Energy Future Holdings Corp., the Texas utility formerly known as TXU Corp., could file for bankruptcy protection as soon as this week. Or it could make a big debt payment and push off a filing. Here’s a Q&A about what went wrong and what happens next.
Q: Why is Energy Future considering bankruptcy?
A: Energy Future Holdings was the largest of the so-called megabuyouts — monster deals crafted before the financial crisis in which buyout firms took companies into private ownership and loaded significant debt on them to get the deals done. Energy Future carries more than $40 billion of debt, and key payments are coming up.
Q: Why did private-equity firms find it appealing?
A: TXU, taken over in 2007, appealed to buyers because it was the biggest utility in the fast-growing Texas electricity market, and it was the only utility in Texas that hadn’t been broken up amid deregulation. Private-equity investors had profited handsomely in the past by buying Texas electricity-generating assets and flipping them.
Q: What went wrong?
A: The buyers, led by KKR, TPG and Goldman Sachs’s private-equity arm, expected natural gas prices to rise as U.S. reserves dwindled. Instead, prices dropped sharply amid a boom in shale-gas production. Texas power prices are set by the cost of natural gas. As those prices tumbled so did those for electricity, resulting in billions of dollars of losses for Energy Future Holdings.
Q: Would businesses and residents in Texas be affected by a bankruptcy filing?
A: State regulators say in the case of a filing, electricity should continue to flow from power plants owned by Energy Future, and its Oncor unit will continue to deliver power to homes and businesses. In other situations where power companies have filed for bankruptcy protection, operations have generally continued unaffected. But if necessary, the state’s grid operator, the Electric Reliability Council of Texas or Ercot, has the authority to enter into special financial arrangements with plants it deems essential to keeping the electric system stable and reliable.
Q: Who is losing money?
A: Some big-name investors found their Energy Future investments in the red.
Warren Buffett marked a $1 billion loss on $2.1 billion in [[txu?]] “junk” bonds bought in 2007 at a discount to their face value, according to an investment letter from the fourth quarter of 2010. “In tennis parlance, this was a major unforced error,” Mr. Buffett wrote.
Owners KKR, TPG and Goldman Sach’s private-equity arm have written down the value of their investment in the company, originally around $8 billion, to nearly zero.
More recently, a unit of investment management company Franklin Resources Inc. has marked down losses, people familiar with the matter said. A spokeswoman for Franklin Resources declined to comment.
Q: Who is making money?
A: Distressed debt investors that snapped up loans and bonds at low prices could make money depending on how the company’s debt is restructured.
Q: Why is it taking so long to rework the company’s finances?
A: With interest rates at all-time lows, the company has been able to conduct a series of complicated transactions, in part to refinance many of its debts and buy more time to repay them.
Q: Why address Energy Future’s problems now?
A: Energy Future may receive a so-called going concern opinion from its auditor next year, people familiar with the matter said. That development could trigger a debt default and a bankruptcy filing. It also faces a debt payment Friday to lower-ranking bondholders that senior lenders don’t want to see repaid right now, since such a payment would lower the amount of money they could recover following a filing. For these reasons, stakeholders have been working to reach a deal that could lead to a smoother bankruptcy process.
Q: Will it definitely file for bankruptcy protection?
The company has said it expects to file for bankruptcy protection. The question is when. A $270 million debt payment is due Nov. 1, so there has been a big push to craft a deal before then, although the company could make the payment, in which case any filing would likely happen next year.
Q: Why does Wall Street care?
A: Some of the biggest names in finance are creditors who are clashing over their holdings. Large hedge funds and private-equity groups including Apollo Global Management LLC, Oaktree Capital Management LP and Centerbridge Partners LP are facing off against Avenue Capital Group, York Capital Management, Third Avenue Management LLC and GSO Capital Partners, Blackstone Group LP’s credit arm.
Different approaches would mean different payouts for the various camps.
Q: How big is Energy Future compared with other utility companies?
A: Energy Future ranks 25th by revenues, with $2.6 billion annually, 12th by customer count at 3.2 million and ninth by the size of its service territory, which is 51,000 square miles, according to industry trade group Edison Electric Institute.