July 28, 2021 – The Debtors’ notified the Court that their Plan of Reorganization had become effective as of July 28, 2021 [Docket No.293]. The Court had previously confirmed the Debtors’ Plan on April 26, 2021 [Docket No. 263].
On February 3, 2021, Frontera Holdings LLC and five affiliated Debtors (“Frontera” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case number 21-30354 (Judge Isgur). At filing, the Debtors, operators of a 526 MW combined cycle natural gas plant near Mission, Texas that exports energy to Mexico, noted estimated assets between $100.mn and $500.0mn and estimated liabilities between $1.0bn and $10.0bn ($944.0mn of funded debt).
At filing, the Debtors were 100% owned by affiliates of The Blackstone Group Inc. which purchased the Debtors as part of a trio of gas-fired power plants (the other two at Bastrop and Paris, Texas) from Direct Energy (part ot the UK's Centrica) for $685.0mn in December 2013 in a bet that then historically low electricity prices would bounce back. Centrica reportedly paid a combined $331.0mn for the properties in a pair of 2004 and 2006 transactions.
In 2016, the Debtors' plant began exporting its energy output to Mexico.
The Debtors were represented by (i) Jackson Walker LLP as local bankruptcy counsel, (ii) Kirkland & Ellis as general bankruptcy counsel, (iii) PJT Partners LP as financial advisors, (iv) Alvarez & Marsal North America, LLC as investment banker and (v) Prime Clerk LLC as claims agent.
The deadline to file administrative claims have been set for 30 days after the effective date, i.e., August 27, 2021 and the deadline for to file professional fee claim has been set for 45 days after the effective date, i.e. September 11, 2021 which falls on a Saturday giving filers until the following Monday.
On April 23, 2021, the Debtors filed a memorandum in support of Plan confirmation (the "Memorandum" [Docket No. 251] which provides: "The Debtors commenced these chapter 11 cases fewer than three months ago to realign their capital structure and obtain the necessary liquidity to run their business over the short and long term. The Debtors’ capital structure and liquidity issues were the result of the COVID-19 pandemic and other macroeconomic factors which, among other things, significantly reduced demand for electricity throughout most of 2020.
In the face of these extreme challenges, the Debtors worked to build consensus with stakeholders across their capital structure, which culminated in the execution of the Restructuring Support Agreement with the support of supermajorities of debt and equity interest holders in all classes proposed to be impaired by the Plan, comprised of holders of approximately 92% of the OpCo Claims and 100% of the HoldCo Notes Claims and the Debtors’ non-Debtor parent company, Lonestar Generation LLC. This broad consensus allowed the Debtors to obtain immediate access to critical financing and propose a swift, comprehensive restructuring transaction at the outset of these chapter 11 cases. The Debtors and the Consenting Stakeholders met each of the proposed milestones, managed through an unexpected cold-weather event in February, and are now ready to consummate the transactions proposed by the Plan.
The Plan will deleverage the Debtors’ balance sheet by approximately $799 million and pay all general unsecured creditors in full. Further, the Plan transactions will convert the $70 million DIP Facility into a new first lien term loan exit facility upon emergence, maximizing liquidity to position the Debtors for future success. Today, the Debtors are poised to emerge from chapter 11 as a stronger, better-capitalized enterprise positioned for long-term success."
The Disclosure Statement [Docket No. 192] notes: The restructuring support agreement…provides for the realignment of the capital structure through a deleveraging of approximately $799 million and the infusion of $70 million to fund operations. More specifically, the Restructuring Support Agreement is supported by approximately 92% of the Holders of OpCo Claims, 100% of the Holders of HoldCo Notes Claims, and the Debtors’ non-Debtor parent company, Lonestar Generation LLC ('Lonestar Generation'). Notably, all General Unsecured Claims will be paid in full in the ordinary course of business. The Chapter 11 Cases will be used to simply implement this value maximizing reorganization.
The material terms of the Restructuring Transactions are as follows:
- each Allowed Administrative Claim, Other Secured Claim, and Other Priority Claim will be paid in full in Cash or receive such other treatment that renders such Claims Unimpaired;
- each Allowed Priority Tax Claim will either be paid in full in Cash or otherwise treated in accordance with the terms set forth in section 1129(a)(9)(C) of the Bankruptcy Code;
- each Holder of an Allowed DIP Facility Claim shall receive its Pro Rata share of (a) the New First Lien Facility and (b) 87.5%of the New Equity Interests in connection with the conversion of the DIP Facility into the New First Lien Facility, so long as such Holder is also a Consenting Lender, subject to dilution on account of the New Warrants and the Management Incentive Plan (if any);
- each Holder of an Allowed OpCo Claim shall receive its Pro Rata share of and/or interest in (a) 12.5% of the New Equity Interests, subject to dilution by the Management Incentive Plan (if any) and the exercise of the New Warrants; and (b) the New Second Lien Facility;
- each Holder of an Allowed HoldCo Notes Claim shall receive its Pro Rata share of (a) the New Warrants and (b) the proceeds of the Consenting Sponsor Cash Payment in cash;
- each Allowed General Unsecured Claim will either (a) be Reinstated and satisfied in full either (i) on the Effective Date or (ii) in the ordinary course of business in accordance with the terms and conditions of the particular transaction giving rise to such Allowed General Unsecured Claim or (b)such other treatment that renders such Allowed General Unsecured Claim Unimpaired in accordance with section 1124 of the Bankruptcy Code;
- all Intercompany Claims shall either be (a) Reinstated; (b) compromised, cancelled, set off, settled, canceled and released, contributed or distributed; or (c) otherwise addressed at the election of the Debtors such that Intercompany Claims are treated in a tax-efficient manner;
- all Intercompany Interests shall receive no recovery or distribution and shall be Reinstated solely to the extent necessary, and with the consent of the Required Consenting Lenders, to maintain the Debtors’ corporate structure; ·all Existing Equity Interests will be cancelled, released and extinguished without any distribution;
- the Debtors shall obtain the New First Lien Facility and the New Second Lien Facility; and
- the parties to the Restructuring Support Agreement and certain other parties will grant full, mutual releases as set forth in the Plan."
The following is 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.
- Class 2 (“Other Priority Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan.
- Class 3 (“OpCo Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $826,994,224.79 and the estimated recovery is 9.5%. The OpCo Claims will be Allowed in the principal amount of $757,746,240.64 with respect to the Term Loan Claims, in the principal amount of $35,000,000.00 with respect to the Revolving Credit Loan Claims, and $12,532,215.56 with respect to Obligations under the Secured Non-Commodity Hedge Agreements (each as defined in the OpCo Credit Agreement or herein, as applicable), plus accrued and unpaid interest on such principal amounts (as applicable) through the Petition Date, without any obligation to file any Proof of Claim. Each Holder will receive its Pro Rata share of and/or interest in (A) 12.5% of the New Equity Interests, subject to dilution by the Management Incentive Plan (if any) and the exercise of the New Warrants; and (B) the New Second Lien Facility.
- Class 4 (“HoldCo Notes Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $174,486,898.80 and the estimated recovery is 4.3%. The HoldCo Notes Claims will be allowed in the aggregate principal amount of $160,000,000.00 plus accrued and unpaid interest on such principal amount through the Petition Date, without any obligation to file any Proof of Claim. Each Holder will receive its Pro Rata share of (A) the New Warrants, and (B) the proceeds of the Consenting Sponsor Cash Payment in cash.
- Class 5 (“General Unsecured Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $14,554,956.06 and the estimated recovery is 100%.
- Class 6 (“Intercompany Claims”) is unimpaired/impaired, deemed to accept/Deemed to reject and not entitled to vote on the Plan.
- Class 7 (“Intercompany Interests”) is unimpaired/impaired, deemed to accept/Deemed to reject and not entitled to vote on the Plan.
- Class 8 (“Existing Equity Interests”) is impaired, deemed to reject and not entitled to vote on the Plan.
The Debtors’ claims agent notified the Court of the Plan voting results [Docket No. 250], which were as follows:
- Class 3 (“OpCo Claims”) 161 claim holders, representing $774,611,136.62 in amount (or 100%) and 100% in number, voted in favor of the Plan.
- Class 4 (“HoldCo Notes Claims”) 3 claim holders, representing $175,291,168.84 in amount (or 100%) and 100% in number, voted in favor of the Plan.
The Debtors’ First Amended Plan Supplement [Docket No. 253] attached the following exhibits:
- Exhibit B – New First Lien Loan Documents
- Exhibit B-1 – Redline to Version in the Initial Plan Supplement
- Exhibit D – Restructuring Steps Memorandum
- Exhibit E – Identities of the Members of the Reorganized Frontera Board
- Exhibit L – New Intercreditor Agreement
Petition Date Perspective
After a "sudden and profound impact on liquidity necessitated action and a complete realignment of the capital structure," on February 3, 2021, the Debtors entered into a restructuring support agreement (the "RSA," attached to Docket No. 20 at Exhibit B) with HoldCo Noteholders, the Ad Hoc Group of Term Loan Lenders and Lonestar Generation (ie Blackstone) that "contemplates a comprehensive and highly-consensual restructuring transaction that will be implemented through a pre-arranged plan of reorganization…resulting in a substantial deleveraging and an immediate infusion of new capital to fund the Debtors’ operations and emergence from chapter 11. Certain lenders under the Debtors’ OpCo Loans have agreed to backstop a $70 million new money DIP term loan facility (the 'DIP Facility') to fund these chapter 11 cases, which will roll into a new first lien term loan exit facility upon emergence. Pursuant to the Restructuring Support Agreement, the DIP Facility will receive an equity-based fee upon emergence, in the amount of 87.5% of the equity of reorganized Frontera. Holders of OpCo Claims will receive their pro rata share of the remaining 12.5% of equity of reorganized Frontera and $75 million in new second lien take-back debt. Holders of the HoldCo Note Claims will receive their pro rata share of $7.5 million of cash and a warrant package. Lonestar Generation has agreed to fund the $7.5 million cash payment to holders of HoldCo Note Claims in connection with, and contingent upon, the consummation of the restructuring transactions and approval of the releases contemplated by the Restructuring Support Agreement. Importantly, general unsecured claims will be paid in full in the ordinary course of business and will be unimpaired, and any other priority or secured claims will be paid in full in cash upon emergence. Pursuant to the Restructuring Support Agreement, these transactions are supported by holders of approximately 92% of the OpCo Loans, 100% of the HoldCo Notes, Morgan Stanley, as OpCo Term Loan Agent and L/C Agent, Lonestar Generation, Kindle Energy, and Fisterra Energy.
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Meleski Declaration”), Brant Meleski, the Debtors’ Vice President, detailed the events leading to Frontera's Chapter 11 filing. The Meleski Declaration provides: “… for Frontera—the owner and operator of the only U.S.-based power plant that sells all of its power to Mexico—to say COVID-19 is the band leader in a parade of horribles would be a gross understatement. Demand for electricity began to fall from the sky in March 2020, further accelerating through the summer and fall, exactly when demand and profitability historically peak. The numbers do not lie: year-over-year peak pricing was down nearly 70% through September 2020, resulting in lower energy revenues by more than 60% as compared to 2019. To add insult to injury, it is unclear if and when this will all be over and peak demand will return to pre-pandemic levels. Sprinkle on top various macroeconomic factors, including:
- compressed spark spreads because natural gas prices in the U.S. have not fallen as significantly as power prices in Northeastern Mexico;
- plummeting oil prices in 2020 making oil-fired power generators more economically competitive; and
- recent solar installations exerting downward pressure on prices in Mexico’s electricity market.
What was manageable pre-pandemic suddenly became unmanageable. The sudden and profound impact on liquidity necessitated action and a complete realignment of the capital structure, including a significant reduction of approximately $944 million in indebtedness."
The Meleski Declaration continues: "the COVID-19 pandemic disrupted Mexican manufacturing and commercial operations, which drastically reduced demand for electricity beginning in March 2020 and continuing throughout the summer and fall, precisely when demand and profitability has historically peaked. Year-over-year peak pricing was down nearly 70% through September 2020,resulting in 61.9% lower energy revenue in 2020 than 2019. It is unclear if and when peak demand will return to pre-pandemic levels.
Meanwhile, natural gas prices in the U.S. have not fallen as significantly as power prices in Northeastern Mexico. As a result, Frontera has experienced significantly compressed realized spark spreads relative to prior years, straining its liquidity and working capital. Spark spreads were further reduced in the first half of 2020 in part due to plummeting oil prices. As a result, oil-fired generation has become a much closer competitor to natural-gas fired generation. Also, Frontera expects to see an influx of additional solar installations over the coming years, resulting in an additional five gigawatts of solar supplied power over the next four years. This additional capacity will continue to exert downward pricing pressure on the electricity market in which Frontera participates. Finally, Frontera anticipates that it will need to replace a critical rotor in the Frontera Facility in the fall of 2021, straining forecasted liquidity as a result of a three week projected outage to facilitate the replacement."
DIP and Exit Financing
Frontera secured $70.0mn in new money debtor-in-possession (DIP) financing from certain of their term loan lenders with $30.0mn of that financing made available by an interim DIP order. The Debtors' "liquidity position will allow the plant to operate the business in the ordinary course and fund chapter 11 administrative costs." The $70.0mn DIP facility will convert into a new first lien term loan exit facility (the "New First Lien Term Loan"). The $145.0mn of exit financing also includes a new $75.0mn second lien take-back term loan facility (the “New Second Lien Term Loan Facility”), which shall be junior in priority to the New First Lien Term Loan and shall be distributed to holders of prepetition first lien claims.
As of the Petition date, the Debtors have approximately $944.0mn in aggregate funded debt obligations, all of which is secured debt.
Recovery and Liquidation Analysis (see Exhibit E to Disclosure Statement for notes)
Liquidation Analysis (for (a) Frontera Holdings LLC and (b) Frontera Intermediate Holdings LLC and its Debtor subsidiaries, respectively).
About the Debtors
According to the Debtors: “Frontera Holdings operates a 526 MW combined cycle natural gas plant near Mission, Texas, and exports power to Mexico."
The Meleski Declaration adds: "Frontera’s 526 megawatt natural-gas-fueledpower generation facility is located approximately 1.8 miles from the U.S.-Mexico border in Mission, Texas and has a position in the Mexican wholesale electricity market (the Mercado Eléctrico Mayorista, or the 'MEM') as a baseload generator. The Frontera Facility benefits from access to natural gas at lower prices relative to peer power generation facilities in Northeast Mexico, plant operational efficiencies, and its strategic location."
At filing, the Debtors are 100% owned by affiliates of The Blackstone Group Inc. which purchased the Debtors as part of a trio of gas-fired power plants (the other two at Bastrop and Paris, Texas) from Direct Energy (part ot the UK's Centrica) for $685.0mn in December 2013 in a bet that then historically low electricity prices would bounce back. Centrica reportedly paid a combined $331.0mn for the properties in a pair of 2004 and 2006 transactions.
In 2016, the Debtors' plant began exporting its energy output to Mexico.
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