| CHAPTER 11 CASES, ABILITY TO CONTINUE AS A GOING CONCERN AND COVENANT VIOLATIONS | NOTE 2. CHAPTER 11 CASES, ABILITY TO CONTINUE AS A GOING CONCERN AND COVENANT VIOLATIONS
Voluntary Reorganization under Chapter 11
On March 13, 2018, EVEP, EV Energy GP, EV Management and certain of EVEP’s wholly owned subsidiaries (each a “Debtor” and, collectively, the “Debtors”) entered into a Restructuring Support Agreement (the “Restructuring Support Agreement”) with (i) holders (collectively, the “Supporting Noteholders”) of approximately 70% of the 8.0% senior unsecured notes due April 2019 (the “Senior Notes”) issued pursuant to that certain indenture, dated as of March 22, 2011 (as amended, restated, supplemented or otherwise modified from time to time, the “Indenture”), among EVEP, EV Energy Finance Corp., each of the guarantors party thereto, and Delaware Trust Company, as indenture trustee (the “Notes Trustee”), that are signatories to the Restructuring Support Agreement; (ii) lenders (collectively, the “Supporting Lenders” and, together with the Supporting Noteholders, the “Supporting Parties”) under our reserve-based lending facility, by and among EVEP, EV Properties, L.P., JPMorgan Chase Bank, N.A., as administrative agent (the “Administrative Agent”), BNP Paribas and Wells Fargo, National Association, as co-syndication agents, the guarantors party thereto (the “credit facility”), and the lenders signatory thereto, initially constituting approximately 94% , but subsequently increased to 100% , of the principal amount outstanding thereunder; (iii) EnerVest; and (iv) EnerVest Operating, L.L.C. (“EnerVest Operating” and, together with EnerVest, the “EnerVest Parties”). The Restructuring Support Agreement sets forth, subject to certain conditions, the commitment of the Debtors and the Consenting Creditors to support a comprehensive restructuring of the Debtors’ long-term debt (the “Restructuring”).
On March 14, 2018 , the Partnership commenced the solicitation of votes from the holders of the Senior Notes to accept or reject the prepackaged plan of reorganization (the “ Plan ”) . If the Partnership effectuates the Restructuring pursuant to the Restructuring Support Agreement and the Plan, and the Plan is approved by the Bankruptcy Court, then the claims of the lenders under the credit facility and the holders of the Senior Notes will be cancelled.
On April 2, 2018, the Debtors commenced the Chapter 11 Cases in the Bankruptcy Court. In connection with the Chapter 11 Cases, t he Debtors filed motions with the Bankruptcy Court seeking operational and procedural relief, including joint administration of their Chapter 11 Cases. The Bankruptcy Court granted such motions at a “first day” hearing held on April 4, 2018, and on April 25, 2018, entered into orders granting such motions on a final basis. The Bankruptcy Court schedule d a hearing to consider confirmation of the Plan on May 15, 2018 . If the Plan is confirmed by the Bankruptcy Court and becomes effective, then the claims of the lenders under the credit facility and the holders of the Senior Notes will be discharged. There can be no assurance regarding the Partnership’s ability to obtain confirmation of the Plan or approval of other relief in the Chapter 11 Cases, the Bankruptcy Court’s rulings in the Chapter 11 Cases or the ultimate outcome of the Chapter 11 Cases in general.
For the duration of the Restructuring and after the Chapter 11 Cases, our operations and our ability to develop and execute our business plan are subject to risks and uncertainties associated with the Restructuring and Chapter 11 Cases. As a result of these risks and uncertainties, our assets, liabilities, officers and/or directors could be significantly different following the outcome of the Chapter 11 Cases, and the description of our operations, properties and capital plans included in these financial statements may not accurately reflect our operations, properties and capital plans following the Chapter 11 Cases.
The Partnership expects to continue its operations without interruption during the pendency of the Chapter 11 Cases.
The Restructuring Support Agreement sets forth, subject to certain conditions, the commitment of the Debtors and the Consenting Creditors to support the Restructuring. The Restructuring Support Agreement obligates the Debtors and the Consenting Creditors to, among other things, support and not interfere with consummation of the Restructuring and, as to the Consenting Creditors, vote their claims in favor of the Plan. The Restructuring Support Agreement may be terminated upon the occurrence of certain events, including the failure to meet specified milestones relating to the filing, confirmation and consummation of the Plan, among other requirements, and in the event of certain breaches by the parties under the Restructuring Support Agreement. The Restructuring Support Agreement is subject to termination if the effective date of the Plan has not occurred within 250 days of the bankruptcy filing. There can be no assurances that the Restructuring will be consummated.
Under the terms of the Restructuring Support Agreement, the financial restructuring would be effectuated through the Plan, which was filed contemporaneously with the Debtors’ voluntary petitions. Pursuant to the terms of the Plan, if confirmed by the Bankruptcy Court, it is anticipated that, among other things:
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On or prior to the Effective Date of the Plan (the “Effective Date”), the Supporting Holders that hold the Senior Notes will contribute their Senior Notes (the “Contributed Notes”) to a newly formed C-corporation (“New EVEP Parent Inc.”) in exchange for pro rata share of 95% of the shares of common stock of New EVEP Parent Inc. (the “New Equity Interests”);
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On the Effective Date, New EVEP Parent Inc. would contribute to a newly formed subsidiary (“Acquisition Inc.”) (i) the Contributed Notes, (ii) a number of shares of New Equity Interests sufficient to satisfy (a) the claims of the holders of the Senior Notes (the “Notes Claims”) other than the Notes Claims in respect of the Contributed Notes and (b) shares of New Equity Interests to be distributed to the holders of existing equity interests in the Partnership (the “Existing Unitholders”) and (iii) 5 -year warrants for 8% of the New Equity Interests (subject to dilution by the shares (the “MIP Shares”) reserved to participants in the new management incentive plan (the “MIP”)), with a strike price set at an equity value at which the Supporting Holders would receive a recovery equal to par plus accrued and unpaid interest as of the petition date of the Chapter 11 Cases in respect of the Senior Notes (after taking into account value dilution on account of the initial distribution of participants in the MIP) (the “ New Warrants ”) ; and in return, New EVEP Parent Inc. will receive all of the equity interests of Acquisition Inc.;
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On the Effective Date, Acquisition Inc. will acquire all of the assets of the Partnership and certain liabilities not discharged, satisfied or as otherwise provided for under the Plan in exchange for (i) the Contributed Notes and (ii) the New Equity Interests it received from New EVEP Parent Inc.;
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New EVEP Parent Inc. will distribute the New Equity Shares it received from Acquisition Inc. to the (i) holders of the Senior Notes that did not contribute Contributed Notes and (ii) Existing Unitholders;
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At the conclusion of these steps, the Supporting Holders will directly own 95% of the New Equity Interests and 5% will be owned by the Existing Unitholders, subject in each case to the dilution by the MIP Shares and New Equity Interest issued in respect of the New Warrants;
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The Senior Notes will be cancelled and discharged and the holders of those Notes will receive (directly or indirectly) New Equity Interests representing, in the aggregate, 95% of the New Equity Interests issued on the Effective Date (subject to dilution by the MIP Shares and the New Equity Interests issuable upon exercise of the New Warrants);
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Lenders under the credit facility will receive (a) pro rata loans under an amendment to the credit facility (the “Exit Credit Facility”, (b) cash in amount equal to the accrued but unpaid interest payable to such lenders under the credit facility as of the Effective Date, and (c) unfunded commitments and letter of credit participation under the Exit Credit Facility equal to the unfunded commitments and letter of credit participation of such lender as of the Effective Date;
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Each Existing Unitholder will receive its pro rata share of (i) New Equity Interests representing, in the aggregate, 5% of the New Equity Interests issued on the Effective Date and (ii) the New Warrants (in each case, subject to dilution by the MIP Shares and, in the case of the New Equity Interests, subject to dilution by the New Warrants);
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General unsecured claims will receive, (i) if such claim is due and payable on or before the Effective Date, payment in full, in cash, or the unpaid portion of its allowed general unsecured claim, (ii) if such claim is not due and payable before the Effective Date, payment in the ordinary course, and (iii) other treatment, as may be agreed upon by the Debtors, the Supporting Noteholders and the holder of such general unsecured claim; and
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New EVE P Parent Inc. will enter into the Exit Credit Facility.
The Partnership expects to emerge from the Chapter 11 Cases as a corporation, including for US federal income tax purposes.
Subject to certain exceptions, under the Bankruptcy Code, the filing of the Chapter 11 Cases automatically enjoined, or stayed, the continuation of most judicial or administrative proceedings or filing of other actions against the Debtors or their property to recover, collect or secure a claim arising prior to the date of the Chapter 11 Cases. Accordingly, although the filing of the Chapter 11 Cases triggered defaults on the Debtors’ debt obligations, creditors are stayed from taking any actions against the Debtors as a result of such defaults, subject to certain limited exceptions permitted by the Bankruptcy Code. Absent an order of the Bankruptcy Court, substantially all of the Debtors’ pre-petition liabilities are subject to settlement under the Bankruptcy Code.
Subject to certain exceptions, under the Bankruptcy Code, the Debtors may assume, assign or reject certain executory contracts and unexpired leases subject to the approval of the Court and certain other conditions. Generally, the rejection of an executory contract or unexpired lease is treated as a pre-petition breach of such executory contract or unexpired lease and, subject to certain exceptions, relieves the Debtors of performing their future obligations under such executory contract or unexpired lease but entitles the contract counterparty or lessor to a pre-petition general unsecured claim for damages caused by such deemed breach. Counterparties to such rejected contracts or leases may assert unsecured claims in the Bankruptcy Court against the applicable Debtors’ estate for such damages. Generally, the assumption of an executory contract or unexpired lease requires the Debtors to cure existing monetary defaults under such executory contract or unexpired lease and provide adequate assurance of future performance. Accordingly, any description of an executory contract or unexpired lease with the Debtor in these financial statements, including where applicable a quantification of the Partnership’s obligations under any such executory contract or unexpired lease with the Debtor is qualified by any overriding rejection rights the Partnership has under the Bankruptcy Code. Further, nothing herein is or shall be deemed an admission with respect to any claim amounts or calculations arising from the rejection of any executory contract or unexpired lease and the Debtors expressly preserve all of their rights with respect thereto.
A summary of certain of the material expected terms and conditions of the Exit Credit Facility is set forth below :
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a senior secured revolving credit facility with maximum aggregate commitments of $ 1 billion, subject to a borrowing base;
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an expected initial borrowing base of approximately $325 million based on a second quarter 2018 emergence date to be effective upon consummation of the Restructuring, subject to certain automatic deductions between redeterminations;
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the first scheduled borrowing base redetermination will occur no later than April 1, 2019 ;
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a maturity date of February 26, 2021; and
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proceeds of the amended and restated credit facility will be used to finance the emergence from the Chapter 11 Cases and for general corporate purposes (including financing working capital needs).
Ability to Continue as a Going Concern
As of April 2, 2018, the Partnership was in default under certain of its debt instruments. The Partnership’s filing of the Chapter 11 Cases described above constitutes an event of default that accelerated the Partnership’s obligations under its credit facility and the Indenture governing the Senior Notes. Additionally, other events of default, including cross-defaults, are present, including a total debt to EBITDAX ratio higher than the level prescribed in the most recent tenth amendment of our credit agreement, and the receipt of a going concern explanatory paragraph from the Partnership’s independent registered public accounting firm on the Partnership’s consolidated financial statements for the year ended December 31, 2017 , subject to a 30 day grace period. Under the Bankruptcy Code, the creditors under these debt agreements are stayed from taking any action against the Partnership as a result of an event of default.
Throughout 2017, management, along with its legal and financial advisors, explored strategic alternatives to maintain sufficient liquidity and to address the credit agreement covenant compliance issue. The Partnership specifically evaluated options with the lenders under the credit facility and holders of the Senior Notes under the Indenture that would improve liquidity and deleverage the Partnership. The Partnership’s ability to access the capital markets has been extremely limited. In addition, the Partnership’s credit facility is subject to scheduled redeterminations of its borrowing base, semi-annually as of April 1 and October 1. The Partnership’s filing of the Chapter 11 Cases described above accelerated the Partnership’s obligations under its credit facility and under the Inden ture governing the Senior Notes, and the Partnership does not have sufficient liquidity to repay amounts due under the credit facility and the Senior Notes.
The significant risks and uncertainties related to the Partnership’s liquidity and Chapter 11 Cases described above raise substantial doubt about the Partnership’s ability to continue as a going concern. The un audited condensed consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities and commitments in the normal course of business. The un audited condensed consolidated financial statements do not include any adjustments that might result from the outcome of the going concern uncertainty. If the Partnership cannot continue as a going concern, adjustments to the carrying values and classification of its assets and liabilities and the reported amounts of income and expenses could be required and could be material.
In order to decrease the Partnership’s level of indebtedness and maintain the Partnership’s liquidity at levels sufficient to meet its commitments, the Partnership has undertaken a number of actions, including minimizing capital expenditures and further reducing its recurring operating expenses. The Partnership believes that even after taking these actions, it would not have had sufficient liquidity to satisfy its debt service obligations, meet other financial obligations and comply with its debt covenants. As a result, the Debtors filed petitions for reorganization under Chapter 11 of the Bankruptcy Code.
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