Responding to Texas utility regulators' move to block NextEra Energy Inc.'s acquisition of Oncor Electric Delivery Co. LLC, analysts suggested they are still confident NextEra can satisfy its growth targets without the Texas wires business.
After directing staff on March 30 to determine that NextEra’s proposed acquisition of Oncor is not in the public interest, in large part due to ringfencing terms between the two entities, the Public Utility Commission of Texas all but signaled its opposition to the deal, unless NextEra makes major concessions it has thus far declined to make. The deal itself is not entirely dead, but analysts have uniformly avoided incorporating the Oncor business into NextEra’s earnings projections, rendering the deal's potential failure a moot point in NextEra's outlook of 6% to 8% compound annual earnings per share growth.
"Though this action does not completely close the door on NextEra acquiring Oncor, we view it negatively as the path has become much more narrow," Wells Fargo Securities said March 31. "Neither NextEra's 6-8% EPS CAGR guidance or our earnings per share estimates include the pending Oncor transaction. As such, [the Oncor] development does not impact our Outperform rating."
"Should the Oncor transaction fail, we continue to believe that NextEra has significant investment opportunities such that it could still achieve the high-end of its targeted 6-8% EPS growth rate," BMO Capital Markets analysts said March 30.
Should the deal fall through, analysts at Guggenheim Securities LLC asserted, it is unlikely the company would opt to pursue another blockbuster deal. Moreover, NextEra’s renewables, midstream and Florida Power & Light Co. businesses all appear primed to deliver adequate growth.
"NextEra would not need to fill any gaps if they ultimately decided to walk away from Oncor," Guggenheim said March 31. "Management is already comfortable with their 6-8% long-term earnings growth outlook, and may already be aiming toward the top end. At the end of the day, our Buy rating has never been predicated on the Oncor acquisition." The absence of Oncor, combined with broader federal policy changes contemplated by the Trump administration, including tax reform, may provide additional uplift, especially as the company looks to build out what could be between 2,800-MW and 5,400-MW of wind and solar projects by 2018, according to a Feb. 28 investor presentation.
"Even without Oncor we continue to see the stock as offering one of the best risk-rewards within our coverage," Morgan Stanley Research said March 31. "We believe this earnings growth is resilient to potential tax reform and renewable policy changes, and management noted an ability to grow at the top end of the range even without closing the Oncor transaction."
Oncor's future, meanwhile, could ultimately come in the form of a public listing, analysts predicted.
"If Oncor were to go public it would potentially be an attractive investment," added analysts with SSR LLC in a March 31 note, "with a supportive regulatory environment and the opportunity, reflecting previous underinvestment in rate base, to be one of the fastest growing utilities in the country."