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Our Largest Electricity Generator Looks Like It's Preparing for Bankruptcy

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Market seers think Dallas-based Energy Future Holdings, which owns the state's biggest power generating assets, might be engaging in a little prebankruptcy housekeeping. The latest sign? It's repayment of an inter-company loan.

Energy Future isn't a single, vertically integrated giant like it was when it was known as TXU. It's broken up into holding companies. Texas Competitive Electric Holdings, for example, owns electricity retailer TXU Energy and Luminant, the power plant company. Unfortunately, Texas Competitive hasn't been healthy for a while now. Back in 2007, when Kohlberg Kravis Roberts and Goldman Sachs gobbled up TXU for $45 billion, the success of this gamble was predicated on high natural gas prices setting high electricity rates. Then the opposite of that happened, and those money-making coal-fired plants weren't earning nearly enough to pay off all that buy-out debt.

Debt raters like Moody's Investors Service have been saying for a while now that Energy Future is rearranging deck chairs. They can't keep losing $700 million a quarter forever. And so, analysts who spoke to Bloomberg on Thursday speculate Energy Future is preparing for the inevitable. Part of that preparation involves making sure the parent company doesn't owe its ailing subsidiary any money, which it did until recently, to the tune of $680 million. That would explain why Energy Future announced the issuance of $750 million in junk bonds last week to settle up that debt. See, the loan was secured by Oncor, Energy Future's power-line company and the bright spot in its quarterly reports. The last thing they want is the contagion of Texas Competitive's bankruptcy to infect Oncor and the parent company.

That's exactly what had everybody so worried about Oncor in the first place. Part of the deal when lawmakers let the TXU buyout go forward was that Oncor would remain independent, regulated and protected by a firewall from the rising or falling fortunes of the rest of the company. Oncor stays profitable no matter what, because we pay it a surcharge in every utility bill. When Energy Future started leaning on Oncor, not just for cash, but for its implicit value, its independence from its parent company got questioned by Moody's.

Settling any financial entanglements between Oncor, Energy Future and Texas Competitive can be read as a step to protect the power-line company from an impending bankruptcy. Through that lens, so too was a move to leave in place employee pensions at Oncor while terminating them within Texas Competitive. Something will probably happen relatively soon. Moody's is saying we can expect Energy Future to do something big in the next year or so. An analyst told Bloomberg that anything short of a Texas Competitive bankruptcy would be like "putting a Band-Aid on a heart attack."

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