The California-based company that recently acquired Oncor is under review for a potential credit downgrade — in part because of its purchase of the Texas utility.
Oncor is the largest electric utility in Texas. In April it was acquired by California-based Sempra Energy, the nation’s largest natural gas utility. On June 25 Moody’s Investor Services put Sempra under a credit watch, saying the acquisition had strained its balance sheet, according to reports.
“The review is prompted by the increased leverage to fund the acquisition of a majority stake in Oncor Electric Delivery … and uncertainty regarding the timing and extent of potential recovery in Sempra’s consolidated financial metrics,” said Moody’s Vice President Natividad Martel. She also said that recent actions by activist investors had heightened risk for Sempra.
A credit downgrade by Moody’s, one of the nation’s top three credit rating agencies, could increase Sempra’s borrowing costs. While undoubtedly bad news for Sempra investors, such a credit downgrade should not, however, directly impact Oncor ratepayers because of a financial “ring fence” around the Texas utility.
The Steering Committee of Cities Served by Oncor advocated for the maintenance of that ring fence as well as other consumer protections during the years-long Oncor acquisition process. Among the ring-fence ratepayer protections that Sempra accepted as a condition of the acquisition is the separation of its corporate debt from that of the Texas-based company.
In announcing its credit review, Moody’s also referenced actions by a group of activist Sempra investors that include Elliott Management, which made a bid last year to purchase Oncor. The activist investors have complained that Sempra is under-performing and have called for its restructuring.
Sempra is the parent company of San Diego Gas & Electric and Southern California Gas. Oncor owns and operates the electric distribution network serving most ratepayers in northern and central parts of the Texas.
Sempra’s successful $9.45 billion offer to acquire an 80 percent stake in Oncor’s was the largest deal ever for the California-based company. In an April interview with the San Diego Union-Tribune, Sempra CEO Jeff Martin was asked if it spread the company too thin.
“We’ve grown our asset base from roughly $10 billion in 1998 to just over $60 billion in assets, 600 percent growth through this last quarter,” Martin told the newspaper. “And our philosophy has been that diversification has to come with benefits. So it’s less about going into a new state or going into a different market. It’s more about going deep into the market you’re in. We think the best way to reduce risk is to get bigger in the markets we’re in.”
Oncor went on the auction block after the 2014 bankruptcy of its erstwhile parent company, Energy Future Holdings.