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By Nick Brown and Billy Cheung
NEW YORK, April 25 Texas power company Energy Future Holdings is expected to file for bankruptcy as early as Monday evening, sources close to the situation said on Friday, as it struggles to pay its hefty debt load of more than $40 billion because of cheap electricity prices.
The former TXU Corp, which owns 14 power plants, faces a deadline next Thursday, when a 30-day grace period stemming from a missed bond payment will expire, allowing creditors to push the company into default.
Energy Future is aiming to file for Chapter 11 protection in Delaware ahead of markets opening on Tuesday, said the people, who asked not to be named because discussions are private.
A company spokesman declined to comment, but the long awaited filing would be one of the biggest Chapter 11 bankruptcies in history.
So-called "first day" court hearings, in which bankrupt companies seek court approval for routine matters like continuing to pay employees, would begin on Wednesday, two of the people familiar with the situation said.
Thay added that while talks were fluid and timing details could change, advisers in the case have booked hotels near U.S. Bankruptcy Court in Wilmington, Delaware, in anticipation of a Monday night filing.
It remains to be seen whether Energy Future will have a consensual restructuring framework in place when it files, as restructuring discussions with creditors continue.
The company has been in advanced talks with various sets of stakeholders in hopes of reaching the outline of a deal and limiting the length and cost of bankruptcy. Sides are close to a deal, but talks remain ongoing, according to two of the sources.
Energy Future was created through a 2007 leveraged buyout, led by TPG, KKR and Goldman Sachs' private equity unit. The deal loaded the company with debt just before new drilling technology set off a domestic energy boom, reducing natural gas prices and eroding coal's cost advantage.
Falling gas prices have in turn depressed prices for wholesale power, forcing generators like Edison Mission Energy of Santa Ana, California, to file for bankruptcy.
PAYING THE TAX MAN
Energy Future's complex capital structure is split into two subsidiaries that each have their own creditors and negotiating dynamics, making a consensual deal a challenging endeavor.
For lenders to Energy Future's competitive merchant power business, who hold about half of the company's more than $40 billion in total debt, the main discussion point is tax liability. The lenders, including private equity giants like Apollo Global Management and Oaktree Capital Group, are warming to the idea of a deal that does not include the so-called "tax basis step-up" they were initially seeking, two people close to the matter told Reuters last week.
The lenders had hoped to acquire the power merchant unit through bankruptcy using the debt they are owed, which would allow them to increase, or "step up," the unit's tax basis and save money on future taxes, perhaps more than $1 billion, according to one of the sources.
That proposal, though, would create a multibillion-dollar capital gains tax liability at Energy Future's parent, which the company is not expected to be able to pay.
The lenders are willing to go along with an acquisition that does not employ the step-up, in exchange for some other form of compensation, such as equity in the reorganized Energy Future parent, said the two people.
A group of unsecured noteholders of Energy Future's power delivery business, meanwhile, is angling for control of that business, and is locked in its own disputes with other creditor factions over the costs of refinancing debt.
Roughly $9 billion in bankruptcy loans are being negotiated by the company, some of which is earmarked to pay off the most senior secured bondholders of the delivery business, leaving the noteholders with some of that unit's equity. But the secured bondholders say they are entitled to "make-whole" payments, a form of compensation for agreeing to refinance.
The noteholders want to minimize those payments, which would come out of their pockets as the company's new owners. According to one person close to the matter, the noteholders have threatened litigation to address the issue. (Reporting By Nick Brown and Billy Cheung; Editing by Tom Brown)