Why did GAAP EPS rise sharply in 2023 while adjusted EPS was flat?

The 2022 GAAP results included a $199 million after-tax Aliso Canyon charge and a $120 million deferred tax expense tied to the ADIA stake sale, which depressed the prior-year base. In 2023, GAAP results benefited from $366 million of net unrealized gains on commodity derivatives, which management excludes from adjusted earnings because they are volatile and non-operational. Adjusted EPS, which strips out these items, was $4.61 in both years.

What does the increased capital plan mean for future earnings growth?

A roughly $48 billion five-year plan, up 20%, is largely directed to regulated transmission and distribution assets in California and Texas. Because regulated utilities earn a return on rate base, rising investment should support rate base growth and earnings over time, which underpins management's 6-8% long-term EPS growth target. Execution risk, regulatory outcomes, and the cost of financing this spending remain key considerations.

How much of the company's growth depends on Oncor and Sempra Infrastructure?

Sempra Texas, which consists of the equity investment in Oncor, contributed $694 million to 2023 earnings, and Sempra Infrastructure contributed $877 million, which includes noncontrolling interest effects. Together they accounted for a significant share of earnings alongside Sempra California's $1.75 billion. Investors should note that Oncor's capital program is a major driver of Sempra Texas, and Sempra Infrastructure's growth depends on LNG project execution and financing.

Is the dividend increase sustainable?

The dividend rose about 4% to $2.48 per share annualized, consistent with management's pattern of annual increases for 14 consecutive years. Common dividends paid totaled $1.48 billion in 2023, which is covered by the $3.03 billion of GAAP earnings and $6.2 billion of operating cash flow. Sustainability depends on continued earnings growth and on the company's ability to fund its large capital plan without excessive equity or leverage.

What are the main risks highlighted in the release?

The release's forward-looking statements flag California wildfire liability and recovery uncertainty, regulatory decisions (including pending CPUC general rate cases with a proposed decision expected in Q2 2024), project execution and financing for LNG and other projects, Mexico currency and inflation exposure, commodity price volatility, cybersecurity threats, and access to capital at favorable rates. Credit rating actions and rising interest rates are also noted as risks to funding costs.

SRE/SREA 8-K: Earnings & Results

01—Abstract

Summary

Summary of the 8-K filed February 27, 2024. Cited figures are marked; the original filing is the authoritative source.

Sempra (NYSE: SRE) reported full-year 2023 GAAP earnings of $3.03 billion^a, or $4.79 per diluted share, up from $2.09 billion, or $3.31 per share, in 2022.

Adjusted earnings were $2.92 billion^b, or $4.61 per diluted share, flat year over year. The swing in GAAP results was driven largely by non-recurring or non-operating items in 2022 (Aliso Canyon charges, a deferred tax charge tied to the Abu Dhabi Investment Authority stake sale) and by large 2023 unrealized commodity derivative gains. Fourth-quarter GAAP EPS was $1.16 versus $0.69, while adjusted EPS fell to $1.13 from $1.17.

Investors should therefore focus on the flat adjusted EPS as the better measure of underlying operating momentum. The most material forward-looking news is the capital plan. Sempra raised its five-year capital plan by 20% to a company-record approximately $48 billion^c, with over 90% directed to Sempra California and Sempra Texas.

This supports the company's long-term growth thesis in regulated transmission and distribution. Management narrowed 2024 adjusted EPS guidance to $4.60^d-$4.90 and issued 2025 guidance of $4.90-$5.25, implying about 7% growth at the midpoint, and affirmed a projected long-term EPS growth rate of roughly 6-8%. Shareholder returns and balance sheet activity were also notable.

The board raised the annualized common dividend to $2.48 per share from $2.38, marking the 14th consecutive year of increases. Capital spending reached $8.8 billion in 2023, up from $5.7 billion, with Sempra Infrastructure accounting for much of the step-up as Port Arthur LNG Phase 1 reached a final investment decision and project financing was secured.

Operating cash flow rose to $6.2 billion from $1.1 billion, though that comparison was distorted by 2022 Aliso Canyon payments and working capital swings. Total debt increased, and the company remains reliant on capital markets to fund its growth program.

02—Key points

Key Highlights

GAAP EPS of $4.79 for FY2023 (vs. $3.31 in 2022); adjusted EPS of $4.61, flat year over year, with adjusted earnings of $2.92 billion.
Five-year capital plan raised 20% to a record ~$48 billion, with over 90% allocated to Sempra California and Sempra Texas.
2024 adjusted EPS guidance narrowed to $4.60-$4.90; initial 2025 guidance of $4.90-$5.25 (~7% growth at the 2024 midpoint).
Long-term EPS growth rate of approximately 6-8% affirmed.
Quarterly common dividend raised to $0.62 per share ($2.48 annualized, up from $2.38), the 14th consecutive annual increase.
Sempra Infrastructure delivered FY2023 earnings of $877 million (vs. $310 million), supported by Port Arthur LNG Phase 1 FID and sell-downs to ConocoPhillips and KKR; ECA LNG Phase 1 remains on track for summer 2025.
Capital expenditures and investments reached $8.8 billion in 2023 (vs. $5.7 billion), and operating cash flow increased to $6.2 billion (vs. $1.1 billion).

03—Questions

Frequently Asked Questions

Why did GAAP EPS rise sharply in 2023 while adjusted EPS was flat?
The 2022 GAAP results included a $199 million after-tax Aliso Canyon charge and a $120 million deferred tax expense tied to the ADIA stake sale, which depressed the prior-year base. In 2023, GAAP results benefited from $366 million of net unrealized gains on commodity derivatives, which management excludes from adjusted earnings because they are volatile and non-operational. Adjusted EPS, which strips out these items, was $4.61 in both years.
What does the increased capital plan mean for future earnings growth?
A roughly $48 billion five-year plan, up 20%, is largely directed to regulated transmission and distribution assets in California and Texas. Because regulated utilities earn a return on rate base, rising investment should support rate base growth and earnings over time, which underpins management's 6-8% long-term EPS growth target. Execution risk, regulatory outcomes, and the cost of financing this spending remain key considerations.
How much of the company's growth depends on Oncor and Sempra Infrastructure?
Sempra Texas, which consists of the equity investment in Oncor, contributed $694 million to 2023 earnings, and Sempra Infrastructure contributed $877 million, which includes noncontrolling interest effects. Together they accounted for a significant share of earnings alongside Sempra California's $1.75 billion. Investors should note that Oncor's capital program is a major driver of Sempra Texas, and Sempra Infrastructure's growth depends on LNG project execution and financing.
Is the dividend increase sustainable?
The dividend rose about 4% to $2.48 per share annualized, consistent with management's pattern of annual increases for 14 consecutive years. Common dividends paid totaled $1.48 billion in 2023, which is covered by the $3.03 billion of GAAP earnings and $6.2 billion of operating cash flow. Sustainability depends on continued earnings growth and on the company's ability to fund its large capital plan without excessive equity or leverage.
What are the main risks highlighted in the release?
The release's forward-looking statements flag California wildfire liability and recovery uncertainty, regulatory decisions (including pending CPUC general rate cases with a proposed decision expected in Q2 2024), project execution and financing for LNG and other projects, Mexico currency and inflation exposure, commodity price volatility, cybersecurity threats, and access to capital at favorable rates. Credit rating actions and rising interest rates are also noted as risks to funding costs.

04—Continue

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