SEMPRA quarterly report, Q1 FY2021

Sempra Energy Form 10-Q Summary

Business context and reporting period

Combined quarterly report for Sempra Energy, San Diego Gas & Electric Company (SDG&E), and Southern California Gas Company (SoCalGas) for the three months ended March 31, 2021. Sempra operates regulated California utilities and energy infrastructure businesses in Mexico, Texas, and North America. South American operations were sold in the second quarter of 2020 and are presented as discontinued operations in the 2020 comparative period.

Key financial metrics

Metric	Q1 2021	Q1 2020	Change
Total revenue	$3.259 billion	$3.029 billion	+8%
Net income	$928 million	$947 million	-2%
Earnings attributable to common shares	$874 million	$760 million	+15%
Diluted EPS	$2.87	$2.53	+13%
Operating cash flow	$1.502 billion	$1.318 billion	+14%
Capital expenditures for PP&E	$1.181 billion	$1.010 billion	+17%
Cash, cash equivalents and restricted cash	$778 million	$2.454 billion	Down from $985 million at Dec. 31, 2020

Reported earnings attributable to common shares imply a consolidated net margin of approximately 26.8% of revenue; the filing does not present a comparable consolidated operating margin. Income from continuing operations was $928 million, compared with $867 million in 2020. The 2020 period included $80 million of discontinued-operation income and a $100 million equity loss related to RBS Sempra Commodities.

At March 31, 2021, Sempra reported $1.817 billion of short-term debt and $22.023 billion of long-term debt and finance leases. Primary U.S. committed credit facilities totaled $6.685 billion, with $5.640 billion available after commercial paper borrowings. Including foreign facilities, available unused credit was $6.768 billion. Sempra, SDG&E, and SoCalGas complied with applicable financial covenants and maintained investment-grade credit ratings, although Sempra and the California Utilities had negative S&P outlooks.

Material changes versus the prior comparable period

• SoCalGas earnings increased $104 million, or 34%, to $407 million, primarily because Q1 2020 included a $72 million after-tax Aliso Canyon charge and because of higher CPUC base operating margin.
• SDG&E earnings decreased $50 million, or 19%, to $212 million, primarily because Q1 2020 benefited from favorable FERC transmission settlement and regulatory matters.
• Sempra Texas Utilities earnings increased $30 million to $135 million, driven by higher Oncor equity earnings from rate updates, invested capital, and weather-related consumption.
• Sempra Mexico earnings decreased $134 million to $57 million, principally due to much less favorable foreign-currency and inflation effects compared with 2020. The 2020 period benefited from approximately $238 million of such effects, versus approximately $12 million in 2021.
• Sempra LNG earnings increased $71 million to $146 million, primarily from higher Cameron LNG JV equity earnings after the three-train project achieved commercial operations in August 2020.
• Parent and other losses improved by $165 million, largely because Q1 2020 included a $100 million RBS Sempra Commodities equity loss, along with lower interest expense, operating costs, and preferred dividends.
• Revenue increased across the principal segments: SDG&E to $1.337 billion, SoCalGas to $1.508 billion, Sempra Mexico to $367 million, and Sempra LNG to $196 million.

Cash flow, liquidity, and capital allocation

• Operating cash flow of $1.502 billion exceeded capital expenditures for PP&E of $1.181 billion, but investing activities also included $115 million of expenditures for investments and acquisitions.
• Cash used in financing activities was $407 million, compared with $2.114 billion of financing cash provided in Q1 2020. Q1 2021 included $1.093 billion of debt and finance-lease repayments, a $932 million increase in short-term debt, and $301 million of common dividends paid.
• Management expects approximately $5.8 billion of capital expenditures and investments in 2021.
• Management expects cash from operations, unrestricted cash, credit facilities, equity-method investment distributions, debt issuance, project financing, and noncontrolling-interest partners to fund operations, capital expenditures, dividends, debt repayment, acquisitions, and Aliso Canyon obligations.

Guidance, outlook, commentary, risks, and unusual items

• In April 2021, Sempra agreed to sell a 20% interest in the businesses expected to comprise Sempra Infrastructure Partners to KKR for approximately $3.37 billion, subject to adjustments and regulatory and other closing conditions. Management expects to use proceeds for growth investments and debt reduction. Closing was expected in mid-2021.
• Sempra launched an offer in April 2021 to acquire publicly held IEnova shares for Sempra common stock at an exchange ratio of 0.0323 Sempra shares per IEnova share. Completion was expected in Q2 2021, subject to customary conditions.
• On March 19, 2021, IEnova acquired the remaining 50% of ESJ for approximately $65 million net of acquired cash and assumed $277 million of debt. ESJ owns a 155 MW operating wind facility contracted to SDG&E and is constructing an additional 108 MW facility expected to be completed in late 2021 or Q1 2022.
• COVID-19 customer protections in California were extended through June 2021, and the CPUC may extend them further. Utilities may track and request recovery of incremental costs and uncollectible accounts, but recovery is not assured.
• Aliso Canyon remains a significant contingency. Estimated Leak-related costs were $1.627 billion, including $1.279 billion recovered or probable of recovery from insurance. Sempra had accrued $437 million and recorded a $414 million insurance receivable. Additional litigation, penalties, regulatory costs, or unrecovered insurance claims could be material.
• SoCalGas faces potential impairment and higher costs if Aliso Canyon is permanently closed or future cash flows are insufficient; the facility had a $840 million net book value at March 31, 2021.
• The Guaymas-El Oro segment of the Sonora pipeline remained inoperable, with a $442 million net book value. Service was expected to resume by September 14, 2021 under the revised agreement, but failure to repair the pipeline or obtain recovery could result in material losses.
• Mexican regulatory actions affecting renewable energy, pipeline operations, permits, and electricity dispatch remain subject to litigation and regulatory uncertainty.
• Sempra’s maximum exposure under its CFIN Support Agreement was $979 million. In contrast, the $4.0 billion of guarantees related to Cameron LNG JV were terminated when the project reached financial completion in March 2021.
• Sempra did not expect to make a final investment decision on the proposed Port Arthur LNG project in 2021. LNG projects remain subject to customer commitments, permits, financing, partner approvals, construction costs, and market conditions.
• The filing states that no material changes occurred in previously disclosed risk factors. Management concluded that disclosure controls were effective as of March 31, 2021.

Most important facts for investors to verify

• Completion, final proceeds, debt adjustments, and control arrangements for the KKR/Sempra Infrastructure Partners transaction.
• Completion and dilution effects of the IEnova exchange offer.
• Recovery status, insurance proceeds, accrued liabilities, and potential penalties related to Aliso Canyon.
• Repair progress, contract payments, litigation, and impairment risk for the Guaymas-El Oro pipeline.
• California CPUC decisions regarding COVID-19 cost recovery, customer disconnections, authorized rates, and the cost-of-capital mechanism.
• Actual 2021 capital spending versus the approximately $5.8 billion expectation and the effect on debt reduction and liquidity.
• Progress, funding, partner approvals, permits, and final investment decisions for ECA LNG, Cameron LNG Phase 2, and Port Arthur LNG.
• Credit-rating outlooks, collateral requirements, and access to commercial paper and revolving credit facilities.