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Talen Files for Bankruptcy After Power Hedges Drained Cash (4)

May 10, 2022, 7:28 PM

Talen Energy Corp. placed its Talen Energy Supply unit in Chapter 11 bankruptcy on Monday after rising power and gas prices disrupted its hedges and sparked a liquidity crisis.

At least eight of the company’s 18 power plants rely on natural gas to make electricity, which means that when prices spiked in recent months, Talen was “exposed to market price volatility” restructuring adviser Ryan Omohundro said in court papers.

Talen’s strategy of using derivatives to manage commodity and power market volatility backfired when power and natural gas prices spiked last year, according to the filing. The hedges forced the company to post more cash collateral for its counterparties, sparking a “significant liquidity squeeze,” Omohundro said.

“These liquidity requirements were much greater than the (company) could have anticipated or were capable of financing,” he said.

Talen Energy Supply, the company’s debt-issuing vehicle, said it had struck a restructuring deal with a group of bondholders that will see the creditors inject up to $1.65 billion of new equity, according to a statement on Tuesday. The company is scheduled to appear in bankruptcy court at 4 p.m. on Tuesday in Texas.

DIP Financing

TES also obtained $1.76 billion of bankruptcy financing from a group of banks including Citigroup Inc., Goldman Sachs Group Inc., and Royal Bank of Canada. That consists of a $1 billion term loan, a $300 million revolving credit facility, and a $458 million letter of credit facility, the U.S. company said in a statement.

Parent company Talen Energy Corp. and its crypto mining unit didn’t file for bankruptcy.

Talen, based in The Woodlands, Texas, listed both assets and debt of more than $10 billion in its Chapter 11 petition filed in Houston. A Chapter 11 filing allows a company to continue operating while it works out a plan to repay creditors. The Riverstone Holdings-backed power generator had faced years of struggles amid weak energy prices, dividend payments to its sponsor and growing pressure to become more environmentally friendly.

As part of its bankruptcy, Talen also filed a $900 million lawsuit against its former owners, PPL Corp., claiming the company diverted money away from an affiliate of Talen. The companies have been fighting about the transfer in court for several years.

Power Crisis

The company, which operates in several Texas cities, was hit hard by the state’s freeze and power crisis in early 2021. The fallout from the winter storm cost it around $90 million, S&P Global Ratings said.

Talen entered 2022 largely without hedges, which helped it profit from higher power prices, but the company was squeezed by higher gas prices and struggled to find hedging counterparties due to its risky debt profile, people with knowledge of the matter previously told Bloomberg.

The case is Talen Energy Supply, 22-90054, U.S. Bankruptcy Court for the Southern District of Texas.

(Adds first-day hearing time in fifth paragraph. A previous version of this story corrected the unit filing for bankruptcy.)

--With assistance from Carolina Gonzalez, Brian Eckhouse, Eduard Gismatullin and Nicole Bullock.

To contact the reporters on this story:
Allison McNeely in New York at amcneely@bloomberg.net;
Steven Church in Wilmington, Delaware at schurch3@bloomberg.net

To contact the editors responsible for this story:
Claire Boston at cboston6@bloomberg.net

Dawn McCarty

© 2022 Bloomberg L.P. All rights reserved. Used with permission.

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