Judge orders mediation in Energy Future bankruptcy

The mediator will help parties determine if a $805 million proposed settlement contained in the company’s bankruptcy exit plan is fair and how to divide the money.

“I think it is appropriate and important to give mediation a chance to succeed,” U.S. Bankruptcy Judge Christopher Sontchi told a hearing in Wilmington, Del., on Monday, May 4.

Energy Future filed for bankruptcy a year ago under the burden of $42 billion in debt and weak power prices.

The company has proposed spinning off its unregulated Luminant power plants and TXU retail utility, a business known as TCEH, to investors holding $24 billion of secured debt.

The parent company’s creditors would be repaid through the sale of the parent’s investment in Oncor, a regulated power distributor that is not bankrupt and is estimated to be worth at least $18 billion.

The parent company would also transfer $805 million to TCEH to compensate for costs that were put on that side of the business but which benefited the parent company.

Junior creditors have said that payment was far short of what they should receive.

The company’s plan has been opposed by nearly all of its creditors.

Lawyers for the company and junior creditors of TCEH told the court they are working on an alternative plan to create a real-estate investment trust to own the stake in Oncor.

Many companies in recent years have spun off property into REITs to take advantage of more favorable tax treatment and higher valuations.

The junior creditors have said their REIT plan would raise $11 billion. The money would repay parent company creditors and allow the junior creditors of TCEH to receive stock in the Oncor REIT.

Sontchi denied a company request to set a series of deadlines that would culminate in a November trial on the company’s plan, in part to give the parties a chance to develop the alternative plan.

Energy Future took on much of its debt in 2007 in the record buyout of TXU Corp, which was led by KKR & Co, TPG Capital Management and the private equity arm of Goldman Sachs Group Inc.

The case is Energy Future Holdings Corp, U.S. Bankruptcy Court, District of Delaware, No. 14-10979.

(Reporting by Tom Hals in Wilmington, Delaware; Editing by Ted Botha)