Moody's: Hunt plan to take over Oncor carries risk for shareholders

Dive Brief:

Hunt Consolidated's plan to acquire Oncor is risky, according to Moody's, opening the door to “regulatory contentiousness” and investor risk.
Hunt has floated a plan to acquire Oncor as part of a reorganization plan filed by bankrupt Energy Future Holdings, likely for about $19 billion; EFH last month said it was in favor of the plan and hoped for a swift resolution.
But Hunt's proposal calls for a never-before tried scheme to drop the Texas utility giant into a real estate investment trust, aimed at reducing Oncor's tax burden, and Moody's said it is uncertain how Texas regulators will react.

Dive Insight:

Energy Future Holdings told a bankruptcy court last month that it was seeking to “reach rapid closure” with Hunt on its proposal, but Moody's has issued a new report predicting that likely won't be the case.

“The plot will thicken over the next few weeks as additional information comes to light,” Moody's said, according to a report in The Dallas Morning News. The credit agency said state regulators might opt to restrict dividend payments or lower Oncor's return on equity, to factor in tax savings. And there is some concern Oncor may be over-leveraged.

Putting the REIT proposal in front of Texas regulators “will increase the risk of regulatory contentiousness,” Moody's said. The structure has never been tried before with a utility of this size.

The utility serves more than 3 million customers in Texas and is expected to fetch more than $18 billion. Oncor was initially valued between $15 billion and $16 billion, but some estimates have its value closer to $20 billion. The utility serves has about $15 billion in annual earnings.

The quest to sell off Oncor has gone through a few phases, and many unexpected turns. In June, NextEra Energy appeared to be in the lead to acquire the T&D utility, and there was talk of it being named the stalking horse to help set the value of the company for an auction. After that, Fidelity emerged as a frontrunner. Hunt appeared to have replaced those as the likely choice to take over Oncor, but Moody's report may throw that into doubt as well.