森普拉能源

The California legislative session is set to end with no incremental wildfire-related financial protections for the state's investor-owned utilities, including Sempra.

Why it matters: Wildfire-related legislation set to pass, reintroduced Senate Bill 492, is a win for insurers and fire victims. Utilities had sought limits on wildfire payments to insurers. Utilities' push for new financial protections follows a California Earthquake Authority report published in April that suggested utilities still face financial risk from future wildfire liabilities even considering the $21 billion state Wildfire Fund and $18 billion continuation fund. Legislators reportedly shut down California Gov. Gavin Newsom's efforts to include financial protections for utilities. Newsom, who championed landmark wildfire legislation AB 1054 and SB 254 earlier in his tenure as governor, is term-limited. It's uncertain whether his successor will be as supportive of utilities.

The bottom line: We are reaffirming our $93 per share fair value estimate and narrow moat rating for Sempra Energy. Sempra Energy's stock was down 3% on Aug. 31, making it one of the cheaper US utilities stocks we cover. We think the market is overestimating its wildfire risk given existing legislation and Sempra's urban service area that is less prone to wildfires.

Big picture: There is no immediate financial impact on Sempra and no change to legislation that effectively eliminates Sempra's wildfire exposure if deemed a prudent operator. We continue to expect Sempra to invest more than management's $65 billion plan in 2026-30. Our estimate for Oncor to invest $57.5 billion, including $10 billion of incremental investments, remains unchanged. We expect California to continue shrinking as a share of consolidated earnings as Sempra continues to allocate growth capital to Texas. Texas is expected to be more than half of earnings by 2029.

Coming up: The California general election is Nov. 3.

Our fair value estimate is $90 per share, after incorporating year-to-date regulatory and financial updates.

We believe the company can achieve the top of management's 7%-9% annual long-term growth rate target range starting in 2026.

We expect the company to invest more than $65 billion from 2026 to 2030, in line with management's identified growth opportunities in Texas and California.

Of the company's total investment plan, more than 90% of the investment is in utilities, supporting strong annual rate base growth during this time frame. We expect constructive outcomes in the company's regulatory proceedings in California and Texas.

In our discounted cash flow valuation, we use a 5.9% weighted average cost of capital based on a 7.5% cost of equity in our discounted cash flow valuation. This is lower than the 9% rate of return we expect investors will demand for a diversified equity portfolio, reflecting Sempra's lower sensitivity to the economic cycle and lower degree of operating leverage.

We assign Sempra a narrow Morningstar Economic Moat Rating.

Utility regulation in the US recognizes the need for capital providers—lenders and shareholders—to earn a return on their investments while ensuring that utilities do not take advantage of their service area monopoly by gouging customers.

The rate structures and general political climate in the company's California regulatory jurisdiction have provided the utilities with the opportunity to earn returns above their costs of capital. We think this balance results in a narrow moat for regulated utilities. Sempra's California and Texas utilities constitute the lion's share of margins and earnings. Furthermore, a significant portion of the rate base is composed of transmission, which we consider to be premium regulatory assets.

The suite of infrastructure businesses in the company's minority-owned Sempra Infrastructure Partners has narrow-moat characteristics, with high contracted margins and difficult-to-replace infrastructure. Existing relationships in Mexico could make it harder for outside investors to bid on new growth projects, keeping competitors at arm's length for now. We believe Sempra's LNG terminal has some moatworthy characteristics, given its very low cost basis relative to global LNG supply, long-term contracts, and favorable location.

The opportunity for rate base growth at Sempra's Texas utility is above average, and Texas regulation generally allows timely recovery of capital expenditures and a dynamic cost of capital.

Sempra's management team has been adept at recycling capital and directing capital toward regulated utility investment and regulated-like infrastructure development.

Our expectation for 9.5% annual earnings growth is among the highest for all US utilities.

Sempra's nonregulated businesses bring increased risk.

Peers' recent mishaps in California could lead to pressure on all utilities, which could keep rates down and hurt returns.

It will take time for investors to regain confidence in Sempra's management team after a recent earnings guidance cut.