TXU Bondholders Burn as $500 Million Lost in a Single DayMark Chediak and Richard Bravo
Energy Future Holdings Corp. bonds lost almost a half-billion dollars of value in a single day last week as the electricity provider and owner KKR & Co. hire restructuring advisers and the firm’s ability to defer interest nears an end.
Bonds of Texas Competitive Electric Holdings Co., Energy Future’s unregulated unit, plunged as much as 9.25 cents to a record low of 15 cents on the dollar Feb. 8 while a secured loan fell to a two-month low. Energy Future hired law firm Kirkland & Ellis LLP, and KKR, which helped take the power producer private in the largest leveraged buyout, retained Blackstone Group LP to help restructure the $47.2 billion of total debt.
Chances for a bankruptcy or reorganization are growing for the former TXU Corp., following seven consecutive quarterly losses, as contracts protecting it from slumping natural gas prices decrease to 39 percent of what it has at risk next year from 99 percent in 2012. Energy Future may seek a reorganization as soon as May 1, when interest on payment-in-kind bonds that cost as much as $173 million annually, will need to be made in cash, according to Peter Thornton, an analyst at Montpelier, Vermont-based KDP Investment Advisors Inc.
“We are getting very close to a restructuring and a trigger point could be in May when PIK turns to cash interest payments,” Thornton said in a telephone interview. “The trading levels for these bonds reflect expectations for pennies on the dollar recovery.”
As the company’s natural gas forward-sales contracts expire, it won’t have enough cash to meet a $3.8 billion term loan due in October 2014, which would force a bankruptcy filing, Thornton said in a telephone interview. “That’s the absolute wall,” he said. “They are running out of options given the overall insolvency of the capital structure.”
Power prices depend on gas costs in most markets because plants powered by the fuel usually provide the marginal power needed to meet demand. Coal is easy to store, and plants powered by it are usually slow to be turned on and off.
Allan Koenig, a spokesman for Energy Future Holdings in Dallas, declined to comment on the company’s financial situation.
Texas Competitive’s $1.83 billion of 10.25 percent debt due November 2015 traded as high as 32 cents on the dollar in July and ended yesterday at 18.5 cents, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Its $1.23 billion of 15 percent second-lien notes due April 2021 dropped 9 cents to 26 on Feb. 8 and fell to 25.25 cents yesterday.
Texas Competitive’s term loan maturing in October 2014 fell to 69.2 cents on the dollar yesterday from as high as 76.8 cents on Jan. 3, according to prices compiled by Bloomberg. That loan is now within the 50 cent-to-70 cent range that Standard & Poor’s expects lenders to recover in the event of a default.
Energy Future, the biggest power producer in Texas, said in a Jan. 22 regulatory filing that its preliminary 2012 net loss widened to $2.17 billion from $1.91 billion the previous year as revenue fell amid a slump in power prices. Energy Future is scheduled to report fourth-quarter results on Feb. 15.
The company has struggled to be profitable ever since KKR, TPG Capital and Goldman Sachs Capital Partners took it private for $43.2 billion in 2007. The company’s long-term borrowing soared to $37.4 billion as of Sept. 30 from $10.6 billion before the buyout. Meanwhile, natural gas prices have fallen about 76 percent from their 2008 peak to $3.279 per million British thermal units amid a glut of production from U.S. shale deposits.
Energy Future owns Luminant, a generation company that produces electricity, and TXU Energy, a retail unit that markets and sells power. Energy Future also holds an 80 percent stake in Oncor Electric Delivery Co., a profitable regulated transmission and distribution utility that delivers power to more than 3 million homes and businesses in Texas.
Energy Future has sought to protect Oncor from a potential restructuring of other parts of the company by paying off intercompany loans while changing the terms of outstanding bonds to isolate the distribution unit.
Creditors agreed to exchange $1.37 billion of Energy Future’s bonds and to amend rules governing its securities to shift liabilities, the company said in a Jan. 9 regulatory filing.
Still, Moody’s Investors Service expects a restructuring within 12 months.
“Any potential restructuring activity will be organized and amendable because of the political and reputational risk that resides with Energy Future’s equity sponsors and board of directors associated with a contentious and disorganized restructuring,” James Hempstead, a credit analyst at Moody’s, said in a Feb. 4 note.
Billionaire investor Warren Buffett said in his annual letter to shareholders a year ago that his $2 billion investment in Energy Future in 2007 was at risk of being wiped out. He wrote down holdings related to the company and called the investment “a big mistake.”
To aid in a reorganization, Energy Future hired Evercore Partners Inc. as an adviser, along with Kirkland & Ellis, while KKR retained Blackstone, according to people familiar with the situation, who asked not to be identified, citing lack of authorization to speak publicly. Energy Future’s Oncor unit also enlisted New York-based restructuring firm Miller Buckfire & Co., a unit of Stifel Financial Corp., according to three people familiar with the situation.
Energy Future has “less than adequate” liquidity given Texas Competitive’s $3.8 billion term loan that comes due next year, Terry Pratt, a credit analyst for S&P, said in a Feb. 1 note. The unit had total liquidity of $1.4 billion as of Dec. 21, 2012, with $1.3 billion of cash and $114 million available under a secured letter of credit facility, according a Dec. 21 regulatory filing.
Natural gas contracts which support cash flow “will begin to roll off later in 2013, creating greater exposure to weak power-market conditions in late 2013 and more so in 2014,” Pratt wrote.
Hedges that are supporting cash flow by locking in natural gas prices expire by 2015, according to an Oct. 30 regulatory filing. The hedges locked in natural gas at a weighted average price of $7.35 per million British thermal units for 2012, compared with an average market price of about $3.32, according to the filing.
Texas Competitive had 99 percent of its estimated natural gas price exposure hedged for 2012, according to the filing. That hedge decreases to 87 percent in 2013 and 39 percent in 2014.
“Even if gas prices spike to $5 again it still doesn’t support the current debt load,” said Andy DeVries, an analyst at debt researcher CreditSights Inc. in New York.