Sempra Energy Form 10-Q Summary
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) for the three and nine months ended September 30, 2019. Sempra operates regulated electric and gas utilities, Texas transmission investments, Mexican energy infrastructure, and LNG businesses. South American operations were classified as discontinued operations following the January 2019 decision to sell those businesses.
Financial performance and key metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total revenue | $2.758 billion | $2.565 billion | $7.886 billion | $7.276 billion |
| Income from continuing operations | $653 million | $280 million | $1.570 billion | $25 million |
| Net income | $909 million | $334 million | $1.862 billion | $162 million |
| Earnings attributable to common shares | $813 million | $274 million | $1.608 billion | $60 million |
| Diluted EPS | $2.84 | $0.99 | $5.74 | $0.23 |
| Operating cash flow | Not separately provided | Not separately provided | $2.118 billion | $2.659 billion |
| Capital expenditures | Not separately provided | Not separately provided | $2.590 billion | $2.654 billion |
Q3 net income included $256 million from discontinued operations, compared with $54 million in the prior-year quarter. Nine-month discontinued-operations income was $292 million versus $137 million. The reported nine-month improvement therefore includes significant discontinued-operation and tax effects.
Sempra reported 9M 2019 adjusted earnings of $1.464 billion, or adjusted diluted EPS of $5.23. Adjusted results excluded the $45 million after-tax gain on the sale of Sempra Renewables assets and $99 million of tax-related benefits associated with the planned South American divestitures.
At September 30, 2019, total assets were $64.585 billion, cash and cash equivalents were $106 million, short-term debt was $3.588 billion, current debt maturities were $1.623 billion, and long-term debt and finance leases were $20.995 billion. Total equity was $20.551 billion.
Sempra generated $2.118 billion of operating cash flow but used $3.439 billion in investing activities, including $2.590 billion of capital expenditures and $1.449 billion for investments and acquisitions. Financing activities provided $1.575 billion. Primary U.S. credit facilities totaled $6.685 billion, with $4.232 billion available after commercial paper borrowings.
Material changes versus the prior comparable period
- California Utilities: SDG&E earnings increased to $263 million in Q3 from $205 million, while SoCalGas earned $143 million versus a $14 million loss. The principal driver was the retroactive application of the 2019 CPUC General Rate Case decision, contributing $66 million after tax at SDG&E and $130 million after tax at SoCalGas for the first six months of 2019.
- Texas Utilities: Earnings increased to $212 million in Q3 from $154 million and to $419 million for 9M from $283 million, primarily reflecting higher Oncor equity earnings and the May 2019 acquisition of InfraREIT by Oncor.
- Sempra Mexico: Q3 earnings increased to $84 million from $44 million, but included favorable foreign-currency and inflation effects and higher noncontrolling-interest allocations. Force-majeure payments related to the Guaymas-El Oro pipeline ended August 22, 2019.
- Sempra LNG: Cameron LNG Train 1 began commercial operation in August 2019. Sempra LNG reported Q3 earnings of $2 million versus $16 million, but 9M earnings improved to $13 million from a $764 million loss because the prior-year period included a major natural-gas-storage impairment.
- Asset rotation: Sempra completed the sale of its remaining U.S. wind assets in April 2019 for $569 million and recognized a $61 million pretax gain. It also sold non-utility natural-gas-storage assets for approximately $322 million net of transaction costs.
- Accounting: The company adopted the new lease standard on January 1, 2019, recognizing $595 million of operating lease right-of-use assets and $494 million of operating lease liabilities at September 30, 2019. The adoption also shifted certain power-purchase agreement costs from purchased power to depreciation and interest expense.
Guidance, outlook, commentary, risks and unusual items
- Management expected approximately $6.2 billion of 2019 capital expenditures and investments, excluding discontinued operations, up from the prior estimate of $5.8 billion.
- Sempra expected the Peruvian and Chilean South American business sales to close in the first quarter of 2020, subject to regulatory and other closing conditions. Announced base purchase prices were $3.59 billion for the Peruvian businesses and $2.23 billion for the Chilean businesses.
- SDG&E contributed $322.5 million to California’s Wildfire Fund in September 2019, funded through a $322 million equity contribution from Sempra. SDG&E recorded a Wildfire Fund asset and expects additional annual shareholder contributions of approximately $12.9 million for 10 years.
- SoCalGas estimated cumulative Aliso Canyon leak-related costs of $1.099 billion, including $1.069 billion recovered or probable of recovery from insurance. It had received $715 million of insurance proceeds and recorded a $354 million insurance receivable. Further litigation, regulatory sanctions, insurance disputes, and unestimated costs could be material.
- Approximately 390 Aliso Canyon-related lawsuits involving about 36,000 plaintiffs remained pending as of October 28, 2019. A CPUC investigation into potential violations and penalties was ongoing.
- Oncor and Sempra LNG require substantial external financing and capital contributions. Sempra had maximum outstanding guarantees of approximately $3.9 billion related to Cameron LNG financing.
- Train 1 at Cameron LNG was operating at reduced capacity because of an equipment issue, although the filing stated that tolling-agreement revenues had not been reduced. Trains 2 and 3 were expected to begin producing LNG in the first and second quarters of 2020, respectively, subject to construction and commissioning risks.
- Risks include California wildfire liability and exhaustion of the Wildfire Fund, regulatory cost recovery, Aliso Canyon litigation and facility impairment, natural-gas reliability, project delays and cost overruns, Mexican permit and property disputes, CFE contract disputes, foreign-exchange and commodity volatility, cybersecurity, credit downgrades, and restrictions on distributions from Oncor.
Most important facts for an investor to verify
- Whether the South American divestitures close on schedule and at the announced purchase prices after closing adjustments.
- The final outcome and potential financial exposure from Aliso Canyon litigation, the CPUC investigation, insurance recoveries, and any additional penalties or remediation costs.
- SDG&E’s future Wildfire Fund contributions, available coverage, liability cap, and any wildfire-related claims affecting the fund asset.
- Progress, final costs, and commercial operation dates for Cameron LNG Trains 2 and 3 and other LNG projects.
- Whether the Guaymas-El Oro pipeline is repaired and service resumes under the revised CFE agreement, and the impact of any further Mexican contract or permit disputes.
- Debt maturities, commercial-paper reliance, credit ratings, covenant compliance, and the effect of planned equity and asset-sale proceeds on leverage.
- The sustainability of reported earnings after removing discontinued operations, retroactive rate-case benefits, foreign-currency effects, and other unusual tax or asset-sale items.