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Sempra Readies for Texas Scrutiny of Oncor Deal

Sempra Energy executives on Friday made it clear they are seeking 100% ownership of bankruptcy-bound Energy Future Holdings Corp. (EFH), and they are ready for any scrutiny of the mega-transaction by Texas regulators.

During a conference call to discuss the transaction, CEO Debra Reed and CFO Jeff Martin laid out the rationale for spending $9.45 billion to buy Texas utility giant Oncor Electric Delivery Co.'s holding company.

The executives were asked about a potential deal-breaker when the transaction is scrutinized by the Texas Public Utilities Commission. An open hearing before the commission is scheduled Thursday (Aug. 31).

Reed downplayed the concern, noting that Sempra's two California-based utilities, San Diego Gas and Electric Co. and Southern California Gas Co., already operate under similar stringent regulatory requirements.

"Some of the requirements the regulators have put on [Oncor] are not at all unreasonable," Reed said.

Reed and Martin brushed aside any skepticism of the deal by emphasizing that longer term,  Oncor would contribute to earnings growth, value and higher credit ratings. The Texas assets also fit strategically, they said, with the existing California utilities, and the Gulf Coast/Mexico natural gas assets, which include pipelines, storage and liquefied natural gas (LNG).

"Oncor has the same attributes that we value in our other businesses," Reed said.

With an initial 60% stake in Oncor that could be increased longer term, Sempra plans to keep the Dallas headquarters and invest up to $7.5 billion in its distribution and transmission network over five years, Reed said. The acquisition also is expected to nearly double its rate base of $12.8 billion by adding Oncor’s $11 billion.

"We expect Oncor's credit rating profile to improve with our conservative financing under the reorganized holding company," said Reed.

Martin predicted that the transaction would improve Sempra's overall risk profile by improving its share of utility-based earnings. Oncor longer term is expected to add 15-25 cents/share to earnings, he said.

Martin said only Moody's Investors Service is expected to downgrade Sempra when the transaction closes next year; other credit ratings agencies are expected to maintain current ratings. When the transaction was unveiled last Monday, Moody's analysts said "when the transaction becomes more assured, Sempra's rating and/or outlook would likely be negatively affected."

"All the other ratings will remain unchanged," said Martin.

Reed and Martin also outlined a schedule for the rest of this year that includes a Sept. 6 bankruptcy court hearing regarding Sempra's plans of moving forward, and for lining up equity investors in buying the 40% remaining of the holding company over the next two months. Those third-party investors are expected to include infrastructure funds and pension funds, according to Reed.

"Our long-term goal is to own 100% of the EFH, so initially this will be a step transaction for us” to get investors for the remaining 40% stake,” Martin said. "As we attract those third-party investors, we will do so in a way we could call in the equity at future points in time."

Sempra initially said when unveiling the transaction that Oncor funding would come from a combination of debt, third-party equity and $3 billion of expected investment-grade debt at the reorganized EFH. Sempra has already obtained financing commitments from RBC Capital Markets and Morgan Stanley.

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