Sempra Energy 2013 Q2 Form 10-Q Summary
Business context and reporting period
Combined quarterly report for Sempra Energy, San Diego Gas & Electric Company (SDG&E), and Southern California Gas Company (SoCalGas), covering the three and six months ended June 30, 2013. Sempra operates regulated California utilities, South American electric utilities, Mexican energy infrastructure, renewable generation, natural gas storage, power generation, and LNG businesses.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Sempra revenue | $2.651 billion | $2.089 billion | $5.301 billion | $4.472 billion |
| Earnings attributable to common shares | $245 million | $62 million | $423 million | $298 million |
| Diluted EPS | $0.98 | $0.25 | $1.70 | $1.21 |
| Net income | $267 million | $74 million | $445 million | $325 million |
| Operating cash flow | Not separately provided | Not separately provided | $1.105 billion | $1.152 billion |
| Capital expenditures | Not separately provided | Not separately provided | $1.130 billion | $1.517 billion |
| Cash and cash equivalents at period end | $954 million | $221 million at June 30, 2012 |
Sempra’s approximate net margin was 10.1% in Q2 2013 versus 3.5% in Q2 2012, and 8.4% for the first six months versus 7.3% in the prior-year period. The comparison is significantly affected by unusual items.
- Q2 earnings increased $183 million, or approximately 295%, year over year; six-month earnings increased $125 million, or approximately 42%.
- SDG&E earnings were $65 million in Q2 and $156 million for the six months, compared with $95 million and $200 million, respectively, in 2012.
- SoCalGas earnings were $118 million in Q2 and $164 million for the six months, compared with $53 million and $119 million.
- At June 30, Sempra reported $510 million of short-term debt, $1.540 billion of current maturities of long-term debt, and $10.530 billion of long-term debt.
- Sempra had approximately $4.1 billion of committed credit lines, with $3.6 billion unused. Credit facilities were in compliance with applicable covenants, and credit ratings remained investment grade.
- Total assets were $37.020 billion and total equity was $11.548 billion at June 30, 2013.
Material changes versus the prior comparable period
- SONGS retirement: Edison permanently retired San Onofre Nuclear Generating Station Units 2 and 3. SDG&E removed $512 million of plant and nuclear fuel, recorded a $200 million pretax closure loss, and established a $322 million regulatory asset for the amount it believes is probable of recovery. The after-tax earnings impact was approximately $119 million.
- California rate case: The CPUC issued the final 2012 General Rate Case decision, retroactive to January 1, 2012. Sempra recorded cumulative earnings benefits of $69 million at SDG&E and $37 million at SoCalGas in Q2 2013. The related revenue will be recovered over 28 months at SDG&E and 31 months at SoCalGas, creating cash-flow timing pressure.
- Prior-year comparison benefit: Q2 2012 included a $300 million pretax impairment of the Rockies Express investment, or $179 million after tax. This accounts for a substantial portion of the year-over-year improvement.
- Asset sale: Sempra Natural Gas sold a 625-MW block of Mesquite Power for approximately $371 million and recognized a $74 million pretax gain, or $44 million after tax.
- IEnova offering: IEnova sold approximately 18.9% of its shares for net proceeds of $574 million. Sempra retained 81.1% ownership, while noncontrolling interests increased materially. The offering reduced Sempra’s share of Mexican earnings and generated a $63 million first-quarter tax expense related to corporate restructuring.
- Cash flow and investment: Operating cash flow declined $47 million year over year, while investing cash outflow improved by $1.154 billion, primarily because of lower capital spending, the Mesquite sale, Treasury grant proceeds, and investment distributions.
- Segment trends: Sempra Natural Gas improved from a $193 million Q2 2012 loss to $9 million of earnings, while Sempra Mexico earnings declined from $47 million to $26 million and Sempra Renewables declined from $24 million to $15 million.
Guidance, outlook, commentary, and risks
- Management expected 2013 capital expenditures and investments of approximately $3.0 billion, including approximately $2.0 billion for the California Utilities and $1.0 billion for other businesses.
- Management forecast a 2013 consolidated effective tax rate of approximately 29%, compared with 6% in 2012, and projected a 28% to 32% range for 2014 through 2017.
- Management expected available cash, operating cash flow, credit facilities, distributions, and debt or equity issuance to fund capital expenditures, dividends, acquisitions, and debt maturities. Approximately $900 million of cash was held outside the United States and was considered unavailable for U.S. operations unless repatriated.
- SoCalGas expected to reduce or temporarily suspend common dividends over the next several years to support its capital program and authorized capital structure. SDG&E expected to resume common dividends in 2014.
- The Cameron LNG liquefaction project was expected to require approximately $6 billion to $7 billion of incremental investment, with commercial operations targeted to begin in 2017 for the first train and completion of all three trains by the end of 2018, subject to permits, financing, and final investment decisions.
- SONGS recovery remains uncertain. The CPUC proceeding may require refunds or determine that less than the recorded regulatory asset is recoverable. SDG&E may record additional earnings charges if recovery is no longer probable.
- Wildfire litigation reserves were $214 million, with $352 million of related regulatory assets. Management estimated an after-tax charge of up to $190 million for CPUC-regulated assets if recovery were no longer considered probable. Remaining wildfire claims, regulatory approval, settlement costs, and timing of rate recovery remain material risks.
- Pipeline safety requirements could require substantial additional capital investment and operating costs. The California Utilities estimated Phase 1 of their pipeline safety plan at approximately $3.1 billion over ten years, subject to regulatory treatment.
- Other risks include commodity-price volatility, foreign exchange exposure, interest rates, nuclear decommissioning, litigation, regulatory decisions, renewable-energy incentives, project execution, credit and liquidity conditions, and cybersecurity threats.
Most important facts for investors to verify
- Whether the CPUC ultimately approves recovery of the SONGS regulatory asset, replacement-power costs, and related revenue refunds.
- The final exposure and rate-recovery treatment for 2007 wildfire claims, including the approximately $750 million of settlement demands from remaining plaintiffs.
- Actual 2013 capital spending versus the approximately $3.0 billion plan and the effect on debt, dividends, and credit metrics.
- Whether the IEnova offering, Mexican project pipeline, and reduced ownership percentage produce the expected growth and cash returns.
- Permitting, financing, construction costs, and final investment decisions for the Cameron LNG liquefaction project.
- Changes in natural gas and electricity prices, storage economics, LNG margins, and the recoverability of the Rockies Express and other investments.
- Future regulatory treatment and timing for California pipeline safety investments and associated rate recovery.