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PUCT rejects NextEra's rehearing motion for Oncor

Texas regulators on June 7 denied NextEra Energy Inc.'s motion for rehearing on an earlier rejection of the company's proposed $18.7 billion acquisition of Oncor Electric Delivery Co. LLC.

The Public Utility Commission of Texas' decision officially ended NextEra's current effort to purchase Oncor. In rejecting the rehearing motion, commissioners used their April 13 order initially denying the deal but added further rationale in response to their solicitation of comments from NextEra, PUCT staff and outside stakeholders.

The PUCT on May 18 hinted at its rejection, with Commissioner Kenneth Anderson saying he remained "unpersuaded" to grant the rehearing motion. Commissioner Brandy Marty Marquez said she had not changed her decision upon reading the motion.

Energy Future Holdings Corp., which is going through protracted bankruptcy proceedings, owns 80.03% of Oncor, while OMERS Administration Corp. has 19.75% and Oncor Management Investment LLC has 0.22%, according to SNL Energy data.

NextEra would have acquired each of these three interests under the transaction's terms. But what gave commissioners pause, in part, was that the Florida company rolled these three transactions into one omnibus application. And problems with individual transactions resulted in a rejection of the whole package.

The 19.75% interest is indirectly held by Texas Transmission Holdings Corp., or TTH, and NextEra sought to merge its affiliate, WSS Acquisition Company, into TTH. This would have resulted in NextEra owning all of TTH and Texas Transmission Investment LLC, including the latter's 19.75% interest in Oncor.

Commissioners took issue with this part of the deal in its rehearing rejection, saying in a June 6 draft order that it would go against state law because it would constitute the transfer of a controlling interest or operational control in Oncor. The PUCT wanted independence for Oncor's board members, while NextEra pushed for greater control.

"Obviously we can't pay $18.7 billion for a utility that we can't run and we can't control the board and we can't have access to dividends," NextEra Chairman, President and CEO Jim Robo said on an April 21 earnings call.

In a Feb. 23 PUCT meeting on the deal, Robo told commissioners that retaining the independent directors was "burdensome and a deal killer." He also made this characterization regarding PUCT staff proposals on Oncor's budgets and dividend policies.

"This conversation between Mr. Robo and the Commission underscored the Commission's understanding that NextEra Energy would not close the proposed transactions if the Commission imposed certain conditions on the proposed transactions," commissioners wrote.

NextEra did not request that the 19.75% transaction be approved on a standalone basis, commissioners wrote, only presenting it as part of the overall $18.7 billion proposal. The company "offered no evidence" for them to evaluate it, they added.

"A public interest evaluation of the purchase of Texas Transmission Holdings would necessarily be different than the proposed transactions addressed in this application," the order read. "On the current state of the record and the application, it would be inappropriate for the Commission to rule on any single piece of the original application."

Commissioners reinforced their reasoning that the deal increased risk to Oncor ratepayers and lacked tangible benefits.

NextEra was also stymied in its attempt to acquire a utility in 2016, when the Hawaii Public Utilities Commission denied its proposed $4.3 billion deal for Hawaiian Electric Industries Inc. But analysts recently suggested they are confident that NextEra can still achieve 6% to 8% compound annual EPS growth without Oncor.

"We're very comfortable with our organic growth prospects. We do not have to do anything. I love our stand-alone prospects. I love our two businesses," Robo said on an April 21 earnings call in reference to subsidiaries Florida Power & Light Co. and NextEra Energy Resources LLC.

Oncor remains a sought-after asset, and an investor group led by Hunt Consolidated Inc. could be another possible buyer. In March 2016, their plan to convert the utility to a real estate investment trust, or REIT, was approved by the PUCT. But a group of Energy Future Holdings creditors backed out after commissioners imposed several conditions regarding the REIT's internal lease structure and tax savings.

Going back to Energy Future Holdings' bankruptcy declaration in April 2014, potential bidders for Oncor cited in media reports have included American Electric Power Co. Inc., Berkshire Hathaway Energy, CenterPoint Energy Inc., Edison International and Exelon Corp.