Texas power company Energy Future Holdings Corp must pay hundreds of millions of dollars for early redemption of notes during its bankruptcy, a U.S. appeals court ruled on Thursday, in a blow to the company’s reorganization plan.
The ruling by the 3rd U.S. Circuit Court of Appeals in Philadelphia reversed lower court decisions and is a victory for holders of the company’s first-lien and second-lien notes. They argued that by repaying the debt early, Energy Future owed them prepayment premiums, known as a make-whole, of $431 million and $351 million respectively.
Two years worth of interest could tack on tens of millions of dollars more.
In its reorganization plan, Energy Future said disallowing the make-whole claims was a condition of reorganization. The U.S. Bankruptcy Court in Delaware is scheduled to begin a trial in two weeks to confirm the company’s reorganization.
Attorneys for Energy Future did not respond to requests for comment.
Philip Anker, an attorney who represented first-lien noteholders, said he was pleased with the ruling.
The plan is built around the sale of Energy Future’s main asset, its stake in the Oncor power line business, to NextEra Energy Inc (NEE.N) of Juno Beach, Florida, for about $18.4 billion.
NextEra could waive Energy Future’s requirement that the make-whole payments are disallowed, allowing Energy Future to meet the plan conditions.
Energy Future said in court filings if it lost the appeal of the make-whole ruling, it could prompt added litigation and reduce the funds available for junior creditors.
EFIH, the subsidiary that issued the debt, refinanced investors’ $4 billion in first-lien notes after it filed for bankruptcy and a portion of $2 billion of second-lien notes, saving the company millions of dollars monthly in interest.
The investors had said the make-whole premium was meant to compensate them for the loss of interest if the notes were repaid early.
Thursday’s ruling turned in part on whether the redemption of the notes was optional for Energy Future or mandatory. Judge Thomas Ambro said the court found that even if the bankruptcy filing made the notes immediately due, the company could have opted to use bankruptcy to reinstate the notes’ original maturity date.
Energy Future filed for bankruptcy in April 2014 and split its business during its Chapter 11. Its power generation business known as Luminant and its retail utility, known as TXU, have exited bankruptcy under the ownership of investment funds that held its debt.