Sempra Energy 2018 Q3 Form 10-Q Summary
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 three and nine months ended September 30, 2018. Sempra operates regulated electric and natural gas utilities and energy infrastructure businesses in North and South America. The filing was signed November 7, 2018.
A major 2018 development was Sempra’s March 9 acquisition of an indirect 100% interest in Oncor Holdings, which owns 80.25% of Oncor. Sempra accounts for Oncor Holdings under the equity method because ring-fencing and governance provisions prevent Sempra from controlling Oncor.
Financial metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenue | $2.940 billion | $2.679 billion | $8.466 billion | $8.243 billion |
| Net income | $334 million | $102 million | $162 million | $802 million |
| Earnings attributable to common shares | $274 million | $57 million | $60 million | $757 million |
| Diluted EPS | $0.99 | $0.22 | $0.22 | $2.99 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $2.591 billion | $2.704 billion |
| Capital expenditures | Not provided for quarter | Not provided for quarter | $2.815 billion | $2.880 billion |
- Q3 revenue increased 10% year over year, led by higher utility revenue and energy-related business revenue.
- Nine-month common earnings fell sharply because of a $1.3 billion impairment of non-utility natural gas storage assets, a $200 million impairment of certain U.S. wind equity investments, higher interest expense, and new mandatory convertible preferred dividends.
- Management reported adjusted earnings of $339 million, or $1.23 diluted EPS, for Q3 2018, compared with $265 million, or $1.04 diluted EPS, in Q3 2017. For the first nine months, adjusted earnings were $1.072 billion, or $4.00 diluted EPS, compared with $979 million, or $3.87 diluted EPS, in 2017. These are non-GAAP measures.
- As of September 30, 2018, Sempra had $212 million of cash and cash equivalents, $73 million of current restricted cash, and $3.240 billion of available unused credit. Total assets were $60.605 billion.
- Short-term debt was $2.897 billion, current long-term debt was $1.464 billion, and long-term debt was $21.335 billion. Total debt therefore increased materially from year-end 2017, primarily due to financing the Oncor acquisition.
- Sempra’s $5.435 billion of primary U.S. committed credit facilities had $2.195 billion of commercial paper outstanding and $3.240 billion of available unused capacity. Foreign operations had approximately $1.0 billion of additional unused credit.
Material changes versus the prior comparable period
- Oncor acquisition: Sempra paid approximately $9.566 billion, including $9.45 billion of merger consideration. Oncor contributed $154 million of Q3 equity earnings and $283 million from the acquisition date through September 30.
- Financing and capitalization: Sempra issued approximately $4.9 billion of long-term debt in January, $1.69 billion of Series A mandatory convertible preferred stock, approximately $2.3 billion of common stock proceeds, and $566 million of Series B mandatory convertible preferred stock. Interest expense rose to $685 million for the first nine months from $493 million in 2017.
- SDG&E: Q3 common earnings increased to $205 million from a $28 million loss, largely because 2017 included a $208 million after-tax wildfire regulatory-asset write-off. Nine-month earnings rose to $521 million from $276 million.
- SoCalGas: Q3 earnings attributable to common shares declined to a $14 million loss from $7 million of earnings. Nine-month earnings declined to $244 million from $268 million, primarily due to Aliso Canyon litigation impacts, lower authorized cost of capital, and higher interest expense.
- Sempra Renewables: Nine-month earnings shifted to a $54 million loss from $49 million of earnings, principally because of the $145 million after-tax impairment of certain U.S. wind investments.
- Sempra LNG & Midstream: Nine-month earnings shifted to a $764 million loss from $24 million of earnings, primarily because of the $1.3 billion impairment of non-utility natural gas storage assets.
- Cash flow: Operating cash flow declined modestly to $2.591 billion from $2.704 billion. Investing cash use increased to $12.704 billion from $3.260 billion, mainly because of the Oncor acquisition. Financing provided $10.045 billion, compared with $381 million in 2017.
Guidance, outlook, commentary, risks, and unusual items
- Management expected 2018 capital expenditures and investments of approximately $14.1 billion, above the prior estimate of $13.3 billion. The increase was attributed primarily to California utility safety and integrity programs, South American transmission investments, and additional Sempra Mexico projects.
- Sempra expected all three Cameron LNG liquefaction trains to begin producing LNG in 2019 and the project to begin generating earnings in 2019. The project’s estimated cost increased above the original approximately $10 billion estimate but was expected to remain within project contingency and not be material to Sempra.
- Sempra planned to sell its U.S. wind and solar portfolio and certain southeastern U.S. natural gas storage assets. A sale of specified renewables assets to a Con Edison subsidiary was agreed for $1.54 billion, subject to customary adjustments and closing conditions. Sempra expected the renewables transaction to close in Q4 2018 and the remaining asset sales to be completed in 2019.
- Sempra expected to use anticipated asset-sale proceeds to help fund approximately $1.025 billion of capital contributions to Oncor for its planned InfraREIT acquisition and to fund a planned purchase of a 50% interest in Sharyland Holdings. The transactions were expected to close in mid-2019, subject to regulatory and other approvals.
- SoCalGas’s Aliso Canyon cost estimate was $1.039 billion, including $1.012 billion recovered or probable of recovery from insurance. The company had received $538 million of insurance proceeds, recorded a $474 million insurance receivable, and accrued $161 million for future payments. Additional litigation, regulatory, remediation, insurance-recovery, and storage-facility risks remain material.
- SDG&E continued to appeal denial of recovery for 2007 wildfire costs. The filing highlights the risk of inverse condemnation, under which a utility may be liable for wildfire damage regardless of fault, and the possibility that uninsured costs may not be recoverable from customers.
- SDG&E’s Otay Mesa power agreement included a counterparty put option requiring a potential purchase of the facility for approximately $280 million, subject to adjustments, by October 3, 2019. A replacement capacity agreement signed after quarter-end could eliminate the put option if lender and CPUC approvals are obtained.
- All three registrants remained investment grade, but SDG&E was downgraded by S&P, Moody’s, and Fitch in September 2018. Sempra Energy and SoCalGas retained investment-grade ratings but had negative outlooks from certain agencies.
Investor verification priorities
- Verify the sustainability of earnings excluding the large storage, renewables, RBS Sempra Commodities, wildfire, and Aliso Canyon items.
- Reconcile the Oncor equity earnings, dividend capacity, ring-fencing restrictions, and Sempra’s planned $1.025 billion capital contribution.
- Track debt maturities, remaining forward-sale settlements, mandatory preferred-stock conversion dilution, and progress toward the stated capital structure.
- Confirm closing and proceeds from the Con Edison renewables transaction and the planned sale of natural gas storage assets.
- Monitor Aliso Canyon litigation, insurance recoveries, regulatory proceedings, potential additional costs, and the carrying value of the Aliso Canyon facility.
- Review California wildfire exposure, SB 901 implementation, SDG&E’s wildfire-cost appeal, and the outcome of the California utilities’ 2019 general rate case.
- Assess Cameron LNG construction progress, cost-to-complete estimates, guarantees, and the timing of commercial operations.
- Review the effect of the Tax Cuts and Jobs Act, including provisional tax adjustments and future regulatory refunds or liabilities.