Energy Future Holdings, the biggest power company in Texas, filed for bankruptcy protection on Tuesday, seven years after a massive leveraged buyout saddled it with debt just before the U.S. natural gas boom slashed prices for electricity.
The former TXU Corp owes $49.7 billion, mainly to hedge funds and investment firms, and its more than $36.4 billion in assets make it nearly tied for the 10th largest Chapter 11 filing ever.
ERCOT, the Texas grid operator, and the Texas Public Utility Commission sought to assure retail customers the bankruptcy would not hurt power availability.
But the filing is sure to put new pressure on regulators to overhaul the market where wrangling about how to pay for new generation capacity has left the grid with scant extra power, threatening to hurt growth in the surging Texas economy.
Energy Future's bankruptcy was on par with those of Pacific Gas & Electric Co and Enron in 2001 but trailed behind the $691 billion in assets the investment bank Lehman Brothers had when it blew up in 2008, according to Bankruptcydata.com.
Energy Future said it entered bankruptcy with some creditor agreements that would restructure about $40 billion in debt. The filing was a long-awaited end to a record buyout led by some of the most respected names in finance, including a unit of Goldman Sachs.
Seasoned investors like Warren Buffett suffered losses after buying Energy Future bonds.
The filing could mark the start of years of expensive court-supervised negotiations, as indicated by one of the first filings on the docket. Junior creditors of its power-producing business made an unusual request to transfer the case from Wilmington, Delaware to Dallas, the company's hometown, saying it was an issue for Texans to sort out.
The company also said it reached an agreement with a couple of banks to borrow $11.8 billion to finance operations during the Chapter 11 bankruptcy which it expects to last 11 months.
Energy Future joins a list of operators of coal-fired power plants that have struggled in recent years as new drilling technology created a glut of natural gas in the United States.
The company's 15,400-megawatt generating unit, Luminant, relied on its large coal-fired power plants to fuel profits in the Texas power market where natural gas prices set wholesale prices.
When natural gas prices fell dramatically in 2009, profit margins eroded for Luminant and other owners of coal-fired generators. Modern gas-fired plants are more economical to operate.
Luminant and Energy Future's retail unit were included in the filing. But Oncor, the regulated transmission and distribution business, which ranks among the largest in the United States, did not file for bankruptcy protection.
Texas regulators demanded that Oncor be "ring-fenced" to insulate it from credit woes at other EFH companies as a condition of the buyout.
FROM GOLDEN ERA TO BLACK EYE
The company's collapse is a rare black eye for private equity firm KKR & Co LP (KKR.N), which led the $45 billion buyout in 2007 along with Goldman Sachs Group Inc's (GS.N) private equity arm and TPG Capital Management LP TPG.UL.
They put up a combined $8 billion in equity at the time of the deal, but likely syndicated some of that to other investors, financial statements showed.
The creation of EFH came at the end of what has been called a "golden era," for private equity, a period from 2006 to mid-2007, when lenders eagerly financed many of the largest LBOs. TXU, completed in October 2007, was the biggest of them.
A host of creditors have been hit by losses from the LBO and subsequent financial troubles. Buffett disclosed a cumulative $873 million pre-tax loss on Berkshire Hathaway's original $2 billion investment. Bondholders owning debt issued by the company before the buyout also have lost money.
But in 2012, Oncor took over responsibility for the company's thousands of retirees and outside pension funds have invested little in Energy Future.
The company has been in talks for months with its diverse group of creditors, ranging from funds like Apollo Global Management, which specialize in profiting from bankruptcy workouts, to traditional money managers such as Fidelity Investments.
DEALS IN PLACE
The company said it entered bankruptcy with deals in place to sever its Texas Competitive Electric Holdings (TCEH) unit, the unregulated power producer and retailer, from its parent.
The deal would be accomplished without triggering a tax liability that might have cut the repayment to the parent company's creditors. The tax impact was a key sticking point in the recent months of negotiations.
TCEH would emerge from bankruptcy under the ownership of its first-lien lenders, such as investment firms Apollo and Oaktree Capital Management.
Ownership of the Energy Future Holding parent company would be turned over to the unsecured creditors of Energy Future Intermediate Holding Co (EFIH), which in turn owns the power line operator Oncor.
Those creditors could infuse up to $1.9 billion into the business, according to an Energy Future regulatory filing. Sources close to the talks said the creditors include hedge funds such as Avenue Capital Group, P. Schoenfeld Asset Management and GSO Capital Partners.
The proposed deal would cut $2.5 billion in EFIH debt.
The restructuring plans would need the approval of U.S. Bankruptcy Judge Christopher Sontchi in Delaware, who was assigned to the case.
BAD BET ON GAS PRICES
EFH has five large coal plants and one nuclear plant, along with eight mostly idled natural gas plants - primarily across northeast Texas.
The 2007 buyout deal relied on natural gas prices remaining at least $7 per million British thermal units, the prevailing price at the time. At that price, TXU's coal-fired plants were highly profitable.
But then natural gas prices fell sharply in 2009 as U.S. production swelled on advances in horizontal drilling and hydraulic fracturing, hitting a decade low of $1.95 per million Btus in April 2012. Prices now hover in the $4 range.
The case is In re: Energy Future Holdings Corp, U.S. Bankruptcy Court, District of Delaware, No:14-10979.