Hedge Fund Says Tottering, Dallas-based Electricity Giant is Screwing Creditors

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Aurelius Capital Management, a multibillion-dollar hedge fund and perpetual pain-in-the-ass for distressed companies like Dallas-based Energy Future Holdings, sued the massive utility in federal court Tuesday for $725 million. It claims Energy Future made some sweetheart intra-company loans even as it was technically insolvent.

Aurelius, by the way, has a penchant for buying the debt of tottering companies and suing the pants off of them to increase the value of its investment. The fund claims Energy Future has drained its struggling power-generation subsidiary of billions of dollars, enriching its directors, weakening the subsidiary and screwing its creditors. The low-interest loans the parent company has received violate a covenant requiring arm's-length dealings between it and its subsidiaries, Aurelius claims.

The hedge fund said as much back in 2011 when it went on a buying spree, snapping up the utility's bonds. Energy Future denied the allegations but nonetheless succeeded in getting a majority of its credit holders to waive the provision of the loan Aurelius claims was violated.

Now Aurelius is taking the fight to court, citing a recent U.S. Securities and Exchange Commission filing that it says proves the Energy Future had no business getting loans with terms so favorable. "... Recent valuation analyses of [the power-generation subsidiary's] business indicate that the principal amount of its outstanding debt currently exceeds its enterprise value."

In other words, Aurelius says the subsidiary was upside-down when it made "fraudulent transfers" worth billions to Energy Future.

The subsidiary, which includes power generator Luminant, is upside-down, of course, because the value of its fleet of coal-fired power plants has depreciated considerably. A glut of natural gas has driven down the price of electricity. That cut into the profit margin Energy Future needed to handle the debt it assumed after being taken private in 2007 during the biggest leveraged buyout in history.

Since then, its quarterly reports have been splashed with red ink. Last year alone, the company logged a $3.36 billion net loss. Analysts believe the company is headed to bankruptcy court, and soon. Now it has to contend with Aurelius, known as a dogged litigator. The hedge fund says the missing interest on those allegedly sweet intra-company loans is worth $725 million.



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8 comments
ratepayer
ratepayer

The old TXU shareholders should have a picture of J. Wilder hanging over the mantel.  He came in, undid some mistakes that had been made over the preceding decade, had the extraordinary good-fortune of operating under a stupid dereg law, and had the good sense to sell-out when gas prices were 3-4 times higher than today.  Somehow, KKR/Texas Pacific convinced themselves that they could lever it up, drain some cash, and flip it.  Now, it would appear they're left trying to pick the change out of the couch cushions before the banks change the locks.  It can't be fun to be an employee these days, but be thankful that a bunch of retirees aren't depending on the dividend checks to make ends meet.  KKR/Texas Pacific and their lenders are going to eat the vast majority of this fiasco.

The "old company" almost went bust in 2002 when their European sub went poof.  They were saved by the fact that the brain trust in Austin passed a dereg law that let them index their rates to nat gas, despite the fact that ~70% of the electricity they produced was from coal/nuc plants.  When nat gas was going for $5-10/mmbtu, this was a license to print money.  Had the "old company" not been sold, it would probably still be solvent, but the "old" shareholders are far better off today thanks to those evil Wall Street charlatans who took this mess off their hands.  

oakclifftownie
oakclifftownie

So what did they expect ? They borrowed a lot  money to buy something and now that something isn't producing enough cash to pay the note ?The old company was profitable because it didn't owe a tremendous amount of Debt on it self .

James080
James080

So a vulture is picking at the carcass of a dead snake. Meh. The EFH deal was structured to fail from the beginning. No one should be surprised that parachutes are being packed and assets are being sheltered.

brantley.hargrove1
brantley.hargrove1

@ratepayer The funny part is, in Wilder's pitch to shareholders, he said he didn't think gas prices would stay as high as KKR/TPG projected. Damn, he was right.

scottindallas
scottindallas topcommenter

@ratepayer had we never deregulated none of this would happen.  We'd have ample generation, lower rates, and a better system.  You make it sound like TXU stumbled into deregulation, they didn't, they lobbied hard for it. 

scottindallas
scottindallas topcommenter

@oakclifftownie and the execs never got a big income out of the firm off the loans that let them hollow out the firm.  And, the great thing is that we get to inherit the empty shell they leave behind.  Then we can get the new plants built and make up for the deferred maintenance and other petty thefts from the utility.

brantley.hargrove1
brantley.hargrove1

@James080 A vulture do what it do, yes, but I don't know that I agree that EFH was structured to fail. I think they thought TXU would always be as profitable as it was back then. Not many saw the shale revolution coming.

scottindallas
scottindallas topcommenter

@brantley.hargrove1 @James080 they don't care.  They borrowed vast sums of money, recouped their stake, and paid themselves a many fold bonus.  Now, the debt and the poorly run utility will be lost to them and left to us.  They didn't care.  But, you make a fair point about natural gas prices, it's really screwed the model up for the firms, they thought they could rig the NG price as they have with oil. 

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