Dive Brief:
- The U.S. Internal Revenue Service is skeptical of a plan to split Energy Future Holdings Corp. into two entities as it emerges from bankruptcy, informing the company that the potential tax implications could exceed $4 billion.
- The Wall Street Journal reports on new filings with the bankruptcy court, where the company said tax officials have indicated they are “tentatively adverse” to a tax-free split of the companies.
- A plan to rescue Energy Future Holdings from bankruptcy had hinged on splitting off Oncor, the largest utility in Texas, and operating it as a Real Estate Investment Trust. But conditions attached to the state's approval of that plan and an associated tax windfall were untenable for investors.
Dive Insight:
Bankruptcy plans for Energy Future Holdings remain largely up in the air, and news that the IRS is skeptical of a tax-free split of the company has shocked some creditors, the Wall Street Journal reports, calling it a "potential bombshell."
The company is waiting on guidance from the IRS on a plan to split the company's generation and retail sales into one company and Oncor into another. Creditors have proposed the structure as a tax-free plan, but the company told the bankruptcy court that the IRS is “tentatively adverse” to the plan.
If the agency determines a split would trigger the need for tax payments, "a cash tax liability in excess of $4 billion” would result, EFH told the court.
Texas regulators approved a bankruptcy plan proposed by Hunt Consolidated earlier this year, but attached conditions that forced Hunt to walk away. The primary issue in the proceeding was Hunt's plan to operate the utility as a Real Estate Investment Trust, a strategy which has never been used with a utility of its size. A $250 million annual tax windfall would have gone to investors, but regulators have pressed for that to be shared with customers, one of the sticking points in Hunt's ability to accept Texas' conditions.
EFH filed a second bankruptcy plan in an effort to emerge from Chapter 11 in may, after controversial plans for spinning off Texas utility Oncor hit stumbling blocks. The new plan still spins off Luminant and TXU Energy, but would likely leave Oncor in the hands' of creditors – though it leaves open the possibility of a sale, but Hunt withdrew its proposal.NextEra appears to have renewed its pursuit of Oncor, potentially dimming the future of its acquisition of Hawaiian Electric Co.
Energy Future Holdings has more than $40 billion in debt it is attempting to restructure in the proceeding.