Tax ruling clears way for restructuring of Energy Future Holdings

Posted Wednesday, Apr. 03, 2013  comments  Print Reprints

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Energy Future Holdings, the Dallas-based power company struggling with a huge debt load from a leveraged buyout six years ago, won't have to pay $23 billion of potential tax liability if it cuts ties to some of its units in a restructuring, according to a decision by the Internal Revenue Service.

The ruling clears the way for Energy Future to proceed with financial maneuvering that could pave the way for an expected bankruptcy filing later this year. With the decision from the IRS received April 1, Energy Future can sell its shares in its unit, Energy Future Competitive Holdings Company, without triggering the tax liability, the company said in a filing Wednesday.

The former TXU Corp. was taken over in a $48 billion deal in 2007 led by KKR, TPG Capital and Goldman Sachs Group. The buyout, which saddled Energy Future with more than $40 billion in debt, was a gamble that natural gas prices would rise and give its coal-fired plants a competitive advantage. Instead, U.S. prices fell to a 10-year low last year.

Energy Future faces a "material restructuring" within six to 12 months, Moody's Investors Service said in a March 26 note. The rating company said a bankruptcy filing is likely at the company's Texas Competitive Electric Holdings unit, which sells power on wholesale markets. Texas Competitive has $29.5 billion in debt, including $3.8 billion of loans maturing in October 2014. Bond investors have previously refused to extend the payment date.

KKR, TPG and Goldman Sachs contributed an $8.3 billion equity stake in Energy Future, they disclosed in 2008. By March 2012, KKR had written down its equity in the company to 5 cents on the dollar.

Losses may widen as hedging contracts used to shield against fluctuations in gas prices disappear by the end of 2014. Energy Future lost $3.36 billion last year, 76 percent more than its $1.91 billion net loss in 2011, according to data compiled by Bloomberg.

Energy Future's state-regulated power business, Oncor Electric Delivery, is profitable and ring-fenced from any restructuring, according to Moody's. The company's private equity owners have extended debt maturities and repaid intracompany loans to protect parts of the business.

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