April 1, 2019 − Southcross Energy Partners, LP (OTCQX: SXEE) and 26 affiliated Debtors (together “Southcross” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 19-10702. The Company, a master limited partnership that provides natural gas gathering, processing, treating, compression and transportation services and NGL fractionation and transportation services, is represented by Robert J. Dehney of Morris, Nichols, Arsht & Tunnell LLP. Further board-authorized engagements include (i) Davis Polk & Wardwell LLP as general bankruptcy counsel, (ii) Alvarez & Marsal as financial advisor, (iii) Evercore Group L.L.C. as investment banker and (v) Kurtzman Carson Consultants as claims agent.
The Company’s petition notes between 1,000 and 5,000 creditors; estimated assets between $610.5mn and estimated liabilities $614.3mn. Documents filed with the Court list the Company's three largest unsecured creditors as (i) Lewis Petro Properties Inc. ($3.0mn trade payable), (ii) Marathon Oil EF LLC ($1.3mn trade payable) and (iii) Urban Oil & Gas Group, LLC ($1.1mn trade payable).
In a press release announcing the filing, Southcross advised that it “intends to use the restructuring process to evaluate a range of options for the Company, including a sale of the business, the divestiture of certain assets or a standalone restructuring plan that would strengthen the Company’s financial position, accelerate future growth and enable Southcross to better serve customers. The Company continues to engage in constructive discussions with its lenders and other stakeholders regarding the terms of a financial restructuring plan and is focused on achieving a resolution as expeditiously as possible.”
James W. Swent III, Southcross’s Chairman, President and CEO, commented, “Over the course of the last several years, Southcross has continued to adapt to the changing and challenging market environment in which we operate, but our strong underlying business has continued to labor under a heavier debt burden than most of our competitors. Our objective is to use the restructuring process to explore a range of strategic alternatives, including a potential sale of the Company, while on a parallel track, we are working to restructure our balance sheet to reduce leverage, enhance flexibility and prepare for a potential emergence as a viable, more profitable company.”
Debtor-in-Possession (“DIP”) Financing
The press release also noted the Debtors have received a commitment for $255mn in debtor-in-possession (“DIP”) financing from its current lenders.
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Howe Declaration”), Michael B. Howe, the Debtors' Senior Vice President and Chief Financial Officer detailed the events leading to Southcross’s Chapter 11 filing: “Businesses throughout the natural gas industry came under intense pressure during 2015 and 2016, when gas prices (measured per million BTU at the Henry Hub) dropped from a high of $8.15 on February 10, 2014, to a low of $1.49 on March 4, 2016, and extracted gas volumes received at Southcross’s gathering and processing facilities dropped from 494 million cubic feet per day in November 2015 to 281 million cubic feet per day in December 2016.
Southcross’s business depends almost entirely on the demand for processing of newly extracted natural gas, and its experience during the crash was no exception: the price of its common units plummeted from a peak of $24.79 on July 7, 2014, to a low of $0.38 on February
11, 2016. While dozens of its peers (including Holdings) filed for chapter 11 as a result of commodity declines, Southcross narrowly avoided a bankruptcy filing through operational cutbacks, several capital contributions from Holdings and the Sponsors, and a waiver of certain
financial covenants under the Revolving Credit Agreement. (Despite avoiding chapter 11 during the crash, Southcross has continued to experience strong headwinds. Some of its major facilities have been permanently shut down.
The Bonnie View facility has only recently come back online after significant capital expenditures, and Southcross continued to labor under a heavier debt burden than competitors that equitized a substantial portion of their funded debt starting in 2015. Meanwhile, natural gas prices have stayed consistently low, with current prices below $3.00 per million BTU.
Southcross believes that an orderly sale of its assets will likely maximize value for its stakeholders. Without chapter 11 and the availability of post-petition financing, Southcross would likely be unable to execute on this strategy.
First, the Revolving Credit Facility matures on August 4, 2019. Southcross has been unable to negotiate an extension or refinancing and cannot pay off the balance when due. Accordingly, Southcross’s audited financial statements, which will be released on April 1, 2019, will include a “going concern” qualification, giving rise to a default under both Credit Agreements. Furthermore, those audited financial statements will show that Southcross failed to meet certain of its financial covenants as of the end of 2018. Perhaps more urgently, Southcross is experiencing an immediate liquidity crisis due to significant liquidity losses over the past quarter, included a scheduled reduction of commitments under the Revolving Credit Facility and requests from key counterparties for Southcross to provide additional credit support, such as cash prepayments and letters of credit.
Meanwhile, Southcross has been unable to make certain representations regarding its financial condition that are necessary in order to borrow new money or obtain new letters of credit under the Revolving Credit Facility."
Southcross Energy Partners, L.P. is a master limited partnership that provides natural gas gathering, processing, treating, compression and transportation services and NGL fractionation and transportation services. It also sources, purchases, transports and sells natural gas and NGLs. Its assets are located in South Texas, Mississippi and Alabama and include two cryogenic gas processing plants, a fractionation facility and approximately 3,100 miles of pipeline. The South Texas assets are located in or near the Eagle Ford shale region. Southcross is headquartered in Dallas, Texas.
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