HOUSTON May 5 The bankruptcy of Energy Future Holdings (EFH) may lead to much tougher scrutiny of any potential owners of the conglomerate's staid but important Oncor power transmission unit.
Although the bankruptcy filing was designed to protect the century-old power delivery unit from its debt-laden parent and its other generation and marketing affiliates, it could also open up Oncor to greater review by Texas regulators, something EFH managed to avoid.
EFH, created in the 2007 buyout of Dallas-based TXU Corp, filed one of the largest Chapter 11 bankruptcies in U.S. history on Tuesday after an unsuccessful attempt to work out a deal with creditors.
All major EFH units were included in the court filing with the exception of Oncor, the monopoly operator of the largest transmission system in Texas that is 80-percent owned by EFH.
Oncor avoided bankruptcy because of a credit provisions called a ring-fence put in place in 2007 to satisfy Texas legislators and regulators worried about the $40 billion debt created in the leveraged buyout by a group of private equity firms led by KKR & Co LP.
The ring-fence was designed to protect Oncor from exactly what happened this week, said Texas Senator Troy Fraser who was critical of TXU before and after the buyout.
"I feared that EFH would end up in bankruptcy because of the excessive debt they were assuming," Fraser said in a statement. "Unfortunately, those fears have become a reality."
Since the TXU takeover, a dramatic fall in natural gas prices has eroded the handsome profits once reported by the EFH power plant unit, Luminant, while Texas' growing economy has improved Oncor's steady, regulated earnings.
Now, as part of the EFH restructuring proposal, two groups of unsecured creditors, including Avenue Capital Group, P. Schoenfeld Asset Management and GSO Capital Partners, could wind up as equity owners of Oncor parent Energy Future Intermediate Holding Co.
That ownership shift could give the Texas Public Utility Commission (PUC) a chance to approve or reject new owners through a public interest hearing to evaluate the benefits of a change of control, authority the agency did not have when KKR took over in 2007.
"We believe the restructuring will trigger a regulatory approval process," said Jim Hempstead, associate managing director for Moody's Investors Service.
Geoffrey Gay, general counsel for a group of more than 140 Texas cities in the Oncor service territory, agreed.
"With EFH's proposed changes in the ownership of Oncor's parent, the PUC will ultimately have a hearing to determine whether the changes in ownership are in the public interest," Gay said.
Oncor officials declined to comment.
Moody's Hempstead does not expect the PUC to object to new owners, but said there is some risk of a push for rate concessions from Oncor during a public interest hearing.
"We think the PUC and elected officials will see this as a positive development for Oncor because it will be separated, once and for all, from its more risky affiliates," Hempstead added.
One of the first hearings held last year under the PUC's expanded authority showed how uncertain the process can be. The PUC was determining whether Entergy Corp's plan to divest its transmission system to ITC Holdings Corp met the public-interest test.
After an extensive hearing, Entergy and ITC were forced to withdraw and resubmit their application when commissioners insisted on seeing more evidence regarding merger commitments made in other states.
"The commission has a statutory obligation to determine whether the change of control is in the public interest," said Tom Anson, an attorney with Strasburger & Price in Austin who represented ITC Holdings in Texas.
"For a transaction of (Oncor's) significance, the change of control would be thoroughly and comprehensively evaluated."
Entergy and ITC ultimately abandoned their transaction after it was denied in Mississippi.
"These proceedings will be complex, and it's still too early to know how they will play out," said Gay, the counsel for the cities.
"What's certain, however, is that EFH's investors borrowed tens of billions of dollars in the largest leveraged buyout in history. Our organization believes that Texas home and business consumers should not have to pay the price for that bad bet." (Editing by Jessica Resnick-Ault and Andre Grenon)