'California Risk' Sinks Sempra's Rating At Bank Of America

The ongoing wildfire risk may have shifted California from a premium to a discount jurisdiction on inverse condemnation risk, according to Bank of America Merrill Lynch. 

Inverse condemnation is a situation where the government takes private property but fails to pay the compensation required by the Fifth Amendment, causing the property owner to sue to obtain just compensation.

Earlier in the week, PG&E Corporation PCG suspended its dividend, citing liabilities from the October fires in Northern California.

With the Thomas Fire shaping up to be the largest in California's history, another notable gas and electric firm was hit with a downgrade.

The Analyst

Bank of America’s Julien Dumoulin-Smith downgraded Sempra Energy SRE from Buy to Neutral rating and lowered the price target from $125 to $112.

The Thesis

California makes up well over half of Sempra Energy's earnings, but given the uncertainty that persists in the market, the company is making moves to diversify, Dumoulin-Smith said. (See the analyst's track record here.) 

The fallout from the devastating fires are making it increasingly clear that the company can benefit from shifting its earnings outside of the state, as the California wildfires continue to impact Sempra’s share price, the analyst said. 

Shares of the company have dropped over 10 percent since the Thomas fires ignited Dec. 4. 

The recent sell-off has pressured the potential acquisiton of the Texas utility company Oncor, Dumoulin-Smith said. The wildfire risk continues to weigh on accretional benefits Sempra Energy could see from an Oncor acquisition, he said. 

“The uncertainty now is how much short- to medium-term dilution management can stomach in the interest of a longer-term strategic move,” the analyst said. 

“To the extent that the deal structure would not be changed, achieving near-term accretion would seemingly require a rebound in California sentiment, so the prospects for a legislative fix are increasingly important." 

Price Action

Sempra Energy was trading down slightly at $108.13 at the time of publication. 

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