Lincoln Power files bankruptcy as non-performance penalties loom

By Sarah Lizee

Olympia, Wash., March 31 – Lincoln Power, LLC and some of its affiliates filed Chapter 11 bankruptcy on Friday in the U.S. Bankruptcy Court for the District of Delaware.

The Charlotte, N.C.-based power company owns two gas-fired power-generation facilities in Illinois. The debtor generates and sells electric energy from the power plants into the wholesale markets operated by PJM Interconnection, LLC.

As a result of the power plants having not complied with PJM’s energy demands during the winter storm Elliott performance assessment intervals, PJM indicated that the debtors owe $38.89 million in non-performance penalties, payable over nine months with the first payment coming due on April 14.

Lincoln has contested PJM’s calculation of the penalties.

Meanwhile, PJM has continued to garnish $350,000 per week from the power plants, collectively, and has issued new, increasingly burdensome collateral demands, Lincoln said.

On March 29, PJM issued formal collateral calls requiring payment of the about $2 million lump sum by 4 p.m. ET on March 31.

“Against the backdrop of headwinds that were already straining the debtors’ liquidity, the significant collateral demanded by PJM, and the looming winter storm Elliott penalties on which PJM has been unwilling to compromise as of yet, the debtors’ cash flow and liquidity have been severely harmed and the debtors have been forced to operate under a cloud of uncertainty that has, in turn, further strained the debtors’ cash flows and negatively affected liquidity,” Justin D. Pugh, chief restructuring officer of the debtors, said in court documents.

“As a result of these factors, the debtors’ debt load is simply no longer workable.”

Restructuring plan

The company currently has about $151 million of secured funded debt outstanding. The debt is through a credit agreement with ABN Amro Capital USA LLC as issuing lender, Investec Bank plc as administrative agent and First Citizens Bank & Trust Co. as collateral agent. There is $136 million outstanding under a term loan, $15 million outstanding under a revolver and $7.9 million of letters of credit issued.

In February, the company began discussions with the lenders with the goal of restructuring its balance sheet and addressing the winter storm Elliott penalties.

On March 30, the debtors, holders of more than 66.67% of the outstanding first-lien loans and equity sponsor Carlyle Power entered into a restructuring support agreement that outlines a debt-to-equity swap for secured creditors.

However, the RSA also contemplates that the debtors will start a marketing process within 45 days to assess whether there are potential purchasers interested in acquiring some or all of the debtors’ assets.

Lincoln Power is seeking court approval to use the cash collateral of its prepetition secured lenders on a consensual basis.

Adversary proceeding

The company said that in order to preserve its assets and obtain certainty and finality regarding the winter storm penalties, it may file an adversary proceeding against PJM that would seek declaratory judgments that the penalties are dischargeable, and that the debtors can sell their assets free and clear of any interest PJM may have in their assets, among other things.

However, Lincoln said it is open to mediation if both sides believe that it could bring an efficient resolution to these issues.

Other details

In its petition, the company listed up to 49 creditors, $100 million to $500 million in assets and $100 million to $500 million in liabilities.

Its largest unsecured creditor is PJM Interconnection, based in Audubon, Pa., with a $38.89 million penalty claim.

Latham & Watkins LLP and Young Conaway Stargatt & Taylor, LLP are proposed bankruptcy counsel, and Guggenheim Securities, LLC is proposed financial adviser and investment banker.

The power company’s Chapter 11 case number is 23-10382.

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