As promised, Energy Future seeks Chapter 11 bankruptcy protection

Energy Future Holdings (EFH), which had been saying for months that it would probably need to file a prepackaged Chapter 11 bankruptcy reorganization, said on April 29 that it has done so.

The Texas power plant operator has entered into an agreement with certain of its key financial stakeholders to reduce its approximately $40bn of debt, lower its annual cash interest costs, access significant additional capital and create a sustainable capital structure for the future.

To implement this pre-arranged restructuring plan, Energy Future Holdings Corp. and certain of its subsidiaries, including Texas Competitive Electric Holdings Co. LLC (TCEH) (the holding company for EFH’s competitive businesses, including Luminant and TXU Energy) and Energy Future Intermediate Holding Co. LLC (EFIH) (the holding company for EFH’s regulated business, Oncor Electric Delivery Co.), have filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the Bankruptcy Court for the District of Delaware. Oncor is not a part of the Chapter 11 filing.

“We are pleased to have the support of our key financial stakeholders for a consensual restructuring,” said John Young, president and chief executive officer of EFH. “With this restructuring plan, we now have a path to a sustainable capital structure that would put EFH and its family of companies in an even stronger position over the long term to deliver for all of our stakeholders, including our customers, our employees and our business partners. This restructuring is focused on our balance sheet, not our operations. We fully expect to continue normal business operations during the reorganization.”

This reorganization plan based around debt-for-equity swaps

Under the terms of the proposed restructuring agreement, upon emergence, transactions would be implemented to eliminate certain debt at EFH and certain of its subsidiaries. TCEH and its subsidiaries would separate from EFH without triggering any material tax liability, and TCEH’s first lien lenders would receive all of the equity in the reorganized TCEH and the cash proceeds from the issuance of new debt at the reorganized TCEH in exchange for eliminating approximately $23bn of TCEH’s funded debt.

At EFIH, the proposed transaction would eliminate approximately $2.5bn of EFIH’s funded debt through, among other things, a capital infusion of up to $1.9bn from certain EFIH unsecured noteholders. This capital would convert, along with all EFH and EFIH unsecured notes, into equity in the reorganized EFH upon the completion of the company’s reorganization. In addition, certain EFIH unsecured noteholders will receive cash consideration as a part of the reorganization.

At EFH, the proposed transactions would eliminate approximately $600m of EFH’s funded debt. The reorganized EFH would continue to own EFIH, and EFIH would continue to retain its interest in Oncor.

The agreement contemplates the confirmation of the proposed plan of reorganization within about nine months and exit from the restructuring within approximately eleven months, in each case, from the petition date.

The agreement has substantial support from the TCEH first lien lenders, the EFIH unsecured creditors, the EFIH first and second lien lenders, EFH unsecured creditors, and the three private equity holders of EFH. The company will work to obtain additional support for the agreement during the reorganization process.

In conjunction with the filing, TCEH and EFIH have secured commitments for new capital totaling up to $4.475bn and $7.3bn, respectively, in debtor-in-possession (DIP) financing. Subject to court approval, these financial resources will be made available in order to, among other things, help support normal business operations during the Chapter 11 process.

The TCEH financing is also expected to permit TCEH subsidiary Luminant Mining Co. LLC to grant the Railroad Commission of Texas a collateral bond in an amount equal to or in excess of Luminant Mining’s current lignite coal mine reclamation bond obligations. Environmental groups have said that the state allowing the company to self-bond for reclamation might leave massive liabilities for the state to handle if the company were to go out of business.

Finally, EFIH and TCEH each have reached an agreement with secured lenders that permits the continued use of cash flow from operations to fund ongoing business and meet obligations in the normal course during the reorganization process.

EFH has made customary filings, including first day motions, with the bankruptcy court, which, if granted, will help ensure a smooth transition to Chapter 11 without business disruption.

Plan of reorganization to be filed soon

The company intends to file a plan of reorganization to implement the proposed restructuring agreement in the near term. The consummation of the plan of reorganization will entail certain regulatory approvals, including, among others, the approval of the tax-free transaction by the Internal Revenue Service and approvals by the Public Utility Commission of Texas and the U.S. Nuclear Regulatory Commission.

EFH is a Dallas-based holding company engaged in competitive and regulated energy market activities, primarily in Texas. Its portfolio of competitive businesses consists primarily of Luminant, which is engaged largely in power generation and related mining activities, wholesale power marketing and energy trading, and TXU Energy, a retail electricity provider with more than 1.7 million customers in Texas. Luminant has approximately 15,400 MW of generation in Texas, including 2,300 MW fueled by nuclear power and 8,000 MW fueled by coal. Luminant is also one of the largest purchasers of wind-generated electricity in Texas and the United States.

EFH’s regulated operations consist of Oncor, which operates the largest electricity distribution and transmission system in Texas with more than 3.2 million delivery points and 119,000 miles of distribution and transmission lines. While EFH indirectly owns approximately 80% of Oncor, the management of Oncor reports to a separate board with a majority of directors that are independent from EFH.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.