Corporate News: How Shale Boom Killed TXU
When electricity deregulation rolled out in Texas, private-equity shops were eager to get their hands on old-guard utilities suddenly capable of generating big returns.</br></br>It looked like nothing but upside, but the $32 billion buyout of TXU Corp. was "based on assumptions that didn't pan out," said Shalini Mahajan, credit analyst for Fitch Ratings who covers the company, now known as Energy Future Holdings Corp.</br></br>The deal closed on Oct. 10, 2007, the day before the Dow Jones Industrial Average hit its prerecession peak of 14,164. Not only did the buyers pay too much for the utility, they financed most of the deal with debt, creating an enormous repayment burden. They also managed to miss the change in U.S. energy markets.</br></br>At the time of the buyout, the investors assumed electricity prices in Texas, an electrical island -- it has its own grid -- that can't import much power, would stay high for years to come. Before the recession, power prices in Texas were inflated because much of the state's electricity generation came from burning natural gas, an expensive fuel at the time.</br></br>TXU was uniquely positioned to profit from high electricity prices because it made most of its electricity with coal or uranium, which were cheaper than natural gas. So it was able to collect prices for its electricity that were pegged to gas prices even though its actual costs were much lower.