Calpine's Bankruptcy: Key First Day Pleadings, Plus a Glimpse from Mirant Group's Bankruptcy Court into Valuation Issues of Relevance to Calpine Investors and Speculators

The days preceding and following a company's bankruptcy filing are some of the most hectic in a bankruptcy lawyer's professional experience, with one good night's sleep typically representing the total number of hours slept during the entire week. Most debtor lawyers use first-day motions as the opportunity to educate the judge, who is seeing the case for the first time, of the circumstances leading to the bankruptcy filing, the business challenges ahead, and the debtor's reorganization prospects. Generally, the first-day hearing is a well-orchestrated event in which the debtor pretty much gets what it asks for, the judge begins to learn about the case, and final evidentiary hearings are scheduled on matters requiring notice and a hearing.

The NY office of Kirkland & Ellis, led by veteran lawyer Richard Cieri, handled Calpine's massive filing this week, and got several routine first-day motions granted which were aimed at providing a relatively seamless transition for the company into bankruptcy from a purely operational perspective. In addition, several key substantive motions were presented, including the following (all of which are available for your downloading convenience):

Links to news reports on the filing are available here, here($), here($), and here. Here's a link to Tom Kirkendall's initial report on the filing.

On a related point, Calpine investors and speculators looking at the "end game" here and trying to predict ultimate values available for distribution will surely find of interest a recent opinion from Judge Dennis Michael Lynn, the bankruptcy judge overseeing the Mirant Group bankruptcy case. In re Mirant Corp., 2005 WL 3471546, (Bankr. N.D. Tex., 12/9/05). In this lengthly opinion, Judge Lynn tackles the question of how to determine the "total enterprise value" of the entities that make up Mirant Corp. and its 82 affiliated entities for purposes of plan confirmation. In the end, he concluded, valuation of a behemoth like Mirant is far more art than science. He wrote:

At best, the valuation of an enterprise like Mirant Group is an exercise in educated guesswork. At worst it is not much more than crystal ball gazing. There are too many variables, too many moving pieces in the calculation of value of Mirant Group for the court to have great confidence that the result of the process will prove accurate in the future. Moreover, the court is constrained by the need to defer to experts and, in proper circumstances, to Debtors' management. The law governing the court, from Till [v. SCS Credit Corp., 541 U.S. 465 (2004),] to Protective Comm. [v. Anderson, 390 U.S. 414, 442 (1968)] was developed in cases far different from that at bar.


It may be that there are better ways to determine value than through courtroom dialectic. That said, the court must work within the system created by Congress-and, in valuing a company in chapter 11, that system contemplates an adversary contest among parties before a neutral judge. The court believes all participants in the Valuation Hearing performed their duties to their constituencies, Debtors' estates, the public and the court, for which it expresses its appreciation.

The Court first described the process of sifting through the evidence and preparing for the contested hearing on valuation as follows:

Given that a basic dispute existed concerning value and the parties entitled to participate under a plan of reorganization, the court determined it would address the issue of Mirant Group's enterprise value (as well as other issues pertinent to confirmation) before proceeding to solicitation of votes. As a result of conferences presided over by the Examiner, Debtors filed their Motion for Order Determining Valuation and for Entry of a Scheduling Order in Connection Therewith (the "Motion"). The Examiner, working with the principal parties, developed a scheduling order (the "Scheduling Order") for consideration of the Motion, and general notice of the Motion and the scheduled valuation hearing (the "Valuation Hearing") was given to interested parties.


Pursuant to the Scheduling Order, parties intending to participate actively in the Valuation Hearing were required to give notice of their intent to participate by February 18, 2005. As of that date, the following entities had given notice of their intent to participate: the Equity Committee, the Corp. Committee, the MAG Committee, Debtors, Phoenix, the Mirma Landlords,FN18 Edison Mission Energy, the Ad-Hoc Committee of Bondholders of MAG, U.S. Bank National Association as Lease Indenture Trustee and Pass Through Trustee, Law Debenture Trust Company of New York as Indenture Trustee and Property Trustee, Pepco, Kinder Morgan Power Company, and Deutsche Bank AG. Thereafter on March 15, 2005, L. Matt Wilson, Esq., a shareholder of Mirant, filed a notice on behalf of himself and other shareholders (collectively "Wilson") of intent to participate in the Valuation Hearing.

The Scheduling Order established times for submission of initial expert reports and rebuttal expert reports. As of the deadlines set by the Scheduling Order, Debtors, the Corp. Committee, the MAG Committee, the Equity Committee and Phoenix (collectively the "Valuation Parties") submitted expert reports and, subsequently, rebuttal reports. Also in accordance with the Scheduling Order, the Valuation Parties conducted extensive discovery....

The Valuation Hearing commenced on April 18, 2005 and continued for 27 days over the following 11 weeks.... Morgan [Mirant COO], Krishnan [Mirant Officer], and Holden [Mirant Treasurer] gave testimony regarding the formulation and reliability of the business plan for Mirant Group (the "Business Plan"), which furnished the data on which Coleman [Mirant expert from Blackstone Group] based his opinions of value. Tabors [Mirant expert from Charles River Assoc.] provided testimony in support of the Business Plan and Coleman's valuation and in criticism of, inter alia, the reports of BSA [Corp. Committee expert], Slater Consulting [Equity Committee expert] and PJSC [Equity Committee expert]. Filsinger [Corp. Committee expert] gave testimony respecting development by his firm of cash flows used by Ying in his valuation of Mirant Group. Coleman and Ying [Corp. Committee expert] testified as to their valuations; Ying was also called (by the Corp. Committee) along with Morgan (called by Debtors) as rebuttal witnesses to respond to testimony by experts called by the Equity Committee and Phoenix. Schlesigner's testimony [from BSA] principally concerned future gas prices which, as discussed below, are a key factor in the business of Mirant Group. Slater used Schlesinger's gas price forecasts (as well as other input) to develop his own cash flows for Mirant Group. From these cash flows Maxwell developed his valuation of Mirant Group. Shaked [Phoenix expert] critiqued the valuation testimony of other experts-principally Coleman and Ying.

Including expert reports from Coleman, Tabors, Filsinger, Ying, Schlesinger, Slater, Maxwell and Shaked, and the Business Plan, the parties placed in evidence a total of 454 exhibits. The court also received into evidence, by agreement of the parties, the deposition and expert report of William H. Hardie, III ("Hardie") of Houlihan Lokey Howard & Zukin ("Houlihan"), the expert retained by the MAG Committee. The parties also designated for the court's consideration portions of transcripts of depositions taken of A.W. Dahlberg ("Dahlberg"), the chairman of Mirant's board of directors; Robert A. Hayes ("Hayes"), Mirant's Vice President of Corporate Planning, Strategy and Business Development; Seth G. Parker ("Parker"), a principal of Levitan & Associates, Inc., another expert retained by the Equity Committee; and Slater.

During the Valuation Hearing, Wilson filed a motion (and, later, a renewed motion) (both the "Till Motion") asking that the court determine, based on Till v. SCS Credit Corp., 541 U.S. 465 (2004), that the enterprise value of Mirant Group must, as a matter of law, exceed the total debt of Mirant Group. At the court's invitation, other parties (Debtors, the Corp. Committee, the MAG Committee, the Equity Committee and Michael Sammons, a shareholder) filed briefs addressing the Till Motion.

Following completion of the Valuation Hearing, the court issued its preliminary ruling in letter form on June 30, 2005. On July 26, 2005, the court, by a second letter (together with the June 30 letter, the "Letter Ruling"), responded to inquiries transmitted by the Examiner and modified its prior ruling. [FN31] By the Letter Ruling the court directed that, under Morgan and Coleman's supervision and the general supervision of the Examiner, the value of Mirant Group be recalculated to effect changes required by the court and discussed below. In the Letter Ruling the court indicated it would explain and substantiate its ruling in this memorandum opinion.

[FN31] The June 30 and July 26 letters may be found in the court's file at docket nos. 10393 and 10723, respectively.

Following issuance of the Letter Ruling, the Committee, Debtors, Phoenix and certain ad hoc committees entered into negotiations respecting a consensual plan. On September 8, at the request of those parties, the court held an in-chambers status conference at which the parties announced that they had reached agreement on a consensual plan of reorganization for Debtors that would allow for participation of Phoenix and existing shareholders. [FN33] The parties also requested that the court direct that the recalculation of value of Mirant Group not be completed and that the court not at that time issue this memorandum opinion.

[FN33] The deal struck by the parties allocated outright 3.75% of the stock of the reorganized entity to existing equity owners and 3.5% to the Phoenix class. Under the 9/22 Plan shareholders and the Phoenix class are to receive warrants entitling them, respectively, to 10% and 5% of the equity in the reorganized company. Finally, 50% of the recoveries from the litigation assigned to the Plan Trust is to benefit existing equity owners.

One of the goals of Congress in fashioning the Bankruptcy Code was to encourage parties in a distress situation to work out a deal among themselves. See Marandas v. Bishop (In re Sassalos), 160 B.R. 646, 653 (D. Or. 1993) ("compromises are favored in bankruptcy"); see also 10 COLLIER ON BANKRUPTCY � 9019.01 (15th ed. rev.2005). Mindful of the likely effect on the commitments of the parties to the consensual plan of completion of recalculation of value, the court agreed to the parties' request and directed that the recalculation of value be halted, at least temporarily. The court also deferred issuance of this memorandum opinion until confirmation.

The Plan, as modified to reflect the deal of the parities, has now been considered at a confirmation hearing. Because this memorandum opinion is pertinent to a number of confirmation issues (including the tests of Code § 1129(a)(7) and (11)), because it addresses the Till Motion, because at least one party (Wilson) has indicated an intent to appeal confirmation and the court believes an appellate court should have the benefit of the reasoning underlying the Letter Ruling, and because some objections to confirmation of the Plan concerned the failure to complete the valuation process, the court concluded it would be appropriate and beneficial to the parties to issue this memorandum opinion in connection with confirmation of the Plan.

Happy Holidays to All!

© Steve Jakubowski 2005

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