INSIGHT: Anadarko lawsuit to determine fate of much of Tronox debt

07 December 2010 18:18  [Source: ICIS news]

By Al Greenwood

HOUSTON (ICIS)--Tronox is likely to emerge from bankruptcy protection in the coming weeks, but the fate of its biggest claims will depend on a lawsuit filed against its former corporate parent, Kerr-McGee, and energy producer Anadarko.

If the litigation is successful, Anadarko could end up paying roughly $1.5bn-5.8bn (€1.1bn-4.4bn), money that would then go to creditors, according to estimates in Tronox's reorganisation plan.

However, no grand total is listed in the actual lawsuit. It will be up to the court to decide how much money - if any - is received by the creditors.

Tronox accuses Kerr-McGee of draining it of millions of dollars while burdening the company with debt, pensions and the obligation to clean up hundreds of polluted sites throughout the US.

Tronox was once part of Kerr-McGee before it was spun-off at the end of March 2006.

Tronox alleged that the spin-off was part of a strategy for Kerr-McGee to attach those liabilities to Tronox, making Kerr-McGee an attractive takeover target for Anadarko.

Anadarko ultimately acquired Kerr-McGee for $18bn, closing on the deal just months after the Tronox spin-off.

The lawsuit attempts to recover some of the money transferred to Kerr-McGee while sending back some of its debt as well as its pension and clean-up obligations.

If the lawsuit is successful, government regulators would receive 88% of the proceeds, a payout that would come on top of $270m in cash and other payments, the company said. Altogether, government creditors could recover $1.4bn-5.2bn

The remaining 12% would go towards individuals and groups that sued the company, in an attempt to recover damages caused by alleged pollution, Tronox said. Those groups already will receive at least $12.5m in cash and other payments - for a possible grand total of $500m-1bn.

Although Tronox provides rough estimates of the proceeds in its reorganisation plan, it did not specify a grand total in the lawsuit.

Instead, it describes the transfers of wealth as well as the legal and environmental obligations that it said were unfairly imposed on the company.

Kerr-McGee burdened Tronox with more than 70 years worth of legacy liabilities, the company said. Tronox was legally responsible for businesses that were abandoned decades ago, many of which had nothing to do with titanium dioxide (TiO2).

These liabilities would include the clean-up costs for old petroleum terminals and service stations as well as its wood-treating plants, Tronox said.

In all, Kerr-McGee had more than 500 active pollution sites, according to Anadarko's pre-acquisition analysis, quoted by Tronox in the lawsuit.

In that same analysis, Anadarko estimated that there were more than 1,000 sites with Kerr-McGee ownership, including 61 federal sites and 461 state regulated clean-up sites.

Altogether, the sites could require $2bn-3bn in clean-up costs, with no end in sight for at least 30 more years, according to the Anadarko analysis.

In addition to clean-up costs, the spin-off made Tronox legally responsible for lawsuits filed by individuals and groups, the company said.  Tronox estimated that at the time of its spin-off, there were nearly 11,000 claims related to the wood-treatment sites.

Tronox did not say how many of these claims were still pending.

In addition to transferring the legacy liabilities, Kerr-McGee required Tronox to assume $550m in debt. Furthermore, Tronox got stuck with employee benefits connected to Kerr-McGee's old chemical, refining, coal, nuclear and offshore-contract-drilling businesses, Tronox said.

Meanwhile, Kerr-McGee stripped assets from its chemical business - including some of the oil and gas assets that would ultimately be acquired by Anadarko, Tronox said.

Tronox alleged it never received a fair return for giving so many assets to Kerr-McGee. Likewise, Tronox alleged it was never fairly compensated for taking on so many environmental and legal liabilities.

Even with the $1.5bn-5.8bn estimate in Tronox's reorganisation plan, it is still unclear how much money could be recovered, given the scope and uncertainty of the clean-up costs.

In fact, the lawsuit could fail to collect anything.

Anadarko is fighting the lawsuit, and the court has already thrown out five of the original 11 counts. Tronox was given a chance to amend another three.

Anadarko said those three counts are still inadequate, and the court should throw them out.

The alleged events are simply too old, Anadarko said. But even if the allegations were recent, the lawsuit still presents a weak case, relying on speculation and conjecture instead of hard facts.

Also, a key portion of the claims relies on allegations that Kerr-McGee exerted an undue control of the company, Anadarko said. Kerr-McGee, however, never controlled a majority of the board members on the Tronox board.

Also, Tronox alleges that Kerr-McGee had a duty to look over the financial interests of Tronox when it was still a subsidiary. However, parent corporations typically do not owe any fiduciary duties to their subsidiaries.

Throughout the course of the litigation, Anadarko has repeatedly said that it was not responsible for the financial state of Tronox.

"Tronox’s bankruptcy is directly linked the collapse of the housing, construction and automobile industries, which are the primary purchasers of its white pigment," Anadarko said in a statement. "These difficult market conditions are unfortunate, but are unrelated to our company, Kerr-McGee or the IPO [initial public offering]."

Anadarko added, "The market demonstrates that Tronox was solvent and adequately capitalised at the time of its IPO, as Tronox was able to issue stock at approximately $14/share, and it was also able to enter into a credit facility and issue unsecured bonds."

The company's claims lack merit, Anadarko said.

For its part, Tronox said it would not comment on the lawsuit because it is still pending.

Once Tronox emerges from bankruptcy protection, the company will no longer have any association with the litigation.

Instead, management and control will pass over to the US government.

Whatever money collected by the litigation will go towards two funds established to pay off the environmental regulators and people who had successfully sued the company.

($1 = €0.75)

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By: Al Greenwood
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