And so why is Energy Future Holdings, the largest electric company in Texas, undergoing bankruptcy proceedings in Delaware?
Ed Weisfelner, quoted in report from the Reuters news service, thinks he has the answer.
“It’s naked forum-shopping,” said the lawyer. His coalition of EFH creditors wants the court proceedings moved to Texas. Many observers say the move makes sense for Texas consumers, although they also say that getting court approval for the move is a long-shot.
The Energy Future Holdings bankruptcy is one of the largest in corporate history. Years in the making, it is the result of heavy-duty borrowing by investors and a colossally bad bet on natural gas prices. Whether in Delaware or Dallas, the bankruptcy court’s decisions could have multi-billion-dollar implications for the electricity market in Texas.
However, Delaware bankruptcy courts have a reputation among critics for favoring lawyers for bankrupt companies over the interests of creditors and company employees, according to Reuters. Weisfelner also has argued that a bankruptcy proceeding in Delaware a state over 1,000 miles away can only add to its costs.
EFH counters that Delaware makes more sense because many of the company’s entities are incorporated there. Under the U.S. bankruptcy code, companies can file for bankruptcy protection in the state where they are headquartered, where they are incorporated or where they have significant assets.
“The major issues in our restructuring involve our financial structure, rather than our high-performing operations or other constituents based in Texas such as our employees, customers or others,” spokesman Allan Koenig told the news service.
Energy Future Holdings is the product of the largest leveraged buyout in history — a $45 billion deal under which investors for private equity firms took possession of the former TXU Corporation. The massive borrowing used to finance the 2007 acquisition became the company’s undoing. A drop in natural gas prices beginning in 2008 led to a related drop in electricity prices, making the company’s massive debt untenable.
EFH is comprised of Luminant, its wholesale generation company; TXU, the retail electricity arm; and Oncor, the regulated transmission and distribution system. Although EFH has been losing money for years, the Oncor subsidiary has remained healthy. Geoffrey Gay, an attorney for a coalition of cities in Oncor’s service territory, said it’s especially important that it remain so.
“Oncor is a regulated monopoly with millions of captive customers in North Texas — it is important that the bankruptcy not undermine Oncor’s financial stability or lead to higher rates,” said Gay, an attorney for the Steering Committee of Cities Served by Oncor. “EFH’s investors borrowed tens of billions of dollars in the largest leveraged buyout in history. Our organization believes that Texas home and business consumers should not have to pay the price of that bad bet.”
Although the Texas attorney general is expected to intervene in the bankruptcy proceedings, there’s still no word as to whether he’ll call for a venue change. Such a request would not be unprecedented. For instance, then-Texas Attorney General John Cornyn attempted unsuccessfully during the Enron bankruptcy to change the venue from Manhattan to Texas.
Reuters reports that no initial hearing has been scheduled in the EFH case and so it remains unclear when the judge may consider Weisfelner’s request.