Sempra 2022 Q2 Form 10-Q Summary
Business Context and Reporting Period
This combined Form 10-Q covers Sempra Energy, San Diego Gas & Electric Company and Southern California Gas Company for the quarter and six months ended June 30, 2022. Sempra operates regulated California utilities, owns an interest in Texas electric transmission through Oncor Holdings, and develops and operates energy infrastructure through Sempra Infrastructure.
Key Financial Metrics
| Metric | Q2 2022 | Q2 2021 | YTD 2022 | YTD 2021 |
|---|---|---|---|---|
| Total revenue | $3.547 billion | $2.741 billion | $7.367 billion | $6.000 billion |
| Net income | $659 million | $455 million | $1.316 billion | $1.383 billion |
| Earnings attributable to common shares | $559 million | $424 million | $1.171 billion | $1.298 billion |
| Diluted EPS | $1.77 | $1.37 | $3.70 | $4.24 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $2.364 billion | $2.255 billion |
| Capital expenditures | Not separately provided for the quarter | Not separately provided for the quarter | $2.361 billion | $2.424 billion |
Approximate Q2 net income margin was 18.6%, compared with 16.6% in the prior-year quarter. Earnings attributable to common shares represented approximately 15.8% of revenue, compared with 15.5% in Q2 2021. For the six months, net income declined approximately 5% and diluted EPS declined approximately 13%, primarily because of higher taxes and unusual prior-year items.
- Q2 revenue increased approximately 29%, driven by higher natural gas prices and revenue recovery at the California utilities, higher energy-related business activity, and stronger transportation and renewable revenues.
- Q2 earnings attributable to common shares increased approximately 32%.
- YTD earnings attributable to common shares decreased approximately 10%; the decline reflected a $120 million deferred tax charge associated with a change in the indefinite reinvestment assertion for foreign subsidiaries, $137 million of Aliso Canyon-related charges, higher noncontrolling interests and the absence of a $50 million prior-year benefit from RBS Sempra Commodities VAT matters.
- Cash, cash equivalents and restricted cash totaled $2.093 billion at June 30, 2022, compared with $581 million at December 31, 2021.
- Total debt and finance leases reported on the balance sheet were approximately $25.9 billion, including $955 million of short-term debt, $303 million of current maturities and $24.661 billion of long-term debt and finance leases.
- Sempra reported $9.150 billion of available unused credit, including $1.931 billion of unrestricted cash and cash equivalents. The company was in compliance with applicable credit-facility leverage covenants.
Segment Performance and Material Changes
| Segment earnings attributable to common shares | Q2 2022 | Q2 2021 | YTD 2022 | YTD 2021 |
|---|---|---|---|---|
| SDG&E | $176 million | $186 million | $410 million | $398 million |
| SoCalGas | $87 million | $94 million | $421 million | $501 million |
| Sempra Texas Utilities | $186 million | $138 million | $348 million | $273 million |
| Sempra Infrastructure | $183 million | $53 million | $278 million | $255 million |
| Parent and other | $(73) million | $(47) million | $(286) million | $(129) million |
- SDG&E: Q2 earnings declined 5% because of higher income taxes and interest expense, partly offset by higher CPUC base operating margin and electric transmission margin. YTD earnings increased 3%.
- SoCalGas: Q2 earnings declined 7% and YTD earnings declined 16%, primarily due to $32 million of after-tax Q2 civil litigation charges related to the Aliso Canyon Leak, $98 million of YTD after-tax Leak-related charges, and $10 million of penalties related to energy-efficiency and advocacy proceedings.
- Sempra Texas Utilities: Q2 and YTD earnings increased 35% and 27%, respectively, primarily from higher Oncor equity earnings attributable to rate updates, customer growth and weather-related consumption.
- Sempra Infrastructure: Q2 earnings increased $130 million, mainly from asset and supply optimization, favorable comparative foreign-currency effects, Cameron LNG equity earnings, higher transportation rates and renewable project contributions. YTD earnings increased 9%, partly offset by higher noncontrolling interests and unfavorable Mexican foreign-currency and inflation effects.
- On June 1, 2022, Sempra sold a 10% interest in Sempra Infrastructure Partners to Abu Dhabi Investment Authority for $1.7 billion. Following the transaction, Sempra, KKR and ADIA owned 70%, 20% and 10%, respectively; Sempra retained control.
- Sempra repurchased $450 million of common stock during the first half of 2022 through accelerated share repurchase programs and paid $711 million of common dividends.
Guidance, Outlook, Risks and Unusual Items
- Management expects approximately $5.8 billion of 2022 capital expenditures and investments, reduced from the previously projected $6.2 billion primarily because of delays at SDG&E and SoCalGas.
- Management expects liquidity from operating cash flow, cash, credit facilities, debt issuance, equity-method investment distributions, project financing and minority-owner funding to support operations, capital expenditures, dividends, debt repayment and Leak-related obligations.
- SoCalGas expected to pay approximately $1.8 billion around August 30, 2022 to settle most Individual Plaintiff Litigation claims related to the Aliso Canyon Leak. Sempra expected to contribute approximately $500 million of additional equity to SoCalGas in August 2022, following a $150 million contribution in June 2022 and $800 million in September 2021.
- Total estimated Aliso Canyon Leak costs were $3.361 billion at June 30, 2022, including $1.279 billion recovered or considered probable of recovery from insurance. SoCalGas had accrued approximately $2.007 billion and recorded a $344 million insurance receivable. The estimate excludes certain unresolved claims, regulatory penalties and other costs that could be material.
- SoCalGas’ Aliso Canyon facility had a $908 million net book value. Permanent closure or insufficient future cash flows could lead to impairment, additional costs and reliability issues.
- California utilities filed 2024 General Rate Case applications requesting 2024 revenue requirements of approximately $3.0 billion for SDG&E and $4.4 billion for SoCalGas. Decisions were requested by the end of 2023, with proposed annual post-test-year increases of approximately 8% to 12% for SDG&E and 6% to 8% for SoCalGas.
- Key ongoing risks include California wildfire liability and Wildfire Fund sufficiency, CPUC and other regulatory decisions, rising interest rates and inflation, commodity and foreign-currency volatility, cybersecurity, permitting and construction risks, Mexico energy-law changes, customer and land disputes, and potential impairment of Mexican infrastructure assets.
- Sempra Infrastructure’s Shell Mexico and Gazprom disputes resulted in exhausted letters of credit and customer nonpayment. Gazprom-related draws are expected to provide payment security through 2024, but recovery and future commercial arrangements remain matters to monitor.
- Potential LNG projects, including Cameron LNG Phase 2, Port Arthur LNG and ECA LNG Phase 2, remain subject to binding offtake agreements, permits, financing, partner approvals and final investment decisions. The filing does not provide a committed completion date for these proposed projects.
Important Facts for Investors to Verify
- Confirm the final amount and timing of the approximately $1.8 billion Aliso Canyon settlement payment and the related SoCalGas equity contribution and financing.
- Monitor developments in unresolved Aliso Canyon civil and regulatory proceedings and whether additional losses exceed recorded reserves.
- Track CPUC decisions on the 2022 SDG&E cost-of-capital proceeding, the 2024 General Rate Cases and recovery of wildfire mitigation costs.
- Evaluate the effect of the ADIA transaction and increased noncontrolling interests on Sempra’s share of future Sempra Infrastructure earnings and cash flows.
- Reconcile reported debt, refinancing needs and available credit capacity as interest rates rise.
- Assess construction, permitting, partner-consent and financing milestones for LNG and Mexican infrastructure projects, including the $426 million Guaymas-El Oro pipeline asset exposed to potential impairment.
- Review the filing’s full commitments, contingencies and risk-factor disclosures, particularly wildfire exposure, Mexico regulatory actions, Aliso Canyon obligations and guarantees with maximum exposure of $165 million for Cameron LNG’s reserve account and $979 million under the CFIN Support Agreement.