Entegra Power seeks prepackaged Chapter 11 reorganization

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Power plant operator Entegra Power Group LLC and some of its related companies on Aug. 4 filed a prepackaged plan of reorganization under Chapter 11 at the U.S. Bankruptcy Court for the District of Delaware.

Other affiliates seeking bankruptcy protection include Entegra TC LLC, Basso TP-2 Inc., EPG LLC, Union Power LLC, Union Power Partners LP, UPP Finance Co. LLC, Trans-Union Pipeline LLC, Trans-Union Interstate Pipeline LP, Entegra Power Services LLC, Union Power Employee Co. LLC and Gila River Energy HoldCo LLC, according to GenerationHub.

Like many other prepackaged plans, this one at its heart involves debtholders in the bankrupt companies getting equity in those companies. Notably, prepackaged plans generally go through about as planned, but sometimes they don't, which is currently the case for Texas-based power producer Energy Future Holdings.

Only holders of Allowed Prepetition Second Lien Claims, Allowed Prepetition Third Lien Claims, and Allowed Equity Interests in the parent company are entitled to vote on the plan.

“The Debtors operate an independent power company that owns two of the largest gas-fueled power plants in the United States, located in El Dorado, Arkansas (the ‘Union Facility’) and Gila Bend, Arizona (the ‘Gila Facility’),” said one Entegra filing. “The Debtors market electric power from the Union Facility and Gila Facility to wholesale customers in the southeastern and southwestern United States. The Entities that directly own and operate the Gila Facility are not anticipated to commence Chapter 11 Cases, and the Gila Facility will not become property of the Debtors’ chapter 11 estate.”

The debtors’ corporate headquarters and full service asset management group is based in Tampa, Florida. For the fiscal year ended Dec. 31, 2013, the debtors reported on a consolidated basis $220.6 million in revenue. As of Dec. 31, 2013, the debtors reported on a consolidated balance-sheet basis total debt of about $1.5 billion.

Union power plant has lately undergone customer changes

The Union Facility is a natural gas-fired, combined-cycle plant consisting of four identical combined power blocks (each, a “Union Power Block”), located in El Dorado, Arkansas. It began full commercial operation in June 2003. Each of the Union Power Blocks has an average annual capacity of 527.5 MW, with a total facility capacity of about 2,100 MW. The Union Facility is owned and operated by debtor affiliate Union Power Partners LP (UPP), an exempt wholesale generator (EWG), which has been authorized by the Federal Energy Regulatory Commission to make sales of electric energy, capacity, and ancillary services at market-based rates.

The Union Facility historically operated as a merchant facility selling capacity and energy into the Entergy submarket of the Southeastern Reliability Corp. (SERC) region. In December 2013, Entergy completed its integration into the Midcontinent Independent System Operator (MISO) South region, a regional transmission organization. The FERC has approved a five-year transition period for transmission planning to be coordinated across MISO’s existing footprint and MISO South.

Following the integration of Entergy into MISO, capacity and associated energy from Union Power Block 1 has been sold to Entergy Arkansas Inc. (EAI) until May 31, 2017 (the “Toll Period”), pursuant to a tolling arrangement in accordance with a Capacity Sale and Fuel Conversion Services Agreement, dated as of October 2012 (the “Tolling Agreement”).

Under the Tolling Agreement, UPP will make available 495 MW of capacity during the Toll Period. The debtors have entered into several amendments of the Tolling Agreement with EAI to eliminate any impact of the commencement of the Chapter 11 cases on the Tolling Agreement.

The energy management, asset management, and operations management services for the Union Facility are provided by debtor Entegra Power Services LLC (EPS), a full service asset management organization, pursuant to a Management Services Agreement, dated as of June 1, 2005, by and among EPS, Gila River Power LP, and UPP.

Property taxes for the Union Facility are abated through a sale-leaseback arrangement with Union County, Arkansas. Under this arrangement, UPP leases the Union Facility from Union County pursuant to a 20-year lease agreement, dated as of May 2001 (the “Act 9 Lease”).

Union County financed the sale-leaseback transaction through the issuance of 20-year 7.5 percent fixed rate industrial development revenue bonds in the aggregate principal amount of $700 million (the “Act 9 Bonds”) to debtor UPP Finance Co. LLC, a special purpose vehicle created by UPP to facilitate the sale-leaseback transaction. Pursuant to the Act 9 Lease, UPP makes quarterly lease payments to Union County in the amount of the debt service on the Act 9 Bonds.

Debtor Trans-Union Interstate Pipeline LP owns and operates a natural gas transmission system known as the Trans-Union Interstate Pipeline. The TUIP extends from interconnections with Texas Gas Transmission LLC, an interstate natural gas pipeline, and Regency Intrastate Gas System, an intrastate pipeline, at or near Sharon, Louisiana, traversing Louisiana and Arkansas for 41.7 miles to its terminus and sole delivery point at the Union Facility.

Arizona plant partially controlled by company not in bankruptcy

Non-debtor Gila River Power LLC (f/k/a Gila River Power LP) owns and operates two of four combined power blocks (each, a “Gila Block”) that make up the Gila Facility located in Gila Bend, Arizona. Each of the Gila Power Blocks has an approximate installed capacity of 583 MW, with a total facility capacity of around 2,334 MW.

The Gila Facility is located in its own generator-only balancing authority area, which has no load other than station power loads when the Gila Facility is operating, and is interconnected to the transmission system of Arizona Public Service (APS). Gila River is an EWG and has been authorized by the FERC to sell wholesale electric energy, capacity, and ancillary services at market-based rates.

Gila River makes such sales primarily into APS and Salt River Project balancing authority areas, within the Western Electricity Coordinating Council region (WECC). Gila River also makes some sales into the markets operated by the California Independent System Operator (CAISO), also in the WECC region.

Gila River previously owned all of the Gila Blocks, but sold Gila Block 2 to Sundevil Power Holdings LLC, a unit of Wayzata Investment Partners in 2010, and Gila Block 1 to Sundevil in July 2011. Gila River continues to own and operate Gila Block 3 and Gila Block 4 but has committed all of the output from Gila Block 4 to APS under a long-term sales agreement ending in 2017.

Gila River is not anticipated to commence a Chapter 11 case, but is a wholly owned subsidiary of non-debtor GRE 2014 LLC, which is a unit of debtor Gila River Energy HoldCo LLC.

In December 2013, Gila River entered into a purchase agreement with Tucson Electric Power (TEP) for the sale of Gila Block 3 for $219m, which is expected to close in December 2014, subject to regulatory approval. One hundred percent of any net cash proceeds received by the debtors on or following the Aug. 4 bankruptcy petition date, but before the reorganization effective date, from the disposition of Gila Block 3 to TEP, its affiliates, or any other third-party purchaser will be held by the debtors until the closing date of the New Third Lien Credit Agreement and immediately thereafter will be applied to prepay the New Third Lien Debt.

Michael Schuyler, the President and CEO of Entegra Power Group, said in accompanying testimony about the reasons to seek bankruptcy reorganization: “Wholesale electricity prices have fallen significantly in recent history as a result of reduced electricity demand and substantial reductions in natural gas prices. Lower natural gas prices have been caused, in part, by the rapid expansion of natural gas production, and natural gas inventories arising from the development of new extraction techniques and the discovery of new shale deposits. Generally, the presence of low-priced natural gas reduces the variable costs of natural-gas fired power facilities and reduces the wholesale market price for all generators. Furthermore, the power generation industry is highly competitive on both a regional and national level. This competitive environment has added an additional layer of complexity to the Debtors’ existing challenges.”

He cited the $1.5 billion in debt and said the company tried to work deals with some debtholders to obtain relief. The prepackaged workout plan was the eventual result. “The Plan contemplates a comprehensive financial restructuring of the Debtors’ capital structure that will reduce the Debtors’ leverage and place the Debtors in a stronger financial position for future competitive and strategic initiatives,” he noted.

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