Energy Future Holdings said it would conduct a “court supervised bid process with respect to” its restructuring and that of its unit, Energy Future Intermediate Holdings (EFIH), the intermediate holding company that is the direct owner of the company’s 80% interest in regulated utility Oncor, in order “to maximize their respective enterprise values for all stakeholders.”
Meanwhile, according to a Form 8-K the company filed this morning with the Securities and Exchange Commission, the company sent official notice that it would terminate its restructuring support agreement. The agreement, reached by the company and various clusters of creditor groups in late April ahead of Energy Future’s April 29 filing for Chapter 11, will officially terminate on July 31.
The pact’s termination was expected. As reported, the company told the bankruptcy court overseeing its Chapter 11 case last Friday that it would either terminate the agreement in coming days, or amend it to expire by its own terms on Aug. 8. Obviously, immediate termination won the day, but as reported the RSA was, for all intents and purposes, dead regardless of the path the company followed (see “Energy Future to scrap current reorg deal; sees potential new offers,” July 18, 2014).
At last week’s bankruptcy court hearing in Wilmington, Del., the company explained that the RSA was being terminated because since it was negotiated, higher trading prices for the company’s debt in secondary markets, along with amplified interest in the company’s assets (and higher valuations resulting from that interest) as exemplified by the efforts of NextEra Energy to acquire EFIH, had resulted in “parties … reaching out to the company to suggest transactions that were not previously available to it.”
Among other things, the company said during last week’s hearing that the NextEra offer for EFIH was “very promising.”
In today’s Form 8-K filing, the company provided the first clues as to the shape of the coming negotiations over the company’s future. At this early stage, at least, it appears to present a mixed picture for the company’s prospects, suggesting that notwithstanding the improved opportunities the company says it sees in the market, the difficult issues arising from the company’s size, complexity, and capital structure that consumed nearly a year of pre-filing negotiation among creditors, and ultimately its entry into a RSA that is now being abandoned three months into the Chapter 11 process, have not significantly changed.
Among other things, the termination of the RSA suggests that the company’s stay in Chapter 11 will be longer than the 11 months the company was hoping for when it filed for Chapter 11. Indeed, the company filed a motion today with the bankruptcy court seeking to extend the exclusive period during which only the company could file a reorganization plan by 180 days, through Feb. 23, 2015. The company is also seeking to extend the corresponding exclusive period to solicit votes to a reorganization plan through April 25, 2015. A hearing on the exclusivity motion is set for Aug. 6.
The company’s initial exclusivity period is set to expire on Aug. 27, according to the motion, so even if the RSA remained in place the company was going to require an extension. That said, in its motion, the company states, “While the debtors remain focused on reaching consensus, they recognize that full consensus may not come right away or, at the end of the day, be possible given the diverse interests of their stakeholders.”
The EFIH bid process
In the Form 8-K, meanwhile, the company reiterated its comments from last week’s bankruptcy court hearing in Wilmington, Del., saying in the filing that it was “encouraged by the interest in EFIH and its subsidiaries, including Oncor.” In addition to pursuing a court-supervised bid process, the company said, it “intends to continue to negotiate with each party that has submitted bids to date with respect to the reorganization of EFH and EFIH.”
One of those bids, incorporated into the now defunct RSA, would have left EFH and EFIH in the hands of holders of unsecured 11.25% toggle notes due 2018 at EFIH and holders of unsecured debt, primarily Fidelity, at parent Energy Future Holdings (EFH), through a combination of the exchange of a proposed $1.9 billion second-lien DIP that EFIH and EFH unsecured creditors were to back for about 65% of the reorganized company’s equity, and the remainder of the equity distributed to EFIH and EFIH unsecured holders via the terms of a reorganization plan (with a small amount of equity reserved for holders of EFH legacy debt and EFH’s equity holders).
That transaction was premised on an enterprise value of EFIH and EFH of about $3.325 billion.
On June 18, however, NextEra, acting together with a group of EFIH second-lien lenders, submitted an offer to acquire the company out of Chapter 11 that valued EFIH and EFH at about $3.6 billion. NextEra and the second-lien lenders upped that offer on July 16, proposing a two-step merger transaction that it said would provide an additional $180 million of value for EFIH and EFH creditors (see “NextEra, noteholder group up offer for Energy Future Holdings,” July 17, 2014).
One significant difference between the two offers on the table, at least insofar as second-lien lenders are concerned, is the payment of a make-whole claim asserted by holders of the second-lien debt. The total claim is roughly $700 million, according to an affidavit filed by CFO Paul Keglovic in connection with the company’s Chapter 11 filing.
Under the RSA and the unsecured creditor proposal for EFH/EFIH, the company offered second-lien lenders a settlement offer of 50% of the asserted make-whole claim, launching a tender offer encompassing the settlement offer on May 9 (see “Energy Future launches tender offer for EFIH second-lien debt,” LCD, May 12, 2014). According to the company, 43% of second-lien holders had participated in the tender offer by the early participation deadline of June 11.
The NextEra/second lien acquisition proposal, in contrast, would pay the second-lien make-whole claims in full.
Meanwhile, adversary actions are also pending in the case as to whether, first, the second-lien lenders are entitled to the make-whole payment, and second, whether first-lien lenders at EFIH (who also claim a make-whole payment in excess of $700 million) need to be paid in full before any make-whole claim can be paid to second-lien lenders, in light of inter-creditor agreements among the secured lenders governing the treatment of collateral (see “EFIH first-lien lawsuit opens new front in make-whole claims fight,” LCD, June 24, 2014).
Those second-lien make-whole issues, at least, appear to have been mooted for the time being by the recent developments. According to the Form 8-K, the tender offer for the second-lien settlement, which will terminate on July 25, will not be extended or consummated due to the termination of the RSA.
The TCEH tax-free spin-off
Meanwhile, the company said that it “remains committed” to a tax-free spin off of Texas Competitive Electric Holding (TCEH), the intermediate holding company for Energy Future’s unregulated power generation and sales units, TXU Energy and Luminant.
The spin-off of TCEH remains on the table, obviously, because of the company’s plan to pursuing a bid process for the restructuring of EFIH and EFH. Indeed, the rationale the company provides for pursuing this bidding process – increasing valuation – suggests that the same dynamic that drove the structure of the RSA and the tax free spin-off of TCEH – the growing and stable enterprise value of the company’s regulated utility, Oncor, as compared to the uncertainty of its unregulated operations that are at the mercy of volatile and unpredictable energy markets – remains in place today. That said, the contrast between the company’s two sides is arguably not as stark as it had been over the prior year of negotiations leading up to the Chapter 11 filings thanks to rising natural gas prices that benefit TCEH.
The tax-free spin-off of TCEH was a critical component of the RSA, arising out of a determination that, in light of intractable disputes over the company’s enterprise value and how to allocate that value in any reorganization among the many layers of its complex capital structure, the company’s only path to a consensual reorganization was through a deconsolidation. That deconsolidation strategy, however, would potentially give rise to significant tax liabilities, either immediately or in the future, that would come to rest either with the first-lien TCEH lenders, or the unsecured creditors at EFIH and EFH.
The proposed tax-free spin-off of TCEH, combined with the application of certain of EFH’s tax attributes to the transaction – a structure that, incidentally, remains subject to approval of the Internal Revenue Service – was the key to securing the agreement of TCEH first-lien lenders, who would acquire the reorganized TCEH equity, to the deal in that it would permit the transaction to occur quickly, and let TCEH’s new owners (the lenders) to offset tax liabilities they would incur as a result of the tax-free spin-off.
But the proposed tax-free spin-off of TCEH potentially presents an issue for junior creditors at TCEH, comprised of holders of about $1.57 billion of second-lien notes and $4.9 billion of unsecured debt issued in connection with the company’s 2007 LBO. Under the RSA, both groups would have been, for the most part, out of the money. At last week’s hearing, an attorney for second-lien lenders suggested that a reorganization structure that was not based on a tax-free spin off of TCEH could yield significant enterprise value for TCEH. – Alan Zimmerman