EP Energy Corporation – Files Third Amended Joint Chapter 11 Plan and Related Disclosure Statement

January 8, 2020 –  Further to a January 6th Disclosure Statement hearing, the Debtors have filed a Third Amended Joint Chapter 11 Plan, a related Disclosure Statement, and redlines of each of those documents showing changes to versions filed on January 2, 2020 [Docket Nos. 638, 639 and 640, respectively]. 

On the same day, the Debtors subsequently filed a Modified Third Amended Joint Chapter 11 Plan, a related Disclosure Statement and redlines of each of those documents [also] showing changes to versions filed on January 2, 2020 [Docket Nos. 642, 643, and 644, respectively]. Given that both sets of documents are redlined against the January 2nd versions, it was not abundantly clear how the latter-filed ("Modified") set changed over the course of the day. The only change we could find was a changed footnote as to the "Altamont Adversary Complaint" on page 41 of the Disclosure Statement. 

As to the changes from the January 2nd filings, the most significant changes in respect of the Plan's treatment of classes and claims is (i) the addition of a Class 7B (“Parent Unsecured Claims”) and (ii) additional language as to distributions for holders of claims in Class 6 (“Secured 1.5L Notes Claims”) who are not entitled to participate in the planned rights offering (see the summary table below). Other material amendments include the addition of disclosure relating to the intention of the Debtors' Creditors' Committee to object to the Plan (see highlighted text below).

Revised Plan Overview (with changes from January 2nd highlighted)

The Disclosure Statement [Docket No. 643] notes, “The Plan is the result of extensive good faith negotiations, overseen by the Debtors’ independent Special Committee…among the Debtors and a number of their key economic stakeholders that have agreed to support the Plan pursuant to (i) that certain Plan Support Agreement dated as of October 18, 2019…with holders of approximately (a) 52.0% of the Debtors’ 8.00% senior secured notes due 2024 and (b) 79.3% (in the aggregate) of the Debtors’ 9.375% senior secured notes due 2024 and the Debtors’ 8.00% senior secured notes due 2025, and (ii) that certain Exit Commitment Letter…with holders of over 100% of the Claims under the Debtors’ prepetition RBL Facility.

The Plan provides for a comprehensive restructuring of the Company’s balance sheet and a significant investment of capital in the Debtors’ business. The transactions contemplated in the Plan will strengthen the Company by substantially reducing its debt and increasing its cash flow on a go-forward basis and preserve in excess of 500 jobs. Specifically, the proposed restructuring contemplates, among other things:

• a reduction of current debt on the Debtors’ balance sheet by approximately $3.3 billion,
• a $475 million equity rights offering (the 'Rights Offering'), $463 million of which is being backstopped by the Supporting Noteholders,
• access to an approximately $629 million exit credit facility (the 'Exit Facility'), which RBL Lenders holding over 100% of the Claims under the Debtors’ prepetition RBL Facility have committed to provide support for, and which the Debtors’ prepetition RBL Facility and post-petition DIP Facility will 'roll' into on the effective date of the Plan ('Effective Date').

The Company also may, subject to the terms of the Plan Support Agreement and Exit Commitment Letter, (i) consummate a private placement of New Common Shares for an aggregate purchase price of up to $75 million (the ‘Private Placement’), and (ii) obtain an incremental amount of up to $300 million in exit financing under the Exit Facility. 

The Debtors will use the proceeds of the Rights Offering (and the Private Placement, if consummated) to, among other things, fund the costs and expenses of these Chapter 11 Cases, fund distributions under the Plan, and pay down the DIP Facility and Exit Facility as well as for working capital after emergence from chapter 11. The Debtors believe that upon consummation of the Plan and the transactions contemplated thereby, the post-emergence enterprise will have the ability to withstand the challenges and volatility of the oil and gas industry and succeed as a leading operator in their three main regions: Northeastern Utah, the Eagle Ford shale in South Texas, and the Permian basin in West Texas. 

The Plan provides for the following treatment of claims and equity interests:

• To the extent the DIP Facility is not paid down in full from the proceeds of the Rights Offering or the Private Placement, each holder of Allowed DIP Claims will receive on a dollar-for-dollar basis, first-lien, first-out revolving loans or revolving commitments (as applicable) under the Exit Credit Agreement and letter of credit participations under the Exit Credit Agreement.
• Holders of Allowed RBL Claims will receive, on a dollar-for-dollar basis, first lien, second-out term loans under the Exit Credit Agreement; provided, that each holder of an Allowed RBL Claim that elects to participate in the first-out revolving portion of the Exit Facility by the Voting Deadline shall receive on a dollar-for-dollar basis first lien, first-out revolving loans under the Exit Credit Agreement and letter of credit participations under the Exit Credit Agreement. 
• Holders of Allowed 1.125L Notes Claims will be reinstated in the principal amount of $1 billion in accordance with section 1124(2) of the Bankruptcy Code and the 1.125L Notes Indenture and continued after the Effective Date in accordance with the terms of the 1.125L Notes Indenture. 
• Holders of Allowed 1.25L Notes Claims will be reinstated in the principal amount of $500 million in accordance with section 1124(2) of the Bankruptcy Code and the 1.25L Notes Indenture and continued after the Effective Date in accordance with the terms of the 1.25L Notes Indenture. 
• Holders of Allowed 1.5L Notes Claims will receive on account of the secured portion of such Allowed 1.5L Notes Claims, in full and final satisfaction of the secured portion of such Allowed 1.5L Notes Claims, their Pro Rata share of (i) 99.0% of the New Common Shares, subject to dilution by the Rights Offering Shares, the Private Placement (if applicable), the Backstop Commitment Premium, and the EIP Shares, and (ii) either (A) for Eligible Offerees, the right to participate in the Rights Offering or (B) for Non- Eligible Offerees, the Non-Eligible Offeree Distribution. Holders of Allowed 1.5L Notes Claims should carefully review the Rights Offering Procedures annexed hereto as Exhibit F. Notes Claims should carefully review the Rights Offering Procedures annexed hereto as Exhibit F.
• Holders of Allowed Unsecured Claims (i.e., Unsecured Notes Claims, 1.5L Notes Deficiency Claims, and General Unsecured Claims) will receive their pro rata share of 1.0% of the New Common Shares, subject to dilution by the Rights Offering Shares, the Backstop Commitment Premium, the Private Placement (if applicable), and the EIP Shares.
• The legal, equitable, and contractual rights of holders of Parent Unsecured Claims are unaltered by the Plan. Except to the extent that a holder of a Parent Unsecured Claim agrees to different treatment, on and after the Effective Date, the Reorganized Debtors shall pay or dispute each Parent Unsecured Claim in the ordinary course of business.
• Holders of Allowed Convenience Claims (i.e., Claims that would otherwise be a General Unsecured Claim but are (i) Allowed in the amount of $100,000 or less, or (ii) irrevocably reduced to the Convenience Claim Amountat the election of the holder in accordance with the Plan) will receive the lesser of (a) payment in Cash of 10% of such Allowed Convenience Claim, or (b) their pro rata share of the Convenience Claim Distribution Amount. 
• Holders of Existing Parent Equity Interests will receive, on account of available assets of EP Energy, their Pro Rata share of $500,000 in cash.

The Creditors’ Committee has asserted that it will object to confirmation of the Plan on various grounds, including asserting (i) that the Plan cannot be confirmed without the Debtors’ preparing a “desktop valuation” analysis (as opposed to relying on the value of the Company implied by the Backstop Commitment Agreement and the Rights Offering); (ii) that the recoveries to Backstop Parties on account of the Exchange Transaction result in those parties’ receiving outsized value; (iii) that the releases granted under the Plan are unduly broad and that notice will be insufficient; (iv) that Apollo and Access receive and/or have the opportunity to receive outsized value on account of their Claims and Interests; (v) that the Plan improperly provides for a distribution to Class 11 (Existing Parent Equity Interests) even though Class 7(a) (Unsecured Claims) is Impaired; (vi) that holders of Claims cannot be deemed to be parties to New Corporate Governance Documents; and (vii) that Class 7(a) (Unsecured Claims) should receive greater value under the Plan. The 1.5L Notes Trustee, one of three members of the Creditors’ Committee, generally supports the Plan. The Debtors do not agree with any of the Creditors’ Committee’s positions stated herein or the stated reasoning.”

The following is an updated summary of classes, claims, voting rights, and expected recoveries (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 N/A and expected recovery is N/A.
• Class 2 (“Other Priority Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan. The aggregate amount of claims is N/A and expected recovery is N/A.
• Class 3 (“RBL Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $314,710,456 and expected recovery is 100%. Each holder will receive, on a dollar-for-dollar basis, first lien, second-out term loans under the Exit Credit Agreement; provided, that each holder of an Allowed RBL Claim that elects to participate in the first-out revolving portion of the Exit Facility by the Voting Deadline shall receive on a dollar-for-dollar basis first lien, first-out revolving loans under the Exit Credit Agreement and letter of credit participations under the Exit Credit Agreement.
• Class 4 (“1.125L Notes Claims”) is unimpaired, presumed to accept, and not entitled to vote on the Plan. The aggregate amount of claims is $1.0bn and expected recovery is 100%. The estimated Allowed amount of 1.125L Notes Claims does not include any accrued interest. On the Effective Date, all Allowed 1.125L Notes Claims will be reinstated in the principal amount of $1.0bn and continued after the Effective Date in accordance with the terms of the 1.125L Notes Indenture.
• Class 5 (“1.25L Notes Claims”) is unimpaired, presumed to accept, and not entitled to vote on the Plan. The aggregate amount of claims is $500.0mn and expected recovery is 100%. The estimated Allowed amount of 1.25L Notes Claims does not include any accrued interest. On the Effective Date, all Allowed 1.25L Notes Claims will be reinstated in the principal amount of $500.0mn and continued after the Effective Date in accordance with the terms of the 1.25L Notes Indenture.
• Class 6 (“Secured 1.5L Notes Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $2,186,617,532 and expected recovery is 17.58%. Approximately 60% of such recovery is based on account of the Rights Offering and approximately 40% of such recovery is on account of the New Common Shares. Each holder will receive its pro rata share of (i) 99.0% of the New Common Shares, subject to dilution by the Rights Offering Shares, the Backstop Commitment Premium, the Private Placement (if applicable), and the EIP Shares, and (ii) either (A) for Eligible Offerees, the right to participate in the Rights Offering in accordance with the Rights Offering Procedures or (B) for Non-Eligible Offerees, the Non-Eligible Offeree Distribution. The estimated Allowed amount referred to herein includes the full amount of the 1.5L Notes Claims, including the 1.5L Notes Deficiency Claims. For purposes of establishing the Allowed amount of the 1.5L Notes Deficiency Claims, the Plan provides that, on the Effective Date, the Secured 1.5L Notes Claims (Class 6) will receive a recover on account of the secured portion of the 1.5L Notes Claims of $383,441,951, and the 1.5L Notes Deficiency Claims shall therefore be Allowed in an amount equal to $1,803,175,181.
• Class 7A (“Unsecured Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $2,648,242,809 and expected recovery is 0.06% (fully diluted). Each holder of Allowed Unsecured Notes Claims, 1.5L Notes Deficiency Claims, and General Unsecured Claims will receive its pro rata share of 1.0% of the New Common Shares, subject to dilution by the Rights Offering Shares, the Backstop Commitment Premium, the Private Placement (if applicable), and the EIP Shares (the “Unsecured Shares”).
• Class 7B (“Parent Unsecured Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan. The aggregate amount of claims is N/A and expected recovery is 100%.
• Class 8 (“Convenience Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $1.75mn and expected recovery is 10%. Each holder will receive the lesser of (a) payment in Cash of 10% of such Allowed Convenience Claim, or (b) its pro rata share of the Convenience Claim Distribution Amount.
• Class 9 (“Intercompany Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan. The expected recovery is 100%.
• Class 10 (“Subordinated Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is N/A and expected recovery is N/A.
• Class 11 (“Existing Parent Equity Interests”) is impaired and entitled to vote on the Plan. The aggregate amount of claim is N/A and expected recovery is N/A. Each holder of Allowed Existing Parent Equity Interests will receive its Pro Rata share of $500k in cash.
• Class 12 (“Other Equity Interests”) is impaired, presumed to reject and not entitled to vote on the Plan. The aggregate amount of claims is N/A and expected recovery is N/A.
• Class 13 (“Intercompany Interests”) is unimpaired, presumed to accept and not entitled to vote on the Plan. The aggregate amount of claim is N/A and expected recovery is N/A.

Equity Holdings of Reorganized Debtors

The following table sets forth the projected approximate percentages of equity ownership of the Reorganized Debtors (including per Supporting Noteholder) upon the Effective Date (prior to dilution by the EIP) assuming the Private Placement is not consummated:

_{FN1: Assumes pro rata participation in full of $475 million Rights Offering. The fully subscribed cash equity Rights Offering amount is assumed to be $337 million.}

_{FN2: Supporting Noteholder equity splits include projected New Common Shares distributed on account of the 1.5L Deficiency Claim, assuming $2,648,242,809 of Unsecured Claims (of which $1,803,175,581 is the 1.5L Deficiency Claim).}

Exhibits attached to the Amended Disclosure Statement:

• Exhibit A: Plan
• Exhibit B: Plan Support Agreement
• Exhibit C: Organizational Chart
• Exhibit D: Liquidation Analysis
• Exhibit E: Financial Projections
• Exhibit F: Rights Offering Procedures
• Exhibit G: Ad Hoc Proposal (October 27, 2019)
• Exhibit H: Ad Hoc/Creditors’ Committee Proposal (December 31, 2019)
• Exhibit I: Creditors’ Committee Letter

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