Hedge Funds Buying Oncor Face Pressure to Share Tax Windfall

  • Tax question may `make or break' bankruptcy sale, lawyer says
  • Dispute is latest chapter in saga of parent Energy Future

Hedge funds taking over the profitable half of bankrupt Energy Future Holdings Corp. may have to share their tax windfall with consumers to get the proposal past Texas regulators.

The real estate investment trust that the creditors are forming to take over Oncor Electric Delivery Co. is trying to cut its federal tax bill by distributing earnings to shareholders. The tax breaks have become a focus of settlement talks aimed at securing approval for the deal from the Public Utility Commission of Texas, according to Geoffrey Gay, an attorney involved in the discussions who represents ratepayers. Some $210 million to $250 million a year is at stake, he said.

The tax question is the latest to embroil Energy Future since it filed for creditor protection in April 2014, crushed under the burden of a record leveraged buyout. At the time, the company projected an 11-month trip through bankruptcy. Those plans almost immediately proved too optimistic and warring groups of creditors embarked on more than a year of often rancorous talks over the fate of the company.

Hunt Consolidated

Under the reorganization plan approved by a bankruptcy judge last year, Energy Future’s Oncor would be taken over by Hunt Consolidated Inc. and investors owed billions of dollars. 

The REIT, to be owned by a coalition of Energy Future creditors, would lease its 121,000 miles (195,000 kilometers) of power lines and other assets to Hunt, a Dallas-based oil and gas and real estate company. The structure would allow Oncor to pay an effective tax rate of about 5 percent instead of the top federal corporate rate of 35 percent, Gay said.

“Could it make or break the deal? Yes,” Gay said of the tax issue in a phone interview Monday. “That’s solely a question for the commissioners to weigh. There has been some expression of concern.”

Energy Future was undone by the weight of $48 billion in debt. In 2007, when the company -- formerly known as TXU Corp. -- was taken private, investors were betting that energy prices would rise enough to justify the cost of the deal. Instead, the global financial crisis hit, followed by the fracking boom, and prices plunged.

March Deadline

While the bankruptcy court has given the nod to the Oncor sale, the Texas PUC must still approve it. Several commissioners raised questions about the tax issue at public hearings this month and urged the parties to reach a settlement. The deadline for the PUC to approve the deal is March 27. The next PUC open meeting is set for Feb. 11. Federal tax officials must also sign off for the deal to go through.

Hunt is negotiating with consumer groups and the staff attorneys for the PUC to address their objections. The PUC’s staff recommended that the commission reject the proposal in its current form.

Some parties, including Gay’s Steering Committee of Cities Served by Oncor, say ratepayers should get at least a cut of the tax savings. The buyers, in public filings in the case, have said they are willing to consider additional benefits for ratepayers without being more specific. Texas, which consumes more power than any other state, relies on the low electricity prices created by its competitive wholesale market.

‘Largest’ Issue

The tax dispute “seems to be the largest dollar-value contested issue in the case,” said Catherine Webking, an attorney for the Texas Energy Association for Marketers, who is also involved in the settlement talks. The association represents retail electricity providers.

The buyers have said they need the matter resolved, Webking said. Settlement talks between individual parties and the groups as a whole are expected to continue in the days and weeks ahead, according to Gay and Webking.

“No one has walked out and I can’t believe anybody will walk out,” Gay said. “Dialogue will continue as long as anyone is willing to talk.”

For its part, Oncor wants to ensure that “the financial and operational structure put in place under any transaction” gives the company the greatest amount of flexibility to achieve its goals, Geoff Bailey, a spokesman for the company, said in an e-mailed statement.

Hunt believes “having 100 percent management and operational control of Oncor remain in Texas, by Texans, is the best possible solution for all parties involved,” spokeswoman Jeanne Phillips said in an e-mail. She confirmed that Hunt is in discussions to reach a resolution. Energy Future itself isn’t involved in the PUC talks because Oncor is run separately.

Unresolved Matters

PUC spokesman Terry Hadley said in an e-mail that while the final decision will rest with the three commissioners “a proposed settlement option can help narrow the range of issues and allow the commissioners to focus on matters that remain unresolved.”

Bailey, Phillips and Hadley didn’t comment directly in their statements on the question of sharing the tax savings with consumers.

Under its restructuring plan, Energy Future’s unregulated power-generating side would go to senior lenders owed about $24 billion. Oncor, the regulated powerline side, would go to Hunt and a coalition of lower-ranking creditors, including BlackRock Inc., Centerbridge Partners LLC, GSO Capital Partners and the Teacher Retirement System of Texas.

The case is Energy Future Holdings Corp., 14-bk-10979, U.S. Bankruptcy Court, District of Delaware (Wilmington).

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