April 29, 2014

Breakup likely for Energy Future Holdings in bankruptcy

Analysts said they anticipate few if any disruptions to customers or the Texas power grid as the state’s biggest power company restructures in bankruptcy court.

Tuesday’s long-expected bankruptcy filing by Dallas-based Energy Future Holdings will likely result in the breakup of the state’s biggest power firm, but there should be little immediate impact on customers and the state’s power grid, observers said.

“The lights aren’t going out,” said Bernard Weinstein, an economist at the Maguire Energy Institute at Southern Methodist University in Dallas. “Financially, it’s a big deal. But in terms of impact on the economy, it’s not.”

The filing by the state’s biggest power company, formed with the $45 billion leveraged buyout of the former TXU Corp. in 2007 by dealmakers KKR, TPG Capital and Goldman Sachs, followed weeks of negotiations with creditors that are owed more than $40 billion.

In its Chapter 11 reorganization petition filed in Delaware, EFH said senior creditors would gain ownership of the subsidiary that includes Luminant Generation and TXU Energy. That subsidiary, Texas Competitive Electric Holdings, would jettison $23 billion in debt as part of the exchange.

EFH’s other big subsidiary, which owns 80 percent of Oncor Electric Delivery, will remain with EFH, although creditors would gain an unspecified ownership stake.

Oncor itself is not part of the bankruptcy proceeding. The finances of the regulated utility, which operates the power lines serving most of North Texas, were isolated, or “ring-fenced,” from the rest of company as part of the 2007 buyout of TXU Corp. that created EFH.

EFH said it expects to file its plan of reorganization “in the near term.” It hopes to have a confirmed reorganization plan within nine months and to exit from its Chapter 11 proceeding in 11 months, which could prove ambitious given the number of interests involved, analysts said.

“We are pleased to have the support of our key financial stakeholders for a consensual restructuring,” John Young, president and chief executive officer of Energy Future Holdings, said in a prepared statement. “This restructuring is focused on our balance sheet, not our operations. We fully expect to continue normal business operations during the reorganization.”

It is the nation’s fifth-largest bankruptcy of a non-financial company, based on assets, according to EFH employs about 9,000 people.

St. Clair Newbern, a principal in Live Energy, a Colleyville energy consultant to businesses, said he doesn’t anticipate any impact on TXU Energy customers. TXU Energy is Texas’ biggest electricity retailer, with about 1.7 million customers.

“A couple of years ago, we contacted TXU and asked for some real direct answers” on the company’s condition, he said, “and to their credit they explained their position and what they anticipated, and we haven’t had any hiccups.”

Regulators said they will monitor the proceedings to make sure Luminant’s involvement in the bankruptcy doesn’t disrupt the state’s power grid. Luminant is the state’s largest power generator and one of the 20 largest in the United States, with 14 power plants that include the Comanche Peak nuclear plant near Glen Rose, southwest of Fort Worth.

Donna Nelson, chair of the Public Utility Commission of Texas, said: “We have every expectation that the Texas electric market will continue to thrive. Both the PUC and Energy Future Holdings are committed to a continuation of all customer protections during this bankruptcy proceeding.”

The Electric Reliability Council of Texas, the state’s largest power grid, said it and state regulators have “been monitoring this situation. Prior to this filing, ERCOT has communicated, as necessary, with the affected Energy Future Holdings Corp. subsidiaries that operate in the ERCOT market to address any concerns that could impact system reliability or the efficiency of the market.”

EFH said Tuesday it arranged up to $4.5 billion in new loans for Texas Competitive Electric Holdings and $7.3 billion for Energy Future Intermediate Holdings. Loans extended to a company after it files for bankruptcy are senior to debt accumulated before the filing and allow the company to continue operations.

An unexpected outcome

When the buyout of TXU Corp. was first announced on Feb. 25, 2007, many consumer advocates viewed the deal as little more than a license to print money. TXU, under its aggressive CEO John Wilder, had already managed to push through big rate increases, and the state was still adapting to the 2002 deregulation of retail electricity markets.

But the $45 billion buyout, the largest ever, was fueled by rising natural gas prices and borrowed money. Energy Future Holdings was instead brought down by falling natural gas prices and the horrendous cost of servicing that debt.

In Texas and other deregulated markets, natural gas generally sets the wholesale price of power, SMU’s Weinstein said. That’s because while coal and nuclear power plants generally supply a baseline of steady power, natural gas-fired plants meet the ups and downs in electricity demand.

When natural gas prices are high, coal and nuclear — and more recently wind power — get the same high price, even though they generally have lower costs of production. And for a year after the TXU deal was struck, the price of natural gas did nothing but rise, eventually topping $13 per 1,000 cubic feet in July 2008 and taking Texas electricity prices with it.

Then the price crashed as a glut of natural gas from new shale formations like the Barnett in North Texas flooded the market and the nation slid into its worst recession since the Great Depression.

The power company has been struggling ever since under the weight of $40 billion in debt as its revenues have plunged with sinking prices for electricity. Last year, the average wholesale spot price of power in ERCOT was about half the average rate in 2008.

Between 2008 and the first nine months of 2013, EFH paid $21.1 billion in interest and related expenses, according to regulatory filings. That’s just more than half its total revenues of $41.8 billion over the same period.

KKR, TPG, Goldman Sachs and their investors, which put a total of $8.3 billion into the buyout, are expected to lose all or nearly all that money. Under several contemplated restructuring plans disclosed previously, the investors were left with less than 5 percent of the company’s ownership.

Tuesday’s announcements by the company did not address the ownership stake retained by the investors.

Some valuable assets

The creditors who are set to own Luminant and TXU Energy are expected to sell those operations at some point. Moody’s Investors Service last year estimated that the Texas Competitive Electric Co. unit that holds those two companies was worth about $15 billion.

CreditSights, an independent investment research company, on Tuesday gave TCEH a value of $17.1 billion with natural gas at $4.25 per 1,000 cubic feet. CreditSights valued Energy Future Intermediate Holdings, the Oncor unit, at about $9.1 billion, but said it doesn’t expect Oncor to be sold within the next two years.

James Hempstead, a senior vice president and analyst for Moody’s who has been following the company for more than 20 years, told The Associated Press that Luminant’s coal plants are profitable. But a new owner, he said, could decide to diminish the company’s reliance on coal as it becomes more costly to meet federal clean air regulations — such as a cross-state pollution ruling upheld Tuesday by the U.S. Supreme Court — or even shutter old facilities rather than invest in costly updates.

The impact of such decisions could be widespread because several Texas counties and school districts rely on the coal plants for taxes and jobs.

Weinstein noted that Comanche Peak, whose two reactors opened in 1990 and 1993, is the nation’s youngest nuclear plant and Luminant also operates several new-generation coal plants that could be attractive to a buyer.

“They’ve got some really nice assets,” he said, although he noted that even Luminant’s latest coal plant likely could not meet net EPA emission rules.

In Somervell County, where Comanche Peak is located, there has been concern about how a bankruptcy will affect the county’s finances. The plant accounts for roughly 80 percent of the tax roll for the county, the second smallest in the state, said County Auditor Brian Watts.

“Right now, it doesn’t look like it’s going to have an immediate impact,” Watts said. Comanche Peak’s property taxes of $8.83 million were paid in January. But as part of the bankruptcy proceedings, Comanche Peak’s 2014 property taxes could be put on a payment plan for up to five years.

“Five years is not a good outcome,” Watts said. “We would like to have those property tax payments on time.” But he said company officials have told the county that they intend to keep paying their taxes on time.

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