Executive Summary / Key Takeaways

• Strategic Utility Focus: Sempra is strategically re-weighting its portfolio towards regulated U.S. utilities in high-growth markets like Texas and California, targeting 90% or greater of earnings from these segments by the end of the decade, enhancing stability and credit profile.
• Unprecedented Growth in Texas: Oncor, Sempra's Texas utility, is at the forefront of an energy "super cycle," driven by massive demand from AI data centers and economic expansion. Its $36 billion 5-year capital plan is expected to be augmented by an additional $12 billion in incremental projects, with rate base projected to double by 2029.
• Technological & Operational Edge: Sempra leverages advanced technologies for competitive advantage, including AI-enhanced wildfire mitigation at SDG&E (reducing undergrounding costs by 40%) and a robust high-voltage transmission network in Texas crucial for AI data center interconnections.
• LNG Expansion & Capital Recycling: Sempra Infrastructure is advancing major LNG projects (ECA LNG Phase 1, Port Arthur LNG Phase 1 & 2) to capitalize on global energy security demands. Concurrently, strategic divestitures of Ecogas and a minority stake in Sempra Infrastructure Partners are set to recycle capital into core utility growth and strengthen the balance sheet.
• Affirmed Outlook with Strong Long-Term Growth: Despite near-term regulatory headwinds impacting 2025 guidance ($4.30-$4.70 EPS), Sempra affirms its 2026 EPS guidance ($4.80-$5.30) and projects a long-term EPS CAGR of 7-9%, expecting to achieve 9% or higher for 2025-2029, primarily driven by Texas.

Sempra, a San Diego-based energy infrastructure holding company, is strategically positioning itself at the nexus of North America's evolving energy landscape. The company's core business revolves around investing in, developing, and operating critical energy infrastructure, alongside providing essential electric and gas services across its three primary segments: Sempra California, Sempra Texas Utilities, and Sempra Infrastructure. This foundational structure, established since its incorporation in 1996, has been meticulously refined to capitalize on shifting market dynamics and regulatory frameworks, particularly through a pronounced pivot towards regulated U.S. utilities.

The broader energy sector is experiencing what many are calling a "super cycle" of growth. This surge is fueled by robust economic expansion, the reshoring of industries, and an unprecedented demand for electricity from digital infrastructure, notably AI and data centers. The International Energy Agency estimates that by 2026, global AI and data centers will require nearly twice the amount of electricity currently consumed by the entire State of Texas. This trend underscores a national need for over $600 billion in transmission and distribution investments by 2030, creating a fertile ground for companies like Sempra with extensive regulated asset bases.

Sempra's competitive positioning is anchored in its geographic diversity and a strategic focus on markets with constructive regulatory compacts. In Texas, Oncor maintains the lowest rates among investor-owned utilities, a testament to its operational efficiency and regulatory effectiveness. Similarly, SoCalGas's customer bills are in the bottom quartile nationally, and SDG&E boasts the lowest average bills among California's investor-owned utilities. This cost leadership, combined with a strong track record in operational excellence and technological innovation, provides Sempra with a distinct competitive moat against rivals such as Duke Energy (DUK), Southern Company (SO), Dominion Energy (D), and NextEra Energy (NEE). While competitors like NextEra Energy lead in renewable energy innovation, Sempra's strength lies in its diversified, regulated asset base and its ability to integrate advanced technologies into traditional utility operations, ensuring stability and resilience.

Technological Edge and Operational Excellence

Sempra's strategic responses to market demands and operational challenges are deeply intertwined with its technological advancements. In California, SDG&E has achieved a significant milestone by hardening 100% of its transmission system in the highest fire threat (Tier 3) zones using steel structures, with plans to fully harden Tier 2 zones by the end of 2028. This proactive approach is supported by innovative engineering and project management, which has successfully reduced the cost per mile of undergrounding by an impressive 40% over the last 24 months.

SDG&E's wildfire mitigation program, recognized as the most mature among international utilities, is further enhanced by an expanded weather network incorporating artificial intelligence (AI) for improved forecasting and monitoring. The deployment of a dual Black Hawk helicopter strategy for rapid response and quicker inspections, alongside drone inspections in wildland urban interface areas, exemplifies a commitment to leveraging technology for superior situational awareness and community safety. These efforts contribute directly to SDG&E's 17-year track record without a utility-related catastrophic wildfire, a significant differentiator in a high-risk region.

In Texas, Oncor is uniquely positioned to capitalize on the burgeoning demand from AI data centers. The company's interconnection queue includes approximately 186 gigawatts of data centers, a staggering figure when compared to Oncor's current peak load of 31 gigawatts. Sempra views high-voltage transmission as the "best low risk and high growth play on AI," and Oncor's robust network is critical for integrating this new, power-intensive load. The "Fit for 2025" campaign, a company-wide initiative, further underscores Sempra's commitment to technology adoption, including AI for improving productivity and customer service, aiming to streamline processes and align its cost structure with future business needs.

Segmental Performance and Strategic Execution

Sempra's financial performance in the second quarter of 2025 reflects both strategic adjustments and the impact of a dynamic regulatory environment. For Q2 2025, Sempra reported adjusted EPS of $0.89, consistent with the prior year. Year-to-date adjusted EPS stood at $1.44, up from $1.34 in the first quarter of 2025.

Sempra California experienced a $57 million (18%) decrease in Q2 2025 earnings compared to Q2 2024, primarily due to disallowed regulatory recovery of COVID-19 costs, lower income tax benefits from flow-through items, higher net interest expense, and a reduced CPUC base operating margin. However, year-to-date earnings increased by $85 million (9%), driven by higher CPUC base operating margin, a 2025 CPUC-approved regulatory award, and increased electric transmission margin. SDG&E's recent award of an estimated $600 million in transmission projects from the Cal ISO 2024-2025 plan, coupled with a filing to save customers $300 million by phasing out non-beneficial regulatory programs, highlights ongoing efforts to enhance reliability and affordability.

Sempra Texas Utilities saw a $6 million (3%) increase in Q2 2025 earnings, primarily from higher equity earnings from Oncor Holdings. This was driven by rate updates reflecting increased invested capital, contributions from the System Resiliency Plan (SRP), and the newly established Unified Tracker Mechanism (UTM), alongside robust customer growth. The Texas House Bill 5247 (UTM), signed in June 2025, is a significant regulatory enhancement, expected to reduce investment lag and improve Oncor's earned ROE by 50 to 100 basis points over time. Oncor's filing of a comprehensive base rate review in June 2025, seeking a 45% equity layer and a 10.55% ROE, aims to align its cost structure with the "unprecedented" growth in Texas, where 20,000 new premises were added in Q2 2025 alone.

Sempra Infrastructure reported a $219 million decrease in Q2 2025 earnings, largely due to unfavorable foreign currency and inflation impacts in Mexico and a $26 million income tax expense related to the classification of Ecogas as held for sale. Despite this, operational progress is strong: Cameron LNG Phase 1 celebrated its 1,000th LNG cargo export with 98% plant reliability. ECA LNG Phase 1 is over 94% complete and is expected to begin commercial operations in Spring 2026. Port Arthur LNG Phase 1 is over 50% complete, targeting commercial operations for Train 1 in 2027 and Train 2 in 2028. The Port Arthur LNG Phase 2 project achieved a major milestone with DOE non-FTA export authorization in May 2025 and secured definitive 20-year SPAs with JERA (1.5 Mtpa) in July 2025 and ConocoPhillips (COP) (4 Mtpa) in August 2025, targeting a Final Investment Decision (FID) in 2025.

Financial Health and Capital Allocation

Sempra's financial strategy is centered on disciplined capital allocation and efficient funding to support its ambitious growth plans. The company's total rate base is projected to grow from $56 billion in 2024 to over $91 billion by 2029, representing a 10% compounded annual growth rate. This growth is underpinned by a record $56 billion 5-year capital plan (2025-2029), a 16% increase over the prior plan, with over 90% allocated to regulated U.S. utilities.

The financing strategy is a thoughtful mix of operating cash flows, debt, and equity issuances. Sempra expects to issue $2 billion to $3 billion in net equity, assuming asset sales at or above $1 billion. This includes leveraging its $3 billion at-the-market (ATM) equity program established in November 2024. The planned divestiture of Ecogas and a minority interest in Sempra Infrastructure Partners, expected to close by mid-2026, are key capital recycling initiatives designed to be accretive to EPS and credit-enhancing, reducing reliance on future common equity issuances.

Sempra maintains a strong commitment to its investment-grade credit ratings, with its financing plan structured to provide robust support. The company's board approved its 15th consecutive annual dividend increase to $2.58 per share, reflecting confidence in its long-term cash flow generation and commitment to shareholder returns.

Outlook and Risks

Sempra has affirmed its full-year 2025 adjusted EPS guidance range of $4.30 to $4.70 and its 2026 EPS guidance of $4.80 to $5.30. While the 2025 guidance reflects near-term headwinds from the California GRC decision, FERC rulings, and Oncor's early base rate review filing, management views these as necessary strategic adjustments to establish a stronger foundation for future growth. The company projects a long-term EPS CAGR of 7-9% for 2025-2029, with an expectation to achieve 9% or higher, disproportionately driven by Sempra Texas.

Oncor's $36 billion base capital plan is a conservative estimate, with an additional $12 billion in incremental capital opportunities identified for 2025-2029, which could add $400 million to $500 million in upside earnings. Further, Oncor anticipates $55 billion to $75 billion in investments from 2030-2034, underscoring the long-term growth trajectory. Sempra Infrastructure's major projects, including ECA LNG Phase 1 and Cimarrón Wind, are expected to reach commercial operations in Spring 2026 and H1 2026, respectively, contributing significantly to future cash flows. The FID for Port Arthur LNG Phase 2, targeted for 2025, is a key catalyst for further growth.

However, the investment thesis is not without risks. Regulatory lag, particularly in Texas, can impact earned returns, although the new UTM is designed to mitigate this. Wildfire risks in California, despite SDG&E's advanced mitigation programs, remain a concern, with ongoing legislative discussions around the AB 1054 fund. Mexican regulatory and legal uncertainties, including changes to energy laws and unresolved land disputes, pose risks to Sempra Infrastructure's projects like ECA LNG and the Sonora pipeline. Inflationary pressures on costs and the impact of U.S. and retaliatory tariffs also present challenges, though Sempra has implemented mitigation strategies such as diversified sourcing and foreign trade zones.

Conclusion

Sempra is executing a clear and compelling strategy to transform into a predominantly regulated U.S. utility powerhouse, leveraging its strong positions in the dynamic Texas and California energy markets. The company's commitment to disciplined capital allocation, coupled with its technological leadership in areas like wildfire mitigation and AI integration for grid management, positions it favorably to capitalize on the burgeoning energy demand driven by economic expansion and the digital revolution. While near-term regulatory adjustments present challenges, the long-term outlook is robust, supported by a massive capital plan, significant incremental growth opportunities in Texas, and strategic LNG projects.

The strategic divestitures and capital recycling initiatives are critical steps in enhancing Sempra's financial flexibility and strengthening its balance sheet, ultimately aiming for a higher-quality earnings mix and improved credit profile. For discerning investors, Sempra represents an opportunity to participate in the North American energy super cycle, backed by a resilient business model, a clear growth trajectory, and a management team focused on delivering sustained shareholder value through operational excellence and strategic foresight.