Morningstar | Sempra Energy Wisely Recycles Capital Into Transmission With InfraREIT Acquisition
We are maintaining our $114 per share fair value estimate and stable, narrow moat ratings for Sempra Energy after it announced that its Oncor subsidiary entered into an agreement to acquire 100% of InfraREIT for $1.275 billion. The deal represents a roughly 20% premium before the Hunt Consolidated Group indicated it was seeking strategic alternatives for the asset. Sempra's 2018 ongoing earnings per share guidance of $5.30 to $5.80 remains unchanged. Sempra also reaffirmed its 2019 and 2020 earnings guidance.Oncor is paying roughly 16 times 2019 earnings, which we think is a fair premium for moaty transmission assets. Management expects to add $65 million to $70 million of ongoing earnings. InfraREIT faced some headwinds from federal tax reform negatively affecting its REIT status and a 2020 rate case decision that will lower the company's current 6.73% allowed debt recovered through rates. We think this contributed to a lower acquisition premium than recent sector transactions. Offsetting the earnings contribution for Sempra are the loss of earnings from the sale of Sempra's renewable and non-utility U.S. storage assets.
We like management's recycling capital toward moaty regulated assets, particularly toward Texas. This aligns well with management's plan to reregulate its asset mix, a move we think is in investors' best interest. InfraREIT's assets also align nicely with Oncor's transmission assets and positions it well to continue to benefit from the renewable energy buildout in the state. In ERCOT, there are roughly 70 GW of proposed renewable energy new-build projects in the interconnection queue, highlighting the continued appetite for renewable energy in the state. Management notes this has led to 4.6 GW of interconnection requests in the region.
The transaction is expected to close mid-2019, with approvals needed from InfraREIT shareholders, Texas commissioners, and several federal agencies.
Sempra Energy is an energy-services holding company. The company's segments are: San Diego Gas & Electric Company, which provides electric services and natural gas services in Southern California; Southern California Gas Company, which owns and operates a natural gas distribution, transmission and storage system that supplies natural gas in Southern California and portions of central California; Sempra Texas Utilities, which includes Oncor Electric Delivery Company LLC that provides electricity to consumers; Sempra Mexico, which develops, owns and operates, or holds interests in, energy infrastructure in Mexico; and Sempra LNG, which develops projects for the export of liquefied natural gas.
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