EUR 850.00 For Business Accounts Only

Morningstar | Sempra Energy Off to Good Start, Key California Regulatory Docket for 2019

We are maintaining our $125 per share fair value estimate and stable, narrow moat ratings for Sempra Energy after the company reported first-quarter 2019 earnings per share of $1.59 compared with $1.33 in the same year-ago period. Management reaffirmed its $5.70-$6.30 earnings guidance range. Sempra is increasing the dividend 8% in 2019. We expect dividend increases of 11% once Cameron comes on line.

Sempra has a busy California regulatory schedule. Sempra Energy recently filed its cost of capital proposal at the California Public Utilities Commission, requesting a 14.3% allowed return on equity at SDG&E. This includes a 3.4% adder to account for wildfire risk. We expect a base ROE in line with previous allowed returns of 10.2%. If regulators approve the short-term wildfire adder, it would add approximately $1 to our fair value estimate.

SoCalGas requested a 10.7% allowed return, up from the current 10.05%. There is no set timetable for the cost of capital review. Additionally, we are awaiting the outcome of Sempra's 2019 General Rate Case, which is the first rate case incorporating the Risk Assessment Mitigation Phase, or RAMP, investments. We think Sempra's capital plan aligns well with the goals under RAMP, and we expect a constructive outcome. An outcome for the filing is expected in mid-2019, with rates effective July 1.

In Texas, Sempra continues to move to complete is regulated acquisitions in the state. A settlement has been reached in the proposed acquisition of InfraREIT and 50% acquisition of Sharyland utilities. The transaction is expected to close in mid-2019.

Asset sales to fund the regulated transition continue. In April, Sempra completed the sale of wind assets to American Electric Power for $584 million. The asset sale program, which includes renewables and non-utility natural gas assets, has netted $2.5 billion. For the sale of its South American utilities, management seeks a sale by year-end. While the assets operated in countries that provided sound returns for Sempra, the utilities don't fit into management's revised strategy. We continue to like management's divesting of noncore assets, and investing proceeds to pay down debt and invest in its regulated California and Texas utilities.

We were disappointed in the once again revised timeline for Cameron Trains 1-3. Train 2 is now targeted for LNG production in first-quarter 2020, and Train 3 in second-quarter 2020 compared with the previous timeline of having all trains producing LNG by first-quarter 2020. Short-term delays have no long-term impact on our fair value estimate as our estimate for long-term cash flows remains unchanged.