NRG battles at Sherwin Alumina bankruptcy court over cogen plant issues

NRG Energy‘s (NYSE: NRG) Gregory Power Partners LLC on Nov. 14 at the bankruptcy court for Sherwin Alumina Co. LLC objected to the bankrupt company’s Nov. 10 emergency motion to expedite the hearing and objection deadlines on its bankruptcy reorganization and asset sale plan.

Sherwin Alumina, a maker of alumina, a key ingredient in aluminum, has been since Jan. 11 in Chapter 11 protection at the U.S. Bankuptcy Court for the Southern District of Texas. Gregory Power Partners (GPP) supplied the company with steam and some power from an on-site, 550-MW cogeneration plant. The operation of that cogen plant is endangered by Sherwin Alumina’s actions, said NRG.

Sherwin Alumina is currently owned by international commodities trader Glencore Ltd., which is now proposing to buy some assets out of the bankruptcy case. Sherwin Alumina had gotten most of the raw bauxite for its facility from Noranda, with other bauxite supplied by Glencore itself.

GPP said in its Nov. 14 objection that Sherwin Alumina is proposing to collapse the 60+ day, two-stage process for approving a disclosure statement and confirming a reorganization plan into a truncated single hearing heard on an emergency basis.

Said GPP: “The Emergency Motion to Expedite is not supported by evidence because the timeline is driven exclusively by Glencore’s desire to be finished with its bankruptcy case. Glencore put Sherwin, its wholly-owned subsidiary, into bankruptcy as part of a larger strategy to drive concessions from its supplier (Noranda), its labor union, environmental authorities, and its power/steam provider, GPP. Glencore’s grand strategy failed when Noranda filed bankruptcy and eventually liquidated; and now Glencore is moving on to its backup plan by proposing to acquire Sherwin’s desired assets through a credit bid while leaving behind the more environmentally contaminated assets.

“Whether Glencore succeeds will—and should—be examined by this Court in the fullness of time. What Glencore proposes however, is a classic strategy to jam all parties, including the Court, by bending the rules to fit Glencore’s timetable.

“After nearly a year of incurring the expenses of chapter 11, the Debtors claim they cannot afford the expenses associated with the traditional confirmation process. In reality, the Debtors can control the majority of accruing administrative expenses, including professional fees. The Sherwin Facility has largely ceased operations. There is no competing chapter 11 plan or other reason of judicial economy here that has in some cases justified a shortening of the confirmation periods mandated by Bankruptcy Rule 2002(b).”

Until Sept. 30 of this year, Sherwin Alumina operated a plant in Gregory, Texas, that produced aluminum oxide (or alumina), which is the primary component of aluminum, from bauxite. Sherwin Alumina’s facility was historically capable of producing approximately 1.65 million metric tons of smelter grade alumina per year. Until Sept. 30, Sherwin Alumina operated one of the few alumina plants in the world that can refine Jamaican bauxite, which because of its low quality (and cheaper price), must be refined using higher temperatures and more energy than higher quality bauxite.

In 2007, Glencore Ltd., together with certain of its affiliates, completed a series of transactions that resulted in Glencore acquiring a 100% indirect equity interest in Sherwin Alumina. 

GPP historically provided steam and electricity to the Main Facility under an Energy Services Agreement, a long-term energy supply agreement originally executed in 1998. The Energy Supply Agreement was a long-term take-or-pay agreement under which GPP provides steam and electricity necessary to operate the Main Facility to Sherwin Alumina. GPP’s obligations under the Energy Supply Agreement were guaranteed by equity sponsor NRG Energy (up to a cap of $100 million).

Said Sherwin Alumina’s Nov. 10 disclosure statement filed with the court: “The Energy Supply Agreement required Sherwin Alumina to purchase steam on uneconomic and unreasonable terms. The Energy Supply Agreement also did not adequately compensate Sherwin Alumina for the diminished revenues and high equipment repair costs associated with the prolonged outages that regularly delayed production at the Main Facility.”

Said the disclosure statement: “Upon consummation of the Plan, it is anticipated that substantially all of the Debtors’ assets will be transferred to the Buyer. On April 20, 2016, the Debtors, in consultation with the Committee and the Prepetition Secured Lender, determined that the bid from the Buyer, an Affiliate of the Prepetition Secured Lender, was the Successful Bid and that the Buyer was the Successful Bidder (as such terms are defined in the Bid Procedures Order). The Purchase Agreement does not contemplate that the Buyer will continue to operate the Main Facility. As of September 30, 2016, the Debtors terminated substantially all of their employees and began to wind down their operations.”

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.