Alberta Treasury Branches v Tallgrass Energy Corp, 2013 ABQB 432

Court of Queen ’ s Bench of Alberta Citation: Alberta Treasury Branches v Tallgrass Energy Corp, 2013 ABQB 432 Date: 20130806 Docket: 1301 08759; 1301 08497 Registry: Calgary Between: Alberta Treasury Branches Plaintiff - and - Tallgrass Energy Corp. Defendant 1301 08497 In The Matter of the Companies’ Creditors Arrangement Act , R.S.C. 1985, c. C-36, as amended And in the Matter of the Alberta Business Corporation Act , R.S.A. 2000, c. B-9 , as amended -and- Tallgrass Energy Corp. Defendant _ ________________________________________ ______________

Reasons for Decision of the Honourable Madam Justice B.E. Romaine _________________________________________ ______________ Introduction [ 1 ] Tallgrass Energy Corp applied for an initial order under the Companies’ Creditors Arrangement Act , R.S.C. 1985, c. C-36 as amended. That application was opposed by its secured creditors, Alberta Treasury Branches and Toscana Capital Corporation, which prior to Tallgrass’ application for CCAA protection had applied for an order appointing a receiver over the property and assets of the company.

I dismissed Tallgrass’ application for an initial CCAA order and allowed the receivership application. These are my reasons. Facts [ 2 ] In July, 2012, ATB extended a $12 million credit facility to Tallgrass, payable on demand and secured by a first charge on all of the company’s assets. At about the same time, Toscana granted Tallgrass a bridge loan credit facility in the amount of $6 million secured by a second in priority charge against the assets.

This bridge loan facility matured on April 30, 2013. [ 3 ] In July, 2012, John McAdam, the CEO of Tallgrass, began the process of looking for traditional financing to replace the Toscana bridge financing. In early 2013, Mr. McAdam realized that no conventional financing was available, and Tallgrass began to explore the availability of non-traditional forms of financing. [ 4 ] Tallgrass management decided to attempt to obtain $100 million of non-traditional financing, as there were no third parties willing to step into the shoes of Toscana’s subordinate position.

The company retained an advisor in March, 2013 to aid in the search. [ 5 ] After the Toscana facility matured on April 30, 2013, Tallgrass acknowledged that the loan was in default. Toscana agreed to forbear enforcement until May 31, 2013 to provide Tallgrass with additional time to finalize certain financing alternatives that were being explored. [ 6 ] On June 17, 2013, Toscana issued a demand to Tallgrass, and on June 25, 2013, ATB followed with its demand.

There is no issue that Tallgrass is also in default of the ATB credit facility. [ 7 ] On June 27, 2013, at the request of the secured lenders, Tallgrass retained Grant Thornton Limited as financial advisor, on the condition that Grant Thornton would provide financial information and reports to the secured lenders. Grant Thornton provided two reports to the lenders, on July 4 and on July 11, 2013.

The lenders granted further forbearance during this period and continuing until July 17, 2013. [ 8 ] On about July 15, 2013, on the basis of the information and reports received from Grant Thornton, Toscana advised Tallgrass that it would not be prepared to grant further forbearance, and that it intended to bring an application to appoint a receiver on Wednesday, July 24, 2013.

On July 16, 2013, ATB advised Tallgrass that it was taking the same position, and that after July 17, 2013, Tallgrass would have no further access to the remaining $100,000 available under the line of credit. [ 9 ] Tallgrass sought an initial order under the CCAA on July 17, 2013. The application was put over to July 24, 2013 to be heard at the same time as the receivership application, with a temporary stay to preserve the status quo.

ATB agreed to allow Tallgrass access to up to $50,000 of the line of credit to pay certain critical suppliers. [ 10 ] In its application, Tallgrass represented that it currently has assets of $28,829,874 and liabilities of $28,896,371.

The secured lenders are owed approximately $18 million and Tallgrass has unsecured accounts payable in the amount of roughly $3 million, decommissioning liabilities as of March 31, 2013 in the amount of approximately $7.4 million and a financing contract under which approximately $484,000 is outstanding as of March 31, 2013. [ 11 ] The company values its property, plant and equipment, including undeveloped land, at approximately $21.6 million. Analysis [ 12 ] As a preliminary matter, it is clear that Tallgrass meets the technical requirements for protection under the CCAA.

It is also clear and uncontested that Tallgrass has breached various provisions of the ATB credit facility and the Toscana bridge loan facility, and that the secured lenders are entitled to apply for a receivership order. In fact, there was no question that, if Tallgrass’s application for an initial order under the CCAA did not succeed, a receivership would follow. [ 13 ] As I indicated in Matco Capital Ltd. v Interex Oilfield Services Ltd. , (1 August 2006), Docket No. 060108395, a

section 11 order under the CCAA is not granted merely upon the fact of its application. Tallgrass must satisfy the court that circumstances exist that make the order appropriate, and that it has acted and is acting in good faith and with due diligence. The CCAA therefore requires that the court hearing the application exercise discretion in making these determinations.

[ 14 ] A key issue here is whether Tallgrass can establish that there is any reasonable possibility that it will be able to restructure its affairs. The burden placed on an applicant for an initial CCAA order in this regard is not a very onerous one, in that it is not necessary for an applicant company to have a fully-developed plan or the support of its secured creditors, although either or both are desirable and helpful. However, there must be some evidence of what Farley J. in Re Inducon Development Corp. , 1991 CarswellOnt 219 referred to as the outline of a plan, what he called the “germ of a plan”: para 14.

I would add a further gloss on that phrase: there should be a germ of a reasonable and realistic plan, particularly if there is opposition from the major stakeholders most at risk in the proposed restructuring. As noted in Inducon at para 13, the CCAA is remedial, not preventative, and it should not be the “last gasp of a dying company”.

Unfortunately, Tallgrass appears to be at that desperate stage. [ 15 ] While it is certainly true that the fundamental purpose of the CCAA is to permit a company to carry on business and where possible avoid the social and economic costs of liquidating its assets, this is a company with very few employees, a handful of independent contractors, and relatively minor unsecured debt. Tallgrass does not carry on a business that has broader community or social implications that may require greater flexibility from creditors.

The major stakeholders here are the secured lenders who oppose the application, and the equity holders. [ 16 ] The secured lenders submit that the restructuring options presented by Tallgrass are commercially unrealistic and unlikely to come to fruitation, that it is obvious that a liquidation of the assets will be the end result for this company, and that they have lost confidence in the management of Tallgrass to effect such a liquidation.

They submit that, as they are likely the only parties with any economic interest in the company, their preference for a receivership over what would ultimately be a liquidating CCAA should be taken into account. [ 17 ] I must agree that the restructuring options proposed by Tallgrass, while more detailed than the kind of general good intentions offered by the applicant in Matco , are not realistic or commercially reasonable. Specifically: 1.

Tallgrass concedes that it has exhausted any chance of conventional financing after nearly a year of attempting to find a conventional lender to take out its existing secured debt, turning in early 2013 to what it calls non-traditional sources; 2. Company management decided in March of this year to pursue $100 million in non-traditional debt rather than merely retiring existing secured debt of $18 million.

As noted by the secured lenders, it is unrealistic for a small public company with a market capitalization of approximately $800,000 and existing assets worth roughly $29 million, which has already encountered difficulties finding sources of funding to take out Toscana’s subordinate position, to attempt to obtain $100 million in financing within a reasonable time frame. The unsatisfactory and uncertain results of approximately six months of effort in that regard must be analyzed carefully; 3. Tallgrass has obtained no firm commitments for refinancing. What it has been able to obtain is the following:

a) a letter dated July 23, 2013 from a financing broker that purports to be a “commitment letter”. This “commitment” to lend $100 million states that the broker will source the finding through an unnamed “top 25 bank”. It requires an upfront “bank guarantee fee” of $2 million. The letter provides that the broker shall have no liability to Tallgrass “under any theory of law or equity” for the failure of any transaction contemplated by the loan commitment letter .

The secured lenders have pointed out the many unusual provisions of this letter, and ask, reasonably enough, why a “top 25 bank” would contemplate a loan of $100 million to Tallgrass in its present circumstances. Tallgrass management has had no direct discussion with any financial institution and is relying on assurances from the broker that the source of funding would be reputable. This “commitment letter” lacks credibility. At any rate, Tallgrass is unable in its current financial state even to fund the $2 million bank guarantee fee necessary to take the proposal to a next step. This leads to the next proposal.

b) Tallgrass has obtained a letter from a friend of its CEO that indicates that he has obtained verbal commitments from Chinese investors in the amount of $10 million for the purpose of investing in the company, and that they are willing to fund the $2 million required by the above-noted proposal. The secured lenders note that this potential funding source has no track record or experience with respect to Canadian oil and gas assets, and that, even if the commitment became firm, the amount is insufficient to pay off existing indebtedness.

c) Tallgrass has identified a further option, a potential loan in the process of negotiations with a broker, not a source lender, that would involve the broker earning approximately $16 million in fees to find a source for a $100 million loan. This is an even softer proposal, with no real commitment. Tallgrass’ CEO concedes in understatement that this would be “expensive funding”. [ 18 ] Given that these options are not commercially realistic, I must conclude that the secured lenders are correct in their view that this would likely be a liquidating CCAA.

While this does not in itself preclude the use of the statute, the secured lenders object to Tallgrass management controlling the liquidation process under CCAA protection as they have lost faith in such management. The secured lenders have identified concerns about management’s estimate of the value of Tallgrass’ oil and gas assets, concerns about the effect of abandonment liabilities on realization values, and concerns about discrepancies between the Cost Flow Projections contained in the CCAA application as compared to those prepared by Grant Thornton.

The secured lenders also have concerns with respect to how management is executing its alternate financing strategy, particularly its decision to pursue financing from the kind of sources it has identified, and what they feel is a lack of attention from senior management to realistic alternatives and options.

They are critical of management’s decisions with respect to covering short-term liabilities in the course of these applications. [ 19 ] Tallgrass submits that the opinions given by an officer of Toscana, Dean Jensen, on behalf of the secured lenders with respect to the value of its oil and gas assets should be given little weight as Mr. Jensen does not have the proper expertise to comment on the reserve reports. I take Mr. Jensen’s comments to be the opinions of a banker experienced with loans in the oil and gas sector and with familiarity with reserve reports. What Mr.

Jensen is really questioning is whether Tallgrass would be able to achieve a price for these assets equal to management’s projections, and whether such projections are reliable. He thus questions whether the secured lenders are assured of recovery or whether they are at risk. [ 20 ] The concern expressed by Mr. Jensen with respect to cost flow projections relates to whether the costs of a CCAA proceeding

will be as projected by Tallgrass, and, again, a lack of confidence with respect to management’s projections in that regard. While it appears that Mr. Jensen may have misunderstood some of the calculations, there remain unanswered questions about the projections. [ 21 ] This is not a case where the secured lenders have acted precipitously, or where the debtor has not had a more than adequate opportunity to canvass the market for refinancing and restructuring options.

This process has been ongoing for more than a year under Tallgrass management, which was not able to obtain take-out financing for Toscana’s bridge loan, nor obtain sufficient financing to satisfy its licensee liability rating report requirements and provide funding necessary for further development activities. It is also clear that Tallgrass and its major secured stakeholders are in an adversarial mode, which does not bode well for an efficient or relatively inexpensive CCAA restructuring.

Tallgrass was most likely a liquidating CCAA, and given the lack of confidence and the adversarial relationship between the company and the secured lenders at risk, I was not satisfied that a CCAA order would be appropriate in the circumstances. I dismissed Tallgrass’ application. [ 22 ] It thus followed that the secured lenders’ application for a receivership order must succeed. Heard on the 24th day of July, 2013. Dated at the City of Calgary, Alberta this 6th day of August, 2013. B.E. Romaine J.C.Q.B.A.

Appearances: Thomas Cumming and Jeffrey Oliver for the Plaintiff Alberta Treasury Branches Howard Gorman for Toscana Capital Corporation Ryan Zahara and Matthew Beavers for the Defendant Tallgrass Energy Corp.