- KKR left with no equity after leading record $48 billion LBO
- Texas regulator still must approve power company restructuring
Energy Future Holdings Corp. won court approval to shed about $30 billion in debt and split into two separate companies, taking a step closer to unraveling the biggest -- and perhaps the worst-timed -- leveraged buyout ever.
Thursday’s ruling means the bifurcated Energy Future can exit bankruptcy in a few months, provided Texas regulators bless the reorganization and the Dallas-based company wins the Internal Revenue Service’s endorsement of the tax structure behind the deal.
With lower debt, the two companies will be in a better position to weather the difficult market conditions that caused the $48 billion leveraged buyout to founder about seven years after it was completed under the leadership of KKR & Co. and TPG. The new plan wipes out the LBO sponsors’ equity.
The plan “easily meets” the public policy goals of the Bankruptcy Code, U.S. Bankruptcy Judge Christopher Sontchi said at a hearing Thursday in Delaware.
In 2007, when the company -- formerly known as TXU Corp. -- was taken private, investors were betting that energy prices would rise enough to justify the cost of the deal. Instead, the global financial crisis hit, followed by the fracking boom, and prices plunged.
Energy Future’s April 2014 Chapter 11 filing has been followed by bankruptcies in the coal mining, oil drilling, and oilfield services sector. Among those casualties is another KKR investment, Samson Resources Corp.
Energy Future’s unregulated power-generating side will go to senior lenders owed about $24 billion. Oncor, the regulated powerline side, will go to a coalition of lower-ranking creditors and Hunt Consolidated Inc., a Dallas-based oil and gas, real estate and power company.
When the two companies do exit bankruptcy, the Oncor side will be publicly traded, said Tom Lauria, an attorney with White & Case LLP, the main law firm for creditors in the Hunt-led coalition.
Each side will be free to pursue its own best interest, something that may have been tougher when they were under one roof, Paul Patterson, a New York-based analyst for Glenrock Associates LLC, said in a phone interview Tuesday.
“There’s an inherent conflict that starts to show up when these businesses are separated,” Patterson said.
Oncor has already pushed a proposal in Texas that could further hurt generators like Energy Future’s Luminant unit.
It’s talked to Tesla Motors Inc. about a $2 billion investment in stationary battery storage to solve the problem of fluctuating output from wind and solar sources. Integrating more renewable output into the grid could further depress prices in the already cheap Texas market, and that could hurt the bottom lines of generators that rely more heavily on higher prices amid anemic demand growth.
“I don’t think you would have seen that proposal if Energy Future wasn’t in a bankruptcy proceeding,” Patterson said.
Most customers served by Oncor and Luminant won’t notice any difference from the split, Kit Konolige, a senior analyst with Bloomberg Intelligence, said in an interview Wednesday.
But investors will.
“Their balance sheets have been adjusted,” Konolige said. Investors have been concerned about the high debt loads being carried by Luminant’s competitors, he said. Bankruptcy should reduce Luminant’s debt enough to compensate for the low price of electricity in Texas, he said.
Luminant is the biggest electric generator in the state, with 1.7 million customers. Even before it won approval of its bankruptcy plan, Energy Future agreed to pay $1.5 billion for two natural-gas power plants.
The group taking over Oncor includes Anchorage Capital Group LLC, Arrowgrass Capital Partners LLP, Avenue Capital Group LLC, BlackRock Inc., Centerbridge Partners LP, GSO Capital Partners and the Teacher Retirement System of Texas, according to a statement by Hunt.
The generating business will go to a group that includes Angelo, Gordon & Co., Apollo Management Holdings LP, Brookfield Asset Management Inc., Fortress Credit Opportunities Advisors LLC, Oaktree Capital Management LP and Paulson & Co.
The Hunt plan has the backing of almost all creditors owed money by the generating unit, Texas Competitive Electric Holdings Co. Different groups of lower-ranking creditors, owed money by the powerline unit also signed onto the reorganization proposal, leaving a handful of minor objections.
The case is Energy Future Holdings Corp., 14-bk-10979, U.S. Bankruptcy Court, District of Delaware (Wilmington).