EUR 850.00 For Business Accounts Only

Morningstar | SRE Updated Star Rating from 14 Nov 2018

We are reaffirming our $123 per share fair value estimate, narrow moat, and stable moat trend for Sempra Energy after meeting with management at the Edison Electric Institute Financial Conference in San Francisco.

Investors are focused on the company's potential wildfire liability given the current wildfire activity in California. While Sempra doesn't have any current exposure, the ongoing risks and potential liability of operating in the state have weighed on all California utilities.

While recent legislation (Senate Bill 901) helps mitigate liability from the 2017 wildfires--to which Sempra has no liability--it doesn't address ongoing potential liability. Due to this lack of regulatory and legal clarity, California utilities have traded at a discount to their peers and we think this will persist until further policy changes. Sempra hasn't had a major fire in its territory since 2007.

What impresses us most is the ability of Sempra Energy's management to move forward with its significant LNG development opportunities. Sempra recently announced a Memorandum of Understanding with Total, which would allow the company to contract up to 9 Mtpa of LNG from future Sempra LNG projects, including ECA phase 1 and 2 and Cameron phase 2. Opportunities for expansion at Port Arthur remain, as well. We think this sets up the LNG unit to be a significant growth contributor in the middle of the next decade.

Sempra is also unlocking additional growth opportunities at recently acquired Oncor in Texas. Oncor also increased its capital expenditure forecast to $10.5 billion, up from $8.4 billion and supporting our long-held belief that there are significant additional capital investment opportunities at the unit. We also think there may be additional investment opportunities with its InfraREIT acquisition.