The bankruptcy court overseeing the Chapter 11 proceedings of Energy Future Holdings (EFH) today confirmed the company’s reorganization plan.
In a lengthy opinion read this morning from the bench in bankruptcy court in Wilmington, Del., Bankruptcy Court Judge Christopher Sontchi said the evidence presented in the case “overwhelmingly supports confirmation of the plan.”
Among other things, Sontchi lauded the company’s management and professionals at the close of his opinion, directing them, to laughter from the courtroom, to “go forth and implement the plan,” or as Sontchi termed it, “the easy part.”
Following certain settlements reached in the case last week, the confirmation ruling was expected (see “With latest Energy Future settlement, plan nod could come next week,” LCD News, Nov. 25, 2015 -$$).
In confirming the reorganization plan, Sontchi acknowledged that the proposed plan was subject to some amount of implementation and regulatory risk, but found the risk was relatively small given the company’s size and complexity, and mitigated by the built-in financial and legal incentives for the parties to consummate the proposed plan, and the strong reputation and experience of the plan’s primary backer, the Texas-based Hunt family via Hunt Consolidated.
It should be noted that Sontchi did not approve certain provisions of the plan related only to the mechanisms under which professionals that worked on the case would get paid, but this part of the ruling will not have any effect on the plan itself insofar as the company or its creditors are concerned.
Sontchi also issued a separate ruling this morning approving certain settlements in the case upon which the company’s reorganization plan is based. Those settlements include, among other things, a $700 million settlement of a tax allocation claim asserted against EFH by unit Texas Competitive Electric Holdings (TCEH, or the company’s so-called “T-side”), as well as certain other deals reached by the company, one with Fidelity Management & Research, one with certain other key holders of unsecured debt at EFH and unit Energy Future Intermediate Holdings (EFIH), and one with the official creditors’ committee representing creditors at EFH and EFIH, primarily with respect to the amount and manner of calculation of allowed interest related to unsecured claims on the company’s so-called “E-side.”
As reported, the company filed for Chapter 11 on April 29, 2014, following nearly a year of contentious and often public disputes as it sought to restructure its large and extremely complex capital structure.
In the end, the company’s largely consensual reorganization was made possible by the value ultimately ascribed to its regulated utility, Oncor, and the decision to unlock that value via a REIT conversion.
As reported, under the plan Hunt would back an investment of roughly $12.6 billion, comprising up to $5.5 billion in a senior secured term loan, a $250 million bridge loan, and about $7 billion of equity, including the $5.8 billion to be raised through a rights offering to unsecured creditors of TCEH.
As also reported, the plan calls for TCEH to be spun off as a standalone entity. The new entity would, among other things, use certain tax attributes of EFH, valued at about $1 billion, to provide it with a partial step-up in the tax basis of its assets. (Note that the proposed reorganization plan is conditioned on, among other things, a private tax ruling from the IRS approving this structure. The company applied for a ruling on June 10, 2014, but according to the disclosure statement has yet to receive a reply.)
As noted above, the plan also provides for a $700 million payment from EFH to TCEH in settlement of a tax claim asserted against the parent company arising out of disputes over certain tax-sharing arrangements among the company and its subsidiaries.
First-lien lenders to TCEH (with claims of roughly $26 billion) would receive, among other things, all of the equity of the spun-off the new entity (subject to dilution by the management-incentive plan), cash on hand, the cash proceeds from the issuance of new TCEH debt and preferred stock, and the rights to purchase $700 million in new EFH stock pursuant to a rights offering in connection with the plan.
The recovery rate for the first-lien lenders is estimated at 59.4%, according to the company’s disclosure statement.
Unsecured creditors at TCEH, meanwhile, comprising holders of first-lien deficiency claims (in an allowed amount of $8.1–9.5 billion, which holders would waive with respect to distributions, but not with respect to voting rights), second-lien notes claims (in an allowed amount of about $1.6 billion), unsecured notes claims (in an allowed amount of $5.1 billion), and general unsecured claims, would receive a pro rata share of 2% of the stock in the reorganized EFH, and the rights to purchase about $5.1 billion of the reorganized EFH common stock.
The recovery rate for unsecured claims would range from 6.8–44.9%, according to the company’s disclosure statement, depending upon, primarily, the spun-off entity’s enterprise value, which the disclosure statement measures in a range of $19–24 billion in calculating recovery rates.
Holders of claims against EFH and EFIH, meanwhile, would be paid in full, in cash, except that EFH legacy note claims (with about $1.9 billion outstanding, including about $1.3 billion of which are held by EFIH) could, at the company’s option, be reinstated.
According to the company’s disclosure statement, creditors of EFH and EFIH were unimpaired, and therefore were presumed to accept—and thus did not vote on—the proposed reorganization plan.
Following the TCEH spin-off, EFH would be restructured into a REIT, which would continue to own the transmission and distribution assets currently owned by Oncor. The newly restructured REIT would be managed by Hunt and owned by the consortium of investors, which include Anchorage Capital Group, Arrowgrass Capital Partners, Blackrock, GSO Capital Partners, Avenue Capital Group, and the Teacher Retirement System of Texas. — Alan Zimmerman