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NextEra’s Bid for Texas Transmission Assets Makes Perfect Sense

transmissionlines2NextEra Energy may be better known for building out renewable energy assets across the nation. But it has now taken a stab at owning the transmission of Texas Transmission Holdings Corp. The deal, valued at $2.4 billion, would also include a 20% ownership of Oncor Electric Delivery Co. that is trying to emerge from bankruptcy. Oncor is the owner of those businesses.

The proposals involves some other buyouts associated with Oncor that would ultimately give the Florida-based utility a 100% stake in the Texas-based transmission business. Owning such an asset that provides stable cash flows is considered a prized jewell. And because NextEra already owns 3,000 of renewable generating assets in Texas, it could be a wise strategic decision.

“We, together with Oncor, look forward to filing our joint application by Nov. 1 with the Public Utility Commission of Texas seeking approval of our proposed acquisition of Oncor,” said NextEra Chairman and CEO Jim Robo, in a statement. They expect the deal to be completed during the first half of 2017.

NextEra Energy expects that the total purchase of the company would result in growth at or near the top end of its previously announced 6 percent to 8 percent per year adjusted earnings per share growth rate through 2018, off a 2014 base, its release says.

The transactions are consistent with NextEra Energy’s focus on investing in regulated and long-term contracted assets and leverage many of the company’s core competencies, including investing smartly to improve operations, creating long-term value for both customers and shareholders, it adds.

Some history: NextEra has been interested in Energy Futures Holdings for about two years — a company that has been bankruptcy; it owns Oncor and its Texas transmission business. But a bid by Hunt Consolidated had edged out one by NextEra, although that offer was eventually swallowed by the regulatory process.

Before Energy Future Holdings, company was known as TXU. In 2007, some private equity firms had offered a 15 percent premium over the value of TXU’s stock, which at that time was $69.25 a share. That took place when the stock market had been consistently moving higher and when credit was easy to come by.

Private equity investors are attracted to assets that produce the steady cash flow needed to help pay down their debt. And, TXU had an enormous fleet of power plants along with 2 million residential and business customers. The demand for power in Texas had been expected to escalate and necessitate the need for more production. The private equity firms had promised to take a more environmentally friendly approach and to build fewer coal plants than TXU had wanted; today, of course, it would be nearly impossible to coal-fired power plants at all.

But the private equity firms had essentially made a bet that those prices — that also affect the marginal costs of coal and nuclear — would remain high. They borrowed big — and lost: A deep recession would hit and cut into demand for electricity while a glut of natural gas had flooded utility markets. That has been reducing prices for the power. The resulting revenues have not been nearly enough to pay down debt.

Even today, the banks are still reluctant to lend. That’s especially true for Energy Future Holdings, with its massive debt burden — and its inability to sell high-priced electricity to retail customers.

Times have changed since Oncor took control of TXU’s asset. And now it maybe NextEra’s turn. It’s calculated risk that appears prudent in today’s markets — one that not only would guarantee a stream of income but also one that would host the electrons generated by NextEra’s renewable assets.

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