Billionaire investor Paul Singer targeted California power giant Sempra Energy for a major overhaul Monday, and in doing so, he may have inadvertently delivered a warning to all of America’s growth-starved electric utilities: Stick to basics.
Singer’s Elliott Management Corp. and Bluescape Resources Co. called for Sempra — which is based in San Diego and is the parent of SoCalGas — to sell Mexican and South American businesses, spin off its U.S. liquefied natural gas unit and name six new directors.
Sempra’s shares soared 15.5% to $117.19, their biggest rally in almost two decades. Before Monday, the shares had declined 12% in the last year. Elliott and Bluescape said their strategy would raise the share price to between $139 and $158.
Sempra’s U.S. utilities division, consisting of SoCalGas, San Diego Gas & Electric and Oncor, would have a combined value of as much as $30 billion, according to Elliott and Bluescape. The investors said Monday in a statement that the company’s conglomerate structure holds “no compelling strategic or financial rationale.”
“Sempra Energy is committed to an open dialogue with all shareholders,” the company said in a statement. “Our board and management will review their letter and presentation in detail and respond in due course.”
Elliott and Bluescape are proposing Sempra sell its stakes in IEnova, which develops and operates energy infrastructure in Mexico; Chilquinta Energia SA in Chile; Luz Del Sur SAA in Peru; and the Sempra Renewables division.
The investors are also pushing Sempra to spin off liquefied natural gas assets to shareholders for a combined value of $8 billion to $9 billion. That includes Sempra LNG & Midstream, Cameron LNG and Port Arthur LNG.
In calling for Sempra to go back to basics, Elliott and Bluescape said the San Diego company’s share price has underperformed compared with its peers and its “achievable value.” But there are other utilities that, like Sempra, have sought profits outside their core businesses and have lagged behind the S&P 500 Utilities Index. They include Dominion Energy Inc., PPL Corp. and Black Hills Corp., according to Bloomberg Intelligence.
“The basic utility investor wants stability and a dividend — plain vanilla,” said Kit Konolige, a utility analyst for Bloomberg Intelligence. “It seems to be a trend, certainly, for investors to take a look at these companies and say, well, if they’ve underperformed and if they have separate businesses, maybe they’d be better off focusing on the core utility.”
The pressure on Sempra could make it harder for utilities that are starving for growth in the face of weaker power demand to branch out and find a way to increase profits. This year, Elliott and Bluescape took a stake in FirstEnergy Corp. to push the Akron, Ohio-based utility owner to exit its unregulated power business. Utility owners Duke Energy Corp. and American Electric Power Co. have shed non-regulated businesses in recent years.
In 2017, Elliott and Bluescape — which together hold a 4.9% interest in Sempra — went after NRG Energy Inc., which became one of the best-performing stocks on the Standard & Poor’s 500 Index in 2017. Monday’s letter on Sempra appears to follow a similar blueprint. NRG agreed in February to divest $2.8 billion in assets.
“We would expect that Elliott Management and Bluescape could have a similar impact that it has had with NRG,” Shahriar Pourreza and other analysts at Guggenheim Securities LLC wrote in a research note Monday.
Dominion declined to comment. PPL didn’t immediately return a request for comment. Black Hills has focused on selling its non-regulated businesses while investing in its regulated utility businesses, spokesman Jerome Nichols said.
Chediak and Efstathiou write for Bloomberg.