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Energy Future’s Reduced Earnings to Sap Credit Recovery Values

By: Mark Chediak |

Energy Future Holdings Corp.’s creditors may be carving up less of the Texas energy giant in a bankruptcy reorganization after it cut the earnings forecast for its deregulated unit earlier this week.

The former TXU Corp. reduced its 2015 profit forecast for its Texas Competitive Electric Holdings unit by almost 20 percent on lower expectations for natural gas prices, compared with earnings projections six months ago, the Dallas-based company said in an Oct. 15 regulatory filing. The revised outlook may cut how much debtholders receive after a Chapter 11 restructuring, which may come as soon as next month, said Peter Thornton, an analyst for KDP Investment Advisors Inc.

Texas’ largest electricity provider has been in negotiations with creditor groups in an attempt to devise a plan on reducing Energy Future’s $43.6 billion of debt and how to apportion ownership of the company in bankruptcy. KKR & Co., TPG Capital and Goldman Sachs Capital Partners took it private six years ago in the biggest leveraged buyout in history.

“We’ve lowered our expectations for adjusted earnings based on management’s revised forecasts,” Thornton said in a telephone interview. “Part of that is due to lower power prices and gas prices.”

Senior creditors at Energy Future will now recover 53 percent, Thornton wrote in an Oct. 17 research note. That’s down from a 56 percent recovery he estimated in August.

Bonds Decline

Texas Competitive’s $1.23 billion of 15 percent, second-lien notes due in April 2021 traded at 22.3 cents on the dollar at 11:18 a.m. in New York, down from a high this year of 36.5 cents in January, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The unit’s $15.4 billion term loan was quoted at 67.2 cents on the dollar, according to prices compiled by Bloomberg.

Energy Future spokesman Allan Koenig declined to comment on the company’s recent financial disclosures.

Texas Competitive projects $1.64 billion of earnings before interest, taxes, depreciation and amortization in 2015 when adjusting for natural gas prices, according to the October filing. That’s down from an earlier forecast of $2.04 billion, according to an April 15 release. The reduction is due to lower expected gas and power prices.

Energy Future released financial projections for the Texas Competitive unit, which owns Luminant, a power generator, and TXU Energy, an electricity retail seller, as part of a disclosure of its efforts to reach a pre-negotiated bankruptcy pact with its creditors. Senior lenders are seeking a Chapter 11 filing before the company makes $270 million in interest payments Nov. 1 to junior bondholders.

Ebitda Impact

Texas Competitive’s earnings are “quite sensitive” to natural gas prices, according to Shalini Mahajan, an analyst for Fitch Ratings, who said a $1 change in those prices may affect the unit’s 2015 earnings by $450 million to $500 million. Since the company’s April filing, “gas prices have come down, so obviously you see that impact on Ebitda,” she said.

Natural gas prices for 2014 dropped 24 cents, or 5.7 percent, to $3.99 per million British thermal units today from $4.23 at the end of the first quarter, according to the Bloomberg Fair Value Curve. Gas prices for 2015 fell 16 cents, or 3.7 percent, to $4.14 per million Btu from $4.30 at the end of the first quarter.

Gas costs set energy prices in the Texas market because plants fueled by it usually provide the marginal power needed to meet demand.

Weak gas prices and a glut of cheap wind power being delivered by new transmission lines are keeping a lid on Texas wholesale electricity rates. Texas power prices in the hottest months in 2013, when generators pocket the bulk of their profits, were 12.3 percent lower in 2013 compared with 2012, according to CreditSights Inc.