Creditors to take control of TXU Energy
- September 24, 2015
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This is the second article in a series on the proposal to bring Energy Future Holdings companies out of bankruptcy. On August 10th, Hunt Consolidated and a consortium of investors announced an agreement with Energy Future Holdings (EFH) in bankruptcy court to bring the EFH companies out of bankruptcy. In my first article, I analyzed the Oncor portion of the proposed deal. This article examines the value of TXU Energy portion of the proposal.
In 2007, a group of investors including Kohlberg Kravis Roberts, TPG Capital, and Goldman Sachs Capital Partners acquired TXU Corporation for $45 billion and formed EFH. EFH is composed of two parts Energy Competitive Electric Holdings (EFCH) which includes TXU Energy and Luminant; and Energy Future Intermediate Holdings which includes 80.33% of a ring-fenced Oncor.
Oncor is the transmission and distribution portion of EFH. The two deregulated parts of the company are Luminant, which owns and operates power plants and TXU Energy, a retail electricity provider (REP). EFCH will be spun off to creditors in a tax free deal satisfying $25 billion in debt owed to those creditors. This effectively values TXU Energy and Luminant at $25 billion.
Figure 1 - EFH Organizational Structure (simplified)
TXU Energy Retail LLC
Lets examine a possible TXU Energy Retails valuation.
TXU operates solely in the Electric Reliability Council of Texas (ERCOT) operational area. It markets electricity and related products to almost 1.7 million customers with 2014 revenues of $4.4 billion. TXU has demonstrated its innovative capabilities over the years with a string of products and services including:
- Complete Connect service, which offers customers a one stop shop for connecting utilities, cable TV, etc.,
- iThermostat program a wireless, two-way communication thermostat (home energy management system),
- Distributed energy purchase plans,
- Prepaid billing plan,
- Home warranty protection, and
- Time of use and time of day pricing. For example, currently TXU is heavily promoting a free mornings and evenings plan to residential customers.
Figure 2 - TXU Mobile App
In addition, according to the PUCs Power to Choose website, TXU ranks among the top companies in customer satisfaction. TXU has embraced the consumer mobility trend with a smartphone/tablet app, which is a simple cost, usage, and billing app. A few other REPs offer more functionality in their apps.
TXU is an attractive acquisition candidate for other reasons as well. It is an established market participant. This means that it probably has effective energy market risk management policies, well-functioning IT systems and established business processes in place.
Over the years, values of Texas REPs have fluctuated. The rule of thumb for comparing REP valuations is a concept called Residential Customer Equivalent (RCE). RCE measures the typical electric consumption (kWh) per residential customer. It spreads total kWh sold across the number of residential customers. Some examples of past valuations: in 2002, AEP sold its Texas customer base to Direct Energy for about $116 per RCE. In 2010, Reliant bought Green Mountain Energy for about $1,500 per RCE. More recent deals have valued REPs at between $300 and $500 per RCE. Valuations are affected by the companys business operations, marketing and branding, as well as its profitability, growth and competitive positioning (e.g., electricity marketed as a commodity versus value-add products and services). For example, Green Mountain built and maintains a premium green renewable energy brand, thus earning a higher valuation.
I calculate TXU to have about 2.65 million RCEs for the year ending 2014. TXUs revenues were $4.4 billion for 2014. Typically REPs earn about 8-9% on gross revenues. This gives TXU earnings of about $352 396 million for 2014.
An investor also has to consider growth. In this area, TXU has lost ground since 2012.
Table 1 TXU Customer Growth
All of these issues must be taken into account when valuing TXU. Given the maturity of the Texas market and TXUs lack of growth, its RCE value would probably be somewhere between $300 and $500 per RCE. This simple RCE calculation reveals a value between $795 million ($300 per RCE) and $1.325 billion ($500 per RCE). This values the company at 2.25 - 3.76 times earnings.
Table 2 - RCE Valuation
What about a valuation using a PE ratio (price/earnings)? Comparable company PE ratios vary from 9.75 to 26. At a PE ratio of 15, TXU would be valued at $5.28 billion to $5.94 billion quite a difference from $1.325 billion. At a PE of 9.75, TXU would be valued from $3.432 to $3.861 billion. If an investor believes that TXU will maintain, but not grow revenues then a lower valuation would be in order.
Table 3 - PE Valuation
Business valuation is a complicated art. There are several methodologies which can be utilized for determining a companys value. Ive chosen two methods to illustrate the range of possible values for TXU Energy. Many subjective judgments go into a business valuation analysis. This article does not offer a definitive answer to the actual value for TXU Energy. Rather, it has discussed several key issues and a couple of estimations which might be considered in such a valuation. In the course of the next several months it will be interesting to watch as the results of this intriguing process come forth.