Sempra Energy: California Bliss
Posted on: September 13, 2008 - Email Article - Printable Version
The recent volatility in commodity prices has made investing in many utility companies a lackluster and mundane decision. As “spark spreads” sector wide have diminished, so too have stock prices and shareholder value. That does not mean, however, that there are not investment opportunities in today’s utility sector. What it does mean is it takes a diversified utility company with revenue sources outside of electrical distribution to withstand the fluctuations in commodity prices.
A company equipped with the credentials to fend off rising input prices is Sempra Energy [SRE: 43.97, 0.00 (0.00%)], a diversified gas utility company based in Southern California. Sempra has two core utility subsidiaries in Southern California Gas (SoCalGas), the largest gas utility in the United States and San Diego Gas & Electric (SDG&E), which serves 3.4 million customers in the San Diego area. Combined, these two entities comprise 60% of Sempra’s revenue stream. The remaining 40% comes from their natural gas infrastructure businesses, which includes Sempra Generation and Sempra Commodities. This 40% has allowed Sempra to maintain the stability typically seen in the utilities sector, which has been reflected strongly in 2008 results to this date.
In the first half of the fiscal year 2008, Sempra has seen 41% earnings growth in natural gas pipeline & storage investments along with a surprising 11% earnings growth from SDG&E and SoCalGas. This strong performance prompted Sempra to raise their full year guidance by 4% from an average estimate of $3.75/share to an average estimate of $3.90/share. Despite the strong results, Sempra has traded down 6.75% year to date primarily on macro economic conditions. However, do not be put off by the recent price depreciation. Sempra has the growth initiatives and stable business line to prosper over the long run.
Project Portfolio
Sempra has an extensive pipeline of developing investments that should have investors believing in the company’s ability to grow and increase in value. Sempra has an intriguing mix of renewable energy, LNG & natural gas storage, and pipeline projects that will allow the company to expand its business line. A quick synopsis of the projects are as followed:
- Gulf Coast Expansions – Sempra has made three separate major investments in the Gulf Coast region of the United States. With these investments, Sempra has given itself the infrastructure and supply chain capabilities to push natural gas and LNG from the Gulf Coast to the Northeast and Southeast regions on the United States. The three investments are the Cameron LNG storage facility, which has 1.5 Bcf storage capacity, the $250 million Liberty Storage Facility and the purchase of EnergySouth, two large natural gas facilities with 57 Bcf capacity. The EnergySouth purchase alone potentially will add $.30/share to Sempra’s annual earnings.
Rockies Express Pipeline – Sempra has acquired a 25% stake in the Rockies Express Pipeline, one the largest natural gas pipelines in North America. The pipeline runs from Wyoming to West Virginia. Through the Rockies Express, Sempra will now have an infrastructure based to move natural gas and LNG in the northern part of the United States.
- La Rumerose Wind Project – The La Rumerose wind plant is one of Sempra’s green initiatives. The plant is a 20 year project based in Northern Mexico that has the potential to supply Southern California and Northern Mexico with 1000 MW of wind energy.
- Utility Investments – In addition to the aforementioned project line, Sempra has made several investments in its utility subsidiaries. The most substantial of which is a $1.5 billion project called the Sunrise Powerlink. The Sunrise project, which could potentially add $0.32/share in earnings, is a renewable energy investment. Specifically, it will bring wind, geothermal, and solar energy into SDG&E and SoCalGas’s distribution portfolio. Furthermore, Sempra has made several transmission investments and has implemented a smart meter installment plan.
- Energia Azul LNG Terminal/Bajanorte Expansion – The Energia Azul LNG Terminal is the first LNG storage facility on the west coast of North America. The terminal, located in Mexico, is being built by Sempra in order to supply SDG&E with LNG to be distributed throughout Southern California. The Bajanorte Expansion is an addition to the Bajanorte, a natural gas pipeline that runs through northern Mexico. The expansion brings the LNG from the Energia Azul LNG Terminal though Mexico, ultimately getting delivered to SDG&E.
RBS Sempra Commodities
Part of Sempra’s diverse revenue stream comes from their commodities-trading business. On July 9th 2007, Sempra Energy entered into a joint venture with the Royal Bank of Scotland in which essentially RBS will supply the capital in Sempra’s commodity trading operations. In return, RBS will receive 30% of the first $500 million in commodity trading returns and 70% on any return thereafter. Over time, commodities trading have proven to be a bit of a boom or bust business due to the volatility in commodity prices. With this joint venture, Sempra may have decreased their upside potential, but they have also significantly diminished their downside. In addition, Sempra’s cash flows from commodities trading will be more stable and predictable which will take a substantial amount of uncertainty out of their earnings potential
Positive Regulatory Environment
On July 31st Sempra received a decision from the California Public Utility Commission (CPUC) on their general rate hike request. The CPUC granted Sempra with a $209 million revenue requirement increase in 2008, and a $95 million average increase over the next three years. Historically, Sempra and the CPUC have proven to have a favorable relationship as the CPUC has been a willing catalyst to Sempra’s financial health. This recent general rate hike case reiterated the positive relationship between the two entities, which is an upbeat sign for a continued favorable regulatory environment.
Final Thoughts
All in all, utility investors look for two key components: stability and dividends. With strong, consistent financial results and a yield of 2.5%, Sempra has exhibited that it is investment worthy. Their performance, coupled with their extensive expansion initiatives and diverse revenue stream, makes Sempra attractive on all fronts. Bottom line? Expect Sempra to rise like the Southern California sun.
- T.J. Smith
Disclosure: The mutual fund the author manages seeks to be long SRE in the near future.
The Following Stocks Were Mentioned In This Article: sre
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what happens if the JV with rbs collapses due to rbs financial issues?
what is sre’s course of action to take back this jv and how much would it impact earnings?
tia
Yesterday was a real tough day for SRE owners and I personally felt the pain as the mutual fund I am associated opened a position in Sempra 10 days ago. But what are we to make of this situation? I am very uneasy right now about the company because of all the uncertainity that has been generated with RBS’s need for a capital infusion. Quite frankly, if RBS needs a capital injection from their government just to run their business, I am not sure how dire it is to them to maintain a joint venture with a foreign utility. However, none of that is set in stone. What I will say is that I think that this news has driven SRE’s share price to below fair value even discounting the company for the potential loss of this revenue stream (25% to be exact). However, I think we need clarity from Sempra on the status on the joint venture before even considering the stock. I’ll keep the readers updated as soon as word gets out, but for now, hold on tight, there is still value in SRE but sometimes market reaction is too substantial to overcome. Lets see what the next few days have in store for this stock and their JV.
SRe filed an 8-K last week that was anything but transparent. Essentially, what the company did was laid out the terms of their deal with RBS and conceded that their credit faculty in this venture will be probably be reduced. Investors need to maintain a close eye on this situation as RBS and the UK government work out their capital infusion plan. SRE has traded with the broader market since this news and things have settled down. They are cheap, but stay on the sideline until more of the uncertainity surrounded RBS is panned out.