August 23, 2022

Case Study: Complex carve-out, stand-up in restructuring environment

Regulatory and market headwinds spell trouble for the long-term viability of a large public utility’s subsidiary

The subsidiary of a large, publicly traded utility that owned and operated nuclear and fossil power stations was in trouble. The company faced growing compliance costs to satisfy strict environmental regulations. Further complicating matters was the recent and rapid expansion of natural gas supplies, which sent prices in the energy and capacity markets plunging, thus reducing the company’s profit and cash flow to dangerously low levels. 

With long term viability in serious question, the company filed for voluntary bankruptcy under Chapter 11.

A&M stepped in as the company’s Chief Restructuring Officer (CRO) to lead the overall transformation of the subsidiary’s business and the restructuring through the bankruptcy process. The work would entail managing the subsidiary’s cash flow closely and leading it through the bankruptcy restructuring process. It would also involve “carving-out” the struggling subsidiary from the parent and standing up the new, standalone entity that could operate on its own post-bankruptcy. 

Leading the carve-out and stand-up of the new business

The carve-out included the separation and stand-up of the new entity’s entire back office. Prior to filing, the parent utility had provided all business support services including technology, supply chain, human resources, payroll, compensation and benefits, finance, accounting, treasury, risk, legal, retail, safety, environmental, lab services, unit dispatch, communications, external affairs, facility maintenance and other support services departments. 

A&M would lead the planning and execution to separate the subsidiary and build out all the necessary components of the new entity’s operating model and at an optimized cost structure. Through the course of the work A&M would:

  • Create and manage a detailed carve-out plan, financial model and the associated governance framework used by the board of directors and management to oversee the work
  • Design a lean, simplified business model and organization structure for all functional areas noted above
  • Design and implement detailed business policies, process flows and procedural documentation for all functional areas noted above
  • Plan and manage the separation from the parent’s IT environment – including more than 200 business applications, networks, plants, corporate headquarters, end user devices, telephony, etc.
  • Source, contract and implement multiple outsourcing service providers for IT, payroll, environmental and regulatory compliance, unit dispatch, lab services, communications and tax
  • Execute a workforce plan to hire and onboard roughly 130 new company resources
  • Design and implement an entire new suite of compensation and benefit plans for nearly 3,000 union and non-union employees
  • Implement all new treasury processes, technologies and banking partners
  • Develop the company’s overall enterprise risk plan, which included the sourcing and execution of all required business insurances (general liability, property and casualty, worker’s compensation, and directors and officers liability)
  • Manage all carve-out-related communications with external (creditors, vendors, advisors) and internal (board of directors, management, employees) stakeholders

Successful emergence from Chapter 11

Just shy of two years after filing, the company emerged from bankruptcy as an independent power producer and retail energy provider. The new entity enjoyed a significantly improved capital structure and investment grade credit rating and was poised for long-term growth. As part of the restructuring process, A&M assisted the company with:

  • Resolving litigation against third parties that brought in more than $1 billion in new value to the company
  • Reducing funded debt obligations by $3.7 billion, resulting in a post-restructuring balance sheet with approximately $1 billion in cash and only $450 million in funded debt
  • Renegotiating several nuclear fuels contracts to achieve cost savings of approximately $90 million over a two-year period
  • Reducing the new entity’s cost of support services from an annual run rate of approximately $220 million to about $50 million, resulting in recurring cost take-out of $170 million annually; The one-time cost incurred to achieve these recurring savings was $100 million, and all carve-out/separation related activities were executed without any disruption to ongoing business operations

As a result of the carve-out, the annual run rate of ~$220 million to cover support services was reduced to ~$50 million – a recurring savings of $170 million for the company. 

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