Sempra 2022 Q3 Form 10-Q Summary
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, 2022. Sempra operates regulated California utilities, owns an equity-method interest in Texas transmission utility Oncor, and develops energy infrastructure through Sempra Infrastructure. Historical segment information reflects the formation of Sempra Infrastructure in the fourth quarter of 2021.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | YTD 2022 | YTD 2021 |
|---|---|---|---|---|
| Sempra revenue | $3.617 billion | $3.013 billion | $10.984 billion | $9.013 billion |
| Net income | $561 million | $(632) million | $1.877 billion | $751 million |
| Earnings attributable to common shares | $485 million | $(648) million | $1.656 billion | $650 million |
| Diluted EPS | $1.53 | $(2.03) | $5.23 | $2.09 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $1.455 billion | $2.981 billion |
| Capital expenditures | Not separately provided for the quarter | Not separately provided for the quarter | $3.540 billion | $3.606 billion |
- Approximate net margin was 15.5% in Q3 2022 and 17.1% for the first nine months of 2022, based on reported net income divided by revenue.
- At September 30, 2022, Sempra reported $685 million of cash and cash equivalents, $49 million of current restricted cash, and $52 million of noncurrent restricted cash.
- Sempra reported $1.750 billion of short-term debt, $1.005 billion of current long-term debt and finance leases, and $23.830 billion of long-term debt and finance leases.
- Sempra had $8.652 billion of available unused committed credit capacity under facilities shown in the debt note, plus additional uncommitted capacity. The MD&A presents total available unused credit of $8.905 billion, including committed and uncommitted lines.
- All three registrants were in compliance with applicable debt covenant ratios at September 30, 2022. Sempra, SDG&E, and SoCalGas remained investment grade, although Sempra and SoCalGas had negative S&P outlooks.
Material changes versus the prior comparable period
- Sempra’s Q3 common earnings improved by $1.133 billion year over year, primarily because SoCalGas recorded substantially lower Aliso Canyon litigation and regulatory charges. SoCalGas recorded $122 million of such charges in Q3 2022 versus $1.571 billion in Q3 2021.
- For the first nine months, Sempra’s common earnings increased by $1.006 billion. SoCalGas generated $339 million of common earnings versus a $625 million loss in the prior-year period.
- Revenue increased 20% in Q3 and 22% year to date, driven largely by higher natural gas prices and higher energy-related business revenue. Natural gas revenue increased to $1.587 billion in Q3 from $1.255 billion, while energy-related business revenue increased to $673 million from $453 million.
- Higher gas prices also increased the cost of natural gas to $505 million in Q3 from $282 million. Utility commodity costs are generally recovered through rates and therefore do not directly represent an equivalent increase in earnings.
- SDG&E common earnings increased 32% in Q3 to $271 million and 13% year to date to $681 million, supported by higher CPUC base operating margin and favorable income-tax effects.
- Sempra Texas Utilities common earnings increased 24% in Q3 to $256 million and 26% year to date to $604 million, primarily reflecting stronger Oncor equity earnings from rate updates, customer growth, weather-related consumption, and an energy-efficiency performance bonus.
- Sempra Infrastructure common earnings decreased 30% in Q3 to $114 million and 6% year to date to $392 million. The decline reflected increased noncontrolling-interest allocations after minority investments in SI Partners, foreign exchange and inflation effects, and the absence of a prior-year lease gain, partly offset by stronger asset optimization, power prices, transportation rates, and renewable operations.
- Operating cash flow declined $1.526 billion year to date, primarily because of $2.052 billion of higher Aliso Canyon-related payments and lower accruals, partly offset by higher net income and insurance proceeds.
- Financing cash flow increased to $1.936 billion from $397 million, reflecting debt issuances, $1.732 billion of proceeds from the sale of noncontrolling interests, and other financing changes. Sempra repurchased $478 million of common stock during the first nine months.
Guidance, outlook, commentary, risks, and unusual items
- Management expects approximately $5.7 billion of 2022 capital expenditures and investments, reduced from the previously projected $6.2 billion primarily because of delays of approximately $400 million at SDG&E and $100 million at SoCalGas.
- Management expects available cash, operating cash flow, credit facilities, debt issuance, equity-method investment distributions, project financing, and minority-owner funding to support operations, capital expenditures, debt service, dividends, Leak-related expenditures, and other requirements. Rising interest rates and market volatility could increase financing costs or constrain access to capital.
- SoCalGas and Sempra estimate total Aliso Canyon Leak-related costs of $3.485 billion, including $1.279 billion expected to be recoverable from insurance. SoCalGas had received $1.269 billion of insurance proceeds through September 30, 2022. The company had paid $1.79 billion under the individual plaintiff settlement by October 31, 2022.
- More than 99% of the approximately 36,000 individual plaintiffs had submitted valid settlement releases as of October 31, 2022, but remaining individual claims, shareholder derivative actions, and regulatory matters remain unresolved. The CPUC settlement resolving the Leak investigation was subject to CPUC approval at filing.
- SoCalGas’s Aliso Canyon facility had a $923 million net book value. Permanent closure or inadequate future cash flows could require a material impairment, additional operating costs, or capital expenditures that may not be recoverable in rates.
- SoCalGas made or received parent equity support of $650 million during the first nine months of 2022, including $150 million in June and $500 million in August, to help maintain its approved capital structure.
- Sempra Infrastructure completed the sale of a 10% SI Partners interest to Abu Dhabi Investment Authority for $1.7 billion in June 2022. Following the transaction, Sempra, KKR, and ADIA owned 70%, 20%, and 10%, respectively, of SI Partners.
- Port Arthur LNG Phase 1 remained targeted for a final investment decision in the first quarter of 2023. The amended EPC contract reflected an estimated price of approximately $10.5 billion, subject to adjustments, and final investment depended on offtake commitments, equity investments, financing, permits, and other conditions.
- ECA LNG Phase 1 was under construction, with commercial operations expected in mid-2025. External borrowings for the project totaled $455 million at September 30, 2022.
- The Guaymas-El Oro segment of the Sonora pipeline remained inoperable. Sempra Infrastructure reported $423 million of related net PP&E that could be impaired if repairs or rerouting do not enable a return to service or if contractual recovery is unavailable.
- Key ongoing risks include California wildfires and cost recovery, regulatory decisions and rate cases, Aliso Canyon liabilities, construction and permitting risks, Mexican energy-law changes, foreign exchange and inflation, commodity prices, cybersecurity, counterparty performance, debt refinancing, and higher interest rates.
- The Inflation Reduction Act was enacted in August 2022. Management did not expect it to have a material adverse effect, but continued to assess implementation guidance, including the corporate alternative minimum tax.
Important facts for investors to verify
- Reconcile reported earnings improvement with the unusually large reduction in Aliso Canyon charges and assess the remaining litigation and regulatory exposure.
- Review the quality and timing of operating cash flow, including the effect of regulatory balancing accounts, customer collections, insurance recoveries, and Leak-related payments.
- Confirm total debt, maturities, variable-rate exposure, credit ratings, covenant compliance, and the availability of revolving credit facilities after the October 2022 refinancing actions.
- Evaluate the financial commitments, permitting status, financing, offtake contracts, and final investment decisions for Port Arthur LNG, Cameron LNG Phase 2, and ECA LNG projects.
- Assess potential impairment exposure for the Aliso Canyon facility, the Guaymas-El Oro pipeline, Mexican energy assets, and projects affected by permit or legal challenges.
- Verify the outcome and timing of the CPUC proceedings, including the Leak settlement approval, the 2024 general rate cases, cost-of-capital decisions, and SDG&E wildfire mitigation cost recovery.