executive Officer. “With the support of our key senior lenders, we will use this process to pursue the best possible outcome on behalf of all of our stakeholders, including our employees and our communities. In the face of ongoing depressed conditions in the market for met coal, we must do what is necessary to adapt to the new reality in our industry.”

The company says it has sufficient cash to assure that vendors, suppliers and other business partners will be paid in full for goods and services that they provide during the reorganization process.

As part of the terms of the restructuring, if Walter cannot satisfy the various conditions and milestones or confirm a chapter 11 plan, the company will pursue a sale of substantially all of its assets through a court-supervised auction process.

As of March 31, when Walter filed its last quarterly report, the company had US$3.02 billion in debt, much of that still stemming from its $3.3 billion purchase of Western Coal in 2010.

At the time, coal prices were on the upswing, heading for a record high of $330/tonne in 2011. That high was hit during a time of surging demand for steel production in China and the worst floods in 50 years in Australia basically shutting down much of the Met Coal exporting business in that country for months.

But once Australia came back on-stream, prices began to drop and continue to drop to this very day. And with one American dollar being with $1.36 against the Australian dollar (compared to $1.30 vs the Canadian dollar), the buying power of American dollars is stronger in Australia, giving those producers a leg up against North American producers.

And Australian producers are engaged in a race for the bottom, with major coal producers trying to increase their output, which reduces production cost.

Since Australian met coal exports peaked at 160 million tons before the 2011 floods, production has risen to over 180 million tonnes in 2014, with no signs of that abating, while at the same time, the Chinese market has slowed. In 2013, the country was importing about 75 million tons of met coal. Last year, that fell to just over 60 million tons.

In order for the prices to recover, an estimated 40 to 50 million tons of coal would need to be cut from the market, but, outside of the idling of the Tumbler Ridge mines, nobody wants to be the first to blink, and production is still outstripping demand, with met coal producers continuing to mine coal on razor thin margins, and with many mines actually losing money, in an effort to outlast the competition.

So far, only Teck has shown any interest in budging, announcing it would be doing a series of rolling three week shut-downs at six of its mines, reducing output by a predicted 1.5 million tonnes.

That’s a 22 percent reduction in what the company would normally produce, but a drop in the bucket of the oversupply.

This year, the World Steel Association has lowered its estimate for growth in the global steel market, dropping it from two percent growth to a mere half a percent.

As a result, BMO has revisited its forecast for met coal prices. They were predicting coal would climb back up to US$114 per ton in 2016, but now they are estimating the price will only climb to $97/ton.

The move comes a week after the New York Stock Exchange (NYSE) suspended trading in the company and began the process of delisting the company.

According to the NYSE, the company’s common stock was had “abnormally low” price indications at the opening of trading, and informed Walter that they were applying to the US Securities and Exchange Commission (SEC) to delist the company’s common stock “upon completion of all applicable procedures.”

According to Walter, “the suspension and commencement of delisting does not affect the company’s business operations, nor do they trigger any violation of any of the company’s credit agreements or other debt obligations.”

The Alabama-based firm said the “pre-negotiated” Chapter 11 filing in the U.S. will allow senior lenders to convert their debt into company equity.

A global coal glut has put huge pressure on coal companies everywhere, as the price of metallurgical coal used in steel production has plunged from a peak of US$330 a tonne in 2011 to less than $100 a tonne now.

The company is not alone. Alpha Natural Resources, another met coal producers was delisted from the NYSE for abnormally low share prices, and is also rumoured to be looking at bankruptcy protection, and Arch Coal recently declared a reverse stock split to avoid suffering the same fate.

However, such paper shuffling doesn’t address the underlying problem: oversupply of met coal and a reduced demand has caused the price to crater with no end in sight.

Walter Energy’s bankruptcy filing does not include its Canadian or U.K. operations. Because it has been prenegotiated, experts predict that Walter should come out of Chapter 11 relatively quickly.

The company idled its Wolverine and Brazion coal mines in northeastern B.C. last year, putting about 700 employees out of work — a big hit for the nearby towns of Tumbler Ridge and Chetwynd.

Walter Energy’s (WLTG) bankruptcy is a part of restructuring plan negotiated with its creditors. According to the plan, the ownership of Walter Energy’s Alabama and Virginia assets will pass on to the senior creditors. Junior creditors will get nothing. Walter Energy’s non-US operations (Canada and the UK) are not included in the plan. Because the bankruptcy is pre-negotiated, it is expected to end soon.