Welcome to the twenty-ninth Pari Passu newsletter,

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Today, we will learn more about:

1. Talen Energy Restructuring

2. David Einhorn - Cambridge Union Interview

Talen Energy Restructuring

Talen Energy Corporation is a power generation company owned by Riverstone Holdings LLC, a private equity firm focused on the energy and utility space. In 2022, Talen filed for bankruptcy due to a liquidity crisis. The liquidity crunch faced by Talen Energy was primarily caused by the surge in natural gas prices in 2021. Talen hedged against commodities risk through derivatives contracts, but the Company was forced to put up $451mm of cash as collateral to maintain the contracts. This compounded the effects of Winter Storm Uri, which caused a $78mm loss for the Company. To help carry itself through the downturn, Talen Energy secured a rescue loan of $848mm from GoldenTree Asset Management and Silver Point, but reduced energy demand coupled with higher input prices caused by Russia’s invasion of Ukraine made it difficult for the Company to survive. Thus, on May 29, 2022, Talen filed for Chapter 11 bankruptcy. Talen was represented by our friends at Evercore.

Utilities Hedging

One of the key reasons driving Talen’s bankruptcy was the Company’s failure to properly hedge against rising input prices. Power generators will typically make money from the spread between power prices (what they sell their energy at) and input prices (typically natural gas, which is what they used to produce energy). To ensure stable and recurring revenue, power generators will enter contracts to purchase and/or sell power and inputs at set prices through futures contracts. Talen, however, did not hedge against rising natural gas prices – thus, when prices spiked, Talen was forced to eat the difference, which significantly cut into the Company’s bottom line. The Company tried to enter contracts ex post facto, but due to the Company’s risky debt profile, counterparties demanded a large amount of cash collateral ($451mm), reducing Talen’s liquidity. In theory, higher gas prices would lead to higher revenue and make the company more profitable, but the rising price causes an immediate need to put up capital.

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