October 7, 2022 – The Debtors filed a Revised Chapter 11 Plan of Reorganization and a related Disclosure Statement [Docket Nos. 1318 and 1320, respectively]; and separately filed redlines of each showing changes to the versions filed on September 9, 2022 [Docket Nos. 1319 and 1322, respectively]. The revised Disclosure Statement now attaches the Debtors' Liquidation Analysis (see below) and Financial Projections.

The substantially amended Disclosure Statement also, inter alia, (i) updates on various legal proceedings/adversary proceedings, (ii) adds a debtor-by debtor breakdown of projected recoveries for  Unsecured Notes Claims (Class 4) and General Unsecured Claims (Class 5), (iii) adds language as to TEC Global Settlement at (p.8), (iv) adds language as to TES’ Investment in Cumulus (p.36), (v) adds language as the Internal Investigation (p. 56), (vi) adds language as to Creditors’ Committee’s Challenge Rights (p.64), (vii) inserts disclosure as to compensation arrangements with the Debtors' Executive Vice President of Restructuring in Leonard Lobiondo (p. 76), (viii) updates on the Debtors' sale process (p.77). (ix)  adds disclosure as to Cumulus Settlement (p. 84) and (ix) adds enhanced disclosure on value (p.123). 

See below for more on new language as to Weil's internal investigation, sale process, benefits of Plan Settlements (to counter creditors' committee argument that it may have causes of action to pursue) and valuation.

Case Status

On May 9th, Talen Energy Supply LLC and 71 affiliated debtors (together, “TES*” or the “Debtors”) filed for Chapter 11 protection noting estimated assets between $10.0bn and $50.0bn; and estimated liabilities between $10.0bn and $50.0bn ($4.46bn of funded debt).  At filing, the Allentown, Pennsylvania based Debtors, “one of the largest* competitive power generation and infrastructure companies in North America,” noted that liquidity constraints had left them unable to redeem their 2021 notes or post additional collateral as required under hedging arrangements (the latter hitting $451.0mn in October 2021).

*TES owns and/or controls approximately 13,000 Megawatts of generating capacity in wholesale U.S. power markets, principally in the Mid-Atlantic, Texas and Montana. In December 2016, the Debtors became wholly owned by affiliates of Riverstone Holdings LLC (“Riverstone”).

Overview of the Plan

The Revised Disclosure Statement [Docket No. 1320] states, “The Plan provides for a comprehensive restructuring (the ‘Restructuring’) pursuant to either (i) a debt-for-equity exchange in which the equity of New Parent will be distributed to Holders of Unsecured Notes Claims and General Unsecured Claims on account of their Claims and to Holders of Unsecured Notes Claims and General Unsecured Claims that participate in the Rights Offering (the ‘Equitization Transaction’); or (ii) one or more sale transactions in which one or more third-party bidder(s) will acquire either the equity of New Parent or all or substantially all of the Debtors’ assets, including the equity in the Debtors’ subsidiaries (a ‘Sale Transaction’).

Under the terms of the [restructuring support agreement (the ‘RSA’)], the Debtors may solicit, initiate, facilitate, encourage, develop and negotiate one or more alternative restructuring proposals from third parties (an ‘Alternative Restructuring’), including a potential Sale Transaction, and may toggle to a Sale Transaction if certain conditions are met, as described more fully below. In the event an actionable Sale Transaction does not occur, the Debtors believe the Equitization Transaction provided for in the RSA and the Plan will maximize value and allow the Debtors’ business to reorganize with a substantially reduced debt load and increase their cash flow on a go-forward basis.

Equitization Transaction 

The Equitization Transaction is anchored by the Consenting Parties’ commitment to equitize their respective holdings of the approximately $1.4 billion in principal amount of Unsecured Notes Claims and backstop $1.55 billion of an up to $1.9 billion equity rights offering. Specifically, in the event an actionable Sale Transaction does not occur, the proposed Equitization Transaction provides for, among other things:

• an up to $1.9 billion common equity rights offering (the ‘Rights Offering’), $1.55 billion of which will be backstopped by the Backstop Parties (the ‘Rights Offering Amount’), pursuant to which eligible Holders of Unsecured Notes Claims and General Unsecured Claims will be distributed subscription rights to purchase shares of New Common Equity issued by New Parent (the ‘Rights Offering Equity’) in accordance with the Restructuring Transactions Exhibit (as defined in the Plan), to be included in the Plan Supplement;
• repayment of the DIP Facilities in full in Cash;
• payment in full of Allowed Other Priority Claims and payment in full, reinstatement or such other treatment of Allowed Other Secured Claims as to render such Claims Unimpaired; 
• Holders of Allowed Prepetition CAF Claims to receive payment in full in Cash of the Settled CAF Claim Amount; 
• Holders of Allowed Prepetition First Lien Non-CAF Claims to receive payment in full in Cash of the Settled First Lien Non-CAF Claim Amount; 
• Holders of Allowed Unsecured Notes Claims to receive their Pro Rata share of 99% of the new common equity in the New Parent (the ‘New Common Equity’), less any New Common Equity distributed to general unsecured creditors pursuant to the Plan (the ‘GUC Recovery Equity Pool’) or on account of the Retail PPA Incentive Equity (as defined in the Plan), subject to dilution from the Rights Offering, the Employee Equity Incentive Plan, the New Warrants Equity, the Backstop Periodic Premium, and the Backstop Put Premium (each as defined in the Plan); 
• Holders of Allowed Unsecured Notes Claims and Allowed General Unsecured Claims to receive their Pro Rata share e (on a Claim by Debtor basis) of the 1145 Subscription Rights (as defined in the Plan) and (i) with respect to an Eligible Holder, the 4(a)(2) Subscription Rights (as defined in the Plan) or (ii) with respect to an Ineligible Holder, solely to the extent such Holder fully exercises its 1145 Subscription Rights, New Common Equity or Cash, at the option of the Requisite Consenting Parties, in the amount equal to the value of the 4(a)(2) Subscription Rights that would have been distributable to the Holder if such Holder was an Eligible Holder; 
• Holders of Allowed General Unsecured Claims to receive their Pro Rata share (on a Claim-by-Debtor basis) of the GUC Recovery Equity Pool, subject to dilution from the Rights Offering, the Backstop Periodic Premium, the Backstop Put Premium, the New Warrants Equity and the Employee Equity Incentive Plan;
• Holders of Claims that would otherwise be Allowed General Unsecured Claims (i) in an amount of $1,000 or less or (ii) reduced to $1,000 that are designated as General Unsecured Convenience Claims will receive payment in full in Cash; 
• the Debtors’ collective bargaining agreements, pension obligations and asset retirement obligations to be assumed and/or otherwise unimpaired; 
• the Debtors’ entry into any credit facility in accordance with the RSA, including a priority revolving credit facility in a principal amount of at least $1,000,000,000 with the capacity for the issuance of letters of credit (the ‘Exit Facility’); and 
• if the TEC Global Settlement remains in effect as of the Effective Date of the Plan, the Reinstatement of Existing Equity Interests so as to maintain the organizational structure of the Company as such structure exists on the Effective Date.

Sale Transaction

Pursuant to the Plan, the Debtors may elect to pursue a Sale Transaction premised on an Eligible Alternative Restructuring. The RSA provides that the Consenting Parties will support a Sale Transaction that is an Eligible Alternative Restructuring. An ‘Eligible Alternative Restructuring’ is an Alternative Restructuring that provides for: 

• satisfaction in full, including any accrued but unpaid interest (including postpetition interest at the contract rate, as increased due to the Company’s default), of all Claims arising under (i) the DIP Documents, (ii) the Prepetition First Lien Debt Documents (as defined in the DIP Order), including as set forth in the CAF Settlement and the First Lien Non-CAF Settlement, as applicable, and (iii) the Unsecured Notes Indentures; 
• payment of any fees due and payable in accordance with the Order (I) Authorizing the Debtors to Enter into Backstop Commitment Letter, (II) Approving All Obligations Thereunder and (III) Granting Related Relief [Docket No. 1133] (the ‘Backstop Order’); and
• treatment of all other Claims against the Company on terms that are no less favorable than as provided in the RSA.”

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

• Class 1 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
• Class 2 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
• Class 3A (“Prepetition First Lien NonCAF Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $2.1382bn and estimated recovery is 99%. Each Holder will receive payment in full in Cash of such Holder’s Pro Rata share of the Settled First Lien Non-CAF Claim Amount on the Effective Date.
• Class 3B (“Prepetition CAF Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $1.0420bn and estimated recovery is 88%. Each Holder will receive payment in full in Cash of such Holder’s Pro Rata share of the Settled CAF Claim Amount on the Effective Date.
• Class 4 (“Unsecured Notes Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $1.5042bn and estimated recovery is 24%-47%.Each Holder will receive, in accordance with the Restructuring Transactions, its Pro Rata share of, as applicable:
  • If the Equitization Transaction occurs:
  • 99% of the New Common Equity, less the New Common Equity distributed on account of the Retail PPA Incentive Equity and the GUC Recovery Equity Pool, and subject to dilution from the Rights Offering, the Backstop Periodic Premium, the Backstop Put Premium, the New Warrants Equity and the Employee Equity Incentive Plan;
  • the 1145 Subscription Rights; and
  • with respect to:
    • Eligible Holders of Unsecured Notes Claims: the 4(a)(2) Subscription Rights; or
    • Ineligible Holders of Unsecured Notes Claims (if any): solely if such Holder fully exercises its 1145 Subscription Rights, New Common Equity or Cash, at the option of the Requisite Consenting Parties, in the amount equal to the value of the (4)(a)(2) Subscription Rights that would have been distributable to such Holder if such Holder was an Eligible Holder of Unsecured Notes Claims; or
  • if the Sale Transaction occurs, the Waterfall Recovery; provided, however, that in no event will the Holders of Unsecured Notes Claims receive, on account of such Claims, a recovery greater than 100% of the Unsecured Notes Claims, including after payment of postpetition interest on any Unsecured Notes Claims from the Petition Date through the date of payment of such Claim, plus any additional amounts due under the Unsecured Notes Documents, to the maximum extent permitted by law, in each case as provided for in the relevant indenture and as allowed under the Bankruptcy Code.
• Class 5 (“General Unsecured Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $0.3195bn and estimated recovery is 0%. Each Holder will receive, in accordance with the Restructuring Transactions, its Pro Rata share (on a Claim by Debtor basis) of:
  • If the Equitization Transaction occurs:
  • the GUC Recovery Equity Pool, subject to dilution from the Rights Offering, the Backstop Periodic Premium, the Backstop Put Premium, the New Warrants Equity and the Employee Equity Incentive Plan;
    • the 1145 Subscription Rights; and
  • with respect to:
    • Eligible Holders of General Unsecured Claims: the 4(a)(2) Subscription Rights; or
    • Ineligible Holders of General Unsecured Claims (if any): solely if such Holder fully exercises its 1145 Subscription Rights, New Common Equity or Cash, at the option of the Requisite Consenting Parties, in the amount equal to the value of the 4(a)(2) Subscription Rights that would have been distributable to such Holder if such Holder was an Eligible Holder of General Unsecured Claims; or
  • if the Sale Transaction occurs, the Waterfall Recovery; provided, however, that in no event shall the Holders of General Unsecured Claims receive, on account of such Claims, a recovery greater than 100% of the General Unsecured Claims.
• Class 6 (“General Unsecured Convenience Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $0.1mn and estimated recovery is upto 100%. Each Holder will receive:
  • if the Equitization Transaction occurs, payment in full in Cash of such Holder’s General Unsecured Convenience Claim; or
  • if the Sale Transaction occurs, such Holder’s rights and entitlements hereunder as a Holder of a General Unsecured Claim and this Class will be deemed vacant pursuant to Article III.E of the Plan.
• Class 7 (“Prepetition Cumulus Intercompany Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
• Class 8 (“Prepetition Intercompany Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $20.1536bn and estimated recovery is 100%.
• Class 9 (“Section 510(b) Claims”) is impaired, deemed to reject and not entitled to vote on the Plan.
• Class 10 (“Intercompany Interests”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
• Class 11 (“Existing Equity Interests”) is impaired, deemed to reject and not entitled to vote on the Plan.

Key Disclosure Statement Amemdments

• On Weil's Internal investigation. "With respect to potential claims based on the Dividend, the investigation did not uncover any facts supportive of colorable actual or constructive fraudulent transfer claims. Although the investigation revealed that the Debtors may own a colorable preference claim, the Company concluded that the significant costs associated with bringing and litigating a potential preference claim outweighed any potential recovery for the benefit of the bankruptcy estate."
• On Benefits of Plan Settlements. "The proposed Plan Settlements, if approved by the Bankruptcy Court, would fully and finally resolve the claims and causes of action that are the subject of the Standing Motions and the CAF Objection. In particular, the CAF Settlement resolves key issues related to the allowance, classification, secured status, treatment, extent and priority of liens, and the accrual of postpetition interest. The litigation of such issues would raise complex issues of law and fact and would likely require months of discovery and extensive expert testimony to litigate, all at great expense to the Debtors’ Estates. In exchange for settling the causes of action that the Creditors’ Committee seeks to pursue, the Debtors are receiving significant value—including, but not limited to, meaningful support for the Plan and other relief sought pursuant to the Restructuring, a substantial discount (approximately $120 million) on the CAF Make Whole (as defined herein), and the resolution of these contentious disputes without the expense of lengthy and value-destructive litigation. Likewise, the TEC Global Settlement resolves, among other things, significant issues raised by the Avoidance Standing Motion without costly and lengthy litigation. Among other benefits to the Debtors, the TEC Global Settlement resulted in (i) the opportunity for the continued corporate consolidation of TEC and TES, saving up to approximately $115 million in potential tax costs that might be incurred if the entities were to be deconsolidated, (ii) TEC’s and Riverstone’s support for the Plan and the avoidance of a contentious hearing on the Backstop Commitment Letter, and (iii) a greater economic interest inand control over the Cumulus entities by the Debtors."
• On Status of Sale Process. "Following entry of the Backstop Order on August 29, 2022, the Debtors, with the help of the Debtors’ advisors, contacted over 59 potential third-party investors, including a broad spectrum of potential strategic buyers and financial sponsors who were believed to have interest in acquiring some or all of the Debtor’s assets. Through this initial marketing process, the Debtors sent nondisclosure agreements and teasers to all potential bidders contacted, participated in numerous conversations, and held in-person and virtual management presentations with all potential bidders that requested such presentations. The Debtors also shared comprehensive marketing materials, including confidential information and financial models, with the potential bidders and created a confidential electronic data room to permit potential third-party bidders to conduct due diligence. The Debtors have received a number of non-binding indications of interest (the 'Initial IOIs') and are in the process of evaluating such Initial IOIs".
• On "Value" (formerly "Valuation"). "The key feature of the Equitization Transaction is the equity investment to be provided under the terms of the Backstop Commitment Letter. The terms of the Backstop Commitment Letter were negotiated based upon a $4.5 billion total enterprise value (the 'Plan Enterprise Value'). The Debtors and Evercore believe that the Plan Enterprise Value is currently the best measure of the Reorganized Debtors’ value given the facts and circumstance of these cases, which include:
  • The terms of the Equitization Transaction are the result of (i) an extensive process that commenced prepetition (the 'Prepetition Process') amongst the Debtors and various creditor constituencies (including the Unsecured Notes Group, the Secured Creditor Group, and the Crossholder Group) and (ii) good faith, arm’s length, comprehensive negotiations between the Debtors and the Consenting Parties and their respective financial and legal advisors based on in-depth due diligence and a determination of the value-maximizing development and operation of the Debtors’ business.
  • A substantial capital infusion is necessary for the Debtors to reorganize and the Equitization Transaction provides for that necessary capital. 
  • Significant new capital would be difficult to obtain without the equitization of the Unsecured Notes.
  • There are very few relevant comparable transactions.

Accordingly, the expected recoveries disclosed herein are calculated based on the $4.5 billion Plan Enterprise Value. However, as described above, the Debtors are presently engaged in the process of marketing and soliciting bids in connection with a potential Sale Transaction in accordance with the Bidding Procedures. As such, the Equitization Transaction and Plan Enterprise Value thereunder remain subject to the Debtors’ ongoing Sale Process and any higher or otherwise better transaction realized in connection with such process. The Debtors and their advisors believe that evaluating the results of the Prepetition Process and subsequent Sale Process market-testing the Plan Enterprise Value is the best method of valuing the Debtors’ businesses.

Based on the Plan Enterprise Value, the projected net debt of $1.68 billion as of June 30, 2023 and the implied New Warrants Equity value of $32 million, there is an implied $2.788 billion of New Common Equity value available for distribution in accordance with the Plan."

Key Documents: 

The Revised Disclosure Statement [Docket No. 1320] attaches the following exhibits:

• Exhibit A: Plan 
• Exhibit B: Plan Release Provisions 
• Exhibit C: Organizational Chart 
• Exhibit D: Liquidation Analysis 
• Exhibit E: Financial Projections

Proposed Key Dates:

• Disclosure Statement Hearing: October 26, 2022
• Plan Supplement Filing: November 29, 2022
• Voting Deadline: December 6, 2022
• Plan Objection Deadline: December 6, 2022
• Confirmation Hearing: December 15, 2022

Petition Date Perspective

In a press release announcing the filing, the Debtors advised that it had taken: “a major step in its corporate transformation with a recapitalization transaction that is expected to greatly strengthen the financial position of its Talen Energy Supply LLC (‘TES’ or the “Company”) subsidiary. The transaction will include a new equity investment of up to $1.65 billion, which will accelerate TES’ clean power transformation, advance carbon-free data center growth initiatives, and maximize value to stakeholders.

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 expects additional senior unsecured noteholders will join the RSA in the coming weeks.

TES expects to continue its day-to-day business in the normal course and intends to move as quickly as possible through the process.”

The Debtors’ CEO Alejandro “Alex” Hernandez commented: “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…We want to thank our TES creditors and in particular the Consenting Noteholders—the future owners of TES—for their continued support of the Company and commitment to its future.”

Restructuring Support Agreement

The Debtors have reached an agreement with the Unsecured Notes Group (an ad hoc group of holders of the Senior Unsecured Notes represented by Kirkland & Ellis LLP and Rothschild & Co US Inc.) on a restructuring term sheet (the “Restructuring Term Sheet”) and a restructuring support agreement (the “RSA”) [attached at Docket No. 16]. The Restructuring Term Sheet provides for an up to $1.65 billion rights offering (the “Rights Offering”) that would provide for the payment of secured claims in full, backstopped by certain members of the Unsecured Notes Group (the “Backstop Parties”) pursuant to a form of backstop commitment letter (the “Backstop Commitment Letter” appended to the RSA as Exhibit C).

Additionally pursuant to the RSA, the Unsecured Notes Group has agreed to equitize the $1.4 billion of Senior Unsecured Notes held by their group.

Creditors: Who is Who?

In recent months, the Debtors’ creditors have organized into several groups, including: (i) an ad hoc group of CAF Lenders represented by Akin Gump Strauss Hauer & Feld LLP and Houlihan Lokey Capital, Inc. (the “CAF Lender Group”), (ii) an ad hoc group of 2026 TLB Lenders and holders of Senior Secured Notes represented by King & Spalding LLP and Houlihan Lokey Capital, Inc. (the “2026 TLB Lender Group” and, together with the CAF Lender Group, the “Secured Creditor Group”), (iii) an ad hoc group of “crossholder” creditors consisting of 2026 TLB Lenders and holders of Senior Secured Notes and Senior Unsecured Notes represented by Paul, Weiss, Rifkind, Wharton & Garrison LLP and Perella Weinberg Partners LP (the “Crossholder Group”), and (iv) an ad hoc group of holders of the Senior Unsecured Notes represented by Kirkland & Ellis LLP and Rothschild & Co US Inc. (the “Unsecured Notes Group” and, collectively with the Secured Creditor Group and the Crossholder Group, the “Ad Hoc Groups”).

Capital Structure

The following table provides a summary of the Debtors’ funded debt:

Senior Secured Notes

Senior Unsecured Notes

Municipal Bonds

About the Debtors

According to the Debtors: “Talen Energy Corporation, through its subsidiary, TES, is one of the largest competitive power generation and infrastructure companies in North America. TES owns and/or controls approximately 13,000 Megawatts of generating capacity in wholesale U.S. power markets, principally in the Mid-Atlantic, Texas and Montana.

Through its non-filing subsidiary, Cumulus Growth, Talen Energy Corporation is developing a large-scale portfolio of renewable energy, battery storage, and digital infrastructure assets across its expansive footprint.”

Collectively, the Debtors consist of TES and all of its wholly-owned subsidiaries—except for LMBE-MC HoldCo I LLC and its three subsidiaries (“LMBE-MC”) and Talen Receivables Funding LLC (“TRF”)—totaling 72 entities formed under the laws of Delaware, Massachusetts, New Jersey, and Pennsylvania. The Company’s headquarters are located in The Woodlands, Texas.

Liquidation Analysis (see Exhibit D to Docket No. 1320 for notes)

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