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[Enterprising Investor]

For Hunts, Oncor deal nearly a decade in the making (10/02/15)

By James Osborne

The deal was there. Then it wasn’t.

It was 2006, and Hunter Hunt, the son of Dallas billionaire Ray L. Hunt and a top executive at the family’s energy and real estate conglomerate, seemed to be making inroads with the new CEO at TXU Corp. The Hunts wanted TXU’s more than 100,000 miles of power lines, and the word was John Wilder, who had been recruited from a rival power company and was looking to make his mark, was not all that interested in that side of the business.

Heavily regulated with little room for the fast growth prized on Wall Street, power line companies were jokingly referred to as widow and orphan stocks. Wilder indicated he could be interested in selling, said Pat Wood, former chairman of the Federal Energy Regulatory Commission under President George W. Bush and a Hunt adviser.

“We had approached John and said we'd be really interested getting your wires if you’re interested in spinning them off like the other utilities had done,” Wood said. “The thing was, at the same time TXU was talking to KKR.”

So began what would would turn into an almost decade-long pursuit of the power line company Oncor by one of Texas’ wealthiest and most powerful families. It is a chase that took the Hunts from federal bankruptcy court to corporate boardrooms, one that seemed to be nearing its end this week when Hunt Consolidated filed an application with the Texas Public Utility Commission to take over Oncor.

What the Hunts walked into the middle of in 2006 would go down as the largest leveraged buyout in U.S. financial history, a $45 billion deal that put TXU, Texas’ largest power company, in the hands of two of Wall Street’s most famed deal makers in Henry Kravis, CEO of New York-based KKR & Co., and David Bonderman, CEO of TPG in Fort Worth.

But the Hunts -- the descendants of eccentric mogul H.L. Hunt, who had made a vast fortune during last century’s Texas oil boom and was one of the wealthiest men in the world when he died in 1974 -- were undeterred

Ray L. Hunt has built upon his family’s fortune through a global enterprise of oil and gas drilling and real estate development. Electrical lines, a predictable business run on steady returns and good relationships with politicians, suited his business style.

Hunts didn’t give up

Even after the deal with KKR and TPG closed, the Hunts stayed in touch with the new owners in anticipation they would eventually flip Energy Future, Hunter Hunt said in an interview.

“Our view was it’s a shame we missed it. But it will come up again, and we’ll do what we need to do in the interim, to make ourselves more equipped and position ourselves so next time we have a shot at acquiring it,” he said.

What some may not have realized, the Hunts were already in the power lines business -- just in a very small way.

In 1973, the Hunt Oil Co. had bought 5,800 acres of farmland along the Rio Grande near the border city of McAllen as part of a plan to expand into the sugar market. After H.L. Hunt died, speculation quickly rose around how his assets would be divided among his 14 children - spread across three different families. Most of the attention was on the oil company, control of which was bequeathed to Ray. But also included in his inheritance was the farmland in South Texas.

For two decades the farm was just that, growing a particularly sweet variety of onion known as the Texas Sweet 1015. But after the North American Free Trade Agreement went into effect in 1994, trucks were pouring through South Texas to and from Mexico, where a wave of new electronics and car part factories were under construction along the border.

Hunt soon broke ground on Sharyland Plantation, a high-end residential community and warehouse district. The only problem was they were building faster than the power lines could be hooked up, Hunter Hunt said.

In the manner of a family whose fortune, legend says, was built upon a winning hand of poker, they decided to start their own power company. It had been nearly 50 years since the last electrical utility in Texas was launched, but in 1998 the new Sharyland Utilities filed an application to begin delivering electricity to their development on the Rio Grande.

The power sector immediately opposed it. A top executive with what is now American Electric Power, the Ohio-based utility that runs the majority of power lines in South Texas, testified before state regulators that granting the Hunts a license could result in skyrocketing rates and frequent power outages.

Building Sharyland Utilities

But it wasn’t enough to dissuade utlity commissioners. Before the new millennium Sharyland had its first customer, a softball field.

“I don’t think the utilities felt very threatened, and as usual that was a big mistake,” said Sam Vale, a South Texas businessman who owns one of the international bridges connecting to Mexico. “The way they came in and challenged [AEP], it’s right in line with the legacy of H.L. Hunt -- anybody who can have a team moved out of Dallas and have them win a Super Bowl” as Ray’s half brother Lamar did in 1963 when he took what were the Dallas Texans to Kansas City where they became the Chiefs.

Even now Sharyland Utilities only serves around 2,000 customers in South Texas. After losing out to KKR for control of Oncor, the Hunts decided they needed scale in the power business.

Over the next nine years, they set about building up Sharyland Utilities.

In 2009 Hunter Hunt watched with interest as a New York investment firm tried to sell off the Texas power utility it had bought four years earlier. Named Cap Rock Energy, the company had a spotty service record. But it had 38,000 customers and controlled power service around West Texas’ Permian Basin, an oil field that was about to take off again.

When the sale of Cap Rock to a New Mexico gas utility fell apart, Hunter Hunt picked up the phone.

“I actually did a cold call. They said there was no interest. And then the next day they called back and said, ‘Let’s talk,’” he said.

Within the year, the Hunts were in front of Texas regulators to close the deal.

Once that was done, they turned their attention to building 300 miles of new transmission lines in the Texas Panhandle, part of an $7 billion state project to connect wind farms across the western half of the state. Between buying up the right of way and conducting the environmental reviews, the Hunt’s piece of the project, worth more than $850 million, didn’t finish until 2013, four years after it started.

Confluence of events

Suddenly, the power business, long an afterthought within Hunt’s new curved glass headquarters looming over Klyde Warren Park, was becoming a significant part of the family business. Earlier this year the family broke with its long avoidance of shareholders and stock analysts when they listed their power line assets on the New York Stock Exchange under a new company named InfraREIT.

Meanwhile, down the road at the headquarters of TXU -- now renamed Energy Future Holdings -- the the financial situation had become bleak. U.S. natural gas prices crashed in the hydraulic fracturing boom, bringing Texas electricity prices down with them. By early 2013, bankruptcy had become a foregone conclusion.

A group of investment firms that specialize in a field of finance known as “distressed debt” had been buying up large blocks of Energy Future bonds on the cheap. Once there was a bankruptcy filing, they would be in a position to force the company to settle with them to avoid a lengthy court fight.

In April 2014, the inevitable happened. Under the restructuring plan laid out by Energy Future, Oncor would be handed over to the distressed debt firms. But unbeknownst to all but a handful of top executives, those firms were partnered with Hunt Consolidated, the result of a years-long negotiation.

“We never left,” said Kirk Baker, a longtime attorney of Hunt and chairman of InfraREIT, said of the company’s pursuit of Oncor. “We stayed close with management at EFH. We stayed close with” KKR and TPG.

The pursuit didn’t end there. Last June the Florida power giant NextEra Energy topped Hunt’s original offer, setting off an auction process in which the Hunts appeared doomed, only to startle everyone by putting together a deal with a rival group of creditors.

That deal, which purports to settle the 18-month Energy Future bankruptcy once and for all, still awaits a final court showdown in November. It is expected to be tightly fought, pitching hedge fund against hedge fund in the federal bankruptcy court in Delaware.

Even there, the Hunt name and legacy, cannot be escaped.

In June, arguing the sale of Oncor was all but assured regulatory approval in Texas, Thomas Lauria, a bankruptcy attorney representing creditors alligned with the family, made the case the Hunts “not only have the operational expertise, which has been recognized in the state of Texas, but they also have the regulatory connections and experience that we believe is vital.”

The Texas Attorney General’s Office, angered at the insinuation the Hunts would get special treatment from state regulators, promptly sent a letter off to Lauria telling him nothing was decided. Lauria later wrote a letter to the attorney general to apologize.

http://www.dallasnews.com/business/energy/20151002-for-hunts-oncor-deal-nearly-a-decade-in-the-making.ece