Sempra Energy 2017 Q2 Form 10-Q Summary
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, 2017. Sempra operates regulated California utilities and infrastructure businesses in Mexico, South America, renewable energy, LNG, pipelines, and natural gas storage.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Sempra revenue | $2.533 billion, versus $2.156 billion | $5.564 billion, versus $4.778 billion |
| Sempra earnings attributable to common shareholders | $259 million, versus $16 million | $700 million, versus $369 million |
| Sempra diluted EPS | $1.03, versus $0.06 | $2.77, versus $1.47 |
| Sempra operating cash flow | Not separately provided for the quarter | $1.889 billion, versus $916 million |
| Sempra capital expenditures | Not separately provided for the quarter | $1.802 billion, versus $2.006 billion |
| Sempra cash and cash equivalents at period end | Not applicable | $223 million, versus $349 million at December 31, 2016 |
| Sempra short-term and current long-term debt | Not separately provided for the quarter | $3.113 billion at June 30, 2017 |
| Sempra long-term debt | Not separately provided for the quarter | $15.000 billion at June 30, 2017 |
Sempra’s consolidated six-month operating margin, calculated as earnings before interest and taxes divided by revenue, is not clearly comparable from the filing because the company presents significant regulatory, derivative, foreign-exchange, and nonrecurring items across multiple income-statement lines.
At June 30, 2017, Sempra had $4.3 billion of primary U.S. committed credit facilities, with approximately $3.1 billion available. Foreign operations had an additional $1.7 billion of facilities, with approximately $1.0 billion available. Sempra, SDG&E, and SoCalGas were in compliance with applicable financial covenants and maintained investment-grade credit ratings.
Segment and subsidiary performance
- SDG&E: Earnings attributable to common shares were $149 million in the second quarter and $304 million for six months, compared with $100 million and $236 million, respectively, in 2016. The increase reflected higher authorized margins, transmission earnings, AFUDC, and favorable tax-item resolutions.
- SoCalGas: Earnings attributable to common shares were $58 million in the second quarter and $261 million for six months, compared with a $1 million loss and $198 million of earnings, respectively. Results benefited from the absence of 2016 tax-related charges and a prior-year project impairment.
- Sempra South American Utilities: Earnings increased to $45 million in the quarter and $92 million for six months, primarily from higher rates and lower operating costs at Luz del Sur, partly offset by lower volumes.
- Sempra Mexico: The segment reported a $9 million quarterly loss and $39 million of six-month earnings, versus $57 million and $75 million of earnings in the comparable periods. Results were reduced by the $71 million impairment of the Termoeléctrica de Mexicali power plant, foreign-currency and inflation-related tax effects, higher interest expense, and joint-venture losses. Pipeline acquisitions and Ventika operations provided offsets.
- Sempra Renewables: Earnings rose to $23 million in the quarter and $34 million for six months, supported by higher renewable generation and tax-equity allocations.
- Sempra LNG & Midstream: Earnings were $27 million in the quarter and $28 million for six months, compared with losses of $149 million and $181 million. The improvement primarily reflected the absence of the 2016 pipeline-capacity release charge, favorable marketing results, and $57 million of settlement proceeds received in May 2017.
Material changes versus the prior comparable period
- Consolidated earnings increased $243 million in the quarter and $331 million for six months. Adjusted earnings were $276 million for the quarter and $714 million for six months, compared with $200 million and $625 million in the respective 2016 periods.
- Revenue increased 17% in the quarter and 16% for six months, driven by higher utility revenues, Sempra Mexico pipeline activity, Ventika, renewable assets, and improved LNG and natural gas marketing results.
- Operating cash flow more than doubled for the six months, partly because of higher earnings and favorable changes related to Aliso Canyon insurance receivables and accrued costs.
- Interest expense increased to $328 million for six months from $285 million, primarily due to debt associated with acquisitions and project development.
- Sempra issued $750 million of 3.25% notes due 2027. SDG&E issued $400 million of 3.75% first mortgage bonds due 2047. SDG&E also recorded a $500 million capital lease obligation when a peaker plant began delivering contracted power.
- Consolidated assets increased to $49.376 billion from $47.786 billion at year-end 2016, while total equity increased to $15.605 billion from $15.241 billion.
- The prior-year comparative results were adjusted for the adoption of ASU 2016-09 relating to employee share-based payment accounting.
Outlook, management commentary, risks, contingencies, and unusual items
- Management expects approximately $4 billion of 2017 capital expenditures and investments, increased from the prior estimate of $3.4 billion, primarily because of an additional solar project and higher SDG&E spending. No consolidated earnings guidance is provided in the filing text.
- The Cameron LNG three-train project schedule was revised; management expects the first train could be delayed into 2019, with the second and third trains following during 2019. The project has approximately $7 billion of anticipated incremental investment, and the EPC contractor has asserted potential claims for additional compensation, although the amount and validity were not yet determinable.
- SoCalGas recorded estimated Aliso Canyon leak-related costs of $832 million, an insurance receivable of $554 million, and a remaining accrued reserve of $63 million at June 30, 2017. Insurance proceeds received through that date totaled $273 million. Additional damages, penalties, remediation costs, litigation costs, and insurance recoveries remain uncertain.
- As of August 3, 2017, 281 Aliso Canyon lawsuits involving more than 25,500 plaintiffs were pending. The company also faced governmental investigations and regulatory proceedings. Limited injections at Aliso Canyon resumed July 31, 2017, subject to restrictions, while a CPUC proceeding considers reducing or eliminating use of the facility.
- Aliso Canyon had a net book value of $582 million, including $237 million of construction work in progress. A material impairment or unrecovered operating and capital costs could adversely affect SoCalGas and Sempra.
- SDG&E carried $350 million of wildfire-related regulatory assets. Management continued to believe substantial recovery in rates was probable, but estimated that failure to recover the assets could result in an after-tax charge of up to approximately $207 million.
- The CPUC’s July 2017 cost-of-capital decision reduced SDG&E’s authorized ROE from 10.30% to 10.20% and SoCalGas’s from 10.10% to 10.05%, effective January 1, 2018 through December 31, 2019.
- Sempra had outstanding guarantees with a maximum aggregate amount of $4.7 billion and a carrying value of $44 million, including guarantees associated with Cameron LNG and the IMG pipeline project.
- Sempra recorded a $71 million noncash impairment for Termoeléctrica de Mexicali, which was held for sale and expected to be sold in the second half of 2017.
- Sempra expects to adopt the new revenue-recognition standard on January 1, 2018 using the modified retrospective method and does not expect a material change in the amount or timing of consolidated revenue, although presentation and disclosures may change.
- SoCalGas faced a CPUC investigation into billing practices from 2014 through 2016; a decision was expected in 2018. The filing states that there were no material changes to previously disclosed risk factors.
Most important facts for an investor to verify
- Whether Aliso Canyon litigation, regulatory actions, penalties, remediation costs, or insurance disputes increase the recorded $832 million estimate or reduce the $554 million insurance receivable.
- Whether SDG&E obtains substantial recovery of the $350 million wildfire regulatory asset and the timing of the CPUC’s decision.
- Whether Cameron LNG experiences further construction delays, cost overruns, EPC claims, or additional funding requirements.
- Whether Sempra completes the planned sale of Termoeléctrica de Mexicali and whether further impairment charges arise.
- Whether the CPUC’s Aliso Canyon proceedings, proposed phase-out, storage restrictions, or potential rate refunds impair the facility’s $582 million carrying value.
- Whether the approximately $4 billion 2017 capital program and related debt issuances remain consistent with targeted investment-grade credit metrics and liquidity.
- How foreign-exchange and inflation effects in Mexico, including the $850 million of foreign-currency derivatives expiring in December 2017, affect taxes, earnings, and cash flow.