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
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
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,"
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
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
"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)