AES Eastern Energy sale delayed; no asset purchase agreement signed

By Jim Witters

Wilmington, Del., March 28 - AES Eastern Energy, LP's proposed sale of the company's two operating power plants hit a snag during the sale hearing on Wednesday when the court learned that the buyers had not signed an asset purchase agreement.

"There are too many balls in the air. I am not inclined to move forward today," said judge Kevin J. Carey during a hearing in the U.S. Bankruptcy Court for the District of Delaware.

Debtors attorney Joseph H. Smolinsky sought court approval of the sale without a signed asset purchase agreement, "so we can turn on a dime when all the other issues are resolved."

Stalking horse agreement

As previously reported, a settlement agreement reached on March 2 calls for the sale of AES Eastern Energy's Somerset and Cayuga plants to a new company sponsored by holders of pass-through trust certificates in connection with a leveraged lease transaction that financed the acquisition of the plants.

The plants are in Barker, N.Y., and Lansing, N.Y.

The new company formed by the certificate holders, along with the indenture trustee, is the stalking horse bidder with a credit bid of $600 million, which includes a price of $499 million plus the interests of the lease equity, according to the March 2 agreement.

The certificate holders are to pay a $13.5 million cash deposit and pay half of any operating losses incurred during April and all operating losses incurred from April forward, Smolinsky said.

For their cooperation and support of the settlement and the sale, the owner participants and owner trusts will received allowed claims totaling $92.8 million, Smolinsky said.

No other qualified bids were received by the March 19 deadline.

Trustee caught in middle

Deutsche Bank Trust Co. Americas, the pass-through trustee and the indenture trustee for certain lessor notes, is caught in a dispute between two groups of noteholders and cannot sign the asset purchase agreement, said attorney Mark R. Somerstein.

A group of certificate holders from the steering committee "purporting to represent a majority interest of the certificates" retained counsel for offering and providing financing to the proposed buyer, Newco, according to court documents.

On March 12, that group provided Deutsche Bank with a non-binding term sheet for $70 million of debt financing for Newco in connection with the planned sale, court documents state.

On March 25, the same group of noteholders gave Deutsche Bank a package of draft proposed materials related to the sale, including the following:

• A purported "direction of the majority in interest" to complete the transactions contemplated by the settlement agreement, including with respect to the Newco financing and formation of Newco;

• A term sheet for Newco financing;

• A commitment letter for Newco financing;

• An indenture for Newco financing;

• A note purchase agreement;

• A registration rights agreement for Newco equity interests;

• A certificate of incorporation for Newco;

• Newco bylaws;

• A stockholders agreement; and

• Instructions to Deutsche Bank not to disclose any of the materials or terms to anyone, including other noteholders.

Deutsche Bank responded, seeking permission to destroy the materials or to reveal them to other noteholders.

The group told Deutsche Bank to delete the documents, then sent an updated set of documents with instructions to share them with the other noteholders, according to court documents.

Noteholder concerns

Some noteholders, including members of the original steering committee, contacted Deutsche Bank with concerns about the proposed financing.

J.P. Morgan Investment Management Inc. and its asset management affiliates in their capacity as investment advisor to certain certificate holders held similar concerns. JP Morgan submitted an alternative financing proposal on March 27.

Deutsche Bank "perceives a conflict" between the noteholders. And the noteholders "apparently do not agree regarding what actions [Deutsche Bank] must perform," court documents state.

Because of the conflict and because executing the stalking horse asset purchase agreement may prove harmful to some of the noteholders, Deutsche Bank cannot move forward with the sale, Somerstein said.

Other issues

Once the asset purchase agreement is signed, the debtor can apply for the transfer of permits associated with the operation of the plants, Smolinsky said.

A meeting with the New York State Electric & Gas Corp. is scheduled for April 6 to negotiate new interconnection agreements, he said.

And the debtors have meetings scheduled with the New York attorney general to work out regulatory issues.

Catherine Creighton, who represents the International Brotherhood of Electrical Workers, said her clients have agreed to continue the contracts at the two plants being sold and have agreed to negotiate with Newco on amendments to those contracts.

If the asset purchase agreement is signed and the sale is approved quickly, the deal could still close by the end of April, Smolinsky said.

Carey told the parties to try to work out their differences. He scheduled a continuation of the sale hearing for 11 a.m. ET on April 5.

AES Eastern Energy operates more than 1,000 megawatts of capacity at four facilities in New York that were acquired from New York State Electric & Gas in May 1999. The Chapter 11 case number is 11-14138.

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