FirstEnergy Solutions – Judge Refuses to Approve Disclosure Statement, Sides with FERC as to “Unconfirmable Plan”

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April 4, 2019 – The Court hearing the FirstEnergy Solutions Corp ("FES") cases issued an oral ruling refusing to approve the adequacy of the Debtors' Disclosure Statement [Docket No. 2121]. In holding that the Disclosure Statement "underlies an unconfirmable Plan" and hence could not be approved, Judge Alan Koschik clearly took to heart the objection of the Federal Energy Regulatory Commission (“FERC”) which accused the Debtors of completely punting on its obligation to inform creditors of the nature and potential impact of ongoing FERC litigation and of trying to use bankruptcy releases to escape potential liability. As noted below, FERC did a good job of nudging Judge Koschik, pointing out that "It is well-settled that bankruptcy courts have the authority to refuse approval of disclosure statements when the chapter 11 plans underlying them are unconfirmable."

The sudden aligning of interests between FERC and the Court is an interesting development and in a sense Judge Koschik's ruling is a hedge against a position his Court took earlier against FERC. In a May 11, 2018 ruling, he enjoined FERC from exercising its jurisdiction under the Federal Power Act with respect to certain power purchase agreements ("PPAs"). FES is party to nine “bundled” long-term PPAs that obligate FES to purchase power, capacity, renewable energy credits, and related services and is also party (with 12 others) to an intercompany power agreement (the “ICPA”) pursuant to which it is obligated to purchase power from the Ohio Valley Energy Corporation (“OVEC”). 

FES agrees with Judge Koschik and would like to see the PPAs rejected in bankruptcy, as would lots of possibly competing unsecured creditors. OVEC would like those contracts to remain in force and above the bankruptcy fray. FERC would like to maintain its unfettered dominance over wholesale power rates and the adjudication of PPAs, even in the face of a Chapter 11 filing. So who wins the bankruptcy Court or FERC? Bankruptcy Code Section 365 or The Power Act? And why does it matter? 

As to the import of these determinations, Judge Koschik's May 11 ruling makes it clear that “the obvious and dominant purpose" of OVEC et al's effort in the FERC proceeding was to leap frog other creditors. If OVEC or other PPA counterparties succeed in obtaining the relief requested in the FERC proceeding (ie blocking the ability of the Debtors to reject the PPAs), the result would be to advantage OVEC and the PPA counterparties relative to other unsecured creditors. This issue is far from resolved and, if anything, Judge Koschik is bucking earlier court precedent. He may side with the Debtors as to whether they can reject the PPAs, but he is not about to let the Debtors forget to point out to creditors receiving a Disclosure Statement…that he might be wrong. On June 8th, he approved OVEC’s request to certify its appeal directly to the US Court of Appeals for the Sixth Circuit. That appeal is pending.

In a press release responding to the Court's ruling, theb Debtors stated that "it expects to submit a revised Disclosure Statement for its proposed Plan of Reorganization ('the Plan') to the U.S. Bankruptcy Court overseeing its Chapter 11 restructuring."

John Judge, CEO and President of FES, added "Working with our advisors, we have already initiated action to address the Court's ruling and will submit a new request to have the disclosure statement approved in a timely manner. The Company remains focused on a plan that will significantly strengthen its financial position and allow it to exit Chapter 11 in 2019."

On March 12, 2019, the Federal Energy Regulatory Commission (“FERC”) objected [Docket No. 2266] to the Debtors' Disclosure Statement citing the failure of the document to adequately inform creditors as to the ramification of an adverse ruling in the Debtors' ongoing Sixth Circuit proceeding with FERC.

The FERC objection stated, “As set forth below, this Court should not approve the Disclosure Statement and authorize solicitation of the Plan because the Disclosure Statement fails to provide adequate information, and the Plan is patently unconfirmable.

The Disclosure Statement does not provide adequate information to creditors regarding the impact of a potential adverse ruling in the pending appellate proceeding with FERC. This contingency is only mentioned in a short paragraph that states that an adverse ruling by the Sixth Circuit could result in the Debtors being required to ‘continue performing under the PPA Appeal Proceeding Contracts, seek authorization from FERC to terminate or abrogate the PPA Appeal Proceedings Contracts, or breach the contracts resulting in substantial administrative expense claims that could substantially reduce recoveries for other Unsecured Creditors.’ Disclosure Statement at 161. This description is inadequate for a creditor evaluating the Plan because it provides insufficient detail to allow a creditor to assess whether the Debtors would be capable of consummating the Plan if the Injunction Order is reversed…For instance, the Debtors provide no estimate of the amount of potential administrative expense claims related to the PPAs, no quantitative analysis of likely creditor recoveries if the Injunction Order is reversed and FERC orders compliance with the Debtors’ filed rates, and no explanation of the extent to which ongoing operations could be jeopardized. Moreover, although the Disclosure Statement discloses that an adverse appellate ruling could result in a termination of the Restructuring Support Agreement, it provides insufficient information to creditors regarding the potential impact of such a termination…The Plan, as currently proposed, cannot be confirmed because it includes broad non-consensual non-Debtor releases and third party injunctions that are prohibited under Sixth Circuit precedent. It is well-settled that bankruptcy courts have the authority to refuse approval of disclosure statements when the chapter 11 plans underlying them are unconfirmable.

The Plan also fails to meet the Dow Corning standard because it could be interpreted to release and enjoin claims of the United States and its agencies against non-debtors but does not provide for the United States to vote on the plan on account of these non-debtor claims or receive full, or any, recovery on released non-debtor claims that are not identical to claims against the estates…Because the Dow Corning requirements that nonconsenting parties vote for the Plan and receive payment in full on their claims cannot be satisfied for the United States, the Debtors should not be permitted to solicit acceptances of a Plan that on its face contravenes Sixth Circuit law by imposing releases of the United States’ claims against non-debtors…Further, solicitation should not be permitted of this Plan because the Debtors will be unable to amend the Plan’s release provisions prior to confirmation to cure any deficiencies related to the releases.”

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