Relevant Document:Bid Procedures Motion
On Monday evening, July 9, the FirstEnergy Solutions debtors filed a motion seeking approval of bid procedures in connection with a proposed free and clear sale of the debtors’ retail book assets.
The motion reveals that Exelon Generation Co. is the stalking horse purchaser, explaining that Exelon’s bid is the “highest or otherwise best bid” received for assets, subject to the debtors’ receipt of any higher or otherwise better bids at an auction proposed to be held on Sept. 6.
According to the filing, under the Exelon bid the debtors will realize total consideration of approximately $140 million, subject to certain adjustments that are set forth in the stalking horse agreement.
The debtors state that they have elected to offer bidders a hedge in connection with the proposed sale transaction, which would “run from the closing of the sale through May 31, 2019.” The hedge agreement would obligate the debtors to deliver physical power to the buyer at a fixed price during the term of the hedge. The debtors’ obligations under the agreement are proposed to be supported by superpriority administrative expense status. The motion also seeks approval of procedures for the assumption and assignment of certain executory contracts, including retail customer contracts.
In connection with the contemplated sale, the motion seeks entry of an order approving the free and clear sale of the retail power sales assets, approval of the debtors’ entry into the hedge agreement and approval of the assumption and assignment of certain executory contracts pursuant to sections 363 and 365 of the Bankruptcy Code
The debtors include an overview of their retail power sales business through which they serve more than 1.3 million commercial and industrial, or C&I, and residential customer accounts in six states. The motion explains that the retail business primarily consists of the following “channels”: “(i) large C&I customers; (ii) medium C&I customers; (iii) government aggregation contracts under which a buying group represents all members of a group consisting of residential and small C&I customers; (iv) municipal and co-op contracts; (v) mass market contracts[]; (vi) ‘provider of last resort’ contracts; and (vii) standard transactions with counterparties.”
The motion also outlines the debtors’ prepetition marketing and sales process and the events following their decision to “re-commence the marketing process for the Retail Power Sales Assets” in early 2018, noting that “over 20” potential buyers expressed interest and 19 of those parties executed NDAs. The motion states that the debtors determined that it was “preferable to sell the Retail Power Sales Assets to a single purchaser” and thereafter qualified five full-platform bidders to move to the second stage of the process, beginning in early April 2018. The debtors and their advisors ultimately engaged in “extensive negotiations” with two second-stage bidders and selected Exelon as the stalking horse purchaser.
“Absent the approval of the Bid Procedures, a Sale Transaction, and the related relief contemplated by this Motion,” the debtors contend that they will be “unable to realize the maximum value of the Retail Power Sales Assets for the benefit of all stakeholders.” The motion reasons that the sale of the retail power sales assets is “critical to preserving and realizing their value and, in turn, maximizing recoveries for the Debtors’ stakeholders.” The debtors attach the declarations of Tyler Cowan, a managing director of the debtors’ investment banker Lazard Frères & Co., and Kevin Warvell, who serves as Vice President, Chief Financial Officer, Treasurer and Corporate Secretary for FirstEnergy Solutions Corp., in support of the bid procedures motion.
A hearing on the bid procedures motion is
scheduled for Aug. 3 at 10 a.m. ET. The response deadline is July 23.
The notable terms of the bid procedures motion are summarized below.
Terms of Stalking Horse Bid
Under the sale contemplated by the stalking horse purchase agreement, Exelon Generation would purchase the following assets:
- “[A]ll Contracts related to the Business (including LCI, MCI, Government Aggregation, POLR, Structured, Muni/Co-op and Mass Market Contracts) still in effect at Closing”;
- “[C]ertain Contracts with brokers”;
- “[C]ertain monitoring and other equipment, as well as certain Contracts relating thereto”; and
- “[C]ertain assets used in the Business in the ordinary course, including cash and credit support provided by counterparties to Seller, records, Claims under Assumed Contracts, rights under confidentiality, non-compete, and non-solicit contracts, accounts receivable under the Assumed Contracts, phone numbers for Transferred Employees primarily related to the Business, and claims in respect of the Business.”
According to the motion, the stalking horse purchaser will only assume “ordinary course liabilities arising after the Closing Date or Assignment Date, as applicable,” which include the following: “(i) performance obligations under the Assumed Contracts, (ii) liabilities from any Proceeding or Governmental Body, and (iii) Taxes on or after such applicable date.” The motion also sets forth a series of assets and liabilities that are excluded from the proposed sale.
The motion outlines the following potential purchase price adjustments to the $140 million base price:
- “[A]greed upon amount corresponding to potential energy price value protection set forth in a spreadsheet attached to the Stalking Horse Agreement, calculated by evaluating peak and off-peak backlog MWhs”;
- “[T]he aggregate amount equal to Contract Value (based on MWh value for Customer accounts) not conveyed at Closing (in the case of Significant Contracts other than Government Aggregation Contracts) or the MWh value and volume for Customer accounts, as evaluated as of 120 days after the Closing Date (in the case of Government Aggregation Contract accounts and Mass Market Contract accounts)”;
- “[T]he value of Contracts excluded from the Assumed Contracts in order to obtain HSR approval”; and
- “[A]ny Cure Payments paid by the Stalking Horse Purchaser in excess of $100,000 in the aggregate.”
The bid procedures motion also provides a summary of the other terms of the stalking horse bid and stalking horse agreement, including those related to the applicable deposit, closing conditions, representations and warranties and covenants.
Hedge Agreement
According to the motion, the hedge agreement “represents an obligation of the Debtors to deliver physical power to the buyer at a fixed price during the term of the hedge.” The motion continues, “The amount of power, the hub at which the power is required to be delivered and the “shape” of the delivery obligations (
i.e., the amount of power to be delivered over the course of each hour of each day) represents the customer delivery obligations under FES’s Customer Contracts (as defined herein) as they are anticipated to exist as of the sale closing date based upon historical energy usage patterns of FES’s customers.”
The debtors explain that the peak delivery obligation under the hedge “represents approximately 62% of the Debtors’ current aggregate generation capacity, scaling down to approximately 24% of the Debtors’ current aggregate generation capacity” (emphasis added).
While “[i]ndustry practice typically requires ‘out of the money’ parties to provide credit support in the ordinary course of business based upon net mark-to-market valuations,” the motion explains that in light of “FES’s position as a debtor-in-possession, and because the Debtors are not pledging any collateral to support their obligations under the Hedge Agreement,” Exelon and the debtors have agreed that “any amounts owed by FES under the Hedge Agreement shall be afforded superpriority administrative expense status.”
Bid Protections/Initial Topping Bid
The stalking horse agreement entitles Exelon Generation to a termination fee equal to 3% of the base price and buyer expense reimbursement equal to 1% of the base base price, “which would be payable in the event that a higher or otherwise better competing bid in respect of the Retail Power Sales Assets is consummated and under certain other limited circumstances.” The bid procedures also contemplate an initial topping bid of $146.6 million, according the motion, which notes that subsequent overbids must be in the minimum amount of $1 million.
Timeline
The bid procedures include the following deadlines:
- Aug. 8: Deadline to file notice of assumption and assignment for other executory contracts, which are any of the debtors’ executory contracts other than customer contracts;
- Aug. 23 at 5 p.m. ET: Bid deadline;
- August 24:
- Deadline to notify qualified bidders (5 p.m. ET).
- Deadline to file notice of assumption and assignment of customer contracts.
- Sept. 6 at 9 a.m. ET: Auction (if required);
- Sept. 14 at 4 p.m. ET:
- Deadline to object to sale transaction
- Assumption and assignment objection deadline (for other executory contracts only) .
- Assumption and assignment objection deadline (for assigned customer contracts only) .
- Sept. 21 at 10 a.m. ET: Sale hearing
Cowan Declaration
Cowan says in his declaration, “In my opinion, the marketing process conducted by the Debtors was robust and included all of the parties that are mostly likely to be interested in potentially acquiring the Retail Power Sales Assets.” According to Cowan, the retail power sales assets “were fairly and thoroughly marketed prior to entering into the Stalking Horse Agreement with and providing the Bid Protections to Exelon Generation Company.” He also contends that “all negotiations with Exelon Generation Company LLC in connection with the Stalking Horse Agreement were in all respects conducted in good faith, at arm’s length, and without any collusion or fraud of any kind.” Cowan maintains that the bid procedures, including the bid protections, and the process contemplated by the bid procedures “will set the stage for an Auction that will maximize the value of the Retail Power Sales Assets for the benefit of the Debtors’ estates and all parties-in-interest.”
Warvell Declaration
According to the Warvell declaration, “The Debtors estimate that the Retail Power Sales Assets, in particular the committed sales, are expected to continue to attrite rapidly over the next several years from an estimated $824.4 million in committed sales for the remainder of 2018 to a mere $48.2 million in estimated committed sales in 2022.” Warvell maintains that the stalking horse purchaser’s current bid will “set the floor at any auction for the Retail Power Sales Assets” and “would provide the Debtors’ estates with substantial incremental value as compared to a scenario where the Debtors simply wound-down their retail sales business.” The declaration also reasons that a sale of the retail power sales assets “eliminates certain operational and regulatory risks related to the retail sales business.” Warvell points out that the debtors “are currently struggling to retain retail customers and, given the Debtors’ comparative inability to win material new business, the Debtors’ risk of losing key salespeople is increasing.”
Warvell also address the debtors entry into the hedge agreement. “In my experience,” says Warvell, “absent entering into the Hedge Agreement, as set forth herein and in the Motion, the Debtors would have been unable to achieve the same level of recovery provided under the Stalking Horse Agreement for the Retail Power Sales Assets.” He indicates that his understanding is that the stalking horse purchaser “would be unwilling to proceed with the transaction for the Retail Power Sales Assets unless the Debtors agreed to enter into the Hedge Agreement, and that the Stalking Horse Purchaser likewise would have been unwilling to enter into the Hedge Agreement absent the Sale Order providing for any amounts that may be due and owing by FES to the Stalking Horse Purchaser under the Hedge Agreement to be afforded superpriority administrative expense status.” Warvell contends that entry into the hedge agreement in connection with the sale of the retail power sales assets “has enabled the Debtors to obtain the highest or otherwise best offer for the Retail Power Sales Assets, which will inure to the benefit of the Debtors’ creditors and other stakeholders.”
Motion to Seal
The debtors also filed a
motion to seal in connection with the bid procedures motion, explaining that the purchase price adjustment mechanism and the information contained in the stalking horse agreement “specifically allocating value by individual customer accounts” both constitute “sensitive commercial information that the Debtors and the Stalking Horse Purchaser believe require protection from general public disclosure and should be redacted.”