Sempra Energy (SRE) — a holding in my conservative model portfolio — raised the mid-point of its 2021 earnings guidance range to $8.05 per share, a significant leap from the previous $7.80, notes utility sector specialist Roger Conrad, editor of Conrad's Utility Investor.
A key driver of the increase is a $900 million boost in planned utility CAPEX through 2025 to $32 billion. That’s fueled by 2.2 percent customer growth at the Texas utilities, the fastest rate since 2007.
More from Roger Conrad: Top Picks Mid-Year Updates: Avangrid
In California, gas and electricity distribution units reached an amicable resolution with the Public Utilities Commission on rates for 2022 and 2023. They also scored a win from regulators’ decision last month to cut rooftop solar subsidies. The utility currently passes these directly onto ratepayers.
Any reduction should enable increased spending on grid hardening and enhancement, with the company targeting 10 percent compound annual rate base growth through 2025 in the state.
With the acquisition of the former IENOVA SA now closed, the newly formed Sempra Infrastructure unit ($25.2 billion enterprise value) holds all of the company’s non-utility assets and operations.
Those include the Cameron LNG export facility in Louisiana, roughly 1,000 megawatts of renewable energy generation, contracted midstream infrastructure (20 year average life) including 5,000 miles of pipelines and 11 of the 25 Mexican cross-border connections, and a large LNG export facility planned on the Pacific Coast of Baja California.
Infrastructure is entirely self-funding and will be 20 percent-owned by financial partner KKR, once the private capital firm pays Sempra $3.37 billion in cash “in the coming weeks.”
Management plans to fund a development pipeline of 3 GW of cross-border solar, wind and battery projects over the next few years, as well as hydrogen, green ammonia, energy storage and carbon sequestration.
Putting the pieces together, Sempra appears safely on track to generate reliable mid-to-upper single digit percentage annual earnings and dividend growth well beyond mid-decade.
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That should be more than enough to bring the stock’s discounted valuation of 16.5 times expected next 12 months earnings closer to the 20 plus of other best in class companies. My upside target for the shares is to easily eclipse the February 2020 high of $160 plus in the next 12 to 18 months. Buy at $140 or less.
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