On the Money

Once-bank­rupt TXU En­ergy de­serves an­other look

Alberta Venture - - Con­tents - By Jody Chud­ley

The once-bank­rupt TXU En­ergy, re­born as both a power pro­ducer and dis­trib­u­tor, de­serves an­other look

The Play

Even great in­vestors make mis­takes. War­ren Buf­fett did just that in 2007 when he pur­chased the junk bonds of Texas power com­pany TXU En­ergy. By 2015, when it was all said and done, Buf­fett’s com­pany Berk­shire Hath­away closed out this in­vest­ment with a bil­lion-dol­lar loss on a $2-bil­lion in­vest­ment.

He was far from the only big loser on TXU. In 2007, pri­vate eq­uity heavy­weights KKR & Co., Gold­man Sachs Cap­i­tal Part­ners and TPG Cap­i­tal teamed up to ac­quire TXU for a whop­ping $45 bil­lion. It was the sin­gle largest lever­aged buy­out (LBO) in U.S. his­tory at the time. While Buf­fett lost half of his in­vest­ment, these firms lost 100 per cent of their eq­uity stake.

Where did all of these smart in­vestors go wrong? Two things: us­ing too much debt and get­ting the nat­u­ral gas mar­ket very wrong. They loaded up a healthy com­pany with a mas­sive amount of debt and by do­ing so, bet on nat­u­ral gas prices to stay high.

Of the $ 45- bil­lion pur­chase price, $ 37 bil­lion was fi­nanced with debt. Prior to be­ing ac­quired, TXU’s an­nual in­ter­est ex­pense was $ 830 mil­lion. Af­ter be­ing sad­dled with the ac­qui­si­tion debt, it soared to $4.3 bil­lion. That’s a heavy pi­ano to drag around be­hind you.

If nat­u­ral gas prices had stayed at the $6/mcf level that the pri­vate eq­uity ac­quir­ers ex­pected, this deal may have worked out. In­stead, with cash flows crimped by low nat­u­ral gas prices and mas­sive in­ter­est pay­ments, the com­pany could not sur­vive. In 2014, TXU En­ergy ( re­named En­ergy Fu­ture Hold­ings at that point) filed for Chap­ter 11 bank­ruptcy.

The Pick

Vis­tra En­ergy (OTC: VSTE) In Oc­to­ber of 2016, the first lien bond­hold­ers of TXU/En­ergy Fu­tures Hold­ings took con­trol of the as­sets of the com­pany and put them into pub­licly traded Vis­tra En­ergy.

Vis­tra has two oper­at­ing units: Lu­mi­nant and TXU En­ergy. TXU pro­vides elec­tric­ity to 1.7 mil­lion cus­tomers, 1.5 mil­lion of whom are res­i­den­tial and the rest in­dus­trial or com­mer­cial. It’s the largest re­tail elec­tric­ity provider in Texas, with 25 per cent of the res­i­den­tial mar­ket. Lu­mi­nant gen­er­ates power. The busi­nesses are run sep­a­rately but are in­te­grated. TXU buys elec­tric­ity from Lu­mi­nant and sells it to its cus­tomers at a small markup. TXU gen­er­ated 53 per cent of the com­pany’s EBITDA in 2016 and Lu­mi­nant 47 per cent.

This is a util­ity, a sta­ble busi­ness with pre­dictable cash flows. Be­fore TXU filed for bank­ruptcy, the com­pany was car­ry­ing $34 bil­lion of debt. Net debt for Vis­tra is now only $3 bil­lion, an in­cred­i­ble im­prove­ment in the com­pany’s bal­ance sheet.

Against its peers, Vis­tra’s bal­ance sheet has gone from worst to best. A case could even be made that the busi­ness is, for a util­ity, un­der­lever­aged.

And val­u­a­tion-wise, the com­pany ap­pears in­ex­pen­sive. Cur­rent enterprise value to EBITDA is 6.7 times. Com­peti­tors with three times as much debt trade at 8 to 9 times. At 8 times EBITDA, Vis­tra would trade for $20 per share. At nine times, that fig­ure would be $22.52. You would think that the com­pany that has one-third the debt would have a premium mul­ti­ple, not a dis­counted one.

The Postscript

A dis­counted val­u­a­tion is good. Hav­ing onethird the debt of sim­i­lar com­pa­nies is bet­ter. The cherry on top is that there are cat­a­lysts that should drive Vis­tra’s share price higher over the next 12 months. The first is that this $10-bil­lion com­pany trades on the over- the- counter mar­ket. When it moves to a larger ex­change, a whole bunch of ad­di­tional in­sti­tu­tions are go­ing to be able to buy shares.

Se­cond, hav­ing just come out of bank­ruptcy, Vis­tra has yet to file any fi­nan­cial state­ments. That means it isn’t com­ing up on the stock screens of in­vestors.

Third, an­a­lysts haven’t started cover­ing the com­pany. Once they do, more in­vestors will get this at­trac­tive op­por­tu­nity put in front of them.

Fourth, with $900 mil­lion of free cash flow ex­pected in 2017 and no need to re­duce debt, there is a good chance that a div­i­dend will be an­nounced.

This isn’t a sexy busi­ness and you aren’t go­ing to triple your money, but a 30 to 40 per cent up­side is cer­tainly pos­si­ble while own­ing a com­pany on solid fi­nan­cial foot­ing.

“We be­lieve our unique in­te­grated busi­ness model will pro­vide in­vestors with an at­trac­tive, sta­ble earn­ings pro­file.” – Curt Mor­gan, CEO, Vis­tra En­ergy



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