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Sempra Energy to Sell Peruvian Stakes, Focus on North America

Zacks Equity Research

Sempra Energy SRE recently signed an agreement to divest stake in its Peruvian businesses to China Yangtze Power International. The sale deed also includes an 83.6% stake in Luz del Sur, Peru’s largest electric power distribution company. Sempra Energy will earn cash worth $3.59 billion, from this deal, subject to working capital and debt adjustments.

Further, the agreement includes the company’s interest in Tecsur S.A. and Inland Energy S.A.C. Sale formalities are expected to get completed in the first quarter of 2020, subject to customary closing conditions, including approval from the Peruvian anti-trust authority and the Bermuda Monetary Authority.

Rationale Behind the Agreement

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

Evidently, the latest Peruvian business divestments come as part of the company's planned exit from the South American markets. This was approved by management in January to extensively focus on its core U.S. and Mexican markets for additional growth opportunities.

Also, in line with this vision, Sempra Energy expects to announce a divestiture agreement for its entire stake in Chile-based Chilquinta Energía S.A. and Tecnored S.A. during the fourth quarter of 2019. Notably, these equity divestments will pave way for 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 is a familiar strategy among U.S.-based utility companies to drive growth. In 2016, Duke Energy DUK agreed to sell its South America-based power operations to New York-based I Squared Capital for $1.2 billion to focus on the expansion of its domestic business.

How Will This Divestment Benefit Sempra Energy?

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

Shifting the focus to the second-largest economy in the United States, Texas, Sempra Energy has a capital investment plan of about $10.6 billion for the 2019-2023 period. Going ahead, strong growth across the state should drive demand for new transmission and distribution infrastructure.

Notably, the company’s ongoing efforts to completely exit the South American markets and focus on California and Texas-based utilities would allow it to witness a solid 13% annual growth in earnings per share (EPS) for the 2019-2022 period, as part of Vision 2022.

Apart from Sempra Energy, Pacific Gas & Electric Co. PCG and CenterPoint Energy CNP are two major companies in the utility sector, which intend to make significant capital investments in North America, mainly California and Texas.

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