by Charles H. Martin, Senior Associate
After nearly four years, Energy Future Holdings Corp. (“EFH”) is poised to finally exit bankruptcy. EFH is a Dallas-based energy company that provides electric power generation, transmission, and distribution services in Texas. According to its bankruptcy filing, EFH is the largest electric energy provider in Texas. It, along with 70 of its subsidiaries, filed for Chapter 11 protection under the United States Bankruptcy Code in the Bankruptcy Court for the District of Delaware on April 29, 2014, to restructure nearly $49 billion in debt.
Events Leading Up to the Bankruptcy Filing
Much of EFH’s debt resulted from the leveraged buyout (“LBO”) of its predecessor company, TXU Corp. (“TXU”), which was the largest in history at the time. TXU was one of the most profitable utilities in the country prior to the merger. Investors, principally KKR and Texas Pacific Group, invested $8 billion in equity and obtained commitments for another $37.35 billion in financing—not all of which was expected to be drawn or used at closing—to purchase TXU. Investors purchased TXU using a reverse triangular merger, whereby an acquisition subsidiary created and owned by Texas Energy Future Holding LP merged with and into TXU, the surviving company. TXU then changed its name to Energy Future Holdings Corp. and began transitioning the company into several indirect subsidiaries, including Texas Competitive Energy Holdings (“TCEH”)—which owns Luminant and TXU—and Oncor Electric Delivery Holdings Company LLC. The LBO resulted in $31.5 billion new debt issued; it left EFH with approximately $41.3 billion in outstanding debt, with approximately $28.8 billion at the TCEH level. EFH remained profitable after the acquisition, but decreasing natural gas prices decreased profitability and ultimately caused the company to file for bankruptcy protection.
Plan of Reorganization
In a typical Chapter 11 reorganization, the debtor reorganizes its debt by extending the payment due date and reducing the total amount paid. Larger reorganizations may, for example, also involve the sale of large assets with the sale proceeds going to creditors. The debtor will file a plan of reorganization with the court and some creditors, depending on whether or not the creditor’s claim is impaired or unimpaired, will have the opportunity to vote to accept or reject the plan. Once the plan has been accepted, the bankruptcy judge will confirm the plan. Then, the debtor will execute the plan and exit bankruptcy. The effect of confirmation, among other things, is to discharge the debtor of all debt incurred prior to confirmation of the plan.
The bankruptcy judge confirmed EFH’s plan on February 27, 2018. The final restructuring plan consists of two main phases, both of which are outlined below.
The First Phase: Discharging $33.8 Billion in Debt and Rising from the Ashes
The first phase of the restructuring occurred in August 2016. EFH spun off its largest indirect subsidiary, TCEH, into a separate company. The first lien debt, comprising approximately $24.38 billion in secured debt, was converted into equity with the first lien debt holders receiving 427.5 million shares of TCEH common stock. Through this transaction, which was tax free, TCEH discharged approximately $33.8 billion in debt. TCEH eventually renamed itself Vistra Energy.
The Second Phase: Selling off to Sempra
The second phase of the restructuring entails the acquisition by Sempra Energy of EFH and its 80% stake in Oncor Energy Holding Company LLC for $9.45 billion in cash, plus debt assumed, for a total enterprise value of $18.8 billion. The deal was subject to regulatory approval by the Texas Public Utility Commission (“TPUC”). Sempra is the fifth suitor of EFH and its indirect subsidiary Oncor. First, Hunt Consolidated (“Hunt”) proposed to acquire EFH in 2016 for $18 billion. Hunt was unable to secure the necessary regulatory approval and the deal fell apart. Second, NextEra Energy proposed to buy EFH for $18 billion, but this deal also fell apart. Third, Berkshire Hathaway Energy (“BHE”) proposed to purchase EFH for $9 billion in cash. After BHE made its bid, Elliot Management began raising capital to outbid BHE by $300 million for a total bid of $9.3 billion, marking the fourth bid. Both bids, however, were unsuccessful and paved the way for Sempra’s bid of $9.45 billion in cash and $9.3 billion in debt assumed, which was similar to the BHE proposal. The TPUC approved the Sempra deal at a March 2018 meeting.
After completion of the second phase of its plan, EFH is poised to successfully restructure its balance sheet and exit bankruptcy. With the sale to Sempra, the company that entered bankruptcy effectively no longer exists. Former creditors now own Vistra Energy, renamed from TCEH when it was EFH’s largest indirect subsidiary, and Sempra now owns Oncor and what remained of the debtor after the Vistra Energy spinoff. Through the spinoff and assumption of debt as part of the Sempra deal, approximately $43.1 debt was unloaded from EFH’s balance sheet. The remaining cash from the Sempra deal will be sufficient to pay other creditors and the administrative expenses under the plan, including at least $600 million in legal and other professional fees.
See Order Confirming the First Amended Joint Plan of Reorganization of Energy Future Holdings Corp., Energy Future Intermediate Holding Co., LLC, and the EFH/EFIH Debtors Pursuant to Chapter 11 of the Bankr. Code, In re Energy Future Holdings Corp., No. 14-10979 (Bankr. D. Del. filed April 29, 2014).
Public Utility Commission of Texas, EFH Bankruptcy FAQs pt. 1, at 1, https://www.puc.texas.gov/agency/topic_files/Energy_Future_Holdings_Bankruptcy_FAQs.pdf [https://perma.cc/KZ2M-NTEZ].
Voluntary Petition at 6, In re Energy Future Holdings Corp., No. 14-10979 (Bankr. D. Del. filed April 29, 2014).
Peter Lattman, A Record Buyout Turns Sour for Investors, N.Y. Times, Feb. 22, 2012, https://dealbook.nytimes.com/2012/02/28/a-record-buyout-turns-sour-for-investors/ [https://perma.cc/JU59-XAZA]. A leveraged buyout is an acquisition of a company using borrowed money that is later secured with the assets of the company being acquired. Leveraged Buyout (LBO), Investing Answers, http://www.investinganswers.com/financial-dictionary/businesses-corporations/leveraged-buyout-lbo-961 (last visited March 9, 2018) [https://perma.cc/PDG5-RU7D]. In a typical LBO, the debt-to-equity ratio is 10% to 90%. Id. In some case, the acquiring company will secure financing through banks and private equity firms, and in other instances the acquiring company will secure financing through issuing bonds. Id. Because of the high debt to equity ratio, the bonds are not investment grade and are instead classified as junk bonds. Id.
Lattman, supranote 6; Order Confirming the First Amended Joint Plan, supranote 2, at 53.
TXU Corp., Definitive Proxy Statement at 8 (Form DEF 14A) (July 25, 2007).
Press Release, KKR, TXU Corp. Announces Completion of Acquisition by Investors Led by KKR and TPG (Oct. 10, 2007), http://media.kkr.com/media/media_releasedetail.cfm?releaseid=332996 [https://perma.cc/U7M6-3KYX]; Energy Future Holdings Corp., Annual Report, Exhibit 21(a), Subsidiaries of Energy Future Holdings Corp. (Form 10-K) (March 1, 2016), https://www.sec.gov/Archives/edgar/data/1023291/000102329116000017/efh-12312015x10k.htm [https://perma.cc/BP49-698K].
Order Confirming the First Amended Joint Plan, supranote 2, at 44.
Id. at 52. In 2015, natural gas-fueled generation accounted for approximately 53% of electricity generation capacity in Texas. Id. at 49. Accordingly, the price of electricity is tied to the cost of natural gas. Id. at 50. Between 2005 and 2008, natural gas prices were steadily increasing, thus the price of electricity was increasing, which increased the profitability of EFH and its subsidiaries. Seeid. at 51. But following improvement in fracking technology, natural gas prices started to decline until dropping to as low as $2.04 per MMBtu in May 2012. Id. at 52. The decrease in natural gas prices resulted in a decreased profitability of EFH and its subsidiaries. Id. at 52.
Elizabeth Warren, et al., The Law of Creditors and Debtors 359 (7th ed. 2014).
Id. at 360.
11 U.S.C. § 1121(a).
Seeid. at § 1124 (explaining that generally a claim is unimpaired when the plan “leaves unaltered the legal, equitable, and contractual rights” of the claimholder). If a claim is unimpaired, the claimholder is conclusively presumed to accept the plan. Id. at § 1124(f).
Id. at § 1126.
Id. at § 1129.
Id. at § 350(a).
Id. at §1141(d). In contrast, a Chapter 7 debtor who files a voluntary petition is discharged of all debt incurred prior to the filing, i.e. pre-petition debt. Seeid. at § 727(b) (“[D]ischarge under . . . this section discharges the debtor from all debts that arose before the date of the order for relief under this chapter . . . .”); § 301(b) (“The commencement of a voluntary case under a chapter of this title constitutes an order for relief under such chapter.”).
Order Confirming the First Amended Joint Plan, supranote 2, at 1.
Matt Chiappardi, EFH Gets Green Light for First Phase of Ch. 11 Exit, Law360, Aug. 26, 2016, https://www.law360.com/articles/833135/efh-gets-green-light-for-first-phase-of-ch-11-exit [https://perma.cc/82BM-KPCA]; Order Confirming the Third Amended Joint Plan of Reorganization of Energy Future Holdings Corp., et. al., Pursuant to Chapter 11 of the Bankr. Code as it Applies to the TCEH Debtors and EFH Shares Services Debtors at 1, In re Energy Future Holdings Corp., No. 14-10979 (Bankr. D. Del. filed April 29, 2014).
Third Amended Joint Plan of Reorganization of Energy Future Holdings Corp., et. al., Pursuant to Chapter 11 of the Bankr. Code at 70, In re Energy Future Holdings Corp., No. 14-10979 (Bankr. D. Del. filed April 29, 2014).
Disclosure Statement for the First Amended Joint Plan of Reorganization of Energy Future Holdings Corp., et. al., Pursuant to Chapter 11 of the Bankr. Code at 33, In re Energy Future Holdings Corp., No. 14-10979 (Bankr. D. Del. filed April 29, 2014). The first lien debt can be further broken down into the following: a $22.635 billion credit facility; $1.75 billion first lien notes; and $1.235 billion in commodity hedges and interest rate swaps. Id. at 33.
Press Release, Texas Competitive Energy Holding Corp., TCEH Corp., Parent Company for Luminant and TXU Energy, Emerges from Chapter 11 as a Competitive, Well-Capitalized Company (Oct. 4, 2016), https://www.prnewswire.com/news-releases/tceh-corp-parent-company-for-luminant-and-txu-energy-emerges-from-chapter-11-as-a-competitive-well-capitalized-company-300338561.html [https://perma.cc/P665-R7YZ].
Vistra Energy Corp., Annual Report at 48 (Form 10-K) (period ending Dec. 31, 2016), https://s21.q4cdn.com/410616722/files/doc_financials/annual/Vistra_2016-Annual-Report-Final.pdf [https://perma.cc/A63N-BV25].
Id. at 49.
History, Vistra Energy, https://www.vistraenergy.com/history/ (last visited March 8, 2018) [https://perma.cc/H65C-Q2HQ].
Press Release, Sempra Energy, Sempra Energy Announces Agreement To Acquire Ownership Interest In Oncor (Aug. 21, 2017) https://www.prnewswire.com/news-releases/sempra-energy-announces-agreement-to-acquire-ownership-interest-in-oncor-300506912.html [https://perma.cc/RGU2-8L8G]; Disclosure Statement for the Joint Plan of Reorganization,supranote 16, at 12–14.
See Order Confirming the First Amended Joint Plan, supranote 2, at 86.
Jeff Mosier, Fifth time’s the charm? Sempra reveals details on its plan to win Texas electricity giant Oncor, The Dallas Morning News, Aug. 25, 2017, https://www.dallasnews.com/business/oncor/2017/08/25/fifth-times-charm-sempra-lays-plans-win-texas-electricity-giant-oncor [https://perma.cc/BZ4T-W9TU].
Press Release, Hunt Consolidated, Inc., Hunt Consolidated, Inc. Consortium Selected by Energy Future Holdings As Plan For Bankruptcy Solution (Aug. 10, 2015) https://www.prnewswire.com/news-releases/hunt-consolidated-inc-consortium-selected-by-energy-future-holdings-as-plan-for-bankruptcy-solution-300125944.html [https://perma.cc/EY34-TDA3]. As part of the deal, Hunt proposed to split Oncor into two companies, with the first company owning the assets and the second company leasing the assets from the first company. Mark A. Davidson, Texas Oncor Buyout Approved – With Reservations, The National Law Review, March 24, 2016, https://www.natlawreview.com/article/texas-oncur-buyout-approved-reservations [https://perma.cc/Z555-FHVP]. The company owning the assets would be structured as a real estate investment trust (“REIT”). Id. Under a REIT structure, 90% of the REIT’s income must be paid to shareholders through dividends, and taxation of the REIT is passed through to shareholders. Id. This would result in an estimated $250 million in tax savings. Id.
See Vince Sullivan, EFH Says It’s Nearing Resolution of NextEra’s Plan Objection, Law360, Feb. 23, 2018, https://www.law360.com/articles/1015521/efh-says-it-s-nearing-resolution-of-nextera-s-plan-objection [https://perma.cc/EA2T-LTG3]. The merger agreement between NextEra and EFH provided for a $275 million termination fee. Id. After the deal fell apart, NextEra filed a claim against EFH for this fee. Id. The bankruptcy judge disallowed the claim, and NextEra appealed. Id. To resolve the issue, which was necessary for confirmation of the bankruptcy plan, EFH placed $275 million in a reserve fund pending resolution at the appellate level. Id.
Michael J. De La Merced, Berkshire Hathaway Makes a $9 Billion Bid for Energy Future Holdings, N.Y. Times (July 7, 2017), https://www.nytimes.com/2017/07/07/business/dealbook/warren-buffett-energy-future-oncor.html [https://perma.cc/U964-E38Z].
Jessica DiNapoli & David French, Elliott lawyer says third bidder may top Buffet’s Oncor bid, Reuters (Aug. 18, 2017), https://www.reuters.com/article/us-oncor-m-a/elliott-lawyer-says-third-bidder-may-top-buffetts-oncor-bid-idUSKCN1AY28Y [https://perma.cc/97JB-PS6F].
Another Flop Means Warren Buffett Isn’t Having His Best Year, Fortune (Aug. 21, 2017), http://fortune.com/2017/08/21/warren-buffett-oncor-deal/ [https://perma.cc/PB8F-N3QA]; Scott Deveau, Noah Buhayar, & Matthew Monks, Oncor Is Buffett’s Latest Dealmaking Flop, Bloomberg (Aug. 21, 2017), https://www.bloomberg.com/news/articles/2017-08-21/berkshire-s-flop-on-oncor-adds-to-buffett-s-dealmaking-woes[https://perma.cc/R6X3-V63V]; Mark Curriden, A three-minute call and two multi-billion-dollar wire transfers: The end of Energy Future Holdings, The Texas Lawbook (March 14, 2018), https://www.bizjournals.com/dallas/news/2018/03/14/a-three-minute-call-and-two-multi-billion-dollar.html[https://perma.cc/KN4G-8QLS].
Cara Salvatore, Regulators OK $9.5B Oncor Sale, Capping EFH Bankruptcy, Law360 (March 8, 2018), https://www.law360.com/articles/1020153/regulators-ok-9-5b-oncor-sale-capping-efh-bankruptcy [https://perma.cc/82C4-LQFX].
Mark Curriden, A three-minute call and two multi-billion-dollar wire transfers: The end of Energy Future Holdings, The Texas Lawbook(March 14, 2018), https://www.bizjournals.com/dallas/news/2018/03/14/a-three-minute-call-and-two-multi-billion-dollar.html (“At 9:34 a.m., the sale of Oncor to Sempra was complete. At that same minute, Dallas-based Energy Future Holdings, which only two years ago was the largest power company in Texas with 8,900 employees, ceased to exist.”) [https://perma.cc/6L5F-CXGE].
This calculation was reached by adding the $33.8 billion in debt that was discharged through the Vistra Energy spinoff to the $9.3 billion in debt that was assumed under the Sempra deal. Both aspects of the reorganization were discussed previously.
Mark Curriden, Energy company’s bankruptcy generating Enron-sized legal fees, The Texas Lawbook, March 29, 2018, https://www.chron.com/business/energy/article/Energy-company-s-bankruptcy-generating-12789018.php [https://perma.cc/S235-WFAH]. EFH’s general counsel speculated that professional fees will hit $1 billion, making this bankruptcy one of the most expensive in history. Id.