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Former TXU’s Likely Bankruptcy is Not the Final Chapter on Utility Restructuring

By: Ken Silverstein |

Recall the buyout of TXU Corp. in 2007? It had been the largest privatization ever, valued at $45 billion. Now, it may be one of the biggest bankruptcies of a non-financial firm since 1980.

That’s according to Moody’s Investors Service that said this week that the retail arm, called Texas Competitive Electric Holdings, will go belly-up by year-end, and that it will also take down the parent, now called Energy Future Holdings. The parent has a debt total of $40 billion and of that, the retail arm owns $30 billion.

Meantime, the company’s generation assets are comprised largely of natural gas, which in 2007 had been getting some handsome prices. Today, though, those prices have dramatically fallen because of the shale gas boom. That will also cause the downfall of the generation arm, called Luminant, Moody’s says. Its transmission arm, Oncor, is expected to do just fine.

“The ability to service that debt included an assumption that gas prices would go no lower than $6 per million cubic feet,” says Jim Hempstead, an analyst with Moody’s, in his report. “The other assumption was that if natural gas prices did fall, they were volatile and would not stay low for a long period time … This is a story about too much debt. It was an aggressive use of leverage and it didn’t work.” Today, those prices are at $3.70 per million cubic feet.

The buyers: KKR, TPG Capital and Goldman Sachs Capital Partners. Lenders and bondholders will not come out of this whole.

In 2007, the private equity firms had offered a 15 percent premium over the value of TXU’s stock, which at that time was $69.25 a share. That took place when the stock market had been consistently moving higher and when credit was easy to come by — a much different environment from what exist today.

Private equity investors are attracted to assets that produce the steady cash flow needed to help pay down their debt. And, TXU had an enormous fleet of power plants along with 2 million residential and business customers. The demand for power in Texas had been expected to escalate and necessitate the need for more production. Recall that the private trio came into the deal riding a white horse because they promised to take a more environmentally friendly approach and build fewer coal plants than TXU had wanted.

But the private equity firms had essentially made a bet that those prices — that also affect the marginal costs of coal and nuclear — would remain high. They borrowed big — and lost: A deep recession would hit that continues to cut into the demand for electricity while a glut of natural gas is still flooding utility markets and reducing prices for the power. The resulting revenues have not been nearly enough to pay down debt.

And five years after the Great Recession began, the banks are still reluctant to lend. That’s especially true for Energy Future Holdings, with its massive debt burden — and its inability to sell high-priced electricity to retail customers.

Free markets are a test for any entrepreneur, including those who brave the utility winds. Those entities that gambled on TXU understood the risks and the potential rewards. Their ultimate fate, though, is not the final judgment for how restructuring, in general, will turn out. It is merely a chapter in what will be a continually evolving story.