Energy Future, Creditors Square off in Bankruptcy Hearing

Hearings kicked off one of the biggest-ever U.S. bankruptcies on Thursday with creditors of Energy Future Holdings Corp, the largest power company in Texas, airing grievances over timing, value and how to administer the case.

Energy Future, created in the 2007 buyout of TXU Corp, filed for Chapter 11 bankruptcy on Tuesday after struggling more than a year to work out a deal with its creditors. The company's lawyer, Edward Sassower of Kirkland & Ellis, told the court its proposal was "wildly complicated," and many creditors began to explore lines of attack.

The hearing in the U.S. Bankruptcy Court in Wilmington, Delaware, drew scores of top bankruptcy lawyers from around the country on behalf of sophisticated investment funds that are owed nearly $50 billion.

The hearing spilled into two overflow courtrooms and seemed unlikely to finish before Friday.

The company proposed splitting from the parent its power plant and retail electricity business, and turning the holding company that owns those assets over to lenders. In a separate deal, a group of unsecured creditors would end up controlling Texas's largest network of power lines.

The proposed deal would leave lower-ranking creditors of Texas Competitive Electric Holdings Co, or TCEH, the holding company for Luminant and TXU Retail, with less than 3 percent of what they are owed. They raised the first objections.

"They don't use the term wipe-out, but wipe-out is what they intend," said Ed Weisfelner, a Brown Rudnick attorney who represents a group of lower-ranking secured creditors that is owed $1.6 billion.

Creditors lodged a highly unusual objection to consolidating the cases, which forced the company's chief financial officer, Paul Keglevic, to the stand before Judge Christopher Sontchi overruled the objection.

Weisfelner said Energy Future is trying to undervalue the TXU Retail and Luminant businesses to steer those assets into the hands of investment firms that hold the $24.4 billion in loans. He told Sontchi he feared he would not get his day in court to prove his clients deserved to be paid.

An attorney who represented the largest group of creditors which would end up owning the those businesses tried to assure the judge his group would work with Weisfelner's, and talks would continue.

"This is not the end of the story. You have to start somewhere," said Alan Kornberg of Paul, Weiss, Rifkind, Wharton & Garrison. He said he expected support for the deal among the class of creditors he represents to grow from the current 41 percent.

The second part of the agreements would swap ownership of the Oncor business, which operates the largest network of Texas power lines, to two groups of unsecured creditors. The company has proposed borrowing $7.3 billion to pay off higher-ranking creditors of the Oncor business.

Some of those higher-ranking creditors oppose the deal because it does not provide them with an added payment for retiring their debt prior to maturity. The company said it will litigate with creditors that hold out for that added money, known as a "make-whole payment."

Those higher-ranking creditors are also challenging the company's attempts to obtain this financing, arguing that the added payment needs to be "adequately protected" before the financing can be in place.

Judge Sontchi issued an interim order allowing the company to enter a commitment letter for that financing and giving it the authority to pay lenders just under $100 million in fees.

The judge set a final hearing on the loan for June 5.

Energy Future and its affiliates owe $49.7 billion, mainly to hedge funds and investment firms. Its $36.4 billion in assets make one of the biggest non-financial Chapter 11 filings ever.

The company was the target of a record $45 billion buyout in 2007, when it was known as TXU Corp, in a deal led by KKR & Co LP, TPG Capital Management LP and the private equity unit of Goldman Sachs Group Inc.

The buyout was a leveraged bet on the price of natural gas, which in turn essentially sets the price of electricity.

But natural gas prices have plummeted since the buyout.

The case is In re: Energy Future Holdings Corp, U.S. Bankruptcy Court, District of Delaware, No:14-10979.

(Reporting by Tom Hals in Wilmington, Delaware; Editing by Alden Bentley)