| ORGANIZATION AND DESCRIPTION OF BUSINESS | ORGANIZATION AND DESCRIPTION OF BUSINESS Organization Southcross Energy Partners, L.P. (the "Partnership," "Southcross," "we," "our" or "us") is a Delaware limited partnership formed in April 2012. We are a master limited partnership, headquartered in Dallas, Texas, that provides natural gas gathering, processing, treating, compression and transportation services and access to NGL fractionation and transportation services. We also source, purchase, transport and sell natural gas and NGLs. Our assets are located in South Texas, Mississippi and Alabama and include two gas processing plants, one fractionation facility, one treating facility and gathering and transportation pipelines. As of March 31, 2019, Southcross Holdings LP, a Delaware limited partnership (“Holdings”), indirectly owned 100% of Southcross Energy Partners GP, LLC, a Delaware limited liability company and our General Partner (“General Partner”) (and therefore controlled us), all of our subordinated and Class B convertible units and 54.4% of our common units. Our General Partner owns an approximate 2.0% interest in us and all of our incentive distribution rights. EIG Global Energy Partners, LLC (“EIG”) and Tailwater Capital LLC (“Tailwater”) (collectively, the “Sponsors”) each indirectly own approximately one-third of Holdings, and a group of consolidated lenders under Holdings' term loan (the "Lenders") own the remaining one-third of Holdings. However, as a result of the Chapter 11 Cases (defined below), Holdings lost control over the Partnership’s operations when the Debtors (defined below) submitted to the jurisdiction of the Bankruptcy Court on April 1, 2019. See Note 2. Chapter 11 Cases and Going Concern Assessment On April 1, 2019 (the "Petition Date"), the Partnership, our General Partner, and certain of the Partnership’s subsidiaries, including, Southcross Energy Finance Corp., Southcross Energy Operating, LLC, Southcross Energy GP LLC, Southcross Energy LP LLC, Southcross Gathering Ltd., Southcross CCNG Gathering Ltd., Southcross CCNG Transmission Ltd., Southcross Marketing Company Ltd., Southcross NGL Pipeline Ltd., Southcross Midstream Services, L.P., Southcross Mississippi Industrial Gas Sales, L.P., Southcross Mississippi Pipeline, L.P., Southcross Gulf Coast Transmission Ltd., Southcross Mississippi Gathering, L.P., Southcross Delta Pipeline LLC, Southcross Alabama Pipeline LLC, Southcross Nueces Pipelines LLC, Southcross Processing LLC, FL Rich Gas Services GP, LLC, FL Rich Gas Services, LP, FL Rich Gas Utility GP, LLC, FL Rich Gas Utility, LP, Southcross Transmission, LP, T2 EF Cogeneration Holdings, LLC, and T2 EF Cogeneration LLC (collectively the “Filing Subsidiaries” and, together with the Partnership and General Partner, the “Debtors”) filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). The Debtors’ Chapter 11 cases are being jointly administered under the caption In re Southcross Energy Partners, L.P., Case No. 19-10702 (the “Chapter 11 Cases”) pursuant to Rule1015(b) of the Federal Rules of Bankruptcy Procedure and the Order Directing Joint Administration of Chapter 11 Cases entered by the Bankruptcy Court on April 2, 2019. We will continue to operate our businesses as “debtors in possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. The Bankruptcy Court entered orders approving a variety of first-day relief designed primarily to minimize the impact of the Chapter 11 Cases on our operations, customers and employees, including authorizing post-petition financing. We expect to continue our operations without interruption during the pendency of the Chapter 11 Cases. For the duration of the of the Chapter 11 Cases, our operations and our ability to develop and execute our business plan are subject to significant risks and uncertainties associated with Chapter 11 Cases. As a result of these significant risks and uncertainties, we expect our assets, liabilities, partners’ capital (deficit), officers and/or directors will be significantly different following the outcome of the Chapter 11 Cases, and the description of our operations, properties and capital plans included in this quarterly report on Form 10-Q may not accurately reflect our operations, properties and capital plans following the Chapter 11 Cases. We have not reached an agreement with our creditors for a plan of reorganization and continue to engage in discussions regarding the terms of a financial restructuring plan. In conjunction with this process, we are exploring potential strategic alternatives to maximize value for the benefit of our stakeholders, which include a sale of certain or substantially all of our assets under Section 363 of the Bankruptcy Code, a plan of reorganization to equitize certain indebtedness as an alternative to the sale process, or a combination thereof. Therefore, the outcome of the Chapter 11 Cases is subject to a high degree of uncertainty and is dependent upon numerous factors, some of which are outside of our control (including actions of the Bankruptcy Court and our creditors). The significant risks and uncertainties related to our liquidity and the Chapter 11 Cases described above raise substantial doubt about our ability to continue as a going concern. These condensed financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and other commitments in the normal course of business. The accompanying condensed financial statements do not include any adjustments to reflect the possible future effects of this uncertainty on the recoverability or classification of recorded asset amounts or the amounts or classification of liabilities. Chapter 11 Filing Impact on Creditors and Unitholders We have filed schedules and statements of financial affairs with the Bankruptcy Court setting forth, among other things, the assets and liabilities of each of the Debtors, subject to the assumptions filed in connection therewith. These schedules and statements of financial affairs may be subject to further amendment or modification after filing. Certain holders of pre-petition claims that are not governmental units were required to file proofs of claim by the July 19, 2019 deadline for general claims. Differences between amounts scheduled by the Debtors and claims by creditors will be investigated, reconciled and resolved in connection with the claims resolution process. In light of the expected number of creditors, the claims resolution process may take considerable time to complete and likely will continue after the Debtors emerge from bankruptcy. Accordingly, the ultimate number and amount of allowed claims is not presently known, nor can the ultimate recovery with respect to allowed claims be presently asserted. Under the priority requirements established by the Bankruptcy Code, unless creditors agree otherwise, pre-petition and post-petition liabilities to creditors must be satisfied in full before the holders of our existing common units are entitled to receive any distribution or retain any property under a plan of reorganization. The ultimate recovery for creditors, if any, will not be determined until confirmation and implementation of a plan of reorganization. The outcome of the Chapter 11 Cases remains uncertain at this time and, as a result, we cannot accurately estimate the amounts or value of distributions that creditors may receive. We believe it is highly likely that our existing common units will be canceled at the conclusion of our Chapter 11 Cases and the holders of our existing common units will be entitled to little recovery, if any. Automatic Stay Subject to certain specific exceptions under the Bankruptcy Code, the Chapter 11 Cases automatically stayed most judicial or administrative actions against the Partnership and the Filing Subsidiaries as well as efforts by creditors to collect on or otherwise exercise rights or remedies with respect to pre-petition claims. As a result, for example, most creditor actions to obtain possession of property from us or any of the Filing Subsidiaries, or to create, perfect or enforce any lien against our property or any of the Filing Subsidiaries, or to collect on or otherwise exercise rights or remedies with respect to a pre-petition claim are stayed. Impact on Indebtedness As of the Petition Date, we had approximately $527.6 million in principal amount of indebtedness, including approximately: (i) $429.1 million related to our term loan and $81.1 million (excluding outstanding letters of credit) related to our revolving credit facility and $17.4 million related to the Investment Notes (defined below). The commencement of the Chapter 11 Cases described above constituted an event of default that accelerated our obligations under the following debt instruments (the “Debt Instruments”): • Third Amended and Restated Revolving Credit Agreement, dated as of August 4, 2014, by and among Southcross Energy Partners, L.P., Wilmington Trust, National Association (successor to Wells Fargo Bank, N.A.), as Administrative Agent, UBS Securities LLC and Barclays Bank PLC, as Co-Syndication Agents, JPMorgan Chase Bank, N.A., as Documentation Agent, and the lenders party thereto, as amended; (the “Third A&R Revolving Credit Agreement”) • Term Loan Credit Agreement, dated as of August 4, 2014, by and among Southcross Energy Partners, L.P., Wilmington Trust, National Association (successor to Wells Fargo Bank, N.A.), as Administrative Agent, UBS Securities LLC and Barclays Bank PLC, as Co-Syndication Agents, and the lenders party thereto (the “Term Loan Agreement”); and • $15.0 million aggregate principal amount of Qualifying Notes dated January 22, 2018, issued by the Partnership to each of certain funds or accounts managed or advised by EIG and certain funds or accounts managed or advised by Tailwater. On August 19, 2019, the Successor Agent Agreement and Seventh Amendment to the Third Amended and Restated Revolving Credit Agreement (the "Seventh Amendment") became effective, pursuant to which Wells Fargo Bank, N.A. resigned as administrative agent under the Third A&R Revolving Credit Agreement and was succeeded by Wilmington Trust, National Association. These debt instruments provide that, as a result of the commencement of the Chapter 11 Cases, the principal and interest due thereunder shall be immediately due and payable. Any efforts to enforce such payment obligations under the debt instruments are automatically stayed as a result of the commencement of the Chapter 11 Cases, and the creditors’ rights of enforcement in respect of the debt instruments are subject to the applicable provisions of the Bankruptcy Code. On the Petition Date, the Debtors filed a motion with the Bankruptcy Court seeking approval of term loan and letter of credit facilities (the “DIP Facilities”) in the aggregate principal amount of $255.0 million , consisting of (i) a senior secured priming superpriority term loan in the aggregate principal amount of $72.5 million (the “DIP New Money Loan”), (ii) a senior secured priming superpriority term loan in the aggregate principal amount of $55.0 million (the “DIP LC Loans” and, together with the DIP New Money Loans, the “DIP Term Loans”) to cash collateralize a letter of credit sub-facility for the issuance of letters of credit (including the deemed issuance of existing letters of credit) by certain issuing banks party to the DIP Credit Agreement (as defined below) in an aggregate face amount of $52,597,087.38 , and (iii) a senior secured priming superpriority term loan in the aggregate principal amount of $127.5 million , which would be subordinate to the DIP Term Loans, to refinance term loans (the “Rolled-Up Loans”) outstanding under the Term Loan Agreement owed to the DIP Lenders (as defined below) on a dollar-for-dollar basis to the DIP Term Loans provided by the DIP Lenders (the “DIP Roll-Up Loans” and, together with the DIP Term Loans, the “DIP Loans”). On April 2, 2019, the Bankruptcy Court entered an interim order (the “Interim Order”) authorizing the Debtors (the “DIP Loan Parties”) to enter into the DIP Facilities. The Interim Order allowed the DIP Loan Parties to access immediately up to $85.0 million of DIP Term Loans and refinance their obligations outstanding under prepetition letters of credit (the “Existing Letters of Credit”). However, both the DIP Facilities and the refinancing of such letters of credit and of certain term loans outstanding under the Term Loan Agreement remained subject to entry of a final order by the Bankruptcy Court (the “Final Order” and, together with the Interim Order, the “DIP Orders”). Pursuant to the Interim Order, on April 3, 2019, the Loan Parties entered into a Senior Secured Superpriority Priming Debtor-In-Possession Credit Agreement as amended by that certain First Amendment to Senior Secured Superpriority Priming Debtor-in-Possession Credit Agreement, dated as of May 20, 2019, and as further amended by that certain Second Amendment to Senior Secured Superpriority Priming Debtor-in-Possession Credit Agreement, dated as of June 12, 2019 (the “DIP Credit Agreement”) governing the terms of the DIP Facilities with the lenders party thereto (the “DIP Lenders”), Wells Fargo Bank, N.A., Royal Bank of Canada and UBS AG as issuing banks (the “DIP L/C Issuers”) and Wilmington Trust, National Association, as the administrative agent and the collateral agent thereunder (the “DIP Agent”). On April 3, 2019, the conditions precedent to closing were satisfied and the Partnership made an initial borrowing of $30.0 million of DIP New Money Loans and $55.0 million of DIP LC Loans and the Existing Letters of Credit were deemed issued under the DIP Credit Agreement. Subsequent borrowings and issuances of new letters of credit under the DIP Credit Agreement are also subject to the satisfaction of additional specified conditions precedent. The $55.0 million of the proceeds from the DIP LC Loans is considered restricted cash and is included in the restricted cash line items within our consolidated balance sheet as of June 30, 2019. On May 7, 2019, the Bankruptcy Court entered the Final Order approving the DIP Facilities and allowing the Borrower to draw down on the remaining commitments with respect to the DIP Term Loans and to refinance the Rolled-Up Loans with the DIP Roll-Up Loans. On May 9, 2019, we borrowed the remaining $42.5 million of DIP New Money Loans and made a payment of $127.5 million to our term loans outstanding under the Term Loan Agreement. Sale of Assets Since the Debtors formally retained Evercore Group L.L.C. (“Evercore”) on March 12, 2019, Evercore and the Debtors have run an extensive marketing process for the potential sale (the “Sale”) of all or substantially all of the Debtors’ assets (the “Assets”) under Section 363 of the Bankruptcy Code. To effectuate the Sale, Evercore and the Debtors have contacted numerous potential purchasers, the Debtors have executed non-disclosure agreements with a significant number of such parties, and Evercore has provided additional details to these parties, including access to confidential diligence materials. On May 22, 2019, the Debtors filed with the Bankruptcy Court the Motion of Debtors for Entry of Orders (i)(a) Approving Bidding Procedures for Sale of Debtors’ Assets, (b) Authorizing the Selection of a Stalking Horse Bidder, the initial Bidder selected by the Partnership to make the first Bid on the Partnership’s remaining assets (the “Stalking Horse Bidder”), (c) Approving Bid Protections, (d) Scheduling Auction for, and Hearing To Approve, Sale of Debtors’ Assets, (e) Approving Form and Manner of Notices of Sale, Auction, and Sale Hearing, (f) Approving Assumption and Assignment Procedures, and (g) Granting Related Relief and (ii)(a) Approving Sale of Debtors’ Assets Free and Clear of Liens, Claims, Interests, and Encumbrances, (b) Authorizing Assumption and Assignment of Executory Contracts and Unexpired Leases, and (c) Granting Related Relief [D.I. 225] (the “Bidding Procedures Motion”). On June 13, 2019, the Bankruptcy Court entered an order approving the Bidding Procedures Motion [D.I. 324] (the“Bidding Procedures Order”). Pursuant to the Bidding Procedures Order, the Debtors intend to sell all of their right, title and interest in and to the Assets free and clear of any pledges, liens, security interests, encumbrances, claims, charges, options, and interests thereon (collectively, the “Interests”) to the maximum extent permitted by section 363 of the Bankruptcy Code, with such Interests to attach to the net proceeds of the sale of the Assets with the same validity and priority as such Interests applied against the Assets. The deadline for the submission of bids that satisfy the requirements of the Bidding Procedures Order (each a “Qualified Bid,” and those parties who submit a Qualified Bid, each a “Qualified Bidder”) was July 24, 2019 at 6:00 p.m. (prevailing Eastern Time) (the “Bid Deadline”). In the event that the Debtors timely receive more than one Qualified Bid, the Debtors shall conduct an auction (the “Auction”) for the Assets. The Auction shall be in accordance with the procedures outlined in the Bidding Procedures Order and upon notice to all Qualified Bidders that have submitted Qualified Bids. The Auction shall be conducted on September 3, 2019 at 10:00 a.m. (prevailing Eastern Time) or such later time as the Debtors shall notify all relevant parties. If (a) no Qualified Bids are submitted by the Bid Deadline other than a Qualified Bid that shall serve as the minimum bid for the Assets or any lot thereof (a “Stalking Horse Bid”), (b) only one Qualified Bid that is not a Stalking Horse Bid is submitted by the Bid Deadline, or (c) only one or more bids for less than all or substantially all of the Debtors’ assets (each a “Partial Bid”) are submitted by the Bid Deadline for non-overlapping lots of the Assets, the Debtors may in their discretion (in consultation with certain parties) elect to cancel the Auction and seek approval of the transactions contemplated in the Stalking Horse Bid, the Qualified Bid which is not a Stalking Horse Bid, or the transactions in respect of the Partial Bids at the hearing to consider and approve the Sale (the “Sale Hearing”). Prior to the conclusion of the Auction, the Debtors shall (in consultation with certain parties) (a) review and evaluate each bid made at the Auction on the basis of financial and contractual terms and other factors relevant to the sale process, including those factors affecting the speed and certainty of consummating the Sale, (b) determine and identify the highest or otherwise best offer or collection of offers (the “Successful Bid(s)”), (c) determine and identify the next highest or otherwise best offer or collection of offers (the “Alternate Bid(s)”), and (d) notify all Qualified Bidders participating in the Auction, prior to its adjournment, of (i) the identity of the party or parties that submitted the Successful Bid(s) (the “Successful Bidder(s)”), (ii) the amount and other material terms of the Successful Bid(s), (iii) the identity of the party or parties that submitted the Alternate Bid(s), and (iv) the amount and other material terms of the Alternate Bid(s). The Sale Hearing will be held on September 18, 2019 at 10:30 a.m. (prevailing Eastern Time) before the Honorable Judge Mary F. Walrath, in the United States Bankruptcy Court for the District of Delaware, 824 N. Market St., Wilmington, Delaware 19801. The Sale Hearing may be adjourned by the Debtors (with the consent of the certain parties) by an announcement of the adjourned date at a hearing before the Bankruptcy Court or by filing a notice on the Bankruptcy Court’s docket. At the Sale Hearing, the Debtors will seek the Bankruptcy Court’s approval of the Successful Bid(s) and, at the Debtors’ election (in consultation with certain parties), the Alternate Bid(s). The Debtors’ presentation to the Bankruptcy Court of the Successful Bid(s) and Alternate Bid(s) will not constitute the Debtors’ acceptance of such bid(s), which acceptance will only occur upon approval of such bid(s) by the Bankruptcy Court. Following the Bankruptcy Court’s entry of the order approving any Sale, the Debtors and the Successful Bidder(s) shall proceed to consummate the transaction(s) contemplated by the Successful Bid(s). Executory Contracts Subject to certain exceptions, under the Bankruptcy Code, the Partnership and the Filing Subsidiaries may assume, assume and assign, or reject certain executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and fulfillment of certain other conditions. The rejection of an executory contract or unexpired lease is generally treated as a breach as of the petition date of such executory contract or unexpired lease and, subject to certain exceptions, relieves the Partnership and the Filing Subsidiaries of performing their future obligations under such executory contract or unexpired lease but may give rise to a general unsecured claim against us or the applicable Filing Subsidiaries for damages caused by such rejection. The assumption of an executory contract or unexpired lease generally requires the Partnership and the Filing Subsidiaries to cure existing monetary or other defaults under such executory contract or unexpired lease and provide adequate assurance of future performance. Any description of the treatment of an executory contract or unexpired lease with the Partnership or any of the Filing Subsidiaries, including any description of the obligations under any such executory contract or unexpired lease, is qualified by and subject to any rights we have with respect to executory contracts and unexpired leases under the Bankruptcy Code. See further discussion regarding the Chapter 11 Cases in Note 2. Reorganization Expenses The Debtors have incurred and will continue to incur significant costs associated with the reorganization throughout 2019, principally professional fees. The amount of these costs, which are being expensed as incurred, are expected to affect our results of operations significantly. Delisting of Common Units from NYSE On February 27, 2019, the New York Stock Exchange (“NYSE”) notified the Partnership that the staff of NYSE Regulation, Inc. (the “NYSE Regulation”) had determined to commence proceedings to delist our common units. The NYSE Regulation reached its decision to delist our common units pursuant to Rule 802.01C of the NYSE’s Listed Company Manual, as the Partnership’s unit price had fallen below the NYSE’s continued listing standard with average closing price of less than $1.00 over a consecutive 30 trading-day period and the Partnership failed to cure this non-compliance within the required timeframe. The NYSE suspended trading after the market close on the NYSE on February 27, 2019. Effective February 28, 2019, our common units commenced trading on the OTCQX Marketplace under the ticker symbol "SXEEQ". On March 20, 2019, the NYSE filed with the SEC a notification of removal from listing and registration on Form 25 to delist our common units and terminate the registration of our common units under Section 12(b) of the Securities Exchange Act of 1934. The delisting became effective on April 1, 2019. On April 1, 2019, the Partnership was notified by the OTC Markets Group Inc. that our common units, ticker: “SXEEQ”, was being removed from the OTCQX tier of the OTC Marketplace and downgraded to the OTC Pink, effective April 1, 2019. The Partnership was informed that the foregoing decision was made by the OTC Markets Group Inc. in light of the Chapter 11 Cases. Holdings' Sale of Robstown Facility On October 4, 2018, EPIC Midstream Holdings, LP (“EPIC”) and EPIC Y-Grade Holdings, LP, a subsidiary of EPIC, entered into a definitive equity purchase agreement (the "Robstown Purchase Agreement") with Holdings and Holdings Borrower to acquire Holdings' Robstown fractionation facility ("Robstown") and related pipelines that enables Robstown to receive natural gas liquids from various supply sources and several short pipelines that allow the delivery of fractionated products to Corpus Christi-area markets. Under the terms of the agreement, EPIC assumed all of the NGL purchase and sale agreements associated with Robstown, including certain natural gas liquids sales and transportation agreements with the Partnership. The sale was completed in November 2018. Liquidity Consideration and Ability to Continue as a Going Concern Our liquidity and ability to maintain compliance with debt covenants have been negatively impacted by our level of indebtedness. Our future cash flow may be materially adversely affected if the natural gas and NGL volumes connected to our systems decline. The majority of our revenue is derived from fixed-fee and fixed- spread contracts, which have limited direct exposure to commodity price levels since we are paid based on the volumes of natural gas that we gather, process, treat, compress and transport and the volumes of NGLs we fractionate and transport, rather than being paid based on the value of the underlying natural gas or NGLs. In addition, a portion of our contract portfolio contains minimum volume commitment arrangements. The majority of our volumes are dependent upon the level of producer drilling activity and our success in connecting volumes to our systems. The accompanying consolidated financial statements have been prepared assuming that the Partnership will continue as a going concern, which contemplates continuity of operations, the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. However, the Chapter 11 Cases raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements and related notes do not include any adjustments related to the recoverability and classification of recorded asset amounts or to the amounts and classification of liabilities or any other adjustments that would be required should we be unable to continue as a going concern. See further discussion regarding the Chapter 11 Cases in Note 2. |
