Retail Supplier Declares Bankruptcy, Will Wind Down Substantially All Of Retail Business
Parent Announces Recapitalization Transaction, Up To $1.65 Billion In New Equity Investment
May 10, 2022 Email This Story Copyright 2010-21 EnergyChoiceMatters.com
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Talen Energy Supply, LLC and various subsidiaries, including Talen Energy Retail LLC, filed voluntary Chapter 11 petitions in federal bankruptcy court, stating that, "unpredictable and unlikely weather patterns and commodity/fuel
pricing have proved to be a strong headwind for the Debtors," which have created liquidity challenges
In the petitions, Talen Energy Supply said, "the Debtors intend to wind down substantially all of their retail business," though the petitions noted that, "the Debtors will continue to
purchase power from the RTOs’ and ISOs’ grids to service their few remaining retail customers."
The Debtors have moved to reject substantially all unaffiliated commercial, industrial, and institutional
customer counterparties (retail electric contracts)
The Debtors intend to keep their retail licenses for certain limited retail power
sales necessary for operation of their power plants
Expanding on the conditions leading to the bankruptcy filings, a filing from Talen Energy Supply said, "the Debtors have commenced these
chapter 11 cases in large part due to immediate and significant liquidity concerns that can be traced
back to the sudden and sustained rise of natural gas prices in late 2021, which sharply increased
the collateral requirements for the Debtors’ hedging activities, resulting in an unexpected squeeze
on available cash."
"The significant increase in natural gas prices in 2021 and concurrent
increase in power prices, resulted in the Debtors being required to provide cash collateral in large
amounts as the Exchange Traded Hedges moved further out of the money—reaching as high as
$451 million in October. In turn, this caused a significant liquidity squeeze for the Debtors,
particularly in light of certain then near-term cash requirements, including the maturity of $114
million in unsecured notes due in December 2021 (the '2021 Notes'). To manage liquidity, the
Debtors exited collateral-intensive Exchange Traded Hedges while prioritizing trades under the
Bilateral Hedges, which would align timing for posting discretionary letters of credit," the filing said
"The effectiveness of the Debtors’ Exchange Traded Hedging Agreements is
dependent on having ample cash collateral available to enter into or maintain these contracts, and,
given the sustained increase in the price of natural gas in the second half of 2021 and the first quarter of 2022, these liquidity requirements were much greater than the Debtors could have
anticipated or were capable of financing," the filing said
While Debtors obtained an Accordion Facility in December 2021, paid 2021 Notes at
maturity, and expected to have adequate liquidity for at least enough time for the Debtors to allow
the winter 2021-22 season to play out and also preserve the opportunity to negotiate a
consensual recapitalization transaction with their creditors, the Debtors said that, "real-time and forward prices
fell through the mild winter in December 2021 and the first quarter of 2022."
"In particular, the
decline of day-ahead and real time PJM and ERCOT pricing exerted further downward pressure
on the Debtors’ liquidity," the filing said
"Collateral postings under the Exchange Traded Hedges remained high
through the winter, due in part to higher margin rates. Additionally, because the Debtors exited
many of their Exchange Traded Hedges in late 2021 and have since had insufficient cash to enter
into new Hedging Agreements, the Debtors are currently under-hedged and exposed to market
price volatility (i.e. the Debtors’ future margins are 'open' to market volatility)," the filing said
"Given the recent uptick in future power prices (principally through the
balance of 2022 and the winter of 2023) and the Debtors’ open position, the Debtors’ have the
ability to lock in higher than normal future cash flows. However, because of the Debtors’ lack of liquidity and balance sheet constraints, they are unable to hedge and lock in these higher than
normal cash flows," the filing said
In conjunction with the Chapter 11 filing of Talen Energy Supply LLC, parent Talen Energy Corporation ("TEC") announced a recapitalization transaction for Talen Energy Supply LLC ("TES" or the "Company") that will include a new equity investment of up to $1.65 billion
"Our Company is at an important inflection point to strategically reposition TES for long-term value creation. This transformation must be accompanied by balance sheet repair and equity capital to drive the long-term success of the Talen-Cumulus platform and our people. By restructuring TES' balance sheet through an in-court process, we will create a strong capital structure suitable for today's elevated commodity market, position the Company for growth, and continue to build upon the many operational achievements we have made in recent years," said TEC Chief Executive Officer Alejandro "Alex" Hernandez.
TES has executed a restructuring support agreement ("RSA") with an ad hoc group of TES' unsecured noteholders (the "Consenting Noteholders"). The Consenting Noteholders collectively hold approximately 62% of principal amount of TES' unsecured notes. Pursuant to the RSA, certain of the Consenting Noteholders have agreed to enter into a backstop commitment with respect to a common equity rights offering of up to $1.65 billion, subject to certain adjustments at closing. The Consenting Noteholders have also agreed to equitize more than $1.4 billion of their unsecured notes pursuant to the Plan. TES said that it expects additional senior unsecured noteholders will join the RSA in the coming weeks.
In addition, TES has secured $1.76 billion of debtor-in-possession financing (the "DIP Facilities") led by Citigroup, Goldman Sachs, and RBC Capital Markets. The DIP Facilities are comprised of a $1.0 billion term loan, a $300 million revolving credit facility, and $458 million letter of credit facility. The $1.0 billion term loan is being provided by an investor group of leading financial institutions.
"In order to effectuate the consensual restructuring contemplated by the RSA, TES and certain of its subsidiaries have voluntarily filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of Texas. Pursuant to the RSA, the Company plans to confirm its plan of reorganization approximately six months following the commencement of this restructuring," TEC said
TEC, its Cumulus Growth subsidiary, and TES' LMBE subsidiaries are excluded from the in-court process.
"TEC's Cumulus Growth platform will continue executing on its business plan, constructing carbon-free hyperscale data centers and digital coin processing facilities, as well as renewable energy and battery storage development projects to meet rapidly growing consumer demand for clean, reliable energy," TEC said
"TES expects to continue its day-to-day business in the normal course and intends to move as quickly as possible through the process. TES has filed customary 'first day' motions with the Court to ensure no interruption to employee wages, healthcare, and other benefits as well as the ability to conduct routine business with vendors and other business partners, including the resumption of hedging activities. TES' plants will continue to generate needed electricity for the markets they serve," TEC said
The TES case is #22-90054, U.S. Bankruptcy Court
Southern District of Texas (Houston)