Sempra 10-Q Summary
Business context and reporting period
Combined quarterly report for Sempra, San Diego Gas & Electric Company and Southern California Gas Company for the three and six months ended June 30, 2023, filed August 3, 2023. Sempra operates regulated California utilities, owns an investment in Texas electric transmission and distribution through Oncor Holdings, and develops energy infrastructure through Sempra Infrastructure. Effective May 12, 2023, the parent changed its legal name from Sempra Energy to Sempra.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | YTD 2023 | YTD 2022 |
|---|---|---|---|---|
| Total revenue | $3,335 million | $3,547 million | $9,895 million | $7,367 million |
| Net income | $736 million | $659 million | $1,908 million | $1,316 million |
| Earnings attributable to common shares | $603 million | $559 million | $1,572 million | $1,171 million |
| Diluted EPS | $1.91 | $1.77 | $4.97 | $3.70 |
| Net margin | 22.1% | 18.6% | 19.3% | 17.9% |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $3,737 million | $2,364 million |
| Capital expenditures for PP&E | Not separately provided for the quarter | Not separately provided for the quarter | $4,282 million | $2,361 million |
At June 30, 2023, Sempra reported total assets of $82.7 billion, cash and cash equivalents of $1.1 billion, total debt before applicable discounts and excluding finance leases of approximately $29.9 billion, and total equity of $31.0 billion. Restricted cash brought total cash, cash equivalents and restricted cash to $1.2 billion.
Sempra had $7.6 billion of available unused credit, including $9.9 billion of aggregate committed credit capacity less commercial paper, other borrowings and letters of credit. Sempra, SDG&E and SoCalGas were in compliance with applicable leverage covenants. Credit ratings remained investment grade, although SoCalGas had a negative S&P outlook.
Material changes versus the prior comparable period
- Q2 earnings attributable to common shares increased 8% to $603 million; year-to-date earnings increased 34% to $1.572 billion. Diluted EPS increased 8% in Q2 and 34% year to date.
- Q2 revenue declined 6%, primarily because lower natural gas and electric commodity costs were passed through to utility customers. Year-to-date revenue increased 34%, primarily due to higher natural gas costs at SoCalGas and SDG&E and stronger energy-related business revenue.
- SDG&E earnings increased 5% in Q2 and 8% year to date, supported by higher CPUC base operating margin, lower authorized cost of capital, and higher regulatory interest income.
- SoCalGas earnings increased 78% in Q2 and 22% year to date. The comparison benefited from the absence of 2022 Aliso Canyon litigation charges, higher CPUC regulatory awards, and tax benefits related to gas-repair expenditures.
- Sempra Texas Utilities earnings declined 14% in Q2 and 30% year to date, primarily because of lower Oncor equity earnings, including rate-base disallowances and higher depreciation, interest and operating costs.
- Sempra Infrastructure earnings increased 14% in Q2 and 88% year to date, driven principally by favorable unrealized commodity-derivative results and higher transportation earnings, partially offset by foreign currency and inflation effects, higher noncontrolling-interest allocations and project development costs.
- Interest expense increased 17% in Q2 and 33% year to date because of higher debt balances, interest rates and a $47 million year-to-date impact from a contingent interest-rate swap related to Port Arthur LNG.
- Operating cash flow increased $1.373 billion year to date, while capital expenditures increased $1.921 billion. The company therefore remained heavily investment-focused, with year-to-date investing cash use of $4.421 billion.
Guidance, outlook, commentary and unusual items
- Management expects approximately $9.4 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, primarily because of Port Arthur LNG Phase 1, SDG&E energy storage projects and higher Sempra Texas Utilities investment.
- Major planned investment areas include regulated utility transmission and distribution, Port Arthur LNG Phase 1, ECA LNG Phase 1 and natural gas pipelines. Management expects available cash, operating cash flow, credit facilities, debt financing, project financing, equity-method distributions and minority-owner funding to support operations and planned investment while maintaining investment-grade ratings.
- Port Arthur LNG Phase 1 reached final investment decision in March 2023. The project has approximately $6.8 billion of project-level term-loan capacity, $228 million outstanding at June 30, 2023, and expected capital expenditures of approximately $13 billion including capitalized interest and contingency. Commercial operations are expected in 2027 and 2028 for the two trains.
- Management is targeting a third-quarter 2023 closing for KKR Denali’s proposed acquisition of a 42% indirect interest in Port Arthur LNG Phase 1, subject to approvals and other conditions. Sempra would hold an indirect 19.6% interest after closing.
- The CPUC’s 2024 general rate case remains pending. A proposed decision is expected in the second quarter of 2024, with any final decision authorized to apply retroactively to January 1, 2024. The filing states that requested revenue requirements and post-test-year increases may differ materially from the final outcome.
- The CPUC cost-of-capital mechanism could increase SDG&E’s and SoCalGas’s authorized returns effective January 1, 2024 if triggered and approved. The filing states that the benchmark condition appeared to have been exceeded through June 30, 2023.
- The Aliso Canyon matter remains material. SoCalGas paid approximately $1.79 billion in 2022 under a settlement with most individual plaintiffs; claims by remaining and new plaintiffs, regulatory proceedings and possible additional costs remain unresolved. Accrued Aliso Canyon costs totaled $128 million at June 30, 2023, and management cannot reasonably estimate losses beyond accrued amounts.
- SoCalGas recorded a $43 million income-tax benefit in Q2 and year to date related to previously unrecognized gas-repair tax benefits, with an associated regulatory liability for the customer-benefit portion. Q2 and year-to-date results also benefited from the absence of 2022 Aliso Canyon charges.
- A two-for-one Sempra stock split in the form of a 100% stock dividend was declared on August 2, 2023, with a record date of August 14 and expected post-split trading beginning August 22, 2023. Historical share and per-share data will be retroactively adjusted in future filings.
Principal risks and contingencies
- California wildfire liability, potential depletion or impairment of the Wildfire Fund, insurance limitations and regulatory cost recovery risk.
- Aliso Canyon litigation, the pending Leak OII settlement, possible facility closure or impairment, and gas-storage reliability requirements.
- Construction, financing, permitting, cost-overrun and offtake risks for Port Arthur LNG, ECA LNG, Cameron LNG Phase 2 and other infrastructure projects.
- Mexican land, environmental-permit, regulatory and energy-law disputes, including risks affecting ECA LNG and the Guaymas-El Oro pipeline.
- Higher interest rates, inflation, foreign currency and commodity-price volatility, counterparty credit risk, cybersecurity threats and possible restrictions on access to capital.
- Oncor dividend restrictions, regulatory outcomes and the possibility that Sempra may need to provide additional capital if Oncor cannot finance its requirements.
- Sempra provided guarantees with maximum exposures of $165 million related to Cameron LNG’s reserve account and $979 million under the CFIN Support Agreement.
Most important facts for investors to verify
- Whether the large increase in 2023 earnings is sustained after removing unrealized commodity-derivative gains, tax benefits and the favorable Aliso Canyon comparison.
- Progress, financing, construction costs, permits, offtake and ownership changes for Port Arthur LNG Phase 1 and ECA LNG Phase 1.
- The final CPUC 2024 general rate case decision and whether the cost-of-capital mechanism is triggered for 2024.
- Potential additional Aliso Canyon liabilities, the status of the Leak OII settlement and any decision affecting continued operation of the storage facility.
- Capital spending, debt growth, interest costs, available liquidity and preservation of investment-grade credit ratings.
- Completion of the proposed KKR Denali transaction and its effect on Sempra’s ownership, funding obligations and noncontrolling interests.