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, 2017, with audited comparisons for 2016 and 2015. Sempra operates regulated electric and natural-gas utilities in California and South America, and energy infrastructure businesses in Mexico and the United States, including renewable generation, LNG, pipelines and storage.
The filing is an annual report rather than a quarterly filing; fourth-quarter results were materially affected by the Tax Cuts and Jobs Act of 2017.
Key Financial Metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $11.207 billion | $10.183 billion | +10% |
| Net income | $351 million | $1.519 billion | -77% |
| Earnings attributable to Sempra common shares | $256 million | $1.370 billion | -81% |
| Diluted EPS | $1.01 | $5.46 | -82% |
| Cash flow from operations | $3.625 billion | $2.311 billion | +57% |
| Capital expenditures | $3.949 billion | $4.214 billion | -6% |
| Long-term debt | $16.445 billion | $14.429 billion | +$2.016 billion |
| Short-term debt | $2.967 billion | $2.692 billion | +$275 million |
Revenue increased to $11.207 billion, including $5.415 billion of electric revenue, $4.361 billion of natural-gas revenue and $1.431 billion from energy-related businesses. Based on reported revenue, net income margin was approximately 3.1% and earnings attributable to common shares margin was approximately 2.3%, versus approximately 14.9% and 13.4%, respectively, in 2016.
- Segment earnings: SDG&E $407 million, SoCalGas $396 million, Sempra South American Utilities $186 million, Sempra Mexico $169 million, Sempra Renewables $252 million and Sempra LNG & Midstream $150 million. Parent and other recorded a $1.304 billion loss, principally because of tax effects.
- Adjusted earnings: Management reported non-GAAP adjusted earnings of $1.368 billion, or $5.42 diluted EPS, compared with $1.267 billion, or $5.05 diluted EPS, in 2016. Adjustments principally excluded the TCJA, the wildfire regulatory-asset write-off, the TdM impairment and Aliso Canyon litigation reserves.
- Liquidity: At December 31, 2017, consolidated unrestricted cash was $288 million and available unused U.S. credit was approximately $3.035 billion. Foreign operations had approximately $1.444 billion of additional unused credit capacity.
- Capital structure: Sempra’s debt-to-capitalization ratio increased to 56% from 53%. SDG&E’s ratio increased to 51% from 46%, while SoCalGas’ declined to 44% from 46%.
- Dividends: Sempra paid $755 million of common dividends in 2017 and declared $3.29 per common share for the year. In February 2018, the quarterly dividend was increased to $0.895 per share, or $3.58 annually.
Material Changes Versus the Prior Comparable Period
- Consolidated revenue rose 10%, mainly from higher utility rates and costs passed through to customers, increased Sempra Mexico pipeline and renewable activity, and higher energy-related sales.
- Reported earnings fell sharply because of the $870 million increase in income-tax expense from the TCJA and a $208 million after-tax charge from SDG&E’s wildfire regulatory-asset write-off.
- Sempra Renewables earnings rose to $252 million from $55 million, primarily from the TCJA remeasurement benefit and increased solar and wind activity.
- Sempra LNG & Midstream improved to $150 million from a $107 million loss, benefiting from the absence of the 2016 pipeline-capacity charge and from settlement proceeds.
- Sempra Mexico earnings declined to $169 million from $463 million, principally because 2016 included a $432 million after-tax remeasurement gain related to the IEnova Pipelines acquisition. The segment also recorded a $47 million after-tax TdM impairment in 2017.
- Operating cash flow increased by $1.314 billion, supported by higher noncash adjustments, insurance proceeds and improved Aliso Canyon-related working capital movements.
- Capital expenditures remained high at $3.949 billion. Utility investments included $1.555 billion at SDG&E and $1.367 billion at SoCalGas.
Guidance, Outlook, Management Commentary, Risks and Unusual Items
Pending Oncor Acquisition
Sempra agreed to acquire Energy Future Holdings, including its indirect 80.03% interest in Oncor, for $9.45 billion in cash. Management expected closing in the first half of 2018, subject to regulatory and other conditions. The transaction was intended to expand Sempra’s regulated earnings base, but Sempra would not control Oncor because of ring-fencing and independent-governance requirements. Management expected approximately 65% of the transaction and related costs to be funded with equity and 35% with debt.
Subsequent financing disclosed in the filing included approximately $1.69 billion of mandatory convertible preferred-stock proceeds, $368 million of common-stock proceeds and $4.9 billion of net debt proceeds. These financings create additional debt-service obligations and potential dilution.
Major Projects and Outlook
- Management expected all three Cameron LNG liquefaction trains to produce LNG and begin generating earnings in 2019. The project has expected export capacity of approximately 12 Mtpa and Sempra guarantees up to $3.9 billion of project-financing obligations until financial completion.
- 2018 capital expenditures and investments were projected at approximately $13.3 billion, including $9.45 billion for the proposed EFH acquisition and $250 million of related capital contribution and transaction costs.
- Over 2018–2022, Sempra projected approximately $12.9 billion of capital expenditures and investments at the California Utilities and $11.9 billion at other subsidiaries, subject to financing, regulatory approvals and market conditions.
- Sempra continued to pursue the sale of the 625-MW TdM power plant, classified as held for sale, and expected completion in 2018.
Material Risks and Contingencies
- Aliso Canyon: SoCalGas estimated cumulative leak-related costs of $913 million, including $887 million recovered or probable of recovery from insurance, and had received $469 million of insurance proceeds through December 31, 2017. Litigation, regulatory proceedings, penalties, emissions mitigation and additional costs remain uncertain. The facility’s net book value was $644 million.
- Wildfires: The CPUC denied recovery of approximately $379 million of SDG&E’s pretax 2007 wildfire costs. SDG&E recorded a $351 million pretax, or $208 million after-tax, write-off and pursued rehearing and appeals.
- Regulatory recovery: Pipeline Safety Enhancement Plan costs, rate-case requests, safety spending and other regulatory assets remain subject to CPUC reasonableness review and possible disallowance.
- Credit ratings: Sempra remained investment grade, but Moody’s placed its ratings on negative outlook in December 2017. Moody’s cited merger-related leverage, California wildfire recovery risk, TCJA effects and potential Cameron LNG delays.
- TCJA estimates: The $870 million tax impact was provisional and could be adjusted during 2018 as tax guidance, returns and foreign-earnings calculations were finalized.
- Market and operating risk: Key exposures include interest rates, foreign currencies, commodity prices, counterparty performance, cybersecurity, natural disasters, severe weather, wildfire liability, environmental regulation and project delays.
Most Important Facts an Investor Should Verify
- Whether the Oncor acquisition closed on the expected timetable and the final funding mix, leverage, dilution and regulatory conditions.
- Actual post-2017 cash taxes, repatriation amounts and any revisions to the provisional $870 million TCJA charge.
- Resolution of Aliso Canyon litigation, insurance recoveries, emissions-mitigation obligations and CPUC rate-recovery proceedings.
- Status of SDG&E’s wildfire-cost rehearing and appeals, and the potential treatment of future California wildfire liabilities.
- Cameron LNG construction completion, cost performance, commercial operation dates and release of Sempra’s $3.9 billion guarantees.
- Progress and final outcomes of the 2019 California Utilities general rate case, PSEP recovery applications and cost-of-capital adjustments.
- Debt maturities, post-merger refinancing needs, credit-rating actions and the potential effect of mandatory preferred-stock conversion and forward-sale settlements on common-share dilution.