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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SRE 2016 Strategic Presentation

SRE: Steady as she goes delivering strengthening value ||

Value proposition: Roughly double average utility EPS growth rate (SRE CAGR of about 12%), strengthening balance sheet, and about double average utility dividend growth (SRE CAGR of about 8%-9%) through long-term contracted diversified infrastructure development, investment and operations anchored by California Utilities at least through 2020. In addition to the high CAGR in EPS and dividend, SRE also plans to strengthen its balance sheet and return capital to shareholders. This is a rare combination.
2016 and 2020 EPS guidance unchanged at $4.60-$5.00 and $7.20-$7.80, respectively.
Growing dividend: Plan includes growing dividend by some CAGR of 8%-9% through 2020, but will review after Cameron is fully on-line. Additional growth projects would accelerate dividend increases.
Strong risk management philosophy drives predictability of earnings and cash flow:

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SRE 1Q2016 Earnings Note

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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SRE: Signals minor shift in strategy w/sale of EnergySouth Inc.

Sempra US Gas & Power (a unit of Sempra Energy (NYSE: SRE)) signed a definitive agreement to sell EnergySouth, Inc., parent to Mobile Gas Services Corp. (Mobile Gas) and Willmut Gas & Oil Company (Willmut Gas) to The Laclede Group, Inc. (NYSE: LG) for $390MM.
Upon closing, SRE would receive $323MM in cash and transfer $67MM in existing debt to the Laclede Group and is expected to book a gain, the amount of which is expected to be announced with the 1Q2016 results.
The transaction does not include Bay Gas Storage Company, Mississippi Hub, LLC, Liberty Gas Storage and Southern Gas Transmission.
Mobile Gas and Willmut Gas are gas utilities that serve 85,000 customers in southwest Alabama, and 19,000 customers in Mississippi, respectively.

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SRE 2017 Analyst Day

Conservative 5-year outlook more than supports our $203 NIV/Share ||
Conservative 5-year outlook more than supports our $203 NIV/Share

As pointed out by the entire management team, we agree that SRE’s outlook is very conservative

CAGR in EPS through 2021: 10%-11% driven by $14.2B in capex of which some 92.6% goes to utes
CAGR in dividends through 2021: 8%-9%
Excess free cash flow of $1.5B would go towards:
Invest in additional growth projects,
Accelerate dividend payout, then
Share buyback

But, an additional up to $15B in opportunities could push CAGR well above 10%-11% through 2021

Opportunities specified by management include (but are not limited to):

Expansion of Cameron by two trains to a total of five increasing capacity by 9MM Metric Tons/Year
Addition of up to 2-liquefaction trains totaling ~12MM Metric Tons/Year to Port Arthur
Addition of up to 2-liquefaction trains totaling ~12MM Metric Tons/Year to Energia Costa Azul (ECA)
Addition of up to 2GW of renewable projects pushing SRE’s renewable portfolio to about 3.5GW

Opportunities that we believe SRE could pursue that was not mentioned by management:

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SRE: Selling 25% remaining interest in REX is correct, despite loss

• Today, SRE announced the sale of its remaining 25% interest in REX for $440MM to Tallgrass Development LP (Tallgrass): Despite the $27MM loss, we believe that the sale of SRE’s remaining interest in Rockies Express Pipeline (REX) is the correct decision, particularly given the plethora of opportunities SRE has to invest this capital for far better returns than what it would be able to extract from REX. Tallgrass would increase its interest in REX to 75% from 50%, while Philipps 66 would retain its 25% interest. The transaction is expected to close in 2Q2016.
• SRE also announced that it would release the remaining uncontracted capacity: This is expected to result in a charge to earnings of some $100MM to $120MM in 2Q2016. This charge represents the acceleration of losses that SRE would have incurred anyway through November 2019 when the existing contract term is scheduled to expire.
• No effect on 2016 guidance:

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SRE 4Q2015 Earnings Note

SRE: So much more to come ||
Going forward, SRE is expected to grow dividends between 8%-9% to match it AEPS growth. SRE is pursuing a sale and purchase agreement for Cameron LNG train 4 and is in the midst of negotiating final contracts with customers. FID is expect by yearend 2016, and we fully expect Cameron train 4 to be built. We are also inclined to believe that train 5 will also get built and Port Arthur LNG 1&2 is likely to be some of the last liquefaction plants that get built in the continental US for quite some time. We like SRE’s Mexico plan and we are of like mind with SRE’s view on Mexican deregulation: It’s been a long-time coming but it’s finally here and low commodity prices are helping to push deregulation. SRE announced that it’s bidding on three more pipeline projects in Mexico. Aliso Canyon should be back in service sometime within 2016 and other than the lawsuit, the emergency is largely behind SRE, in our opinion, We like SRE’s focus on renewable investments too. We believe demographics will continue to improve as well, and SRE’s long-term outlook of a CAGR in AEPS of 11%-15% may be conservative.

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SRE Initiation Report

SRE: So Much More to Come ||
In our view, key to SRE valuation is its Cameron liquefaction facility starting operations on time and on budget. Also, adaptation of Rockies Express (REX) pipeline may deliver unexpected upside to investors. California’s utility regulatory framework is among best in country and should help sustain valuations. We view SRE’s utilities as stable base from which to launch contracted growth projects, while its other operations deliver higher risk/return growth; proper balance of both is another key to valuation. Additional factors to SRE’s future is management’s strong and proven ability to evaluate risks/rewards, especially with regards to non-utility projects, in our opinion. We don’t believe that SRE needs financing structures to boost shareholder value and would be cautious about its involvement with oil & gas businesses, even as rate-based projects. We look for new liquefaction project at Energia Costa Azul (ECA) in Mexico, but unlikely at other sites. We believe that steady delivery of both utility and non-utility projects at budget and on-time will propel SRE to our ST-target of $140/share, while long-term projects such as Cameron and REX have the potential to propel the stock to our NIV of some $211/share.

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LNG 1Q2017 Earnings Note

1Q17 show cases power of M&T; LNG cash flow power taking shape ||
In our opinion, Cheniere needs to buy back all CCH HoldCo II Convertible Senior Notes (CCH Holdco 2 Convertibles). We don’t like 10% automatic discount on conversion price. We believe Quarter showed power of marketing and trading (M&T) accounting for more than half of revenue. We like it. We like that Cheniere is looking at ways to deploy future FCF, but not thrilled about foreign investments and liquids-based ventures; we believe there are many US involving E&P, pipelines or marketing and trading (M&T) or all 3. We’re surprised and disappointed Cheniere could not roll-up CQH but we believe roll-up of CQH and CQP will happen in due time. We believe new Midship pipeline feels right but mid-scale LNG plant feels wrong. We believe that there are better ways to finance expansion program, but, long-term, company faces under-leverage problem. We’d like Cheniere to take excess cash flow to pay dividend after rolling up CQH and CQP and after its third act. Though loose now, we expect global LNG markets to tighten quicker than current expectations and believe Europe would continue to migrate towards hub pricing/trading, and Asia is likely to start hub pricing/trading.

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