- Debt holders sign confidentiality agreements
- Company lines up $9 billion in DIP financing
- Auditor’s opinion could trigger Chapter 11 filing
The former TXU Corp owes more than $40 billion, and if a deal cannot be struck with creditors, the owner of 14 power plants is expected to file one of the biggest Chapter 11 bankruptcies in history soon afterward, sister news service Reuters reported.
(UPDATE: Energy Future Holdings said on March 31 it has extended a deadline to file its annual report, giving the company more time to negotiate with creditors as it seeks an agreement to reduce its crushing debt. The former TXU Corp was expected to report that its auditor had determined it could not survive as a going concern, a finding that would have triggered a default on its loans and a likely bankruptcy filing. In a statement, the company said it has extended that deadline, but did not say for how long. It added that it will miss an interest payment due on April 1, but has a grace period in which to make the payments before a default.)
The bankruptcy could touch off years of expensive court-supervised negotiations with funds such as Apollo Global Management, which specialize in profiting from bankruptcy work-outs, and traditional money managers such as Fidelity Investments. Ultimately, Energy Future’s businesses are likely to be broken up and transferred to the hands of its creditors, people close to the matter have told Reuters. The company’s generation business, Luminant, and regulated distribution unit, Oncor, both rank among the largest in the United States.
Energy Future Holdings is lining up around $9 billion of bankruptcy loans before an imminent bankruptcy filing, sources involved in the matter told sister service Thomson Reuters Loan Pricing Corp. The $9 billion debtor-in-possession loan is in the final stages of negotiation, the sources said. Credit agreements have yet to be signed, but the deal is expected to be the largest-ever privately funded bankruptcy financing, according to Thomson Reuters LPC data.
At the same time, efforts to reach a deal with creditors ahead of an Energy Future Holdings bankruptcy have regained steam, according to published reports. A critical group of the power company’s debt holders have signed confidentiality agreements with EFH, giving them access to confidential financial records and opening the door to direct negotiations with the company, sources close to EFH told the Dallas Morning News. The final-hour rush to find common ground before going to court comes seven years after EFH was bought out for $45 billion. Led by private equity firms Kohlberg Kravis Roberts & Co, TPG Capital Management and Goldman Sachs Capital Partners, the deal has since struggled amid falling power prices in Texas and what became an unsustainable debt load.
Allan Koenig, a spokesman for EFH, declined to comment on the talks. Tom Johnson, a spokesman for the private equity firms, also declined to comment.
Many coal-fired power plants have struggled in recent years as the economics of electricity generation changed. New drilling technology set off a domestic energy boom, reducing natural gas prices and eroding coal’s cost advantage. Falling gas prices have in turn depressed prices for wholesale power, forcing generators like Edison Mission Energy of Santa Ana, California, to file for bankruptcy.
Consumers are not expected to suffer power disruptions, and EFH might be the last in a string of big bankruptcies that have hit the energy sector over the past decade. Most of its competitors carry less debt.
Energy Future’s bankruptcy hinges on the anticipated opinion of its auditor in a regulatory filing due March 31 that it could not continue as a going concern. The conclusion would trigger a default on loans, although the filing could be delayed depending on whether a grace period is triggered.
The company said in its most recent regulatory filing it had $38.7 billion in assets and $50.2 billion in liabilities. If it were to file for bankruptcy, it would be the 10th largest in U.S. history, according to Bankruptcydata.com. EFH was created at the end of what has been called a “golden era” for private equity, a period from 2006 to mid-2007 when lenders eagerly financed many of history’s largest LBOs. The buyout of TXU, completed in October 2007, was the biggest.
With capacity of 15,400 megawatts, Energy Future Holdings is the biggest power generator in Texas and one of the top 20 in the United States. It has eight natural gas plants, five coal plants and one nuclear plant, primarily across northeast Texas. It also operates the largest transmission and distribution network in Texas, serving the northern third of the state.
When the new owners took the company private in October 2007, they changed its name to Energy Future Holdings and saddled the company with about $40 billion in debt. Shortly thereafter, the economic recession and the use of hydraulic fracturing, or fracking, to tap hard-to-reach sources of energy lowered prices for natural gas and wholesale power, making it difficult for EFH to service its debt. Last April, Energy Future revealed it had hired law firm Kirkland & Ellis to advise on its restructuring options, saying it could face a bankruptcy filing, liquidation or insolvency.
Among key obstacles hindering the talks was a dispute over how to structure a breakup of Energy Future. According to people close to the matter, the Apollo-led creditor group wanted to take control of Energy Future’s unregulated power merchant business in a way that would allow it to save money in future taxes.
However, such a move would create a massive capital gains tax owed by the Energy Future estate to the Internal Revenue Service. People close to the matter estimated it could be as high as $8 billion and reduce the amount of money available for unsecured creditors, who are among the last to be paid.
Nick Brown and Bill Cheung are correspondents for Reuters in Dallas and London, respectively.