SRE 1Q2016 Earnings Note

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Market Price (5/4/2016): $105.07/share; ST-Target: $140/share; NIV: $200/share

SRE: Disappointing quarter isn’t indicative of investment value

SRE’s touting LT growth-profile and subsequent generation of excess cash flow that could go toward 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. 2016 GRC is still not finalized, but SRE expects final decision to be in-line with settlement agreement. 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 mid-stream projects. Sale of TdM and REX weren’t surprising, but both illustrate to us SRE’s disciplined approach to asset management. New 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 at same time 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 is likely to be some of the last liquefaction plants built in US. The 3 project disqualification in Mexico may have been more convenient excuse to disallow SRE every project that they bid on, therefore, we are not concerned about SRE’s future in Mexico.

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