Sempra 10-Q Summary: Quarter Ended June 30, 2021
Business context and reporting period
This combined, unaudited Form 10-Q covers Sempra Energy, San Diego Gas & Electric Company (SDG&E), and Southern California Gas Company (SoCalGas) for the three and six months ended June 30, 2021. Sempra operates regulated California utilities, owns an interest in Oncor, and develops energy infrastructure and LNG businesses in North America. Sempra began doing business as Sempra on July 2, 2021.
Former South American businesses were sold in 2020 and are presented as discontinued operations. Accordingly, 2020 earnings include significant disposal gains that do not recur in 2021.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $2,741 million | $2,526 million | $6,000 million | $5,555 million |
| Income from continuing operations | $455 million | $528 million | $1,383 million | $1,395 million |
| Earnings attributable to common shares | $424 million | $2,239 million | $1,298 million | $2,999 million |
| Diluted EPS | $1.37 | $7.61 | $4.24 | $9.91 |
| Operating cash flow | Not separately provided | Not separately provided | $2,255 million | $1,027 million |
| Capital expenditures and investments | Not separately provided | Not separately provided | $2,589 million | $2,338 million |
Sempra's continuing-operations net income margin was approximately 16.6% in Q2 2021 versus 20.9% in Q2 2020, and approximately 23.1% for the first six months of 2021 versus 25.1% in the comparable 2020 period. The comparison is affected by regulatory items, foreign-currency impacts, derivative results, and changes in discontinued operations.
- Segment earnings attributable to common shares, Q2 / six months: SDG&E $186 million / $398 million; SoCalGas $94 million / $501 million; Sempra Texas Utilities $138 million / $273 million; Sempra Mexico $4 million / $61 million; Sempra LNG $47 million / $193 million; Parent and other losses $45 million / $128 million.
- Revenue growth: Utilities revenue increased 9% in Q2 and 8% year to date, while energy-related revenue increased 5% in Q2 and 10% year to date. Much of the utility increase reflected higher pass-through gas and power costs and refundable program activity.
- Cash and liquidity: At June 30, Sempra had $335 million of cash and cash equivalents and $6.319 billion of available unused credit, including Sempra Mexico facilities. SDG&E had $13 million of cash and $1.063 billion of unused credit; SoCalGas had $4 million of cash and $607 million of unused credit.
- Debt: Sempra reported $2.266 billion of short-term debt and $22.090 billion of long-term debt and finance leases. Sempra's total debt increased from year-end 2020, primarily reflecting higher short-term borrowings. Sempra, SDG&E, and SoCalGas complied with their 65% indebtedness-to-capitalization covenants.
- Effective tax rate: Sempra's continuing-operations effective tax rate was 30% in Q2 and 22% for the first six months, compared with 31% and a benefit of 4%, respectively, in the comparable 2020 periods.
Material changes versus the prior comparable period
- Reported earnings and EPS declined sharply because 2020 included $1.777 billion of after-tax discontinued-operations income in Q2 and $1.857 billion for the first six months, principally gains on the sale of South American businesses. No comparable discontinued-operations income was recorded in 2021.
- Continuing-operations income declined modestly in Q2 but was broadly stable year to date. Equity earnings increased to $313 million in Q2 and $631 million year to date, supported by Cameron LNG's three-train project reaching full commercial operations and a $50 million favorable adjustment related to RBS Sempra Commodities.
- SDG&E Q2 earnings fell 4% and six-month earnings fell 13%, primarily because 2020 included a favorable release of a regulatory liability and favorable regulatory resolutions. The 2020 period also included a $15 million charge related to the Energy Efficiency Program inquiry.
- SoCalGas Q2 earnings fell 36%, largely because of the 2020 regulatory-liability release. Six-month earnings increased 12%, primarily because 2020 included a $72 million after-tax Aliso Canyon charge and 2021 benefited from higher CPUC-authorized operating margin.
- Sempra Mexico earnings decreased $57 million in Q2 and $191 million year to date, primarily due to unfavorable foreign-currency and inflation effects and related derivatives, as well as higher tax expense.
- Sempra LNG Q2 earnings declined 23% because of losses in natural-gas marketing, partially offset by higher Cameron LNG equity earnings. Six-month earnings increased 42% due primarily to Cameron LNG's higher operating contribution.
- Operating cash flow increased by $1.228 billion year to date, primarily because 2020 included cash taxes associated with the South American divestitures and 2021 benefited from higher Cameron LNG distributions and lower Aliso Canyon-related cash requirements. Investing cash flow was negative $2.588 billion, compared with $2.854 billion of inflow in 2020 due to divestiture proceeds.
Guidance, outlook, commentary, risks, and unusual items
- Capital spending: Management expects approximately $5.9 billion of 2021 capital expenditures and investments, up from the previous $5.8 billion estimate, primarily due to Sempra Mexico pipeline expansion projects and partly offset by shifted ECA LNG Phase 1 spending.
- Sempra Infrastructure Partners: Sempra agreed to sell a 20% interest in the combined Sempra LNG and IEnova businesses to KKR for approximately $3.37 billion, subject to adjustments and closing conditions. Closing was expected around the end of the third quarter of 2021. Management intended to use proceeds for growth investments and debt reduction. The transaction would reduce Sempra's ownership and require shared control over certain matters.
- Aliso Canyon: SoCalGas estimated total Leak-related costs at $1.627 billion, including $1.279 billion recovered or probable of recovery from insurance. The company had accrued $422 million and recorded a $414 million insurance receivable; it had received $865 million of insurance proceeds through June 30, 2021. Additional litigation, regulatory costs, penalties, and recovery shortfalls could be material.
- Mexican pipeline exposure: The Guaymas-El Oro segment of the Sonora pipeline had been inoperable since 2017. Sempra Mexico had $439 million of related net PP&E at June 30, 2021. If repairs or an agreed reroute were not completed by September 14, 2021, the asset could be impaired and contract recovery could be uncertain.
- Mexican regulatory and permitting risk: Changes affecting renewable dispatch, self-supply permits, hydrocarbon permits, and import/export authorizations were being challenged in court. Unfavorable outcomes could impair projects, reduce operating flexibility, or increase costs.
- LNG development: ECA LNG Phase 1 was under construction, with estimated capital expenditures of approximately $2.0 billion and expected LNG production by the end of 2024. Management was targeting a potential Cameron LNG Phase 2 final investment decision around the end of 2022. Sempra did not expect to make a Port Arthur LNG final investment decision in 2021.
- Wildfire and regulatory risks: SDG&E's Wildfire Fund asset had a carrying value of $378 million. Wildfire claims, fund depletion, regulatory cost recovery, and a potential downward California cost-of-capital adjustment could adversely affect earnings and cash flow.
- COVID-19: California customer protections and suspended service disconnections were extended through September 2021. Uncollectible accounts and tracked costs may increase, and recovery through future rates is not assured.
- Guarantees and contingencies: Cameron LNG construction-period guarantees of up to $4.0 billion terminated in March 2021. Remaining exposures included a $165 million Cameron LNG reserve-account guarantee and a CFIN support agreement with maximum exposure of $979 million.
- Subsequent events: Sempra converted its Series B preferred stock into common stock on July 15, 2021. SDG&E borrowed $200 million under a new term loan in July 2021. Sempra also contributed $50 million to Oncor Holdings and received a $438 million distribution in July 2021.
Most important facts for investors to verify
- Whether the KKR transaction for a 20% interest in Sempra Infrastructure Partners closed on expected terms and how ownership, control, debt, and cash flows changed.
- The status and ultimate cost, insurance recovery, regulatory treatment, and litigation exposure related to the Aliso Canyon Leak.
- Whether the Guaymas-El Oro pipeline returned to service or required impairment, contract termination, or renegotiation after September 14, 2021.
- Progress, financing, permits, offtake commitments, and final investment decisions for ECA LNG, Cameron LNG Phase 2, and Port Arthur LNG.
- The effect of Mexican energy-policy litigation and permit changes on renewable and LNG assets.
- Changes in Sempra's leverage, liquidity, credit ratings, and use of expected transaction proceeds for debt reduction.
- Whether California COVID-19 arrearages, wildfire exposure, regulatory balancing accounts, and potential cost-of-capital adjustments create future unrecovered costs.