Mechanical problems at the 700-MW, coal-fired Longview plant in West Virginia, which went on-line in late 2011, were a major factor in why Longview Power LLC on Aug. 30 sought Chapter 11 bankruptcy protection.
That is according to a first-day bankruptcy filing written by Jeffery Keffer, the Chief Executive Officer of Longview Intermediate Holdings C LLC, one of the several inter-related debtors in this case. The case was filed at the U.S. Bankruptcy Court for the District of Delaware.
The debtors operate through two distinct business units: Longview Power LLC, which controls the power plant, and Mepco Holdings LLC and its subsidiaries, which produce coal from nearby mines for the power plant. Longview Power was formed for the specific purpose of constructing and operating a 700 MW (net) supercritical coal-fired facility located in Maidsville, on the Monongahela River north of Morgantown, W.Va., very near the state line with Pennsylvania. Longview Power took possession of, and commenced operating, the power facility in December 2011.
When able to operate at full capacity, the facility is one of the most efficient coal-fired power plants in the country and has one of the lowest air emissions profiles of any such power plant in operation in the U.S. It was built at a cost of approximately $2bn, which was funded through the proceeds of a $1bn equity investment from an affiliate of First Reserve Corp., the debtors’ equity sponsor, among others, and funded debt totaling approximately $1.2bn arising under the Longview Credit Facility. As of Aug. 30, approximately $1bn remains outstanding under the Longview Credit Facility.
Mepco was founded more than 50 years ago and is one of the largest independent coal companies in Northern Appalachia. Mepco has been managed by three generations of the Laurita family, including Mepco’s current CEO, James Laurita Jr.
Approximately half of Mepco’s annual coal production is sold to Longview Power under an intercompany supply contract. Mepco and its subsidiaries are parties to the Longview Credit Agreement.
“Facing an impending interest payment due on August 30, 2013, and with a need to protect valuable estate assets—in the form of $59 million in letters of credit—which are part of the collateral package for the Debtors’ lenders under the Longview Credit Agreement, the Debtors have sought chapter 11 protection,” Keffer wrote. “The Debtors’ need to restructure their debt obligations has been brought to a head in large part because the Power Facility has been plagued by design, construction, and equipment defects and failures (collectively, the ‘Contractors’ Failures’) since Longview Power took possession of the Power Facility in December 2011. Because of the Contractors’ Failures, the Power Facility has only had a capacity factor of 68 percent since Longview Power took possession, due to numerous forced outages, extended planned outages, and generation derating—including three material forced outages to address boiler tube leaks at the Power Facility in the last four months alone.”
Keffer also wrote: “As a result of the Contractors’ Failures, Longview Power is party to a pending arbitration with the Contractors arising from the Power Facility’s design and construction and the significant damages incurred by the Debtors as a result. The Power Facility is subject to the Alleged Mechanics’ Liens, which have been asserted by each of the Contractors on account of claims arising from the Power Facility’s construction. … At this time, the Debtors do not anticipate that the arbitration proceeding before the Arbitration Panel will conclude until the first quarter of 2015 at the earliest. Given this timeframe and the complications the Alleged Mechanics’ Liens have caused in the Debtors’ capital structure, the Debtors may seek an expedited ruling on certain or all of the matters related to the arbitration proceeding in this Court.”
Company says it’s optimitistic that it can reorganize
The debtors are subject to a significant funded debt balance, including the maturity of about $557m of these obligations in February 2014, Keffer said. Due to, among other things, the power facility’s operational issues, the debtors do not expect to be able to satisfy all of their obligations under the Longview Credit Agreement. Thus, the debtors have sought to proactively “right-size” their capital structure and position themselves for ongoing success in the current industry and economic environment, Keffer added.
“In this process, the Debtors continue to review strategic alternatives in their efforts to maximize stakeholder value,” he said. “To this end, the Debtors determined it was in their best interests to explore debt restructuring options with a steering committee of the lenders under the Longview Credit Agreement (the ‘Steering Committee’), and the Debtors began negotiations with the Steering Committee over all aspects of a potential restructuring starting in the fall of 2012. These negotiations remain ongoing. Importantly, significant progress has recently been made as the Debtors work towards a consensual restructuring, and the Debtors are hopeful that they will be able to reach an agreement on a plan of reorganization with their stakeholders.”
In the twelve months ended June 30, 2013, the debtors generated revenues totaling approximately $255m on a consolidated basis (excluding intercompany revenues) consisting of: revenues totaling about $106m arising from Longview Power’s power generation and sales; and revenues totaling about $149m from Mepco’s coal mining, processing, waste disposal, and sales operations.
Electricity generated by the Longview plant is sold into the PJM Interconnection system in the day-ahead or real-time markets. Marketing activities are undertaken on Longview Power’s behalf by Tenaska Power Services, a third party services provider.
Longview Power does not directly operate the power plant. Instead, under an Operation and Maintenance Agreement dated June 2011, between Longview Power and GenPower Services LLC, its non-debtor affiliate, GenPower Services provides the debtors with approximately 94 employees to manage, operate, and maintain the power facility. Longview Power’s corporate officers, including its Chief Executive Officer and Chief Financial Officer, are also officers of GenPower Services. GenPower Services is a lateral affiliate of the debtors and is wholly-owned by GenPower Holdings (Delaware) LP, the debtors’ ultimate parent. GenPower Holdings and GenPower Services are not debtors in these chapter 11 proceedings.
Mepco producing about 4 million tons per year, half of which goes to Longview
Currently, Mepco owns or operates three active underground coal mines and one active surface mine located in northern West Virginia and southwestern Pennsylvania. In addition to these four active mines, Mepco has one inactive underground mine and three additional mines which are in various stages of reclamation. Mepco’s activities also include coal transportation, processing, treatment, and waste disposal. In its various operations, Mepco employs around 550 individuals, including independent contractors.
Mepco and its related operations were purchased by GenPower Holdings in 2007 to, among other things, provide the power facility with the coal necessary to support operations.
Mepco currently produces approximately 4 million tons of coal per year. About half of this volume is purchased by Longview Power through an intercompany supply agreement, and this coal is delivered directly to the power facility on a four-mile long conveyer belt stretching between Mepco’s Four West Mine operations located near Bobtown, Pa., and ending at the power facility. Mepco’s remaining production is sold to third parties under long term supply contracts and, when the market is available, on a spot basis.
Longview also weathering the current poor power market
The current economic environment was also a factor in this case, Keffer noted. “Wholesale electricity prices have fallen significantly since construction on the Power Facility began in 2007 as a result of, among other things, the broader recession that commenced around that time, resulting in reduced electricity demand and substantial reductions in natural gas prices. Lower natural gas prices have been caused, at least in part, by the rapid expansion of natural gas production and natural gas inventories arising from the discovery of new shale deposits and the development of new extraction techniques.”
Low natural gas prices reduce the variable costs of gas-fired power facilities and reduce the wholesale market price for all generators, he added. “Year-to-date, the average price per megawatt for electricity sold into the PJM on a day-ahead basis was approximately $33 per megawatt-hour—approximately 52 percent of the average power price forecasted for 2013 when construction began on the Power Facility in 2007.”
Longview Power competes to deliver electricity to PJM against other coal-fired power generation stations as well as natural gas-fired power, nuclear power, and renewable energy, among other sources, Keffer said. “This competitive environment has added an additional layer of complexity to the Debtors’ existing challenges,” he added.
The debtors, however, believe they can compete effectively once they are no longer “hamstrung” by power plant operational issues, Keffer wrote. The Longview plant uses designs, equipment, processes, and technology that have made it one of the most efficient coal-fired power plants in the country—when it can operate at full capacity, he said.