Pengrowth/WEF

Documents
(SEDAR filing: 18 November 2019) Circular of Pengrowth Energy Corporation respecting an ABCA Plan of Arrangement involving, Pengrowth, Cona Resources Ltd. (the “Purchaser”), Waterous Energy Fund (Canadian) LP (“WEF”), Waterous Energy Fund (US) LP, Waterous Energy Fund (International) LP, and the holders of common shares (the “Shares”) of Pengrowth and the “Secured Debtholders” being: (i) the holders of Pengrowth’s 7.98% Senior Secured Notes, Series B, due May 11, 2020 (the “2010 Notes”); (ii) Pengrowth’s 5.49% Senior Secured Notes, Series A, originally due October 18, 2019, 5.45% Senior Secured Notes, Series D, originally due October 18, 2019, 6.07% Senior Secured Notes, Series B, due October 18, 2022, 6.74% Senior Secured Notes, Series E, due October 18, 2022, and 6.17% Senior Secured Notes, Series C, due October 18, 2024 (collectively, the “2012 Notes” and together with the 2010 Notes, the “Notes”); and (iii) the syndicate of lenders (the “Lenders”) under the Credit Agreement with a principal obligation outstanding of $177,000,000. McCarthy/Blakes
Summaries
Summary Under
Tax Topics - Public Transactions - Spin-Offs & Distributions - Taxable dividends-in-kind - Litigation trust distribution
dividend-in-kind of litigation trust interest followed by cash sale
Overview

Pengrowth owes over $0.7B to secured debtholders. A private purchaser (the “Purchaser”) has agreed, under an Alberta Plan of Arrangement, to pay off the secured debt and to acquire all the Pengrowth common shares for $0.05 per share ($28 million in aggregate).

The Circular discloses an agreement of Pengrowth with the purchaser that, in the event that the Plan of Arrangement does not proceed, they would seek to finalize an alternative proceeding (likely under the CCAA) which would proceed on similar terms, but under which “Shareholders may receive the nominal value of $0.001 per Share.”

Initial steps in the proposed Plan of Arrangement entail first the settling by Pengrowth of a litigation trust by assigning its claim in an action in the Court of Queen’s Bench of Alberta together with a contribution of funds (and a commitment to potentially provide further funds) for the costs of the action, and then a dividend in kind by it of the interests in that litigation trust to its shareholders. The Circular does not disclose how that dividend will be valued regarding T3 information reporting. Although unclear, withholding tax on the dividend may be funded out of sale proceeds otherwise payable to a non-resident shareholder for their shares.

Pengrowth

Pengrowth is an ABCA corporation (whose 560,113,864 Shares are listed on the TSX and traded over-the-counter in the U.S. on the OTCQX) focused on development and production of oil and gas in Western Canada from its Lindbergh thermal oil property and its Groundbirch Montney gas property. In 2014, Pengrowth completed the largest capital project in its history (the successful construction and start-up of its Lindbergh thermal oil project) shortly before a precipitous drop-off in oil prices. In 2015, it eliminated its dividend and started an asset disposition program. The proceeds from the asset dispositions, together with free cash flow generated, were used to repay indebtedness of approximately $1.3 billion during 2017.

WEF and the Purchaser

WEF is a private limited partnership existing under the laws of the Province of Alberta whose business is the investment in oil and gas companies. WEF holds all of the issued and outstanding common shares in the capital of the Purchaser, a corporation incorporated under the laws of the Province of Alberta. The Purchaser is a heavy oil producer in southwest Saskatchewan.

Litigation Trust

A trust to be established on the Effective Date of the Arrangement pursuant to a “Litigation Trust Agreement” with a person to be determined by Pengrowth prior to that time. The trust will acquire the claim in Alberta Court of Queen’s Bench Action No. 1701-11469 (the “Litigation Trust Claim”) and be funded with the “Litigation Funding Amount.”

Plan of Arrangement
  1. Each outstanding stock option shall be cancelled.
  2. Each of the Shares held by dissenting shareholders shall be transferred to the Purchaser.
  3. Each of the outstanding “Incentives” (DEUs, DSUs, PSUs and RSUs) shall be surrendered to Pengrowth and each Incentiveholder whose Incentives are so surrendered and transferred shall be entitled to receive from Pengrowth that number of Shares that are deliverable to such Incentiveholder as set forth in the LTIP Schedule.
  4. Pengrowth shall: (i) transfer to the Litigation Trustee its interest in the Litigation Trust Claim, (ii) contribute in cash the Initial Litigation Funding Amount to the Litigation Trustee, and (iii) agree to further contribute, from time to time, such cash amounts as are required in accordance with the Litigation Trust Agreement; in consideration for the issuance to Pengrowth of all the Litigation Trust Interests.
  5. Pengrowth shall distribute to each Shareholder pro-rata interests in the Litigation Trust as a dividend-in-kind.
  6. All of the letters of credit obligations under the Credit Agreement and all swap indebtedness shall be assumed by the Purchaser.
  7. Each Secured Debtholder shall be entitled to receive its applicable share of the Secured Debtholder Consideration (being a cash payment in U.S. dollars equal to the sum of U.S.$366.3 million, $196.5 million and £12.1 million (as adjusted for post-October 31, 2019 changes) Credit Agreement fee amounts and certain interest amounts, and with the obligations of Pengrowth in relation thereto being extinguished.
  8. Each outstanding Share shall be transferred to the Purchaser and each Shareholder shall be entitled to receive from the Purchaser $0.05 in cash per Share.
WEF Guarantee

WEF has unconditionally and irrevocably guaranteed in favour of Pengrowth the performance by the Purchaser of each of the Purchaser’s covenants and obligations under the Arrangement Agreement.

Alternative Transactions

Concurrently with the Arrangement Agreement, the Corporation has entered into the Alternative Transaction Agreement with the Purchaser and WEF, pursuant to which, in the event that: (i) the Arrangement Agreement is terminated by the parties due to inability to receive the Shareholder Approval or the Secured Debtholder Approval; and (ii) the Purchaser and WEF so request, the parties agreed to negotiate in good faith to enter into a definitive agreement providing for an alternative implementation structure in order to complete the acquisition of Pengrowth by the Purchaser. The definitive agreement shall provide for the acquisition by the Purchaser of all of the outstanding Shares or all of the assets, obligations and liabilities of Pengrowth. The alternative implementation structure includes, but is not limited to, a proceeding under the CCAA.

The Alternative Transaction Agreement contemplates a proceeding, including a proceeding under the CCAA, pursuant to which Shareholders may receive the nominal value of $0.001 per Share and the Secured Debtholders will receive, subject to the Purchaser and WEF agreeing with the Corporation otherwise, the same consideration available to them under the Arrangement. The Alternative Transaction Agreement also contemplates that a definitive agreement will be entered between Pengrowth, the Purchaser and WEF containing substantially similar provisions relating to the payment of the Purchaser Termination Fee of $45 million.

Canadian tax consequences
Dividend of Litigation Trusts interests

A Resident Holder will be required to include the dividend-in-kind in computing its income. Each Holder that receives the Dividend will be the beneficial owner of Litigation Trust Interests. There may be certain Canadian tax consequences with respect to holding such Litigation Trust Interests, including an income inclusion upon the distribution of proceeds by the Litigation Trust pursuant to the Litigation Trust Agreement. Holders should consult their own tax advisors.

Share disposition

Resident Holders will realize a capital gain (or a capital loss) equal to the amount by which the Cash Consideration exceeds (or is less than) the aggregate of the adjusted cost base to the Resident Holder of such Shares immediately prior to the disposition and any reasonable costs of disposition.

Non-Residents

A dividend, such as the Dividend, paid or credited or deemed to be paid or credited to a Non-Resident Holder will be subject to Canadian withholding tax at the rate of 25%, subject to any reduction in the rate of withholding to which the Non-Resident Holder is entitled under any applicable income tax convention.

Summary Under
Tax Topics - Public Transactions - Mergers & Acquisitions - Cross-Border Acquisitions - Inbound - Canadian Buyco
Overview

Pengrowth owes over $0.7B to secured debtholders. A private purchaser (the “Purchaser”) has agreed, under an Alberta Plan of Arrangement, to pay off the secured debt and to acquire all the Pengrowth common shares for $0.05 per share ($28 million in aggregate).

The Circular discloses an agreement of Pengrowth with the purchaser that, in the event that the Plan of Arrangement does not proceed, they would seek to finalize an alternative proceeding (likely under the CCAA) which would proceed on similar terms, but under which “Shareholders may receive the nominal value of $0.001 per Share.”

Initial steps in the proposed Plan of Arrangement entail first the settling by Pengrowth of a litigation trust by assigning its claim in an action in the Court of Queen’s Bench of Alberta together with a contribution of funds (and a commitment to potentially provide further funds) for the costs of the action, and then a dividend in kind by it of the interests in that litigation trust to its shareholders. The Circular does not disclose how that dividend will be valued regarding T3 information reporting. Although unclear, withholding tax on the dividend may be funded out of sale proceeds otherwise payable to a non-resident shareholder for their shares.