Morningstar | Sempra Energy Enters Into Cooperation Agreement With Activist Investors
We are maintaining our $114 per share fair value estimate and stable, narrow moat ratings for Sempra Energy after Elliott Management and Bluescape Resources entered into a cooperation agreement. Elliott and Bluescape own a combined 4.9% interest in Sempra Energy.The agreement allows Elliott and Bluescape to name two agreed-upon directors to Sempra's board of directors. The investor group originally called for six new directors. Debra Reed, who will retire from the board on Dec. 1, and William Ouchi, who will meet the required retirement age as of the 2019 annual meeting, will not stand for re-election.
We think the overall impact will be minimal since 13 of the 15 directors in 2019 will be legacy directors who have supported Sempra's strategy to date. The largest impact in our opinion will be Reed's retirement and a succeeding director who will more likely advocate for change. Reed was a champion of Sempra's current structure as CEO from 2011 to early 2018.
The previously agreed-to five-person committee reviewing Sempra's strategy will now be named the LNG and Business Development Committee and will include the two new directors. We think this increases the likelihood the committee will recommend strategic changes to Sempra.
Elliott and Bluescape previously called for a break-up by spinning off Sempra's LNG business to shareholders and divesting its interest in its Latin American utilities, IEnova and Sempra Renewables. We believe there is some merit to this argument. While we see some operating synergies with Sempra's current portfolio, we do think shareholders would benefit from a pure regulated utility with a steadier cash flow profile.
The agreement also buys management time to prove that its strategy has merits. All parties have agreed to a standstill and nondisparagement restrictions until Dec. 31, 2019.
Sempra Energy is an energy-services holding company. The company's segments are: San Diego Gas & Electric Company, which provides electric services and natural gas services in Southern California; Southern California Gas Company, which owns and operates a natural gas distribution, transmission and storage system that supplies natural gas in Southern California and portions of central California; Sempra Texas Utilities, which includes Oncor Electric Delivery Company LLC that provides electricity to consumers; Sempra Mexico, which develops, owns and operates, or holds interests in, energy infrastructure in Mexico; and Sempra LNG, which develops projects for the export of liquefied natural gas.
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