FERC approves transfer of two AES coal plants to NewCo

FERC on June 8 approved a request by bankrupt AES Eastern Energy LP to transfer control of the coal-fired Cayuga and Somerset power plants to NewCo, an entity formed by the financial entities that have owned the plants for some time.

On April 13, AES Eastern Energy, AES Somerset LLC and AES Cayuga LLC filed the joint request for transfer along with Somerset Cayuga Holding Co. Inc., and its wholly-owned subsidiaries (NewCo), under section 203(a)(1)(A) of the Federal Power Act (FPA). Under the transaction, the AES Entities will transfer two coal-fired electric generation facilities, associated interconnection facilities, and certain other assets to NewCo, or one of NewCo’s to-be formed wholly owned subsidiaries.

The transfer was approved June 8 by Steve Rodgers, Director, FERC’s Division of Electric Power Regulation–West.

The AES Entities are indirect subsidiaries of the AES Corp. (NYSE: AES). In New York, the AES Entities indirectly own or lease interests in six electric generation facilities, including two that are leased by AES Eastern. AES Eastern, a Delaware limited partnership, is a public utility under the FPA and an exempt wholesale generator (EWG) that leases and operates two coal-fired generation facilities, Somerset and Cayuga, both located in the New York Independent System Operator (NYISO) control area. Somerset consists of a single coal-fired generating unit with a summer rating of 678 MW. Cayuga has two coal units with a combined summer rating of 313 MW.

AES Somerset is an EWG formed for the purpose of providing operation and maintenance services to its affiliate, AES Eastern, with respect to the Somerset facility. AES Somerset does not make power sales decisions or dispatch decisions with respect to the Somerset facility. AES Cayuga is an EWG formed to provide operation and maintenance to its affiliate, AES Eastern, with respect to the Cayuga facility.

New York State Electric & Gas and its affiliate NGE Generation previously owned Somerset and Cayuga. In 1998, AES NY LLC entered into an Asset Purchase Agreement whereby AES NY agreed to buy six generation facilities, including Cayuga and Somerset, from NYSEG as part of NYSEG’s divestiture of generating capacity in the state of New York. AES NY then assigned its rights and interests in these facilities to AES Eastern.

To finance the acquisition of Cayuga and Somerset from NYSEG, AES Eastern entered into a 1999 leveraged lease transaction with 12 owner trusts (Owner Trusts) and the predecessor of Deutsche Bank Trust Co. Americas, as Trustee. The twelve Owner Trusts each issued a series of debt securities to the predecessor to the Trustee, which twelve series aggregated $550m of original principal (collectively, Notes). The Notes are secured by first priority security interests in and liens on the Somerset and Cayuga facilities, in addition to certain other rights and property described in the related indentures.

All the Notes and securities were conveyed to two pass-through trusts (Trusts) and the predecessor to the Trustee, which issued, collectively, $550m of original principal in pass through certificates (collectively, Certificates). The $550m raised through the sale of the Certificates was used to finance the Trusts’ purchase of the Notes issued by the Owner Trusts and represented the entire debt capital utilized in the 1999 Transaction. As a result of the Transaction, the holders of these Certificates (Certificate Holders) will own 100% of NewCo’s outstanding equity.

Newco plans to operate plants with current workforce

Upon consummation of the Transaction, 100% of NewCo’s outstanding common stock will be transferred to and owned by the Certificate Holders pursuant to such Certificate Holders’ percentage ownership in the outstanding Certificates. Applicants told FERC that NewCo will use existing employees at the Somerset and Cayuga facilities to manage day-to-day operation. Applicants add that, of the five entities that will own 10% or more of NewCo’s stock, only two, Carlyle and J.P. Morgan, own interests in energy affiliates.

In December 2011, the AES Entities, and several of their affiliates (collectively, AES Debtors), each commenced a voluntary case under chapter 11 of title 11 of the U.S. Bankruptcy Code. On Jan. 4, following negotiations, the AES Debtors and a majority of the Certificate Holders entered into a non-binding term sheet (Term Sheet) resolving issues regarding the 1999 Transaction and providing for, among other things, the sale of the Somerset and Cayuga facilities and related assets necessary for operation of these facilities, to NewCo, subject to higher and better offers in any auction process. No qualified bidders were identified by the March 19 deadline and as a result, no auction was conducted. On April 11, the Bankruptcy Court approved the sale to NewCo.

Applicants stated that NewCo, through its wholly-owned subsidiaries, will acquire approximately 922 MW of generation capacity, the aggregate gross capacity of the Somerset and Cayuga facilities. They said that the 606 MW held by Noble, applicants’ affiliate, is wind generation. J.P. Morgan has a passive interest in Noble Environmental I Power (Noble).

Applicants stated that the remaining assets owned or controlled by affiliates to NewCo in NYISO, the market in which the Somerset and Cayuga facilities are located (and thus the relevant market for the transaction), represents approximately 96 MW. Therefore, applicants state that NewCo’s affiliates currently own or control about 204 MW of generation in NYISO.

Applicants said that NewCo’s affiliates own or control about 30.7 MW of generation capacity potentially available for import into the NYISO market (accounting for import limitations into NYISO). When combined, NewCo’s pre-transaction market share in NYISO is less than 0.53%, and following consummation of the Transaction, NewCo’s share will be less than 2.7%.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.