Energy Future Holdings Considers Bankruptcy, Appeasement of Creditors

Energy Future Holdings continues to consider if a bankruptcy filing is in the company’s future, as the company evaluates options to appease its two major creditors.

Energy Future Holdings was formerly known as TXU Corporation before the company went private in 2007 as a part of an almost $50 billion leveraged buyout.  As a result of the buyout, the company has approximately $44 billion in debt on its books.

The backers of the buyout, which included Goldman Sachs Capital Partners, KKR & Company, and TPG Capital, were betting that natural gas prices would continue to rise.  However, that proved not to be the case.  In fact, gas prices have declined steeply since that time.

Given the steep decline in energy prices since 2007, the company is now struggling to generate sufficient cash flow to continue making payments on that debt.

The company is attempting to restructure its debt before November 1, when a $270 million payment is due to bondholders.  The company may also declare bankruptcy before November 1.

Ideally, the company will reach a restructuring plan with creditors before declaring bankruptcy.  If the company cannot get a restructuring plan in place, it would have to arrange a restructuring plan with the bankruptcy court, which is a much more difficult and time-consuming endeavor.

Structure of Energy Future Holdings

Energy Future Holdings has two subsidiaries.  Texas Competitive Electric Holdings represents Energy Future Holdings’ unregulated business, whereas Energy Future Intermediate Holdings represents Energy Future Holdings’ regulated business.

Energy Future Intermediate Holdings is the parent company of Oncor, which is the consumer-facing component responsible for delivering electricity to 91 counties in parts of western, north central, and central Texas.

Appeasing Secured and Unsecured Creditors Poses Challenge

The difficulty faced by Energy Future Holdings relates to the $270 million bond payment due November 1.  The bondholders are unsecured creditors of Energy Future Intermediate Holdings.

If the company makes the payment as scheduled to the unsecured bondholders, it would give the company additional time to take other steps in preparation for filing bankruptcy.  However, the secured creditors would frown upon the distribution of further assets to the unsecured creditors, as any distribution to unsecured creditors would lessen the equity available to the secured creditors in any future restructuring.

The secured creditors could retaliate against the company’s board by refusing to release them of legal liability.  Such a move would leave the board potentially subject to a lawsuit.

Energy Future Holdings has also entertained proposals from Bank of America, Citigroup, Fidelity Investments, JPMorgan, and Morgan Stanley on a loan that would allow the company to pay creditors in the event it declares bankruptcy.  Such a loan would be for approximately $3.5 billion and would make the lender a primary lienholder of Texas Competitive Electric Holdings as a part of any Chapter 11 bankruptcy filing on the part of Energy Future Holdings.

If Energy Future Holdings is unable to reach a restructuring deal, it is unclear if the company will be able to make the $270 million payment due November 1.

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Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.