Lights out at Energy Future Holdings

June 2014 | DEALFRONT | BANKRUPTCY & CORPORATE RESTRUCTURING

Financier Worldwide Magazine

Energy Future Holdings Corp (EFH), the largest power company in Texas, filed for Chapter 11 bankruptcy protection in late April ending months of speculation surrounding the company’s future. EFH’s bankruptcy filing is the eighth largest in US history.

In a statement announcing the filing at the US Bankruptcy Court in Wilmington, Delaware, EFH noted it had entered into an agreement with a number of its major creditors to restructure around $40bn of outstanding debt. EFH’s decision to file for Chapter 11 protection came just days before the company was due to pay out more than $100m in skipped debt payments.

According to EFH, all of the company’s businesses will continue to function as normal throughout the bankruptcy process, and the restructuring plan put into place will provide it with a sustainable financial structure for the future.

EFH was acquired in 2007 by investment bank Goldman Sachs and private equity firms KKR & Co and TPG Capital, in the biggest ever leveraged buyout deal. The transaction saw the acquiring group use $40.1bn of debt and $8.3bn equity. Accordingly, the acquisition of EFH, once known as TXU Corp, saddled the company with an insurmountable debt pile just as prices for its electricity began to tumble. The leveraged nature of the deal notwithstanding, the shale gas revolution in the US had a particularly damaging effect on EFH’s finances. Indeed, it was the nascent shale gas market which ultimately brought about the collapse in US natural gas prices.

EFH expects the confirmation of its reorganisation plan will take about nine months to carry out, with an exit from bankruptcy protection expected to take around 11 months. During this time the company expects to continue operations as normal. It has arranged for two debtor-in-possession credit facilities, with Texas Competitive Electric Holdings Company pledging $4.475bn and Energy Future Intermediate Holding Company (EFIH) committing $7.3bn.

The company’s pre-packaged bankruptcy plan will see Texas Competitive Electric Holdings (TCEH) and its subsidiaries separate from EFH without triggering any material tax liability. TCEH’s first lien lenders will receive all of the equity in the new TCEH and the cash proceeds from new debt issued by TCEH in exchange for eliminating around $23bn of its funded debt.

At EFH’s regulated business, EFIH, the reorganisation plan will eliminate about $2.5bn of funded debt through a capital infusion of up to $1.9bn from certain EFIH unsecured note holders. Along with all EFH and EFIH unsecured notes, the capital will be converted into equity in the reorganised EFH when the company eventually exits Chapter 11. Certain EFIH unsecured note holders will also receive cash under the plan, the company said. At EFH, the plan will eliminate about $600m of funded debt; the reorganised EFH will continue to own EFIH.

Despite the company’s bankruptcy petition, EFH’s future is still far from clear. As well as winning the approval of the bankruptcy judge, the firm’s reorganisation plan must also be approved by a number of creditor groups. Key aspects of the plan must also be approved by various regulators including the Internal Revenue Service, the Public Utility Commission of Texas, the regulator, and the US Nuclear Regulatory Commission before the reorganisation can proceed.

Shortly after the firm filed for Chapter 11 protection the trustee for second lien debt holders linked to TCEH moved to transfer the proceeding from the federal bankruptcy court in Wilmington to the bankruptcy court in Dallas, which is within walking distance of the company’s corporate headquarters. Wilmington Savings Fund Society, FSB, the trustee for holders of $1.5bn of second lien debt, cited “the interests of justice and/or for the convenience of the parties” in seeking the court move. The bond trustee also highlighted comments from Moody’s Investors Service in 2013. Moody’s stated there is the “likelihood for political intervention and regulatory scrutiny over the bankruptcy restructuring process”, if there is an impact on regulated units. EFH has dismissed calls for a venue change.

Richard Summerfield