SEMPRA Quarterly Report for Q3 Ended Sep 30, 2018

Summary

Sempra Energy (SRE) reported a mixed financial performance for the nine months ended September 30, 2018. While consolidated revenues saw a modest increase to $8.466 billion, net income attributable to common shares decreased significantly to $60 million from $757 million in the prior year period. This decline was largely driven by substantial impairment charges, particularly related to the sale of non-utility natural gas storage assets and U.S. wind equity method investments, amounting to $1.3 billion and $200 million respectively, impacting the Sempra LNG & Midstream and Sempra Renewables segments. The company's consolidated balance sheet reflects significant growth in assets, largely due to the $9.57 billion acquisition of an 80.25% interest in Oncor Holdings, which closed in March 2018, expanding Sempra's regulated earnings base and its footprint in the Texas energy market. This acquisition, along with other strategic financing activities including the issuance of mandatory convertible preferred stock and long-term debt, has led to an increase in total assets to $60.6 billion and total liabilities and equity to $60.6 billion as of September 30, 2018. Despite the earnings decline, operating cash flows remained robust at $2.59 billion for the nine months ended September 30, 2018, reflecting the stable performance of its core utility operations. Key operational highlights include the ongoing integration of the Oncor acquisition, the planned divestiture of certain non-utility renewables and natural gas storage assets, and continued focus on capital expenditure programs aimed at improving infrastructure safety and reliability across its utility operations. The company's credit rating outlooks were reviewed, with some agencies downgrading SDG&E's ratings and maintaining negative outlooks on other Sempra entities, citing wildfire risks and the regulatory environment in California. Investors should monitor the progress of asset divestitures, the integration of Oncor, and regulatory developments impacting wildfire cost recovery.

Key Highlights

• 1Net income attributable to common shares decreased significantly to $60 million for the first nine months of 2018, down from $757 million in the prior year period, primarily due to substantial impairment charges and the impact of the Tax Cuts and Jobs Act (TCJA) on deferred taxes.
• 2Sempra Energy completed the acquisition of an indirect 80.25% interest in Oncor Holdings for $9.57 billion in March 2018, significantly expanding its regulated earnings base and strategically positioning it in the Texas energy market. This acquisition is accounted for as an equity method investment due to ring-fencing measures.
• 3The company announced a strategic capital rotation plan, including the divestiture of certain non-utility U.S. wind and solar assets for approximately $1.54 billion, expected to close in the fourth quarter of 2018, and certain non-utility natural gas storage assets in the southeast U.S., expected to complete in 2019.
• 4Total assets grew to $60.6 billion as of September 30, 2018, primarily driven by the Oncor acquisition, while total liabilities and equity increased to $60.6 billion, reflecting increased debt and equity issuances to fund the acquisition and other corporate purposes.
• 5Cash flows from operating activities remained strong, providing $2.59 billion for the nine months ended September 30, 2018, underscoring the stable cash generation from core utility operations.
• 6Despite stable operations, credit rating agencies like S&P, Moody's, and Fitch took various actions, including downgrading SDG&E's ratings and maintaining negative outlooks on other Sempra entities, citing wildfire risks and regulatory uncertainty in California.
• 7SoCalGas is addressing significant liabilities and ongoing litigation related to the Aliso Canyon natural gas storage facility leak, with an estimated cost of $1.039 billion as of September 30, 2018, of which $1.012 billion is considered probable of recovery from insurance.

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