By Tom Kleckner
NextEra Energy’s bid to acquire Texas’ largest electric utility, which cleared a U.S. bankruptcy court earlier this week, may have to navigate some choppy waters with state regulators.
At the Public Utility Commission’s open meeting Thursday, Chairman Donna Nelson and Commissioner Ken Anderson both expressed concerns with NextEra’s proposed $18.7 billion purchase of Oncor.
Anderson said his concern is with the $275 million termination fee to be paid to NextEra should the company be out-bid by a last-minute competitor, or if the commission rejects the sale or imposes overly “burdensome” conditions. Nelson said she was concerned about the impact on competition.
Anderson said he has no problem with the termination fee itself, but with how it is structured.
“This merger agreement … appears to be an effort to really tie the commission’s hands in the proceeding,” he said. “If I read the merger agreement and if the commission rejects the transaction in its entirety as not in the public interest, subject to some caveats, there’s no termination fee.
“If, on the other hand, the commission purports to approve it, but with what they call burdensome conditions … that could have a material adverse effect on NextEra or its credit rating … the result is they could walk the deal and get $275 million. Now that’s an extraordinary requirement.”
‘Offended’
“I have frankly been offended by [the merger agreement], but it is what it is,” Anderson added. “I don’t know where the $275 million is coming from, but it can’t be from Oncor’s ratepayers.”
Anderson said he wanted to explain his concern “so the potential applicant, if it wants to, can address them.” The commissioner admitted he has not reviewed the merger agreement in detail, but he promised to file a memo “maybe” next week that fully explains his viewpoint (Docket No. 42750).
“Burdensome” conditions sank a previous bid to buy Oncor from its bankrupt parent, Energy Future Holdings, when creditors objected to the PUC’s conditional approval in March of Hunt Consolidated’s offer. One of the commission’s requirements was that the Hunt group share potential tax savings with the utility’s ratepayers. (See Hunt Reopens Oncor Bid in Lawsuit Against PUCT.)
For her part, Nelson said she is concerned with the deal’s tax implications and its effect on ERCOT’s competitive market. The Internal Revenue Service earlier this summer issued a ruling that eliminates a potential $4 billion tax liability for its remaining assets, power generator Luminant and electricity retailer TXU Energy.
Anderson noted that NextEra has “substantial competitive assets” in ERCOT that could give the company an unfair advantage, a position Nelson agreed with. Brandy Marty Marquez, the PUC’s third member, was silent during the discussion.
“As this transaction has progressed, it does feel in many ways like a step backwards … with respect to [Oncor’s] ownership,” Nelson said. “The reason the [ERCOT] market is restructured the way it was with separate and regulated [transmission and distribution providers] was to grant generators and retailers access to customers and a way of serving those customers.”
Oncor is not a separate, unbundled company like most in the ERCOT market. As part of EFH’s leveraged buyout of TXU Corp. in 2007, the commission required Oncor to be ring-fenced from its sister companies with a separate, independent board of directors.
“The utility press says part of the reason NextEra buys Oncor is they continue to invest in generation and take advantage of the production tax credits,” Nelson continued. “I do want to look at those, as well.”
An Oncor spokesman declined to comment on the commissioners’ statements.
OK from Bankruptcy Court
On Sept. 19, NextEra won approval from the U.S. Bankruptcy Court in Delaware of its bid for Oncor after increasing its offer by $300 million in cash. The company said it would also make other changes to satisfy EFH creditors (Docket No. 14-10979).
EFH’s legal counsel told U.S. Bankruptcy Judge Christopher Sontchi during a hearing that unsecured creditors will now receive an additional $450 million. NextEra will pay $4.4 billion in cash for Oncor and assume its debt and other liabilities, including funding $9.5 billion for the repayment of EFH debt. Oncor was valued at $18.4 billion before NextEra added its sweetener.
After the collapse of the Hunt group’s bid, NextEra announced in July it had reached an agreement with EFH to purchase its 80.25% stake in Oncor. The other 19.75% is owned by an investor group led by Borealis Infrastructure Management and Singapore’s GIC Special Investments. (See NextEra Reaches Deal for Oncor.)
NextEra says it expects to file a joint application with the PUC “soon,” and that it expects the transaction to close in the first quarter of next year.
“Our proposed transaction provides Oncor with a financially strong, utility-focused owner that shares Oncor’s commitment to providing customers with affordable, reliable electric delivery service and significant value and certainty for the EFH bankruptcy estate,” NextEra CEO Jim Robo said in a statement.
NextEra said the deal is subject to bankruptcy court confirmation of EFH’s Chapter 11 reorganization and approval by FERC and the Texas commission, as well as “other customary conditions and approvals.”
NextEra shares have gained $4.72 since Monday, closing at $128.03/share Thursday.
The Hunt group remains unfazed by NextEra’s progress, with spokesperson Jeanne Phillips saying Hunt “will continue to work with all stakeholders to develop a Texas-based solution for the purchase of Oncor.”
EFH has been struggling to emerge from bankruptcy for more than two years now. It has proposed to sell Luminant and TXU to senior creditors owed $24.4 billion. Another hearing is scheduled in bankruptcy court next Monday.
