Sundevil seeks bankruptcy after failing to sell 1,100 MW of Arizona capacity

Sundevil Power Holdings LLC and a related company, which control 1,100 MW of gas-fired power generation in Arizona, on Feb. 11 filed for Chapter 11 protection at the U.S. Bankruptcy Court for the District of Delaware.

Raphael T. Wallander, a Principal at Wayzata Investment Partners LLC, a private equity firm that is the investment manager to Wayzata Opportunities Fund LLC and Wayzata Opportunities Fund II LLC, told the court about the circumstances behind this filing in a Feb. 11 affidavit. The Wayzata Funds own, directly or indirectly, the equity interests in Sundevil Power Holdings and SPH Holdco LLC. Sundevil and SPH are affiliated companies that both filed for Chapter 11, with their cases likely to be combined by the court.

To minimize the Chapter 11 cases’ impact on business operations, the companies on Feb. 11 filed first-day motions and pleadings for approvals needed to allow them to keep operating.

Wrote Wallander: “I am familiar with the contents of each First Day Pleading (including the exhibits and schedules thereto) and believe that the relief sought in each First Day Pleading: (a) is necessary to enable the Debtors to operate in chapter 11 with minimum disruption and loss of value to the Debtors’ estates, (b) is critical to achieving a successful sale of all or substantially all of Sundevil’s assets or the equity interests in Sundevil, and (c) best serves the interests of the Debtors’ creditors.”

These companies are merchant power generators through Sundevil’s ownership of two of the four 550-MW natural gas-fired power blocks (Power Blocks I and II) of the Gila River Power Station (GRPS), located in Gila Bend, Arizona. Sundevil and the other power block owners sell energy into the Southwest electric power market, specifically the sub-region of Arizona, New Mexico, and Southern Nevada known as the Desert Southwest (DSW). Most of Sundevil’s output is sold at the Palo Verde hub and to the California Independent System Operator (CAISO) market. Sundevil also is capable of reaching other market hubs such as Mead (Southern Nevada) and Four Corners. The debtor’s sales of energy for 2015 generated approximately $63.9 million in revenue.

Low power demand, renewable penetration and stubborn coal capacity cited as factors

Wallander wrote: “The combination of lower than anticipated power demand growth, declining natural gas prices, increased distributed generation (rooftop solar), slower than expected retirement of older, inflexible coal-fired generation and a substantial buildout of utility scale renewable energy sources has contributed to the Debtors’ inability to generate sufficient revenue and liquidity to continue to maintain their capital structure on a long term basis. While the buildout of substantial utility scale renewable resources actually increases the need for flexible generation resources such as those owned by the Debtors, regulated utilities have continued to rely on older, inflexible, carbon intensive, coal-fired generation to meet electric demand needs despite the ability of Sundevil’s assets to serve those needs more economically while achieving comparatively significant reductions in air emissions – carbon dioxide reductions of up to 65%, nitrous oxide reductions of roughly 95% and sulfur dioxide emissions reductions of nearly 99%. While these older coal generation assets are more expensive to operate, and pollute more, regulated utilities have been allowed to continue to pass such costs on to their customers.

“Although the Debtors have attempted to find a third-party equity investor or, alternatively, to sell their assets outside of bankruptcy, these efforts have not yet resulted in a binding offer and the Debtors no longer have sufficient funds to continue this process. Sundevil’s secured lender has agreed to provide financing in order to continue to operate the business and continue the sale efforts in a chapter 11 case. The Debtors filed these chapter 11 cases with the goal of continuing the process for a sale of all or substantially all of the assets of Sundevil (the ‘Project Assets’) or of all of the equity interests in Sundevil (the ‘Equity Interests’) through section 363 of the Bankruptcy Code.

Sundevil was formed in 2010 and SPH Holdco was formed in 2012. Sundevil is a wholly owned subsidiary of SPH Holdco, which is jointly owned by the Wayzata Funds. Sundevil was formed for the purpose of purchasing Power Blocks I and II of the GRPS. SPH Holdco was formed for the purpose of owning the equity interests in Sundevil and facilitating a secured financing.

Power Blocks I and II began commercial operations in 2003 and were previously owned by Gila River Power LP (GRP). GRP is an affiliate of Entegra Power Services LLC. Sundevil purchased Block II from GRP in 2010 and Block I from GRP in 2011. Sundevil has made significant capital improvements to both Power Blocks during the course of its ownership.

Each Power Block consists of two combustion turbines (General Electric 7FA CTs) and one GE D11 steam turbine. The Power Blocks each have a separate cooling tower. Sundevil owns a 50% undivided tenant-in-common interest in the common facilities of the GRPS with the owners of the other two power blocks. 

Sundevil is party to the Second Amended and Restated Ownership Agreement, dated as of Dec. 10, 2014, with Entegra, Tucson Electric Power (TEP) and UNS Electric (the owners of the remaining power blocks of the GRPS). As a pro rata owner of the GRPS, Sundevil has the right to participate in expansion opportunities at the GRPS. The 1,100-acre site includes approximately 600 acres of usable land for expansion. Expansion opportunities are governed by certain restrictions and requirements set forth in the Ownership Agreement.

Gila Bend Operations Co. LLC (GBOC) is a special purpose entity set up to facilitate common ownership of permits used by the owners of the power blocks at the GRPS. Ownership in GBOC is ratably based on ownership of the power blocks (i.e., Sundevil owns 50% of the membership interests in GBOC due to owning 50% of the power blocks). GBOC subcontracts performance of its operations and maintenance services to EthosEnergy Power Plant Services LLC. EthosEnergy employs a single management team and staff across all four power blocks, consisting of approximately 61 full-time employees.

Sundevil’s two units haven’t dispatched since last October

Power demand in the DSW is seasonal, peaking during the summer when temperatures are high and reaching a trough in the spring and late fall when temperatures are moderate, Wallander noted. This means that merchant generators like Sundevil tend to run infrequently between November and April. From November through April, the debtors work to ensure that Power Blocks I and II are properly maintained and to avoid damage due to systems and equipment remainingidle. Additionally, seasonal and major outage work is typically scheduled during the November through April timeframe to ensure that Power Blocks I and II will be available when it is       economical for them to run. Sundevil has scheduled its summer readiness outages for the month of April.

Sundevil’s power blocks have not dispatched into the market since October 2015 as it has not been economical for them to do so, however Power Blocks I and II remain available for dispatch into the day-ahead market if dispatch is economical or needed for system reliability, Wallander reported.

He added: “Based upon forward market prices, which are currently illiquid and depressed, consistent economic dispatch is expected to begin in June 2016 and continue through the Fall of 2016. The Debtors believe that intermittent periods of dispatch may also arise in April 2016, as a result of significant unit outages that frequently occur in April, and in May, if unseasonably warm weather moves into the DSW. In April and May of 2015, Power Blocks I and II had capacity factors of 2.6% and 38.5% respectively. Capacity factor is calculated as the number of megawatt hours generated in a period over the total possible megawatt hours that could have been generated in a period.”

Due to continued losses, the debtors began considering strategic alternatives in early 2015 and in June 2015, commenced an effort to market the project assets or the equity interests outside of bankruptcy to one or more third-party investors or buyers. They hired Jefferies LLC as a financial adviser to lead this process. Jefferies reached out to numerous potential investors or buyers, and to date no potential counterparty has definitively decided to move forward with an investment in or purchase of the assets or the equity.

“While the Debtors did not realize the economic return they anticipated from Power Blocks I and II, the Project Assets or the Equity Interests should be attractive to a potential purchaser for many reasons,” Wallander said. “For example, unlike dedicated baseload (coal) or peaking facilities (simple combustion turbines) which are able to only serve one type of generation need or the other, Power Blocks I and II have the ability to operate in many modes (baseload, cycling (turning on and off) or peaking) and the ability to switch between these operating modes on a daily basis, helping the system operators increase both efficiency and reliability. Effectively, Power Blocks I and II are a baseload and peaking resource co-located at one site.

“In addition to possessing the characteristics of multiple unit types, Power Blocks I and II are also attractive for the following reasons: (a) with the proper infrastructure in place, the GRPS is well-positioned to sell power into markets beyond the DSW region, including the Southern California market, (b) anticipated population growth in the DSW region would make the purchase of the Project Assets or the Equity Interests an attractive long-term investment, and (c) purchasing Power Blocks I and II is a cost-effective alternative to the significant expense of new construction in the DSW and CAISO. Additionally, when regulations or economics finally force the retirement of older coal-burning generation assets, the Project Assets are a logical alternative for load serving entities at a fraction of the cost of new build generation.”

Among the first-day motions from the companies was a request for approval of a “stalking horse” bidding process that would see the assets sold yet this year.

The motion calls for an April 14 deadline for interested bidders to lodge an executed confidentiality agreement and sufficient information to allow the debtors to determine that the interested party has the financial wherewithal to make this buy.

A potential bidder who desires to be a qualified bidder must deliver the required bid documents by 12:00 p.m. (Eastern Time) on April 29 to Jefferies LLC, 520 Madison Avenue, 7th Floor, New York, New York 10022 (Attn: Kevin Phillips, kphillips@jefferies.com, and Richard Morgner, rmorgner@jefferies.com).

In the event that the debtors timely receive at least one qualified bid, there would be an auction conducted at the offices of law firm Vinson & Elkins LLP, 666 Fifth Avenue, 26th Floor, New York, New York 10103-0040 on May 2 at 10:00 a.m. (Eastern Time).

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.