It took Sempra Energy less than seven months but numerous concessions to complete the complex purchase of a prized Texas utility that slipped through the hands of other large-cap suitors.

The San Diego-headquartered energy company on March 9 completed its acquisition of Energy Future Holdings Corp. and its 80% ownership interest in Oncor Electric Delivery Co. LLC. The deal closure came about 24 hours after the Public Utility Commission of Texas' landmark decision to approve Sempra's $9.45 billion cash bid for bankrupt Energy Future Holdings and its majority stake in the elusive transmission and distribution utility.

Sempra's offer, including the assumption of about $7 billion in debt, won over regulators and activist investors critical of buyouts from other companies, including Hunt Consolidated Inc., NextEra Energy Inc. and Berkshire Hathaway Energy.

"The route [Sempra] took to achieve this accomplishment wasn't the most direct, having to update its financing structure in the process and succumbing to somewhat cumbersome regulatory concessions around governance, ring-fencing provisions, and equity financing needs," Guggenheim Securities LLC analyst Shahriar Pourreza wrote in a March 12 report.

Sempra was willing to bend to regulators who expressed frustration with NextEra's rehashed acquisition attempts.

"If you think about NextEra, their viewpoint was we're not going to spend over $18 billion for something we can't control," Pourreza said in an interview with S&P Global Market Intelligence. "In Sempra's case, they took a step back and said let's take a different approach, kind of see what the PUCT wants, work with it, but in time get what we need."

Pourreza noted that Sempra was able to overcome regulatory hurdles "and put forward a financing plan without leaving much more to be desired from a shareholder's perspective."

"I think they took a much more passive approach with this transaction, which appeased the PUCT," Pourreza said. "There's no question that eventually in time Sempra is going to likely get what NextEra was trying to get immediately."

Analysts contend Sempra will ultimately seek to acquire 100% of Oncor and remove the ring-fencing provisions that shield the utility from parent debt.

"In time, I think Sempra will buy the minority stake that it doesn't own from [Texas Transmission Investment LLC]. They will remove the ring fencing or request to remove the ring fencing and essentially recapitalize [the balance sheet]," Pourreza said.

Removing the ring-fencing provisions and taking full control of Oncor will enable Sempra to "deploy incremental capital and grow Oncor at a faster clip while utilizing more leverage but still staying within their credit rating targets," the analyst noted.

Set for growth

Guggenheim predicts 3% earnings accretion from the Oncor transaction with most of the benefits showing up in 2020 after accounting for the impacts from federal tax reform and paying down debt.

Goldman Sachs & Co. LLC is modeling 6% upside to Sempra's 2020 consensus estimates "as large infrastructure and gas/electric utility spending drive peer leading growth."

The 2020 outlook for Sempra "remains solid" with Goldman Sachs pointing to several factors that lead to an increase in annual per-share earnings to more than $8 in 2020 from estimated earnings of $5.46 per share in 2018.

The Cameron LNG export project is expected to provide a full year of earnings and cash flow after it comes online in 2019 with Oncor O&M and revenue contributions also expected to "drive an earnings ramp," Goldman Sachs analyst Michael Lapides wrote in a March 11 report. In addition, the analyst expects rate base growth to continue for Sempra's San Diego Gas & Electric Co. and Southern California Gas Co. utilities and increased contributions from the company's Mexico segment.

"While we still expect greater growth at [Sempra's] infrastructure segments to make the US Utilities a smaller proportion of the total earnings mix, we now expect them to account for almost two-thirds of consolidated EPS in 2020 as a result of the Oncor acquisition," Lapides wrote.

Morningstar also sees strong earnings growth potential and significant capital investment opportunities above the $8.4 billion that Oncor plans to spend over the next five years.

"Strategically, we think Oncor offers numerous benefits for Sempra," Morningstar analyst Andrew Bischof wrote in a March 8 report. "We like that the acquisition increases the earnings contribution from regulatory operations, which provide more stable cash flows than Sempra's unregulated businesses."

Guggenheim's Pourreza said the benefits of adding Oncor to the diversified energy company's utility mix are "pretty massive."

"First of all, it dilutes California's relatively unconstructive backdrop by diversifying into another region like Texas. Sempra goes from 70% California exposure to now slightly less than 50%," the analyst said.

Pourreza added that not only is Oncor accretive, "there's upside to the accretion numbers" stemming from potential accelerated capital expenditure. Sempra may also pursue asset sales to help mitigate financing needs for Oncor, with the renewables business among the potential divestitures. "And third, you can get eventual incremental opportunities by eventually removing the ring fencing and recapitalizing the balance sheet."

"Let's also remember the most important thing," Pourreza said. "Sempra buying Oncor and having Mexico operations, which Sempra has through [Infraestructura Energetica Nova S.A.B. de C.V., or IEnova], could lead to significant opportunities between the two regions."