Sempra Energy to Sell Entire US Renewables Portfolio

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Energy infrastructure and distribution company Sempra Energy (NYSE: SRE) announced Thursday morning that it plans to sell all its U.S. wind and solar assets, along with other infrastructure assets and some midstream assets, as the first phase of a multistage “portfolio optimization initiative designed to sharpen the company’s strategic focus and create value for all shareholders.”

The asset sales were no doubt helped along when activist investor Paul Singer of Elliott Management and Bluescape Resources acquired a combined stake of 4.9% Sempra’s stock. In a statement cited by The Wall Street Journal, Elliott expressed some disappointment with the planned divestments: “The yardstick we will use to measure the company’s stand-alone plan will be our illustrative Sustainable Sempra Plan.”

Sempra said it will take an after-tax impairment charge of $870 million to $925 million in the second quarter due to the planned asset sales.

Jeffrey W. Martin, Sempra’s CEO, said:

Our strategy is to continue building a leading energy company operating best-in-class utilities and developing contracted energy infrastructure in some of the largest economies in the Americas, with a focus centered on North America. … The [company’s recent strategic] review was guided by several important considerations and factors, including: deployment of additional capital to improve critical utility infrastructure, changes in the U.S. tax code, California regulatory developments and strategic growth opportunities.

Sempra said it has ownership interests and investments in nine solar projects in Nevada, Arizona and California and in wind energy projects in nine states. Martin said that while these assets are a “great platform” the company has decided they would be “more valuable to another owner.”

Without actually saying so, Sempra is choosing (with a push from Elliott and Bluescape) to focus more on its main regulated businesses: Southern California Gas, San Diego Gas & Electric and Oncor Energy in Texas. The company has about 25 million customers in California and a combined rate base of around $14 billion. Oncor claims approximately 10 million electricity customers in Texas, primarily in the Midland/Odessa region and a large area from the Red River to Austin. Oncor’s rate base is about $11.6 billion.

Sempra also owns regulated utilities in Chile and Peru, energy infrastructure in Mexico and a liquefied natural gas liquefaction plant in Louisiana. These businesses remain under the Sempra umbrella for the time being.

Elliott Management and Bluescape participated in a $2.5 billion investment in struggling midwestern electricity generator FirstEnergy Inc. (NYSE: FE). The goal of that investment was to pay down some debt and firm up FirstEnergy’s regulated business by shedding the company’s merchant power business. FirstEnergy has been chasing some government help with its weak nuclear generation business, but with little success so far.

In an investor day presentation also delivered Thursday morning, Sempra projects a midpoint compound annual growth rate (CAGR) for its utilities business in the United States, Chile and Peru to rise by 8% at the midpoint through 2020. The infrastructure business CAGR is pegged to grow by 54% at the midpoint over the same period for an overall CAGR of 20% and earnings per share growth of 13% per year.

Sempra stock traded down about 0.7% in the early afternoon Thursday, at $115.05 in a 52-week range of $100.49 to $122.98. The 12-month price target on the stock is $123.56.