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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 eq

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 13y 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 13y 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 13y 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 13y 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.

uncoder0 13y 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 13y 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 13y 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 13y 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.