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January 25, 2019 – Talen Montana, LLC (“Talen”) objected to confirmation of the Debtors’ Plan, arguing that the Debtors’ recently announced intention to reject certain coal supply agreements between Talen and the Debtors, without otherwise presenting a legitimate justification for doing so, renders the Plan unconfirmable. Talen also suggests that there exists a non-legitimate rationale for rejecting the coal contracts: to extract concessions in ongoing commercial negotiations to actually extend one of the existing agreements [Docket No. 1161].
The objection states, “Notwithstanding the WLB Debtors’ numerous comments about the importance of their coal supply agreements and an explicit provision in the Plan that was served on stakeholders for solicitation providing for the assumption and assignment of the coal supply agreements to the WLB Debtors’ purchasers, the WLB Debtors have recently indicated that they now intend to reject the Colstrip Coal Supply Agreements. Yet, the WLB Debtors have not met their burden for rejecting these agreements, as they have failed to articulate any legitimate business justification for doing so. Nor can they. This is not a situation where a debtor has made a difficult, but reasonable business decision with which a counterparty simply disagrees. Rather, here, there is simply no possible legitimate business reason for the WLB Debtors to rid themselves of the Colstrip Coal Supply Agreements, as was clearly reflected in the Plan circulated for vote. The WLB Debtors are not seeking to reject unprofitable contracts that burden their estates. To the contrary, the Colstrip Coal Supply Agreements are profitable contracts that guarantee WECO’s profitability, as they are ‘cost-plus’ agreements under which the Buyers pay WECO’s annual costs of mining operations, a return on WECO’s capital investment, and per-ton profit fees….Instead, it appears that the WLB Debtors are threatening rejection and the withholding of vital coal to these captive Buyers to extract what in Talen’s view are extremely unreasonable terms from them in the context of ongoing commercial negotiations focused on extending the U34 Coal Supply Agreement beyond its December 31, 2019 expiration date.
There are multiple reasons not to authorize rejection of the Colstrip Coal Supply Agreements.
First, the Plan states that the WLB Debtors will assume and assign the Colstrip Coal Supply Agreements, consistent with representations the WLB Debtors have made to the Court, the creditors, and the public since they filed for chapter 11, including in their first day Coal Contract Performance Motion (as defined below). The WLB Debtors should not be permitted to manufacture uncertainty at this late juncture as to the otherwise clear and explicit language in the Plan in an attempt to exert leverage over Talen and the Co-Owners. Nor should the WLB Debtors be permitted to make any changes to the Plan at this eleventh hour after solicitation is complete and the objection deadline has passed.
Second, the WLB Debtors cannot meet their burden of proof to justify rejection of the Colstrip Coal Supply Agreements. Put simply, rejection would not benefit the estate. There is no sound business justification for rejection, which could lead to significant rejection damage claims diluting the recovery to general unsecured creditors, and the balance-of equities test that applies in this situation pursuant to binding precedent from the Fifth Circuit Court of Appeals weighs against rejection…The fact that what is at stake here – coal for electricity – is a vital public good and that rejection would put the operations of the Colstrip Plant and its hundreds of employees at risk (let alone the employees of the Rosebud Mine, which might no longer have a customer for its coal) should make the Court all the more reluctant to approve this risky tactic, especially when applying the Mirant balance-of-equities test.
Third, a rejection of the Colstrip Coal Supply Agreements would render the WLB Debtors unable to meet the feasibility standard for confirmation of the plan as to WECO given the uncertainty that WECO or its successor will be able to sell any coal and pay its costs and expenses absent assumption of the Colstrip Coal Supply Agreements.”
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