Mizuho Downgrades Sempra Energy (SRE) to Neutral

Mizuho analyst Anthony Crowdell downgraded Sempra Energy (NYSE: SRE) from Outperform to Neutral with a price target of $84.00 (from $104.00).

The analyst comments "We are downgrading the California utilities to Neutral from Outperform due to the failure of the state legislature to pass meaningful reform. Friday was the last day for bills to be introduced, and the legislature passed SB 492, which does not do the two things we believed were required to re-rate California utilities: 1) provide a replenishment mechanism or evergreen fund that will always maintain adequate capital in the wildfire fund 2) break the linkage between fund solvency and liability caps (currently at 20% CPUC T&D rate base). Gov. Newsom proposed several solutions to limit withdrawals from the wildfire fund such as a $6B cap per incident and eliminating subrogation, but both of those proposals failed to make it in the final legislation. Where do we go from here? We believe the state's utilities will make another push for legislation in 2027, but with a new administration set to take over in January, we see it as an uphill climb. We believe investors are better-positioned with regulated utilities that have few or no issues associated with wildfire liability. PCG management had previously stated that they will provide an update shortly after the legislature ends (Tuesday 2am EST), which could include a change in the capital plan, and potentially stock buybacks, but we struggle to see a meaningful re-rating in valuations. Investors enjoyed the strong rate base and earnings growth from California utilities, but without any change in liability standards, we believe they will look elsewhere. SB 492 provides no new funding into the wildfire fund. Misunderstanding of new bill language may cause investors to wrongly believe the fund will always be solvent (and therefore liability caps will be permanent). We view the language as just a technical cleanup that a state agency can issue bonds extending the fund existence (but not new money into it). See page 2 for more on the continuation account."

For an analyst ratings summary and ratings history on Sempra Energy click here. For more ratings news on Sempra Energy click here.

Shares of Sempra Energy closed at $84.31 yesterday.

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