Sempra 2024 Q1 Form 10-Q Summary
Business context and reporting period
Sempra filed a combined Form 10-Q for Sempra, San Diego Gas & Electric Company (SDG&E), and Southern California Gas Company (SoCalGas) for the three months ended March 31, 2024. Sempra operates regulated California utilities, owns an equity investment in Oncor Holdings, and develops and operates energy infrastructure in North America. Sempra’s reportable segments are Sempra California, Sempra Texas Utilities, and Sempra Infrastructure.
Key financial metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Total revenue | $3.640 billion | $6.560 billion | Down 45% |
| Net income | $881 million | $1.172 billion | Down 25% |
| Earnings attributable to common shares | $801 million | $969 million | Down 17% |
| Basic/diluted EPS | $1.27/$1.26 | $1.54/$1.53 | Down 18%/18% |
| Net margin | 24.2% | 17.9% | Improved |
| Cash flow from operations | $1.851 billion | $1.980 billion | Down $129 million |
| Capital expenditures and investments | $2.126 billion | $1.915 billion | Up $211 million |
Revenue declined primarily because lower natural gas prices and volumes reduced pass-through utility revenues, and Sempra Infrastructure recorded materially lower commodity optimization results. The decline in reported revenue did not translate proportionally to earnings because utility fuel costs are generally recovered through rates.
- Sempra California earnings: $582 million, down 6% from $618 million. Lower operating margin, higher interest expense, and lower tax benefits offset higher authorized cost of capital and AFUDC.
- Sempra Texas Utilities earnings: $183 million, up from $83 million, primarily reflecting higher Oncor equity earnings from rate updates, transmission volumes, customer growth, and new base rates.
- Sempra Infrastructure earnings: $131 million, down from $315 million. The decrease was driven mainly by unfavorable commodity derivative results, lower LNG diversion fees, a transportation customer termination, and higher credit-loss provisions.
- Equity earnings: $348 million, up from $219 million, including $179 million attributable to Sempra from Oncor Holdings versus $79 million in the prior-year quarter.
Cash flow, debt, liquidity, and balance sheet
- Sempra ended the quarter with $606 million of cash and cash equivalents and $834 million of total cash, cash equivalents, and restricted cash.
- Available unused credit capacity was $8.376 billion for Sempra, $1.500 billion for SDG&E, and $1.057 billion for SoCalGas.
- Short-term debt was $1.659 billion and long-term debt and finance leases were $29.519 billion at March 31, 2024. Total debt-related obligations increased from year-end primarily because of new debt issuance.
- Cash flow from operations of $1.851 billion was below capital expenditures and investments of $2.126 billion before financing and other cash sources.
- Sempra issued $600 million of 6.875% junior subordinated notes. SDG&E issued $600 million of 5.55% first mortgage bonds, and SoCalGas issued $500 million of 5.6% first mortgage bonds.
- At March 31, 2024, Sempra’s total assets were $89.604 billion and total equity was $34.661 billion.
- Sempra, SDG&E, and SoCalGas remained investment grade. S&P assigned SoCalGas an A rating with a negative outlook; the other disclosed ratings had stable outlooks.
Material changes versus the prior comparable period
- Natural gas revenue fell to $2.109 billion from $4.412 billion, primarily due to lower gas prices and weather-related volume reductions.
- Energy-related business revenue fell to $475 million from $1.121 billion. Commodity derivative results shifted significantly from gains in 2023 to unfavorable results in 2024.
- Interest expense decreased to $305 million from $366 million, partly because more project interest was capitalized, although interest expense increased at Sempra California due to higher debt balances.
- The effective tax rate decreased to 21% from 26%, influenced by flow-through tax items, the gas-repair tax accounting method, and changes in foreign currency and inflation effects.
- Capital expenditures and investments increased to $2.126 billion from $1.915 billion, with significant spending on California utility assets, Oncor Holdings, and Sempra Infrastructure projects.
- Operating cash flow declined at Sempra overall but increased at SDG&E to $676 million from $372 million and at SoCalGas to $887 million from $326 million, primarily due to working-capital and regulatory-account movements.
Guidance, outlook, commentary, risks, and unusual items
- Management expects available cash, operating cash flow, credit facilities, debt and equity financing, distributions from equity investments, project financing, and noncontrolling-interest funding to support operations, dividends, debt repayment, capital expenditures, and project development. The filing does not provide a clear full-year earnings guidance range.
- The 2024 CPUC general rate case decisions for SDG&E and SoCalGas remained pending. The utilities recorded revenues using 2023 authorized levels, although the final decision is expected to apply retroactively to January 1, 2024.
- SDG&E is seeking recovery of approximately $1.5 billion of incremental wildfire-mitigation costs. The CPUC authorized interim recovery of $194 million in 2024, subject to reasonableness review, with a possible additional $96 million in 2025 if a recovery mechanism is not established.
- Port Arthur LNG Phase 1 construction is proceeding under existing permits. The 2022 air permit remains subject to review by the Texas Supreme Court, but management did not anticipate a material effect on project cost, schedule, or commercial operations at the filing date. First and second trains are expected to begin operations in 2027 and 2028.
- ECA LNG Phase 1 construction is expected to reach commercial operations in summer 2025. The project had $926 million of borrowings outstanding at quarter-end.
- Sempra expects to settle forward sale agreements for approximately 17.1 million common shares by December 31, 2024, potentially generating approximately $1.2 billion of net proceeds if physically settled, subject to contractual adjustments. Settlement could dilute EPS.
- Aliso Canyon litigation remains outstanding. Approximately 96 non-settling plaintiffs and approximately 436 new plaintiffs had claims as of April 30, 2024. Sempra and SoCalGas had accrued $31 million for SoCalGas-related legal matters, including $29 million in current and $2 million in noncurrent Aliso Canyon accruals; possible losses above accrued amounts cannot be estimated and could be significant.
- Potential closure or reduced use of the Aliso Canyon facility could impair its approximately $1.0 billion net book value and affect regional gas and electric reliability.
- Other material risks include California wildfires, regulatory and rate-recovery decisions, LNG project delays or cost overruns, Mexican regulatory and permit disputes, commodity-price volatility, customer credit losses, cybersecurity, inflation, interest rates, and access to capital.
Most important facts for investors to verify
- Outcome and retroactive financial effect of the 2024 CPUC general rate cases for SDG&E and SoCalGas.
- Resolution and recoverability of SDG&E wildfire-mitigation costs and the continuing adequacy of the California Wildfire Fund.
- Progress, financing, permits, costs, and expected commercial operation dates for Port Arthur LNG and ECA LNG.
- Timing and form of settlement of Sempra’s forward equity sale agreements and resulting share dilution.
- Commodity derivative exposure and the potential volatility of Sempra Infrastructure earnings.
- Remaining Aliso Canyon litigation, potential impairment of the storage facility, and any changes to authorized storage levels.
- Oncor’s dividend capacity, regulatory developments, and Sempra’s potential need to provide additional capital.