Sempra 2023 Q3 Form 10-Q Summary
Business context and reporting period
This combined Form 10-Q covers Sempra, San Diego Gas & Electric Company (SDG&E), and Southern California Gas Company (SoCalGas) for the three and nine months ended September 30, 2023. Sempra operates regulated California utilities, owns an equity investment in Texas utility Oncor, and develops energy infrastructure through Sempra Infrastructure. Sempra changed its legal name from Sempra Energy to Sempra in May 2023 and completed a two-for-one common-stock split effective August 22, 2023; per-share data has been retroactively adjusted.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Total revenues | $3.334 billion | $3.617 billion | $13.229 billion | $10.984 billion |
| Net income | $854 million | $561 million | $2.762 billion | $1.877 billion |
| Earnings attributable to common shares | $721 million | $485 million | $2.293 billion | $1.656 billion |
| Diluted EPS | $1.14 | $0.77 | $3.63 | $2.62 |
| Net margin | 25.6% | 15.5% | 20.9% | 17.1% |
| Cash flow from operations | Not separately provided for the quarter | Not separately provided for the quarter | $5.129 billion | $1.455 billion |
Revenue declined 8% year over year in the quarter, primarily because of lower natural gas and electricity costs passed through to utility customers and lower energy-related revenue. Nine-month revenue increased 20%, largely due to higher natural gas pass-through revenues at SoCalGas and SDG&E and higher Sempra Infrastructure derivative-related revenue.
Q3 net income increased 52% and nine-month net income increased 47%. Earnings attributable to common shares rose 49% in Q3 and 38% for the first nine months. The reported results benefited from lower Aliso Canyon charges, favorable commodity derivative results, foreign-currency and inflation effects, tax benefits, and higher Oncor equity earnings.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $5.129 billion, up from $1.455 billion. The comparison benefited substantially from approximately $1.8 billion of lower Aliso Canyon-related payments versus 2022, working-capital changes, and higher earnings.
- Investing cash use was $6.304 billion, including $6.074 billion of property, plant and equipment expenditures. Total capital expenditures and investments were $6.355 billion, including investments in unconsolidated entities.
- Financing cash flow was $2.198 billion, supported by debt activity, noncontrolling-interest contributions, and other financing sources, partially offset by dividends and debt repayments.
- At September 30, Sempra had $1.149 billion of unrestricted cash and $1.491 billion of cash, cash equivalents and restricted cash. Management reported $8.096 billion of available unused credit for Sempra.
- Short-term debt was $1.977 billion, current maturities of long-term debt and finance leases were $974 million, and long-term debt and finance leases were $27.703 billion. These reported debt-related balances imply approximately $30.7 billion of gross debt and finance-lease obligations, before considering other adjustments.
- Sempra, SDG&E, SoCalGas, and Sempra Infrastructure were in compliance with applicable leverage covenants. Credit ratings remained investment grade, although SoCalGas had a negative outlook from S&P.
Material changes versus the prior comparable period
- SDG&E: Nine-month earnings increased 5% to $716 million, driven by higher CPUC base operating margin, regulatory interest income, transmission margin, and favorable tax effects. Q3 earnings were broadly stable at $274 million.
- SoCalGas: Nine-month earnings increased to $531 million from $339 million, while Q3 earnings improved to $16 million from an $82 million loss. The primary comparison benefit was the absence of 2022 Aliso Canyon litigation and regulatory charges of $259 million for nine months and $122 million for Q3.
- Sempra Texas Utilities: Nine-month earnings declined 9% to $548 million because of higher interest and depreciation expense, higher operating costs, and Oncor rate-base disallowances. Q3 earnings increased 19% to $305 million due to higher Oncor revenues.
- Sempra Infrastructure: Nine-month earnings increased 90% to $746 million, primarily from favorable unrealized commodity derivative results and transportation-related earnings. Results also included higher noncontrolling-interest allocations and unfavorable Mexican peso and inflation effects.
- Port Arthur LNG: Sempra Infrastructure completed sales of project noncontrolling interests to ConocoPhillips and KKR Denali. The KKR transaction generated approximately $984 million of cash consideration, and Sempra’s indirect interest in Port Arthur LNG Phase 1 fell to 19.6%.
- Capital intensity: Sempra Infrastructure property, plant and equipment expenditures increased sharply to $2.725 billion from $489 million, principally reflecting Port Arthur LNG Phase 1 and other projects under construction.
Guidance, outlook, commentary and risks
- Management expects approximately $9.4 billion of 2023 capital expenditures and investments, compared with $5.7 billion previously projected. From 2023 through 2027, the company expects approximately $38.6 billion of aggregate capital expenditures and investments, or approximately $40 billion when calculated on a proportionate basis for certain equity-method investments and excluding noncontrolling interests. Management expects a further 10% to 20% utility-focused increase when updating the 2024–2028 plan.
- Management expects ECA LNG Phase 1 commercial operations in summer 2025 and Port Arthur LNG Phase 1 trains to begin commercial operations in 2027 and 2028, respectively. These are expectations rather than guarantees, and the filing does not provide consolidated earnings or revenue guidance.
- The CPUC cost-of-capital mechanism was triggered for SDG&E and SoCalGas. Subject to regulatory approval, each utility’s authorized return on rate base would increase to 7.67% effective January 1, 2024.
- Major risks include California wildfire liability and potential depletion of the Wildfire Fund; CPUC rate cases and cost recovery; Aliso Canyon litigation, regulatory proceedings, possible facility impairment, and unresolved claims; construction delays, cost overruns, permitting and financing risks for LNG projects; Mexican regulatory, land and environmental disputes; commodity, foreign-currency, inflation and interest-rate volatility; cybersecurity events; and access to capital.
- At September 30, Sempra had $203 million of accrued loss contingencies for legal matters, including $127 million at SoCalGas. Aliso Canyon-related accruals totaled $126 million in current liabilities and $3 million in deferred credits, excluding potential losses that cannot presently be estimated.
- Management concluded that disclosure controls were effective as of September 30, 2023, and reported no material changes to internal control over financial reporting.
Most important facts for an investor to verify
- Whether the reported earnings improvement remains after excluding Aliso Canyon comparison effects, commodity derivative gains, tax benefits, foreign-currency effects, and other unusual items.
- The funding requirements, ownership dilution, debt drawdowns, completion dates, contracted offtake, and cost-to-complete for Port Arthur LNG Phase 1 and ECA LNG Phase 1.
- The outcome of the 2024 CPUC general rate cases and approval of the higher authorized returns under the cost-of-capital mechanism.
- Potential additional Aliso Canyon costs, remaining litigation exposure, and the effect of any permanent reduction or closure of the Aliso Canyon facility.
- Wildfire Fund availability, SDG&E wildfire claims exposure, and the adequacy of insurance and regulatory recovery mechanisms.
- Whether Sempra can fund its significantly increased capital plan while preserving investment-grade ratings and maintaining dividends.