News Column

Another Revel issue: The fate of its $129 million utility plant

August 28, 2014

By Harold Brubaker, The Philadelphia Inquirer



Aug. 28--Among the thorny issues surrounding the shutdown of Revel at the end of Labor Day weekend is the fate of the $129 million utility plant that heats and cools the massive money-losing Atlantic City casino-hotel and is crucial to preserving the building itself.

It's not unusual in bankruptcy for the prosaic matter of utility bills to capture a lot of attention, because electricity and other utilities are essential to keeping a bankrupt business going, giving it a chance to reorganize.

In the case of Revel, there's a twist.

To build the utility plant, which chills water for Revel's air-conditioning, provides hot water, and distributes electricity to the 47-story tower, the plant's owner, ACR Energy L.L.C., borrowed $118.6 million in the tax-exempt municipal-bond market in 2011.

That $118.6 million in bond debt came unscathed through Revel's first bankruptcy last year, which wiped out $1.23 billion in Wall Street debt. When Revel filed for its second bankruptcy in June, the casino had $447 million in secured debt.

Conflict over what happens to the municipal-bond debt is likely to be a stumbling block in negotiations with prospective buyers. In practical terms, the bond debt is additional Revel debt under a 20-year contract because the casino is ACR's only customer.

The utility plant is also an example -- along with 13 restaurants and several entertainment firms that will likely lose significant investments when Revel closes -- of potential collateral damage from the casino's colossal failure.

The consequences of the restaurant closures are severe for employees and investors, but of little significance for potential reuses of the structure. If the utililty plant goes out of service, the consequences would be disastrous.

In hot weather, "if you shut down the electric utilities to the building, you're going to get an instant build-up of heat and humidity inside the building, both of which are terrible for finishes, equipment, and everything else that's inside that building," said Greg Lucado, director of construction-management programs at Philadelphia University. Mold would not be far behind, he said.

That makes it crucial to keep paying ACR, a joint venture of South Jersey Industries Inc. of Folsom and DCO Energy L.L.C. of Mays Landing. Each paid $20 million in equity to build the plant.

The fight is over how much ACR will be paid.

Dan Lockwood, a spokesman for publicly traded South Jersey Industries, declined to say much this week about ACR's future.

"It's too early to tell, and at this point we can't speculate on what could happen with the property and the services we provide," Lockwood said.

Privately held DCO Energy, which is South Jersey Industries' 50-50 partner in numerous utility plants, did not respond to a request for comment.

Revel started building the power plant in September 2008. By the time Revel's original owners ran out of money and halted all construction in June 2010, they had spent $42 million on the plant. Construction of it resumed in February 2011, with the money to continue coming from municipal bonds.

The nearly $40 million equity infusion by ACR's owners went toward paying off the $42 million Revel had sunk into what is now called the Inlet District Energy Center.

Recognizing that Revel was a risky proposition, ACR demanded a 15 percent return on its equity in the first five years and 18 percent after that.

Revel's fixed debt and equity payments to ACR total $20.1 million annually, plus $4 million annually for operations and maintenance. On top of that are variable costs, for example, for chilled water, ranging from $50,000 to $450,000 per month.

By contrast, Borgata, including the Water Club -- with twice as many hotel rooms and a larger casino floor -- had fixed payments of $11.7 million last year for its utility plant.

This year, Revel stopped making payments to ACR and owed nearly $10 million at the time of the June bankruptcy, putting ACR under financial pressure.

Last week, ACR notified bondholders that it had received a notice of default in June from Bank of New York Mellon, the trustee for the bonds.

In bankruptcy court, Revel has tried to separate fixed debt and equity payments to ACR from the variable energy payments.

ACR has fought to preserve the terms of the Revel contract, as in the 2013 bankruptcy, when ACR was paid in full and the bond debt was kept.

This time ACR is in a much tougher spot.

"There is absolutely no assurance that the [contract] will be assumed," if a buyer emerges, an ACR filing says.

hbrubaker@phillynews.com

215-854-4651

@InqBrubaker

___

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Source: Philadelphia Inquirer (PA)


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