Optim Energy LLC on March 18 asked its bankruptcy court for approval of a bidding process where it will put its two gas-fired power plants in Texas up for sale.
Optim last year auctioned off its coal-fired Twin Oaks power plant in Texas as part of its Chapter 11 case at the U.S. Bankruptcy Court for the District of Delaware. That left it with the two gas-fired plants, the Altura Cogen Plant and the Cedar Bayou Plant. The proposed sale would be of the reorganized equity of debtor Optim Energy Generation LLC (or such other reorganized equity of the debtors as may be necessary or convenient) pursuant to the debtors’ Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code dated March 18.
That reorganization plan, filed contemporaneously with the sale motion, contemplates a potential sale of the “Gas Plant Portfolio” at a value to the debtors in cash of at least $355 million (net of all deductions and/or adjustments and with no right of set off).
Optim Energy Generation owns all of the equity interests in debtors Optim Energy Altura Cogen LLC and Optim Energy Cedar Bayou 4 LLC.
- Altura Cogen owns the Altura Cogen Plant, a natural-gas-fired plant capable of producing 600 MW located in Harris County, Texas, which sells the majority of its energy in the ERCOT market. The Altura Cogen 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 land under which the power plant is situated from Lyondell pursuant to a ground lease entitled the “Lease and Easement Agreement” dated September 2005.
- Optim Cedar Bayou owns a 50% undivided interest in the Cedar Bayou Plant, a gas-fired plant capable of producing 550 MW located in Chambers County, Texas, which operates in ERCOT’s Houston Zone. NRG Cedar Bayou Development Co. LLC owns the remaining 50% undivided interest. The Cedar Bayou Plant began operating in 2009 and 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 dated August 2007 between Optim Cedar Bayou.
Sale process has gone through two rounds of bidding up to this point
In November 2014, the Optim debtors initiated a broad-based marketing process led by Barclays Capital, their investment banker retained in these chapter 11 cases. As was done with the Twin Oaks Plant, Barclays prepared a high level “teaser” that provided basic information regarding the opportunity to purchase the Gas Plant Portfolio. The teaser was sent to more than 70 parties that Barclays believed, based on its experience with the Twin Oaks Plant and in conducting sales of assets in distressed situations and sales of power plant facilities, might have an interest in acquiring the Gas Plant Portfolio. The recipients of the teaser included private equity investors and strategic industry participants.
Barclays received a high level of initial interest in the Gas Plant Portfolio. Nearly 30 parties executed confidentiality agreements. Optim requested that these “Potential Purchasers” submit non-binding preliminary proposals to purchase the Gas Plant Portfolio by Nov. 21, 2014. After a thorough review process, the debtors invited several Potential Purchasers to participate in a second round of the marketing process, designed to elicit detailed binding proposals from the “Round Two Participants.”
The debtors provided each of the Round Two Participants an opportunity to tour the facilities, attend a management presentation and participate in detailed question and answer sessions. Several of the Round Two Participants retained independent consultants and advisors to assist with their due diligence and bid preparation. The debtors distributed a proposed form of purchase agreement to Round Two Participants and established a deadline for them to submit definitive documented bids. The debtors have now determined that the best path forward for a potential sale of the Gas Plant Portfolio is through a court-approved process in accordance with the proposed Bidding Procedures.
Highlights of the proposed sale procedures include:
- Potential bidders, other than the debtor in possession (DIP) lenders and the pre-petition secured parties, must provide by 3:00 p.m. (prevailing Eastern Time) on April 24; an executed confidentiality agreement (to the extent that a Potential Bidder has not already entered into a confidentiality agreement with Optim Energy concerning the debtors’ confidential information); financial information acceptable to the debtors to determine that the Potential Bidder has the financial wherewithal to consummate the sale; and evidence that the potential bidder has the internal corporate, legal or other authorizations or approval to engage in and close the sale.
- If the debtors receive more than one Qualifying Bid that meets or exceeds the Reserve Price on terms satisfactory to the debtors and other parties, the debtors will identify the Baseline Bid for the auction and provide a copy of the Baseline Bid to all Qualifying Bidders within three business days after the bid deadline. The debtors would conduct the auction at the New York office of Bracewell & Giuliani LLP starting at 10:00 a.m. (prevailing Eastern Time) or such other time as announced by the debtors no later than two business days prior to the Auction, on a date to be determined but in any event at least seven days after the Bid Deadline.
- If the debtors receive only one Qualifying Bid that meets or exceeds the Reserve Price on terms satisfactory to the debtors and other parties, such Qualifying Bid shall become the Prevailing Bid and such bidder shall become the Prevailing Bidder, and the debtors will negotiate in good faith with such Prevailing Bidder regarding execution of the Purchase Agreement.
- If the debtors do not receive a Qualifying Bid prior to the bid deadline that meets or exceeds the Reserve Price on satisfactory terms, the debtors will not hold an auction and instead shall promptly proceed to seek confirmation and consummation of their reorganization plan.
Depressed gas and power prices drove this Chapter 11 case
In the disclosure statement that accompanied the March 18 reorganization plan, the Optim companies said about why they in February 2014 sought Chapter 11 protection: “Optim Energy’s acquisition of the Twin Oaks Plant and Altura Cogen Plant and its investment to develop and construct the Cedar Bayou Plant occurred in 2007, one year before the 2008 economic downturn that plagued the energy industry, power markets and economy as a whole. Over the ensuing years, sustained lower electricity prices, primarily driven by plummeting natural gas prices, 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’ Power Plants are located), fell from about $8.50 per MMBtu in 2008 to under $3.90 per MMBtu as of December 2013 (a decline of approximately 54%).
“In large part as a result of the drop in natural gas prices, ERCOT market power prices fell correspondingly from about $63.24 per MWh in 2008 to under $38.00 per MWh as of December 2013 (a decline of approximately 40%). Consequently, the Debtors were left with a significant debt load that could not be serviced or repaid due to persistent operating losses, which were magnified by seasonal fluctuations in the Debtors’ revenue with decreased revenues generally recorded in the winter months.”
The companies noted a need to re-work their debtor-in-possession (DIP) financing. “The DIP Facility will mature on May 12, 2015. The Debtors have been in discussions with the DIP Lenders regarding the terms of an extension of the DIP Facility. The Debtors plan to file a motion seeking Bankruptcy Court approval to extend the DIP Facility maturity date beyond May 12, 2015 on terms satisfactory to the Debtors and the Consultation Parties.”
The companies also said they have lined up “Exit Financing” in case they can’t sell the power plants on workable terms and the still-viable Optim companies need to emerge from bankruptcy protection. “In the event the Sale does not close as prescribed in Section 3.02(a)(ii)a of the Plan, the Exit Financing shall become effective on the Effective Date. From and after the Effective Date, the Reorganized Debtors, subject to any applicable limitations set forth in any post-Effective Date financing, shall have the right and authority without further order of the Bankruptcy Court to raise additional capital and obtain additional financing as the boards of directors of the applicable Reorganized Debtors deem appropriate.”