Q1 2018 Preliminary Review

Long Duopolies = Long Kirkland & Ellis & Weil Gotshal & Manges

As we think about duopolies today, Google ($GOOGL) and Facebook ($FB) come to mind. The two large companies - recent controversies notwithstanding - represent a significant amount of annual ad revenue generation and have increasingly siphoned off market share and revenue from other advertising mediums; in other words, they have dominated the advertising industry. But this isn’t the kind of duopoly that we’re focused on today.

Over last week’s brief holiday respite, we set out to examine restructuring activity in Q1 2018. We wanted to answer this question: who is dominating the restructuring industry? Well, Captain Obvious: Kirkland & Ellis LLP and Weil Gotshal & Manges LLP.

We admit: we’re not surprised by this. We’ve been paying attention. In Q1 2018, Kirkland & Ellis LLP filed EXCO Resources Inc., PES Holdings LLC, Cenveo Inc., iHeartMedia Inc., and the Toys R Us “propco.” Weil Gotshal & Manges LLP filed Fieldwood Energy LLC, Tops Holdings II Corp., Claire’s Stores Inc. and Southeastern Grocers. That’s a meaningful and significant share of the large bankruptcy filings in the quarter. The industry is definitely a two-horse race when it comes to law firms and debtor filings. If we could long these firms, we would.

But, there are some changes afoot. Quintessential creditor-side firms are encroaching on the debtor shops and vice versa. Milbank Tweed Hadley & McCloy LLP filed Remington Outdoor Company and Akin Gump Strauss Hauer & Feld LLP filed Rand Logistics Inc. and FirstEnergy Solutions Corp. In turn, Weil Gotshal & Manges LLP seems to be positioning itself to take a chunk of revenue out of other firm’s debtor-side deals where it can — by sitting in other seats at the table. Weil represents both the potential buyer and the private equity sponsors in iHeartMedia Inc. and the ad hoc first lien group in Cobalt International Energy. Said another way, while Akin and Milbank are no longer creditor-only shops, Weil is no longer a debtor-shop only.

Getting even more granular, Weil Gotshal - along with Evercore Group LLC ($EVR) and FTI Consulting Inc. ($FTI) - have dominated the beleaguered grocery space. After working on the A&P Chapter 22 (which, for all three firms, was a round trip), the trifecta secured both Tops’ and Southeastern’s chapter 11 filings.

Meanwhile, DLA Piper LLP seems to be securing a foothold in the healthcare space. It was involved in Adeptus Health last year and recently filed Orion Healthcare Corp. and 4 West Holdings LLC. This is a firm to watch as people suspect more healthcare flow on the horizon.

🌑Trouble Brews in Coal Country🌑

Enter FirstEnergy, MurrayEnergy & Westmoreland

Earlier this week we posted our brief summary of FirstEnergy Solutions Corp’s chapter 11 bankruptcy filing on our free website. We wrote,

The issue, though, is whether the rejection of the nine PPAs will cause disruption to the continued supply of wholesale electricity or impact the reliability of the transmission grid in the regional transmission organization that governs FES and FG. That generally means YOUR electricity - if you live in the Northeast. Naturally, the debtor argues it won't. The federal government may think otherwise. And this is precisely why the company filed an action seeking a declaratory judgment and injunction against the Federal Energy Regulatory Commission ("FERC") to prevent the feds from hindering -- on the basis of the Federal Power Act -- the company's attempts to reject the PPAs under the federal bankruptcy code. FERC regulates the wholesale power market. It is also why the company has filed a request for assistance from Rick Perry, President Trump's Energy Secretary. This is some real dramatic sh*t folks: a conflict between federal statutes with efforts for executive branch intervention. Someone dial up Daniel Day-Lewis and bring him out of retirement: this could be the next "Lincoln." 

Hyperbolic as that may be, this bankruptcy filing does, indeed, put the President in an odd spot. FirstEnergy has asked President Trump to intervene under his purported “202(c) emergency authority” under the Federal Power Act by compelling the nation’s largest electric grid operator, PJM Interconnection LLC, to deploy power from FirstEnergy’s coal and nuclear units in priority before any other power provider. The main argument is that too much reliance on natural gas, a volatile commodity, could create a natural security risk. And in the absence of intervention — or a sale to another entity — FirstEnergy will close its nuclear plants by 2021 heightening that risk. Proponents of intervention argue that, in addition to avoiding national security risks, thousands of nuclear and coal-related jobs would be saved — at FirstEnergy and further down the stack.

Apropos, Murray Energy Corp., a coal supplier to FirstEnergy, has sent a number of high profile letters to the Trump Administration advocating the use of 202(c) powers. In a letter dated August 17, 2017, Robert Murray wrote about the prospect of FirstEnergy filing for chapter 11,

"Their bankruptcy will force Murray Energy Corporation into immediate bankruptcy, terminating our 6,500 coal mining jobs. Each of our coal mining jobs spins off up to eleven (11) more jobs in our coal mining communities, according to university studies. This would be a disaster for President Trump and for our coal miners and employees."

Mr. Murray continued,

"Absent immediate action to preserve these power plants, many thousands of jobs in Ohio, West Virginia and elsewhere will be at dire risk. In addition, the risk to the grid and national security will reach a level that is unacceptable. You fully understand the war on coal that was waged during the previous Administration and you have taken steps to end that war and provide for a potential future once again for coal. But the wounds from that war have not healed and the future of coal is dependent upon surviving the present. As more plants shut down, the future of coal becomes bleaker and bleaker. The storm is here and we will suffer significant harm if the Secretary fails to take emergency action. Not only are coal jobs at risk, but nuclear jobs are also at risk as well as the nuclear infrastructure in the United States that is vital to our global nuclear dominance."

Shall we commence the Murray Energy Corp. bankruptcy countdown? 🤔🤔

Opponents call this whole scheme a big “bailout” and note that intervention on behalf of higher-cost fossil-based power will lead to increased prices for the end user — companies and consumers across a bunch of states.

*****

Elsewhere in coal land, Colorado-based Westmoreland Coal Company ($WLB) reported its fourth quarter and full year 2017 financial results on Monday, April 2. The company has U.S. coal operations in Montana, Wyoming, North Dakota, Texas, New Mexico and Ohio; it also has operations in Alberta and Saskatchewan Canada. While certain EBITDA metrics — primarily US-based results — surprised minimally to the upside, the overall results aren’t good enough given revenue declines, a large debt load and macro coal sales trends.

In the US, consolidated EBITDA was up 18% YOY in Q4 and 2% YOY for the fiscal year. In Canada, consolidated EBITDA was down 41% YOY in Q4 and up 2% YOY for the fiscal year. Finally, in its “Coal - MLP” segment (which governs Ohio operations), consolidated EBITDA was down 25% YOY in Q4 and down 13% YOY for the fiscal year. Here, according to the company’s recent 10-K filing, is a snapshot of coal tons sold from 2015-2017 for the company’s US-based mines:

Source: Westmoreland 10-K

A pretty marked downward trends across most of the mines.

This, of course, makes it challenging for the company to service its capital structure. The company carries an $50 million untapped revolver (CIBC and East West Bank), $350 million of 8.75% secured notes due 2022 (US Bank NA), a $425 million secured term loan due 2020 (Bank of Montreal), a $125 million San Juan loan due 2020 (NM Capital Utility Corporation), and a $295 million WMLP term loan due in December 2018 (US Bank NA). For the math challenged, that is $1.075 billion of total debt.

Some other disturbing facts included in the filing:

• #1 Risk Factor. “We may seek protection from our creditors under Chapter 11 of the United States Bankruptcy Code ("Chapter 11") or an involuntary petition for bankruptcy may be filed against us, either of which could have a material adverse impact on our business, financial condition, results of operations, and cash flows and could place our shareholders at significant risk of losing all of their investment in our shares.” Kirkland & Ellis LLP, Centerview Partners and Alvarez & Marsal North America LLC continue to advise the company. Yup, more Kirkland and Alvarez.

• Going Concern Warning. The company’s auditor has issued an explanation that “the Company has a substantial amount of long-term debt outstanding, is subject to declining industry conditions that are negatively impacting the Company’s financial position, results of operations, and cash flows, and has stated that substantial doubt exists about the Company’s ability to continue as a going concern“. This constitutes a breach of the company’s revolver covenants and its San Juan term loan. Currently there is a waiver in place with respect to the potential event of default and this, in turn, has kept potential cross-defaults under the company’s term loan and senior notes at bay. Substantially all of the company’s debt is now classified as current. The waiver expires on May 15, 2018.

• Competition for the publicly-traded WMLP segment ($WMLP). “WMLP's principal direct competitors are other coal producers, including but not limited to (listed alphabetically) Alliance Resource Partners, L.P., Alpha Natural Resources, CONSOL Energy, Foresight Energy, Hallador Energy Company, Murray Energy Corporation, Peabody Energy Corp., Rhino Resource Partners, L.P. and various other smaller, independent producers.” There are a number of familiar names there for those who have been following bankruptcy. Note, also, Murray Energy Corporation!

• No CEO. “Westmoreland has suspended the search for a permanent Chief Executive Officer until the conclusion of the capital structure negotiations.” Must be having a hard time recruiting for this sh*tshow.

In summary, like a lot of its coal-producing competitors before it, Westmoreland looks effed.

*****

Earlier this week, Riccardo Puliti, the World Bank's global head of energy and extractives, indicated in a CNBC interview that coal reliance will dramatically decline in the next 30 years.

Given the FirstEnergy drama and Westmoreland’s current state of affairs, will President Trump have anything (more) to say about that?