Sempra’s CEO sees ‘great fit’ in the $9.45-billion purchase of a Texas power transmission company
There was no hint of buyer’s remorse at Sempra Energy on Monday after the San Diego-based Fortune 500 company outbid storied investor Warren Buffett to acquire a Texas power transmission company — a deal that extends Sempra’s reach well beyond subsidiaries Southern California Gas and San Diego Gas & Electric.
“This is a great fit for our portfolio,” Sempra Chief Executive Debra Reed said hours after Sempra confirmed it will pay $9.45 billion in cash to pick up Oncor, the largest electric transmission and distribution system in Texas.
It’s the biggest acquisition for Sempra since the company was formed in 1998 and substantially expands its footprint in one of the most energy-rich states in the country.
As part of the deal, Sempra will also acquire Energy Future Holdings Corp., a bankrupt Dallas utility that is an indirect owner of 80% of Oncor. The total value of the deal is estimated at $18.8 billion, including debt.
Two months ago, Buffett’s Berkshire Hathaway Inc. offered $9 billion. Reports said Sempra in recent days sweetened its original offer of $9.3 billion to help seal the deal with Elliott Management Corp., a hedge fund that is Energy Future’s biggest creditor.
Elliott Management had resisted Berkshire Hathaway’s offer, arguing that it was not high enough. On Monday, Elliott said it supported the Sempra offer.
“I think the issue came down to how much each party was willing to pay and whether you could get the creditors on board,” Reed said in an interview. Sempra’s bid “was really about getting something that is strategic for Sempra and will allow us to grow our business and will really be a good asset for us long term.”
The agreement still has to be approved by the Public Utility Commission of Texas, as well as a U.S. bankruptcy judge.
A lawyer for Energy Future said in a Bankruptcy Court hearing Monday that Berkshire Hathaway declined to increase its offer, indicating that it is taking its deal off the table.
Buffett has a long history of not taking part in bidding wars. “I’m a ‘one-price’ guy,” Buffett said in a 2008 shareholder letter.
Sempra executives hope to complete the transaction in the first half of 2018 and expect Oncor to add to earnings next year.
“Oncor is really a top-tier utility,” Reed said. “It’s a well-managed company, and it has a lot of growth opportunity. Higher growth rates than most utilities across the United States are occurring in Texas.”
Although Energy Future has run aground in recent years, Oncor is considered a steady, valuable company. It has nearly 4,000 employees and delivers power to 3.4 million homes and businesses in Texas, with about 122,000 miles of transmission and distribution lines.
“Oncor is kind of a jewel asset to obtain,” said Andy Smith, a senior analyst who follows utilities for Edward Jones. “It’s fully regulated, very safe, conservative utility in the true sense of the word and a profitable company.”
In 2016, Oncor posted $431 million of profit and earned similar returns in the previous three years.
The deal is part of an active expansion by Sempra, whose subsidiary in Mexico, IEnova, recently identified $45 billion in potential investments in that country, which is dramatically reforming its energy system.
The company also has a subsidiary in South America, and its liquefied natural gas division is aggressively moving in the Gulf Coast.
Its Cameron LNG project in Louisiana, scheduled to go online in 2019, has filed applications with the federal government to build another LNG facility in Port Arthur, Texas. Sempra is also considering adding an export facility to its LNG facility outside Ensenada, Mexico.
Sempra “is a company that has greater ambitions and the capital to fund these additional avenues,” said Smith, who on Monday issued a positive report on the deal. “They see additional opportunities elsewhere, and they’re going after them.”
Considering that Sempra paid more than Buffett and Berkshire Hathaway were willing to spend, did the San Diego company pay too much?
“I don’t see that as the case,” Reed said. “We think we got a really strong asset, and we are the right owner for this asset.”
Sempra is at least the fourth entity to make a run for Oncor. Before Berkshire Hathaway’s bid, two other offers had been blocked by regulators in Texas.
As part of the deal, Sempra said it would maintain independence of Oncor’s board of directors and committed to support Oncor’s plan to invest $7.5 billion over a five-year period.
Reed said “we’re hopeful” the deal will be approved by regulators.
“We took a lot of the lessons from prior transactions and incorporated them in terms of our commitments and how we structured this,” Reed said.
Sempra plans to fund the $9.45-billion transaction through a combination of its own debt and equity, third-party equity and $3 billion of expected investment-grade debt at the reorganized holding company.
In a news release Monday, Sempra executives said the company has received financing commitments from RBC Capital Markets and Morgan Stanley.
“This is very manageable for Sempra,” Reed said. “It’s investment-grade debt so it’s a pretty simple, structured transaction in terms of being within our appetite.”
Sempra shares rose $1.85, or 1.6%, to $118.40 on Monday.
