Energy Future Reaches Bankruptcy Deal

Biggest LBO ever ran aground after a wave of deregulation.

Energy Future Holdings Corp., the Texas power company Henry Kravis and David Bonderman took private in 2007 in the biggest-ever leveraged buyout, filed for bankruptcy after reaching a deal to cut billions in debt.

The filing today in Wilmington, Delaware, is the result of months of wrangling among creditors, owners and management, and comes after a wave of deregulation opened Texas’s wholesale energy market to competition.

Energy Future, formerly known as TXU Corp., had bet wrongly that the price of natural gas, used to make electricity, would rise enough to justify the company’s $48 billion price.

“Energy Future Holdings is just another example of road kill on the electric deregulation highway,” said Paul Patterson, a New York-based analyst for Glenrock Associates LLC.

In the past three years, independent power producers Dynegy Inc. and Edison Mission Energy, a unit of Edison International, have sought bankruptcy protection amid a collapse in electricity prices.

Today’s filing has already drawn objections from one group of creditors, who accused Dallas-based Energy Future’s executives of mismanagement.

The trustee for some junior noteholders of the Energy Future unit Texas Competitive Electric Holdings attacked the bankruptcy deal, accusing managers of “disabling conflicts of interest.”

In court filings, they asked U.S. Bankruptcy Judge Christopher Sontchi for permission to obtain documents from the company and question managers under oath. They also want the case moved to a bankruptcy court in Texas.

Wilmington Savings Fund Society FSB is the successor trustee for the $1.6 billion in second-lien notes due 2021, which come after $24 billion in first-lien debt and before $6 billion in lower priority debt.

Senior debtholders, who typically have more influence over a bankruptcy case than lower-ranked creditors because they have higher priority to be paid, back the debt-cutting plan.

“We are pleased to have the support of our key financial stakeholders for a consensual restructuring,” Chief Executive Officer John Young said in a statement. “We fully expect to continue normal business operations during the reorganization.”


Eleven Months

Energy Future said it seeks to exit bankruptcy in 11 months. The company also said it has commitments for financing totaling more than $11 billion, including $7.3 billion for Energy Future Intermediate Holding.

As part of the financing, some bondholders are planning a $1.9 billion capital infusion with a 5 percent fee that will function both as a debtor-in-possession loan and a rights offering, according to a person familiar with the matter.

Under the proposal announced today, the company’s deregulated Texas Competitive Electric Holdings unit would separate from Energy Future without triggering “any material tax liability,” according to the company. The plan would hand ownership of Texas Competitive to creditors in exchange for eliminating $23 billion in debt.

One dispute in pre-bankruptcy talks was over whether to break up the company. Splitting the regulated and deregulated portions of Energy Future might trigger a tax bill of more than $7 billion, people with knowledge of the matter had said.

About $3.1 billion in debt would be canceled at the holding companies that own the regulated utility Oncor.

The company has about 9,100 employees, most of whom work in three main businesses: electricity generation, retail electricity sales, where they face competition, and the rate-regulated transmission and distribution business, according to a filing.

About $31 billion of its funded debt was issued by the generation business and its affiliates and $7.7 billion by the entity that owns Oncor.

Today’s petition listed assets of $36.4 billion and debt of of $49.7 billion. The bankruptcy ranks with Enron Corp.’s $48.9 billion collapse in 2001. Billionaire Warren Buffett called his $2 billion investment in Energy Future bonds “a big mistake.”

Texas’s largest electricity provider traces its roots to a business that first powered electric lights in Dallas in 1882. The 2007 going-private deal, coming at the peak of a three-year boom in leveraged buyouts, turned into a big loss for Kravis’s KKR & Co., as well as Bonderman’s TPG Capital and Lloyd Blankfein’s Goldman Sachs Capital Partners, which loaded the company with debt.


Shale Boom

The buyout, larger even than KKR’s 1989 takeover of RJR Nabisco Inc., left Energy Future struggling to reduce debt. The trouble began when the financial crisis, coupled with booming shale production, sent gas prices down starting in 2008.

KKR and TPG later wrote down most of their $5 billion equity investment to 5 cents on the dollar. The deal included a total of $8.3 billion in equity, including checks from co- investing clients. KKR’s and TPG’s losses were partly offset by more than $500 million in fees generated by the buyout through October 2012, Energy Future said in regulatory filings.

Energy Future bondholders saw their investments dive as gas prices plunged to less than $2 from a July 2008 high of more than $13 per million British thermal units. The company made $5 million in the third quarter of 2013, its first net income since the fourth quarter of 2010.

In an annual report on March 1, Buffett said his Omaha, Nebraska-based Berkshire Hathaway Inc. had a pretax loss of $873 million on its $2 billion Energy Future debt investment after selling it for $259 million last year and receiving $837 million in interest.

Funds such as Leon Black’s Apollo Global Management LLC, Howard Marks’s Oaktree Capital Group LLC and Centerbridge Capital Partners LP amassed Energy Future debt after the buyout, giving them a seat at the negotiating table when the company sought to reach a restructuring deal with creditors.

This week’s filing followed collapsed talks in October that aimed to avoid a $270 million interest payment that was ultimately made to otherwise out-of-the-money creditors. In the final week of October, months of negotiations blew up after a failure to reach consensus with every investor group.

A pre-arranged agreement “avoids the pandemonium of an unorganized bankruptcy,” Erik Gordon, a professor at the University of Michigan’s business and law schools, said before the filing. “It would have taken years for a bankruptcy court to understand the ramifications of the competing plans that would have been filed.”


DIP Loan

The $1.9 billion capital infusion will be funded by five holders of the company’s “payment-in-kind” notes due 2018, a person familiar with the matter said. They are Avenue Capital Group, York Capital Management, GSO Capital Partners, Third Avenue Management and Peter Schoenfeld Asset Management, said the person, who requested anonymity because the matter isn’t public.

The financing, which becomes a $2 billion loan including a 5 percent fee, will function as a rights offering, the person said, open to outside parties including other PIK noteholders and Fidelity Management & Research Co. Fidelity manages $1.9 trillion of assets and owns debt in at least seven parts of the company.

The infusion will be part of $7.3 billion in operating funds in total for the Energy Future Intermediate Holding unit, according to the person. Texas Competitive Electric Holdings has about $4.48 billion in proposed financing, according to the company statement.

Energy Future Intermediate’s 11.25 percent bonds due December 2018 traded at 91 cents on the dollar and are still bid there, according to a person familiar with the matter. Those securities were quoted at 83.8 cents on the dollar yesterday, according to prices compiled by Bloomberg.

Kirkland & Ellis LLP is the company’s main bankruptcy counsel, and its advisers include Evercore Partners Inc. and Alvarez & Marsal North America LLC, according to the petition.

The case is Energy Future Holdings Corp., 14-10979, U.S. Bankruptcy Court, District of Delaware (Wilmington).


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