SEMPRA quarterly report, Q3 FY2015

Sempra Energy 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 nine months ended September 30, 2015. Sempra operates regulated California utilities and energy infrastructure businesses in South America, Mexico, and the United States. Financial statements are unaudited and presented under U.S. GAAP.

Key financial metrics

Metric	Q3 2015	Q3 2014	9M 2015	9M 2014
Total revenue	$2,481 million	$2,815 million	$7,530 million	$8,288 million
Earnings attributable to Sempra common shareholders	$248 million	$348 million	$980 million	$864 million
Diluted EPS	$0.99	$1.39	$3.91	$3.45
Net income	$282 million	$383 million	$1,060 million	$941 million
Operating cash flow	Not separately provided	Not separately provided	$2,089 million	$1,661 million
Capital expenditures for property, plant and equipment	Not separately provided	Not separately provided	$2,227 million	$2,320 million

• Q3 earnings declined 29%, while nine-month earnings increased 13%.
• Approximate net margin was 11.4% in Q3 2015 versus 13.6% in Q3 2014, and 14.1% for the first nine months versus 11.4% in the prior-year period.
• Dividends declared were $0.70 per share in Q3 and $2.10 per share for the first nine months, compared with $0.66 and $1.98, respectively, in 2014.

Balance sheet, debt and liquidity

• At September 30, 2015, Sempra had $697 million of cash and cash equivalents, compared with $570 million at December 31, 2014. Approximately $525 million was held outside the United States and was unavailable for U.S. operations unless repatriated.
• Total assets were $40.6 billion and total equity was $12.4 billion, compared with $39.7 billion and $12.1 billion, respectively, at year-end 2014.
• Short-term debt was $1.1 billion, current long-term debt was $1.2 billion, and long-term debt was $12.5 billion at September 30, 2015. Total debt increased from approximately $14.4 billion at year-end 2014 to approximately $14.8 billion.
• Sempra reported approximately $3.3 billion of available unused credit under its primary committed facilities, plus $485 million of available unused credit under additional subsidiary facilities. The companies remained in compliance with applicable debt covenants and maintained investment-grade credit ratings.
• On October 13, 2015, after quarter-end, Sempra, Sempra Global, and the California Utilities amended and extended their revolving credit facilities to expire in 2020.

Cash flow and capital allocation

• Operating cash flow increased $428 million, or 26%, to $2.089 billion, primarily due to higher earnings, favorable changes in regulatory balancing accounts, lower inventory-related cash usage, and lower income-tax payments.
• Investing cash use declined to $1.979 billion from $2.466 billion, aided by $347 million of proceeds from the sale of the remaining 625-megawatt Mesquite Power block.
• Financing activities provided $29 million, versus $572 million in the prior-year period. Sempra paid $468 million of common dividends and repurchased $74 million of common stock.
• Management expected approximately $4.8 billion of 2015 construction expenditures and investments, including approximately $2.4 billion at the California Utilities and $2.4 billion at other subsidiaries.

Material changes versus the prior comparable period

• SoCalGas seasonalization: A CPUC decision changed the timing of recognition of annual core-gas authorized revenue. This reduced Q3 2015 revenue and earnings by $158 million and $113 million, respectively, and reduced nine-month revenue and earnings by $67 million and $48 million. Management stated that the change does not affect full-year revenue, earnings, or cash flow, but shifts earnings toward the first and fourth quarters. SoCalGas reported a Q3 loss of $8 million versus earnings of $98 million in Q3 2014.
• SDG&E: Earnings increased to $170 million from $157 million in Q3 and to $443 million from $379 million for the first nine months, reflecting higher authorized margins, transmission earnings, lower nonrefundable operating costs, and a reduction in the SONGS closure loss.
• Sempra Mexico: Nine-month earnings rose to $160 million from $139 million, supported by new pipeline operations and higher equity earnings, partly offset by lower Mexicali power results and foreign-exchange effects.
• Sempra Natural Gas: Nine-month earnings increased to $43 million from $39 million, including a $36 million after-tax gain from the Mesquite Power sale. Q3 earnings fell to $1 million from $26 million, primarily because the 2014 period included a $25 million tax benefit.
• Sempra Renewables: Nine-month earnings declined to $47 million from $63 million because 2014 included a $16 million after-tax gain on the sale of a Copper Mountain Solar 3 interest.

Guidance, outlook and unusual items

• Management expected Sempra Energy’s 2015 effective tax rate to be approximately 23%, compared with 20% in 2014, before the anticipated Gasoductos de Chihuahua acquisition. SDG&E’s expected rate was approximately 34% and SoCalGas’s approximately 26%.
• IEnova agreed to acquire PEMEX’s 50% interest in Gasoductos de Chihuahua for $1.325 billion, excluding approximately $170 million of assumed net debt. Closing was expected by year-end 2015, subject to antitrust review and other conditions. Management expected the transaction to be accretive to diluted EPS after financing, but the expected noncash remeasurement gain was not yet estimable.
• The 2016 California Utilities general rate case settlements proposed 2016 revenue requirements of $1.811 billion for SDG&E and $2.219 billion for SoCalGas, subject to CPUC approval and unresolved tax-treatment issues. A draft decision was expected in the first quarter of 2016.
• The Cameron LNG liquefaction project was under construction with estimated total incremental investment of approximately $7 billion. Sempra guaranteed 50.2% of the project debt, or up to approximately $3.7 billion, until specified completion conditions are met.
• Sempra paused efforts to pursue an initial public offering of Sempra Partners, LP because of unfavorable MLP capital-market conditions and planned to reassess the proposal in mid-2016.

Risks, contingencies and regulatory matters

• Wildfire recovery: SDG&E recorded $362 million of regulatory assets for 2007 wildfire costs and sought recovery of approximately $379 million through CPUC rates. Failure to obtain substantial recovery could result in an after-tax charge of up to approximately $213 million for CPUC-regulated amounts.
• SONGS: The San Onofre facility remained permanently retired and under decommissioning. The regulatory asset for expected recovery of SONGS costs was $272 million at September 30, 2015. In October 2015, the co-owners reached a $400 million settlement with Nuclear Electric Insurance Limited; SDG&E’s share was approximately $80 million, with 95% of the recovery allocated to customers.
• Pipeline safety: PSEP regulatory accounts totaled $7 million for SDG&E and $153 million for SoCalGas. Recovery applications remained subject to CPUC reasonableness review and potential disallowances.
• Regulatory projects: The companies were pursuing major gas and electric infrastructure projects, including the Southern Gas System Reliability Project, the Pipeline Safety & Reliability Project, and several SDG&E transmission projects. Costs, permits, timing, and rate recovery remained uncertain.
• Market and operating risks: Management identified exposure to natural-gas and electricity prices, low storage spreads, foreign-currency movements, interest rates, construction and permitting delays, counterparty credit, cybersecurity, weather, natural disasters, nuclear decommissioning, and regulatory decisions.
• Legal proceedings: Accrued liabilities for material legal proceedings were $52 million for Sempra Energy, $27 million for SDG&E, and $13 million for SoCalGas. The filing stated that reasonably possible losses in excess of accrued amounts generally could not be estimated.

Most important facts for investors to verify

• Whether the SoCalGas seasonalization effect reverses as expected in the fourth quarter and leaves full-year earnings and cash flow unaffected.
• Final CPUC decisions on the 2016 general rate cases, tax-treatment issues, pipeline-safety cost recovery, wildfire recovery, and SONGS-related matters.
• Closing, financing, accounting treatment, and earnings accretion of IEnova’s Gasoductos de Chihuahua acquisition.
• Progress, cost performance, financing obligations, completion guarantees, and commercial operation timing for the Cameron LNG project.
• The ultimate recoverability of wildfire, SONGS, pension, decommissioning, and other regulatory assets.
• Actual 2015 capital expenditures, debt issuance and refinancing activity, cash available for U.S. operations, and the effect of foreign exchange and commodity prices on nonregulated earnings.