Utilities are usually boring stocks with dependable yields, but not much in the way of growth prospects, given that they are highly regulated. Sempra (SRE) is an unusual case, a utility that is growing internationally and has both regulated and unregulated businesses. Sempra is actually a holding company, a kind of focused conglomerate, consisting of San Diego Gas & Electric (SDG&E), Southern California Gas Co. (SoCalGas), Sempra U.S. Gas and Power and Sempra International. The latter distributes electricity and natural gas to customers in Mexico, Chile, Peru, and Argentina.
SDG&E is a huge electric utility with five natural gas powered generation facilities. The company provides electricity to parts of southern California, Arizona and Nevada. Southern California is one of the best environments for an electric utility, since rates there are 60% higher than the national average and because state law allows utilities to protect earnings from cutbacks in energy use due to desirable conservation efforts. Sempra expects to increase its regulated earnings by over 50% through 2016 through multibillion dollar transmission projects, including the Sunrise Powerlink to San Diego.
SoCalGas is a natural gas storage and distribution company with about 100,000 miles of various kinds of pipelines, and storage for over 134 billion cubic feet of gas. Sempra Generation owns power plants, including renewable generation, in California, Arizona, Nevada and Mexico. Sempra Pipelines and Storage operates natural gas pipelines and storage facilities in Alabama, Chile, and Peru and has LNG terminals in Baja California, Mexico and Hackberry, Louisiana.
The LNG terminal in Hackberry is the focus of an agreement between Sempra’s Cameron LNG unit and Mitsubishi Corp (TYO: 8058) and Mitsui & Co (TYO: 8013) of Japan to build a natural gas liquefaction plant (natural gas has to be condensed and cooled so that it can be transported as a liquid) and an export facility so that American natural gas can be transported to Japan. The U.S. currently has a glut of natural gas due to the advent of fracking technology, which has led to decade low prices for the commodity. Japan, meanwhile, is suffering energy shortages because it has shut down its nuclear power plants in the wake of the Fukushima disaster. In Japan, natural gas sells for six times its current U.S. price. The export facility, which is projected to have a capacity of 1.7 billion cubic feet of gas per day, will cost $6 billion and take three years to build. Besides the Japanese, GDF Suez has contracted to take the remaining capacity of the facility. Sempra joins Cheniere Energy (NYSE: LNG), which is also planning to export LNG from its Sabine Pass facility, also in Louisiana. ExxonMobil (NYSE: XOM), BP (NYSE: BP), and ConocoPhilips (NYSE: COP) are similarly planning on exporting natural gas that is now stranded in Alaska to countries in Asia.
Though most of its energy generation is focused on the use of natural gas, which is fortunate given the drop in price over the last year, Sempra is also involved with alternative energy sources. Recently, Sempra and BP announced a joint project to produce 23 megawatts of wind energy in Maui. The companies are racing to take advantage of a tax credit before it expires. The entire output of the plant has been presold to Maui Electric Co. BP and Sempra are also building an $800 million wind farm in Kansas. Also, near Boulder City, Nevada, Sempra has a solar field with more than a million solar panels. In Mexico, Sempra runs a geothermal plant. More than 20% of SDG&E’s energy is generated from renewable sources, from wind, geothermal, biomass, hydroelectric and solar facilities. So Spectra is diversified across many different energy sources, in addition to natural gas.
For the investor, Sempra offers capital appreciation plus a reasonable dividend. The company’s stock price recently set a 52 week high. In March of this year, the company raised the dividend to 60 cents quarterly from 48 cents previously, a 25% increase, signifying management’s faith in the future. The company yields about 3.5% at its current price. In 2011, earnings per share were up 14% to $4.47 per share, with profits of over $1 billion.
Motley Fool Seth Jayson is concerned with the large capital expenditures that the Sempra is making. But utilities by their nature invest in large projects and it is these that set the stage for growth in the future.
I think that Sempra is a buy here and believe that the stock will extend its run. The company is sitting pretty to benefit from the current abundance of natural gas and management is enlightened enough to take advantage of alternative energy sources. The company’s major business is in the vibrant Southern California area and it is expanding into Latin America with its higher growth rates. The ability to export natural gas, starting about 2016, will generate growth in profits far into the future. Billionaire Israel Englander, John A. Levin, and Sean Cullinan are among the hedge fund managers with bullish SRE positions (see Israel Englander’s top stock picks).
Note: This article is written by Steven Edwards.