Sempra 2021 Form 10-K Summary
Business context and reporting period
Sempra filed a combined Form 10-K for Sempra Energy, San Diego Gas & Electric Company and Southern California Gas Company for the fiscal year ended December 31, 2021. Sempra is a North American energy infrastructure holding company with regulated California utilities, an 80.25% economic interest in Oncor through Sempra Texas Utilities, and LNG, pipeline, storage, renewable and power assets in the Sempra Infrastructure segment.
In the fourth quarter of 2021, Sempra formed the Sempra Infrastructure segment by consolidating its LNG and Mexico businesses under SI Partners. Historical segment information was restated. South American operations sold in 2020 are presented as discontinued operations.
Key financial metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total revenue | $12.857 billion | $11.370 billion | Up 13% |
| Net income | $1.463 billion | $4.105 billion | Down $2.642 billion |
| Earnings attributable to common shares | $1.254 billion | $3.764 billion | Down 67% |
| Diluted EPS | $4.01 | $12.88 | Down $8.87 |
| Cash flow from operating activities | $3.842 billion | $2.591 billion | Up $1.251 billion |
| Capital expenditures | $5.015 billion | $4.676 billion | Up $339 million |
| Debt-to-capitalization | 47% | 49% | Improved |
Revenue growth was driven by higher natural gas revenues, higher energy-related business revenue and increased activity at Sempra Infrastructure. Natural gas revenues rose to $6.333 billion from $5.411 billion, electric revenues rose to $4.658 billion from $4.614 billion, and energy-related business revenue rose to $1.866 billion from $1.345 billion. Higher natural gas prices materially increased both revenue and cost of natural gas.
- SDG&E: Earnings attributable to common shares were $819 million, compared with $824 million in 2020. Operating revenue was $5.504 billion, operating income was $1.367 billion and operating cash flow was $1.376 billion.
- SoCalGas: Earnings attributable to common shares were a loss of $427 million, compared with earnings of $504 million in 2020. The result included $1.593 billion of Aliso Canyon litigation and regulatory charges. Operating cash flow was $1.033 billion.
- Sempra Texas Utilities: Earnings increased to $616 million from $579 million, primarily due to higher equity earnings from Oncor Holdings.
- Sempra Infrastructure: Earnings increased to $682 million from $580 million, primarily due to Cameron LNG reaching full three-train commercial operations, higher asset and supply optimization earnings, and new Veracruz terminal operations.
Material changes versus the prior comparable period
- Consolidated earnings declined sharply because 2020 included $1.840 billion of after-tax earnings from discontinued South American operations, including gains on the sales of the Peruvian and Chilean businesses. There was no discontinued-operation earnings contribution in 2021.
- SoCalGas recorded $1.148 billion of after-tax charges related to Aliso Canyon litigation and regulatory matters in 2021, compared with $233 million in 2020. The filing reports a total Aliso Canyon cost estimate of $3.221 billion, including $1.279 billion recovered or probable of recovery from insurance, and a $1.983 billion accrued reserve at December 31, 2021.
- Sempra sold a 20% noncontrolling interest in SI Partners to KKR for approximately $3.2 billion of net cash proceeds. Sempra also agreed to sell an additional 10% interest to ADIA for approximately $1.8 billion, subject to approvals and closing conditions.
- Sempra acquired the remaining 50% of ESJ, increasing ownership to 100%, and acquired additional publicly held IEnova shares, increasing ownership to 99.9% at year-end.
- Sempra repurchased $300 million of common stock in late 2021. A further $200 million ASR was completed on February 11, 2022.
- Sempra Infrastructure revenue increased 39% to $1.916 billion, while its cost of sales increased to $611 million from $276 million, reflecting higher natural gas prices and volumes.
Cash flow, debt and liquidity
- Sempra had $559 million of unrestricted cash and cash equivalents and $6.909 billion of available unused credit at December 31, 2021. Available unused credit was $1.099 billion for SDG&E and $365 million for SoCalGas.
- Consolidated short-term debt was $3.471 billion and long-term debt and finance leases were $21.068 billion at year-end. Commercial paper outstanding was $2.026 billion.
- Sempra issued $1.0 billion of 4.125% junior subordinated notes due 2052 and redeemed $2.35 billion of senior unsecured notes early, recognizing $126 million of pretax charges and $92 million after tax.
- Credit ratings remained investment grade. Sempra was rated Baa2 stable by Moody’s, BBB+ negative by S&P and BBB+ stable by Fitch. The S&P negative outlook is a matter for investors to monitor.
- 2021 operating cash flow exceeded capital expenditures by approximately $1.173 billion before investments, dividends and other financing uses. Sempra expects to fund operations and planned investments through operating cash flow, cash, credit facilities, debt, equity-method distributions, project financing and minority-owner funding.
Guidance, outlook, commentary and unusual items
- Management expects approximately $6.2 billion of capital expenditures and investments in 2022: $2.7 billion at SDG&E, $2.1 billion at SoCalGas, $400 million at Sempra Texas Utilities and $1.0 billion at Sempra Infrastructure.
- For 2022 through 2026, Sempra expects aggregate capital expenditures and investments of approximately $24.4 billion, subject to regulatory approvals, financing conditions, inflation, customer growth, capital availability and project execution.
- ECA LNG Phase 1 is under construction with estimated capital expenditures of approximately $2.0 billion and expected LNG production by the end of 2024. The project had $341 million of debt outstanding at December 31, 2021.
- Sempra continues to evaluate Cameron LNG Phase 2, Port Arthur LNG, ECA LNG Phase 2, Vista Pacifico LNG and other projects. No final investment decision had been reached for these potential projects unless specifically stated otherwise.
- The proposed ADIA transaction is expected by management to close in summer 2022, subject to regulatory and third-party approvals. Proceeds are intended to support capital spending, repay commercial paper used for share repurchases and strengthen the balance sheet.
- SoCalGas faces continuing uncertainty over Aliso Canyon settlements, regulatory penalties, insurance recovery and potential closure or impairment of the Aliso Canyon facility. The filing states that additional losses beyond recorded amounts cannot be reasonably estimated and could be significant.
- Mexico-related risks include proposed constitutional electricity reforms, changes to hydrocarbon and foreign-trade rules, permit challenges, land disputes, customer arbitration and the temporary shutdown and permit-revocation proceeding involving the Puebla refined-products terminal.
- Other principal risks include California wildfires and potential exhaustion of the Wildfire Fund, regulatory cost recovery, cybersecurity, climate policy, natural-gas demand reduction, commodity and foreign-exchange volatility, interest rates, counterparty performance and project construction delays.
Most important facts for an investor to verify
- Whether the Aliso Canyon settlements receive all required approvals and whether the $1.8 billion individual-plaintiff settlement becomes effective.
- Whether additional Aliso Canyon litigation, regulatory penalties, defense costs or insurance shortfalls exceed the $1.983 billion accrued reserve.
- Whether the ADIA transaction closes on expected terms and whether proceeds are used as described.
- Whether Sempra can execute its $6.2 billion 2022 capital program without material cost overruns, financing pressure or regulatory disallowances.
- The outcome of SDG&E’s 2022 cost-of-capital proceeding and the potential retroactive reduction of its authorized return under the cost-of-capital mechanism.
- The status of Mexico’s proposed energy reforms, permit challenges, ECA land and customer disputes, and the Puebla terminal proceeding.
- The sufficiency of liquidity, credit ratings and subsidiary distributions to support dividends, debt service, share repurchases and project funding.
- Whether California wildfire exposure, natural-gas transition policies and distributed energy resources cause stranded assets or reduce recoverable utility earnings.