Sempra Energy Continues To Find Growth in Texas

Strategist

Andrew Bischof

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's subsidiaries received constructive decisions on its cost of capital proceedings for the 2023-25 timeframe, with SDG&E's 9.95% allowed return and SoCalGas' 9.8%.

The company has also filed with regulators its general rate application for 2024 through 2027 seeking high-single-digit percentage rate attrition increases. We think regulators will continue to support investments that align with the state's broader clean energy and safety goals. The company forecasts over $20 billion of capital investment over the next five years.

Sempra's Texas subsidiaries' transmission assets should continue to benefit from Texas' clean energy transition, industry leading customer growth, and grid resiliency investments. We expect nearly $21 billion of capital investment for 2023-27 to address economic development, customer growth, and grid hardening and expansion. Multiple constructive legislative bills in the state support our forecast for $2 billion in additional capital investment beyond management's current plan, which will be reviewed later this year. We expect rate base in the region to nearly double in our forecast.

Sempra's natural gas infrastructure businesses should be able to capitalize on the increasing demand for natural gas given the recent renewed global focus on energy security. Management is moving forward on developing its LNG portfolio. ECA Phase 1 is under construction. The company is progressing on an additional train at Cameron as well as debottlenecking opportunities at the existing three trains. Management has also moved forward with the Port Arthur LNG project.

Sempra management limits its LNG development risk by entering into long-term contracts with creditworthy counterparties, many of which also become equity owners. Management has sold 30% in noncontrolling interests to KKR and Abu Dhabi Investment Authority.

Business Strategy & Outlook

On a consolidated level, we believe Sempra has a narrow economic moat. Utility regulation in the U.S. recognizes the need for capital providers--lenders and shareholders--to earn a return on their investments while ensuring that utilities do not take advantage of their service area monopoly by gouging customers.

The rate structures and general political climate in the company's California regulatory jurisdiction have consistently provided the utilities the opportunity to earn returns above their costs of capital. We think this balance leads to a narrow economic moat for regulated utilities. Sempra's California and Texas utilities constitute the lion's share of margins and earnings. Further, a healthy portion of rate base is transmission, which we consider to be premium regulatory assets.

Its suite of infrastructure businesses in the company's majority-owned Sempra Infrastructure Partners has some narrow-moat characteristics with a high degree of contracted margins and difficult-to-replace infrastructure. Existing relationships in Mexico could make it harder for outside investors to bid on new growth projects, keeping competitors at arm's length for now. We believe Sempra's LNG terminal has some moatworthy characteristics, given its very low cost basis relative to world LNG supply, long-term contracts, and favorable location.

Narrow

Economic Moat

Sempra Energy

San Diego Gas & Electric provides natural gas and electricity to San Diego County and southern Orange County in southwestern California, United States. It is owned by Sempra Energy, a Fortune 500 energy services holding company based in San Diego. SDG&E is a regulated public utility that provides energy service to 3.3 million consumers through 1.4 million electric meters and more than 840,000 natural gas meters in San Diego and southern Orange counties. The utility's area spans 4,100 square miles. SDG&E employs about 5,000 people.

San Diego Gas & Electric

South California Gas Copany is the primary provider of natural gas to the region of Southern California. SoCalGas provides natural gas service for approximately 21.6 million customers, spanning roughly 20,000 square miles of California, extending from Visalia in the north to the Mexican border in the south. Gas service for San Diego County is provided by sister utility San Diego Gas & Electric, and Southwest Gas and the Long Beach Gas & Oil Department carve out small portions of the Southern California area for natural gas delivery.

Southern California Gas Company

Sempra is an energy-service holding company, which engages in the development and operation of energy infrastructure, and provision of electric and gas services. It operates through the following segments: San Diego Gas and Electric Company (SDG&E), Southern California Gas Company (SoCalGas), Sempra Texas Utilities, Sempra Mexico, and Sempra LNG. The SDG&E segment offers electric and natural gas services. The SoCalGas segment owns and operates natural gas distribution, transmission, and storage systems. The Sempra Texas Utilities segment consists of equity method investments in Oncor Holdings and Sharyland Holdings. The Sempra Mexico segment includes the operating companies of IENova. The Sempra LNG segment develops natural gas storage and related pipeline facilities. The company was founded on October 11, 1996, and is headquartered in San Diego, CA.

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