Sempra Energy 10-Q Summary
Business context and reporting period
Combined Form 10-Q for Sempra Energy, San Diego Gas & Electric Company (SDG&E), and Southern California Gas Company (SoCalGas), covering the three and six months ended June 30, 2015. Sempra operates regulated California utilities, South American electric utilities, Mexican energy infrastructure, renewable generation, natural gas pipelines and storage, and LNG-related assets. The financial statements are unaudited and prepared under U.S. GAAP.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Change |
|---|
| Sempra revenue | $2.367 billion | $2.678 billion | Down 12% |
| Sempra earnings attributable to common shareholders | $295 million | $269 million | Up 10% |
| Diluted EPS | $1.17 | $1.08 | Up 8% |
| Approximate net margin | 12.5% | 10.0% | Improved |
| Common dividend declared per share | $0.70 | $0.66 | Up 6% |
| Metric | Six months 2015 | Six months 2014 | Change |
|---|
| Sempra revenue | $5.049 billion | $5.473 billion | Down 8% |
| Earnings attributable to common shareholders | $732 million | $516 million | Up 42% |
| Diluted EPS | $2.91 | $2.07 | Up 41% |
| Approximate net margin | 14.5% | 9.4% | Improved |
- Operating cash flow was $1.219 billion for the first six months, up from $1.034 billion.
- Capital expenditures for property, plant and equipment were $1.466 billion, compared with $1.513 billion.
- Net cash used in investing activities was $1.201 billion, improved from $1.621 billion, mainly because of $347 million of proceeds from the Mesquite Power sale.
- Cash and cash equivalents were $636 million at June 30, 2015, compared with $570 million at December 31, 2014. Approximately $372 million was held outside the United States and was unavailable for U.S. operations unless repatriated.
- Total debt, including current and long-term debt, was approximately $14.6 billion at June 30, 2015, compared with approximately $14.4 billion at December 31, 2014.
- Sempra had approximately $3.5 billion of available unused credit under primary committed facilities, plus $576 million available under additional subsidiary facilities. Management reported compliance with applicable financial covenants.
Segment and operating developments
- SDG&E: Earnings were $126 million in the quarter, compared with $123 million, and $273 million for the six months, compared with $222 million. Benefits came from higher authorized margins, transmission rate base growth, favorable tax items, and a reduced SONGS plant-closure loss.
- SoCalGas: Earnings were $70 million in the quarter, down from $80 million, but $284 million for the six months, up from $158 million. Quarterly results were reduced by the new seasonal recognition of authorized core-gas revenue; the six-month comparison benefited from that same change.
- Sempra South American Utilities: Earnings increased to $45 million in the quarter and $86 million for the six months, aided by higher rates and volumes, particularly in Peru, partly offset by foreign-currency effects.
- Sempra Mexico: Earnings increased to $50 million in the quarter and $97 million for the six months, principally from the Los Ramones I and Sonora pipeline projects entering service.
- Sempra Renewables: Six-month earnings fell to $32 million from $46 million because the prior-year period included a $16 million after-tax gain on the Copper Mountain Solar 3 transaction.
- Sempra Natural Gas: Earnings increased to $40 million in the quarter and $42 million for the six months, primarily due to a $36 million after-tax gain from selling the remaining 625-MW block of Mesquite Power.
Material changes versus the prior comparable period
- Revenue declined primarily because of lower natural gas and power prices, lower fuel and purchased-power recovery, the SoCalGas seasonalization change, and lower energy-related business activity.
- Profitability improved despite lower revenue because of lower commodity costs, higher regulated margins, pipeline project contributions, favorable tax resolutions, and the Mesquite Power sale.
- SoCalGas’s seasonalization shifted earnings toward the first and fourth quarters. Management stated that the change does not affect full-year authorized revenue, full-year earnings, or cash flow, but it materially affects quarterly comparisons.
- Debt financing increased during the period. Sempra issued $500 million of notes, SDG&E issued $390 million of first mortgage bonds, and SoCalGas issued $600 million of first mortgage bonds, while proceeds were used partly to repay commercial paper and other debt.
- Capital investment remained substantial. Management expected approximately $3.5 billion of 2015 capital expenditures and investments, including $2.4 billion for the California Utilities.
Guidance, outlook, risks, contingencies and unusual items
- Management expected operating cash flow, available credit, debt issuance, project financing, distributions from equity-method investments, and joint-venture funding to support operations, dividends, capital spending, and maturing debt.
- In July 2015, IEnova agreed to acquire PEMEX’s 50% interest in Gasoductos de Chihuahua for $1.325 billion, excluding approximately $170 million of assumed net debt. The transaction was subject to shareholder, antitrust, and other approvals and was expected to close in the fourth quarter of 2015. Sempra expected a noncash remeasurement gain, but the filing did not provide a clear estimate.
- Sempra had committed up to $1.325 billion of interim financing to IEnova for the acquisition. Management expected the transaction to be accretive to diluted EPS beginning in 2016, subject to completion and financing.
- Major risks include CPUC, FERC, NRC, DOE, environmental and other regulatory actions; recovery of regulatory assets; construction delays and cost overruns; commodity-price and natural-gas-storage volatility; foreign-exchange exposure; counterparty and credit risk; cybersecurity and infrastructure disruptions; litigation; and project-financing requirements.
- SDG&E recorded $373 million of regulatory assets for 2007 wildfire costs exceeding insurance and third-party recoveries. If rate recovery were no longer considered probable, the filing estimated an after-tax earnings charge of up to approximately $218 million.
- SONGS remains permanently retired and subject to decommissioning. SDG&E’s nuclear decommissioning trusts had fair value of approximately $1.1 billion. A CPUC petition sought to reopen the SONGS settlement, and the ultimate regulatory outcome was uncertain.
- SDG&E and SoCalGas had recorded PSEP regulatory-account costs of $5 million and $137 million, respectively. Recovery remained subject to CPUC review.
- Sempra’s completion guarantees for Cameron LNG project debt covered 50.2% of the committed project debt, or approximately $3.7 billion, until specified completion conditions were met.
- Management disclosed no material changes to previously reported risk factors. Disclosure controls and procedures were assessed as effective, with no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether the Gasoductos de Chihuahua acquisition closed as planned, the final financing mix, assumed debt, consolidation effects, and any remeasurement gain.
- Future CPUC decisions affecting wildfire-cost recovery, SONGS regulatory assets, PSEP costs, general rate cases, and SoCalGas’s authorized revenue requirements.
- The timing and cost performance of Cameron LNG, Mexican pipeline, renewable, and California utility capital projects, including exposure under completion guarantees.
- Whether lower natural gas prices, storage spreads, LNG market conditions, and foreign-currency movements continue to affect nonregulated earnings.
- Debt maturities, interest-rate sensitivity, credit ratings, commercial-paper utilization, and liquidity after funding the IEnova acquisition and planned capital expenditures.
- The status and potential financial exposure from wildfire, SONGS/Mitsubishi, Rim Rock wind-farm, RBS Sempra Commodities, Mobile Gas, and other litigation.
