Energy Future Holdings bankruptcy would likely attract bidders for Oncor

04/16/2014 2:06 PM

04/16/2014 2:07 PM

The expected bankruptcy filing by Dallas-based Energy Future Holdings, created through the biggest leveraged buyout in history, is poised to put the most profitable unit of the power producer up for grabs.

Oncor Electric Delivery, which operates most of the power lines serving North Texas, may eventually end up in the hands of creditors, who could sell it to a utility buyer if EFH is broken up during bankruptcy, according to debt researchers Gimme Credit and CreditSights.

MidAmerican Energy Holdings, owned by Warren Buffett’s Berkshire Hathaway; Houston-based CenterPoint Energy; Exelon; and American Electric Power may jump at the chance to bid for the operator of the largest transmission and distribution system in Texas, said Moody’s Investors Service. Oncor may be the most-coveted unit because of its regulated, steady earnings.

Energy Future’s two other big units — Luminant Generation, the state’s largest power producer, and TXU Energy, a big electricity retailer — are deregulated.

KKR, Goldman Sachs Capital Partners and TPG Capital bought out the former TXU Corp. in 2007 with tens of billions in borrowed dollars, hoping that the deregulated electricity market, high power prices and steady growth would prove a winning investment. But falling natural gas prices led to lower electricity prices, eroding EFH’s ability to generate enough money to pay down the loans.

It now owes about $45 billion in debt. EFH owns about 80 percent of Oncor, having sold the rest shortly after the buyout to raise cash.

“We view Oncor as a premium asset,” said Jim Hempstead, a New York-based analyst at Moody’s. “The list of interested buyers would probably be as long as a West Texas country mile.”

EFH, now in a 30-day grace period of a missed interest payment that was due April 1, is widely expected to file a Chapter 11 bankruptcy petition this month.

Oncor, which provides electricity to more than 3 million homes and businesses, “recovered faster from the recession than anyone else and is one of the few utilities reporting actual customer growth,” said Dot Matthews, a New York-based analyst who covers the utility for CreditSights. “They have remained a stable, good investment.”

Allan Koenig, a spokesman for Energy Future Holdings, declined to comment.

Although creditors would take majority ownership of Oncor in the restructuring, they would probably want to sell it eventually instead of holding it for dividend payments that are capped by regulators, said Philip Adams, a credit analyst for Gimme Credit. A buyer could also bid for the other 20 percent not owned by EFH, he said.

Oncor’s steady return and growth potential could make it a target for a number of investor-owned utilities, including MidAmerican Energy, said Timothy Winter, an analyst for Gabelli & Co.

Oncor is allowed about a 10 percent return on its investments by regulators and said in February that it plans to spend $1 billion annually over the next five years as it upgrades its power line network to meet increasing demand.

Net income at the utility increased 24 percent last year to $432 million, according to a February filing.

Oncor could appeal to Exelon, which has expressed interest in expanding in Texas, said Julien Dumoulin-Smith, a New York-based analyst with UBS AG.

Representatives for MidAmerican and Exelon declined to comment.

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