SRE: Oncor acquisition is strategically astute and appears financially sound

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Market Price (8/25/2017): $119.03/share; ST-Target: $165/share; NIV: $210/share

    Conference call reveals little additional information other than multiple paid and that SRE would issue some equity to fund the transaction: It was revealed by management that it estimates having valued Oncor at some 9.9x 2018E AEBITDA and some 23x 2018E adjusted net income. This includes SRE’s estimate of the impact of Oncor’s recently settled 2017 rate case. The financial data is expected to be updated just before or after closing the transaction in 1H18.

·         Oncor’s 2018E AEBITDA and Net Income based on offering price for EFHC: Based on the multiple that SRE believes it would pay, if successful, Oncor’s implied 2018E AEBITDA and Net Income would be about $1,900MM and $513MM, respectively

·         The deal looks to be accretive based on 2018E. The following is based on 0% equity financing, 50%/50% equity/debt financing, and 100% equity financing scenarios assuming a uniform 5.25% interest rate on the debt financing regardless of financed amounts, and $3,870MM in SRE’s financing obligations. We assume new equity would be issued at $117/share and use 35% tax rate:

Under all scenarios, assuming our estimate of SRE’s 2018 numbers and SRE’s estimates of Oncor’s 2018E numbers are reasonably accurate, the deal looks to be accretive: We believe our estimate of the interest rate is on the high side based on recently closed financing deals in the utility sector.

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