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Energy Future Said to Revive Talks on Bankruptcy Funding

By: Mary Childs |

Energy Future Holdings Corp. is meeting with lenders in New York this week to discuss loans that would fund it through bankruptcy as the latest chapter of the power generator’s restructuring begins to unfold.

Banks began presenting proposals to the former TXU Corp. yesterday to provide debtor-in-possession financing, according to two people with knowledge of the deliberations who asked not to be identified because the talks are private.

Energy Future, purchased in the largest leveraged buyout in history six years ago, is resuming efforts to line up the funding less than two months before auditors may raise doubts about its ability to remain a going concern. The Dallas-based company is seeking to restructure $45.6 billion of debt after a plunge in natural gas prices, which set the price of electricity in the state, triggered 10 straight quarterly losses. Attempts to agree on a reorganization plan with creditors in October failed.

“It’s smart to at least line up a DIP so you know what is available and to crystallize the options for you,” Marc Gross, a New York-based money manager at RS Investments, said in an e-mail. “It could also help focus all the interested parties into negotiations. With the pressure on and an actual DIP lined up and the clock ticking down to the coupon payment, the negotiating parties might focus more.”
Liquidity Needs

Energy Future’s $3.8 billion term loan due Oct. 10, 2014, was quoted at 69.4 cents on the dollar today, according to prices compiled by Bloomberg. That’s down from 78.9 cents in May.

The company needs to resolve its “liquidity needs, including refinancing the $3.8 billion of maturities due in October 2014” in order to satisfy financial maintenance requirements connected to its loans, according to a Nov. 21 regulatory filing.

Adam McGill, a spokesman for Energy Future, declined to comment on the discussions.

Energy Future’s $1.83 billion of 10.25 percent bonds due Nov. 1, 2015, traded at 5.63 cents on the dollar Feb. 7, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Those securities are rated C by Moody’s Investors Service, the lowest graded class of debt, with “little prospect for recovery of principal or interest.”

Record Buyout

Texas’s largest electricity provider previously obtained commitments for $4.4 billion of loans in the event it filed for bankruptcy, the company said in a Nov. 1 regulatory filing. DIP financing typically has priority over existing debt, equity and other claims and may help reassure vendors, customers and regulators the company can meet its obligations.

The funding negotiated last year included as much as $3.6 billion of senior secured DIP loans as well as a $750 million uncommitted portion, according to the filing. The company would get the proposed two-year facilities from “certain third-party financial institutions” if it were to file for bankruptcy.

Energy Future was bought in 2007 for $48 billion by KKR & Co., TPG Capital and Goldman Sachs Capital Partners. The buyout was a bet natural gas prices would rise; instead they fell as the development of hydraulic fracturing created a surge in U.S. gas supplies.

Power Glut

Natural gas futures traded at $4.69 per million British thermal units at 11:10 a.m. in New York, from $6.88 when the private-equity firms took it private and down 65 percent from its 2008 level of $13.58.

The power provider made $5 million in the third quarter of 2013, its first net gain since the three months ended Dec. 31, 2010, Bloomberg data show. Total liabilities were $50.2 billion as of Sept. 30, compared with total assets of $38.7 billion.

Any qualification about a going concern would constitute a default under terms of the company’s secured debt, Fitch Ratings analysts Shalini Mahajan and Philip Smyth wrote in a Dec. 3 note. Energy Future may also violate a restriction on how much debt it can have relative to earnings in the first half of 2014, which would also trigger a default.

Energy Future owns Texas’ largest regulated power-line company. A glut of wind power and natural gas kept electricity prices low in the state in the third quarter despite above-average economic growth, Chief Executive Officer John Young said in a call with investors Nov. 5.

“Power prices remained at levels that pose a significant challenge to the company’s cash flows for the remainder of the year and in 2014 as we become less hedged than previous years,” Young said.