TXU Bankruptcy Potential Has Rivals ‘Licking Their Chops’

Energy Future Holdings Corp.’s bankruptcy will leave 1.7 million retail electricity customers ripe for poaching in a state that consumes the most power in the U.S.

The Chapter 11 filing of Texas’ largest retail power supplier has competitors “licking their chops,” said Rob Snyder, co-founder and chairman of Dallas-based electricity retailer Stream Energy. “Retailers in Texas will be asking: Do you feel comfortable with your electricity provider being in bankruptcy?”

Losing customers would drain value from TXU Energy, Energy Future’s biggest revenue-generating unit, representing one of the main risks for creditors if there is a prolonged reorganization. TXU has lost about 400,000 customers since 2008 as its parent has sought to ward off a bankruptcy.

The retail unit may lose more subscribers “if a lengthy and protracted bankruptcy plays out in the media,” Jim Hempstead, an analyst at Moody’s Investors Service, said in a March interview.

TXU Energy’s business operations will not be affected by the restructuring, Energy Future Chief Executive Officer John Young said in a statement today. The Public Utility Commission of Texas said today it will protect TXU Energy customer contracts, and the retailer will continue operating.

The highly competitive retail market in the state, which has allowed customers of most investor-owned utilities to choose their supplier since 2002, has 225 entities jockeying to serve 11.1 million retail customers. Texas is the largest power consumer and producer in the U.S., according to the Energy Information Administration.

Sales Decline

Energy Future’s own projections suggest retail sales may fall as much as $165 million this year, according to a filing today. Declines will come as customers choose other suppliers or get discounts to stay, said Julien Dumoulin-Smith, a New York-based analyst for UBS AG. The estimate also includes weather effects and wholesale power costs, said Michael Patterson, a spokesman for the unit.

“All retail electric providers in Texas’ highly-competitive market face the same wholesale and retail challenges,” Patterson said. “There is no basis to assume that TXU Energy customers will switch away.”

Among the companies that may gain are smaller providers such as closely held Stream Energy and Source Power & Gas LLC, as well as NRG Energy Inc. and Centrica Plc, owners of two of the state’s largest retail power suppliers. While TXU Energy has said it will be able to continue to serve its customers after a bankruptcy filing, some companies are ramping up incentives and advertising campaigns to grab new accounts.

Gift Cards

Direct Energy, a subsidiary of Centrica, said today it would offer incentives to new or renewing customers including up to $400 in gift cards.

Stream Energy, with about 360,000 Texas customers, began offering sales staff financial incentives such as credits on power bills for signing up new customers last September as bankruptcy talks brewed, Snyder said in a phone interview.

Source Power, with more than 5,000 customers, hired a public-relations firm and plans to increase its spending on marketing “significantly” in the second quarter from the first three months of the year, said John Werner, president of the Sugar Land, Texas-based company. The campaign would emphasize that the company offers more stability and can adapt to market changes more quickly than larger rivals, Werner said.

To entice switchers, Source considered giving TXU customers who joined the company a $50 to $100 gift card. Instead, it has cut rates -- the company is selling power at 8.9 cents compared with a 9.7-cent plan offered by TXU Energy, Werner said.

Interesting Reaction

While Texas retail power prices are 25 percent less than the national average, each household pays about $1,801 a year for electricity, among the highest in the nation, according to data from the U.S. Energy Information Administration.

Energy Future was taken private in the largest leveraged buyout in history more than six years ago. The company filed for bankruptcy today after months of negotiations with creditors, owners and management yielded a plan to eliminate $26.1 billion in debt. The Dallas-based company, formerly known as TXU Corp., said it hopes to exit bankruptcy within a year.

‘Ideally Positioned’

NRG’s Reliant Energy, the state’s second-biggest retail provider, is “ideally positioned” to pick off TXU Energy’s most profitable customers, UBS’s Dumoulin-Smith said.

Pat Hammond, a spokeswoman for Reliant Energy, declined to comment on Reliant’s interest in TXU’s customers.

“Our strategy in Texas is to grow our business by providing innovative products and services that customers want and by being a trusted partner when it comes to their electricity service,” Hammond said in an e-mail.

Centrica’s Direct Energy has “an aggressive plan to gain new customers in Texas,” Manu Asthana, president of the residential unit, said in a March interview. While the company has followed TXU’s financial troubles, it hasn’t changed strategy to gain new customers, he said.

“This is going to be a once-in-a-lifetime event for all of us,” said Werner, of Source. “It’s going to be very interesting to see how the customers and suppliers react.”

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