Sempra 10-Q Summary — First Quarter 2023
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 months ended March 31, 2023. Sempra operates regulated California utilities, owns an investment in Oncor through Sempra Texas Utilities, and develops energy infrastructure through Sempra Infrastructure, including LNG, natural gas, pipeline and power assets.
The financial statements are unaudited interim statements prepared under U.S. GAAP. Results for the quarter are not necessarily indicative of full-year results.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Sempra revenues | $6.560 billion | $3.820 billion | +72% |
| Net income | $1.172 billion | $657 million | +78% |
| Earnings attributable to common shares | $969 million | $612 million | +58% |
| Diluted EPS | $3.07 | $1.93 | +59% |
| Net margin | 17.9% | 17.2% | Higher |
| Operating cash flow | $1.980 billion | $1.607 billion | +$373 million |
| Capital expenditures for PP&E | $1.830 billion | $1.204 billion | +52% |
Revenue growth was driven primarily by higher natural gas prices and related pass-through revenues, as well as energy-related business activity and commodity derivative gains. Revenue growth should not be interpreted as equivalent earnings growth because many utility commodity costs are recovered from customers through rates.
| Segment earnings attributable to common shares | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| SDG&E | $258 million | $234 million | +10% |
| SoCalGas | $360 million | $334 million | +8% |
| Sempra Texas Utilities | $83 million | $162 million | -49% |
| Sempra Infrastructure | $315 million | $95 million | +232% |
| Parent and other | $(47) million | $(213) million | Loss narrowed |
Sempra’s effective income tax rate declined to 26% from 41%, primarily reflecting the absence of a $120 million deferred tax expense recorded in 2022 and investment tax credits associated with standalone energy storage projects.
Cash flow, debt and liquidity
- Cash, cash equivalents and restricted cash totaled $703 million at March 31, 2023, compared with $462 million at December 31, 2022. Unrestricted cash and cash equivalents were $534 million.
- Operating cash flow of $1.980 billion exceeded PP&E expenditures of $1.830 billion, but total investing cash use was $1.895 billion.
- Short-term debt was $3.037 billion and current maturities of long-term debt and finance leases were $1.220 billion. Long-term debt and finance leases were $25.206 billion.
- Sempra reported $9.9 billion of aggregate committed credit-line capacity and $7.686 billion of available unused credit under the detailed facility table. Management separately reported $7.861 billion of available unused funds for Sempra, including committed and uncommitted facilities.
- Sempra, SDG&E and SoCalGas were in compliance with applicable debt covenants. All three maintained investment-grade credit ratings with stable outlooks at quarter-end.
- Sempra’s debt increased in connection with project financing and other borrowings, while interest expense rose to $366 million from $243 million.
Material changes versus the prior comparable period
- Sempra Infrastructure: Earnings increased by $220 million, primarily from asset and supply optimization, unrealized commodity derivative gains, higher LNG diversion fees and transportation activity. The segment also incurred higher interest expense, including losses and settlement costs on a contingent interest-rate swap related to Port Arthur LNG.
- California utilities: SDG&E earnings increased due to higher CPUC base operating margin, regulatory interest income, transmission margin and lower income taxes. SoCalGas benefited from the absence of the $66 million after-tax Aliso Canyon-related charge recorded in 2022, partly offset by higher interest expense and lower authorized margin.
- Sempra Texas Utilities: Earnings declined by $79 million, primarily because of Oncor rate-base disallowances, higher depreciation, interest and operating expenses, and lower weather-related customer consumption.
- Commodity and derivative effects: Sempra recorded $384 million of pretax gains from undesignated derivatives in Q1 2023 versus a $59 million pretax loss in Q1 2022. These results are volatile and may reverse as market prices change.
- Capital program: PP&E expenditures and investments increased to $1.915 billion from $1.289 billion, primarily due to substantially higher Sempra Infrastructure spending.
- Ownership transactions: Sempra Infrastructure completed the sale of an indirect 30% noncontrolling interest in Port Arthur LNG Phase 1 to a ConocoPhillips affiliate for approximately $265 million. It also agreed to sell an additional indirect interest of 25% to 48.65% to KKR Denali, subject to approvals and closing conditions.
Guidance, outlook, commentary and unusual items
- Sempra expects approximately $9.2 billion of capital expenditures and investments in 2023 and approximately $38.6 billion from 2023 through 2027. The 2023 estimate increased from $5.7 billion previously disclosed, mainly because of Port Arthur LNG Phase 1.
- Port Arthur LNG Phase 1 reached final investment decision in March 2023. The project is expected to cost approximately $13 billion, including capitalized interest and contingency; first and second trains are expected to begin commercial operations in 2027 and 2028, respectively.
- ECA LNG Phase 1 is expected to begin commercial operations in summer 2025. The estimated EPC price is approximately $1.5 billion, with total capital expenditures estimated at approximately $2 billion.
- Sempra expects the Topolobampo refined-products terminal to begin commercial operations in the fourth quarter of 2023, subject to regulatory approval of rates.
- Management stated that available liquidity, operating cash flow, credit facilities, debt financing, equity-method investment distributions, project financing and minority-owner funding are expected to support operations, capital expenditures, debt repayment, dividends and other obligations. Access to financing could be affected by higher interest rates, market volatility, rating actions or banking-sector disruptions.
- The 2024 California General Rate Case remains significant. SDG&E and SoCalGas requested 2024 revenue requirements of $3.0 billion and $4.4 billion, respectively. A proposed decision was issued in April 2023, but final results may differ materially from the requests.
- SoCalGas continues to face Aliso Canyon litigation and regulatory matters. Accrued loss contingencies for legal and regulatory matters were $280 million for Sempra, including $204 million for SoCalGas; $129 million related to the Leak was included in the reserve for Aliso Canyon costs. Potential additional losses cannot be reasonably estimated and could be significant.
- The Aliso Canyon facility had a net book value of $965 million. Permanent closure or insufficient future cash flows could result in a material impairment and higher operating or capital costs.
- Key project and regulatory risks include construction delays and cost overruns, permitting, LNG offtake and financing requirements, Mexican energy-law changes, environmental and land disputes, wildfire exposure, cybersecurity, commodity prices, foreign exchange and inflation.
Most important facts for investors to verify
- Whether Q1 earnings remain sustainable after excluding the significant unrealized commodity derivative gains and other market-sensitive items.
- The final outcome of the California General Rate Case and recovery of wildfire mitigation and other regulatory balances.
- The scope and potential cost of remaining Aliso Canyon litigation and the pending CPUC settlement approval.
- Port Arthur LNG Phase 1 construction progress, total project costs, funding commitments, leverage and the planned KKR Denali transaction.
- Whether Sempra can fund the approximately $9.2 billion 2023 capital program while maintaining investment-grade ratings and dividend capacity.
- Oncor’s revised authorized return on equity, rate-base disallowances, dividend capacity and Sempra’s potential need to provide additional capital.
- Exposure under Sempra’s guarantees, including the maximum $979 million exposure under the CFIN Support Agreement and the $165 million Cameron LNG reserve-related guarantee.
- Potential impairment or recovery issues involving the Aliso Canyon facility, the Guaymas-El Oro pipeline segment and Mexican LNG projects.