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Energy Future Bonds Drop After Report of Third-Quarter Loss

The bonds of Energy Future Holdings Corp., the Texas power company that was taken private in 2007 in the largest buyout in history, plunged after it announced a $407 million third-quarter loss.

The energy provider’s $744.3 million of 6.55 percent bonds due November 2034 fell 9.8 cents on the dollar to 38.3 cents at 2:30 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Sales at the closely held company fell 25 percent to $1.75 billion on low power prices and weaker demand due to milder summer weather, the Dallas-based company said in an Oct. 29 filing with the U.S. Securities and Exchange Commission. Chief Executive Officer John Young said in a conference call yesterday that continued low natural gas prices would “pose a significant challenge” to cash flow as hedges expire.

“The company’s capital structure is unsustainable and will likely see defaults within the next two years,” Peter Thornton, an analyst at high-yield researcher KDP Investment Advisors Inc., wrote in a note today. “We expect the company to continue to tap the high-yield market again in 2013, using the remaining value of its equity holdings in Oncor as collateral.”

Energy Future’s $2.18 billion of 10 percent, first-lien notes due December 2020 dropped 2.5 cents to 109.5 to yield 8.36 percent, Trace data show. The notes are secured by equity interest in Oncor Electric Delivery Co., Energy Future’s power-transmission unit, which has been profitable for 11 of the past 12 years, according to data compiled by Bloomberg.

Expiring Hedges

Hedges that are supporting profit by locking in natural gas prices expire by 2015, according to a July 31 regulatory filing. The hedges lock in natural gas at a weighted average price of $7.32 for 2012, compared with an average monthly forward natural gas price of about $2.96, according to an Oct. 30 earnings presentation. Electricity prices are linked to those for natural gas.

The company’s Texas Competitive Electric Holdings unit has 99 percent of its estimated natural gas price exposure hedged for 2012, according to the presentation. That hedge decreases to 87 percent in 2013 and 39 percent in 2014.

Energy Future, which was taken private by KKR & Co., TPG Capital and Goldman Sachs Capital Partners in 2007, has reported seven straight quarterly losses, Bloomberg data show.

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