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Salem Harbor Power Development LP (f/k/a Footprint Power Salem Harbor Development LP) – Operator of LNG-Powered Generating Facility Seeks Approval of Bidding Procedures as Part of RSA-Backed “Toggle” Structure, Aims for June 14th Auction

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March 31, 2022 – The Debtors filed a motion requesting a Court order that (i) approve bidding procedures in respect of a sale of substantially all of the Debtors' assets, (ii) authorize the Debtors to select a stalking horse bidder (none selected yet) and offer bidder protections to any selected stalking horse and (iii) approve a proposed timetable culminating in a June 14, 2021 auction and a TBD sale hearing [Docket No. 69]. The bidding procedures motion attaches a declaration in support filed by the Debtors' investment banker Houlihan Lokey.

On March 23, 2022, the Debtors filed for Chapter 11 protection noting estimated assets between $500.0mn and $1.0bn; and estimated liabilities between $500.0mn and $1.0bn. At filing, the Debtors cited the impact of their long-running dispute with contractor Iberdrola Energy Projects, Inc. (“IEP”); with IEP's March 23, 2022 termination of a standstill agreement (relating to the outcome of arbitration) compelling the Debtors, facing the combined weight of "$337 million of Secured Obligations and the $236.4 million Arbitration Award," to seek bankruptcy shelter (see "Events…" below).

The proposed sale efforts are part of a dual path (or "toggle") structure agreed with signatories to a prepetition RSA which "contemplates implementation of either (a) a standalone restructuring transaction…through which holders of Secured Credit Facility Claims would receive, among other things, 100% of the equity of the reorganized Debtors on account of their Secured Credit Facility Claims or (b) a sale transaction…"

The Debtors' motion [Docket No. 69] states, “Prior to the Petition Date, the Debtors and their advisors engaged in extensive discussions regarding potential restructuring transactions with the Prepetition Secured Parties, IEP, and the holders of equity interests in the Debtors. As more fully described in the First Day Declaration, while the Debtors sought to reach consensus among all of their key stakeholders, the parties were collectively unable to reach mutually acceptable terms regarding the terms of a consensual restructuring transaction. Nonetheless, discussions with certain parties ultimately resulted in the execution of a restructuring support agreement (as may be amended, supplemented, or otherwise modified from time to time, the ‘RSA’), dated as of March 23, 2022, by and among the Debtors, certain Prepetition Lenders (the ‘Consenting Lenders’), and certain holders of equity interests in the Debtors (the ‘Consenting Equityholders’ and, together with the Consenting Lenders, the ‘Consenting Stakeholders’). 

The RSA contemplates implementation of either (a) a standalone restructuring transaction (the ‘Standalone Restructuring Transaction’) through which holders of Secured Credit Facility Claims would receive, among other things, 100% of the equity of the reorganized Debtors on account of their Secured Credit Facility Claims or (b) a sale transaction (the ‘Sale Transaction’) through which all, or substantially all, of the Debtors’ assets would be sold and proceeds generated therefrom would be distributed to the Debtors’ creditors in accordance with the absolute priority rule. As set forth in the RSA, the Plan contemplates a ‘toggle’ structure, whereby the Debtors will pursue consummation of the Standalone Restructuring Transaction simultaneously with the Sale Transaction, in consultation with the Consultation Parties (defined below), to ultimately determine the outcome that would maximize value for the Debtors’ estates, and therefore should be consummated (such election between the Standalone Restructuring Transaction and the Sale Transaction, the ‘Transaction Election’). The Debtors will make the Transaction Election in connection with filing supplements to the Plan (collectively, the ‘Plan Supplement’), which, subject to the entry of an order approving the disclosure statement for the Plan and the related solicitation process and materials (the ‘Solicitation Order’), shall be no later than ten (10) days prior to the deadline by which applicable parties in interest must submit votes to approve the Plan (the ‘Voting Deadline’).

Accordingly, the Debtors propose to continue their prepetition marketing process on a postpetition basis and pursue a potential Sale Transaction in accordance with the Bidding Procedures (defined below). To the extent the Debtors are able to identify a viable and value-maximizing Sale Transaction, the Debtors, in consultation with the Consultation Parties, will toggle to implement such Sale Transaction by making the Transaction Election. Consummation of any Sale Transaction will ultimately be subject to entry of an order confirming the Plan (the ‘Confirmation Order’) and will be pursuant to the Plan and such Confirmation Order. The Debtors anticipate such Sale Transaction would close contemporaneously with the effective date of the Plan (the ‘Plan Effective Date’).”

Marketing Process

The motion continues: "Prior to the Petition Date, on March 7, 2022, the Debtors, with the assistance of Houlihan, formally commenced a marketing process to sell the Debtors” Assets (such process, “Phase I”). Prior to the Petition Date, Houlihan reached out to 100 potential acquiring parties (the 'Initial Contact Parties') to solicit Non-Binding Indications of Interest. As of the date hereof, the Debtors have entered into approximately 31 confidentiality agreements with potentially interested parties. Such parties have received a confidential information memorandum, as well as access to additional diligence materials to assist them in formulating Non-Binding Indications of Interest.

As of the Petition Date, the Phase I process remains ongoing. The Debtors have or will soon advise interested parties that have executed confidentiality agreements that they will have until on or about April 12, 2022 to submit Non-Binding Indications of Interest. The Debtors and their advisors continue to engage in discussions with certain of these parties regarding the submission of Non-Binding Indications of Interest.

The Debtors intend to continue the marketing process on a postpetition basis, including completing the Phase I process for submissions of Non-Binding Indications of Interest and commencing the second phase ('Phase II') for solicitation of binding bids pursuant to the Bidding Procedures."

Proposed Key Dates

  • Hearing on Bidding Procedure Motion: April 21, 2022
  • Objection Deadline: April 14, 2022
  • Stalking Horse Motion Deadline: June 3, 2022
  • Bid Deadline: June 10, 2022
  • Auction: June 14, 2022
  • Confirmation Hearing: July 11, 2022

Background

On March 23, 2022, Footprint Power* Salem Harbor Development LP and five affiliated debtors (together the “Salem Harbor Companies” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 22-10239 (Judge Walrath). The Debtors, operators of a 674-megawatt natural gas-fired, electric generating facility located in Salem, Massachussetts (the "Facility"), are represented by Andrew L. Magaziner of Young Conaway Stargatt & Taylor, LLP. Further board-authorized engagements include: (i) Paul, Weiss, Rifkind, Wharton & Garrison LLP as general bankruptcy counsel, (ii) AlixPartners as financial advisors (with AlixPartners' John Castellano to serve as the Salem Harbor Companies’ chief restructuring officer, (iii) Houlihan Lokey Capital, Inc. as investment bankers and (iv) Prime Clerk as claims agent. In addition on November 11, 2021 Messrs. D. Jan Baker and William Transier were appointed as "independent and disinterested directors" and to comprise a Special Committee that would "evaluate paths forward." 

*The Debtors have used the words “Footprint Power” and its associated logo in their names pursuant to a license which was terminated shortly before filing. To avoid and/or mitigate any alleged trademark-related claims, the Debtors will no longer be utilizing the “Footprint” logo and, as part of their “first day” motions, are seeking authorization to change the respective Debtors’ names that will be utilized in connection with these chapter 11 cases.

The Debtors’ lead petition notes between 100 and 200 creditors; estimated assets between $500.0mn and $1.0bn; and estimated liabilities between $500.0mn and $1.0bn. Documents filed with the Court list the Debtors’ largest unsecured creditor as Iberdrola Energy Projects, Inc. ($237.1mn judgment claimFN1). The Debtors' list of top 30 unsecured claim holders does not provide amounts as to the remaining 29 claims.

FN1 On March 23, 2022, prior to the commencement of the Debtors’ chapter 11 cases, Iberdrola Energy Projects, Inc. recorded a judicial lien on the land records with the Southern Essex District Registry of Deeds in Massachusetts with respect to its judgment claim.

Goals of the Chapter 11 Filings

The Castellano Declaration (defined below) provides: "The Debtors commenced these Chapter 11 Cases to implement a comprehensive financial restructuring through a pre-arranged chapter 11 plan of reorganization (the 'Plan'), the terms of which are set forth in the Restructuring Support Agreement."

Restructuring Support Agreement and Anticipated "Toggle" Plan

On March 23, 2022, the Debtors entered into a restructuring support agreement (the "RSA," attached to the Castellano Declaration at Exhibit B) with the Consenting Lenders [ie parties to the Debtors' 2015 credit agreement that have signed on to the RSA] and and the Consenting Equity Parties [ie OCM-Highstar Footprint Aggregator LLC, in its capacity as a direct holder of limited partnership interests in TopCo and any other direct holder of limited partnership interests in TopCo that signs on to the RSA] further to which each of the RSA parties agreed to support the restructuring transactions that will be set forth in the Plan. As of the Petition date, holders representing over 80% of the aggregate principal amount of Secured Credit Facility Claims (defined below) are parties to the RSA

The RSA contemplates implementation of either (a) a standalone restructuring transaction (the “Standalone Restructuring Transaction”) through which holders of
Secured Credit Facility Claims would receive 100% of the equity of the reorganized Debtors
on account of their Secured Credit Facility Claims or (b) a sale transaction (the “Sale Transaction”) through which all, or substantially all, of the Debtors’ assets would be sold; with both paths of the "toggle" Plan to be pursued simultaneously.

RSA milestones include an obligation to file the pre-arranged Plan no later than 28 days following the Petition date.

Events Leading to the Chapter 11 Filing

In a declaration in support of first day filings (the “Castellano Declaration") [Docket No. 9], John R. Castellano, the Debtors’ CRO details the Debtors' long-running dispute with contractor Iberdrola Energy Projects, Inc. (“IEP”) which culminated in IEP's March 23, 2022 termination of a standstill agreement (relating to the outcome of arbitration) and compelling the Debtors, facing the combined weight of "$337 million of Secured Obligations and the $236.4 million Arbitration Award,"to seek bankruptcy shelter.

In December 2014, Debtor Devco entered into an Engineering, Procurement and Construction Contract (the “EPC Contract”) with IEP further to which IEP agreed to
construct the Facility for lump sum price of approximately $702.1 million and have it substantially completed by May 31, 2017.

During construction of the Facility, however, numerous disputes arose between DevCo and IEP concerning changes, added costs, delays, and inefficiencies; with the Debtors ultimately declaring a default under the EPC Contract and then terminating it [NB: The Debtors subsequently engaged a third party to complete construction and the Facility began commercial operations on May 31, 2018]. 

Responding to the Debtors' actions, however, IEP recorded a Notice of Contract with the registry of deeds in Southern Essex County in Massachusetts in April 2018 asserting a $327.7mn mechanic’s lien related to amounts IEP asserted it was owed under the EPC Contract; and commenced arbitration proceedings shortly after termination of the EPC Contract. 

Delays in completing construction of the Facility and the ensuing arbitration between DevCo and IEP had the knock on effect of triggering events of default under the Credit Agreement, with senior lenders ultimately allowing the Debtors to limp on, albeit with reductions in capital under the Credit Agreement and (after the arbitration ruling) several cash sweeps.

On October 15, 2021, an arbitration panel found that DevCo lacked sufficient grounds to terminate the EPC Contract and awarded IEP approximately $236.4mn and on January 24, 2022, a New York state court entered a judgment against DevCo in the amount of $237.1mn. 

Meanwhile, back in November, the Debtors' advisors had "engaged with IEP’s counsel to propose that the parties enter into a standstill with respect to the Lift Stay Request and the 5229 Action, as well as agree that if the Arbitration Award were confirmed by the New York state court, IEP may take action to perfect the IEP Asserted Lien, but would not take actions during the term of the standstill to enforce or collect on any judgment against the Debtors or the Facility." 

Those negotiations resulted in a January 18, 2022 standstill agreement with IEP; the existence of which allowed the Debtors to extend a November 2021 forbearance agreement with their senior lenders in respect of the defaulted Credit Agreement. That forbearance, and the uncomfortable truce with IEP, came to an abrupt end on March 23rd when IEP "out of nowhere, delivered a termination notice to the Debtors, notifying the Debtors that IEP was electing to terminate the Standstill Agreement effective March 23, 2022. Because the Forbearance Agreement and Standstill Agreement were structured to be coterminous, as a result of IEP’s election, the Forbearance Agreement would also terminate on March 23, 2022.

Prepetition Indebtedness

As of the Petition Date, the Debtors have outstanding funded debt obligations comprised of (i) approximately $290.0mnn of term loans issued under a single January 2015 credit facility (the “Credit Facility”) by and among DevCo, as Borrower, MUFG Union Bank, N.A., as Administrative Agent, Collateral Agent, and Depositary Bank (“MUFG” or the “Prepetition Agent”) and (ii) $49.92mn of letters of credit issued under the Credit Facility. The stated maturity date under the Credit Agreement is December 31, 2022. The Castellano Declaration gives a combined figure in respect of the Term Loans and the LOCs of $337.0mn.

The Credit Facility originally provided for a $600.0mn term loan facility (the “Term Loans”), a $120.0mn letter of credit facility, and a $10.0mn working capital
facility. In December 2019, the Credit Agreement was amended to, among other things, terminate the working capital facility commitment, terminate the letter of credit commitments in excess of $49.92mn, convert the loans thereunder from construction loans to term loans, and waive certain existing events of default.

About the Debtors

According to the Debtors: “The new Salem Harbor Station is a 674-megawatt (MW) natural gas-fired, quick-start, combined-cycle electric generating facility on a 23 acre portion of the original 65-acre Salem Harbor Generating Station, a coal-fired generating plant site. It will produce and provide efficient, reliable, low-emission electrical power to New England, and will support the introduction of new renewable resources to the energy grid."

The Castellano Declaration adds: "DevCo [the only Debtor with business operations] owns and operates the Facility, a 674 MW natural gas-fired combined-cycle electric power plant located in Salem, Massachusetts. The Facility, located along Salem Harbor, is a more efficient and environmentally responsible replacement of a previous coal-fired power plant located at the same site.

DevCo generates revenue by selling energy, capacity, and ancillary services from the Facility through ISO New England Inc. (“ISO-NE”), the not-for-profit organization that manages New England’s electrical grid and its competitive wholesale market. DevCo sells its electricity into the ISO-NE wholesale electricity market through scheduling services offered by its energy manager, EDF Trading North America, LLC ('EDF'). DevCo receives so-called 'capacity revenues' pursuant to ISO-NE Forward Capacity Auctions. Capacity revenue consists of payments from ISO-NE in exchange for keeping the Facility available to produce energy (regardless of whether or not energy is actually needed or produced). For the year ended December 31, 2021, DevCo recognized energy revenues of approximately $47.5 million and capacity revenues of approximately $147.7 million.

DevCo’s ability to procure competitively-priced natural gas for the Facility is essential for its electrical energy production. DevCo purchases natural gas primarily through EDF, most of which is delivered to the Facility through a pipeline owned and operated by Algonquin Gas Transmission, LLC ('Algonquin') pursuant to a firm transportation service agreement. DevCo also purchases natural gas from DTE Energy Co. and other suppliers."

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