Sempra Energy 2016 Q2 Form 10-Q Summary
Business context and reporting period
This combined 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, 2016. Sempra operates regulated California utilities, South American electric utilities, Mexican energy infrastructure, renewable generation, natural gas pipelines and storage, and LNG projects.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Sempra revenue | $2.156 billion, down from $2.367 billion | $4.778 billion, down from $5.049 billion |
| Sempra net income | $27 million, down from $320 million | $357 million, down from $778 million |
| Earnings attributable to Sempra common shareholders | $16 million; diluted EPS $0.06 | $335 million; diluted EPS $1.33 |
| Operating cash flow | Not separately provided for the quarter | $882 million, down from $1.219 billion |
| Capital expenditures | Not separately provided for the quarter | $2.006 billion, up from $1.466 billion |
| Cash and cash equivalents at period end | $616 million, versus $403 million at December 31, 2015 | |
| Total debt at period end | $15.862 billion, including $1.777 billion short-term debt, $907 million current maturities, and $13.178 billion long-term debt | |
| Available committed credit | Approximately $2.5 billion of consolidated committed facilities; foreign operations had $843 million available |
Sempra's reported six-month net margin was approximately 7.5%, compared with approximately 15.4% in the prior-year period. The reported quarter was affected by significant unusual charges and benefits, so margins are not directly indicative of recurring operating performance.
- SDG&E: Six-month revenue was $1.983 billion and earnings attributable to common shares were $229 million, compared with $273 million in 2015. Operating cash flow was $508 million and capital expenditures were $602 million.
- SoCalGas: Six-month revenue was $1.650 billion and earnings attributable to common shares were $194 million, compared with $284 million in 2015. Operating cash flow was $262 million and capital expenditures were $650 million. Second-quarter earnings attributable to common shares were a loss of $1 million.
- Other segments: Six-month earnings were $81 million for Sempra South American Utilities, $74 million for Sempra Mexico, $25 million for Sempra Renewables, and a loss of $185 million for Sempra Natural Gas.
Material changes versus the prior comparable period
- Sempra's second-quarter earnings fell $279 million and six-month earnings fell $397 million year over year.
- Sempra Natural Gas recorded a $206 million pretax, $123 million after-tax charge for the permanent release of pipeline capacity, materially reducing second-quarter and year-to-date earnings.
- SoCalGas and SDG&E recorded combined after-tax charges of $80 million related to the CPUC's 2016 General Rate Case decision, primarily reallocating prior tax-repair benefits to ratepayers. SoCalGas also recorded a $13 million after-tax impairment related to the Southern Gas System Reliability Project and a $9 million after-tax charge for tax-expense tracking.
- Sempra recorded a $44 million pretax, $27 million after-tax impairment on its Rockies Express investment in the first quarter and completed the sale of that 25% interest for $443 million.
- Prior-year results benefited from a $61 million pretax gain, or $36 million after tax, on the sale of the remaining Mesquite Power block.
- Energy-related revenue declined 31% year over year to $162 million in the quarter and to $342 million for the first six months, while utilities revenue declined primarily because of lower natural gas prices and regulatory adjustments.
- Capital expenditures increased by $540 million year over year, led by renewable projects and continued investment in the California Utilities.
Guidance, outlook, commentary, risks and unusual items
- Management expected approximately $5.6 billion of 2016 capital expenditures and investments, including approximately $2.7 billion at the California Utilities and $2.9 billion at other subsidiaries.
- IEnova expected to acquire PEMEX's 50% interest in Gasoductos de Chihuahua for approximately $1.1 billion in the third quarter of 2016, subject to Mexican antitrust and other approvals. Sempra expected a noncash remeasurement gain, but could not estimate it reliably.
- Management planned to sell the 625-MW Termoeléctrica de Mexicali plant in the second half of 2016 and expected the EnergySouth sale to close in 2016, subject to approvals. The filing later states an expected after-tax gain of approximately $70 million for EnergySouth.
- The Aliso Canyon leak was permanently sealed in February 2016, but SoCalGas had recorded estimated costs of $717 million and an insurance receivable of $679 million at June 30, 2016. Insurance recovery remains subject to policy limits, exclusions, disputes and timing risk.
- At least 181 lawsuits and multiple governmental investigations related to Aliso Canyon were pending as of July 28, 2016. Potential damages, penalties, remediation costs, regulatory requirements and additional claims were not fully estimable.
- Aliso Canyon injections remained prohibited pending safety reviews. The facility had a $441 million net book value, including $199 million of construction work in progress; prolonged shutdown could result in impairment, higher operating costs and reliability risks.
- SDG&E carried $355 million of regulatory assets for 2007 wildfire costs. If rate recovery were no longer probable, the potential after-tax charge was estimated at up to approximately $210 million.
- The California Utilities' 2016 GRC established revenue requirements of $1.791 billion for SDG&E and $2.204 billion for SoCalGas, with 3.5% annual escalation for 2017 and 2018. Recovery of certain retroactive amounts was to occur over 17 months beginning August 2016.
- Management stated that investment-grade credit ratings remained in place and that available liquidity, operating cash flow and access to debt markets were expected to fund operations, capital expenditures, dividends, acquisitions, debt maturities and Aliso Canyon costs.
- Sempra provided or supported guarantees, including Cameron LNG completion guarantees covering 50.2% of project debt, or up to approximately $3.7 billion. Aggregate guarantees were disclosed at approximately $4.5 billion, with a $63 million carrying value.
- Principal risks include regulatory disallowances, litigation, wildfire and nuclear decommissioning obligations, Aliso Canyon liabilities, project construction and financing risk, commodity and interest-rate volatility, foreign currency exposure, cybersecurity, counterparty performance, and changing natural gas storage and LNG regulations.
Important facts investors should verify
- Whether Aliso Canyon insurance recoveries are ultimately collected in full and whether the $717 million cost estimate increases.
- The outcome and timing of Aliso Canyon civil, criminal and regulatory proceedings, including potential fines, penalties, remediation and rate recovery.
- Whether SDG&E obtains substantial recovery of the $355 million wildfire regulatory asset and the timing of the CPUC proceeding.
- Completion, financing and valuation of the approximately $1.1 billion GdC acquisition and any resulting remeasurement gain.
- Completion and proceeds of the Termoeléctrica de Mexicali and EnergySouth divestitures.
- Whether California regulators approve recovery of pipeline safety, reliability and other capital expenditures without material disallowances.
- The sustainability of reported earnings after excluding the $123 million pipeline-capacity charge, GRC-related charges, Rockies Express impairment, and other unusual items.
- Debt growth, commercial paper reliance, liquidity availability and the effect of approximately $5.6 billion of planned 2016 investments on leverage and cash flow.