Grade: F — Three Red Flags from Regulated Utility Structure, Plus Genuine Oncor Complexity
Framework: Tang Chao screening + Schilit *Financial Shenanigans* + Beneish M-Score
Data: SEC EDGAR 10-K (filed February 26, 2026) + Yahoo Finance
Auditor: Deloitte & Touche LLP — Unqualified opinion
One-line verdict: Sempra triggers three red flags (negative FCF, $29M cash against $35B debt, negative FCF after acquisitions for three years) and two watch items. The structural utility explanation applies but Sempra adds genuine complexity: it is a diversified energy infrastructure company operating SDG&E and SoCalGas (California regulated utilities), Sempra Texas Utilities (Oncor), and Sempra Infrastructure (LNG export, Mexico operations). Net income fell 36% YoY to $1.84B, partly due to a $651M regulatory disallowance. CFFO/NI of 2.49x confirms operating cash flow quality, but FCF of -$6.05B reflects a $10.6B capital program — by far the most capital-intensive profile in this group. The Z-Score of 1.91 (grey zone) is the best among the utilities reviewed, reflecting Sempra's diversified revenue base. The genuine risk is regulatory: the $651M disallowance signals that California regulators are pushing back on cost recovery.
| Metric | Result |
|---|---|
| Red Flags | **3** (FCF, cash/debt, serial acquirer FCF) |
| Watch Items | **2** (CapEx surge, leverage) |
| Checks Completed | **15/18** |
| Beneish M-Score | **N/A** (insufficient data) |
| Altman Z-Score | **1.91** (grey zone — best among reviewed utilities) |
| F-Score Probability | **0.33%** (low manipulation risk) |
| Report Period | FY2025 (ended December 31, 2025) |
Auditor Opinion and Critical Audit Matters
Deloitte & Touche LLP issued an unqualified opinion on both the financial statements and internal controls.
Critical Audit Matters (plural — Sempra had multiple CAMs):
Profitability
From the Consolidated Statements of Operations (in millions):
SDG&E Segment:
| Line Item | 2023 | 2024 | 2025 |
|---|---|---|---|
| Electric Revenues | $4,349 | $4,313 | $4,568 |
| Natural Gas Revenues | $1,248 | $1,028 | $1,129 |
| Total Operating Revenues | $5,597 | $5,341 | $5,697 |
| Operating Income | $1,295 | $1,474 | $886 |
Sempra Consolidated:
| Line Item | 2023 | 2024 | 2025 |
|---|---|---|---|
| Total Revenues | $16,720 | $13,185 | $13,702 |
| Net Income | $3,075 | $2,862 | $1,837 |
| Dividends Per Share | -- | -- | $0.6575/quarter |
Net income dropped 36% from $2.86B to $1.84B. The primary driver is the $651M regulatory disallowance at SDG&E. The 10-K discloses this under "Operating expenses: Regulatory disallowances $651" — a line item that did not exist in prior years. SDG&E's operating income fell from $1.47B to $886M, a 40% decline, almost entirely attributable to this one-time charge.
Revenue appears to have declined from $16.7B in 2023 to $13.7B in 2025, but this reflects changes in Sempra's segment reporting structure (the sale of South American operations and LNG contract changes). On a comparable basis, SDG&E revenues grew 6.7%.
| Margin | 2022 | 2023 | 2024 | 2025 | Trend |
|---|---|---|---|---|---|
| Gross Margin | 36.1% | 39.6% | 46.2% | 46.6% | Improving |
| Net Margin | 14.8% | 18.4% | 21.7% | 13.4% | Crushed by disallowance |
Cash Flow
| Item | 2023 | 2024 | 2025 |
|---|---|---|---|
| Net income | $3,075 | $2,862 | $1,837 |
| D&A | $2,227 | $2,437 | $2,563 |
| Regulatory disallowances | -- | -- | $651 |
| **Operating cash flow** | **$6,218** | **$4,907** | **$4,565** |
| Capital expenditures | $(8,397) | $(8,215) | $(10,612) |
| **Free cash flow** | **$(2,179)** | **$(3,308)** | **$(6,047)** |
CFFO declined 7% despite the regulatory disallowance being a non-cash charge. The $651M disallowance adds back to operating cash flow, meaning underlying CFFO generation weakened. Operating cash flow at $4.57B against CapEx of $10.6B produced free cash flow of negative $6.05B — the most negative FCF among the utilities reviewed.
The five-year capital expenditures plan is detailed in the 10-K by segment, covering "2026 through 2030 capital expenditures" for SDG&E, SoCalGas, Sempra Texas Utilities (Oncor), and Sempra Infrastructure. The 10-K warns that "changes to our capital expenditure plans and their potential impact on rate base or other growth" face risks from "trade and other foreign policy, including the imposition of tariffs."
Balance Sheet
| Item | Amount |
|---|---|
| Cash | $29M |
| Total Debt | $35.0B |
| Total Equity | $38.8B |
| Total Assets | $110.9B |
| Debt/EBITDA | 6.7x |
| Interest Coverage | 2.01x |
Interest coverage of 2.01x is the tightest among the utilities in this group, barely covering debt service costs at 2x EBIT. The $29M cash balance is essentially zero — Sempra operates entirely through credit facilities.
The 18-Point Screening
A. Revenue Quality
| # | Check | Result | Detail |
|---|---|---|---|
| A1 | DSO Change | PASS | DSO 47 days, -8 days YoY. Improving |
| A2 | AR vs Revenue Growth | PASS | AR declined 10.9% vs revenue +3.9% |
| A3 | Revenue vs CFFO | PASS | Revenue +3.9%, CFFO -7.0% |
DSO improving by 8 days and AR declining while revenue grows is a positive signal — Sempra is collecting faster.
B. Expense Quality
| # | Check | Result | Detail |
|---|---|---|---|
| B1 | Inventory vs COGS | PASS | Inventory +0.4% vs COGS +3.1%. Normal |
| B2 | CapEx vs Revenue | WATCH | **CapEx +29.2% vs revenue +3.9%** |
| B3 | SG&A Ratio | N/A | Insufficient data |
| B4 | Gross Margin | PASS | 46.6%, +0.4pp. Stable |
C. Cash Flow Quality
| # | Check | Result | Detail |
|---|---|---|---|
| C1 | CFFO vs Net Income | PASS | CFFO/NI = 2.49. Strongly cash-backed |
| C2 | Free Cash Flow | FAIL | **FCF negative 3 consecutive years (worsening)** |
| C3 | Accruals Ratio | PASS | -2.5%. Negative accruals |
| C4 | Cash vs Debt | FAIL | **$29M cash covers 0% of $35B debt** |
D. Balance Sheet
| # | Check | Result | Detail |
|---|---|---|---|
| D1 | Goodwill + Intangibles | PASS | No goodwill. Clean |
| D2 | Leverage | WATCH | **Debt/EBITDA = 6.7x. Interest coverage only 2.0x** |
| D3 | Soft Asset Growth | PASS | Other assets -2.9% vs revenue +3.9% |
| D4 | Asset Impairment | N/A | No write-off data |
E. Acquisition Risk
| # | Check | Result | Detail |
|---|---|---|---|
| E1 | Serial Acquirer FCF | FAIL | **FCF after acquisitions negative 3 years** |
| E2 | Goodwill Surge | PASS | Goodwill -100% YoY |
F. Manipulation Detection
| # | Check | Result | Detail |
|---|---|---|---|
| F1 | Beneish M-Score | N/A | Insufficient data |
Key Risks from the 10-K
1. The $651M Regulatory Disallowance
This is the most significant item in Sempra's FY2025 financials. SDG&E had $651M in costs that California regulators refused to allow recovery for. This is not a theoretical risk — it happened. The 10-K includes "Regulatory disallowances $651" as a standalone line item in operating expenses. If the CPUC continues to deny cost recovery at this scale, Sempra's California utilities will face persistent earnings pressure.
2. Oncor and Texas Regulatory Risk
Sempra Texas Utilities (Oncor) operates under the Public Utility Commission of Texas. The 10-K discloses that in April 2023, the PUCT "set Oncor's authorized regulatory capital structure ratio at 57.5% debt to 42.5% equity, its authorized return on equity at 9.70%." Oncor is anticipated to file a UTM (Utility Transmission Market) case, and the 10-K warns about changes "due to evolving economic, political and other factors, to (i) trade and other foreign policy, including the imposition of tariffs."
3. Interest Coverage at 2.0x
With $35B in debt and interest coverage barely above 2x, Sempra has the thinnest coverage margin in this utility group. Rising interest rates on refinanced debt could squeeze this further. The 10-K states "we rely on long-term debt to fund a significant portion of our capital expenditures."
4. Infrastructure and LNG Exposure
Sempra Infrastructure includes LNG export facilities and Mexico operations, adding commodity and geopolitical risk beyond the regulated utility model. Tariff policy and trade tensions could affect the LNG business.
5. Escalating CapEx ($10.6B and Growing)
Capital expenditures reached $10.6B in 2025 — nearly 2.5x operating cash flow. The five-year plan implies continued heavy spending. With interest coverage at 2.0x and essentially zero cash, Sempra depends entirely on capital market access to fund operations.
Summary
Grade: F. Mostly structural, but the $651M regulatory disallowance is a genuine red flag.
Sempra's FY2025 10-K shows a diversified energy infrastructure company under pressure. While the three screening red flags are largely structural for a regulated utility, two findings warrant genuine attention: (1) the $651M regulatory disallowance that crushed SDG&E's operating income by 40%, and (2) interest coverage of only 2.0x on $35B in debt. These are not framework artifacts — they represent real financial stress.
The positive signals remain strong: CFFO/NI of 2.49x, negative accruals ratio, improving DSO, and the Z-Score of 1.91 (grey zone rather than distress) reflecting Sempra's diversification. But the California regulatory environment appears to be tightening, and the scale of the capital program ($10.6B annually) against $4.6B in operating cash flow creates persistent dependence on external financing.
**Disclaimer**: This report applies a forensic screening framework to public financial data. This is NOT investment advice.
Sources: Sempra Annual Report on Form 10-K for the fiscal year ended December 31, 2025, filed February 26, 2026 (SEC EDGAR). Financial data cross-referenced with Yahoo Finance.