10-KPeriod: FY2017

SEMPRA Annual Report, Year Ended Dec 31, 2017

Filed February 27, 2018For Securities:SRESREA

Summary

Sempra Energy (SRE) reported a significant decrease in net income for 2017 compared to 2016, primarily due to a $208 million charge related to wildfire costs for SDG&E and a $870 million income tax expense resulting from the Tax Cuts and Jobs Act of 2017. Despite these headwinds, the company made substantial progress on its strategic initiatives, most notably entering into an agreement to acquire Energy Future Holdings Corp. (EFH), the indirect owner of 80.03% of Oncor Electric Delivery Company LLC, a major Texas electric transmission and distribution utility. This pending acquisition, valued at $9.45 billion in cash, is expected to close in the first half of 2018 and is anticipated to expand Sempra's regulated earnings base and provide a platform for future growth. Operationally, the company's various segments, including utilities in California and South America, infrastructure development in Mexico and the U.S. renewables market, and LNG and midstream operations, all contributed to the overall financial performance. While Sempra Utilities (SDG&E and SoCalGas) experienced a dip in earnings, Sempra Infrastructure segments, particularly Sempra Mexico and Sempra Renewables, showed growth driven by acquisitions and new projects. Sempra LNG & Midstream faced challenges, resulting in a loss for the year, partly due to pipeline capacity releases and unfavorable results in midstream activities.

Financial Highlights

46 data points
Beta

Revenue

$9.64B

Net Income

$256.00M

2.7% Net Margin

EPS (Diluted)

$0.51

Total Assets

$50.45B

Cash & Equivalents

$288.00M

Free Cash Flow

$3.63B

Financial Statements
Beta
Revenue$9.64B
Interest Expense$622.00M
Net Income$256.00M
EPS (Basic)$0.51
EPS (Diluted)$0.51
Shares Outstanding (Basic)503.09M
Shares Outstanding (Diluted)504.60M

Key Highlights

  • 1Sempra Energy announced a pending $9.45 billion cash acquisition of Energy Future Holdings Corp. (EFH), which includes an indirect 80.03% interest in Oncor Electric Delivery Company LLC, a Texas-based electric utility. This acquisition is expected to close in the first half of 2018 and is a major strategic move to expand Sempra's regulated earnings base.
  • 22017 net income decreased significantly to $256 million ($1.01 per share) from $1.37 billion ($5.46 per share) in 2016, largely impacted by a $208 million write-off of a wildfire regulatory asset by SDG&E and an $870 million income tax expense related to the Tax Cuts and Jobs Act of 2017.
  • 3SDG&E's earnings were negatively impacted by the $208 million wildfire regulatory asset write-off and a $28 million unfavorable tax impact from the TCJA.
  • 4SoCalGas showed an increase in earnings of $47 million (13%) in 2017, primarily due to favorable tax adjustments and higher earnings from infrastructure assets, partially offset by litigation reserves related to Aliso Canyon.
  • 5Sempra Mexico's earnings decreased significantly by $294 million in 2017, mainly due to a large non-cash gain in 2016 from the remeasurement of its equity interest in IEnova Pipelines and higher income tax expense.
  • 6Sempra Renewables saw a substantial increase in earnings by $197 million in 2017, driven by favorable tax impacts from the TCJA and higher earnings from solar tax equity investments.
  • 7Sempra LNG & Midstream reported an increase in earnings of $257 million in 2017, benefiting from favorable tax impacts from the TCJA and improved results in midstream activities, though it still incurred a loss for the segment overall.

Frequently Asked Questions

Sempra Energy agreed to acquire EFH, including its interest in Oncor, for $9.45 billion in cash. This acquisition is expected to significantly expand Sempra's regulated earnings base and provide future growth opportunities. The company has taken steps to finance the acquisition through equity and debt issuances in early 2018. The acquisition is subject to regulatory approvals, with an expected closing in the first half of 2018. The 'ring-fencing' measures associated with Oncor will limit Sempra's control over Oncor's management and operations.

The primary drivers for the substantial decrease in net income in 2017 were a $208 million charge taken by SDG&E for the write-off of a wildfire regulatory asset and an $870 million income tax expense recognized due to the enactment of the Tax Cuts and Jobs Act of 2017. These one-time items significantly impacted the company's profitability for the year.

The Tax Cuts and Jobs Act of 2017 significantly impacted Sempra Energy's tax provision. It led to an increase in income tax expense of $870 million for Sempra Energy Consolidated in 2017, primarily due to the remeasurement of deferred income taxes at the new U.S. federal statutory corporate income tax rate of 21% (resulting in $182 million expense) and the one-time deemed repatriation tax on cumulative undistributed foreign earnings ($328 million U.S. federal tax and $360 million state and non-U.S. withholding tax).

SoCalGas discovered a natural gas leak at its Aliso Canyon facility in October 2015, which was permanently sealed in February 2016. As of December 31, 2017, SoCalGas had incurred costs of $913 million related to the incident, with $887 million expected to be recovered from insurance. The company faces ongoing litigation and regulatory scrutiny related to the leak, including potential fines and additional mitigation costs, some of which may not be recoverable through insurance or rates.