An $850 million bond sale from
Energy Future Holdings Corp. is paving the way for the power
producer KKR & Co. and TPG Capital bought in 2007 for $43.2
billion to potentially put its unregulated unit into bankruptcy.
Proceeds from the sale, a portion of which was secured by
the firm?s equity interest in Oncor Electric Delivery Co., will
be used to repay a loan to Energy Future?s Texas Competitive
Electric Holdings Co. Repayment allows the power producer to put
Texas Competitive into bankruptcy without triggering defaults
elsewhere in the company, according to Covenant Review LLC.
Natural gas prices have tumbled 80 percent since July 2008,
dragging down electricity rates and cutting Energy Future?s cash
flow, leading to six consecutive quarterly losses. The Dallas-
based company?s $36.6 billion of long-term debt, $23.5 billion
of which may be due in 2015, make the capital structure
?untenable,? Moody?s Investors Service wrote last week.
?Texas Competitive is so under water and so far out of the
chances of making money at current gas prices that they would
have to sale leaseback every single asset they had, and it just
doesn?t make sense,? Andy DeVries, a New York-based analyst at
CreditSights Inc., said in a telephone interview. ?It?s like
putting a Band-Aid on a heart attack.?
Clear Path
Energy Future sold the secured debt last week to pay off a
$680 million loan it owed to its unregulated Texas Competitive,
which owns a generation unit, the biggest electricity producer
in the state, and a unit that sells power directly to customers.
Paying the loan helps clear a path for a restructuring of
the division without jeopardizing the parent or its regulated
business, Oncor, which distributes electricity to about 3
million homes and businesses in Texas.
Chief Financial Officer Paul Keglevic said last month that
the Texas Competitive unit is frozen out of the debt markets and
may have to sell and then leaseback assets to raise funds.
Molly Sorg, a spokeswoman at Energy Future, declined to
comment on the company?s finances.
Lenders demanded the firm pay about $85 million in annual
interest on the bonds, which included a $250 million first-lien
portion due in 2017 and $600 million of second-lien debt that
matures in 2022, according to data compiled by Bloomberg.
?One read, perhaps, on the repayment of the loan, is that
they are preparing to be able to file Texas Competitive Electric
Holdings at some point in the future in a way that would not
result in bankruptcies elsewhere in the capital structure,?
Chris Chaice, an analyst at credit research firm Covenant
Review, said in a telephone interview.
Bond Prices
KKR and TPG?s 2007 leveraged buyout of Energy Future, then
known as TXU Corp., is the largest private-equity transaction on
record, Bloomberg data show.
Energy Future?s $1.1 billion of 10 percent first-lien notes
due January 2020 dropped 0.1 cent to 110 cents on the dollar
yesterday to yield 8.17 percent, according to Trace, the bond-
price reporting system of the Financial Industry Regulatory
Authority.
Texas Competitive?s $1.83 billion of 10.25 percent
unsecured notes due November 2015 fell 0.3 cent at 10:30 a.m. in
New York to 30 cents on the dollar, Trace data show. The
unregulated Energy Future unit had $29.4 billion of outstanding
long-term debt as of June 30, according to a July 31 regulatory
filing with the U.S. Securities & Exchange Commission.
?Everything that will move the bonds is beyond
management?s control, and that?s natural gas prices, heat rates
and anything coming out of the regulatory side or the
Environmental Protection Agency,? DeVries said.
Accelerated Loans
Energy Future has about $4.2 billion in bonds and loans
that come due in 2014, according to the filing. The company has
$3.1 billion of long-term debt due in 2015 that could surge to
$23.5 billion if it fails to prepay certain obligations and
breaches a financial maintenance covenant.
That provision requires Texas Competitive to retire certain
bonds before they mature and forbids it to exceed a leverage
ceiling, according to the filing. Should it fail to comply with
both of those elements, its term loans would come due the
following day under a so-called springing maturity.
Natural gas futures have fallen 60 percent to $2.75 per
million British thermal units yesterday in New York since Oct.
11, 2007, the day KKR and TPG took Energy Future private just as
the recession sapped demand and drilling expanded in the gas-
rich Marcellus shale in the eastern U.S. creating a supply glut.
?Strong Enough?
Hedges that are supporting profit by locking in natural gas
prices expire by 2015, according to the regulatory filing. The
hedges lock in natural gas at a weighted average price of $7.32
for 2012, compared with an average monthly forward natural gas
price of about $2.96, according to a July 31 earnings
presentation.
Texas Competitive has 96 percent of its estimated natural
gas price exposure hedged for 2012, according to the
presentation. That hedge decreases to 67 percent in 2013 and 33
percent in 2014.
?The hedges look strong enough to get them through the end
of 2013 without tripping the maintenance covenant,?
CreditSights?s DeVries said. ?With just the hedges you?re
looking at an early-2014? restructuring event.
Moody?s lowered its credit grade on Energy Future to Caa3,
nine steps below investment grade, and that of Oncor to Baa2,
two levels above junk, according to an Aug. 9 rating report. The
New York-based rating company said it expects ?material balance
sheet restructuring in the next 12 to 18 months? amid ?low
natural gas prices? that will damp Energy Future?s ability to
generate cash.
Credit Amendment
Texas Competitive had leverage, or secured debt to adjusted
Ebitda, of 5.53 times as of June 30, according to the regulatory
filing, and is not permitted by a financial maintenance covenant
to exceed eight times.
The unit amended its credit agreement in April 2011,
allowing it to extend $17.8 billion of loans to 2016 and 2017
with loosened financial covenants, according to an April 13,
2011, regulatory filing. In exchange, it agreed to pay lenders
fees and increased interest that may top $1 billion, according
to the filing.
?When they did the amend-and-extend effort they eased up
all those covenants in the credit agreement,? Terry Pratt, an
analyst at Standard & Poor?s, said in a telephone interview,
saying that upcoming debt maturities are the company?s most
pressing matter. ?To refinance all the debt under these market
conditions, I think that is going to be difficult to do.?
To contact the reporter on this story:
Richard Bravo in New York at
rbravo5@bloomberg.net
To contact the editors responsible for this story:
Alan Goldstein at
agoldstein5@bloomberg.net
Enlarge image
Energy Future Paves Way for Unit?s Bankruptcy: Corporate Finance
Natural gas prices have tumbled 80 percent since July 2008, dragging down electricity rates.
Natural gas prices have tumbled 80 percent since July 2008, dragging down electricity rates. Photographer: Daniel Acker/Bloomberg
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