Bloomberg News

TXU Spared Tax Liability on $23 Billion by IRS Ruling

April 03, 2013

Energy Future Holdings Corp., the Texas power company taken private six years ago in the largest leveraged buyout, won’t have to pay a potential tax liability on $23 billion when transferring ownership of some of its units, according to a decision by the U.S. Internal Revenue Service.

With the decision from the IRS received April 1, Energy Future can dispose of its shares in its unit, Energy Future Competitive Holdings Co., without triggering the tax liability, the company said in a filing yesterday.

The tax disclosure is unrelated to Energy Future’s program to manage its debt, Allan Koenig, a spokesman for Energy Future, said in a telephone interview. Energy Future’s proposed transfer of shares in its competitive unit to a newly created unit will have no effect on its operations or financial statements, it said in the filing.

The IRS ruling helps clear the way for Energy Future to proceed with internal financial moves that could pave the way for an expected bankruptcy filing at Texas Competitive Electric Holdings within a year, said Andy DeVries, a credit analyst for CreditSights Inc.

“It helps, but the IRS fears were overblown,” DeVries said yesterday.

Analysts at high-yield researcher KDP Investment Advisors Inc. wrote in a Nov. 1 note that the power firm may face a tax liability if it places its Texas Competitive unit into bankruptcy.

$48 Billion Bet

Texas’ largest electricity provider, formerly known as TXU Corp., was taken over in a $48 billion deal in 2007 led by KKR & Co. (KKR:US), TPG Capital LP and Goldman Sachs Group Inc. The buyout, which left Dallas-based Energy Future with more than $40 billion in debt, was a gamble that natural gas prices would rise and give its coal-fired plants a competitive advantage. Instead, U.S. prices fell to a 10-year low last year.

Energy Future faces a “material restructuring” within six to 12 months, Moody’s Investors Service said in a March 26 note. The rating company said a bankruptcy filing is likely at Energy Future’s Texas Competitive Electric Holdings unit, which sells power on wholesale markets. Texas Competitive has $29.5 billion in debt, including $3.8 billion of loans maturing in October 2014. Bond investors have previously refused to extend the payment date.

Billionaire Warren Buffett called his $2 billion investment in Texas Competitive bonds “a big mistake” in a letter last year to Berkshire Hathaway Inc. (A:US) holders. With a boom in U.S. gas production, continuing low prices “will virtually wipe out” the debt’s remaining market value, he said. Berkshire has written down its investment by about $1.7 billion in the past two years, regulatory filings show.

Bond Price

Texas Competitive’s $1.83 billion of 10.25 percent notes due November 2015 traded at 11 cents on the dollar at 4:10 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Those securities are down from 31 cents on Jan. 4.

Energy Future disclosed it had a $19 billion excess loss account and $4 billion deferred intercompany gain that are reflected in the tax basis of the stock it holds of Energy Future Competitive Holdings, and might have been triggered as taxable income if those shares are transferred, according to an Oct. 30 filing with the U.S. Securities and Exchange Commission.

The company sought the IRS ruling to be sure it would not have to pay the taxes if it went through with the transactions it was considering. Those transactions will be completed during the second quarter of 2013, the company said in the filing.

NRC Approval

The U.S. Nuclear Regulatory Commission approved in February Energy Future’s plans for an internal restructuring that would convert a division that owns its Luminant power generation fleet from a Texas corporation into a Delaware limited liability corporation.

The atomic agency agreed to transfer the license for Comanche Peak Nuclear Power Plant, a twin-reactor station outside Fort Worth, Texas, to the new Delaware entity on the condition that Luminant boost a “support agreement” for the plant by $50 million to $300 million. The amount is “adequate” to fund about one year’s worth of operations and maintenance expense at Comanche, the NRC said in its approval order.

KKR, TPG and Goldman Sachs (GS:US) contributed an $8.3 billion equity stake in Energy Future, they disclosed in 2008. By March 2012, KKR had written down its equity in the company to 5 cents on the dollar, according to a regulatory filing.

Widening Losses

Losses may widen as hedging contracts used to shield against fluctuations in gas prices disappear by the end of 2014. Energy Future lost $3.36 billion last year, 76 percent more than its $1.91 billion net loss in 2011, according to data (TXU:US) compiled by Bloomberg.

Energy Future’s state-regulated power business, Oncor Electric Delivery, is profitable and ring-fenced from any restructuring, according to Moody’s. The company’s private equity owners have extended debt maturities and repaid intracompany loans to protect parts of the business.

Hedge fund Aurelius Capital Management filed suit on March 19 alleging Texas Competitive was owed more than $725 million for loans to the parent company.

Creditors agreed to extend the maturity date on more than $17 billion in loans in 2011, and this year lenders agreed to exchange $1.37 billion of bonds and to amend rules governing its securities as Energy Future shifted liabilities.

Energy Future and its investors have recruited advisers for restructuring negotiations, people familiar with the discussions said earlier. Senior lenders at Texas Competitive -- a group that includes Franklin Resources Inc. (BEN:US), Apollo Global Management LLC (APO:US), Oaktree Capital Group LLC (OAK:US) and GSO Capital Partners -- hired Millstein & Co. to advise them.

KKR and TPG hired Blackstone Group LP (BX:US), GSO Capital’s parent, Energy Future has retained Evercore Partners Inc. (EVR:US) and Kirkland & Ellis LLP. Oncor enlisted Miller Buckfire & Co., a unit of Stifel Financial Corp.

To contact the reporters on this story: Mark Chediak in San Francisco at mchediak@bloomberg.net; Julie Johnsson in Chicago at jjohnsson@bloomberg.net

To contact the editor responsible for this story: Jeffrey McCracken at jmccracken3@bloomberg.net


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