SEMPRA quarterly report, Q2 FY2014

Sempra Energy 2014 Q2 Form 10-Q Summary

Business context and reporting period

This combined Form 10-Q, filed August 7, 2014, covers Sempra Energy, San Diego Gas & Electric Company (SDG&E), and Southern California Gas Company (SoCalGas) for the three and six months ended June 30, 2014. Sempra operates regulated California utilities, South American electric utilities, Mexican energy infrastructure, renewable generation, natural gas generation, storage, pipelines, and LNG businesses.

SDG&E and SoCalGas are wholly owned subsidiaries of Sempra Energy. The interim financial statements are unaudited and prepared under U.S. GAAP. Results for interim periods are not necessarily indicative of full-year results.

Key financial metrics

Metric	Three months ended June 30, 2014	Three months ended June 30, 2013	Six months ended June 30, 2014	Six months ended June 30, 2013
Sempra revenue	$2,678 million	$2,651 million	$5,473 million	$5,301 million
Sempra earnings attributable to common shares	$269 million	$245 million	$516 million	$423 million
Diluted EPS	$1.08	$0.98	$2.07	$1.70
Net margin, calculated	10.0%	9.2%	9.4%	8.0%
Operating cash flow	Not separately provided for the quarter	Not separately provided for the quarter	$1,034 million	$1,105 million

• Utilities generated $4,855 million of revenue in the first six months, up from $4,666 million. Energy-related businesses generated $618 million, down from $635 million.
• Six-month earnings increased 22%, primarily because 2013 included a $119 million after-tax SONGS plant-closure charge at SDG&E, while 2014 included only a $9 million after-tax adjustment related to the proposed settlement.
• SDG&E earnings were $123 million in the second quarter and $222 million for the first six months, compared with $65 million and $156 million, respectively, in 2013.
• SoCalGas earnings were $80 million in the second quarter and $158 million for the first six months, compared with $118 million and $164 million, respectively, in 2013. The comparison was affected by $37 million of retroactive 2012 General Rate Case earnings recorded in the second quarter of 2013.
• Sempra declared common dividends of $0.66 per share for the quarter and $1.32 per share for the first six months, compared with $0.63 and $1.26 in the comparable 2013 periods.

Cash flow, debt, liquidity, and balance sheet

• Sempra operating cash flow was $1,034 million in the first six months, down $71 million year over year. The decrease primarily reflected higher undercollected regulatory balancing accounts, higher income tax payments, and lower cash earnings adjusted for noncash items.
• Investing cash outflow was $1,621 million, compared with $627 million in 2013, including $1,513 million of property, plant and equipment expenditures and $160 million of investment expenditures.
• Financing cash inflow was $472 million, reflecting $2,345 million of debt issuances and $1,475 million of debt repayments. Common dividends paid were $301 million.
• Cash and cash equivalents declined to $789 million at June 30 from $904 million at December 31, 2013. Approximately $622 million was held outside the United States and was unavailable for U.S. operations unless repatriated.
• Sempra reported $1,238 million of short-term debt, $195 million of current long-term debt, and $12,323 million of long-term debt at June 30. The carrying amount of total long-term debt, before specified exclusions and adjustments, was $11,952 million; its estimated fair value was $13,134 million.
• Committed credit facilities totaled approximately $4.1 billion, with $2.4 billion unused. Additional foreign subsidiary credit facilities totaled $781 million, of which $683 million was unused. The company and utilities were in compliance with applicable financial covenants and maintained investment-grade credit ratings.
• Sempra’s 2014 capital expenditure and investment forecast was approximately $3.4 billion, including $2.2 billion for the California Utilities and $1.2 billion for other subsidiaries.

Material changes versus the prior comparable period

• SDG&E benefited from the absence of the significant 2013 SONGS closure charge, higher authorized CPUC base operating margins, and lower non-refundable operating costs.
• SoCalGas earnings declined because 2013 included retroactive General Rate Case earnings and 2014 included a $6 million after-tax charge for Pipeline Safety Enhancement Plan costs disallowed for recovery.
• Sempra Mexico earnings increased to $76 million for the first six months from $57 million, supported by $20 million of equity-related allowance for funds used during construction for the Sonora Pipeline and improved operating results.
• Sempra Renewables earnings increased to $46 million from $19 million, including a $16 million after-tax gain from selling a 50% interest in Copper Mountain Solar 3.
• Sempra Natural Gas earnings declined to $13 million from $62 million because 2013 included a $44 million after-tax gain on the sale of a 625-MW Mesquite Power block.
• Consolidated income tax expense was $220 million for the first six months versus $210 million in 2013, but the effective tax rate declined to 29% from 32%. The 2013 rate included a $63 million tax charge related to the IEnova stock offering reorganization; 2014 included $24 million of tax on planned repatriation of current-year foreign earnings.
• Sempra acquired or funded renewable investments, including a $109 million investment in four California solar projects, while deconsolidating its 50% interest in Copper Mountain Solar 3.

Guidance, outlook, risks, contingencies, and unusual items

• Management stated that operating cash flow, available credit, securities issuances, project financing, distributions from equity-method investments, and joint-venture funding should be adequate for operations, capital expenditures, dividends, acquisitions, and debt maturities.
• The proposed SONGS settlement remained subject to CPUC approval. It contemplated recovery of remaining SONGS investment over approximately ten years, subject to a reduced return, and included customer refunds related to the steam-generator replacement project. A $232 million regulatory asset related to expected SONGS recovery was recorded at June 30 and could change materially if the settlement is not approved or is modified.
• SDG&E recorded $373 million of wildfire-related regulatory assets, including $354 million related to CPUC-regulated operations. Recovery requires future regulatory action. If recovery were no longer considered probable, the potential after-tax charge was estimated at up to approximately $210 million.
• SDG&E’s ERRA account was undercollected by approximately $591 million at June 30. Rate increases approved by the CPUC were expected to reduce the balance through 2015, assuming energy costs approximate forecasts.
• Pipeline safety spending remains subject to reasonableness review and potential disallowances. Recorded PSEP implementation costs were $1 million for SDG&E and $48 million for SoCalGas after the June 2014 CPUC decision.
• Major ongoing matters include SONGS decommissioning, litigation against Mitsubishi Heavy Industries, wildfire litigation, a disputed $285 million Rim Rock wind investment, Sunrise Powerlink contractor claims, foreign regulatory and property disputes, and RBS Sempra Commodities litigation and indemnification exposure.
• Cameron LNG had a construction contract estimated at approximately $6 billion and, after the reporting date, Sempra signed project financing documents involving up to $7.4 billion of debt and a completion guarantee for 50.2%, or approximately $3.7 billion. The financing remained subject to conditions, including final regulatory approvals.
• Key operating risks include regulatory decisions, rate recovery, permitting and construction execution, commodity and interest-rate volatility, foreign currency movements, counterparty performance, weather and natural disasters, cybersecurity, energy-market changes, nuclear decommissioning, and litigation outcomes.

Important facts investors should verify

• Final CPUC approval and implementation of the SONGS settlement, including the recoverability of the $232 million regulatory asset.
• Future CPUC treatment of wildfire-related regulatory assets and remaining claims, including the potential for the stated approximately $210 million after-tax exposure.
• Progress in reducing SDG&E’s approximately $591 million ERRA undercollection and the effect of future energy costs on cash flow.
• Resolution of PSEP cost-recovery proceedings and the effect of any additional pipeline-safety disallowances.
• Completion, financing, permitting, and cost exposure for Cameron LNG, Sonora Pipeline, Los Ramones, renewable projects, and California utility capital programs.
• Changes in debt levels, commercial paper usage, foreign cash availability, interest rates, and compliance with credit-facility covenants.
• Actual outcomes of wildfire, SONGS/MHI, Rim Rock, Sunrise Powerlink, LNG, and other legal or regulatory proceedings.