NextEra Energy Inc (NYSE:NEE), having failed to buy Hawaiian Electric because it wanted to control the supply market, has grabbed a bigger opportunity to do just that by taking Energy Future Holdings out of bankruptcy in an $18.4 billion deal.
The prize is Oncor, which runs the power supply network serving North Texas, including Dallas.
So, what exactly does that mean for NEE stock holders? Well, there’s three main areas where NextEra wins out, and thus, NEE shareholders win as well.
Get the Distribution: NEE wants that distribution network, and it wants to control the supply of power to that network, mixing energy sources to get the lowest possible prices, generating a return by controlling power access to customers, but it doesn’t want all the power plants in Texas’ deregulated environment, where wind power carries a negative price when it’s in heaviest supply.
The deal takes out private equity from Goldman Sachs Group Inc (NYSE:GS), KKR & Co. L.P. (NYSE:KKR) and TPG Capital, which had bought the utility, and its Luminant generation arm, funded by $45 billion in debt-heavy financing back in 2007.
Senior bondholders on that deal will now get the Luminant and the old TXU to pay off $24.4 billion. Luminant had bought two of NextEra’s largest natural gas plants just last year for almost $1.6 billion. NextEra itself will fund another $9.5 billion in debt with cash and stock. Bondholders still seem to be taking a haircut.
NEE stock, which already owns Florida Power & Light, has been very good to investors over the last five years, the stock up 131% (and 22% just since January), with a rising dividend that now yields just shy of 3%. Shares were up about 60 basis points on the news.
NextEra Wants Control: While the company likes to call itself “a clean energy company,” its commitment to renewables is far from pure. As an example, it’s currently fighting an expansion of natural gas supplies in Maine, where it has an oil-powered plant it fires up each winter when rates there peak.
The depth of its commitment to renewables was also a factor in the Hawaii regulators’ decision.
A Win for Gas and Renewables: With Energy Future, NEE gets assets on the cheap and the chance to manage Texas’ transition from coal to natural gas and renewables. The bankers had come unstuck in the 2007 deal betting that coal would remain competitive with natural gas, and that gas prices would rise. NextEra looks set to make natural gas and renewables a big part of the future mix, but says that will depend on prices, and tax policies are part of that equation.
Much of the talk at its earnings call this week concerned proposals to “re-power” 327 MWatts of wind power. “We continue to believe that the longer-term fundamentals for North American renewables growth have never been stronger,” CFO John Ketchum said on the call.
In its June quarter NextEra earned $540 million, $1.16 per share, on revenues of $3.82 billion. The results came out a day before the Energy Future deal was announced. At the time of the deal, NEE stock had $26 billion in debt supporting $81 billion in assets. The deal still has to be approved by a bankruptcy court.
Taking North Texas will increase NextEra’s size by about 25%, dramatically increase its distribution footprint, but will not threaten its ability to control costs and customers.
If you like utility shares in your portfolio, NEE stock is a buy.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he did not hold a position in any of the stocks mentioned here.
