8-K: Mammoth Energy Services Reaches $188.4 Million Settlement with Puerto Rico Electric Power Authority

Mammoth Energy Services has reached a settlement with the Puerto Rico Electric Power Authority (PREPA) for $188.4 million, resolving outstanding claims related to hurricane restoration work.

Summary

• Mammoth Energy Services subsidiary, Cobra Acquisitions LLC, has reached a settlement agreement with PREPA and the Financial Oversight and Management Board for Puerto Rico (FOMB).
• The settlement resolves outstanding claims related to restoration work following Hurricane Maria in 2017.
• Cobra will receive an allowed administrative expense claim of $170 million, plus $18.4 million in withheld FEMA funds, totaling $188.4 million.
• The settlement will be paid in three installments: $150 million, $20 million, and $18.4 million.
• The first $150 million is expected by August 31, 2024, or ten business days after court approval.
• The second $20 million will be paid within seven days of PREPA's plan of adjustment.
• The final $18.4 million will be paid after the resolution of appeals related to withheld FEMA funds.
• In exchange for the settlement, Cobra will release all further claims against PREPA.
• Mammoth will record a $170.7 million non-cash, pre-tax charge in Q2 2024 to reduce its accounts receivable balance.
• Mammoth intends to use a portion of the settlement proceeds to pay off its $49.3 million term credit facility with Wexford Capital LP.

Sentiment

Score: 5

Explanation: The settlement is a mixed bag. While it resolves a significant issue and provides a path to recovering some funds, the large non-cash charge and the fact that the settlement is less than half of the outstanding receivables is a negative. The uncertainty around the final payment and court approval also temper the positive aspects.

Positives

• The settlement provides a clear path to recovering a significant portion of the outstanding receivables from PREPA.
• The agreement reduces uncertainty and potential future litigation costs.
• The settlement allows Mammoth to pay off its term credit facility with Wexford Capital LP.
• The settlement provides a defined timeline for payments.

Negatives

• Mammoth will record a $170.7 million non-cash, pre-tax charge in Q2 2024, impacting profitability.
• The settlement amount is significantly less than the $359.1 million in receivables owed by PREPA as of June 30, 2024.
• The final $18.4 million payment is contingent on the resolution of appeals related to withheld FEMA funds.
• There is no guarantee that the court will approve the settlement on the indicated timeframe or at all.

Risks

• The settlement is subject to approval by the Title III Court, and there is no guarantee of approval.
• The timing of the first payment is dependent on court approval and may be delayed.
• The final $18.4 million payment is contingent on the resolution of appeals related to withheld FEMA funds, which could be delayed or not received.
• There is a risk that the Specified Municipalities may pursue further legal action related to the Specified Municipal Tax Claims.
• The indemnity obligation related to the withheld FEMA funds could create a contingent liability for Mammoth.

Future Outlook

Mammoth expects to receive $188.4 million from the settlement, which will be used to pay off its term credit facility and reduce its accounts receivable balance. The company anticipates the settlement will be approved by the Title III Court, but there is no guarantee of the timing or outcome.

Management Comments

• The Settlement Agreement was approved by the Company's Board of Directors on July 22, 2024.
• Mammoth intends to use a portion of the proceeds from the Settlement Agreement to pay off all of the outstanding amounts under its term credit facility, together with accrued and unpaid interest, and terminate the facility.

Industry Context

This settlement is significant for Mammoth as it resolves a major outstanding receivable issue related to its work in Puerto Rico. The energy services sector has faced challenges with payment delays and disputes, and this settlement provides a positive example of resolving such issues. The bankruptcy of PREPA has created uncertainty for many contractors, and this settlement provides a degree of clarity for Mammoth.

Comparison to Industry Standards

• The settlement represents a partial recovery of the outstanding receivables, which is common in bankruptcy proceedings.
• Other companies in the energy services sector have also faced challenges in recovering payments from government entities and utilities.
• The non-cash charge is a typical accounting treatment when the expected recovery is less than the outstanding receivable.
• The use of settlement proceeds to pay down debt is a common strategy to improve financial stability.

Legal Proceedings

• PREPA is currently subject to bankruptcy proceedings in the United States District Court for the District of Puerto Rico.
• Mammoth has been pursuing litigation in the Title III Court and other dispute resolution efforts seeking recovery of the amounts owed to Cobra by PREPA.
• The Specified Municipalities have asserted garnishments for certain municipal tax claims, which Cobra disputes.

Related Party Transactions

• Mammoth is required to remit up to 50% of PREPA claim proceeds to Wexford Capital LP, an affiliate of Mammoth, to reduce outstanding amounts under the term credit facility.

Stakeholder Impact

• Shareholders will be impacted by the $170.7 million non-cash charge in Q2 2024.
• Creditors, specifically Wexford Capital LP, will receive payment of the outstanding term credit facility.
• The settlement provides some certainty for employees and suppliers related to the Puerto Rico operations.

Next Steps

• The FOMB will file a motion seeking an order from the Title III Court to approve the Settlement Agreement.
• The Title III Court will hear the motion relating to the Settlement Agreement at either a non-omnibus hearing in August 2024 or at the next omnibus hearing on September 18, 2024.
• Mammoth will use a portion of the settlement proceeds to pay off its term credit facility with Wexford Capital LP.

Key Dates

Keywords

settlement, PREPA, Mammoth Energy Services, Cobra Acquisitions, Puerto Rico, FEMA, receivables, bankruptcy, litigation, credit facility