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    Sempra (SRE)

    Business Description

    Sempra is a leading energy infrastructure company in North America, focusing on investing in and operating energy infrastructure that provides regulated electric and gas services in California and Texas, as well as other energy services globally . The company is structured around three main growth platforms: Sempra California, Sempra Texas, and Sempra Infrastructure, which includes LNG, Energy Networks, and Low-Carbon Solutions . Sempra's strategic investments and diversified business model aim to deliver stable cash flows and increase shareholder value .

    1. Utilities - Provides regulated electric and gas services in California and Texas, contributing significantly to the company's revenue.
    2. Sempra Infrastructure - Focuses on long-term contracted cash flows, primarily in the LNG sector, ensuring stability and earnings visibility.
      • LNG - Engages in liquefied natural gas operations, offering long-term contracts for energy supply.
      • Energy Networks - Develops and operates energy networks to support infrastructure needs.
      • Low-Carbon Solutions - Invests in solutions aimed at reducing carbon emissions and promoting sustainability.
    3. Energy-Related Businesses - Engages in energy derivatives to manage market risks related to natural gas and electricity price volatility .

    Q3 2024 Summary

    Initial Price$76.14July 1, 2024
    Final Price$83.92October 1, 2024
    Price Change$7.78
    % Change+10.22%

    What went well

    • Oncor's growth is incremental to Sempra's $48 billion capital plan, suggesting potential for additional capital investments and increased returns.
    • Port Arthur Phase 2 is advancing with increasing interest, including a 20-year agreement with Aramco for 5 million tons per annum and 25% equity participation, highlighting strong growth prospects in the LNG business.
    • Sempra has visibility to exceed the high end of its 6% to 8% EPS growth target, with a robust pipeline of opportunities that could lead to above-average sector growth.

    What went wrong

    • Incremental Capital Expenditure at Oncor Beyond Existing $48 Billion Plan: Sempra's growth at Oncor is expected to be incremental to the $48 billion capital plan, indicating higher capital needs that could strain financial resources.
    • Potential Dilution from $3 Billion At-The-Market Equity Program: Sempra is considering issuing up to $3 billion in equity through an ATM program to fund increased capital expenditures, which could dilute existing shareholders' value.
    • Uncertainty Around Future Funding and Equity Issuance Timing: Management is not prepared to specify when they would need to use the ATM equity program, creating uncertainty around future funding needs and potential dilution.

    Q&A Summary

    1. $3B ATM Equity Issuance and Funding Needs
      Q: Is the $3B ATM enough to fund all expected CapEx increases?
      A: Sempra has introduced a $3 billion ATM program as an additional financing tool to support anticipated capital increases, primarily at Oncor. The company feels very comfortable with $3 billion and does not expect it to be higher.

    2. Oncor's Significant CapEx Growth
      Q: What is driving Oncor's 40-50% CapEx increase?
      A: Oncor is experiencing remarkable growth, planning to increase capital expenditures by 40–50% due to strong demand across all customer categories, especially in transmission investments and AI-related data centers. Potential load additions from large customers total 103 GW, with 82 GW related to data centers—more than 3× Oncor's current peak load of 31 GW.

    3. California Regulatory Impact on CapEx
      Q: Does the proposed decision in California affect CapEx plans?
      A: While some aspects of the proposed decision are constructive, Sempra sees opportunities to improve it, particularly in funding for safety, reliability, and affordability programs. The company continues to collaborate with regulators and might adjust CapEx accordingly, aiming for an outcome that is constructive for all stakeholders.

    4. LNG Business and Port Arthur Phase 2 Progress
      Q: Are there changes to LNG outlook or Port Arthur Phase 2 timing due to administration changes?
      A: Sempra continues to advance Port Arthur Phase 2, with increasing interest and momentum. Key milestones include a 20-year agreement with Aramco for 5 Mtpa and 25% equity, and an EPC agreement with Bechtel. Awaiting a DOE non-FTA export permit expected in the first half of next year, with growing confidence in obtaining necessary permits despite any administration changes.

    5. Equity Funding Timing and Needs
      Q: When will the $3B equity be raised, and is more equity needed?
      A: Sempra views the $3 billion ATM as another financing alternative and will provide detailed funding plans, including timing and sources, during the February call. The company does not expect to need more than the $3 billion and is comfortable with that amount.

    6. Texas Legislative Session Impact
      Q: Could the upcoming Texas legislative session impact growth?
      A: Sempra does not expect significant impacts from the Texas legislative session. Oncor is in an excellent position and is confident in handling any utility issues that may arise, with nothing overly concerning at this time.

    7. Exposure to AI-Related Demand Growth at Oncor
      Q: How is AI demand affecting Oncor's growth prospects?
      A: Oncor has 82 GW of pending interconnection requests related to AI data centers, representing a substantial growth opportunity. This exposure to AI is considered an understated investment thesis for Sempra, contributing to Oncor's robust growth.

    8. Transmission Infrastructure Plans
      Q: Will Oncor invest in 765 kV transmission lines?
      A: Oncor's Permian plan currently assumes a 345 kV build-out, but the PUCT will determine by May whether it will be upgraded to 765 kV, which could significantly impact investment levels.

    9. Earnings Growth Expectations
      Q: Is Sempra expecting EPS growth above the 6–8% range?
      A: Sempra is comfortable with a 6–8% EPS growth rate but acknowledges having a field of vision to more opportunities. The company aims to deliver at or above the high end of that range, considering the significant growth period for the utility sector.

    10. LNG Permit Confidence Despite Elections
      Q: Are there concerns about LNG permit delays after elections?
      A: Sempra maintains confidence in obtaining necessary LNG permits, emphasizing that energy infrastructure has bipartisan support. The company expects to receive permits for Port Arthur Phase 2 in the first half of next year.

    Key Metrics

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    Executive Team

    NamePositionStart DateShort Bio
    Jeffrey W. MartinChairman, Chief Executive Officer, and President2018Jeffrey W. Martin has served as the Chairman of the Board, Chief Executive Officer, and President of Sempra since 2018. He was previously Executive Vice President and Chief Financial Officer from 2017 to 2018 .
    Trevor I. MihalikExecutive Vice President and Chief Financial OfficerJanuary 1, 2024Trevor I. Mihalik serves as the Executive Vice President and Chief Financial Officer of Sempra as of January 1, 2024. He oversees Sempra California and certain corporate functions .
    Karen L. SedgwickExecutive Vice President and Chief Financial OfficerJanuary 1, 2024Karen L. Sedgwick was promoted to Executive Vice President and Chief Financial Officer effective January 1, 2024. She previously served as Chief Administrative Officer and Chief Human Resources Officer .
    Peter R. WallSenior Vice President, Controller, and Chief Accounting OfficerN/APeter R. Wall is responsible for overseeing the company's accounting functions. Specific details regarding his start date in this role or his career history prior to this position are not provided.
    Kevin C. SagaraFormer Executive Vice President and Group President (retired)Retired Dec 1, 2023Kevin C. Sagara served as the Former Executive Vice President and Group President at Sempra Energy. He retired on December 1, 2023, after a total of 27 years of service, including prior employment from 1992-1999 .
    Jennifer M. KirkDirector; Member of the Audit Committee and Safety, Sustainability and Technology CommitteeN/AThe documents do not provide any information about Jennifer M. Kirk serving in these roles at SRE.

    Questions to Ask Management

    1. With the proposed decision in your General Rate Cases indicating a lower than requested rate base and critical investment areas requiring additional work, how will you ensure that necessary infrastructure investments for safety and reliability are adequately funded if not fully approved?

    2. Given the reduction of 42 basis points in authorized ROEs and the lower adjustment percentage for future triggers in the California cost of capital proceeding, how do you anticipate this will impact your earnings and future investment plans in California?

    3. Considering Oncor's anticipated 40-50% increase in its five-year capital plan due to significant new investment opportunities, how do you plan to finance this substantial growth while maintaining your balance sheet strength and credit ratings?

    4. With the DOE non-FTA export permit for Port Arthur Phase 2 LNG project still pending and expected in the first half of next year, what are the risks of further delays, and how might they impact your timeline and commitments for the project?

    5. In light of intensifying geopolitical developments and potential increased competition in the LNG export market, how does Sempra Infrastructure plan to secure long-term contracts and maintain its competitive edge in supplying growing demand in Europe and Asia?

    Past Guidance

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: FY 2024 and FY 2025
    • Guidance:
      1. Adjusted EPS Guidance: Affirmed full-year 2024 and 2025 EPS guidance ranges (specific figures not provided) .
      2. Capital Plan: $24 billion 5-year capital plan, expected to increase by 40% to 50% .
      3. Equity Program: Establishing a $3 billion at-the-market equity program .
      4. General Rate Cases (GRC): Optimistic about finalizing in California by year-end .
      5. Future Guidance: Full update on roll-forward capital program and 2026 guidance to be provided in Q4 call .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: FY 2024 and FY 2025
    • Guidance:
      1. Adjusted EPS Guidance: Reaffirmed full-year 2024 and 2025 EPS guidance ranges (specific figures not provided) .
      2. Long-term EPS Growth Rate: Projected 6% to 8% .

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: FY 2024 and FY 2025
    • Guidance:
      1. Full Year 2024 Adjusted EPS Guidance: $4.60 to $4.90 .
      2. 2025 EPS Guidance: $4.90 to $5.25 .
      3. Long-term EPS Growth Expectations: Approximately 7% annual growth from 2023 to 2025, consistent with 6% to 8% long-term growth expectations .

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: FY 2024 and FY 2025
    • Guidance:
      1. 2024 EPS Guidance: Narrowed to $4.60 to $4.90 .
      2. 2025 EPS Guidance: $4.90 to $5.25, representing approximately 7% growth .
      3. Long-term EPS Growth Rate: 6% to 8% .
      4. Dividend: Increased to $2.48 per share .
      5. Capital Plan: $48 billion, with over 90% for regulated investments .
      6. Rate Base Growth: California at 7% and Texas at 11% from 2023 to 2028, combined growth over 9% .
      7. Share Count: Expected increase by 4 million in 2024, reaching approximately 654 million shares in 2025 .