Sempra Energy 2014 Form 10-K Summary
Business context and reporting period
This combined Form 10-K covers Sempra Energy, San Diego Gas & Electric Company (SDG&E), and Southern California Gas Company (SoCalGas) for the fiscal year ended December 31, 2014. The filing was signed February 26, 2015. Sempra’s businesses include California regulated electric and natural-gas utilities, Sempra International’s Mexico and South American operations, and Sempra U.S. Gas & Power’s renewable generation, natural-gas, storage, pipeline, power-generation and LNG activities.
The provided filing text incorporates the principal consolidated financial statements and management’s discussion from the 2014 Annual Report but does not reproduce the consolidated revenue, operating income, net income, cash-flow or margin tables. The parent-company information below is therefore not a substitute for consolidated results.
Financial metrics, liquidity and capital structure
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Sempra Energy parent net income | $1.161 billion | $1.001 billion | Up $160 million |
| Basic earnings per share | $4.72 | $4.10 | Up $0.62 |
| Diluted earnings per share | $4.63 | $4.01 | Up $0.62 |
| Parent long-term debt, net | $4.666 billion | $4.117 billion | Up $549 million |
| Parent cash and cash equivalents | $3 million | $6 million | Down $3 million |
| Parent shareholders’ equity | $11.326 billion | $11.008 billion | Up $318 million |
| Parent cash used in operating activities | $(260) million | $(131) million | Use increased $129 million |
| Dividends received from subsidiaries | $300 million | $50 million | Up $250 million |
| Common dividends paid | $598 million | $606 million | Down $8 million |
Parent-company earnings principally reflect equity in subsidiary earnings, which increased to $1.291 billion from $1.103 billion. Parent interest expense was $235 million, compared with $239 million in 2013. Parent cash flow was supported by $300 million of subsidiary dividends and $627 million of net decreases in affiliate loans. The filing text does not provide a clear consolidated revenue, consolidated net income, consolidated operating cash flow, consolidated margin, consolidated debt or consolidated liquidity value.
Parent debt maturities were $750 million in 2016, $600 million in 2017, $500 million in 2018, $500 million in 2019 and $2.3 billion thereafter. Sempra’s ability to pay dividends and service parent debt depends substantially on distributions and other cash flows from subsidiaries.
Material changes versus the prior comparable period
- Parent net income increased 16.0% to $1.161 billion, while diluted EPS increased 15.5% to $4.63.
- Parent equity in subsidiary earnings increased $188 million.
- Parent long-term debt increased $549 million, primarily reflecting the absence of the $800 million current portion reported in 2013 and the issuance of $500 million of 3.55% notes in 2014, partly offset by other debt changes.
- Parent operating cash use increased to $260 million from $131 million, while subsidiary dividends received rose to $300 million from $50 million.
- Other comprehensive income declined to $892 million from $1.149 billion, primarily because 2014 included a $269 million net-of-tax other comprehensive loss, compared with $148 million of other comprehensive income in 2013. Foreign-currency translation loss was $193 million in 2014 versus a $111 million gain in 2013.
- On October 1, 2014, Sempra contributed Cameron LNG to Cameron LNG Holdings and retained a 50.2% equity interest. The investment was thereafter accounted for under the equity method and was approximately $1 billion at year-end.
- Cameron LNG began construction of a three-train liquefaction project in the second half of 2014. The project has expected export capability of approximately 12 Mtpa, with estimated incremental investment of approximately $7 billion excluding capitalized interest and other financing costs.
- Customer and operating scale remained broadly growing: SoCalGas added approximately 26,000 gas meters, SDG&E added approximately 8,000 electric meters and 3,000 gas meters, Chilquinta Energía added approximately 17,000 meters, and Luz del Sur added approximately 33,000 meters.
Guidance, outlook, commentary, risks and unusual items
- Management expected 2015 annual new-meter growth at SoCalGas and SDG&E to be slightly higher than 2014 levels.
- Luz del Sur expected to complete the 100-MW Santa Teresa hydroelectric plant in the first half of 2015. The filing also identified a pending sale of the remaining 625-MW block of the Mesquite Power Plant, subject to third-party consents.
- Key growth initiatives include Cameron LNG liquefaction, potential LNG export projects at Port Arthur, Texas and Energía Costa Azul in Mexico, renewable generation, pipeline and storage development, and South American utility investments.
- The California Utilities’ Pipeline Safety Enhancement Plan was estimated at $2.1 billion over 10 years, including $1.6 billion for SoCalGas and $500 million for SDG&E. Recovery is subject to regulatory processes and reasonableness review.
- SDG&E carried $373 million of regulatory assets related to excess 2007 wildfire litigation costs, including $366 million related to CPUC-regulated operations. Recovery requires future regulatory approval; the filing states that a potential after-tax charge could have been up to $217 million if recovery was no longer considered probable at year-end.
- SDG&E’s 20% interest in the permanently retired San Onofre Nuclear Generating Station creates continuing decommissioning, trust-funding, regulatory and potential cost-overrun risks.
- Environmental accruals at December 31, 2014 were $7 million for SDG&E and $24 million for SoCalGas. SDG&E estimated total SONGS marine mitigation costs of $63 million, with $20 million accrued for remaining costs through 2050.
- Principal risks include regulatory disallowances or delayed rate recovery, pipeline and electric safety penalties, wildfire and drought exposure, SONGS decommissioning, cybersecurity, commodity-price volatility, counterparty performance, foreign-exchange and political risks, project delays or cost overruns, LNG-market competition, and potential impairment of natural-gas storage assets.
- The filing states that cybersecurity incidents had not caused a material breach as of the filing date, but a successful attack could materially affect operations, infrastructure and customer information.
Most important facts for an investor to verify
- Review the incorporated 2014 Annual Report for consolidated revenue, earnings, operating cash flow, capital expenditures, segment results, margins, debt, liquidity and non-GAAP measures, which are not clearly provided in the supplied text.
- Assess the timing, cost, financing, contractual coverage and construction risks of the Cameron LNG project and other proposed LNG export facilities.
- Track CPUC decisions affecting recovery of wildfire costs, Pipeline Safety Enhancement Plan expenditures, safety-related costs and other regulatory assets.
- Evaluate SONGS decommissioning obligations, trust balances, future funding requirements and potential unrecovered costs.
- Review pending litigation and property-rights disputes, particularly those involving Energía Costa Azul and Cameron LNG.
- Examine parent-company dependence on subsidiary distributions, upcoming debt maturities and the limited parent cash balance.
- Consider foreign-currency exposure and regulatory, tax, political and economic risks in Mexico, Chile and Peru.