Sempra Energy 2014 Q1 Form 10-Q Summary
Business context and reporting period
Combined quarterly report for Sempra Energy, San Diego Gas & Electric Company (SDG&E), and Southern California Gas Company (SoCalGas), covering the three months ended March 31, 2014. Sempra operates regulated California utilities, South American electric utilities, Mexican infrastructure and energy businesses, renewable generation, natural gas generation, storage, pipelines, and LNG activities.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Sempra revenue | $2.795 billion | $2.650 billion | 6% increase |
| Net income | $266 million | $178 million | 49% increase |
| Earnings attributable to Sempra shareholders | $247 million | $178 million | 39% increase |
| Diluted EPS | $0.99 | $0.72 | 38% increase |
| Operating cash flow | $904 million | $835 million | 8% increase |
| Capital expenditures | $801 million | $531 million | 51% increase |
| Cash and cash equivalents | $844 million | $1.471 billion | Down from Q1 2013; $904 million at December 31, 2013 |
| Total debt, including short-term debt | Approximately $12.9 billion | Approximately $12.9 billion | Composition shifted toward short-term debt |
| Dividends declared per share | $0.66 | $0.63 | 5% increase |
Calculated net margin was approximately 9.5% based on consolidated net income and approximately 8.8% based on earnings attributable to Sempra shareholders. The filing does not provide a consolidated operating margin.
At March 31, 2014, Sempra had $4.1 billion of committed credit lines and $2.7 billion of unused capacity. Sempra Energy held $704 million of cash outside the United States that was unavailable for U.S. operations unless repatriated. All principal credit facilities remained in compliance with their covenants, and credit ratings remained investment grade.
Segment performance and material changes
- SDG&E: Earnings increased to $99 million from $91 million. Benefits from the 2012 California general rate case and lower operating costs were partly offset by a $9 million after-tax SONGS-related charge, lower transmission margin, and lost SONGS revenue.
- SoCalGas: Earnings increased to $78 million from $46 million, primarily from higher authorized operating margin and recovery of previously expensed program costs under the 2012 general rate case.
- Sempra South American Utilities: Earnings declined to $35 million from $37 million, primarily because of foreign-currency effects and higher interest expense, partly offset by the absence of a 2013 Argentine investment impairment.
- Sempra Mexico: Earnings increased to $42 million from $31 million due principally to lower tax expense and $9 million of equity-related allowance for funds used during construction on the Sonora Pipeline, partly offset by increased noncontrolling interests.
- Sempra Renewables: Earnings increased to $28 million from $4 million, including a $16 million after-tax gain from selling a 50% interest in Copper Mountain Solar 3 and higher renewable-project tax benefits.
- Sempra Natural Gas: Earnings fell to $9 million from $53 million because Q1 2013 included a $44 million after-tax gain on selling one 625-MW block of Mesquite Power. The remaining block was classified as held for sale and is expected to be sold in 2014.
- Parent and other: Losses improved to $44 million from $84 million, primarily because Q1 2013 included a $63 million tax expense related to the IEnova stock offerings.
Cash flow, debt, liquidity, and outlook
- Operating cash flow of $904 million exceeded capital expenditures of $801 million, but investing activities used $770 million and financing activities used $193 million. Cash declined by $60 million during the quarter.
- Total assets were $37.484 billion and total equity was $11.889 billion at March 31, 2014. Long-term debt was $11.700 billion and short-term debt was $1.084 billion.
- Management expected approximately $3.2 billion of 2014 capital expenditures and investments, including $2.2 billion for the California Utilities and approximately $1.0 billion for other subsidiaries.
- Management stated that operating cash flow, available credit, securities issuances, investment distributions, project financing, and joint-venture funding were expected to support operations, capital expenditures, dividends, acquisitions, and debt maturities.
- SDG&E’s ERRA balancing account was undercollected by approximately $525 million at March 31, 2014. Continued commercial-paper issuance was expected as the utility awaited authorization to recover the balance through rates.
- SoCalGas expected to reduce or temporarily suspend common-stock dividends over the next several years to support its capital program and authorized capital structure. SDG&E expected to resume common dividends in 2014.
- Cameron LNG’s three-train liquefaction project was expected to require approximately $6 billion to $7 billion of incremental investment, predominantly project-financed, with commercial operation targeted for 2018 and first full production in 2019. The filing states that final FERC permitting and financing remained conditions to proceeding.
Risks, contingencies, and unusual items
- SONGS settlement: SDG&E filed a proposed settlement of the CPUC investigation into the San Onofre Nuclear Generating Station outage and retirement. Approval was uncertain. SDG&E recorded a $255 million regulatory asset related to expected recovery, which could change if the CPUC modifies or rejects the settlement.
- Wildfire litigation: SDG&E had $130 million of wildfire litigation reserves and $377 million of related regulatory assets. Recovery of substantial costs in rates remained subject to future regulatory approval. Failure to obtain recovery could result in an after-tax charge of up to approximately $210 million based on the filing’s March 31 assessment.
- Regulatory and pipeline safety exposure: SDG&E and SoCalGas had recorded $2 million and $56 million, respectively, for pipeline safety programs. Cost recovery, eligible expenditures, and the final CPUC treatment remained subject to review.
- Contractual commitments: Purchased-power commitments increased by $742 million, while commitments for LNG purchases, construction, and development also changed materially. The Cameron LNG engineering, procurement, and construction contract had an estimated cost of approximately $6 billion, subject to specified adjustments.
- Other litigation and project disputes: Matters included claims involving Mitsubishi Heavy Industries over SONGS steam-generator defects, the Rim Rock wind project investment, Sunrise Powerlink construction claims, Mexican property and permit disputes, and RBS Sempra Commodities liabilities.
- Market risks: Results remained exposed to natural-gas and electricity prices, foreign-currency movements, interest rates, regulatory decisions, construction and permitting delays, counterparty performance, cybersecurity, weather, natural disasters, and nuclear decommissioning obligations.
Most important facts for an investor to verify
- Whether the CPUC approved the SONGS settlement as filed and whether the $255 million SONGS regulatory asset remained recoverable.
- Whether SDG&E obtained recovery of its approximately $525 million ERRA undercollection and how this affected borrowing and liquidity.
- Whether wildfire-related regulatory assets and reserves changed as remaining claims were resolved.
- Actual 2014 capital spending, debt issuance, project financing, and progress toward the approximately $3.2 billion investment plan.
- Completion and proceeds from the planned sale of the remaining Mesquite Power block.
- Final permits, financing, construction progress, total committed cost, and equity funding requirements for Cameron LNG.
- Effects of proposed Chilean tax reform, foreign-currency movements, and natural-gas price volatility on international and energy-related earnings.