Monday, June 25, 2018

NextEra Still Faces Skepticism over Oncor Acquisition

By Tom Kleckner

AUSTIN, Texas — NextEra Energy has taken its bid to acquire Texas utility Oncor before the Public Utility Commission of Texas, the same body that last year effectively sank a previous attempt to buy the same company.

nextera texas Oncor acquisition

Oncor CFO David Davis, CEO Bob Shapard | © RTO Insider

If the first day of hearings Feb. 21 was any indication, NextEra’s $18.7 billion attempt to gain 100% ownership of Oncor is no slam dunk.

PUC commissioners peppered Oncor CEO Bob Shapard with questions about whether his regulated Texas utility would really be able to be managed by a Florida company with a reputation as an aggressive competitor.

“A broad concern in the pink building,” Commissioner Ken Anderson said, referring to the nearby state Capitol, “as well as with the stakeholders, is that they’re not known as being wallflowers. Even early on in this process, they have gently reminded us that [our approach] wasn’t the right approach.”

Shapard worked hard to allay the PUC’s concerns.

PUC commissioners Ken Anderson, Brandy Marty Marquez question TIEC’s Phillip Oldham | © RTO Insider

NextEra is “trying to show they’re listening,” he said. “They’re trying to convince you they’re listening to other parties.” Shapard pointed out that, through its Florida Power & Light subsidiary, NextEra is the largest investor, employer and taxpayer in Florida, a position it’s vigorously protected.

“When they first came in [to Texas], they thought this market was like Florida, but it’s not,” Shapard said. “I think [NextEra CEO] Jim [Robo] will trust us to handle business in Texas.”

Robo is scheduled to personally make his case as a witness before the PUC on Thursday.

The two companies need the commissioners’ approval to proceed with the acquisition. NextEra has attempted to appease the PUC through numerous commitments to maintain Oncor’s independence, including placing Texas residents and independent directors on the utility’s board. (See NextEra Energy Talks Up its Oncor Acquisition.)

nextera texas Oncor acquisition

Attorney Matt Henry huddles with Oncor witnesses (l-r) Stephen Ragland, David Davis, Bob Shapard and Jim Greer | © RTO Insider

Shapard would chair the board, with General Counsel E. Allen Nye Jr. succeeding him as CEO. Nye is the son of former TXU CEO Erle Nye, who retired from the company before a 2007 leveraged buyout by private-equity groups that eventually led to the Chapter 11 bankruptcy of Oncor’s parent corporation.

“Aren’t you a little worried about being hometowned by a Florida company?” Chairman Donna Nelson asked Shapard.

“Jim will insist this company is run pretty well,” Shapard said. “Will he drive Allen crazy? I don’t know, but the operation of the company is not the issue.”

PUC’s Ken Anderson, Donna Nelson, Brandy Marty Marquez | © RTO Insider

There was little disagreement with commissioners over Oncor’s performance and value, despite the bankruptcy of its parent company, Energy Future Holdings. That was generally attributed to stringent ring-fence measures placed upon the utility after the leveraged buyout, which insulated Oncor from its unregulated generation and retail energy affiliates and the eventual financial difficulties of its owner.

PUC staffer Stephen Mack said there was no disputing that the ring fence around Oncor has served its purpose and the risks to the company are lower than if it had been exposed to the “EFH family.”

nextera texas Oncor acquisition

NextEra-Oncor hearings begin before Texas’ PUC | © RTO Insider

Oncor has “maintained a strong credit rating, and it cares deeply about maintaining that credit rating,” Mack said.

NextEra and Oncor are now saying the ring fence is still strong enough. Intervenors, led by PUC staff, the Texas Office of Public Utility Counsel, Texas Industrial Energy Consumers (TIEC) and the Steering Committee of Cities Served by Oncor, are pushing for even more robust protection.

Geoffrey Gay, representing cities served by Oncor | © RTO Insider

Attorney Geoffrey Gay, representing cities served by Oncor, noted that when Hunt Consolidated withdrew its offer for Oncor last year, the utility was still able to reach out to 18 other entities to gauge their interest. (See With Oncor Back on the Market, Multiple Suitors Line Up.)

“That tells me the industry in general recognizes Oncor is a gem,” Gay said. “It’s worth a lot, and its ownership will be beneficial to whoever acquires it.”

NextEra says it needs to maintain control over Oncor’s board by having the ability to appoint, remove or replace the utility’s directors.

That might seem a small price to pay for having NextEra lend its A- credit rating and a market cap of $59.24 billion to help Oncor eliminate the overhang of $11 billion to $12 billion in debt left by EFH — but the Texas entities don’t seem to see it the same way.

Oncor attorney Matt Henry discusses a point with TIEC’s Phillip Oldham | © RTO Insider

“The TIEC members represent billions of dollars captive to Oncor that could be harmed if this doesn’t turn out well,” said the TIEC’s legal counsel, Phillip Oldham. “Our group requires us to kick the tires, look under the hood and see how much stress this situation can endure.”

TIEC’s Phillip Oldham | © RTO Insider

The TIEC has submitted testimony from Charles Griffey, a consultant and former regulatory executive with Houston-based Reliant Energy. Griffey offered a number of recommendations that he said would improve Oncor’s position, including a requirement that all the board members be Texas residents.

“We ask you to take a hard look at that issue in particular,” Oldham said. “Our desire is to ensure Oncor is protected and continues to do the job it’s been doing, even if there are problems with the parent.”

Oldham also said NextEra is not really “extinguishing” Oncor’s debt, a position with which Anderson agreed.

“That’s not really correct,” Anderson told Oncor’s panel of witnesses. “It’s being refinanced. Whatever the amount and however you describe it, what they’re really doing is spreading the peanut butter over a bigger piece of bread.”

TIEC’s Katie Coleman | © RTO Insider

During the second day of hearings, Mark Hickson, NextEra’s executive vice president of corporate development, strategy and integration, said that the company has $12.2 billion in funding for the transaction — $9.8 billion for an 80% interest in Oncor and $2.4 billion for a 20% interest in various holding companies.

He agreed that the full debt would not transfer to NextEra, saying the company would assume only $6.5 billion, in line with its 60/40 debt-to-equity ratio.

“We have said we are going to finance this transaction in a way that allows us to maintain our strong credit rating,” Hickson said. “We are laser focused, as we always have been as a company, in maintaining our credit metrics, which means maintaining our target metrics.”

TIEC’s Phillip Oldham questions NextEra Energy’s Mark Hickson | © RTO Insider

Hickson said NextEra works closely with Moody’s Investors Service, Standard & Poor’s and Fitch Ratings, and has separate targets with each of the three. He spent much of Wednesday downplaying the company’s communications with the agencies.

The PUC’s approval would end EFH’s nearly three years in bankruptcy. What’s left of TXU has already spun off its Texas competitive businesses, power generator Luminant and retailer TXU Energy as standalone companies.

On Feb. 17, a U.S. bankruptcy judge in Delaware accepted EFH’s plan to exit bankruptcy after the company said it had resolved a final lingering dispute after its noteholders reached an agreement to modify what they were owed.

The settlements were with two creditor groups, who were offered 95% or 87.5% of their make-whole claim premiums, in addition to full principal and interest. The groups had been seeking about $800 million.

The PUC’s hearings on the acquisition are scheduled through the end of the week but will likely end Thursday.

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