U.S. private equity firm Blackstone in 2016 unplugged a Texas power plant that it owned from the state’s grid in a bet that it could make a fortune as the only American-based generator selling electricity exclusively to Mexico.
That bet has gone south.
Nearly five years later, Blackstone’s gas-fired plant, Frontera Holdings LLC, is struggling to exit bankruptcy after burning investors holding nearly $1 billion of its debt – the victim of a succession of problems ranging from a power market collapse in Mexico in 2020 to last month’s severe cold snap.
Frontera filed for bankruptcy protection last month in Houston, extinguishing loans and notes held by U.S. hedge funds, mutual funds, pensions and private equity firms, according to U.S. regulatory filings.
While the company has since secured $145 million in financing for a fresh start, its future is uncertain: Mexico has announced market reforms that could undo Frontera’s business model, and the facility is at risk of big fines for failing to deliver power during the regional deep freeze.
Early last month, Mexican President Andres Manuel Lopez Obrador said he would crack down on his country’s wholesale electricity market, saying power producers are among those that have made excessive profits.
He is also now armed with a new law that would open the door to renegotiating and potentially terminating contracts with independent producers such as Frontera.
About two weeks later, the deep freeze hit Texas and northern Mexico, knocking Frontera and other power generators offline. Lawyers for Frontera say the plant may face penalties for not being able to supply power for several days.
Blackstone Group LP declined to comment on the impact of the developments on Frontera’s plans to exit bankruptcy.
Frontera attorney Matthew Fagen of Kirkland & Ellis told U.S. Bankruptcy Judge Marvin Isgur late last month, after the cold snap, that the company’s planned exit from bankruptcy in the spring remains on track.
Frontera’s bet was going well before things fell apart.
The plant, for example, generated about $87 million in profit on nearly $200 million of revenue in 2019, according to disclosures in U.S. Bankruptcy Court in Houston.
That year, Blackstone paid itself a dividend of about $116 million, following a similar payout of $120 million the previous year, from operating cash and incremental debt, court disclosures show.
Frontera owns 100% of its transmission line to Mexico and has exclusive use of it. New U.S.-based entrants likely would not have that advantage because of rule changes at the U.S. Department of Energy.
But last year peak pricing for electricity in the Mexican market tumbled 70%, in part because of the coronavirus pandemic’s impact on the economy.
Frontera posted a $9 million operating loss on $79 million in revenue that year, court disclosures show.