10-Q: Sempra Q2 Earnings Decline Amid FX Headwinds, Strategic Asset Sales

Sempra reports a significant drop in Q2 2025 net income and EPS, primarily due to unfavorable foreign currency and inflation effects in Mexico and a tax expense from the planned sale of its Ecogas subsidiary, despite increased capital expenditures in key infrastructure projects.

Summary

• Sempra's net income for the three months ended June 30, 2025, decreased to $519 million from $871 million in the same period of 2024.
• Basic earnings per common share (EPS) for Sempra fell to $0.71 in Q2 2025 from $1.13 in Q2 2024.
• For the six months ended June 30, 2025, Sempra's net income was $1,438 million, down from $1,752 million in 2024, with basic EPS at $2.10 compared to $2.39.
• Sempra California's earnings decreased by $57 million (18%) in Q2 2025, primarily due to $25 million in disallowed regulatory recovery of COVID-19 costs and $20 million lower income tax benefits.
• Sempra Infrastructure's earnings saw a substantial decrease of $219 million in Q2 2025, largely driven by $251 million in unfavorable foreign currency and inflation effects in Mexico and a $26 million income tax expense related to the decision to sell Ecogas.
• Capital expenditures for property, plant, and equipment increased significantly to $5,612 million for the six months ended June 30, 2025, from $4,217 million in the prior year period.
• SoCalGas recorded a $36 million ($25 million after tax) write-off in disallowed costs following a CPUC final decision authorizing only partial recovery of Catastrophic Event Memorandum Account costs.
• SDG&E is appealing a FERC order that found it ineligible for the California ISO adder, requiring a retroactive refund from June 1, 2019.
• Oncor filed a comprehensive base rate review in June 2025, requesting an average increase of approximately 13% ($834 million annualized) and a revised authorized return on equity (ROE) of 10.55% (up from 9.7%).
• Sempra is pursuing the sale of its Ecogas natural gas distribution utility in Mexico, with an expected completion in Q2 or Q3 2026, and is also exploring the sale of 15-30% of its equity interest in SI Partners.
• A new collective bargaining agreement for SoCalGas employees was ratified on March 31, 2025, and is scheduled to expire on September 30, 2028.

Sentiment

Score: 4

Explanation: The overall sentiment is moderately negative due to significant declines in net income and EPS for the quarter and year-to-date, largely driven by non-operational factors like foreign currency impacts and a one-time tax expense. While there are positive developments in strategic projects and regulatory awards, ongoing legal and regulatory risks, particularly in Mexico and related to wildfires, create considerable uncertainty. The increased capital expenditures are a long-term positive, but the immediate financial performance is a concern.

Positives

• Sempra California's earnings for the six months ended June 30, 2025, increased by $85 million (9%), driven by higher CPUC base operating margin and income tax benefits.
• Sempra Texas Utilities saw a $6 million (3%) increase in earnings for Q2 2025, primarily from higher equity earnings from Oncor Holdings due to rate updates, system resiliency plan (SRP), unified tracker mechanism (UTM) implementation, and customer growth.
• Sempra Infrastructure benefited from $46 million in asset and supply optimization in Q2 2025, including unrealized gains on commodity derivatives and higher LNG diversion fees.
• A new collective bargaining agreement for SoCalGas employees was successfully ratified on March 31, 2025, providing labor stability until September 30, 2028.
• Oncor recognized revenues and corresponding regulatory assets for UTM-eligible transmission and distribution capital investments from January 1, 2025, through June 30, 2025, indicating future cost recovery.
• The Cimarrón Wind project, a 320-MW wind generation facility in Baja California, Mexico, has begun construction and is expected to commence commercial operations in H1 2026.
• The Hackberry Carbon Sequestration project is progressing, with a draft Class VI carbon injection well construction permit issued in April 2025 and a final permit expected in 2025.

Negatives

• Sempra's net income and basic EPS significantly decreased for both the three-month and six-month periods ended June 30, 2025, compared to the prior year.
• Sempra Infrastructure's earnings were heavily impacted by $251 million in unfavorable foreign currency and inflation effects in Mexico during Q2 2025.
• A $26 million income tax expense was recognized in Q2 2025 due to the decision to classify Ecogas as held for sale, related to a Mexican deferred tax liability.
• SoCalGas incurred a $36 million write-off ($25 million after tax) of disallowed COVID-19 costs from its Catastrophic Event Memorandum Account.
• SDG&E's Q2 2025 earnings decreased by $11 million (6%), partly due to disallowed regulatory recovery of COVID-19 costs and lower CPUC base operating margin.
• Sempra Texas Utilities experienced a $31 million (8%) decrease in earnings for the six months ended June 30, 2025, primarily due to higher interest and depreciation expenses at Oncor Holdings.
• An incident at the PA LNG Phase 1 project site in April 2025 resulted in three deaths and two injuries among Bechtel employees, leading to ongoing investigations and litigation.

Risks

• California wildfires, including potential liability for damages regardless of fault and inability to recover costs from insurance, the Wildfire Fund, or rates.
• Regulatory decisions, denials of cost recovery, audits, investigations, and other actions by regulatory bodies (CPUC, CNE, DOE, FERC, IRS, PUCT) and governments in the U.S. and Mexico.
• Risks associated with business development efforts, construction projects, acquisitions, and divestitures, including delays, budget overruns, and failure to realize anticipated benefits.
• Changes in capital expenditure plans and their potential impact on rate base or other growth.
• Evolving economic, political, and foreign policy factors, including tariffs and changes in energy industry laws and regulations in the U.S. and Mexico.
• Litigation, arbitration, property disputes, and other proceedings, with potential for large awards including punitive damages.
• Cybersecurity threats, including ransomware or other attacks on systems or energy infrastructure.
• Availability, sufficiency, and cost of capital resources, and ability to borrow or raise capital on favorable terms, affected by credit rating downgrades, market instability, and fluctuating interest rates/inflation.
• Impact of climate policies, laws, and regulations, including actions to reduce reliance on natural gas, increased uncertainty for California natural gas distribution companies, and risk of non-recovery for stranded assets.
• Weather, natural disasters, pandemics, accidents, equipment failures, explosions, terrorism, and information system outages disrupting operations or causing liability.
• Availability of electric power, natural gas, and natural gas storage capacity, including disruptions from transmission grid or pipeline failures.
• Oncor's ability to reduce or eliminate quarterly dividends due to regulatory and governance requirements.
• Potential impairment of Sempra Infrastructure's $395 million investment in the Sonora pipeline if re-routing and operations cannot resume or if the contract is terminated without recovery.
• Unfavorable final decisions on land disputes or environmental and social impact permit challenges for the ECA Regas Facility and proposed ECA LNG liquefaction projects in Mexico.
• Impact of the 2025 Energy Laws in Mexico, which increase government control in the energy sector and may adversely affect operations, development, costs, revenues, and investment recovery.
• Tariffs levied by the U.S. Administration and retaliatory actions by other countries, which may affect business development, project affordability, and demand for LNG exports.
• Risk of the Wildfire Fund being exhausted due to fires in other California electric IOUs' service territories, potentially leading to accelerated amortization of SDG&E's Wildfire Fund asset and material adverse effects.
• Uncertainty regarding the cause of the LA Fires and potential liability for SDG&E if its equipment is determined to be a cause.

Future Outlook

Sempra expects to meet cash requirements through operating cash flows, credit facilities, debt, equity offerings (including the ATM program), NCI funding, and asset sales. The company anticipates capital expenditures for PP&E and investments to total $12.1 billion in 2025, with a proportionate ownership interest in expected capital expenditures at unconsolidated equity method investees totaling $12.5 billion. Oncor's capital plan is expected to grow, potentially exceeding $12 billion over 2025-2029. The Cameron LNG Phase 2 project is under evaluation, with an extension expected for the May 2026 commercial exports deadline. ECA LNG Phase 1 is expected to reach substantial completion in Spring 2026 and commence commercial operations in Summer 2026. PA LNG Phase 1 trains are expected to commence commercial operations in 2027 and 2028. Sempra Infrastructure is targeting a final investment decision for PA LNG Phase 2 in 2025. The Cimarrón Wind project is expected to begin generating energy in late 2025 and commence commercial operations in H1 2026. The Hackberry Carbon Sequestration project expects its final permit in 2025. The company does not expect the OBBBA or Pillar Two framework to have a material adverse effect on its financial results.

Management Comments

• SDG&E's president assumed the responsibilities of the CODM effective July 5, 2025.
• SoCalGas's CEO, Maryam Brown, signed a letter agreement offering Mia DeMontigny a special time-based restricted stock unit award and a cash retention bonus, recognizing her key leadership role.

Industry Context

The energy industry is navigating significant shifts, including increased government control in Mexico's energy sector following the 2025 Energy Laws, which could impact infrastructure development and operations. U.S. tariffs on imported materials and potential retaliatory tariffs on LNG exports introduce macroeconomic uncertainty for large-scale projects. Utilities like SDG&E and SoCalGas face ongoing regulatory scrutiny and cost recovery challenges, particularly concerning wildfire mitigation and catastrophic event costs. The industry is also seeing continued investment in cleaner energy infrastructure, such as LNG liquefaction, wind power, and carbon sequestration projects, reflecting a broader transition towards sustainable energy solutions.

Comparison to Industry Standards

• Oncor's proposed authorized ROE of 10.55% in its 2025 base rate review is higher than its current authorized ROE of 9.7%, indicating a push for better returns in the Texas utility market.
• SDG&E's proposed base ROE of 11.75% plus the California ISO adder (total 12.25%) in its TO6 filing, though disallowed by FERC, suggests a desire for higher returns compared to the 10.60% ROE in its TO5 settlement, reflecting potential cost of capital pressures in California's regulated transmission sector.
• The implementation of the Unified Tracker Mechanism (UTM) in Texas, allowing for annual interim rate adjustments for transmission and distribution capital expenditures, provides a more agile cost recovery mechanism for utilities like Oncor compared to traditional, less frequent rate reviews in other jurisdictions.

Management Changes

Corporate Governance

Legal Proceedings

• Approximately eight outstanding plaintiffs have not entered into a settlement agreement related to the Aliso Canyon natural gas storage facility gas leak, with SoCalGas's loss contingency accruals at $25 million.
• Two lawsuits are pending in Texas courts against Port Arthur LNG, SI Partners, Sempra, and/or other Sempra affiliates, Bechtel, and others, related to the April 2025 construction incident at the PA LNG Phase 1 project site that resulted in three deaths and two injuries. Claims assert negligence, gross negligence, wrongful death, survival, and bystander claims, seeking compensatory and punitive damages.
• A federal administrative appeal is pending in Mexico regarding alleged deficiencies in the public consultation process for environmental and social impact permits issued to ECA LNG, with the appeal yet to be resolved by the Second Federal Collegiate Court.
• Port Arthur LNG continues to litigate before the U.S. Court of Appeals for the Fifth Circuit regarding the 2022 Clean Air Act permit, which was previously vacated and remanded to the TCEQ, though the permit remains effective during litigation.
• Oncor has an appeal pending with the Fifteenth Court of Appeals in Texas seeking judicial review of certain rate base disallowances from the PUCT's 2023 comprehensive base rate review order.

Related Party Transactions

• Sempra has a long-term note receivable of $358 million (net of allowance for credit losses) from KKR Pinnacle, bearing 5% compound interest, due no later than October 2029.
• Sempra has $359 million in long-term loans due to unconsolidated affiliates, including TAG Pipelines and TAG Norte.
• Sempra Infrastructure received a $165 million distribution from Cameron LNG JV's SDSRA, for which Sempra provided a promissory note and letters of credit as a guarantee.
• Sempra provided a Support Agreement for the benefit of CFIN (an unconsolidated affiliate of Cameron LNG JV) with a maximum exposure to loss of $979 million, guaranteeing repayment of bank debt.
• SI Partners and ConocoPhillips have provided guarantees related to their respective affiliates' commitment to fund 110% of the development budget of the PA LNG Phase 1 project, up to $9.0 billion.
• Sempra Infrastructure has non-binding MOUs and/or HOAs with affiliates of TotalEnergies SE, Mitsui & Co., Ltd., ConocoPhillips, Aramco International Gas Holding Co B.V., and JERA Co. Inc. for potential LNG offtake and/or equity participation in various LNG projects (Cameron LNG Phase 2, ECA LNG Phase 2, PA LNG Phase 2, Vista Pacifico LNG).

Stakeholder Impact

• Shareholders: Experience reduced earnings and EPS in the short term, but potential long-term growth from significant capital investments and strategic asset sales. Dilution risk from the ATM program and forward sale agreements.
• Employees: SoCalGas employees benefit from a new collective bargaining agreement. Certain eligible employees at SDG&E and SoCalGas received special termination benefits under a Voluntary Retirement Enhancement Program (VREP).
• Customers (SDG&E & SoCalGas): Face potential rate increases from GRC decisions, Track 2/3 requests, and cost of capital updates. SDG&E customers may receive refunds if the California ISO adder appeal is unsuccessful. SoCalGas customers will not bear the $25 million in disallowed COVID-19 costs.
• Creditors: Credit ratings remain investment grade, but S&P downgraded Oncor's senior secured debt, which could impact future borrowing costs. Guarantees provided by Sempra and SI Partners expose them to certain affiliate debt obligations.
• Local Communities: The PA LNG Phase 1 project incident resulted in fatalities and injuries, impacting the safety and well-being of workers and potentially the community perception of the project. Ongoing legal disputes in Mexico could affect local land rights and environmental concerns related to ECA Regas Facility.

Next Steps

• SDG&E expects to receive a proposed decision for its 2024 GRC Track 2 request in the second half of 2025.
• SDG&E and SoCalGas expect to receive proposed decisions for their 2024 GRC Track 3 requests in the first half of 2026.
• SDG&E and SoCalGas expect to receive a Final Decision on their cost of capital applications for 2026-2028 by the end of 2025.
• Oncor expects to make its first comprehensive Unified Tracker Mechanism (UTM) filing in the first half of 2026.
• Sharyland Utilities expects to receive a Final Decision on its 2025 rate case in the fourth quarter of 2025, with rates, if approved, going into effect in December 2025.
• Sempra Infrastructure expects to complete the sale of Ecogas in the second or third quarter of 2026.
• Sempra expects to complete the sale of a portion of its equity interest in SI Partners in the second or third quarter of 2026.
• Sempra Infrastructure expects to request an extension for the May 2026 deadline to commence commercial exports for the Cameron LNG Phase 2 project.
• ECA LNG Phase 1 project is expected to reach substantial completion in Spring 2026 and commence commercial operations in Summer 2026.
• Sempra Infrastructure is targeting a final investment decision for the PA LNG Phase 2 project in 2025.
• The Cimarrón Wind project is expected to begin generating energy in late 2025 and commence commercial operations in the first half of 2026.
• The Louisiana Department of Energy and Natural Resources (LDENR) is expected to issue the final permit for the Hackberry Carbon Sequestration Project in 2025.
• Sempra will continue to assess the impacts of the One Big Beautiful Bill Act (OBBBA) as the U.S. Department of the Treasury and the IRS issue guidance.

Key Dates

Recommendation

While Sempra's Q2 earnings show a decline, this is largely attributed to non-recurring tax expenses and foreign currency impacts, rather than core operational issues. The company is actively pursuing significant capital projects in LNG, wind, and carbon sequestration, which represent long-term growth drivers. Regulatory challenges and legal proceedings, particularly regarding wildfires and Mexican energy laws, introduce uncertainty. However, the company's regulated utility segments (SDG&E, SoCalGas, Oncor) provide stable cash flows, and management is addressing regulatory and legal hurdles. The planned divestiture of Ecogas and the potential sale of SI Partners equity could streamline operations and provide capital. The increased capital expenditures indicate continued investment in infrastructure, which is positive for future rate base growth. The stock is a hold due to the mixed short-term financial performance and ongoing regulatory/legal uncertainties, balanced by strong long-term strategic investments and the stable nature of its core utility businesses.

Keywords

Sempra, SEC Filing, 10-Q, Quarterly Report, Earnings, EPS, Utilities, Energy Infrastructure, LNG, Natural Gas, Electric, California, Mexico, Texas, SDG&E, SoCalGas, Oncor, Sempra Infrastructure, Capital Expenditures, Regulatory, Wildfire Fund, Asset Sale, Ecogas, Foreign Exchange, Inflation, Severance Agreement, Capital Raise, Debt, Credit Ratings, Environmental Permits, Legal Proceedings, Carbon Sequestration, Wind Energy