Energy Future Parts Crowd to Get Early Bankruptcy Financing

Energy Future Holdings Corp. made it through the first hearing in its $50 billion bankruptcy by fending off creditors who tried to block access to cash and loans it needs to keep operating.

After two days of proceedings so crowded it took three courtrooms to accommodate all the lawyers and financial professionals, the judge overseeing the case allowed the company to stay in business while it restructures. The hard part, lawyers said, is yet to come with decisions the judge put off.

“There is a lot more to go,” Philadelphia bankruptcy attorney Lawrence McMichael said in an interview. “The fact that they got what they wanted in the first-day hearings means that they just followed the rules. That’s pretty easy.”

Energy Future, which was taken private in a record $48 billion leveraged buyout in 2007, filed for court protection April 29 after falling natural gas prices pulled down electricity rates in Texas. It listed $49.7 billion in liabilities, the most ever for an energy-industry bankruptcy and the second-most for a Delaware case, behind only Washington Mutual Inc., according to data compiled by Bloomberg.

U.S. Bankruptcy Judge Christopher Sontchi in Wilmington, Delaware, delayed consideration of two issues that threaten to disrupt the company’s prearranged deal to trade a unit to senior creditors in exchange for canceling billions of dollars in debt.

Two-Day Hearing

On May 22, he will hold a two-day hearing on whether to transfer the case to a Dallas court, and on June 5 he may decide whether to approve a $5.4 billion loan package designed to pay-off creditors of Energy Future Intermediate Holding Co.

Junior creditors owed $1.6 billion want the case transferred to Dallas where the company’s headquarters are located. They oppose the prearranged deal because it leaves them with too little.

Another group of creditors opposes Energy Future’s plan to pay off their principal in full while denying them full early-termination payments the company said may reach $1.4 billion.

As one of the biggest U.S. bankruptcies since the fall of Lehman Brothers Holdings Inc., Energy Future began its first day in court May 1 with more than 100 people jammed into the main courtroom. About a dozen people stood near the doors, prompting Sontchi to warn against stealing seats as the hearing broke for lunch.

“It’s just like in law school,” Sontchi said as lawyers laughed. “Return to your own seat.”

The junior creditors began the hearing by complaining that Energy Future is trying to rush its deal with senior lenders. The plan would leave holders of the unit’s lower-ranked debt with less than $350 million of the $7.7 billion they’re owed, according to court filings.

Junior Creditors

Energy Future may be able to afford to give them more, Edward Weisfelner, a lawyer for the junior creditors, said.

“We are desperate to have our day in court,” he told the judge.

Potential changes to how electricity is regulated in Texas and a rise in natural gas prices next year may boost the company’s value enough to increase the junior creditors’ recovery, said Weisfelner.

Energy Future has said it intends to exit bankruptcy in 11 months, less than half the time of its proposed 24-month loan to finance the reorganization.

That loan, if approved at the June 5 hearing, would go to “promptly repay” about $4 billion owed to senior lenders of the Energy Future Intermediate Holding unit, company attorney Stephen Hessler said. A second, $1.9 billion loan would be used to repay lower-ranked creditors.

Loan Ruling

Sontchi yesterday approved a separate loan for the company’s main operating subsidiary, Texas Competitive Electric Holding Co. He signed an order giving TCEH interim permission to borrow $2.3 billion after the company and creditors who had opposed the loan worked out final wording. The company said it will return to the judge to seek approval for an additional $2.2 billion.

The second-lien creditors said Delaware incorporation of an Energy Future unit isn’t enough to keep the case in Wilmington. They want the proceedings moved to Texas, where Dallas-based Energy Future does all its business, has all its operations and is overseen by state utility and environmental regulators.

Sontchi authorized Energy Future to pay some fees for the proposed $5.4 billion loan. Creditors repaid under the loan would have the option to either settle for less than any early-payoff fee they may be owed, or fight Energy Future in court over the so-called make-whole claims, said Hessler. The company said it doesn’t owe any make-whole payment.

The case is Energy Future Holdings Corp., 14-bk-10979, U.S. Bankruptcy Court, District of Delaware (Wilmington).

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