NGL Energy Partners LP provides this update on certain bankruptcy proceedings related to a customer of its FERC regulated subsidiary Grand Mesa Pipeline, LLC ("Grand Mesa"). Extraction Oil & Gas, Inc. ("Extraction") is a customer of Grand Mesa under two Transportation Services Agreements ("TSAs") originally entered into in 2014 Ė one is a TSA originally entered into with Extraction as the anchor shipper of the pipeline ("Original TSA") and the other is a much smaller TSA that was originally entered into between Grand Mesa and a different producer, but that Extraction was assigned ("Second TSA"). On June 14, 2020, Extraction filed for relief under Chapter 11 of the United States Bankruptcy Code in the District of Delaware. The next day, Extraction filed a motion to reject the TSAs (the "Rejection Motion").
The following is a brief (but not exhaustive) summary of the issues within the bankruptcy relevant to Grand Mesa:
Extractionís Motion to Reject the Original TSA and Second TSA
Today, we learned that the bankruptcy court issued a bench ruling granting Extractionís motion to reject both of the long-term TSAs entered into between Extraction and Grand Mesa. As a result, Grand Mesa intends to appeal the bankruptcy courtís ruling and raise what it respectfully believes are numerous infirmities with the ruling.
Grand Mesaís Motion Confirming that the Automatic Stay Does Not Apply Or, In The Alternative, For Relief From the Stay ("Lift Stay Motion")
Shortly after Extractionís filing of the Rejection Motion on June 15, 2020, Grand Mesa filed the Lift Stay Motion because the commitments, including the tariff rates committed to by Extraction in the TSAs, were properly approved by the Federal Energy Regulatory Commission ("FERC"). Once approved, the filed rates and terms in the TSAs carry the "force of law" which can only be modified or discontinued by the FERC on the basis of whether the filed rates are just and reasonable or whether filed rates must be set aside to avoid serious harm to the public interest. Grand Mesaís position within the bankruptcy case is that although the bankruptcy court has authority over the rejection of Extractionís executory contracts as private obligations; the FERC has exclusive jurisdiction under the Interstate Commerce Act over the modification or discontinuation of the public law obligations that the TSAs created and have imposed on both Extraction and Grand Mesa. The FERC agrees with Grand Mesaís position and on September 17, 2020, the FERC filed a Statement In Support of Motion of Grand Mesa Pipeline, LLC. However, on October 14, 2020, the bankruptcy court entered an order denying the Lift Stay Motion. Both Grand Mesa and the FERC have appealed this ruling.
Extractionís Adversary Proceeding Regarding the Second TSA
The Second TSA is based upon an acreage dedication that "runs with the land" and as such, multiple bankruptcy courts have held that when an obligation in a contract is tied to and is a burden upon real property interests under applicable state laws (in this instance, Colorado) such contracts are not subject to rejection in the context of bankruptcy as an executory contract. Regardless, Extraction commenced an adversary proceeding seeking a declaratory judgment that it does not qualify as a covenant running with the land; and, as such, Extraction should be allowed to reject the Second TSA. On October 14, 2020, the bankruptcy court granted Extractionís summary judgment motion and issued a ruling that the acreage dedication in the Second TSA does not reflect a valid covenant that runs with the land under Colorado law. Grand Mesa respectfully disagrees with the bankruptcy courtís ruling and believes Colorado real property law supports Grand Mesaís position that the dedication at issue in the Second TSA qualifies as a real property covenant that touches and concerns the real property at issue and runs with the land. Grand Mesa disagrees with the bankruptcy courtís denial of Grand Mesaís request to have this specific state law issue heard and decided by a Colorado State Court sitting in the state of Colorado. Grand Mesa has appealed this ruling as well.
Extractionís Disclosure Statement and Amended Disclosure Statement
On July 31, 2020, Extraction filed a Disclosure Statement relating to its "Plan of Reorganization". On September 25, 2020, Grand Mesa filed an Objection to the Disclosure Statement requesting the bankruptcy court deny approval of the Disclosure Statement because it did not contain adequate information and it describes a "patently unconfirmable plan". On October 22, 2020, Extraction amended both its original Plan and original Disclosure Statement. On October 28, 2020, Grand Mesa filed a Supplemental Objection requesting approval of the amended Disclosure Statement be denied, wherein Grand Mesa documented several unresolved and we believe fatal deficiencies in the amended Disclosure Statement, including (a) its failure to disclose the significant financial ramifications to Extraction upon rejection of the Grand Mesa TSAs and the other midstream agreements Extraction has sought to reject; (b) its failure to adequately describe the risk to unsecured creditors of substantial equity dilution and the benefits being conferred upon the Rights Offering participants and backstop parties at the expense of the unsecured creditors; (c) the apparent incompleteness of the exit credit facility; (d) its failure to provide adequate information regarding the scope of certain third party releases; (e) its failure to disclose how beholden Extraction is to the Senior Noteholders and the significant control and influence those Noteholders have been provided under the Restructuring Support Agreement; and (f) its failure to address the need for the FERCís approval in connection with any rate changes under the Plan where the FERC has exclusive jurisdiction over the Grand Mesa Pipeline tariff. Grand Mesa will continue to request that it and the other stakeholders within the bankruptcy are given full and meaningful information relating to Extractionís proposed Plan of Reorganization and will vigorously defend its rights as necessary during this bankruptcy proceeding.
The Rights Offering
Extractionís Rights Offering, as presented, permits only the "Rights Offering Participants" including the Senior Noteholders, and existing holders of preferred and common interests with the right to purchase, at a steep discount, the "New Common Shares" of the company that emerges from the bankruptcy. However, no similar rights are provided to stakeholders like Grand Mesa who hold similar claims against Extraction with similar long-term expectations. Grand Mesa objected to the approval of the Rights Offering on the grounds that it is not fair and equitable because, among other reasons, to the extent the Rights Offering is effectuated, the Senior Noteholders and the holders of lower priority existing preferred and common interests will obtain more value than other similarly-situated creditors, such as Grand Mesa. Grand Mesa will continue to urge the bankruptcy court not to approve any Rights Offering or Backstop Agreement that is improper or inequitable.
Mr. Krimbill, the Partnershipís Chief Executive Officer, commented "while we disagree with the rulings thus far and will pursue overturning them on appeal, Grand Mesa also remains amenable to resolving this on a commercial basis." Mr. Krimbill continued, "NGL owes it to its stakeholders to continue to defend the value of the TSAs and will be considering all available legal remedies, including but not limited to asserting Grand Mesaís approximately $650 million unsecured claim, which, under Extractionís proposed Plan of Reorganization, will ultimately convert to equity in the emerged Extraction, and pursuing the appeals of the various rulings in Extractionís bankruptcy proceedings until there is final resolution. Of course, we will also take such other interim action as we deem necessary and appropriate."