Sempra Energy 2019 Q1 Form 10-Q Summary
Business context and reporting period
Combined quarterly report for Sempra Energy, San Diego Gas & Electric Company and Southern California Gas Company for the three months ended March 31, 2019, filed May 7, 2019. Sempra operates regulated California utilities, an equity investment in Oncor, infrastructure and energy businesses in Mexico, LNG operations and renewable assets. South American businesses were classified as discontinued operations following approval of a plan to sell them.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $2.898 billion | $2.536 billion | +14% |
| Net income | $518 million | $358 million | +45% |
| Earnings attributable to common shares | $441 million | $347 million | +27% |
| Diluted EPS | $1.59 | $1.33 | +$0.26 |
| Income from continuing operations | $560 million | $330 million | +70% |
| Discontinued operations attributable to common shares | $(51) million | $21 million | $(72) million |
| Operating cash flow | $951 million | $966 million | $(15) million |
| Capital expenditures | $783 million | $979 million | $(196) million |
Reported net margin was approximately 17.9%, compared with 14.1% in the prior-year quarter. The improvement primarily reflected higher equity earnings, lower income taxes and stronger segment earnings, partially offset by discontinued-operations losses and higher interest expense.
- SDG&E earnings attributable to common shares were $176 million, compared with $170 million.
- SoCalGas earnings were $264 million, compared with $225 million.
- Sempra Texas Utility earnings were $94 million, compared with $15 million, primarily reflecting a full quarter of Oncor ownership in 2019.
- Sempra Mexico earnings were $57 million, compared with $20 million.
- Sempra LNG earned $5 million, compared with a $16 million loss.
- Consolidated equity earnings were $101 million, compared with a $21 million loss, largely due to Oncor.
Balance sheet, debt and liquidity
- Total assets were $61.618 billion at March 31, 2019, compared with $60.638 billion at December 31, 2018.
- Cash and cash equivalents were $78 million, with total cash, cash equivalents and restricted cash of $207 million, including discontinued operations.
- Short-term debt was $2.523 billion; current long-term debt and finance leases were $2.152 billion; long-term debt and finance leases were $19.738 billion.
- Total primary U.S. committed credit facilities were approximately $5.435 billion, with $3.718 billion available after commercial paper borrowings. IEnova had approximately $692 million of additional unused credit.
- Sempra Energy, SDG&E and SoCalGas were in compliance with applicable credit-facility covenants. All three maintained investment-grade ratings, although Sempra Energy and SDG&E had negative outlooks from certain agencies.
Material changes versus the prior comparable period
- Revenue increased primarily from higher natural gas prices and volumes, higher SoCalGas revenues, stronger Sempra Mexico marketing activity and improved LNG results.
- Interest expense increased $54 million to $260 million, partly because finance lease costs for SDG&E power purchase agreements were reclassified into interest expense and depreciation under the new lease standard.
- The consolidated effective tax rate declined to 8% from 40%. SDG&E and SoCalGas recognized $31 million and $35 million of tax benefits, respectively, following a CPUC decision concerning excess deferred income tax balances.
- Operating cash flow was broadly stable, while investing cash usage fell substantially because Q1 2018 included approximately $9.55 billion paid for the Oncor acquisition. Q1 2019 included $327 million of proceeds from the sale of non-utility gas storage assets.
- Sempra adopted the lease standard on January 1, 2019, recording operating lease right-of-use assets of $612 million on a consolidated basis and materially increasing recognized lease liabilities.
- Management adjusted earnings for the South American sale-related tax effects and reported Q1 2019 adjusted earnings of $534 million and adjusted diluted EPS of $1.92, compared with adjusted earnings of $372 million and adjusted diluted EPS of $1.43 in Q1 2018.
Guidance, outlook, risks and unusual items
- Management expected approximately $5.8 billion of 2019 capital expenditures and investments, excluding discontinued operations.
- The planned sale of the South American businesses was expected to close by year-end 2019. Sale proceeds were intended for North American investment and debt reduction, but completion, valuation and redeployment benefits remained uncertain.
- Oncor’s pending InfraREIT transaction was expected to close in mid-2019. Sempra expected to contribute approximately $1.025 billion to Oncor, excluding its share of certain additional costs, and separately acquire a 50% interest in Sharyland Holdings for approximately $98 million.
- Sempra Renewables completed the sale of its remaining wind assets in April 2019 for $584 million in cash, subject to customary adjustments. The segment ceased to exist after the sale.
- OMEC LLC exercised its put option requiring SDG&E to purchase the 605-MW Otay Mesa facility for approximately $280 million, subject to adjustments, by October 3, 2019. The outcome could be affected by pending regulatory rehearing requests.
- SoCalGas estimated Aliso Canyon leak-related costs of $1.071 billion, including $1.043 billion recovered or probable of recovery from insurance. The company had received $566 million of insurance proceeds and recorded a $477 million insurance receivable and a $60 million reserve. Additional litigation, regulatory and insurance outcomes remain uncertain.
- Approximately 48,500 plaintiffs were involved in 394 pending Aliso Canyon lawsuits as of May 2, 2019. The filing states that potential damages, penalties and future legal costs not included in the estimate could be material.
- California wildfire liability, regulatory cost recovery, pipeline-safety spending, Aliso Canyon operations, cybersecurity, market volatility, credit ratings and execution of major LNG and infrastructure projects remain material risks.
- Sempra expected Cameron LNG’s three-train liquefaction project to begin generating earnings in mid-2019, subject to construction, commissioning and operational risks. No formal earnings guidance range was provided in the filing.
Most important facts for investors to verify
- Progress, pricing and regulatory approvals for the South American divestiture and use of sale proceeds.
- Closing status and final funding requirements for the InfraREIT and Sharyland transactions.
- Whether SDG&E ultimately acquires the Otay Mesa facility and the related rate-recovery treatment.
- Insurance recoveries, legal settlements, regulatory proceedings and potential additional liabilities related to Aliso Canyon.
- California wildfire exposure, credit-rating outlooks and the ability to recover safety and mitigation costs through rates.
- Actual start-up timing, costs, guarantees and cash requirements for Cameron LNG and other LNG projects.
- The sustainability of Q1 earnings growth, given the contribution from tax benefits, Oncor ownership, foreign-currency effects and other unusual items.