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Energy Future Plugs Auction Plan, Draws Fire From Creditors

By: Jamie Santo |

Law360, Wilmington (October 17, 2014, 9:12 PM ET) — Energy Future Holdings Corp. urged a Delaware bankruptcy judge on Friday to bless a proposal to auction its prized stake in Oncor Electric Delivery Co. LLC but faced resistance from various creditor groups who contend the auction scheme would deprive them of billions of dollars.

At a hearing in Wilmington, Delaware, EFH championed the two-tiered process to select a stalking horse bidder and eventual buyer for its 80 percent equity stake in nondebtor Oncor, a move the energy giant contends will maximize value for all parties. Opposition to the auction plan is misplaced, EFH said, since the proposal before the court will establish a framework to solicit offers, not enshrine a particular deal or sale structure.

“We believe the objectors are essentially challenging a motion that we have not filed, arguing against relief that we have not requested,” said attorney Stephen E. Hessler of Kirkland & Ellis LLP.

While EFH believes a tax-free transaction is “optimal,” Hessler told the court, suitors interested in the Oncor assets will be free to design offers as they see fit, and all bids will be considered.

“We have not precluded or insisted upon any form of structure,” he said.

Under the proposed process, sealed nonbinding offers would be due Oct. 23, and EFH would then narrow the field for a second round ending on Nov. 21, according to Hessler. After that, it would select a stalking horse bidder, present it for court approval and conduct an open bidding process in advance of a February auction.

The climate is right for a sale given the positive market conditions, widespread availability of credit and the strong interest from buyers, Hessler said, and having court-ordered deadlines put will encourage the best offers.

EFH entered court protection in April, toting a restructuring support agreement for a prearranged Chapter 11 plan, but scrapped the RSA in July in light of interest shown in its Oncor stake, notably from NextEra Energy Inc. Earlier this month, EFH published a dire analysis of the tax issues involved in a potential sale, warning that a wrongly structured transaction could result in a $7 billion tax bill it couldn’t afford.

Various creditor constituencies lined up Friday against the proposed auction, objecting, among other things, that the process would entrench the debtors’ favored transaction structure — a tax-free sale of stock in a reorganized unit holding the Oncor stake — and lock out alternatives.

Wilmington Savings Fund Society FSB, indenture trustee for a group of junior noteholders, argued that while EFH claims it will accept all manner of bids, they will only anoint a tax-free transaction, attorney Edward S. Weisfelner of Brown Rudnick LLP told the court.

Approval of the process will limit options and recoveries available to creditors under any Chapter 11 plan, dissipating billions of dollars in value that is “going to be gone, never to arrive again,” Weisfelner said.

The official committee of unsecured creditors claimed the auction process would lead to chaos since a tax-free sale involving reorganized equity requires confirmation of a Chapter 11 plan by the end of next year, which is unreasonable given the looming issues that must be dealt with before plan negotiations can even begin. A purchaser under that scenario would be “buying into a royal rumble,” faced with creditors owed about $40 billion fighting over every penny, according to committee counsel Brett H. Miller of Morrison & Foerster LLP.

Hearings on the motion are slated to resume on Monday before U.S. Bankruptcy Judge Christopher S. Sontchi.

Dallas-based EFH and 70 affiliates sought court protection April 29, launching one of the largest Chapter 11 cases in history, armed with a prearranged plan designed to restructure some $42 billion in debt.

Backed by the RSA reached with certain creditors, the original plan included a tax-free spinoff of subsidiary Texas Competitive Electric Holdings Co. LLC, whose first-lien creditors are owed $24.4 billion and were slated to get 100 percent of the equity in the reorganized unit, according to court documents.

EFH is represented by Kirkland & Ellis LLP and Richards Layton & Finger PA.

WSFS is represented by Brown Rudnick LLP and Ashby & Geddes PA.

The creditor committee is represented by Morrison & Foerster LLP and Polsinelli PC.

The case is In re: Energy Future Holdings Corp. et al., case number 1:14-bk-10979, in the U.S. Bankruptcy Court for the District of Delaware.