10-QPeriod: Q2 FY2016

SEMPRA Quarterly Report for Q2 Ended Jun 30, 2016

Filed August 4, 2016For Securities:SRESREA

Summary

Sempra Energy (SRE) reported a significant year-over-year decrease in earnings for the second quarter and first half of 2016. This decline was primarily driven by substantial charges and impairments across its various segments. Notably, Sempra Natural Gas incurred a $123 million loss due to the permanent release of pipeline capacity and a $27 million impairment charge related to its investment in Rockies Express. The California Utilities, SDG&E and SoCalGas, also faced significant impacts from tax repairs adjustments related to the 2016 General Rate Case (GRC) final decision, resulting in charges of $31 million and $49 million, respectively. SoCalGas also recorded a $13 million impairment for the Southern Gas System Reliability Project. These factors collectively led to a sharp drop in net income. Despite the earnings decline, Sempra Energy continues to invest heavily in capital projects, with planned expenditures of $5.6 billion for 2016 across its segments, including significant investments in pipeline safety and reliability projects for its California utilities, as well as renewable energy and LNG projects. The company also maintains substantial liquidity through its credit facilities. However, investors should be aware of the ongoing Aliso Canyon natural gas leak incident at SoCalGas, which has significant cost implications and is subject to extensive regulatory and legal scrutiny, as well as potential future liabilities. The company is also facing regulatory decisions regarding wildfire claims and potential impacts from energy storage and renewable energy policies.

Financial Statements
Beta
Revenue$2.16B
Interest Expense$142.00M
Net Income$16.00M
EPS (Basic)$0.03
EPS (Diluted)$0.03
Shares Outstanding (Basic)500.20M
Shares Outstanding (Diluted)504.00M

Key Highlights

  • 1Sempra Energy reported a substantial decrease in net income for both the three and six months ended June 30, 2016, compared to the prior year, largely due to significant charges and impairments across its business segments.
  • 2Sempra Natural Gas incurred a $123 million loss on the permanent release of pipeline capacity and a $27 million impairment charge related to its investment in Rockies Express, significantly impacting the "U.S. Gas & Power" segment.
  • 3The California Utilities (SDG&E and SoCalGas) recorded significant charges totaling $31 million for SDG&E and $49 million for SoCalGas related to prior years' income tax benefits being reallocated to ratepayers as per the 2016 General Rate Case final decision.
  • 4SoCalGas recorded a $13 million asset impairment for the Southern Gas System Reliability Project and also faced an $9 million charge related to tracking income tax benefits from flow-through items in relation to the 2016 GRC.
  • 5The company continues to invest heavily in capital expenditures, with approximately $5.6 billion planned for 2016 across its segments, including major projects in renewable energy, LNG, and pipeline safety and infrastructure.
  • 6Sempra Energy's balance sheet shows a significant increase in assets held for sale ($654 million), primarily related to the planned divestiture of Termoeléctrica de Mexicali and EnergySouth Inc.
  • 7The Aliso Canyon natural gas leak incident at SoCalGas continues to have significant financial implications, with estimated costs of $717 million recorded at June 30, 2016, and ongoing legal, regulatory, and community mitigation efforts, though insurance is expected to cover a substantial portion of these costs.

Frequently Asked Questions

The decrease in earnings was primarily driven by significant charges and impairments across Sempra's segments. Key factors included a $123 million loss from pipeline capacity releases and a $27 million Rockies Express investment impairment at Sempra Natural Gas, substantial charges related to tax repairs adjustments from the 2016 General Rate Case at both SDG&E ($31 million) and SoCalGas ($49 million), and a $13 million asset impairment at SoCalGas for the Southern Gas System Reliability Project.

The Aliso Canyon incident has resulted in significant costs, with SoCalGas recording an estimated $717 million related to the leak as of June 30, 2016. These costs include relocation programs, leak control efforts, legal expenses, and lost natural gas. While a substantial portion is expected to be covered by insurance, any unrecovered costs or delays in insurance recoveries could materially affect the financial condition and results of operations. The incident is also subject to extensive regulatory investigations and legal proceedings.

Sempra Energy plans to invest approximately $5.6 billion in capital expenditures for 2016. Key areas include significant investments in pipeline safety and infrastructure upgrades for its California utilities ($2.7 billion), and approximately $2.9 billion for other subsidiaries in projects related to Mexico and South American infrastructure, renewable energy development (Sempra Renewables), and LNG projects (Sempra Natural Gas).

Sempra Mexico has classified its Termoeléctrica de Mexicali (TdM) power plant as held for sale and expects to complete its sale in the second half of 2016. Similarly, Sempra Natural Gas has entered into an agreement to sell EnergySouth Inc., the parent company of Mobile Gas and Willmut Gas, with an expected closing in 2016. The assets and liabilities of EnergySouth were reclassified to held for sale in the second quarter of 2016.