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2020-105 Gibbons Creek SaleDate: December 18, 2020 Report No. 2020-105       INFORMAL STAFF REPORT TO MAYOR AND CITY COUNCIL SUBJECT: Gibbons Creek Steam Generation Station – Asset Purchase Agreement BACKGROUND: On January 12, 2021, City Council will hold a work session to discuss the potential sale of the Gibbons Creek Steam Generating Station (Gibbons Creek) by the Texas Municipal Power Agency (TMPA) to the Gibbons Creek Environmental Redevelopment Group (GCERG), a Texas LLC that is a wholly owned subsidiary of Charah Solutions, Inc. (https://charah.com/). A work session will also be conducted by the Public Utilities Board on January 11, 2020. The board of directors of TMPA approved the Asset Purchase Agreement (APA) on December 10, 2020. Under the terms of the TMPA Joint Operating Agreement (“JOA”), all members of TMPA must approve the sale for the transaction to close. Consideration of the ordinance to approve the APA is scheduled for January 26th with a recommendation from the Public Utilities Board to be considered on January 25th. DISCUSSION: Under the JOA, each Member City has an ownership interest in the generation assets of TMPA. The ownership interests are based on the respective amounts paid by each Member City, and those interests are recalculated and approved by the TMPA Board each year. Under the most recent calculation, approved by the TMPA Board on December 10, 2020, the ownership interests are: Bryan 21.24%; Denton 21.45%; Garland 47.30%; and Greenville 10.01%. The ownership interests are used by the JOA to allocate among the Member Cities costs of the TMPA Generation Business as well as the proceeds of sales of Generation Business assets. Title to the Generation Business assets is in the name of TMPA. The Generation Business assets of TMPA consist of the Gibbons Creek Steam Electric Station, a 470 MW coal-fired power plant located approximately 25 miles east of Bryan in Grimes County, Texas (“Gibbons Creek”). Gibbons Creek consists of the plant site compromising 6200 acres, inclusive of the 2200-acre Gibbons Creek Reservoir. (Note: the adjacent 10,600-acre lignite mine, and the TMPA transmission system, are not included in this sale.) Gibbons Creek began operation in 1983 and was retired in 2018 due to its uneconomic operating costs as compared to market based alternative supplies of wholesale electric power. Since 2016, the staff and the Board of TMPA have been focused on the sale of Gibbons Creek and the remediation/closure of the Coal Combustion Residuals units (CCR Units). Two prior attempts to sell the plant site, which consists of the power plant, fuel handling facilities, administration buildings, warehouses, the reservoir, coal ash disposal landfills and several other regulated impoundments ( the CCR Units) did not result in a final sale agreement. In June 2019, TMPA issued a new Request for Proposals to sell the plant site. In response to the RFP, five proposals were submitted to TMPA in August 2019 and the TMPA staff, with approval of the TMPA Board of Directors, began negotiating with Charah/Melt Solutions, LLC in September 2019. A fully negotiated agreement that is acceptable to the TMPA Board of Directors and the buyer was approved on December 10, 2020. That Asset Purchase Agreement (APA) must be approved by each of the TMPA member cities as required by the TMPA Joint Date: December 18, 2020 Report No. 2020-105       Operating Agreement. The member cities of Bryan, Garland, Greenville and Denton will be seeking approval from their respective governing bodies over the next 2 months. The form of approval is a Concurrent Ordinance that must be approved by each city. The Buyer - GCERG is a Texas limited liability company that is a subsidiary of Charah Solutions (https://charah.com/), a leading provider of mission-critical environmental services and byproduct sales to the power generation industry (“Charah”). Charah is a publicly traded company listed on the NYSE. (CHRA) The company has its roots in the management and marketing of coal combustion residuals for beneficial reuse. Coal combustion byproducts include fly ash, which can be used beneficially in the production of concrete, bottom ash, which is used beneficially as road base, grit for roofing shingles and structural fill applications, and sulfur dioxide scrubber sludges which also can be beneficially used in structural fill applications. In addition to the beneficial reuse of coal combustion byproducts, Charah is a leading provider of remediation and compliance service to the electric utility industry, a provider of maintenance and operating services to the nuclear power industry, and provides on-site management of coal ash at power plants. A link to the Charah’s 2019 annual report is provided below. (https://s22.q4cdn.com/897826995/files/doc_financials/2019/ar/Charah-Solutions-2019-Annual- Report.pdf) Decommissioning and Remediation – The APA requires the buyer to decommission the existing power plant structures. The buyer will remove all oils and chemicals from the plant site, properly dispose of them, and demolish the power plant structures and associated equipment. The power plant structures contain a large amount of steel, copper, and other valuable materials that Charah plans to sell as scrap. Remediation of the CCR units, include Site A landfill, Site F landfill, the ash ponds and the scrubber sludge pond must be accomplished to achieve “regulatory closure” of each CCR unit as required by USEPA and TCEQ regulations. CCR units pose long-term environmental risks if not properly remediated. Coal ash contains many potential pollutants including heavy metals, sulfate compounds and some hydrocarbons which can leach into groundwater or run off to surface waters if not properly stored and monitored. Figure 1 provides a bird’s eye view of the Gibbons Creek plant site and identifies the CCR units. Date: December 18, 2020 Report No. 2020-105       Figure 1 – Gibbons Creek Coal Combustion Residual Units Remediation activities will include:  Excavation of all coal combustion byproducts from the ash ponds and scrubber sludge pond and achieving “clean closure” of these CCR units  Disposal of excavated materials in the Site F Landfill  Design and installation of an impermeable cap for the Site F Landfill  Design and installation of leachate collection and treatment systems for the landfill CCR units Upon completion of the remediation activities, GCERG will be required to sample, analyze, and report the groundwater quality around the landfill sites monthly to demonstrate that no regulated pollutants are entering the groundwater. GCERG will report its results to TCEQ and such reports will be published on a publicly available website. The post closure compliance period is 30 years. TCEQ will require performance bonds to securitize this ongoing monitoring and O&M. The amount of the performance bond will be determined by TCEQ once closure is achieved. Under the terms of the APA, GCERG is required to provide all such bonding to TECQ. (Due to Date: December 18, 2020 Report No. 2020-105       the length of time that the Site A Landfill has been inactive, the Site A Landfill is exempt from current CCR regulations, and it is not clear whether the TCEQ will require post-closure bonding for it. However, in the event post-closure bonding for the Site A Landfill is not required by the TCEQ, the APA requires the buyer to provide post-closure bonding for the Site A Landfill to TMPA.) Decommissioning, demolition, and remediation activities are anticipated to take up to three (3) years to complete. Asset Purchase Agreement Major Terms and Conditions – The APA contains the following major provisions: Obligations of the Buyer:  Decommissioning – decommission and demolish the power plant and associated structures  Remediation – remediate all CCR units and any other environmental contamination discovered to levels and specifications deemed compliant with applicable TCEQ regulations.  Indemnify TMPA and the member cities against all environmental claims for past, present and future site activities o Buyer must provide and maintain a $25 million pollution liability environmental insurance naming TMPA and the member cites as additional insured o Assume all environmental liabilities (past/present/future)  Provision of Performance Bond – Buyer must provide a performance bond in the amount of $36.5 million to securitize performance of all remediation requirements. The amount of the bond will be reduced as remediation activities are completed.  Post Closure – Buyer must meet the post closure bonding requirements imposed by TCEQ and must operate and maintain any post closure treatment and monitoring equipment.  Provide perpetual deed restrictions on land use for CCR containing real estate parcels. Obligations of TMPA as Seller  Convey to Buyer ~6200 acres of real estate including all improvements and equipment present at closing o Ten separate deeds describing the parcels of real estate conveyed to Buyer  Pay Buyer an initial amount of $6.354 million  Deposit into an Environmental Escrow $28.546 million which shall be used by Buyer to remediate the CCR units and will be drawn down in equal monthly installments during the remediation activities. o The balance in the escrow shall not drop below $2.854 million until the post-closure performance bond is issued, to ensure delivery of post-closure bonding.  Pay Buyer 50% of the initial $36.5 million performance bond premium at the time of closing Under the terms of the APA, TMPA will hire an Environmental Designee who will monitor and audit the remediation activities and the post closure regulatory requirements of the Buyer and will make all determinations regarding the Buyer’s ability to draw down the Environmental Escrow. Date: December 18, 2020 Report No. 2020-105       Transaction Economics – The sale of Gibbons Creek under the terms of the APA achieves significant savings for TMPA and the member cities as compared to TMPA self-performing the decommissioning and remediation activities. Table 1 provides the side by side comparison of the three potential paths. Scenario 1 depicts the cash flows to TMPA associated with execution of the APA. Cost to TMPA is $36.4 million. Scenario 2 depicts a risk scenario in which GCERG defaults on performance and the performance bond and escrow funds are used to complete the remediation activities. Additional costs to TMPA are associated with TMPA taking over responsibilities for post-closure activities and additional demolition costs that GCERG does not plan to incur. This scenario has TMPA costs at $78.7 million. Scenario 3 is the self-performance approach and is the baseline to compare the other scenarios to in determining the savings associated with the APA. Table 1 - Gibbons Creek Asset Puchase Agreement ‐ Savings ($ millions) Scenario 1  (Plant sells ‐  no issues) Scenario 2 (Plant sells ‐  Charah default) Scenario 3 (2) (TMPA  decommissions) Cash Outflow    Direct payment/Escrow(1) 29.80$          29.80$                   ‐$                               Remediation/Decommissioning ‐$              60.03$                   60.03$                          Site F Landfill cost(3) 6.60$            14.90$                   14.90$                          Concrete removal/Plant cleanup ‐$              13.10$                   13.10$                          O&M during decommissioning ‐$              5.60$                      5.63$                             Post‐closure OM&M ‐$              15.00$                   15.00$                       TOTAL CASH OUTFLOW 36.40$          138.43$                 108.65$                     Cash Inflow    Sale of plant land/reservoir (6,170 acres) ‐$              ‐$                        24.00$                          Check from Surety for performance bond ‐$              36.50$                   ‐$                               Use of the escrow ‐$              23.20$                   ‐$                            TOTAL CASH INFLOW ‐$              59.70$                   24.00$                       Net Cash Flow (36.40)$        (78.73)$                 (84.65)$                     Net Value Compared to Scenario 3 48.25$         5.93$                     (2) Scenario 3 is TMPA's Decommissioning Project estimate based on the AMEC study. (3) Scenarios 1 & 2 assume that TMPA will pay $6.6M of the Site F Landfill costs. (1) This amount includes $23.1M for the escrow, $5.2M for the direct payment, and $1.5M for the surety  bond.  TMPA is obligated to pay half of the surety bond.  It is currently estimated the total will be $2.2M  (TMPA's half would be $1.1M).  However, this amount is still uncertain, so we are conservatively  assuming the total to be $3M (TMPA's half would be $1.5M). For Denton, our ownership of TMPA translates into an APA savings of $10.28 million as compared to Scenario 3. From a budget forecast perspective, the five-year budget forecast provided Date: December 18, 2020 Report No. 2020-105       to City Council for fiscal year 2021 included Denton’s share of remediation cost at $21.3 million. Under Scenario 1, Denton’s one-time share of the remediation cost is $7.75 million. This represents a forecasted five-year savings of $13.57 million versus forecast. The five-year forecast was based upon the projected decommissioning and remediation costs effective March 2020. Future Land Use – The APA divides the plant site into 10 separate parcels for purposes of conveying the plant site to the Buyer. The APA also makes provision for two deed forms. One deed form will be used for parcels that contain one or more Recognized Environmental Conditions (the “Restrictive Deed Form”). The other deed form will be used to convey parcels that have no Recognized Environmental Conditions. The Restrictive Deed Form will be used for the parcels containing the power plant, the ash ponds, the scrubber sludge pond, the Site A Landfill, the Site F Landfill, and any other parcel that contains one or more Recognized Environmental Conditions. The restrictions in the Restrictive Deed Form will run with the land and must be included in future transfers of the property. Prior to the Buyer reselling a parcel subject to a Restrictive Deed Form, the transfer documents must be provided to TMPA. If the transfer documents fail to include the required restrictions, TMPA may veto the sale. If a resale of a parcel subject to the Restrictive Deed Form complies with the above requirements, the transferee will “step into the shoes” of GCERG. In other words, all APA obligations, including the environmental indemnity obligations, of GCERG will be applicable to the transferee. In addition, GCERG will remain “on the hook” after any such transfer, and will remain responsible for its APA obligations with respect to any such parcel. For example, if the Site A Landfill is sold by GCERG before closure is achieved, the transferee must agree to remediate the Site A Landfill, post a Regulatory Performance Bond, and provide the required environmental insurance. In such case, both the transferee and GCERG will be responsible for completion of closure of the Site A Landfill. Risk Mitigation – the proposed APA not only achieves significant cost savings to DME’s customer/owners but also drastically reduces the future risk that Denton shares with the other TMPA member cities. Under federal the Comprehensive Environmental Response Liability Act (CERCLA) of 1980, liability for environmental cleanup rests with the original generator of such wastes. CERCLA mandates “cradle to grave” liability and such liability is joint and several meaning that any one potentially responsible party may be held liable for the entire clean-up of the site. A critical concern in approving the APA, is the ability of the Buyer to perform the work and the financial strength of the Buyer. If the Buyer were to default during any phase of the remediation work, the liability could potentially fall back to TMPA. Significant effort has been put into assessing the ability of Charah Solutions to complete the work for the costs projected. Charah Solutions is currently performing similar remediation work at other retired coal fired generation plants throughout North America and has a proven track record. Performance bonding and pollution liability insurance along with the requirement for the Buyer to provide requisite post- closure bonding in the amounts mandated by the TCEQ have been deemed adequate by the TMPA board of directors and TMPA’s legal and environmental counsel. Date: December 18, 2020 Report No. 2020-105       Disbursement of the environmental escrow money deposited by TMPA, through assessments to the member cites, poses a risk to TMPA and member cities if the achievement of remediation activities does warrant the release of escrowed funds. The APA requires the appointment of an Environmental Designee who will be the sole arbiter of remediation progress and who will have authority to suspend releases to the Buyer from the escrow in the event the Buyer’s remediation efforts fall behind the project schedule. The Environmental Designee is a former TMPA environmental professional who is well known to TMPA and will act with integrity to protect the interest of TMPA and member cities. ATTACHMENTS 1. Presentation STAFF CONTACT: Terry Naulty Assistant General Manager, DME and Interim Director of Water/Wastewater Terry.Naulty@cityofdenton.com (940) 349-7565 REQUESTOR: Staff Initiated PARTICIPATING DEPARTMENTS: DME Gibbons Creek Steam Generating Station Sale January 12, 2021 Gibbon Creek Steam Electric Generating Station •Owner -Texas Municipal Power Agency •Garland –47.3% •Bryan –21.24% •Denton –21.45% •Greenville –10.01% •470 MW lignite/coal fired generator •6170 Acres including 2200 Acre Gibbons Creek Reservoir •In Operation from 1983 –2018 •Since shutdown TMPA staff activities •Decommissioning studies •Coal Combustion Residual management •Mine reclamation •Issued RFPs for the sale of the plant •Developed strategy and solicited proposals for marketing of the mine properties (10,600 acres) 2 Ongoing Costs of Ownership Decommissioning and Demolition of Plant Coal Combustion Residual Units (CCRs) Requiring Remediation •Landfill Site A •Landfill Site F •Ash Ponds •Scrubber sludge pond Decommissioning & Remediation Cost Estimates •Clean Closure -$88 million •Ongoing monitoring and leachate disposal -$500,000/year ➢$15 million over 30 years Operations and Maintenance •Dam & Nat Gas Pipeline Landfill Site A Landfill Site F Ash PondsScrubber sludge ponds Gibbons Creek Sale Process •Request for Proposals issued in June 2019. TMPA sought: ➢Buyer to decommission plant and remediate all CCR units ➢Buyer to provide surety bond to TMPA during remediation activities ▪Sufficiently sized to ensure remediation could be completed ➢Buyer to provide surety bond to TMPA to cover post-closure activities ▪Sufficiently sized to ensure required activities could continue ▪Sampling and analysis of groundwater in vicinity of CCR units ▪Operation and maintenance of leachate treatment system ▪Proper disposal of wastes from leachate treatment system •Five proposals received in August 2019 •Evaluation of proposals presented to TMPA Board of Directors in September 2019 ➢Charah/Melt Solutions through Gibbons Creek Environmental Redevelopment Group (GCERG) has been negotiating transaction for over a year with TMPA ➢Original transaction had the coal plant potentially restarting –transaction not successful ➢Current deal requires the demolition of the coal plant and retains the economics of original proposal •TMPA Board approved Resolution to execute the Asset Purchase Agreement on December 10, 2020 ➢Projected to save member cities ~ $48.3 million versus self-performance of decommissioning and remediation •TMPA Joint Operating Agreement (JOA) requires all member cities approve transaction ➢Concurrent Ordinance provided for consideration by City Council Who is the Buyer? •Gibbons Creek Environmental Redevelopment Group •Texas Limited Liability Company formed to purchase, decommission and remediate the Gibbons Creek site •Wholly owned subsidiary of Charah Solutions, Inc. •Charah Solutions Inc. •NYSE publicly traded company (CHRA) •$550 million revenues in 2019 •Leading provider of coal combustion byproducts in North America •Currently performing CCR remediation at various sites for utilities •Also provides O&M services to the electric utilities including nuclear •Performance of Charah/GCERG is independently securitized •Performance bonds •Pollution liability insurance •Post-closure bonds Asset Purchase Agreement(APA) Major Terms TMPA •GCERG assumes all environmental liabilities (past/current/future) •Indemnification from GCERG at closing •Remediation of all CCRs and decommissioning of plant •Performance bond -$36.5 million •Amount reduced as remediation is completed •$2.84 million retained in escrow fund until Post Closure Bond is delivered •Post closure bond upon completion of remediation as required by TCEQ •Special warrantee deeds that extend the indemnification to future landowners •$25 million pollution legal liability insurance policy naming TMPA and member cities as additional insured •Member cities are express third party beneficiaries of all GCERG obligations to TMPA GCERG •6200 acres including all structures and reservoir •Initial TMPA payment of $6.354 million •Environmental Escrow Payment of $28.546 million •To fund the remediation projects •Draws based upon progress over 34 months •Draws controlled by TMPA Environmental Designee •50% of the cost of initial performance bond (~$1.1 million) Transaction Economics TMPA Economics Denton Economics •$10.34 million in savings as compared to Scenario 3. (21.45% of $48.25 million) •5-Year Forecasted Costs – •FY 21-FY 24 Budget -$21.3 million •APA one-time cost: $ 7.75 million •5-year savings:$13.57 million •FY 21 Budget: $9.55 million •APA one-time cost: $7.75 million •FY 21 DME Savings $1.80 million Gibbons Creek Asset Puchase Agreement - Savings ($ millions) Scenario 1 (Plant sells - no issues) Scenario 2 (Plant sells - Charah default) Scenario 3 (2) (TMPA decommissions) Cash Outflow Direct payment/Escrow(1)29.80$ 29.80$ -$ Remediation/Decommissioning -$ 60.03$ 60.03$ Site F Landfill cost(3)6.60$ 14.90$ 14.90$ Concrete removal/Plant cleanup -$ 13.10$ 13.10$ O&M during decommissioning -$ 5.60$ 5.63$ Post-closure OM&M -$ 15.00$ 15.00$ TOTAL CASH OUTFLOW 36.40$ 138.43$ 108.65$ Cash Inflow Sale of plant land/reservoir (6,170 acres)-$ -$ 24.00$ Check from Surety for performance bond -$ 36.50$ -$ Use of the escrow -$ 23.20$ -$ TOTAL CASH INFLOW -$ 59.70$ 24.00$ Net Cash Flow (36.40)$ (78.73)$ (84.65)$ Net Value Compared to Scenario 3 48.25$ 5.93$ (2) Scenario 3 is TMPA's Decommissioning Project estimate based on the AMEC study. (3) Scenarios 1 & 2 assume that TMPA will pay $6.6M of the Site F Landfill costs. (1) This amount includes $23.1M for the escrow, $5.2M for the direct payment, and $1.5M for the surety bond. TMPA is obligated to pay half of the surety bond. It is currently estimated the total will be $2.2M (TMPA's half would be $1.1M). However, this amount is still uncertain, so we are conservatively assuming the total to be $3M (TMPA's half would be $1.5M). Risk Management Measures •GCERG as owner of the real estate will determine future land use and redevelopment that is consistent with Grimes County limitations •Perpetual deed restrictions will be placed on CCR unit parcels to limit future land use so that waste is not disturbed •TMPA will have veto rights on future land transfers if deed restrictions and insurance requirements are not met •“Clean” deeds will permit the GCERG to redevelop those parcels without restriction •“Dirty” deeds will impose the same restrictions as those parcels with CCR units •Accountability •TMPA will appoint an Environmental Representative to monitor and audit site activities •The Environmental Representative is the sole arbiter of when and how much of the escrow fund get release to GCERG –to ensure progress is correlated with reimbursement Summary and Action •Sale of Gibbons Creek represents a potential savings of $48.3 million to TMPA versus self-performance •Denton savings –$10.28 million •Represents a FY 2021 savings of $1.826 million versus budget and $13.5 million versus five-year plan •Environmental risk profile is significantly reduced •All risk mitigated unless GCERG defaults •Additional 10,000+ acres of mine land ultimately to be sold •TMPA retains all transmission assets on plant site ➢Action Requested –Approve Concurrent Ordinance Questions Bob Kahn –General Manager, TMPA Terry Naulty –Asst. General Manager, DME