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Junior Creditors to Investigate Energy Future

NEW YORK ( The Deal ) -- Junior creditors of an Energy Future Holdings Corp. unit are free to look into the electricity producer's finances following allegations the company downplayed its value for the benefit of other creditors.

Judge Christopher Sontchi of the U.S. Bankruptcy Court for the District of Delaware in Wilmington on Wednesday, Aug. 13, signed an order approving a request from Wilmington Savings Fund Society FSB, trustee for second-lien noteholders of EFH unit Texas Competitive Electric Holdings Co. LLC, to move forward with a probe into the debtor's books.

The order said the creditors may look into any alleged mismanagement, conflict of interests or alleged fraudulent transfers or preferences that took place when the debtor was negotiating its restructuring agreement, since abandoned.

In an April 29 motion, Wilmington said the company's "controlling owners and managers have promulgated a series of projections (most recently in October 2013) that appear purposely designed to curry favor with their senior lenders and line their own pockets."

The trustee continued: "The resulting artificially depressed valuation derived from these projections appears intended to allow the senior lenders and management to print cheap reorganized equity and wipe out billions in legitimate creditor claims."

EFH on July 31 terminated a restructuring support agreement reached with certain stakeholders, according to a July 24 filing with the Securities and Exchange Commission.

EFH said the RSA was the best available option in late April, but it had since received superior offers from various stakeholders. Among the offers is one from Next Era Energy Inc. and a different group of second-lien noteholders to acquire EFH in a two-step process.

Energy Future Holdings filed for Chapter 11 on April 29 to implement the restructuring, which would have eliminated more than $26 billion in debt.

The RSA called for first-lien creditors of TCEH to receive a pro rata share of 100% of the equity in a reorganized TCEH, plus all net cash from proceeds of the issuance of new long-term secured debt for the company. Unsecured creditors, including second-lien noteholders and first-lien noteholders with deficiency claims, were to split TCEH's unencumbered assets.

Certain unsecured noteholders of EFH's Energy Future Intermediate Holding Co. LLC unit, meanwhile, were to invest $1.9 billion, and that capital and all EFH and EFIH unsecured notes were to be converted into equity in the reorganized parent.

EFIH first- and second-lien lenders would have had their debt restructured.

EFIH holds a majority stake in nonbankrupt Oncor Electric Delivery Co. LLC, owner of the largest electricity distribution and transmission system in Texas. TCEH owns utility TXU Energy and Luminant, an electricity generation, mining and wholesale energy trading and power marketing company.

Debtor counsel Edward Sassower of Kirkland & Ellis LLP could not be reached Thursday.