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With Hawaiian Electric Deal off the Table, What’s Next for NEE?

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Why Oncor?

NextEra Energy (NEE) called off the deal to buy Hawaiian Electric (HE) after Hawaiian regulators rejected the deal. The deal was long pending before the regulators said it may not support Hawaii’s 100% clean energy target for 2045.

Oncor is the largest electric distribution company in Texas and delivers nearly 36% of the state’s total power. NextEra Energy is targeting 6%–8% annual earnings growth, and it estimates it will achieve the upper range of the earnings guidance after the acquisition.

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After the acquisition, the combined assets NextEra Energy would own are expected to be worth $102 billion. Its transmission network is expected to be more than 200,000 miles. NextEra shares rose 1% and closed on $128.29 on July 29, 2016.

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NextEra catches bigger fish than Hawaiian Electric

NextEra estimates that the transaction is expected to fortify Oncor’s credit rating. NextEra is one of the highest investment-grade utilities in the US with a credit rating of “A-” from the S&P. Oncor has been given a rating of “BBB+” by the S&P. Expanding the geographical network with a strong rate base growth bodes well for NextEra Energy.

Berkshire Hathaway (BRK.A) and Consolidated Edison (ED) were expected to be the potential suitors in the Oncor bid along with NextEra Energy.

Large-cap US utilities (XLU) continue to stay dominant when it comes to inorganic growth. US utilities are likely to benefit from lower financing costs before the Fed raises interest rates further. Slower electricity demand growth has forced utilities to discover non-traditional options like gas and midstream.

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