SEMPRA quarterly report, Q3 FY2020

Sempra Energy Form 10-Q Summary

Business context and reporting period

This combined, unaudited Form 10-Q covers Sempra Energy, San Diego Gas & Electric Company (SDG&E), and Southern California Gas Company (SoCalGas) for the quarter and nine months ended September 30, 2020. Sempra operates regulated electric and natural gas utilities, Texas utility investments, Mexican energy infrastructure, and LNG businesses. South American businesses were sold during the second quarter of 2020 and are presented as discontinued operations.

Key financial metrics

Metric	Three months ended September 30	Nine months ended September 30
Total revenues	$2.644 billion, versus $2.758 billion in 2019	$8.199 billion, versus $7.886 billion in 2019
Income from continuing operations	$428 million, versus $653 million	$1.823 billion, versus $1.570 billion
Earnings attributable to common shares	$351 million, versus $813 million	$3.350 billion, versus $1.608 billion
Diluted EPS	$1.21, versus $2.84	$11.43, versus $5.74
Net cash from operating activities	Not separately provided for the quarter	$1.629 billion, versus $2.118 billion
Capital expenditures for PP&E	Not separately provided for the quarter	$3.313 billion, versus $2.590 billion

The nine-month earnings increase was primarily driven by $2.899 billion of pretax gains from the sales of the Peruvian and Chilean businesses, reported in discontinued operations. Continuing-operations earnings were lower in the third quarter but higher year to date. Based on common earnings divided by revenue, the reported consolidated margin was approximately 13.3% for the quarter and 40.9% year to date; these figures are significantly affected by discontinued-operation sale gains and are not representative of recurring operating margins.

Segment and operating performance

• SDG&E: Common earnings were $178 million in the quarter, down from $263 million, and $633 million year to date, up from $582 million. The quarter was affected by the prior-year benefit from retroactive rate-case revenues and a $29 million after-tax impact from the Energy Efficiency Program inquiry. Year-to-date results benefited from higher transmission margin, AFUDC, and a regulatory-liability release.
• SoCalGas: The company reported a $24 million quarterly loss versus $143 million of earnings in 2019, while nine-month earnings declined to $425 million from $437 million. Results reflected the absence of prior-year rate-case benefits and $22 million of third-quarter after-tax impacts associated with Aliso Canyon litigation and regulatory matters.
• Sempra Texas Utilities: Earnings were $209 million in the quarter and $458 million year to date, compared with $212 million and $419 million, respectively, primarily reflecting higher Oncor earnings year to date.
• Sempra Mexico: Earnings were $50 million in the quarter, down from $84 million, and $302 million year to date, up from $214 million. Quarterly results were pressured by foreign-currency and inflation effects, while year-to-date results benefited from favorable currency effects and the Sur de Texas-Tuxpan pipeline entering commercial operation.
• Sempra LNG: Earnings increased to $71 million in the quarter from $2 million and to $207 million year to date from $13 million, primarily due to Cameron LNG Phase 1 commercial operations. All three Cameron LNG trains achieved commercial operations by August 2020.

Cash flow, debt and liquidity

• At September 30, 2020, Sempra Energy had $3.515 billion of unrestricted cash and $3.546 billion of cash, cash equivalents, and restricted cash for cash-flow reporting purposes.
• Consolidated short-term debt was $772 million, compared with $3.505 billion at December 31, 2019. Long-term debt and finance leases were $21.770 billion, compared with $20.785 billion.
• Consolidated operating cash flow declined to $1.629 billion from $2.118 billion, while investing activities generated $2.415 billion, primarily because of $5.186 billion of cash provided by discontinued operations, including South American divestiture proceeds.
• Financing activities used $710 million. Major items included $890 million of net proceeds from Series C preferred stock, $565 million of common-stock repurchases, $872 million of common dividends, and substantial debt issuance and repayment activity.
• Sempra Energy and its subsidiaries reported $6.685 billion of unused primary U.S. committed credit facilities. Including foreign facilities, available unused credit was reported as $7.793 billion. Management stated that available liquidity, operating cash flow, asset-sale proceeds, credit facilities, debt markets, and investment distributions are expected to fund current needs.
• Debt-to-total-capitalization covenants were not more than 65% for Sempra Energy, SDG&E, and SoCalGas, and all entities were in compliance at September 30, 2020.

Material changes versus the prior comparable period

• South American divestitures generated $5.765 billion of cash proceeds and $1.747 billion of after-tax gains, materially increasing year-to-date earnings and liquidity while eliminating those businesses from continuing operations.
• Cameron LNG moved from construction and start-up toward commercial operations, substantially increasing Sempra LNG and equity-method earnings.
• Capital expenditures for PP&E rose by $723 million year to date to $3.313 billion, with higher spending at SDG&E and SoCalGas.
• Operation and maintenance expense rose $378 million, or 15%, year to date, including higher refundable-program costs, increased California utility operating costs, and Aliso Canyon-related costs.
• Sempra issued $900 million of Series C preferred stock and completed a $500 million accelerated share repurchase of 4,089,375 common shares at an average price of $122.27.
• Credit ratings remained investment grade but weakened: Moody’s downgraded Sempra Energy to Baa2 and SoCalGas to A2; S&P assigned negative outlooks to Sempra Energy, SDG&E, and SoCalGas.
• The company adopted the expected-credit-loss standard in 2020. Consolidated allowances for trade and other receivables increased to $103 million at September 30, 2020, including $84 million of provisions during the period.

Guidance, outlook, commentary and unusual items

• Management reduced expected 2020 capital expenditures and investments to approximately $5.6 billion from $5.9 billion previously, primarily because of deferred Sempra Mexico spending and delayed investment decisions for ECA LNG.
• The final investment decision for ECA LNG Phase 1 was delayed, in part because of permitting uncertainty and COVID-19-related disruptions. The proposed Port Arthur LNG final investment decision was delayed from 2020 to 2021.
• COVID-19 has increased customer nonpayment and uncollectible-account risk at the California Utilities. Regulatory recovery of COVID-19-related costs and customer relief is not assured.
• SoCalGas estimated total Aliso Canyon-related costs of $1.440 billion, including $1.279 billion recovered or probable of recovery from insurance. The company recorded a $504 million insurance receivable and had received $775 million of insurance proceeds through September 30, 2020. Additional losses could arise from litigation, regulatory proceedings, penalties, unrecovered costs, or inability to collect the receivable.
• SDG&E recorded a $6 million fine and customer refund-related charges associated with its Energy Efficiency Program inquiry; CPUC approval of the related settlement was pending at filing.
• Sempra Energy had maximum potential exposure of $4.0 billion under guarantees related to Cameron LNG financing. Financial completion is required by September 30, 2021, subject to a potential force-majeure extension; failure could result in a demand under the guarantees.
• A separate Support Agreement related to Cameron LNG financing had a maximum exposure to loss of $979 million and a recorded fair value of $6 million at September 30, 2020.
• The Guaymas-El Oro segment of the Sonora pipeline remained inoperable. CFE payments were contingent on repairs, with a revised service-start date of March 14, 2021. The segment had a $446 million net book value.
• Mexican regulatory and permitting disputes could affect renewable projects, ECA LNG development, and existing regasification operations. Shell Mexico arbitration and related permit challenges remained unresolved.
• Sempra recorded a $100 million equity loss related to RBS Sempra Commodities for estimated pending tax matters and legal costs.

Most important facts for investors to verify

• Separate recurring earnings from the $2.899 billion pretax South American divestiture gains and other discontinued-operation effects.
• Progress toward Cameron LNG financial completion and the potential $4.0 billion guarantee exposure.
• Resolution and ultimate recoverability of Aliso Canyon costs, insurance receivables, litigation accruals, and regulatory claims.
• CPUC treatment and recovery of COVID-19 customer-protection costs, uncollectible accounts, and the Energy Efficiency Program settlement.
• Current credit ratings, refinancing needs, interest-rate exposure, and compliance with debt covenants.
• Timing, permits, financing, offtake commitments, and final investment decisions for ECA LNG and Port Arthur LNG.
• Outcome of Mexican legal and regulatory disputes affecting the Sonora pipeline, renewable projects, and ECA LNG.
• Whether operating cash flow and recurring distributions can replace the earnings and liquidity formerly provided by the divested South American businesses.