Energy Future Crown Jewel Creates Rift: Corporate Finance

Jockeying has begun for the prized asset of Energy Future Holdings Corp., which filed for bankruptcy in April with about $50 billion of debt after the largest leveraged buyout in history.

Energy Future passed on an offer over the weekend by NextEra Energy Inc. and a group of second-lien bondholders to provide a $2.3 billion loan that would result in a merger between the two utilities, according to a court document filed yesterday. Instead, it’s pursuing a sweetened $1.9 billion loan agreement with a different group of creditors.

While falling natural gas prices undercut the electricity provider’s ability to remain profitable after its 2007 acquisition, the latest moves underscore the value of the Oncor Electric Delivery Co. unit and its steady earnings. Energy Future’s 80 percent equity stake in the utility is valued at more than $7 billion, excluding $6.3 billion in total debt, according to Spencer Cutter, a credit analyst with Bloomberg Industries.

“Oncor is a valuable asset,” Dot Matthews, an analyst who covers the utility for New York-based researcher CreditSights Inc., said in a telephone interview. “If NextEra were to add regulated assets, that would take their risk profile down somewhat and that might help them in the market.”

New Terms

Energy Future has proposed to accept the loan from note holders including Avenue Capital Group and York Capital Partners, which would allow them to convert their financing into a majority of the equity of the reorganized Oncor parent.

The improved second-lien debtor-in-possession loan initially suggested by Energy Future will convert into 60 percent of the equity in a newly reorganized company, down from 64 percent initially described in the restructuring proposal, said one of the people, who asked not to be identified because the talks are private. The interest rate on the debt will be reduced to 6.25 percent from 8 percent, the people said.

DIP financing, which is lined up while in bankruptcy, helps fund operations during a reorganization and typically has a senior claim on assets.

Adam McGill, a spokesman for Energy Future and Debbie Larsson, a spokeswoman for NextEra, declined to comment.

Merger Proposal

Energy Future, formerly known as TXU Corp., filed for Chapter 11 protection on April 29 in a bid to restructure its $49.7 billion of debt after falling natural gas prices undercut the electricity provider’s ability to remain profitable. KKR & Co., TPG Capital and the private-equity unit of Goldman Sachs Group Inc. took Energy Future private for $48 billion.

The acquisition was a bet natural gas prices would rise; instead, prices have fallen more than 60 percent since July 2008. Gas prices guide the cost of electricity in the deregulated Texas market.

The NextEra proposal, in collaboration with bondholders that own Energy Future Intermediate Holding’s second-lien debt, was declined by Energy Future’s board on June 22, according to two people with knowledge of the talks who asked not to be identified because the discussions are private. That loan would pay 6 percent interest and would allow for NextEra to acquire 100 percent of Energy Future after it completed its reorganization.

The $1.9 billion loan currently being considered by the company is backed by holders of the Intermediate unit’s 11.25 percent, unsecured payment-in-kind notes due December 2018, according to the proposal.

PIKs Fall

Avenue, York, GSO Capital Partners LP, Third Avenue Management LLC and P. Schoenfeld Asset Management LP held 76 percent of those securities when Energy Future filed for court protection, which would hand them about half the ownership of the Oncor stake.

Those 11.25 percent notes were quoted down 4.25 cents on the dollar at 121.5 cents at 11 a.m. in New York, according to prices compiled by Bloomberg. That’s up from 82.5 cents on April 29 as Energy Future and some of its creditors said they agreed to a blueprint for a reorganization.

NextEra’s stock rose 1.2 percent to $100.85 at 12:24 p.m. The securities held by its allies, Energy Future Intermediate Finance’s 11 percent second-lien notes due 2021 rose 2.25 cents on the dollar at 9:30 a.m. in New York to trade at 117 cents, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The 20 percent of Oncor not owned by Energy Future is in the hands of Texas Transmission Investment LLC, an entity indirectly owned by an Ontario municipal pension fund and Singapore’s sovereign wealth fund.

Net income at the utility increased 24 percent last year to $432 million, according to a February regulatory filing. The company paid $310 million in dividends to Energy Future and other owners in 2013.

The case is Energy Future Holdings Corp., 14-bk-10979, U.S. Bankruptcy Court, District of Delaware (Wilmington).

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