Sempra Energy 10-Q Summary: Third Quarter 2013
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, 2013. Sempra operates regulated California utilities, South American electric utilities, Mexican energy infrastructure, renewable generation, natural gas storage and power assets, and LNG-related businesses.
Key Financial Metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Sempra revenue | $2,551 million | $2,507 million | $7,852 million | $6,979 million |
| Sempra net income | $323 million | $290 million | $768 million | $615 million |
| Earnings attributable to Sempra common shareholders | $296 million | $268 million | $719 million | $566 million |
| Diluted EPS | $1.19 | $1.09 | $2.89 | $2.31 |
| Operating cash flow | Not separately provided | Not separately provided | $1,330 million | $1,688 million |
| Capital expenditures | Not separately provided | Not separately provided | $1,785 million | $2,241 million |
Sempra's earnings margin was approximately 11.6% in the third quarter and 9.2% for the first nine months, based on earnings attributable to common shareholders divided by reported revenue. The filing does not present a consolidated operating margin.
- Cash and cash equivalents were $1,061 million at September 30, 2013, compared with $475 million at December 31, 2012.
- Total debt, including current and long-term portions, was approximately $12.4 billion at September 30, 2013. Long-term debt carried a fair value of $12.6 billion.
- Sempra had approximately $4.1 billion of committed credit lines, with $3.6 billion unused. Credit facilities required compliance with a maximum 65% debt-to-total-capitalization covenant; the company reported compliance.
- Common dividends declared were $0.63 per share in the third quarter and $1.89 per share for the first nine months, compared with $0.60 and $1.80 in the comparable 2012 periods.
Material Changes Versus the Prior Comparable Period
- Third-quarter earnings increased $28 million, or 10%, primarily because 2012 included a $60 million after-tax impairment charge related to Rockies Express, SoCalGas earnings increased $31 million, and Sempra Renewables recorded $24 million of after-tax gains from selling 50% interests in two solar projects. These benefits were partly offset by a $45 million decline at SDG&E and higher Parent and Other losses.
- Nine-month earnings increased $153 million, or 27%. The improvement reflected the absence of $239 million of 2012 Rockies Express impairment charges, a $44 million after-tax gain on the sale of a Mesquite Power block, 2013 General Rate Case benefits, and higher SoCalGas earnings.
- SDG&E nine-month earnings declined to $285 million from $374 million. The decline included a $119 million after-tax charge associated with the early retirement of SONGS, lower authorized returns, and higher interest expense, partly offset by $52 million of favorable retroactive 2012 General Rate Case effects.
- SoCalGas nine-month earnings increased to $266 million from $190 million, benefiting from higher authorized margins, General Rate Case recovery, tax items, and recovery of previously expensed program costs.
- Operating cash flow declined 21% to $1.33 billion, primarily because of regulatory-balancing-account changes, working-capital movements, lower accounts payable, and the absence of certain 2012 wildfire and transmission-related receipts.
- Investing cash outflows declined to $901 million from $2.576 billion, reflecting lower capital expenditures, proceeds from asset sales, U.S. Treasury renewable-energy grants, and distributions from investments.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management expected approximately $2.9 billion of 2013 capital expenditures and investments, including approximately $1.9 billion at the California Utilities and $1.0 billion at other subsidiaries.
- Management expected 2013 effective tax rates of approximately 29% for Sempra Energy, 34% for SDG&E, and 29% for SoCalGas. The filing discusses potential Mexican tax reform that could increase future tax expense, although the final effect remained uncertain.
- SoCalGas indicated that common dividends could be reduced or temporarily suspended during a period of elevated capital investment. SDG&E expected to resume common dividends in 2014 after completing the Sunrise Powerlink investment program.
- The Cameron LNG liquefaction project was expected to require approximately $6 billion to $7 billion of incremental investment, excluding capitalized interest and other financing costs. The project remained subject to permits, financing, final investment decisions, and other conditions.
- SONGS Units 2 and 3 were permanently retired following prolonged outages. SDG&E recorded a $200 million pretax plant-closure charge and carried a $431 million regulatory asset representing costs management believed probable of recovery. Recovery depends on future CPUC decisions and could differ materially from the recorded amount.
- SDG&E's SONGS-related nuclear decommissioning trust had a fair value of $981 million. CPUC approval was required for most withdrawals to fund decommissioning.
- Wildfire litigation reserves were $164 million at September 30, 2013, and regulatory assets related to wildfire litigation costs were $339 million. Management stated that a loss of probable rate recovery could result in an after-tax charge of up to $186 million for CPUC-regulated assets, excluding potential future increases in claims costs.
- Pipeline safety programs could require substantial additional investment. The California Utilities estimated Phase 1 costs at approximately $3.1 billion over 10 years, with recovery subject to regulatory decisions.
- Other exposures included regulatory proceedings, nuclear decommissioning, commodity and interest-rate volatility, foreign exchange risk, cybersecurity, natural disasters, litigation, project execution, and potential changes in renewable-energy incentives.
Most Important Facts for Investors to Verify
- Whether the CPUC ultimately permits recovery of the $431 million SONGS regulatory asset and related replacement-power and operating costs.
- The final outcome and timing of the SONGS regulatory investigation, decommissioning funding, insurance claims, and SDG&E's litigation against Mitsubishi Heavy Industries.
- Whether wildfire litigation costs and reserves remain recoverable through rates and whether remaining claims exceed current estimates.
- The final terms and economic impact of Mexican tax reform, including potential corporate and dividend taxes.
- Actual 2013 capital spending versus the approximately $2.9 billion plan and the effect of capital investment on leverage, dividends, and liquidity.
- Progress, financing, permitting, and partner commitments for the Cameron LNG liquefaction project and other major pipeline and renewable projects.
- Whether SoCalGas dividend reductions or suspension become necessary to maintain its authorized capital structure.
- Changes in operating performance at Rockies Express, natural gas storage assets, LNG operations, and Sempra's Mexican and South American businesses.