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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