Too big just failed.
The troubled Texas utility Energy Future Holdings – which, as TXU, was private equity’s biggest-ever buyout – filed for bankruptcy on Tuesday.
After months of on-again, off-again talks between the company, its owners and a dizzying hierarchy of creditors, the company went into Chapter 11 protection with a plan intended to stave off months of potentially rancorous fighting in court over pieces of the power company.
Energy Future will probably 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 $7 billion.
Energy Future will become one of the biggest Chapter 11 filings in corporate history. Lest we forget Enron With $62 billion in assets as of Sept. 30, it was the biggest American company ever to go bankrupt, dwarfing the filing by Texaco in 1987.
This is not the ending that the Wall Street private equity firms, including Kohlberg Kravis Roberts, TPG Capital and the private equity arm of Goldman Sachs, envisioned in 2007, when they acquired the TXU Corporation in a colossal $45 billion deal.
Their investments are expected to be all but be wiped out in the bankruptcy.
The takeover of TXU was an audacious transaction that epitomized the golden era of private equity. Buyout firms went on a buying spree, acquiring hotel chains, gambling icons, giant hospital systems and mammoth real estate properties.
When the financial crisis struck, many of these boom-era deals struggled. Still, amid dire predictions, few have actually failed, thanks to their owners’ savvy market movements that allowed them to refinance their mountains of debt at friendly terms over the last two to three years.
Energy Future Holdings refinanced its debt as well – pushing back nearly $25.7 billion of its debt to later dates. But its problems ran much deeper than the simple sum of its debt.
Indeed, while it faced a total debt load of about $38 billion, much of which was taken on to complete the buyout in 2007, its underlying business – the generation and sale of electricity – deteriorated sharply. In the deregulated Texas market, electricity prices are strongly related to those of natural gas. That fact, essentially, made the buyout of Energy Future Holdings a towering bet on the price of natural gas.
But instead of rising, natural gas prices fell. And kept falling. That led to billions of dollars in losses at the company.
And even while natural gas prices spiked sharply higher last winter as bands of arctic air froze broad swaths of the country, it was simply too little, too late for Energy Future Holdings, analysts say.
“You’d need to see higher natural gas prices for a sustained period of time to get the company out of trouble, and they just ran out of time,” James Hempstead, an analyst with Moody’s Investors Service, said in an interview in early March. “There was simply too much debt on this organization.”
Mr. Hempstead had been predicting that Energy Future Holdings would simply run out of cash sometime in the first half of 2014. Declining cash, along with a $3.8 billion loan due in October that the company could not repay and, most likely, could not refinance, led its auditors to question its ability to continue as a going concern.
Earlier this year, Energy Future skipped some of its interest payments, setting up a 30-day grace period that was set to expire on Thursday. The company has been negotiating with its rafters of creditors with increasing urgency over the past month, and had come close to tentative agreements on many of the important financial issues, a person briefed on the matter said this week.
One of the most contentious points of debate had been whether creditors of the unregulated power business could take control of the unit by claiming the debt they are owed. But they had contemplated a financial maneuver that could have cost Energy Future a multibillion-dollar tax bill, raising the specter of involvement by the Internal Revenue Service.
The matter has since been resolved.
Driving all sides was the recognition that an unplanned bankruptcy could quickly devolve into a messy free-for-all among the myriad hedge funds and investment firms that hold the company’s debt.
In a filing with the federal bankruptcy court in Delaware, the company disclosed that it had lined up financing fromCitigroup to stay afloat during its Chapter 11 case.
It is being advised by Evercore Partners, the law firm Kirkland & Ellis and the consultancy Alvarez & Marsal.