By Tom Kleckner

Stepping in where others have failed, San Diego’s Sempra Energy on Monday announced a $9.45 billion cash deal to acquire bankrupt Energy Future Holdings and its 80% interest in Texas utility Oncor.

Sempra’s move short-circuited a looming battle between Berkshire Hathaway Energy and hedge fund Elliott Management, the largest holder of EFH bonds, which had opposed as too low BHE’s $9 billion all-cash offer in July. Elliott said it was working on a competing bid totaling $9.3 billion. (See PUCT Staff Welcomes Buffett’s Oncor Bid; Debtor Miffed.)

Elliott spokesperson Michael O’Looney said the investment fund is “supportive” of Sempra’s proposed transaction, “which provides substantially greater recoveries to all creditors of Energy Future than the proposed Berkshire transaction.”

Including debt, BHE’s bid valued Oncor at $18 billion, while Sempra’s values the utility at $18.8 billion.

Sempra CEO Debra Reed said the acquisition will “enhance our earnings beginning in 2018 and further expand our regulated earnings base, while serving as a platform for future growth in the Texas energy market and U.S. Gulf Coast region.”

Debt and Equity

The company said it expects to fund the transaction using a combination of its own debt and equity, third-party equity, and $3 billion of expected investment-grade debt at the reorganized EFH. Sempra will hold about a 60% equity ownership of EFH and projects the transaction to be completed in the first half of 2018.

BHE, which had said last week it would not increase its $9 billion all-cash offer for Oncor, announced Monday that EFH had terminated its proposed acquisition. Warren Buffet’s company is renowned for its fiscal discipline and avoids bidding wars.

The Nebraska-based company is eligible for a $270 million breakup fee, but it would have to be approved by the court overseeing EFH’s bankruptcy case in Wilmington, Del.

On late Friday, Berkshire said it had reached a settlement agreement resolving “all issues” with Public Utility Commission of Texas staff, the Texas Office of Public Utility Counsel, the Steering Committee of Cities Served by Oncor, Texas Industrial Energy Consumers and International Brotherhood of Electrical Workers Local 69.

Oncor CEO Bob Shapard praised Sempra as a “well-respected and experienced utility operator with a quality workforce and management team.”

“The announcement today is just another example of how our 3,900 employees have made Oncor one of the most sought-after companies in the energy sector today.”

At a previously scheduled bankruptcy court hearing Monday, EFH creditors expressed their support for the Sempra deal. Judge Christopher Sontchi set a Sept. 6 date for an expedited hearing on Sempra’s merger agreement. The deadline for filing objections is Aug. 31.

“This is a big change, clearly a change to the benefit of the estate and the creditors,” said Sontchi, thanking the parties for “freeing up his day.” The judge had scheduled up to eight hours of testimony and arguments on Elliott Management’s opposition to the Berkshire offer.

Oncor is the sixth largest transmission and distribution utility in the nation, serving more than 10 million Texans through more than 122,000 miles of wires and 3.4 million meters. It has been the subject of a tug-of-war since parent EFH, saddled with almost $50 billion in debt after poor bets on energy prices, declared bankruptcy in April 2014.

Dallas’ Hunt Consolidated and Florida-based NextEra Energy had separate bids fall apart in the face of the Texas PUC’s strict ring-fencing measures and demands that Oncor be run by a “truly independent” board with control over decisions on capital expenditures and operating expenses. (See NextEra-Oncor Deal Meets Third Denial.)

PUC Concerns

Although it was rejected by Elliott Management, Berkshire’s offer was received positively by PUC staff.

During the PUC’s open meeting Thursday, Commissioner Ken Anderson restated his insistence that Oncor be protected from incurring any additional debt from EFH’s bankruptcy proceeding. Anderson’s focus is on the billions in debt owed by Oncor stemming from the 2007 leveraged buyout of EFH’s predecessor, TXU.

That debt “was all incurred either in connection with the original [leveraged buyout] or refinancing the 2007 leveraged buyout,” Anderson said. “None of it ever was, nor can it be, an obligation, directly or indirectly, or legally implied of Oncor. None of either the principal or interest can go into rates.”

Anderson alleged that the suitors before BHE intended to use Oncor’s profits to pay off what he viewed as “imprudently incurred debt” by the utility’s holding company.

“The continued existence of any material amount of debt above Oncor will be a concern,” Anderson said. “One of the most important aspects is the cash flow generated out of Oncor must be protected. It needs to be available to Oncor’s management and to Oncor’s board to put it back into the business.”

The debt “is not Oncor’s problem. It is the problem of the commission now, but when the dust settles, I don’t want it to be the problem of either this commission or future commissions.”

Sempra has committed to support Oncor’s plan to invest $7.5 billion of capital over a five-year period to expand and reinforce its existing system.

New CEO

When the transaction is completed, Shapard will become executive chairman of the utility’s board of directors. Allen Nye, currently the utility’s general counsel, will succeed Shapard as CEO. Both have been asked to serve on the board, which will consist of 13 directors, including seven independent directors from Texas, two from existing equity holders and two from the new Sempra-led holding company.

The transaction is subject to customary closing conditions, including the approval of the PUC, FERC, the bankruptcy court and antitrust regulators at the U.S. Justice Department.

“It is important for Oncor to remain financially strong,” Sempra’s Reed said. “Our proposal will help bring a satisfactory resolution to Energy Future’s bankruptcy case, keep Oncor financially strong and protect Oncor customers, while addressing the needs of Texas regulators, creditors and the U.S. bankruptcy court.”

The deal would allow Sempra to regain a foothold in Texas, where it once owned and operated 10 power plants and currently maintains a 200-person office in Houston to support marketing and development activities. A Fortune 500 corporation that includes San Diego Gas & Electric and Southern California Gas, Sempra had 2016 revenues of more than $10 billion.

Sempra’s announcement was not a complete surprise. Word began leaking out last week that a mystery bidder had emerged to take on BHE’s offer. During a bankruptcy hearing Friday, legal counsel for Elliott identified the new competitor for Oncor as “a large investment-grade utility.”

Elliott’s representative also told the court that EFH was considering pursuing talks with the new competitor. EFH’s board met Friday and Sunday before accepting Sempra’s offer.

Rory Sweeney reported from Wilmington, Del.