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In Oncor deal, Hunts face tough test at Texas utility commission


Four weeks ago in a windowless Delaware courtroom, a federal bankruptcy judge told a roomful of attorneys that he was approving their agreed upon plan to break up Energy Future Holdings. After more than 18 months of hearings, the ruling appeared to signal the end of what could have been a years-long legal battle over the Texas power giant.

There were conditions, but they seemed surmountable. Chief among them was that the Texas Public Utility Commission had to approve the sale of power line subsidiary Oncor to an investors’ group led by Dallas billionaire Ray L. Hunt. A major Republican donor whose name is synonymous with Texas industry, Hunt’s imprint was expected to carry the day, putting the state’s largest power utility in the hands of one of its favorite sons.

But a tidal wave of opposition has risen up around the deal in recent weeks.

Those fighting against it are arguing that the sale of of Oncor represents a massive transfer of wealth from Texas ratepayers to Hunt and his investors — a sprawling group that includes hedge funds, banks and the state teachers pension fund. At the same time, questions are being raised about whether Hunt’s plans to convert the company’s corporate structure into a Real Estate Investment Trust would leave Oncor financially unstable, threatening its ability to restore power after storms and maintain employees’ pensions.

Hunt Consolidated, the family-owned oil and real estate conglomerate, contests those claims and has filed hundreds of pages of documents with the utility commission before a hearing to decide its fate that begins Jan. 11.

“We believe that our offer provides the best outcome to Oncor customers and employees by keeping Oncor owned and managed by Texans for generations to come,” Hunt spokesman Jeanne Phillips said in a statement.

The fact that there’s opposition is not surprising. Oncor’s business of delivering electricity reaches into every corner of the state economy, generating $3.7 billion in revenue last year. Ratepayers groups like the Texas Coalition for Affordable Power and the Texas Industrial Energy Consumers take any opportunity they can to hammer utilities, hoping to extract concessions and rate cuts for their clients.

But joining them in their criticism are the Texas Office of Public Utility Counsel and the the staff of the utility commission itself, which earlier this month urged commissioners to reject Hunt’s proposal.

“You’re seeing all these groups, which are usually on different sides, come together on this,” said Geoffrey Gay, an attorney representing the Texas Coalition for Affordable Power. “Under [ Hunt Consolidated’s structure], Oncor would be provided an extraordinary rate of return. They were authorized for 10.5 percent in the last rate case. According to some analysis, the expectation is it would rise to 16 percent, which is absurd.”

Tax questions

To win the approval of the state’s three public utility commissioners, the Hunts must convince them that the takeover is in the best interest of the public. To that end, Hunt attorneys have argued that Ray and his son Hunter, who runs the company’s power business, would serve as stable, long-term caretakers for a company whose parent company was put into bankruptcy after a $45 billion leveraged buyout by private equity firms in 2007.

At the core of the regulatory back and forth is Hunt’s plan to convert Oncor into a REIT, shifting the company’s entire income tax burden to its shareholders. The conundrum is that Texas sets utility rates based on how much it costs to deliver electricity, including a utiilty’s tax bill. Ratepayer advocates want to see the tax savings translated into a rate cut. But so far Hunt is resisting such a move.

In a filing last week, top Hunt executive Kirk Baker argued that the tax savings that Oncor would enjoy under a REIT structure is not far off what power utilities have traditionally enjoyed. Through their accountants’ efforts to account for the depreciation of equipment and other tax-saving schemes, the state’s five other major electric utilities have collectively paid less than 6 percent in income taxes over the last decade, according to a Hunt filing.

Likewise, Hunt maintains it has assurances from credit rating agencies that it will maintain an investment grade rating — even though Moody’s warned earlier this year that the REIT structure would likely lead to a downgrade.

Whether those arguments will win the day might come down to how persuasive Hunts’ attorneys are.

Growing concern

The Hunts have long tried to avoid the public eye, keeping Hunt Consolidated out of the stock market and away from Wall Street analysts and activist investors. But that reticence started to thaw earlier this year, when the Hunts began selling stock in their power business, named InfraREIT.

“When there’s outages, you’re in the front seat,” Pat Wood, a longtime consultant to the Hunts, said in an interview earlier last summer. “That’s something we’ve done on a smaller scale since 1999 [though Hunt-owned Sharyland Utilities]. That public aspect, Hunter and the team are pretty used to that. It’s just going to get a lot bigger.”

Already among insiders to the deal, there is growing concern that the utility commission will not grant Hunt the terms it needs to buy Oncor.

The problem, sources close to the deal said, is that the settlement of the Energy Future bankruptcy hinges on a sale price for Oncor valued at close to $19 billion. If the utility commission cuts Oncor’s rates, the value of the deal starts to shrink, limiting payouts to creditors and potentially collapsing a deal that was 18 months in the making.

If the sale does not go through, at least one roadblock to earlier efforts to reach a settlement would be removed. A group of junior creditors partnered with the Hunts have agreed that if the deal collapses, they will no longer fight Energy Future on its restructuring plans. In exchange, they would walk away with a payout of $550 million.