Energy Future Files for Bankruptcy Protection in Delaware
Energy Future Holdings Corp., the Texas power company Henry Kravis and David Bonderman took private in 2007 with Goldman Sachs Group Inc. in the biggest-ever leveraged buyout, filed for bankruptcy after reaching a deal with stakeholders to cut billions in debt.
Today’s filing in Delaware is the result of months of wrangling among creditors, owners and management, and represents the failure of a bet that natural-gas prices would rise enough to justify the $48 billion price. Instead, the financial crisis coupled with booming shale production sent gas prices down starting in 2008.
Energy Future said it seeks to exit bankruptcy in 11 months. The Dallas-based company, formerly known as TXU Corp., also said it has commitments for financing totaling more than $11 billion, including $7.3 billion for Energy Future Intermediate Holding.
“We are pleased to have the support of our key financial stakeholders for a consensual restructuring,” Chief Executive Officer John Young said in a statement. “We fully expect to continue normal business operations during the reorganization.”
‘Big Mistake’
The bankruptcy ranks with Enron Corp.’s $48.9 billion collapse in 2001. Billionaire Warren Buffett called his $2 billion investment in Energy Future bonds “a big mistake.” Today’s petition listed assets of $36.4 billion and debt of of $49.7 billion.
Texas’s largest electricity provider traces its roots to a business that first powered electric lights in Dallas in 1882. The 2007 going-private deal, coming at the peak of a three-year boom in leveraged buyouts, turned into a big loss for Kravis’s KKR & Co. (KKR), as well as Bonderman’s TPG Capital and Lloyd Blankfein’s Goldman Sachs Capital Partners, which loaded the company with debt.
They later wrote down most of their $5 billion equity investment to 5 cents on the dollar. The deal included a total of $8.3 billion in equity, including checks from co-investing clients.
Energy Future’s management, its private-equity sponsors, and creditors have been in talks since last year to devise a reorganization plan that would avoid a free-for-all during Chapter 11 proceedings.
Talks Collapse
This week’s filing followed collapsed talks in October that aimed to avoid a $270 million interest payment that was ultimately made to otherwise out-of-the-money creditors. In the final week of October, months of negotiations blew up after a failure to reach consensus with every investor group.
One dispute in pre-bankruptcy talks was over whether to break up the company. Splitting the regulated and deregulated portions of Energy Future might trigger a tax bill of more than $7 billion, people with knowledge of the matter have said.
Under the proposal announced today, the company’s Texas Competitive unregulated unit would separate from Energy Future without triggering “any material tax liability,” according to the statement. The plan would split the company, handing ownership of Texas Competitive to creditors in exchange for eliminating $23 billion in debt.
About $3.1 billion in debt would be canceled at the holding companies that own the regulated utility Oncor, with some lenders also infusing $1.9 billion in equity.
A pre-arranged agreement “avoids the pandemonium of an unorganized bankruptcy,” Erik Gordon, a professor at the University of Michigan’s business and law schools, said before the filing. “It would have taken years for a bankruptcy court to understand the ramifications of the competing plans that would have been filed.”
Wiped Out
TXU’s buyout, larger even than KKR’s 1989 takeover of RJR Nabisco Inc., left Energy Future struggling to reduce debt. Most of KKR’s and TPG’s equity was wiped out, though their losses were partly offset by more than $500 million in fees generated by the buyout through October 2012, Energy Future said in regulatory filings.
Energy Future bondholders saw their investments dive as gas prices plunged to less than $2 from a July 2008 high of more than $13 per million British thermal units. The company made $5 million in the third quarter of 2013, its first net income since the fourth quarter of 2010.
In an annual report on March 1, Buffett said his Omaha, Nebraska-based Berkshire Hathaway Inc. (BRK/A) had a pretax loss of $873 million on its $2 billion Energy Future debt investment after selling it for $259 million last year and receiving $837 million in interest.
Funds such as Leon Black’s Apollo Global Management LLC, Howard Marks’s Oaktree Capital Group LLC and Centerbridge Capital Partners LP amassed Energy Future debt after the buyout, giving them a seat at the negotiating table when the company sought to reach a restructuring deal with creditors.
The case is In re Texas Competitive Electric Holdings LLC, 14-bk-10978, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Source: bloomberg
