By: JAMES OSBORNE |
For eight years, Energy Future Holdings has walked a tightrope of falling power prices and an enormous debt load. Since a $45 billion buyout by private equity firms in 2007, the company has cut costs, negotiated with creditors and, when that failed in April 2014, filed for bankruptcy.
Energy Future will seek a fresh start in U.S. Bankruptcy Court in Wilmington, Del., on Tuesday, arguing that breaking up the company offers it and its creditors the best chance to move on with the least possible financial pain. The trial is expected to run through at least the end of the month, pitting rival attorneys against one another in a bid to extract the most value they can from $40 billion in outstanding debts.
As the reorganization plan stands now, creditors would take over the power plants and retail business TXU Energy. A group of investors led by Dallas billionaire Ray L. Hunt and his son Hunter Hunt plan to buy the power line business Oncor in a deal valued at up to $19 billion.
Allegiances are starkly divided. Results of a vote of Energy Future creditors released Monday showed that about 95 percent supported the plan. But that did not include a contingent of creditors that Energy Future says don’t get a vote because they are being fully compensated for their debt.
Those creditors disagree. What’s more, they are fighting Energy Future’s reorganization plan, arguing it’s not a viable solution.
The Oncor sale is contingent on a regulatory hearing before the Texas Public Utility Commission to determine the rates for delivering electricity across North and West Texas. The caveat is that the Hunts want to reorganize the company as a real estate investment trust, a structure that shifts tax liability from the company to its shareholders. The question for state regulators is: Should Oncor get to charge the same rates it does under a standard corporate tax structure?
If the PUC lowers the rates too much, opposing creditors fear that the Hunt group would walk away. And the plan still awaits approval from the Internal Revenue Service, which must determine whether the company can be split apart without triggering a tax bill estimated to be in the billions.
“These are legitimate arguments, but the counterargument is also legitimate. Any exit from a bankruptcy of this size is going to require some massive regulatory approval and contingency that can’t be predicted with 100 percent certainty,” said Ben Feder, an attorney in the case who represents an outside group of creditors.
The bankruptcy case is entering its 19th month and is expected to rack up hundreds of millions of dollars in professional fees.
At Energy Future headquarters in downtown Dallas, the hope is that a new but smaller company will be in operation by mid-2016. But after two reorganization plans, the attitude remains cautious.
In a memo to employees Monday, Energy Future said “we cannot predict at this time when the actual date of emergence may be.”
“The bottom line is that EFH continues to make considerable progress in our restructuring, and we are now laser-focused on the confirmation hearing and related milestones on the path to emergence.”
Once the confirmation trial wraps up, so begins the regulatory process in earnest. The IRS is expected to offer its ruling early next year. The Hunts are scheduled to appear for what is expected to be at least a weeklong hearing before state utility regulators on Jan. 11.