Citing the imminent expiration of several project-related agreements, SunEdison Inc. (SUNE) on July 5 asked its bankruptcy court for quick approval of the sale of interests in a 201-MW solar project in California.
SunEdison and First Wind California Holdings LLC (FWCH) want to sell and transfer 100% of the equity interests in Imperial Valley Solar 2 LLC (IVS2) and 88FT 8ME LLC (88FT) to DESRI MS2 Development LLC under a Purchase and Sale Agreement dated as of July 1, 2016. DESRI is an affiliate of D.E. Shaw Group, which was involved in a pre-bankruptcy deal to buy a number of SunEdison assets. That deal collapsed when SunEdison filed for bankruptcy.
On April 21, SunEdison and affiliates filed for Chapter 11 protection at the U.S. Bankruptcy Court for the Southern District of New York. The July 5 sale motion is due to be heard at a July 21 court hearing.
SunEdison, in the ordinary course of its development business, is in the process of developing two interrelated projects, known as the Mt Signal 2 Project and the Mt Signal 3 Project. The Mt Signal 2 Project is a 201-MW photovoltaic solar project, and the Mt Signal 3 Project is a 245-MW photovoltaic facility. Both are located in Imperial Valley, California.
Both projects were originally developed by 8minutenergy Renewables (8ME), and the Mt Signal 2 Project was sold to SunEdison. While certain assets relating to the Mt Signal 2 Project are owned by IVS2 and 88FT, certain assets relating to the Mt Signal 3 Project are owned by other subsidiaries of SunEdison. The two projects are currently under development, although the progress of development has greatly slowed since the commencement of these Chapter 11 cases.
Said the July 5 sale request from SunEdison: “The Debtors’ ability to preserve and monetize value in the Mt Signal 2 Project faces significant and imminent challenges. The most immediate threat to the Mt Signal 2 Project is the risk that critical interconnection rights granted pursuant to the California Independent System Operator Corporation’s (‘CAISO’) tariff will expire on August 22, 2016 (the ten year anniversary of the underlying interconnection agreement) unless an extension is granted by CAISO prior to such date. Without valid interconnection rights, the owner of the Mt Signal 2 Project has no ability to sell the power such project will generate, thus rendering the project much less valuable without the ability to generate the same amount of revenue as originally envisioned. CAISO generally requires up to 60 days to process an extension request, but is unlikely to process an extension request in less than approximately 30 days. Unlike with respect to the Mt Signal 3 Project, the Debtors can start the process of obtaining an extension prior to closing of the sale of the Equity Interests, however, the Buyer and the Seller Parties believe CAISO is unlikely to grant the extension unless the transferee is identified prior to the August 22, 2016 deadline.
“Second, certain conditional use permits and building permits for the Mt Signal 2 Project must also be renewed with the County of Imperial, California by August, 2016. Like the CAISO extension process, the project owner must begin the process of renewing these permits by mid-July, 2016, at the latest. Without such renewals, the Mt Signal 2 Project will be significantly delayed.
“Third, the Mt Signal 2 Project shares complex co-tenancies, shared infrastructure, rights of way and transmission facilities with the Mt Signal 3 Project that need to be addressed with the current Mt Signal 3 Project owner/developer, 8ME, to preserve and maximize the value of the Mt Signal 2 Project. For example, a local governmental entity, the Imperial Irrigation District (the ‘IID’), has placed a limit on the transmission capacity of the line (referred to as the ‘gen-tie’) which links the Mt Signal 2 and Mt Signal 3 Projects to the CAISO grid that will prevent the Mt Signal 2 and 3 Projects from delivering and selling their full output. Because the Mt Signal 2 Project is not expected to be operational until more than a year after the Mt Signal 3 Project, the Mt Signal 2 Project bears the risk that its output (and thus revenue-generating ability) will be limited absent an amendment to the IID restriction or agreement with 8ME. The owner of the Mt Signal 2 Project also requires cooperation from 8ME to use various portions of the gen-tie and corresponding transmission equipment. The Buyer has been working closely with 8ME as business partners and proposed joint bidders for the Projects for approximately nine months to resolve these issues and develop a strategy to obtain a suitable amendment to the shared capacity limit.
“Fourth, development of the Mt Signal 2 Project is secured by approximately $10 million in letters of credit constituting DIP Obligations under the Final DIP Order that will be fully drawn if the project does not get built or the project’s power purchase agreement is terminated. Accordingly, without a sale of the Mt Signal 2 Project to a creditworthy owner such as the Buyer, recoveries to creditors in these Chapter 11 Cases may be reduced by the amount of such letters of credit. In addition, pursuant to the terms of the PSA, the Buyer has agreed to (i) assume responsibility for certain credit support obligations upon the closing of the transaction as set forth in the PSA and (ii) replace the Project LCs (as defined in the PSA) by the six month anniversary of closing the transaction. The extension of credit support by the LC Lenders prior to then during the initial 180-day period after closing is subject, among other things, to the consent of such lenders to the proposed terms thereof, and entry into definitive documentation among the Seller, the Buyer, the DIP Administrative Agent (as defined in the PSA) and the LC Issuers (as defined in the PSA) for the benefit of the LC Lenders (as defined in the PSA).
“Fifth, the Mt Signal 2 Project owes Imperial Valley Solar Holdings, LLC (a third-party entity unaffiliated with either the Buyer or the Seller Parties) a substantial earn out payment, though the governing documentation is unclear regarding the owed amounts and timing for payment. The Buyer and its affiliates have made progress towards resolving these ambiguities with Imperial Valley Solar Holdings, LLC over the last three months. Another potential buyer would require additional time to negotiate terms with Imperial Valley Solar Holdings, LLC, which may slow down progress towards closing an alternative transaction.”
Following the bankruptcy petition date, SunEdison has marketed the Mt Signal 2 Project, along with other pending projects, to a wide variety of bidders, both as a standalone asset and as a part of a broader portfolio of assets. Upon consultation with advisors, including Rothschild Inc., SunEdison said it has received and evaluated 26 bids for the Mt Signal 2 Project, including four parties who have bid on the Equity Interests as a standalone sale transaction, and 22 parties who have bid on the Equity Interests as part of a larger portfolio bid for a number of assets.
Given the buyer’s familiarity with the Mt Signal 2 Project, the price offered by the buyer, the significant and imminent operational challenges faced, the likely inability of any other potential bidder to timely close a transaction given these operational challenges, SunEdison concluded, in an exercise of its business judgment, that the buyer and the transaction represented in the PSA constitute the highest or otherwise best value that the debtors could achieve for the Mt Signal 2 Project.
Under the PSA, the gross purchase price for the Equity Interests is $80 million. DESRI has agreed to a lesser, $70 million gross purchase price if its offer is used as a stalking horse bid in an auction process, but SunEdison told the court that the time involved with holding an auction would be an issue considering the imminent expiration of project approvals and agreements.
Hy Martin, the Director of Strategy and Mergers & Acquisitions for SunEdison, said in July 5 supporting testimony: “After reviewing all of the bids submitted for the Mt Signal 2 Project during both the pre- and post-petition competitive bidding processes, I believe that the private sale of the Equity Interests pursuant to the PSA represents the Debtors’ best opportunity to achieve a certain and timely closing to ensure that the Debtors are able to preserve and maximize the value of the Equity Interests for the benefit of all of the Debtors’ stakeholders. For the reasons set forth above, it is critical that the Debtors move forward expeditiously to close a transaction for the Mt Signal 2 Project. The PSA provides a monetary incentive, in the form of a $10 million increased purchase price, for the Debtors to move quickly towards a closing with the Buyer under a private sale transaction structure.”
Martin added: “Furthermore, given the imminent expiration of the CAISO interconnection rights, the consummation of a sale transaction would help ensure that the application to renew or extend those rights is timely considered and granted by CAISO. Absent a timely application submission and the renewal or extension of the CAISO interconnection rights, it is my belief that the Mt Signal 2 Project would suffer significant value degradation and a failure to achieve a higher or better price from any other party, to the detriment of the Debtors and their estates.”