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*

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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