Sempra Energy 2016 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
This combined 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, 2016. Sempra operates regulated California utilities, South American electric utilities, Mexican energy infrastructure, renewable generation, natural gas infrastructure, and LNG businesses. The filing was signed November 2, 2016.
Key Financial Metrics
| Metric | Three months ended Sept. 30, 2016 | Three months ended Sept. 30, 2015 | Nine months ended Sept. 30, 2016 | Nine months ended Sept. 30, 2015 |
|---|
| Total revenues | $2.535 billion | $2.481 billion | $7.313 billion | $7.530 billion |
| Earnings attributable to Sempra common shareholders | $622 million | $248 million | $991 million | $980 million |
| Diluted EPS | $2.46 | $0.99 | $3.93 | $3.91 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $1.691 billion | $2.089 billion |
| Capital expenditures | Not separately provided for the quarter | Not separately provided for the quarter | $3.087 billion | $2.227 billion |
- Sempra’s nine-month gross margin, calculated as revenue less disclosed natural gas, electric fuel, purchased power, and other cost of sales divided by revenue, was approximately 60% in 2016 versus approximately 65% in 2015; the comparison is affected by business mix and unusual items.
- Cash and cash equivalents were $518 million at September 30, 2016, compared with $403 million at December 31, 2015. Approximately $474 million was held outside the United States and was unavailable for U.S. operations unless repatriated.
- Short-term debt was $2.869 billion, current long-term debt was $904 million, and long-term debt was $13.522 billion at September 30, 2016. Total reported debt was approximately $17.3 billion.
- Sempra had approximately $2.025 billion of available unused credit on its primary facilities. Foreign operations had another $429 million of available unused credit. Management stated that liquidity and financing sources were adequate for expected operations, capital spending, dividends, debt maturities, acquisitions, and Aliso Canyon expenditures.
- Dividends declared were $0.76 per common share for the quarter and $2.27 per share for the nine months, compared with $0.70 and $2.10, respectively, in 2015.
Segment and Subsidiary Results
| Segment earnings | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|
| SDG&E | $183 million | $170 million | $419 million | $443 million |
| SoCalGas | Approximately break-even | $(8) million | $198 million | $276 million |
| Sempra South American Utilities | $46 million | $43 million | $127 million | $129 million |
| Sempra Mexico | $332 million | $63 million | $407 million | $160 million |
| Sempra Renewables | $17 million | $15 million | $43 million | $47 million |
| Sempra Natural Gas | $77 million | $1 million | $(104) million | $43 million |
Material Changes Versus Prior Comparable Period
- Third-quarter earnings increased $374 million, primarily from a $350 million after-tax and noncontrolling-interest-adjusted noncash gain on the remeasurement of Sempra Mexico’s previously held interest in Gasoductos de Chihuahua (GdC), a $78 million after-tax gain on the EnergySouth sale, and improved California utility results.
- Nine-month earnings increased only $11 million because 2016 included significant charges: a $123 million after-tax loss from permanently releasing pipeline capacity, a $90 million after-tax and noncontrolling-interest-adjusted impairment of the Termoeléctrica de Mexicali plant, $49 million of SoCalGas tax-repair-related charges, $31 million of SDG&E tax-repair-related charges, and a $27 million after-tax impairment of the Rockies Express investment.
- Management’s non-GAAP adjusted earnings were $259 million, or $1.02 diluted EPS, for the third quarter and $884 million, or $3.51 diluted EPS, for the nine months. These figures exclude specified gains, impairments, capacity-release costs, and regulatory tax adjustments.
- Operating cash flow declined 19% to $1.691 billion, principally because of Aliso Canyon expenditures and the increase in the related insurance receivable, lower underlying earnings, and higher income-tax payments.
- Investing cash outflows increased to $3.432 billion, reflecting the $1.078 billion cash acquisition of the remaining 50% of GdC and higher capital expenditures.
- Sempra acquired full ownership of GdC on September 26, 2016, for $1.144 billion plus assumed debt. The acquisition added $1.375 billion of goodwill and generated a $617 million pretax remeasurement gain.
- Sempra sold EnergySouth in September 2016 for $318 million of cash proceeds, with the buyer assuming $67 million of debt, and recorded a $130 million pretax gain.
- SoCalGas nine-month earnings fell 28%, mainly because of CPUC-directed tax-repair refunds and related adjustments, a $13 million after-tax impairment of the Southern Gas System Reliability Project, and the absence of prior-year favorable items.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected approximately $6.3 billion of 2016 capital expenditures and investments, including approximately $2.8 billion for the California Utilities and $3.5 billion for other subsidiaries.
- IEnova completed a follow-on equity offering in October 2016 that generated approximately $1.57 billion of net proceeds. The proceeds were used in part to repay Sempra Global’s $1.150 billion bridge loan used for the GdC acquisition. Sempra’s ownership of IEnova decreased to approximately 66.4%.
- Sempra expected to complete the approximately $852 million acquisition of the 252-MW Ventika wind facilities in the fourth quarter of 2016, subject to customary conditions and Mexican regulatory approval.
- As of September 30, 2016, SoCalGas had recorded $763 million of estimated Aliso Canyon leak-related costs, a $664 million insurance receivable, and a $73 million remaining reserve for amounts expected to be paid after period-end. The estimate excluded potentially material damages, penalties, restitution, additional cleanup, and other costs that could not be reasonably estimated.
- Aliso Canyon insurance coverage was estimated at $1.2 billion to $1.4 billion, subject to policy limits, exclusions, conditions, and disputes. Failure or delay in recovering the recorded insurance receivable could materially affect earnings, liquidity, and financial condition.
- As of November 1, 2016, 212 Aliso Canyon lawsuits involving more than 12,000 plaintiffs had been filed, along with governmental investigations, a federal securities class action, shareholder derivative actions, and civil and criminal proceedings. SoCalGas entered a no-contest plea concerning the notice charge and agreed to pay a $75,000 fine, approximately $232,500 of penalty assessments, and up to $4 million of operational commitments and related costs, subject to court action.
- SDG&E recorded $356 million of regulatory assets for wildfire-related costs and estimated recovery remained dependent on future CPUC approval. The filing states that a negative conclusion regarding recoverability could result in an after-tax charge of up to approximately $210 million.
- Aliso Canyon injections remained suspended pending safety reviews and regulatory approvals. The facility had a $491 million net book value, including $217 million of construction work in progress, and prolonged unavailability could cause impairment, higher costs, and regional gas or electric reliability issues.
- Cameron LNG construction schedules were revised after quarter-end, with the contractor indicating possible in-service dates of mid-2018, late 2018, and mid-2019 for the three trains. Delays could defer anticipated earnings and increase project costs. Sempra also had completion guarantees for approximately 50.2% of Cameron LNG project debt, or up to $3.7 billion.
- The filing identifies continuing exposure to regulatory decisions, rate recovery, pipeline safety requirements, wildfire claims, nuclear decommissioning and spent-fuel matters, cybersecurity, commodity prices, foreign exchange and inflation, construction execution, counterparty performance, and changes in energy policy.
- Management concluded that disclosure controls and procedures were effective at September 30, 2016. GdC was excluded from the internal-control evaluation because insufficient time had elapsed since acquisition; management expected to include it within one year.
Important Facts for Investors to Verify
- Whether Aliso Canyon insurance recoveries cover the $763 million cost estimate and whether additional litigation, regulatory, mitigation, or climate-related costs arise.
- The outcome and timing of CPUC proceedings regarding SDG&E wildfire cost recovery and the recoverability of the $356 million regulatory asset.
- Final closing, financing, and operating performance of the Ventika acquisition and the effect of the IEnova equity offering on Sempra’s ownership and earnings.
- Whether the $1.375 billion GdC goodwill balance and other Mexican assets remain recoverable under market, regulatory, currency, and commodity conditions.
- Progress, cost, financing, guarantees, and revised completion dates for the Cameron LNG project.
- The impact of 2016 GRC decisions, tax-repair refunds, PSEP cost recovery, and future CPUC rate proceedings on California utility earnings and cash flow.
- The composition and sustainability of reported earnings after excluding the GdC remeasurement gain, EnergySouth sale gain, impairments, capacity-release charge, and other unusual items.
