December 9, 2020 – The Court hearing the Tonopah Solar Energy cases confirmed the Debtor's Amended Chapter 11 Plan [Docket No. 291].

On July 30, Tonopah Solar Energy, LLC (“Tonopah” or the “Debtor”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, case number 20-11884. At filing, the Debtor, which owns and operates a net 110-megawatt concentrated solar energy power plant located near Tonopah in Nye County, Nevada, noted estimated assets between $500.0mn and $1.0bn; and estimated liabilities between $100.0mn and $500.0mn.

Overview of the Plan

The Debtor’s memorandum of law in support of Plan confirmation [Docket No. 246] provides the following pre-Plan confirmation summation: “Confirmation of the Plan is the culmination of months of negotiation and compromise—both prepetition and postpetition. Following extensive negotiations among the Debtor, DOE, DOJ, and Cobra, the Debtor entered into the Restructuring Support Agreement and commenced this chapter 11 case with a proposed plan of reorganization that leaves all allowed claims unimpaired, with the sole exception of the claim held by the United States (which supports the treatment of the Prepetition Notes Claim under and has voted in favor of the Plan).

The Plan, if confirmed and consummated, will provide for, among other things: (a) a $200 million cash payment, plus potential deferred payments pursuant to the terms of a $100 million contingent note to be guaranteed by ACS, to DOE, acting through Secretary of Energy on the effective date of the Plan (the ‘Effective Date’), with Cobra funding the Debtor’s obligations under the Plan; (b) a settlement of the complex and highly contentious ICC Arbitration between the Debtor and Cobra, which otherwise likely would have continued for years and presented vast, unnecessary and significant expenses to litigate through to a final determination, and related mutual releases by the Debtor, Cobra, and DOE on the terms set forth in the Plan; (c) Cobra or an affiliate thereof to own 100% of the Company as one of the conditions of and upon the Effective Date; and (d) the unimpairment of all other Claims, as set forth in the Plan. Upon emergence from bankruptcy, the Debtor will have a significantly deleveraged balance sheet free of costly, extremely complicated, inherently uncertain and time-consuming litigation with Cobra.

The decision to commence this chapter 11 case and proceed with the proposed restructuring was ultimately validated by the decision of the United States, on behalf of DOE, the only impaired creditor under the Plan, to vote in favor of the Plan. All other holders of Allowed Claims will not have their rights affected in respect of such claims, as all Allowed Claims, other than those held by DOE, are unimpaired under the Plan."

The Disclosure Statement [Docket No. 149] notes, “The Plan and this Disclosure Statement are the result of months of extensive and vigorous negotiations among the Debtor, the U.S. Department of Energy (‘DOE’), the U.S. Department of Justice (‘DOJ’) and ACS Servicios Comunicaciones y Energía S.L. (‘ACS’), Cobra Thermosolar Plants, Inc. (‘CPI’) and Cobra Energy Investment, LLC (‘CEI’, and together with ACS and CPI, ‘Cobra’). The culmination of these negotiations was entry into the Restructuring Support Agreement (the ‘Restructuring Support Agreement’), upon which the Plan is premised, by and among the Debtor and Cobra. The Restructuring Support Agreement provides for the restructuring of the Debtor through the filing of the chapter 11 case with the Bankruptcy Court and the confirmation of the Plan. The Debtor firmly believes the Restructuring Support Agreement puts the Debtor on firm footing to prosecute the chapter 11 case expeditiously to conclusion.”

The Plan provides for, among other things:

• A $200 million cash payment, plus a $100 million contingent note to be guaranteed by Cobra, with Cobra funding the Company’s obligations under the Plan through new debt financing and cash to be provided on the Effective Date of the Plan;
• Mutual releases of Claims on the terms set forth in the Plan;
• Release of claims held by third parties on the terms set forth in the Plan;
• Dismissal of the ICC Arbitration;
• Cobra or a Cobra Designee to own 100% of the Company upon the Effective Date;
• The unimpairment of all other Claims, as set forth in the Plan.”

The following is a summary of classes, claims, voting rights and expected recoveries (defined terms are as in the Plan and/or Disclosure Statement; see also the Liquidation Analysis below):

• Class 1 (“Priority Non-Tax Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The Debtors estimate aggregate claims of $0 and estimated recovery is 100%.
• Class 2 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The Debtors estimate aggregate claims of $481,863 and estimated recovery is 100%.
• Class 3 (“Prepetition Note Claims”) is impaired and entitled to vote on the Plan. The Debtors estimate aggregate claims of $435.7mn and estimated recovery of 47-71%. The holder of the Allowed Prepetition Note Claims shall receive: (a) $200.0mn in Cash (which shall be satisfied by DOE by a draw on the Cobra Backstop Letter of Credit) and (b) all rights and obligations under the Exit Contingent Note.
• Class 4 (“General Unsecured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The Debtors estimate aggregate claims of $770k and estimated recovery is 100%.
• Class 5 (“Existing Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. The Debtors estimate aggregate claims of $421.8mn and estimated recovery is 0%.

Voting Result

On November 18, the Debtor's claims agent notified the Court of Plan voting result [Docket No. 242], which was as follows:

• Class 3 (“Prepetition Note Clams”): 1 claim holder, representing $432,120,913.53 in amount (or 100%) and 100% in number, voted in favor of the Plan.

Goals of the Chapter 11 Filings

The Pugh Declaration, defined below, states: "The Debtor has commenced the Chapter 11 Case to effectuate a consensual financial restructuring pursuant to the terms of the Plan. As a result of the Restructuring, the Debtor will emerge from the Chapter 11 Case with a reduced debt burden that is better aligned with its present and future operating prospects. The Debtor is well-positioned to emerge quickly from chapter 11 with a renewed focus on obtaining full operational capacity."

Sounds like a pretty straightforward/standard bankruptcy. Its not. 

To get an idea of how unusual it is, one needs to start with an idea of the underlying solar project and the parties involved.

The Project. The Debtor owns and operates a net 110-megawatt concentrated solar energy power plant (the “Power Plant”) located near Tonopah in Nye County, Nevada. The Power Plant is also known as the Crescent Dunes Solar Energy Project (the “Project”). The Project was the first utility-scale concentrated solar power plant in the United States to be fully integrated with an energy storage technology; it was designed to address the core limitation of renewable energy sources such as solar and wind, their  intermittency, by creating an enormous salt battery. The Power Plant uses 10,347 mirrors assembled in a 2-mile circle to collect and focus thermal energy to heat 70,000,000 pounds of molten salt flowing a 640-foot tall solar power tower (the “Receiver Tower”) to 1050°F. The molten salt is then stored in a hot salt tank, before it is transmitted to the other areas of the Power Plant. At that point, the Power Plant relies on conventional technology to convert the heat energy to high-pressurized steam through a steam generation system, which powers a turbine that creates electricity for sale.

The Parties. TSE was formed in February 2008 by SolarReserve, Inc. (“SolarReserve”) to develop the Project. To develop the Project, SolarReserve needed to line up several other key players: (i) someone to build the Project, (ii) further parties to fund the project, (iii) someone to guarantee the debt financing and (iv) someone to buy the energy to provide the revenue necessary to service debt incurred to construct the Project.

Those players were/are:

• Developer/Construction Company: The Debtor executed a contract (the “EPC Contract”) with Cobra Thermosolar Plants, Inc. (“CPI”) to provide engineering, procurement and construction services in connection with the Project (at an initial fixed price amount of $766.4mn).
• Capital/Investors: 
  • Equity. TSE obtained equity investments from SolarReserve, Cobra Energy Investments, LLC (“CEI”), which is an affiliate of Spanish construction company ACS Servicios Comunicaciones y Energía S.L. (“ACS” and, together with CEI and CPI, “Cobra”) and Banco Santander, S.A. 
  • Debt. TSE received a project loan of $737.0mn from the Federal Financing Bank (the “FFB,” which is a corporation set up by the US Treasury).
• Guarantor: The Debtor and the Department of Energy (“DOE”) executed a Loan Guarantee Agreement, dated as of September 23, 2011, in an authorized amount of up to $737.0mn to guarantee the FFB project loan.
• Utility Company: Nevada Power Company, d/b/a NV Energy (“NVE”), with whom the Debtor entered into a “Long-Term Firm Portfolio Energy Credit and Renewable Power Purchase Agreement” dated November 4, 2009 (the “PPA”).

What could go wrong? Well, of course, everything; and although the Pugh Declaration goes into significant detail, this is what one needs to know. The hot salt tank leaked causing the Power Plant to be shut down from October 2016 through July 2017 (it had gone on line in November 2015) and then again from April 2019 until NOW. The Power Plant has been idle since April 2019 and no revenue has been generated. The Debtor and CPI fought, with arbitration beginning in November 2017 and that arbitration continuing to the present. NVE served a notice of default in respect of the PPA (the Debtor claims this was simply an opportunistic effort to escape a PPA agreed rate of $139 per megawatt hour, a rate which ten years after the PPA was executed has become considerably above market). In September 2019, the DOE sent TSE a notice of default that alleges several defaults under the LGA.

The RSA and the Bankruptcy Filings

The solution to history's largest leaky battery has been a restructuring support agreement (the "RSA") involving most of the key parties (NVE conspicuously absent; who will buy the energy of the emerged Debtor and at what price?) and the use of a "pre-arranged" Chapter 11 to implement the terms of the RSA.

The Pugh Declaration provides: "Ultimately, following months of extensive arm’s-length negotiations, the Debtor, CEI, and DOE agreed in principle to implement he terms of a de-leveraging transaction through a pre-negotiated chapter 11 plan that also involved the settlement of the ICC Arbitration. 

On July 29, 2020, the Debtor and Cobra entered into that certain Restructuring Support Agreement…pursuant to which, among other things: 

(a) the DOE shall receive, in full and complete satisfaction of the Debtor’s outstanding obligations …a payment of $200.0mn in cash upon the Effective Date of the Plan [as of the Petition date, the approximate principal amount outstanding under the DOE Loan is $425.0mn]…plus a $100.0mn contingent note to be guaranteed by Cobra, with Cobra funding the Debtor’s obligations under the Plan through new debt financing and cash to be provided on the Effective Date of the Plan; 

(b) the security interests granted under the Security Documents (as such term is defined in the LGA) shall be released; 

(c) the parties shall mutually release each other from all Claims (as defined in the Plan) on the terms set forth in the Plan; 

(d) Cobra or an affiliate thereof shall own 100% of the company upon completion of the restructuring; and 

(e) all other claims shall remain unimpaired as set forth in the Plan." 

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Pugh Declaration”), Justin D. Pugh, the Debtors’ Treasurer, detailed the events leading to Tonopah's  Chapter 11 filing. The Pugh Declaration provides: “A series of events, set off by the March 2019 leak of the hot salt tank, necessitated the filing of the Chapter 11 Case.

Hot Salt Tank Leak. The hot salt tank—an essential component in the operation of the Power Plant—experienced a leak in late March 2019. Consequently, the Power Plant has been unable to produce any electricity since April 2019, and the Debtor has not generated any revenue through the sale of power since that time

Its only source of cash inflow has been the CPM Payments, which have now ended.

Termination of the PPA. In the ten years that have passed since the execution of the PPA, the market price of renewable energy has dropped to a level that is significantly below the PPA Purchase Price(an escalating figure beginning at $135 per megawatt hour, which had reached approximately $139 per megawatt hour at the time the PPA terminated). Eager to free itself from the long-term obligation to purchase site-specific power generated at the Power Plant at a price it no longer viewed as economic, NVE capitalized on the operational difficulties at the Project and served a notice of default under the PPA on January 1, 2019 (‘NVE Default Notice’).

Upon receipt of the NVE Default Notice, TSE, along with CPI, worked diligently to cure the potential event of default alleged in the NVE Default Notice within the applicable cure periods. Nevertheless, on October 4, 2019, the PPA was terminated with respect to all parties.

Since the termination of the PPA, CPI has continued with repair activities at the Power Plant, and TSE has investigated options for replacing the terminated PPA with a similar offtake contract. Given the shifts in the market dynamics since the execution of the PPA nearly ten years ago, there is not an equivalent PPA available today nor is there a PPA that would permit TSE to satisfy the repayment of the DOE Loan and satisfy its own operating costs even if the Power Plant were operational.”

Key Documents

The Disclosure Statement [Docket No. 149] attached the following documents:

• Appendix A: Chapter 11 Plan for Tonopah Solar Energy, LLC (Filed Separately [Docket No. 25])
• Appendix B: Liquidation Analysis 
• Appendix C: Financial Projections

The Debtor filed Plan Supplements at Docket Nos. 49 and 156, 242, 273 and 293 which attached the following documents:

• Exhibit A: Amended Constituent Documents [Docket Nos. 49 and 293]
• Exhibit B: List of Proposed Officers and Managers and Disclosure Regarding Compensation [Docket Nos. 49, 156, 242 and 273]
• Exhibit C: Schedule of Rejected Contracts [Docket Nos. 49 and 293]
• Exhibit D: Exit Credit Facility Agreement [Docket No. 49]
• Exhibit E: Exit Contingent Note [Docket No. 49]
• Exhibit F: Exit Contingent Note Guaranty [Docket No. 49]
• Exhibit G: New O&M Agreement [Docket No. 49] 
• Exhibit H: Form of Confirmation Order [Docket No. 49] 
• Exhibit I: Restructuring Support Agreement [Docket No. 49] 
• Exhibit J: Cobra Backstop Letter of Credit [Docket No. 49] 
• Exhibit K: Amendment No. 4 to the EPC Contract [Docket No. 49] 
• Exhibit L: Backstop Agreement [Docket No. 49]

Recovery Table and Liquidation Analysis (see Appendix B to Disclosure Statement [Docket No. 149] for notes)

About the Debtors

According to the Pugh Declaration: "The Debtor owns and operates a net 110-megawatt concentrated solar energy power plant (the “Power Plant”) located near Tonopah in Nye County, Nevada. The Power Plant is also known as the Crescent Dunes Solar Energy Project (the ‘Project’). The Project is the first utility-scale concentrated solar power plant in the United States to be fully integrated with energy storage technology. The Power Plant uses solar power technology to concentrate and convert sunlight into heat energy, which is stored and converted, through a series of heat exchangers, to generate high-pressure steam.

Until October 2019, the electricity generated by the Power Plant was sold exclusively to the Nevada Power Company, d/b/a NV Energy (‘NVE’), under that certain Long-Term Firm Portfolio Energy Credit and Renewable Power Purchase Agreement dated November 4, 2009 (as amended, the 'PPA'), which, as discussed below, was terminated by NVE in the fall of 2019. The Debtor’s sole source of revenue was the sale of power under the PPA.

Due to certain issues with a critical plant component, discussed below, the Power Plant is not currently generating any electricity; thus, it is not generating any revenue from the sale of electricity. The Debtor’s vendors and contractors are working to fix structural issues that would allow the Debtor to recommence operations."

Corporate Structure 

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