SunEdison, saying that certain solar project approvals could lapse if project development doesn’t resume soon, on July 1 asked its bankruptcy court to allow SunEdison and its First Wind California Holdings LLC affiliate to sell or transfer their equity interests in Imperial Valley Solar 3 LLC, Imperial Valley Solar 4 LLC and Sun Lake Solar LLC to 93LF 8ME LLC under a Purchase and Sale Agreement dated as of July 1.
On April 21, SunEdison and affiliated companies sought Chapter 11 protection at the U.S. Bankruptcy Court for the Southern District of New York.
SunEdison, in the ordinary course of its development business, and pursuant to a joint development agreement, entered into with an affiliate of the buyer, owns through subsidiaries certain interconnection rights relating to the Mt Signal Solar 3 Project, which is a 245-MW photovoltaic project located in Imperial Valley, California. This project is currently in development by the prospective buyer and other affiliates of 8minutenergy Renewables (8ME).
The progress of development has greatly slowed since the commencement of these Chapter 11 cases and the ongoing ability to fully develop the project is threatened by the looming expiration of the interconnection rights owned by SunEdison affiliates. As a result, any buyer would be forced to expend significant funds in order to proceed further to develop, commence construction and, ultimately, complete the project, SunEdison told the court.
8minutenergy SPV1 LLC, an affiliate of 8ME, and Imperial Valley Solar Power LLC (IVSP), an affiliate of SunEdison, executed a Joint Development Agreement, dated as of September 2010, to co-develop, own and manage utility-scale solar photovoltaic projects in the western United States, including this project. The terms and continued viability of the JDA with respect to this project are currently subject to dispute among the 8ME JDA parties, Under the JDA, IVSP holds an option to acquire equity interests in certain affiliates of 8ME which hold the power purchase agreement, land use and other permits, and site control rights comprising the project (other than the interconnection rights, which are held by SunEdison subsidiaries).
However, as part of the JDA dispute, 8ME and its affiliates not only dispute IVSP’s continuing ability to exercise the option, but have asserted certain claims against IVSP, including: claims that IVSP has defaulted on its obligations under the JDA in that (i) it is no longer able to, and has elected not to, perform its obligations, (ii) such inability constitutes a failure of consideration, and (iii) 8ME SPV1 has suffered and will suffer financial and reputational harm as a result (including, without limitation, due to IVSP’s failure to remit to 8ME SPV1 a previously negotiated payment of approximately $11.5 million); and claims that the JDA is subject to rescission by 8ME SPV1.
SunEdison told the court: “Absent a resolution of the JDA Dispute, any buyer would be stepping into the JDA Dispute, which would likely impair the value, if any, that the Seller Parties are able to recover from the Equity Interests. Accordingly, while the Debtors dispute the merit of these claims, the transfer of the JDA, the JDA Amendment (as defined in the PSA), and the JDA Related Agreements (as defined in the PSA) (collectively, and together with all related agreements, documents, or instruments and all exhibits, schedules, and supplements to any of the foregoing, as the same may have been amended or otherwise modified in accordance with the terms thereof, the “JDA Documents”) and, more broadly, the transfer of the Equity Interests associated with the interconnection rights for the Project, will require a resolution of the JDA Dispute in order to maximize any value that the Debtors might be able to obtain for the Equity Interests. The JDA Dispute has been pending for some time, and any resolution would require significant additional time and effort to negotiate and finalize among the prospective buyer, the Debtors, and 8ME and its affiliates.
“Furthermore, as contemplated by the JDA, 8ME, through certain of its affiliates, including the Buyer, owns all of the existing rights and assets constituting the Project, other than the interconnection rights being conveyed pursuant to the sale of the Equity Interests. The Debtors and the Buyer recognize that the development of the Project faces significant challenges, including: (i) the looming expiration of the Project’s interconnection and co-tenancy rights, pursuant to the California Independent System Operator Corporation’s tariff, unless extended by as soon as August 22, 2016, the ten year anniversary of the underlying interconnection agreement; (ii) the Project’s current lack of certain real property rights, mineral rights and permits that may be required or desirable for the development, construction and operation of the Project; (iii) the need for the Project to obtain certain increased capacity and interconnection rights from the Imperial Irrigation District and to acquire the rights to use certain shared facilities, which may require agreement by certain co-tenants that are unaffiliated with any Seller Party; and (iv) the ambiguity of the terms (including with respect to quantity and timing) of certain obligations owed to IVSP in connection with the Project.”
In the third quarter of 2015, SunEdison engaged in a marketing process to solicit interest in a portfolio of project assets including this project, the Mililani II, Waipio and Kawailoa solar projects in Hawaii, the Four Brothers and Three Cedars solar projects in Utah, the Mt Signal 2 solar project in California and equity interests in Deepwater Wind. At least 15 qualified bidders of recognized standing in the solar power industry executed non-disclosure agreements and performed diligence on the portfolio.
Ultimately, on Dec. 29, 2015, SunEdison and certain of its affiliates entered into a purchase and sale agreement with certain affiliates of the D.E. Shaw Group, Madison Dearborn Capital Partners IV LP and Northwestern University (collectively, the “D.E. Shaw Buyers”). However, SunEdison commenced the Chapter 11 cases before the D.E. Shaw sale could be consummated by the parties.
Certain land rights and conditional use permits associated with the Mt Signal Solar 3 project are set to expire imminently in the absence of renewal or extension. The debtors have been informed that certain land options (which cover 950-1,000 acres of the approximately 2,400 acres of the project’s total usable land) may have already expired, and additional land options are set to expire between now and October 2016 if not renewed. Further loss of land rights may jeopardize the project’s viability and 8ME’s ability to continue development and construction. In addition, the conditional use permits for the project are set to expire in August 2016, potentially further impeding progress on the project’s development.
Hy Martin, the Director of Strategy and Mergers & Acquisitions at SunEdison, said in July 1 companion testimony: “The interconnection renewal process is a discretionary process, and the authorities processing such renewal requests (including the California Independent System Operation Corporation and the San Diego Gas & Electric Company) may take a wide variety of factors into account in evaluating those requests. It is my understanding that unless the Equity Interests and the Subsidiaries’ interconnection rights are brought under common ownership with the remainder of the Project (e.g., power purchase agreement and land options), as would result from consummation of the Sale Transaction, the interconnection agreement may not be extended, because it is possible that neither SUNE nor 8ME (or their respective affiliates) would be eligible to file an extension application before the time allowed for doing so under the tariff approved by the Federal Energy Regulatory Commission elapses, which, as noted above, may be as soon as August 22, 2016. Given the various operational complexities presented by the divided ownership of the various Project assets (as discussed above), it is critical that the sale of the Equity Interests be consummated in a timely manner such that the buyer can submit the appropriate renewal or extension paperwork and commence the process to obtain a renewal or extension prior to the expiration date.”
Martin added: “Given the severe time pressures presented by the potential expiration of the Subsidiaries’ key interconnection rights, as well as the extended marketing process already undertaken by the Company, I believe that the proposed sale transaction provides the best opportunity to close the sale of the Equity Interests in a timely manner, providing certainty of execution and optimal timing for the benefit of the Debtors and their estates. It is my understanding that both the Seller Parties and the Buyer are highly motivated to proceed to an expeditious closing following entry of an order approving the Sale Transaction. I do not believe any other interested party would be able to resolve the JDA Dispute and close with sufficient time remaining to submit the interconnection renewal rights documentation, jeopardizing the value of the Equity Interests to the detriment of the Debtors. Similarly, the requirement to conduct a further marketing and auction process would not only require the Debtors to expend additional resources on additional marketing, but would also result in significant value degradation due to the material timing issues described above.”