On Aug 20, 2015, we updated our research report on San Diego, CA-based Sempra Energy SRE. Sempra Energy’s future cash inflows will get a boost from LNG development prospects as well as expansion of renewable capacity. On these multiple development ventures, Sempra expects to achieve the upper end of the 9–11% earnings CAGR through 2019. Yet, regulatory uncertainties and several operational risks could act as a drag on the company’s performance.

Sempra Energy reported mixed results in second-quarter 2015 with earnings surpassing the Zacks Consensus Estimate but declining year over year. Revenues too deteriorated due to seasonal adjustment at the company’s subsidiary Southern California Gas Co.

Sempra Energy’s stable earnings from utility subsidiaries however provide reassurance. The company is confident of its three LNG export expansion projects beyond Cameron 1-3 − Cameron Trains 4-5, Port Arthur and Energía Costa Azul. The Cameron LNG liquefaction export facility is on track to complete all three trains in 2018. Starting from 2019, it is expected to generate $300 million to $350 million in earnings per year.

As for renewables, Sempra Energy is focused on adding solar, wind and hydro assets to its portfolio. In the second quarter, the company placed the 155 MW Energía Sierra Juarez wind project into service. Sempra Energy’s U.S. Gas & Power added two new solar projects at the Mesquite facility in Arizona. The projects with a combined capacity of 250 MW are expected to commence operations by the end of next year.

Moreover, IEnova, a unit of Sempra Energy, is expected to be one of the major growth drivers for the company over the next several years. This July, IEnova won a new CFE pipeline project with five more pipelines slated to be awarded this year.

On the downside, any adverse decision on pending rate cases related to Sempra Energy’s regulated utilities will substantially affect its utility earnings. Apart from this, operational risks and exposure to foreign currency volatility could hurt the company’s performance.

Zacks Rank

Sempra Energy currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the same industry are WGL Holdings Inc. WGL, Brookfield Infrastructure Partners L.P. BIP and Empresa Nacional de Electricidad S.A. EOC. All three stocks currently sport a Zacks Rank #1 (Strong Buy).

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