Sempra Energy's decision to offload its U.S. renewables business and natural gas storage assets is relatively in-line with analyst expectations, but Wall Street is waiting for clarity from management around equity needs.
Sempra on June 28 held an analyst day in New York to detail its planned sale of U.S. wind and solar assets and a portion of its natural gas midstream holdings, but management offered few details on how these proceeds will support the company's financial outlook.
"We were disappointed [Sempra] didn't make more commitment to the balance sheet," CreditSights analysts wrote in a June 29 report.
While estimating the renewables portfolio could fetch $1.5 billion to $2 billion, Guggenheim Securities LLC analyst Shahriar Pourreza said "EPS guidance was somewhat light, and the message around remaining equity needs was vague, in our view, as it was unclear whether proceeds from the eventual asset sales would be used to offset some of the remaining [approximately $1.6 billion] in [Oncor Electric Delivery Co. LLC] equity financing."
"As we think about the equity requirements for Oncor, we still have $1.6 billion left out there to tackle on the equity side, but we have been very closely choreographing our approach both to equity and balance sheet management because we believe as we execute on our strategic initiatives across the next three years, our balance sheet support is very, very important," Sempra Energy CEO and Director Jeffrey Martin told analysts and investors.
Pourreza noted Sempra Energy "purposely geared discussions toward its U.S. regulated operations," where more than 80% of the company's $15 billion capital plan through 2020 is targeted.
Sempra Executive Vice President and CFO Trevor Mihalik said the company's acquisition of Oncor will increase the company's future earnings visibility, pointing to $200 million to $300 million of possible upside not included in the $8.4 billion slated for investment at the Texas utility over the next three years.
Sempra's California utilities San Diego Gas & Electric Co. and Southern California Gas Co. are planning $7.8 billion to $8.6 billion of capital investments through 2020, Mihalik added.
Overall, the CFO said Sempra's $15 billion capital plan assumes a 7% compound annual growth rate in domestic utility rate base through 2022, driven by $12.3 billion in California and Texas spending.
Outside of equity needs, it remains unclear whether and to what extent activist investors prompted the asset sales announced hours before the analyst day.
Activist investors Elliott Management Corp. and Bluescape Resources Company LLC on June 11 announced their two-step plan to unlock value at Sempra Energy and simplify its business structure through the appointment of six independent directors and the creation of a strategic review committee. The investors pitched the sale of Sempra's non-U.S. businesses and Sempra Renewables LLC, and the spin off its Sempra LNG & Midstream segment.
"Management made it fairly clear during the analyst day they have no plans to sell or spin the LNG or Mexico business," CreditSights analysts wrote. "The growth opportunity in Mexico is so compelling to management that we don't see Sempra selling it, but we speculate the Chilean and Peruvian businesses could be sold."
Executives did not dismiss the possibility of future asset sales or potential acquisitions.
"Management expressed a willingness throughout the day's commentary to consider all options in evaluating the ideal business mix going forward, including international sales," J.P. Morgan Securities LLC analyst Christopher Turnure wrote in a June 28 report.
Turnure, however, echoed concerns that Sempra management "remains vague on the pro forma balance sheet, and it is unclear what equity needs are over the next 12 months."