By Tom Kleckner

AUSTIN, Texas — The Public Utility Commission of Texas concluded four days of hearings on NextEra Energy’s proposed $18.7 billion acquisition of Oncor on Friday with both regulators and the Florida company warning of potential “deal-killers.”

The hearing concluded after NextEra’s legal staff submitted into the record a revised list of regulatory commitments, which now number 72. The applicants, intervenors and commissioners briefly discussed minor revisions to the document before adjourning the hearing.

PUC staff and intervenors have sought to revise some of the company’s earlier commitments, with staff expressing concerns over Oncor’s existing debt, credit ratings, board makeup, budgets, dividend policies and ring-fencing measures.

CEO’s Last-Minute Pitch

In a last-minute appearance before the PUC on Thursday, NextEra CEO Jim Robo said several of staff’s revisions to the commitments would qualify as “burdensome conditions” or “deal-killers.”

He said a number of the changes would affect how credit rating agencies viewed the deal, a point Mark Hickson, the company’s executive vice president of corporate development, strategy and integration, made frequently to the commission earlier in the week. (See NextEra CEO Crashes PUC Hearings on Oncor Acquisition.)

Robo told the commissioners he wanted to address “head-on” issues raised during the first two days of hearings on the acquisition (Docket 46238), which he said he had watched online.

Texas vs. Florida

Having heard concerns from the commissioners over Oncor’s potential out-of-state ownership, Robo played up his Texas ties. Robo noted his wife grew up in Dallas, their marriage took place in Dallas and his many in-laws in the state include the mayor of Waco (Kyle Deaver). He also noted that NextEra has invested $8 billion in Texas through various subsidiaries.

“There’s been a lot of talk and discussion about how Oncor is a gem, and I couldn’t agree more,” Robo said. “I’ve been very clear … I love the Oncor management team. I’ve asked every one of them to stay. I do know this: As good as Oncor is, as terrific a company as NextEra is, we will be a better utility together. That’s my vision.”

Robo said Oncor and NextEra’s utility, Florida Power & Light, will be able to share best practices, benefiting both of them. Oncor CEO Bob Shapard’s “team will teach us things; we’ll teach Bob’s team things. We’ll be a better company going forward,” he said.

PUC commissioners began the hearing Tuesday by peppering Shapard with questions about whether Oncor would approve of being 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 [NextEra is] 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.

NextEra is “trying to show they’re listening,” he said. “They’re trying to convince you they’re listening to other parties.” As the owner of FP&L, NextEra is the largest investor, employer and taxpayer in Florida, a position it has vigorously protected, Shapard acknowledged.

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

Ring Fencing

Robo also addressed the commissioners’ concerns over NextEra’s unregulated businesses, citing his “very clear business strategy of de-risking” them. He also said NextEra would not try to pass on affiliate costs from its subsidiaries in Oncor’s upcoming rate case. “Our intention is not to layer costs on Texas customers,” he said.

NextEra and Oncor say the ring fence proposed in the acquisition is sufficient. PUC staff and intervenors Texas Industrial Energy Consumers (TIEC), the Texas Office of Public Utility Counsel and the Steering Committee of Cities Served by Oncor are pushing for stronger protection.

Staff said the acquisition would be “funded with high levels of debt that would significantly increase NextEra Energy’s debt as a percentage of total capitalization, while removing the protective ring fencing currently protecting Oncor.”

The changes “would expose Oncor to the substantial risks of NextEra Energy’s nonregulated businesses, which carry much more risk than that of a [transmission and distribution] utility,” staff said.

A strong ring fence has been credited with insulating Oncor from its unregulated generation and retail energy affiliates when a Chapter 11 bankruptcy took down Energy Future Holdings, the company formed by private equity investors following a leveraged buyout of TXU Corp. in 2007.

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

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. “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.”

Board Makeup

The makeup of Oncor’s board of directors is one of the central points of contention. NextEra has committed to an Oncor board composed of 11 people, with three designated as “disinterested directors” and four independent from NextEra and its subsidiaries.

The company has promised to maintain Oncor’s independence by placing Texas residents and independent directors on the utility’s board.  Shapard would chair, 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 the 2007 buyout. (See NextEra Energy Talks Up its Oncor Acquisition.)

Robo told the PUC that changes to the board composition, or any of about a dozen other commitments, would be deal-killers.

“I appreciate you coming in and being so frank,” Commissioner Brandy Marty Marquez said.

“I feel very strongly that when we make commitments, we’ll do what we say,” Robo responded.

NextEra says it needs to maintain control over Oncor’s board to ensure its ability to appoint or remove the utility’s directors. The company said that is a fair trade-off for lending its A- credit rating and $59.2 billion market capitalization to help Oncor eliminate the more than $11 billion in debt left by EFH.

The Texas entities don’t see it the same way. TIEC submitted testimony from Charles Griffey, a former executive with Houston-based Reliant Energy, who offered a number of recommendations, including a requirement that all the board members be Texas residents.

“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.

“We ask you to take a hard look at that issue in particular,” he 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.”

Debt Overhang

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

“That’s not really correct,” Anderson told an Oncor 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.”

Hickson said that NextEra 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.”

Hickson pointed Anderson to commitment No. 71, which requires NextEra and its subsidiaries to “provide advance notice of their corporate separateness to lenders on all new debt.”

Anderson expressed concern during the week about the ability of NextEra’s affiliates to collect expenses from Oncor.

“I haven’t decided what I think about it completely yet,” Anderson said. “Where we’ve talked about federal tariffs, it’s not going to be sufficient for me. I’ll come up with the language, but this falls pretty close to being a deal-killer for me.”

“We know what your deal-killers are; we just haven’t determined what ours are,” Chairman Donna Nelson said to Hickson.

Not on the Record

Robo did not testify on the record Thursday and was not made available for comment afterward. He answered the commissioners’ questions in what was an “emergency” open meeting of the PUC — framed as an opportunity to visit with the commissioners and get to know them better.

“We envision [Robo’s] discussion as a statement of opportunity and to discuss the company’s position,” said NextEra’s lead legal counsel, Anne Coffin. “It’s no different than calling people up before regular open meetings. It’s not evidence; it’s simply dialogue.”

Attorneys for the intervenors declined an opportunity to put Robo under oath, agreeing to expedite the hearings by having their witnesses respond to Robo’s comments following the open meeting.

April 29 Deadline

The PUC is scheduled to next take up the case at its March 30 open meeting. It has an April 29 deadline to issue an order.

“I have found this entire process, the intervenors, the staff … to be extremely informative to us,” Hickson said. “We have learned so much since July 29 [when the company’s deal with EFH was announced]. We have a lot of very thoughtful participants in this room. It has shown us time and time again we haven’t been able to think of everything on our own. We have been continuing to welcome that input. It’s been very helpful in getting us to where we are today.”

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 after the company said it had resolved a final dispute, with noteholders agreeing 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.