Court File and Parties

COURT FILE NO.: CV-16-11363-00CL DATE: 20160829 ONTARIO SUPERIOR COURT OF JUSTICE COMMERCIAL LIST

IN THE MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, AS AMENDED

AND IN THE MATTER OF A PLAN OF COMPROMISE OR ARRANGEMENT OF: PACIFIC EXPLORATION & PRODUCTION CORPORATION, PACIFIC E&P HOLDINGS CORP., META PETROLEUM CORP., PACIFIC STRATUS INTERNATIONAL ENERGY LTD., PACIFIC STRATUS ENERGY COLOMBIA CORP., PACIFIC STRATUS ENERGY S.A., PACIFIC OFF SHORE PERU S.R.L., PACIIFC RUBIALES GUATEMALA S.A., PACIFIC GUATEMALA ENERGY CORP., PRE-PSIE COÖPERATIF U.A., PETROMINERALES COLOMBIA CORP., and GRUPO C&C ENERGIA (BARBADOS) LTD. Applicants

Counsel: Tony Reyes, Virginie Gauthier, Alexander Schmitt, and Orestes Pasparakis, for the Applicants John Finnigan and Rebecca Kennedy, for the Monitor, PricewaterhouseCoopers Inc. Scott Bomhof and Lily Coodin, for Bank of America, Agent for certain Bank Lenders Brendan O’Neill, Celia Rhea, and Ryan Baulke, for the Ad Hoc Committee Timothy Pinos and Joseph Bellissimo, for the Shareholder Consortium Jennifer Whincup, for BNY Mellon Michael Rotsztain, for Wilmington Trust, N.A. & Bank Syndicate Caitlin Fell and Andy Kent, for the Plan Sponsor, The Catalyst Capital Group Inc. Mark Gelowitz, for the Independent Committee John Salmas for Blackhill Advisors, CRO George Michailopoulos, unrepresented shareholder

HEARD: August 23, 2016

HAINEY J.

REASONS FOR JUDGMENT

Background

[1] The applicants seek an order (the “Plan Sanction Order”) [1]:

(a) sanctioning the applicants’ Plan of Compromise and Arrangement dated June 27, 2016, as amended to August 17, 2016 (the “Plan”) pursuant to the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended (the “CCAA”); and

(b) extending the Stay Period to and including October 31, 2016.

[2] According to the applicants, the Plan and the restructuring of Pacific Exploration & Production Corporation (“Pacific”) and its subsidiaries (“Pacific Group”) to be implemented thereby (the “Restructuring Transaction”) results from significant efforts by the applicants to achieve a resolution of their financial condition. If implemented, the Restructuring Transaction will reduce Pacific’s indebtedness by approximately US $5.1 billion, reduce its annual interest expense by approximately US $258 million and leave the US $250 million of Exit Notes as the only long-term debt in Pacific’s capital structure other than facilities to support letters of credit or oil and gas hedging. The Plan will maintain Pacific Group as a going concern for the benefit of all stakeholders, preserving employment and economic activity in the many communities in which it operates.

[3] The applicants and their boards of directors believe that the Restructuring Transaction achieves the best possible outcome for the Pacific Group and its stakeholders in the circumstances and achieves results that are not attainable under any other scenario.

[4] The Plan is supported by the Catalyst Capital Group Inc., the Plan Sponsor, the Ad Hoc Committee, the Consenting Lenders, the other parties to the Support Agreement (who together with the Ad Hoc Committee and supporting Bank Lenders, hold approximately 84% by value of all Bank Claims and Noteholder Claims) and the Monitor.

[5] At a creditors’ meeting held on August 17, 2016, the Plan was approved by 98.4% (by number) and 97.2% (by dollar value) of Affected Creditors voting in person or by proxy at the meeting.

[6] The Monitor supports the sanctioning of the Plan and believes it is fair and reasonable and that it represents the best option available to the Pacific Group and the Affected Creditors.

[7] For these reasons the applicants submit that the Plan should be sanctioned pursuant to s. 6 of the CCAA.

Adjournment Request

[8] On August 16, 2016, one week before the scheduled hearing of this motion, a group of stakeholders (the “Shareholder Consortium”) put forward a recapitalization and refinancing proposal (the “Alternative Proposal”) which the Shareholder Consortium submits provides the applicants and its stakeholders with a superior alternative to the Plan sought to be sanctioned on this motion.

[9] The applicants disagree that the Alternative Proposal is superior to the Plan and have formally rejected it.

[10] The Shareholder Consortium requested that I adjourn the motion to permit further consideration of the Alternative Proposal.

[11] The applicants and all other interested parties and stakeholders appearing on the motion strongly opposed the adjournment request and characterized it as a “last minute effort to de-rail the Restructuring Transaction”.

[12] I agree with this characterization of the Alternative Proposal. There was a process in place to obtain proposals that contained a clear timetable for the submission of proposals which the Shareholder Consortium was well aware of. This last minute Alternative Proposal ignores the timelines that have been in place for many months. Further, the Alternative Proposal has been considered and rejected by the applicants. The adjournment request is denied because I am satisfied that the Plan, which results from extraordinary efforts by the applicants and the other interested parties to arrive at the best result for the Pacific Group and its stakeholders, should not be de-railed at this late stage of the process by the Shareholder Consortium’s Alternative Proposal.

Issues

[13] I must decide the following issues:

a) Should the Plan be sanctioned? b) Should the third party releases be approved? c) Should there be a stay of proceedings in favour of the other Non-Applicant parties? d) Should the Stay Period be extended to October 31, 2016?

Should the Plan be sanctioned?

[14] Section 6 of the CCAA provides that a compromise or arrangement is binding on a debtor company and all of its creditors if a majority in number, representing two-thirds in value of the creditors present and voting at a meeting of creditors, approve the compromise or arrangement and the compromise or arrangement has been sanctioned by the court.

[15] Pacific’s Affected Creditors, in both number and value, voted in favour of the Plan thereby satisfying the first requirement of s. 6 of the CCAA. The Monitor has confirmed that 98.4% in number and 97.2% in value of the Affected Creditors voted in favour of the Plan.

[16] As the voting requirement under s. 6 of the CCAA has been satisfied, I must determine whether to approve and sanction the Plan.

[17] The criteria I must consider in determining whether to sanction a CCAA plan are as follows:

a) There must be strict compliance with all statutory requirements; b) All materials filed and procedures carried out must be examined to determine if anything has been done or purported to have been done which is not authorized by the CCAA; and c) The plan must be fair and reasonable.

[18] I am satisfied on the record before me that there has been strict compliance with the statutory requirements of the CCAA.

[19] I am also satisfied that throughout the course of these proceedings the applicants have acted in good faith and with due diligence and they have strictly complied with the requirements of the CCAA and the orders of this Court. This is confirmed in the reports of the Monitor.

[20] I have concluded that the Plan is fair and reasonable because it represents a reasonable and fair balancing of the interests of all parties in light of the other commercial alternatives available. In assessing the Plan’s fairness and reasonableness I am guided by the objectives of the CCAA which are “to enable compromises to be made for the common benefit of the creditors and of the company, particularly to keep a company in financial difficulties alive and out of the hands of liquidators”. Reorganization, if commercially feasible, is in most cases preferable to liquidation.

[21] The factors that I have considered in concluding that the Plan is fair and reasonable include the following:

a) The claims were properly classified pursuant to s. 22 of the CCAA; b) The Plan received overwhelming support from the applicants’ creditors; c) The Monitor is of the view that the applicants’ creditors would be worse off if the Plan is not sanctioned; d) The Plan appears to be the best alternative available under the current circumstances; e) There is no oppression of the rights of the applicants’ creditors under the Plan; f) Since the applicants’ creditors are not being paid in full there is no unfairness to the applicants’ shareholders. Their treatment is consistent with the provisions of the CCAA; g) The Plan is in the public interest as it continues the Pacific Group as a going-concern thereby preserving employment for thousands of people and generating economic activity in the many local communities in which it operates.

[22] For all of these reasons I am satisfied that the Plan should be sanctioned.

Should the third party releases be approved?

[23] It is well established that courts have jurisdiction to sanction plans pursuant to the CCAA that contain releases in favour of third parties. Courts will generally approve third party releases in the context of plans of arrangement where the releases are rationally tied to the resolution of the debtor’s claims and will benefit creditors generally. I am satisfied in this case that the third party releases should be approved. In arriving at this conclusion I have considered the following factors:

a) Whether the parties to be released from claims are necessary to the Restructuring Transaction; b) Whether the claims released are rationally connected to the purpose of the Plan and necessary for it to succeed; c) Whether the Plan would fail without the releases; d) Whether the third parties being released contributed in a tangible and realistic way to the Plan; e) Whether the releases benefit the debtors as well as the creditors generally; f) Whether the creditors who voted on the Plan had knowledge of the nature and effect of the releases; and g) Whether the releases are fair and reasonable and not overly broad.

[24] The releases were negotiated as part of the overall framework of the compromises contained in the Plan. They facilitate the successful completion of the Plan and the Restructuring Transaction. The releases are a significant part of the various compromises that were required to achieve the Plan and are a necessary element of the global consensual restructuring of the applicants. The releases are therefore rationally related to the purpose of the Plan and are necessary for the successful restructuring of the applicants. They were also well-publicized and there does not appear to be any objections to them.

[25] For these reasons the third party releases are approved.

Should there be a stay of proceedings of the other Non-Applicant parties?

[26] Section 11 of the CCAA provides the court with authority to impose a stay of proceedings with respect to non-applicant parties. In determining whether to grant the Non-Applicant Stay requested I must be satisfied that it is fair and reasonable in the circumstances. I am satisfied that I should grant the Non-Applicant Stay for the following reasons:

a) A significant portion of the value of the Pacific Group is held in the Non-Applicants and their business and operations are significantly intertwined and integrated with those of the applicants. b) The exercise of the rights stayed by the Non-Applicant Stay which arise out of the applicants’ insolvency or the implementation of the Plan would have a negative impact on the applicants’ ability to restructure, potentially jeopardizing the success of the Plan and the continuance of the Pacific Group; c) The granting of the Non-Applicant Stay is a condition of the Plan. If the applicants are prevented from concluding a successful restructuring with their creditors, the economic harm would be far-reaching and significant; d) Failure of the Plan would be even more harmful to customers, suppliers, landlords and other counterparties whose rights would otherwise be stayed under the Non-Applicant Stay; and e) If the Plan is approved, the applicants will continue to operate for the benefit of all of their stakeholders, and their stakeholders will retain all of their remedies in the event of future breaches by the applicants or breaches that are not related to the released claims.

[27] For these reasons the Non-Applicant Stay is granted.

Should the stay period be extended to October 31, 2016?

[28] The applicants have requested an extension of the stay period until and including October 31, 2016. The applicants anticipate that this extension will give them sufficient time to complete all of the transactions, documents and steps required to implement the Plan and to emerge successfully from these CCAA proceedings.

[29] I am satisfied that under the circumstances the stay extension requested is appropriate. I am prepared to grant the requested stay extension for the following reasons:

a) The applicants have made substantial progress towards completion of the Restructuring Transaction; b) The applicants require the ongoing benefit of the stay proceedings in order to complete the CCAA proceedings including the implementation of the Plan; c) The applicants intend to implement the Plan as expeditiously as possible; d) The requested extension is not overly lengthy and avoids the additional time and expense that would be incurred if the applicants are required to return to court in the interim; e) The applicants’ cash flow forecast projects that they will have access to all necessary financing during the extended stay period; f) The applicants have acted in good faith and with due diligence towards the completion of the Restructuring Transaction and the implementation of the Plan; and g) The Monitor, the Ad Hoc Committee, the steering committee of Bank Lenders and the Plan Sponsor all support the requested stay extension.

[30] A stay is therefore granted up to and including October 31, 2016.

Conclusion

[31] For the reasons outlined above the applicants’ motion is granted.

[32] It should be noted that the parties to the Restructuring Support Agreement reserve whatever rights they may have under that agreement following the sanction of the Plan. Nothing contained in the orders granted today, or s. 6.3 (a) of the Indemnity Agreement approved thereby, is a determination of what those rights may be.

HAINEY J. Released: August 29, 2016

Footnote

[1] I have used the same defined terms in my reasons for judgment as are contained in the applicants’ factum.