When setting the allowed returns on common equity of jurisdictional utilities, state regulatory authorities apply the virtually universal standard that the allowed returns should be similar to...
Texas Ring Fence
TXU’s buyout structure creates a potential model for utility M&A and refinancing deals
Few electric utilities have experienced more change in one year than TXU Corp. did in 2007.
In February, TXU was a publicly held company, whose shareholders were well rewarded by the stock price movement over the previous year. The company was engaged in a $11 billion program to build 11 new coal-fired power plants totaling 8,600 MW to solidify its competitive position in the unregulated Texas electricity markets — a goal that made it a prime target of environmental groups at that time. TXU had $12 billion in debt and a BBB- rating.
By November, TXU was privately held by a Kohlberg Kravis Roberts & Co. (KKR) and TPG Capital (TPG)-led consortium. It had cancelled eight of the 11 coal plants — or about 6,400 MW — and thereby gained the alliance of several environmental groups to endorse the KKR- and TPG-led buyout. The new company, Energy Future Holdings Corp. (EFH), had about $39 billion in debt and a B- rating.
What a difference ten months can make.
Private equity has had mixed results in acquiring utility assets, with success measured by getting regulators to agree a deal is in the public interest — mainly a question of keeping rates low and providing reliable service. With TXU, regulators had a different role, because about 75 percent of cash came from unregulated operations. Regulated T&D service provided the rest. EFH and its private-equity sponsors developed successful strategies to deal with opposition to the overall buyout of the firm and to deal effectively with Texas regulators on the profitable T&D unit.
Many of the measures they adopted for EFH’s regulated T&D unit could prove highly influential in supporting more private-equity buyouts of utility assets in the years to come, or in adding leverage to utility ownership structures without harming ratings at regulated units.
Buying Different Future Value
Recent private-equity deals for utility assets offer some contrast to the TXU buyout. Examples include the $3 billion Duquesne Light Holdings acquisition by a consortium of Macquarie Infrastructure Partners and publicly listed fund Diversified Utility and Energy Trusts; and the failed $2.2 billion buyout of NorthWestern Corp. by Babcock & Brown Infrastructure Ltd. (BBI), which is owned by Australia-based Babcock & Brown.
The Macquarie-led consortium bought into Duquesne to benefit from steady, largely regulated cash flow. Duquesne Light Holdings’ main subsidiary, Duquesne Light Co. (BBB-/Stable), makes money through regulated T&D operations serving nearly 600,000 customers in and around Pittsburgh, Pa. BBI’s interest in NorthWestern Corp. was driven by similar factors — primarily cash-flow stability. The utility provides electric and gas T&D service to about 640,000 customers in Montana, South Dakota and Nebraska.
By contrast, the former TXU’s unregulated operations involve wholesale and retail electric-generation supply in Texas, while regulated T&D operations serve about 2.7 million customers in Northern Texas. EFH’s wholesale unit has a large asset position in