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Sunday, 02/23/2014 12:17:56 PM

Sunday, February 23, 2014 12:17:56 PM

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Lengthy bankruptcy looking more likely for Energy Future (2/20/14)

By Nick Brown

Feb 20 (Reuters) - Efforts to negotiate a consensual restructuring at Energy Future Holdings, the embattled Texas utility, are looking bleaker, and a long bankruptcy is becoming the most likely option, according to several people close to the matter.

The company, struggling under about $40 billion in debt, had hoped to have the framework of a restructuring deal in place before filing for bankruptcy, which would save time and legal costs. But with time running out before potential defaults and no deal close, a so-called "free-fall" bankruptcy is looking more likely, said three people close to the matter on Thursday, and who declined to be named because talks are private.

A bankruptcy would likely result in the breakup of the company, though it is unclear exactly how it would be broken up, two of the people said. Energy Future Holdings has not given up on the prospect of keeping the company together, said one of the people.

One major obstacle in restructuring talks, according to two of the people, is a dispute over whether holders of senior loan debt are entitled to a tax basis "step up," which would allow them save on tax payments post-bankruptcy based on a higher depreciable tax base.

The company is in talks for a roughly $4 billion loan to fund its regulated holding company through bankruptcy, said another person close to the matter.

Its unregulated holding company is also in talks for a bankruptcy loan with a consortium that includes Citigroup, said one of the people.

The Wall Street Journal first reported that Energy Future was preparing for a breakup and in talks for a bankruptcy loan.

Energy Future Holdings was created in October 2007 in a $45 billion buyout of Dallas-based TXU Corp, the biggest electricity generating and distribution company in Texas.

The buyout, led by KKR & Co, TPG Capital Management LP and the private equity arm of Goldman Sachs, saddled the company with debt just as natural gas prices were about to plunge, making its coal-fired plants unprofitable.

Many industry experts believed the company would choose to skip a $270 million interest payment and file bankruptcy last November, but the company chose to make the payment, extending its runway for restructuring talks.

Its next day of reckoning may be fast approaching. Sometime this month or next, Energy Future expects to receive an opinion from auditors on whether it can survive as a going concern based upon its annual financial statements. It may have trouble convincing auditors to grant a positive opinion, given that it does not have enough cash to afford the $3.8 billion of bank debt that matures in October. Failure to secure such an opinion would trigger a default of EFH's $20 billion of bank debt, meaning lenders could push the company into bankruptcy.

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