Sempra Energy 10-Q Summary
Business context and reporting period
This combined Form 10-Q covers Sempra Energy, San Diego Gas & Electric Company and Southern California Gas Company for the quarter and six months ended June 30, 2020. Sempra operates regulated California utilities, owns interests in Texas electric transmission, and develops and operates natural gas, LNG, electric, renewable and other energy infrastructure in North America. The filing was signed August 5, 2020.
South American businesses were sold during the second quarter and are presented as discontinued operations for all periods.
Financial performance and key metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenues | $2.526 billion, versus $2.230 billion | $5.555 billion, versus $5.128 billion |
| Income from continuing operations | $528 million, versus $357 million | $1.395 billion, versus $917 million |
| Net income | $2.305 billion, versus $435 million | $3.252 billion, versus $953 million |
| Earnings attributable to common shares | $2.239 billion, versus $354 million | $2.999 billion, versus $795 million |
| Diluted EPS | $7.61, versus $1.26 | $9.91, versus $2.85 |
| Cash flow from operating activities | Not separately provided for the quarter | $1.027 billion, versus $1.704 billion |
| Capital expenditures for PP&E | Not separately provided for the quarter | $2.198 billion, versus $1.651 billion |
Discontinued operations contributed $1.777 billion in the quarter and $1.857 billion for the six months, primarily from gains on the sales of the Peruvian and Chilean businesses. Continuing-operations results benefited from higher California utility earnings, increased Oncor equity earnings and Cameron LNG operations.
At June 30, 2020, Sempra had $4.894 billion of cash and cash equivalents, total assets of $68.385 billion, short-term debt of $3.143 billion, current maturities of long-term debt and finance leases of $2.285 billion, long-term debt and finance leases of $20.535 billion, and total equity of $25.386 billion. The filing reports $6.685 billion of unused primary U.S. committed credit facilities and $236 million of unused IEnova committed credit capacity.
Material changes versus the prior comparable period
- Revenue increased 13% for the quarter and 8% for the six months, driven principally by higher California utility revenues and regulatory recoveries.
- Continuing-operations income increased 48% for the quarter and 52% for the six months. California utility earnings benefited from the 2019 General Rate Case being effective for the full current-year period, releases of regulatory liabilities related to prior income-tax forecasting differences, and higher transmission margins.
- SDG&E earnings increased to $193 million for the quarter and $455 million for the six months, from $143 million and $319 million. SoCalGas earnings increased to $146 million and $449 million, from $30 million and $294 million.
- Sempra LNG earnings increased to $61 million for the quarter and $136 million for the six months, primarily because Cameron LNG Train 1 and Train 2 entered commercial operations in August 2019 and February 2020.
- Sempra Mexico six-month earnings increased to $252 million from $130 million, substantially reflecting foreign-currency and inflation effects, while quarterly earnings declined to $61 million from $73 million.
- Energy-related business revenue declined to $293 million for the quarter and $657 million for the six months, from $335 million and $718 million, mainly because of lower natural gas prices and volumes and the end of force-majeure payments for the Guaymas-El Oro pipeline segment.
- Operating and maintenance expense increased 7% for the quarter and 11% for the six months. The increase included higher recoverable program costs and Aliso Canyon-related litigation impacts.
- Operating cash flow declined $677 million year over year, mainly because of taxes paid on the South American sales and changes in insurance receivables, despite higher earnings and regulatory-account activity.
Guidance, outlook, commentary and unusual items
- The filing does not provide a consolidated earnings-per-share guidance range. Management expects 2020 capital expenditures and investments of approximately $5.4 billion, reduced from the previously projected $5.9 billion because of deferred Sempra Mexico spending and delays to the ECA LNG Phase 1 investment decision.
- Sempra received $3.549 billion from the sale of its Peruvian businesses and $2.232 billion from the sale of its Chilean businesses. The transactions generated after-tax gains of approximately $1.499 billion and $255 million, respectively.
- Sempra issued $889 million of net proceeds from 4.875% Series C preferred stock in June 2020. It subsequently prepaid $500 million under an accelerated share repurchase program; 4,089,375 shares were repurchased by August 4, 2020.
- COVID-19 has resulted in customer-payment risks, suspended service disconnections, potentially higher uncollectible accounts, project delays and volatility in commercial paper and capital markets. Recovery of California utility pandemic-related costs through regulatory mechanisms is not assured.
- Moody’s downgraded Sempra Energy to Baa2 with a stable outlook and SoCalGas to A2 with a stable outlook. S&P assigned Sempra Energy a BBB+ rating with a negative outlook.
- Aliso Canyon-related costs were estimated at $1.411 billion, including $1.277 billion recovered or probable of recovery from insurance. Sempra recorded a $505 million insurance receivable, had received $772 million of insurance proceeds, and carried $263 million in related reserves and deferred credits. Additional litigation and regulatory costs could be material.
- California wildfire exposure remains significant. SDG&E’s Wildfire Fund asset was $378 million at June 30, 2020; the asset could be reduced if covered wildfire claims consume fund capacity.
- Sempra provided a $753 million guarantee in July 2020 for affiliate financing related to Cameron LNG. Existing Cameron LNG guarantees had a maximum aggregate amount of $4.0 billion.
- Port Arthur LNG’s expected final investment decision was delayed from 2020 to 2021. ECA LNG Phase 1 remained subject to an export permit, financing, final investment decision and other conditions.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal control over financial reporting.
Most important facts for investors to verify
- Separate recurring earnings from the $1.857 billion of discontinued-operation income and sale gains.
- Track whether COVID-19 customer nonpayment and uncollectible costs are recovered through California and Texas regulatory mechanisms.
- Monitor Aliso Canyon litigation, regulatory proceedings, insurance recoverability and the potential impairment of the facility’s $775 million net book value.
- Assess leverage, refinancing needs and rating-agency actions following the 2020 term loans, utility debt issuances, preferred-stock offering and share repurchase.
- Verify Cameron LNG Train 3 commercial operations, financial completion requirements and the potential exposure under Sempra’s guarantees.
- Follow ECA LNG and Port Arthur LNG permits, final investment decisions, customer commitments, financing and construction-cost risks.
- Monitor Mexican regulatory and legal challenges affecting renewable projects, the ECA LNG facility and the Guaymas-El Oro pipeline.
- Review the RBS Sempra Commodities exposure, including the $100 million equity loss recorded in the first half of 2020 and unresolved U.K. tax litigation.