Case 17-10015-KJC Doc 329-1 Filed 03/07/17 Page 1 of 21 Exhibit 1 Declaration of Douglas Friske RLF1 17134249v.1
Case 17-10015-KJC Doc 329-1 Filed 03/07/17 Page 2 of 21 UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE ) In re: ) Chapter 11 ) BONANZA CREEK ENERGY, INC., et al., 1 ) Case No. 17-10015 (KJC) ) Debtors. ) (Jointly Administered) ) DECLARATION OF DOUGLAS FRISKE IN SUPPORT OF THE DEBTORS FIRST AMENDED JOINT PREPACKAGED PLAN OF REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE I, Douglas J. Friske, hereby declare under penalty of perjury: 1. I am a Managing Director at Willis Towers Watson PLC ( Willis Towers Watson ). In September 2016, Bonanza Creek Energy, Inc. ( Bonanza ), one of the above captioned debtors and debtors in possession (the Debtors ) engaged Willis Towers Watson to provide compensation consulting services before and following the commencement of these chapter 11 cases. I am familiar with the pre- and postpetition structure of the Debtors compensation plans as well as the structure of the Debtors proposed emergence equity program the Management Incentive Plan (the MIP ) as outlined in the Debtors First Amended Joint Prepackaged Plan of Reorganization Under Chapter 11 of the Bankruptcy Code, filed on February 3, 2017 (the Prepackaged Plan ), and Exhibit 6 to the Notice of Filing of Plan Supplement, filed on February 3, 2017 (the MIP Plan Supplement ). 1 The Debtors and debtors in possession in these cases and the last four digits of their respective Employer Identification Numbers are: Bonanza Creek Energy, Inc. (0631), Bonanza Creek Energy Operating Company, LLC (0537), Bonanza Creek Energy Resources, LLC (6378), Holmes Eastern Company, LLC (5456), Rocky Mountain Infrastructure, LLC (6659), Bonanza Creek Energy Upstream LLC (6378) and Bonanza Creek Energy Midstream, LLC (6378). The Debtors mailing address is 410 17th Street, Suite 1400, Denver, Colorado 80202. 1
Case 17-10015-KJC Doc 329-1 Filed 03/07/17 Page 3 of 21 2. I submit this declaration (the Declaration ) on behalf of Willis Towers Watson in support of the Prepackaged Plan. Except as otherwise indicated, I have personal knowledge of all facts in this declaration, based on my review of the Debtors operations and finances, my research into compensation practices for companies in the energy industry and those that have recently filed for chapter 11 protection, and information supplied to me by members of the Debtors management team and the Debtors other advisors. If called upon to testify, I could and would testify competently to the facts and opinions set forth herein. 3. I have been asked to provide an opinion on behalf of the Debtors concerning the reasonableness of the MIP. To assess the reasonableness of the MIP, I directed a team at Willis Towers Watson to compile data on incentive plans from both peer companies as well as companies that have recently emerged from chapter 11 restructurings. I reviewed these findings and concluded that the Debtors MIP is reasonable and consistent with market practice, both for companies in the exploration and production industry and those in chapter 11. Each of the relevant points of comparison, including the MIP Pool, Emergence Grant Pool, Emergence Grant Vehicles, Emergence Grant Vehicle Weighting, and Change in Control (each as described more fully below), are in-line with market practice. Background and Qualifications 4. I received my Bachelor s degree in Finance from the University of Illinois in 1986. After working at Allstate and Chubb Insurance Companies, I returned to school at Northwestern University. I received a Master s degree in Management from Northwestern University s J.L. Kellogg Graduate School of Management in 1990. Since that time, I have been employed by Willis Towers Watson (effective January 5, 2016, Willis and Towers Watson have formally merged to form Willis Towers Watson). 2
Case 17-10015-KJC Doc 329-1 Filed 03/07/17 Page 4 of 21 5. Willis Towers Watson is an international professional services firm that offers a wide variety of services to public and private clients, including expert analysis of executive and management compensation. Willis Towers Watson designs and delivers solutions that manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Willis Towers Watson focuses on four key business segments: corporate risk and broking, human capital and benefits, exchange solutions, and investment, risk and reinsurance. 6. My responsibilities at Willis Towers Watson have primarily involved consulting to large companies, specifically with regard to executive compensation. I have worked with numerous Fortune 1000 companies, and have participated in the development and design of hundreds of management and employee incentive plans for companies inside and outside of bankruptcy. 7. I am frequently retained by large companies to advise them on their employee compensation strategies, programs, and pay levels. I am also retained by companies performing specific searches for management personnel, for which I provide guidelines on general market practice and the level and form of current market compensation for those positions. 8. I am highly experienced in executive, management, and employee compensation matters with over 26 years of experience in the field. During this time, I have been the lead or supporting employee compensation expert in more than 40 bankruptcy cases, and have frequently testified as to the reasonableness of a variety of postpetition compensation arrangements. Specifically, I have been involved in the review and design of key employee incentive plans, MIPs, and other similar-type plans in the chapter 11 cases of, among others, American Airlines, AMF, Breitburn, Conexant, Energy Future Holdings, Keystone Automotive, Longview Power, 3
Case 17-10015-KJC Doc 329-1 Filed 03/07/17 Page 5 of 21 Midstates, Penn Virginia, RadioShack, Reader s Digest Association, Sabine Oil & Gas, Samson Resources, Sbarro, School Specialty, and TOUSA. Willis Towers Watson s Involvement with the Debtors 9. Since Willis Towers Watson was retained by Bonanza in September 2016, I have familiarized myself with the Debtors operations and unique business and restructuring challenges. At the start of our engagement, Willis Towers Watson discussed with the Debtors and their advisors the Debtors operational history, financial performance, restructuring process, and various issues regarding the Debtors workforce and employee programs. 10. During the course of Willis Towers Watson s engagement, my team and I provided input, advice and relevant market data to Bonanza s management team and the compensation committee of its board of directors with respect to the MIP design, and the Debtors performed significant due diligence in developing the MIP. The primary goal in the course of these interactions with the Debtors was to provide an independent assessment of the Debtors MIP that drew directly upon relevant market data as well as my experience in designing comparable programs for similarly-situated companies. Overview of the Management Incentive Program 11. The Debtors initiated their bankruptcy proceedings in January 2017, and in connection with their expected emergence as a going concern, the Debtors are seeking Court approval of the equity-based MIP as outlined in the MIP Plan Supplement. The MIP contains the following primary design features: (a) (b) MIP Pool: The MIP will reserve 10% of the new equity of the Company on a fully-diluted basis. Emergence Grant Pool: 40% of the MIP Pool (i.e., 4% of the new equity) shall be allocated to employees during these Chapter 11 cases. As desired, the Company also has flexibility to grant new equity from the 4% MIP Pool to future employees who might get hired into open positions subject 4
Case 17-10015-KJC Doc 329-1 Filed 03/07/17 Page 6 of 21 to the discretion of the existing board of directors. Allocation of emergence equity awards to employees are in the sole discretion of the compensation committee of the current board of directors of Bonanza, subject to the reasonable consent of supporting noteholders. Emergence equity allocations will be granted to employees on the plan effective date (c) (d) (e) Emergence Grant Vehicles: The Emergence Grants shall be (i) 50% in the form of stock options, with a 10-year term struck at plan value and (ii) 50% in the form of restricted stock units; and in each case shall vest onethird on each of the first three anniversaries of the plan effective date. Change in Control: The Emergence Grants shall fully accelerate on a Change in Control, unless they are continued or assumed by the Company or the acquirer or are substituted or replaced by the acquirer with substantially equivalent terms and value. Future Grants: All future grants under the MIP shall be determined by the compensation committee of the board of directors of the Company following the plan effective date. Analysis of the MIP 12. To assess the reasonableness of the design of the MIP, a critical initial step in this analysis was to define relevant market comparators. As such, I analyzed the equity programs of three groups of companies that are similarly situated to the Debtors. 13. First, before Willis Towers Watson was engaged, the Debtors had developed, and the Compensation Committee of the Board of Directors had approved, a set of 13 peer companies (the Peer Companies ) operating in the oil and gas exploration and production industry for purposes of benchmarking compensation programs. It is my understanding that the Debtors selected this group in light of a number of factors, including scope of operations and industry relevance. Importantly, I understand these companies are reasonably likely to compete with the Debtors for executive talent. The Peer Companies include: Bill Barrett Corp., Carrizo Oil & Gas Inc., Diamondback Energy, Inc., Gulfport Energy Corp., Halcón Resources Corporation, Newfield Exploration Co., Northern Oil & Gas, Inc., PDC Energy, Inc., QEP Resources, Inc., Rex Energy Corporation, SM Energy Company, Synergy Resources Corporation, and WPX Energy, Inc. My 5
Case 17-10015-KJC Doc 329-1 Filed 03/07/17 Page 7 of 21 team and I analyzed the reasonableness of the Peer Companies, and the equity plans offered at these companies in keeping with the Debtors and the Compensation Committee s historical focus on exploration & production and energy industry practices. We concluded that the selection of the Peer Companies was reasonable for purposes of benchmarking the MIP. 14. Second, my team and I reviewed equity emergence programs authorized and approved in chapter 11 cases involving the following 15 companies ( the Chapter 11 Industry Peers ) that operate in the oil and gas industry, energy industry, or more broadly in other commodity driven industries: Applied Natural Gas Fuels, Inc., Aventine Renewable Energy Holdings, Basic Energy Services Inc., Centrus Energy Corp., Energy Partners (EPL Oil & Gas), Goodrich Petroleum, Halcon, Hercules Offshore, Inc., Midstates Petroleum Company, Inc., Overseas Shipholding Group Inc., Par Pacific Holdings, Inc., Sabine Oil & Gas, Saratoga Resources, SandRidge, and Swift Energy. 15. Third, my team and I reviewed equity emergence programs authorized and approved in chapter 11 cases involving the following 19 companies ( the Chapter 11 Size Peers ) that operate in a variety of industries, however have similar revenues a common measure of size and complexity in executive compensation analyses as the Debtors: Aventine Renewable Energy Holdings, Eagle Bulk Shipping, Inc., Energy Partners (EPL Oil & Gas), Genco Shipping & Trading Ltd., Golden Minerals, Goodrich Petroleum, GSI Group, Halcon, Hancock Fabrics, Hawaiian Telcom Holdco, InSight Health Services Holdings, Midstates Petroleum Company, Inc., Otelco Inc., Sabine Oil & Gas, Saratoga Resources, Silicon Graphics, Swift Energy, U.S. Concrete, and William Lyon Homes. 16. In conducting my analysis, I also relied upon my significant consulting experience in the analysis and design of emergence equity plans generally at other companies. Based upon the 6
Case 17-10015-KJC Doc 329-1 Filed 03/07/17 Page 8 of 21 findings of my review, it is my opinion that the general structure of the MIP comports with the equity plans among the aforementioned market comparator groups. As set forth in paragraphs 17 20, the key design features of the MIP are reasonable and consistent with market practice. 17. MIP Pool: The Debtors 10% MIP pool is consistent with the median equity pool reserve observed at the Chapter 11 Industry Peers and Chapter 11 Size Peers (who at median both reserved 10% of new common shares), and aligns with the 75 th percentile equity pool (9.8%) observed among the Peer Companies. It is important to note that we would generally expect chapter 11 emergence equity reserves to be higher than those of the Peer Companies as chapter 11 related reserves represents a full initial pool of equity, whereas the public Peer Companies equity data reflects a point-in-time equity pool. This point-in-time pool is lower (all-else-equal) as it reflects both outstanding equity awards and remaining shares available for future issuance, however does not count previously granted equity awards that have already been converted to common shares of stock (through stock option exercise or award vesting). 18. Emergence Grant Pool: The Debtors 40% emergence allocation is well in line with the Chapter 11 Industry Peers (who at median allocated 40.5% of the equity pool to emergence grants) and conservative when compared to the Chapter 11 Size Peers (who at median allocated 52.5% of the equity pool to emergence grants). 19. Emergence Grant Vehicles: The Debtors use of stock options and restricted stock units is well in line with the practices of both the Chapter 11 Industry Peers (of which 53% granted both stock options and full value shares) and the Chapter 11 Size Peers (of which 61% granted both stock options and full value shares). It s also common for the Peer Companies to use multiple equity vehicles as part of their long-term incentive structure. 7
Case 17-10015-KJC Doc 329-1 Filed 03/07/17 Page 9 of 21 20. Emergence Grant Vehicle Weighting: The Debtors 50% weighting on stock options and 50% weighting on restricted stock units is well in line with the practices of both the Chapter 11 Industry Peers (who at median had an equity mix of roughly 45% stock options and 55% full-value shares) and the Chapter 11 Size Peers (who at median had an equity mix of roughly 60% stock options and 40% full-value shares). 21. Change in Control: In my experience, it is common practice in both chapter 11 cases and in the normal course to fully accelerate awards on a Change in Control in cases where awards are not (i) continued or assumed by the Company or the acquirer or (ii) are substituted or replaced by the acquirer with substantially equivalent terms and value. 22. Based on conversations between my team and I and the Debtors senior management team, it is my understanding that equity grants made from the Emergence Grant Pool and future grants made from the MIP Pool are anticipated to be awarded to a broad group of employee participants, rather than solely to members of senior management, which is consistent with pre-petition practice. 23. I have also reviewed the Objections of the Ad Hoc Committee of Equity Security Holders of Bonanza Creek Energy, Inc. to Motion of Debtors for Entry of (I) An Order (A) Approving the Rights Offering Procedures and Related Forms, (B) Authorizing the Debtors to Conduct the Rights Offering in Connection with the Debtors Prepackaged Plan of Reorganization, and (C) Granting Related Relief and (II) An Order (A) Authorizing the Debtors to Assume the Backstop Commitment Agreement and Pay the Backstop Obligation and (B) Granting Related Relief, filed on February 3, 2017, and the Motion of the Ad Hoc Equity Committee of Bonanza Creek Energy Inc. for an Order (I) Appointing a Trustee Pursuant to Section 1104(a) of the Bankruptcy Code or (II) In the Alternative, Appointing an Examiner Pursuant to Section 8
Case 17-10015-KJC Doc 329-1 Filed 03/07/17 Page 10 of 21 1104(c) of the Bankruptcy Code, filed on February 3, 2017. In particular, I have reviewed the Ad Hoc Equity Committee s statements that prior to the commencement of their Chapter 11 proceedings, the Debtors management team owned less than 1% of the Debtors common equity and that, pursuant to the MIP, the Debtors management team will receive 10% of the new equity of the Company post-emergence, with 4.3% being granted immediately. 24. The Ad Hoc Equity Committee s assertions do not provide a complete or accurate picture of stock awards or employee ownership. For example, aggregate unvested stock awards held by the Debtors employees, measured as of February 3, 2017, constituted approximately 5.6% of outstanding common stock. The Ad Hoc Equity Committee s estimate of 1% substantially underrepresents employee holdings because 1) it includes only the few senior-most executive officers required to be named in public ownership disclosures, and 2) it fails to account for awarded but unvested shares held by those officers and other employees. The Ad Hoc Equity Committee s references to the 10% of new equity being granted under the MIP also overlook the fact that new equity pool reserve is being made available to the overwhelming majority of employees rather than solely to officers. 25. Moreover, as discussed below, there is a performance focus inherent in the MIP design, and when comparing publicly available information about pre-petition officer holdings to the equity pool reserve in chapter 11 cases, it is not uncommon to see significant differences, with the new full equity pool reserve, as a percentage of outstanding common stock, being significantly larger than pre-petition officer holdings. 26. I would also note that the Debtors emergence grants add a strong performanceorientation element, as compared to its pre-petition practices. Debtors pre-petition 2016 equity awards were made solely in the form of LTIP Units which would vest based on time served by the 9
Case 17-10015-KJC Doc 329-1 Filed 03/07/17 Page 11 of 21 recipient and were subject to a share price cap. The emergence equity grants for the Debtors similarly contain time-vesting restricted stock units, but also incorporate a 50% weighting on stock options. This introduces a performance-focus to the long-term incentive program that was previously absent from the pre-petition program, given that stock options will only provide value to a recipient if the company share price ultimately exceeds the exercise price. Conclusion 27. Based on my education, experience, and the work I have done in this case and in similar cases, I believe that the design and structure of the MIP are reasonable given the facts and circumstances of these chapter 11 cases. Pursuant to 28 U.S.C. 1746, I declare under penalty of perjury that the foregoing statements are true and correct to the best of my knowledge, information, and belief. Dated: February 23, 2017 Douglas J. Friske Managing Director Willis Towers Watson PLC 10
Case 17-10015-KJC Doc 329-1 Filed 03/07/17 Page 12 of 21 Doug Friske Managing Director Willis Towers Watson PLC Appendix A Relevant Experience/Specialization Doug Friske is recognized as one of the leading global experts in executive compensation consulting today. He has worked with companies around the world to develop executive remuneration programs that align the interests of management and owners, and provide organizations with effective means of communicating values and objectives. Many of his assignments that have been in place for more than a decade involve ongoing advisory work with outside directors and senior management. Over the course of Doug s career, he has addressed virtually all contemporary executive compensation issues including short- and longterm incentive plan design, employment contracts, change-in-control agreements, executive benefits, transaction-related pay, restructuring compensation issues and outside director pay. Doug has worked with many multinational and Fortune 500 corporations. He also has significant experience with private organizations, non-u.s.-headquartered companies and business units within public companies. He currently serves as the named compensation consultant to the board and management at companies that span a wide range of industries and revenues. In addition, Doug has significant experience with in- and out-of-court restructurings, working on over 40 cases with a recent emphasis on the E&P sector. He frequently speaks at conferences and presents on executive compensation matters, and he has published numerous articles on the topic. He is often quoted in general interest and human resources news articles in such publications as The Economist, The Wall Street Journal, USA Today and The New York Times. Role at Willis Towers Watson Doug currently serves as the Global Head of Willis Towers Watson s Talent & Reward business, which includes over 2,500 colleagues in offices around the world. Doug has served in many other leadership roles during his career, including Global Leader for Willis Towers Watson s Executive Compensation LOB. Education and Credentials Doug holds a B.S. degree in finance from the University of Illinois at Urbana/Champaign and an M.M. degree in finance and marketing from the J.L. Kellogg Graduate School of Management at Northwestern University. 11
Case 17-10015-KJC Doc 329-1 Filed 03/07/17 Page 13 of 21 Appendix B Peer Companies: Overhang (1) Current Company Undiluted Overhang Bill Barrett Corp. 8.9% Carrizo Oil & Gas Inc. 9.8% Diamondback Energy, Inc. 4.9% Gulfport Energy Corp. 4.3% Halcón Resources Corporation 11.7% Newfield Exploration Co. 6.3% Northern Oil & Gas, Inc. 9.5% PDC Energy, Inc. 5.1% QEP Resources, Inc. 8.0% Rex Energy Corporation 12.4% SM Energy Company 10.8% Synergy Resources Corporation 9.6% WPX Energy, Inc. 7.2% 25th Percentile 6.3% 50th Percentile 8.9% 75th Percentile 9.8% (1) Overhang represents the aggregate number of outstanding equity awards and shares available for future issuance as a percentage of total common shares outstanding. 12
Case 17-10015-KJC Doc 329-1 Filed 03/07/17 Page 14 of 21 Chapter 11 Industry Peers: Emergence Grants Shares Reserved as a % of Outstanding Stock Options as a % of Total Equity Emergence Grants Full-Value Shares as a % of Total Equity Emergence Grants Emergence Equity Grants as a % of Reserved Emergence Equity Grants as a % of Outstanding Company Applied Natural Gas Fuels, Inc. 10.0% 100% 0% 80.0% 8.0% Aventine Renew able Energy Holdings 10.0% 60% 40% 94.8% 9.5% Basic Energy Services Inc 10.0% 29% 71% 70.0% 7.00% Centrus Energy Corp. 11.1% 80% 20% 11.6% 1.3% Energy Partners (EPL Oil & Gas) 3.1% 59% 41% 9.4% 0.3% Goodrich Petroleum 8.0% 0% 100% 100.0% 8.0% Halcon 10.0% 67% 33% 75.0% 7.5% Hercules Offshore, Inc. 10.0% 0% 100% 8.2% 0.8% Midstates Petroleum Company, Inc. 10.0% 50% 50% 40.0% 4.0% Overseas Shipholding Group Inc. 12.8% 47% 53% 2.4% 0.3% Par Pacific Holdings, Inc. 10.8% 0% 100% 13.7% 1.5% Sabine Oil & Gas 7.0% 0% 100% 71.4% 5.0% Saratoga Resources 25.6% 100% 0% 24.4% 6.2% SandRidge 25.0% 0% 100% n/a n/a Sw ift Energy 5.5% 44% 56% 40.9% 2.3% 25th Percentile 9.3% 0.0% 37.8% 12.4% 1.4% Median 10.0% 46.5% 53.5% 40.5% 4.5% 75th Percentile 11.0% 63.1% 100.0% 74.1% 7.4% Bonanza 10.0% 50% 50% 40.0% 4.0% Bonanza %ile Ranking 50% 57% 43% 46% 46% 13
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Case 17-10015-KJC Doc 329-1 Filed 03/07/17 Page 18 of 21 Chapter 11 Size Peers: Emergence Grants Shares Reserved as a % of Outstanding Stock Options as a % of Total Equity Emergence Grants Full-Value Shares as a % of Total Equity Emergence Grants Emergence Equity Grants as a % of Reserved Emergence Equity Grants as a % of Outstanding Company Aventine Renew able Energy Holdings 10.0% 60% 40% 94.8% 9.5% Eagle Bulk Shipping, Inc. 8.9% 73% 27% 100.0% 8.9% Energy Partners (EPL Oil & Gas) 3.1% 59% 41% 9.4% 0.3% Genco Shipping & Trading Ltd. 16.0% 89% 11% 100.0% 16.0% Golden Minerals 10.0% 0% 100% 93.7% 9.4% Goodrich Petroleum 8.0% 0% 100% 100.0% 8.0% GSI Group 8.0% 0% 100% 14.4% 1.1% Halcon 10.0% 67% 33% 75.0% 7.5% Hancock Fabrics 14.4% 66% 34% 52.1% 7.5% Haw aiian Telcom Holdco 13.8% 0% 100% 35.1% 4.8% InSight Health Services Holdings 11.1% 100% 0% 20.0% 2.2% Midstates Petroleum Company, Inc. 10.0% 50% 50% 40.0% 4.00% Otelco Inc. 11.1% n/a n/a n/a n/a Sabine Oil & Gas 7.0% 0% 100% 71.4% 5.0% Saratoga Resources 25.6% 100% 0% 24.4% 6.2% Silicon Graphics 11.2% 78% 22% 100.0% 12.7% Sw ift Energy 5.5% 44% 56% 40.9% 2.3% U.S. Concrete 18.8% 23% 77% 47.6% 9.0% William Lyon Homes 15.4% 66% 34% 53.0% 8.1% 25th Percentile 8.4% 5.7% 28.3% 36.3% 4.2% Median 10.0% 59.2% 40.8% 52.5% 7.5% 75th Percentile 14.1% 71.7% 94.3% 94.6% 8.9% Bonanza 10.0% 50% 50% 40.0% 4.0% Bonanza %ile Ranking 50% 41% 59% 29% 24% 17
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