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Sempra Energy to Sell Chilean Stakes, Focus on North America

Zacks Equity Research

Sempra Energy SRE recently signed an agreement to divest equity stake in its Chilean businesses to State Grid International Development Limited (SGID). The sale deed includes its 100% stake in Chilquinta Energía S.A., the third-largest distributor of electricity in Chile. Sempra Energy will receive $2.23 billion in cash from this deal, subject to working capital and debt adjustments.

The agreement also includes Sempra Energy's 100% interest in Tecnored S.A. and 50% in Eletrans S.A. Sale formalities with SGID are expected to get completed in the first quarter of 2020, subject to customary closing conditions and certain regulatory approvals.

Rationale Behind the Agreement

As Sempra Energy strives to become North America's premier energy infrastructure company, it is strictly following the Vision 2022 plan, which includes a disciplined three-phase execution of portfolio optimization and divestitures to strengthen its business in the region.

In line with this, toward the end of September, Sempra Energy signed an agreement to divest its entire stake in its Peruvian businesses to China Yangtze Power International for $3.6 million. Evidently, the latest Chilean business divestments also are part of the company's planned exit from the South American markets, which was approved by its management in January, to extensively focus on its core U.S. and Mexican markets for additional growth opportunities.

Notably, these planned equity divestments take Sempra Energy a step closer to completing the sale of its South American businesses. This will also enable the company to strengthen its balance sheet and fund capital for its core utilities in California and Texas.

Interestingly, the trend of divesting businesses in South America seems to be a familiar strategy among U.S.-based utilities to drive growth. In December 2016, Duke Energy DUK sold its South American power operations to New York-based I Squared Capital for $1.2 billion to expand its domestic businesses.

How Will This Divestment Benefit Sempra Energy?

Sempra Energy focuses strongly on making systematic investments in its infrastructure development projects, especially in California and Texas. For the 2019-2023 period, the company expects to make capital investments of approximately $25 billion toward its California-based utilities.

Shifting the focus to Texas, the second largest economy in the United States, Sempra Energy plans to invest about $10.6 billion for the 2019-2023 period. Going ahead, strong growth across the state should aid new transmission and distribution infrastructure.

With its recent divestments, Sempra Energy looks to generate approximately $5.82 billion in cash, which will enable it to significantly invest in its North American ventures. Notably, the company’s ongoing efforts to completely exit the South American markets and focus on California and Texas-based utilities should result in 13% annual growth in its earnings per share for the 2019-2022 period, as part of Vision 2022.

Alongside Sempra Energy, Pacific Gas & Electric Co. PCG and CenterPoint Energy CNP are two major companies in the Utilities sector, which intend to make significant capital investments in North America.

Price Movement

Shares of Sempra Energy have rallied 25.6% in the past 12 months compared with the industry’s growth of 9.5%.

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