Sempra Energy 2018 Form 10-K Summary
Business context and reporting period
This combined Form 10-K covers Sempra Energy, San Diego Gas & Electric Company and Southern California Gas Company for the fiscal year ended December 31, 2018. Sempra is an energy infrastructure holding company with regulated utilities and energy infrastructure operations across North America and South America. Reportable segments include SDG&E, SoCalGas, Sempra Texas Utility, Sempra South American Utilities, Sempra Mexico, Sempra Renewables and Sempra LNG & Midstream.
- Sempra completed its acquisition of an indirect 80.25% interest in Oncor in March 2018 and accounts for Oncor Holdings using the equity method.
- The company’s strategy shifted toward North American energy infrastructure. The board approved plans to sell the South American businesses in January 2019.
- Management also initiated divestitures of U.S. renewable assets and non-utility southeastern U.S. natural gas storage assets.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $11.687 billion | $11.207 billion | Up 4% |
| Utilities revenue | $10.046 billion | $9.776 billion | Up 3% |
| Energy-related revenue | $1.641 billion | $1.431 billion | Up 15% |
| Net income | $1.126 billion | $351 million | Up $775 million |
| Earnings attributable to common shares | $924 million | $256 million | Up $668 million |
| Diluted EPS | $3.42 | $1.01 | Up $2.41 |
| Effective tax rate | 12% | 81% | Improved materially |
| Operating cash flow | $3.447 billion | $3.625 billion | Down 5% |
| Capital expenditures | $3.784 billion | $3.949 billion | Down 4% |
Net income attributable to common shares represented approximately 7.9% of revenue. A comparable normalized margin is not clearly provided in the filing; reported earnings were significantly affected by impairments, asset-sale gains, tax adjustments and litigation-related items.
- Segment earnings attributable to common shares were: SDG&E $669 million, SoCalGas $400 million, Sempra Texas Utility $371 million, Sempra South American Utilities $199 million, Sempra Mexico $237 million, Sempra Renewables $328 million and Sempra LNG & Midstream a loss of $617 million.
- SDG&E operating revenue was $4.568 billion and earnings attributable to common shares were $669 million, compared with $4.476 billion and $407 million in 2017.
- SoCalGas operating revenue was $3.962 billion and earnings attributable to common shares were $400 million, compared with $3.785 billion and $396 million in 2017.
- Adjusted earnings, excluding specified unusual items, were $1.503 billion, or $5.57 adjusted diluted EPS, versus $1.368 billion, or $5.42, in 2017.
Debt, liquidity and capital resources
- Total consolidated debt included $21.611 billion of long-term debt, excluding current portions, and $3.752 billion of short-term debt at December 31, 2018.
- Consolidated debt-to-capitalization was 57%, compared with 56% at year-end 2017.
- Cash and cash equivalents were $190 million, with $4.219 billion of available unused U.S. credit capacity. Foreign operations had approximately $829 million of additional unused credit capacity.
- Commercial paper outstanding was $1.216 billion at year-end, with a weighted-average interest rate of 2.786%.
- Cash provided by financing activities was $9.006 billion, reflecting debt and equity issuances used primarily to fund the Oncor acquisition and related refinancing.
- 2018 net proceeds included approximately $2.3 billion from mandatory convertible preferred stock, $2.3 billion from common stock and $4.9 billion from debt issuances.
- Sempra paid $877 million of common dividends and $89 million of mandatory convertible preferred dividends in 2018. The annualized common dividend was increased to $3.87 per share in February 2019.
Material changes versus the prior comparable period
- Oncor contributed $371 million of equity earnings from the March 2018 acquisition. Sempra also contributed $230 million to Oncor during 2018.
- Revenue increased $480 million, primarily from higher utilities revenue and growth in Sempra Mexico and renewable operations.
- 2017 included an $870 million income tax expense from the Tax Cuts and Jobs Act, while 2018 included an $85 million adjustment to provisional TCJA amounts. This was the principal reason for the lower effective tax rate and the sharp increase in reported earnings.
- SDG&E’s 2017 results included a $351 million pretax write-off of a wildfire regulatory asset, or $208 million after tax. No comparable charge was recorded in 2018.
- Sempra LNG & Midstream recorded a $1.1 billion impairment of non-utility natural gas storage assets in 2018, or $629 million after tax and noncontrolling interests.
- Sempra Renewables recorded a $200 million impairment of U.S. wind equity method investments, or $145 million after tax, but recognized a $513 million pretax gain, or $367 million after tax, on the sale of certain U.S. solar and wind assets.
- Operating cash flow declined despite higher reported earnings, partly because of higher interest payments, working-capital changes, greenhouse-gas allowance purchases and Aliso Canyon insurance-receivable activity.
- Capital expenditures declined modestly, but investing cash outflows rose to $12.557 billion because of the $9.227 billion Oncor acquisition expenditure and related capital contributions.
Guidance, outlook, commentary and risks
- Management expected Cameron LNG’s three-train liquefaction project to begin generating earnings in mid-2019. The project has approximately 13.9 Mtpa of nameplate capacity, expected export capability of 12 Mtpa and long-term tolling agreements covering the full capacity.
- Sempra expects approximately $6.1 billion of 2019 capital expenditures and investments, including $1.57 billion of planned Oncor capital contributions and $500 million related to the Sharyland and InfraREIT transactions. The filing estimates approximately $18.2 billion of aggregate capital expenditures and investments for 2019 through 2023.
- Sempra has guaranteed up to $3.9 billion of Cameron LNG project financing obligations. The guarantees are expected to terminate after financial completion, subject to all three trains achieving commercial operation and specified performance tests.
- The company expects to complete the sale of its remaining U.S. wind assets in the second quarter of 2019, the southeastern U.S. storage-asset sale was completed in February 2019, and the South American business sale process was expected to conclude by year-end 2019.
- Key risks include California wildfire liability under inverse condemnation, potential inability to recover wildfire costs through rates or insurance, regulatory disallowances, Aliso Canyon litigation and regulatory proceedings, pipeline-safety cost recovery, cybersecurity, commodity and interest-rate volatility, foreign-exchange exposure, project delays and cost overruns, and counterparty nonperformance.
- Aliso Canyon-related costs were estimated at $1.055 billion, including $1.027 billion recovered or probable of recovery from insurance. Sempra had received $566 million of insurance proceeds through December 31, 2018; additional damages, penalties, litigation costs and remediation expenses were not fully estimable.
- At December 31, 2018, Aliso Canyon had a net book value of $724 million. Permanent closure or inadequate future cash flows could result in impairment and additional reliability-related costs.
- The California Utilities had substantial pending pipeline-safety investments. Approximately $1.876 billion had been invested under the Pipeline Safety Enhancement Plan through 2018, while significant cost recovery remained subject to CPUC review.
- Credit ratings remained investment grade at year-end, but Sempra Energy, SDG&E and SoCalGas had negative outlooks from at least one major rating agency. SDG&E was downgraded or placed under review by the major agencies in January 2019.
Important facts an investor should verify
- Whether Cameron LNG achieved commercial operation on schedule and within its revised cost expectations, and whether Sempra’s $3.9 billion guarantees were released.
- The final purchase price, regulatory approvals, financing and expected earnings impact of the InfraREIT and Sharyland transactions.
- The outcome of the 2019 CPUC general rate cases, the FERC TO5 transmission proceeding and recovery of PSEP expenditures.
- Actual insurance recoveries, litigation settlements, penalties and remaining exposure related to the Aliso Canyon leak.
- Whether California wildfire reforms materially reduce SDG&E’s inverse-condemnation exposure and improve credit metrics.
- Progress and proceeds from the South American and remaining renewable-asset divestitures, including related tax consequences.
- The effect of mandatory preferred-stock conversion and remaining forward-sale agreements on common-share dilution and future EPS.
- Debt maturities, refinancing costs, Oncor dividend capacity and the company’s ability to fund planned capital spending while maintaining investment-grade ratings.