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Private equity firms will be big losers in Energy Future bankruptcy

KKR & Co., TPG Capital and Goldman Sachs, the investment firms that acquired Dallas-based TXU Corp. and created Energy Future Holdings in the biggest-ever leveraged buyout, would be all but wiped out in a reorganization plan being discussed, said three people with direct knowledge of the negotiations.

The firms may accept as little as 1 percent of the equity in the company after it completes a Chapter 11 restructuring, said the people, who asked not to be identified because the talks are private. The pre-bankruptcy plan is being negotiated by the private equity owners, the company’s management and holders of the power producer’s $45.6 billion in debt.

Energy Future is hashing out a proposal that would reduce the time it takes to restructure in Chapter 11 and limit the chaos of a free-for-all filing. Fidelity Investments, a key debt holder of the power company that had been a holdout on the bankruptcy road map, moved closer to an accord last week.

Adam McGill, a spokesman for Energy Future, declined to comment, as did Tom Johnson, a spokesman for the private equity sponsors at Abernathy MacGregor Group.

The proposal, which may still fall through, would also give full legal releases to KKR, TPG and Goldman Sachs, the people said. The private equity firms, as well as a group of unsecured creditors at the regulated Energy Future Intermediate Holding division, agreed to the deal being discussed, according to one of the people.

Last year, the sponsors said they would support a restructuring proposal that would have allowed them to retain 15 percent of the company’s equity interest, according to a filing with the Securities and Exchange Commission. That plan was rejected.

The power producer’s acquisition at the peak of the buyout boom in 2007 was essentially a bet, using $40.1 billion of debt and $8.3 billion in equity, that natural gas prices would rise. Instead, prices have fallen 68 percent since July 2008 as supplies of natural gas soared with booming production from shale fields. Natural gas prices set the cost of electricity in the Texas market.

The company operates retail electricity provider TXU Energy, power producer Luminant and the regulated Oncor Electric Delivery, which operates and maintains power lines.

The biggest losers in the bankruptcy will be the equity investors. KKR put up $2 billion, and TPG and Goldman Sachs each added $1.5 billion. An additional $3.3 billion came from clients of the three firms and from Lehman Brothers, Citigroup and Morgan Stanley. KKR and TPG had both written down their investment to 5 percent of the initial value as of last year.

Energy Future said in an SEC filing Monday that it would delay releasing its annual report, skip $109 million in interest payments that were due Tuesday and use grace periods to avoid a default. The company said in a separate filing that its 10-K filing may include a warning about its ability to continue as a going concern, which would trigger a default.

The move may avoid a bankruptcy filing for as long as a month and will allow creditors and Energy Future more time to develop a reorganization plan. Any deal would be contingent on lenders at the company’s deregulated Texas Competitive Electric Holdings unit agreeing to a resolution that wouldn’t trigger a tax liability at the parent, one of the people said.

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