Sempra Energy 10-Q Summary: First Quarter 2018
Business context and reporting period
Combined unaudited Form 10-Q for Sempra Energy, San Diego Gas & Electric Company (SDG&E), and Southern California Gas Company (SoCalGas) for the three months ended March 31, 2018. Sempra operates regulated electric and natural-gas utilities, infrastructure businesses in Mexico and South America, renewable generation, LNG and midstream assets, and, beginning March 2018, an equity-method investment in Oncor Holdings.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $2,962 million | $3,031 million | Down 2% |
| Net income | $358 million | $452 million | Down 21% |
| Earnings attributable to common shares | $347 million | $441 million | Down 21% |
| Diluted EPS | $1.33 | $1.75 | Down $0.42 |
| Operating cash flow | $966 million | $1,004 million | Down 4% |
| Capital expenditures | $1,035 million | $992 million | Up 4% |
| Interest expense | $216 million | $169 million | Up 28% |
| Dividends declared per common share | $0.90 | $0.82 | Up $0.08 |
Consolidated effective income tax rate increased to 43% from 39%. The company recorded $25 million of additional tax expense to update provisional Tax Cuts and Jobs Act estimates. Adjusted earnings, excluding this item, were $372 million, or $1.43 diluted EPS, versus adjusted earnings of $438 million, or $1.74 diluted EPS, in Q1 2017.
At March 31, 2018, Sempra had $239 million of cash and cash equivalents, $3.665 billion of short-term debt, $1.871 billion of current maturities of long-term debt, and $20.863 billion of long-term debt. Available unused credit under primary U.S. facilities was approximately $2.169 billion; foreign facilities added approximately $1.3 billion of available capacity. Total assets were $60.485 billion, including a $9.176 billion investment in Oncor Holdings.
Subsidiary results
- SDG&E: Earnings attributable to common shares were $170 million versus $155 million. Net income was $169 million versus $157 million. Operating cash flow increased to $404 million from $386 million, while capital expenditures increased to $475 million from $418 million.
- SoCalGas: Net income was $225 million versus $203 million. Revenue declined to $1.126 billion from $1.241 billion, principally because of lower natural-gas costs and volumes. Operating cash flow declined to $419 million from $463 million, and capital expenditures rose to $403 million from $357 million.
Material changes versus the prior comparable period
- Sempra completed the $9.566 billion acquisition of Oncor Holdings and related assets on March 9, 2018. Sempra owns 100% of Oncor Holdings, which owns 80.25% of Oncor, but accounts for the investment under the equity method because of ring-fencing and independent-governance provisions. Sempra recognized $15 million of equity earnings from Oncor for the post-acquisition period.
- The acquisition was financed with approximately $4.9 billion of long-term debt, approximately $2.6 billion of commercial paper, $1.693 billion of mandatory convertible preferred stock proceeds, and common-stock offerings and forward-sale settlements.
- Interest expense increased by $47 million due primarily to acquisition-related debt. Parent and other losses increased to $134 million from $24 million.
- Utilities earnings increased: SDG&E by $15 million and SoCalGas by $22 million, aided by authorized margin changes and lower tax rates. Sempra Mexico earnings decreased by $28 million, while Sempra Renewables earnings increased by $10 million and Sempra LNG & Midstream earnings declined by $17 million.
- Revenue from energy-related businesses increased 9% to $364 million, while utility revenue decreased 5% to $2.598 billion, largely reflecting lower natural-gas costs passed through to customers.
Guidance, outlook, commentary, risks, and unusual items
- Management expected approximately $13.4 billion of 2018 capital expenditures and investments, compared with approximately $13.3 billion previously disclosed. The California Utilities expected more than $1.2 billion of SDG&E capital investment and approximately $1.2 billion of SoCalGas capital investment in 2018.
- Management stated that liquidity, operating cash flow, credit facilities, debt and equity markets, project financing, and other funding sources were expected to be adequate for operations, capital expenditures, dividends, debt maturities, acquisitions, and Aliso Canyon costs.
- Management continued to expect all three Cameron LNG liquefaction trains to begin producing LNG and generating earnings in 2019, while acknowledging construction, contractor, cost, schedule, financing, and commissioning risks.
- The Aliso Canyon leak remained a significant contingency. SoCalGas estimated total related costs of $954 million, including $928 million recovered or probable of recovery from insurance. A $447 million insurance receivable and $122 million reserve remained recorded at March 31, 2018. Additional litigation, penalties, remediation, regulatory costs, and insurance-recovery uncertainty could materially affect results.
- The CPUC had not yet approved the Revised Settlement Agreement concerning the SONGS investigation. SDG&E recorded a $153 million receivable from Edison under the related Utility Shareholder Agreement, which becomes effective only if the CPUC approves the revised settlement.
- California wildfire liability, inverse-condemnation exposure, potential cost disallowances, regulatory proceedings, and insurance availability remained material risks. Moody’s changed SDG&E’s outlook to negative in April 2018 because of California wildfire and regulatory risks.
- Other risks included Oncor’s independent governance and potential limits on dividends, foreign-currency and inflation effects, commodity and interest-rate volatility, LNG project execution, natural-gas storage impairment, cybersecurity, litigation, and Mexican property and permitting disputes.
- The company adopted revenue-recognition guidance under ASC 606 with no material financial-statement impact and adopted or early adopted several other accounting standards. Lease accounting adoption was planned for January 1, 2019.
Most important facts for investors to verify
- Whether Oncor delivers expected earnings and dividends despite ring-fencing, independent governance, capital requirements, and potential restrictions on distributions.
- The final funding mix for the Oncor acquisition, including settlement of the remaining approximately $1.6 billion of forward equity sales and the resulting leverage and dilution.
- Progress and final cost, schedule, and commercial performance of Cameron LNG, including the timing of 2019 operations.
- CPUС decisions affecting the 2019 California Utilities rate cases, SONGS settlement, pipeline-safety recovery, Aliso Canyon cost recovery, and wildfire-related claims.
- Whether the $447 million Aliso Canyon insurance receivable remains probable of recovery and whether additional litigation, remediation, regulatory, or penalty costs arise.
- Actual 2018 capital spending, regulatory recovery, credit ratings, debt refinancing needs, and cash flow after acquisition-related financing.