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Sempra Energy to Sell Assets for Portfolio Optimization

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Sempra Energy SRE recently made an announcement regarding its plan to sell several energy infrastructure assets, including its entire U.S. based renewable portfolio and midstream assets. The company's board of directors gave the final nod for the asset sales on Jun 25, based on a comprehensive strategic review of its businesses and asset portfolio over the past year.

Details of the Optimization Initiatives

In an attempt to transform itself into a leading energy company, Sempra plans to sell the company's entire U.S. wind and solar asset portfolio along with some of its midstream assets. This sellout comes as the first phase of a multistage portfolio optimization initiative that the company has lately designed for further strengthening its strategic focus and creating value for shareholders.

The planned sales include the company’s solar and wind assets with a total generating capacity of approximately 2,600 megawatts, along with projects already in development stage. It also includes joint-venture and some tax-equity investments.

Also, part of the planned sales are its domestic Midstream assets that include the Mississippi Hub, an underground salt dome with 22 billion cubic feet (Bcf) of working natural gas storage capacity, compression and pipeline facilities, and its 90.9% ownership stake in a 20 Bcf natural gas storage facility named the Bay Gas Storage Company.

Several important factors were taken into consideration, pertaining to the strategic portfolio review. These factors include the deployment of additional capital for improving critical utility infrastructure, changes in the U.S. tax code and regulatory developments, and strategic growth opportunities in California.

The company expects to have incurred after-tax impairment charges of approximately $870-$925 million in the second quarter of 2018 due to the planned asset sales.

Benefits of the Initiative

The latest announced strategy of Sempra Energy comes as part of the company’s Vision 2022 plan that includes a disciplined, three-phase execution of portfolio optimization and divestitures, for strengthening its focus on North American business model. Per this plan, the company expects to witness a solid 13% annualized growth in its earnings per share (EPS) for the period of 2018-2022. We assume proceeds from the latest divestiture deal to partially boost Sempra Energy’s aforementioned EPS growth expectations.

Portfolio optimization typically maximizes expected return from investment and minimizes costs. In this line, the planned monetization of Sempra Energy’s assets should favorably support the company’s future growth opportunities in its other U.S. businesses. The proceeds from the planned asset sales may further help Sempra Energy in reducing its equity financing.

Such strategic implementation of plans, in turn, should strengthen the company’s balance sheet, along with positioning it to meet global customer needs and drive additional shareholder value.

Price Performance

Sempra Energy has underperformed the industry in the last year. During this period, the company’s shares have gained 3.5% compared with its industry’s growth of 11.3%. The underperformance may have been caused by stiff competition that Sempra Energy faces throughout the United States.


Zacks Rank & Key Picks

Sempra Energy currently carries a Zacks Rank #4 (Sell).

A few better-ranked stocks in the same space include Northwest Natural Gas Company NWN, Atmos Energy ATO and Chesapeake Utilities Corporation CPK, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Northwest Natural Gas has surpassed the Zacks Consensus Estimate in all of the previous four quarters, with an average surprise of 20%. The Zacks Consensus Estimate for 2018 earnings rose by 2 cents to $2.23 in the last 60 days.

Atmos Energy has surpassed the Zacks Consensus Estimate in three of the last four quarters, with an average surprise of 8.76%. The Zacks Consensus Estimate for 2018 earnings rose by 3 cents to $3.99 in the last 60 days.

Chesapeake Utilities has surpassed the Zacks Consensus Estimate in three of the last four quarters, with an average surprise of 0.29%. The Zacks Consensus Estimate for 2018 earnings rose by 5 cents to $3.44 in the last 90 days.

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