The Public Utility Commission (PUC) of Texas, in an April 13 final order, said that the joint report and application filed by Oncor Electric Delivery Company and NextEra Energy (NYSE:NEE) for PUC approval of transactions, by which NextEra Energy would acquire all equity interests in Oncor, is denied.
As reported in January, FERC has approved the takeover of Oncor by NextEra Energy. Oncor is part of bankrupt Energy Future Holdings Corp., with Energy Future’s power plants in Texas spun off late last year to creditors and now operating under the name Vistra Energy.
As noted in the PUC’s order, under the proposed transactions, NextEra Energy would acquire both the approximately 80% in Oncor indirectly held by Energy Future Holdings, and the 19.75% interest indirectly held by Texas Transmission Holdings Corporation. In addition, the application discussed NextEra Energy’s agreement to purchase the 0.22% interest in Oncor held by Oncor Management Investment LLC, subject to closing the proposed transaction with Energy Future Holdings. As a result of those proposed transactions, NextEra Energy would own all of the equity securities of Oncor, the PUC added in its order.
NextEra Energy intended to fund $12.2bn in order to obtain 100% of Oncor, and of that amount, $9.8bn would be used to obtain the 80.03% stake in Oncor currently held indirectly by Energy Future Holdings. The financing of the $9.8bn was to include about $7.5bn in debt funding financed at NextEra Energy Capital Holdings. The PUC also said that in addition to the $9.8bn, $2.4bn would be used to obtain the 19.75% interest held by Texas Transmission Holdings, and NextEra Energy proposed to pay for that acquisition in cash.
While NextEra Energy is a well-regarded utility holding company, the expansive and diversified structure of NextEra Energy and its affiliates would subject Oncor to new and potentially substantial risks, the PUC said. NextEra Energy’s method of financing the proposed transactions does not entirely eliminate the debt above Oncor, but merely refinances that debt with new debt at NextEra Energy Capital Holdings, the PUC said, adding that the revenues of Oncor would continue to support repayment of that debt, albeit to a lesser extent.
Including the debt from the proposed transactions, the total amount of consolidated debt at NextEra Energy would be about $45bn, and Oncor would be required to support about 15% of that debt, the PUC said.
The proposed transactions would also introduce Oncor to risks associated with NextEra Energy’s unregulated businesses, including generation development, the PUC said. The evidence in the case has shown that NextEra Energy, including its subsidiary NextEra Energy Resources LLC, is subject to numerous risks, including potential changes in renewable demand resulting from changes in climate or tax policy, commodity risks, retail electric provider risks, as well as power and nuclear generation risks, the PUC said.
Under NextEra Energy’s proposal, the tangible benefits of the proposed transactions to Texas ratepayers are minimal in comparison to the status quo, the PUC said, adding that the sole tangible and quantifiable benefit offered by NextEra Energy in its rebuttal testimony is a commitment to share 90% of the interest-rate savings on Oncor’s cost of debt between the closing of the transaction and Oncor’s next rate case after the rate case filed on March 17. At most, the PUC said, that quantifiable benefit to Texas ratepayers would amount to credits of about $3.2m per year for the first four years after the closing of the transaction.
The PUC further noted that NextEra Energy sought to achieve sufficient financial control over the actions and resources of Oncor to enable the linkage of Oncor and NextEra Energy’s credit profiles. To accomplish that goal, NextEra Energy requested that the PUC grant it the ability to eliminate these two protections from Oncor’s existing ring fence: restrictions on NextEra Energy’s ability to appoint, remove, and replace members of the Oncor and Oncor Holdings boards of directors, with the exception of three disinterested directors on the Oncor board of directors; and the ability of the Texas Transmission Investment shareholders to veto dividends declared by the Oncor board of directors and, in certain circumstances, capital and operating budgets.
The PUC added that since the 2007 leveraged buyout of TXU Corp., by Energy Future Holdings, a robust ring fence has protected Oncor and its ratepayers from financial difficulties. Oncor has not been made a party to the bankruptcy of its indirect parent company, Energy Future Holdings, as a result of that robust ring fence, the PUC said, adding: “A truly independent board of directors at Oncor, with control over Oncor’s decisions on capital expenditures and operating expenses is a critical part of the ring fence protecting Oncor. The ability for a majority of independent and disinterested directors to limit dividends or other upstream distributions from Oncor is another critical layer of ring-fencing.”
Oncor’s existing ring fence requires that Oncor and Oncor Holdings each have a majority independent board and that the Oncor board has the sole right to determine dividends, the PUC noted. Under the proposed transactions, a robust ring fence is still necessary to protect Oncor if NextEra Energy or one of its subsidiaries were to file for bankruptcy.
The PUC said that it finds that if the proposed transactions were to close, a majority of Oncor’s board would need to be independent and disinterested and retain all of the authority the Oncor board currently possesses, and a majority of the independent and disinterested directors would need the authority to veto dividends.
Without those protections, the PUC said that it finds that Oncor will not be adequately insulated from the additional risks resulting from NextEra Energy ownership.
“Because NextEra Energy has stated that these conditions would be unacceptable, the commission finds that the proposed transactions are not in the public interest,” the PUC said. “The commission notes that all ring-fencing conditions placed on Oncor continue to have full force and effect.”