Energy Future Holdings Corp., the Texas power producer taken private in 2007 in the largest leveraged buyout, sees earnings for its competitive power unit tumbling by a third during the next five years as hedges against natural gas prices expire.
The company formerly known as TXU Corp. predicts adjusted earnings before interest, taxes, depreciation and amortization for its Texas Competitive Electric Holdings unit will fall to $1.83 billion in 2017 from $2.75 billion this year, according to a filing (TXU:US) yesterday. Energy Future released the projections to creditors as part of confidential discussions for a proposed pre-packaged bankruptcy.
As the natural gas contracts run out next year, the unit holding the company’s Luminant power generation division risks running afoul of an agreement limiting how much debt it can hold, Andy DeVries, a New York-based analyst with CreditSights Inc., said yesterday. It appears that Dallas-based Energy Future is “going to restructure before the covenants trip” on $32 billion in debt, he said.
Texas’ largest electricity provider has struggled with debt since it was taken over in a $48 billion deal in 2007 led by KKR & Co., TPG Capital LP and Goldman Sachs Group Inc. The buyout, which left Energy Future with more than $40 billion in debt, was a gamble that gas prices would rise and give its coal-fired plants a competitive advantage. Instead, U.S. prices for the fuel fell to a 10-year low last year.
Energy Future’s gas contracts mitigate the effect falling prices have on electricity. The Texas Competitive unit said in February that its hedges against fluctuating gas prices will decrease to 41 percent of exposure by 2014, from 99 percent last year.
The 2013 hedges lock in gas at a weighted average price of $6.89 per million British thermal units, a 67 percent gain from the settlement price of $4.137 at yesterday in New York.
The hedging positions are expected to boost the unit’s adjusted Ebitda by $1.02 billion this year and $577 million next year, according to the company filing.
Energy Future sees wholesale power prices in its Texas market increasing to $43.85 a megawatt-hour this year from $34.28 as gas rises to $4.47 by 2017.
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