In the third quarter, Sempra Energy ( SRE 1.11% ) threw a real curveball when it announced that its Cameron LNG export facility was facing significant delays. This past quarter, the company looked to resolve the Cameron issue and some other problems that have been plaguing the company. For the most part, it did a good job of that as it delivered solid earnings. There was one question Sempra didn't address very well, though: Its spending habit.
Here's a rundown of Sempra Energy's most recent quarterly results as well as why investors should keep a sharp eye on turning all that spending into growing earnings in 2017.
By the numbers
|Metric||Q4 2016||Q3 2016||Q4 2015|
|Revenue||$2,870 million||$2,535 million||$2,701 million|
|Adjusted earnings||$383 million||$259 million||$367 million|
|GAAP earnings||$379 million||$622 million||$369 million|
|Earnings per share||$1.51||$2.46||$1.47|
Before reacting to that large sequential decline in GAAP earnings, keep in mind that the company realized a one-time gain from its Mexican subsidiary, IEnova, after it bought out its joint venture partner PEMEX's stake in a pipeline for $1.1 billion. The figure that is a more important to look at here is adjusted earnings, because it strips out one-time gains and losses from its various business segments. In that regard, this quarter was pretty solid. Sempra does generally have stronger results in the winter months when natural gas demand for heating is its highest, hence the strong increase in adjusted earnings compared to the prior quarter.
One thing that has changed this quarter is that Sempra now reports its earnings with two business segments: utilities and infrastructure. Under the utilities segment will be its CoCalGas and San Diego Gas & Electric businesses as well as its South American utilities business. Under infrastructure will be its IEnova investment in Mexico, its renewable power business, and Sempra's midstream and liquefied natural gas (LNG) businesses. As part of this change, it did not break out the third quarter on these lines, but did give year-over-year results.
When comparing the year-over-year results for these two segments, it's a very flat year. Gains in its California utilities business offset some weakness in its South American utilities business related to tax reform in Peru. Its Mexico, renewables, and LNG businesses remained flat.
Probably the best news to come out this quarter was that management is upping its guidance for fiscal year 2017 and raising its dividend. Initial guidance was earnings per share of $4.80-$5.20, but it was bumped to $4.85-$5.25. Also, the board approved a 9% increase to its dividend.
According to management, there are two focal points right now: Resolving some issues with its California utilities, and getting Cameron LNG back on track. Last quarter, Sempra announced that the contractor currently building the LNG export facility, Chicago Bridge & Iron ( CBI ), had experienced some significant flooding at one of its fabrication facilities in Louisiana that will likely delay completion of the project by a year. Management has been in damage-recovery mode ever since reassuring investors that Chicago Bridge & Iron will be mostly responsible for the delays and cost overruns, and that it will be able to recapture some of the lost returns with higher rates.
The other elements it highlighted were operations at SoCalGas and SDG&E. Both entities received approval from regulators for authorized return on equity of 10.05% and 10.2%, respectively, for its investments. Also, Sempra announced it had resolved all issues related to the Aliso Canyon natural gas leak and expects to resume gas injection at the facility in the coming quarters.
The thing that the company doesn't seem to talk about much, though, is the massive amount of capital spending going into its Mexico business right now. Total capital spending in Mexico increased from $302 million in 2015 to $1.8 billion in 2016. A large chunk of that was the $1.1 billion acquisition of the PEMEX pipeline stake, but it's a pretty clear trend that Mexico will play a big part in Sempra's growth in the coming years.
What management had to say
Here's CEO Debra Reed on Sempra's results in 2016 that allowed management to raise its guidance for 2017 and increase its dividend payment:
In the past year, we received regulatory approval of our California utilities' General Rate Case, so they have more revenue certainty through 2018. Our utilities also received regulatory approval to proceed with several major reliability projects. Additionally, in 2016, our Mexican subsidiary, IEnova, completed a successful $1.6 billion equity offering to raise capital and we completed the divestiture of several non-strategic assets.
What a Fool believes
For all the decent results that Sempra Energy has been posting recently, the one concern here is that the company is wildly outspending its operational cash flow to make all of these investments. Total cash used in investing was $4.9 billion for 2016 compared to $2.3 billion in cash from operations. This is also before it makes its large capital commitments to Cameron LNG that will be ramping up this year and next. The company's debt loads are already a little high for a utility company, and it has already sold $1.1 billion in assets in 2016 to help fund these investments. One does have to wonder where the capital will come from for the next phase of growth.
Management says it's on the right track, and the increase in its dividend is a sign of confidence. That being said, investors should watch how 2017 plays out to see if Sempra can start to reap the rewards of these massive investments.