Sempra Eenergy (NYSE:SRE) is a unique beast when it comes to the utility and electricity space. Unlike so many of its peers that are pushing to increase their regulated utility business, Sempra is taking a very different approach by diversifying into international markets and LNG exports. It's a slightly more risky growth model, but it also provides much more upside than the tired and true utilities business.
To ensure investors that it can execute on this plan, Sempra has laid out how it plans to achieve its goals through numerous investor presentations. Here's a quick look at five charts to help you understand the company's current business and its growth trajectory over the next several years.
Strong growth plans baked in
Unlike many other U.S.-based utilities that rely on modest rate increases and regulated business models to achieve earnings growth, Sempra has a pretty expansive blend of regulated utilities, unregulated power generating assets, international assets, and ventures into natural gas transportation and logistics. This more diverse operational model, and the current growth plans it has in place, mean that the company is looking to increase its earnings around 50% by 2019.
While the company will see some modest increases from regulated utility business and some better performance from its operations in Mexico, Peru, and Chile, the bulk of the company's planned earnings growth will come from its US Gas and Power division and its investment in the Cameron LNG export facility. Once up and running, the export project is expected to generate between $550 million and $600 million in EBITDA annually.
Pending any major changes to this plan, Sempra should be able to meet these stated goals. That should give investors a bit of confidence in an investment. What could get them excited, though, is the unplanned spending that has a good chance of happening.
Even bigger options available
While the development that is "on the books" for Sempra looks tempting, it's the "off the book" work that should really get investors' attention. According to the company, that baked-in earnings growth should require about $14.7 billion in capital spending. At the same time, though, the company has identified an additional $7 billion to $8 billion in spending tangential to that base growth program that could really accelerate that growth track if Sempra deems certain projects worthy of additional investment.
The largest of those "off the books" opportunities is in Mexico, where the company's Mexican subsidiary, IEnova, is bidding on billions in projects commissioned by Mexico's Federal Electricity Commission. The government's public utility regulator is looking to upgrade and expand the country's electric and gas infrastructure, and unlike in years prior it's opening up these projects to bids from private companies. In natural gas pipelines alone, IEnova plans to bid on $11 billion worth of new projects that would eventually flow to Sempra Energy's bottom line.
Sempra is keeping these projects off its base growth plan because they're only part of the development plan if IEnova can win the bid. So far it has won quite a few of these projects, and the company's joint-venture efforts with Pemex suggest that it should be able to keep winning bids on these natural gas projects and other electric transmission and power generation projects.
Paying for everything
As awesome as all of these growth plans sound, there is one thing that will make them challenging: paying for them all. As robust as Sempra's cash flows have been over the past couple of years, it's not enough to pay for its base plan and the possible development extensions. During last year's analyst presentation, the company said it should expect to generate a little more than $17.2 billion in cash from investing and operations between now and 2019, a little less than what it will take to cover all of its base plan spending and its current dividend.
So to pay of that additional $7 billion to $8 billion in optional spending, it will need to have quite a bit of access to the capital markets. Thanks to the company's wide array of subsidiaries and operations in other countries, Sempra has quite a few options here.
The one option that's been debated was the one on the chart labeled "possible TRV." At the time, Sempra was considering spinning off its stake in the Cameron LNG and some other steady cash flow-generating assets into a total return vehicle like a master limited partnership or yieldco. At the time of the presentation, the company was pretty much set and ready to IPO Sempra Energy Partners, an MLP that would hold several of these assets and help pay for the development of several projects.
Problem was, just about the time Sempra was ready to IPO the new MLP in late 2015, the market for limited partnerships and high-yield resource investments went over a cliff.
As investors have soured on MLPs and similar investments, Sempra backed out of the plan to spin off Sempra Partners back in November, but has said it will revisit the idea if valuations for MLPs become favorable.
Until that time, we will be a little less certain as to how many of these additional projects Sempra will be able to take on. The company just recently announced that it was unloading its stake in the REX pipeline for about $440 million in cash, and you can bet that the proceeds of that sale will go into the development of other projects.
What a Fool believes
Sempra is a little bit more complex than your standard-fare regulated utility company, but those couple of extra layers of business give the company a pretty large swath of growth ahead of it. As these charts show, the company has a ton of potential places to invest and grow over the next half-decade, but it may be a bit of a challenge to get the funding necessary to pay for all of these projects.
From an investor standpoint, the most important thing to watch here is how the company is able to fund these projects. Lots of debt could cause problems down the road, and more equity could dilute the benefits for each share. So keep an eye on how the company finds the cash to keep its growth engine humming along.