A battle between creditors of Energy Future Holdings, the Texas electricity company that was the largest ever leveraged buyout, has become focused on the future of Oncor, the regulated utility business that is the group’s most valuable asset.
It looks increasingly likely that Oncor could be sold at a profit, but creditors are fighting over how those profits will be divided.
The first deadline for bids for Oncor, which operates electricity transmission and distribution grids in north and west Texas, is on March 2. A second round is expected six weeks later.
EFH is split into two principal units: the regulated utility side, known as Texas Energy Intermediate Holding, which owns 80 per cent of Oncor; and the electricity generation and retail side, known as Texas Competitive Electric Holdings. Across the group, total debts are about $40bn.
Over the past year, low interest rates have boosted the value of companies such as regulated utilities that have steady regulated income streams. Utility stocks were among the best performing stock market sectors in 2014.
CreditSights, a debt research boutique, suggested at the start of the year that Oncor was worth $26.5bn: above previous estimates valuing it at $18bn-$20bn.
NextEra Energy, the US utility group, put in a bid for Oncor last year that was said to be worth about $18bn.
Ten bidders have signed confidentiality agreements ahead of the auction, EFH has said. People familiar with the process said they included NextEra, ITC, the largest specialist transmission company in the US, and, coming back again, the Dallas-based Hunt family group.
One option for Oncor could be to put it into a real estate investment trust, a structure with tax advantages that has been pioneered in the energy industry by the Hunt companies.
The valuations and the level of interest in the auction make it likely that the sale of Oncor will raise more than the debt on the regulated side of the group, and that the equity of the original owners, Goldman Sachs, KKR and TPG Capital, will be in the money.
On the competitive side of EFH, however, the debts are significantly greater than the estimated value of the business of about $15bn. Creditors of that side are trying to determine ways to establish claims on the unexpected rise in value on the utility side.
Since the company engaged in complicated money transfers between its various entities, not all of which were clear at the time the company filed for bankruptcy protection in April, the jockeying is likely to be protracted.
So far creditors on each side have not reached a settlement on any of the claims they have against each other.
“Even if Oncor is valued more conservatively, that part of the business is solvent,” says one person involved in the matter.
“Now everyone wants to glom on to the value of Oncor. What will happen will depend on negotiation not legal points.”
At stake is billions of dollars in potential losses and gains for investors in distressed debt. Among those with big bets on the outcome are Avenue Capital, Centerbridge, the GSO arm of Blackstone and Oaktree, in addition to the original trio of private equity investors.
While the regulated side of EFH has the most valuable assets, the creditors of the competitive side do have some leverage, because the sale of Oncor will be much more valuable if it can be tax free, which requires a restructuring of the entire group.
Buyout value of Energy Future Holdings, then known as TXU, in 2007
Doing that will require the consent of the creditors of the competitive side of the group, since it could mean them forgoing some tax advantages, although their tax claims have become worth less in recent months as the value of that part of EFH has fallen.
Unless the restructuring is done in a tax-efficient way, which would include a spin-off of the competitive side of the group, the additional taxes could total as much as $7bn.
“Although the amount involved may have gone down, it is still a big number,” says one person involved. “The Oncor side can give us the benefit, or give it to the IRS.”
The skirmish comes as the company makes its way through complicated and costly bankruptcy court proceedings that by April will have lasted a year, with no end in sight.
The more money at stake, the less likely creditors on one side are to make concessions to the other, according to people involved in the sparring.
Lawyers involved say it is unlikely that the case will be concluded this year.
KKR and TPG, along with the buyout arm of Goldman Sachs, bought the former TXU in 2007 for $48bn at the height of the private equity boom in a bet gone wrong that natural gas prices would rise.