Energy Future Delays Annual Report to Foster Bankruptcy Deal

Mar 31, 2014 6:43 pm ET

(Updates with decision to skip interest payments in first paragraph.)

March 31 (Bloomberg) -- Energy Future Holdings Corp., the power producer taken private in the largest-ever leveraged buyout, extended the deadline to file its annual report and said it will miss a payment due tomorrow.

The company filed with the U.S. Securities and Exchange Commission to delay its 10-K for 2013, according to a statement today. Energy Future also said it will miss interest payments due tomorrow. The company has 30 days before it’s considered in default, according to a filing today.

The Texas electricity provider is still negotiating a plan for reorganization under Chapter 11 bankruptcy. Fidelity Investments, a key creditor involved in the negotiations, moved closer last week to accepting a reorganization agreement being discussed with the company’s sponsors, management and other creditors, according to people familiar with the talks. Dallas, Texas-based Energy Future wants to reduce the time needed to reorganize in Chapter 11.

“They’re getting closer,” said Erik Gordon, a professor of business and law at the University of Michigan at Ann Arbor. “They’re not dealing with the creditors on the basis of making threats. They’re dealing collaboratively.”

Energy Future, formerly known as TXU Corp., was taken private by KKR & Co. LP, TPG Capital and Goldman Sachs Group Inc. for $48 billion in 2007. The power producer’s acquisition was essentially a bet, using $40.1 billion of debt, 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 has about $45.6 billion of debt outstanding.

Coupon Due

Energy Future won’t make $109 million in coupon payments due tomorrow, including on its 15 percent, second-lien notes due April 2021, according to the filing today. Those securities traded at 23.3 cents on the dollar on March 28 to yield 67.4 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Auditors will express “substantial doubt” about Energy Future’s ability to remain a going concern in its annual report, according to the filing today. The automatic extension for filing the annual report is 15 days, according to a person familiar with the process, who asked not to be identified because discussions are private.

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, Fidelity has been left in the position where any reorganization decision would favor some assets over others.

Negotiating Debt

Discussions also include as much as $9.7 billion in loans that would fund the company during bankruptcy, according to the filing. The parent company’s Energy Future Intermediate Holding unit is negotiating $5.2 billion in debtor-in-possession financing and the deregulated Texas Competitive Electric Holdings division is seeking $4.5 billion of DIP loans.

Citigroup Inc., Morgan Stanley and Deutsche Bank AG would provide the financing for the $5.2 billion loan, according to two people with knowledge of the negotiations.

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, according to a person involved in the talks who asked not to be identified because the negotiations are private. 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 filing with the U.S. Securities and Exchange Commission.

Orderly Bankruptcy

Energy Future is vying for an orderly bankruptcy to avoid being saddled with a $2 billion tax bill. That liability could be triggered if it fails to keep the regulated and deregulated divisions intact, the company said in an April 15, 2013 regulatory filing. That would put the recovery of some unsecured classes of investors in jeopardy.

Previous negotiations fell apart last year right before Energy Future made a $270 million interest payment on Nov. 1 to junior bondholders, money that senior lenders didn’t want to see leave the company.

--With assistance from Shannon D. Harrington in New York.