When reports surfaced in June that NextEra Energy was the top contender to purchase Oncor out of bankruptcy, you couldn't be blamed for a moment of deja vu.
A year ago, many observers thought the company was nearing a deal to purchase the Dallas-based utility as a part of Energy Future Holdings' bankruptcy proceeding. But that bid was ultimately derailed when Hunt Consolidated stepped in with an innovative — and some thought risky — plan to operate the utility as Real Estate Investment Trust.
As that bid unfolded over the course of a year, ultimately falling apart due to regulatory conditions the creditors declined to accept, NextEra had already turned its sights on Hawaiian Electric. At about the same time Hunt withdrew its bid to purchase Oncor, Hawaiian regulators nixed NextEra's widely unpopular proposal.
And so here we are again, with NextEra now adding about $200 million to its initial bid.
Late last month, NextEra Energy agreed to buy Oncor Electric Delivery from its parent company Energy Future Holdings in a deal valued at $18.4 billion. As part of the deal, NextEra Energy intends to fund $9.5 billion, primarily for the repayment of Energy Future Intermediate Holding Co. debt. Of that amount, some creditors will be paid primarily in cash with the remainder in NextEra Energy common stock.
The company said the deal "provides certainty of value for the creditors of the EFH bankruptcy estate."
Stacy Nemeroff, a utilities analyst with Bloomberg Intelligence, said the deal will likely go through this time around — but it will hinge on more than just the bottom line. In some ways, NextEra is a natural fit. NextEra Energy Resources — the company's development subsidiary — is already renewable energy giant in Texas, owning 17 facilities totaling 3,000 MW of gross capacity.
"Oncor is considered to be one of the most innovative T&D utilities," Nemeroff said. "Partly because they have to integrate wind energy. But from what I understand, they have a very technology-savvy group in management. ... From a a strategic perspective it's a very good asset, a strong fit with NextEra."
NextEra is one of the largest wind owners in the United States - more than 12,500 gross MW, spread across 110 facilities in 19 states and Canada. "Oncor probably has to integrate wind energy more than any other utility in the United States," Nemeroff said.
In Texas, the company has 17 wind facilities providing about 3 GW of gross capacity.
There is a twist to this. One of the reason's NextEra's bid for HECO fell through was doubt over the company's commitment to renewable energy. The $4.3 billion merger would have seen NextEra take control of a utility committed to meet a 100% renewable energy mandate — and its Florida subsidiary, Florida Power & Light, has little renewable energy on its system.
Texas regulators are unlikely to put the same emphasis on environmental goals as Hawaiian officials, but the performance of FPL could yet become a topic in the Oncor debate.
Different this time
That NextEra is getting a second bite of the apple with Oncor demonstrates the difficulty in structuring utility deals and the risk that regulators will alter the best-laid plans of company officials.
Hunt's proposal, the REIT structure, had never been attempted with a utility of Oncor's size, and some of it was being figured out along the way. It was meant to deliver $250 million in annual tax savings to shareholders, but in their final approval regulators inserted provisions to ensure some of those funds would go to customers as well.
Tax savings from the REIT structure were "a huge part of the value of what they offered bidders," Nemeroff said. "Once it became clear that they wouldn't necessarily be able to share all those tax benefits, that they might not just belong to the owners ... once that became uncertain then it didn't necessarily make sense to go forward with that proposal."
Any way you look at it, the Oncor deal will be complicated. "You have so many different parties that have to be satisfied, trying to max out whatever value they can get," she said. But this time around, Nemeroff expects the deal to pass regulatory scrutiny.
"NextEra is a more traditional utility holding company," she said. "They have good relationships there, billions of dollars in assets in Texas. All that transmission bringing wind power." That transmission is a part of ERCOT, and regulated by the Public Utilities Commission of Texas, so longstanding relationships are in already in place.
The deal also speaks to larger trends at play in the utility space.
"We are still in an environment where you see stagnant load growth, and I think that is driving deal activity in the space," said Kenyon Willhoit, PwC’s U.S. Power & Utilities Deals Director. "It's driven by desires to scale as well as to petition themselves to capture some growth potential," he said.
Willhoit was speaking to broader trends in the industry: A recent report showed renewable deals were up in second quarter of 2016 to 28% of total deal value, as compared to 3% in the prior quarter.
But NextEra's quick shift from Oncor to HECO and back illustrates the company's drive to expand into the regulated arena.
"I do think with stagnant load growth you'll continue to see folks trying to position themselves for growth and scale," he said.
But one way or another, said Nemreoff, "Oncor has to get bought."
"It is a part of the trend of large holding companies increasing their regulated operations," she said. "But it is different in terms of the fact that it's not its own independent utility holding company right now."
Up next: Look for a Delaware bankruptcy court decision this month, and then the proposal heads back to the Public Utilities Commission of Texas for review.