Canada: Energy Update - June 2009

This is a joint publication by our Energy, Regulatory and Energy Litigation Practice Groups

ROFRs In The CCAA Process
By Donald E. Greenfield, Laurel Lui Maclean, Nazeef Muhammad

CCAA Impact on Third Party Rights

Generally, ROFRs have been honoured in Companies' Creditors Arrangement Act (CCAA) proceedings, as a ROFR is a substantive right and it has been held that a Court cannot permanently strip a third party of its substantive rights under the CCAA.

However, courts may interfere with third party and creditor rights under s. 11 of the CCAA. Re Metcalfe & Mansfi eld Alternative Investments II Corp. ("Metcalfe"), a 2008 Ontario decision that involved the restructuring of the entire Canadian market in asset-backed commercial paper, supports an "open-ended and fl exible" approach to third party rights in the CCAA process and appears to support the proposition that third party rights may be compromised if:

  1. such compromises are essential to the restructuring of the debtor;
  2. the compromised rights are rationally related to the purpose of and necessary for the plan;
  3. the plan cannot succeed without compromising the rights;
  4. the parties who receive the benefit of the compromises are contributing to the plan; and
  5. the plan will benefit the debtor company and its creditors.

Although Metcalfe involved creditors, these considerations may resonate where a third party purchaser of assets in a CCAA process seeks to avoid ROFRs.

Package Sales

In many cases of a sale of a package of assets in CCAA proceedings a ROFR exemption will be available, for example because the sale is of all or substantially all of the debtor's assets. Where an exemption is not available, it will be necessary to determine whether the sale of a ROFR-encumbered asset as part of the package triggers the ROFR. The law in this area, primarily developed outside the context of the CCAA, is mixed. Budget Car Rentals Toronto Ltd. v. Petro-Canada Inc. and Gulf Canada Ltd. ("Budget") (Ontario) supports the proposition that the package sale does not trigger the ROFR. See also Southland Canada Inc. v. Zarcan Equities Ltd.) (Alberta). However, Budget has been criticized by academic writers and was rejected in Apex Corp. v. Ceco Developments Ltd ("Apex"), where Brooker J. concluded that a ROFR from which there was no express exemption was not defeated by the fact that the sale was a package sale; this decision was upheld in the Court of Appeal of Alberta. Both Budget and Apex imply a good faith requirement that may not be met by a package sale which is designed or appears to be designed to defeat or frustrate a ROFR.

This brings us to the situation of a proposed sale of assets in CCAA proceedings where one of the assets is subject to a ROFR and an express ROFR exemption is not available: A Court acting under authority of the CCAA has found that a ROFR was not triggered when the encumbered asset was being sold as part of a package. In a very short Saskatchewan Court of Queen's Bench decision in Re Bear Hills, Kyle J. held that the ROFR was not triggered. Kyle J. did not rely on any blanket exception for package sales; instead, his reasons suggest that in CCAA proceedings a Court may take into account additional considerations such as the welfare of the business and its employees in deciding whether the ROFR is engaged. These considerations are consistent with those set out by the Ontario Court of Appeal in Metcalfe.

It is unclear whether Kyle J., in deciding that the ROFRs were not triggered, as opposed to being unenforceable, relied on non-CCAA precedents such as Budget and Southland or on his discretion under the CCAA. The consideration of commercial reasons unique to the CCAA process suggest that a Court may be willing to interfere with ROFR rights to facilitate an orderly and eff ective plan of compromise or arrangement. A Court operating under the CCAA may be more likely to adopt the reasoning in Budget (as opposed to that in Apex) to achieve its purposes under the CCAA. It may well be easier for a Court in a CCAA proceeding to fi nd the requisite degree of good faith on the basis that the package sale transaction has not been constructed for the sole purpose of stripping the ROFR holder of its right, but rather to meet the purposes and objectives of the CCAA.

What's "NEXT"? NGL Extraction Rights
By Marie H. Buchinski, Kelsey J. Drozdowski

One year after commencing the oral portion of an Inquiry into NGL extraction rights from the common natural gas stream, the Alberta Energy and Utilities Board (AEUB), now the Alberta Utilities Commission (AUC), has recommended that NGTL adopt a receipt point allocation model, largely based on the NGTL "NEXT" proposal (D2009-009). While the scope of the initial inquiry was broad enough to encompass extraction practices relating to the natural gas stream transported on NGTL, ATCO Pipelines and AltaGas, AEUB recommendations for the adoption of the new extraction regime were made only in respect of the NGTL system. From here, NGTL will have a three-year transition period in which to file an amended tariff in compliance with the AEUB's recommendations, which will be monitored closely by industry participants particularly having regard to other recent developments, including the NGTL move to Federal jurisdiction. The ability of the AUC to implement the positions adopted in this inquiry are subject to considerable uncertainty.

Background

In June 2007, the AEUB initiated the inquiry into NGL extraction to determine, in the public interest, whether changes to existing conventions and practises for NGL extraction should be made having regard to the evolution of the Alberta natural gas market, pipeline/transportation, extraction, NGL and petrochemical industries; the pending expiry of the Alberta Ethane Policy; market deregulation; and anticipated future developments respecting ex- Alberta sourced gas, CBM, and intra-Alberta gas markets. The inquiry was the culmination of prior AEUB directions (Gulf Strachan, Solex) and industry consultations (the TransCanada Customer Advisory Council; Natural Gas Liquid Extraction Convention Task Force) which were unable to resolve perceived inequities in the existing NGL extraction practises.

Intended to be a comprehensive review of existing rules, contractual arrangements and practises regarding the extraction of NGL within Alberta, the AEUB heard from a diverse group of industry participants on three broad issues: NGL extraction, lean gas streaming; and co-streaming/side-streaming.

NGL Extraction

Consistent with the views of the AEUB in Gulf Strachan and Solex, the inquiry concluded that resource ownership should remain with the producer of the resource until the producer relinquishes ownership through a commercial contract. That is, contrary to the practise then existing on the NGTL system pursuant to which only export delivery shippers had an entitlement to contract regarding extraction rights, the AEUB recommended that producers have the right to NGL entrained in their produced gas, until the producer contracts away those rights. The AEUB acknowledged that a change to the NGL extraction convention could result in parties raising in another forum issues relating to the NGTL System rate design.

Most parties proposed that the AEUB should retain the current convention for NGL extraction or adopt a receipt point convention such as the NEXT model proposed by NGTL. Having regard to the ease of implementation, costs, and ability to resolve perceived inequities, the AEUB recommended the implementation of a receipt point model, largely based on the NEXT Model proposed by NGTL. The AEUB also considered that a receipt point convention would assist in attracting ex-Alberta gas to use existing Alberta infrastructure. The AEUB therefore recommended that, within three years, NGTL revise its tariff to refl ect the new practise and that NGTL take steps to encourage the development of a competitive transparent NGL extraction rights market.

Lean Gas Streaming, Co- Streaming and Side-Streaming

The AEUB found merit in lean gas streaming and noted that all parties were supportive of the concept. The AEUB recommended that applications for new or facilities modifi cations be conducted on a case by case basis based on the public interest, including NGL recovery and potential eff ects on other facilities. The AEUB further recommended that industry pursue lean gas streaming on the NGTL System through a collaborative process, and thereafter develop by April 1, 2010, guidelines and criteria for lean gas streaming for regulator approval. The AEUB made a similar recommendation that co-streaming and side-streaming facilities be considered on a case-by-case basis, but did set out a list of guiding factors to be addressed in any future co-streaming or side-streaming application.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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