The bankruptcy judge for Texas power producer Optim Energy LLC will need to work through at a July 2 hearing a series of objections to Optim’s June 17 motion for approval of a bid auction procedure for its coal-fired Twin Oaks power plant.
One of those objections was filed June 27 at the U.S. Bankruptcy Court for the District of Delaware by the 305-MW plant’s primary coal supplier, Walnut Creek Mining, which has had a contentious relationship for some time with Optim. Optim said in its motion for approval of the plant auction that it deliberately kept potential bidders away from Walnut Creek Mining and that it plans to seek court rejection of this contract, known as a Fuel Supply Agreement (FSA).
Walnut Creek said June 27 that it understands Optim’s rationale for limiting discussions between potential bidders and Walnut Creek concerning the FSA up until this point. “Before completing the initial marketing process, the Debtors rationally could have determined that prohibiting prospective purchasers from engaging in discussions with Walnut Creek regarding the FSA was necessary to obtain the highest and best bids for their assets,” Walnut Creek added. “However, now that the Debtors have undertaken a ‘broad-based marketing process’ resulting in the Proposed Purchaser’s ‘highest and best offer for the Facility,’ there is no legitimate basis to restrict communications among prospective purchasers and Walnut Creek.”
Optim and its affiliated companies through the sale process so far have obtained a floor value for their assets, independent of the pricing of a fuel supply for the facility, the minemouth lignite producer said. “While it is in Walnut Creek’s economic interest to engage in discussions with all prospective purchasers, contrary to the Debtors’ assertions, the Debtors’ and Walnut Creek’s rational self-interests are aligned at this point in the process,” it added.
“At bottom, Walnut Creek’s exclusion from the sale process appears to be an emotional and irrational decision, based solely on a difficult relationship among the parties (including Cascade Investment, L.L.C. (‘Cascade’), the Debtors’ ultimate equity owner), and is not calculated to maximize the value of the Debtors’ assets,” Walnut Creek contended. “In any case, the Court should not approve a process that when viewed objectively is fundamentally flawed. Structured bid procedures should provide a vehicle to enhance the bid process, not chill prospective bidders’ interest and disenfranchise unsecured creditors. The Debtors’ proposed Bid Procedures do not meet the relevant standard for approval (whether business judgment or otherwise) and, thus, should not be approved.”
Carlyle, U.S. Trustee also say Walnut Creek gag order a bad idea
Carlyle Investment Management LLC, a creditor and party in interest, on June 27 objected to only two aspects of the sale motion:
- the proposed gag order between the bidders and Walnut Creek, which it said depresses value by foreclosing any opportunity to renegotiate an above-market fuel supply contract; and
- the proposed topping bid of 13%, which unnecessarily chills bidding.
“Under the proposed Sale Procedures, anyone who has discussions with Walnut Creek—this Debtor’s largest unsecured creditor and sole fuel supplier whose contract is being rejected by the Proposed Purchaser—would be excluded from the auction regardless of the amount of its bid,” the company said. “Carlyle, which has thoroughly participated in the Debtors’ marketing process to date, submits that superior bid structures could be offered that contemplate the assumption and renegotiation of the Debtors’ Fuel Supply Agreement with Walnut Creek (the ‘FSA’), but only if bidders can engage in discussion with Walnut Creek. Any resulting bid that otherwise qualifies will necessarily be greater than the stalking horse bid, to the benefit of the estate as a whole.”
In addition, Carlyle said the Optim debtor companies have proposed bid protections that minimize any challenge to the Proposed Purchaser by requiring that the minimum topping bid exceed the Proposed Purchaser’s bid of $60m by an additional $7.8m or 13%. In particular, the initial bid increment of $5m (which is in addition to the proposed $1.8m Break-up Fee and $1m Expense Reimbursement) would unnecessarily chill competition and should not be approved as an actual and necessary expense, Carlyle wrote.
The U.S. Bankruptcy Trustee, a court-backed entity that oversees bankruptcy cases, also filed a June 27 objection, saying the prohibition against any party talking to Walnut Creek “should not be approved given its propensity to chill bidding.” The Trustee also objected to an Optim plan to limit the parties allowed at the auction.
Optim Energy CEO Nick Rahn said in support of the auction proposal: “Put simply, based on the long-standing history of failed negotiations with Walnut Creek and the posture Walnut Creek has taken in these chapter 11 cases, contact between potential bidders and Walnut Creek carries significant risk of being counterproductive, distracting, not in the best interest of the estate, and potentially detrimental to the overall sale process.”
Twin Oaks is a two-unit lignite-fired plant located in Robertson County, Texas. Twin Oaks sells its generated power into the market regulated by the Electric Reliability Council of Texas (ERCOT). Under the FSA, 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 its actual needs. Under the FSA, Twin Oaks is obligated to purchase coal from Walnut Creek for at least another 10 years. The terms of the FSA provide for escalating prices for coal purchased from Walnut Creek over time without any adjustment for declining power prices, Optim Energy told the court.
In the recent bid process run by Barclays Capital, “stalking horse” bidder Major Oak Power LLC was the initial winner. It would purchase the facility for a cash purchase price of $60m, subject to certain additional adjustments, plus the assumption and assignment of certain executory contracts.
To see if any other offers are out there, Optim Energy is asking the court for:
- A bid deadline of July 23;
- A sale objection deadline of July 29;
- An auction on Aug. 4 at the offices of Bracewell & Giuliani LLP in New York City; and
- A sale hearing before the court on Aug. 5 to look at the auction results.
The June 13 sale agreement is signed by Sean Klimczak as President of Major Oak Power. His contact information is: Major Oak Power LLC c/o The Blackstone Group LP, 345 Park Avenue, New York, NY 10154 Telephone: (212) 583-5701, Email:firstname.lastname@example.org.