Affiliates of bankrupt Edison Mission Energy asked their bankruptcy court on July 17 to let them assume two partnerships related to gas-fired power plants in California, with the possibility that their interests in the plants might be sold later.
The motion has an Aug. 14 objection deadline and is due for hearing on Aug. 21.
In December 2012, Edison Mission Energy and many of its affiliates, though not all, sought chapter 11 protection at the U.S. Bankruptcy Court for the Northern District of Illinois. They have indicated plans to sell assets, but have not done so as yet.
Western Sierra Energy Co. and Southern Sierra Energy Co. (collectively called the “Gas Partnership Debtors” and also in chapter 11) filed the motion seeking entry of an order authorizing them to assume, respectively and as applicable, the Sycamore Cogeneration Co. General Partnership Agreement and the Kern River Cogeneration Co. General Partnership Agreement (collectively the “Gas Partnership Agreements”).
“Since the commencement of these chapter 11 cases, the Debtors and their advisors, in close consultation with their major creditor constituencies, including the official committee of unsecured creditors (the ‘Committee’) and the ad hoc group of holders of senior unsecured notes (the ‘Ad Hoc Group’) issued by debtor Edison Mission Energy (‘EME’), have been focused on considering, analyzing, and potentially pursuing strategic alternatives that will maximize value for the benefit of all stakeholders,” the motion said. “Through these initiatives, the Debtors recently have determined that exploration of a potential sale or sales of certain or substantially all of their assets, businesses, and/or business units potentially could maximize value in these chapter 11 cases.”
The filing added: “At the same time, the Debtors are actively analyzing and preparing a proposed standalone restructuring (and related business plan) to be pursued either in its own right or in parallel with any potential sale process. Importantly, the Debtors have not yet determined whether to actually commence a sale process, or what form that sale process would take. Instead, the Debtors are actively exploring the possibility and coordinating all efforts that would be necessary to implement such a process as well as a potential resulting transaction or transactions.”
EME wants its shares of these partnerships in hand, for whatever happens
A necessary first step under either an asset sale or plan of reorganization strategy is for EME’s indirect subsidiaries to assume the lucrative partnership agreements housing a significant portion of its investments, the filing said. In the event these bankrupt companies decide to engage in a standalone restructuring, the Gas Partnership Debtors can be reorganized as part of a chapter 11 plan with the assumption of the Gas Partnership Agreements already completed. Alternatively, if the debtors determine to implement a sale transaction with respect to the Gas Partnership debtors’ corporate parents, then the bankrupt companies potentially may proceed with a sale of EME’s interest in the respective non-debtor parents of the Gas Partnership Debtors.
The two cogeneration partnerships at issue are the Kern River Cogeneration and Sycamore Cogeneration deals. “The Cogen Partnerships began nearly thirty years ago on the premise that the symbiotic nature of electricity and steam generation, coupled with favorable regulatory treatment, could create efficiencies allowing a cogeneration facility to be more than the sum of its parts,” the filing noted. “The Cogen Partnerships are profitable and continue to operate exemplary workplaces that have returned over a billion dollars to the partners over the last 25 years.”
The partners in the Cogeneration Partnerships are, at the present time, direct or indirect subsidiaries of Edison International (NYSE: EIX), on the one hand, and Chevron Oil on the other. Edison International is the indirect parent of EME, the lead debtor in the chapter 11 cases. The relationship between the Gas Partnership Debtors and their non-debtor partners is governed by the Gas Partnership Agreements.
In mid-2012, Chevron decided that it wanted to acquire the Gas Partnership debtors’ partnership interests in the Cogen Partnerships. EME’s management deemed Chevron’s purchase offer well below market value and rejected it. On Dec. 26, 2012, just nine days after commencement of the debtors’ chapter 11 cases, Chevron initiated an adversary proceeding (something like a lawsuit) seeking declaratory and injunctive relief.
The crux of Chevron’s three-count complaint was that the Gas Partnership Debtors’ bankruptcy filings placed them in default of the Partnership Agreements. Chevron sought a declaration that the bankruptcy court’s automatic stay on all legal proceedings against the bankrupt companies should be lifted so that it could send a default notice to the Gas Partnership debtors, expel them from the partnerships, and purchase their interests for $42.5m.
On Jan. 18, this bankruptcy court found that Chevron had failed: to carry its burden to establish the elements of a preliminary injunction: and to establish “cause” sufficient to lift the stay under section 362 of the Bankruptcy Code. On Jan. 20, Chevron filed a notice of appeal of that order.
Each of the subject gas-fired cogen plants has 300 MW of total capacity, is 50% controlled by EME affiliates, and is located near Bakersfield, Calif. They serve adjacent oil operations.