Sempra Update -- SeekingAlpha-- January 31, 2021

I honestly don't know why investors still pay attention to analysts after all these years. P/Es, earnings, growth, guidance, no longer matter, it seems. It's all about FOMO and MOJO. 

Exhibit A: GME.

Exhibit B: TSLA.

But it is what it is.

Like Apple, I've always been fascinated with Sempra. I got into one very, very early. I got into the other very, very late. 

I am fascinated by Apple: I think it represents everything going on in America right now (previously posted).

I was never fascinated by Sempra. It was simply a San Diego utility. In fact, didn't it began as San Diego Gas and Electric? If so, it was the second stock I ever bought. The first was Burlington Northern. Both, back in 1985 or thereabouts. Have accumulated shares in both ever since. Of course, with BNI, it's now through Berkshire Hathaway. 

I was never fascinated by Sempra. Until 2018 or thereabouts. With stories and headlines like the following I felt very, very exposed. 

I was curious how Sempra would thread this needle, or how it would dodge a Black Swan event. 

The Oncor acquisition provided great relief. Sempra has telegraphed shareholders and California regulators it has options. 

That acquisition was brilliant. 

Directly or indirectly it led to another brilliant move: Costa Azul. 

I was thrilled to see this at SeekingAlpha today: Sempra: the utility that makes growth look easy. Archived.

Summary:

• Sempra has been growing dividends and earnings at double-digit rates in the last few years.
• Recently announced transaction will clarify value on its unregulated infrastructure business, which has achieved important milestones but remains unrecognized.
• Its 2017 diversification into Texas Oncor is turning out well, now guiding to double the size of the acquired rate base as soon as 2022.

Excerpts:

Good:

Sempra has sold non-core midstream facilities, its US wind and solar generation portfolio and its South American electric utilities. Last month the company announced a set of transactions that will simplify its structure into essentially two parts: a pure-play regulated US utility and a “new” infrastructure platform (of which it intends to sell a minority stake). This platform will integrate its IEnova business and its LNG business.

Extremely bad:

All California utilities, including SDG&E that run electric T&D lines, are exposed to potentially uncapped liabilities from fire. In California, the courts have upheld a doctrine of inverse condemnation to include investor-owned utilities (IOUs). Inverse condemnation gives property owners the ability to claim damages to governments or municipalities when property is lost. In California this condition is extended to include investor owner utilities, when their equipment is proven to be the cause of the fires. This stands, even if no fault can be placed on the utility (i.e. no negligence is proven).

The legislative rationale behind this revolves around the fact that utilities serve a public good, and therefore damages caused by their activity should be spread out among the population being served. This makes sense and happens automatically with municipalities, for example. However, IOUs are privately funded, and their rates need to be approved by the regulatory body CPUC.

This means utilities are exposed (as PG&E demonstrated recently) to unrecoverable losses when the regulator refuses to pass along costs. In practice, the costs and claims, in an event as large as the fires of 2017 would be difficult to spread among its rate base even if allowed.

For these reasons, the risk has become practically uninsurable.