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More Signs Pointing to Imminent EFH/TXU Bankruptcy

By: Texas Electricity Ratings |

Per the Wall Street Journal, Energy Future Holdings (parent company to TXU, Oncor, and Luminent)  formerly known as TXU Corp., has hired restructuring lawyers at Kirkland & Ellis LLP, according to people familiar to the matter. Speculation about the financial woes of Energy Future Holdings has been rampant for years now, and I’ve written about their financial status myself, as well as what might happen to the Texas electricity market if TXU goes bankrupt. Well, it looks like the next domino in this process is about to fall, and Texans should be aware of what this potentially means to them as customers.

Energy Future Holdings is 40 BILLION dollars in debt, and in October of 2014 they have 4 billion dollars in interest payments that will be coming due. For that reason apparently, the people at Energy Future Holdings retained outside legal advice on restructuring to help them “try to get a handle on their crushing debt load.” As of the end of September, the former TXU Corp. loads 10 times the size of its earnings before interest, taxes, depreciation and amortization.

There’s no telling exactly how this will all shake out. We can assume that some of Energy Future Holdings assets (particularly Oncor), will be moved around in a way to avoid bankruptcy and remain solvent. It might also happen that the residential/commercial electricity sales (TXU) could be spun off separately, or their customer book being sold to another Retail Electricity Provider. At this point my guess is as good as anyone’s. And to be honest, it’s not really that important. The important question is how a potential restructuring/bankruptcy will affect Texas electricity customers. Here is what I wrote last time:

On the surface, the bankruptcy of the largest competitive electricity provider and/or the bankruptcy of the largest power generation company in Texas would seem like a cause for concern for electricity customers. If TXU were to go bankrupt, would those customers be without electricity? Or if Luminent went bankrupt, does that mean that their electricity generation plants would go offline, leaving the Texas electric grid without much needed power? The answer to both of those questions, is of course, no. And we need look no further than Dynegy, a company with generation assets that came out of bankruptcy just two weeks ago and during no time in that process did their generation plants ever stop churning out electricity. The most important thing for Texans to understand is that a bankruptcy or sale of one or more of EFH’s business units would ever result in an interruption in electricity for individual customers.

Again, this is unlikely to affect customers in regards to service interruption. But only a fool would believe that customers won’t be facing higher prices from TXU as a result. Even if spun off into a separate entity, there’s no way TXU would be able to sell electricity for anything other than a decent margin coming from bankruptcy, and that would mean higher prices than most of what we’re seeing in the market today. Additionally, there’s also the possibility that TXU’s massive book of residential customers could be straight up sold to another electricity provider. Who knows what might happened to their rates, much less customer satisfaction, in that case. Or if TXU simply goes bankrupt and shutters their doors, then the largest group of customers in the state of Texas would suddenly be free to test the market and find a new electricity provider. That could promote a different kind of customer feeding frenzy as Texas electricity providers try to give any and all incentives to acquire large chunks of customers en mass.

If Luminent, the power generation portion of Energy Future Holdings that operates the coal and natural gas generation plants, goes bankrupt then all of Texans in deregulated areas might be looking at increased electricity prices. Trading prices and bids for energy Luminent puts into the grid would likely increase, and that means anyone trading with Luminent will have to pay more for their electricity. Those prices will in turn be passed onto every Texas electricity customer eventually. Luminent owns 20% of all generation in Texas, so everyone would be affected, not just the people who currently have trading contracts with Luminent. But that’s just speculation on my part, and it’s possible that a situation like that could be one where competition in the marketplace helps keep prices lower for customers.

Of course, right now all of this is still speculation, although. I contacted Energy Future Holdings and was given this quote by Allen Koenig, their Vice President of Corporate Communication, who gave me this quote:

Since initiating our liability management program in 2009, we have regularly and opportunistically worked to improve our balance sheet and increase our financial flexibility. As part of that program, we have continued to evaluate various alternatives to address our capital structure. We have worked with a number of outside parties from time to time to advise us on these types of matters. As a matter of policy, we do not comment on the identities of our specific advisers.”

So as of right now, Energy Future Holdings is still saying this is business as usual. None of this changes the fact that the bankruptcy of Energy Future Holdings or a massive restructuring of their assets isn’t a huge piece of news for the Texas electricity market. While it’s hard to predict the eventual changes that it would have on the Texas marketplace, it definitely isn’t like the ripples one sees from tossing a rock in a pond. It’s more like throwing a boulder in a backyard swimming pool.