A year after it closed, a deal between Quicksilver Resources of Fort Worth, TX, and Los Angeles-based BreitBurn Energy Partners LP has gone south, with Quicksilver alleging in a lawsuit that it was misled by BreitBurn with respect to plans for the partnership's ownership structure and governance.
Quicksilver filed a lawsuit in District Court of Tarrant County, TX, against BreitBurn, Randall Breitenbach, Halbert Washburn and others seeking damages, injunctive relief and a declaratory judgment. BreitBurn said it is aware of the suit and believes that its allegations are without merit. BreitBurn GP, BreitBurn Management and Provident Energy Trust are also among the defendants named in the lawsuit.
In November 2007 Quicksilver contributed certain assets and equity interests to an affiliate of BreitBurn in exchange for $750 million in cash and common units of BreitBurn. The BreitBurn units acquired by Quicksilver currently comprise approximately 41% of outstanding BreitBurn units, according to Quicksilver. Assets acquired from Quicksilver by BreitBurn as part of the combination agreement are natural gas, oil and midstream assets in Michigan, Indiana and Kentucky.
At the time the deal was seen as a boon to BreitBurn's natural gas business. BreitBurn acquired producing assets with output of 95 MMcfe/d (75.4 MMcfe/d net) from more than 5,400 producing wells. Proved reserves were estimated to be 660 Bcfe (530 Bcfe net), with a proved reserve life of 19 years. Included were related gas gathering and processing systems and Quicksilver's interests in 260,000 net undeveloped acres. The properties had total proved reserves of 539 Bcfe at year-end 2006 (see NGI, Sept. 17, 2007). The deal closed one year ago.
When Quicksilver acquired the units, all of the limited liability company interests in BreitBurn GP LLC, the general partner of BreitBurn, were held by BreitBurn Management Co. LLC. Provident indirectly held 95.5% of the limited liability company interests in BreitBurn Management, and the remaining interests were indirectly held by Breitenbach and Washburn, the co-CEOs of BreitBurn GP, Quicksilver said.
Quicksilver said it made the agreement assuming that the benefits of BreitBurn's relationship with Provident were a "significant attribute" and were integral to its business strategy. Shortly after the deal closed, Provident and BreitBurn informed Quicksilver that Provident was contemplating the liquidation of its entire interest in BreitBurn. Then in June BreitBurn purchased Provident's entire interest in BreitBurn at a premium in a transaction that was orchestrated by Breitenbach and Washburn "in a fashion that advanced their own personal interests at the expense of Quicksilver," Quicksilver said. BreitBurn simultaneously purchased the remaining interest in BreitBurn Management indirectly held by Breitenbach and Washburn.
However, according to BreitBurn, "The contribution agreement contained no specific covenant from BreitBurn with respect to Provident's continued ownership of interests in BreitBurn."
On the same day it announced this transaction, BreitBurn also said it had amended its partnership agreement so as to limit Quicksilver's voting rights, Quicksilver said. The purported amendment gave Quicksilver only half of the per-unit voting strength of BreitBurn's other limited partners and included provisions that further restricted Quicksilver's ability to replace directors of BreitBurn GP, Quicksilver said. In addition, BreitBurn eliminated the general partner economic interest, and BreitBurn did not offer Quicksilver or any other limited partner the opportunity to vote on any of these transactions or on the purported amendment to the partnership agreement, Quicksilver said.
"Our significant investment in BreitBurn in November 2007 represented a vote of confidence in BreitBurn and what it publicly stated was BreitBurn's ability to parlay its relationship with Provident to pursue value-enhancing acquisitions," said Quicksilver CEO Glenn Darden, who said the confidence was later betrayed by BreitBurn's actions.
BreitBurn said the allegations in the lawsuit had not been presented to the company before Quicksilver filed its suit. BreitBurn also maintained that Quicksilver did not previously object to amendments to the BreitBurn partnership agreement even though it had the opportunity to do so. And BreitBurn said the transactions to which Quicksilver objects were approved by the BreitBurn conflicts committee, which is composed of independent directors.
Further, BreitBurn said that when Quicksilver acquired its BreitBurn units, limited partners did not have the right to elect members of the BreitBurn general partner board. And when BreitBurn acquired interests in its general partner from Provident and BreitBurn Corp. in June, the voting rights of all of the limited partners were expanded, not restricted, to provide all of the limited partners with new rights to nominate and vote in the election of directors of BreitBurn's general partner.
"Prior to the purchase by BreitBurn of its general partner in June 2008...Washburn and Breitenbach (through their wholly owned company, BreitBurn Corp.) owned a small indirect interest in BreitBurn's general partner, giving them partial control as well as the right to receive distributions," BreitBurn said. "As part of BreitBurn's purchase of its general partner from Provident...Washburn and Breitenbach exchanged their indirect interest in the general partner for BreitBurn common units at the same price paid to Provident. However, while Provident received cash...Washburn and Breitenbach received BreitBurn common units, which they continue to hold today. The result is that BreitBurn now owns 100% of its general partner."
Quicksilver is seeking all of its damages resulting from the defendants' alleged fraudulent conduct, violations of securities laws of Texas, breaches of contracts, and breach of the duty of good faith and fair dealing; exemplary damages; injunctive relief prohibiting BreitBurn from limiting Quicksilver's voting rights in future director elections; and a declaration that, among other things, Quicksilver may vote all of its approximate 41% of the outstanding units of BreitBurn in the election of directors of BreitBurn as well as all matters requiring a vote of BreitBurn unitholders.
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