SEMPRA quarterly report, Q3 FY2021

Sempra 2021 Q3 Form 10-Q Summary

Business context and reporting period

Combined Form 10-Q for Sempra, San Diego Gas & Electric Company (SDG&E), and Southern California Gas Company (SoCalGas), covering the quarter and nine months ended September 30, 2021. Sempra operates regulated California utilities, Texas utility investments, and energy infrastructure businesses in Mexico and North America, including LNG, natural gas, renewable power, and liquid-fuels infrastructure. Former South American operations are presented as discontinued operations.

Key financial metrics

Metric	Three months ended September 30	Nine months ended September 30
Total revenue	$3,013 million, versus $2,644 million	$9,013 million, versus $8,199 million
Net income attributable to common shares	$(648) million, versus $351 million	$650 million, versus $3,350 million
Diluted EPS	$(2.03), versus $1.21	$2.09, versus $11.43
Operating cash flow	Not separately provided for the quarter	$2,981 million, versus $1,629 million
Capital expenditures for PP&E	Not separately provided for the quarter	$3,606 million, versus $3,313 million

Revenue increased approximately 14% in the quarter and 10% year to date, driven mainly by higher utility revenue, natural gas prices and volumes, new Mexico terminal operations, and increased energy-related activity. Approximate net margin was negative 21.0% for the quarter and 7.2% for the nine months, compared with 15.9% and 44.8%, respectively, in the prior-year periods; the comparison is heavily distorted by Aliso Canyon charges and the 2020 gains from discontinued operations.

At September 30, 2021, Sempra reported $873 million of cash and cash equivalents, $70.5 billion of total assets, approximately $26.1 billion of short-term and long-term debt including current maturities, and $24.6 billion of total equity. Primary U.S. committed credit facilities totaled $6.685 billion, with $4.573 billion unused after commercial paper borrowings. Including foreign facilities, management reported $6.312 billion of available unused credit for Sempra. Sempra, SDG&E, and SoCalGas were in compliance with their 65% debt-to-capitalization covenants.

Material changes versus the prior comparable period

• SoCalGas recorded a $1.571 billion pretax charge in the third quarter related to Aliso Canyon litigation and regulatory matters, compared with $27 million in the prior-year quarter. The after-tax impact was approximately $1.13 billion.
• SoCalGas reported a nine-month net loss attributable to common shares of $625 million, compared with earnings of $425 million in 2020. Sempra's nine-month earnings declined primarily because 2020 included approximately $1.84 billion of gains from completed South American business sales.
• SDG&E third-quarter earnings increased to $205 million from $178 million, but nine-month earnings declined to $603 million from $633 million. The quarter benefited from higher CPUC base operating margin and the absence of a 2020 energy-efficiency charge; year-to-date results were affected by 2020 regulatory liability releases and favorable FERC-related items.
• Sempra Mexico third-quarter earnings increased to $164 million from $50 million, while nine-month earnings declined to $225 million from $302 million, largely because of foreign currency and inflation effects, partially offset by new terminal operations and increased ownership of IEnova.
• Sempra LNG earnings declined to $1 million in the quarter and $194 million year to date, versus $71 million and $207 million, respectively, primarily because of weaker natural gas marketing results, partly offset by stronger Cameron LNG JV equity earnings.
• Sempra increased its ownership of IEnova from 70.2% to 99.9% through a May share exchange and September cash tender offer. The transactions included 12.3 million newly issued Sempra shares and approximately $202 million of cash consideration.
• Series A and Series B mandatory convertible preferred stock were converted into common stock in January and July 2021, reducing preferred dividends and increasing common shares outstanding.

Cash flow, capital allocation, and outlook

• Operating cash flow increased by $1.352 billion year to date, primarily because of the $1.525 billion Aliso Canyon reserve accrual, higher Cameron LNG distributions, and the absence of cash taxes associated with 2020 South American divestitures.
• Investing cash flow was $(3.456) billion, compared with $2.415 billion of inflow in 2020, when divestiture proceeds were received. Financing cash flow was $397 million, including a $1.999 billion increase in short-term debt, $2.315 billion of debt and finance-lease payments, and $981 million of common dividends paid.
• Management expects approximately $6.1 billion of 2021 capital expenditures and investments, above the previous $5.8 billion estimate, primarily due to higher expected Oncor contributions and Sempra Mexico pipeline investments, partly offset by delayed ECA LNG Phase 1 spending.
• On October 1, 2021, Sempra completed the sale of a 20% interest in Sempra Infrastructure Partners to KKR for $3.37 billion, subject to post-closing adjustments. Management said proceeds would support growth investments and debt reduction. Sempra retained 80% ownership but must share control over certain decisions.
• On November 1, 2021, Sempra funded a $300 million loan to KKR under an accommodation and support agreement. The loan bears compound interest at 5% and is due no later than October 1, 2029.
• Sempra LNG expects ECA LNG Phase 1 to begin producing LNG by the end of 2024. Management does not expect to make a Port Arthur LNG final investment decision in 2021 and was working toward a potential Cameron LNG Phase 2 final investment decision around the end of 2022.

Guidance, risks, contingencies, and unusual items

• Aliso Canyon remains the principal financial contingency. Estimated related costs were $3.199 billion, including $1.279 billion recovered or considered probable of recovery from insurance. Sempra and SoCalGas had accrued $1.976 billion and recorded a $414 million insurance receivable; $865 million of insurance proceeds had been received through September 30, 2021.
• SoCalGas and Sempra agreed to a settlement covering more than 80% of individual plaintiffs for payments of up to $1.8 billion, subject to broad claimant acceptance and court approval. A separate property class settlement totaled $40 million. Unresolved litigation and CPUC proceedings could create additional material costs beyond recorded amounts.
• Potential permanent closure or reduced use of the Aliso Canyon facility could impair its $863 million net book value, increase operating or capital costs, and affect regional gas and electric reliability.
• Mexico-related risks include proposed constitutional electricity reforms, changes to hydrocarbons and foreign-trade rules, permit challenges, land disputes, customer arbitration, and possible restrictions on private energy infrastructure. A Puebla refined-products terminal was temporarily shut during a September 2021 investigation, and the Guaymas-El Oro pipeline segment remained inoperable with $436 million of related PP&E potentially subject to impairment.
• SDG&E's wildfire exposure includes the risk that its $371 million Wildfire Fund asset could be reduced or exhausted. SDG&E also filed for updated cost-of-capital terms; if its application is not approved, the CPUC mechanism could reduce authorized ROE beginning January 1, 2022.
• Sempra's guarantees and support arrangements included maximum exposures of $165 million for the Cameron LNG SDSRA and $979 million under the CFIN Support Agreement. The separate Cameron LNG construction-period guarantees of up to $4.0 billion terminated in March 2021.
• Credit ratings remained investment grade, but S&P maintained negative outlooks for Sempra and SoCalGas. A downgrade could increase borrowing costs and collateral requirements.
• Management stated that disclosure controls were effective as of September 30, 2021.

Important facts for investors to verify

• Whether Aliso Canyon settlements receive required claimant and court approvals, the ultimate cash payments, and the amount of additional insurance recovery.
• The outcome of CPUC Aliso Canyon penalty and cost-recovery proceedings and any potential impairment of the storage facility.
• The final accounting, debt reduction, distributions, and governance effects of the KKR transaction completed after quarter end.
• Whether Mexican legal and regulatory changes affect permits, power-market access, terminal operations, and the carrying values of affected assets.
• Progress and funding requirements for ECA LNG Phase 1, Cameron LNG Phase 2, Port Arthur LNG, and Sempra Mexico projects.
• SDG&E's cost-of-capital application, wildfire fund exposure, and recovery of COVID-19-related customer arrearages.
• The timing and terms of Sempra's planned $2.35 billion senior-note redemptions, expected in December 2021, including estimated after-tax charges of approximately $93 million.