Sempra Energy 10-Q Summary: Third Quarter and Nine Months Ended September 30, 2014
Business context and reporting period
This combined, unaudited Form 10-Q covers Sempra Energy, San Diego Gas & Electric Company (SDG&E), and Southern California Gas Company (SoCalGas) for the three and nine months ended September 30, 2014. Sempra operates regulated California utilities, South American electric utilities, Mexican energy infrastructure, renewable generation, natural gas infrastructure, storage, power generation, and LNG businesses.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Total revenues | $2,815 million | $2,551 million | $8,288 million | $7,852 million |
| Earnings attributable to common shares | $348 million | $296 million | $864 million | $719 million |
| Diluted EPS | $1.39 | $1.19 | $3.45 | $2.89 |
| Net income | $383 million | $323 million | $941 million | $768 million |
| Operating income | Not separately provided on the consolidated statement | Not separately provided | Not separately provided | Not separately provided |
| Cash flow from operations | Not provided for the quarter | Not provided for the quarter | $1,661 million | $1,330 million |
| Capital expenditures | Not provided for the quarter | Not provided for the quarter | $2,320 million | $1,785 million |
Consolidated net margin was approximately 13.6% in Q3 2014 versus 12.7% in Q3 2013, and approximately 11.4% for the first nine months versus 9.8% in the prior-year period. Earnings increased 18% in the quarter and 20% year to date; diluted EPS increased 17% and 19%, respectively.
- Utilities revenue increased 11% in Q3 and 6% year to date, primarily reflecting higher recovered fuel and purchased-power costs, higher authorized revenues, and increased natural gas prices.
- Energy-related revenue increased 7% in Q3 to $352 million but only 1% year to date to $970 million. Higher Sempra Mexico and Sempra Natural Gas activity was substantially offset by intercompany eliminations and renewable-asset deconsolidations.
- Income tax expense declined to $71 million in Q3 from $117 million, and to $291 million year to date from $327 million. The consolidated effective tax rate was 16% in Q3 and 24% year to date, versus 27% and 30%, respectively.
- Cash and cash equivalents were $667 million at September 30, 2014, down from $904 million at December 31, 2013. Approximately $591 million was held outside the United States and was not available for U.S. operations unless repatriated.
- Total debt consisted of $1,309 million of short-term debt, $188 million of current long-term debt, and $12,437 million of long-term debt at September 30, 2014.
- Sempra had approximately $4.1 billion of committed primary credit facilities, with $2.8 billion unused, plus $875 million of additional subsidiary facilities, of which $630 million was unused. The company reported compliance with applicable covenants.
- Common dividends declared were $0.66 per share in Q3 and $1.98 per share for the first nine months, compared with $0.63 and $1.89, respectively, in 2013.
Segment performance and material changes
| Segment earnings | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| SDG&E | $157 million | $129 million | $379 million | $285 million |
| SoCalGas | $98 million | $102 million | $256 million | $266 million |
| Sempra South American Utilities | $32 million | $39 million | $109 million | $110 million |
| Sempra Mexico | $63 million | $39 million | $139 million | $96 million |
| Sempra Renewables | $17 million | $37 million | $63 million | $56 million |
| Sempra Natural Gas | $26 million | $(7) million | $39 million | $55 million |
- SDG&E: Earnings benefited from higher authorized CPUC operating margin, favorable tax items, and the absence of most of the 2013 SONGS closure charge. Nine-month earnings also benefited from the $119 million after-tax 2013 SONGS-related charge comparison. Results were partly reduced by lower FERC-authorized transmission returns.
- SoCalGas: Earnings declined modestly because of the absence of a 2013 insurance recovery, higher tax effects, and a $5 million after-tax charge for Pipeline Safety Enhancement Plan costs disallowed for recovery. These factors offset higher authorized margin.
- Sempra Mexico: Earnings rose due to $14 million of after-tax gain from selling half of the first phase of the Energía Sierra Juárez wind project, $34 million of equity-related AFUDC from the Sonora Pipeline, and improved Mexicali power-plant results.
- Sempra Renewables: Q3 earnings declined because 2013 included gains from selling interests in Mesquite Solar 1 and Copper Mountain Solar 2. Nine-month earnings increased because of the Copper Mountain Solar 3 sale and higher tax benefits.
- Sempra Natural Gas: Q3 earnings benefited from a $25 million tax benefit related to releasing a Louisiana valuation allowance and higher LNG marketing results. Year-to-date earnings declined because 2013 included a $44 million after-tax gain on the sale of a Mesquite Power block.
- Consolidated other comprehensive income was adversely affected by foreign-currency translation losses of $153 million after tax for the first nine months, compared with a $125 million gain in 2013.
Cash flow, leverage, and liquidity
Operating cash flow increased 25% to $1.661 billion, but investing cash use increased to $2.466 billion, principally because capital expenditures rose to $2.320 billion and the company invested in renewable-energy joint ventures. Financing activities provided $572 million, including substantial debt issuance. Cash therefore declined by $237 million during the first nine months.
Management expected approximately $3.2 billion of 2014 capital expenditures and investments, including approximately $2.2 billion at the California Utilities and $1.0 billion at other subsidiaries. Management stated that operating cash flow, available credit, securities issuance, distributions from equity-method investments, project financing, and joint-venture funding should be adequate for operations, capital spending, dividends, and debt maturities.
Guidance, outlook, risks, and unusual items
- The filing does not provide a consolidated earnings-per-share guidance range.
- SoCalGas and SDG&E filed preliminary 2016 general rate case proposals seeking revenue-requirement increases of $290 million and $168 million, respectively, with proposed rate changes beginning January 1, 2016.
- SDG&E’s ERRA account was undercollected by $489 million at September 30, 2014. Rate increases approved in 2014 were expected to reduce the undercollection through 2015, but recovery depends on regulatory actions and actual energy costs.
- The CPUC had not yet issued a final decision on the amended SONGS settlement. SDG&E recorded a $192 million regulatory asset related to expected recovery of SONGS costs. The agreement could terminate if not approved by December 23, 2014, and recovery remains subject to CPUC approval.
- SDG&E recorded $371 million of wildfire-related regulatory assets, including $357 million associated with CPUC-regulated operations. If recovery were no longer considered probable, the potential after-tax charge could have been up to approximately $210 million.
- SDG&E’s nuclear decommissioning trusts had a fair value of approximately $1.1 billion. Access to funds for decommissioning costs remained subject to CPUC approval.
- In October 2014, Sempra completed the Cameron LNG joint venture. Sempra retained a 50.2% interest and became an equity-method investor. Sempra guaranteed 50.2% of project senior debt, up to a maximum principal amount of $3.7 billion, until expected financial completion in the second half of 2019.
- Sempra expected to sell the remaining 625-MW Mesquite Power block in late 2014 or early 2015, subject to approvals and assignment of the associated power contract.
- Key risks include CPUC, FERC, NRC, and other regulatory decisions; cost recovery and rate proceedings; wildfire and SONGS litigation; pipeline-safety spending; construction and permitting delays; commodity and foreign-exchange volatility; counterparty credit; cybersecurity; nuclear decommissioning; and project-financing guarantees.
Important facts for investors to verify
- Whether the CPUC ultimately approved, modified, or rejected the SONGS amended settlement and the recoverability of the $192 million regulatory asset.
- Whether SDG&E receives recovery of wildfire-related costs and whether the $210 million potential after-tax exposure changes.
- Actual debt growth, commercial-paper balances, refinancing needs, and the effect of the Cameron LNG completion guarantee on consolidated credit metrics.
- Progress, cost, permitting, and commercial operation of Cameron LNG, Sonora Pipeline, Los Ramones, renewable projects, and California utility capital programs.
- Whether ERRA and other regulatory undercollections convert to cash as projected and whether future rate decisions permit full recovery.
- The sustainability of earnings excluding tax benefits, asset-sale gains, AFUDC, and comparisons against the 2013 SONGS charge and GRC retroactive benefits.