Is Energy Future Holdings on its last leg?
That was the question posed recently by The New York Times, which pointed out in a that EFH’s acquisition of the former TXU Corp. has turned sour for investors. EFH”s investment partners acquired the energy giant in 2007 for $45 billion — most of which was borrowed money.
And now EFH is groaning under the strain. As an analyst told the Times, “it seems to us that they’re effectively borrowing more now to increase cash and be able to pay interest in the future — not a good long-term strategy.” Said another: “The game may not be over just yet, but the prospects don’t look so good.”
Consumer advocates and other observers had expressed alarm about the buyout when the equity partners first proposed it in 2007. The Dallas Morning News also concluded in a report that year that “the buyout of TXU provides no inherent benefits to the customer.” State Sen. Troy Fraser proposed legislation that would have granted the Public Utility Commission authority to ensure the transaction was in the public interest.
But Fraser’s bill failed after TXU and its buyout partners spent a reported $6 million for lobbyists, $11 million for advertising and $200,000 for legislative gifts. That was about twice what TXU had said it planned to spend before the proposed transaction.
Why would investors agree to pile up so much debt? Part of the reason is that TXU, buoyed by high electricity prices, was making tons of money. The buyout partners bet that the gravy train would continue, giving them the needed margins to make their debt payments. But energy prices in Texas are linked to natural gas prices, and when the cost of natural gas began plummeting in late 2008, this new mountain of debt became crushing.
As James Hempstead, an analyst for Moody’s Investors Service, told The New York Times: “Before the leveraged buyout, this was a highly profitable utility.”
You can read more about the 2007 legislative session and the TXU buyout in a new report from the Texas Coalition for Affordable Power. Here’s a link to the appropriate chapter. And just below I’ve included a bit of information about TCAP, which produces original policy research about the Texas market.