Sempra(US:SRE)2024-02-27 20:59Part I. Financial Information Business Overview Sempra operates as a North American energy infrastructure holding company, realigning its segments in Q4 2023 to Sempra California, Sempra Texas Utilities, and Sempra Infrastructure, focusing on stable cash flows from transmission and distribution investments - Sempra's mission is to be North America's premier energy infrastructure company, focusing on transmission and distribution investments to produce stable cash flows and earnings28 - In Q4 2023, Sempra realigned its reportable segments, combining the former SDG&E and SoCalGas segments into a new Sempra California segment, alongside Sempra Texas Utilities and Sempra Infrastructure2931 Sempra California The Sempra California segment includes regulated utilities SDG&E and SoCalGas, serving millions of customers in Southern and Central California, facing challenges from Community Choice Aggregation and distributed energy resources SDG&E Electric Customer and Volume Data (as of Dec 31, 2023) | Customer Class | Meter Count | Volumes (millions of kWh) | | :--- | :--- | :--- | | Residential | 383,150 | 2,004 | | Commercial | 41,458 | 1,868 | | Industrial | 359 | 670 | | Street/Highway Lighting | 1,785 | 77 | | Subtotal | 426,752 | 4,619 | | CCA and DA | 1,090,386 | 12,228 | | Total | 1,517,138 | 16,847 | SoCalGas Natural Gas Customer and Volume Data (as of Dec 31, 2023) | Customer Class | Meter Count | Volumes (Bcf) | | :--- | :--- | :--- | | Residential | 5,890,601 | | | Commercial | 248,498 | | | Industrial | 24,119 | | | Electric Gen/Wholesale | 40 | | | Natural Gas Sales | | 321 | | Transportation | | 549 | | Total | 6,163,258 | 870 | - The Aliso Canyon natural gas storage facility, with a capacity of 86 Bcf, represents 63% of SoCalGas's working gas storage capacity, with CPUC authorizing its use up to 68.6 Bcf as of December 31, 2023, for regional reliability53 Sempra Texas Utilities Sempra Texas Utilities comprises equity method investments in Oncor Holdings and Sharyland Holdings, with Oncor being Texas's largest transmission and distribution utility, though Sempra does not control it due to ring-fencing measures - Oncor operates the largest transmission and distribution system in Texas, delivering electricity to nearly 4.0 million homes and businesses across a territory with an estimated population of 13 million72 - Sempra does not control Oncor Holdings or Oncor due to ring-fencing measures that limit its ability to direct management, policies, and operations, leading to equity method accounting for its interest66 Sempra Infrastructure Sempra Infrastructure develops and operates North American energy infrastructure, focusing on LNG, Energy Networks, and Low Carbon Solutions, including key LNG projects and extensive natural gas and renewable assets in Mexico and the U.S. Gulf Coast - Sempra holds a 70% interest in SI Partners, with KKR Pinnacle and ADIA holding 20% and 10% respectively, serving as the primary vehicle for Sempra's non-U.S. utility energy infrastructure assets78 Major LNG Projects | Project | Status | Sempra's Interest (via SI Partners) | Key Details | | :--- | :--- | :--- | :--- | | Cameron LNG Phase 1 | Operational | 50.2% of JV | 13.9 Mtpa nameplate capacity in Louisiana | | ECA LNG Phase 1 | Construction | 83.4% of project | 3.25 Mtpa nameplate capacity in Baja California, Mexico; commercial operations expected summer 2025 | | PA LNG Phase 1 | Construction | 28% of project | ~13 Mtpa nameplate capacity in Port Arthur, Texas; commercial operations expected 2027-2028 | - The Energy Networks business includes 1,850 miles of natural gas transmission pipelines and the Ecogas natural gas distribution utility in Mexico, while Low Carbon Solutions includes 1,044 MW of operating wind and solar facilities9699105 Regulation and Ratemaking Sempra's utilities are heavily regulated by bodies like the CPUC in California and PUCT in Texas, with ratemaking primarily determined through General Rate Cases and Cost of Capital proceedings - SDG&E and SoCalGas are principally regulated by the CPUC, which sets customer rates, conditions of service, and authorized rates of return114120 - Oncor and Sharyland Utilities are regulated by the PUCT, which has jurisdiction over wholesale transmission and retail rates121 - The Cost of Capital Mechanism (CCM) adjusts the authorized Return on Equity (ROE) for California utilities based on interest rate changes, with a 2023 trigger resulting in an approved 70 bps ROE increase for SDG&E and SoCalGas, effective January 1, 2024148315 Risk Factors Sempra faces diverse risks, including operational, financial, legal, and regulatory challenges, notably California wildfire liability, energy transition impacts, project development risks, and political uncertainty in Mexico - California Wildfires: Sempra, SDG&E, and SoCalGas face significant risks from wildfires, including potential liability under the doctrine of inverse condemnation, with the Wildfire Fund offering some protection but susceptible to exhaustion by major events224225 - Energy Transition: Political and public debate, particularly in California, aims to reduce or eliminate reliance on natural gas, potentially leading to stranded assets and reduced demand for SoCalGas and SDG&E's natural gas infrastructure231234 - Project & International Risk: Sempra Infrastructure faces risks in developing and constructing large-scale projects like LNG export facilities, and its international operations, particularly in Mexico, are exposed to increased legal, regulatory, tax, and geopolitical risks, including governmental influence over the energy sector267284287 - Holding Company Structure: As a holding company, Sempra's ability to pay dividends and meet obligations depends on distributions from its subsidiaries, which can be restricted by regulations or contractual obligations174 Cybersecurity Sempra maintains a cybersecurity risk management program overseen by its Board's SST Committee, with no identified material past or present threats impacting financial condition or operations - The Board's Safety, Sustainability and Technology (SST) Committee, composed of independent directors, provides oversight of cybersecurity risks, receiving regular briefings from the chief information security officer298 - The company has not identified any known cybersecurity threats or prior incidents that have materially affected or are reasonably likely to materially affect its financial results or operations297 Part II. Other Information Management's Discussion and Analysis (MD&A) Sempra's 2023 earnings significantly increased to $3,030 million, driven by Sempra Infrastructure's derivative gains and Sempra California's improved results, despite a slight decrease in Sempra Texas Utilities' earnings, with $8.8 billion invested in capital expenditures Sempra Earnings by Segment (in millions) | Segment | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Sempra California | $1,747 | $1,514 | $392 | | Sempra Texas Utilities | $694 | $736 | $616 | | Sempra Infrastructure | $877 | $310 | $682 | | Parent and other | ($288) | ($466) | ($436) | | Earnings attributable to common shares | $3,030 | $2,094 | $1,254 | - Sempra California's earnings increased by $233 million (15%) in 2023, primarily due to a $199 million charge in 2022 related to the Aliso Canyon gas leak litigation that did not recur in 2023323325 - Sempra Infrastructure's earnings surged by $567 million, mainly due to a $1.1 billion positive swing in asset and supply optimization, driven by unrealized gains on commodity derivatives in 2023 compared to unrealized losses in 2022327 - Sempra Texas Utilities' earnings decreased by $42 million (6%) due to higher interest, depreciation, and O&M expenses at Oncor, partially offset by higher revenues from rate updates and customer growth323 Capital Resources and Liquidity Sempra maintains strong liquidity, funding operations and capital plans through cash, credit facilities, and issuances, with $8.4 billion in 2023 capital expenditures and a planned $40.4 billion from 2024-2028, supported by a recent common stock offering Capital Expenditures by Segment (in millions) | Segment | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Sempra California | $4,560 | $4,466 | $4,204 | | Sempra Infrastructure | $3,832 | $884 | $802 | | Parent and other | $5 | $7 | $9 | | Total | $8,397 | $5,357 | $5,015 | - Sempra plans to invest approximately $40.4 billion in capital expenditures from 2024 through 2028, with $24.1 billion allocated to Sempra California, $3.4 billion to Sempra Texas Utilities, and $12.9 billion to Sempra Infrastructure503 - In November 2023, Sempra completed a common stock offering and entered into forward sale agreements, expecting to receive approximately $1.2 billion in net proceeds upon full physical settlement by the end of 20244001134 Critical Accounting Estimates Management identifies critical accounting estimates including contingencies, regulatory assets and liabilities, income taxes, pension and postretirement benefits, and impairment testing, all requiring significant judgment and impacting financial reporting - Contingencies: Loss accruals are made when a loss is probable and reasonably estimable, which is critical for matters like litigation and environmental cleanup525 - Regulatory Accounting: Management must judge the probability of recovering costs through future rates, determining the carrying value of regulatory assets, where adverse regulatory actions could lead to write-offs527528 - Pension & PBOP: Estimates for pension and postretirement benefit obligations are sensitive to assumptions about discount rates and expected returns on plan assets; a 100 bps change in the discount rate could change the projected benefit obligation by approximately $235 million to $298 million for Sempra's pension plans535538539 Market Risk Disclosures Sempra is exposed to market risks from commodity prices, interest rates, and foreign currency/inflation, which are managed through derivatives and other strategies, particularly impacting its debt portfolio and Mexican operations - A hypothetical 10% change in commodity prices would change the fair value of commodity-based derivatives by $14 million as of December 31, 2023559 - A hypothetical 10% change in interest rates on variable-rate debt would change annual earnings by approximately $5 million for long-term debt and $9 million for short-term debt561 - A hypothetical 10% appreciation of the U.S. dollar against the Mexican peso would result in a transactional gain of $126 million, primarily from the remeasurement of monetary assets and liabilities for tax purposes564 Controls and Procedures Management of Sempra, SDG&E, and SoCalGas concluded their disclosure controls and internal control over financial reporting were effective as of December 31, 2023, a conclusion affirmed by Deloitte & Touche LLP's unqualified opinion - Management of Sempra, SDG&E, and SoCalGas concluded that their respective disclosure controls and procedures were effective as of December 31, 2023571 - Based on the COSO framework, management concluded that internal control over financial reporting was effective for each registrant as of December 31, 2023, a conclusion audited and confirmed by Deloitte & Touche LLP573 Financial Statements and Notes Commitments and Contingencies This note details significant legal proceedings, lease agreements, contractual commitments, and environmental issues, including ongoing Aliso Canyon litigation, ECA LNG land disputes, and substantial natural gas and construction project commitments - SoCalGas paid $1.79 billion in 2022 to settle claims from approximately 36,000 plaintiffs related to the 2015 Aliso Canyon gas leak, though claims from ~100 non-settling plaintiffs and ~413 new plaintiffs remain pending1189 - The CPUC approved an increase in the Aliso Canyon storage facility's capacity to 68.6 Bcf in August 2023, but a proceeding to potentially minimize or eliminate its use is ongoing, with the facility having a net book value of $1.0 billion11931194 - Sempra Infrastructure faces ongoing legal challenges to land titles and environmental permits for its ECA LNG project in Mexico, which could adversely affect the project119812011202 Future Minimum Payments for Natural Gas Contracts (as of Dec 31, 2023) | (in millions) | Sempra Total | SoCalGas Total | | :--- | :--- | :--- | | 2024 | $283 | $151 | | 2025 | $246 | $136 | | 2026 | $196 | $97 | | 2027 | $177 | $81 | | 2028 | $152 | $70 | | Thereafter | $1,421 | $176 | | Total | $2,475 | $711 |