Energy Future Lenders Fight to Put Brakes on Turnaround

Eight groups of Energy Future Holdings Corp. lenders want a Delaware judge to put the brakes on the company’s speedy trip through bankruptcy, accusing the power supplier of funneling benefits to favored investors.

Under review today in U.S. Bankruptcy Court in Wilmington, Delaware, is the Dallas-based company’s proposal to borrow $1.9 billion. The loan, which would be used to pay and compensate lenders who earlier bought high-interest-rate securities, is part of a reorganization plan devised by the company with what it calls “anchor” investors such as Fidelity Investments.

Energy Future doesn’t need the money to pay employees and operate while in bankruptcy and instead will use the loan to lock in a restructuring plan that would hand its prize asset to favored lenders, creditor lawyers told U.S. Bankruptcy Judge Christopher Sontchi. Fidelity Investments is treated too generously by the loan terms, the lawyers said.

Creditors need time to draw up a “consensual plan” that’s fair to all of the company’s lenders, said James Peck, a lawyer for a committee of creditors. Most disadvantaged were lenders to the company’s competitive business, who had grounds to sue, he said.

“Fifty-seven percent of the lenders oppose it and our committee greatly dislikes it,” Peck said of the loan proposal.

Energy Future defended the loan as the best possible deal of 17 rival proposals submitted before and after its April 29 bankruptcy. The loan terms had been changed to address past objections, such as that breakup fees would stop the company from considering better offers, Energy Future’s lawyers told Sontchi today.

Breakup Fee

Energy Future told the judge it had killed a $380 million fee attached to the loan, and made another fee payable later instead of upfront. That way, the company is “free” to consider a better offer, if it’s made, Energy Future said.

Morgan Stanley and NextEra Energy Inc. are part of a group that offered a $2.3 billion loan, along with a rival restructuring plan, and NextEra’s takeover of Energy Future’s profitable unit, Oncor. The takeover plan puts a $17.5 billion value on the electricity company, lawyers said in court today.

NextEra said last week it was committed to its proposal even after two rejections. Energy Future said yesterday it was “in continuing negotiations with various parties on potential alternatives to the proposed financing,” without specifying them.

Evercore Advice

Evercore Partners Inc., an Energy Future adviser, last night told the company’s board to reject NextEra’s latest offer, David Ying, Evercore’s head of restructuring, said at today’s hearing. Accepting the proposal would add to Energy Future’s debt, Ying said.

The hearing continues tomorrow.

Sontchi could reject Energy Future’s financing plan and send the company back to the drawing board. That would intensify the battles that broke out among lenders almost immediately after the company filed, and stretch the case past the 11 months it had mapped out, racking up more bills.

“It moves the proceedings back a mile, and it is a mile of tough terrain to try to come back over,” said Erik Gordon, a law professor at the University of Michigan Ross School of Business, who is following the case.

Energy Future, which has already won Sontchi’s support for $10 billion of other loans, had said since April 29 that it struck the best loan deals it could after canvassing banks. Still, the NextEra group offered lower rates and fees, which, it said, Energy Future rejected.

Breakup Proposed

The plan Energy Future came up with after months of negotiation would break the company into a regulated half that controls Oncor and a second, unregulated, money-losing operation.

Without endorsing NextEra’s proposals, State Senator Troy Fraser said in an interview that most Texans would be “comfortable” with an Oncor takeover by NextEra because the company operates in the state and tends to hold assets rather than flip them. Fraser, a Republican, sponsored a law giving the Texas utility regulator a veto over any ownership change at Oncor.

Energy Future, after adding $48 billion in debt seven years ago to go private with KKR & Co., TPG Capital and Goldman Sachs Capital Partners, filed for bankruptcy as power prices dropped. Its former owners’ stake will be cut to less than 1 percent.

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

(An earlier version of this story was corrected to delete a reference to the Public Utility Commission.)

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