Sempra Wins Oncor - Acquiring Some Peace of Mind?

Earlier this week a shake up occurred in the hotly contested sale of Oncor, the power-transmission powerhouse owned by Energy Future Holdings Corp. Following NextEra's pursuit, in July, Berkshire Hathaway agreed to buy Oncor for $9 billion, but hours before a court hearing, Energy Future terminated the deal in favor of Sempra Energy's  $9.45 billion bid. In addition to a higher price, Sempra's bid included assurances that it could get the acquisition approved by the Public Utility Commission of Texas, as well as a U.S. bankruptcy court. Sempra said that it expects the deal to be completed in the first half of 2018. But what's in it for Sempra? With an already strong gas infrastructure asset base including pending liquefied natural gas (LNG) terminals, what does Sempra expect to achieve  by adding  Oncor to its roster?


For one, Sempra may be diversifying its earnings by growing its regulated assets, given that Sempra's recent earnings data shows that it expects sizeable growth into 2021 from non-regulated assets. But non-regulated assets, which primarily include Sempra's expanding LNG fleet -- Port Arthur and Cameron (50% owner) -- are also viewed as more risky by investors, given delays with Cameron LNG that have delayed cash flows. The acquisition would grow Sempra's utility assets, which currently include Southern California Gas Company and San Diego Gas and Electric, both located in California. But the acquisition also grows Sempra's presence in Texas, the site of its pending Port Arthur Liquefaction terminal.


Sempra is not alone in Texas. The Port Arthur terminal is still undergoing environmental review at the Federal Energy Regulatory Commission (FERC) while several other terminals have received FERC Certificates and begun construction, including Freeport LNG, Cheniere Corpus Christi and Golden Pass Sabine Pass terminals. And there are more LNG terminals, specifically export terminals, that are currently undergoing the early stage pre-filing review. Liquefaction projects are on the rise (even Jordan Cove has been resurrected with a new pre-filing) with five projects currently in pre-filing and 20 projects filed from 2014 to 2017 for Certificate review of increased capacity. As such, Sempra's LNG expansion efforts enter an increasingly competitive marketplace. And securing long-term offtake agreements (not simply MOU's) with creditworthy buyers remains as crucial as executing on permitting and construction timetable expectations.


Successfully constructing an LNG terminal requires not only receiving a FERC Certificate but also export approval from the Department of Energy (DOE). While neither permit is conditioned on receiving the other, timing the receipt of two permits can create additional risk. Fortunately for developers, the DOE, under Energy Secretary Rick Perry, has committed to reducing the DOE's review process for LNG export applications. In recent months, the DOE initiated two rulemakings to revisit the agency's policies on approving exports and exploring a potential review process for smaller terminals seeking to reduce review time. However, these potential policy changes won't be finalized for months and likely not prove useful for developers who already have  the ball rolling on their federal review.


Developers who have already received export permits from DOE to non-free trade agreement (FTA) countries and those still pursuing those permits, like Sempra, won't see much relief. While Sempra's application to export to FTA countries has been approved its application for non-FTA exports is still under review. Rumblings from the Trump administration, as well as public interest groups, have created concerns about exports to countries that do not belong to NAFTA. And of course, the United States full withdrawal from NAFTA could negatively impact export agreements in coming years in unprecedented ways.


The rise of LNG exports has continued to attract the attention of the Sierra Club. In recent years, the Sierra Club has doubled down its focus on LNG terminal projects, primarily by sparring in federal court. Despite a string of losses, including one related to stopping the development of the Freeport LNG terminal, the environmental organization persists. Sierra Club is still pursuing lawsuits against DOE's export approvals for Cheniere Energy's Sabine Pass Liquefaction and Corpus Christi LNG export terminals, as well as the Dominion Cove Point LNG project. Could Sempra's Port Arthur terminal be the next target? (See LawIQ's Breaking: D.C. Circuit Vacates FERC's EIS for Sabal, Hillabee and FSC) And what's to come of the Sierra Club's recent victory against the consortium of gas pipeline projects in the Southeast? Could the FERC apply the D.C. Circuit ruling, which now requires it to quantify the impact of greenhouse gas emissions, to pipeline projects connected to LNG terminals?Stay tuned.

LNG Terminal Certificate Application Review