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Mitchell Schnurman: Let Oncor follow American’s template for prosperity (3/25/16)

By Mitchell Schnurman

For American Airlines, life after bankruptcy couldn’t be much better. There are record profits, big pay raises, billions in new investment, thousands of new employees and now profit-sharing for all.

It’s scary to think that this almost didn’t happen. At one point, the Justice Department sued to block a merger with US Airways that was essential to American’s restructuring. Regulators settled after American agreed to give up valuable slots in Washington, New York and Dallas Love Field.

It was a win all around. Low-cost airlines got more access to prime real estate, and Fort Worth-based American continued to move ahead on one of the best turnarounds ever.

That close call is worth recalling today because another Dallas institution is in a similar place. Dallas-based Oncor, the state’s largest regulated utility, and parent company Energy Future Holdings, the state’s largest power generator, are close to leaving bankruptcy behind and starting anew.

Both are poised to be part of growth stories, too. Oncor would become the anchor for InfraREIT, an ambitious growth play in regulated infrastructure, including electricity transmission lines. EFH would emerge from Chapter 11 with a good balance sheet and many opportunities in a beaten-down energy industry.

Such prospects would energize employees, attract talent and investment, and boost the local economy. The question is whether Texas regulators will make all that potential goodness evaporate.

On Thursday, the Public Utility Commission approved the $18 billion sale of Oncor to the Ray Hunt family of Dallas. The 3-0 vote was the first of many steps toward the future, but commissioners imposed some tough conditions. They also created regulatory uncertainty, which threatens the Hunts' deal and harms Texas' pro-business reputation.

3 regulators, 3 views

The outstanding issue applies to tax savings from the new Oncor. The Hunts would put the utility in a real estate investment trust, a novel financial structure with tax benefits of about $250 million a year.

One commissioner said ratepayers should get all of that. Another said the money belongs to the owners, in part because other utilities, including Oncor, have been reaping the same windfall. The third commissioner tried to find a middle ground.

Ken Anderson of Dallas proposed classifying the tax benefit as a “regulatory liability” so it could be tapped later, after a rate review. Then if the PUC decides ratepayers should get a break, the money will be there.

The Hunts had already pledged $100 million in rate relief, and one commissioner suggested that stay in place along with the accounting order.

“It feels like you’re punishing them now,” said Chairman Donna Nelson, who doesn’t believe Oncor’s tax savings should be taken away unless the rules are changed for all utilities. “If we’re already setting aside taxes, I don’t really understand what the point of it is.”

“But we’re not setting aside taxes; we’re just keeping a number in a book,” said Commissioner Brandy Marty Marquez.

Oncor’s current CEO, Bob Shapard, cleared things up: To meet that PUC condition, Oncor would have to withhold real money because all of it could be refunded. That adjustment would require reducing revenue, equity and debt.

Marquez said she wanted to send a signal to ratepayers that the PUC had their interests in mind.

Nelson’s frustration almost boiled over: “If we’re gonna deny it, why not just deny it?” she said about the sale. “If we keep attaching all these things, it’s gonna end up dying anyway. And all we're doing is wasting time.”

The Hunts are raising over $8 billion in equity and have spent four years developing the Oncor strategy and pulling together backers. Now they have to see if the PUC ruling breaks up the consortium.

“Everything, we need to take back to the investors,” said Hunter Hunt, CEO of Hunt Consolidated Energy.

Will they accept the deal without the $250 million benefit? Can the Hunts get the tax sharing low enough to keep investors on board?

Some rate proceedings will occur before the funding deadlines. So regulators and the Hunts will have a chance to find a sweet spot, the same way the Justice Department and American worked things out.

Uncertainty of an auction

If the Hunt deal falls apart, the bankruptcy court will hold another auction for Oncor, considered the crown jewel among EFH’s assets. Ironically, the next winning bidder almost certainly wouldn’t be using a REIT so there wouldn’t be any tax savings to argue over.

More important, the delay would extend Energy Future Holdings’ stay in bankruptcy for months. EFH is spending about $1 million a day on legal bills, and its leaders are eager to get growing again.

On Thursday, a routine item on the PUC agenda was approved without garnering extra attention. It was EFH’s purchase of two gas plants in Northeast Texas for almost $1.6 billion, a deal first disclosed in November.

There’s more of that to come from the state’s biggest power players. As American has shown, life after bankruptcy can be very good indeed. But first you’ve gotta get out.

http://www.dallasnews.com/business/columnists/mitchell-schnurman/20160325-mitchell-schnurman-let-oncor-follow-americans-template-for-prosperity.ece