Sempra Energy 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. This combined filing covers Sempra Energy, San Diego Gas & Electric Company and Southern California Gas Company; the requested “2019 Q4” is not a separate quarterly filing, although quarterly data is included. Sempra is a North American energy-infrastructure holding company with regulated California utilities, Texas utility investments, Mexico energy infrastructure and LNG operations.
Business context and strategic developments
- Reportable segments at year-end were SDG&E, SoCalGas, Sempra Texas Utilities, Sempra Mexico and Sempra LNG. Sempra Renewables ceased to exist as a segment after completing its remaining wind-asset sale in April 2019.
- Sempra acquired an indirect 50% interest in Sharyland Holdings for $95 million and supported Oncor’s acquisition of InfraREIT. Sempra’s investment in Oncor Holdings is accounted for under the equity method because of ring-fencing and governance restrictions.
- Cameron LNG Train 1 began commercial operations in August 2019. Sempra owns a 50.2% equity-method interest in Cameron LNG JV.
- South American businesses were classified as discontinued operations and agreed for sale for aggregate base purchase prices of $3.59 billion for Peru and $2.23 billion for Chile, with closings expected in the first half of 2020.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $10.829 billion | $10.102 billion | Up 7% |
| Income from continuing operations | $1.999 billion | $938 million | Up $1.061 billion |
| Income from discontinued operations | $363 million | $188 million | Up $175 million |
| Net income | $2.362 billion | $1.126 billion | Up $1.236 billion |
| Earnings attributable to common shares | $2.055 billion | $924 million | Up $1.131 billion |
| Diluted EPS | $7.29 | $3.42 | Up $3.87 |
| Effective tax rate | 18% | (10%) | Improved from tax benefit in 2018 |
| Operating cash flow | $3.088 billion | $3.516 billion | Down $428 million |
| Capital expenditures | $3.708 billion | $3.544 billion | Up $164 million |
Revenue growth was led by utilities revenue, which increased to $9.448 billion from $8.539 billion. Energy-related revenue declined to $1.381 billion from $1.563 billion, primarily because of asset sales and lower Sempra LNG revenue.
Segment earnings and operating trends
| Segment earnings attributable to common shares | 2019 | 2018 |
|---|---|---|
| SDG&E | $767 million | $669 million |
| SoCalGas | $641 million | $400 million |
| Sempra Texas Utilities | $528 million | $371 million |
| Sempra Mexico | $253 million | $237 million |
| Sempra Renewables | $59 million | $328 million |
| Sempra LNG | $(6) million | $(617) million |
| Parent and other | $(515) million | $(620) million |
- SDG&E benefited from higher authorized base operating margin, higher transmission margin and a $31 million tax benefit related to excess deferred tax balances, partly offset by $10 million of Wildfire Fund amortization.
- SoCalGas benefited from higher authorized base operating margin and tax benefits, partly offset by a $21 million impairment of non-utility native gas assets and $8 million of penalties related to billing practices.
- Sempra Texas Utilities benefited from higher Oncor equity earnings, including the InfraREIT acquisition and rate updates reflecting increased transmission investment.
- Sempra LNG’s loss narrowed substantially because 2018 included a $1.1 billion impairment of non-utility natural-gas storage assets. Cameron LNG Train 1 contributed higher equity earnings after commencing operations.
Liquidity, debt and capital structure
- At December 31, 2019, Sempra had $108 million of unrestricted cash and $4.351 billion of available unused credit under primary U.S. committed facilities. IEnova had approximately $706 million of additional unused credit.
- Consolidated long-term debt and finance leases, excluding current portions, were $20.785 billion; short-term debt was $5.031 billion. Total debt-to-capitalization was 54%, compared with 56% in 2018.
- Commercial paper outstanding was $2.334 billion at year-end, with a weighted-average interest rate of 2.062%.
- Credit ratings remained investment grade, but Sempra Energy was rated Baa1 with a negative outlook by Moody’s and BBB+ with a negative outlook by S&P. Fitch rated it BBB+ with a stable outlook.
- Sempra paid $993 million of common dividends and $142 million of preferred dividends in 2019. The board later increased the annualized common dividend to $4.18 per share beginning in 2020.
- Management expected approximately $5.9 billion of 2020 capital expenditures and investments and approximately $22.8 billion from 2020 through 2024, excluding capital expenditures funded by unconsolidated entities.
Material changes versus the prior comparable period
- Net income and diluted EPS increased substantially, primarily because 2018 contained major impairment charges at Sempra LNG and Sempra Renewables.
- Operating cash flow declined despite higher earnings, primarily because of regulatory balancing-account movements, SDG&E’s $323 million initial Wildfire Fund contribution, higher tax payments and Aliso Canyon-related payments.
- Investing cash outflow declined to $4.593 billion from $12.470 billion in 2018, when Sempra acquired its interest in Oncor Holdings for approximately $9.568 billion.
- Financing cash inflow declined to $1.475 billion from $8.850 billion in 2018, when Sempra raised substantial common equity, preferred equity and debt to fund the Oncor transaction.
- Consolidated assets increased to $65.665 billion from $60.638 billion, while Sempra shareholders’ equity increased to $19.929 billion from $17.138 billion.
- The company adopted the lease standard in 2019, recognizing operating lease right-of-use assets and liabilities; the adoption did not change previously reported results.
Guidance, outlook, risks and unusual items
- Cameron LNG: Management expected Train 2 to commence commercial operation shortly after the filing and Train 3 in the third quarter of 2020. Sempra guaranteed up to $4.0 billion of Cameron LNG JV financing obligations until financial completion conditions are met, including operation of all three trains and specified performance tests.
- Capital program: Management expected substantial investment in California utility safety and reliability, Texas transmission, Mexico liquid-fuels and renewable projects, and LNG development.
- Wildfire exposure: SDG&E contributed $322.5 million initially to the Wildfire Fund and was obligated to make annual contributions of approximately $12.9 million for nine additional years. The fund may be exhausted, and recovery of wildfire losses or insurance costs is not assured.
- Aliso Canyon: SoCalGas estimated total Leak-related costs of $1.116 billion, including $1.086 billion recovered or probable of recovery from insurance. The company recorded a $339 million insurance receivable and acknowledged that litigation, regulatory penalties and other unestimated costs could be material. At year-end, 393 lawsuits involving approximately 36,000 plaintiffs were pending.
- Regulatory matters: CPUC proceedings could affect recovery of pipeline-safety, wildfire, Aliso Canyon and other costs. SoCalGas faced an OII alleging 330 violations related to Aliso Canyon operations and recordkeeping.
- Mexico: The Guaymas-El Oro segment of the Sonora pipeline remained inoperable because of damage and legal restrictions. Payments under the revised CFE agreement would resume only after repairs; failure to restart service by May 15, 2020, absent a further agreement, could materially affect results and cash flow.
- Other risks: Key risks include project delays and cost overruns, LNG market competition, counterparty performance, commodity and foreign-exchange volatility, cybersecurity, regulatory changes, litigation, environmental compliance and potential credit-rating downgrades.
Most important facts for an investor to verify
- Whether Cameron LNG Trains 2 and 3 achieved commercial operation as projected and whether the $4.0 billion guarantee was released.
- Progress and ultimate resolution of Aliso Canyon litigation, CPUC enforcement proceedings, insurance recoveries and potential additional liabilities.
- Whether the Wildfire Fund remains adequately funded and whether SDG&E maintains required safety certifications and insurance coverage.
- Completion of the planned Peru and Chile divestitures and actual proceeds after closing adjustments, taxes and debt changes.
- Repair, restart or termination of the Guaymas-El Oro pipeline contract and any resulting CFE recovery.
- Actual 2020–2024 capital spending, financing needs, Oncor distributions and the effect of investment-grade rating outlooks on borrowing costs.
- The filing’s audited financial statements and notes, including debt maturities, regulatory assets and liabilities, commitments, guarantees and discontinued-operations accounting.