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Texas based Energy Future Holdings (EFH) announced today that it has entered into an agreement with certain of its key financial stakeholders to reduce its approximately US$40 billion current level of debt, lower its annual cash interest costs, access significant additional capital and create a sustainable capital structure for the future.
The private equity owned company EFH has three separate, and distinct, lines of business. The first is its regulated electrical transmission and distribution business, called Oncor, which has 14, 000 miles of transmission lines and over 100, 000 miles of associated local distribution in the State of Texas. The second is its power generation, and coal mining, business called Luminant, which has over 18, 000 mega watts of generating capacity in Texas from coal, nuclear and gas powered generating plants The third is its retail energy business TXU which has over 2 million Texas retail customers.
EFH was acquired in October 2007 for US$45 billion, in the largest ever leveraged-buy-out in American history. The purchasers, Kohlberg Kravis Roberts (KKR), TPG Capital and the private equity arm of Goldman Sachs, took the electric utility private in 2007 for US$32 billion plus about US$13 billion in assumed debt.
KKR is run by two of its original co-founders Henry Kravis and George Roberts. TPG is managed by private equity legend David Bonderman and his co-founder James Coulter. Goldman Sachs is led by its Chairman Lloyd Blankfein.
The private-equity sponsors have since written down their own, and their investors’, investment of about US$8 billion. They were gambling at the time on ever rising energy prices, particularly for natural gas which they thought would give a competitive advantage to EFH’s coal fired generating stations.
To implement what is a pre-arranged restructuring plan, Energy Future Holdings Corp. and certain of its subsidiaries, including Texas Competitive Electric Holdings Company (TCEH), which is the holding company for EFH’s unregulated businesses including Luminant and TXU Energy and Energy Future Intermediate Holding Company(EFIH), which is the holding company for EFH’s regulated business, Oncor Electric Delivery Company, have filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the Bankruptcy Court for the District of Delaware. As a regulated business Oncor itself is not a part of the Chapter 11 filing.
In summary terms EFH hopes to swap TCEH, a subsidiary that sells power in wholesale markets to big corporations, trading companies and other utilities, to have US$25 billion of its debt forgiven.
Additionally, the company has been talking to some of its bondholders owed roughly US$1.7 billion to convert their debt to ownership stakes in EFIH, the subsidiary that owns Oncor, the company’s regulated business that delivers power to more than 10 million customers across Texas.
EFH will probably eventually be split between its regulated electricity arm, Oncor, and its unregulated power-generation business. The talks had long been stymied by an array of issues, including whether such a split would create a tax bill of more than US$7 billion.
In order to get it done EFH intends to file a plan of reorganisation to implement the proposed restructuring agreement in the near term. The consummation of the plan of reorganization will entail certain regulatory approvals, including, among others, the approval of the tax-free transaction by the Internal Revenue Service and approvals by the Public Utility Commission of the State of Texas and the U.S. Nuclear Regulatory Commission.
EFH’s bankruptcy preparations also included the negotiation of over US$ 11.7 billion in debtor in possession financing, to make sure the company stays in normal operation during the Chapter 11 proceedings. The case has been assigned to Judge Christopher Sontchi in Delaware.
John Young, the President and Chief Executive Officer of EFH said with some relief after the protracted negotiations that delivered this agreed approach to dealing with its problems, ”We are pleased to have the support of our key financial stakeholders for a consensual restructuring, ” adding that the deal focused heavily of repairing the company’s broken balance sheet that was drowning in debt:
”With this restructuring plan, we now have a path to a sustainable capital structure that would put EFH and its family of companies in an even stronger position over the long term to deliver for all of our stakeholders, including our customers, our employees and our business partners. This restructuring is focused on our balance sheet, not our operations.”
Finally he promised that normal operations would continue for all its customers:
“We fully expect to continue normal business operations during the reorganisation. As always, Luminant will continue to provide safe, reliable energy and TXU Energy will continue to provide best-in-class customer service and innovative energy solutions. We will maintain our commitment to operational excellence in a competitive energy market.”
There are lots of people who have egg on their face with the way this deal turned out, but none more so perhaps than Marc Lipschultz who is today head of KKR’s energy and infrastructure group and who was the KKR partner who masterminded the deal in 2007, essentially as a giant play on the price of natural gas.
Well they certainly lost that bet, and Mr. Lipschultz resigned in January from the Board of Directors of EFH, preparing the way for today’s filing.
Given all the damage that has been done one wonders if indeed he should also fall on his own sword, as a good soldier now, and even resign from KKR as well. Or, perhaps the EFH result is seen as just a bad day at the office for him.
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