Energy Future weighs options for $680 million of intercompany debt

By Paul Deckelman

New York, July 31 - Energy Future Holdings Corp. maintained its liquidity at just over $3 billion at the end of the second quarter and is keeping its options open as to what to do about nearly $700 million of looming intercompany debt that it owes to one of its subsidiaries.

The Dallas-based regulated utility and power generation company, formerly TXU Corp., held a conference call on Tuesday following the release of results for the quarter ended June 30. On the call, chief financial officer Paul Keglevic told analysts that the company's intercompany loan obligation to subsidiary Texas Competitive Electric Holdings Co. LLC "remains at the same levels that it was at the first quarter. Other than that, we accrue interest as we go."

He estimated the loan balance at around $680 million, "or maybe a little north of that."

The CFO said that there are "two sources of payment" available to Energy Future Holdings. One is using cash at the parent holding-company level, which he said is "very close to that amount of money."

In answer to an analyst's inquiry during the question-and-answer portion of the conference call that followed his formal presentation and that of John Young, the company's president and chief executive officer, Keglevic estimated that Energy Future Holdings and its Energy Future Intermediate Holding Co. LLC subsidiary have roughly $700 million of cash available to them, most of it at the parent company level.

The alternative to just using that cash to pay off the intercompany debt, he said, is raising money in the marketplace either though Energy Future Intermediate or at the parent company. He said that the company has about $500 million of first-lien borrowing capacity available under the various covenants in its complex capital structure, "and then significantly more than that available for second lien."

A slide presentation that Energy Future Holdings put out in conjunction with the conference call estimated that additional second-lien capacity at $1.29 billion.

No urgency - yet

Keglevic said that a key question on the timing of the repayment - "the first thing we would look at," he called it - is "does TCEH need the money?"

The short answer, he said, is not immediately.

"We've repaid a lot and given TCEH liquidity. As we sit here today, that's not a driving need for repayment."

During the first quarter, the parent, via Energy Future Intermediate and another subsidiary, EFIH Finance Inc., issued $1.15 billion of new 11¾% senior secured notes due 2022 in two tranches that priced several weeks apart in February. It then used $950 million of the proceeds to repay a portion of the intercompany debt owed to Texas Competitive Electric, which in turn then used those funds to repay all of the borrowings under its revolving credit facility, augmenting its liquidity. That left a balance due on the intercompany note of about $671 million, which has since increased slightly due to accrued interest.

But while Keglevic said Texas Competitive Electric does not need to demand payment of the rest of the debt right now, "as we get into '13, we will see some needs for TCEH."

During the first quarter, Energy Future Holdings classified the intercompany note as a current liability - effectively meaning that it plans to pay it off within the following 12 months.

Massive debt from LBO

According to Energy Future's 10-Q report filed Tuesday with the Securities and Exchange Commission, the company's balance sheet as of June 30 showed $36.56 billion of long-term debt, much of that issued in connection with the $45 billion leveraged buyout of the old TXU and its various subsidiaries by private equity firms Kohlberg Kravis Roberts, Texas Pacific Group and Goldman Sachs Capital Partners. That deal, which closed in October 2007, is believed to be the biggest such leveraged buyout on record.

About $29.4 billion of the total debt was held at the Texas Competitive Electric level, with the biggest portion of that being $15.35 billion of term loan debt scheduled to mature in October 2017. Texas Competitive Electric also has $3.8 billion of term loan debt coming due in October 2014. Its outstanding bond debt includes $1.83 billion and $1.29 billion of 10¼% notes issued in two series and due in November 2015, $1.56 billion of 10½%/11¼% PIK toggle notes due in November 2016, $1.75 billion of 11½% senior secured notes due in October 2020 and $336 million and $1.23 billion of 15% senior secured second-lien notes issued in two series and due in April 2021.

There was about $3.27 billion of outstanding debt at the parent level, including $2.18 billion of 10% senior secured first-lien notes due in January 2020 and the $1.15 billion of 11¾% paper sold in February.

$3 billion liquidity cushion

According to the company presentation, liquidity at June 30 stood at $3.01 billion, including $1.06 billion of cash and equivalents on hand, $1.87 billion of availability under Texas Competitive Electric's replenished revolver and $81 million available under its letter-of-credit facility. The latter facility had $865 million of outstanding letters of credit, and there was $185 million drawn under the revolver.

Liquidity was down somewhat from the $3.4 billion figure recorded at the end of the first quarter on March 31, which included $1.14 billion of cash and equivalents on hand, $2.05 billion of revolver availability and $198 million available under Texas Competitive Electric's letter-of-credit facility. The latter facility had $749 million of outstanding letters of credit, with nothing drawn on the revolver at March 31.

During the second-quarter conference call, Keglevic addressed the question of whether the company might issue further debt at the Texas Competitive Electric level, with the answer being probably not.

"As we sit here today, we think it's very difficult to issue any traditional first- or second-lien debt at TCEH given the current trading levels of our existing first- and second-lien debt," the CFO declared.

Texas Competitive Electric's shortest secured maturity, the 10¼% first-lien notes due 2015, were trading on Tuesday around the 32 bid level, while its longest such issue, the 15% second-lien notes due 2021, were trading around 38.

But Keglevic said that the company has other financing options, noting that "there are some provisions in our credit agreement that could allow for investment baskets to an unrestricted subsidiary. Potentially, sale-leaseback transactions are available to us to raise additional money beyond the traditional means. But we are not actively engaged in any discussions on that latter financing as we sit here today."

He said that because the company publicly files its credit agreement, "and in the credit agreement are provisions that allow us to do investment baskets and sale-leasebacks, that's public information." Consequently, he continued "we have investors from time to time call and say 'I'm reading the credit agreement that says you can do this,' and I say 'yes it does.'" However, he added, "beyond that, we've not had any discussion with investors about those structures."

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