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TXU is a utility that provides electricity and related services to more than 2.1 million electricity customers in Texas. In October of 2007, TXU was taken private by Kohlberg Kravis Roberts and TPG (formerly Texas Pacific Group) for $69.25 a share. The total cost, at $32 billion plus $13 billion in assumed debt, was one of the largest private equity deals in history.[1] At the time, it was the largest deal ever completed.[2]
[edit] Subsidiary of Energy Future Holdings Corp.TXU is a subsidiary of Energy Future Holdings Corp, a Dallas-based energy holding company with a portfolio of regulated energy subsidiaries, primarily in Texas, including TXU Energy (with a focus on customer service and selling energy products to consumers), Luminant (which focuses on electricity generation), and Oncor (which focuses on electricity distribution and transmission).[3] As of December 31, 2007, EFH Corp. had approximately 7,600 full-time employees, including approximately 2,500 employees under collective bargaining agreements.[4] EFH, in turn, is a wholly owned subsidiary of Texas Holdings, a Delaware limited partnership.[5]
[edit] Financial DataIn 2006, the entities which now comprise EFH had $2.465 billion in net income on $10,856 billion in revenue. This demonstrated a significant trend of cost-cutting. In 2005, the entities which now comprise EFH had $1.775 billion in net income on $10.662 in revenue. In 2004, they had $.081 billion in net income on $9.216 billion in sales.[6]
[edit] Market ShareTXU operates primarily within the ERCOT market, which represents approximately 85% of electricity consumption in Texas. ERCOT is the regional reliability coordinating organization for member electricity systems in Texas and the system operator of the interconnected transmission grid for those systems. As of December 31, 2007, TXU Energy’s estimated share of the total ERCOT retail market for residential and small business electricity customers was approximately 36% and 25%, respectively (based on number of customers).[7] As of December 2007, net generation capacity in the ERCOT market totaled approximately 81,000 MW. Of this 81,000 MW, approximately 40% is owned by Luminant, the electricity-generating subsidiary of EFH.[8]
[edit] Energy PortfolioThrough its subsidiary Luminant, EFH has 18,365 MW of generation capacity. Of this, 2,300 MW come from 1 nuclear plant, 5,837 MW come from 4 coal plants, and 10,228 MW come from 14 natural gas plants.[9] This chart compares EFH's energy portfolio with those of the nation's largest electricity generators.
[edit] Market Trends[edit] Rising Energy DemandEnergy demand throughout the United States is growing rapidly, and it is increasing at an above-average rate in EFH's market. Texas' population is expected to double by 2060 and Texans need plenty of electricity to run their air-conditioners in the blazing summer heat.[18] From 1996 through 2006, peak hourly demand in the ERCOT market grew at a compound annual rate of 2.8%, compared to a compound annual rate of growth of 2.5% for the entire US over the same period.[19] [edit] Rising Commodity PricesThe rising cost of coal, uranium, and natural gas increases generating costs for EFH. However, EFH's bottom line is partially insulated from fluctuations in these costs in three ways. First of all, approximately 80% of the natural gas price risk exposure of Luminant’s baseload generation output is hedged against price fluctautions on a rolling five-year basis.[20] Secondly, ERCOT’s October 1, 2005 report titled “Report on Existing and Potential Electric System Constraints and Needs” found that natural gas-fueled plants set the market price more than 90% of the time in the ERCOT market. As a result, wholesale electricity prices are highly correlated to natural gas prices.[21] This means that EFH can often raise the price it charges for electricity when its generating costs go up. Thirdly, 13% of EFH's generating capacity comes from nuclear. Though the cost of uranium is also going up, 60-75% of a nuclear plant’s costs are front-loaded in planning and construction; for a gas plant, about a quarter may be.[22] This means that the cost of electricity generated from nuclear plants is less sensitive to commodity price fluctuations. [edit] Environmental Concerns and RegulationBetween 2004 and 2006, TXU released an average of 57 million tons of CO2 per year, most of it from its coal-fired power plants.[23] Prior to being taken private, TXU had planned to spend $10 billion building 11 new coal-fired power plants to accomodate this new demand. However, in order to gain approval for the take-over bid, the private equity buyers made major concessions like scrapping the plans for building eight of the 11 plants, reducing carbon dioxide emissions to 1990 levels by 2020, and supporting a $400 million energy efficiency initiative.[24] While this reduces EFH's ability to meet growing demand for electricity, it also reduces its exposure to tightening environmental regulations, including talk by all three major presidential candidates of either a carbon tax or a carbon cap-and-trade system. If regulations are tightened on CO2 emissions, EFH is is greatly exposed through the 32% of its electricity generated through coal, slightly exposed through the 56% of its electricity generated through natural gas (which is much cleaner), and not at all exposed through the 13% of its electricity generated through nuclear (which does not produce CO2).
[edit] Risks[edit] DebtThe private equity group which bought TXU had to take on significant debt to do so (EFH currently has $40.8 billion in debt).[25] EFH Corp.’s substantial leverage could adversely affect its ability to raise additional capital to fund its operations, limit its ability to react to changes in the economy or its industry, expose EFH Corp. to interest rate risk to the extent of its variable rate debt and prevent EFH Corp. from meeting obligations under the various debt agreements governing its indebtedness. Because of the recent credit crunch that resulted from the sub-[prime crisis, EFH may have difficulty borrowing further funds if it encounters trouble. [edit] Rising Commodity PricesIf the price of oil, gas, and uranium continue to climb, EFH's generation costs will also climb (though TXU has 5-year hedges for commodity costs, it has not hedged everything and it is still vulnerable to long-term increases). This may hurt EFH's bottom line, particularly if legislative action prevents them from passing those costs onto consumers.[26] If the price of oil, gas, and uranium continue to climb, EFH's generation costs will also climb (though TXU has 5-year hedges for commodity costs, it has not hedged everything and it is still vulnerable to long-term increases). This may hurt EFH's bottom line, particularly if legislative action prevents them from passing those costs onto consumers. [edit] Regulatory UncertaintiesEFH Corp.’s businesses are subject to ongoing complex governmental regulations and legislation that have impacted, and may in the future impact, its businesses and/or results of operations.[27] All major candidates for president are discussing either a carbon tax or a carbon cap-and-trade system to combat global warming, which would jurt TXU's bottom line.
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