UPDATE 1-Creditors of Energy Future sue for $725 mln

Wed Mar 20, 2013 2:16pm EDT

* Aurelius says unit's directors shortchanged creditors

* Company once known as TXU went private in $45 bln LBO

* Energy Future has warned of bankruptcy risk

* Aurelius, Energy Future decline to comment

By Jonathan Stempel

March 20 (Reuters) - Energy Future Holdings Corp, the power company that went private in a record $45 billion buyout but last month said it could go bankrupt, is facing a new headache as a unit's creditors have filed a $725 million lawsuit to recover unpaid interest.

Affiliates of the hedge fund Aurelius Capital Management LP sued seven current and former Energy Future Competitive Holdings Ltd (EFCH) directors, saying they improperly let the parent once known as TXU Corp be repaid billions of dollars of fraudulent intra-company loans without ensuring full payment to creditors.

Aurelius accused Energy Future Chief Executive John Young and the other directors of showing a "demonstrated indifference" to creditors stemming in part from conflicts of interest, and said these directors should pay the interest owed.

Energy Future spokesman Allan Koenig declined to comment. A spokeswoman for Aurelius declined to comment. Aurelius is also suing Argentina, and challenging natural gas company Chesapeake Energy Corp, in litigation over debt payments.

Tuesday's lawsuit filed in Dallas federal court adds to problems stemming from the 2007 buyout of TXU by KKR & Co , TPG Capital Management and Goldman Sachs Group Inc's private equity arm.

The Dallas-based company is Texas' largest power generator, but has been pummeled by falling natural gas prices, which are down nearly 50 percent since the buyout was announced.

Falling natural gas prices put downward pressure on the electricity prices that power producers can charge.

In a Feb. 19 regulatory filing, Energy Future said it lost $3.36 billion in 2012 and ended that year with $37.8 billion of long-term debt and $61 billion of contractual cash obligations.

It also said it could face "bankruptcy, liquidation or insolvency" if its lenders and noteholders were to demand immediate full repayment.

Warren Buffett's Berkshire Hathaway Inc has already written off much of its $2 billion investment in the company's bonds. In February 2012, the billionaire investor called that investment "a major unforced error."

"INSOLVENCY" ALLEGED

The case concerns "upstream" loans that Aurelius said were made to Energy Future by its Texas Competitive Electric Holdings Co unit, after TCEH had entered a $24.5 billion credit agreement with several hundred lenders to help finance the TXU buyout.

Aurelius said most of these loans were made or extended and much of the interest was accrued after January 2011, when it became a creditor owning both loans issued under the credit agreement and TCEH bonds that EFCH had guaranteed.

The New York-based hedge fund called the upstream loans "classic fraudulent transfers" and "a continuing fraud" because the terms did not reflect energy market stresses or Energy Future's "untenable" capital structure.

It said Energy Future repaid the loans in January after repeated complaints by creditors, but that the interest paid was more than $725 million below what it should have been.

Aurelius said this contributed to the "insolvency" of both TCEH and EFCH, but that the EFCH board chose not to fix this.

It said this was in part because each member was conflicted by having a stake in Energy Future, and also being an officer or director in all three entities: Energy Future, TCEH and EFCH.

"The defendants showed a demonstrated indifference to their duty to protect the interests of EFCH and its creditors," and authorized the upstream loans "with the intent to harm EFCH and its creditors," the complaint said.

Other individual defendants in the case are Arcilia Acosta, chief executive of Dallas-based construction firm Carcon Industries; former KKR mezzanine fund manager Frederick Goltz; Energy Future Chief Financial Officer Paul Keglevic; Goldman managing director Scott Lebovitz; TPG partner Michael MacDougall, and KKR partner Jonathan Smidt.

Last month, a person familiar with the matter said Energy Future had hired Blackstone Group LP and the law firm Kirkland & Ellis to advise on its debt load.

Energy Future's unregulated merchant power unit Luminant owns more than 15,000 megawatts of nuclear, coal and gas-fired power plants. Its TXU Energy retail unit is unregulated, and its Oncor power delivery unit is regulated.

In Wednesday afternoon trading, Energy Future's 6.55 percent senior debt maturing in 2034 was down 1.8 cents on the dollar to 65.5 cents, yielding 10.66 percent, according to bond pricing service Trace.

The case is Aurelius Capital Master Ltd et al v. Acosta et al, U.S. District Court, Northern District of Texas, No. 13-01173.

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