Sempra Energy 2017 Q3 Form 10-Q Summary
Business context and reporting period
This combined, unaudited Form 10-Q covers Sempra Energy, San Diego Gas & Electric Company (SDG&E), and Southern California Gas Company (SoCalGas) for the quarter and nine months ended September 30, 2017. Sempra operates regulated utilities and infrastructure businesses across the United States, Mexico, Chile, and Peru, including electric and natural-gas utilities, pipelines, renewables, LNG, and storage assets.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total revenue | $2.679 billion | $2.535 billion | $8.243 billion | $7.313 billion |
| Earnings attributable to Sempra | $57 million | $622 million | $757 million | $991 million |
| Diluted EPS | $0.22 | $2.46 | $2.99 | $3.93 |
| Net income | $102 million | $719 million | $802 million | $1.110 billion |
| Operating cash flow | Not separately provided | Not separately provided | $2.710 billion | $1.691 billion |
| Capital expenditures | Not separately provided | Not separately provided | $2.880 billion | $3.087 billion |
Reported diluted EPS declined 91% year over year in the quarter and 24% for the nine months. Approximate net margin was 3.8% in Q3 2017 versus 28.4% in Q3 2016, and 9.7% for the first nine months versus 15.2% in the prior-year period.
- Adjusted earnings: Excluding specified unusual items, adjusted earnings were $265 million, or $1.04 per diluted share, in Q3 2017, compared with $259 million, or $1.02 per share, in Q3 2016. For the first nine months, adjusted earnings were $979 million, or $3.87 per share, compared with $884 million, or $3.51 per share.
- Cash and liquidity: Sempra held $189 million of cash and cash equivalents at September 30, 2017, including $135 million held outside the United States. Primary U.S. committed credit facilities totaled $4.335 billion, with approximately $2.612 billion unused. Foreign facilities totaled $1.684 billion, with $844 million unused.
- Debt: Current debt was $3.921 billion and long-term debt was $14.803 billion, for total reported debt of approximately $18.724 billion, compared with approximately $17.121 billion at December 31, 2016. Sempra remained in compliance with applicable debt covenants.
- Balance sheet: Total assets were $50.129 billion and total equity was $15.502 billion at September 30, 2017, compared with $47.786 billion and $15.241 billion, respectively, at year-end 2016.
- Dividends: Sempra declared $0.82 per common share for the quarter and $2.47 per share for the nine months, versus $0.76 and $2.27 in the comparable 2016 periods.
Material changes versus the prior comparable period
- Sempra recorded a $351 million pretax impairment, or $208 million after tax and noncontrolling interests, of SDG&E’s wildfire regulatory asset after a CPUC proposed decision denied recovery of the costs. SDG&E reported a $28 million Q3 loss, compared with $183 million of earnings in Q3 2016.
- The prior-year quarter benefited from a $617 million pretax remeasurement gain related to Sempra Mexico’s acquisition of the remaining interest in IEnova Pipelines, a $130 million gain on the sale of EnergySouth, and a $131 million impairment of Termoeléctrica de Mexicali (TdM). These items materially distort reported year-over-year comparisons.
- SoCalGas earnings increased to $268 million for the first nine months from $198 million, primarily due to higher earnings from Pipeline Safety Enhancement Plan and advanced-metering assets and the absence of certain 2016 tax-related charges. Q3 earnings were $7 million versus zero in the prior-year quarter.
- Sempra Mexico’s nine-month earnings fell to $105 million from $407 million, despite higher pipeline and Ventika operating contributions, primarily because of the absence of the 2016 IEnova Pipelines remeasurement gain and unfavorable foreign-currency and inflation effects.
- Sempra LNG & Midstream generated $24 million of nine-month earnings versus a $104 million loss in 2016. The improvement reflected the absence of the 2016 pipeline-capacity charge and Rockies Express impairment, plus a $57 million settlement, partly offset by the prior-year EnergySouth sale gain.
- Operating cash flow increased by $1.019 billion, while investing cash use declined modestly to $3.260 billion. Cash declined by $160 million during the nine months to $189 million, after $381 million of financing cash inflow and $561 million of common dividends paid.
Guidance, outlook, risks, contingencies, and unusual items
- Pending EFH/Oncor acquisition: Sempra agreed to acquire Energy Future Holdings for $9.45 billion in cash, including an indirect 80.03% interest in Oncor. Closing was expected in the first half of 2018, subject to bankruptcy, regulatory, tax, and other approvals. Sempra expected approximately 65% of the consideration to be funded with equity and approximately 35% with debt. A $4.0 billion bridge facility was available but undrawn at September 30, 2017. The transaction could increase leverage, dilute shareholders, raise financing costs, and expose Sempra to substantial execution and regulatory risks.
- Wildfire recovery: SDG&E continued to pursue recovery of the impaired wildfire costs through rehearing and potential appeal. A final CPUC decision was expected in Q4 2017; the ultimate recovery outcome was uncertain.
- Aliso Canyon: SoCalGas had recorded $841 million of estimated leak-related costs, an insurance receivable of $542 million, and a remaining reserve of $42 million at September 30, 2017. It had received $294 million of insurance proceeds. Additional litigation, penalties, remediation, regulatory costs, and uninsured losses could be material. Limited injections resumed July 31, 2017, but the facility remained subject to operating restrictions and possible phase-out proceedings.
- SONGS: The CPUC could modify or set aside the settlement governing recovery of San Onofre shutdown costs. The remaining SONGS regulatory asset was $158 million, with amortization scheduled through January 2022.
- Projects and commitments: Sempra expected approximately $4.2 billion of 2017 capital expenditures and investments. Cameron LNG’s three-train project was expected to produce LNG in 2019, but construction delays and potential contractor claims could increase costs or defer cash flows.
- Other transactions: IEnova agreed to acquire PEMEX’s 50% interest in DEN for approximately $231 million, subject to approvals. Sempra Renewables expected $270 million to $300 million of tax-equity proceeds through mid-2018.
- Accounting and controls: Sempra expected no material revenue impact from adopting ASC 606 in 2018. Management concluded disclosure controls were effective, while Ventika remained excluded from the evaluation of internal controls to the extent its controls had not yet been fully assessed.
Facts investors should verify
- Whether the CPUC ultimately allowed recovery of SDG&E’s wildfire costs and whether the $351 million impairment was later reversed or supplemented.
- The closing status, final financing mix, equity dilution, regulatory conditions, and leverage impact of the EFH/Oncor transaction.
- Actual versus recorded insurance recoveries and the ultimate liability for Aliso Canyon litigation, penalties, remediation, and regulatory requirements.
- Whether Aliso Canyon remains operational, is phased out, or requires impairment of its $609 million net book value.
- Cameron LNG construction completion, contractor claims, final cost exposure, and the timing of commercial operations.
- Changes in credit ratings, borrowing costs, available liquidity, and debt-service capacity following acquisition financing.
- The final outcome of SONGS regulatory proceedings and the recoverability of related regulatory assets.