How TXU’s ‘bankrupt’ owners could still win by Lauren Silva Laughlin @FortuneMagazine April 30, 2014, 2:22 PM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons Energy Future Holdings certainly doesn’t have the cleanest bankruptcy. The $44 billion buyout of the energy company (formerly TXU) filed for Chapter 11 Tuesday after languishing for several years under owners KKR KKR and TPG Capital. Though the equity owners will lose much of their cash, they helped squeeze over $400 million in fees out of the company over the past seven years. And the bankruptcy leaves an opening for some of its previous private owners to walk away with a little kicker. The juiciest asset the company owns is Oncor, the regulated part of the business that, according to the company, is protected from bankruptcy. Oncor pipes electricity into Texan homes. Because it essentially has a monopoly, Texas regulators keep equity returns on this business in check. Equity owners cannot make an annual return higher than 10.25% per year, according to the Public Utility Commission of Texas (PUCT). MORE: Buffett lost nearly $900 million exiting biggest buyout ever When KKR and its partners bought TXU in the go-go days of 2007, this return looked pretty paltry. Fast forward seven years, and Oncor’s low leverage and steady returns have suitors running a Texas mile for a crack at it. The first among them are current bondholders. As part of the planned bankruptcy, they are claiming a right to Oncor. The logic is this: Oncor is still owned by a parent company, which has filed for bankruptcy. KKR’s stock is in that parent. Its Oncor ownership should go down like a rodeo clown. But this assumption has an inconsistency. If Oncor is protected from bankruptcy, theoretically its assets should be left out of the restructuring. Otherwise, the bankruptcy could get dragged into a dynamic regulators strive to avoid. Once Oncor’s ownership is jostled, the PUCT legally needs to grant approval of the arrangement. Even if the legal structure works in favor of bondholders, there is no guarantee the new creditors will receive a sign-off to take control of Oncor. There is another twist to this story: KKR sold 20% of its stake in Oncor to a separate group in 2008. A footnote in one docket filling for the bankruptcy plan says the creditors may restructure Oncor, which could mean “purchasing the 20% minority interest or acquiring such interest” by swapping it for equity in the parent company. So these outside investors don’t have to forfeit their stake. While KKR’s investment seems excluded, the many gray areas of bankruptcy leave much up for grabs.