Sempra Energy 2013 Q1 Form 10-Q Summary
Business context and reporting period
Combined quarterly filing for Sempra Energy, San Diego Gas & Electric Company (SDG&E), and Southern California Gas Company (SoCalGas) for the three months ended March 31, 2013, filed May 2, 2013. Sempra operates regulated California utilities, South American electric utilities, Mexican energy infrastructure, renewable generation, natural-gas generation, storage, pipelines, and LNG businesses.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Sempra revenue | $2.650 billion | $2.383 billion | 11% increase |
| Sempra net income | $178 million | $251 million | 29% decrease |
| Earnings attributable to common shareholders | $178 million | $236 million | 25% decrease |
| Diluted EPS | $0.72 | $0.97 | 26% decrease |
| Dividends declared per share | $0.63 | $0.60 | Increase |
| Net cash from operating activities | $835 million | $699 million | 19% increase |
| Capital expenditures | $531 million | $811 million | 34% decrease |
| Cash and cash equivalents at March 31 | $1.471 billion | $404 million | Increase |
Sempra’s net margin was approximately 6.7% in Q1 2013 versus approximately 10.5% in Q1 2012. The filing does not present a consolidated operating-income margin. Interest expense increased to $138 million from $113 million, and the effective income tax rate increased to 51% from 33%, primarily because of a $63 million tax expense associated with the IEnova corporate reorganization and offerings.
At March 31, 2013, Sempra reported $762 million of short-term debt, $1.381 billion of current maturities of long-term debt, and $10.680 billion of long-term debt. Total equity was $11.261 billion. Sempra had $4.1 billion of committed credit facilities, of which $3.3 billion was unused. Management stated that liquidity and expected operating cash flow were adequate for capital expenditures, dividends, acquisitions or start-ups, and debt maturities.
Segment performance and material changes
- SDG&E: Earnings decreased to $91 million from $105 million. Higher depreciation, operating and maintenance costs, interest expense, and a lower authorized return more than offset tax benefits, higher Sunrise Powerlink earnings, and higher transmission margin.
- SoCalGas: Earnings declined to $46 million from $66 million because of higher operating and depreciation expenses, the absence of a $4 million prior-year regulatory award, and a lower authorized return.
- Sempra South American Utilities: Earnings declined to $37 million from $40 million, including a $7 million after-tax impairment charge related to Argentine investments.
- Sempra Mexico: Earnings were $31 million versus $33 million. IEnova completed debt and equity offerings, leaving Sempra with 81.1% ownership and creating approximately $574 million of net proceeds and $439 million of noncontrolling interest.
- Sempra Renewables: Earnings declined to $4 million from $10 million, primarily because of lower deferred tax benefits and the impact of federal sequestration on renewable-energy grants, partly offset by higher production tax credits.
- Sempra Natural Gas: Earnings increased to $53 million from $1 million, primarily due to the $74 million pretax gain, or approximately $44 million after tax, on the sale of one 625-MW block of Mesquite Power and higher LNG earnings.
- Parent and Other: Losses increased to $84 million from $19 million, principally because of the $63 million IEnova-related tax expense.
Cash flow, liquidity, debt, and capital plans
- Sempra generated $835 million of operating cash flow, invested $162 million net in investing activities, and generated $320 million from financing activities. Financing inflows included $574 million from the IEnova equity offering.
- Cash increased by $996 million during the quarter. Approximately $1.0 billion of IEnova debt and equity proceeds remained in cash at quarter-end, largely in non-U.S. entities.
- Approximately $1.3 billion of cash was held in non-U.S. jurisdictions and was unavailable for U.S. operations unless repatriated. Management planned an approximately $200 million distribution in 2013 from previously taxed foreign income.
- Management expected approximately $3.3 billion of 2013 capital expenditures and investments, including $2.5 billion for the California Utilities and $800 million for other subsidiaries.
- Credit ratings remained investment grade, and the registrants were in compliance with applicable credit-facility covenants.
- SoCalGas management expected common-stock dividends to be reduced or temporarily suspended over the next several years to support capital investment and its authorized capital structure. SDG&E expected to resume common dividends in 2014.
Guidance, outlook, risks, contingencies, and unusual items
- Sempra projected a 2013 consolidated effective tax rate of approximately 29%, compared with 6% in 2012, and a 28% to 32% range for 2014 through 2017. SDG&E projected approximately 35% for 2013; SoCalGas projected approximately 34%.
- The CPUC had issued a proposed 2012 General Rate Case decision, but no final decision had been issued by March 31. The utilities were recording revenue using 2011 authorized levels, subject to a retroactive final decision expected in Q2 2013. The final outcome could materially affect revenue, earnings, cash flow, and financial condition.
- Both SONGS units remained offline. SDG&E had incurred approximately $107 million of replacement-power costs through March 31, including $35 million in Q1. CPUC proceedings could require refunds, disallowance of costs, or removal of some SONGS revenue requirement from customer rates.
- SDG&E had $360 million of regulatory assets related to wildfire litigation costs and $266 million of wildfire litigation reserves. If recovery in rates were no longer considered probable, the potential after-tax charge for CPUC-regulated regulatory assets was up to $190 million.
- Pipeline safety programs could require substantial additional investment. The California Utilities estimated Phase 1 costs of approximately $3.1 billion over 10 years, with recovery subject to regulatory decisions.
- Sempra Natural Gas was developing Cameron LNG liquefaction. Incremental investment for the three-train project was estimated at approximately $6 billion to $7 billion, with field construction expected to begin in the first half of 2014 subject to approvals and milestones.
- Other risks included energy-price volatility, interest and foreign-exchange exposure, regulatory actions, severe weather and natural disasters, nuclear and cybersecurity risks, litigation, project permitting, and possible changes to renewable-energy incentives.
- The filing states that no material changes occurred in previously disclosed risk factors. Disclosure controls and procedures were considered effective as of March 31, 2013.
Most important facts for investors to verify
- Final CPUC General Rate Case decisions and the retroactive revenue impact on SDG&E and SoCalGas.
- NRC and CPUC decisions regarding SONGS restart, retirement, cost recovery, potential refunds, and replacement-power expenses.
- Whether wildfire litigation costs and related regulatory assets remain probable of recovery, and the ultimate settlement costs.
- Deployment of IEnova offering proceeds, the effect of 18.9% dilution on Sempra’s earnings, and the sustainability of foreign cash balances.
- Actual 2013 capital spending versus the approximately $3.3 billion plan and the resulting debt, dividend, and liquidity requirements.
- Progress, permitting, financing, and final investment decisions for Cameron LNG and other major infrastructure projects.