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Texas PUC Staff: NextEra Acquisition of Oncor "Not In Public Interest" Absent Substantive Changes To Merger Conditions

PUCT Staff Cites Concerns From Risks of NextEra's Non-Regulated Businesses, Transaction Debt

January 19, 2017

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Copyright 2010-17
Reporting by Paul Ring •

Staff of the Public Utility Commission of Texas have filed testimony stating that NextEra Energy's proposed acquisition of Oncor is, "not in the public interest without making substantive changes and additions to the applicants' proposed commitments," as Staff cited concerns regarding the risks from NextEra's non-regulated businesses as well as the large amount of debt NextEra proposes to use to fund the transaction.

"NextEra Energy will finance the transactions with over $16 Billion of debt, increasing holding company consolidated debt to over 60 percent of total capitalization and posing serious long-term financial risks to Oncor," a Staff witness testified.

"NextEra Energy's large unregulated energy business portfolio poses substantial risks to T&D utility Oncor due to the risky business segments of NEER [NextEra Resources], which include merchant wholesale generation and nuclear operating risks," Staff testified.

"NextEra Energy proposes transactions funded with high levels of debt that would increase NextEra Energy's debt as a percentage of total capitalization to over 60 percent, imposing financial risks to Oncor. NextEra Energy has high levels of non-utility business, including one of the largest positions in wholesale electric generation in the U.S. Its generation operations include the riskier merchant and nuclear generation sectors that pose substantial risks to other NextEra Energy affiliates. Oncor would be exposed to the substantial risks of NextEra Energy's non-regulated businesses, which carry much more risk than that of a T&D utility," a Staff witness testified.

"NextEra Energy has been in danger of credit downgrades during the past several years as its non-utility businesses had grown to pose serious risks to the financial health of NextEra Energy. The pursuit of low-risk T&D utilities such as Oncor in recent years is an effort to address concerns of the credit rating agencies, who have been vocal about the magnitude and rapid growth of riskier wholesale power business within NextEra Energy," Staff said in testimony.

"NextEra Energy proposes to replace the financial risks of EFH ownership and its debt with those of a holding company owner with high levels of consolidated debt and non-utility business risks when compared to its peers. Despite the risks that NextEra Energy will pose to Oncor, NEE proposes to eliminate two of the key ring-fencing measures that have successfully protected Oncor from the bankruptcy and severe financial problems caused by EFH. NextEra Energy has proposed a structured solution to the EFH bankruptcy, but the solution comes with substantial risks to Oncor and its customers ... One effect of the Proposed Transactions will be to eliminate Oncor's current stand-alone credit status, linking it to that of NextEra Energy. Combining Oncor's comparatively lower business risk with that of NextEra Energy will enable the latter to maintain its current credit rating level, benefitting NextEra Energy at the expense of added financial risk to Oncor," Staff testified

"I believe that NextEra Energy's Proposed Transactions pose significant financial risk for Oncor, should the removal of these two proven and effective ring-fencing protections occur, especially given the high levels' of debt at NextEra Energy," Staff's witness testified

Commenting on the debt that NextEra would incur under the transaction, Staff testified, "The response to a Staff RFI makes clear that NextEra Energy is seeking to protect the rate of return to shareholders following the acquisition by maximizing its transaction financial leverage, and minimizing related equity financing."

"Using high levels of debt to fund the Oncor acquisition allowed NextEra Energy to bid a high, winning price for the utility, while supporting what it considers the returns its shareholders require. My view is that NextEra Energy's attempts to satisfy stakeholders and creditors comes at imposing risk to Oncor and its customers. NextEra is capable of funding the transaction with more equity. Replacing transaction debt financing with equity would erode the return on the transaction to NextEra Energy shareholders, a situation that NextEra Energy seeks to avoid through financing plans that require heavy debt financing, the elimination of key ring-fencing provisions, and a credit linkage between Oncor and NextEra Energy," Staff's witness testified

Staff testified that certain conditions could mitigate these concerns, including establishing "tight" ring-fencing for Oncor while paying off all EFH and EFIH debt

"The most important ring-fencing required to protect Oncor are board control and financial control measures currently in place," Staff testified, noting NextEra proposes to eliminate two key ring-fencing provisions, with Staff testifying that NextEra's proposals regarding ring-fencing, "are either not effective or omit key protections."

Regarding affiliate concerns, Staff noted that NextEra has proposed a requirement that any NextEra Energy generation affiliate seeking to interconnect to Oncor's system shall seek approval from the PUC for such interconnection. Staff testified rather than just requiring that affiliates "seek" approval, the transaction should be conditioned on a requirement that NextEra generation affiliates must "secure" Commission approval for any such interconnections

"Moreover, in order to promote administrative efficiency and to reflect the primacy of this Commission's interest in the matter, the Commission should require NextEra Energy to secure approval before initiating the process of seeking other approvals, except where waived by the Commission," Staff proposes in testimony.

Docket 46238

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