Forrest for the Trees

There’s a growing drumbeat that TXU, the Texas utility giant, may be in deep trouble. Seems that the Wall Street geniuses who took TXU private in a highly-leveraged $45 billion deal almost three years ago made a huge miscalculation about the company’s worth.

Here’s a recent story in the The Wall Street Journal:

It was the biggest leveraged buyout ever and one of the last hurrahs of this decade’s private-equity boom. Two years later, the former TXU, now Energy Future Holdings Corp., is struggling to pare down its debt, like so many other big, overleveraged companies that went private at the peak of the market.

And, like many other LBO’ed companies, this first attempt at restructuring will only nibble away at the problem and postpone the inevitable day of reckoning.

Ultimately, EFH and many other private-equity-backed companies likely will have to sell assets to rationalize their balance sheets before their debt matures.

What went wrong?

To understand the answer you need to know a little bit about how the deregulated Texas electricity market works. The market functions in a way that allows natural gas to set the price of power. When natural gas prices are high, nuclear and coal-fired power plants are extremely profitable. That’s why TXU, in its previous incarnation, was hellbent on building 11 new coal-fired power plants; at that time, coal plants looked like a mint.

The two private equity firms, KKR and Texas Pacific Group, essentially placed an enormous bet on natural gas prices remaining high. Whoops! Gas prices have tumbled and are expected to remain low.

EFH’s balance sheet wasn’t designed for this scenario. It currently has roughly $43 billion in debt. Based on first-half earnings before interest, taxes, depreciation and amortization of $2.3 billion, that equates to leverage of more than nine times. Worse yet, debt has crept up as EFH has husbanded cash by exercising its toggle rights and servicing some of its notes in kind.

Let’s not forget that many folks anticipated that something like this could happen. During the Public Utility Commission review of the buyout, consumer advocates and some large industrial power customers argued that the level of debt was unsustainable and could bring about the collapse of the state’s largest utility.

Yesterday, I called up Geoffrey Gay, an Austin utility attorney who represents cities in rate cases, to get his reaction.

“This was foreseeable,” Gay told me. “The buyout partners were putting a higher value on the company than the company officials themselves.”

As part of the buyout deal, the regulated portion of the company – Oncor, which oversees the electric grid – is supposed to be protected from the risky retail and power generation components of Energy Future Holdings.

Gay says that he doubts the parent company will file for bankruptcy. Still, consumer advocates worry that the equity firms could move to drain EFH of its assets, putting the electric system in danger.

“It’s clear that the wires company is the cash cow,” said Gay, “and it funnels money up to the company, its owners.” In a recent rate case, Gay said the PUC awarded Oncor suspiciously high rates, perhaps in a bid to prop up the parent company. 

“There’s part of me that believes that the financial loads of the parent were a motivating factor in Oncor getting as much relief as they did,” he said.

The silver lining, though, is that the breaking-up of EFH could reduce TXU’s outsized market power. Allegations of market manipulation have dogged the company for years.

Whatever happens I doubt the Wall Street players are going to go without a meal.

A recent New York Post story (“Private equity firms milk ailing buyout”) looked at the fees the attendant firms are paying themselves.

As part of the [debt] restructuring, KKR is seeking an exchange-offer agent fee, while TPG wants an advisory fee and Goldman is eyeing a restructuring fee. The payments, which total $13.5 million, are contingent on the restructuring, sources said.

However, many observers think EFH can ill afford to cough up even that amount of cash.

Nice work if you can get it.

On Nov. 3, voters–or at least the small number that make it to the polls–will choose whether to enshrine Texas’ populist open beaches law in the state Constitution.

Proposition 9, one of 11 proposed constitutional amendments on the ballot, would guarantee the public’s right to access and use Texas beaches from Sabine Pass to South Padre Island. Many developers, beachside homeowners, and private property rights activists have never liked the 50-year-old Texas Open Beaches Act, periodically challenging it at the Legislature and in court. A libertarian legal organization is the latest to bring suit against the General Land Office in an effort to gut the law.

Proponents of Prop 9 say the measure would elevate the public’s right to the beaches and make such assaults harder. “This is the next logical step to protect what we have,” says A.R. “Babe” Schwartz, a former state senator from Galveston who co-authored the Open Beaches Act. “It is an absolute protection; it’s a brick wall.”

One of the more popular notions currently circulating among global warming skeptics is that the Earth has entered a cooling phase. The “theory” is based on a dishonest and faulty reading of temperature data from the last decade. This week, the AP does a very thorough job debunking the ‘global cooling’ nonsense.

The story is a fantastic example of how journalists can use an empirical analysis to fact-check the climate denialists.

WASHINGTON — Have you heard that the world is now cooling instead of warming? You may have seen some news reports on the Internet or heard about it from a provocative new book.

Only one problem: It’s not true, according to an analysis of the numbers done by several independent statisticians for The Associated Press.

The case that the Earth might be cooling partly stems from recent weather. Last year was cooler than previous years. It’s been a while since the super-hot years of 1998 and 2005. So is this a longer climate trend or just weather’s normal ups and downs?

In a blind test, the AP gave temperature data to four independent statisticians and asked them to look for trends, without telling them what the numbers represented. The experts found no true temperature declines over time.

“If you look at the data and sort of cherry-pick a micro-trend within a bigger trend, that technique is particularly suspect,” said John Grego, a professor of statistics at the University of South Carolina.

[...]

Global warming skeptics base their claims on an unusually hot year in 1998. Since then, they say, temperatures have dropped — thus, a cooling trend. But it’s not that simple.

Since 1998, temperatures have dipped, soared, fallen again and are now rising once more. Records kept by the British meteorological office and satellite data used by climate skeptics still show 1998 as the hottest year. However, data from the National Oceanic and Atmospheric Administration and NASA show 2005 has topped 1998. Published peer-reviewed scientific research generally cites temperatures measured by ground sensors, which are from NOAA, NASA and the British, more than the satellite data.

The recent Internet chatter about cooling led NOAA’s climate data center to re-examine its temperature data. It found no cooling trend.

“The last 10 years are the warmest 10-year period of the modern record,” said NOAA climate monitoring chief Deke Arndt. “Even if you analyze the trend during that 10 years, the trend is actually positive, which means warming.”

What I especially like about this approach is that the reporter avoids politicizing the analysis by submitting “blind” data to the statisticians. That way, the analysts have only raw data to work with and no one can accuse them of reaching conclusions based on desired outcomes.

This is in marked contrast to the climate denialist camp: Their whole point is to “debunk” global warming; they’ll twist and distort information until they can get the conclusion they want.

This Saturday, Oct. 24, is International Day of Climate Action, a world-wide effort to get governments to take action on climate change. The day is being organized by 350.org, which takes its name from NASA scientist James Hansen’s contention that the earth’s systems will go haywire above an atmospheric carbon dioxide concentration of 350 parts per million.

Check out the map below for climate action events in towns and cities across Texas, including Marfa, Brenham, Austin, San Antonio, Houston, The Woodlands, Denton, Fort Worth, Dallas, and other locales.

View Actions at 350.org

“It’s interesting that you’re worried about what the lakes are going to look like down there and the pressure that you’re going to have to endure, and the front page of the paper showing what used to be lakes and are ultimately rivers now. I can certainly appreciate that.

“But, what about these small rural communities, where you drive down Main Street and the lights are all turned off, because there’s no economy left?” -Rice farmer Joe Crane, as quoted by News 8 Austin

“Let’s say you’re a marina owner, and you know rice farmers have two complete crops, and for them it’s business as usual. You might have some hard feelings, whether they’re reasonable or not. They haven’t suffered one single bit out of this.”-Cole Rowland, president of the Highland Lakes Group, as quoted in the Austin American-Statesman

These two recent quotes from individuals on opposite ends of the Colorado River Basin, each with a very different stake in the river, points to growing conflicts over water in Texas, between cities and rural areas, farmers and city-dwellers, people and wildlife, and among different regions of the state.

We keep hearing that a water crisis is imminent. Well, no, it’s here already.

A complex tug-of-war is well underway in the Colorado River Basin. The most visible division is between rice farmers along the coast, who require massive quantities of river water to flood their fields, and affluent homeowners around Lakes Travis and Buchanan who’ve watched the lake levels plummet.

Yesterday, the Lower Colorado River Authority was poised to make a decision on whether to declare the current drought an emergency topping the drought of record in the ’50s. If they had done so, it would have triggered an immediate halt to the release of water downstream to rice farms on the coast.

Instead, LCRA postponed the decision.

This drought, by some measures worse than the “drought of record” in the ’50s, is forcing water suppliers to make tough decisions now while giving us a taste of what lies ahead. Texas is booming but our supply of water is more or less fixed. In fact, if you believe a growing body of research that looks at regional impacts of climate change, we can expect the supply of surface water in this state to shrink considerably over the coming decades. “Drought” may become the new normal.

LCRA postponed their decision but the issue is not going away.

Despite the sustained rainfall in Central Texas, the LCRA-managed Highland Lakes, which provide drinking water for cities such as Austin, are still at a dismal 830,000 890,0000 acre-feet, about 40 42 percent capacity. The lakes have been lower before but not by much. [I wrote this post last night. Overnight rainfall has helped fill the lakes some, thus the revised figures.]

Click for larger image

And the long-term view is that rapid population growth in Central Texas will trump the rice farmers. The Statesman:

In the long run, the cities and industries along the river basin are likely to win out. Projections in the state water plan forecast that between 2010 and 2060, partly because of water-saving technology, water use for irrigation will drop from 589,705 acre-feet per year to 468,743. During the same period, municipal use is estimated to increase from 226,437 acre-feet to 442,110 acre-feet.

***

There’s another upper vs. lower river basin controversy erupting in East Texas too. The issue is whether to allocate more water rights to a lower Neches River water authority for a proposed Liquefied Natural Gas (LNG) plant on the coast. Interests on the upper Neches River are none too happy about the idea. From the Cherokeean Herald:

“Basically, the Lower Neches Valley Authority is trying to take our water,” said [Cherokee County Judge Chris] Davis. “They want our fresh drinking water to warm the liquefied natural gas, and then they are just going to dump it into the gulf. This is not a good use of our fresh water.”