In re Breitburn Energy Partners LP

• Decision Date: 09 March 2018
• Docket Number: Case No.: 16–11390 (SMB)
• Citation: 582 B.R. 321
• Parties: IN RE: BREITBURN ENERGY PARTNERS LP, et al., Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

582 B.R. 321

IN RE: BREITBURN ENERGY PARTNERS LP, et al.,¹ Debtors.

Case No.: 16–11390 (SMB)

United States Bankruptcy Court, S.D. New York.

Signed March 9, 2018

Entered March 12, 2018

WEIL, GOTSHAL & MANGES LLP, Attorneys for Debtors, 767 Fifth Avenue, New York, New York 10153, Ray C. Schrock, P.C. Esq., Stephen Karotkin, Esq., Edward Soto, Esq., Richard W. Slack, Esq., Yehudah Buchweitz, Esq., Of Counsel

PROSKAUER ROSE LLP, Attorneys for the Official Committee of Equity Securities Holders, Eleven Times Square, New York, New York 10036, Martin J. Bienenstock, Esq., Vincent Indelicato, Esq., Michael T. Mervis, Esq., Scott A. Eggers, Esq., Of Counsel

MILBANK, TWEED, HADLEY & MCCLOY LLP, Attorneys for the Official Committee of Unsecured Creditors, International Square Building, 1850 K Street, NW, Washington, DC 20006, Andrew M. LeBlanc, Esq., Of Counsel

KIRKLAND & ELLIS LLP, Attorneys for Second Lien Group, 601 Lexington Avenue, New York, NY 10022, Mark McKane, Esq., Of Counsel

JACK N. MAYER, 532 East 8th Street, Brooklyn, NY 11218

DOUGLAS B. MAY, 687 Long Rifle Road, Grand Junction, CO 81507

CORRECTED MEMORANDUM DECISION AND ORDER DENYING CONFIRMATION OF THE DEBTORS' THIRD AMENDED PLAN

STUART M. BERNSTEIN, United States Bankruptcy Judge:

Breitburn Energy Partners LP ("BBEP") and its debtor affiliates (with BBEP, the "Debtors" or "Breitburn") seek confirmation of their Third Amended Joint Chapter 11 Plan, dated Dec. 1, 2017 ("Plan"). The Plan was rejected by Class 5B, the unaccredited bondholders and deemed rejected by Classes 9, the subordinated creditors, and 11, BBEP's preferred and common unitholders ("Equity"). The Court conducted a four day evidentiary hearing largely focused on the Debtors' valuation.

The credible valuation evidence demonstrated that the Debtor is hopelessly insolvent and Equity is out of the money. However, based on the valuation of the Debtors' assets as found by the Court, the Court concludes that the Debtors have failed to sustain their burden of proving that the Plan does not unfairly discriminate against Class 5B. Accordingly, the application to confirm the Plan is denied.

BACKGROUND²

Breitburn consists of a group of affiliated independent oil and gas exploration and production ("E & P") companies. Their portfolio consists of largely undeveloped, unconventional acreage located in the Permian Midland Basin primarily in Howard and Martin counties in West Texas (the "Permian Assets"), and mature, developed assets spread across multiple onshore basins within the United States (the "Legacy Assets"). (Declaration of Douglas A. Fordyce in Support of Confirmation of Debtors' Third Amended Joint Chapter 11 Plan , dated Jan. 8, 2018 ("Fordyce "), ¶¶ 13, 14 (ECF Doc. # 2071).)³ The Legacy Assets include thousands of individual wells, mostly with long-life production from proved developed oil and gas reserves. These assets are situated in Texas, New Mexico, Ark–La–Tex (situated in portions of Arkansas, Louisiana, and eastern Texas), a mid-continent area in Oklahoma, Kansas, and Northern Texas, California, Wyoming, the Southeast, including Florida and parts of the Midwest, including Michigan, Indiana, and Kentucky. The Legacy Assets also include certain assets in the Permian Midland Basin, but references to the Permian Assets in this opinion do not include these Legacy Assets. (Fordyce ¶¶ 13, 15.)

Like many of its peers, Breitburn was battered by declining oil and gas prices and filed these chapter 11 cases on May 15, 2016 (the "Petition Date"). As of the Petition Date, Breitburn had several tranches of secured and unsecured funded debt aggregating approximately $3 billion. (See BX 90 ("Disclosure Statement") at 18).) The secured debt included a Revolving Credit Facility ("First Lien Debt"), 9.25% Senior Secured Second Lien Notes due 2020 ("Second Lien Debt," and with the "First Lien Debt," the "Prepetition Secured Debt") and two tranches of unsecured notes ("Bond Debt"). (Id. ) In addition, BBEP had outstanding equity held by preferred and common unitholders.

A. Plan Negotiations

The Debtors faced several obstacles to confirmation from the start of the cases, and plan negotiations had to address several moving parts often headed in opposite directions. According to the unrefuted testimony of Timothy R. Pohl of Lazard Frères & Co., Breitburn's financial advisor, (see Declaration of Timothy R. Pohl in Support of Confirmation of Debtors' Third Amended Joint Chapter 11 Plan, dated Jan. 8, 2018 ("Pohl ") (ECF Doc. # 2070) ), the Debtors required approximately $1 billion in new capital to (a) repay or refinance the approximately $750 million of the First Lien Debt (net of hedge proceeds), (b) repay estimated debtor in possession ("DIP") loans and administrative costs, and (c) provide working capital for the reorganized Debtors upon emergence. (Pohl ¶ 9.) In addition, the Debtors needed to provide for the payment or confirmable treatment of the claims of the holders of the Second Lien Debt (the "Second Lien Group") which totaled approximately $792 million as of the Petition Date (inclusive of contractual make-whole payments and prior to any post-petition interest accruals) before unsecured creditors would be entitled to any recovery. (Pohl ¶ 9.)

During the ensuing eighteen months, the Debtors and Pohl negotiated various potential plans with holders of the First Lien Debt (the "First Lien Group"), the Second Lien Group and the Official Committee of Unsecured Creditors (the "UCC"), whose constituency included the holders of the Bond Debt (the "Bondholders"), some of whom formed into ad hoc groups represented by separate counsel. The initial negotiations focused on obtaining the Second Lien Group's willingness to convert its prepetition secured debt to equity and provide $150 million in new equity and the First Lien Group's agreement to provide a new secured exit facility in an amount of approximately $850 million. (Pohl ¶ 10.) The Debtors' unsecured creditors, including the Bondholders, would receive a small minority equity interest in the reorganized Debtors. (Pohl ¶ 10.) These negotiations did not succeed because, among other things, the Debtors could not reach an agreement with the holders of their Prepetition Secured Debt. (Pohl ¶ 12.)

During late 2016 and early 2017, the Debtors received competing proposals from two groups: an ad hoc group of Bondholders represented by Akin Gump Strauss Hauer & Feld LLP (the "Akin Group"), which held approximately one-third of the principal amount of the Bond Debt, and an ad hoc group of Bondholders represented by White & Case LLP (the "White & Case Group") who were partnering with members of the UCC. (Pohl ¶¶ 13–15.) Each proposal had the following characteristics: a backstopped rights offering⁴ of $800 million or more available to eligible Bondholders in exchange for the majority of the equity of the reorganized Debtors, a new first lien exit facility provided by the First Lien Group, reinstated or new second lien debt distributed to the Second Lien Group and a minority equity interest in the reorganized Debtors distributed to unsecured creditors (including Bondholders) outside of the rights offering. (Pohl ¶¶ 14–16.) The Debtors continued negotiations with each group to improve the terms, including increasing the size of the equity rights offering up to $1 billion and agreement on a consensual treatment of the Second Lien Debt, (Pohl ¶ 16), but the parties could not agree on that treatment. (Pohl ¶ 17.)

At the same time that the Debtors were negotiating with the White & Case Group and the UCC, the White & Case Group and the UCC began discussions with the Akin Group in an attempt to gain its participation in and support for the plan proposal. In June 2017, the Debtors were presented with a materially revised proposal that had the support of the UCC and both the White & Case and Akin Groups premised on a $1 billion rights offering (the "Revised Bondholder Proposal"). The Revised Bondholder Proposal called for, among other things, a substantially altered proposed treatment of the Second Lien Debt, which the Debtors believed was not confirmable. (Pohl ¶ 18.)

During this same period, the Debtors also sought to raise capital from third-parties. Among other things, the Debtors explored the possibility of issuing new second lien or unsecured bond debt in the capital markets to refinance the Second Lien Debt. While two institutions potentially interested in underwriting the issue of new debt believed this might be viable, they advised the Debtors that their ability to raise sufficient new capital to pay off the Second Lien Debt was predicated on a material new equity infusion by the Bondholders and a lien securing the new debt on the Debtors' assets, including the Permian Assets. (Pohl ¶¶ 19–20.) This last requirement conflicted with the Revised Bondholder Proposal under which the Permian Assets had to remain free of liens. Hence, the third party financing proposal was not a feasible alternative. (Pohl ¶ 21.)

In June and July 2017, the Debtors renewed negotiations with the Second Lien Group even while they continued to negotiate potential modifications to the Revised Bondholder Plan, but the two groups were at an impasse. The Second Lien Group would not accept debt under a plan that was satisfactory to the proponents of the Revised Bondholder Proposal or less than 100% in cash of their (disputed) claims. (Pohl ¶ 22.) Further, the Second Lien Group would not agree to and could not be forced to equitize their debt. (Pohl ¶ 22.) The ad hoc Bondholder Groups, on the other hand, would not accept the terms necessary to raise the funds through third party financing. (Pohl ¶ 22.) Furthermore, certain members of the Bondholder Groups were unwilling to invest sufficient amounts unless coupled with a cram down structure for the Second Lien Debt that the Debtors did not consider confirmable. (Pohl ¶ 22.) In short, the Debtors had not been able to procure the approximate $1 billion needed to emerge...