Is TXU/Energy Futures Holdings in Default?
Tue March 1, 2011 12:38 pm

The Star-Telegram yesterday ran a Bloomberg wire service story that began with this paragraph:

A hedge fund claims that Dallas-based Energy Future Holdings, the former TXU Corp., is in default on a big loan, which the company denies.

How big is a "big" loan? Try $23.9 billion.

Here are the elements of the dispute:

1. Aurelius Capital Management charges that Texas Competitive Electric Holdings made improper loans to EFH. Texas Competitive Electric Holdings includes two EFH units, Luminant Generation and TXU Energy.

2. According to a filing by EFH with the Securities and Exchange Commission last week, the allegedly improper loans put EFH in default on the $23.9 billion loan.

3. Aurelius owns a very small portion of the debt, around $50 million, or 0.2%.

4. Aurelius's lawyers say the inter-company loans made to EFH by Texas Competitive Electric Holdings weren't arm's-length transactions, meaning they may not have been made in good faith. Aurelius wrote the primary lender, Citi, making the same allegation.

5. UPDATE: Citi convened a call of the lenders, who number "in the hundreds," according to EFH spokesperson Lisa Singleton. For Aurelius to prevail, it must persuade 50%+ of the lenders to agree with their position that the loans were not arm's length transactions.

* * * *

The EFH board includes some of the most recognizable names in Texas, including former Secretary of Commerce Don Evans; Ambassador Lyndon Olson; mega investor David Bonderman; and Rick Perry confidante and Plains Capital Bank chairman James Huffines, who, like Evans, is a former UT regents chairman. Former secretary of state James A. Baker III has served as advisory chairman.

EFH didn't need any more bad news. In the course of making calls about this story, I learned from a source familiar with the electric power business that EFH had lost $30 million in the recent rolling blackouts when it was forced to buy power the most expensive way, on the spot market. (As it turned out, the Morning News had previously published this number.)

There is no reason to believe at this time that the dispute could affect the Texas electric power market. However, when a provider's parent company isĀ  ssddled with $40 billion in debt and faces potential legal and regulatory action, the future is unclear, to put it mildly.

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