* Any bankruptcy seen several months away -sources
* Law firms, creditors start to group as company hires advisers
* Power company may try to stay out of bankruptcy court
* TXU could try to keep regulated unit out of court
By Nick Brown and Michael Erman
Feb 15 Energy Future Holdings has enough money to pay its debts for at least the next year, but lawyers and bankers are betting a big chunk of the Texas power company will file for bankruptcy, and are already trying to line up clients to represent in any restructuring.
Energy Future - formerly TXU - set the wheels in motion last week when it tapped restructuring advisers from law firm Kirkland & Ellis and financial advisers Evercore Partners and the Blackstone Group.
The hiring of advisers came just months before the company, which was taken private in 2007 in the largest leveraged buyout, has to start making payments on some of the $52 billion of debt it had as of the end of September.
Now, creditors have begun to organize themselves for a restructuring and a plethora of large law firms, including Cadwalader Wickersham & Taft, Brown Rudnick, Otterbourg Steindler Houston & Rosen, and White & Case, are involved or making pitches to represent creditor groups, people close to the matter said.
With more than $42 billion in assets, Energy Future has the potential to be one of the 10 largest U.S. bankruptcies, and the largest since specialty finance company CIT Group Inc filed for protection in late 2009, according to bankruptcydata.com.
Law firms and investment banks can make millions of dollars from large bankruptcies, depending on the size and complexity of the case. Some leading bankruptcy partners charge around $1,000 an hour, and lead teams of dozens of partners and associates whose hourly rates vary from about $300 to about $800.
Energy Future and its advisers declined to comment on the matter. White & Case declined to comment.
The $45 billion TXU buyout, which loaded the company with debt, is viewed as one of the most spectacular failures of the last decade's buyout boom. KKR & Co, one of the private equity firms that led the TXU deal, has written off 95 percent of the value of its investment in the company. TPG Capital Management and Goldman Sachs Group Inc's private equity arm were also part of the consortium.
The debt is held by scores of parties, including distressed debt investors Aurelius Capital Management, Centerbridge Partners and Angelo Gordon & Co, one of the sources said.
KKR and TPG declined to comment. Goldman was not available for comment. The distressed investors and other law firms could not immediately be reached for comment.
Also at stake is the future of the power market in Texas.
Energy Holdings is the largest power generator in the state and has three units. The merchant power unit Luminant, which owns more than 15,000 megawatts of nuclear, coal and gas-fired power plants, and its retail business TXU Energy are unregulated, while the power delivery business Oncor is regulated.
Depending on how the restructuring plays out, it could add turmoil to the electric market in Texas, where new generating capacity is not keeping pace with demand for power.
Restructuring experts and people close to the case expect Energy Future will eventually try to put its struggling unregulated power businesses into bankruptcy, while attempting to keep the parent company and Oncor out of bankruptcy.
But these people also said the company has enough liquidity to see it into late 2014, and may wait as long as possible before raising the white flag.
"I don't think (a bankruptcy) is imminent," said Bill Brandt, a turnaround specialist at Development Specialists Inc who has followed the case but is not involved. "They've got some issues to straighten out first."
Energy Future has been trying to buy itself time.
In January, it extended the maturity date of a $16.5 billion term loan to 2017 from 2014. It has also exchanged debt on which it owed cash payments, for debt on which interest payments could be deferred.
The company also has around $2.7 billion in liquidity - plenty for it to survive on, at least until a $3.85 billion bank loan matures in October 2014, a U.S. regulatory filing from last month shows.
The company may also wish to avoid a filing altogether, as potential ramifications could include investigations both within the bankruptcy process and by Texas politicians or regulators, said one person close to the matter.
But most analysts and investors believe these scenarios are unlikely.
The TXU takeover was built on hopes that natural gas prices would stay high. Instead, they have dropped sharply with benchmark U.S. prices falling about 56 percent to around $3.29 per million British thermal units now from around $7.50 per mmBtu in February 2007.
Prices for the fuel are not expected to top $4 this year, natural gas futures indicate.
As Energy Future restructures, a central question is which of its entities will be forced to file for bankruptcy and which will stay out.
The company has ring-fenced its healthiest entity, power distributor Oncor, by making sure all creditor claims and liabilities are at other entities.
By all accounts, the ring-fence is "solid," said Fitch Ratings Analyst Shalini Mahajan. "We do not think that Oncor's assets are going to get pulled in."
Fitch has delinked ratings for the parent company, Energy Future Holdings (EFH), from its unregulated units.
Oncor has tapped financial adviser Miller Buckfire, one of the sources said.
Still, creditors may try to drag Oncor into Chapter 11. EFH, itself, has about $6 billion of bond debt, some of which is secured by equity in Oncor. This equity could be worth about $7.7 billion, according to a recent CreditSights research note.
Creditors may work to keep Oncor as part of EFH's estate to avoid the risk that it is sold before the rest of the company files for bankruptcy, one source said.
CreditSights estimated recovery for secured lenders and bondholders at about 77 cents on the dollar, based on forecasts of about $2 billion in earnings before interest, taxes, depreciation and amortization.
According to a forecast by one sell-side analyst, who could not be named because the information was not public, full recovery for secured lenders would require EBITDA of between $2.4 billion and $3.7 billion.
Current projections forecast EBITDA at only between about $1.5 billion and $2 billion, the analyst said.