How Texans Could Be on the Hook if Energy Future Holdings Goes Bankrupt

Categories: Biz

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Flickr User wccnds
Dallas-based Energy Future Holdings, Texas' largest power generator and utility, is getting its books scrutinized by state mining regulators. The Railroad Commission of Texas is apparently worried that if the company goes bankrupt, which analysts expect it may, it could jeopardize more than a billion dollars in bonds the company put up as collateral toward the restoration of its strip coal mines.

In a December 2012 order to approve a $220 million bond for a new coal mine in East Texas, the Commission allowed EFH's Luminant Mining to use as collateral assets from its sister company, Luminant Generating. It's known as "self bonding," often used in Texas in place of an actual bond for solvent, financially robust companies in no danger of going bankrupt. Which is probably why the Commission placed extra conditions on Luminant Mining's self bond.

Reviewers couldn't help but notice the ubiquitous coverage of EFH's balance-sheet woes. Back in April, it was widely reported that EFH was convening with investors to discuss a restructuring proposal that could erase more than $30 billion from its $40 billion debt.

Because of that, the Commission is requiring the company to submit quarterly, unaudited financial reports from Luminant Generating. Beyond TXU, the Sierra Club's campaign to end the country's dependence on coal, believes the Commission has reason to place Luminant's books under a microscope.

"We're concerned that a company this large and going through bankruptcy has not set aside real cash bonds for more than a dozen coal mines in Texas," former regional EPA chief and Beyond TXU campaign director Al Armendariz tells Unfair Park. "We're concerned that through the bankruptcy process one or more mines might not be reclaimed."

Environmentalists and watchdog group Public Citizen are posing two main questions:

First, why doesn't EFH's $40 billion in debt figure anywhere into the calculation of assets and liabilities Luminant gave to regulators? The company told the Commission it has $3.8 billion in liquidity. That's exactly how much EFH will have to pay on October 2014, when analysts believe the company will run out of cash. Last year alone, EFH spent half of every dollar it earned on interest.

Second, they're wondering if the collateral for Luminant's mine reclamation isn't already promised to another party. Secured bondholders own $30 billion of Texas Competitive Energy Holdings, the umbrella company over Luminant Generating. If EFH goes bankrupt, they get the first bite out of the carcass by contract. By the time they're through, environmental watchdogs fear there may not be much left over for Texas. It's like the mortgage on your house. If you quit paying, the bank owns it. If the bond holders don't want the mines, taxpayers could end up on the hook for the cost of reclamation.

EFH, for its part, says it intends to satisfy its obligations to the state. "The environmentalists are, as usual, wrong," an EFH spokesman writes in an email. "Regardless of how we ultimately resolve our balance sheet issues, we will continue operating and providing Texas with power that is fueled by low-cost Texas lignite. We are not contemplating selling off our assets or walking away from them."

A spokesperson for the Commission says that once a company no longer meets financial requirements, it has 90 days to provide substitute bonding or it must cease mining operations immediately.

EFH notes that it spent $165 million in 2011 and 2012 on mine reclamation.


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14 comments
MikeWestEast
MikeWestEast

How are we on the hook?  The bonds are collateral.  We do not own them.  If something goes wrong with the bonds, they provide new ones or stop mining.  They still own them and are ultimately responsible for reclamation.  I do not think you can shed it in bankruptcy.

JohnNeelyBryan
JohnNeelyBryan

For the last several years the Observer has covered this story in some depth while the DMN has largely ignored it by reporting some financial results/actions but offering no analysis. EFH is going to go bankrupt, this is as big a local story as there is. They either lack the interest or capability to report this story.

oakclifftownie
oakclifftownie

Who says the land actually has to be reclaimed ? If its a law then change it .

Those holes will make great land fills for years to come .

brantley.hargrove1
brantley.hargrove1

@everlastingphelps Not sure the bankruptcy everyone's predicting has much to do with Obama. But consistently huge quarterly losses at a company that owes more than it's worth just might...

MikeWestEast
MikeWestEast

@JohnNeelyBryan Explain how if the holding company goes bankrupt, it would affect operating companies.  It won't.  Investors and bondholders get stabbed and probably a lot of HQ employees are gone.  No one cares about those people.  DMN has done stories, but answer is always the same.  If it does not affect keeping the lights on, few care.

RTGolden1
RTGolden1 topcommenter

@oakclifftownie @oakclifftownie You're thinking in gravel pit terms, not strip mining terms.  Strip mining is not a stationary endeavor.  The operation travels along the surface, following the vein of coal.  Reclamation is a time-consuming, expensive process, but a necessary one.  I'm not sure what the Texas standards are for reclamation, but the Federal standards are mediocre.  I think in Colorado, the mines where I grew up had to reclaim the land behind the operation to an equal or better level than it was before.  They were scrutinized for: native plant populations, native animal populations, water quality and soil quality.  The contour of the land had to be brought back as close as possible to original contour and drainage basins had to remain intact.

ThePosterFormerlyKnownasPaul
ThePosterFormerlyKnownasPaul topcommenter

@schermbeck @everlastingphelps  

There is not a "free market" in electrical generation and consumption, despite the oft repeated mantra of "choice".

Right now, this so called "free market is sending mixed and different signals to generators and consumers.  To the generators it is sending the signal that demand is low because prices are low.  To the consumer it is sending the signal that there is excess supply as prices are low.

The electric market in this state (actually only ERCOT) is based upon the traditional expectation that electricity is priced based on the highest cost producer.  That highest cost producer had been electricity produced by burning natural gas in either a steam plant or a gas turbine.  This cost of generation had been  about $80 per MWHr.  During the run up of natural gas prices, this climbed to the range of $100 to $150 per MWHr.

Now the coal/lignite and nuclear plants are producing power at a cost of arount $30 to $50 per MWHr and were selling at the higher rate.  The spread was fantastic as upwards of $120 per MWHr were flowing to the generators who were producing from coal/lignite and nuclear.

Who is the generator with the largest amount of coal and nuclear, you might ask?  None other than TXU, which is why the buyout occurred.


The spread between cost of gas fired and coal fired has shrunk considerably but the big problem is that the TXU buyout was based on wholesale power prices remaining about $100 per MWHr, or higher

This whole debacle just points out the underestimated outsized risks of leverage buyouts.

Unfortunately, neither KKR nor TPG will suffer any real damage.

Consumers will suffer the most as the collapse of EFH (a matter of when, not if) will be the excuse to add on a "capacity charge" to the electric bills.  Essentially, the consumer will be forced to be a guarantor of a generator's at risk capital.  Hardly a free market when an enterprise is able to foist its risks off to a 3rd party at no cost to them.

JohnNeelyBryan
JohnNeelyBryan

@MikeWestEast @JohnNeelyBryanVery true, we are in no danger of losing power. But I think the quality of life in North Texas is somewhat coupled to EFH/Luminant/Oncor in the long run.


The DFW area is growing, but instead of investing in the future EFH ownership is raiding the pantry and continuing to run on infrastructure built in the 70s & 80s. Based on my interaction with them they are an extremely short sighted company, and I think DFW & Texas will pay for that in time. That is the kind of story a good paper can bring to life.

oakclifftownie
oakclifftownie

@RTGolden1 @oakclifftownie But if the money isn't there then it sits as it is ...Shouldn't it ?  That would be unfortunate but what else can be done that won't cost the rest of us a bunch of money ?

RTGolden1
RTGolden1 topcommenter

@oakclifftownie The alternative to reclamation is not just ugly landscape.  It's erosion of topsoil, degradation of water quality, shifting of natural drainage patterns, possible disruption of aquifer recharge and the loss of arable and grazing land.  Add up the eventual cost of all this, and reclamation becomes a bargain at twice the cost.

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