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A major credit-rating agency is expressing grave doubts about the ability of the state’s largest nonregulated power generator to pay off its debt.
Energy Future Holdings, the Dallas-based parent company of power generator Luminant, transmission company Oncor and retail electricity provider TXU Energy, has been downgraded to a CC rating by Fitch Ratings, a long-term credit rating agency.
A “CCC” rating means Fitch believes there is “a real possibility” that EFH will not be able to pay its debts. The “CC” rating it bestowed upon the company Tuesday, however, means that “default of some kind appears probable at some point in the future.” A spokesman for Energy Future declined to comment.
As detailed in a recent cover story, the $45 billion leveraged buyout of TXU by Kohlberg Kravis Roberts and Goldman Sachs buried the company in a mountain of merger debt. At the time, natural gas prices — which usually set the marginal rate of electricity in the most of Texas — were soaring, and TXU had a fleet of coal-fired power plants that could produce electricity for a fraction of what they could sell it for. Then the Barnett Shale got fracked and the gas market got glutted. Natural gas prices hit the floor and never really recovered. Nor did Energy Future’s profit margins — at least not enough to service all that merger debt. So they pushed that debt back. And back, taking advantage of robust credit markets to refinance.
Fitch isn’t convinced that a refi will be enough to stave off default, and seems to believe Energy Future will hit a brick wall soon. “The downgrade … is driven by a further sharp deterioration in the company’s business outlook over the last few months such that the current highly leveraged capital structure is no longer sustainable and some kind of default seems inevitable, in Fitch’s view.”
Part of the problem is that TXU Energy has lost retail customers to the competitive market. The rating agency sees liquidity problems past 2014. Energy Future is leveraged to the hilt. “Fitch’s forecasts include an increase in leverage from an already untenable level due to a need for higher borrowings to fund operations.”
The biggest kick in the rear comes from low electricity prices, which Fitch doesn’t see changing anytime soon. They’ve had a huge impact on the company’s valuation, which it estimates is about half of what KKR, Goldman and Warren Buffett paid for it.
