SEMPRA annual report, FY2016

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Sempra Energy 2016 Form 10-K Summary

Business Context and Reporting Period

Sempra Energy filed a combined Form 10-K for the fiscal year ended December 31, 2016. The filing also covers wholly owned subsidiaries San Diego Gas & Electric Company and Southern California Gas Company. It is an annual filing, not a standalone 2016 fourth-quarter report.

Sempra’s operations are organized into Sempra Utilities, comprising SDG&E, SoCalGas and Sempra South American Utilities, and Sempra Infrastructure, comprising Sempra Mexico, Sempra Renewables and Sempra LNG & Midstream. The 2016 realignment and renaming of reportable segments did not affect previously reported financial results.

Financial Metrics, Debt and Liquidity

  • The supplied filing text does not provide clear consolidated Sempra revenue, operating income, consolidated net income, cash flow from operations, consolidated margins or consolidated liquidity ratios. Those amounts are incorporated by reference from the 2016 Annual Report.
  • At the parent-company level, net income was $1.370 billion in 2016, compared with $1.349 billion in 2015 and $1.161 billion in 2014.
  • Parent-company diluted earnings per share were $5.46 in 2016, compared with $5.37 in 2015 and $4.63 in 2014. Basic EPS was $5.48 versus $5.43 in 2015.
  • Parent-company equity in earnings of subsidiaries increased to $1.549 billion from $1.519 billion in 2015.
  • Parent-company cash flow used in operating activities improved to $178 million in 2016 from $255 million in 2015. Dividends received from subsidiaries were $175 million, compared with $350 million in 2015.
  • Parent-company cash and cash equivalents were $12 million at December 31, 2016, compared with $4 million at December 31, 2015.
  • Parent-company total long-term debt was $5.100 billion at year-end 2016, compared with $5.195 billion at year-end 2015. Current maturities were $600 million, including $600 million due in 2017.
  • Parent-company debt maturities, excluding the build-to-suit lease and swap adjustments, were $600 million in 2017, $500 million in 2018, $1 billion in 2019, $900 million in 2020 and $2.6 billion thereafter.
  • Sempra paid $686 million in common dividends in 2016 and repurchased $56 million of common stock. Approximately $500 million remained authorized for future repurchases.

Material Changes Versus the Prior Comparable Period

  • Parent-company net income increased $21 million, or approximately 2%, from 2015; diluted EPS increased $0.09.
  • Parent-company operating cash use decreased by $77 million, while dividends received from subsidiaries declined by $175 million.
  • Parent-company debt declined by $95 million. The company issued $499 million of long-term debt and repaid $750 million during 2016.
  • Sempra early adopted ASU 2016-09. The parent recorded a $49 million cumulative-effect adjustment to retained earnings and a $17 million 2016 earnings benefit from previously unrecognized excess tax benefits related to share-based compensation.
  • SoCalGas permanently sealed the Aliso Canyon leak well in February 2016. The company measured approximately 4.62 Bcf of gas released and had not injected gas into the facility since October 2015.
  • In 2016, SDG&E implemented a successor net-energy-metering tariff after reaching the prior program’s 617-MW cap.
  • Management approved a plan in February 2016 to market and sell a natural-gas-fired power plant in Mexico.

Guidance, Outlook, Risks and Unusual Items

  • The filing does not provide a clear consolidated earnings or revenue guidance figure in the supplied text.
  • Cameron LNG was constructing three liquefaction trains with expected export capability of approximately 12 million tonnes per annum. The project’s incremental investment was estimated at approximately $7 billion, with total facility cost estimated at approximately $10 billion. Sempra had a 50.2% equity interest and guaranteed up to $3.9 billion of project financing and financing-related obligations until financial completion.
  • The filing states that Cameron LNG construction delays could defer a portion of anticipated 2018 and 2019 earnings and could increase project costs or required equity contributions.
  • Aliso Canyon was the most significant unusual matter. Sempra recorded an estimate of $780 million for certain leak-related costs at December 31, 2016, excluding unsettled damage claims, restitution, civil or criminal fines, additional home-cleaning costs, future legal defense costs and other potentially material items. The estimate could increase significantly.
  • Sempra had received $169 million of insurance proceeds for control-of-well expenses and temporary relocation costs. Available insurance coverage was estimated at $1.2 billion to $1.4 billion, subject to policy limits, exclusions and conditions.
  • As of February 27, 2017, 250 lawsuits involving more than 14,000 plaintiffs had been filed against SoCalGas, with some also naming Sempra Energy. A federal securities class action and shareholder derivative actions were also pending.
  • SoCalGas agreed to pay $8.5 million under a February 2017 settlement with the South Coast Air Quality Management District and agreed to spend approximately $4.3 million under a November 2016 settlement with the Los Angeles County District Attorney’s Office.
  • Resumption of Aliso Canyon injection required a safety determination by DOGGR and concurrence by the CPUC. Continued restrictions could increase operating costs, require additional capital expenditures, impair the facility and affect regional natural-gas and electric reliability.
  • Other major risks include CPUC and FERC decisions affecting rate recovery, pipeline safety costs, wildfire liabilities, SONGS decommissioning, environmental compliance, commodity-price volatility, foreign exchange exposure, cybersecurity, project execution, counterparty credit and changes in U.S.-Mexico trade policy.
  • SoCalGas and SDG&E had invested $1.1 billion and $302 million, respectively, in the Pipeline Safety Enhancement Plan from 2011 through 2016. SoCalGas had received approval for recovery of $33 million as of year-end 2016.
  • SDG&E’s regulatory assets related to 2007 wildfire costs totaled $352 million at December 31, 2016. Recovery remains subject to CPUC approval; the filing estimated a potential after-tax earnings charge of up to approximately $208 million if recovery were no longer considered probable.

Most Important Facts for Investors to Verify

  • Verify consolidated 2016 revenue, earnings, operating cash flow, capital expenditures, debt, liquidity and segment results in the incorporated 2016 Annual Report.
  • Track the ultimate cost, insurance recoveries, litigation outcomes, regulatory penalties and rate recovery associated with Aliso Canyon.
  • Monitor DOGGR and CPUC decisions regarding the resumption of Aliso Canyon injections and the potential impairment of the facility’s $531 million net book value.
  • Review Cameron LNG construction progress, commercial-operation dates, cost overruns, financing obligations and Sempra’s $3.9 billion guarantee exposure.
  • Assess the recoverability of SDG&E wildfire regulatory assets and Pipeline Safety Enhancement Plan expenditures.
  • Review SONGS decommissioning obligations, trust-fund access and the status of potential changes to the CPUC settlement.
  • Evaluate parent-company liquidity and the timing of the $600 million 2017 debt maturity relative to subsidiary distributions and external financing access.