Electric utility company Energy Future Holdings’ plan to exit bankruptcy by mid-2016 may have hit a snag, thanks to the U.S. House of Representatives.
The Dallas company originally entered into bankruptcy protection nearly two years ago to reduce its $40 billion of debt. The reorganization plan was approved Dec. 3, 2015 by the U.S. Bankruptcy Court for the District of Delaware.
As part of the plan, Energy Future will complete a tax-free real estate investment trust (REIT) spin-off of some of its businesses and assets related to holdings in transmission and distribution company Oncor Electric Delivery.Tax-free spin-offs have been a favored tool used by activist investors pushing companies to monetize their real estate.
But it may no longer be possible. Just two weeks later, on Dec. 17, as part of a larger tax bill, Congress passed legislation that includes provisions eliminating the tax-free element of spinning off corporate real estate into separate and publicly-traded REITs.
The legislation does include a grandfather clause to allow for companies far along enough in their plans to complete the transaction.
“The amendments made by this section shall apply to distributions on or after Dec. 7, 2015, but shall not apply to any distribution pursuant to a transaction described in a ruling request initially submitted to the Internal Revenue Service on or before such date, which request has not been withdraw and with respect to which a riling has not been issued or denied to its entirely as of such date,” the bill states.
The problem for Energy Future is that it has not yet received approval from the IRS for the spin-off, according to a source familiar with the situation.
That’s not the only obstacle; Energy Future has acknowledged that it will also need the consent of several agencies to complete the reorganization.
“Following the court’s confirmation, the company must also receive regulatory approvals and satisfy various other closing conditions in order to emerge from Chapter 11,” Energy Future said Dec. 3. “The regulatory process is expected to extend into the spring of 2016, though final timing is subject to modification.”
This would delay the bankruptcy proceedings, but the company would not likely lose all of the work it has done up until this point.
“The approved plan of reorganization included a settlement between creditor groups,” the source said. “They arrived at solution that contemplated the REIT and tax-free spinoff. If this isn’t approved it was agreed to go back to the court but not back to square one.”
For companies that were considering a tax-free REIT spinoff, there are other options to be considered that would also enable them to monetize their real estate assets, Evan Levy, a partner with law firm Skadden, Arps, Slate, Meagher & Flom LLP and head of the firm’s Real Estate Capital Markets practice, told Leveraged Finance News.
“Companies are looking at other structures to do this. Companies can pursue sales of real estate assets, sale-leaseback transactions and straight conversions to REITs,” Levy said.
Other dsitressed energy comapnies include Red Mountain Resources, which is in negotiations with its lenders.