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Energy Future Says Oncor Bids May Be Higher Than Expected

By: Linda Sandler |

Energy Future Holdings Corp.’s finance chief, facing creditor ire over auction plans for the company’s Oncor unit, said bids could come in higher than expected if potential buyers devise tax-free structures or pursue strategic goals in Texas.

Chief Financial Officer Paul Keglevic defended Energy Future’s sale proposal at a bankruptcy court hearing this week in Wilmington, Delaware, saying a bid floated by NextEra (NEE) Energy Inc. in July, which he valued at around $18 billion, “surprised” him.

“None of us assumed we could get the price in the multiple that we ended up getting from NextEra,” Keglevic said.

Before NextEra came forward, Dallas-based Energy Future was set to lock in a $42 billion bankruptcy restructuring that left some creditors out in the cold. Pressure from eight lender groups made it ditch part of that plan and invite bids for Oncor, a regulated electricity-distribution business and the company’s prize asset.

Creditors of the company’s unprofitable power business protested this week that they’re still at a disadvantage, as most of the auction proceeds would be used to pay lenders to the regulated business.

Keglevic was grilled Oct. 20 by Ed Weisfelner, a lawyer for creditors fighting key aspects of the planned auction, including its timing and tax structure. The next day, U.S. Bankruptcy Judge Christopher Sontchi delayed the planned Oct. 23 start of the auction to give creditors more time to interrogate directors about the sale plans.

Confidentiality Agreements

A dozen parties signed confidentiality agreements to see Energy Future documents. NextEra, CenterPoint Energy Inc., Warren Buffett’s Berkshire Hathaway Inc. and Hunt Consolidated Inc. are among them, said people familiar with the matter who asked not to be named as the matter is private.

According to Keglevic, “no more than five” potential buyers will make offers in the first round of bidding. Weisfelner said an Energy Future adviser predicted “two to four.”

The lawyer asked Keglevic whether NextEra’s bid would have been less surprising if Energy Future had had Oncor valued by a specialist. The executive admitted the company hadn’t done so.

A bidding company might use some of its own stock as part of a payment for Oncor, which will go to creditors of the regulated unit that controls 80 percent of the electricity company, Keglevic said.

‘Intrinsic Issues’

Some bidders might use a real estate investment trust structure to buy Oncor, which would eliminate taxes, he said. Also, for a Texas utility, “there are unique intrinsic issues associated with another utility in Texas that might have, you know, synergies,” he said.

Weisfelner countered Keglevic’s arguments, saying bidders might trim their offers because it’s not known whether they can carry out an Oncor takeover on terms set today. The creditor group he represents wants Oncor to be sold in six months to a year, as part of Energy Future’s as-yet-unfiled restructuring plan.

“No one’s told you that Oncor’s going to be worth more or less a year from now, have they?” he asked.

“They have not,” Keglevic said.

One uncertainty is whether an Oncor deal will be tax-free, as Energy Future has said it preferred. Potential bidders may offer less because a tax-free structure is riskier, a creditor trustee said in court papers.

Nor does a potential buyer know whether Energy Future’s disadvantaged creditors will extract more money in the restructuring, forcing the company to raise prices for Oncor.

A restructuring plan that’s backed by creditors will answer such questions, removing some “execution risks,” Weisfelner said.

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