Energy Future wins Chapter 11 plans approval

February 2016 | DEALFRONT | BANKRUPTCY & CORPORATE RESTRUCTURING

Financier Worldwide Magazine

Having filed for Chapter 11 bankruptcy protection in April 2014 with debts of $49.7bn, Energy Future Holdings has endured nearly two years of financial difficulty. However, the company is finally on the verge of emerging from bankruptcy protection following the approval of its reorganisation plan.

US Bankruptcy Judge Christopher Sontchi spent nearly two hours reading a pair of rulings that confirm the plan, the product of more than 18 months of contentious and wide-ranging legal fights between warring creditors. Under the terms of the company’s restructuring plan, Energy Future will sell its regulated Oncor power distribution business to a consortium led by Hunt Consolidated, a Dallas-based oil and gas, real estate and power company for around $19bn. In summary, the company will split in two and shed around $30bn worth of debt. The divestiture to Hunt has won the approval of virtually all of the creditors owed money by the unit. As a result, Oncor is to be converted to a real estate investment trust.

The company will also be required to spin off its power plants and retail utility to a number of senior creditors who are owed $24bn. “We are pleased to have reached this critical milestone on the road to emergence,” said John Young, chief executive of Energy Future. “We can now begin, in earnest, to build for the future, with a strong capital structure, excellent assets and a singular commitment to delivering for our customers, employees and business partners in Texas’ growing, competitive market. Our financial restructuring has been among the most complex in history, and it is a credit to our entire team and our outside advisors that the company has reached this point while maintaining stellar customer service and operational excellence.”

However, the Court’s approval is just one step in the process of emerging from bankruptcy, albeit a hugely important one. Energy Future must now await regulatory approvals in Texas and satisfy a number of other conditions in order to complete its reorganisation, including endorsement from the IRS which must approve the tax structure behind the deal. The approval process is expected to last into the second quarter of 2016.

Energy Future filed for one of the biggest ever bankruptcies in 2014 following the $48bn leveraged buyout of the company, which was taken private in 2007 by a number of large investors including private equity firms KKR and TPG Capital. Burdened by a significant debt pile on the eve of the financial crisis, Energy Future, then known as TXU Corp, was unable to remain above water. As the crisis bit and the shale revolution in the US took hold, energy prices plummeted and Energy Future had no alternative but to file for bankruptcy protection. The PE firms will have their equity in the company wiped out when the restructuring plan is finally implemented.

Given the scale of the company’s financial difficulty, the Judge praised Energy Future’s management team who were able to keep the company on course throughout the lengthy and complicated bankruptcy. The company has a number of lines of business and two major divisions, each of which had its own creditors and financial roadblocks to overcome. Judge Sontchi also took the time to hail the company’s creditors for championing a restructuring process which will erase a significant amount of debt and will include a merger which “infuses billions of dollars in new equity and debt into the capital structure”.

Some of the settlements of Energy Future’s bankruptcy were already approved prior to Judge Sontchi’s endorsement of the restructuring scheme. Indeed, Judge Sontchi had already approved a settlement which helped bring an end to a contentious dispute over intercompany claims, as well as a number of potential lawsuits against Energy Future’s leaders and owners.

Richard Summerfield