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Footprint Power Salem Harbor Development LP – Court Okays “Abundance of Caution” Exclusivity Extensions in Advance of August 16th Plan Confirmation Hearing; Debtors Confident as to Unresolved Iberdola Energy Challenge


August 8, 2022 – The Court hearing the Footprint Power Salem Harbor Development cases has extended the periods during which the Debtors have an exclusive right to file a Chapter 11 Plan, and solicit acceptances thereof, through and including November 18, 2022 and January 17, 2023, respectively [Docket No. 363]. Absent the requested relief, the Plan filing and solicitation periods were scheduled to expire on July 21, 2022 and September 19, 2022, respectively.

The Debtors, operators of a Salem, MA natural gas fired electricity plant, have filed their solicitation Plan and are aiming for an August 16th Plan confirmation hearing. As such, they view this as an "abundance of caution" request for extra time. As to an eventual emergence from bankruptcy, however, the Debtors added in their July 20th requesting motion that their "Plan will not go effective until certain regulatory approvals are obtained subsequent to confirmation," with the regulatory gating factor explaining the lengthy (4-month) extensions on the eve of Plan confirmation.

The Debtors' requesting motion also touches on a still open adversary proceeding involving Plan nemesis Iberdrola Energy Projects, Inc. (“IEP,” see further below on IEP relationship) and IEP's "Challenge" which the Debtors largely dismiss as "hardly a challenge at all" and rather a transparent vehicle for an "unsupportable smear campaign against other parties in interest, principals, and advisors in these chapter 11 cases." The Debtors add in an August 2nd filing [Docket No. 351]:

"It is perhaps most notable for what it does not challenge: IEP does not object to or otherwise contest the extent, validity, and priority of the Prepetition First Priority Liens and the Prepetition Secured Obligations. The extent, validity and priority of such liens is therefore confirmed and binding. All that IEP seeks, by way of its purported Challenge,  is a declaration that the Prepetition Secured Parties do not have perfected liens on the proceeds of the Debtors’ commercial tort claims and Avoidance Actions (such claims, collectively, the 'Commercial Tort Claims and such Challenge, the 'IEP Challenge'). But it is undisputed that the Prepetition Secured Parties have no such liens, their collateral is not secured by the proceeds of such actions, and the Debtors and the Prepetition Secured Parties in fact so stipulate. That resolves the IEP Challenge in its entirety."

So what is left? Much gnashing of teeth, of no legal significance. IEP uses its purported Challenge as a platform to launch an unsupported and unsupportable smear campaign against other parties in interest, principals, and advisors in these chapter 11 cases—a campaign that is laden with rhetoric, innuendo, second-guessing, and conspiracy theory, but precious short on factual substance or legal rigor."

Case Status

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 estimated assets between $500.0mn and $1.0bn; and estimated liabilities between $500.0mn and $1.0bn. At filing, the Debtors cited a long-running dispute with contractor IEP which compelled them, facing the combined weight of “$337 million of Secured Obligations and the $236.4 million [IEP] Arbitration Award,” to seek bankruptcy shelter.

On May 17, 2022, the Debtors filed an adversary proceeding that seeks avoidance of the IEP arbitration award [Docket No. 181]. The Debtors expect the adversary proceeding will allow them "to resolve treatment of the IEP Claims under the Plan and make a cash recovery available to other general unsecured creditors."

On June 30th the Debtors filed solicitation versions of their Amended Plan and Disclosure Statement [Docket Nos. 289 and 290, respectively] with the Court approving the latter for solicitation on that same date.

The Debtors’ initial Plan was filed on April 20, 2022 and contemplated a ‘toggle’ structure, whereby the Debtors would pursue consummation of a standalone restructuring simultaneously with a sale transaction, with the Debtors ultimately electing to pursue a standalone path and the June 30th Plan documents largely reflecting that choice.

The Extension Motion

The extension motion states, "The Debtors commenced these chapter 11 cases to accomplish a comprehensive value-maximizing going-concern restructuring of their business. The Debtors have made significant progress toward this goal and are currently in the process of seeking confirmation of their proposed plan of reorganization. The Confirmation Hearing is scheduled to take place in less than a month.           

Prior to the Petition Date, the Debtors and their advisors sought to engage in good faith, arm’s-length discussions with their key stakeholders regarding the terms of a fully consensual out-of-court restructuring transaction. 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 contours of a consensual restructuring transaction. As a result of these discussions, however, on March 23, 2022, the Debtors, the Consenting Lenders (which hold approximately 99% in amount of the Credit Facility Claims as of the date hereof), and the Consenting Equity Parties executed a restructuring support agreement (as amended, modified, restated, or supplemented from time to time, the ‘RSA’), a copy of which is annexed as Exhibit B to the Disclosure Statement. Under the terms of the RSA, the Consenting Stakeholders have agreed, subject to the terms and conditions of the RSA, to support the Restructuring Transactions reflected in the Plan.

As filed, the initial Plan contemplated implementation of either (a) a standalone restructuring transaction (the ‘Standalone Restructuring’) through which holders of Credit Facility Claims would receive, among other things, 100% of the equity of the Reorganized Debtors on account of their 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. The initial Plan incorporated a ‘toggle’ structure, whereby the Debtors would pursue consummation of the Standalone Restructuring simultaneously with the Sale Transaction to determine which outcome would maximize value for the Debtors’ estates (such election between the Standalone Restructuring and the Sale Transaction, the ‘Transaction Election’).

Following the completion of the Sale Process, pursuant to the Bidding Procedures Order and as contemplated by the initial Plan, the Debtors, in consultation with the Consultation Parties, determined that the Standalone Restructuring would maximize value for the Debtors’ estates and, on June 24, 2022, filed the Notice of Election to Pursue Standalone Restructuring [D.I. 263] informing the Court and parties in interest of the Debtors’ determination to pursue consummation of the Standalone Restructuring pursuant to the Plan.

Since the Petition Date, the Debtors have advanced these chapter 11 cases by, among other things: (a) smoothly transitioning the Debtors’ business into chapter 11 through the approval of fully consensual first day motions; (b) negotiating and obtaining approval of the Cash Collateral Orders on a fully consensual basis; (c) filing their schedules of assets and liabilities and statements of financial affairs; (d) establishing claims bar dates to facilitate the timely reconciliation and administration of claims in these chapter 11 cases; (e) obtaining entry of the Bidding Procedures Order; (f) conducting a marketing and sale process to solicit bids for all or substantially all of the Debtors’ assets in accordance with the Bidding Procedures Order; (g) filing the Plan and Disclosure Statement; (h) engaging with the Office of the United States Trustee for the District of Delaware (the ‘U.S. Trustee’) and other parties in interest throughout these chapter 11 cases, including with respect to the Plan and Disclosure Statement and significant revisions made on account thereof; (i) obtaining entry of the Disclosure Statement Order; (j) commencing solicitation of votes to confirm the Plan; (k) cooperating with IEP’s extensive rule 2004 requests and examinations on a fully consensual basis; and (l) negotiating and documenting a settlement agreement with respect to potential claims allegedly held by the Federal Energy Regulatory Commission (‘FERC’) against Debtor DevCo and obtaining entry of an order approving such settlement agreement. In addition, in connection with Plan confirmation, the Debtors commenced an adversary proceeding to avoid the IEP Judicial Lien asserted by IEP, which will allow the Debtors to resolve treatment of the IEP Claims under the Plan and make a cash recovery available to other general unsecured creditors.

The Confirmation Hearing…is scheduled to begin on August 16, 2022, after the expiration of the current Exclusive Filing Period, and if confirmed, the Plan will not go effective until certain regulatory approvals are obtained subsequent to confirmation. Accordingly, to allow sufficient time to prosecute the Plan and have it go effective, and out of an abundance of caution, the Debtors seek a 120-day extension of the Exclusive Periods without prejudice to their right to seek further extensions of the Exclusive Periods as appropriate or necessary."

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 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.

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 $47.5mn and capacity revenues of approximately $147.7mn.

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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The post Footprint Power Salem Harbor Development LP – Court Okays “Abundance of Caution” Exclusivity Extensions in Advance of August 16th Plan Confirmation Hearing; Debtors Confident as to Unresolved Iberdola Energy Challenge appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.

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