NEE/Oncor: Texas PUC Rejects the Deal: What does this mean for NEE and Oncor?

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______________________________________________________________________________

Eric Selmon Hugh Wynne

Office: +1-646-843-7200 Office: +1-917-999-8556

Email: eselmon@ssrllc.com Email: hwynne@ssrllc.com

SEE LAST PAGE OF THIS REPORT FOR IMPORTANT DISCLOSURES

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March 31, 2017

NEE/Oncor: Texas PUC Rejects the Deal:

What does this mean for NEE and Oncor?

Portfolio Manager’s Summary

  • The Texas PUC has unanimously directed staff to write up an order rejecting NEE’s proposed takeover of Oncor as not in the public interest, effectively ending the deal.
    • While NEE could file a new application that addresses the PUC’s concerns, we view that as highly unlikely given the centrality of the issues identified by the PUC as problematic.
  • The primary concerns of the PUC are the ring-fencing protections of Oncor, its credit ratings and ability to fund capex. NEE’s proposal would have kept many ring-fencing features, but would have given control of the board and of dividend decisions to NEE.
    • The commissioners noted that Moody’s believed the acquisition would exhaust NEE’s available credit and that the level of debt at the immediate holding company would remain at the current levels.
    • Board, capital budgeting and dividend control were identified as “deal killers” by NEE, so the PUC decided that issuing a conditional order would not be of any value.
  • While the Oncor acquisition offered the opportunity for significant rate base growth, and thus upside to NEE’s earnings guidance, the merger’s failure should not prevent NEE from achieving its current guidance of 6-8% EPS growth through 2020.
  • We still believe NEE is an attractive long-term investment with multiple growth opportunities, but this removes one of the near-term catalysts for appreciation.
    • In our note of Dec. 20th NEE: Why Oncor Can Drive $0.45 of EPS Upside at NextEra by 2019, [1] we quantified the acquisition’s upside to NEE’s current earnings guidance.
  • The next question would be what NEE does with the capital that NEE has raised for the deal ($1.5 billion of common shares and $1.5 billion of equity units).
    • We expect that NEE will use the capital to fund its organic growth; as a result, NEE should not need to issue additional equity through 2020, depending on its capital spending plans and the cash flow impact of any tax reform.
    • Having raised this capital, NEE also enjoys additional balance sheet flexibility if non-deductibility of interest expense is included in a tax reform package.
  • For Oncor, the rejection signals that acquisition by a publicly traded, strategic investor may be difficult.
    • We view foreign infrastructure funds or utilities as the most likely acquirers of Oncor.
    • Alternatively Oncor could pursue a public offering.
  • If Oncor were to go public it would potentially be an attractive investment, with a supportive regulatory environment and the opportunity, reflecting previous under-investment in rate base, to be one of the fastest growing utilities in the country.
    • In our note from December 20, 2016, we identified the potential for acceleration of annual rate base growth to 9% or more without the need to issue equity, which would make Oncor one of the fastest growing utilities in the country over the next few years. However, we do not expect such plans to be implemented until Oncor is either acquired or goes public.

Exhibit 1: Heat Map: Preferences Among Utilities, IPP and Clean Technology


Source: SSR analysis

©2017, SSR LLC, 225 High Ridge Road, Stamford, CT 06905. All rights reserved. The information contained in this report has been obtained from sources believed to be reliable, and its accuracy and completeness is not guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein.  The views and other information provided are subject to change without notice.  This report is issued without regard to the specific investment objectives, financial situation or particular needs of any specific recipient and is not construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results.

  1. Available on the SSR website at http://www.ssrllc.com/publication/nee-why-oncor-can-drive-0-45-of-eps-upside-at-nextera-by-2019/.
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