May 15, 2019 − Privately-held EdgeMarc Energy Holdings LLC and 7 affiliated Debtors (“EdgeMarc” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 19-11104. The Company, a natural gas exploration and production company headquartered in Canonsburg, Pennsylvania, is represented by Adam G. Landis of Landis Rath & Cobb LLP. Further board-authorized engagements include (i) Davis Polk & Wardwell as counsel, (ii) Evercore Partners as investment banker, (iii) Opportune LLC and Dacarba LLC as financial advisors and (iv) Prime Clerk as claims agent.
The Company’s petition notes between 1,000 and 5,000 creditors; estimated assets between $100mn and $500mn; and estimated liabilities between $100mn and $500mn. Documents filed with the Court list the Company's three largest unsecured creditors as (i) BP Energy Company ($41.3mn trade debt), (ii) Rover Pipeline LLC ($3.8mn trade debt) and (iii) Rockies Express Pipeline LLC ($1.6mn trade debt).
In a press release announcing the filing, the Debtors stated: “EdgeMarc intends to implement the sale under Section 363 of the U.S. Bankruptcy Code, which will allow the Company to provide for an orderly sale of its assets in a court-supervised environment. EdgeMarc has submitted auction procedures to the Court for approval. Under those procedures, the auction of substantially all of EdgeMarc’s assets is expected to take place on or prior to August 14, 2019, although that date is subject to change. EdgeMarc expects all of its operations and well sites that are not contracted with the Revolution pipeline to operate without disruption during the sale process. Customers, lessors, and employees of those operations should see no interruption as a result of this process.”
Callum Streeter, EdgeMarc’s Chief Executive Officer, stated: “Since the explosion of the Revolution pipeline in 2018, EdgeMarc’s production has been significantly curtailed and the Company has been unable to satisfy its long-haul firm transportation contracts. Following a comprehensive review of all possible alternatives to ensure the Company’s long-term ability to develop our natural gas and NGL rich assets, the EdgeMarc Board and management team have determined that a sale is the best path forward for all stakeholders. This process will provide the necessary resources and flexibility to resume normal upstream operating activities at our well sites in Pennsylvania and Ohio.
Despite the unfortunate challenges as a result of the explosion, our underlying business fundamentals remain sound. Pursuing a sale under the Court’s supervision provides the quickest and most efficient path forward so we can return to doing what we do best – safely developing our high-quality assets.”
In conjunction with the proposed transaction, EdgeMarc has received a commitment for approximately $108 million in debtor-in-possession (“DIP”) financing from KeyBank, its prepetition lender, which includes $30 million in new money financing and approximately $78 million of “roll up” loans to refinance all outstanding debt owed to KeyBank. Upon Court approval, the new financing and cash generated from the Company’s ongoing operations will be used to support the business throughout the Chapter 11 proceedings and sale process.
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Streeter Declaration”) [Docket No. 3], Callum Streeter detailed the events leading to the Debtors’ Chapter 11 filing. The Streeter Declaration States, “On September 10, 2018, due to factors entirely outside of the Debtors’ control, an explosion (the ‘Revolution Explosion’) occurred along a pipeline and gathering system (the ‘Revolution System’) being built by a third party, ETC Northeast Pipeline LLC (‘ETC’), that performs gathering and processing services for the Debtors in Pennsylvania. The Revolution System was expected to go into commercial service around the time of the Revolution Explosion, and would have enabled the Debtors to gather, process and—ultimately—sell, gas from several newly drilled wells in Pennsylvania. Instead, the Revolution Explosion prevented the Debtors from selling the gas produced from those wells. As a result, EdgeMarc experienced a significant reduction in production capacity and revenue from its Pennsylvania operations.
Because the Debtors could not flow through ETC’s Revolution System due to the Revolution Explosion, because ETC refused to gather the Debtors’ gas via other infrastructure, and because the Debtors had no other means of selling gas from the affected wells, they determined in their business judgment to “shut in” their Pennsylvania wells and pause all remaining Pennsylvania operations. When flowing, those Pennsylvania operations account for approximately 50 million net cubic feet per day (MMcfd), or approximately one third of the Debtors’ existing production capacity.
The Debtors’ inability to sell gas from their Pennsylvania properties had a substantial negative impact on their liquidity and ability to satisfy their funded debt, contractual and other payment obligations. In particular, in anticipation of ETC’s Revolution System coming online by January 1, 2019 (the ‘Guaranteed In-Service Date’), as required under their contracts with ETC, the Debtors had contracted for fixed amounts of transportation capacity under certain of their firm transportation service agreements (‘FT Agreements’). The Debtors remain contractually obligated to pay for that transportation capacity even though they are unable to transport their natural gas through the applicable pipelines.
In addition, on March 21, 2019, the agent under the Debtors’ secured revolving credit facility issued a notice of redetermination of the Debtors’ borrowing base thereunder, reducing it from approximately $80 million to $40 million. Under the terms of the agreement governing that facility, the Debtors were required to begin repayment of outstanding amounts in excess of the borrowing base on May 1, 2019. On April 30, 2019, the Debtors received a one- week forbearance to May 8, 2019 for the event of default under the secured revolving credit facility of failing to make the first repayment. On May 7, 2019, the Debtors received an extension of that forbearance through May 15, 2019."
Private Equity Sponsors and Prepetition Capital Structure
The Debtors are effectively owned by two private equity sponsors, Goldman Sachs Capital Partners (holding 71.18% across three investment vehicles) and Ontario Teachers’ Pension Plan (holding 27.76%).
The Debtors’ funded debt obligations consist entirely of secured obligations an Amended and Restated Credit Agreement, dated as of December 19, 2017 (the “RBL Credit Agreement”), by and among Debtor affiliate EM Employer, as borrower, the other Debtors, as guarantors, the lenders from time to time party thereto and KeyBank National Association (“KeyBank”) as administrative agent, collateral agent and letter of credit issuer. Under the RBL Credit Agreement, the Debtors had access to a revolving credit facility (the “Revolving Credit Facility”) that could be used to either fund cash draws for working capital or support letters of credit issued by the RBL Agent. The Debtors’ obligations under the RBL Credit Facility are secured by mortgages on oil and gas properties representing substantially all of the value of the Debtors’ oil and gas properties included in the Debtors’ most recent reserve report and liens on certain other assets.
As of the Petition Date, the Debtors had approximately $77.79 million in outstanding obligations under the RBL Credit Facility, consisting of $47 million in drawn revolving credit obligations and $30,792,041 in issued and outstanding letters of credit.