Texas coal producer seeks court order against Optim Energy

The Walnut Creek Mining unit of Kiewit Mining Group filed an “emergency” motion on Feb. 17 with the bankruptcy court for Optim Energy LLC, seeking certain assurances of performance that it will be paid for lignite delivered to an Optim Energy power plant in Texas.

Optim Energy, which owns two gas-fired plant and one-coal-fired plant in Texas, sought Chapter 11 protection on Feb. 12 at the U.S. Bankruptcy Court for the District of Delaware. It cited slumping power markets, a high debt load and the high costs from the Walnut Creek Mining contract, which covers most of the coal need for the 305-MW Twin Oaks power plant, as key reasons to seek Chapter 11.

Walnut Creek on Feb. 17 asked the court for an order compelling Optim Energy and Optim Energy Twin Oaks LP to provide adequate assurance of performance to Walnut Creek under the Fuel Supply Agreement and authorizing suspension of performance by Walnut Creek under the Fuel Supply Agreement until such adequate assurances are received.

Walnut Creek and Twin Oaks are parties to a long-term supply agreement under which Walnut Creek supplies Twin Oaks substantially all of the lignite that Twin Oaks requires to operate its Twin Oaks plant located in Robertson County, Texas. “Although Walnut Creek is willing to continue to provide lignite to Twin Oaks on a post-petition basis, it seeks to enforce its statutory state law rights by requesting adequate assurance of performance from the Debtors prior to any delivery,” the Feb. 17 petition said. “Specifically, Walnut Creek requests that the Debtors be required to provide an advanced cash payment to Walnut Creek in an amount sufficient to satisfy the price of lignite purchased by Twin Oaks for the average thirty-day purchase amount during 2013, or $4,600,000.00 (the ‘Advanced Cash Payment’).”

Twin Oaks has already failed to pay under its agreement with Walnut Creek and has admitted its insolvency in its bankruptcy filings, Walnut Creek added. Importantly, Walnut Creek said it is not seeking to withhold delivery of post-bankruptcy petition lignite supplies in exchange for payment of pre-petition claims. Rather, it simply seeks adequate assurances that it will be paid for the lignite it delivers post-petition and requests that until such adequate assurances are given, that it be able to suspend delivery as allowed under state law.

Walnut Creek is a wholly owned subsidiary of Kiewit Mining Group. Annually, Walnut Creek’s captive lignite operation produces more than two million tons of lignite per year, all of which is sold and delivered to Twin Oaks under the Fuel Supply Agreement. The Fuel Supply Agreement has been in existence for many years. The original agreement was dated November 1987 and was entered into originally between Texas-New Mexico Power and Phillips Coal.

On Feb. 4, Twin Oaks advised Walnut Creek it would not make the payment due Feb. 5 in the amount of $2,566,471.54 for already-delivered lignite, which it never did pay, Walnut Creek said. In addition, Twin Oaks would owe on Feb. 20 an additional $2,880,107.50 for lignite delivered between Jan. 16 and Jan. 31, and $40,717.58 for power adjustment for shipment in the period of Jan. 1 through Jan. 31.

With power plant to be sold, Walnut Creek worries that it getting paid is not a priority

In addition to the Debtors’ admission of insolvency, Walnut Creek said it is concerned about receiving payment in light of the fact that Twin Oaks is positioning itself to be sold. That intent to sell the power plant was both indicated by an Optim Energy official in first-day testimony and in a debtor-in-possession financing agreement that says in part that Optim Energy commits to: “As soon as practicable, but in any event within the 90 days immediately following the Petition Date, either (i) executing a sale agreement with a stalking horse bidder relating to the sale of, at a minimum, Twin Oaks or substantially all of Twin Oaks’ assets, and filing a sale motion and bidding procedures motion relating to such sale with the Bankruptcy Court, or (ii) filing a bidding procedures motion and an auction sale motion with the Bankruptcy Court to implement bidding procedures for a sale of Twin Oaks or substantially all of Twin Oaks’ assets without a stalking horse bidder; in each case acceptable to the Majority Lenders in their sole discretion.”

“With the Twin Oaks’ power plant set to be sold, there is absolutely no incentive for the Debtors to be concerned about maintaining a working relationship with Walnut Creek,” said the Walnut Creek petition. “To that end, there is no motivation for the Debtor to assure Walnut Creek is paid for delivered lignite, especially in the weeks leading up to Twin Oaks’ ultimate liquidation. Since any payment for delivered lignite is customarily in the millions of dollars, one missed payment has a significant impact on Walnut Creek.

“Reinforcing Walnut Creek’s concern that the Debtors are not concerned about making payment to Walnut Creek a priority is the fact that there is no explicit mention of Walnut Creek in the Debtors’ Critical Vendor Motion,” Walnut Creek added. “The motion is devoid of any reference to Walnut Creek, presumably one of the largest – if not the largest – suppliers to any of the Debtors, and it does not appear to fall within the scope of classes to be paid by the Debtors under the motion. To date, Walnut Creek has received no indication from the Debtors that it is to be paid as a critical vendor pursuant to such motion.”

The Twin Oaks plant is capable of producing 305 MW. Twin Oaks must purchase in excess of approximately 90% of its coal from Walnut Creek and is required to purchase minimum coal quantities regardless of the Twin Oaks Plant’s actual coal needs. Twin Oaks is obligated to purchase coal from Walnut Creek to operate the Twin Oaks plant for at least another ten years.

The impact of depressed power prices is particularly acute with respect to the Twin Oaks plant because of the existing coal supply contract, said Nick Rahn, the Chief Executive Officer of Optim Energy. This contract provides for escalating prices for coal purchased from Walnut Creek over time without any adjustment for declining power prices. “Over the last two years, this dynamic has generated average annual operating losses of approximately $11.5 million attributable to the Twin Oaks Plant,” he noted in Feb. 12 testimony. “The material cash flow drain required to sustain the Twin Oaks Plant, when combined with the systemic decrease in power prices, has materially impaired the Debtors’ ability to service their debts and perform their obligations. The Debtors intend to explore all strategic alternatives to address the Twin Oaks Plant operating losses during these chapter 11 cases, including a potential sale pursuant to section 363 of the Bankruptcy Code.”

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.