How many bankruptcies come with a public thank you to the people who caused the wreck?
It’s another twist in the strange trip of Energy Future Holdings, the power giant that finally filed for Chapter 11 on Tuesday. CEO John Young told a gathering of about 800 employees in Dallas that it was a very, very, very good day.
That’s right: a three-peat.
Most executives wouldn’t break such news this way. But most wouldn’t take the moment to also kiss up to their private equity owners.
Young’s bosses borrowed billions to buy the former TXU Corp. in 2007, at the peak of the market. That put EFH on a path to bankruptcy, yet Young praised the buyout kings for helping “further the company’s goals.”
“KKR, TPG and Goldman Sachs have been constructive partners,” Young wrote in a statement posted on the EFH website.
They provided resources and support, he said. And the company met many commitments to Texans, Young wrote, “due, in large measure, to the persistence and determination of our owners.”
Maybe they’ll buy this, but nobody else will. And Young’s appreciation may be as good as it gets.
A year ago, KKR, TPG and Goldman proposed a restructuring that included a 15 percent stake for their firms. Dubbed “Project Olympus,” the plan would have kept the vertically integrated utility together.
That failed to garner enough support, so the owners proposed another plan with an 8 percent stake. Then they tried for 2 percent. The latest proposal is for less than 1 percent, with a breakup of the company.
“These debtors effectively wasted nearly a year and many hundreds of millions of dollars pursuing their doomed ‘Project Olympus,’” according to a court filing by a trustee for second-lien bondholders.
The private equity owners will get less than 1 percent in Oncor, the smaller of the two businesses expected to emerge from bankruptcy. All the equity in the second unit, comprising generation and retailing, is slated to go to first-lien creditors.
It’s fitting that the architects of the doomed deal be shut out of the upside, but don’t shed any tears. Their companies and investment funds have fared just fine. They collected millions in fees and brought in many outside investors to reduce their risk.
The early take on EFH’s Chapter 11 is that the company lined up key creditors to support a plan and speed the process. But some pushback has begun.
A trustee for second-lien holders, Wilmington Savings Fund, wants to conduct discovery of the “mismanagement” and “conflicts of interest” affecting the case.
The filing provides a critical look at a company that has insisted it’s a top-flight operator. Young often said that EFH had only a balance sheet problem, a reference to its crushing debt, and he used that language on Tuesday.
But Wilmington offered several examples of management shortcomings.
A sharp decline in retail electricity customers hurt cash flow. If TXU Energy regained one-third of the market share it lost since the buyout, it would add $150 million to annual earnings before interest, taxes, depreciation and amortization, the trustee said.
High overhead costs, led by fees of about $50 million annually to the owners, put EFH expenses well above the nearest comparable company. If overhead (as a share of revenue) were on par with NRG Energy, the motion said, EFH would save over $100 million a year.
EFH failed to diversify the generation fleet, which would make the company less vulnerable to low power prices. Dominated by its debt, management didn’t “focus on the ‘blocking and tackling’ of running a merchant power business,” the trustee said.
The potential conflicts of interest are numerous and varied. There were loans from one EFH unit to another and directors serving on multiple boards. And EFH entities are “amassing significant positions in the public debt of other debtors and related entities,” the trustee said.
For years, EFH has amended and extended its debt, putting off payments in the near term and adding to the total load. The company’s credit rating kept falling, so borrowing became more expensive.
“Nonetheless, management continued its ‘amend and pretend’ campaign, while continuing to fail to address the underlying problems,” the motion states.
It points to an example in January 2013. To extend about $645 million in revolving credit, the company paid a fee of $340 million — “an astonishing 54 percent of the face amount,” according to the filing.
The trustee wants to examine the circumstances, lenders and benefits of that deal and others. There may be claims for breach of fiduciary duty, it said.
The motion lists almost $200 million in fees that EFH paid to KKR, TPG and Goldman. The trustee wants those examined, too, to see whether they might be recovered.
At least the CEO’s attaboy appears safe: Thanks for the memories.
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