Energy Future Holdings, Texas’ largest power company, has cleared a major hurdle in its effort to emerge from one of the largest corporate bankruptcies in American history.
U.S. District Judge Christopher Sontchi on Thursday signed off on the company’s plan to break up key pieces of the company — a major step in the conglomerate’s effort to shed tens of billions of dollars in debt though a plan that could hold major implications for Texas ratepayers and the electric grid.
“The plan is at its heart a business transaction involving tens of billions of dollars negotiated by sophisticated parties,” Sontchi said from his bench in Wilmington, Delaware, according to The Dallas Morning News. “The evidence overwhelmingly supports confirmation of the plan.”
The ruling essentially wraps up 19 months of wrangling between Wall Street firms and other creditors in the courtroom — proceedings that cost Energy Future some $1 million each day in legal fees.
“We are pleased to have reached this critical milestone on the road to emergence,” John Young, the company’s chief executive officer, said in a statement. “We can now begin, in earnest, to build for the future.”
He called the restructuring “among the most complex in history.”
Still, the company’s march from red ink to black is not over. Sontchi’s ruling shifts the focus to Austin, where state regulators must sign off on the lynchpin of Energy Future’s plan. Those discussions will prove contentious.
As it stands, Energy Future, saddled with $42 billion in debt, owns all or part of three crucial pieces of the Texas electric grid.
Luminant is the state's largest generator, with a fleet of 14 coal, natural gas and nuclear plants that can power nearly 20 percent of the grid. TXU Energy is one of the state's largest retail electric providers, serving more than 1.7 million Texans.
Energy Future also is the majority owner of Oncor, a monopoly utility whose 119,000 miles of transmission and distribution lines deliver power to more than 3 million homes and businesses in North and West Texas.
The deal Sontchi approved would spin off Energy Future’s electric generation side to its creditors tax-free, allowing them to be paid in full. It would also hand Oncor — the only asset continually making money — to a group led by Ray L. Hunt, the Dallas oilman and real estate mogul. That deal is valued at roughly $18 billion.
The Texas Public Utility Commission must sign off on the Hunt sale after balancing corporate interests with those of Texas ratepayers. The commissioners could also add stipulations of their own.
Some Texas officials and others following the issue like the idea of giving a Texan control of Oncor, particularly one regulators are used to dealing with.
But Hunt’s plan is complicated, and it’s never been tried for a utility this big. That's making some observers nervous.
To save on federal income taxes, he wants to reorganize Oncor into a “real estate investment trust,” essentially dividing it into two companies: one owning the assets (power lines, trucks and transformers, for instance), while the other rents the equipment, operates it and deals with customers.
That financial structure has long served the real estate world. Shopping malls, for instance, commonly use it, as investors back a broad entity that rents space and other assets to individual stores.
The structure would help Oncor borrow money at lower rates, proponents say, which could ultimately translate into lower electric rates for customers.
But it’s nearly unprecedented in the energy world. Hunt owns the only other U.S. utility organized in such a trust: Sharyland Utilities, which serves just 50,000 customers in small patches of rural West and North Texas and has the highest rates in the state.
The deal’s experimental nature makes some lawmakers and consumer advocates nervous.
That includes state Rep. Dan Flynn, a Republican whose district includes Sharyland customers who are upset about rates.
“We remain deeply concerned about Hunt's proposal to purchase Oncor," Flynn wrote in a letter to the commissioners last month, mentioning the high Sharyland rates. “The idea of selling Oncor to these same individuals is placing at risk 2 million more individuals.”
Hunt points out that a host of unique factors caused that utility’s rates to spike — beyond the fact that delivering power to sprawling, rural communities tends to cost more.
But the plan has also drawn questions about whether Oncor would still be protected from the debt of its parent.
When Energy Future was formed eight years ago, the commissioners insisted on a financial "ring fence" around Oncor to keep bankruptcy from dragging it down. It worked, keeping Oncor financially healthy even as its parent sank. Under the mechanism, a minority investor owned 20 percent of Oncor, which also had separate leadership.
Hunt's plan would eliminate Oncor's minority investor.
Consumer advocates are calling for a solid ring fence around Oncor this time, as well as assurances that any tax savings in the reorganization will translate into lower rates for consumers.
The agency has set a hearing for January, which is expected to last two weeks.
Hunt's camp applauded Sontchi's ruling on Thursday.
"We are pleased with the plan confirmation today," spokeswoman Jeanne Phillips said in a statement. "We look forward to continuing the process to acquire Oncor."
Energy Future – known as TXU Corp. before a massive leveraged buyout in 2007 – accumulated some $42 billion in debt after betting big on natural gas prices that later plummeted.
When it filed for Chapter 11 protection in April 2014, the conglomerate suggested it could complete the proceedings in less than a year.
Disclosure: Oncor and Energy Future Holdings were corporate sponsors of The Texas Tribune in 2012. A complete list of Texas Tribune donors and sponsors can be viewed here.