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Big Texas Utility Files for Bankruptcy

17 points by iamsalman 12y ago

Gravityloss 12y ago
The article wastes a lot of words but fails to explain the mechanism why low natural gas prices are a problem for this company. It just talks about money and equity. What an odd way of looking at things.
- uncoder0 12y ago
  The article is from Andrew Ross Sorkin's DealB%k section of the nytimes. Article Category: PRIVATE EQUITY | RESTRUCTURING & BANKRUPTCY The discussion seems appropriate for the target audience.
- antr 12y ago
  Take-or-Pay gas contracts and wrong gas hedges can put you in the red. As an example, many European energy players during '10-13 struggled financially because take-or-pay + high agreed gas prices (while 50% cheaper on spot) coincided with a dip in demand, a double whammy for any utility. Note how on the Energy Future Holdings situation, it's the trading/generation business that suffers i.e. EFH. The distribution business (i.e. Oncor), which was part of the original TXU acquisition was spun off as an independent, more resilient business (due to the regulated nature of income). Personally, KKR/TPG/GS is to blame big time for this - the acquisition financing has killed the company. They over-leveraged a highly volatile business (volatility in commodity prices + demand volatility), and this acquisition raised many eyebrows in its day.
- refurb 12y ago
  I'm assuming much of the electricity generated is from natural gas. Natural gas prices fall, electrical prices fall, all those estimates of fat revenues to cover debt payments fail to materialize.
- stonemetal 12y ago
  Since they are in an unregulated commodity profit margins are thin. This leads to a "paradox"(in the sense of the birthday paradox not a real paradox): when costs fall profits shrink, i. e. 1% of 1000 is larger than 1% of 100. Therefore if you have a huge mountain of debt that other competitors in your space don't have, plunging costs can be deadly as either your profits dry up chasing the market or all your customers leave because you are too expensive.
coldcode 12y ago
I get my energy from this company. I wonder how that will affect me. This goes to show you what a colossal ####up leveraged buyouts often are. My employer was worth 4B and had 1B in debt when it was LBO'd seven years ago. Now it is worth 4B and has 3.6B in debt. What a waste.
- GFK_of_xmaspast 12y ago
  Sounds like it's working as intended.
- deleted 12y ago
  [deleted]
- arbuge 12y ago
  Quite so. It always struck me that bankrupting an otherwise perfectly sound company (with all the attached negative consequences for customers and employees) is an inevitable risk of highly leveraged LBOs yet there seems to be little regulation/oversight in this space. Most people agree that capitalism and the free market can be taken too far - it's why the government regulates monopolies and big banks for instance - so why not regulate LBOs?
  - nickff 12y ago
    I have three questions for anyone who wishes to regulate LBOs (or most other things): 1) What are the objectives of the regulation(s)? 2) How will these objectives be achieved (and what is the failure criteria for the regulator)? 3) Does the proposed regulator have a proven track record, or a system which is likely to produce success?
  - hga 12y ago
    I'll add some more to nickff's comments: LBOs reallocates capital; a liquid capital market is thought to be a good thing. Our tax system massively favors capital obtained by debt. For all forms of capital you pay something. It gets complicated in our favorite situation where future growth prospects result in a rising stock price, but stock buybacks are taxed once (they come from profit), dividends are notoriously taxed twice (they're shareholder income), but the interest payed on debt is deducted as a cost of doing business. Before adding another regulatory epicycle to a system that's choking to death on them, perhaps consider reforming this perverse incentive?
not_paul_graham 12y ago
Energy Future Holdings pretty much demonstrates what might be wrong with private equity. All players, namely Goldman Sachs, KKR and TPG pretty much recouped their investments in the company so at least they broke even. The suckers might be the folks losing jobs for these companies to come out of bankruptcy. Also a lot of times PE firms start buying the debt when the company is doomed to fail and trading at a discount to actual value and they have another go at the company post bankruptcy restructuring.
- wsh91 12y ago
  What you contend in paragraph two seems to explicitly contradicted by the article: "This is not the ending that the Wall Street private equity firms, including Kohlberg Kravis Roberts, TPG Capital and the private equity arm of Goldman Sachs, envisioned in 2007, when they acquired the TXU Corporation in a colossal $45 billion deal. Their investments are expected to be all but be wiped out in the bankruptcy." Did you mean something different?
endersshadow 12y ago
What's even more worrisome is that summer is coming, and that usually means rolling blackouts. I wonder how this will affect all of their customers. I know companies like Green Mountain and others lease from Oncor, and put their power back into the grid elsewhere. Does anybody understand the electricity/utility business enough to explain how this will affect Texans? I also wonder how Texas's emerging reliance on wind power affected this, too. It may be a very good thing, as Texas has a very high percentage of power coming from wind.
- tvjunky 12y ago
  This will certainly have no impact on power generation in TX. TXU transitioned all of it's generation / distribution to Luminant / Oncor as part of the buyout. Since TX is deregulated, TXU was a retailer of electricity. I would imagine this will boost sales for the many competitors that have sprung up in recent years.
  - endersshadow 12y ago
    In the article, it mentioned that Oncor was Energy Future's electricity arm, and that it would "probably be split" from its power-generation business, hence my question. Is Oncor not part of Energy Future Holdings?
    - tvjunky 12y ago
      To my knowledge Oncor is not part of EFH. Though I could imagine they were left with some kind of stake after the split. More specifically though, Oncor is only the delivery side. Basically meaning, meters and maintenance. Retail providers contact Oncor to have service started. Oncor then send back usage data which the retail side use to bill the customer. If there is a problem, say a line down, Oncor will dispatch the technician.
      - vonmoltke 12y ago
        EFH has a partial interest in Oncor.
wehadfun 12y ago
Well this does not sounds as bad as the last Texas energy company that filed for bankruptcy. http://en.wikipedia.org/wiki/Enron http://en.wikipedia.org/wiki/Enron

17 points by iamsalman 12y ago

The article wastes a lot of words but fails to explain the mechanism why low natural gas prices are a problem for this company. It just talks about money and equity. What an odd way of looking at things.

uncoder0 12y ago
The article is from Andrew Ross Sorkin's DealB%k section of the nytimes. Article Category: PRIVATE EQUITY | RESTRUCTURING & BANKRUPTCY The discussion seems appropriate for the target audience.
antr 12y ago
Take-or-Pay gas contracts and wrong gas hedges can put you in the red. As an example, many European energy players during '10-13 struggled financially because take-or-pay + high agreed gas prices (while 50% cheaper on spot) coincided with a dip in demand, a double whammy for any utility. Note how on the Energy Future Holdings situation, it's the trading/generation business that suffers i.e. EFH. The distribution business (i.e. Oncor), which was part of the original TXU acquisition was spun off as an independent, more resilient business (due to the regulated nature of income). Personally, KKR/TPG/GS is to blame big time for this - the acquisition financing has killed the company. They over-leveraged a highly volatile business (volatility in commodity prices + demand volatility), and this acquisition raised many eyebrows in its day.
refurb 12y ago
I'm assuming much of the electricity generated is from natural gas. Natural gas prices fall, electrical prices fall, all those estimates of fat revenues to cover debt payments fail to materialize.
stonemetal 12y ago
Since they are in an unregulated commodity profit margins are thin. This leads to a "paradox"(in the sense of the birthday paradox not a real paradox): when costs fall profits shrink, i. e. 1% of 1000 is larger than 1% of 100. Therefore if you have a huge mountain of debt that other competitors in your space don't have, plunging costs can be deadly as either your profits dry up chasing the market or all your customers leave because you are too expensive.

coldcode 12y ago

I get my energy from this company. I wonder how that will affect me. This goes to show you what a colossal ####up leveraged buyouts often are. My employer was worth 4B and had 1B in debt when it was LBO'd seven years ago. Now it is worth 4B and has 3.6B in debt. What a waste.

GFK_of_xmaspast 12y ago
Sounds like it's working as intended.
deleted 12y ago
[deleted]
arbuge 12y ago
Quite so. It always struck me that bankrupting an otherwise perfectly sound company (with all the attached negative consequences for customers and employees) is an inevitable risk of highly leveraged LBOs yet there seems to be little regulation/oversight in this space. Most people agree that capitalism and the free market can be taken too far - it's why the government regulates monopolies and big banks for instance - so why not regulate LBOs?
- nickff 12y ago
  I have three questions for anyone who wishes to regulate LBOs (or most other things): 1) What are the objectives of the regulation(s)? 2) How will these objectives be achieved (and what is the failure criteria for the regulator)? 3) Does the proposed regulator have a proven track record, or a system which is likely to produce success?
- hga 12y ago
  I'll add some more to nickff's comments: LBOs reallocates capital; a liquid capital market is thought to be a good thing. Our tax system massively favors capital obtained by debt. For all forms of capital you pay something. It gets complicated in our favorite situation where future growth prospects result in a rising stock price, but stock buybacks are taxed once (they come from profit), dividends are notoriously taxed twice (they're shareholder income), but the interest payed on debt is deducted as a cost of doing business. Before adding another regulatory epicycle to a system that's choking to death on them, perhaps consider reforming this perverse incentive?

not_paul_graham 12y ago

Energy Future Holdings pretty much demonstrates what might be wrong with private equity. All players, namely Goldman Sachs, KKR and TPG pretty much recouped their investments in the company so at least they broke even. The suckers might be the folks losing jobs for these companies to come out of bankruptcy. Also a lot of times PE firms start buying the debt when the company is doomed to fail and trading at a discount to actual value and they have another go at the company post bankruptcy restructuring.

wsh91 12y ago
What you contend in paragraph two seems to explicitly contradicted by the article: "This is not the ending that the Wall Street private equity firms, including Kohlberg Kravis Roberts, TPG Capital and the private equity arm of Goldman Sachs, envisioned in 2007, when they acquired the TXU Corporation in a colossal $45 billion deal. Their investments are expected to be all but be wiped out in the bankruptcy." Did you mean something different?

endersshadow 12y ago

What's even more worrisome is that summer is coming, and that usually means rolling blackouts. I wonder how this will affect all of their customers. I know companies like Green Mountain and others lease from Oncor, and put their power back into the grid elsewhere. Does anybody understand the electricity/utility business enough to explain how this will affect Texans? I also wonder how Texas's emerging reliance on wind power affected this, too. It may be a very good thing, as Texas has a very high percentage of power coming from wind.

tvjunky 12y ago
This will certainly have no impact on power generation in TX. TXU transitioned all of it's generation / distribution to Luminant / Oncor as part of the buyout. Since TX is deregulated, TXU was a retailer of electricity. I would imagine this will boost sales for the many competitors that have sprung up in recent years.
- endersshadow 12y ago
  In the article, it mentioned that Oncor was Energy Future's electricity arm, and that it would "probably be split" from its power-generation business, hence my question. Is Oncor not part of Energy Future Holdings?
  - tvjunky 12y ago
    To my knowledge Oncor is not part of EFH. Though I could imagine they were left with some kind of stake after the split. More specifically though, Oncor is only the delivery side. Basically meaning, meters and maintenance. Retail providers contact Oncor to have service started. Oncor then send back usage data which the retail side use to bill the customer. If there is a problem, say a line down, Oncor will dispatch the technician.
    - vonmoltke 12y ago
      EFH has a partial interest in Oncor.

wehadfun 12y ago

Well this does not sounds as bad as the last Texas energy company that filed for bankruptcy. http://en.wikipedia.org/wiki/Enron http://en.wikipedia.org/wiki/Enron