DMN has an article today about how EFH did this huge leveraged buyout of TXU (now Luminant) and the economy hasn't done them good. I love this paragraph.
Buyout barons Kohlberg Kravis Roberts & Co., TPG and the private equity arm of Goldman Sachs Group might ultimately turn a profit, but at the moment, they are as upside down on this deal as a two-bit Las Vegas condo owner.
Yeah. Two-Bit Las Vegas Condo Owner.
What happened? Natural gas prices went lower, including the drilling from the Barnett Shale. What does Moody's investors service think of this?
"Moody's continues to believe EFH's longer-term fundamentals remain weak and that its business plan appears unsustainable, given current commodity price outlooks," the ratings agency said.
So you have a few fabulously wealthy guys, KKR, who hoped to buy out TXU in the LARGED leveraged buyout yet, based on being able to make a profit and turn the company around for a sale in an upcoming year. Did that happen? Well,... No.
EFH's long-term debt increased from $10.2 billion to $36.9 billion.
To put that into perspective, before the 2007 buyout, TXU paid $1.51 billion in interest expense on its debt, according to an analyst. Since then, the company said, it forked out $4.9 billion in interest payments in 2008 and $2.9 billion in 2009....
....early last year, EFH accountants reduced the value of the company by $8.9 billion. That charge-off shouldn't really matter to the private equity owners – unless and until they try to sell the company – but it does put a number on just how bad this investment has been so far.
"This deal doesn't look so smart anymore," Gale said in a recent interview. "They have a debt repayment model built on higher prices for natural gas, and they are not going to get that higher price in the next two years."
What EFH had done was to buy some security, hedges (sounds like insurance) to go with the deal. but those hedges start expiring in a couple or years. THEN, EFH HAS TO PAY BACK THE MONEY, a small matter of 20 BILLION DOLLARS. That debt is secured by.. Luminant.
This debt is secured by EFH's Luminant power generation segment, which is perhaps its most important business segment. The distribution part of the company, Oncor, is regulated by the Public Utility Commission of Texas and is not on the hook for the debt. Luminant is not regulated.
EFH is also ..
.... considering expanding the Comanche Peak nuclear plant.
"Let me stress that the company continues to perform operationally well and generate positive cash flow," said EFH's Singleton.
Right. And that's where YOU come in, dear taxpayer, because you are the sucker that would guarantee a government backed loan for EFH/Luminant to build the two new reactors. A loan, mind you, that even the financial and investment communities don't recommend their investors go for because it's a poor risk.
How does it feel to be potentially supporting a Welfare Queen?
Could they possibly sell off parts of the company in order to get their debt down? Well, yes, they COULD with Oncor. But not with Luminant, because they are using that was collaterol.
My family was raised Southern Baptists, and we didn't believe in gambling. Guess what, I still don't. If KKR wanted to take a risk on making buttloads of money from their investment, fine and dandy and they should be prepared to take the risk of a LOSS now that it Ain't Working So Well. But we taxpayer should insist that the burden of their failure not be put on us.
Oh, and one more note on that article. Ther'es a strong stench of "Too Big To Fail" in that one.
Its power plants won't stop running, Hempstead said. They're too important for the North Texas power grid.
Right. That's the Corporate Welfare Way. How about we all figure out how to do neighborhood grids based on solar and wind and see how that works out? It is a MYTH that people cannot get off the grid.
P.S. As I was reading this, I saw that Oncor is spending MILLION BUCKS in Dallas on recreation centers. So, on the one hand you have KKR that is in dire straits, the investment community is telling them to dump some debt and they're paying a million bucks out????? Couldn't that million bucks be used to help pay down their debt? IF IT WERE YOU AND ME and we were badly in debt, would we go spend our money on Bermuda vacays (well, maybe you would , but you would be a fiscal idiot). And that's how THIS looks, except perhaps it a Million Dollar way to pander to the Mayor of Dallas.