Energy Future Holdings Loses Billions by Playing It Safe in the Natural Gas Market

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Researched by Industrial Info Resources (Sugar Land, Texas)--Energy Future Holdings (EFH) (Dallas, Texas), formerly TXU Corporation, released its second-quarter earnings report for 2008 on August 19. The report covers both the three-month and six-month periods ending June 30, 2008. EFH was formed last year and consists of three subsidiaries: TXU Energy, Oncor and Luminant. Oncor and TXU are both energy distributors, delivering electrical power to a combined 9.5 million customers in Texas. Luminant is a power provider with 19 operational power plants providing more than 18,300 megawatts (MW) of power generation.

The company posted net income losses of $3.33 billion for the quarter and losses of $4.6 billion for the first six months of 2008. These losses, however, are primarily due to EFH's long-term hedging strategies in the natural gas market. The company is engaged in a natural-gas hedging program from 2008 to 2014 in order to help maintain and regulate cash flow and stabilize electricity prices in the volatile power market. EFH estimates that it has already hedged 97% of its total natural gas position for 2009 and 96% for 2010. The company expects to continue this hedging program on a five- to six-year basis. Because of price variability in this quarter, mark-to-market losses, mostly from the hedging program, accounted for over $3 billion of the company's recorded losses. EFH estimates that a $1 change in price per million British thermal units of natural gas would cause a mark-to-market gain or loss of $2.4 billion for the company.

EFH's power-generating subsidiary, Luminant, had mixed reports regarding power generation. John Young, President and CEO of EFH, said in a conference call regarding the earnings report that "Luminant continued its ongoing focus on productivity improvements." Luminant is currently constructing a coal-fired generating plant in Robertson County that will add 1,600 MW of capacity. An additional coal-fired unit at its Sandow plant in Milam County will add another 600 MW. On a year-to-date basis, nuclear generation was up 10%, but coal-based capacity was down 3%, primarily because of unplanned outages.

TXU's per-capita revenues were also down. As part of the formation of EFH, the company was required to provide a 15% discount to over 1 million existing TXU customers. This discount, in addition to increased power transport congestion and higher commodity prices, helped to decrease year-to-date annual residential revenues from $139 per megawatt-hour (MWh) in 2007 to $130.8 per MWh in 2008, a decrease of 6%. On a more positive note, TXU's customer base continues to grow, increasing 4% from June 30, 2007.

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