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Energy Future Keeps a Lid on Questions About Solvency

By: Peg Brickley |

Energy Future Holdings Corp. Tuesday successfully fended off questions from creditors anxious to probe the financial health of a company division that is the target of deal talks.

The questions arose in a brewing court fight over whether Energy Future owes of millions of dollars of premiums on $4 billion worth of debt attached to the division, which owns an 80% stake in the Texas transmission business, Oncor. At some point, that fight may turn on the question of whether the division is solvent. The answer to that question is in the works, as Energy Future engages in talks aimed at selling the Oncor stake, probably by way of a complex transaction worked into a Chapter 11 restructuring plan.

“The case is dynamic,” commented Judge Christopher Sontchi, at a court session where he said investors pressing the premium litigation could ask questions later about the solvency of the Energy Future division, Energy Future Intermediate Holding. By the time those questions are asked, the judge said, the “extraordinary” course of the Texas power company’s bankruptcy case may have made the answers obvious.

When Energy Future filed for Chapter 11 protection in April, it had a predetermined pathway out of bankruptcy. Some leading creditors had agreed to split the company in two, with one division to be spun out, and the other, Energy Future Intermediate, reorganized.

However, the prospect of picking up a stake in Oncor, a valuable, cash-producing business, sparked a bidding war that caused Energy Future to scrap its restructuring strategy. The chance to infuse new cash into the massive bankruptcy case was not one Energy Future could afford to let pass by, especially with investors demanding premiums in addition to having their debts paid off.

Energy Future’s swift response to deal overtures from NextEra Energy and others, “shows how quickly things can and do change,” said Energy Future lawyer Andrew McGaan at Tuesday’s hearing in the U.S. Bankruptcy Court in Wilmington, Del. Mr. McGaan argued successfully that the premium litigation should take place in two stages, with the question of solvency to be dealt with only after the bankruptcy judge rules on whether a premium is due on the debt.

Earlier in the Chapter 11 proceeding, Energy Future refinanced the debt, top-ranking loans to the Oncor-related division. The company offered to settle the premium dispute, but many investors spurned the offer, choosing to go to court instead.

The Oncor-related division is generally believed to be the healthier of Energy Future’s two divisions. Texas Competitive Electric, the division that has the mining, power generating and power selling businesses, is carrying most of Energy Future’s debt, about $32 billion.

Information about Energy Future’s deal plans has been limited, and Tuesday’s debate over the pre-trial investigation for the premium litigation was not the first time the company was confronted with requests for more data. Creditors are looking for answers to everything from the shape of the transaction to the price on the baseline, or “stalking horse” deal that the company is believed to be negotiating. The stalking horse chosen in the first round of talks will set a floor price for another round of competition over the division that owns most of Oncor, if Energy Future follows the usual procedure for bankruptcy sales.

The questions arose in a brewing court fight over whether Energy Future owes hundreds of millions of dollars of premiums on $4 billion worth of debt attached to the division, which owns an 80% stake in the Texas transmission business, Oncor. At some point, that fight may turn on the question of whether the division is solvent. The answer to that question is in the works, as Energy Future engages in talks aimed at selling the Oncor stake, probably by way of a complex transaction worked into a Chapter 11 restructuring plan.