Sempra Energy 2020 Form 10-K Summary
Business context and reporting period
This combined Form 10-K covers Sempra Energy, San Diego Gas & Electric Company and Southern California Gas Company for the fiscal year ended December 31, 2020. Sempra is a North American energy infrastructure holding company with regulated utilities and energy infrastructure investments in the United States and Mexico. Reportable segments were SDG&E, SoCalGas, Sempra Texas Utilities, Sempra Mexico and Sempra LNG. Former South American operations are presented as discontinued operations.
Key financial metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $11.370 billion | $10.829 billion | +$541 million, 5% |
| Income from continuing operations | $2.255 billion | $1.999 billion | +$256 million, 13% |
| Earnings attributable to common shares | $3.764 billion | $2.055 billion | +$1.709 billion, 83% |
| Diluted EPS | $12.88 | $7.29 | +$5.59 |
| Income from discontinued operations | $1.850 billion | $363 million | Primarily divestiture gains |
| Operating cash flow | $2.591 billion | $3.088 billion | -$497 million, 16% |
| Capital expenditures | $4.676 billion | $3.708 billion | +$968 million, 26% |
| Cash and cash equivalents | $960 million | $108 million | +$852 million |
| Long-term debt and finance leases | $21.781 billion | $20.785 billion | +$996 million |
| Debt-to-capitalization ratio | 49% | 54% | Improved by 5 percentage points |
Consolidated net margin was approximately 36% in 2020, but was materially elevated by discontinued-operation gains. Continuing-operations net margin was approximately 20%. The reported effective tax rate was 14%, compared with 18% in 2019.
Segment earnings attributable to common shares were: SDG&E $824 million, SoCalGas $504 million, Sempra Texas Utilities $579 million, Sempra Mexico $259 million, Sempra LNG $320 million and Parent and other a loss of $562 million. Cameron LNG JV contributed materially to the improvement in Sempra LNG earnings.
Material changes versus the prior comparable period
- Revenue increased primarily from higher regulated utility revenues, transmission revenues, refundable program recovery and regulatory-liability releases.
- SDG&E earnings increased 7% to $824 million, supported by higher electric transmission margin, authorized revenue and AFUDC, partly offset by Energy Efficiency Program concessions and higher Wildfire Fund costs.
- SoCalGas earnings declined 21% to $504 million, primarily because of a $307 million pretax Aliso Canyon litigation and regulatory charge, equivalent to a $233 million after-tax impact.
- Sempra LNG earnings increased to $320 million from a $6 million loss as Cameron LNG Phase 1 achieved commercial operations for Train 2 in February 2020 and Train 3 in August 2020.
- Operating cash flow declined because of lower cash from discontinued operations, higher Aliso Canyon insurance receivables and customer-collection effects, partly offset by higher distributions from investments and regulatory balancing-account changes.
- Sempra completed the sales of its Peruvian businesses for $3.549 billion of cash proceeds and its Chilean businesses for $2.216 billion. After-tax gains were $1.499 billion and $248 million, respectively.
- Sempra issued $889 million of net Series C preferred-stock proceeds, repurchased $500 million of common stock under an accelerated share repurchase program and reduced short-term debt substantially.
- Sempra completed the strategic shift away from South America and legacy renewable and storage assets, focusing on regulated utilities and North American energy infrastructure.
Liquidity, debt and capital allocation
- At December 31, 2020, Sempra Energy reported $960 million of unrestricted cash and $7.700 billion of available unused credit. SDG&E reported $262 million of cash and $1.500 billion of unused credit; SoCalGas reported $4 million of cash and $637 million of unused credit.
- Consolidated long-term debt and finance leases were $21.781 billion, with $1.504 billion of long-term debt maturities in 2021 and $2.632 billion due in 2022-2023.
- Sempra Energy, SDG&E and SoCalGas retained investment-grade ratings. Sempra Energy was rated Baa2 stable by Moody’s, BBB+ negative by S&P and BBB+ stable by Fitch. S&P placed Sempra Energy and both California utilities on negative outlook.
- Management expects to fund operations, dividends, capital expenditures and debt obligations through operating cash flow, cash, asset-sale proceeds, credit facilities, debt issuance, project financing and distributions from equity-method investments.
- Expected 2021 capital expenditures and investments are approximately $5.8 billion: SDG&E $2.4 billion, SoCalGas $2.0 billion, Sempra Texas Utilities $200 million, Sempra Mexico $400 million and Sempra LNG $800 million. Expected 2021-2025 aggregate spending is approximately $22.5 billion.
- The common dividend was increased to $1.10 per quarter, or $4.40 annually, beginning with the April 2021 payment. Future dividends remain subject to board approval, earnings, cash flow and legal requirements.
Guidance, outlook and management commentary
- Management’s strategy is to emphasize transmission and distribution investments and other infrastructure businesses intended to provide stable cash flows and greater earnings visibility.
- Cameron LNG Phase 1 is fully operational across three trains. Sempra expected financial completion and termination of its up-to-$4.0 billion Cameron LNG guarantees in the first half of 2021, subject to operational performance testing.
- ECA LNG Phase 1 reached final investment decision in November 2020. The project has estimated capital expenditures of approximately $2.0 billion, including capitalized interest and contingency, and an EPC contract estimated at approximately $1.5 billion.
- Potential Cameron LNG Phase 2, ECA LNG Phase 2 and Port Arthur LNG projects had not reached final investment decisions as of the filing date. Port Arthur’s EPC contract contemplated an estimated price of approximately $8.7 billion, subject to further conditions and potential renegotiation.
- Sempra proposed to acquire the publicly held shares of IEnova in a stock exchange offer and intended to sell a noncontrolling interest in Sempra Infrastructure Partners. Both transactions were subject to regulatory approvals, closing conditions and other uncertainties.
- Management stated that COVID-19 had not materially affected 2020 results, but customer nonpayment, uncollectible accounts, project delays, permitting interruptions, supply-chain disruptions and financing-market volatility could become material.
Risks, contingencies and unusual items
- Aliso Canyon: SoCalGas estimated total Leak-related costs at $1.627 billion, including $1.279 billion recovered or probable of recovery from insurance. The balance sheet included a $451 million reserve and a $445 million insurance receivable. Insurance other than certain future defense and directors’ and officers’ coverage was substantially exhausted. Approximately 395 lawsuits involving about 36,000 plaintiffs remained pending as of February 22, 2021, and CPUC proceedings could result in additional penalties or limited rate recovery.
- Wildfires: SDG&E faces potential strict liability for fires caused by its equipment, insurance availability and affordability risks, possible exhaustion of the Wildfire Fund and uncertainty regarding recovery of uninsured or disallowed costs.
- Cameron LNG guarantees: Failure to achieve financial completion by September 30, 2021, subject to force-majeure extension provisions, could trigger an event of default and demands under guarantees of up to $4.0 billion. Sempra also had up to $979 million of exposure under a separate Cameron-related Support Agreement.
- Mexico: ECA Regas Facility land and permit disputes, Shell Mexico and Gazprom arbitration, regulatory changes affecting renewable energy, and the Guaymas-El Oro pipeline dispute could affect earnings, cash flow and asset recoverability. The Guaymas-El Oro segment had a $447 million net book value at year-end.
- Regulation and energy transition: CPUC, FERC, PUCT, Mexican and environmental decisions may affect rate recovery, permitted operations, natural-gas demand, renewable integration and asset values. A 2021 California Cost of Capital Mechanism trigger could reduce authorized returns beginning in 2022.
- Credit and structural subordination: Sempra’s ability to pay dividends and service parent debt depends on subsidiaries and equity-method investments, many of which are subject to dividend restrictions, ring-fencing or third-party governance.
- Unusual items: Sempra recorded a $100 million equity loss related to RBS Sempra Commodities, adopted the expected-credit-loss standard, and reported no material impairment of long-lived assets or goodwill in 2020.
Most important facts for investors to verify
- Whether Aliso Canyon settlements, CPUC proceedings and related litigation generate costs beyond the $451 million recorded reserve and whether the $445 million insurance receivable is collected.
- Whether Cameron LNG achieves financial completion on schedule and releases the up-to-$4.0 billion guarantees.
- The final outcome of ECA Regas Facility land, permit and customer arbitrations and the effect on ECA LNG Phase 1.
- Whether Sempra completes the IEnova exchange offer and the proposed Sempra Infrastructure Partners transaction, including share dilution, proceeds and ownership changes.
- Whether the $5.8 billion 2021 capital program remains within budget and can be financed while preserving investment-grade ratings.
- Trends in customer nonpayment, regulatory assets and liabilities, wildfire exposure, insurance costs and recovery of COVID-19-related expenses.
- Oncor dividend capacity and governance restrictions, including the possibility that Sempra may need to provide additional capital to its Texas investments.