NextEra deal marks beginning of end of TXU saga

July 29, 2016

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The long, sad saga of TXU may finally be heading toward a conclusion. Power producer NextEra Energy is buying the bankrupt giant’s 80 percent stake in transmission group Oncor Electric Delivery, valued at $18.4 billion. The $45 billion leveraged buyout of TXU, now called Energy Future Holdings, hit trouble soon after its 2007 completion. Most creditors will have to be satisfied with a slice of the former TXU’s other assets.

The largest-ever LBO essentially involved backers KKR, TPG Capital and Goldman Sachs taking a huge punt on the price of natural gas. If it rose, the utility’s coal-powered generators would become highly profitable – with largely fixed costs, the power they produced could be sold at a relatively high price set by the cost of gas. The bet misfired as gas prices plummeted.

Regulators, however, had insisted Oncor be ring-fenced, and a 20 percent stake sold to outside investors, before agreeing to the buyout nearly 10 years ago. That proved sensible, saving Oncor from going bust. NextEra is taking control of the company, along the way repaying $9.5 billion to creditors and assuming additional debt.

NextEra’s purchase needs approval from the bankruptcy court and regulators. With the rest of Energy Future’s business – including power generation and retail services – set to be spun off, the court and creditors may be on side. But watchdogs are not always a pushover. NextEra saw a $4.3 billion plan to purchase a utility in Hawaii shot down earlier this month. Its promises to keep Oncor’s Dallas headquarters, retain employees and maintain pay should help, as presumably will the prospect of an end to uncertainty over Energy Future’s fate.

Assuming Oncor goes, holders of the remainder of what was once $40 billion worth of debt will be left owning chunks of Energy Future’s less-regulated operations. These were the great hopes at the time of the TXU LBO, but their prospects are uncertain and depend on how volatile electricity markets evolve. That could mean the story is not quite yet over for battered creditors. But they’ll be hoping it’s at least the beginning of the end.

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