Hurt by weak power markets in Texas and a high debt load, Optim Energy LLC, which owns three power plants in Texas, on Feb. 12 sought Chapter 11 protection at the U.S. Bankruptcy Court for the District of Delaware.
Nick Rahn, the Chief Executive Officer of Optim Energy, in first-day testimony in support of the Chapter 11 petition outlined what led the company to this point. At the time of its formation, Optim Energy LLC was known as EnergyCo LLC. Rahn actually works for Competitive Power Ventures Inc. (CPV), which provides executive management, contract administration, accounting, treasury, regulatory compliance and other services and specializes in the energy sector.
Optim Energy and affiliated companies that also sought Chapter 11 protection are power plant owners principally engaged in the production of energy in Texas’s deregulated energy market. They own three power plants in eastern Texas. Two of the plants are fueled by natural gas, and the third is coal-fired.
“The current depressed economic environment of the electric power industry—particularly with respect to coal-fired plants—and the Debtors’ liquidity constraints have resulted in continuing losses that, simply put, have left the Debtors without alternatives,” Rahn said. “After struggling against the downturn in the Texas power markets in recent years, aggressively managing costs, and engaging in a comprehensive effort to explore strategic alternatives to mitigate systemic operating losses, the Debtors filed these chapter 11 cases with the goal of reorganizing, including the restructuring of the Debtors’ obligations and pursuing strategic alternatives that will maximize the value of their power producing assets.”
In 2007, PNM Resources and Cascade Investment LLC through its wholly-owned subsidiary, ECJV Holdings LLC, formed Optim Energy as a limited liability company organized under the laws of Delaware. The focus of PNM Resources, an energy holding company that provides electricity through its subsidiaries to areas in New Mexico and Texas, and Cascade was to enter the deregulated Texas electricity markets by acquiring or constructing merchant power plants to sell electricity to the public through the Electric Reliability Council of Texas (ERCOT).
In September 2011, PNM Resources, ECJV and Cascade entered into agreements whereby Optim Energy was restructured such that PNM Resources’ ownership in Optim Energy was reduced from 50% to 1% (with PNM Resources’ remaining 1% ownership interest acquired by ECJV in January 2012). In preparation for, and in conjunction with this restructuring, the Debtors exhausted various cost reduction and stabilization strategies and ultimately laid off over 50 employees to enable the transition of the operations and management of the Debtors’ plants to contractors NAES Corp. and CPV. This transition ultimately resulted in approximately $15m in annual savings, in the aggregate, among the three power plants.
“Unfortunately, the reduction in force and other cost-saving initiatives were insufficient to eliminate the recurring operating losses and required capital expenditures that strained liquidity and ultimately forced the Debtors to commence these chapter 11 cases,” Rahn noted.
The Debtors’ day-to-day management and operations are outsourced to third-party contractors and, therefore, they have no employees.
The plants in question are:
Twin Oaks Plant: This is a coal-fired facility capable of producing 305 MW. The plant is owned by Debtor Optim Energy Twin Oaks LP, is located in Robertson County, Texas, and sells energy into the ERCOT market. Twin Oaks owns both the plant and underlying real property. Twin Oaks purchases the vast majority of its coal to operate the plant from Walnut Creek Mining Co. under a long term fuel supply agreement executed in 1987. Under this agreement, 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.
Altura Cogen Plant: This is a natural-gas powered plant capable of producing 600 MW located in Harris County, Texas, and sells the majority of its energy in the ERCOT market. The plant is owned by Debtor Optim Energy Altura Cogen LLC. The plant has been commercially operating since 1985 and is located within a complex of petrochemical facilities owned by Lyondell Chemical Co. Altura Cogen leases the property at which the power plant is situated from Lyondell. Altura Cogen purchases the natural gas to fuel the plant from EDF Trading North America LLC under fuel purchase agreements which typically expire every few years, at which time the Debtors must enter into a new agreements to supply the Altura Cogen Plant. The current natural gas supply contract with EDF expires on March 31, 2014, and will need to be replaced.
The energy generated by the Twin Oaks and Altura Cogen plants is sold on a short-term basis into the ERCOT market pursuant to an energy management agreement between Optim Marketing and EDF, dated as of November 2011. EDF provides power management services for the two plants, including scheduling, bidding, and dispatching, in coordination with NAES. EDF also provides fuel management services, including procuring fuel for Altura Cogen, and EDF assists the Debtors with risk management, all of which is supervised by CPV. Lyondell purchases a portion of the power generated at the Altura Cogen Plant, as well as the steam produced from power production operations. The terms of the sale of steam and power to Lyondell are governed by a Steam and Electric Power Sales Agreement.
Cedar Bayou Plant: Cedar Bayou is a gas-fired plant capable of producing 550 MW located in Chambers County, Texas, which operates in ERCOT’s Houston Zone. Debtor Optim Energy Cedar Bayou 4 LLC owns a 50% undivided interest in the Cedar Bayou Plant and NRG Cedar Bayou Development Co. LLC owns the remaining 50% undivided interest. The Cedar Bayou Plant began operating in 2009. It is located within a complex of electric generation facilities owned by NRG Texas Power LLC, which owns the real property upon which the Cedar Bayou Plant is situated. The Cedar Bayou Plant is operated by NRG Cedar Bayou in accordance with a Joint Ownership Agreement. The energy generated by the Cedar Bayou Plant is sold on behalf of Cedar Bayou and NRG Texas as joint owners on a short-term basis into the Texas power market through a scheduling and dispatch agreement with NRG Texas. Cedar Bayou purchases its share of the natural gas to fuel the plant pursuant to short term (typically periods of three months) fuel purchase agreements with NRG Power Marketing LLC. The current fuel purchase agreement expires on March 31, 2014, at which time the Debtors will need to enter into a new fuel purchase agreement to supply the Cedar Bayou Plant.
Plunging natural gas prices have also pulled down power prices in the region
Rahn said that in recent years, sustained lower electricity prices, primarily driven by plummeting natural gas prices, have proved to be a substantial challenge to the Debtors’ power generation assets. The price of natural gas, which is closely tied to the price of electricity in much of the U.S. (including the ERCOT market where the Debtors’ plants are located), has fallen from about $8.50 per MMBtu in 2008 to under $3.90 per MMBtu as of December 2013 (a decline of about 54%).
In large part as a result of the drop in natural gas prices, ERCOT market power prices have fallen correspondingly from about $63.24 per MWh in 2008 to under $38.00 per MWh as of December 2013 (a decline of around 40%).
“Consequently, the Debtors have been left with a significant debt load that could not be serviced or repaid due to persistent recent operating losses, which are magnified by seasonal fluctuations in the Debtors’ revenue with decreased revenues generally recorded in the winter months,” Rahn added.
The impact of depressed power prices is particularly acute with respect to the Twin Oaks Plant because of the existing coal supply contract, he said. This contract provides for escalating prices for coal purchased from Walnut Creek overtime 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. “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.”
The Debtors in this case include:
- Optim Energy LLC;
- Optim Energy Marketing LLC;
- OEM 1 LLC;
- Optim Energy Cedar Bayou 4 LLC;
- Optim Energy Generation LLC;
- Optim Energy Twin Oaks GP LLC;
- Optim Energy Altura Cogen LLC; and
- Optim Energy Twin Oaks LP.
The Kiewit Corp. website says about the Walnut Creek mining operation: “Walnut Creek Mining Company, a subsidiary of Kiewit Mining Group Inc., owns and is responsible for project operations and day-to-day management of this lignite mine located between Dallas and Houston, Texas. The operation includes an 80-cubic-yard dragline, a 20-cubic-yard mass excavator, an 18-cubic-yard hydraulic backhoe and a fleet of 150-ton end-dump trucks to move more than 20 million cubic yards of material annually. The captive lignite operation produces more than two million tons of lignite per year and incorporates a blending program that provides consistent quality lignite to fuel two 150-megawatt circulating-fluidized-bed power plants.”