SRE: Details on financing given; Oncor deal looks to remain on track for 1H18 close

Expected 2018E AEPS accretion of $0.15-$0.25/share, which is in line with our expectations (please see the first Table 1 below)
SRE intends to own 100% of Energy Future Holdings (If realized SRE would own approximately 80% of Oncor and TTI would own the balance of 20%) after $3.0B debt at the holding company is paid-off, which we expect to occur within 7 years
Equity issue of some 50%-65% of SRE’s equity commitment, which is about $3.87B (60% of $6.45B)

Balance of the equity commitment is going to come from a combination of cash and debt, likely more debt in our opinion, given the plethora of projects that SRE needs to fund
Still searching for 40% equity commitment for transaction or about $2.58B of third-party equity investment: Looking for long-term strategic partner with about a 7 year investment horizon
Based on $7.5B five-year investment program at Oncor, SRE expects CAGR in net income to be some 6%-7% through 2022
SRE states 100% valuation for Oncor based on $18.8B EV
Deal expected to close in 1H2018

Conclusion: The more we study and hear about this deal, the more we like it.

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SRE: Oncor acquisition is strategically astute and appears financially sound

Conference call reveals little additional information other than multiple paid and that SRE would issue some equity to fund the transaction: It was revealed by management that it estimates having valued Oncor at some 9.9x 2018E AEBITDA and some 23x 2018E adjusted net income. This includes SRE’s estimate of the impact of Oncor’s recently settled 2017 rate case. The financial data is expected to be updated just before or after closing the transaction in 1H18.

· Oncor’s 2018E AEBITDA and Net Income based on offering price for EFHC: Based on the multiple that SRE believes it would pay, if successful, Oncor’s implied 2018E AEBITDA and Net Income would be about $1,900MM and $513MM, respectively

· The deal looks to be accretive based on 2018E. The following is based on 0% equity financing, 50%/50% equity/debt financing, and 100% equity financing scenarios assuming a uniform 5.25% interest rate on the debt financing regardless of financed amounts, and $3,870MM in SRE’s financing obligations. We assume new equity would be issued at $117/share and use 35% tax rate:
Under all scenarios, assuming our estimate of SRE’s 2018 numbers and SRE’s estimates of Oncor’s 2018E numbers are reasonably accurate, the deal looks to be accretive: We believe our estimate of the interest rate is on the high side based on recently closed financing deals in the utility sector.

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SRE: We like strategic direction of Oncor acquisition; not sure of financing

Strategically, we believe this is a good deal for SRE’s investors: The five year $7.5B investment program at Oncor should be accretive to SRE’s earnings and help raise the value of SRE. More than anything else, we believe that SRE paid just the right amount to win the bid, but not be strapped with the infamous “Winner’s Curse,” in our opinion. However, SRE’s choice to finance part of the deal with debt may be something that needs some explanation, in our opinion, based on some basic math.
Deal terms: Although details were scant, it seems SRE would buy 100% of Oncor’s ultimate parent, Energy Future Holdings Corp. (EFHC), for $9.45B in cash, resulting in an EV for Oncor of about $18.8B.
Third-party investor(s) for risk mitigation:
Based on some simple calculations, we believe that SRE paid just about the right amount for the deal:
SRE’s ultimate ownership: Sale to a 3rd-party investor(s) would leave SRE with total equity interest in EFHC of some 60% and, therefore, a 48% non-controlling interest in Oncor (EFHC currently indirectly owns an 80.03% equity interest in Oncor).
Depending on the tax rate at EFHC, debt financing may or may not be accretive to ROE:
Oncor’s CAGR in net income from 2016-to-2018 must be above 7.06% for SRE’s 2018 AEPS to be breakeven or higher:
Conclusion: We always believed that this transaction could be good for SRE, but circumstances had not prevailed on management to allow for SRE to submit a winning bid. However, given the price and the way it was structured, we believe that this transaction is good for SRE’s shareholder value, and strongly support management’s decision to make the acquisition.

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SRE 2Q2017 Earnings: Cameron delay: Big Whoop; IEnova continues to impress; more upside

Cameron delay: Big Whoop; IEnova continues to impress; more upside || SRE raised AEPS guidance to $5-$5.30/share from $4.85-$5.25/share on strong 2Q17 results. 2020 AEPS guidance of $7.20-$7.80 seems low – only some 12% CAGR from 2016A AEPS. SRE is expected to grow dividends 8%-9% to match. Cameron delay was not only forewarned but also immaterial to valuation, investment thesis and stock performance. We look for outperformance with regards to SRE’s guidance in ST, MT and LT. Within next 12-months we look for Cameron 4&5 to get FID and begin construction. We believe SRE will use excess $2B in capital for Cameron 4&5. Even Port Arthur seems likely, given MOU with KoGas. We feel global supply/demand picture is tipping towards favoring supply again. We support projects in Mexico; IEnova’s has billions in potential opportunities in energy infrastructure, renewable generation, transmission and more. We feel SRE growth beyond 2020 would be equally strong as MT-growth. We support SDG&E’s move towards energy storage and more renewables, and SCG’s continuing emphasis on pipeline safety and reliability. SCG also is returning Aliso Canyon to full operations. Potential for LNG-to-power projects in oil- and coal-fired dominant regions like Central and South America and even Hawaii could be another future growth source. Chile seems most likely in the MT. ST-Target raised to $165/share, up $5, while NIV/share moves up to $210/share from $207/share.

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SRE 1Q2017 Earnings Note

Strong 1Q17 is but a portend for even better things to come, we feel ||

1Q17 was strong, but we feel it is but an indication of more good things to come. We continue to look for outperformance from SRE with regards to its guidance in ST, MT and LT. Within next 12-months we look for Cameron 4&5 to get FID and begin construction. We believe SRE will use excess $2B in capital for Cameron 4&5. Even Port Arthur seems likely. We feel global supply/demand picture is tipping towards favoring supply again. We continue to support projects in Mexico; IEnova’s bilateral contract with industrial for 110MW solar should be 1st of many. 2020 AEPS guidance of $7.20-$7.80 seems low – only some 12% CAGR from 2016A AEPS results. SRE is expected to grow dividends 8%-9% to match. We believe that growth beyond 2020 would be equally strong as MT-growth. We support SDG&E’s move towards energy storage and more renewables, and SCG’s continuing emphasis on pipeline safety and reliability. Potential for LNG-to-power projects in oil-fired and coal-fired dominant regions like Central and South America and even Hawaii could be another future growth source. Chile seems most likely. Our estimates and NIV increased to reflect 1Q17 results. ST-Target remains at $160/share, while NIV/share moves up to $207/share from $203/share.

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Preliminary Decision from ALJ on CA IOU’s Cost of Capital Proceeding is Largely in Tact with Two Relatively Benign Changes to the Settlement

On May 10, 2017, two assigned Administrative Law Judges (ALJ) issued a proposed decision (PD) in the cost of capital (COC) proceeding pending final decision (FD) by the California Public Utility Commission (CPUC)
The PD upholds the settlement agreement but for the following two modifications that was submitted by Southern California Edison (SCE), PG&E (PGE), San Diego Gas & Electric (SDG&E), and Southern California Gas (SCG) – all four combines (CA-IOUs) – CPUC Office of Ratepayer Advocates, and The Utility Reform Network on February 7, 2017
Instead of requiring the next COC application in two years to April 22, 2019 for 2020, the PD would require the next COC application to be filed on March 22, 2018 for 2019
The PD left open the possibility of reducing PG&E’s return on equity until recommendations made by the NorthStar Consulting Group which are adopted by the CPUC are implemented in the second phase of the CPUC’s safety culture investigation
The earliest the CPUC would promulgate a FD is June 15, 2017

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SRE 4Q2016 Earnings Note

We continue to be positive on SRE based on its growth prospects ||

Delay in Cameron construction doesn’t faze us one bit nor affect our analysis. We like the Southern Peruvian pipeline project for LT shareholder benefit. SB32 likely to have big impact on SDG&E. SRE’s touting LT growth-profile and excess cash flow generation, which we agree with. We believe at least by 2019, SRE would’ve found ways to utilize $2B in a way that really adds to shareholder value and the Peruvian pipeline would go a long way as well as projects in Mexico. Aliso Canyon looks to return to normalized service in-time for 2017 winter. We like and support acquisition of PEMEX interest in GdC. 2020 AEPS guidance of $7.20-$7.80 seems low – only some 12% CAGR from 2016A AEPS results. SRE is expected to grow dividends 8%-9% to match. We expect SRE to sign SPA and simultaneously issue FID for Cameron #4 by yearend with in-service date of at least mid-2021. We also believe #5 will get built and Port Arthur #1 & #2 are likely to be some of the last liquefaction plants built in US. We believe that growth beyond 2020 would be equally strong as MT-growth.

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SRE 4Q2016 Earnings Quick Note

We continue to be positive on SRE based on its growth prospects ||

Note: Please note that due to 5 companies (NRG, CNP, PNM, LNG, SRE) reporting on one day, we will be writing Quick Notes for all of the companies reporting today followed by full notes later in the week

SRE increases 2017E AEPS guidance by $0.05 to $4.85-$5.25 from $4.80-$5.20
Also increases dividend by some 9.2% to $3.29 from $3.02
In line with other CA IOUs, SRE proposes 2-year cost of capital extension:
2% ROE at SDG&E and 10.05% ROE at SCG starting 1/1/2018 through 12/31/2019
Looking to true-up some $36MM of debt costs in 2018, which is largely included in guidance
Aliso Canyon is finally fading in the review mirror; we continue to applaud SCG’s disaster management response
MHI Arbitration is expected in the near future
Current SONGS settlement calls for 50%/50% split of any favorable settlement awards between customers and shareholders
We continue to remain unconcerned about the delays in Cameron LNG 1-3, which we had built-in to our modeling, anyway, and view the delay as a lot to do about nothing:

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SRE 3Q2016 Earnings Note

Cameron construction delay big whoop, but Peru Pipeline is promising ||

Delay in Cameron construction doesn’t faze us one bit nor affect our analysis. We like the Southern Peruvian pipeline project for LT shareholder benefit. SB32 likely to have big impact on SDG&E. SRE’s touting LT growth-profile and excess cash flow generation, which we agree with. We believe at least by 2019, SRE would’ve found ways to utilize $2B in a way that really adds to shareholder value and the Peruvian pipeline would go a long way as well as projects in Mexico. Aliso Canyon looks to return to normalized service in-time for 2017 winter. We like and support acquisition of PEMEX interest in GdC. 2020 AEPS guidance of $7.20-$7.80 seems very low – only some 12% CAGR from mid-point of 2016 AEPS guidance. SRE is expected to grow dividends 8%-9% to match. We expect SRE to sign SPA and simultaneously issue FID for Cameron #4 by yearend with in-service date of at least mid-2021. We also believe #5 will get built and Port Arthur #1 & #2 are likely to be some of the last liquefaction plants built in US. We believe that growth beyond 2020 would be equally strong as MT-growth.

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SRE 2Q2016 Earnings Note

SRE: Disappointing quarter isn’t indicative of investment value ||
Raised ST-Target to $150/share from $140/share, but lowered our NIV to $195 from $200/share and lowered estimates to reflect 2Q16 results and final 2016 GRC. SRE’s touting LT growth-profile and excess cash flow generation that could go towards up to $2B of share buybacks, which we oppose. But it seems SRE is using this to illustrate its upside potential rather than actually executing share buybacks. We believe at least by 2019, SRE would’ve found ways to utilize $2B in a way that really adds to shareholder value. Aliso Canyon looks to return to normalized service in-time for 2017 winter. To us, REX and Energy South sales indicate SRE is abandoning its efforts to expand US gas LDC presence, but likely would continue to pursue pipeline projects. Sale of TdM and REX weren’t surprising, but both show us SRE’s disciplined approach to asset management. 2020 AEPS guidance of $7.20-$7.80 seems very low – only some 12% CAGR from mid-point of 2016 AEPS guidance. SRE is expected to grow dividends 8%-9% to match. We expect SRE to sign SPA and simultaneously issue FID for Cameron #4 by yearend with in-service date of at least mid-2021. We also believe #5 will get built and Port Arthur #1 & #2 are likely to be some of the last liquefaction plants built in US. IEnove looks to close $1.1B acquisition of PEMEX’s JV shares by yearend. IEnova and TransCanada JV won another pipeline project in Mexico.

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