Hunt-Oncor Marriage on the Rocks Before They've Tied Knot

  • Energy Future's Oncor is raising concerns about its own sale
  • Hunt Consolidated working to strengthen deal to get state nod

Energy Future Holdings Corp. was created by the biggest leveraged buyout on record. The electricity supplier’s bankruptcy was the largest ever by any company in the industry. Now it’s making headlines as it tries to get out of Chapter 11.

With less than a month to go before Texas regulators must decide whether to allow a group led by Hunt Consolidated Inc. to buy Energy Future’s Oncor Electric Delivery Co. utility, an unlikely hurdle has been thrown up. By Oncor. The power distributor has raised red flags about key aspects of the deal, which is the cornerstone of the plan to allow Energy Future to emerge from bankruptcy.

“Normally, when these things are happening the parties are all in agreement on the applicant’s side,” said Paul Patterson, a New York-based analyst for Glenrock Associates LLC. “In this case, it doesn’t appear that way. This is kind of uncharted territory.”

Oncor’s questions bolster the concerns of a long list of opponents to the deal, from consumer advocates to the Texas Public Utility Commission’s own staff. While Oncor hasn’t asked that the transaction be rejected, it said in filings with the commission that the terms of the purchase might not be good for Oncor’s customers, revenue and credit ratings. In fact, Oncor Chief Executive Officer Robert Shapard was blunt when asked at a hearing if the sale as initially proposed would be in the public interest. His answer: “No.”

Upcoming Vote

Should Texas reject the deal, Energy Future would return to bankruptcy court. While the state has until March 27 to decide, the commission hopes to vote sooner at a March 3 meeting, Chair Donna Nelson said last week at the IHS CERAWeek energy conference in Houston.

Energy Future believes “this option is the preferred path to exit bankruptcy court,” spokesman Allan Koenig said in an e-mail Monday. Hunt declined to comment but said in a Feb. 3 filing that, “by working with Oncor management to address its concerns, the transaction has been made stronger.”

Oncor spokesman Geoff Bailey said by e-mail that the utility’s role “is to ensure that the financial and operational structure put in place is in the best interest of our shareholders, customers and company.”

Energy Future filed for bankruptcy reorganization in April 2014, with nearly $50 billion in debt, much of which was racked up by its record leveraged buyout seven years earlier by KKR & Co., TPG Capital and Goldman Sachs Capital Partners. That bet went bad when natural gas prices plunged.

‘Ring Fence’

To win regulatory backing of the buyout in 2007, the sponsors agreed to create what came to be known as a “ring fence” around Oncor, giving the unit’s board and management control over day-to-day operations. That set Oncor apart at the time of the bankruptcy -- when Oncor was, unlike the rest of the parent company, in sound financial health.

The proposal before Texas regulators is the product of over a year of negotiations, a compromise that would deliver Oncor to Hunt and a coalition of creditors, including BlackRock Inc., Centerbridge Partners, GSO Capital Partners and the Teacher Retirement System of Texas.

The Energy Future unit that owns Oncor would be converted into a real estate investment trust owning 121,000 miles of wiring that delivers power throughout Texas. The typical REIT owns shopping centers or office parks and makes money through rent; this one would make money by leasing its transmission lines to Hunt, a Dallas-based oil and gas, real estate and power company.

Tax Savings

A main issue for opponents is the federal income-tax savings the buyers would get by forming a REIT. Some parties have demanded those savings be shared with ratepayers. The buyers called the argument “illogical” in a recent filing with the PUC.

For its part, Oncor said in a Feb. 3 filing that the company was concerned about its ability under the deal to change lease payments if circumstances require the company to spend more than expected to keep the utility system running properly.

The utility also said that, while the buyers have a plan to restore an investment grade credit rating if it’s lost following the transaction, the company needs to “emerge as investment grade.” The Hunt-led group said in response that it couldn’t guarantee such a rating at closing and would be opposed to delaying dividends if it were lost. The group is also against the idea of seeking state approval to issue new debt.

‘Additional Harms’

In a non-binding recommendation, the state agency’s staff has urged commissioners to reject the sale, saying the buyers’ latest commitments, rather than resolving concerns, “will actually impose additional harms onto ratepayers" by creating $295 million in added costs. Oncor had previously warned that residential rates may increase 1.25 percent if it’s combined with Sharyland Utilities for ratemaking purposes, as some parties in the case have proposed. The Hunt entity that would control Oncor also owns Sharyland, a regulated electric utility in Texas.

The three state commissioners haven’t said how they’ll vote. The chief goal, Commissioner Kenneth Anderson said at a Feb. 11 hearing in Austin, is “to ensure that the utility is financially viable.”

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