By Tom Kleckner
The Public Utility Commission of Texas on Thursday approved Hunt Consolidated’s proposed acquisition of Oncor, the state’s largest transmission and distribution utility and the most valuable remaining piece of troubled Energy Future Holdings (Docket # 45188).
The PUC’s March 24 order would split Oncor into two companies, one of which would operate as a real estate investment trust (REIT) under the state Public Utility Regulatory Act. The commission gave the parties a Nov. 30 deadline to complete the transaction.
As a REIT, Oncor AssetCo would own the transmission and distribution facilities, while Oncor Electric Delivery Co. (OEDC) would rent the facilities to provide electric delivery services. OEDC would house most of Oncor’s management and employees and the remainder of the assets.
Oncor AssetCo would avoid paying federal income taxes as part of the transaction if it derives at least 75% of the its gross income from property rents. Hunt has taken a similar tack with its Sharyland Utilities, which provides services to 53,000 customers, primarily in West Texas and the Rio Grande Valley.
The commission agreed with the proposal, saying “payments received from OEDC, as the lessee and operator of the assets, will constitute rents from real property under the meaning of the Internal Revenue Code.”
The plan has drawn criticism from a disparate group that includes former Texas Gov. Rick Perry, a coalition of cities served by Oncor, the AARP and PUC staff. Much of the criticism centers on the REIT conversion and whether it would provide a windfall for the company at the expense of ratepayers.
Two Texas state senators, Kelly Hancock and Royce West, called into the meeting to add their objections, saying the REIT should not be able to collect taxes in its rate structure if it doesn’t intend to pay them. The tax benefit is worth about $250 million, and the Hunt group had been looking for a guarantee it could take full advantage of the benefit.
“I am not against the acquisition,” West said from China through heavy static. “I understand a REIT has to distribute [funds to shareholders]. The question in my mind is should [the REIT] be allowed to use dollars earmarked for taxes … to shareholders.”
The commissioners discussed whether to add a separate accounting treatment for the taxes, with one proposal to immediately credit ratepayers $100 million. However, Chair Donna Nelson stepped in to say adding too many restrictions to the deal might make it unmanageable.
“It sounds like you’re punishing them now,” she said. “If we’re going to deny it, why don’t we just deny it? If you’re going to keep attaching these things to it, it’s going to die anyway. All we’re doing is wasting time.”
In the end, the PUC’s order said the tax-savings issue will be “addressed by commission staff and intervenors in the next rate proceeding of Oncor AssetCo and OEDC.”
While siding with Anderson and Commissioner Brandy Marquez on the order, Nelson dissented from the majority’s decision “regarding the timing and treatment of the income tax expense.” Nelson’s position throughout the Hunt-Oncor process has been to oppose customer refunds.
Geoffrey Gay, legal counsel for about 150 cities served by Oncor, said he expects his clients to file rate cases by the end of April, bringing about the rate case a year earlier than the current schedule.
Oncor expects the proposed transaction, “if funded by investors,” to close on or before year-end.
“While there are a number of hurdles left to clear, we look forward to working with the parties involved to reach a conclusion in this change-in-control proceeding,” said Geoff Bailey, Oncor’s director of communications, in a statement.
Hunt did not respond to a request for comment on the order. However, a Hunt representative issued a statement after the PUC meeting saying it would “continue to work with all parties in the EFH bankruptcy proceeding over the coming months to reach a successful closure of the transaction consistent with the order approved today.” The company is a Dallas-based oil and gas, real estate and power company, owned by the wealthy Hunt family.
Oncor delivers power to more than 3 million homes and businesses over about 119,000 miles of transmission and distribution lines in North and West Texas. Determining its fate is central to resolving EFH’s Chapter 11 bankruptcy reorganization, which was filed in April 2014.
EFH was the result of a $48 billion leveraged buyout of TXU Corp. in 2007, when the utility faced strong public opposition to its plan to build 11 coal plants in Texas. Private investors led by KKR and TPG Capital bet on rising energy prices but found themselves instead saddled with $42 billion in debt following the 2008 global financial crisis and plunging gas prices due to the fracking boom.
A U.S. bankruptcy judge in December approved EFH’s plan to split into two separate companies — Oncor and the unregulated power generation and retail arms, Luminant and TXU Energy, respectively — wiping out the LBO sponsors’ equity. The Luminant-TXU Energy businesses would go to senior lenders owed about $24 billion.
The decision assumes creditors would not incur a multibillion-dollar tax bill. The IRS is reviewing whether the transfer of assets to creditors represents a taxable sale.
