Energy Future Holdings files for bankruptcy

The largest-ever LBO, backed by KKR and TPG, has succumbed to its $40bn debt load.

Energy Future Holdings, the largest-ever leveraged buyout, has filed for bankruptcy protection.

The record $45 billion buyout orchestrated by Kohlberg Kravis Roberts, TPG and others in 2007 was a high-water mark for private equity’s so-called Golden Age. Energy Future Holdings’ fortunes have since taken a turn for the worse. The Texas power company’s debt load stands at $40 billion.

Oncor, Energy Future’s regulated energy business, is not a part of the bankruptcy filing and will be separated from its unregulated division under the reorganisation plan.

It is understood that the $8.3 billion in equity committed by KKR, TPG and others to acquire Energy Future Holdings, then known as TXU, will be completely wiped out as a result of the bankruptcy.

“Our existing capital structure has become unsustainable,” John Young, president and chief executive officer of Energy Future Holdings, said in a statement. “We expect that, with the support of our financial stakeholders, our restructuring can proceed expeditiously as we seek to strengthen our balance sheet and position the company for the future.”

KKR made the investment from its $17.64 billion 2006 fund, while TPG invested from its $15.3 billion Partners V Fund. The firms’ investment in the energy and power company came at a time when natural gas prices were on the rise. At the time of the acquisition, natural gas was selling at $5.78 per thousand cubic feet, according to the US Energy Information Administration. After spiking to more than $10 in the months following the EFH deal, the rise of alternative drilling techniques such as hydraulic fracturing drove up supply, which in turn led to a rapid decline in natural gas prices.

As natural gas prices fell, so did the values of the Energy Future Holding’s nuclear and coal generation assets, according to a 2013 Energy Future Holdings filing with the US Securities and Exchange Commission.

At the end of 2012, KKR valued the company at only 5 cents on the dollar, down from 10 cents on the dollar the previous year.

In conjunction with the bankruptcy filing, Energy Future subsidiaryTexas Competitive Electric Holdings Company has secured up to $4.475 billion of new capital in debtor-in-possession financing while subsidiary Energy Future Intermediate Holding Company has secured $7.3 billion in DIP financing.

Firms acting as legal advisors include Kirkland and Ellis, Paul Weiss Rifkind Wharton & Garrison, Akin Gump Strauss Hauer & Feld, Wachtell Lipton Rosen & Katz and Fried Frank Harris Shriver & Katz.

Blackstone Advisory Partners, Evercore Partners Millstein & Company and Centerview Partners are acting as financial advisors. Alvarez & Marsal is acting as restructuring advisor.