Customers, employees and others would benefit from a proposal by two large shareholders in San Diego-based Sempra Energy for a board refresh and strategic review committee in what arguably is using California ratepayer money to invest in non-California business, proponents said earlier today.
"That's a great question," Geoff Sorbello, manager of strategic equity at Elliott Management and a former Okapi Partners and Institutional Shareholder Services staffer, said in response to a California Business Daily question during a conference call earlier today. "That is essentially what we illustrated throughout the presentation [to Sempra], that there has been this process where the company has taken those dollars and used that to expand."
Ratepayers wouldn't be the only ones providing money, Jeff Rosenbaum, portfolio manager overseeing Elliott's proposal and a signatory to a letter to Sempra that was made public earlier today, said in follow-up.
"This isn't just take money from the ratepayers and turn around and spend it somewhere else," Rosenbaum said. "It's an access to capital that these businesses allow. So these are the types of businesses that have good credit profiles, they're steady, safe businesses and you can go out and you can get additional capital to do things. So it's not just a pure siphoning of funds from those businesses into businesses outside those utilities; it's the actual access to capital. That might be a key nuance."
Access to funds and cost to capital is an important part of the proposal, Sorbello added.
"It's access and it's cost to capital," he said.
"So, as a regulated utility is probably the best business along the quality of business spectrum, and consistent with that they have super low cost to capital. Once you start delving into other businesses and other geographies (i.e. Peru, Chile, Mexico and other businesses that are not regulated) (i.e. gas infrastructure), by definition, the cost to capital for the entire entity goes up. So, as my colleague mentioned, he's exactly right, it's using the balance sheet and the borrowing capacity and increasing the cost to capital along the way."
The conference call followed the release earlier in the day of a letter from Elliott and Bluescape Resources, both shareholders in Sempra Energy, to urge Sempra's board and CEO Jeff Martin to take up a two-step plan for the natural gas utilities holding the company's future. The first step would be six new "independent, highly qualified directors" that Elliott and Bluescape had "identified" who would be "excellent additions to the board and are interested and ready to help oversee the transition to a Sustainable Sempra," the letter said.
The second step would be establishing a strategic review committee "empowered to conduct full and unfettered 'no stone unturned' portfolio and operational reviews aimed at identifying value-creation opportunities for all key stakeholders," the letter said.
"While the specific details, evaluations and conclusions will ultimately be up to the committee, we believe the goal of the strategic review committee's work should be to formulate a strategic performance plan to i) unlock Sempra’s significant conglomerate discount, ii) highlight the value of its LNG development pipeline, and iii) improve the safety, reliability and service of its core U.S. utilities through continued system investment, importantly, with no net increase in customer rates," the letter continued. "This can be viewed as a 'back to basics' strategy where individual businesses can excel without unintended externalities and boards and executives can execute their core competencies, in turn, benefitting all key stakeholders."
Elliott and Bluescape together own $1.3 billion, or 4.9 percent, in economic interest in Sempra, "making us one of your largest investors," the letter said.
The letter alone seemed to have a positive influence on the market early Monday with Sempra's shares reported up 7.9 percent at $109.50 before the bell.
In March, Sempra, reportedly with backing from Elliott, completed the $9.45 billion acquisition of the power transmission company Oncor after receiving approval from Texas regulators.
Elliott has successfully used the two-step strategy with previous companies and would expect similar success for Sempra, Rosenbaum said during the conference call.
"We see a lot of opportunity at Sempra," he said.
"We're excited to be large shareholders; we're excited to have constructive dialogue with the company, the management team and the board. We think there's a clear point in time right now - as Jeff Martin became the new CEO - for a pivot, a real line in the sand demarcation for the company to embark on a bold set of initiatives and allow all key stakeholders a paradigm shift in the company. From customers to employees to regulators and shareholders and creditors. We think there is a lot of value creation opportunity here and we can't wait to engage them on some of the further details."
The shareholders have received a response from Sempra, Sorbello said.
"I believe the company has responded to our announcement with a statement simply saying that they are committed to an open dialogue with shareholders and welcome the opportunity to consider perspectives that would deliver long-term shareholder value," he said.
"So we see that as a good sign. We're hopeful that we can get a meeting with them soon and discuss these ideas with them."