U.S. Energy Biogas files Chapter 11 bankruptcy following failed attempt to renegotiate 'flawed' loan

By Caroline Salls

Pittsburgh, Nov. 30 - U.S. Energy Biogas Corp. filed for Chapter 11 bankruptcy Thursday in the U.S. Bankruptcy Court for the Southern District of New York as a result of a capital structure impaired by "a flawed and unjustifiably onerous loan agreement" negotiated by former management with Countryside Power Income Fund, according to a company news release.

Having failed to renegotiate the Countryside loan, including offering to repay the loan in full, the company said its board of directors determined that Chapter 11 is the best venue for establishing an appropriate capital structure to support the continued operation and growth of the business.

The company said it believes the Countryside loan is flawed and unjustifiably onerous because:

• The loan was the result of a self-dealing transaction by members of Countryside's management who, at the time, were also serving as U.S. Energy Biogas' management;

• The Countryside loan includes an unduly burdensome 15-year make-whole provision that constitutes a penalty, preventing prepayment, regardless of current market rates; and

• The Countryside loan includes covenants that require U.S. Energy Biogas to set aside significant amounts from cash flow in reserve accounts, needlessly trapping cash that might otherwise help grow the enterprise.

The company said it believes that it will be able to achieve a plan of reorganization that will honor 100% of all pre-bankruptcy claims.

U.S. Energy Biogas said its business is "operationally healthy with attractive growth opportunities, it is current in its payment of all principal and interest, no monetary defaults exist or are alleged by any creditors, and it has honored every material reporting requirement under its loans."

In connection with the Chapter 11 filing, the company has filed a motion for cash collateral that it said will provide ample liquidity to pay all vendors and suppliers in full for goods and services received after the Chapter 11 filing.

U.S. Energy Biogas' parent, U.S. Energy Systems, Inc., was not included in the Chapter 11 filing.

"USEB is an operationally healthy business with exciting growth potential, and it should also be a valuable business, but instead its value has been nullified by its capital structure and it has been on a collision course with insolvency," U.S. Energy Biogas chairman and U.S. Energy chief executive officer Asher E. Fogel said in the release.

"The Countryside loan traps approximately $33 million in cash that could fund growth investments and help to meaningfully contain our cost of funds.

"Our efforts to improve USEB's capital structure and enable it to take advantage of its growth opportunities are consistent with our fundamental business strategy.

"USEB's U.S. landfill gas business currently generates strong profit margins and has attractive growth potential. Moreover, we are moving forward with our highly experienced renewable energy leadership team to execute business development plans that we believe can double the level of USEB's current free cash flow over the next four years."

Countryside reaction

In a Countryside Power Income Fund release, the lender said the fund's C$102 million loan to U.S. Energy Biogas is collateralized by all of U.S. Energy Biogas' operating assets and cash reserves.

In connection with the reorganization filing, Countryside said it intends to enforce its rights as senior secured lender, including seeking protection for the continuation of debt service payments on the loan.

Countryside said its management and trustees are assessing the reorganization filing's impact on the fund.

Parent company contributions

U.S. Energy said it has agreed to grant a reduced number of warrants to a secured term loan lender in connection with the U.S. Energy Biogas bankruptcy filing, and it has no further obligation to deliver additional warrants under a previous warrant purchase agreement.

On Aug. 10, secured term loan lender Silver Point Finance, LLC demanded U.S. Energy provide by Dec. 31 either an unsecured guaranty of the U.S. Energy Biogas business in support of its loan to a U.S. Energy affiliate or warrants for 4 million shares of U.S. Energy common stock, exercisable at $0.01 and with a term of 7.5 years.

With U.S. Energy Biogas' bankruptcy filing, U.S. Energy said it is unable to obtain the necessary waiver from Countryside in order to provide the unsecured guaranty to the secured term loan lender, and U.S. Energy has agreed to grant the lender warrants for 1.1 million, instead of 4.0 million, shares of common stock under the same term and conditions.

U.S. Energy also has agreed to extend the exclusive agreement with the secured term loan lender to arrange financing for the company for an additional 12 months.

U.S. Energy also completed the acquisition of the 46% or 4,574 shares of U.S. Energy Biogas' class B common stock it previously did not own from DEGS Biogas, Inc. to reflect the parent company's confidence in U.S. Energy Biogas' operational performance, intrinsic value and growth potential.

In consideration for the stock, U.S. Energy agreed to assume a promissory note, with a total of $430,000 in remaining payments; a contingent obligation based on the value of Section 29 tax credits, with a face amount of $4.3 million; and other capital and operating expense obligations not to exceed $1 million.

Management said it expects the total assumed payments and obligations in the stock transaction will not exceed $1.43 million.

As part of the transaction, U.S. Energy also agreed to enter into a defined commercial relationship with the selling stockholder.

In connection with U.S. Energy's consolidation of ownership in U.S. Energy Biogas, it also appointed U.S. Energy senior vice president Adam D. Greene as U.S. Energy Biogas' chief executive officer.

Richard J. Augustine will remain as U.S. Energy Biogas' president and will continue to oversee day-to-day operations.

Debt details

According to the release, U.S. Energy Biogas had $161 million of total assets as of Sept. 30 and $155 million in total debt.

According to court documents, the company's largest unsecured creditor is the Office of the Chief Clerk, Illinois Commerce Commission, Springfield, Ill., with a $62.52 million claim for repayment of tax incentives.

Note default

According to an 8-K filing with the Securities and Exchange Commission, the Chapter 11 filing prompted an event of default under a U.S. Energy Biogas note purchase agreement with Countryside Canada Power Inc., accelerating payment on the $91.2 million of notes outstanding under the agreement.

In addition, the company filed an amendment to its certificate of incorporation to increase the number of shares of common stock it has authority to issue to 75 million shares from 50 million shares.

The amendment was approved by shareholders on Nov. 6.

U.S. Energy Biogas is an Avon, Conn.-based renewable energy business. Its Chapter 11 case number is 06-12827.

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