Tuesday, January 22, 2019

NextEra Energy Talks Up its Oncor Acquisition

TXU Energy, Luminant Rebrand as Vistra Energy

By Tom Kleckner

DALLAS — Having finally chased down Oncor, a quarry it has been after for two years, NextEra Energy has embarked on a charm offensive to ensure it successfully completes its acquisition.

The Florida-based company sent Senior Vice President Mark Hickson barnstorming across Texas last week to spread the message that Oncor is a perfect fit for NextEra’s focus on regulated investments and long-term power contracts. (See NextEra, EFH Seek to Reassure Texas PUC on Merger Deal.)

NextEra Energy Talks Up its Oncor Acquisition

GCPA Executive Director Tom Foreman (far left), Oncor General Counsel E. Allen Nye (right) listen to NextEra Energy’s Mark Hickson, SVP, corporate development, strategy, quality and integration | © RTO Insider

Speaking at the first of three Gulf Coast Power Association luncheons 48 stories up the Dallas skyline Wednesday, Hickson said Oncor has a lot in common with NextEra’s Florida Power & Light subsidiary.

“FP&L is part of the reason we’re one of the most admired companies for nine of the last 10 years,” Hickson said, pointing to the utility’s repeated listing among Fortune’s “Most Admired Companies.”

“We have the highest reliability [measures] and our bills are lower. Oncor shares those same commitments. The two of us coming together and sharing best practices is going to further our ability to provide that kind of service.”

Hickson also spoke before GCPA gatherings in Houston and Austin last week. Hickson’s tour followed the company’s Oct. 31 earnings announcement, in which it reported a 14% drop in third-quarter earnings.

Reducing Debt

Hickson said NextEra’s financial strength and access to Oncor’s cash flows will allow it to “reduce to zero” the utility’s nearly $11 billion debt and improve its credit ratings, thereby decreasing the cost of borrowing money, said Hickson, who heads the company’s corporate development and strategy functions.

FP&L already enjoys credit ratings of A or above from the three major ratings agencies. Oncor, which has been enmeshed in parent Energy Future Holdings’ bankruptcy since 2014, saw Moody’s bump its senior secured credit rating from Baa1 to A3 on the news of NextEra’s proposed acquisition. (See NextEra Reaches Deal for Oncor.)

Moody’s, Standard & Poor’s and Fitch Ratings have all since issued positive outlooks for Oncor.

“As our operations get less risky, the rating agencies aren’t so fussy about how much debt we have,” Hickson said.

NextEra announced in late July it had reached an agreement to acquire EFH’s 80.03% interest in Oncor for $18.4 billion. On Oct. 31, it announced an affiliate — created through a web of holding companies — would acquire the other 19.75% from Texas Transmission Holdings Corp. (TTHC), composed of a pair of private-venture funds, for an additional $2.4 billion. It has also acquired the remaining 0.22% interest owned by Oncor Management Investment.

That same day, NextEra and Oncor filed an application with the Public Utility Commission of Texas seeking its approval of the merger (Docket No. 46238). The companies expect the deal to close in the second quarter of 2017.

The application quickly drew intervention filings from an organization of Oncor cities and the Office of Public Utility Counsel. The PUC has placed the application on its Nov. 10 open meeting agenda.

Texas Investments

Hickson emphasized NextEra’s substantial investment — $8 billion over 15 years — in Texas through NextEra Energy Resources (NEER), its competitive energy subsidiary. The company’s Texas holdings include 26 wind farms (3,000 MW), 569 miles of natural gas pipelines in South Texas and 330 miles of transmission in western North Texas through subsidiary Lone Star Transmission.

Among the commitments NextEra has made, Hickson said, is to consolidate Lone Star with Oncor’s assets once the transaction is completed. Oncor, which already owns 119,000 miles of transmission and distribution lines and has more than 3 million meters, will keep its name and brand.

NextEra Energy Talks Up its Oncor Acquisition

Oncor’s current ownership structure (L) and the organization chart under NextEra Energy’s proposed acquisition (R). | NextEra

“Oncor is a very sizeable company, but it will end up being 20% of” NextEra, Hickson said. The Texas utility’s addition will increase NextEra’s customer connections to 8.6 million and its regulated assets from $82 billion to $102 billion, he said.

“The trick in bankruptcy is to try and get as many creditors as you possibly can onboard with the transaction,” he said. “The easiest way to do that is to come as close as you possibly can to providing $11 billion of value.”

Under the merger agreement’s terms with TTHC, NextEra will pay 100% of the consideration in cash, leaving no debt at TTHC upon the merger’s close.

NextEra has been interested in acquiring Oncor since 2014, when EFH announced its bankruptcy. EFH and its creditors first supported Texas-based Hunt Consolidated’s bid for the utility in 2015, but that deal fell apart earlier this year when the PUC required conditions that changed the economics for investors.

NextEra says it will continue to maintain a ring fence around Oncor, not allowing it to incur additional debt and setting up a separate board that includes seven independent directors. Oncor CEO Bob Shapard will become the board’s chair, and E. Allen Nye Jr., the utility’s general counsel, will become CEO. Nye is the son of Erle Nye, the long-time CEO of TXU Corp. before EFH’s leveraged buyout.

NextEra also says there will be no “involuntary reductions” at Oncor, labor agreements will be honored and the utility’s operations will not conflict with NextEra’s other businesses.

Hawaii Setback

NextEra is hoping to burnish its image after failing to win Hawaii regulators’ approval in July for the acquisition of the state’s largest utility. The company also has come under criticism from clean energy advocates in its home state over a ballot initiative they say would block solar competition.

Hickson noted former Oncor sister companies Luminant and TXU Energy maintain larger shares of the ERCOT market than do NextEra’s other subsidiaries. He said Luminant accounts for 18% of ERCOT’s generation compared to NextEra Energy Resources’ less than 1%, and retailer TXU Energy has a 12% share of customers compared to NextEra’s 3%.

“Not only do we have a low market share of generation, we don’t have any generation currently interconnected to Oncor,” he said, going on to note the utility will seek the commission’s approval before connecting to any NextEra generation.

Hickson said Oncor and FP&L will operate independently of each other and there are no plans to grow Oncor outside of Texas.

“The thing we surprisingly found — the customer growth, the economic growth — was equal to, if not better than, that of Florida,” Hickson said. “We think there are a lot of opportunities for Oncor to grow within ERCOT.”

TCEH Rebrands Itself as Vistra Energy

On Friday, meanwhile, TCEH Corp., the parent of TXU Energy and Luminant, announced that it has rebranded itself as Vistra Energy. The company emerged from Chapter 11 bankruptcy as a tax-free spinoff from Energy Future Holdings. (See Luminant, TXU Energy Emerge from Bankruptcy.)

NextEra Energy Talks Up its Oncor AcquisitionVistra combines the vision of “an energy company preparing for the future” and the tradition of “an energy company whose lineage dates more than a century,” the company said.

“The Vistra Energy brand is intended to capture the full opportunity set before us, backed by a proud history, the industry’s best team of professionals, stellar operating assets and a strong balance sheet,” said Vistra’s recently installed CEO, Curt Morgan, a former operating partner at private equity firm Energy Capital Partners.

Long known as Texas Utilities and then TXU, the company was acquired in 2007 by EFH and its consortium of private-equity investors through a leveraged buyout. The deal went sour when energy prices collapsed, and EFH filed for bankruptcy in April 2014.

Vistra retains Luminant, the largest generator in the ERCOT market with 17,000 MW, and TXU Energy, the No. 1 retailer with about 1.7 million residential and business customers.

NextEra Shares Drop Following Q3 Earnings Release

NextEra announced Oct. 31 that profits fell 14% in the third quarter compared to last year amid higher overall expenses and declines at NEER.

The company reported net income of $753 million ($1.62/share) down from $879 million ($1.93/share) the year prior. Revenue decreased 3% for the quarter, down to $4.81 billion.

FP&L reported its earnings rose 5.3% to $515 million. However, earnings fell 19% to $307 million for NEER.

CEO Jim Robo said he was not concerned with NEER’s third-quarter decrease.

“There is no one in this industry that has the greenfield capabilities that we do,” he said. “Being in the wind business, 70% or 80% of the value creation is in the … greenfield development of those projects. No one in the industry has the pipeline that we do, that has the team that we do and the year in and year out track record. I worry about a lot of things, but [NextEra’s clean-energy development] is very low in my list of things that I worry about.”

NextEra shares, which have risen 22% in the past 12 months, closed Friday at $123.18, down $3.42/share after the earnings announcement.

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