Wall Street Journal  Apr 13  Comment 
Private equity's bet on natural-gas prices went bad with TXU, but today's smaller deals look better timed.
Wall Street Journal  Feb 20  Comment 
The company that resulted from one of the biggest leveraged buyouts of an American firm is preparing to file for bankruptcy, brought to its knees by heavy debt and a misguided bet on the direction of natural-gas prices.
Forbes  Oct 15  Comment 
Energy Future Holdings Corp., formerly known as TXU, said that it has failed to reach an agreement with creditors on a restructuring of the company’s debt.
Forbes  Sep 11  Comment 
The largest buyout in history is about to give way to one of the largest bankruptcies. The parent of power retailer TXU Energy and generator Luminant may run out of money by year's end, triggering bankruptcy, Moody's predicted in a report this...
Wall Street Journal  Apr 15  Comment 
Energy Future Holdings, formerly called TXU, on Monday revealed plans for a potential bankruptcy filing that would eliminate about $32 billion in debt and preserve some of the ownership stakes of its biggest investors.
Wall Street Journal  Apr 15  Comment 
Energy Future Holdings, the troubled private-equity-owned power company formerly known as TXU, plans to make debt payments in May, partly to buy more time for talks with creditors on a prearranged bankruptcy plan.
Wall Street Journal  Feb 28  Comment 
The troubled mega leveraged buyout that restructuring mavens have been waiting for appears headed their way, and lawyers and bankers are snatching up clients.
Wall Street Journal  Feb 8  Comment 
A Texas power company that once made headlines as the biggest leveraged buyout in U.S. history is now laying groundwork for one of the biggest debt restructurings.




 
TOP CONTRIBUTORS

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]

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]

EFH, in turn, is a wholly owned subsidiary of Texas Holdings, a Delaware limited partnership.[4]

Market Share

TXU 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

Energy Portfolio

Through 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.[5]

This chart compares EFH's energy portfolio with those of the nation's largest electricity generators.

Market Trends

Rising Energy Demand

Energy 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.[6] 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.[7]

Rising Commodity Prices

The 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.[8] 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.[9] 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.[10] This means that the cost of electricity generated from nuclear plants is less sensitive to commodity price fluctuations.

Environmental Concerns and Regulation

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.[11] 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).

Risks

Debt

The private equity group which bought TXU had to take on significant debt to do so (EFH currently has $40.8 billion in debt).[12] 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.

KKR, TPG Capital and Goldman Sachs Capital Partners billed Energy Future Holdings another $37 million in various 2010 fees, after having billed the company $36 million in fees in 2009. Energy Future Holdings is considered distressed because of its $3.6 billion annual interest payments on the enormous debt it took on to finance its $45 billion dollar LBO by KKR, TPG and Goldman (Goldman's investment banking arm even charged Energy Future Holdings a further $11 million fee for helping to convince the utility's lenders, owed $6.9 billion, to exchange their prior loans for new, better-secured loans of just $5 billion).PrivCo Private Company Report: Energy Future Holdings Corp.

Rising Commodity Prices

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.[13] 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.

Regulatory Uncertainties

EFH 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.[14] 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.

References

  1. Motley Fool, 'TXU: A Very Green Deal'. February 26, 2007
  2. The Economist, 'Private Equity: Eco-Wariors at the Gates', March 17, 2001
  3. TXU.com 'About TXU Energy'
  4. TXU's 2008 10-k (pg 1)
  5. TXU's 2008 10-k (pg 5)
  6. The Economist, 'Private Equity: Eco-Wariors at the Gates', March 17, 2001
  7. stock:TXU_(TXU)/Efh Corps Market#rom44150_3 TXU's 2008 10-k (pg 2)
  8. TXU's 2008 10-k (pg 4)
  9. TXU's 2008 10-k (pg 2)
  10. The Economist, 'A Renaissance That May Not Come', March 17, 2001
  11. Motley Fool, 'TXU: A Very Green Deal'. February 26, 2007
  12. TXU's 2008 10-k (pg 15)
  13. TXU's 2008 10-k (pg 21)
  14. TXU's 2008 10-k (pg 17)
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