Sempra Energy 2019 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
This combined Form 10-Q, filed August 2, 2019, covers the quarter and six months ended June 30, 2019, for Sempra Energy, San Diego Gas & Electric Company (SDG&E), and Southern California Gas Company (SoCalGas). Sempra operates regulated California utilities, Texas utility investments, Mexican energy infrastructure, and LNG businesses. The company is repositioning toward North America: Sempra Renewables ceased to exist as a reportable segment after asset sales, and South American businesses were classified as discontinued operations and are expected to be sold by year-end 2019.
Key Financial Metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $2.230 billion, up 3% | $5.128 billion, up 9% |
| Net income attributable to common shares | $354 million versus $(561) million | $795 million versus $(214) million |
| Diluted EPS | $1.26 versus $(2.11) | $2.85 versus $(0.82) |
| Income from discontinued operations attributable to common shares | $70 million | $19 million |
| Cash flow from operating activities | Not separately provided for the quarter | $1.704 billion versus $1.673 billion |
| Capital expenditures | Not separately provided for the quarter | $1.651 billion versus $1.834 billion |
Reported six-month net margin was approximately 18.6%, compared with a negative margin in the prior-year period. The improvement primarily reflects the absence of major 2018 impairment charges and stronger equity earnings, partially offset by higher operating and interest expenses. Management reported adjusted earnings of $309 million, or $1.10 diluted EPS, for the second quarter and $843 million, or $3.03 diluted EPS, for the first six months. These are non-GAAP measures.
- Segment earnings attributable to common shares: SDG&E $143 million for the quarter and $319 million year to date; SoCalGas $30 million and $294 million; Sempra Texas Utilities $113 million and $207 million; Sempra Mexico $73 million and $130 million; Sempra Renewables $46 million and $59 million before its cessation; Sempra LNG $6 million and $11 million; and Parent and other losses of $127 million and $244 million.
- Balance sheet: Total assets were $62.727 billion at June 30, 2019, versus $60.638 billion at December 31, 2018. Cash and cash equivalents were $168 million, with total cash, cash equivalents, and restricted cash of $294 million including discontinued operations.
- Debt: Short-term debt was $2.395 billion, current maturities of long-term debt and finance leases were $2.156 billion, and long-term debt and finance leases were $21.199 billion. Total debt and finance leases therefore approximated $25.8 billion, excluding certain presentation effects.
- Liquidity: Primary U.S. committed credit facilities totaled $6.685 billion, with $5.220 billion available after commercial paper. Sempra Energy, SDG&E, and SoCalGas were in compliance with their 65% indebtedness-to-capitalization covenants. Credit ratings remained investment grade, although several ratings carried negative outlooks at quarter-end.
- Utilities: SDG&E revenue rose to $2.239 billion for the first six months, while earnings attributable to common shares increased slightly to $319 million. SoCalGas revenue rose to $2.167 billion and earnings increased to $294 million, aided by tax-related regulatory benefits and the absence of certain 2018 Aliso Canyon litigation impacts.
Material Changes Versus the Prior Comparable Period
- 2018 included a $1.3 billion impairment of non-utility natural gas storage assets and a $200 million impairment of U.S. wind equity investments. Their absence in 2019 was the principal driver of the improvement from losses to profits.
- Sempra Renewables sold its remaining wind assets in April 2019 for $569 million net of transaction costs and recognized a $61 million pretax gain. The segment was then wound down.
- Sempra LNG sold non-utility natural gas storage assets for approximately $322 million net in February 2019.
- Sempra acquired a 50% interest in Sharyland Holdings for $102 million and contributed approximately $1.180 billion to Oncor, primarily to support Oncor’s $1.275 billion acquisition of InfraREIT.
- Operating and maintenance expense increased 13% in both the quarter and six-month period, primarily from refundable regulatory programs, wildfire insurance, weather-related costs, and growth-related expenses.
- Interest expense increased to $258 million for the quarter and $518 million year to date, partly because lease accounting moved certain power-purchase agreement costs from purchased power into depreciation and interest expense.
- Sempra adopted the lease standard on January 1, 2019, recognizing substantial operating lease right-of-use assets and liabilities. At June 30, operating lease liabilities were $499 million and total lease liabilities were $1.779 billion.
- Oncor Holdings equity earnings increased to $200 million for the first six months, compared with $128 million for the comparable 2018 period, reflecting a full period of ownership and the InfraREIT transaction.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management expected approximately $6.2 billion of 2019 capital expenditures and investments, excluding discontinued operations, including LNG development and a potential $280 million SDG&E acquisition of the Otay Mesa power plant.
- OMEC exercised a put option requiring SDG&E to purchase the 605-MW facility for approximately $280 million by October 3, 2019, subject to regulatory rehearing developments.
- California’s 2019 general rate case decisions were pending. Delays caused SDG&E and SoCalGas to absorb higher costs and reduced base operating margins.
- Following July 2019 wildfire legislation, SDG&E committed to approximately $452 million of shareholder contributions to California’s Wildfire Fund, including an initial $322.5 million contribution and annual contributions of $12.9 million for ten years. These contributions are not rate recoverable.
- Aliso Canyon remains a significant contingency. SoCalGas estimated total leak-related costs of $1.082 billion, including $1.053 billion recovered or probable of recovery from insurance. It had received $672 million of insurance proceeds and recorded a $381 million insurance receivable. Additional litigation, regulatory penalties, insurance disputes, and potential impairment of the facility remain risks.
- Approximately 395 Aliso Canyon lawsuits involving about 36,000 plaintiffs remained pending as of July 29, 2019. A CPUC investigation opened in June 2019 could result in additional sanctions or penalties.
- Sempra Mexico faced arbitration and contract disputes with Mexico’s CFE regarding force-majeure payments and fixed-capacity provisions for the Sonora and Sur de Texas-Tuxpan pipelines. The CFE had not yet accepted the in-service date for the marine pipeline.
- Cameron LNG Train 1 had shipped its first commissioning cargo, and FERC authorized it to enter service in July 2019. Management expected Trains 2 and 3 to begin producing LNG in the first and second quarters of 2020, respectively, but construction delays and cost increases remained risks. Sempra guarantees up to $3.9 billion of Cameron LNG JV financing obligations.
- Management identified wildfire liability, regulatory approvals and rate recovery, litigation, credit ratings, construction execution, commodity and foreign-exchange volatility, cybersecurity, and access to financing as material risks.
Most Important Facts for Investors to Verify
- Whether the South American asset sale closes by year-end 2019 and the eventual sale price and use of proceeds.
- The final outcomes of the California utilities’ general rate cases and cost-of-capital proceedings.
- SDG&E’s purchase or non-purchase of OMEC and the effect of the Wildfire Fund contributions on capital structure and cash flow.
- Insurance recoveries, remaining liabilities, and litigation or CPUC penalties related to Aliso Canyon.
- CFE arbitration and contract outcomes affecting Sempra Mexico’s pipeline cash flows and asset values.
- Cameron LNG commissioning, final project costs, commercial operation dates, and the $3.9 billion guarantee exposure.
- Future settlement of approximately 16.9 million shares subject to forward sale agreements, expected no later than December 15, 2019, and the resulting dilution and cash proceeds.