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Energy Future Plan Said to Almost Wipe Out Owners KKR to TPG

By Richard Bravo and Beth Jinks
April 02, 2014 3:37 PM EDT 10 Comments
Energy Future’s acquisition at the peak of the buyout boom in 2007 was essentially a bet, using $40.1 billion of debt, that natural gas prices would rise. Instead, prices have fallen 69 percent since July 2008. Gas prices set the cost of electricity in the Texas market.
Photographer: Matt Nager/Bloomberg
Energy Future’s acquisition at the peak of the buyout boom in 2007 was essentially a bet, using $40.1 billion of debt, that natural gas prices would rise. Instead, prices have fallen 69 percent since July 2008. Gas prices set the cost of electricity in the Texas market.

KKR & Co., TPG Capital and Goldman Sachs Capital Partners, the firms that acquired Energy Future Holdings Corp. in the biggest-ever leveraged buyout, would be all but wiped out in a reorganization plan being discussed, said three people with direct knowledge of the negotiations.

The firms may accept as little as 1 percent of the equity in the company after it completes a Chapter 11 restructuring, said the people, who asked not to be identified because the talks are private. The pre-bankruptcy plan is being negotiated by the private-equity owners, the company’s management and holders of the power producer’s $45.6 billion of debt.

Energy Future is hashing out a proposal that would reduce the amount of time it takes to restructure in Chapter 11, limit the chaos of a free-for-all filing and allow the company to avoid a tax bill that could exceed $7 billion. Fidelity Investments, which is a key debtholder throughout the Dallas-based company’s capital structure and had been a holdout on the bankruptcy road map, moved closer last week to an accord.

Adam McGill, a spokesman for Energy Future, declined to comment, as did Tom Johnson, a spokesman for the private-equity sponsors at Abernathy MacGregor Group.

The proposal, which may still fall through, would also give legal releases to KKR, TPG and Goldman Sachs lessening their exposure to potential litigation, the people said. The private-equity firms as well as a group of unsecured creditors at the regulated Energy Future Intermediate Holding division, agreed to the current deal being discussed, according to one of the people.

Filing Delayed

Last year, the sponsors said they would support a restructuring proposal that would have allowed them to retain 15 percent of the company’s equity interest, according to an April 15 filing with the U.S. Securities and Exchange Commission. That plan was rejected.

The power producer’s acquisition at the peak of the buyout boom in 2007 was essentially a bet, using $40.1 billion of debt and an $8.3 billion equity check, that natural gas prices would rise. Instead, prices have fallen 68 percent since July 2008. Gas prices set the cost of electricity in the Texas market.

Energy Future earned $5 million in the third quarter of 2013, its first net income since the fourth quarter of 2010, according to data compiled by Bloomberg. Total liabilities were $50.2 billion as of Sept. 30, compared with total assets of $38.7 billion.

Biggest Losers

The biggest losers will be the equity investors. KKR put up $2 billion and TPG and Goldman Sachs each added $1.5 billion. An additional $3.3 billion came from clients of the three firms and from Lehman Brothers Holdings Inc., Citigroup Inc. and Morgan Stanley. KKR and TPG had both written down their investment to 5 percent of the initial value as of last year.

The biggest piece of TXU’s debt load, a $15.4 billion loan due in October 2017, has a market value of about $11.2 billion, Bloomberg data show.

About $16.4 billion of lower-ranking bonds tracked by a Bank of America Merrill Lynch index had a market value of $10.4 billion.

Energy Future said in a March 31 filing with the SEC that it would delay releasing its annual report, skip $109 million in interest payments due yesterday and use grace periods to avoid a default. The company said in a separate filing that the 10-K may include a warning about its ability to continue as a going concern, which would trigger a default.

Back to Table

The move may avoid a bankruptcy filing for as long as a month and will allow creditors and Energy Future more time to develop a reorganization plan. Any deal would be contingent upon lenders at the company’s deregulated Texas Competitive Electric Holdings unit agreeing to a resolution that wouldn’t trigger a tax liability at the parent, one of the people said.

Senior lenders to the deregulated unit who walked away from negotiations last year -- led by Apollo Global Management LLC, Oaktree Capital Group LLC and Centerbridge Capital Partners LP - - are back at the table for talks this month, people with knowledge of the talks said last week.

The central issue being negotiated this month is how to avoid the big tax bill, the people said. Apollo, Centerbridge and Oaktree have pushed a plan that would separate the deregulated unit in a way that would give them favorable tax treatment and generate a bill at the Energy Future parent company that people familiar with the negotiations estimated at more than $7 billion. The bankrupt estate wouldn’t be able to pay a tax bill that large, the people said.

Fidelity’s Take

Other stakeholders are opposed to the plan and are pursuing agreements for a more tax-efficient reorganization.

Fidelity, which manages $1.9 trillion of assets, owns debt in at least seven parts of Energy Future, according to data compiled by Bloomberg. Because varying levels of seniority in the holdings determine which creditors are paid first, the firm has been left in the position where any reorganization would favor some assets over others.

Under terms being discussed, Fidelity would get almost 40 cents on the dollar in cash for notes it holds in the parent company of the power producer, one of the people said. The Boston-based money manager had rejected a previous offer for a debt swap valued at 10 cents on the dollar, according to a Nov. 1 regulatory filing.

To contact the reporters on this story: Richard Bravo in New York at rbravo5@bloomberg.net; Beth Jinks in New York at bjinks1@bloomberg.net

To contact the editors responsible for this story: Shannon D. Harrington at sharrington6@bloomberg.net Caroline Salas Gage

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