Sempra (SRE) Business Profile

What it does

Sempra is a holding company whose principal businesses are regulated electric and natural gas utilities in California and Texas. Its businesses deliver energy to homes and businesses and invest in pipelines, electricity networks and other energy infrastructure. Sempra is headquartered in San Diego and led by chief executive Jeffrey W. Martin.

In California, San Diego Gas & Electric (SDG&E) provides electricity and natural gas service, while Southern California Gas Company (SoCalGas) distributes, transports and stores natural gas. Their customers include households, businesses, power generators and other utilities. SDG&E also generates some electricity and purchases power for customers who use its procurement service.

In Texas, Sempra has interests in Oncor and Sharyland Utilities. Oncor transmits and distributes electricity but does not sell electricity or buy it for resale. Sharyland operates electric transmission facilities. Oncor is managed independently, and Sempra accounts for its investment using the equity method.

Sempra Infrastructure develops, operates and invests in energy assets in the United States and Mexico, including liquefied natural gas (LNG), pipelines and renewable energy. LNG is natural gas cooled into liquid form for shipping. Sempra has agreed to sell part of its interest in SI Partners, the subsidiary that holds much of this infrastructure business; Sempra expects to retain a minority interest after the transaction closes.

How it makes money

Sempra reports segments for Sempra California, Sempra Texas Utilities and Sempra Infrastructure. The California utilities collect revenue for delivering energy and for costs regulators authorize them to recover. Oncor earns transmission and distribution revenue under regulated tariffs, and Sempra recognizes its share of earnings from the independently managed Texas investment. Infrastructure earnings come from energy facilities and investments, including LNG capacity agreements.

In the latest reported fiscal year, Sempra California revenue was $11.5 billion, while Sempra Infrastructure revenue was $1.1 billion. Sempra Texas Utilities consists of equity-method investments, so its contribution is recognized through equity earnings rather than presented like the consolidated California utility revenue.

For California utility customers, regulators authorize recovery of certain operating and capital-related costs, including depreciation, taxes and a return on the regulated asset base. Authorized commodity costs are substantially passed through to customers. SoCalGas and SDG&E bill core customers for purchased natural gas without markup, although a regulatory mechanism can share certain gas purchasing savings or costs between SoCalGas and customers. SDG&E does not earn a return on commodity sales volumes.

Oncor collects transmission revenue from entities using its network. Its residential and small-business distribution charges generally depend on monthly electricity consumption; charges for larger customers depend on demand under applicable tariffs. Oncor does not procure power for resale.

In LNG, the Cameron LNG facility has liquefaction and regasification tolling capacity agreements that collectively subscribe for the full nameplate capacity of its trains. Such agreements pay for access to processing capacity, rather than requiring Sempra to sell all the underlying gas itself.

Customers and how it sells

Sempra’s main utility markets are California and Texas, with infrastructure assets in the United States and Mexico. In the latest reported fiscal year, United States revenue was $12.1 billion, and Mexico revenue was $1.6 billion. Sempra Infrastructure also serves international energy markets through its LNG activities.

SDG&E provides electric and natural gas service in Southern California. Most of its electricity customers receive their power commodity from another provider through community choice aggregation or direct access programs. SDG&E primarily provides those customers with transportation and distribution services.

SoCalGas delivers natural gas in Southern California and parts of central California. Its core customers are primarily residential and small commercial and industrial users. Larger noncore customers include power generators, wholesalers and large businesses; those customers procure their own gas and can use SoCalGas transportation and storage services.

Oncor delivers electricity to homes and businesses in Texas. Its distribution customers include retail electric providers that sell electricity to end users, as well as electric cooperatives and municipal utilities. At Cameron LNG, affiliates of TotalEnergies SE, Mitsubishi Corporation and Mitsui & Co., Ltd. collectively subscribe for the facility’s full liquefaction train capacity.

Suppliers and costs

Sempra’s utility businesses buy fuel and power, maintain extensive networks and invest in facilities. SDG&E supplies electricity from its own generation plants, long-term power purchase agreements and spot-market purchases. Contract charges can depend on the energy received or on available capacity. For some agreements, SDG&E supplies natural gas to the power producer.

SoCalGas buys natural gas for its own and SDG&E’s core customers under short-term and long-term contracts and on the spot market. Supplies come from regions including Canada, the U.S. Rockies and the southwestern United States. Prices are primarily tied to published indices and can fluctuate. Transportation providers include El Paso Natural Gas Company, Transwestern Pipeline Company and Kern River Gas Transmission Company.

Regulated utility costs also include operating and maintenance expenses, depreciation, taxes, interest and capital spending on networks and safety programs. California regulators can review certain costs for reasonableness before allowing recovery.

Equipment, materials, labor and transportation capacity can be subject to shortages or delays. Inflation, tariffs and other cost increases may not be recovered promptly or at all.

Competitive position

SDG&E faces competition for customer electricity demand from distributed and local generation, including rooftop solar. Third-party energy storage and other technologies may also compete with traditional transmission and distribution networks. Some federally regulated transmission projects are open to independent developers rather than reserved for incumbent utilities.

Most of Oncor’s Texas service territory is certificated to Oncor alone for electric transmission and distribution. In areas with multiple certificates, it competes with municipal utilities and rural electric cooperatives to serve customers. Distributed energy resources, private networks and virtual power plants may also compete with its infrastructure. Individual competing companies are not named in the descriptions of these competitive markets.

California franchise agreements allow SDG&E and SoCalGas to locate, operate and maintain electricity or gas facilities in their service territories. Most of those agreements have no expiration dates, although some do expire. Oncor’s network operates in a designated service area and connects generators, retail providers and end users.

Our reading: Oncor’s service-area certificates and existing network are a meaningful source of protection from direct network competition, particularly where it is the sole certificated provider; they do not eliminate competition in shared areas or from alternative technologies. Our reading: California’s franchises and established delivery systems also support Sempra’s position, but customers’ ability to obtain electricity from other providers and generate power locally limits the protection they provide.

Growth opportunities

Sempra is investing in utility networks in California and Texas. Oncor’s earnings benefited from rate updates reflecting increased invested capital and customer growth. Sempra expects its next Oncor base capital plan to increase over the existing plan. The company expects to provide the updated plan with its next year-end results.

The planned increase reflects the addition of a later year, customer load growth and projects moving from an incremental opportunity list into the base plan. Sempra says projects associated with the batch-zero large-load process are not expected to be included in the updated base or incremental plans. Oncor’s system recently reached a new peak.

In California, Sempra is advancing compressor station modernization and the Golden State Power Link transmission project across SDG&E’s eastern system. The company says it continues to invest in California while allocating more capital growth to Texas.

Sempra also has LNG projects under construction or development. It expects to close the sale of an equity interest in SI Partners and expects to retain a minority interest. Sempra expects the transaction to help pay down debt and support further utility investment.

Structural risks

• Regulation and recovery: Utility spending can precede approval, and regulators may delay or deny recovery. The California Public Utilities Commission proposed denying Sempra’s petition to adjust capital attrition rates. Sempra expects an uncorrected outcome to put the following year’s California segment earnings toward the low end of its guidance range.
• Wildfires and operations: Wildfires, severe weather, gas leaks, equipment failures and other incidents can damage property, interrupt service or cause injury. California wildfire exposure can also affect access to capital and credit ratings.
• Funding and debt: Sempra has significant debt-service obligations and an ongoing need for capital. Higher interest rates, weaker credit ratings or disrupted financing markets could make debt harder or more costly to refinance.
• Projects and supply chains: Equipment, material, labor and transportation shortages, permitting delays and cost increases can affect construction and operations. Port Arthur LNG projects may face higher construction costs, delays or other challenges.
• Ownership and distributions: The holding company depends on its subsidiaries and equity-method investments to meet obligations. Oncor’s governance and ring-fencing arrangements limit Sempra’s ability to direct operations and distributions.
• Technology and demand: Cyberattacks or technology failures could disrupt infrastructure. Local generation, storage and changes in California energy policy can affect demand for utility services.

Bottom line

Our reading

Our reading: Sempra combines regulated California utilities and an independently managed Texas utility investment with an infrastructure portfolio it plans to shrink through the SI Partners sale. [item1, call_prepared] Its earnings depend on continued investment and regulatory recovery, while debt needs, wildfire exposure and limits on directing Oncor’s distributions remain important constraints. [item1, item1a] Growth opportunities in Texas come with capital requirements and uncertainty over the timing of large-load projects. [call_prepared, call_qa]