SEMPRA annual report, FY2023

Sempra 2023 Form 10-K Summary

Business context and reporting period

This combined Form 10-K covers Sempra, San Diego Gas & Electric Company and Southern California Gas Company for the fiscal year ended December 31, 2023, filed February 27, 2024. The filing is an annual report rather than a standalone fourth-quarter filing. Sempra is a North American energy infrastructure holding company with three reportable segments: Sempra California, Sempra Texas Utilities and Sempra Infrastructure.

In the fourth quarter of 2023, Sempra combined the former SDG&E and SoCalGas reportable segments into Sempra California and restated historical segment information accordingly. Sempra owns regulated California utilities, an 80.25% interest in Oncor through an equity-method investment, a 50% interest in Sharyland Utilities, and LNG, pipeline, renewable and other infrastructure assets primarily in the United States and Mexico.

Financial performance and key metrics

Metric	2023	2022	Change
Total revenues	$16.720 billion	$14.439 billion	Up 16%
Net income	$3.618 billion	$2.285 billion	Up 58%
Earnings attributable to common shares	$3.030 billion	$2.094 billion	Up 45%
Basic EPS	$4.81	$3.32	Up 45%
Diluted EPS	$4.79	$3.31	Up 45%
Operating cash flow	$6.218 billion	$1.142 billion	Up $5.076 billion
Capital expenditures for PP&E	$8.397 billion	$5.357 billion	Up $3.040 billion
Debt-to-capitalization	48%	50%	Down 2 percentage points
Effective tax rate	15%	28%	Down 13 percentage points

Revenue increased primarily because of higher natural gas revenue, including pass-through commodity costs and refundable programs, while electric revenue declined as lower purchased-power costs and market prices reduced billings. Energy-related business revenue benefited substantially from unrealized gains on commodity derivatives.

• Segment earnings: Sempra California generated $1.747 billion, up from $1.514 billion; Sempra Texas Utilities generated $694 million, down from $736 million; Sempra Infrastructure generated $877 million, up from $310 million; Parent and other losses were $288 million versus $466 million.
• Sempra California: Earnings increased 15%, aided by the absence of the $199 million after-tax 2022 Aliso Canyon litigation charge, higher regulatory interest income, tax benefits and higher authorized margins.
• Sempra Infrastructure: Earnings increased $567 million, primarily from a $1.1 billion improvement in asset and supply optimization, reflecting unrealized gains in 2023 versus unrealized losses in 2022 on commodity derivatives.
• Margins and expenses: Operation and maintenance expense rose 15% to $5.459 billion, largely from refundable California utility programs and higher Sempra Infrastructure costs. Interest expense rose 24% to $1.309 billion due to higher debt balances, interest rates and derivative-related losses.
• Tax items: Results included a $142 million tax benefit from investment tax credits for standalone energy storage, a $131 million estimated benefit from the gas-repairs tax accounting method election and a $43 million benefit from previously unrecognized gas-repairs tax benefits.
• Balance sheet: Total assets were $87.181 billion, up from $78.574 billion. Property, plant and equipment increased to $54.960 billion from $47.782 billion. Total debt, including current and long-term debt and finance leases, was approximately $31.1 billion.

Cash flow, debt and liquidity

Operating cash flow benefited from higher earnings, changes in regulatory accounts, derivative positions, working capital and lower Aliso Canyon-related payments. Investing cash outflows increased to $8.716 billion, principally because of $8.397 billion of PP&E spending. Financing cash inflows were $2.419 billion, including debt issuance, noncontrolling-interest contributions and equity proceeds, partly offset by debt repayments, dividends and distributions to noncontrolling interests.

• At December 31, 2023, Sempra reported $236 million of unrestricted cash and $7.731 billion of available unused credit.
• Sempra commercial paper outstanding was $1.313 billion at year-end, at a weighted-average rate of 5.48%.
• Sempra issued $550 million of 5.40% senior notes due 2026 and $700 million of 5.50% senior notes due 2033.
• Sempra’s investment-grade ratings were Moody’s Baa2, S&P BBB+ and Fitch BBB+, all with stable outlooks.
• Sempra paid $1.483 billion of common dividends and $44 million of preferred dividends in 2023. The board subsequently declared a $0.62-per-share common dividend payable April 15, 2024.

Material changes versus the prior comparable period

• Common-share earnings increased by $936 million, primarily because 2023 did not include the prior-year Aliso Canyon charge and because of improved commodity-derivative results.
• Sempra Infrastructure moved from $310 million of segment earnings in 2022 to $877 million in 2023, but the improvement was heavily influenced by unrealized derivative gains and therefore may not represent recurring operating performance.
• Capital investment accelerated materially, with PP&E expenditures rising from $5.357 billion to $8.397 billion. Sempra’s 2024 capital expenditure and investment forecast is approximately $9.195 billion.
• Sempra completed sales of indirect interests in the Port Arthur LNG Phase 1 project to ConocoPhillips and KKR Denali, generating aggregate cash consideration of approximately $1.230 billion and increasing noncontrolling interests.
• The company completed a public offering of 2.099 million common shares for $144 million of net proceeds and entered into forward sale agreements covering 17.143 million additional shares. Sempra expects to physically settle those agreements by December 31, 2024 for approximately $1.2 billion of net proceeds, subject to adjustments.
• The CPUC approved higher authorized returns on equity for SDG&E and SoCalGas effective January 1, 2024, increasing each utility’s ROE by 70 basis points.

Guidance, outlook, management commentary and unusual items

• Sempra expects approximately $9.2 billion of 2024 capital expenditures and investments and approximately $40.4 billion from 2024 through 2028. Including proportionate interests in equity-method investments and excluding noncontrolling interests, the comparable 2024–2028 amount is approximately $48 billion.
• ECA LNG Phase 1 is expected to begin commercial operations in summer 2025. The project’s estimated capital cost is approximately $2 billion, including capitalized interest and contingency.
• Port Arthur LNG Phase 1 is under construction, with estimated capital expenditures of approximately $13 billion and commercial operations expected for the first and second trains in 2027 and 2028, respectively.
• Sempra expects the Topolobampo refined-products terminal in Mexico to begin commercial operations in the second quarter of 2024 and expected to make a final investment decision on the approximately 300-MW Cimarrón Wind project in the first half of 2024.
• No final investment decision had been reached for Cameron LNG Phase 2, ECA LNG Phase 2, Port Arthur LNG Phase 2, Vista Pacifico LNG or Hackberry Carbon Sequestration.
• The Aliso Canyon facility’s authorized working-gas capacity increased from 41.16 Bcf to 68.6 Bcf, but the CPUC continues to evaluate the facility’s long-term role. The facility had a $1.0 billion net book value at year-end, creating impairment risk if it is closed or becomes uneconomic.
• SDG&E requested recovery of $1.5 billion of incremental wildfire-mitigation costs incurred from 2019 through 2022. The CPUC authorized interim recovery of $194 million in 2024, subject to reasonableness review, with a potential additional $96 million in 2025 if a further mechanism is not established.

Principal risks and contingencies

• Wildfires: SDG&E may face liability regardless of fault under inverse-condemnation principles. Insurance may be unavailable or insufficient, and the California Wildfire Fund could be materially reduced or exhausted.
• Aliso Canyon litigation: Approximately 100 non-settling plaintiffs and approximately 413 plaintiffs in new lawsuits remained as of February 20, 2024. Only $33 million was accrued for specified Aliso Canyon matters, and the company could not estimate potential losses above accrued amounts.
• Regulatory recovery: Significant regulatory assets, balancing accounts and planned capital expenditures depend on CPUC, FERC and PUCT approval and prudence reviews. Delays or disallowances could reduce earnings and liquidity.
• Project execution: LNG and pipeline projects face construction-cost, schedule, financing, permitting, counterparty and commercial risks. PA LNG Phase 1 estimated project capital expenditures of $13 billion may differ substantially from actual costs.
• Permits and litigation: ECA LNG projects face land and environmental-permit disputes in Mexico. The Port Arthur LNG 2022 air permit remains subject to review by the Supreme Court of Texas, although construction was proceeding uninterrupted as of the filing.
• Commodity and derivative volatility: Sempra Infrastructure’s 2023 earnings benefited materially from unrealized derivative gains. A 10% hypothetical change in commodity prices would have changed the fair value of commodity derivatives by approximately $14 million at year-end.
• Leverage and rates: Higher interest rates increase borrowing costs and may pressure credit metrics. A ratings downgrade could increase financing costs, collateral requirements and restrictions on distributions.
• Structural subordination and distributions: Sempra depends on dividends and distributions from subsidiaries and equity-method investments, including Oncor, which Sempra does not control. Restricted net assets of consolidated entities totaled $17.1 billion, with an additional $15.0 billion at unconsolidated entities.
• Mexico: Regulatory, political, currency, inflation, energy-policy and property-rights risks could impair Mexican assets or restrict operations and development.
• Cybersecurity: Management reported no known cybersecurity threats that had materially affected or were reasonably likely to materially affect results, but energy infrastructure and third-party systems remain exposed to ransomware and other attacks.

Most important facts for investors to verify

• Reconcile the $1.1 billion improvement in Sempra Infrastructure’s asset and supply optimization with realized cash earnings and assess the sustainability of derivative-related gains.
• Review the full debt maturity schedule, project-level financing, guarantees and required equity contributions for PA LNG Phase 1 and ECA LNG Phase 1.
• Track settlement of the $1.2 billion forward-sale agreements, resulting share dilution and the company’s use of proceeds before December 31, 2024.
• Monitor CPUC decisions on the 2024 general rate cases, SDG&E wildfire-mitigation cost recovery and the Aliso Canyon proceeding.
• Assess the adequacy of Aliso Canyon and wildfire-related reserves, insurance and Wildfire Fund coverage relative to potential claims.
• Verify construction costs, schedules, permits and offtake arrangements for ECA LNG Phase 1 and Port Arthur LNG Phase 1.
• Review Oncor’s dividend capacity, ring-fencing restrictions, capital needs and the effect of its 2023 rate case on Sempra’s equity earnings.
• Consider the effect of California decarbonization policies and declining natural-gas demand on SoCalGas and SDG&E asset recovery and long-term rate base.