By: JAMES OSBORNE |
Oncor, with its 100,000 miles of power lines and steady profits, had long been considered the workaday, dependable cousin of Energy Future Holdings’ larger power generation and retail electricity business.
But with EFH fast approaching bankruptcy, the possibility that Oncor will go up for sale is whetting the appetites of investors eager for a steady return in a troubled power sector.
Speculation on a sale heightened recently after sources close to Energy Future said the owners were tentatively taking steps to separate the company’s regulated transmission arm from its retail and generation arm during bankruptcy. And with investors’ appetite for power transmission companies high right now, the list of potential suitors is long, said Moody’s associate managing director Jim Hempstead, who tracks the power industry.
“The right question is who would not be interested in purchasing Oncor. It narrows the field down,” he said.
At the top of some observers’ lists are transmission companies looking to expand their reach, including Sharyland Utilities, owned by members of the Ray Hunt family, Centerpoint Energy in Houston and ITC Holdings, which is based in Michigan and recently made a run at buying Entergy’s transmission assets.
And not to be left out are investors like Warren Buffett, pension funds and even foreign governments. EFH sold a 20 percent stake in Oncor to a joint investment group controlled by the Canadian province Ontario’s pension fund and the Singapore government’s investment arm for $1.3 billion in 2008.
What’s it worth?
How much Oncor and its 3.5 million customers would fetch is anyone’s guess. In 2006, as KKR & Co., TPG and Goldman Sachs were preparing to buy the former TXU Corp. in the largest leveraged buyout in U.S. history, Hunter Hunt, CEO of Hunt Consolidated Energy, offered $10.5 billion for what is now Oncor.
Over the last year, the market for distribution assets has grown increasingly competitive as power companies try to find ways to shore up their revenue amid a historic downturn in wholesale power prices, Hempstead said. Power and natural gas distribution lines are regulated by state governments and enjoy fixed rates not affected by the fluctuations of the market.
In May, Buffett’s Mid American Energy Holdings announced it was buying NV Energy, a Nevada utility that distributes electricity to 1.3 million customers, for $5.6 billion. That same month, Florida power company Teco bought a New Mexico natural gas distributor for $950 million.
“The way it is now, the wires are incredibly valuable,” said Michael Webber, deputy director of the Energy Institute at the University of Texas. “As we build more solar and wind farms outside the population centers, they’ll become more valuable.
“And it’s probably going to get harder to get wires built, so those who already have wires will be worth a lot,” Webber said. “On the other side, if we see more rooftop solar and on-site generation, you won’t need as much transmission, and the outlook isn’t so good.”
But a potential spinoff of Oncor faces roadblocks.
In an interview in December, Energy Future CEO John Young warned that splitting up the company would trigger a multibillion-dollar tax bill. That is a matter of contention with creditors, who argue the company is overstating the burden. But such a bill could squelch creditors’ interest in splitting up the company as they try to recover the more than $40 billion Energy Future owes.
Subject to review
Also, were Oncor to change hands, the deal would be subject to review by the Texas Public Utility Commission. Last week, UBS analyst Julien Dumoulin-Smith described the commission as a “tough regulator” in a memo that described potential holdups to an Oncor sale.
The critique follows the failed $1.8 billion spinoff of the transmission division of New Orleans-based Entergy to ITC Holdings in December. Entergy CEO Leo Denault said the deal died for a lack of “regulatory support.” The deal required the approval of agencies in multiple states, but the Texas utility commission had earlier rejected the proposal, citing concerns over the effect on customers.
Ken Anderson, a Texas public utility commissioner, called the decision procedural and attributed Entergy’s decision to pull back to decisions by Louisiana and Mississippi regulators.
“We would have to determine whether the transaction is in the public interest. And those issues would include things like the impact on employment and potential price increases,” he said of an Oncor spinoff.
For now, though, the future of Oncor remains a matter of intense speculation.
On Friday, CEO Bob Shapard was on a conference call with analysts to talk about the company’s $432 million profit last year, a more than 20 percent increase over 2012. But attention quickly turned to a potential sale and what form it might take.
“In terms of whether that’s the likely outcome for us, we probably can’t comment,” Shapard said. “I don’t want to validate that.”