Private equity backed-Energy Future Holdings reports record net income of $3.6bn

Having reported a record loss of $3.3bn last quarter, the Texas utility reported a record net income of $3.6bn since its KKR-, TPG- and Goldman Sachs-led buyout last year. Management cited mark-to-market accounting standards as a primary driver behind both quarters’ earning swings.

Energy Future Holdings (EFH), the parent company of Texas utility TXU, reported a consolidated net income of $3.6 billion for the third quarter of 2008, largely offsetting losses the Kohlberg Kravis Roberts, TPG and Goldman Sachs portfolio company recorded earlier in the year.

Paul Keglevic, EFH’s executive vice president and chief financial officer, said during the company’s earnings call that the net income included nearly $4.0 billion in unrealised after tax mark-to-market gains, which “largely offset unrealised mark-to-market net losses in the first half of the year” and were due to the effects of declining natural gas prices in EFH’s 2008-2014 hedging program.

Last quarter, EFH recorded a net loss of $3.3 billion, which it blamed primarily on the application of mark-to-market accounting procedures on its long-term fuel-hedging program.

The loss was EFH’s poorest quarterly result since the record $45 billion buyout in October 2007 of its predecessor entity, TXU, by private equity firms TPG, Kohlberg Kravis Roberts and Goldman Sachs Principal Investment Area.

This quarter’s positive results represent a quarterly record since the completion of the buyout, highlighting the volatile effects that new fair value accounting standards can have on private equity firms’ portfolio companies.

For the same quarter last year, the Dallas-based company reported consolidated net income of $922 million. 

Keglevic also said EFH's sale of a 19.75 percent minority interest in its distribution and transmission subsidiary Oncor has now reached financial close on $1.2 billion. Borealis Infrastructure Management, the infrastructure arm of the Ontario Municipal Employees’ Retirement System, and GIC Special Investments, the infrastructure arm of Singapore’s sovereign wealth fund, purchased the stake, which Keglevic said was a “key ingredient” in enabling Oncor to earn an investment grade credit rating upgrade during the quarter.

Oncor was one of three operating businesses that the buyout consortium reogranised TXU into after completing its buyout and renaming the company Energy Future Holdings. The other two businesses include TXU Energy, an electricity retailer serving two million customers across Texas and Luminant, a power generation business which produces more than 18,300 megawatts of power in Texas.

EFH’s board of directors features several high-profile members of each private equity firm, including TPG founder David Bonderman, KKR Energy and Natural Resources head Frederick Goltz, and Goldman principal investment area managing director Scott Lebovitz.

Also sitting on the board in an advisory role is former Secretary of State James Baker.