As has been widely reported, the energy giant TXU Energy is inching closer to bankruptcy in what will be the largest default of its kind in more than 30 years. But speculation for a year or more that this would happen is only part of the story. The intricate structure of debt, holding companies and leverage seems to be exceeded only by the strange and complex deals that brought down Lehman Brothers and caused financial panic 5 years ago this week.
The trouble actually began in 2007, with the leveraged buyout of TXU Corporation by Energy Future Holdings, a company formed by Wall Street firms KKR, Goldman Sachs Capital Partners and Texas Pacific Group. The $45 billion buyout was the largest in history, and has saddled the utility with a mountain of debt ever since.
So what happened?
At the time of the buyout, TXU Energy was a profitable electricity provider through its power generator Luminant and regulated utility Oncor. The power plants that TXU operated were largely coal-fired, and at the time of the purchase, coal was the most cost-effective fuel for generating electricity.
Natural gas prices had experienced a huge price spike, and coal-fired plants were reaping the benefits of cheaper production, even as electricity costs began to edge up. Things were looking good for Energy Future Holdings. Unfortunately, as these Wall Street types should have known, the market changes direction when you least expect it.
With TXU under a mountain of debt, the worst thing that could have happened to them did. The price of natural gas came crashing back to earth as new technologies allowed for the drilling of previously unrecoverable gas fields. Because of this, electricity prices pulled back and natural gas became the preferred fuel for power generation.
Add to the recent woes a relatively mild summer in Texas, resulting in fewer coal plants selling electricity. This seems to have been the final nail in the coffin of Energy Future Holdings investment in Texas power generation.
As a result of TXU’s over-leveraged balance sheet, bad timing, Wall Street greed, or whatever else you want to attribute it to, the parent company EFH has seen all of its profits erode in debt payments. As of now, the holding company owes around $50 billion to creditors. The problem is that the value of assets is only around $39 billion. And upcoming debt payments are more than the company is expected to earn in the coming few quarters.
With $270 million due in November, EFH is expected to officially file for bankruptcy protection as early as October. Most secured creditors are expected to receive less than 50 cents on the dollar, and bond holders will be lucky to see anything in return. As for KKR, Goldman and Texas Pacific, they are likely hedged and will be largely unaffected. Not so for investors.
The moral of this tale may be that Wall Street needs to stay out of businesses that it doesn’t know; but that’s not likely. At Choose Energy, we think the only way to ensure a secure and reliable source of energy at the best price is to compare and shop only the most reliable and best run energy companies. We work to bring you the best choices among only those reliable sources. That way you know you’re protected and are getting the best deal possible when you exercise your power to choose an electricity provider for your energy bill.
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