More Headaches For Energy Future Holdings

The hedge fund Aurelius Capital Management LP filed a $725 million lawsuit last month against Energy Future Holdings Corp. and seven of its directors, accusing them of “fraudulent transfers” by allowing the holding company to borrow from its operating units.

Energy Future Holdings, the Texas electric and gas utility formerly known as TXU, was taken private for around $45 billion in 2007 at the peak of the buyout boom by a consortium of buyout shops including Kohlberg Kravis Roberts & Co., TPG Capital and GS Capital Partners, Goldman Sachs Group Inc.’s private equity arm.

But then a severe recession hammered the economy, and plummeting natural gas prices have continued to pound the company. Its $5.6 billion of revenue in 2012 was down by more than half compared to the $11.4 billion of revenue in 2008, the first year after the buyout closed. And while operating income also has declined precipitously over the period, to $1.4 billion from $5.6 billion, operating costs also have fallen sharply, to less than $7 billion from $16.9 billion.

Energy Future Holdings hired financial advisers in February from Evercore Partners and The Blackstone Group and law firm Kirkland & Ellis in an apparent effort to restructure its $37.9 billion of debt and prepare the company for bankruptcy.

The Aurelius Capital suit could upend the company’s plans to untangle its affairs in bankruptcy, said an attorney familiar with the situation. “As soon as they file it, this is going to become an open forum for these claims,” said the lawyer, who asked not to be identified because he was not authorized to discuss the matter.

Outside of bankruptcy, Energy Future Holdings could litigate the hedge fund’s suit in the ordinary course of business, a process that could take years while the company seeks other ways to right its financial ship. But in a bankruptcy, the liability claim would become part of an adversarial proceeding that would have to be resolved before the bankruptcy itself could be settled.

While the outcome might be the same in either case for the corporate defendant, it might be a different story for the individual defendants, who are either executives of Energy Futures Holdings or representatives from KKR, TPG and Goldman Sachs, the lawyer said. “The bankruptcy is not going to help the directors. It might hurt, actually.”

Energy Future Holdings, Blackstone Group and Kirkland & Ellis declined comment, as did TPG. KKR, Goldman Sachs and Aurelius Capital did not respond by deadline to requests for comment.