Edison Mission Energy and affiliate Midwest Generation, both in Chapter 11 bankruptcy protection since December 2012, asked the court on Sept. 11 for a temporary extension of their Sept. 30 deadline to accept or reject leases for coal-fired capacity at the Powerton and Joliet plants in Illinois.
The companies have leased for years all of Powerton and part of Joliet from financial entities as part of a sale-leaseback deal. Since the bankruptcy filing, the Edison Mission Energy companies have been trying to preserve these leases, for a possible sale as part of a broader asset sale process, and to cure lease defaults that would allow the leases to remain in force. These are called the “PoJo” facilities for short.
In the face of ongoing discussions on a restructuring of the leases, as well as the recently launched process to explore a potential sale of certain or substantially all of the debtors’ assets, the companies are asking that the deadline for Midwest Generation (MWG) to assume or reject the leases be extended from the current Sept. 30, to Dec. 31, 2013.
The case is pending at the U.S. Bankruptcy Court for the Northern District of Illinois, where a Sept. 19 hearing is scheduled on the Sept. 11 extension motion.
The bankrupt companies had previously faced a July 1 deadline to extend the leases. Following discussions among MWG and EME and their respective stakeholders, the parties agreed to the terms of a consensual extension of the deadline through Sept. 30, which the court then approved.
“Since entry of the Original Extension Order, MWG and EME and their respective stakeholders continued to engage in discussions regarding the terms of a potential consensual restructuring of the Leases,” the Sept. 11 filing said. “On August 9, 2013, MWG delivered a proposal to its various stakeholders with respect to the terms of a consensual restructuring of the Leases. MWG and EME have continued to engage their stakeholders in restructuring discussions.”
Asset sale process began this past summer
In addition to their efforts to restructure the leases, the EME-related debtors, with the assistance of their advisors and in close consultation with their major creditor constituencies, have been focused on considering, analyzing, and potentially pursuing a sale of substantially all of their assets in an effort to maximize value in these Chapter 11 cases.
On July 17, the debtors obtained court authority to retain J.P. Morgan Securities LLC to advise them, together with Perella Weinberg Partners LP, on all aspects of their sale process and any related transactions. On Aug. 1, the debtors, with the assistance of J.P. Morgan and their other advisors, commenced a formal marketing process. They have subsequently executed nondisclosure agreements with potentially interested parties and recently disseminated a confidential information memorandum to certain such potentially interested parties. The sale process-related efforts are expected to continue well beyond the current Sept. 30 deadline to assume or reject the PoJo leases.
The debtors said they are faced with three choices.
- First, MWG can assume the leases. Assumption of the leases on their current terms, however, is not feasible because assumption would impair stakeholder value in the face of an adjusted operating loss of $253m in 2012, scheduled rent payments in excess of $500m during the remaining terms of the leases, and the obligation to fund substantial capital expenditures at the coal-fired facilities in 2013, to comply with certain environmental regulations.
- Second, MWG can allow the leases to be rejected on Sept. 30. Like assumption of the leases, the rejection of the leases 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. Moreover, rejection could potentially impact the interest among participants in the sale process.
- Third, MWG said that it 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. Although the debtors have begun to explore this third option with all relevant stakeholders, to date, an agreement among the parties has not yet been reached.
MWG and EME said they are prepared to offer consideration to the trustee, certificate holders, and owner lessors in return for an extension of the deadline to assume or reject the leases. The extension contemplates actions that include:
- on the first business day of each month during the extension period, MWG shall pay by wire transfer to the trustee the sum of $3.75m in partial satisfaction of any allowed post-petition administrative lease rent accruing from July 3 onward and the trustee will refund to MWG the allocable portion of any monthly payment that covers the period subsequent to the effective date of rejection of any of the leases;
- MWG will continue to make presently scheduled environmental retrofit capital expenditures for the premises subject to the leases from Oct. 1 through the earlier of the date of the hearing to consider a motion to reject the leases and Dec. 31, 2013; and
- MWG will pay certain professional fees and expenses of the advisors to the trustee and the owner lessors (in addition to any professional fees payable under the original lease deadline extension order).
“Absent a consensual restructuring proposal or extension consistent with the Extension, rejection of the Leases and other related Lease Documents is necessary to preserve stakeholder value in the face of an adjusted operating loss of $253 million in 2012, scheduled rent payments in excess of $500 million during the remaining terms of the Facility Leases, and the obligation to fund substantial capital expenditures at the Facilities in 2013, or consider shutting down certain units, to comply with certain environmental regulations,” the Sept. 11 motion said.
Public Service Enterprise Group affiliates own these facilities
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 Gen to transfer control of these plants to those PSEG affiliates. Preparing for the possibility of losing the leases on these facilities prior to the court’s extension of the July 1 lease deadline, Midwest Gen on May 6 had 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 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.”
Powerton is a 1,538 MW coal-fired facility located in Tazwell County, Ill., and Joliet Units 7 and 8, which are subject to lease, comprise 1,036 MW of the 1,358-MW Joliet plant located in Will County, Ill. The leases for the Powerton facility expire on May 24, 2034, and the leases for Joliet 7 and 8 expire on Aug. 24, 2030.
The PSEG companies told FERC 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.”