Sempra (SRE): Powering the Future with Strategic Growth and Resilience

Published on November 01, 2024 | Ticker: SRE

BUSINESS OVERVIEW AND HISTORY

Sempra's origins can be traced back to 1998 when the company was formed through the merger of Pacific Enterprises and Enova Corporation. The combination of these two energy giants laid the foundation for Sempra's current footprint, which spans critical markets in the United States and Mexico.

Initially created to provide natural gas and electricity services to customers in Southern California, Sempra quickly expanded its operations beyond California in the early 2000s. The company made strategic investments in energy infrastructure projects across North America, including natural gas pipelines, storage facilities, and LNG terminals. This geographic diversification proved crucial in helping Sempra weather changes in the California energy market, including the state's electricity crisis in the early 2000s.

Throughout the following decade, Sempra continued its growth trajectory, acquiring and developing additional energy assets across the United States and Mexico. Notable milestones included the acquisition of Willmut Gas & Oil Company in 2004, which further expanded the company's reach. The development of the Cameron LNG export facility in Louisiana, which began operations in 2019, marked a significant step in Sempra's LNG strategy. In 2018, the merger with EFH expanded Sempra's footprint in Texas, further solidifying its position in key energy markets.

Despite its successes, Sempra has faced significant challenges over the years. In 2015, the company dealt with the Aliso Canyon natural gas leak, which led to legal proceedings and increased regulations around natural gas storage facilities in California. Sempra also navigated the 2008 financial crisis, which impacted the company's access to capital markets and temporarily slowed its expansion plans.

Throughout these ups and downs, Sempra has remained committed to its core mission of developing and operating critical energy infrastructure to serve its customers and communities. The company has leveraged its geographic diversity, regulatory expertise, and operational excellence to navigate industry changes and emerge as a leading player in the North American energy landscape.

GEOGRAPHIC AND OPERATIONAL DIVERSIFICATION

Sempra's geographical diversification is a key strength, with a strong presence in the high-growth markets of California and Texas. The company's regulated utility subsidiaries, San Diego Gas & Electric (SDG&E) and Southern California Gas Company (SoCalGas), serve millions of customers in these regions, benefiting from constructive regulatory environments and increasing demand for energy infrastructure.

In addition to its utility operations, Sempra has strategically expanded into energy infrastructure projects, leveraging its expertise and strong partnerships. The company's Sempra Infrastructure segment, which includes liquefaction, pipelines, and renewable energy assets, has been a significant contributor to its overall growth and diversification.

STRATEGIC GROWTH INITIATIVES

Sempra's growth strategy is centered around capitalizing on the increasing demand for cleaner and more secure energy solutions. The company's investments in LNG projects, such as the Cameron LNG facility and the proposed expansion, as well as the Port Arthur LNG project, position Sempra as a key player in the global LNG market.

Moreover, Sempra's commitment to renewable energy is evident in its development of projects like the Cimarrón Wind farm in Mexico, which further diversifies the company's asset base and aligns with the growing focus on sustainability.

REGULATORY ENVIRONMENT AND RISK MANAGEMENT

Sempra's operations are subject to a robust regulatory framework, particularly in its utility segments. The company has demonstrated its ability to navigate complex regulatory environments, evidenced by the constructive outcomes of its recent general rate case filings in California.

Risk management is a critical focus for Sempra, and the company has implemented various measures to mitigate potential threats. This includes the Wildfire Fund established in California, which provides financial protection against wildfires, as well as the company's ongoing efforts to enhance the resilience of its infrastructure.

FINANCIAL PERFORMANCE AND SHAREHOLDER VALUE

Sempra's financial performance has been consistently strong, with the company reporting annual revenue of $16.72 billion and net income of $3.08 billion in the latest fiscal year. The company's focus on operational efficiency and cost management has contributed to its solid profitability, with an operating margin of 23.1% and a return on equity of 10.4%.

Sempra's commitment to shareholder value creation is reflected in its consistent dividend payouts and a dividend yield of 2.9% as of the latest reporting period. The company's long-term growth strategy, coupled with its prudent financial management, has positioned Sempra as an attractive investment opportunity in the energy sector.

FINANCIALS

For the most recent quarter, Sempra reported revenue of $3.01 billion, a decrease of 10% year-over-year primarily due to lower natural gas and LNG revenues at Sempra Infrastructure, partially offset by higher electric revenues at Sempra California. Net income for the quarter increased 24% year-over-year to $725 million, primarily due to higher equity earnings at Sempra Texas Utilities, partially offset by lower income tax benefits at Sempra California.

Operating cash flow (OCF) for the quarter was $669 million, a decrease of 36% year-over-year primarily due to changes in working capital. Free cash flow (FCF) turned negative at -$1.23 billion in the quarter, primarily due to higher capital expenditures.

For the first six months of 2024, Sempra's total earnings attributable to common shares were $1.51 billion, a decrease of 4% compared to the same period in 2023. This decrease was primarily due to factors affecting each of its three reportable segments:

1. Sempra California: This segment recorded revenues of $5.77 billion in the first six months of 2024, a decrease of 29% compared to the same period in 2023, primarily driven by lower natural gas revenues due to a decrease in the cost of natural gas sold. Earnings attributable to common shares were $898 million, a decrease of 6% compared to the same period in 2023.

2. Sempra Texas Utilities: This segment's earnings attributable to common shares were $385 million, an increase of 58% compared to the same period in 2023, primarily due to higher equity earnings from Oncor Holdings driven by increased revenues, customer growth, and the write-off of rate base disallowances in 2023.

3. Sempra Infrastructure: This segment's earnings attributable to common shares were $422 million, a decrease of 19% compared to the same period in 2023, primarily due to lower earnings from asset and supply optimization activities and the transportation business, partially offset by favorable foreign currency and inflation effects on Sempra's monetary positions in Mexico.

LIQUIDITY

Sempra maintains a strong liquidity position, which provides financial flexibility and supports its ongoing operations and growth initiatives. The company's access to capital markets and prudent financial management have enabled it to maintain a healthy balance sheet and meet its financial obligations.

As of June 30, 2024, Sempra had $9.90 billion in committed credit facilities, with $7.96 billion available. The company also has access to $200 million in uncommitted lines of credit. Sempra's debt-to-equity ratio stands at 1.11, while its current ratio is 0.46 and quick ratio is 0.41.

OUTLOOK AND FUTURE PROSPECTS

Looking ahead, Sempra remains optimistic about its growth prospects. The company's strategic investments in LNG, renewable energy, and utility infrastructure are expected to drive continued expansion and enhance its competitive positioning.

Sempra is affirming its full-year 2024 adjusted EPS guidance range as well as its 2025 EPS guidance range. The company has a long-term EPS growth rate target of 6% to 8%. This growth is supported by several factors across its business segments:

1. In the Sempra Texas Utilities segment, Oncor's rate base is anticipated to grow at an average annual rate of 11% from 2023 through 2028. ERCOT projects peak load in 2030 to reach 152 gigawatts, nearly double the current record of 85.5 gigawatts set in August 2023, with approximately 40% of that future load expected to be served by Oncor. The company's current 5-year capital plan at Oncor is approximately $24 billion, which does not include the incremental $3 billion in the System Resiliency Plan that is pending regulatory approval.

2. In the Sempra Infrastructure segment, the ECA LNG Phase 1 project will be delayed until spring 2026, resulting in an estimated $300 million increase in Sempra's net share of the project costs. However, the company still expects to maintain its targeted mid-teen levered returns.

3. In the Sempra California segment, the company continues to make investments to improve safety, modernize the grid, and support the delivery of cleaner energy.

Furthermore, Sempra's strong balance sheet and access to capital markets provide the necessary resources to execute its growth plans and navigate potential market challenges. The company's focus on operational excellence, disciplined capital allocation, and a steadfast commitment to sustainability position Sempra as a leader in the evolving energy landscape.

CONCLUSION

Sempra's impressive track record, diversified business model, and strategic growth initiatives have solidified its status as a premier energy infrastructure company. By leveraging its expertise, strong partnerships, and a commitment to innovation, Sempra is poised to capitalize on the growing demand for clean and reliable energy solutions, creating long-term value for its shareholders and contributing to the broader energy transition.