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InfraREIT deal represents key step in Sempra's infrastructure expansion strategy

Sempra Energy management framed the $1.28 billion acquisition of InfraREIT Inc. as a natural addition to its Oncor Electric Delivery Co. LLC transmission and distribution business and as another move to advance the company's strategic vision spurred by activist investors.

The California-headquartered company announced Oct. 18 that its Oncor unit would purchase another Texas transmission business in InfraREIT, including Oncor's assumption of outstanding debt. Sempra is also taking on a 50% share of Sharyland Utilities LP.

Sharyland Utilities and its affiliate, Sharyland Distribution & Transmission Services LLC, are majority owned by InfraREIT. Hunt Consolidated Inc. is InfraREIT's largest shareholder. At various points in 2018, InfraREIT's board explored shifting to a C-corporation structure or going private after federal tax reform put a dent in the company's revenues by diluting its tax-advantaged structure as a real estate investment trust.

Sempra is the target of a campaign by Elliott Management Corp. and Bluescape Resources Co. LLC to unlock value at the company by simplifying its business structure, including a primary focus on energy infrastructure. Sempra began that transformation by selling its renewable portfolio and select midstream assets.

Sempra closed its acquisition of an 80% stake in Oncor in March. Oncor's minority owner, Texas Transmission Investment LLC, has also expressed support for the InfraREIT acquisition.

Now with its continued expansion into the Texas transmission and distribution space with the InfraREIT and Sharyland deal, the company has added another avenue for growth through incremental, pure-play regulated opportunities, Sempra CEO and Director Jeff Martin said on a call with analysts.

Sempra is recycling its proceeds from the renewable and midstream asset sales to the Texas transmission and distribution deal, which enabled the company to make the purchases without issuing equity, Martin said. Sempra management expects that earnings from transmission and distribution will further increase, leading to a strengthened credit profile and offsetting the slight dilution from asset sales.

With the InfraREIT-Sharyland deal, Sempra is able to reaffirm its 2019 and 2020 EPS guidance ranges, Martin said. Those ranges are, respectively, $5.70 to $6.30 and $6.70 to $7.50.

The negotiating process took four to six months, leading to synergy opportunities, Martin said.

"We think there's an opportunity to do two things. As you think about [InfraREIT] not in its current format and its unique corporate structure, you think about it within the kind of the scale and footprint of Oncor," Martin said. "We think there's opportunities to bring our capital program to it and to run the business quite efficiently. And that is really built into how we're thinking about the analysis going forward."

Sempra CFO and Executive Vice President Trevor Mihalik said the company had several meetings with credit rating agencies to discuss the transaction, and those agencies received it positively.

Trade agreement

Executives were also asked about how the new trade agreement between the United States, Mexico and Canada affects Sempra's business in Mexico.

"We've operated quite effectively in Mexico for a long period of time under the old NAFTA framework," Martin said. "And you'll recall that the majority of the business we built down there was built largely even before they had energy reform. So I think what is really valuable to us in terms of the new agreement between the United States, Canada and Mexico is the certainty it brings to the regulatory framework; that's always a friend of business.

"So I think we remain quite constructive on that development, and we remain quite constructive on the growth opportunities in Mexico. You'll recall us talking about this at the analyst conference, but it's one of the fastest-growing consumer markets in the western hemisphere. They've been under-invested significantly, I think, from an infrastructure standpoint. And I think we have a scale advantage in the country, and we continue to be quite constructive on it."