Several financial vehicle affiliates of Public Service Enterprise Group (NYSE: PEG) told the Federal Energy Regulatory Commission on June 14 that it would be premature to allow Midwest Generation LLC to transfer control of two coal-fired power plants to those PSEG affiliates.
Midwest Generation, which along with parent Edison Mission Energy has been in Chapter 11 bankruptcy protection since December 2012, is working at the bankruptcy court to win an extension of time beyond July 1 to make a decision to reject or accept longstanding leases for two units at the Joliet plant and all of the Powerton plant. The court has scheduled a June 27 hearing on that issue.
In the meantime, preparing for the possibility of losing the leases on these generating facilities with the PSEG affiliates, Midwest Generation (MWG) on May 6 applied with FERC to let it turn back these facilities to the PSEG-affiliated owners. Those PSEG affiliates have names like Nesbitt Asset Recovery Series P-1 (f/k/a Powerton Trust I) and Powerton Trust II.
“The Applicant, a debtor in an ongoing Chapter 11 bankruptcy proceeding, asks the Commission to authorize its disposal of control over the electric generating facilities in Illinois,” said the June 14 PSEG filing. “The Owner-Lessors protest the Applicant’s unwarranted request for expedited action and respectfully request that the Commission reject the Application in its entirety. In the alternative, the Commission should defer consideration on the Application until multiple threshold transactional, operational, and legal issues implicated by the Application, that could negatively affect the public interest, are resolved.”
MWG told FERC its leases “will be deemed rejected” on July 1, but that is a possibility, not a certainty, the PSEG companies said. “The questions of if and when the leases can be rejected under bankruptcy law will be contested and fully litigated in the Bankruptcy Court,” they added. “This legal dispute is unlikely to be resolved by July 1, 2013. Until that litigation is finally resolved, no rejection will occur.”
Moreover, the commission cannot resolve the application on the merits (expedited or otherwise) until it knows whether the proposed counterparty (when finally identified) is qualified and willing to take control of the subject facilities, the PSEG companies added. “The Applicant has not identified such a counterparty,” they said. “In fact, the Applicant acknowledges that it submitted the Application unilaterally and that Applicant ‘makes no representation with respect to the satisfaction by the Owner-Lessors of any obligations they may have under the FPA.’”
In June 2000, under Section 203 of the Federal Power Act (FPA) and Part 33 of the commission’s regulations, the commission authorized, among other things: the sale by MWG to the owner-lessors of certain FERC-jurisdictional facilities associated with the Powerton Station, a 1,538 MW coal-fired facility located in Tazwell County, Ill., and Units 7 and 8, comprising 1,036 MW, of the Joliet Station, a 1,358 MW coal-fired facility located Will County, Ill.; and the lease of these facilities back to MWG. The leases for the Powerton facility expire on May 24, 2034, and the leases for Joliet 7 and 8 expire on Aug. 24, 2030.
Third coal unit at Joliet something of a sticking point
The PSEG companies said that among other things, there is an issue with the fact that the third coal unit at Joliet is not subject to the sale-leaseback deal. “In the Application, the Applicant states that it will retain ownership and control of a third unit at such facility (unit 6). At the present time, the Joliet 7 and 8 units, which are the subjects of the Application, cannot be segregated and operated separately (from unit 6) without the involvement of the Applicant. By way of example, all coal deliveries and coal handling occur at unit 6, and the Applicant’s ash disposal runs through unit 6 as well. Without alternative arrangements for coal deliveries and ash disposal, Joliet 7 and 8 cannot operate. The Applicant has not addressed this issue at all.”
The PSEG companies added: “For reliable operation of Joliet 7 and 8 to continue, the Applicant and any future operator of those units must agree on how to jointly maintain and use the facilities’ integrated systems, or, alternatively, to separate these systems so that the units can be separately operated. To accomplish this, the parties must perform due diligence regarding operating procedures, processes, and personnel expertise and reach an understanding about how separation of facilities would work.”
MWG has told its court, which is the U.S. Bankruptcy Court for the Northern District of Illinois, that there are three basic options in play.
The three choices offered by the bankrupt companies are:
- First, MWG can assume these leases. Assumption of the leases on their current terms, however, is not feasible because assumption would impair stakeholder value in the face of MWG’s adjusted operating loss of $253m in 2012, scheduled rent payments in 2013 totaling $151.3m (and $560.1m during the remaining terms of the facility leases), and MWG’s obligation to fund about $445m in capital expenditures at the facilities beginning in the summer of 2013 (or consider shutting down units) to comply with certain environmental regulations.
- Second, MWG can allow the leases to be rejected on July 1. Like assumption of the leases, their rejection is an undesirable outcome because rejection impairs—if not conclusively forecloses—the debtors’ ability to facilitate continued discussions and analysis among all stakeholders to determine whether a restructuring of the MWG lease obligations can be achieved.
- Third, MWG and its stakeholders can agree on an extension of the deadline to assume or reject the leases to facilitate continued restructuring discussions in a manner that does not prejudice the debtors’ estates or the rights of their stakeholders.