Good day, ladies and gentlemen, and welcome to the Business Update Call. Today's call is being recorded. At this time, I would like to turn things over to Faizal Khan. Please go ahead, sir.
Good morning, and welcome to Sempra Energy's call to review our recent strategic updates. We'll be discussing Encore's agreement to acquire InfraREIT and Sempra's agreement to acquire an interest in Sherryland Utilities as well as reviewing Sempra's recent sales agreement to sell certain renewable assets. A live webcast of this teleconference and slide presentation is available on our website under the Investors section. Several members of the Sempra and Encore management teams have joined me here today in San Diego, including Jeff Martin, Chief Executive Officer Trevor Mihalik, Executive Vice President and Chief Financial Officer Alan Nye, Chief Executive Officer, Encore Don Clevenger, Senior Vice President and Chief Financial Officer, Encore and Matt Henry, General Counsel of Encore. Before starting, I would like to remind everyone that we will be discussing forward looking statements on this call within the meaning of the Private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those discussed today. The factors that could cause our actual results to differ materially are discussed in our company's most recent 10 ks and 10 Q filed with the SEC. It's important to note that we'll be discussing certain non GAAP financial measures. Please refer to the presentation slides that accompany this call for reconciliation to GAAP measures. I'd also like to mention that the forward looking statements contained in this presentation speak only as of today, and the company does not assume any obligation to update or revise any of these forward looking statements in the future.
The format of today's call will be slightly different than what we've done previously. First, Jeff will provide a high level overview of our strategy and the significance of the announcement. 2nd, Trevor will walk through the transaction details. And 3rd, Helen will discuss our growing footprint in the attractive Texas market. With that, please turn to Slide 4, and let me hand the call over to Jeff.
Thanks a lot, Faisel, and thank you all for joining us today. As you recall, in June, we announced our strategic vision to become North America's premier energy infrastructure company. We're also committed to executing a disciplined and phased approach to optimize our asset portfolio around what we believe are the most attractive markets right here in North America. In that regard, Encore and its operations in Texas provide a solid foundation to build on and advance that strategy. Oncor and Sempra entered into agreements to acquire InfraREIT and a 50% interest in sharing land, respectively.
We're actually quite excited about this Texas T and D transaction for several reasons. First, it expands the transmission and distribution platform we created in Texas when Sempra acquired Ascentris and Encore back in March. 2nd, it adds another avenue for growth through incremental pure play regulated transmission opportunities. And Texas is an attractive market where we're currently seeing over 70 gigawatts of solar and wind in the interconnection queue. 3rd, it's a great opportunity to recycle proceeds from the recently announced sale of our U.
S. Solar portfolio. In fact, that's what allows us to do this transaction without issuing any equity. And 4th, it allows us to further increase the percentage of Sempra's earnings from our long term T and D businesses and strengthens our credit profile, while offsetting the slight dilution resulting from the sale of Sempra Renewables business and storage assets. Next, I'd also like to point out that Oncor is the logical owner of InphiREIT's high quality electric transmission assets.
That's because of the significant overlap with Oncor's existing service territory. Furthermore, these assets provide Encore with additional avenues of growth due to healthy economic fundamentals, which are driving transmission infrastructure needs across the region. In addition, Sempra's investment in Sherri Land establishes a partnership in South Texas with the Hunt Organization, a proven developer in a region with robust growth opportunities. This transaction, coupled with the announced sales agreement with Con Ed, further advances our long term strategic vision of becoming North America's premier energy infrastructure company. As you'll recall, when we spent time with you in June at our Analyst Day, we gave you 2019 2020 EPS guidance, which actually included earnings from renewables.
We also said that the sale of these assets would be slightly diluted to earnings. As we made further progress, we promised to update you on our forecast. Today, we're pleased to say that all the recent positive developments just mentioned provide additional visibility to our guidance targets and enable us to affirm our 20 19 2020 EPS guidance ranges. Lastly, I'd like to take a moment to briefly and welcome the 2 new board members we added to the Sempra Board of Directors and the LNG and Business Development Committee. Both Cynthia Walker and Mike Mears have considerable experience and background in the midstream sector and broader energy industry.
Their valuable knowledge and leadership will be integral components in progressing our strategic vision to become North America's premier energy infrastructure company. This is something that is front of mind for all the members of our Board, and we're quite focused on executing on that vision. Now I'd like to turn the call over to Trevor, who will start by going through some of the guidance and transaction details.
Thanks, Jeff.
Beginning with guidance, I wanted to highlight that our 2019 2020 affirmations include annualized earnings projections from the Texas T and D transaction and expected use of proceeds from all announced asset sales, which will be used to fund the Texas T and D transaction as well as pay down debt. This will be offset by the removal of earnings associated with the Sempra Renewables business and the storage assets. We're also reaffirming our full year 2018 adjusted earnings per share guidance range. Please refer to the slide for the adjusted earnings per share guidance range and updated GAAP range. We believe our guidance now reflects a higher quality T and D like earnings mix.
Please turn to Slide 5. I'll now provide an overview of the transaction. Encore will purchase InfraREIT for an equity value of 1,275,000,000 dollars or $21 a share. Oncor will also assume Infarit's projected debt of approximately $971,000,000 We expect InfraREIT to have a 2019 rate base of about $1,500,000,000 and 2019 annualized earnings of approximately $84,000,000 This implies a 2019 acquisition PE of 15.7x and a 2019 acquisition enterprise value to rate base of 1.5x. Additionally, Sempra is acquiring a 50% interest in Sherri Land for $98,000,000 Sherri Land is a privately owned electric transmission utility that is regulated by the PUCT and is projected to have a 2019 rate base of approximately $260,000,000 as well as 2019 annualized earnings of approximately $11,000,000 This implies a 2019 acquisition PE of 17.9x and a 2019 acquisition enterprise value to rate base of 1.3x.
Sempra share of annualized earnings from the Texas T and D transaction for 2019 is expected to be approximately $65,000,000 to $70,000,000 and we expect to close in mid-twenty 19 subject to PUCT approval. Please turn to Slide 6. Now I'll take a minute to review the respective financing plans. Related to the InfraREIT acquisition, Sempra and TTi plan to each make equity capital contributions to Oncor to fund their respective portions of the purchase price amount in line with their ownership interest in Encore. Sempra will separately fund its acquisition of the 50% limited partnership interest in Sherri Land.
On a combined basis, we estimate that Sempra's financing needs will total approximately $1,120,000,000 which we expect to fund with a portion of the proceeds from our announced asset sales. I think it's important to note that we've had several meetings with the credit rating agencies to discuss this transaction. Overall, the feedback we've received has been positive as these acquisitions further increase our U. S. And utility contributions to overall consolidated earnings at Sempra.
Please turn to Slide 7. We strongly believe that Oncor is the logical owner of InfraREIT and that InfraREIT is an excellent addition to Oncor's long term growth outlook. In fact, approximately 260 miles of InfraREIT's transmission lines were previously owned by Oncor and were swapped in 2017 in exchange for Sherryland's distribution system as part of last year's rate case settlement. As we discussed at our analyst conference in late June, our focus is on attractive markets and transmission and distribution like businesses with shared growth drivers. InfraREIT fits all of these criteria as a transmission business operating in what is a logical extension of Encore service territory.
We'll also provide additional details later on in the presentation on how both InfraREIT and Sherri Land provide Sempra and Encore with incremental future growth opportunities in attractive Texas markets. I'll now turn it over to Alan, who will go over some of the important data points behind the strong economic regulatory environment in Texas. Please turn to Slide 8. Thanks, Trevor.
As Jeff and Trevor have mentioned already, we believe these assets are a logical and strategic fit for Encore and provide a unique opportunity to expand Encore's footprint in Texas. As we have discussed in the past, the macroeconomic environment in Texas remains strong with robust projected population and load growth. The state's economy is currently the 10th largest in the world and 2nd largest in the U. S. Behind our friends in California.
In addition, the population of the state is expected to grow from approximately 28,000,000 to about 54,000,000 by 2,050. Not only are the population and the economy growing, so is ERCOT's electricity demand. Electricity demand growth is expected to outpace the rest of the U. S. And will see additional baseload and renewable projects continue to get built to meet that demand.
These macro drivers continue to make Texas an attractive market for transmission and distribution growth and should provide further opportunities for investment. Please turn to Slide 9, where we will discuss some of these incremental opportunities. There are additional opportunities for public entities to integrate into ERCOT as we have seen with the City of Lubbock and Ravern Electric Cooperative. Additionally, there'll be significant infrastructure investments required to 4.6 gigawatts of new generation capacity in the Panhandle has signed interconnection requests with ERCOT. We expect this trend to continue over the medium to long term as solar generation becomes increasingly competitive in Texas.
We're witnessing significant load growth in West Texas with increased drilling, production, natural gas processing facilities and pipeline activity. This increased activity is expected to spur incremental investments to support reliability of the West Texas grid. Notably, InfraREIT's existing presence in the Panhandle in Permian places it in a unique position to benefit from these trends. And finally, population growth and related economic activity in Texas present additional growth opportunities through interconnections and grid expansions within ERCOT. We're focused on executing our base plan and capturing these incremental opportunities because, as we mentioned earlier, the larger the footprint we have in Texas, the more exposure we have to potential transmission investment opportunities.
Please turn to Slide 10. I'll now briefly touch on the anticipated time line for closing the transaction. For purposes of obtaining PUCT approval, the InfraREIT and Sherryland acquisitions are expected to be filed as a single integrated few weeks following expiration of the go shop period and look forward to working collaboratively with all parties to secure regulatory approvals. The transaction is also subject to review and approval by the FERC and other government agencies and requires customary filings and clearance under the Hart Scott Act. Oncor's acquisition of InfraREIT is also subject to InfraREIT shareholder approval.
Please turn to the next slide, where I'll hand the call back to Trevor to provide further details on Sempra's recently announced sale of certain U. S. Renewable assets.
Thanks, Alan. In June, we announced our plan to sell our nonutility U. S. Solar and U. S.
Wind businesses and certain nonutility U. S. Midstream gas storage assets. As we briefly touched on, we've already made progress on our plan to sell these assets and recently signed an agreement with Con Ed to sell approximately 9 80 Megawatts of Sempra's U. S.
Renewables portfolio, which includes all of our operational solar assets as well as one wind project and additional U. S. Solar and battery storage development projects for a total price of about $1,540,000,000 We expect this transaction to close near the end of 2018. We would also anticipate to announce the sale of the remaining renewable assets by year end. Please turn to the final slide for closing remarks before I open it up to Q and A.
I'll wrap up by reiterating that we're very pleased with today's announcements, which support our long term strategic vision to become North America's premier energy infrastructure company. The progress we're making provides us with increased visibility and confidence in our guidance targets and shifts a greater share of our projected earnings to our long term T and D businesses. We believe that Sempra and Encore are uniquely positioned to maximize the strategic benefits of this bolt on transaction of high quality electric transmission assets in the Panhandle and West and South Texas, markets with strong macro fundamentals. Importantly, we remain committed to delivering disciplined, superior growth with transmission and distribution like risk across our businesses. Our management team is focused on maximizing shareholder value, and we'll continue to execute on projects and investments that progress this goal.
With that, I'll conclude our prepared remarks and stop to take your questions.
And we'll go first to Julien Dumoulin Smith of Bank of America Merrill Lynch.
Excellent. So perhaps just a little bit more of a housekeeping item just to start off with.
How do you think about the long term earnings power of the in free business? You talk about efficiencies through the next rate case, just the rate base, ROE, equity math, just reconciling with the $80 some 1,000,000 that you disclosed here just to kind of kick things off?
Look, I would just start. If you step back from it, Julien, and remember what we're trying to accomplish, right? I think we've been going through a process over the last several years of repositioning the portfolio away from generation, away from commodities and trying to focus on assets like transmission and distribution to give us better visibility to future earnings growth and focusing on our 2 core markets here in the United States, California and Texas. So right upfront, we see this as a great opportunity to extend Oncor's franchise. You recall last summer when we originally kind of underwrote the ESH acquisition, we are looking at a capital plan at Encore of roughly $7,500,000,000 and that was the number that was talked about as part of their regulatory case last fall.
And clearly, we've seen significant growth in their CapEx plan since then, which we updated at the analyst conference. So I think it's been kind of validating to our same thesis around the InfraREIT assets. You probably have something south of sub-five percent growth expected across the north and south assets. We think probably that's conservative when you put that together with the fact that you're moving away from a freestanding public company at InfraREIT, you're moving away from their unique corporate structure and you're adding this asset class right into the growth and operations at Encore. So we're quite excited about it.
Got it. Excellent. And then let
me just follow-up there with respect to synergies and how you think about some of the benefits here, as well as just like in terms of the meat and potato execution timeline for a new rate case in order to see approval time line involved or process involved there?
So obviously, we think there's an opportunity, number one, with the size and scale of Oncor and to kind of continue to add additional CapEx to this business around trying to provide more value to the Texas consumers. And I do think you're on a good point, which is we think the operations at Encore have to have a track record of being operated very efficiently. So as you move away from InfraREIT's current public structure, their unique corporate structure and you put this inside of Encore, we think there's an opportunity to run it more efficiently. But I'll stop and see if I'll pass it to Alan to talk about how you think about going forward with this inside the regulatory process. Yes.
Good morning, Jillian. This is Alan. With regards to
the regulatory process, we intend to file our change of control proceeding at the Public Utility Commission of Texas in the next 45 days. As we all know, having gone through several of these in recent years, it's a 180 day process with the possibility of the commission extending that process up to 2 40 days. I think our track record has indicated that we worked very effectively in Austin with our stakeholders and with our commission in trying to settle these things. So we could get approved faster than that, but the general time line is 180 days less extended by the commission.
Excellent. Well, thank you very much. Actually, just one quick point of clarity to affirm. I know you talked about the
credit metrics, but it does affirm your ability to hit your targets by 'twenty, right? I think you insinuated that.
Yes. We talked about in my prepared remarks that we were reaffirming our 20 19 2020 EPS guidance that we laid out at the analyst conference. And with respect to the credit metrics, this is something that you heard Trevor speak to that we've been iterating with the credit rating agencies. So we're quite comfortable that you're doing 2 things here. You're rotating capital away from noncore assets that have less visibility to growth in the future, and you're doing 2 things at the same time.
You're rotating capital into what we have described as core assets in a top market in the country at the same time that you're improving your business risk profile.
Our next question will come from Shar Pourreza of Guggenheim Partners.
Good morning, guys.
Good morning, Shar. So just a quick clarification on the synergy question. The affirmation of 2019 2020, does that assume any synergy retentions from the transaction? Where would that sort of be coming from? And do you see any incremental opportunities?
Like I guess, like how much do you assume clawback of the synergies? Or there's a portion of that amount that is going to be retained? Right. Shar, thank you for that question. I will speak to it and ask Alan if he wants to add anything or Don Clevenger.
But I think the way I would look at it is you can look at the forward guidance that HIFR has provided in the past and you can look at what we're projecting right now in terms of 2019 annualized earnings. And clearly, we think there's an opportunity to do 2 things. As you think about this business not in its current format, in its unique corporate structure, you think about it within the kind of the scale and footprint of Oncor, 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. And I'll stop there and see if Don Clevenger, the CFO of Encore, like to make any additional comments.
Yes. Thanks, Jeff. No, I think, as we said, Encore's size and scale allows us to run this business very efficiently, just how efficiently will be shown over time. But yes, we
do feel there are some efficiencies to be gained there.
Okay. Got it. And then just lastly, maybe just touch a little bit on sort of the incremental opportunities you see from the JV with Sheryl and outside of Texas, right? So you're obviously very active in Mexico. And if you're looking at outside of Texas, kind of remind us how you expect to keep the jurisdictional control with the PUCT, assuming you look at interstate wires opportunities?
Yes. I would just take a step back, Shar, and say, look, we've had the opportunity to spend time with the HUD family. This is an organization that's had a lot of success across a lot of different business platforms in the past. I think it's a great credit to them, the quality of business that they've created at InfraREIT. So the opportunity for us really in South Texas is to step into the remaining transmission platform down there.
You'll recall that, that distribution platform in the South is operated by Encore. What we're focused on really is making sure that as there's incremental opportunities around their transmission footprint, we're there in a fifty-fifty role to be supportive of that. And you do make a good point, right? We are a we have a big investment footprint in Mexico And the Hunt family and the Hunt organization does have a significant business dealings outside the United States. So there may be other opportunities for collaboration.
Got it. Got it. And then just lastly on InfraREIT. Are you assuming that there aren't the entity is earning its allowed returns for 'nineteen and 'twenty. So what's the level of ROE that you're assuming they're going to earn?
Yes. We are assuming they earn their authorized ROE.
We will now take a question from Ryan Levine of Citi.
Good morning. Good morning, Ryan. Is Sempra entering into any ROLFOs or drag or tag along rights in connection with the remaining on stake in Cherry Line?
If I understand your question correctly, I think what we're really trying
to say here is this
is really a step transaction. So between the LPs and the GPs, they divide the asset base. Encore is cleanly participating in the investments in the North. And we're stepping into a brand new partnership in the South where we have limited partner position. But there's no real complexities in terms of earn outs and drag alongs to reference.
I will say all the material transactional documents will be filed as part of ENCORE's 8 ks later today.
Okay. Great. And then regarding tax implications, what are the expectations for implications for current Sempra shareholders given the way this deal is structured? And is there any cash tax distributions that will be incremental as a result of this transaction?
Right. It's a great question. And given their unique structure and how we've approached it from a tax standpoint, we will have an opportunity to execute on a tax step up in basis. And I'll turn it over to Trevor, our CFO, to address that.
Yes. Ryan, Yes, based on the structure of the transaction, we will be taking a 743 election to step up the basis of the assets. And this results in really the higher tax depreciation, which will result in a larger benefit of lower taxes over time. So that is part of the value that we're stepping into.
Our next question will come from
$1,000,000 You mentioned you're targeting, I guess, earning your authorized ROE, at least in 'nineteen 'twenty. But what's the income tax kind of rate assumption within that? And would it be possible for you to provide us with an EBITDA as well?
Yes. I think I tried to speak to this a little bit earlier, Christopher, but I think the goal here really is that as you move away from their corporate structure and you put this inside of Encore and you look at the combined benefit of their scale, their capital program and the types of efficiencies that you can bring to the investment, I think that accounts for majority of it. But Trevor, do you want to make any other comments in terms of how you think about the assumed tax rate and so forth?
Yes, absolutely. So from the statutory from the tax rate, we're just assuming the statutory tax rate of the 21% in that projection that we have laid out there. And then from an EBITDA perspective, in 20 19, I'd say, call it roughly about $230,000,000 for both the North and the South combined in EBITDA. So call it roughly 200 dollars in the North and about $28,000,000 $30,000,000 in the South.
Okay. And that incorporates the basis step up and everything there as it would pertain to your GAAP earnings at least?
That's right. Okay.
And then I'm not sure if you can comment on this, but is there any way that you can give us a sense as to how the process was run this year by InfraREIT? I guess any other interested parties or anything that could help us kind of frame that process and how to think about the GoShop?
I appreciate the question. Obviously, we won't speak on behalf of InfraRE. But what we would say is that we work very closely with Alan and I and his team at Encore and their Board of Directors. This has been a process and negotiation that's occurred over a 4 to 6 month period of time. And what we've tried to focus on, Christopher, is making sure that from the Encore perspective, together with Sempra, that we're in a position to accomplish our strategic objectives in the state.
And secondly, that we put together attractive offer from InfraREIT as viewed through the lens of their conflicts committee. So that was our goal from the outset. And the GoShop, I mentioned earlier that all the applicable documents will be filed as part of an 8 ks, but the go shop is pretty standard fare for the acquisition of any public company. I think what's unique in this case is the unique value that Oncor brings to not only the transaction and the growth profile, but the regulatory certainty associated with the transaction.
We will now take a question from Lishan Zhuhang of Avila Research Consulting.
Thank you. I understand that Shell London and the Intermedia going to do an asset swap with Northern South assets. Is that going to trigger any tax consequences? Or is there any tax consequences?
Thanks a lot, Lasagna. I appreciate you joining the call. So you're thinking about it correctly. You're thinking almost like it's a 2 part transaction that happens simultaneously. There's the asset exchange between those two entities and there's no expected change in taxes in that exchange.
Do you want to add anything to that, Trevor?
Yes. No, Jeff, you got it right.
It's from the exchange, it's just going to be a like kind exchange with no impact on taxes.
Excellent. The gross operating is 90 days?
No, I'm sorry, it's actually 30 days.
Oh, 30 days. A couple of questions outside of this transaction, if you don't mind. Does the NUC USA trade agreement change your strategy in Mexico at all?
Look, I think that a couple of things. We operated quite effectively in Mexico for a long period of time under the old NAFTA framework. And you recall, Hassan, 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 just the certainty it brings to the regulatory development, and we remain quite constructive on the growth opportunities in Mexico. You 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 underinvested 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.
Okay, great. Last question. You've done a lot of stuff in transmission and distribution in Texas. But a while ago, you did mention something about potentially getting into natural gas transmission. Does this transaction in any way kind of trigger more opportunities in that direction?
Or is it just an independent transaction that is good for our shareholders?
That's a very good question. I would view it independently. I think one of the things that Alan has commented on, on this call and in prior calls is that what's kind of unique about Oncor's platform is not only have they had a track record of providing kind of the lowest cost service in the state, but they really sit on top of more of the faster growing regions in the state of Texas. So Texas itself is a great market, but most of the counties that Encore serve are uniquely in growth mode. And I would point to what's taking place in the Permian.
So we are seeing the need for more pipelines around the Permian and they are flaring gas there. So there's a lot of opportunities, I do think, for some midstream opportunities in that region. But more importantly, together with InfraREIT and Oncor, we really have an electricity service platform that's really uniquely positioned to capture a lot of the growth we're seeing in that region.
And with that, that does conclude today's question and answer session. And I do apologize. We did have someone else in queue. We'll go to Greg Gordon of Evercore ISI.
Hey, good morning, Greg. It's Kevin. It's actually Kevin. Hey, Kevin. Just if I'm looking at Slide 5, I assume that the earnings is including synergies and then it looks like you're earning north of 12% at Inferrit and then about 9.4% at Cherilyn.
Can you just give some color around why the ROEs are playing out that way and why there's such a big difference?
Yes. I think we talked about this a little bit earlier on a couple of other questions. But I think one of the things that you're trying to see here is, as you look at the prior projections of InfraREIT as compared to what we're focused on for 2019, The real driver there is that you're adding this business, number 1, into the scale advantages of Encore and you're looking at what Encore thinks that they can bring to the overall capital plan. And I think the real big difference, Kevin, is InfraREIT is a freestanding public company today with an associated cost structure and it has unique corporate structure. When you move away from that, you look at the tax step up that Trevor described, look at the growth opportunities that Alan outlined and you bring to bear how efficiently they think they can run that on behalf of consumers, I think that's really reflected in our numbers.
Okay, great. That's all I had. Thanks a lot.
I appreciate you joining the call.
And with that, that does conclude today's question and answer session. I would now like to turn the call back to Jeff Martin for closing remarks.
Look, I just want to extend our appreciation for everyone who joined the call today. If you have any follow-up questions per custom, feel free to contact the Investor Relations team. And we hope everyone has a great day.
And with that, ladies and gentlemen, that does conclude today's call. We'd like to thank you again for your participation. You may now disconnect.