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Texas PUC's Anderson Raises Concerns Regarding Sempra Debt, Credit Ratings, In Oncor Transaction

Asks How Oncor Will Be "Insulated" From Attempts By Calif. Lawmakers To Influence Oncor Policies, Practices

October 26, 2017

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Copyright 2010-17 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

Texas PUC Commissioner Kenneth Anderson issued a memo in advance of today's open meeting concerning Sempra Energy's proposed acquisition of Oncor which outlines several concerns regarding Sempra's debt and credit ratings, which Anderson said should be addressed as the Commission adjudicates the application

"We need also to keep in mind that the point of this exercise is once and for all to get Oncor out from under a risky, rickety, debt ladened majority owner and into a situation where Oncor and its management can, for the benefit of its ratepayers, move forward without the nagging specter of a financially troubled parent. Our objective should be to ensure that Oncor is not being permitted to hop from one frying pan into another or even just into a simmering pot. Consequently, I believe that among the many factors that this Commission must consider in its public interest analysis, is the structure of the transaction itself, as well as the resulting financial effects on the financial strength of both Sempra and Oncor. However, Sempra's current application provides very limited details to assist that analysis. Specifically, the application lacks detailed information relating to financing the proposed transaction and Sempra's ability to manage liabilities associated with its debt and far-flung operations," Anderson wrote in the memo

Anderson continued, "Sempra's net debt has risen significantly over the past decade: from less than $5 billion in 2007 to approximately $18 billion in 2017. Sempra's proposal would add approximately $3.18 billion in additional debt, albeit supported by an additional $6 billion in additional new equity. Despite mounting debt, Sempra's cash from operations only increased slightly from 2007 through December 2009, and has remained relatively stable since. So far it seems Sempra has not realized a proportional increase in cash flow from its projects."

Anderson continued, "In addition, the application notes that Sempra's current credit ratings are Baa1 (Moody's) and BBB+ (Standard & Poor's and Fitch). While still investment grade, these credit ratings are in the bottom tier. Credit ratings at this level mean the company is vulnerable to changing economic conditions and could face challenges if overall economic conditions decline or if Sempra continues to experience significant challenges with its other material projects such as the Cameron LNG terminal. The financial strength of Sempra may be highly sensitive to factors, whether geopolitical risks or operation problems, over which they may have limited control."

Anderson continued, "Sempra's projects, both foreign and domestic, present additional risks. As Sempra mentions in the application, it has partnered with Midstream to build a $10 billion liquefied natural gas (LNG) export facility in Louisiana. The project has suffered multiple delays, and it is not yet complete. It should be noted, however, that Sempra's cash flow related to this project should increase once three of its LNG processing units are commissioned in 2019. However, this projection anticipates no future delays on the project. Sempra's desire to incur more debt in the acquisition of Oncor before it realizes cash flow from another expensive project may be concerning because this behavior indicates a higher level of risk-tolerance than one normally associates with a regulated utility. In addition to domestic interests, Sempra also owns Chilean and Peruvian utilities serving approximately 7.2 million customers. Foreign operations can carry the risk of expropriation, as well as economic risks such as a sudden economic downturn in the host country and currency fluctuations."

Anderson continued, "Consequently, I believe that we will need more information related to Sempra's debt, the transaction financing, Oncor's governance structure, the effect of Sempra's other projects on its credit rating, and Sempra's corporate relationship with Oncor. These issues are important because Sempra creates uncertainty when it fails to produce details about how it will fund the transaction. The purchaser of a regulated utility in Texas must be able to demonstrate it has the financial strength to complete the transaction successfully and remain financially sound afterwards. Furthermore, the specific terms of any debt financing may implicate the additional conditions that this Commission may require or even lead the Commission to find the transaction not in the public interest. In other words, the purchaser must be able to prove it has the financial strength and stability to complete the purchase on its own, without impairing itself or Oncor and as Sempra recently disclosed on a Current Report on Form 8-K 'Sempra Energy's ability to raise the necessary funds...through sales of its equity and debt securities is subject to market conditions and other risks and uncertainties, some of which are beyond the control of Sempra Energy.'"

Anderson proposed a list of questions to be addressed in the docket to answer these concerns

Among the questions proposed by Anderson is, "How is Oncor insulated from attempts either by the California legislature or California regulators to affect Oncor's finances, policies or practices?"

Docket 47675

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