Sempra Energy 2018 Q2 Form 10-Q Summary
Business context and reporting period
This combined, unaudited Form 10-Q covers Sempra Energy, San Diego Gas & Electric Company and Southern California Gas Company for the quarter and six months ended June 30, 2018. Sempra operates regulated electric and natural-gas utilities, international utilities, energy infrastructure, LNG, midstream and renewable businesses.
On March 9, 2018, Sempra completed its approximately $9.57 billion acquisition of Oncor Holdings, which owns an 80.25% interest in Oncor. Sempra accounts for Oncor Holdings as an equity-method investment because ring-fencing and governance provisions prevent Sempra from controlling Oncor.
Key financial metrics
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Six months ended June 30, 2018 | Six months ended June 30, 2017 |
|---|---|---|---|---|
| Total revenue | $2.564 billion | $2.533 billion | $5.526 billion | $5.564 billion |
| Net income attributable to common shares | $(561) million | $259 million | $(214) million | $700 million |
| Diluted EPS | $(2.11) | $1.03 | $(0.82) | $2.77 |
| Net cash from operating activities | Not separately provided for the quarter | Not separately provided for the quarter | $1.629 billion | $1.889 billion |
| Capital expenditures | Not separately provided for the quarter | Not separately provided for the quarter | $1.941 billion | $1.802 billion |
Consolidated net margin was approximately negative 20.7% for the quarter and negative 3.1% for the six-month period, primarily reflecting noncash impairment charges. Management reported adjusted earnings of $361 million, or $1.35 per diluted share, for the quarter, and $733 million, or $2.78 per diluted share, for the six months; these are non-GAAP measures.
- Major impairment charges: $1.3 billion at Sempra LNG & Midstream for non-utility natural-gas storage and related midstream assets, and $200 million for certain U.S. wind equity-method investments. Combined after-tax and noncontrolling-interest impact was approximately $900 million.
- Segment earnings attributable to common shares: SDG&E $146 million for the quarter and $316 million year to date; SoCalGas $33 million and $258 million; Sempra Texas Utility $114 million and $129 million; Sempra Mexico $97 million and $117 million; Sempra Renewables $(109) million and $(88) million; and Sempra LNG & Midstream $(764) million and $(780) million.
- Balance sheet: Total assets were $59.907 billion at June 30, 2018, compared with $50.454 billion at December 31, 2017. Cash, cash equivalents and restricted cash totaled $327 million.
- Debt: Short-term debt was $3.708 billion, current maturities of long-term debt were $1.108 billion and long-term debt was $21.278 billion at June 30, 2018. Total reported debt increased materially following the Oncor acquisition financing.
- Liquidity: Sempra reported $2.111 billion of available unused credit on its primary U.S. committed facilities, plus $1.361 billion of available unused credit at foreign operations. It was in compliance with applicable credit-facility covenants.
- Dividends and equity financing: Common dividends declared were $0.89 per share for the quarter and $1.79 per share year to date. Sempra issued $1.693 billion of Series A mandatory convertible preferred stock and received approximately $2.090 billion from common-stock issuances during the first six months.
Material changes versus the prior comparable period
- Quarterly revenue increased modestly by $31 million, while six-month revenue declined by $38 million, reflecting lower utility natural-gas revenue partly offset by growth in energy-related businesses.
- Results shifted from profit to loss because of the $1.5 billion aggregate impairment charges, higher interest expense, adverse foreign-exchange and derivative effects, and Aliso Canyon litigation impacts.
- Interest expense increased to $237 million for the quarter and $453 million for the six months, from $159 million and $328 million, respectively, primarily because of debt raised for the Oncor transaction and higher short-term borrowings.
- Operating cash flow declined 14% to $1.629 billion for the six months, while investing cash outflow increased to $11.740 billion, principally because of the $9.57 billion Oncor acquisition and higher capital expenditures.
- SDG&E six-month earnings increased 4% to $316 million, while SoCalGas earnings declined slightly to $258 million. SoCalGas’s quarter was affected by $22 million of Aliso Canyon litigation-related impacts.
- Sempra Mexico earnings improved from a $9 million loss to $97 million in the quarter, aided by foreign-currency and inflation effects, improved pipeline and Termoeléctrica de Mexicali operations, and the absence of the prior-year TdM impairment.
Guidance, outlook, commentary and unusual items
- The filing does not provide a clear formal full-year EPS guidance range.
- Sempra expects approximately $13.7 billion of 2018 capital expenditures and investments, including significant California utility safety and reliability spending.
- Sempra expects to complete sales of its U.S. wind and solar portfolio and certain southeastern U.S. non-utility natural-gas storage assets in 2019. The timing, sale prices and ability to complete the transactions remain uncertain.
- Management expects all three Cameron LNG liquefaction trains to begin producing LNG and the project to begin generating earnings in 2019, while acknowledging construction, contractor, cost and commissioning risks. Sempra has guaranteed up to approximately $3.9 billion of Cameron LNG project obligations.
- The California Utilities’ 2019 General Rate Case applications remain subject to CPUC review. Management expected a final decision in the first half of 2019, but requested revenue requirements may differ materially from the ultimate decision.
- SoCalGas estimated total Aliso Canyon leak-related costs of $1.014 billion, including $987 million recovered or probable of recovery from insurance. It recorded a $160 million reserve and a $502 million insurance receivable at June 30, 2018. Additional litigation, regulatory penalties, remediation and insurance-recovery risks remain.
- SDG&E continues to pursue recovery of 2007 wildfire costs after the CPUC denied rehearing. Wildfire liability and potential nonrecovery remain material risks.
- Moody’s placed Sempra Energy’s ratings on review for downgrade and moved SDG&E’s outlook to negative. S&P subsequently changed the outlooks for Sempra Energy, SDG&E and SoCalGas to negative, although ratings remained investment grade at the filing date.
- On July 13, 2018, after quarter-end, Sempra issued $565.5 million of Series B mandatory convertible preferred stock and received $163.6 million from common-stock overallotment shares. Remaining forward-sale agreements could provide approximately $1.091 billion of additional net proceeds if physically settled.
Important facts for investors to verify
- Whether the planned asset divestitures close on schedule and at values consistent with management’s assumptions, and whether additional impairments arise.
- The final impact of the Oncor acquisition on leverage, dividend distributions, credit ratings, cash flow and required future capital contributions.
- The ultimate cost, insurance recovery, litigation exposure and regulatory treatment of the Aliso Canyon leak.
- Developments in California wildfire liability rules and the effect on SDG&E’s credit profile and recoverability of costs.
- The CPUC’s decisions in the 2019 General Rate Case and on pipeline safety, Aliso Canyon operations and other major capital programs.
- Cameron LNG construction progress, total project cost, commercial-operation timing and guarantee exposure.
- The dilution and cash proceeds associated with outstanding forward-sale agreements and mandatory convertible preferred stock.