The Dallas Morning News
Oncor’s twisty path
PUC decision due on sale of utility that’s spent years in limbo
State regulators are set to make their decision Thursday on an $18.4 billion deal for Oncor, Texas’ largest regulated electric utility. And there appears to be little suspense.
All three members of the state’s Public Utility Commission indicated last month that Florida-based NextEra’s offer doesn’t go far enough to maintain Oncor’s independence.
This could be the second attempted purchase of Oncor to fall through since last year. It’s part of the bankruptcy process for Oncor’s parent company, Energy Future Holdings.
Here’s a look at how Oncor — which isn’t in bankruptcy — got to this point.
Private equity firms Kohlberg Kravis Roberts & Co., TPG and Goldman Sachs Group completed the largest leveraged buyout in October 2007. The $45 billion purchase created Energy Future Holdings, a company that included retail power seller TXU, electricity generator Luminant, and transmission company Oncor.
Only Oncor was regulated by the state and was perceived as the staid, slow-growing portion of the deal. It was also recognized as the least risky of the businesses. The new EFH took on $24.5 billion in debt for the purchase.
As part of the deal, EFH agreed to cut electricity prices for many TXU customers, rebate millions to Oncor customers and drop plans to build eight of 11 planned coal-fired plants. The PUC concluded in January 2008 that the deal was in the public interest.
EFH’s finances yoyoed for its first year as natural gas hedges — bought to protect against volatility — created giant paper losses and profits. But in 2009, concerns about EFH’s debt emerged again.
At the time, cheap natural gas kept energy prices low, customers were conserving energy and EFH was facing more competition. The troubled economy also suppressed energy consumption.
As revenue decreased, the company offered creditors deals to exchange old debt for small amounts of new debt as a way to cut some of EFH’s own debt load. Analysts weren’t convinced that was enough.
The three large debt rating agencies downgraded EFH following the discounted debt exchange. By 2010, EFH had determined the company was worth $13 billion less than previously calculated.
By 2011, Fitch Ratings said “default is a real possibility” as quarterly losses continued. It wasn’t clear how the company would pay more than $20 billion in debt due in 2014.
Experts described the creation of EFH as a bet that natural gas prices would stay high, since wholesale electric prices in Texas tend to shadow natural gas prices. Instead, natural gas prices dropped by three-quarters between 2007 and 2012.
In April 2014, about seven years after the record leveraged buyout, EFH filed for bankruptcy. It was the largest bankruptcy not involving a financial institution.
EFH officials worked with creditors to create a “prepackaged” bankruptcy and also considered selling Oncor to make money. Oncor operated independently and wasn’t hit by its parent company’s financial troubles.
The EFH bankruptcy proposal involved splitting Oncor — now the most valuable part of the company — from TXU and Luminant. There was speculation even before the bankruptcy that Dallas-based Hunt Consolidated Energy, owned by the famed Hunt family, would bid for Oncor.
The Hunt bid
About two months into the bankruptcy, Hunt Consolidated Energy and the Teacher Retirement System of Texas jointly bid on Oncor. Florida’s NextEra Energy was also angling to outbid its competitors. The Hunts emphasized local control of Oncor.
An auction was organized for 2015 and NextEra was widely considered the leading contender. But that process was canceled after the Hunts negotiated a $17 billion deal for Oncor.
The deal still needed approval from the PUC. Unlike the EFH deal, commissioners this time had to determine if it was in the public’s interest. They did, but with an important “if.”
The Hunt group said a $250 million annual tax break, using an unusual corporate structure, was needed to make the deal happen. Two of the three commissioners wanted some or all of the savings to go back to Oncor customers.
The PUC approved the deal. But several special requirements didn’t have the consent of creditors and also required withholding the tax benefits. In response, the Hunts asked the PUC to end that effort and allow them to start a new one with a better shot at approval. The PUC declined in May 2016.
The NextEra bid
It was clear immediately that NextEra would likely get the next shot. About two months after the Hunt proposal ended, NextEra announced an $18.4 billion cash-and-stock deal to buy Oncor. Warren Buffett’s Berkshire Hathaway also submitted a bid, but it was NextEra that won approval from the bankruptcy court.
The PUC approval process got off to a rough start when commissioners expressed concerns about a $275 million termination fee if the deal fell through. Commissioner Ken Anderson feared the money would come from Oncor and be passed along to its customers.
The bigger hurdle was NextEra’s resistance to PUC demands for a “ring fence.” That corporate structure would give Oncor a completely independent board that couldn’t be replaced by NextEra executives. The PUC also didn’t want Oncor’s credit rating tied to NextEra.
Commissioners said Oncor’s independent structure protected it from the financial collapse of the parent company. Even when the parent company struggled, Oncor was part of a Texas coalition that built more than 3,500 miles of new power lines.
As the deal proceeded through the PUC, both sides staked out their positions on an independent Oncor. Jim Robo, chairman and CEO of NextEra, called the fully independent board and other restrictions “burdensome and a deal-killer” in February.
Last month, the PUC met again. Commissioners said many of NextEra’s deal killers were also the PUC’s. And they were concerned about the debt levels involved in the deal.
“The bottom line is I do not find that the tangible and quantifiable benefits to Oncor’s ratepayers are of such a significant improvement over the status quo as to justify approval,” Anderson said.
The commission needs to vote on the deal before the end of the month or it’ll automatically be approved. If the deal fails, it’ll go back to the bankruptcy court and on to a third effort to sell Oncor.