Sempra Energy 2015 Form 10-K Summary
Business context and reporting period
This combined Form 10-K covers Sempra Energy, San Diego Gas & Electric Company (SDG&E), and Southern California Gas Company (SoCalGas) for the fiscal year ended December 31, 2015. It is an annual filing, not a standalone fourth-quarter filing. Sempra operates regulated California electric and natural-gas utilities, South American utilities, Mexican energy infrastructure, renewable generation, natural-gas pipelines and storage, and LNG businesses.
- California Utilities: SDG&E and SoCalGas.
- Sempra International: South American utilities and Sempra Mexico.
- Sempra U.S. Gas & Power: Sempra Renewables and Sempra Natural Gas.
- Sempra Energy had 249,215,763 common shares outstanding as of February 19, 2016.
- At December 31, 2015, Sempra Energy Consolidated had 17,387 employees, compared with 17,046 in 2014.
Financial metrics, debt and liquidity
The supplied filing text does not include Sempra Energy’s consolidated income statement, consolidated balance sheet, consolidated cash-flow statement, revenue, operating income, consolidated net income, margins, or consolidated liquidity metrics. Those statements are incorporated from the 2015 Annual Report to Shareholders. The following figures are for the unconsolidated Sempra Energy parent and should not be interpreted as consolidated results.
| Parent-only metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net income | $1.349 billion | $1.161 billion | Up $188 million |
| Basic earnings per share | $5.43 | $4.72 | Up $0.71 |
| Diluted earnings per share | $5.37 | $4.63 | Up $0.74 |
| Equity in earnings of subsidiaries | $1.519 billion | $1.291 billion | Up $228 million |
| Net cash used in operating activities | $255 million | $260 million | Use improved by $5 million |
| Dividends received from subsidiaries | $350 million | $300 million | Up $50 million |
| Cash and cash equivalents | $4 million | $3 million | Up $1 million |
| Total debt, including current portion | Approximately $5.947 billion | Approximately $4.644 billion | Up approximately $1.303 billion |
Parent-only total assets were $18.942 billion at December 31, 2015, compared with $17.401 billion at December 31, 2014. Parent-only shareholders’ equity was $11.809 billion versus $11.326 billion. The parent issued $1.248 billion of long-term debt in 2015 and paid $628 million of common-stock dividends. The parent had $752 million of long-term debt classified as current, principally due in 2016.
The filing does not provide consolidated debt, consolidated cash, available credit facilities, consolidated free cash flow, or consolidated interest-coverage metrics in the supplied text.
Material changes versus the prior comparable period
- Parent-only net income increased 16% to $1.349 billion, while equity in subsidiary earnings increased to $1.519 billion from $1.291 billion.
- Parent-only debt increased substantially, reflecting new debt issuance and the classification of $752 million due in 2016 as current.
- Parent-only operating cash use improved modestly, but investing cash flow shifted to a $155 million use from $908 million provided in 2014, primarily reflecting a $457 million net increase in loans to affiliates.
- SoCalGas added approximately 33,000 gas meters in 2015, versus approximately 26,000 in 2014. SDG&E added approximately 5,000 gas meters and 9,800 electric meters, compared with nearly 3,000 and 8,000, respectively, in 2014.
- Chilquinta Energía’s electricity sales declined approximately 1.9%, principally because certain non-regulated customers transferred to a Sempra energy-services subsidiary. Luz del Sur’s electricity sales increased approximately 3.6%.
- Luz del Sur began commercial operation of its 100-MW Santa Teresa hydroelectric facility in September 2015.
- California Senate Bill 350 increased the required California renewable-energy procurement target to 50% by 2030, with interim targets of 40% by 2024 and 45% by 2027.
- Construction continued on the Cameron LNG liquefaction project, consisting of three trains with expected export capability of approximately 12 million tonnes per annum.
Guidance, outlook, management commentary, risks and unusual items
Aliso Canyon gas leak
The most significant unusual event was the natural-gas leak discovered at SoCalGas’s Aliso Canyon storage facility in October 2015. The leak was stopped and the well was permanently sealed in February 2016. At December 31, 2015, Aliso Canyon had a net book value of $243 million, excluding $162 million of construction work in progress for a compression-station project, and represented 63% of SoCalGas’s owned storage capacity.
- SoCalGas faced remediation, relocation, environmental mitigation, investigation, litigation, penalties and potential additional regulatory requirements.
- As of February 24, 2016, 83 lawsuits had been filed, including actions alleging negligence, nuisance, property damage, fraud and other claims.
- The South Coast Air Quality Management District sought civil penalties of up to $250,000 per day for alleged violations.
- Sempra reported insurance policies providing more than $1 billion of coverage, subject to limits, exclusions and conditions; recovery was not assured.
- Extended unavailability of Aliso Canyon could impair the facility, increase operating and capital costs, and jeopardize regional natural-gas and electric reliability.
Other material contingencies and risks
- SDG&E had recorded approximately $362 million in regulatory assets for 2007 wildfire-related costs and sought recovery of an estimated $379 million through a CPUC proceeding. The filing states that an after-tax charge of up to approximately $213 million could result if recovery were no longer probable or were reduced.
- The California Utilities’ Phase I Pipeline Safety Enhancement Plan was estimated at $2.1 billion over 2012–2022: $1.6 billion for SoCalGas and $500 million for SDG&E. Recovery remained subject to regulatory review, and the CPUC had assigned shareholders responsibility for certain older pipelines lacking pressure-test records.
- SDG&E retains a 20% interest in the decommissioning San Onofre Nuclear Generating Station, creating ongoing decommissioning, trust-funding, spent-fuel and cost-recovery risks.
- Sempra Energy had a 50.2% equity interest in Cameron LNG JV and provided completion guarantees for up to $3.7 billion of project-financing principal until specified financial-completion conditions are met.
- The company faced exposure to commodity prices, interest rates, foreign currencies, inflation, counterparties, project execution, permitting, environmental regulation, cybersecurity, natural disasters and changing utility-rate decisions.
- SoCalGas’s Los Angeles County and City of Los Angeles franchise agreements were scheduled to expire in December 2017 and June 2016, respectively.
- The filing provides no specific consolidated earnings or revenue guidance in the supplied text.
Investor verification checklist
- Verify consolidated 2015 revenue, operating income, net income, EPS, operating cash flow, capital expenditures, debt, cash and liquidity from the incorporated Annual Report.
- Review the 2015 Annual Report’s segment results to distinguish recurring utility earnings from international, project-development, equity-method and other items.
- Assess the ultimate cost, insurance recovery, regulatory treatment, impairment exposure and litigation outcomes related to Aliso Canyon.
- Monitor CPUC decisions on wildfire-cost recovery, pipeline-safety costs, rate cases, net-energy-metering reform and income-tax memorandum accounts.
- Review Cameron LNG construction costs, financing, completion-guarantee exposure, commercial-operation timing and partner obligations.
- Evaluate debt maturities, refinancing needs, interest-rate exposure and the parent company’s dependence on subsidiary dividends.
- Review San Onofre decommissioning obligations and the adequacy and accessibility of related trust assets.