By Rory D. Sweeney

Sempra Energy’s transmission footprint in Texas is set to expand with the announcement Thursday that its Oncor utility subsidiary is acquiring transmission owner InfraREIT, while Sempra will buy a 50% stake in Sharyland Utilities.

Sempra CEO Jeffrey Martin said the combined $1.37 billion deals are “rotating capital away from noncore assets to core assets” in the company’s ongoing shift away from generation resources and commodities into the guaranteed rates of return of regulated infrastructure.

InfraREIT and Sharyland are both owned by Hunt Consolidated, which made a play for Oncor in 2016 but scrapped the deal after the Texas Public Utility Commission attached conditions considered unacceptable by the creditors of Oncor parent Energy Future Holdings. (See Texas PUC Denies Rehearing on Oncor Sale, Ends Hunt Bid.) Sempra acquired EFH’s 80% interest in Oncor earlier this year in an all-cash buyout valued at $9.45 billion. (See Texas PUC OKs Sempra-Oncor Deal, LP&L Transfer.)

Martin called Oncor the “logical” owner of InfraREIT’s assets because of their “significant overlap” with the utility’s existing service territory. Sempra CFO Trevor Mihalik noted that approximately 260 miles of InfraREIT’s lines were previously owned by Oncor, but they were exchanged for Sharyland’s distribution system as part of a 2017 rate case settlement. (See Texas PUC OKs Settlement in Oncor-Sharyland Asset Swap.)

The companies plan to submit the transactions as a single integrated filing over the next few weeks for approval by the Texas PUC, company officials said during an analyst call Thursday. It will also require review and approval by FERC and other federal agencies, they said.

The deals are expected to receive final approvals and close in mid-2019.

Hunt will be the noneconomic general partner of Sharyland and continue to manage daily operations and appoint executive management.

Sempra said no equity will be issued to cover the price tag of the transactions. Sempra will fund its $1.12 billion share — which includes the $98 million to become a limited partner in Sharyland — with the proceeds from its recently announced $1.54 billion agreement to sell the majority of its renewable portfolio to Consolidated Edison.

The remainder of Oncor’s payment for InfraREIT will be funded through a capital contribution from Texas Transmission Investment, which owns the remaining 19.75% of Oncor. The deal includes InfraREIT’s outstanding debt of approximately $945 million and allows the company to solicit superior bids.

The deal also includes an “asset exchange” between InfraREIT and Sharyland that will result in all of InfraREIT’s assets being located in North, Central and West Texas and all of Sharyland’s being located in the southern part of the state. InfraREIT will receive two South Plains and Lubbock Power and Light interconnections, along with a Golden Spread Electric Cooperative transmission line that connects with its existing Competitive Renewable Energy Zone assets. Sharyland will receive a DC tie and assets in the city of McAllen that connect with its existing Cross Valley transmission line.

The swap will be a “like-kind exchange with no impact on taxes,” Mihalik said.

Infrastructure over Commodities

The deal continues Sempra’s bid to move away from the volatility of commodities in favor of the infrastructure that transports them, along with the stable returns those assets provide.

Oncor CEO Alan Nye explained the company’s focus in Texas by highlighting the state’s position as the second-largest economy among U.S. states and expectations that ERCOT’s load will increase 16% within 10 years. “Significant” transmission expansion will be necessary to interconnect the roughly 40 GW of wind capacity and 30 GW of solar currently in ERCOT’s interconnection queue, he said, along with oil and gas development in the Permian region of West Texas.

“The purchase of InfraREIT gives us access to high-quality transmission assets that are adjacent to our service territory and are a great fit for our portfolio,” Nye said. “InfraREIT’s existing presence in the panhandle and Permian places it in a unique position to benefit from these trends. … The larger the footprint we have in Texas, the more exposure we have to potential transmission investment opportunities.”

Sempra last month announced it was selling its interest in 980 MW of resources — 11 solar assets across the Southwest, and solar and battery storage development projects and one wind facility in Nebraska — to Consolidated Edison. The company’s remaining seven wind facilities of roughly 720 MW, additional wind development projects and approximately 40 Bcf of natural gas storage in the Gulf Coast region remain up for sale.