econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 01 June 2016

An Income Dream Deferred

by Ari Charney, Investing Daily

Investing Daily Article of the Week

It was always a bit of a longshot: Buying a bankrupt utility's most prized assets - 119,000 miles of transmission and distribution infrastructure serving 10 million customers - and putting them in a real estate investment trust (REIT) in order to avoid an estimated $250 million in annual taxes. Talk about having your cake and eating it too.

That was the plan hatched by an investor consortium led by oil and gas producer Hunt Consolidated for Texas-based Energy Future Holdings' (NYSE:EFH) subsidiary Oncor's wires.

For a time, the bold move to put utility assets in a REIT structure, a concept that Hunt previously pioneered with InfraREIT Inc. (NYSE: HIFR), inspired other Texas utilities to consider a similar plan for their own wires, namely CenterPoint Energy Inc. (NYSE: CNP).

And that had us salivating at the possibilities. For one, the wires are one of the most valuable assets of the 21st century electric utility. A big part of that is due to the shift from central station power to decentralized generation from renewable sources, such as wind and solar. All those renewable megawatts coming on line need connections to the grid.

To incentivize this buildout, the Federal Energy Regulatory Commission (FERC), which oversees interstate electric transmission infrastructure, has authorized returns on equity (ROE) for wires that are typically a couple of percentage points higher than the ROEs authorized for other types of utility infrastructure.

Take that high-returning infrastructure and put it in a tax-advantaged investment vehicle that's required to pay out at least 90% of its taxable income as distributions to unitholders (i.e., a REIT), and you pretty much have the Holy Grail of income investments.

But the biggest hurdle for a so-called wires REIT was always going to be securing the approval of regulators.

After all, by allowing such a structure, state regulators could end up conceding considerable authority to the feds, especially if a wires REIT starts pursuing interstate empire-building.

At this stage, however, the main sticking point was taxes. Since regulators are there to advocate on behalf of ratepayers, they argued that ratepayers should share in the REIT's tax savings.

But some of the investors in Hunt's consortium balked at those terms, as well as others, and the group decided to abandon its bid, though it's considering filing a new one.

Back on the Auction Block

That means Oncor is up for sale again. And there are a lot of interested suitors.

Kit Konolige, a Bloomberg utilities analyst, observed :

"Pretty much anyone would be looking at Oncor and thinking about it now"

He told Bloomberg's news service:

"We have seen a lot of utilities bought by other utilities or infrastructure funds and certainly from offshore interests as well."

The most frequently tipped bidder is one that had previously been in contention for Oncor's assets: Florida-based NextEra Energy Inc. (NYSE: NEE). The utility holding company, which is among the most forward-thinking operators in the sector, made an unsolicited offer for Oncor last November - its second run at the company in the past two years - but the bankruptcy judge reviewing EFH's restructuring plan blocked NextEra's bid due to timing.

NextEra uses the steady cash flows generated by its regulated Florida Power & Light utility, which accounts for about 65% of operating income, to invest in renewable energy projects across the country, and those generate the balance of operating profits.

NextEra's renewables unit is largely oriented toward wind power, which accounts for about 68% of the megawatts in its portfolio. Indeed, the firm is one of the largest wind-power generators in North America. And a number of its wind farms are concentrated in Texas, while the firm also owns Houston-based retail electricity provider Gexa Energy LP. So NextEra could put Oncor's wires to good use.

Of course, NextEra is currently in the most of a protracted bid for Hawaiian Electric Industries Inc. (NYSE: HE).

The $55 billion utility first announced the $4.3 billion deal nearly 18 months ago. But Hawaii's regulators and politicians have repeatedly opposed the deal. Usually such intransigence is just a negotiating tactic to extract concessions from the acquirer.

If, however, that was the intent, then Hawaii's bureaucrats and politicos may not get any sweeteners. After June 3, NextEra can terminate the deal by paying a $95 million break-up fee.

NextEra is rumored to be interested in making a third run at Oncor, according to two sources who spoke to Bloomberg on condition of anonymity. And analysts are already speculating accordingly.

Guggenheim Securities analysts wrote that Oncor's infrastructure would be "a great strategic fit" for NextEra, which can afford to walk away "from the uphill battle in Hawaii."

That makes us wonder whether NextEra is the unnamed suitor that The Wall Street Journal reported is preparing to file a rival plan for Oncor's business. Although company spokesmen were mum about this development, a comment from NextEra's lawyer suggests that, at the very least, the company is weighing another bid.

It should be noted that, in contrast to Hunt, NextEra would likely not pursue a REIT structure for these assets, since it hasn't in the past.

If NextEra does go for Oncor, it would easily be the biggest deal in the utility space this year. NextEra had previously offered $18.2 billion for the EFH subsidiary, but lost out to Hunt when it dropped its bid by $900 million. Presumably, any new offer would be around $18 billion or so. But it could well be worth it.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical Investing Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted. You can also comment using Facebook directly using he comment block below.




Econintersect Investing


search_box

Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.


Take a look at what is going on inside of Econintersect.com
Main Home
Analysis Blog
The Job Guarantee, Wage-Price Inflation And Alternative Solutions: Part 1
The Job Guarantee, Wage-Price Inflation And Alternative Solutions: Part 2
News Blog
The Federal Reserve Banks Provided $91.5 Billion Remittances To The U.S. Treasury In 2016
17 March 2017: ECRI's WLI Growth Index Shows Continued Moderate Slowing Of Rate of Growth
Durable Goods New Orders Improved in February 2017
Why NASA Won't Send Humans To Venus
Rail Week Ending 18 March 2017: Short Term Rate of Growth Slowing
How Taxes And Transfers Affect The Work Incentives Of People With Low And Moderate Income
How Tourism Affects China's Current Account Surplus
Infographic Of The Day: The Habits Of Highly Successful Entrepreneurs
To Where The Maple Syrup Flows
The U.S. Has The Most Expensive Healthcare System In The World
Five Maps That Will Change How You See The World
What We Read Today 16 March 2017 - Special Public Edition
Hate Groups In The U.S. Are Flourishing
Investing Blog
Early Headlines: Asia Stocks Mixed, Dollar, Oil Up, Gold Down, Health Care Vote Today, Calif. Solar, Russia And Poison, Mumbai Bridge, Sanctions Cause Suffering In N. Korea, And More
Tesla Is Playing The Long Game
Opinion Blog
Time To Stop Rewarding Economists For Bad Behaviour
The American Dream: An Endangered Ethos
Precious Metals Blog
These Gold Stocks Will Produce Much Bigger Gains Than Gold Itself
Live Markets
24Mar2017 Pre-Market Commentary: Looks Like Markets Will Flatline
Amazon Books & More






.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government































 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2017 Econintersect LLC - all rights reserved