Bulb Energy (Bulb) dropped into administration because it was unable to hedge effectively against surging wholesale energy prices.
In documents prepared by Interpath Advisory, the administrators of its parent company Simple Energy, it was revealed that Bulb had insufficient credit lines to deal with soaring gas costs.
The administrator’s report suggests the rising gas prices overpowered the energy firm’s six-month rolling hedge strategy.
This underlines both the scale of the crisis facing energy firms while also raising questions over what a potential long-term hedging strategy should like to withstand future market shocks.
Bulb, the UK’s seventh-largest energy firm, is now being propped up by £1.7bn in taxpayer money.
This is the biggest state bailout since Royal Bank of Scotland entered public hands over a decade ago.
The supplier was saved from collapse to protect its 1.6m customers, with the firm simply too big to enter Ofgem’s supplier of last resort process like the previous 24 energy firms in recent months that lost the ability to trade.
Ofgem has since announced it is introducing new measures to ensure suppliers hedge properly, with the market regulator set to apply financial stress tests to energy firms to ensure they can withstand future market shocks.
Bulb’s long-term future remains uncertain as administrators mull over potential sales options
When Bulb fell into administration last year, it publicly laid the blame at the controversial consumer price cap – outlining that the restrictive mechanism prevented them from passing then-record wholesale gas prices to consumers.
It revealed that the £1,277 annual price cap prevented the company from charging consumers more than 70p per therm, even though it was costing them over £4 per therm to supply energy.
However, the latest developments over its failed hedging plan potentially bring up red flags over its financial diligence heading into last winter and possibly explain the lack of bids made for the firm when it was solvent.
Bulb aimed to raise additional funds as early as May last year, and its US-based financial advisers at Lazard tried in vain to find a buyer for the supplier before it fell into special administration in November.
In the weeks before its fall from grace, the report states that potential bidders had indicated they were no longer willing to invest in or acquire Bulb “on a solvent basis”.
The documents show they have once again started talking to potential advisers about a combined sales process for both Bulb Energy and its parent company Simple Energy.
Interpath Advisory, the administrator for Simple Energy, and Bulb’s special administrator Teneo have started talking to potential third party advisers to run a joint sales process as they see “significant advantages to a combined sale approach”.
Rivals including Centrica, Ovo Energy and Octopus are rumoured to have looked at Bulb in recent months, although they are not mentioned in the documents.
Simple Energy went into administration in November with £9.9m of cash available in bank accounts, most of which was to meet employee costs – having employed 855 members of staff.
The documents show it is owed £9.7m by HMRC for VAT refunds and is claiming another £3.9m for other tax payments, although part of this is disputed by authorities.
When Bulb entered administration, it owed investment company Sequoia Economic Infrastructure Income Fund around £55m, which intervened in November to ensure Interpath Advisory became the administrator of Simple Energy, blocking previous plans for AlixPartners as it doubted its independence.
Sequoia has security over some of Simple Energy’s assets, but the administrators remain unsure about whether there would be a shortfall in the amount returned to the company.