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Watchdog: Energy Future Holdings Bankruptcy Could Place Texas Taxpayers on the Hook

With Dallas-based Energy Future Holdings' bankruptcy possibly approaching as soon as the end of this month, Public Citizen warns that if the giant electric utility's assets are broken up, Texas taxpayers may end up paying to reclaim its coal mines.

As we've reported before, the Sierra Club's Beyond TXU campaign claimed the bond guaranteeing reclamation of EFH subsidiary Luminant's vast strip coal mines doesn't pass the smell test. Luminant Mining posted what's known as a "self bond," backed by the assets of its sister company, Luminant Generating. To qualify for a self bond, the Railroad Commission of Texas requires that the collateral company be essentially solvent. But it's been no secret that its parent company, EFH, has struggled mightily. That's exactly why the Railroad Commission now requires them to submit quarterly financial reports, spurred by a 2012 story in The Dallas Morning News about an impending bankruptcy.

Public Citizen and Sierra Club commissioned a report that digs deeper into EFH's financial statements. Authored by Tom Sanzillo, director of finance for the Institute for Energy Economics and Financial Analysis and former acting comptroller for New York state, it tackles the essential question: Are the assets pledged by Luminant to guarantee the reclamation of Texas strip mines already pledged to someone else?

Sanzillo believes the answer may be "yes."

Luminant claims $17.5 billion in assets -- more than plenty to guarantee the $1 billion cumulative cost of reclaiming its strip mines. However, its parent company, EFH, lists Luminant's assets as a significant portion of EFH's $37 billion in total assets. Meanwhile, EFH has $45 billion in liabilities. How do they pay for them? Its corporate structure is really convoluted, but its electricity generation and sales arm is where much of the debt burden rests. Its senior secured creditors are promised an "unconditional" guarantee that their investment is secured by "substantially all of our current and future tangible and intangible assets," financial documents say.

Sanzillo believes those are the very assets also promised to Texas should Luminant fail to meet its reclamation obligations.

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How did it happen? The report indicates that, at least on its balance sheet, Luminant doesn't carry any of the $29 billion in debt it's guaranteeing for EFH. It's called "off-balance sheet" liability. There's nothing illegal about it, but it could make asset and liability calculations difficult for Railroad Commission staff processing its self bond.

In sum, "the fundamental problem is that there does not appear to be any unencumbered capital obligated to the state of Texas to cover the costs of mining reclamation at the Luminant Mining sites, should EFH or TCEH undergo a bankruptcy that results in the assignment of Luminant Generation assets to new owners. Such a bankruptcy could result in the abandonment of one or more mining sites, with reclamation costs being uncovered, in direct variance with the core intent of (Surface Mining Control and Reclamation Act) and state regulations."

Luminant, for its part, says any EFH bankruptcy wouldn't effect the operation structure of the company. "This 'report' today is based on speculation and what-if theories," a spokesman said in an emailed statement to Unfair Park. "We have no plans to shut down plants or mines in the event of a financial restructuring. Importantly, any restructuring would be a financial, not an operational, restructuring.

"Finally, we are in full compliance with the Railroad Commission's bonding requirements."

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