Written on: November 25, 2015
I’ve been writing lately about the proposed sale of Oncor, the state’s largest transmission and distribution utility — and especially the risks such a transaction may pose for consumers. A consortium of investors led by Dallas billionaire Ray L. Hunt wants to acquire Oncor. Is the deal in the public interest? It’s now up to the Public Utility Commission to decide.
Not surprisingly, Hunt’s take-over bid is stunningly complicated. It involves billions of dollars in debt, ring-fencing and tons of moving parts. One key component is the “Real Estate Investment Trust,” or REIT, a complex corporate structure that would divide Oncor into two separate entities.
I’ve written about this earlier, but here’s the Cliff Notes version: a Real Estate Investment Trust would place Oncor’s lines and equipment into one company — we’ll call it the “AssetCo” — but leave Oncor’s operations to a second company, which we’ll call the “OperatingCo.” Under the REIT structure, the OperatingCo leases lines and equipment from the AssetCo. Hunt has proposed the REIT as a way of reducing federal tax liability.
In my earlier post I enumerated several concerns about this plan, among them its sheer complexity. A REIT structure has never been tried on such a massive utility scale. Will it work? Who knows. In order to find out, millions of captive Oncor customers will have to become REIT guinea pigs.
Other major concerns relate to Oncor’s parent company, Energy Future Holdings, which declared bankruptcy in 2014. To understand these concerns, it’s necessary to take a step back.
EFH was formed in 2007 through the massive leveraged buyout of TXU, the North Texas energy giant. EFH amassed billions of debt in that takeover, but then was unable to service that debt when wholesale energy prices began falling after 2008. EFH declared bankruptcy on April 29, 2014 and its creditors are now haggling over the company’s obligations in a bankruptcy court in Delaware.
In a Sept. 24 memo, PUC Commissioner Kenneth Anderson raised various important questions relating to the interplay of the EFH bankruptcy, the company’s massive debt and the proposed REIT.
For instance: some unsecured creditors of EFH likely will become part owners of the REIT and “certain of these investors do not have a reputation of (being) either long-term or particularly patient investors,” according to Anderson.
So “what happens if OperatingCo fails to make a payment … relating to the REIT lease agreement of the (EFH) debt?”
Likewise, Anderson asks “what would happen if the OperatingCo were required to reduce substantially payments to the AssetCo, either because of storm damage or because of Commission-required investment?”
And another question: “if OperatingCo is unable to satisfy a payment obligation related to the 2007 buyout debt, what rights, if any, will the 2007 buyout debt creditors have to control the assets of AssetCo?”
In his memo, which is posted on the PUC website, Anderson also zeroes in on questions relating to storm damage. Oncor operates 119,000 miles of transmission and distribution lines. Not surprisingly damage from a massive storm can impact — at least temporarily — the company’s revenues.
Anderson wrote that when this happens, Oncor currently can react by lowering its dividend payments upstream to Energy Future Holdings. But it’s a bit unclear whether such a response is possible under a REIT structure. “A major storm (or series of storms) may interrupt Oncor’s revenue stream, which could affect the REIT’s lease agreement rent obligation or the 2007 buyout debt payment obligations,” he states in his memo.
Because Oncor is a public utility, the PUC is charged with determining whether the change in ownership serves the public interest. The Texas regulatory agency will make a decision by early next year. According to published reports, the success or failure of the EFH plan to exit bankruptcy largely in part on the PUC’s ruling.