The Public Utility Commission of Texas voted against the deal after a draft order on Wednesday declared the merger wouldn’t be in the public interest. Commissioners expressed concern last month that so-called “ring-fencing” measures, designed to protect Oncor’s credit rating from issues in other NextEra businesses, were not adequate.
A previous takeover attempt from a group backed by Dallas-based Hunt Consolidated failed last year when Texas imposed conditions that the would-be buyer found too onerous. Now Oncor is once again left to seek a new suitor.
Dallas-based Energy Future Holdings, created by the record leveraged buyout of the former TXU Corp., sought bankruptcy court protection in 2014 to restructure almost $50 billion in debt. The rejection sends the case back to court.
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“They just joined a whole graveyard of failed utility mergers,” said Paul Patterson, an analyst at Glenrock Associates in New York. “There’s still a lot of interest in Oncor but this does appear to make a buyout more difficult.”
NextEra, the owner of Florida’s largest utility, agreed to purchase Energy Future’s 80 percent stake in Oncor last year in a transaction that has been valued at more than $18 billion, including debt. A bankruptcy judge approved the sale of the Oncor unit in February.
The deal was opposed by Texas Industrial Energy Consumers, which made the same demands as it did during the earlier Hunt bid. The commission should require NextEra and Oncor to agree to share any savings from the deal with Oncor’s customers, the group said in a March 17 filing.
It’s the second time in less than a year that NextEra fell foul of local regulators. In July, its $2.63 billion deal to acquire Hawaiian Electric Industries fell apart after the Hawaii Public Utilities Commission said the companies had failed to show it was in the public interest.
Oncor serves 10 million customers with the largest distribution and transmission system in Texas, made up of about 121,000 miles.
Figuring out what to do with Oncor is the single biggest hurdle in ending the high-profile bankruptcy of Energy Future Holdings. Formed by KKR, TPG Capital and Goldman Sachs Capital Partners as part of the biggest leveraged buyout in history, Energy Future has been working to restructure almost $50 billion in debt.
NextEra and Oncor declined to comment. Energy Future didn’t immediately return a request for comment.
Without a viable merger in sight, the future of Oncor may depend on the utility going public.
“It’s been difficult to please both bondholders and regulators,” said Andrew Bischof, an analyst at Morningstar. “An IPO may be their best option at this point. If Texas regulators aren’t going to be a little more flexible, then an IPO is more likely.”
But Katie Bays, a Washington-based energy analyst at Height Securities, warned that it’s too soon to talk about a public listing because Energy Future’s creditors would still prefer a takeover. While NextEra’s rejection probably scared away some potential buyers, a group of acquirers may yet emerge.
“The challenge is what does an acquirer look like that the Texas PUC is comfortable with,” Bays said.