AN ENERGY FUTURE HOLDINGS BANKRUPTCY?

Transcription

1 Snapshot Report: AN ENERGY FUTURE HOLDINGS BANKRUPTCY? MARCH 2014 tcaptx.com

2 P1 An Energy Future Holdings Bankruptcy? Energy Future Holdings ( EFH ), the Dallas-based energy giant, teeters close to bankruptcy. Analysts predict the collapse could come in April after auditors review the economic viability of the corporation or in October when multi-billion dollar debt payments come due. How does the state s largest electric company find itself in such dire straits? And what would its financial collapse mean for Texas and its energy consumers? Quick Facts When EFH was formed in 2007, it was a result of the largest leveraged buyout in U.S. history. A bankruptcy would be the 12th largest in U.S. history. 1 Oncor operates the transmission and distribution of electricity in north and west Texas, in the areas noted below in red, while Luminant (wholesale generator) and TXU Energy (retail electric provider) operate throughout most of the state. It is unlikely that the company s financial collapse will cause consumers to lose electric service. The impact to home electricity bills remains uncertain. The eventual disposition of Oncor, the company s regulated utility, and Luminant, the company s wholesale unit, could significantly impact rates. Depending on the eventual disposition of Luminant, an EFH bankruptcy could undermine or enhance the long-term health of competition in the state s wholesale electricity market. Did you know? In 2013, Oncor collected more than $432 million in profits, a more than 20 percent increase over 2012? 2 The Owners Energy Future Holdings was born in 2007 the product of a debt-heavy buyout of TXU Corp., the Dallas-based energy giant. The purchasers were New York-based Kohlberg Kravis Roberts, Texas-based TPG Capital, and the private equity arm of New York investment bank Goldman Sachs. The new board of directors was chaired by Donald Evans, who previously served as U.S. Secretary of Commerce under President George W. Bush. 3 After the acquisition of TXU Corp., the buyers changed its name to Energy Future Holdings.

3 P2 An Energy Future Holdings Bankruptcy? The Background Most analysts believe that the collapse of EFH could occur within weeks. This could take the form of a contentious, drawn-out bankruptcy or corporate restructuring. The company is loaded with debt, and that heavy burden is sinking it. The sheer size of such a collapse is worrisome. Luminant, EFH s deregulated generation company, controls nearly 20 percent of all generation capacity within ERCOT. Oncor, the regulated wires company, owns more than 119,000 miles of transmission and distribution lines. Its deregulated retail unit, TXU Energy, directly serves more than 1.7 million residential customers. 4 The company now known as Energy Future Holdings was created in 2007 when a number of investors acquired the former TXU Corp., the state s largest electric company. This massive transaction was premised on an all-in bet on natural gas prices, which, in Texas, are closely linked to wholesale electricity prices. At the time of the acquisition, natural gas prices were near an all-time high. This made TXU s generating plants extremely profitable. Because of their certainty that those high prices would continue, the investors decided to leverage more than $40 billion in debt for the takeover. They were like a homeowner plac ing an all-in bet with proceeds from a second mortgage. But then the recession slowed industrial production and new exploration techniques increased gas supplies. Natu ral gas prices fell, which led to a decline in EFH revenues. The debt payments became crushing. EFH has posted annual losses each year since 2008 including a $3.4 billion loss in The company also faces lawsuits from creditors seeking $725 million in unpaid interest payments. 6 Because of the state s electric deregulation law, investors as opposed to ratepayers should shoulder most of the financial risk from an EFH collapse. However it is unlikely that such a debt-heavy buyout would have occurred in the first place in the absence of deregulation. Warren Buffet, who invested $2 billion in EFH, called his own involvement a major unforced error. 7 Each of the three EFH lines of business would be impacted by the company s financial collapse. Luminant, the wholesale generation company of EFH, owns more than 15,000 megawatts of coal, nuclear and natural-gas fired generating plants. 8 The Public Utility Commission of Texas ( PUC ) has found previously that this fleet is so massive that the company may have the ability to unilaterally impact prices whether it intends to do so or not. 9 If this fleet is sold in its entirety to a single entity, then that market power could grow. This would be a step backwards for competition and could eventually contribute to higher prices. By contrast, breaking up the Luminant fleet could lead to a more competitive market. Luminant also is the state s No. 1 lignite coal miner, with annual production of more than 30 million tons. Oncor, the regulated transmission and distribution utility overseen by the PUC, serves customers at more than 3 million meters. 10 The company is financially healthy, and it is important for ratepayers that it remains so. The buyout partners in 2007 agreed to a number of complicated legal covenants intended to financially shield Oncor in the case of an EFH bankruptcy. Lawyers for EFH s creditors may attempt to thwart those protections and access the utility s assets. Oncor also could be sold as a unit to another transmission and distribution company, such as Sharyland Utilities, owned by members of the Ray Hunt Family. 11 Overseas investors already own a percentage of Oncor, and could attempt to acquire more. The impact of such a transaction remains unknown. TXU Energy serves more than 1.7 million end-use customers, and is the state s largest retail electric provider. 12 As a stand-alone unit, it remains profitable. EFH may continue to operate TXU Energy under a managed bankruptcy or, alternatively, could sell it to a third party. In either case, service to residential consumers should continue without interruption. Complications could arise because TXU Energy also serves as the default electric provider for customers in a large swath of Texas.

4 P3 An Energy Future Holdings Bankruptcy? Energy Future Holdings: A Timeline 2007 The TXU board agrees to sell the company to investors led by Kohlberg Kravis Roberts & Co. and Texas Pacific Group for about $32 billion and the assumption of about $13 billion in debt. The buyout closes in October. The company is renamed Energy Future Holdings Natural gas prices in July reach $13.58 per million British thermal units, the highest price since the buyout. By December natural gas was selling for less than half that much. 14 This impacted EFH s ability to pay off its newly acquired debt. The company reports a net loss of $8.9 billion for the fourth quarter Attempts to slash $2 billion from its debt meets with little success. EFH offers some bondholders 67 cents on the dollar, but few take the deal. In September, natural gas prices fall to $2.843 per million Btu, less than a fourth the price recorded a year earlier In July EFH exchanges bonds for between 72 and 79 cents on the dollar to cut debt by $900 million. In October, EFH reduces the value of the company on its balance sheet by $4 billion Natural gas prices continue to fall, and hit $2.2 per million Btu in April, their lowest mark since the buyout. 17 EFH reports its sixth consecutive quarter of declining revenues 18 and announces it will terminate pensions for those working for competitive holdings. 19 However, executives get millions of dollars in incentive bonuses, with chief executive John Young receiving $6 million EFH begins discussing a bankruptcy plan with some of its largest creditors that would result in most equity going to senior lenders. Did you know? In 2008, EFH sold 20 percent of Oncor to a group of foreign investors, including the Ontario pension fund in Canada and the investment arm of the Singapore government. The price tag was $1.3 billion. 21

5 P4 An Energy Future Holdings Bankruptcy? End Notes 1 KKR to Goldman Skirmish for Scraps as LBO Bankruptcy Looms, Legal Monitor Worldwide, Oct. 21, KKR s $45 Billion 2007 LBO Energy Future Holdings May Now Be Close to Bankrutpcy, Clive Minchom, Jewish Business News, Feb. 22, Energy Future Holdings press release, online at bit.ly/1rorzkg 5 Energy Future Holdings Could Avoid Paying Taxes on $23 Billion, Nicholas Sakelaris, Dallas Business Journal, Apr. 3, Luminant website, generation.aspx. 9 PUC: North Texas Utility TXU May Be Too Dominant, R.A. Dyer, Fort Worth Star-Telegram, Jan. 29, Oncor website, 11 Sale of Oncor Might be Powerful Draw, James Osborne, Dallas Morning News, Mar. 4, Sale of Oncor Might Be Powerful Draw, James Osborne, Dallas Morning News, Mar. 4, It s Buyout Completed, TXU goes Private under New Name, Associated Press, Oct. 11, Monthly NYMEX Reports. 15 Energy Future Holdings Reports Fourth Quarter and Full Year 2009 Results, Business Wire, Feb. 19, Monthly NYMEX Reports. 17 NYMEX Exchange. 18 Dark Days for EFH Owners, Elizabeth Souder, Dallas Morning News, May 27, Sorting Out All The Pieces, Elizabeth Souder, Dallas Morning News, Oct. 7, Energy Future Holdings press release, online at bit.ly/1rorzkg About the Texas Coalition for Affordable Power TCAP is a coalition of more than 165 cities and other political subdivisions that purchase electricity in the deregulated market for their own governmental use. Because high energy costs can impact municipal budgets and the ability to fund essential services, TCAP, as part of its mission, actively promotes affordable energy policies. High energy prices also place a burden on local businesses and home consumers.