Sempra Could See Additional LNG Opportunities but Focus Should Remain on Utilities

Business Strategy & Outlook

Sempra Energy’s investment opportunities at its regulated utilities in California and Texas will remain the primary growth driver. California’s regulatory environment has remained constructive for Sempra, as its emphasis on distribution-related safety and reliability infrastructure upgrades aligns well with the state’s regulatory priorities. Sempra has received constructive regulatory treatment in the state. The company’s most recent outcome positions the California utilities to grow rate base 9% annually at SDG&E and 12% at SoCalGas, supported by a combined $21 billion of capital investment during the next five years. The state’s regulatory environment will be put to a test during a busy regulatory calendar in the state. Both of Sempra’s subsidiaries in the state filed cost of capital proceedings for 2023-25. Additionally, the company will soon file a general rate case proposal with regulators to determine revenue in 2024-27. Overall, the constructive outcomes.

Sempra’s Texas subsidiaries’ transmission assets should continue to benefit from Texas’ aggressive wind generation build-out. Management continues to identify capital investment opportunities in the state. The expected $17.0 billion capital investment for 2022-26 to address economic development, customer growth, and grid hardening and expansion. Sempra’s natural gas infrastructure businesses should be able to capitalize on the increasing demand for natural gas. Management is moving forward on developing its LNG portfolio, including its ECA LNG export facility. Sempra management limits the risk with LNG development by entering into long-term contracts with creditworthy counterparties, many of which also become equity owners. Management has effectively recycled capital to fund its growing capital plan. Sempra Energy recently sold a 20% noncontrolling interest in Sempra Infrastructure Partners to KKR, which houses LNG, natural gas infrastructure, and Mexican renewable energy and transmission assets. In December, Sempra announced that it would sell an additional 10% ownership to Abu Dhabi Investment Authority. Both transactions were at what one can consider very attractive valuations.

Financial Strengths

The Sempra to maintain a balance sheet with about mid-50% debt through 2026, in line with most regulated utilities. Small equity issuances will help fund the company’s investment plans. With the Cameron LNG export facility completed, Sempra is also considering pursuing incremental large-scale development of other export facilities in its infrastructure portfolio. Any of Sempra’s incremental capital expenditures for the facility would likely be mostly project-financed with equity contributions from LNG off takers. The debt/EBITDA to be below 5.0 times through 2026. With robust capital expenditure plans and ongoing development of its unregulated business, the company to continue borrowing at both the utility and parent levels in the next few years. EBITDA/interest coverage should remain solid, averaging above 5 times through 2026 in the forecast. Sempra’s liquidity remains strong. Sempra’s liquidity position and cash flow generation should give investors’ confidence that it can maintain and grow its dividend.

Bulls Say

Opportunities for rate base growth at Sempra’s utilities are above average, and California and Texas regulation generally allows timely recovery of capital expenditures and a dynamic cost of capital.

As an early and large investor in the Mexican energy sector, Sempra could see an outsize share of new development projects under market deregulation.

Sempra’s LNG terminals and pipeline give investors exposure to a growing market for natural gas in the U.S. and Mexico.

Company Description

Sempra Energy serves one of the largest utility customer bases in the United States. It distributes natural gas and electricity in Southern California and owns 80% of Oncor, a transmission and distribution business in Texas. SoCalGas and San Diego Gas & Electric distribute gas to more than 20

million customers, while Oncor serves more than 10 million Texas customers. The firm’s other affiliates own and operate liquefied natural gas facilities in North America and infrastructure in

Mexico.

(Source: Morningstar)

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