Sempra Energy’s Pending Acquisition of Oncor

Energy Future Holdings Corp. (EFH). Sempra Energy, an electric and natural gas utility holding company, serves roughly 32 million consumers worldwide. As part of the deal, Sempra received EFH’s 80% ownership of Oncor, the largest regulated electric transmission and distribution provider in Texas.

Key Details

  • As a result of the deal, Sempra will add more than 3.4 million retail electric customers, more than 16,000 miles of transmission lines, and roughly 116 MWh of retail sales volume
  • The deal includes $9.45 billion in cash and $7 billion in assumed debt
  • Sempra plans to finance 65% of the deal with equity and 35% with debt
  • Sempra aimed to please the PUCT by pledging to maintain Oncor’s ring-fence, a financial and operational separation
  • Oncor’s board of directors will maintain independence, and the company as a whole will continue to operate independently
  • The acquisition of EFH has been a long time coming, as EFH filed for bankruptcy in 2014
  • In turning away prior bids, Texan regulators demonstrated a strong commitment to protecting Texas consumers
  • Prior to the acquisition by Sempra, other companies, including Hunt Consolidated, NextEra, and Berkshire Hathaway Energy, tried but ultimately failed to acquire Oncor
  • The Hunt Consolidated proposal generated headlines for its novel approach, which proposed converting Oncor into a real estate investment trust, but concerns expressed by the PUCT about where the tax benefits of such a structure accrued (i.e., to the owners vs. to the rate payers) ultimately scuttled the deal
  • NextEra’s bid, which valued Oncor at $18.7 billion, was denied as it lacked a ring-fence provision, and the PUCT stated concerns about Oncor’s board retaining independence
  • Berkshire Hathaway Energy, which would have become the nation’s third-largest electric distribution with the acquisition of Oncor, bid less than any prior suitor and ultimately dropped its bid after EFH’s largest creditor pledged to block Berkshire’s bid
  • Sempra, in an effort to show commitment to Oncor’s customers, made 47 regulatory commitments aimed at preserving the independence and financial strength of Oncor and protecting EFH from new debt
  • Oncor’s operations will continue to be headquartered in Dallas, and all organizational decisions will be made by Oncor’s independent board of directors
  • Sempra made a commitment to own a majority stake of Oncor for more than five years, during which Oncor will report annually to the PUCT regarding Sempra’s compliance with the 47 commitments
  • Sempra has committed to higher reliability standards than what Oncor currently follows, which should ultimately bring more safe and reliable energy to consumers

Implications

  • The deal may increase infrastructure spending in Texas; prior to the closing of the deal, Oncor announced plans for $7.5 billion in capital projects over the next five years. Sempra has announced support of the plan, and some suggest Sempra may increase infrastructure investment
  • As part of its commitment to Oncor customers, Sempra has announced it will not burden Oncor customers with any transaction or transitions costs resulting from the deal
  • Sempra’s shareholders may benefit from the deal; Goldman Sachs increased their outlook for Sempra’s annual per-share earnings from $5.46 per share in 2018 to more than $8 per share in 2020
  • It is expected that Sempra will pursue the remaining 20% ownership of Oncor and ultimately remove the ring-fence provision, which shields utilities from parent company debt

More Information

Oncor: Oncor and Sempra Energy: A Strategic Fit

S&P Global: Texas regulators approve Sempra acquisition of Oncor*

S&P Global: Sempra employed ‘passive approach’ to tackle Texas, win prized Oncor utility*

S&P Global: Sempra beat the odds for Oncor amid Wall Street constraints*

*Membership is required to access this article.

This report is part of the VIU Minute series. To view all featured Minutes, please click here.

Additional Contributing Author: Benjamin Lozier and Tony Gonzalez

View More

Contributing Authors

Ian Falk Director

Welcome to ScottMadden!

Sussex Economic Advisors is now part of ScottMadden. We invite you to learn more about our expanded firm. Please use the Contact Us form to request additional information.