Snapshot Report: AN ENERGY FUTURE HOLDINGS BANKRUPTCY?

MARCH 2014 tcaptx.com P1 • An Energy Future Holdings Bankruptcy?

Energy Future Holdings (“EFH”), the -based energy giant, teeters close to bankruptcy. Analysts predict the collapse could come in April after auditors review the economic viability of the corporation or in October when multi-billion dollar debt payments come due. How does the state’s largest electric company find itself in such dire straits? And what would its financial collapse mean for and its energy consumers?

Oncor operates the transmission and distribution of in north and west Quick Facts Texas, in the areas noted below in red, while (wholesale generator) and TXU Energy (retail electric provider) • When EFH was formed in 2007, it was a result of the operate throughout most of the state. largest in U.S. history. A bank- ruptcy would be the 12th largest in U.S. history.1

• It is unlikely that the company’s finan- cial collapse will cause consumers to lose electric service.

• The impact to home electricity bills re- mains uncertain. The eventual disposition of Oncor, the company’s regulated utility, and Luminant, the company’s wholesale unit, could significantly impact rates.

• Depending on the eventual disposition of Lumi- nant, an EFH bankruptcy could undermine or en- hance the long-term health of competition in the state’s wholesale .

Did you know? The Owners

In 2013, Oncor collected more than $432 mil- Energy Future Holdings was born in 2007 — the product lion in profits, a more than 20 percent increase of a debt-heavy buyout of TXU Corp., the Dallas-based en- 2 over 2012? ergy giant. The purchasers were New York-based , Texas-based TPG Capital, and the arm of New York investment bank Goldman Sachs. The new board of directors was chaired by Donald Evans, who previously served as U.S. Secretary of Commerce under President George W. Bush.3 After the acquisition of TXU Corp., the buyers changed its name to Energy Future Holdings. P2 • An Energy Future Holdings Bankruptcy?

The Background

Most analysts believe that the collapse of EFH could occur Each of the three EFH lines of business would be impacted within weeks. This could take the form of a contentious, by the company’s financial collapse. drawn-out bankruptcy or corporate restructuring. The company is loaded with debt, and that heavy burden is Luminant, the wholesale generation company of EFH, sinking it. owns more than 15,000 megawatts of coal, nuclear and natural-gas fired generating plants.8 The Public Utility The sheer size of such a collapse is worrisome. Luminant, Commission of Texas (“PUC”) has found previously that EFH’s deregulated generation company, controls nearly 20 this fleet is so massive that the company may have the percent of all generation capacity within ERCOT. Oncor, the ability to unilaterally impact prices — whether it intends regulated wires company, owns more than 119,000 miles to do so or not.9 If this fleet is sold in its entirety to a single of transmission and distribution lines. Its deregulated retail entity, then that market power could grow. This would be unit, TXU Energy, directly serves more than 1.7 million a step backwards for competition and could eventually residential customers.4 contribute to higher prices. By contrast, breaking up the Luminant fleet could lead to a more competitive market. The company now known as Energy Future Holdings was Luminant also is the state’s No. 1 lignite coal miner, with created in 2007 when a number of investors acquired the annual production of more than 30 million tons. former TXU Corp., the state’s largest electric company. This massive transaction was premised on an all-in bet Oncor, the regulated transmission and distribution utility on natural gas prices, which, in Texas, are closely linked overseen by the PUC, serves customers at more than 3 to wholesale electricity prices. million meters.10 The company is financially healthy, and it is important for ratepayers that it remains so. The buy- At the time of the acquisition, natural gas prices were near an out partners in 2007 agreed to a number of complicated all-time high. This made TXU’s generating plants extremely legal covenants intended to financially shield Oncor in profitable. Because of their certainty that those high prices the case of an EFH bankruptcy. Lawyers for EFH’s credi- would continue, the investors decided to leverage more tors may attempt to thwart those protections and access than $40 billion in debt for the takeover. They were like the utility’s assets. Oncor also could be sold as a unit to a homeowner plac­ing an all-in bet with proceeds from a another transmission and distribution company, such as second mortgage. But then the recession slowed industrial Sharyland Utilities, owned by members of the Ray Hunt production and new exploration techniques increased gas Family.11 Overseas investors already own a percentage of supplies. Natural­ gas prices fell, which led to a decline in EFH Oncor, and could attempt to acquire more. The impact of revenues. The debt payments became crushing. such a transaction remains unknown.

EFH has posted annual losses each year since 2008 — in- TXU Energy serves more than 1.7 million end-use custom- cluding a $3.4 billion loss in 2012.5 The company also faces ers, and is the state’s largest retail electric provider.12 As a lawsuits from creditors seeking $725 million in unpaid stand-alone unit, it remains profitable. EFH may continue interest payments.6 to operate TXU Energy under a managed bankruptcy or, alternatively, could sell it to a third party. In either case, Because of the state’s electric deregulation law, investors — service to residential consumers should continue without as opposed to ratepayers — should shoulder most of the interruption. Complications could arise because TXU Energy financial risk from an EFH collapse. However it is unlikely also serves as the default electric provider for customers that such a debt-heavy buyout would have occurred in the in a large swath of Texas. first place in the absence of deregulation. Warren Buffet, who invested $2 billion in EFH, called his own involvement a “major unforced error.”7 P3 • An Energy Future Holdings Bankruptcy?

Energy Future Holdings: A Timeline

2007 The TXU board agrees to sell the company to investors led by Kohlberg Kravis Roberts & Co. and Texas Pacific Group for about $32 billion and the assumption of about $13 billion in debt. The buyout closes in October. The company is renamed Energy Future Holdings.13

2008 Natural gas prices in July reach $13.58 per million British thermal units, the highest price since the buyout. By December natural gas was selling for less than half that much.14 This impacted EFH’s ability to pay off its newly acquired debt. The company reports a net loss of $8.9 billion for the fourth quarter.15

2009 Attempts to slash $2 billion from its debt meets with little success. EFH offers some bondholders 67 cents on the dollar, but few take the deal. In September, natural gas prices fall to $2.843 per million Btu, less than a fourth the price recorded a year earlier.16

2010 In July EFH exchanges bonds for between 72 and 79 cents on the dollar to cut debt by $900 million. In October, EFH reduces the value of the company on its balance sheet by $4 billion.

2012 Natural gas prices continue to fall, and hit $2.2 per million Btu in April, their lowest mark since the buyout.17 EFH reports its sixth consecutive quarter of declining revenues18 and announces it will terminate pensions for those working for competitive holdings.19 However, executives get millions of dollars in incentive bonuses, with chief executive John Young receiving $6 million.20

2013 EFH begins discussing a bankruptcy plan with some of its largest creditors that would result in most equity going to senior lenders.

Did you know?

In 2008, EFH sold 20 percent of Oncor to a group of foreign investors, including the Ontario pension fund in Canada and the investment arm of the Singapore government. The price tag was $1.3 billion.21 P4 • An Energy Future Holdings Bankruptcy?

End Notes

1 “KKR to Goldman Skirmish for Scraps as LBO Bankruptcy 11 “Sale of Oncor Might be Powerful Draw,” James Osborne, Looms,” Legal Monitor Worldwide, Oct. 21, 2013. Dallas Morning News, Mar. 4, 2014.

2 Id. 12 “Sale of Oncor Might Be Powerful Draw,” James Osborne, Dallas Morning News, Mar. 4, 2014. 3 “KKR’s $45 Billion 2007 LBO Energy Future Holdings May Now Be Close to Bankrutpcy,” Clive Minchom, Jewish Busi- 13 “It’s Buyout Completed, TXU goes Private under New ness News, Feb. 22, 2014. Name,” Associated Press, Oct. 11, 2007.

4 Energy Future Holdings press release, online at http:// 14 Monthly NYMEX Reports. bit.ly/1rorzkg 15 “Energy Future Holdings Reports Fourth Quarter and Full 5 “Energy Future Holdings Could Avoid Paying Taxes on Year 2009 Results,” Business Wire, Feb. 19, 2010. $23 Billion,” Nicholas Sakelaris, Dallas Business Journal, Apr. 3, 2013. 16 Monthly NYMEX Reports.

6 Id. 17 NYMEX Exchange.

7 Id. 18 “Dark Days for EFH Owners,” Elizabeth Souder, Dallas Morning News, May 27, 2012. 8 Luminant website, http://www.luminant.com/plants/ generation.aspx. 19 “Sorting Out All The Pieces,” Elizabeth Souder, Dallas Morning News, Oct. 7, 2012. 9 “PUC: North Texas Utility TXU May Be Too Dominant,” R.A. Dyer, Fort Worth Star-Telegram, Jan. 29, 2004. 20 Id.

10 Oncor website, http://www.oncor.com/EN/Pages/Who- 21 Energy Future Holdings press release, online at http:// is-Oncor.aspx. bit.ly/1rorzkg

About the Texas Coalition for Affordable Power

TCAP is a coalition of more than 165 cities and other political subdivisions that purchase electricity in the deregulated market for their own governmental use. Because high energy costs can impact municipal budgets and the ability to fund essential services, TCAP, as part of its mission, actively promotes affordable energy policies. High energy prices also place a burden on local businesses and home consumers.