The New Yorker: The Fracking Boom and the Fall of a Texas Utility

In 2007, a consortium of international private-equity firms engineered the largest leveraged buyout in history. Goldman Sachs, KKR & Co., TPG Capital, Lehman Brothers, and others paid more than eight billion dollars in cash, and incurred another thirty-six billion dollars in debt, to purchase TXU Corp., an electric-utility company that provided power to a quarter of Texas residents. They renamed the company Energy Future Holdings. Much like the home buyers who believed, in 2007, that house prices would continue to rise indefinitely, the private-equity firms assumed that the price of electricity, Energy Future’s main product, would keep increasing. But, a year later, the price of natural gas began to fall. The financial crisis had sapped demand, but, more important, thousands of new wells were being tapped using a new method of hydraulic fracturing, or fracking, a mining technology that uses liquid injected at high pressure to break apart rocks and extract gas and oil. The new approach created a glut in the natural-gas market, driving down energy prices.

By the middle of 2009, gas prices had dropped to a quarter of the peak level they had reached a year earlier. Energy Future’s profits plummeted and haven’t recovered, leaving the company unable to repay its billions of dollars in debt. Berkshire Hathaway, which had bought some of the debt, sold its investment in the company last year, at a loss of eight hundred and seventy-three million dollars. At the time, Warren Buffett, Berkshire’s C.E.O., wrote to the company’s shareholders, “Most of you have never heard of Energy Future Holdings. Consider yourselves lucky; I certainly wish I hadn’t.” On Wednesday, with loan-repayment deadlines looming, Energy Future filed for Chapter 11 protection in Wilmington, Delaware, hoping to erase about forty billion dollars in debt.

Energy Future remains one of the largest power companies in the United States; the company owns power plants, lines that distribute electricity in Texas, and a commercial energy retailer that sells power directly to consumers. It will continue to power Texas homes during its restructuring. Since 2012, the company’s lawyers have been negotiating a settlement with most of its creditors, and they downplayed the impact of the bankruptcy itself, telling the U.S. Bankruptcy Court in Wilmington on Thursday morning that its businesses are expected to emerge from the restructuring in about a year.

Still, the collapse has been remarkable to watch, not least because it represents such a big downfall for the private-equity firms involved in the 2007 buyout. The deal came five years after Texas deregulated its power market, for the first time opening the retail electricity business to private competition. Before deregulation, TXU had been the largest provider of electricity in the state, with a monopoly in North Texas. After deregulation, TXU faced competition, but the company still owned the infrastructure for delivering energy to consumers. (An entity called the Electric Reliability Council of Texas, or ERCOT, manages the deregulated market.) No matter who Texans paid for their electricity, TXU earned a cut by sending the current through its power lines.

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http://www.newyorker.com/online/blogs/currency/2014/05/the-fracking-boom-and-the-fall-of-energy-future.html