EFH files for bankruptcy
Energy Future Holdings (EFH) announced on April 29 that it had filed for bankruptcy in a move that, while not unexpected, put a renewed spotlight on the importance of financial stability in the highly competitive Texas electricity marketplace.
The filing came after months of negotiations aimed at working out a plan to restructure Dallas-based EFH’s $49 million debt. Under the proposed agreement, Texas Competitive Electric Holdings – a subsidiary that includes the unregulated power generator Luminant Generation and retail provider TXU Energy – would be handed over to first-lien debt holders in return for the elimination of about $23 billion in debt.
EFH would still own Energy Future Intermediate Holding Co., the holding company for its subsidiaries, and maintain its 80 percent interest in Oncor Electric Delivery Co., the regulated transmission business, which wasn’t part of the agreement.
Additionally, according to the Wall Street Journal, EFH has been in discussions with bondholders who are owed $1.7 billion about converting their debt to ownership stakes in the holding company.
Although a spokesman for TXU Energy described the filing as a “balance sheet issue,” customers were unconvinced that EFH’s weakened financial position would have no adverse impacts. At the heart of their concern were fears that the company’s instability would affect rates and reliability.
“This is a deregulated situation,” Carol Biedrzycki, head of an Austin-based group that advocates for affordable energy, told the Houston Chronicle. “What happens to these customers’ contracts?”
That uncertainty was further reflected in comments by Bob Jackson, sate director of Texas AARP. “Bankruptcy may lead TXU to increase revenue wherever they can, including rates to retail electric customers,” he said.
And Geoffrey Gay, a lawyer who represents cities served by Oncor, added that there are fears Oncor’s service could become more expensive and less reliable if the parent company is split up in the bankruptcy process, the Chronicle reported.
While a potential deal has been in the works for some time, the bankruptcy filing was quickly mired in controversy.
The trustee for second-tier debt holders assailed the move, charging that the managers had “disabling conflicts of interests.” They asked a U.S. bankruptcy judge for permission to get documents from EFH and to question the managers under oath. As the Journal reported:
“(T)he trustee says investors in the debt issue were ‘shut out of restructuring discussions’ while allegedly conflicted senior management engaged with senior lenders in restructuring moves that were allegedly ‘purposefully designed to curry favor with their senior lenders and line their own pockets.’
“According to the trustee, Energy Future masked the magnitude of the effect a possible recovery in natural gas prices would have on the company’s value, in pursuit of a restructuring that ‘appears intended to allow the senior lenders and management to print cheap reorganized equity and wipe out billions in legitimate creditor claims.’
The trustee also sought to have the case moved from Delaware, where EFH filed, to Texas, citing “the interests of justice and/or for the convenience of the parties” who want the move. Energy Future said such a move was not necessary.
EFH was acquired in 2007 by private equity firms KKR & Co., TPG Capital Management Group, and Goldman Sachs Capital Partners in a record-breaking $45 billion deal. For the buyout to work, however, natural gas prices had to rise so EFH could charge more for electricity. But with the onset of the shale boom, supplies – not prices – increased, and prices plummeted.
As a result, the deal has since been routinely called a disaster, and EFH is reportedly the eighth-largest bankruptcy in history.
The company’s struggles demonstrate that in a retail electric marketplace as competitive as the one in Texas, financial stability continues to have a pivotal role to play in who customers choose as a provider.
The landscape is littered with “here today, gone tomorrow” REPs who enter the market without the fiscal strength needed to navigate the state’s competitive waters. As a result, they – like EFH – wind up in bankruptcy and their customers are cut adrift, often ending up with providers of last resort and higher rates.
The EFH bankruptcy put that concern in sharp focus, as customers will inevitably be asking whether they can have any confidence in a provider that’s in Chapter 11. If the numbers are any indication, Texans are already less than comfortable with that thought: Since 2008, when its parent sought to avoid a bankruptcy, TXU has lost about 400,000 customers. EFH has further projected that its retail sales could drop up to $165 million in 2014. These concerns – and uncertainty they create – can be mitigated in part by considering a provider’s financial strength when looking to either select or switch REPs. Confidence, as suggested above, is an essential benefit if working with sound, respectable providers – confidence that power will be delivered reliably and at a price that will not be affected by issues such as bankruptcy.
The absence of that kind of strength and stability should raise a red flag with any business looking for a trusted REP partner.