PES Holdings, LLC – Court Approves Disclosure Statement Although Issues Relating to EPA and U.S. Trustee Objections Remain; Schedules February 6th Confirmation Hearing

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December 11, 2019 – The Court hearing the PES Holdings cases issued an order approving (i) the adequacy of the Debtors’ Disclosure Statement, (ii) proposed Plan solicitation and voting procedures and (iii) a proposed timetable culminating in a Plan confirmation hearing set for February 6, 2020 [Docket No. 671].

Also on December 11th, the Debtors filed their First Amended Plan and a related Disclosure Statement [Docket Nos. 662 & 663, respectively]; and separately filed blacklines showing changes to the Plan and Disclosure Statement from versions filed on October 10, 2019 [Docket No. 663]. The Disclosure Statement attaches a liquidation analysis, but like the class/claims summary table, is currently devoid of any real dollar values.

As perhaps signaled by the Court's December 9th decision to extend Plan exclusivity for a period considerably shorter than that initially requested, the Debtors were able to obtain Court approval of their Disclosure Statement over two outstanding objections. 

As previously reported in respect of the exclusivity extension [Docket No. ]: "The Debtors had initially requested extensions through and including May 18, 2020 (Plan filing) and July 16, 2020 (Plan solicitation), but then modified that request to leave each period expiring on April 15th [Docket No. 647]. The shift appears to have come after consultation with the Debtors' Official Committee of Unsecured Creditors and the resolution of "informal comments." Although no specific rationale was given for the change, the fact of an impending hearing to consider approval of the Disclosure Statement (December 11th) may suggest that the requested lengthy extensions simply seemed like an unnecessary over-reach. The December 11th hearing looks likely to see the Disclosure Statement approved, with the Debtors comfortable that they can see off two outstanding objections, including one from the U.S.Trustee concerning the Debtors' failure to date to provide a quantitative liquidation analysis and one from the Environmental Protection Agency concerning the Debtors' failure to meet requirements, and pay related penalties, agreed in respect of the Clean Air Act’s Renewable Fuel Standard."

As it turns out, as of December 9th, the Debtors and the EPA were clearly a long way along an agreed path as to the EPA's objection; a path which is amply detailed in the Disclosure Statement and which largely punts to the Court the determination as to whether amounts the EPA claims it is owed are dischargeable in bankruptcy. The Disclosure Statement sums up: "In light of this dispute, the Debtors and the United States on behalf of the EPA have agreed to a toggle mechanism for the treatment of any of the Debtors’ liabilities under the Consent Decree. Specifically, the Plan provides that the Court shall determine, at any time prior to or following the Confirmation Hearing, whether such liabilities constitute injunctive compliance obligations or are a dischargeable “debt” and/or a “claim” under the Bankruptcy Code." Although resolved for purposes of approving the Disclosure Statement, this problem is not going away for the Debtors or for other parties facing a similar situation vis-a-vis EPA claims in bankruptcy.

As to the U.S. Trustee's objection on lack of any sort of a proper "quantitative liquidation analysis," the U.S. Trustee appeared to hedge his bets in Court, offering that notwithstanding that the lack of actual numbers for creditors to digest "weighed heavily against approval," the rest of the Plan looked pretty good. Perhaps that hesitation was enough to allow the Court to side with the Debtors. On the face of it, given the complexity of the Debtors' bankruptcy issues (eg insurance coverage and environmental liability), the still undecided choice between an equitization restructuring and an asset sale restructuring, and the complete lack of any real dollar values, the U.S. Trustee's concerns may have gotten short shrift in the name of expediency.

Overview of Plan

The Disclosure Statement provides: "The Plan provides for the restructuring of the Debtors either through (a) an Equitization of existing debt or (b) a third-party sale transaction. The key terms of the Plan are as follows:

The Equitization Restructuring:

If determined by the Debtors with the consent of the Required Term Loan Lenders before the Confirmation Hearing, the Debtors shall effectuate the Equitization Restructuring. On the Effective Date, (i) the Reorganized Debtors shall issue the New PES Interests to fund distributions to certain Holders of Allowed Claims and Interests in accordance with Article III of the Plan, (ii) the Reorganized Debtors shall enter into the Exit Facility, if any, which shall be a new credit facility in an amount sufficient to pay on the Effective Date certain Holders of Claims as set forth in Article III of the Plan, and to provide incremental liquidity, if any, and (iii) the Reorganized PES Board shall be authorized to implement the Management Incentive Plan.

The Reorganized Debtors will fund distributions under the Plan with Cash on hand on the Effective Date, the revenues and proceeds of all assets of the Debtors, including proceeds from all Causes of Action not settled, released, discharged, enjoined, or exculpated under the Plan or otherwise on or prior to the Effective Date, the Exit Facility (if any), the Plan Sponsor Investment (if any), and the New PES Interests.

If an Equitization Restructuring occurs, on the Confirmation Date, except as otherwise provided in the Plan or otherwise agreed to by the Debtors and the counterparty to an Executory Contract or Unexpired Lease, all Executory Contracts or Unexpired Leases not previously assumed, assumed and assigned, or rejected in the Chapter 11 Cases, shall be deemed assumed by the Reorganized Debtors, effective as of the Effective Date, in accordance with the provisions and requirements of sections 365 and 1123 of the Bankruptcy Code, not to be unreasonably withheld, and regardless of whether such Executory Contract or Unexpired Lease is set forth on the Schedule of Assumed Executory Contracts and Unexpired Leases, other than: (1) those that are identified on the Schedule of Rejected Executory Contracts and Unexpired Leases; (2) those that have been previously rejected by a Final Order; (3) those that are the subject of a motion to reject Executory Contracts or Unexpired Leases that is pending on the Confirmation Date; or (4) those that are subject to a motion to reject an Executory Contract or Unexpired Lease pursuant to which the requested effective date of such rejection is after the Effective Date.

The Asset Sale Restructuring:

In the alternative, if the Debtors, with the consent of the Required Term Loan Lenders and Required DIP Lenders, so determine before the Confirmation Hearing, the Debtors shall effectuate the Asset Sale Restructuring. On the Effective Date, the Debtors shall consummate the Asset Sales, and, among other things, the acquired assets, as set forth in the Asset Purchase Agreement, shall be transferred to and vest in the Purchaser free and clear of all Liens, Claims, charges, or other encumbrances pursuant to the terms of the Asset Purchase Agreement and Confirmation Order. The Purchaser shall be deemed not to be a successor of the Debtors. On the Effective Date, the Purchaser shall pay to the Debtors the proceeds from the Asset Sales, as and to the extent provided for in the Asset Purchase Agreement. Except as otherwise provided in the Plan, the Confirmation Order, the Asset Purchase Agreement, or any agreement, instrument, or other document incorporated herein or therein, or any agreement, instrument, or other document incorporated in the Plan or the Plan Supplement, in each case to the extent of the Term Loan Lenders’ consent, (with respect to Term Loan Priority Collateral) and Intermediation Providers’ consent (with respect to SOA Separate Assets and Collateral and Intermediation Priority Collateral), on the Effective Date, the assets of the Debtors that are not transferred to the Purchaser pursuant to the Asset Purchase Agreement, if any, shall vest in the Liquidating Trust free and clear of all Liens, Claims, charges, or other encumbrances; provided that, subject to funding the Professional Fee Escrow Account, the collateral, or proceeds of sales of such collateral, of the Reorganized Debtors securing the DIP Claims the Term Loan Claims, or the Intermediation Claims shall remain subject to the liens and claims of the DIP Lenders Term Loan Lenders, and Intermediation Provider to the same extent as such liens and claims were enforceable against the Debtors and the Debtors’ assets until such DIP Claims Term Loan Claims, and Intermediation Claims are satisfied as set forth in Article II.C and Article III.B.3 of the Plan. On and after the Effective Date, except as otherwise provided for in the Plan, the DIP and Cash Collateral Orders, or the Asset Purchase Agreement, the Debtors and the Reorganized Debtors may operate their business and use, acquire, or dispose of property and compromise or settle any Claims, Interests, or Causes of Action.

The Reorganized Debtors will fund distributions under the Plan with Cash on hand on the Effective Date and the revenues and proceeds of all assets of the Debtors, including proceeds from all Causes of Action not settled, released, discharged, enjoined, or exculpated under the Plan or otherwise on or prior to the Effective Date.

If an Asset Sale Restructuring occurs, on the Effective Date, except as otherwise provided herein, each Executory Contract and Unexpired Lease not previously rejected, assumed, or assumed and assigned, including any employee benefit plans, severance plans, and other Executory Contracts under which employee obligations arise, shall be deemed automatically rejected pursuant to sections 365 and 1123 of the Bankruptcy Code, unless such Executory Contract or Unexpired Lease: (1) is specifically described in the Plan as to be assumed in connection with confirmation of the Plan, or is specifically scheduled to be assumed or assumed and assigned pursuant to the Plan or the Plan Supplement; (2) is subject to a pending motion to assume such Unexpired Lease or Executory Contract as of the Effective Date; (3) is to be assumed by the Debtors or assumed by the Debtors and assigned to another third party, as applicable, in connection with the any sale transaction; (4) is a contract, instrument, release, indenture, or other agreement or document entered into in connection with the Plan; or (5) is a D&O Liability Insurance Policy.”

The following is an updated summary of classes, claims, voting rights, and estimated recoveries showing changes; this version of the Plan adds a new class: "Class 6 – Subordinated Remaining Volume Claim"  (defined terms are as defined in the Plan and/or Disclosure Statement):

  • Class 1 (“Other Secured Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $[ ] and estimated recovery is 100%.
  • Class 2 (“Other Priority Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $[ ] and estimated recovery is 100%.
  • Class 3 (“Term Loan Secured Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is [$698.6mn plus interest and fees] and estimated recovery is [ ]%. Each Holder of an Allowed Term Loan Secured Claim will receive its share of: 
    1. if an Equitization Restructuring occurs, (a) the New PES Interests, if any, after dilution by the Plan Sponsor Investment and (b) any Cash (other than Cash constituting Intermediation Priority Collateral or SOA Separate Assets and Collateral) in excess of the Minimum Liquidity Amount that is not required to make distributions to Administrative Claims, Priority Tax Claims, or Other Secured Claims, fund the Priority Claims Reserve or pay fees and expenses that are required to be paid pursuant to the Plan, including the Professional Fee Claims; 
    2. if the Asset Sale Restructuring occurs, (a) the Distribution Proceeds available for distribution to Holders of Allowed Term Loan Secured Claims from time to time as provided in Article VIII of the Plan; and (b) the Liquidating Trust Units as provided in the Liquidating Trust Agreement and in accordance with Article IV.G of the Plan; and 
    3. whether an Equitization Restructuring or Asset Sale Restructuring occurs, Cash proceeds of the Intermediation Priority Collateral to the extent such proceeds remain available after Holders of Allowed Intermediation Secured Claims are paid in full in accordance with Article III.B.4 of the Plan. To the extent that such distribution is not sufficient to pay the Allowed Term Loan Claims in full, any unsatisfied amount shall constitute an Allowed Term Loan Deficiency Claim.
  • Class 4 (“Intermediation Secured Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $[ ] and estimated recovery is [ ]%. Whether an Equitization Restructuring or Asset Sale Restructuring occurs, each Holder of an Allowed Intermediation Secured Claim shall receive its Pro Rata Share of: 
  1. Cash proceeds of Intermediation Priority Collateral and the SOA Separate Assets and Collateral; provided, for the avoidance of doubt, that the amount of any surcharge applied pursuant to the Final DIP Order shall reduce the amount of the Intermediation Priority Collateral proceeds but not be deducted from the Intermediation Claims; 
  2. all other assets that constitute Intermediation Priority Collateral or the net Cash proceeds thereof; and 
  3. Cash proceeds of the Term Loan Priority Collateral to the extent such proceeds remain available after Holders of Allowed Term Loan Secured Claims are paid in full in accordance with Article III.B.3 of the Plan (or, to the extent applicable, Liquidating Trust Units on account thereof). 

In the event that an Equitization Restructuring occurs and, pursuant to the Plan, Holders of Term Loan Secured Claims are to receive Plan distributions in excess of one hundred percent (100%) of the total amount of the Allowed Term Loan Claims, then Holders of Allowed Intermediation Secured Claims shall receive such additional consideration as such Holders may consent to or as necessary to satisfy the terms of section 1129(b) of the Bankruptcy Code. To the extent such distribution is not sufficient to pay the Allowed Intermediation Secured Claims in cash in full, any unsatisfied amount shall constitute an Allowed Intermediation Deficiency Claim. Accrued and unpaid interest and fees thereon as of the Petition Date plus, to the extent the Intermediation Secured Claims are secured, accrued interest and fees (including any attorneys’, accountants’, appraisers’ and financial advisors’ fees, in each case that are chargeable or reimbursable under the Intermediation Facility) to the extent permitted by section 506(b) of the Bankruptcy Code.

  • Class 5 (“General Unsecured Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $[ ] and estimated recovery is [ ]%. Each Holder of a General Unsecured Claim will receive its Pro Rata share of 
  1. if an Equitization Restructuring occurs, the GUC Equitization Reserve; and 
  2. if an Asset Sale Restructuring occurs, the Distribution Proceeds as provided in Article VIII.H of the Plan. 

Any such distributions on account of Term Loan Deficiency Claims shall be made in accordance with section 7.03 of the Term Loan Credit Agreement.

  • Class 6 (“Subordinated Remaining Volume Claim”) is impaired and entitled to vote on the Plan. The single claim is estimated as $[ ] and estimated recovery is [ ]%. The Holder of the Allowed Subordinated Remaining Volume Claim will receive, following the full satisfaction of all Allowed General Unsecured Claims, its Pro Rata Share of 
  1. if an Equitization Restructuring occurs, the GUC Equitization Reserve; and 
  2. if an Asset Sale Restructuring occurs, the Distribution Proceeds as provided in Article VIII.H of the Plan.
  • Class 7 (“Intercompany Claims”) is unimpaired/impaired and not entitled to vote on the Plan. The aggregate amount of claims is $[ ] and estimated recovery is 100%/0%. Whether an Equitization Restructuring or Asset Sale Restructuring occurs, each Allowed Intercompany Claim, unless otherwise provided for under the Plan, will either be Reinstated or canceled and released at the option of the Debtors; provided that no distributions shall be made on account of any such Intercompany Claims.
  • Class 8 (“Intercompany Interests”) is unimpaired/impaired and not entitled to vote on the Plan. The aggregate amount of claims is $[ ] and estimated recovery is 100%/0%. Whether an Equitization Restructuring or Asset Sale Restructuring occurs, each Allowed Intercompany Interest shall be Reinstated for administrative convenience or canceled and released without any distribution on account of such interests at the option of the Debtors.
  • Class 9 (“Interests in PES Energy and PES Ultimate Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. The aggregate amount of claims is $[ ] and estimated recovery is 0%. Whether an Equitization Restructuring or Asset Sale Restructuring occurs, each Allowed Interest in PES Energy and each PES Ultimate Interest shall be canceled, released, and extinguished, and will be of no further force or effect and no Holder of Interests in PES Energy or Holder of PES Ultimate Interests shall be entitled to any recovery or distribution under the Plan on account of such Interests.
  • Class 10 (“Section 510(b) Claims”) is impaired, deemed to reject. The aggregate amount of claims is $[ ] and estimated recovery is 0%. Whether an Equitization Restructuring or Asset Sale Restructuring occurs, Section 510(b) Claims will be canceled, released, and extinguished as of the Effective Date, and will be of no further force or effect, and each Holder of a Section 510(b) Claim will not receive any distribution on account of such Section 510(b) Claim. The Debtors are not aware of any valid Section 510(b) Claims and believe that no such Section 510(b) Claims exist.

The following documents were filed with the Disclosure Statement

  • Exhibit A: Chapter 11 Plan (filed separately)
  • Exhibit B: Corporate Structure of the Debtors (filed previously)
  • Exhibit C: Liquidation Analysis
  • Exhibit D: Disclosure Statement Order (filed previously)

Key Dates

  • Voting Deadline: February 3, 2020
  • Plan Objection Deadline: February 3, 2020
  • Confirmation Hearing: February 6, 2020

About the Debtors

PES Holdings, LLC is the parent company of Philadelphia Energy Solutions Refining and Marketing (“PESRM”). PESRM owns and operates the Point Breeze and Girard Point oil refineries located on an integrated, 1,300-acre refining complex in Philadelphia. The 335,000 barrels per day of combined capacity makes PESRM the largest refining complex on the Eastern Seaboard.

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