SRE 2Q2016 Earnings Note

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Market Price (8/4/2016): $112.31/share; ST-Target: $150/share; NIV: $195/share

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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