As the economy begins its comeback, the utilities companies that will benefit the most are the ones whose stock prices have suffered for being located in poor housing markets and those with significant counter-party risk. These companies lack the stability an investor looks for in utilities companies during a time of economic hardship. However, as the economy begins its turn around, these investments will once again become attractive.
A company that fits the aforementioned profile is Sempra Energy (SRE), a diversified gas utility company based in Southern California. Sempra has two core utility subsidiaries in Southern California Gas (SoCalGas), the largest gas utility in the United States and San Diego Gas & Electric (SDG&E), which serves 3.4 million customers in the San Diego area. Combined, these two entities comprise 60% of Sempra’s revenue stream. The remaining 40% comes from its natural gas infrastructure businesses, which includes Sempra Generation and Sempra Commodities.
Sempra had a bumpy 2008. For starters, the company’s stock lost over 28% of its value. One of the key drivers behind this decline was Sempra’s location in Southern California, which proved to be one of the hardest hit housing markets in the United States. A poor housing market tends to accompany abundant foreclosures, which is problematic in terms of electricity demand for a utility company servicing that area. In addition, Sempra has a unique joint venture with the Royal Bank of Scotland, in which essentially RBS provides Sempra the capital to operate its commodities trading business. On October 6, 2008, rumors that RBS might be nationalized surfaced, putting into question the bank’s capital commitment to Sempra. Sempra’s stock was down over 16% on this day alone.
However, these same tribulations will be the basis for Sempra’s comeback when the economy turns around. On February 26, 2009, RBS reaffirmed its capital commitment to Sempra, as the UK Financial Services Authority determined that this capital commitment was of regulatory status. This means that RBS’s capital commitment to Sempra is backed by the UK Government. On the heals of this backing, Sempra has come out and projected that its commodities joint venture with RBS will realize a 26% return on invested capital and bottom line increases in a range of 25-33% from 2009 to 2013. In addition, Sempra reaffirmed its 2009 company-wide earnings guidance of $4.35 to $4.60 per share given this more transparent perspective on it’s revenue stream. In summation, Sempra’s joint venture with RBS is safe and will only be enhanced if an economic turnaround helps to strengthen the bank’s capital position.
Furthermore, the Southern California housing market has seen a deceleration in its decline. March home sales were up over 27% from February levels.
