Energy Future Delays 10-K Amid Bankruptcy Discussions

Energy Future Holdings Corp., the power producer taken private in the largest-ever leveraged buyout, put off a bankruptcy filing for as much as a month to allow talks with creditors more time to develop into a consensual reorganization accord.

The company controlled by KKR & Co., TPG Capital and Goldman Sachs Capital Partners said in a filing with the U.S. Securities and Exchange Commission yesterday it would delay releasing its annual report, skip $109 million in interest payments due today and use grace periods to avoid the ensuing default. The 10-K may have included a qualification to its ability to continue as a going concern, which would have triggered a default, the company said in a second filing.

Energy Future, which was taken private for $48 billion in 2007, is working toward a restructuring plan that would reduce the time it takes to reorganize in Chapter 11. Fidelity Investments, a key holder of debt throughout its capital structure, moved closer last week to a bankruptcy accord being discussed with the Dallas-based company’s private-equity owners, management and other creditors.

‘Getting Closer’

“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.”

A message left after regular business hours yesterday with Adam McGill, a spokesman for the company, wasn’t returned.

Energy Future will skip a $58.9 million coupon payment today on its 15 percent, second-lien notes due April 2021, as well as $50.3 million due on its 11.5 percent bonds that mature October 2020, according to the first filing. The contracts for those debentures allow a 30-day grace period for interest payments before a default occurs.

The $1.23 billion of 15 percent securities due 2021 traded at 24 cents on the dollar at 10:09 a.m. in New York to yield 65.5 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Gas Prices

Auditors will express “substantial doubt” about Energy Future’s ability to remain a going concern in its annual report, according to the second filing, conflicting with financial requirements in a secured credit agreement that would also cause a default. The automatic extension for filing the annual report is 15 days and can be further lengthened, according to a person familiar with the process who asked not to be identified because discussions are private.

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.

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.

Fidelity’s Role

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 decision would favor some assets over others.

Discussions, which may still fall through, also include as much as $9.7 billion in loans that would fund the company during bankruptcy, according to the first filing. Energy Future’s regulated 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 the so-called 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. The debt would pay 3.25 percentage points more than the London interbank offered rate with a 1 percent minimum on the benchmark.

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 filing with the U.S. Securities and Exchange Commission.

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, 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.

Before it's here, it's on the Bloomberg Terminal.