SEMPRA quarterly report, Q1 FY2020

Sempra Energy 2020 Q1 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 three months ended March 31, 2020, filed May 4, 2020. Sempra is an energy-infrastructure holding company with California utilities, Texas utility investments, Mexican infrastructure businesses and LNG operations. South American businesses are classified as discontinued operations following the planned strategic exit.

Key financial metrics

Metric	Q1 2020	Q1 2019	Change
Total revenue	$3,029 million	$2,898 million	Up $131 million
Income from continuing operations	$867 million	$560 million	Up $307 million
Net income	$947 million	$518 million	Up $429 million
Earnings attributable to common shares	$760 million	$441 million	Up $319 million
Diluted EPS	$2.53	$1.59	Up $0.94
Operating cash flow	$1,318 million	$951 million	Up $367 million
Capital expenditures	$1,010 million	$783 million	Up $227 million

Net income represented approximately 31% of revenue, while earnings attributable to common shares represented approximately 25% of revenue. These ratios are affected by discontinued operations, noncontrolling interests, foreign-currency effects and unusual items.

Segment earnings attributable to common shares were $262 million at SDG&E, $303 million at SoCalGas, $105 million at Sempra Texas Utilities, $191 million at Sempra Mexico and $75 million at Sempra LNG. Parent and other reported a $248 million loss.
Utilities revenue increased to $2,665 million from $2,515 million, while energy-related revenue declined to $364 million from $383 million.
Cash, cash equivalents and restricted cash totaled $2,454 million at March 31, 2020, including $2,247 million of unrestricted cash and cash equivalents on the consolidated balance sheet.
Total assets were $68.3 billion and total equity was $22.1 billion at March 31, 2020.
Consolidated short-term debt was $5.742 billion, current maturities of long-term debt and finance leases were $2.079 billion, and long-term debt and finance leases were $20.198 billion.
Sempra had $4.010 billion of available unused credit under primary U.S. committed facilities. Including unrestricted cash, reported available funds were approximately $6.257 billion.
Sempra Energy and the California Utilities remained in compliance with applicable debt covenants. Credit ratings were investment grade, although Sempra Energy and SoCalGas had negative outlooks from certain agencies.

Material changes versus the prior comparable period

SDG&E earnings increased $86 million, primarily from higher CPUC base operating margin, FERC transmission revenues following the TO5 settlement, and higher allowance for equity funds used during construction. These benefits were partly offset by the absence of a $31 million tax benefit recorded in 2019 and Wildfire Fund amortization.
SoCalGas earnings increased $39 million, mainly from higher authorized operating margin and tax-flow-through benefits. The increase was partly offset by $72 million of Aliso Canyon litigation-related impacts.
Sempra Mexico earnings increased $134 million, primarily from Mexican peso and inflation effects, the Sur de Texas-Tuxpan pipeline beginning commercial operations and related equity earnings. These benefits were partly offset by higher noncontrolling interests and lower earnings from the Guaymas-El Oro pipeline.
Sempra LNG earnings increased $70 million as Cameron LNG Train 1 and Train 2 entered commercial operations and marketing results improved.
Parent and other losses increased $131 million, principally because of a $100 million equity loss related to RBS Sempra Commodities and investment losses on dedicated benefit-plan assets.
Discontinued operations generated $72 million attributable to common shares versus a $51 million loss in Q1 2019, primarily because 2019 included a significant tax charge related to the planned South American divestitures.
Other expense, net changed from $82 million of income to $254 million of expense, primarily due to foreign-exchange and interest-rate derivative losses, Mexican peso transaction losses and investment losses.
The consolidated effective tax rate was a benefit of 58% versus an 8% expense rate in 2019, largely reflecting foreign-currency and inflation effects in Mexico and related tax impacts. The result is not representative of a normal recurring tax rate.

Cash flow, liquidity and financing

Operating cash flow increased to $1.318 billion, helped by higher earnings, a $375 million increase in the Aliso Canyon reserve and higher noncash adjustments.
Investing cash outflows increased to $1.181 billion, primarily because capital expenditures rose to $1.010 billion. The prior-year period benefited from $322 million of net proceeds from the sale of natural gas storage assets.
Financing activities provided $2.114 billion, primarily from increased short-term borrowings and debt issuances. Sempra borrowed approximately $1.524 billion net under a 364-day term loan in March 2020; SDG&E borrowed $200 million under a similar term loan.
In April 2020, SDG&E issued $400 million of 3.32% first mortgage bonds due 2050 and used $200 million to repay its revolving-credit borrowing. Sempra borrowed an additional $75 million under its term loan on April 1, 2020.
Management expected liquidity from operations, cash, credit facilities, asset-sale proceeds, equity-method distributions and debt markets to fund operations, capital expenditures, dividends and debt maturities. Management also noted significant disruption in commercial paper and broader capital markets due to COVID-19.

Guidance, outlook, management commentary and unusual items

Management expected approximately $5.7 billion of 2020 capital expenditures and investments, down from the previously summarized $5.9 billion, primarily because of changes to the ECA LNG Phase 1 project.
Cameron LNG Train 3 was expected to commence commercial operations in the third quarter of 2020, subject to construction, commissioning and COVID-19 risks. Sempra LNG had guarantees with a maximum aggregate amount of $4.0 billion related to Cameron LNG JV debt.
Sempra continued to target a final investment decision for ECA LNG Phase 1 in the second quarter of 2020, but the required Mexican export permit and COVID-19 restrictions could delay the decision. The EPC contract was estimated at approximately $1.5 billion and total project capital expenditures at approximately $1.9 billion.
The expected final investment decision for the proposed Port Arthur LNG project shifted from 2020 to 2021 because of the pandemic and energy-market uncertainty. The EPC contract price was estimated at approximately $8.9 billion if full notice to proceed was issued by July 15, 2020, subject to escalation or renegotiation thereafter.
Sempra completed the sale of its Peruvian businesses on April 24, 2020 for an aggregate base purchase price of $3.59 billion, subject to post-closing adjustments. The Chilean-business sale, with a base purchase price of $2.23 billion, was expected to close in Q2 2020, subject to conditions.
COVID-19 customer protections included suspending service disconnections, waiving certain late-payment fees and offering flexible payment plans. Recovery of incremental costs through the California Utilities’ COVID-19 memorandum accounts was not assured.
Aliso Canyon costs were estimated at $1.408 billion, including $1.277 billion recovered or probable of recovery from insurance. The companies recorded a $511 million insurance receivable and had received $766 million of insurance proceeds through March 31, 2020. The ultimate cost and recoverability remain uncertain.
The filing reported 393 Aliso Canyon-related lawsuits involving approximately 36,000 plaintiffs as of April 29, 2020. Consolidated legal contingency accruals were $442 million, including $297 million for SoCalGas.
The filing recorded a $100 million equity loss for estimated RBS Sempra Commodities obligations related to pending tax matters and legal costs.
The Wildfire Fund asset was approximately $414 million, including current and noncurrent portions, and remained exposed to depletion from eligible wildfire claims. No known claims required a reduction during Q1 2020.

Most important facts for investors to verify

Whether COVID-19 materially increases customer nonpayment, credit-loss allowances, project delays, capital requirements or financing costs after March 31, 2020.
The collectability and timing of the $511 million Aliso Canyon insurance receivable, as well as additional litigation, regulatory penalties and possible unrecovered costs.
The status and economics of the Peru and Chile divestitures, including final proceeds, adjustments, taxes and debt reduction.
Whether Cameron LNG Train 3 achieves commercial operations on schedule and whether the $4.0 billion guarantee exposure is reduced through financial completion.
Whether ECA LNG and Port Arthur LNG receive required permits, secure financing and offtake commitments, and reach final investment decisions without material cost escalation.
The sustainability of Q1 earnings given the 58% consolidated tax benefit, Mexican peso effects, derivative volatility, discontinued operations and the $100 million RBS Sempra Commodities charge.
Potential changes to Sempra’s investment-grade ratings, outlooks, credit-facility availability and collateral requirements.