AES Eastern Energy LP won court approval March 2 for a settlement that paves the way for bondholders to potentially buy the company’s two operating power plants, the coal-fired Somerset and Cayuga facilities in upstate New York.
Judge Kevin Carey, out of the U.S. Bankruptcy Court for the District of Delaware, signed off on the settlement at a court hearing, along with bid procedures for this possible auction. What the judge approved March 2 was a “stalking horse” bid procedure for the plants, where an entity controlled by the bondholders called Newco has lodged an upfront bid that other bidders would have to beat. Any competing bidders have to lodge a paper bid by March 19, with a live auction to be held March 26 if any competing bids are lodged. The auction would be at the New York offices of Weil, Gotshal & Manges LLP. A March 28 hearing to review the sale results would be held at the bankruptcy court.
At least two factors make Newco the likely winning bidder and make the need for an actual auction to take place seem unlikely. For one thing, the judge’s order said that Newco is the only entity so far to lodge a firm bid. Also, Newco in this sale process will be allowed to “credit bid” up to $600m that Newco’s backers hold as a secured claim against the bankruptcy estate, which means an outside bidder interested in the assets will have to bid at least that much more in cash to win these assets. The initial stalking horse bid by Newco would be only $240m of the secured claim, which means Newco could keep going up in an auction to the full $600m secured claim.
Besides the power plants themselves, other assets to be sold in the auction include coal stockpiled at each plant site and the Somerset Railroad, which serves the Somerset power plant.
AES Eastern is a unit of AES Corp. (NYSE:AES), which on Dec. 30, 2011, put AES Eastern into Chapter 11 protection so that the two active coal-fired plants of that subsidiary can be sold. Various AES Eastern Energy affiliates filed for Chapter 11 protection, including AES Cayuga, AES Greenidge, AES Hickling and AES Jennison.
AES Eastern noted in a first-day court filing that the debtors control, directly or indirectly, six coal-fired power plants in New York, with only two of them currently active, with electricity from the plants sold into the wholesale market. The six plants are Somerset and Cayuga, which are active, and the inactive Greenidge, Westover, Hickling and Jennison facilities.
In another first-day filing, Peter Norgeot, the president of AES NY, the general partner of AES Eastern, said a settlement of issues has been worked out with various parties. Norgeot said the companies are out of options and out of time because they are losing money and a nearly year-long process to sell assets has not met with success.
With the complicated leveraged lease structure for the assets of the company and with the current economic environment, an out-of-court settlement of issues or a sale is not possible, Norgeot added. The companies have pursued a deal with an “ad hoc” committee of holders of a majority of the pass-through certificates issued by the owner-lessors of the Cayuga and Somerset power plants, which are the only active plants for the companies. The settlement will mean the two plants will have a new owner and can continue as going concerns for the future. Under the sale deal, an entity controlled by the certificate holders, Newco, would potentially acquire Somerset and Cayuga in a bankruptcy sale.
Both Cayuga and Somerset are “modern” coal plants equipped with flue gas desulfurization equipment that allows them to burn relatively cheap medium and high-sulfur coal and to achieve relatively low fuel costs compared with competitors, Norgeot said. They are among the largest facilities in the New York ISO. Somerset is a one-unit plant, dating from 1984, with 675 MW of capacity. The two-unit Cayuga plant, dating from 1955 and 1958, has 306 MW of net capacity.
On the other hand, Jennison and Hickling were retired in 2002. In March 2011, to save money, AES put Westover and Greenidge into “protective lay-up” status, which means that although they are expected to be offline for some time, they are being maintained and can be restarted. Westover has two existing units, 7 and 8, with a combined net capacity of 126 MW, and Greenidge has two existing units, 3 and 4, with a combined 161 MW of net capacity.