Texas regulators last week rejected a bid from Florida-based NextEra Energy to purchase Oncor Electric Delivery, the mammoth Dallas-area utility whose fate has been up in the air since parent company Energy Future Holdings went bankrupt three years ago next week.

It is the second rejection of a proposed deal, in part a reflection of the size and complexity of the companies involved. According to Bloomberg, only about 12% of all utility deals announced in the last five years have ultimately fallen through.

"This is the biggest utility bankruptcy in history, so it's an unusual case," said Stacy Nemeroff, a power and utilities analyst for Bloomberg Intelligence.

Last year, the Public Utilities Commission rejected an $18 billion bid from real estate firm Hunt Consolidated, in part over concerns it would convert Oncor into a Real Estate Investment Trust. No utility of Oncor's size had ever attempted REIT organization before.

Denial of that proposal allowed NextEra Energy to step in with a more traditional $18.4 billion plan that many believed was heading towards approval — until PUCT staff raised concerns about consumer risk in February. 

Federal regulators approved the plan in January, and the Texas PUC late last year approved a draft preliminary decision allowing the deal to move ahead. But in its denial last week, the commission said it wanted to ensure the utility, which serves 10 million customers, was independent and secure from NextEra's own finances.

"Among the most important provisions of Oncor's existing ring fence are the two provisions that NextEra Energy seeks to eliminate," according to the adopted draft order. Regulators demanded an independent board of directors and limits on dividend distributions, essentially seeking to wall-off Oncor from its buyer financially. But NextEra balked, not wanting a risk to its credit rating that it could not control. 

In the order denying the deal, regulators explained that Oncor's ring fence provisions had already saved it from "financial calamity" when EFH declared bankruptcy. Those provisions were established in the 2007 leveraged buyout of TXU Corp. by Energy Future Holdings, which resulted in the re-branding of Oncor. 

Given that history, preserving the ring fence was a top priority for the PUC.

"The commission wants to get ring fencing. That's not unheard of," said Nemeroff. She says one reason the deal has been so complicated is the size of the bankruptcy means you have to find a buyer willing to wade into a complex proceeding. “In terms of finding a buyer, they have to find someone willing to deal with that situation," she said.

Already, the proposal has been revised a couple of times, and the price has been adjusted.

"The PUCT has made clear that it intends to protect those customers and does not want Oncor, and as a result its customers, subject to the financial health of its parent company," said Angelo Thalassinos, senior distressed debt legal analyst at Reorg Research.

Could NextEra save the deal?

The most immediate question is can this deal be salvaged?

There is precedence. Regulators in the District of Columbia rejected Exelon's bid to purchase mid-Atlantic utility Pepco in 2015, after the massive deal had wound its way through four state commissions and the Federal Energy Regulatory Commission.

In 2016, the D.C. Public Service Commission allowed the deal to go through, but only after Exelon sweetened the offerings for customers in the nation's capital.

More than six months elapsed between denial and approval in the Exelon-Pepco deal. While some analysts believe NextEra could revive a bid for Oncor, there is unlikely to be an immediate decision, and changes to the proposal would need to be made. 

NextEra declined to comment for this story.

"The NextEra-Oncor deal as proposed is effectively off the table," said Thalassinos. "Does NextEra come back for a second bite at the apple? It's possible but it appeared that NextEra's 'deal killers' — including strong ring-fencing provisions — were not negotiable, cutting against it coming back to the table."

“I don't think it's necessarily dead in the water, it just depends on how NextEra wants to close it. At this point, it's a negotiation," said Nemeroff.

One factor is price. NextEra raised the offering price when it stepped in for EFH, but if a new bidder must come to the table, it's possible the deal's troubled history will generate a lower offer.

“I think there are a lot of people who want to get this closed," said Nemeroff.  “It's one of the best service territories in the country, and they're considered to be very well run. The owners want to continue that … I think the deal could still close."

“Creditors realize this is a pretty good option for them,” she said.

That was a point also made by Thalassinos. The deal's rejection has the biggest impact on creditors of EFH Corp. and unsecured bondholders at EFIH.

What happens next?

This is the second mega-deal NextEra has seen come undone recently: Its bid to purchase Hawaiian Electric also fell apart last year. So far the company has not indicated what it will do.

Liam Denning, over at Bloomberg Gadfly, speculates there may be room to negotiate. During the proceeding, the Texas Industrial Energy Consumers group had suggested that credits to Oncor customers of more than $800 million could have helped the deal ho through. And some analysts peg the benefit back to NextEra at more than $2 billion, meaning there could be some give.

The problem is, there just aren't a lot of companies capable and prepared to wade into the proceedings.

Outside of NextEra amending the deal, Hunt Consolidated could come back to the table though Nemeroff questioned how that would work.

“There weren't a lot of potential buyers. Hunt's proposal, the commission didn't want that—they're pretty sensitive in terms of not having a financial buyer," she said.

Thalassinos said Berkshire Hathaway had previously expressed interest, and Edison International's name has been in the mix before also.

Whatever happens, there is a rosy way to look at it. Perhaps the third time will be the charm, said Thalassinos: "Any subsequent suitor has been provided a path to regulatory approval at the PUCT, now having witnessed two prior regulatory processes."