Limetree Bankruptcy Proceedings Update - Who Will Emerge as the Winner?

Limetree Bay Refining, LLC – Stricken USVI Refinery Seeks Approval of Asset Sale Bidding Procedures, Aims for September 22nd Auction and October 14th Sale Hearing
BY NEW GENERATION RESEARCHON JULY 28, 2021

July 26, 2021 – The Debtors filed a motion requesting each of a bidding procedures order and a sales order [Docket No. 191]. The bidding procedures order would (i) approve bidding procedures in respect of a sale of substantially all of the Debtors' assets (the "Sale"), (ii) authorize the Debtors to select one or more stalking horse bidders, (iii) approve bid protections for any selected stalking horse bidder and (iv) approve a proposed auction/sale timetable culminating in a September 22nd auction and an October 14th sale hearing. The sale order would authorize the Sale.

The Debtors' marketing efforts have not yet started (data room to be established by August 6th) and no stalking horse has been named. Interested parties will be able to make bids for substantially all of the Debtors assets or make a "Piecemeal Bid." The Debtors' debtor-in-possession ("DIP") lender ($25.0mn, with 405 Sentinel, LLC serving as agent) and prepetition secured lenders are deemed qualified bidders and do not need to submit a qualified bid.

On July 12, 2021, Limetree Bay Services, LLC and five affiliated Debtors (“Limetree” or the “Debtors”) filed for bankruptcy protection noting estimated assets between $1.0bn and $10.0bn; and estimated liabilities between $500.0mn and $1.0bn (although see chart below noting $1.848bn of debt under prepetition credit facilities).

The immediate impetus for the filing was a May 4th release of oil from a flare at the Debtors’ U.S. Virgin Islands refinery and a subsequent May 14th EPA order shutting the facility for at least 60 days; but the Debtors, who have pumped $4.0bn into efforts to update an ageing facility, had much deeper regulatory and financial issues than that singular regulatory concern. Since the re-resumption of refining operations in February 2021 (“a year late and more than $1 billion over the initial budget”) the Debtors have “experienced intermittent operational issues and incidents of varying severity.” Worse yet, that $4.0bn was clearly not quite enough to bring the facility into compliance with EPA regulations, with the Debtors’ restructuring advisor B. Riley commenting: “Indeed, the Debtors estimated that the Refinery would require at least $150 million in additional funding to maintain operational capabilities, complete ongoing repairs and retrofitting, fund necessary repairs identified by the EPA audits and establish a reserve for potential expenses pending the restart.”

The impact of the May 14th EPA order, however, was to effectively cap access to necessary funding outside of the bankruptcy context, with B. Riley commenting: “However, due to, among other things, the suspension of operations under the EPA Order, the U.S. Attorney Request and looming deadlines under the Debtors’ agreement with BP, the Debtors have been unable to attract the new capital necessary to fund operational costs during the temporary shutdown and ultimately restart operations…with that reality ultimately compelling the Debtors’ Chapter 11…”

Bidding Procedures and Sale Motion

The Debtors requesting motion notes, “Pending a sale or reorganization through the Chapter 11 Cases, the Debtors intend to idle the Refinery in accordance with applicable law and consultation with the EPA to ensure the protection of the surrounding communities and environment. Simultaneously, and in accordance with the terms of the DIP Loan Documents (as defined in the Interim DIP Order), the Debtors intend to market the Assets for sale and solicit proposals for the acquisition thereof pursuant to the proposed Bidding Procedures, as set forth herein. As of the filing of this Motion, the Debtors do not have a stalking horse bidder for the Assets.

The Debtors developed the Bidding Procedures, with the assistance of advisors and in consultation with the DIP Agent and the Prepetition Secured Parties (as defined in the Interim DIP Order) to maximize the value of the Assets for the benefit of the Estates and their creditors through an efficient and streamlined sale process, which comports with the terms of the DIP Loan Documents and the Bankruptcy Code. In short, the Bidding Procedures provide for the solicitation of bids from potential purchasers in an effort to identify a stalking horse bidder. Prior to the Bid Deadline (defined below), the Debtors, in consultation with the Notice Parties, shall select one or more bids to serve as stalking horse bid(s) for all or substantially all assets of the Debtors, individually or collectively. Thereafter, if additional Qualified Bids are received prior to the Bid Deadline, the Debtors intend to hold an Auction to provide other Qualified Bidders an opportunity to bid against the selected stalking horse bid(s). Upon conclusion of the Auction, the Debtors, in consultation with the Notice Parties, shall select a Winning Bid and file a notice and designation of the Winning Bid for approval at the Sale Hearing.

The provisions of the Bidding Procedures Order approving the Bidding Procedures shall be subject to the terms of the Interim DIP Order. In the event the relief granted in the Bidding Procedures Order or any action taken or proposed to be taken under the Bidding Procedures Order is inconsistent with the terms of the Interim DIP Order, the terms of the Interim DIP Order shall control.”

Bidder Protections: Available for any stalking horse bidder with aggregate amount of any proposed bidder protections (break-up fee and expense reimbursement) capped at 3% of a bid's total purchase price.

Proposed Key dates:

Hearing on bidding procedures motion: August 2, 2021
Bid Summary Deadline: September 7, 2021
Stalking Horse Designation Deadline: September 10, 2021
Bid Deadline and Credit Bid Designation Deadline: September 17, 2021
Auction Date: September 22, 2021
Deadline to file the Designation of Winning Bid: September 24, 2021
Deadline to object to the Sale: October 4, 2021
Sale Hearing: October 14, 2021
Deadline for Winning Bidder to close sale transaction: November 1, 2021
Deadline for Back-up Bidder to close sale transaction (if applicable): November 8, 2021
Background

Prepetition Indebtedness

The Debtors are parties to three (3) principal debt facilities and one (1) inventory arrangement inclusive of safe harbored forward contracts regarding Feedstock and Product (each as defined below) and a term loan in respect of certain catalysts owned by LBRM at the Refinery (collectively, the “Prepetition Facilities”).

As of the Petition date, the principal amount of the Debtors’ obligations under the Prepetition Facilities total approximately $1.848 billion (excluding interest, obligations under various hedging arrangements, letters of credit, and other charges), as summarized on a consolidated basis below:

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Shapiro Declaration”), Mark Shapiro, a senior managing director for the Debtors' restructuring advisor B. Riley, detailed the events leading to Limetree’s Chapter 11 filing. The Shapiro Declaration provides: “…the Refinery project faced significant hurdles — from delays in construction resulting in substantial budget overruns to a global pandemic. Ultimately, the Debtors substantially completed the Refinery refurbishment in December 2020 — a year late and more than $1 billion over the initial budget — and, on February 1, 2021, the Refinery resumed operations and began producing certain refined products for commercial sale.

While the initial relaunch of the Refinery proved successful in many respects, the Refinery experienced intermittent operational issues and incidents of varying severity beginning shortly after the resumption of operations. In late April 2021, residents in the communities neighboring the Refinery began reporting a foul odor allegedly emanating from the Refinery, which prompted internal investigations as well as inquiries by the EPA and DPNR into the Refinery’s emissions of gaseous by-products of the refining processes. The Debtors cooperated with the EPA and DPNR in an effort to expeditiously identify the source of the odor and, moreover, ensure Refinery emissions comported with applicable standards. Although the investigation concluded that the odor was due, at least in part, to an exposed sewage access point on USVI government property, the investigation also uncovered irregularities in the emission of certain gases from the Refinery.

In conjunction with the EPA and DPNR, the Debtors began creating a plan to remedy the issues and ensure emissions complied with applicable standards. Before the Debtors were able to finalize and implement any remediation plan(s), on May 12, 2021, an incident occurred resulting in the release of small amount of oil from a flare located at the Refinery, which affected homes and property in the surrounding neighborhoods. The Debtors immediately began an incident response process and, on May 13, 2021, voluntarily suspended operations at the Refinery to permit a full and complete investigation of the incident and to address any contributing factors.

Operations Suspended

On May 14, 2021, the EPA issued a Clean Air Act Emergency Order (the “EPA Order”) for the Refinery. In the EPA Order, the EPA alleged that the Refinery failed to comply with certain aspect of the United States Clean Air Act pertaining to the emission of certain gaseous by-products of the refining processes. Based on these purported violations, the EPA ordered the Debtors to suspend all operations at the Refinery for a period of 60 days and retain independent auditors to investigate compliance with environmental regulations in the operations of the Refinery.

Upon receipt, the Debtors immediately took action to comply with the EPA Order, including the continuation of the voluntary suspension of Refinery operations and engagement of qualified auditors to evaluate the Debtors’ operations and processes as well as the Debtors’ compliance with applicable regulations. The auditors concluded their audits and provided final reports simultaneously to the EPA and the Debtors on or about June 25, 2021.

As a result of the EPA Order, among other events, the Debtors’ investors and lenders began expressing concerns about the ability to restart the Refinery, which severely impacted the Debtors’ ability to access funding necessary to maintain operations and preserve the Refinery’s assets. Concerns were heightened further due to a June 11, 2021 request from the U.S. Attorney to visit and tour certain operations at the Refinery (the 'U.S. Attorney Request'). Furthermore, certain Debtors and non-debtor affiliates have been named as defendants in multiple class actions lawsuits (the 'Class Actions') alleging private causes of action related to purported pollution caused by the Refinery following the February 1, 2021 relaunch. As of the Petition Date, the Debtors are cooperating with the EPA, DPNR, and U.S. Attorney, and the Class Actions remain in the early stages of litigation.

Following the May 13, 2021 suspension of operations, the Debtors explored various options for renewing operations at the Refinery. The Debtors engaged financial advisors and counsel to advise on potential restructuring and recapitalization options and retained the CRO to lead these efforts. Additionally, on or about July 4, 2021, each of the Debtors appointed Steven J. Pully (the 'Independent Director') as an independent director and/or member, as appropriate, vested with the authority to address matters pertaining to the restructuring of the Debtors, including the resolution of any conflicts that may arise between the Debtors and their officers, directors, members and shareholders, as well as their non-debtor affiliates of the Debtors, including the Terminal Entities….

Capital Needed

Regrettably, despite the involvement of qualified professionals to evaluate and pursue potential financing and restructuring options, the Debtors were unable to devise a plan to preserve the Refinery in operational condition without new capital. Indeed, the Debtors estimated that the Refinery would require at least $150 million in additional funding to maintain operational capabilities, complete ongoing repairs and retrofitting, fund necessary repairs identified by the EPA audits and establish a reserve for potential expenses pending the restart of the Refinery — which amount is exclusive of funds required for working capital and payment of outstanding obligations.

The Debtors, however, lacked access to adequate financing. Accordingly, the Debtors engaged with their investors and their primary lender constituencies to see if they would be willing to provide such new capital. However, due to, among other things, the suspension of operations under the EPA Order, the U.S. Attorney Request and looming deadlines under the Debtors’ agreement with BP, the Debtors have been unable to attract the new capital necessary to fund operational costs during the temporary shutdown and ultimately restart operations after remediating any alleged deficiencies.

As a result of the declining prospects for funding, on June 21, 2021, the Debtors announced that they were suspending indefinitely plans to restart the Refinery. Simultaneously, on June 21, 2021, LBRO, which employs the principal workforce of the Refinery, provided notice to its employees in accordance with the The Worker Adjustment and Retraining Notification (WARN) Act and, out of an abundance of caution, the Virgin Islands Plant Closing Act of its intention to reduce its workforce by 271 employees.

Since announcing the indefinite suspension of operations at the Refinery, the Debtors have worked diligently to idle the Refinery pending a sale or reorganization through these Chapter 11 Cases. In conjunction with the EPA, the Debtors have prepared portions of a plan to purge hydrocarbons from the Refinery equipment (the 'Hydrocarbon Purge Plan'), which is necessary before the Debtors may safely idle the facility. In early July 2021, the Debtors submitted to the EPA a proposal for the first phase of their Hydrocarbon Purge Plan, which is pending agency review and approval. The Debtors are in the process of preparing a proposal for the second phase of their Hydrocarbon Purge Plan, which the Debtors intend to submit to the EPA shortly.

Additionally, the Debtors have provided for the anticipated expenses associated with the Hydrocarbon Purge Plan and other remedial and operational expenses under the DIP Facility and associated budget for the use of the debtor in possession financing and cash collateral (the 'Budget'). In addition to the foregoing, the Debtors have been working with the citizens and government of the USVI to redress the potential environmental, safety and other impacts of the Refinery. Due to the Debtors’ belief in the importance of these payments and their relationship with the government of the USVI, and the potential impact on the value of the Debtors’ assets and any marketing and sales process, the Debtors are working with their lenders to provide for the payment of certain amounts to the citizens of the USVI in the Budget."

EPA Complaint and Stipulation

In a separate July 12th press release, the Department of Justice provided: "Today, the U.S. Department of Justice, on behalf of the U.S. Environmental Protection Agency (EPA), filed a complaint in federal court in the U.S. Virgin Islands against Limetree Bay Terminals LLC and Limetree Bay Refining LLC (jointly Limetree Bay) alleging that the companies’ St. Croix petroleum refinery presents an imminent and substantial danger to public health and the environment. In a stipulation filed simultaneously with the complaint that acknowledges that the refinery is not currently operating and that Limetree Bay does not intend to restart the refinery at the present time, Limetree Bay has agreed to a number of requirements, including the following:

Complete all corrective measures that are necessary to eliminate any imminent and substantial endangerment to public health or welfare or the environment posed by the refinery or refinery process units before the refinery or any refinery process unit restarts;
Notify the United States and the court no fewer than 90 days before restarting the refinery or any refinery process unit;
Install hydrogen sulfide (H2S) and sulfur dioxide (S02) monitors at nine monitoring sites prior to restart of the refinery or any refinery process unit; and
Submit a plan for EPA approval to purge hydrocarbons from refinery process units and other equipment at the refinery as part of the process of indefinite shutdown. The hydrocarbon purging plan will include the operation of ambient air monitoring."
Acting Regional Administrator for the EPA Walter Mugdan commented: “EPA is committed to ensuring that Limetree Bay’s activities and operations comply with laws that protect public health. Today’s action and stipulation further strengthen our work to protect communities near this refinery by securing a binding commitment from the company that any restart of operations or initiation of long-term shutdown activities, such as purging gases, must receive EPA’s prior approval. These actions advance EPA’s commitment to environmental justice and to protect clean air for those living in vulnerable and overburdened communities.”

The EPA release further explains, "Since February of this year, the refinery experienced multiple major incidents resulting in significant air pollutant and oil releases. Many residents in the surrounding St. Croix community reported becoming sickened by some of the releases.

Following four incidents at the refinery, EPA issued an administrative order (EPA Order) to Limetree Bay Terminals LLC and Limetree Bay Refining LLC on May 14. The EPA Order issued under Section 303 of the Clean Air Act required Limetree Bay to cease refinery operations; conduct an environmental compliance audit and process area audits of the refinery’s flare system, delayed coking unit and sulfur recovery unit; and submit a corrective measures plan to address the audits’ findings.

Under Section 303 of the Clean Air Act, the EPA Order remains effective for 60 days unless the United States files a complaint seeking longer-term relief. By filing today’s complaint, the EPA order is automatically extended by 14 days. The complaint seeks an injunction requiring Limetree Bay to comply with the requirements of the EPA order, to take all measures necessary to eliminate the imminent and substantial endangerment before restarting refinery operations including complying with the corrective measures plan and other appropriate relief.

About the Debtors

According to the Debtors: “Limetree Bay Refining, LLC, restarted operations in February 2021 and is capable of processing around 200,000 barrels per day. Key restart work at the site began in 2018, including the 62,000 barrels per day modern, delayed Coker unit, extensive desulfurization capacity, and a reformer unit to produce clean, low-sulfur transportation fuels. The restart project provided much needed economic development in the U.S.V.I. and created more than 4,000 construction jobs at its peak."

Corporate Organizational Chart