SEMPRA annual report, FY2013

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Sempra Energy 2013 Form 10-K Summary

Business context and reporting period

This combined Form 10-K covers Sempra Energy, San Diego Gas & Electric Company (SDG&E), and Southern California Gas Company (SoCalGas) for the fiscal year ended December 31, 2013. The filing was signed February 27, 2014. Although the request identifies 2013 Q4, the filing is an annual report rather than a quarterly filing.

Sempra operates regulated California electric and natural-gas utilities, international electric and gas utilities in Mexico, Chile, and Peru, and U.S. businesses focused on renewable generation, natural-gas generation, pipelines, storage, and LNG. The filing incorporates the 2013 Annual Report to Shareholders for detailed consolidated financial statements and management’s discussion.

Financial metrics, liquidity, and capital structure

  • The filing text provided does not include a clear consolidated Sempra revenue, operating income, net income, cash-flow, margin, or balance-sheet summary. Detailed consolidated financial information is incorporated by reference from the 2013 Annual Report.
  • Unconsolidated Sempra Energy parent net income was $1.001 billion in 2013, compared with $859 million in 2012 and $1.331 billion in 2011.
  • Parent basic earnings per share were $4.10 in 2013 versus $3.56 in 2012; diluted earnings per share were $4.01 versus $3.48.
  • Parent cash and cash equivalents were $6 million at December 31, 2013, compared with $18 million at December 31, 2012.
  • Parent net cash used in operating activities was $131 million in 2013, compared with $809 million used in 2012. Investing activities provided $1.010 billion, primarily reflecting a $962 million net decrease in loans to affiliates.
  • Parent financing activities used $891 million in 2013, including $606 million of common-stock dividends and $650 million of long-term-debt repayments. Long-term-debt issuances were $498 million.
  • Parent total long-term debt was $4.926 billion before current maturities and discounts, and reported long-term debt was $4.117 billion at year-end. Current maturities totaled $800 million. Parent debt maturities were $800 million in 2014, $750 million in 2016, $600 million in 2017, $500 million in 2018, and $2.3 billion thereafter.
  • Parent common-stock dividends paid increased to $606 million from $550 million in 2012.
  • At December 31, 2013, Sempra Energy had 245,089,822 common shares outstanding. Approximately $500 million remained authorized for share repurchases, subject to a limit of approximately 12 million shares.

Material changes versus the prior comparable period

  • Parent net income increased by $142 million, or approximately 17%, from 2012, while diluted EPS increased from $3.48 to $4.01.
  • Parent operating cash use improved by $678 million year over year, although the parent remained dependent on subsidiary distributions and affiliate financing activity.
  • SDG&E’s 20% interest in San Onofre Nuclear Generating Station (SONGS) became a major change in 2013. The majority owner decided in June 2013 to permanently retire the facility, and Sempra recorded an after-tax loss of $119 million to reduce the SONGS regulatory asset to the amount management believed probable of recovery, or $303 million.
  • SDG&E and SoCalGas had approximately $2.4 billion of 2007 wildfire settlement and defense costs through December 31, 2013, compared with $1.1 billion of liability insurance and approximately $824 million recovered from third parties. Recovery of remaining amounts requires future regulatory approval.
  • In 2013, IEnova completed U.S. and Mexican public offerings of common stock, and its shares began trading on the Mexican Stock Exchange.
  • Management approved a plan in January 2014 to market and sell Sempra Natural Gas’s remaining 625-MW block of the Mesquite Power natural-gas facility.
  • Sempra’s employee count increased to 17,122 from 16,893. SoCalGas employees increased to 8,196 from 7,788, while SDG&E employees declined to 4,603 from 4,996.

Guidance, outlook, commentary, risks, and unusual items

  • Management expected 2014 customer-meter growth at SoCalGas and SDG&E to be slightly higher than in 2013, based on housing-start forecasts.
  • Sempra was progressing with Cameron LNG liquefaction development. The proposed three-train project had expected export capability of approximately 12 million tonnes per annum and estimated incremental investment of approximately $6 billion to $7 billion, excluding capitalized interest and other financing costs. The project remained subject to final investment decisions, permits, financing, and other conditions.
  • Key risks include CPUC, FERC, NRC, environmental, permitting, and safety regulation; wildfire liability and rate recovery; SONGS decommissioning and potential customer refunds; natural-gas pipeline safety expenditures; commodity-price and counterparty exposure; foreign-exchange and political risks in Mexico and South America; cybersecurity; severe weather and wildfire risk; and execution, financing, and cost-overrun risk on major infrastructure projects.
  • California’s severe drought increased wildfire risk and could reduce hydroelectric generation available to the Western grid, potentially affecting electric reliability and replacement-power costs.
  • Environmental remediation liabilities at December 31, 2013 were $5.5 million for SDG&E and $15.1 million for SoCalGas under the California hazardous-waste recovery mechanism, plus $0.1 million of SDG&E liabilities outside that mechanism.
  • SDG&E estimated its total SONGS-related environmental mitigation obligation at $57 million, with $43 million incurred and $14 million accrued for remaining costs through 2050.
  • The filing states that Sempra had not experienced a material cybersecurity breach as of the filing date, but continued to identify utility systems, automated meters, and Smart Grid infrastructure as significant exposure areas.
  • The registrants reported no unresolved SEC staff comments and no material legal proceedings other than matters described in the incorporated financial-statement notes and MD&A.

Important facts an investor should verify

  • Review the incorporated 2013 Annual Report for consolidated revenue, earnings by segment, operating cash flow, capital expenditures, margins, total debt, liquidity, and regulated-utility rate-base information.
  • Verify the accounting treatment, recoverability, and remaining balance of SONGS-related regulatory assets and decommissioning obligations.
  • Assess the probability, timing, and amount of CPUC recovery for SDG&E’s excess 2007 wildfire costs and the potential after-tax earnings impact if recovery is reduced or denied.
  • Review Cameron LNG project commitments, financing requirements, permits, final investment decisions, and potential cost overruns.
  • Examine subsidiary dividend capacity and restrictions because Sempra Energy’s parent liquidity, dividend payments, and debt service depend substantially on cash flows from subsidiaries.
  • Review debt maturities, refinancing needs, interest-rate exposure, credit ratings, and collateral requirements for commodity and derivative transactions.
  • Evaluate exposure to regulatory changes, pipeline-safety enforcement, environmental compliance costs, wildfire risk, cybersecurity incidents, commodity volatility, foreign currencies, and counterparties.