Sempra 10-K Analysis: $18B Balance Sheet Reset, Two P/E Ratios, One Binary Bet

Sempra — the $58 billion energy infrastructure company behind California's SoCalGas, Texas's Oncor, and the PA LNG export facility — reported a 36% decline in net income for FY2025. Earnings per share fell from $4.42 to $2.75. Free cash flow was negative $6 billion. The dividend payout ratio hit 94%. Yet the stock barely moved.

The reason: the market is looking at a completely different company than the GAAP statements show. Sempra operates across three segments — Sempra California (SDG&E plus SoCalGas, serving roughly 25 million consumers), Sempra Texas Utilities (an indirect 80.3% ownership of Oncor, the largest transmission and distribution utility in Texas), and Sempra Infrastructure (LNG export, Mexican gas distribution, and cross-border energy transport). Revenue comes primarily from regulated rate recovery, with Infrastructure earnings derived from long-term contracted LNG capacity and pipeline transport. Mexico contributed 11.4% of total revenue in FY2025.

But the 10-K reveals a structural story the headline numbers obscure. Approximately $1.1 billion in non-cash charges — a $703 million held-for-sale tax reclassification, $445 million in FX and inflation losses on Mexican positions, and $241 million in interest rate swap mark-to-market losses — compressed GAAP EPS from an estimated $4.59 (adjusted) to $2.75 (reported). That creates the widest GAAP-to-adjusted earnings gap among major US utilities: 73%. At $88 per share, Sempra trades at either 32x GAAP earnings or roughly 19x adjusted earnings. The filing tells you why both numbers are real — and why a single asset sale determines which one becomes permanent.

The 73% Illusion — Two P/E Ratios, One Company

Sempra's GAAP P/E ratio of 32.1x puts it among the most expensive names in the US utility sector. But strip out $1.1 billion in non-recurring charges and the adjusted P/E falls to approximately 19.2x — squarely in line with Duke Energy (18.5x) and well below NextEra (24.2x). The 73% gap between GAAP and adjusted earnings is the widest among major US utilities, and it produces two entirely contradictory conclusions from the same filing.

The charges break down into three categories: a $703 million tax charge triggered by reclassifying the SI Partners and Ecogas disposal groups as held for sale, approximately $445 million in net FX and inflation losses on Mexican infrastructure positions, and $241 million in interest rate swap mark-to-market losses on PA LNG Phase 1. Management's 8-K earnings reconciliation shows the divergence was concentrated in H2 2025: Q3 adjusted EPS was $1.11 versus GAAP $0.12 — an 825% premium. Q4 adjusted was $1.28 versus GAAP $0.54 — a 137% gap.

The same duality extends to the dividend. On a GAAP basis, Sempra's 94% payout ratio looks unsustainable — the company paid out $1,683 million in dividends against $1,796 million in net income. On an adjusted basis, the payout is roughly 56% of an estimated $3 billion in underlying earnings, well within the 50-65% range typical for diversified utilities. Same company, same dividend, two sustainability conclusions.

The critical question is which lens is correct. The $703 million held-for-sale tax charge and the $241 million swap mark-to-market are genuinely one-time — both were triggered by the SI Partners divestiture and will not recur. The ~$445 million in FX/inflation losses will shrink as Sempra exits Mexico. But the $460 million-plus in regulatory disallowances at SDG&E is a different animal entirely, and whether it repeats in the next GRC cycle determines whether "adjusted" earnings are a legitimate starting point or a permanent fiction.

WM included as a capital-intensive, regulated-rate operator with defensive revenue characteristics. Direct utility comparisons use NEE, DUK, and CEG.

SRE's 6.1x EV/EBITDA stands out as the lowest in the peer group by nearly five full turns, but this figure is misleading. Sempra Texas Utilities is accounted for via the equity method — Oncor's revenues and operating costs never flow through the consolidated income statement, but equity earnings contribute to EBITDA. This inflates the denominator relative to enterprise value. Investors should not use EV/EBITDA for cross-peer comparison without adjusting for this structural accounting difference. Sempra's 73% gap between GAAP earnings ($2.75 EPS) and adjusted earnings (~$4.59 EPS) is the widest among major US utilities, producing two contradictory P/E ratios — 32x and 19x — from the same 10-K filing.

The $18B Balance Sheet Phase Transition

The KKR SI Partners deal is universally reported as "$10 billion in cash proceeds." The 10-K tells a larger story. SI Partners carries $7,925 million in its own debt — $3,610 million without make-whole provisions and $4,315 million with make-whole provisions — all classified within the held-for-sale disposal group. Upon deal close, this debt deconsolidates entirely from Sempra's balance sheet. The combined impact: $10 billion in cash inflow plus $7.9 billion in debt removal equals approximately $18 billion in balance sheet relief.

This is not incremental deleveraging — it is a discontinuous regime change. Every standard balance sheet metric flips simultaneously at close: leverage, payout sustainability, credit outlook, and P/E lens all transition in a single quarter, creating a valuation discontinuity that standard utility analysis frameworks are not designed to handle.

Phase 2 net debt/EBITDA uses an estimated ~$14,300M EBITDA excluding Infrastructure segment contribution. This denominator is not sourced from a specific filing disclosure and should be treated as directional.

The deal's binary nature creates concentrated timing risk. Sempra has $3,254 million in long-term debt maturing in 2026-2027 ($1,804 million in 2026 plus $1,450 million in 2027). Simultaneously, $415 million in ATM equity forward sale agreements remain unsettled — 2,909,274 shares at $92.15 per share due by June 30, 2026, and 2,087,317 shares at $70.66 per share. The June 2026 settlement deadline intersects precisely with the expected KKR close window of Q2-Q3 2026. If the deal closes on schedule, the ATM settlement is a footnote. If the deal delays, $415 million settles at the point of maximum capital need.

"S&P's January 2025 actions that revised Sempra's outlook to negative from stable and downgraded SoCalGas' issuer credit rating, and Moody's March 2025 action that revised Sempra's outlook to negative from stable."

The credit trajectory underscores the stakes. S&P revised Sempra's outlook to negative in January 2025 and downgraded SoCalGas outright. Moody's followed with a negative outlook revision in March 2025. S&P then lowered Oncor's outlook in July 2025. Three negative rating actions across two agencies and three entities within six months signal systemic concern across the Sempra credit complex. Post-close, the balance sheet reset should stabilize outlooks within three to six months. Post-delay, the path leads toward outright downgrades during the most capital-intensive phase of the $65 billion plan.

A further complication sits buried in the risk factors. Blackstone holds contingently redeemable equity in PA LNG Phase 2 with exit rights triggered by construction delays or operational underperformance.

"Blackstone's equity interest... is classified as contingently redeemable because Blackstone has certain redemption and exit rights that are outside the control of SI Partners. These rights include, among others, the ability to require redemption upon (i) failure to complete construction by a specified date; (ii) sustained priority distributions to Blackstone above specified thresholds... as a result of extended periods of operational underperformance."

If triggered, SI Partners must redeem Blackstone's stake — a potential multi-billion-dollar cash call reflected in no balance sheet liability, contingency accrual, or off-balance-sheet schedule. This hidden put option compounds KKR timing risk: if PA LNG Phase 2 construction delays coincide with the post-divestiture period, Sempra's retained 25% SI Partners interest faces a capital call when the company can least afford one. Sempra's KKR deal is an $18 billion balance sheet event — $10 billion in cash plus $7.9 billion in SI Partners debt deconsolidation — that will cut the company's net debt-to-EBITDA from 2.0x to approximately 1.1x in a single transaction.

The California Regulatory Crack — Zero to $676M in Three Years

The CPUC's GRC Track 2 Final Decision retroactively rejected six years of cost recovery at SDG&E, covering 2019 through 2024. The gross charge: $651 million. After tax: $464 million. The result: SDG&E's earnings fell $328 million, a 37% decline from the prior year's approximately $886 million to roughly $558 million.

"The decrease in SDG&E's earnings of $328 million (37%) was primarily due to: $432 million charge in 2025 from regulatory disallowances related to 2019 through 2024 associated with the 2024 GRC Track 2 FD."

Viewed in isolation, one regulatory charge is noise. But the trajectory tells a different story. In FY2023, CPUC disallowances at Sempra's California utilities were zero. In FY2024, a Track 5 adder refund cost $89 million. In FY2025, the GRC Track 2 plus a COVID-related disallowance totaled $676 million. That is a 7.6x year-over-year escalation, and it transforms the question from "was this a one-time charge?" to "is this a structural pattern?"

The GRC Track 2 FD is particularly alarming because of its retroactive scope. The CPUC did not disallow a single year of spending — it looked back across six years and rejected cost recovery decisions that SDG&E had been booking as earned revenue. If this pattern continues at even half the FY2025 rate in future GRC cycles, it structurally reduces California utility returns below authorized levels, breaking the fundamental compact where regulators allow cost recovery for prudent spending. Absent the disallowance, SDG&E would have grown earnings approximately 15% — meaning the regulatory drag didn't just slow growth, it reversed it.

Compounding the regulatory erosion is the Palisades wildfire overhang. Under California's inverse condemnation doctrine, utilities face strict liability for fire damage regardless of negligence.

"The Wildfire Legislation did not change the doctrine of inverse condemnation, which imposes strict liability for certain types of claims (meaning that liability is irrespective of negligence or intent) on a utility whose equipment is determined to be a cause of a fire."

SoCalGas is among 19 defendants in a consolidated legal action related to the January 2025 Palisades fire. The CPUC has historically denied utility recovery of wildfire costs from ratepayers, breaking the traditional assumption that regulated utilities can pass through catastrophic losses.

The dual credit downgrades — S&P revising Sempra's outlook to negative and downgrading SoCalGas, Moody's following with a negative Sempra parent outlook — confirm that rating agencies see California as the credit stress point. California went from Sempra's foundation to its vulnerability in the span of three regulatory cycles. Sempra's California regulatory disallowances have escalated from zero in FY2023 to $89 million in FY2024 to $676 million in FY2025, erasing 37% of SDG&E's prior-year earnings through a single CPUC action covering six years of retroactively rejected costs.

Three Segments, Three Trajectories — The Sum-of-Parts Imperative

Any consolidated metric for Sempra — the 32x P/E, the -36% earnings decline, the -$6 billion in free cash flow — aggregates three businesses moving in opposite directions. Only a segment-by-segment analysis reveals whether the company is growing, shrinking, or both. The answer is all three simultaneously.

Sempra California earned $1,428 million. Within that, SDG&E fell 37% on the GRC Track 2 disallowance while SoCalGas grew on rate base expansion. Sempra Texas Utilities earned $861 million, up $80 million (approximately 10%) on Oncor customer growth, the Utility Transmission Mechanism, and new infrastructure investment. Sempra Infrastructure lost $160 million — but that loss was entirely an artifact of $1.07 billion in non-cash charges: the $703 million held-for-sale tax reclassification, $445 million in FX/inflation charges, and $241 million in swap losses. Underlying Infrastructure earnings were approximately $900 million, operationally healthy.

The growth engine is Oncor. The 10-K discloses plans to introduce 765-kV transmission to the ERCOT market — unprecedented in Texas — driven by data center demand that requires, in the filing's words, a "rapid and significant increase" in grid infrastructure.

"Oncor's capital expenditures plan contemplates the large-scale buildout of new transmission lines, including the planned introduction of the 765-kV voltage class to the ERCOT market through ERCOT's 765-kV Strategic Transmission Expansion Plan. Data center development in Oncor's service territory is expected to drive increasing electric demand and require a rapid and significant increase in Oncor's grid infrastructure."

The UTM mechanism allows Oncor to recover capital costs in real time without multi-year rate case lag, making Texas the only segment where capex translates directly to earnings growth. FY2025 Oncor equity earnings grew 10%, and the 765-kV plan positions the subsidiary for a potential doubling of its capital program within three to five years.

Meanwhile, Sempra is strategically exiting Mexico. The Ecogas sale and SI Partners partial divestiture together reduce Mexico exposure, which accounted for 11.4% of FY2025 revenue. The filing's escalated language — explicitly naming "expropriation or nationalization" as a risk — reflects 2024 Constitutional reforms that converted CFE and PEMEX to public state-owned enterprises and 2025 Energy Laws increasing government control over private operators.

"In 2024, the Mexican government adopted changes to the Mexican Constitution to reinforce state control over strategic sectors by granting a central role to government entities like the CFE and PEMEX, which have been converted from for-profit state-owned enterprises into public state-owned enterprises."

Sempra's $65 billion five-year capital plan directs 95%+ to regulated US utilities, marking a strategic pivot from international diversification to domestic regulated growth. But the plan requires a 23% capex acceleration from the FY2025 run rate ($10.6 billion annually needs to average $13 billion). Whether Oncor's Texas growth can outrun California's regulatory drag is the central question. At ~19x adjusted earnings, the market implies it can — pricing in approximately 7% EPS CAGR for five years to reach roughly $6.40 in adjusted EPS by 2030.

The math requires near-perfect execution with zero regulatory drag — yet the three-year GAAP EPS trajectory ($4.79 in FY2023, $4.42 in FY2024, $2.75 in FY2025) and the $0→$89M→$676M disallowance pattern together represent the key execution risk to that assumption. Sempra's three segments posted opposite FY2025 trajectories — California earned $1.4 billion (declining 37% at SDG&E), Texas earned $861 million (growing 10% at Oncor), and Infrastructure lost $160 million (swinging from a $911 million profit on $1.07 billion in non-cash charges).

What to Watch

At $88 per share, Sempra trades at approximately 19x adjusted earnings, implying roughly 7% annual EPS growth sustained for five years. The filing supports this through Oncor's data center demand catalyst, the UTM real-time recovery mechanism, and a $65 billion capital plan directing 95%+ to regulated US utilities. But it complicates it with a California regulatory framework that erased 37% of SDG&E's earnings in a single action, wildfire exposure that no reserve can yet quantify, and a binary deal whose close or delay flips every metric simultaneously.

At ~19x adjusted earnings, the market prices in the bull case: charges are one-time, the KKR deal closes by Q3 2026, Oncor's growth accelerates, and regulatory friction subsides. At 32x GAAP, the bears see declining earnings, negative FCF, dual credit downgrades, and an unquantifiable wildfire liability. Both sides have evidence from the same filing.

Five metrics to track in the Q1 2026 10-Q and beyond:

1. KKR close confirmation: If Q1 2026 footnotes move SI Partners debt from "held for sale" to "disposed," the $18B reset is complete. If still "held for sale" as of Q2 2026, delay risk is real. Any softening from "second or third quarter of 2026" triggers Phase 3 scenario analysis.

2. SDG&E quarterly earnings: If Q1 SDG&E earnings exceed $200 million (annualized $800M+), the regulatory charge was one-time and underlying growth has resumed. Below $170 million with any new disallowance signals structural pattern.

3. Oncor equity earnings: Target is $210M+ per quarter (annualized $840M+ baseline). Below $190M in any quarter suggests data center demand is slower to materialize than the filing's "rapid and significant" language implies.

4. Credit rating actions: Post-close, expect S&P and Moody's to revise outlooks from negative to stable within three to six months. If a downgrade occurs before close, borrowing costs rise during peak capital deployment.

5. Palisades wildfire reserve: Any reserve disclosure or settlement quantification above $2 billion converts this from a discount-rate risk to a balance-sheet risk and fundamentally changes the SRE thesis.

Frequently Asked Questions

What is Sempra's actual P/E ratio — 32x or 19x?

Both numbers are real. Sempra's GAAP P/E is 32.1x based on reported EPS of $2.75. However, FY2025 included approximately $1.1B in non-recurring charges: a $703M held-for-sale tax reclassification, $445M in FX/inflation swings, and $241M in interest rate swap losses. Stripping these out, adjusted EPS is estimated at ~$4.59, producing an adjusted P/E of approximately 19.2x at $88/share. The 73% gap is the widest among major US utilities. The critical question is whether adjustments are truly one-time — particularly the $460M+ regulatory disallowance, which shows a three-year escalating pattern.

How does the KKR deal affect Sempra's balance sheet?

The KKR SI Partners sale is far larger than the $10B headline. SI Partners carries $7,925M in its own debt ($3,610M without make-whole provisions and $4,315M with), all of which deconsolidates upon closing. Combined impact: $10B cash + $7.9B debt removal = approximately $18B balance sheet event. Post-close, total debt drops from $33.1B to ~$25.2B and net debt drops to ~$15.2B, reducing net debt/EBITDA from 2.0x to an estimated 1.1x. The deal is expected to close Q2-Q3 2026.

Is Sempra's dividend safe?

On a GAAP basis, Sempra's payout ratio hit 94% — dangerously high by any standard. On an adjusted basis, payout is approximately 56% ($1,683M dividends / ~$3,000M adjusted NI), well within sustainable territory. The dividend was raised 4% to $2.58/share despite negative FCF of -$6.0B, funded entirely by debt issuance. Sustainability depends on: KKR proceeds arriving on schedule, charges not repeating, and OCF growth materializing within 2-3 years. If the deal closes, the dividend appears sustainable. If it delays, the 94% GAAP payout persists in a leveraged, FCF-negative environment.

What is Sempra's exposure to Palisades wildfire litigation?

SoCalGas is among 19 defendants named in a consolidated legal action in Los Angeles County Superior Court related to the January 2025 Palisades fire. Under California's inverse condemnation doctrine, liability is strict — meaning SoCalGas could be responsible for damages even without negligence. The CPUC has historically denied utility recovery of wildfire costs, breaking the assumption that regulated utilities can pass through catastrophic losses. No reserve estimate is booked. The $18B Wildfire Fund provides a systemic backstop but does not cap individual company liability.

Why did Sempra's net income drop 36%?

The decline from ~$2.8B to $1.8B was driven by three non-recurring items concentrated in the Infrastructure segment: $703M held-for-sale tax charge, ~$445M FX/inflation loss, and $241M swap mark-to-market swing. SDG&E also took a $432M regulatory disallowance. Absent these charges, underlying earnings were approximately flat year-over-year, and SDG&E alone would have grown earnings ~15%.

What is the $0→$89M→$676M regulatory disallowance pattern?

CPUC disallowances escalated from zero in FY2023, to $89M in FY2024 (Track 5 adder refund), to $676M in FY2025 ($651M GRC Track 2 + $25M COVID). The FY2025 charge retroactively rejected six years of spending (2019-2024), erasing 37% of SDG&E's prior-year earnings in a single action. The different types of disallowances — Track 5 versus GRC — stem from different proceedings, so the trajectory is suggestive rather than deterministic. However, if disallowances continue at even half the FY2025 rate, they structurally reduce California utility returns below authorized levels.

How does Oncor's 765-kV expansion plan affect Sempra's growth?

Sempra's indirect 80.3% ownership of Oncor positions it for a potential capex step-change. The 10-K discloses Oncor plans to introduce 765-kV transmission to ERCOT — unprecedented in Texas — driven by data center development expected to drive "rapid and significant" grid expansion. FY2025 Oncor equity earnings grew 10% to $861M. The UTM mechanism allows real-time capital recovery without multi-year rate case lag, making Oncor Sempra's primary organic growth engine and the counterweight to California regulatory erosion.

What is the Blackstone put option on PA LNG Phase 2?

Blackstone holds contingently redeemable equity in PA LNG Phase 2 with exit rights triggered by construction delays or operational underperformance. If triggered, SI Partners must redeem Blackstone's stake — potentially requiring billions in cash that appears in no balance sheet liability, contingency accrual, or off-balance-sheet schedule. This creates a hidden contingent obligation that compounds KKR timing risk: if Phase 2 delays coincide with the post-divestiture period, Sempra's retained 25% SI Partners interest faces a capital call at the worst possible moment.

How does Sempra compare to peer utilities?

Among peers (NEE, DUK, CEG, WM), Sempra has sector-leading ROIC at 11.5% but the lowest ROE at 5.7% (distorted by non-recurring charges). Adjusted P/E of ~19.2x aligns with DUK (18.5x) and is below NEE (24.2x). Capex/depreciation at 4.14x is an extreme outlier — DUK is 1.82x, CEG and WM are 1.13x. SRE is the only major utility with a capital recycling model, three-segment divergence, and California wildfire strict liability exposure. It is also the only peer with dual negative credit outlooks across multiple entities.

What would make Sempra's investment thesis break?

Four specific events: (1) KKR deal slips past Q3 2026, triggering $3.3B in near-term maturities and $415M ATM equity settlement without offsetting cash; (2) CPUC initiates new cost disallowance exceeding $100M in 2026, confirming the escalation is structural; (3) S&P or Moody's downgrades Sempra's parent credit rating (not just outlook), increasing borrowing costs during peak capex; (4) Palisades wildfire litigation produces a quantified exposure exceeding $2B, converting a discount-rate risk into a balance-sheet risk.

Why is Sempra's EV/EBITDA so much lower than peers?

Sempra's 6.1x EV/EBITDA is far below peers (DUK 10.9x, WM 15.6x, NEE 17.1x, CEG 20.4x). This anomaly reflects segment reporting methodology: Sempra Texas Utilities (Oncor) uses equity method accounting, meaning Oncor's revenues and operating costs don't flow through the consolidated income statement, but equity earnings contribute to EBITDA. This inflates EBITDA relative to enterprise value, producing an artificially low multiple. Investors should not use this ratio for cross-peer comparison without adjusting for Sempra's unique segment structure.

What happens to Sempra's Mexico operations?

Sempra is strategically exiting Mexico. The Ecogas sale and SI Partners divestiture together reduce exposure from 11.4% of revenue. The filing cites three escalating motivations: 2024 Constitutional reforms converting CFE and PEMEX to public state-owned enterprises, 2025 Energy Laws increasing government control over private operators, and judicial reform replacing appointed judges with elected ones that impairs contract enforcement. The filing explicitly names "expropriation or nationalization" as a risk — language that has escalated from prior years.

Methodology

Data Sources

This analysis uses three data sources, each tagged throughout the article:

• MetricDuck Pipeline Data [PIPELINE]: Standardized financial metrics derived from Sempra's SEC XBRL filings, normalized across companies. FY2025 period ending December 31, 2025. Peer data (NEE, DUK, CEG, WM) from the same pipeline for FY2025.
• Filing Text [FILING]: Direct text from Sempra's 10-K (filed February 26, 2026, accession number 0001032208-26-000010). Sections cited include MD&A Results of Operations, Risk Factors, Debt footnotes, Commitments and Contingencies, and Segment footnotes. All quotes are verbatim.
• Derived Calculations [DERIVED]: Analyst calculations using pipeline and filing inputs. Key derivations: adjusted EPS ($4.59 estimated from quarterly 8-K data, not audited), SI Partners debt deconsolidation ($3,610M + $4,315M = $7,925M from debt footnote), post-KKR net debt ($15.2B = $25,220M total debt - $9,990M proceeds - $14M cash), regulatory disallowance trajectory ($0 → $89M → $676M from MDA cross-year comparison), and implied EPS CAGR (~7% back-solve from adjusted P/E of ~19.2x).

Limitations

• Adjusted EPS is estimated, not audited. Full-year adjusted EPS of $4.59 is derived from quarterly 8-K adjusted data. Sempra does not publish a full-year audited adjusted EPS figure. The Q1-Q2 estimate ($700M average per quarter) is inferred.
• Post-KKR EBITDA is an estimate. The Phase 2 net debt/EBITDA of ~1.1x assumes Infrastructure segment EBITDA of ~$2.0B is removed post-sale. This denominator is not sourced from any specific filing disclosure and should be treated as directional, not precise.
• Wildfire exposure is unquantifiable. The analysis treats wildfire risk as a discount-rate factor rather than a balance-sheet risk because no reserve estimate exists. If a reserve is booked in a future quarter, this assessment requires revision.
• Regulatory disallowance trajectory compares different proceeding types. The $0→$89M→$676M escalation compares a Track 5 adder refund (FY2024) with a GRC Track 2 Final Decision (FY2025). They stem from different regulatory proceedings and may not represent a single escalating trend. The pattern is suggestive, not deterministic.
• Peer comparison caveats. NEE's pipeline data shows capex as null and FCF = OCF ($12.5B), likely reflecting reporting methodology differences. SRE's 6.1x EV/EBITDA is not directly comparable to peers due to equity method distortion at Texas Utilities. WM is included as a capital-intensive, regulated-rate operator; it is not a direct utility peer.
• Stock price reference. Pipeline data reflects the end-of-period price (December 31, 2025). Valuation calculations in the body use ~$88 as the approximate market price at time of analysis.

Disclaimer:

This analysis is for informational purposes only and does not constitute investment advice. The author does not hold positions in SRE, NEE, DUK, CEG, or WM. Past performance and current metrics do not guarantee future results. All data is derived from public SEC filings and may contain errors or omissions from the automated extraction process.