As promised, Homer City Funding LP, which is holding the debt for the coal-fired, 1,884-MW Homer City power plant, filed on Nov. 7 for Chapter 11 reorganization at the U.S. Bankruptcy Court for the District of Delaware.
Since a 2001 sale-leaseback transaction, Edison International’s (NYSE: EIX) EME Homer City Generation LP affiliate had been leasing the power plant from affiliates of General Electric Capital. But recently, factors like low power sales prices and the need to install up to $750m worth of new SO2 scrubbers on two of the three Homer City units, pushed EME Homer City into financial trouble. The bankruptcy filing is a mechanism to deal with the debt associated with the plant and to put the plant under new management. On Nov. 7, Homer City Funding filed for both Chapter 11 protection and it filed a consensual reorganization plan among the parties, which should mean this “prepackaged” case can be quickly disposed of.
Homer City Funding is a Delaware limited liability company and is wholly owned by a charitable remainder trust. It was formed to issue the Existing Bonds, which are secured by certain secured lease obligation notes, known as the Lessor Notes, under a financing arrangement entered into in 2001 for the plant.
The Homer City plant is located in Homer City, Pa, approximately 45 miles from Pittsburgh in the PJM Interconnection LLC (PJM) west hub market, with a nameplate capacity of 1,884 MW. It benefits from direct transmission access to both PJM and the New York Independent System Operator (NYISO) through high voltage lines that interconnect through a switchyard located on the facility site. Edison Mission Marketing & Trading Inc. (EMMT), an affiliate of EME Homer City, sells energy and capacity from the facility under established terms, including price, duration, and quantity, arranged with customers through a combination of bilateral agreements (resulting from negotiations or from auctions), forward energy sales and spot market sales, a bankruptcy filing said.
The filing noted that the Homer City plant is subject to both the Cross-State Air Pollution Rule (CSAPR) and the Mercury and Air Toxics Standards (MATS). A federal court recently rejected CSAPR, leaving the older Clean Air Interstate Rule (CAIR) in its place.
“Compliance with MATS and, potentially, any more stringent rule that replaces CAIR, requires significant capital improvements to the Facility through the installation of flue gas desulfurization retrofit scrubber systems (‘FGDs’) to Units 1 and 2 of the Facility,” said the bankruptcy filing. “Construction of the FGDs commenced during the second quarter of 2012 to meet the anticipated regulatory deadlines under CSAPR prior to its vacatur. The cost of construction and installation of the FGDs is currently estimated to be approximately $700 to $750 million. EME Homer City does not have sufficient capital and does not expect to generate sufficient funds from operations to fund installation of the FGDs. Moreover, the agreements entered into pursuant to the 2001 Transaction limit EME Homer City’s ability to incur debt. As a result, installation of the FGDs, and in turn the future viability of the Facility, is dependent on funding from other parties.”
EME Homer City couldn’t raise money for new scrubbers
During the summer and fall of 2011, EME Homer City tried to raise capital to fund construction of the FGDs. It proposed a transaction whereby $300m in additional debt would be issued under the documents governing the current organizational and contractual structure of the facility. Additional funds were to be raised from a new investor that would acquire up to 100% of the equity interests in an entity to which EME Homer City would assign its rights and obligations under the current documents governing the organizational and contractual structure of the facility. “EME Homer City was unable to find an investor willing to engage in the proposed transaction or negotiate a similar transaction on acceptable terms,” the filing noted.
In the fourth quarter of 2011 and continuing into 2012, the market for energy experienced depressed pricing as a result of, among other things, changes in demand for power during the economic slowdown, the advent in the market of cheap natural gas from shale reserves resulting in lower natural gas prices, and increased use of demand response technology. “The impact of the reduction in energy prices on EME Homer City was compounded by the fact that EME Homer City operates without long-term power purchase agreements and therefore is regularly subject to market forces that cause significant and unpredictable price fluctuations over relatively short periods of time,” said the filing. “As a result, EME Homer City faced financial pressure to generate sufficient cash flows to meet its obligations, including the Facility lease payments to the Owner Lessors, and in fact failed to make the portion of the Facility rent payment that satisfies EME Homer City’s obligation to pay equity rent to the Owner Lessors on April 1, 2012, which remains unpaid. Further, EME Homer City disclosed in its Form 8-K, filed with the SEC on May 3, 2012, that ‘[a]bsent a working capital loan or other infusion of cash, [EME] Homer City is not expected to have sufficient cash flow to meet its operating expenses and other obligations either in the near term or during 2012, including the rent payment due on October 1, 2012.’ EME Homer City also attached financial projections to the Form 8-K, supporting its inability to make its Facility lease rent payment due on October 1, 2012. EME Homer City failed to make this October 1, 2012 Facility lease payment, which remains unpaid.”
Reorganization plan leaves plant under new ownership
The current reorganization plan is the result of lengthy negotiations among the “Plan Support Parties,” said the filing. “Pursuant to the Plan, on the Effective Date, a series of restructuring transactions will occur that will establish the Reorganized Debtor as the sole entity owning the Facility and certain real and personal property associated with the Facility. Among other things, the Owner Lessors and the Debtor will merge into NewCo, which, after such merger, will become the Reorganized Debtor. In addition, certain interests in the Facility not currently owned by the Owner Lessors but held by EME Homer City, will be transferred to the Reorganized Debtor, including EME Homer City’s leasehold interest in the Facility, its fee simple interest in the Facility site, and certain other rights and property used to operate the Facility. The Reorganized Debtor will be jointly owned by subsidiaries of GE Capital and by MetLife, will issue New Secured Bonds in exchange for the Existing Bonds, and will enter into a new Working Capital Facility. The Reorganized Debtor has also entered into an agreement with a third-party operator for the operation and maintenance of the Facility.”
The filing added: “The Debtor submits that the restructuring transactions contemplated by the Plan will improve the financial health and future operational viability of the Facility, provide for a capital investment in necessary environmental emissions control technology for the Facility, simplify the ownership and capital structure associated with the Facility, and improve liquidity because, under the New Secured Bonds, the Reorganized Debtor is relieved of its obligation to make principal and cash interest payments on its bond debt through and including April 1, 2014.”
Homer City Funding has requested a Dec. 6 court hearing in this case.
“The most critical and complex task required to effectuate a successful reorganization – the negotiation and formulation of a chapter 11 plan of reorganization – has already been accomplished prior to the Petition Date,” the filing said. “Thus, the Debtor respectfully submits that there is no reason to delay consideration of the Disclosure Statement and confirmation of the Plan. It is in the best interests of the Debtor’s estate and creditors to proceed with the confirmation process as expeditiously as possible.”
The disclosure statement filed along with the Chapter 11 reorganization plan noted: “[I]t is expected that Units 1 and 2 of the Facility will not be operating during limited periods in the construction of the FGDs, including a multiple-week period in late 2013 and early 2014, although one of Units 1 and 2 is expected to be operational at any given time during this period. The completion schedule under the EPC Contract, which is set forth on Schedule 4.04(f)(ii) of the New Secured Bond Indenture, currently contemplates that the construction of the FGDs will be completed in August 2014. However, such completion date may be extended, subject to applicable permitting requirements and receipt of required consents.”
NRG Energy affiliate to take over Homer City operations
The disclosure statement also offered details about what party will run the plant over the long term. “Following an arm’s length negotiation, NewCo executed an Operations and Maintenance Agreement on September 21, 2012, with NRG Homer City Services LLC, a subsidiary of NRG Energy, Inc., a nationally-recognized wholesale power generation company, to take over operation of the Facility after the closing of the Master Transaction Agreement.”
Also, EME Homer City has entered into certain arrangements with EMMT under which EMMT sells energy and capacity from the facility into the wholesale market and provides scheduling and other related services. Upon the closing of the Master Transaction Agreement, the reorganized debtor and EMMT will enter into a certain assignment agreement pursuant to which EMMT will assign to the reorganized debtor, among other things, certain of EMMT’s rights and obligations in connection with these arrangements.
Pursuant to the assignment, the reorganized debtor will honor the day-ahead trades entered into by EMMT on behalf of EME Homer City in the ordinary course of business and will assume such trades after the closing of the Master Transaction Agreement. It is expected that the reorganized debtor, after assuming control of the facility, will contract with EMMT to perform certain of the services it performed for EME Homer City, on terms to be mutually agreed upon, although the reorganized debtor may choose to contract with a third party to perform these services.
Under the Master Transaction Agreement, the reorganized debtor will take assignment of all rights under any transactions providing for the sale of capacity which had not been fully performed as of April 13, 2012, or which continue after the closing of the Master Transaction Agreement.