SEMPRA quarterly report, Q1 FY2015

Sempra Energy 10-Q Summary — Quarter Ended March 31, 2015

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). Sempra operates regulated California utilities, South American electric utilities, Mexican energy infrastructure, renewable generation, natural gas pipelines and storage, LNG projects, and related energy businesses. The financial statements are unaudited and cover the three months ended March 31, 2015, compared with the first quarter of 2014.

Key Financial Metrics

Metric	Q1 2015	Q1 2014	Change
Sempra revenue	$2.682 billion	$2.795 billion	Down $113 million
Sempra net income	$458 million	$266 million	Up $192 million
Earnings attributable to Sempra shareholders	$437 million	$247 million	Up $190 million
Diluted EPS	$1.74	$0.99	Up $0.75
Operating cash flow	$811 million	$904 million	Down $93 million
Capital expenditures	$780 million	$801 million	Down $21 million
Cash and cash equivalents	$377 million	$844 million	March 31, 2015 versus March 31, 2014
Total debt	Approximately $14.3 billion	Not clearly provided on the same basis	Long-term debt increased to $13.012 billion from $12.167 billion at December 31, 2014

Sempra’s operating margin, calculated from reported revenue and operating-related expenses, improved materially year over year, although the filing does not present a single consolidated GAAP operating-margin metric. Income before taxes and equity earnings increased to $606 million from $387 million. The effective income tax rate declined to 27% from 33%.

Segment and Utility Results

SDG&E: Earnings attributable to common shares were $147 million versus $99 million. Operating income increased to $282 million from $221 million. The improvement reflected higher CPUC base operations and transmission earnings, lower major maintenance and nonrefundable operating costs, and a $21 million pretax reduction in the SONGS plant-closure loss.
SoCalGas: Net income was $214 million versus $78 million. The increase primarily reflected $113 million of after-tax earnings from seasonal recognition of annual core-gas authorized revenue, a $13.7 million pretax gas-cost incentive mechanism award, higher authorized margins, and increased AFUDC.
Sempra South American Utilities: Earnings increased to $41 million from $35 million, despite unfavorable foreign-currency effects.
Sempra Mexico: Earnings increased to $47 million from $42 million, primarily due to the start-up of the Los Ramones I and part of the Sonora pipeline projects.
Sempra Renewables: Earnings declined to $13 million from $28 million, mainly because Q1 2014 included a $16 million after-tax gain from the sale of a 50% interest in Copper Mountain Solar 3.
Sempra Natural Gas: Earnings declined to $2 million from $9 million due to lower LNG marketing earnings and LNG development costs.

Material Changes Versus the Prior Comparable Period

Revenue declined despite higher earnings because lower natural-gas prices and warmer weather reduced pass-through utility revenues and costs. Energy-related-business revenue declined $50 million to $260 million.
Utility natural-gas costs fell $274 million, or 44%, to $346 million. SoCalGas’s average gas cost declined 41% to $3.10 per Mcf; SDG&E’s declined 22% to $4.14 per Mcf.
SoCalGas adopted CPUC-required seasonalization of core-gas authorized revenue. This increased Q1 2015 revenue by $163 million and earnings by $113 million versus Q1 2014, but management stated it will not affect full-year 2015 revenue, earnings, or cash flow. Earnings are expected to be concentrated in the first and fourth quarters.
Operating and maintenance expense decreased 3% to $658 million, while depreciation and amortization increased to $303 million from $286 million.
Operating cash flow decreased because of lower accounts payable, higher greenhouse-gas allowance purchases, and regulatory-account movements, partly offset by higher earnings and lower inventory.
Sempra issued $500 million of 2.40% notes due 2020. SDG&E issued $140 million of variable-rate first-mortgage bonds due 2017 and $250 million of 1.914% amortizing bonds due 2022. These proceeds were used primarily to repay commercial paper and other short-term debt.
In March 2015, Sempra acquired the Black Oak Getty 78-MW wind project for $8 million, including $2 million paid at closing and $6 million contingent on development milestones.
After quarter-end, Sempra Natural Gas sold the remaining 625-MW block of Mesquite Power for net proceeds of $345 million and expected to record an approximately $58 million pretax gain in Q2 2015.

Liquidity, Capital Spending, Debt, and Outlook

Sempra reported $3.3 billion of available unused credit under its primary committed facilities and an additional $648 million of unused credit under subsidiary facilities. The primary facilities aggregate $4.1 billion and generally mature in 2017.
At March 31, 2015, SDG&E had $100 million of commercial paper outstanding supported by its credit facility; SoCalGas had no borrowings supported by that facility. Sempra Global had $731 million of commercial paper outstanding.
Sempra’s 2015 capital expenditures and investments were expected to total approximately $3.3 billion, including $2.4 billion for the California Utilities and $0.9 billion for other subsidiaries.
Management stated that operating cash flow, credit facilities, debt issuance, project financing, distributions from equity-method investments, and joint ventures should be adequate to fund operations, capital expenditures, dividends, acquisitions or start-ups, and maturing debt.
Cash of $324 million held outside the United States was unavailable for U.S. operations unless repatriated. Management planned to repatriate certain current-year foreign earnings but continued to assert indefinite reinvestment of prior-year undistributed foreign earnings.
At March 31, 2015, Sempra remained in compliance with credit-facility covenants and maintained investment-grade credit ratings.

Guidance, Risks, Contingencies, and Unusual Items

SONGS: SDG&E’s 20% interest in the permanently retired San Onofre Nuclear Generating Station remains subject to decommissioning, regulatory oversight, litigation, and potential cost-recovery issues. The cumulative after-tax plant-closure loss was $127 million, and the related regulatory asset was $294 million at March 31, 2015.
Wildfire litigation: Sempra and SDG&E recorded $372 million of regulatory assets for wildfire-related costs in excess of insurance and third-party recoveries. If recovery in rates were no longer considered probable, the potential after-tax charge related to CPUC-regulated amounts could have been approximately $217 million.
Pipeline safety: SDG&E and SoCalGas had recorded PSEP regulatory-account costs of $4 million and $104 million, respectively. Recovery remains subject to CPUC review and reasonableness determinations.
Regulatory proceedings: The 2016 general rate cases requested substantial revenue-requirement increases, but the filing notes that the Office of Ratepayer Advocates recommended materially different outcomes. Final decisions were pending.
Cameron LNG: Sempra’s equity-method investment was $969 million. Sempra guaranteed 50.2% of Cameron LNG project debt, or up to $3.7 billion, until specified completion conditions are met.
Market and operating risks: Principal risks include commodity-price volatility, low natural-gas prices and storage spreads, foreign-currency fluctuations, regulatory disallowances, construction delays and cost overruns, project financing availability, cybersecurity, natural disasters, pipeline and grid failures, nuclear decommissioning, counterparty performance, and litigation.
Other unusual items: Q1 2014 benefited from the Copper Mountain Solar 3 gain; Q1 2015 benefited from the SoCalGas seasonalization adjustment, the SoCalGas gas-cost incentive award, the SONGS plant-closure adjustment, and tax benefits related to prior commodities-marketing businesses.

Most Important Facts for Investors to Verify

Whether SoCalGas seasonalization causes expected weakness or losses in the second and third quarters while leaving full-year earnings unchanged.
The timing and amount of CPUC approvals for wildfire, SONGS, pipeline-safety, and other regulatory assets.
The remaining cost, schedule, financing, and guarantee exposure associated with Cameron LNG and other major construction projects.
Whether Sempra’s $3.3 billion 2015 capital program and dividend commitments can be funded while maintaining targeted credit metrics.
The final proceeds and gain from the April 2015 Mesquite Power sale and the use of those proceeds.
The potential financial impact of SONGS decommissioning, spent-fuel storage, MHI litigation, and unresolved wildfire claims.
The effect of lower natural-gas prices, storage-market weakness, foreign exchange, and changing LNG demand on nonregulated earnings.
The filing states that there were no material changes to previously disclosed risk factors and that disclosure controls and procedures were effective as of March 31, 2015.