How did Sempra's 2014 earnings and profitability change versus 2013?

Earnings attributable to Sempra rose $160 million (16%) to $1.161 billion, and diluted EPS increased $0.62 to $4.63. The main drivers were the $119 million 2013 SONGS plant closure charge not repeating, $24 million of higher California Utilities base operating margin, a $25 million Louisiana tax benefit tied to Cameron LNG, and $24 million of gains from partial sales of Sempra Renewables projects. These gains were partly offset by a $38 million U.S. tax on repatriated foreign earnings and higher noncontrolling interest earnings, mainly at IEnova. Return on common equity improved to 10.4% from 9.4%.

What is Sempra's largest contingent financial exposure from its LNG projects?

The biggest exposure is the completion guarantee tied to the Cameron LNG liquefaction project. Sempra severally guarantees 50.2% of the senior secured project debt, a maximum of $3.7 billion of the $7.4 billion facility. Sempra recorded an $82 million liability for the debt reserve requirements that constitute guarantees. The guarantees terminate at financial completion, which management expects in the second half of 2019, but a construction delay past a September 30, 2021 deadline would trigger an event of default and a potential demand on the guarantees. Overall, guarantees at year-end 2014 totaled about $4.5 billion.

What are the main regulatory risks for the California Utilities going forward?

Key risks include recovery of pipeline safety enhancement plan costs, estimated at $2.1 billion for Phase 1 ($1.6 billion at SoCalGas and $500 million at SDG&E), where the CPUC has ordered reasonableness reviews and an ORA/TURN rehearing request remains pending. Electric rate reform under AB 327 could restructure residential rates and net energy metering by December 31, 2015, which the filing says could materially affect SDG&E if reform fails. The CPUC's new safety citation programs allow penalties of up to $50,000 per offense. Finally, SDG&E's approximately $373 million of wildfire-related regulatory assets require future approval, with an after-tax charge of up to about $217 million if recovery becomes improbable.

How is Sempra's capital spending expected to be funded and how much is planned?

Sempra expects 2015 capital expenditures and investments of about $3.3 billion, including $2.4 billion at the California Utilities ($1.1 billion at SDG&E and $1.3 billion at SoCalGas) and about $0.9 billion at other subsidiaries for Mexico, South America, LNG, natural gas and renewables. Over 2015-2019, the California Utilities expect $5.8 billion at SDG&E and $6.0 billion at SoCalGas, and other subsidiaries about $2.8 billion. Funding is expected to come from operating cash flow, debt issuances, project financing, and joint ventures. Sempra had $2.4 billion of available unused credit at year-end 2014 across its primary committed facilities, and management says it intends to maintain investment-grade ratings.

What are the notable risks around Mexico and South America and the company's foreign cash?

Sempra has substantial operations in Mexico and South America and faces currency exposure primarily to the Mexican peso, Peruvian sol, and Chilean peso. A 1% U.S. dollar appreciation would reduce translated net assets by about $20 million. Sempra does not generally hedge its net foreign investments, so currency moves flow through other comprehensive income. Cash held outside the U.S. totaled $469 million at year-end 2014, unavailable for U.S. operations without repatriation, which can trigger U.S. and foreign taxes. The company repatriated $288 million in 2014 and reported a $38 million U.S. tax charge on it. Rule changes, expropriation risk, and unsettled property disputes, notably at the Energía Costa Azul LNG terminal, add further uncertainty.

SRE/SREA 10-K FY2014 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 26, 2015. Cited figures are marked; the original filing is the authoritative source.

Sempra Energy's 2014 combined Form 10-K (filed with SDG&E and SoCalGas) reports a year of higher earnings and a clear strategy centered on regulated utilities and contracted infrastructure.

Sempra reported 2014 earnings of $1.161 billion^a, up 16% from 2013, and diluted EPS of $4.63 versus $4.01. Growth came from lower SONGS-related charges, higher CPUC-authorized base operating margin from the 2012 General Rate Case, a gain on Sempra Renewables' partial equity sales, and a Louisiana tax valuation allowance release tied to Cameron LNG. Consolidated revenues rose to $11.0 billion, and operating cash flow was $2.2 billion against $3.1 billion of capital expenditures, leaving the company reliant on debt and asset sales to fund its build-out.

The filing's central investor story is the transition to large-scale LNG and infrastructure development. Cameron LNG Holdings, a joint venture Sempra now accounts for under the equity method, reached final investment decision and financial close in 2014 for a three-train liquefaction project with a roughly $7 billion^b incremental investment. Sempra guaranteed 50.2% of up to $7.4 billion of project debt, or up to $3.7 billion, which is a significant contingent exposure.

Management expects its earnings and effective tax rate to rise over 2015 through 2019 as Cameron and other projects come online, with an effective rate guided to about 29% in 2015. Key risks flagged in the filing include regulatory outcomes at the California Utilities (pipeline safety cost recovery, electric rate reform under AB 327, and roughly $373 million^c of wildfire-related regulatory assets that require future CPUC approval), exposure to Mexican and South American currencies, LNG project execution and contractor risk, weak long-term natural gas storage economics, and the Rockies Express pipeline's contract roll-off in 2019. Management also highlights a dividend increase to $0.70 per quarter for 2015, investment-grade credit ratings maintained, and a $4.5 billion aggregate guarantee exposure.

02—Key points

Key Highlights

Sempra 2014 earnings rose 16% to $1.161 billion; diluted EPS reached $4.63 versus $4.01 in 2013, helped by the absence of the 2013 SONGS plant closure charge and higher CPUC-authorized margins.
Cameron LNG Holdings reached final investment decision and financial close in 2014 for a three-train, 12 Mtpa liquefaction expansion with roughly $7 billion of incremental investment; Sempra guarantees 50.2% of up to $7.4 billion of project debt (up to $3.7 billion).
Consolidated 2015 capital expenditures and investments are planned at about $3.3 billion, with $2.4 billion directed to the California Utilities; the company expects its effective tax rate to rise to about 29% in 2015 and 30%-33% over 2016-2019.
About $373 million of wildfire-related regulatory assets at SDG&E depend on future CPUC recovery approval; a disallowance could trigger an after-tax charge of up to about $217 million.
SDG&E's SONGS retirement was resolved via a CPUC-approved settlement in November 2014, with SDG&E's investment and a ten-year recovery framework, though NRC proceedings and third-party recovery claims remain open.
Dividend was raised to $0.70 per quarter ($2.80 annualized) for 2015, up from $0.66; year-end 2014 book value per share was $45.98, and credit ratings remained investment grade (Sempra BBB+, SDG&E and SoCalGas A1 at Moody's).
Rockies Express (25% interest, $340 million carrying value) faces contract roll-off in 2019 and a January 2015 pipeline rupture, while the Mesquite Power block sale is expected to close in the first half of 2015.

03—One dollar

04—Financials

Financial Highlights

10-KFY2014filed February 26, 2015

Revenue$11.04B Net Income$1.16B10.5% Net Margin EPS (Diluted)$2.31 Total Assets$39.65B Cash & Equivalents$570.00M Free Cash Flow$2.16B

Financial Statements

FY2014 against FY2013

Line item	FY2014FY2013	FY2013	Change
Revenue	$11.04B$10.56B	$10.56B	+4.5%
Interest Expense	$554.00M$559.00M	$559.00M	−0.9%
Net Income	$1.16B$1.00B	$1.00B	+16.0%
EPS (Basic)	$2.36$2.05	$2.05	+15.1%
EPS (Diluted)	$2.31$2.00	$2.00	+15.5%
Shares Outstanding (Basic)	491.78M487.73M	487.73M	+0.8%
Shares Outstanding (Diluted)	501.31M498.66M	498.66M	+0.5%

05—Questions

Frequently Asked Questions

How did Sempra's 2014 earnings and profitability change versus 2013?
Earnings attributable to Sempra rose $160 million (16%) to $1.161 billion, and diluted EPS increased $0.62 to $4.63. The main drivers were the $119 million 2013 SONGS plant closure charge not repeating, $24 million of higher California Utilities base operating margin, a $25 million Louisiana tax benefit tied to Cameron LNG, and $24 million of gains from partial sales of Sempra Renewables projects. These gains were partly offset by a $38 million U.S. tax on repatriated foreign earnings and higher noncontrolling interest earnings, mainly at IEnova. Return on common equity improved to 10.4% from 9.4%.
What is Sempra's largest contingent financial exposure from its LNG projects?
The biggest exposure is the completion guarantee tied to the Cameron LNG liquefaction project. Sempra severally guarantees 50.2% of the senior secured project debt, a maximum of $3.7 billion of the $7.4 billion facility. Sempra recorded an $82 million liability for the debt reserve requirements that constitute guarantees. The guarantees terminate at financial completion, which management expects in the second half of 2019, but a construction delay past a September 30, 2021 deadline would trigger an event of default and a potential demand on the guarantees. Overall, guarantees at year-end 2014 totaled about $4.5 billion.
What are the main regulatory risks for the California Utilities going forward?
Key risks include recovery of pipeline safety enhancement plan costs, estimated at $2.1 billion for Phase 1 ($1.6 billion at SoCalGas and $500 million at SDG&E), where the CPUC has ordered reasonableness reviews and an ORA/TURN rehearing request remains pending. Electric rate reform under AB 327 could restructure residential rates and net energy metering by December 31, 2015, which the filing says could materially affect SDG&E if reform fails. The CPUC's new safety citation programs allow penalties of up to $50,000 per offense. Finally, SDG&E's approximately $373 million of wildfire-related regulatory assets require future approval, with an after-tax charge of up to about $217 million if recovery becomes improbable.
How is Sempra's capital spending expected to be funded and how much is planned?
Sempra expects 2015 capital expenditures and investments of about $3.3 billion, including $2.4 billion at the California Utilities ($1.1 billion at SDG&E and $1.3 billion at SoCalGas) and about $0.9 billion at other subsidiaries for Mexico, South America, LNG, natural gas and renewables. Over 2015-2019, the California Utilities expect $5.8 billion at SDG&E and $6.0 billion at SoCalGas, and other subsidiaries about $2.8 billion. Funding is expected to come from operating cash flow, debt issuances, project financing, and joint ventures. Sempra had $2.4 billion of available unused credit at year-end 2014 across its primary committed facilities, and management says it intends to maintain investment-grade ratings.
What are the notable risks around Mexico and South America and the company's foreign cash?
Sempra has substantial operations in Mexico and South America and faces currency exposure primarily to the Mexican peso, Peruvian sol, and Chilean peso. A 1% U.S. dollar appreciation would reduce translated net assets by about $20 million. Sempra does not generally hedge its net foreign investments, so currency moves flow through other comprehensive income. Cash held outside the U.S. totaled $469 million at year-end 2014, unavailable for U.S. operations without repatriation, which can trigger U.S. and foreign taxes. The company repatriated $288 million in 2014 and reported a $38 million U.S. tax charge on it. Rule changes, expropriation risk, and unsettled property disputes, notably at the Energía Costa Azul LNG terminal, add further uncertainty.

06—Continue

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