Energy Insider Blog


Posted by Dennis Vegas on Mar 18, 2013 12:37:00 PM


IN 2007, the largest leveraged buy-out in history, at least to that point, occurred in a state where everything is bigger—Texas.  The acquisition of TXU Energy, Oncor (the transmission and distribution company for North and parts of West Texas), and Luminant (a generation company holding the assets of the former TXU), by Wall Street firms Goldman Sachs, Kohlberg Kravis Roberts (KKR), and TPG Capital. The company was renamed Energy Futures Holding, or EFH, and the deal was done at a record cost of $48 billion.  At the time, natural gas prices were spiking and forecasters were calling for natural gas prices to continue to rise.  However, this rosy natural gas picture, at least from a supplier’s side, fractured in to a million pieces as fracking technology led to a boom in natural gas production (For more on Fracking, click and put pressure on electricity prices in Texas.  While this has generally been a boon for customers, it could drive parent company EFH to a “bankruptcy event” causing it to restructure its debt within the next 12-18 months, perhaps through Chapter 11.

Will bankruptcy of EFH impact customers of TXU Energy?
How such an event impacts an end use customer depends on the specific language in the energy supply contract.  Generally retail energy contracts treat a bankruptcy event by either party as an event of default.  To preserve and maximize the value of the TXU Energy brand post-bankruptcy, TXU Energy should  try to avoid breaching retail supply contracts.  Cancelling contracts through bankruptcy would significantly damage their reputation, significantly lower the value of their brand, and compromise their ability to successfully emerge from bankruptcy. Contact your energy advisor to review your electricity agreement, so you can better understand your options in the event of a default.

Would bankruptcy or restructuring of EFH lead to less reliable service from Oncor?
The short answer is “no”.  As part of the approval of the takeover of Oncor by EFH, the PUCT required a “ring-fence” around Oncor, meaning while it was owned by the same parent as TXU Energy and Lumuinant, it had to be treated as a separate entity.  Therefore, any bankruptcy proceeding contemplated by EFH would likely not involve Oncor nor impact the reliability of service for Oncor’s customers.  Equally important, a Chapter 11 filing by EFH would not impact the ability of Oncor to maintain and upgrade its facilities.  Currently, Oncor is investing in infrastructure to alleviate congestion in the West Zone of ERCOT (For more on West Zone congestion, click)
 as well as building new infrastructure as part of the Competitive Renewable Energy Zone (CREZ) project.

What is the impact of a restructuring on Luminant?
The more interesting question is what would happen to Luminant in a Chapter 11 proceeding.  As the owner and operator of a significant generation fleet in the North Texas area, if these plants were to be shut down because they are not economical, this could create reliability problems because there would be insufficient generation to meet the energy needs in North Texas.  This could force ERCOT to write premium priced contracts with these generators, known as “Reliability Must Run”, or “RMR” contracts to keep these units operating to maintain grid reliability.  If this happens, prices in the North Texas zone would increase as these RMR contracts would become part of the energy price.  However, a bankruptcy filing is unlikely to negatively impact the reliability in the North Zone.  For instance, Dynegy, a major independent power producer in Texas filed for bankruptcy, yet its plants continued to provide energy to power the needs of Texas.

There is a real probability that Energy Future Holdings, the parent company of TXU Energy, Oncor and Luminant will seek to restructure its debt within the next 12-18 months. The impact to commercial and industrial customers served by TXU might be minimal as TXU will not want to breach its contracts and tarnish its reputation; however, end users should proactively evaluate their options in the event of a default.  In addition, reliability of delivery service from Oncor should not be impacted as Oncor would likely not be part of any Chapter 11 proceeding.  Finally, the area where a reorganization would likely have the most impact is on the wholesale market in North Texas.  The potential use of RMR contracts to ensure sufficient generation capacity could lead to higher prices in the North Zone.  Acclaim will continue to monitor developments with EFH and their potential impacts on electricity markets. 

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Topics: ERCOT, energy risk management, energy management consulting, energy procurement, energy reliability


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