SEMPRA quarterly report, Q1 FY2017

Sempra Energy 2017 First-Quarter 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 months ended March 31, 2017. Sempra operates regulated California utilities and infrastructure businesses in Mexico, South America, renewable energy, LNG, and natural gas midstream markets. The financial statements are unaudited and prepared under U.S. GAAP.

Key financial metrics

Metric	Q1 2017	Q1 2016	Change
Sempra Energy revenue	$3,031 million	$2,622 million	+16%
Net income	$452 million	$364 million	+24%
Earnings attributable to shareholders	$441 million	$353 million	+25%
Diluted EPS	$1.75	$1.40	+$0.35
Dividends declared per share	$0.82	$0.76	+8%
Operating cash flow	$1,004 million	$626 million	+60%
Capital expenditures	$992 million	$971 million	+2%

Net income represented approximately 14.9% of revenue, compared with approximately 13.9% in the prior-year quarter. Income before taxes increased to $755 million from $455 million, while income tax expense increased to $295 million from $108 million. The effective tax rate rose to 39% from 24%, primarily because of Mexican foreign currency and inflation effects and the absence of the prior-year share-based compensation tax benefit.

Segment earnings increased at SDG&E to $155 million from $136 million, SoCalGas to $203 million from $199 million, Sempra South American Utilities to $47 million from $38 million, and Sempra Mexico to $48 million from $18 million. Sempra Renewables declined to $11 million from $14 million, while Sempra LNG & Midstream improved to $1 million from a $32 million loss.

Cash flow, debt, and liquidity

• Operating cash flow of $1.004 billion exceeded capital expenditures of $992 million, before dividends and other investing activity.
• Investing cash use was $1.026 billion, including $992 million of property, plant, and equipment expenditures and $59 million of investment expenditures.
• Financing cash use was $46 million, including $176 million of common dividends paid, $313 million of debt repayments, and a $97 million net reduction in short-term debt.
• Cash and cash equivalents declined to $290 million from $349 million at December 31, 2016. The consolidated cash balance included $219 million held outside the United States that was unavailable for U.S. operations unless repatriated.
• At March 31, 2017, Sempra reported $2.054 billion of short-term debt, $839 million of current long-term debt, and $14.409 billion of long-term debt, for approximately $17.3 billion of reported debt.
• Committed U.S. credit facilities totaled $4.335 billion, with approximately $2.730 billion available. Foreign credit facilities totaled $1.677 billion, with approximately $1.076 billion available.
• Sempra, SDG&E, and SoCalGas remained in compliance with their credit-facility covenants and maintained investment-grade credit ratings.

Material changes versus the prior comparable period

• Revenue growth reflected higher California utility revenues, higher natural gas prices and volumes, increased Sempra Mexico activity following the GdC and Ventika acquisitions, and improved LNG and natural gas marketing results.
• Sempra Mexico earnings benefited from higher pipeline earnings, Ventika operations, equity-related allowance for funds used during construction, and a $5 million deferred tax benefit related to the Termoeléctrica de Mexicali plant held for sale. These benefits were partly offset by $97 million of Mexican foreign currency and inflation-related tax expense, partly mitigated by $65 million of foreign exchange derivative gains.
• Q1 2016 included a $44 million pretax impairment of the Rockies Express investment and $29 million of deferred tax expense related to the Termoeléctrica de Mexicali plant. The 2017 quarter did not include those charges.
• Other income increased by $120 million to $169 million, including $65 million of foreign exchange derivative gains, $72 million of equity-related allowance for funds used during construction, and $16 million of investment gains.
• Operating cash flow benefited from lower Aliso Canyon-related cash outflows and higher earnings, while working-capital movements also affected the comparison.
• Capital expenditures increased at SDG&E and SoCalGas, Sempra Mexico, and certain renewable projects, partly offset by lower renewable and LNG-related expenditures.

Guidance, outlook, commentary, and unusual items

• Management expected approximately $3.4 billion of capital expenditures and investments during 2017. Funding was expected from operating cash flow, available credit, debt and equity issuance, project financing, investment distributions, and joint-venture funding.
• Management stated that available funds and expected cash flows should support operations, capital expenditures, dividends, debt maturities, acquisitions or start-ups, and Aliso Canyon expenditures. No specific full-year earnings guidance was provided in the filing text.
• SoCalGas did not anticipate paying common stock dividends in 2017 because of its large capital program, described as exceeding $1 billion. SDG&E expected to pay dividends approximating 75% of 2017 earnings, subject to board approval.
• Sempra Mexico continued to pursue the sale of the 625-MW Termoeléctrica de Mexicali plant, classified as held for sale and expected to be sold in the second half of 2017. Assets held for sale totaled $196 million, with related liabilities of $40 million.
• SoCalGas estimated cumulative Aliso Canyon leak-related costs of $799 million at March 31, 2017, recorded an insurance receivable of $621 million, and had received $173 million of insurance proceeds. The estimate excludes unsettled damage claims, certain potential penalties, additional legal costs, and other costs that cannot be reasonably estimated.
• At March 31, 2017, 266 Aliso Canyon-related lawsuits involving more than 22,000 plaintiffs were pending. Insurance coverage was estimated at $1.2 billion to $1.4 billion, subject to policy limits, exclusions, and conditions.
• SDG&E recorded a $12 million net award from the SONGS replacement steam-generator arbitration. The CPUC’s SONGS settlement proceeding remained open and could result in modification or reversal of the settlement and reduced recovery.
• SDG&E recorded $350 million of regulatory assets related to 2007 wildfire costs. If recovery were no longer probable or were reduced, the potential after-tax earnings charge was estimated at up to approximately $207 million.
• The filing identified continued uncertainty regarding Aliso Canyon’s operating authorization, possible rate refunds, additional safety requirements, storage capacity reductions, and potential impairment of the facility, which had a $550 million net book value.
• Management planned adoption of the new revenue-recognition standard on January 1, 2018 using the modified retrospective method and did not expect a material impact on tariff-based revenues. The company was evaluating the effects of new lease, credit-loss, cash-flow presentation, restricted-cash, goodwill, and pension-cost standards.

Most important facts for investors to verify

• Whether Aliso Canyon insurance recoveries are realized and whether litigation, penalties, remediation, rate refunds, or new regulatory requirements exceed recorded amounts.
• The outcome and timing of CPUC proceedings concerning Aliso Canyon, SONGS, 2007 wildfire cost recovery, pipeline safety investments, and future utility rates.
• Progress and economics of the Termoeléctrica de Mexicali sale, Cameron LNG, Sempra Mexico pipeline projects, renewable projects, and other capital commitments.
• Whether the $3.4 billion 2017 capital and investment plan remains achievable without materially increasing debt or reducing liquidity.
• The effect of Mexican foreign currency and inflation volatility, derivative gains or losses, and the elevated 39% consolidated effective tax rate.
• The status of Sempra Mexico acquisition integrations and related internal-control assessments; Ventika and GdC were excluded from the quarter-end evaluation of certain disclosure controls because integration was incomplete.
• Potential future impacts from customer departures to Direct Access or Community Choice Aggregation, which could affect SDG&E load and rate structures even though earnings are substantially decoupled from electric sales volumes.