It has already been established what Energy Future Holdings is not worth: the $45 billion that investors paid in 2007, financed with debt that led to last week’s bankruptcy filing.
But what is it worth now, as the Dallas-based power company faces a likely breakup as part of its Chapter 11 reorganization?
Still billions, analysts say, just not nearly as many billions.
EFH has three big operations: Luminant Generation, TXU Energy, and Oncor Electric Delivery. Luminant is the state’s biggest power generator; TXU Energy is the state’s largest electricity retailer. Oncor, which is not part of the bankruptcy proceeding, operates the power lines in a broad area that includes most of North Texas.
According to various estimates, those units could bring $25 billion or more in a sale, which could be the eventual result of the bankruptcy. Those values are predicated on the appeal of landing a stake in a growing, deregulated electricity market like Texas, with its rapidly growing population and job base.
The company hopes to conclude its Chapter 11 proceeding in 11 months, but most analysts expect it to take much longer. Under the company’s proposed reorganization plan, senior creditors would take possession of the Luminant and TXU Energy businesses in exchange for discharging $23 billion in debt. EFH would keep its 80 percent stake in Oncor under that proposal.
Here’s a look at the three units and how financial analysts evaluate them.
Luminant operates 14 power plants with 15,427 megawatts of capacity, according to the company. More than half of that is fueled by coal. And though coal might be under the gun for its environmental impacts, there’s no denying that it can be a cheap way to produce electricity.
“The coal plants are not worthless. They’re just worth less than the investors paid for them,” said Michael Webber, deputy director of the University of Texas Energy Institute in Austin.
How much less depends on several things that can be tricky to predict, he said, from the future price of natural gas to the impact of new federal regulations aimed at reducing emissions from power plants. But right now the value of those coal plants may be about as low as it’s going to get, he said.
When KKR, TPG Capital and Goldman Sachs Capital Group bought the former TXU Corp. in 2007 with about $37 billion in debt, it was pretty much the opposite. Natural gas prices were high and going higher, boosting the price of Texas electricity as well.
It seems counterintuitive, but high natural gas prices are good for electricity generators that have coal and nuclear plants, as well as for wind farm operators. In Texas and other deregulated markets, generators bid to sell power on the daily market, and the operators of the power grids accept enough bids to meet demand, working from the lowest bid to the highest.
“Natural gas is usually the last one in, because it’s the most expensive,” Webber said. All the bidders receive the price needed to buy enough power to meet demand, and therefore natural gas sets the price of wholesale power in deregulated markets. So operators using coal have lower costs and can make money off the higher price.
Andy DeVries and Charles Johnson, financial analysts for CreditSights, a financial research firm, pegged the value of Luminant and TXU Energy together at $17.1 billion. Their report, issued Tuesday after the bankruptcy filing, assumed a natural gas price of $4.25 per 1,000 cubic feet and annual earnings of $1.9 billion for the EFH unit that owns Luminant and TXU Energy, called Texas Competitive Electricity Holding Co.
Fitch Ratings, a debt rating agency, evaluated Luminant alone and came up with an estimate of $12.9 billion. It based that on values assigned to its nuclear, coal and gas-fired generating plants.
But the impact of a higher natural gas price on those values can be striking.
DeVries told Bloomberg News that a $1 increase in gas prices would mean an additional $700 million in annual revenue, a 37 percent increase from the example above. And that would also boost the value of Luminant considerably.
Just who could buy Luminant is an open question. Texas prohibits any single generator from owning more than 20 percent of the capacity in its market, and Luminant is close to that ceiling.
“My hope is that the assets are sold off to numerous companies. We’d have a lot more competition,” said Geoffrey Gay, an attorney for an Austin-based coalition of cities. “My fear is they’ll try to sell it as one package.”
More than a decade after residential customers started choosing their electricity providers, TXU Energy remains the biggest power retailer in the state. According to the Public Utility Commission of Texas, 42 percent of residential customers in North Texas and the rest of the Oncor service area were TXU Energy customers as of September 2013, the latest figures available.
That amounts to 1.5 million households. Commercial and industrial customers brought TXU Energy’s total customers to 1.7 million at the end of 2013, the company said in its latest financial disclosure.
Paul Ring, publisher of Energy Choice Matters, which follows the retail electricity market, said TXU Energy would represent a plum for a variety of players. Its size and recognized brand make it especially attractive to someone looking to gain a presence in the Texas market, the nation’s largest and one that continues to grow.
Fitch Ratings said last week it valued TXU Energy at $2.5 billion.
The company has leveraged its brand recognition to charge higher prices than newer competitors. And while it has steadily lost customers since deregulation, that “churn” has slowed markedly, Ring said.
Whether the bankruptcy filing shakes more of those customers loose remains to be seen, he said. For example, on the day of the filing, Houston-based Direct Energy launched a marketing campaign offering up to $400 in incentives to new customers.
Ring doesn’t think TXU will lose a lot of customers because of such efforts.
“I know some competitors think this is a good opportunity. But I think it will be at the margin,” maybe 10,000 residential customers or so, he said.
Oncor Electric Delivery
As a regulated utility, Oncor offers the most stable source of income within the EFH organization. When Texas deregulated its electricity markets, it did not deregulate the local “transmission and distribution utilities.”
Today, Oncor has about 3 million meters on its system, which stretches north to the Red River, south nearly to Austin, and east to Lufkin. It also takes a jump to serve the Midland-Odessa metropolitan area as well.
EFH owns 80 percent of Oncor, having sold the rest to outside investors shortly after the buyout to raise cash.
DeVries and Johnson, the CreditSights analysts, estimated that Oncor is worth about $9.1 billion in a sale, based on its earnings and the valuations assigned to its peers around the country.
Moody’s Investors Service, the credit rating service, in September estimated a sale value of about $8 billion. That valuation included an overall value of $15 billion, minus $7 billion in debt.
Fitch valued Oncor at about $9.4 billion.
Who would want to buy Oncor? While DeVries and Campbell said in their report that they don’t expect the unit to be sold for at least two years, a number of utilities would be interested in the chance to bid for the operator of the largest transmission and distribution system in Texas, analysts said.
Moody’s came up with a list that included MidAmerican Energy Holdings, owned by Warren Buffett’s Berkshire Hathaway; Houston-based CenterPoint Energy; Exelon; and American Electric Power.