Sempra (SRE) Q1 2026: Net Profit Surges 25% Despite Revenue Dip
Oncor's record equity earnings, a 32% collapse in gas procurement costs, and a $51M interest expense reduction converge to lift net margins to 31.5% — even as headline revenues decline 3.9% year-over-year.
Source: Q1 2026 Quarterly Report (10-Q) — Filed with the SEC | Consolidated Financial Statements | Unit: $ millions
Sempra (NYSE: SRE) reported first-quarter 2026 net income of $1.150 billion, a 25.1% year-over-year advance, despite total revenues contracting 3.9% to $3.655 billion — a divergence that reflects the company's structural pivot away from volume-sensitive gas distribution and toward a regulated, spread-driven earnings model. Diluted EPS reached $1.58, up 13.7%, with the gap between net income growth and per-share growth attributable to Sempra Infrastructure's minority partners claiming a materially larger share of consolidated profits this quarter. The most dramatic balance sheet development was cash expanding from $29 million to $794 million in a single quarter — a 26-fold increase — driven by $3.345 billion in new long-term debt issuances as the company stages liquidity ahead of the pending 30% stake sale in SI Partners. With Oncor delivering record equity-method earnings of $367 million, up 12.9%, and SDG&E's California electric revenues rising 15.6% on new regulatory rate adjustments, the first quarter demonstrated that Sempra's regulated core is capable of meaningful margin expansion independent of natural gas commodity movements.
Balance Sheet
Asset Composition and Key Movements
| Item ($ millions) | Dec 2025 | Mar 2026 | Change | Driver |
|---|---|---|---|---|
| Cash & equivalents | 29 | 794 | +2,638% | New debt issuances; SI Partners sale liquidity staging |
| Net receivables | 1,767 | 1,604 | -9.2% | Post-winter billing cycle normalization |
| Inventories | 561 | 530 | -5.5% | Seasonal natural gas stock drawdown |
| Net PP&E | 49,011 | 49,189 | +0.4% | Ongoing rate base additions; continued CapEx inflows |
| Oncor Holdings equity investment | 17,472 | 18,243 | +4.4% | Q1 equity earnings + Texas SRP infrastructure outlays |
| Assets held for sale | 31,024 | 31,865 | +2.7% | SI Partners 30% stake transaction staging |
| Total assets | 110,878 | 113,518 | +2.4% |
The 26-fold cash surge is the most visually striking balance sheet change of the quarter, but the mechanism is straightforward: Sempra raised $3.345 billion in new long-term notes and accumulated the proceeds as a liquidity buffer ahead of the SI Partners transaction mechanics. Whether those proceeds ultimately retire commercial paper, reduce revolving credit utilization, or are held in reserve until deal closing is the immediate capital allocation question management has not yet addressed in granular detail.
Oncor's equity investment growing $771 million in a single quarter — to $18.243 billion — reflects the pace of Texas's grid modernization cycle. The Public Utility Commission of Texas approved Oncor's System Resiliency Plan in 2024, authorizing multi-year transmission and distribution spending that flows directly into Oncor's regulated rate base. Sempra, as a 19.75% equity investor via Oncor Holdings, recognizes its proportionate share of that expanded earnings base through the equity method, with returns appearing in the income statement without the associated debt consolidating onto Sempra's balance sheet.
The $31.865 billion classified as assets held for sale — 28.1% of total assets — is the structural overhang that will define Sempra's narrative through the balance of 2026. The classification encompasses Sempra Infrastructure's LNG complex: Cameron LNG (operational, Louisiana), Port Arthur LNG (development-stage, Texas), and ECA LNG (Mexico). A completed 30% stake sale would reposition Sempra as a nearly pure-play regulated utility holding company, with residual infrastructure exposure through the retained majority stake. If the transaction closes as structured, the associated $12.2 billion in liabilities currently held alongside the assets would also exit the consolidated balance sheet, producing a substantial improvement in reported net leverage.
Debt Structure: Financial vs. Operating Liabilities
Short-term borrowings declined to $3.708 billion from $4.166 billion at December 2025 as the company shifted its funding mix toward longer-dated instruments. Long-term debt and finance leases rose 6.4% to $30.847 billion, and current maturities of long-term debt stood at $1.878 billion. In aggregate, financial liabilities approached $36.4 billion, up approximately 4.6% quarter-over-quarter — a direct consequence of the $3.345 billion in new notes issued.
Interest expense, counterintuitively, fell 11.8% year-over-year to $382 million. Two mechanics explain the discrepancy between higher debt balances and lower servicing cost. First, Sempra terminated a series of interest rate swaps during Q1, generating $96 million in net cash receipts that reduced gross interest expense in the reported period. Second, maturing instruments were refinanced at lower effective rates under the current term structure, producing a lasting reduction in coupon cost for the duration of those instruments. Both factors benefited Q1 simultaneously; the swap settlement gain is non-recurring, but the refinancing tailwind will persist.
Operating liabilities normalized from peak winter levels. Accounts payable fell 22.4% to $1.134 billion from $1.461 billion as SoCalGas completed settlement of wholesale gas purchase obligations accumulated during the heating season. Accrued dividends and interest stood at $920 million, and other current liabilities at $858 million — both broadly stable quarter-over-quarter.
Capital Structure
Paid-in capital on common equity stood at $14.731 billion, while retained earnings of $17.699 billion already exceed paid-in capital by more than 20%, indicating cumulative profitability well beyond initial equity deployment and providing substantial headroom for sustained dividend growth. The board declared a quarterly dividend of $0.66 per share, up 1.5% from $0.65 a year earlier, totaling approximately $430 million.
The most structurally complex element of Sempra's equity base is the scale of noncontrolling interests: $7.215 billion in standard NCI plus $3.254 billion in redeemable NCI, for approximately $10.4 billion in aggregate minority equity. These balances reflect KKR's and ADIA's participation in Sempra Infrastructure entities. Against total common equity of approximately $32.2 billion, minority equity represents roughly 32% of consolidated equity — a ratio that means a meaningful fraction of each dollar of consolidated earnings accrues to parties other than Sempra's common shareholders. The SI Partners closing would reduce this fraction by buying out or restructuring a portion of the Infrastructure NCI, directly improving the relationship between consolidated net income and per-share economics.
Income Statement
Core Revenue and Profitability Metrics
| Item ($ millions) | Q1 2025 | Q1 2026 | Change |
|---|---|---|---|
| Total revenues | 3,802 | 3,655 | -3.9% |
| — Natural gas | 2,362 | 2,025 | -14.3% |
| — Electric | 1,059 | 1,224 | +15.6% |
| — Energy infrastructure | 381 | 406 | +6.6% |
| Operating income (est.) | 959 | 1,090 | +13.7% |
| Operating margin | 25.2% | 29.8% | +4.6pp |
| Equity earnings (Oncor et al.) | 325 | 367 | +12.9% |
| Net income | 919 | 1,150 | +25.1% |
| Net margin | 24.2% | 31.5% | +7.3pp |
| Diluted EPS ($) | 1.39 | 1.58 | +13.7% |
Natural gas revenue declining 14.3% to $2.025 billion is mechanically benign for earnings. SoCalGas and SDG&E are rate-of-return regulated gas utilities that pass wholesale commodity costs through to customers on a near-dollar-for-dollar basis under California's existing tariff framework. When SoCalGas's gas procurement costs dropped 32.0% to $335 million, retail billing declined proportionally, but the regulated margin — the difference between allowed revenues and procurement costs — was largely preserved. The revenue line contracted; the earnings line did not.
The genuine revenue growth story was electric: SDG&E's revenues rose 15.6% to $1.224 billion, driven by the TO6 transmission formula rate that took effect June 1, 2025, and by rate case true-ups capturing prior-period authorized revenues that had not yet been billed. This is structurally significant because electric revenues at SDG&E are expected to continue growing as the utility executes its grid hardening and EV infrastructure programs, both of which are being added to rate base under CPUC-approved capital plans. Energy infrastructure revenues grew a modest 6.6% to $406 million, consistent with long-term LNG capacity contract payments that are largely fixed by volume regardless of spot commodity prices.
Oncor's $367 million equity contribution was the single largest individual year-over-year earnings driver, adding $42 million relative to Q1 2025. The equity method treatment is structurally advantageous for Sempra: it captures Texas earnings growth without requiring Oncor's approximately $50-plus billion in regulated assets and associated long-term debt to appear on Sempra's consolidated balance sheet, keeping Sempra's reported leverage metrics cleaner than economic substance would otherwise imply.
Cost Structure: Fixed and Variable Decomposition
Variable costs collapsed during Q1. Gas procurement fell 32.0% to $335 million, tracking the pass-through reduction in customer gas revenues. Purchased power and fuel rose 55.8% to $81 million, reflecting SDG&E's higher renewable energy contract costs and the timing of energy procurement settlements. Energy business cost of sales fell 36.1% to $76 million. In aggregate, variable costs totaled $492 million, down 25.9% from $664 million a year earlier — a $172 million reduction that flowed almost entirely to margin.
Fixed operating costs also declined, though more moderately. Operations and maintenance expense fell 7.5% to $1.242 billion, the single largest absolute improvement among cost categories. The reduction is largely attributable to SDG&E's wildfire-response and vegetation management costs normalizing from an exceptionally elevated Q1 2025 baseline, when the utility incurred above-average emergency response expenditures. Depreciation and amortization declined 3.0% to $621 million, and franchise fees and property taxes rose 7.1% to $210 million as higher assessed rate base values flowed through local tax calculations. Total fixed costs stood at $2.073 billion, down 4.9% from $2.179 billion.
With revenues declining 3.9% but total costs falling more than 8%, operating leverage worked decisively in Sempra's favor. The 460-basis-point improvement in operating margin to 29.8% is exceptional by regulated utility standards, where margin expansion of 50–100 basis points in a given quarter is more typical. The confluence of three simultaneous cost tailwinds — gas procurement pass-through compression, O&M normalization, and interest expense reduction — made Q1 2026 an unusually favorable quarter; not all three will recur at comparable magnitude in subsequent periods.
Cash Flow
| Item ($ millions) | Q1 2025 | Q1 2026 | Change |
|---|---|---|---|
| Operating cash flow | 1,482 | 1,809 | +327 (+22.1%) |
| Investing cash flow | -2,785 | -3,311 | -526 |
| Financing cash flow | 1,476 | 1,912 | +436 |
| Ending cash (incl. restricted) | 1,762 | 3,959 | +2,197 |
Operating cash flow improved 22.1% to $1.809 billion, with two principal drivers beyond the net income increase itself. Income taxes paid dropped from approximately $100 million in Q1 2025 to $20 million in Q1 2026 — an $80 million reduction stemming from the timing of federal estimated tax installments and the recognition of prior-period deferred tax assets. Additionally, working capital moved favorably: winter gas receivables at SoCalGas converted to cash faster than the prior year as customers paid down elevated winter heating bills, while accounts payable for gas purchases settled more quickly than a year ago. Both effects are timing-driven and should partially reverse in subsequent quarters rather than represent a permanent step-up in operating cash generation.
Capital expenditure totaled $2.461 billion in Q1 2026, up 5.4% from $2.336 billion a year earlier — confirming that Sempra is accelerating its investment program rather than moderating it ahead of the SI Partners proceeds. The spending divides roughly across California utilities (SDG&E electric grid hardening and SoCalGas system modernization), equity capital injections into Oncor Holdings to fund Texas SRP commitments, and Sempra Infrastructure LNG construction within the held-for-sale perimeter. The latter category is particularly capital-intensive as Port Arthur LNG moves through development phases, and costs here are accounted for within the assets-held-for-sale classification rather than consolidated CapEx.
Free cash flow — operating cash flow minus capital expenditure — was negative $652 million, an improvement from negative $854 million in Q1 2025. Negative FCF is the expected condition for a large regulated utility executing a multi-year capital investment cycle: the mathematical reality is that a company deploying $2.5 billion in CapEx per quarter cannot generate sufficient operating cash flow to be self-funding at current investment rates. The deficit is financed through capital markets access. Net new debt of $2.672 billion ($3.345 billion raised less $673 million repaid) covered CapEx, dividends of approximately $430 million, and the additional liquidity buffer management is building on the balance sheet. Ending unrestricted and restricted cash reached $3.959 billion, roughly 2.2 times the prior-year level, providing a substantial cushion against any interim financing disruption.
Key Findings
SI Partners Monetization Is the Dominant Variable for 2026
The $31.865 billion in assets classified as held for sale — accompanied by $12.2 billion in associated liabilities — accounts for 28% of Sempra's total asset base and represents the central strategic question facing the company. Management is in the contract review stage for the 30% SI Partners stake, with KKR and ADIA as the most likely counterparties given their existing minority positions in Sempra Infrastructure entities. A successful close would deliver proceeds sufficient to substantially reduce parent-level debt, fund several years of California and Texas rate base reinvestment without additional equity issuance, and simplify the consolidated balance sheet by eliminating a portion of the $10.4 billion in minority equity. The risks are material: LNG development timelines at Port Arthur LNG remain subject to permitting and construction variability, energy market conditions affect infrastructure asset valuations, and financial sponsor appetite is sensitive to prevailing interest rates and credit market conditions. Each quarter the assets remain classified as held-for-sale extends the accounting complexity and dilutes the strategic clarity that investors in a pure-play regulated utility would otherwise receive.
NCI Profit Leakage Has Accelerated Sharply
Noncontrolling interest-attributable net income jumped to $107 million in Q1 2026 from just $2 million in Q1 2025 — an increase of more than 50-fold in a single year. This reflects KKR's and ADIA's minority participation in Sempra Infrastructure's operating profits becoming economically material as LNG projects transition from construction to operations phase and begin generating distributable cash. The direct consequence for common shareholders is that Sempra's 25.1% consolidated net income growth translates into only 13.7% diluted EPS growth — a 1,140-basis-point gap between the two metrics that will persist or widen until SI Partners closes and the associated NCI is restructured. Investors evaluating Sempra on net income alone will overstate the earnings benefit accruing to common equity.
Series C Preferred Redemption Removes a Capital Structure Layer
Sempra redeemed its 4.875% Series C cumulative preferred stock in October 2025, eliminating $11 million in annual preferred dividends. In isolation, this is a modest improvement: $11 million is less than 1% of quarterly net income. The significance is structural rather than financial — Sempra has removed an intermediate claim on earnings senior to common equity, simplifying the capital structure and ensuring that additional earnings growth flows entirely to common shareholders without a preferred leakage layer. Preferred dividend payments appearing in prior-year comparative figures now read as zero, providing a clean basis for EPS comparison going forward.
California Wildfire Season Represents Unquantified Seasonal Risk
SDG&E's $240 million balance in the California Wildfire Fund established under AB 1054 provides a first-loss buffer against catastrophic fire liability, but the fund is finite and has not been stress-tested against a multi-billion-dollar loss scenario in the Q1 disclosure. The normalization of SDG&E's O&M costs in Q1 — which contributed meaningfully to the 460-basis-point margin improvement — reflects a relatively quiet winter fire season and the absence of the elevated emergency response costs that characterized Q1 2025. Q2 and Q3 represent peak California fire season, and any high-severity event attributable to SDG&E infrastructure could introduce headline litigation risk and immediate reserve requirement increases, even if ultimate financial exposure is partially mitigated by the AB 1054 framework and SDG&E's own insurance layers. The geographic concentration of SDG&E's service territory in San Diego County, which encompasses areas with above-average fire risk due to Santa Ana wind patterns, means this is a structural rather than remote contingency.
ATM Program Amendment Preserves Equity Dilution Optionality
Sempra amended its At-the-Market Equity Offering Sales Agreement on May 6, 2026 — five weeks after the Q1 reporting period. The amendment preserves the company's ability to issue new common shares at prevailing market prices without the cost and delay of a marketed equity offering. The ATM has not been heavily utilized thus far, and management has not indicated plans to draw on it in connection with the SI Partners transaction. Its existence functions as a contingency backstop: if SI Partners proceeds are delayed or smaller than anticipated, the ATM provides an alternative funding source. The market would likely receive meaningful ATM utilization negatively, interpreting it as evidence that the infrastructure deal timeline has slipped, and the resulting dilution would compress per-share metrics at a point when the company's earnings story is already partially obscured by NCI leakage.
Outlook
The Q1 2026 result is a showcase of what a well-structured regulated utility holding company can achieve when cyclical tailwinds align simultaneously with structural earnings growth. Four independent levers fired in the same quarter: gas procurement costs fell 32% on commodity pass-through mechanics; SDG&E electric revenues rose 15.6% on new transmission rates; Oncor delivered record equity-method earnings; and interest expense declined on swap terminations and refinancing. The compounding of all four simultaneously produced margin metrics that would be remarkable in any single quarter for a regulated utility. Not all four levers will repeat at equivalent magnitude in Q2 and beyond.
The constructive case for Sempra rests on two regulated earnings streams with multi-year visibility. SDG&E's electric distribution and transmission programs — electric vehicle infrastructure, grid hardening under the Wildfire Mitigation Plan, and load growth from data centers in the region — are progressing through CPUC-approved capital plans with authorized equity returns in the 10–11% range. Oncor's Texas buildout is underpinned by PUCT-approved SRP investment and sustained above-average peak demand growth driven by industrial electrification and technology sector load additions. Together, these two regulated businesses provide a foundation for mid-to-high single-digit earnings growth per share that does not depend on LNG commodity prices or infrastructure deal execution. The interest expense reduction of 11.8% is partially durable: the swap settlement is non-recurring, but the lower coupon cost on refinanced long-term notes is locked in for the life of those instruments.
The bear case concentrates on three risks. First, SI Partners execution: if the 30% stake sale fails to close or is renegotiated at a lower valuation, Sempra holds $31.9 billion in assets generating cash flows more suited to an infrastructure fund than a regulated utility's cost of capital framework. The strategic and accounting complexity of managing that outcome would require a significant narrative reset for investors. Second, FCF remains structurally negative. A company investing $2.5 billion per quarter in CapEx while generating $1.8 billion in operating cash flow is permanently dependent on capital market access to cover the gap. A credit downgrade — triggered by sustained leverage above management's targets or a large uninsured wildfire liability — would raise funding costs across all Sempra subsidiaries, compressing regulated returns at the same time it increases financing costs. Third, California regulatory risk is not static. SDG&E's next general rate case cycle will determine how much of the utility's planned CapEx translates into approved rate base and authorized earnings; any CPUC adjustment to wildfire cost recovery mechanisms, EV infrastructure incentives, or decoupling allowances could trim SDG&E's authorized returns in ways that would not be visible until rate case decisions in 2027 or later.
On balance, Q1 2026 confirms that Sempra's regulated core is generating earnings quality well above industry average — revenue declining while margins expand is not a common outcome for utilities and reflects the company's deliberately narrow focus on two of North America's most capital-attractive regulatory jurisdictions. The second half of 2026 will be determined above all by whether SI Partners closes on schedule: a timely close simplifies the balance sheet, reduces NCI leakage, and provides the capital to accelerate California and Texas rate base investment without equity dilution. A delayed or restructured deal would force a fundamental reassessment of how quickly Sempra can translate its regulated earnings potential into per-share value.
This report is prepared for informational purposes based on Sempra's Q1 2026 quarterly filing (Form 10-Q) with the U.S. Securities and Exchange Commission. It does not constitute investment advice, a solicitation, or a recommendation to buy or sell any security. All financial data is sourced directly from the company's consolidated financial statements. Readers should conduct their own due diligence before making any investment decision.
