2014 Texas power company bankruptcy had been largest leveraged buyout in history in 2007-Wall St. Journal, 3/29/2014

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The 2007 Texas power company buyout by Goldman Sachs and others was based on a bet that natural-gas prices would rise. Instead, they plunged.

4/29/2014, “Energy Future Holdings Files for Bankruptcy,” Wall St. Journal, Spector, Glazer, and Smith

“Chapter 11 Filing by Texas Power Firm, Formerly TXU, Is Among the Biggest”

“The biggest leveraged buyout ever has become one of the largest bankruptcies, as a Texas power company succumbed to a lousy bet on natural-gas prices and more than $40 billion in debt.

Energy Future Holdings Corp., the former TXU Corp., filed for Chapter 11 bankruptcy protection Tuesday to rework debt that became unsustainable amid hefty losses….

The reorganization won’t be as bright for the buyout firms that banded together to take TXU private in 2007 for $32 billion plus about $13 billion in assumed debt. KKR & Co., TPG and Goldman Sachs Group Inc.’s GS private-equity arm company have written down nearly all of the $8 billion they originally invested….

The takeover was built on a bet that natural-gas prices would rise. Electricity rates in Texas were pegged to gas prices, but since TXU generated most of its electricity with less-expensive coal and uranium, for nuclear plants, it stood to profit. Instead, natural-gas prices plunged as hydraulic fracturing of shale rock unleashed a glut, pushing down electricity rates.

The company had to keep prices as high as regulators would allow to service its heavy debt load, said Steven Wolens, who helped write the state’s 1999 deregulation law while serving in the Texas legislature. “Texans didn’t do well” by the TXU buyout, said Mr. Wolens, now a lawyer at McKool Smith in Dallas….

The seeds of the deal were planted in the fall of 2006, when TPG executives received a call from KKR energy partner Marc Lipschultz pitching a wholesale takeover of the utility, a person familiar with the matter said. The firms were interested in different parts of TXU at that point.

TPG founder David Bonderman, a staunch [so-called] environmentalist, insisted on proceeding only if [imaginary CO2 terror profiteers] environmental groups supported the deal.

To build momentum for the TXU takeover, the buyers employed an army of advisers to placate regulators, legislators and environmental groups. Among them: James Baker, a veteran Texas politician,...[Sec. of State for Bush #1 from 1989-1992, White House chief of staff and Treasury Sec. for Reagan, and Commerce Sec. for Gerald Ford].

Henry Kravis, one of KKR’s founders, TPG’s Mr. Bonderman and other representatives from the buyout firms met over several months with Texas Gov. Rick Perry, state lawmakers and state regulators to garner support for the deal.

The firms agreed to drop plans to build a bevy of coal plants, which won support for the deal from the Environmental Defense Fund and the National Resources Defense Council. The buyers also promised to explore renewable energy sources and lower prices for consumers….

The ambitious effort to navigate the eighth-largest bankruptcy case in U.S. history in less than a year could hit roadblocks. The reorganization plan will need approval from additional creditors, some of whom could file suit in opposition. Parts of the plan also are subject to regulatory approval. Any delay promises to rack up hefty fees for the lawyers, bankers and turnaround specialists working on the case.

The lights will stay on for the Texas households and businesses that are Energy Future’s customers, partly because the Texas grid operator can forge special contracts to keep power flowing from ailing, but essential, plants. The company also will have cash, thanks in part to more than $11 billion in bankruptcy loans….

Investment firms-including Apollo Global Management LLC and GSO Capital Partners, the credit arm of Blackstone Group LP—bought up the company’s discounted debt and could profit handsomely from Energy Future’s restructuring, however….

• Buyout Firms Seek TXU for $32 Billion Feb. 24, 2007
• Bidders Try to Pre-Empt Gridlock in TXU Deal Feb. 26, 2007
• TXU’s Press Release on the Buyout (Feb. 26, 2007)

Energy Future’s retail unit, TXU Energy, said that because Texas is highly competitive market, consumers could find new suppliers. Many retail customers did just that. Since late 2008, TXU Energy lost about 400,000 residential customers, dropping to about 1.5 million at the end of September.

For years, the company struck deals to extend deadlines for debt and avoid a reckoning, hoping that natural-gas prices would rebound. But with large amounts of debt coming due this fall, Energy Future ran out of time. Chief Executive John Young said Tuesday the company’s finances had become unsustainable.

For more than a year, Energy Future tussled with lenders and bondholders, many of them hedge funds and private-equity firms such as Apollo, Oaktree Capital Management LP and Centerbridge Partners LP. Those firms and other senior lenders have agreed to forgive roughly $23 billion of debt in exchange for ownership of an unregulated subsidiary, Texas Competitive Electric Holdings, that sells power in wholesale markets to other utilities and big companies….

Energy Future bondholders who are owed about $1.7 billion are set to take control of the reorganized Energy Future that will be left after the spinoff. That includes the company’s regulated Oncor unit, which delivers power to more than 10 million customers across Texas. The bondholders, including Avenue Capital Group, York Capital Management LLC and GSO Capital, also would receive some cash.”

 

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