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Energy Future Holding Corp. Files a Chapter 11 Case to Restructure Roughly $50B of Debt

05.06.14

On April 29, 2014, power giant Energy Future Holding Corp. ("Energy Future"), along with 70 subsidiaries, filed for chapter 11 protection in the District of Delaware as part of a deal it has reached through lengthy negotiations with some of its largest senior creditors to restructure roughly $50 billion in debt.

In the halcyon days of 2007, when the U.S and global economies were strong and natural gas prices high and rising, KKR & Co., TPG, and the private equity arm of Goldman Sachs Group Inc. made history by taking Energy Future (formerly TXU Corp.) private for approximately $32 billion and $13 billion in assumed debt as part of the largest leveraged buyout in in U.S. history. The buyout represented a bet that Energy Future would continue to hold its strong strategic position in the power market, as its main sources of electricity production—coal and uranium—were markedly less expensive at the time than the natural gas that was used to determine electricity rates in Texas. However, the global economic crisis and substantial slide in natural gas prices that quickly followed the deal erased Energy Future's price advantage and made it increasingly difficult for Energy Future Holding Corp. to service its substantial debt load.

Months of negotiations with senior creditors prior to the chapter 11 filing provided the basis for key parts of pre-arranged chapter 11 plan. The proposed plan would spin-off Energy Future's subsidiary, Texas Competitive Electric Holdings Co. LLC ("TCEH"), giving TCEH's first lien creditors, among other things, full equity ownership in the newly reorganized TCEH to extinguish approximately $23 billion in first lien debt. TCEH is the parent company of Luminant and TXU Energy, which are both core operating assets of the debtors' business. The proposed plan would also pay a number of other senior creditors of other debtor entities more or less in full, pursuant to the various settlement agreements amongst those parties.

Energy Future has announced that it seeks to have its proposed plan approved by the bankruptcy court within nine months and emerge from bankruptcy within one year. However, it appears that junior creditors who were not parties to the restructuring negotiations will try to interrupt the debtors' goal of a quick and painless exit from bankruptcy. The indenture trustee for TCEH's second lien creditors has filed motions challenging venue and seeking authorization for a Rule 2004 examination (which would permit the trustee to conduct certain types of discovery under the Bankruptcy Rules) of the debtors and related third parties. In the Rule 2004 motion, the indenture trustee asserts that the debtors' senior management had "disabling conflicts of interest" and may have artificially depressed the debtors' value for restructuring purposes. [Dkt. No. 6 at 1]. The motion further asserts that the proposed plan would pay the TCEH first lien creditors in excess of their claims. Id. at 7. Other junior creditors have filed objections to the debtors' requests for post-petition financing, which are critical components of the proposed plan. The bankruptcy court has issued an interim order permitting the debtors to enter a commitment letter for certain post-petition financing, and has set a final hearing on post-petition financing for June 5.

The case is In re Energy Future Holdings Corp., Case No. 1:14-bk-10979. It is before Bankruptcy Judge Christopher Sontchi in the U.S. Bankruptcy Court for the District of Delaware.

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