Twenty years ago, we experienced the most transformational year in our history with the creation of Sempra Energy. The past year also was transformational. We embarked on our largest acquisition ever, executed on a robust capital plan to reinforce our California utilities’ infrastructure, continued our business expansion in Mexico and moved our most ambitious project — the Cameron LNG joint-venture liquefaction-export project — closer to completion.
Since our formation in 1998, we have been successful in developing a balanced portfolio of businesses comprised of top-tier utilities and long-term-contracted energy infrastructure assets. These infrastructure assets have a utility-like risk profile and a visible earnings stream.
Over the next four years, we expect to grow our earnings at a rate above our peer utilities and our goal is to continue increasing our dividend as our earnings grow. Key to accomplishing this will be an effective capital-allocation strategy — we are focused on investing wisely for the future.
Oncor Acquisition to Facilitate New Growth
On March 9, 2018, we completed our $9.45 billion acquisition of Energy Future Holdings Corp. (EFH), including its approximate 80-percent indirect ownership interest in Dallas-based Oncor Electric Delivery Company LLC (Oncor).
Serving more than 10 million people, Oncor is the largest electric utility in Texas and sixth largest in the U.S. Texas not only holds a national leadership position in energy production, but also features above-average energy growth with a population that is forecasted to expand by nearly 25 percent through 2030. Additionally, Texas has a constructive business and regulatory climate, and its economy (in terms of gross state product) is forecasted to grow 150 percent by 2030.
We expect the addition of Oncor, which has a sterling reputation, to enhance our growth platforms and broaden our base of U.S. utility earnings. Our majority interest in Oncor expands our presence in the U.S. Gulf Coast and cross-border regions, where we already have a strong foothold with our existing LNG projects, and natural gas and Mexican operations.
Under its approved rate case, Oncor plans to spend approximately $8.4 billion over the next five years to provide safe, reliable and affordable service to its growing customer base. Oncor management also has identified additional areas of potential investment beyond the base capital plan to benefit customers.
“We expect the addition of Oncor to enhance our growth platforms and broaden our base of utility earnings.”
Strengthening the SDG&E and SoCalGas Systems
San Diego Gas & Electric (SDG&E) and Southern California Gas Co. (SoCalGas) have robust capital programs underway to strengthen and modernize their systems, procure green energy and promote clean transportation.
The devastating California wildfires in late 2017 and early 2018 were an unwelcome reminder that our communities in the state are at risk during extreme fire conditions. Over the past decade, SDG&E has taken a series of proactive steps to implement a comprehensive fire-risk-mitigation program to help protect its customers, replacing wood power poles with steel, adding higher-strength conductors, increasing spacing between — and aggressively trimming vegetation near — power lines, and developing the largest utility weather network in the nation. SDG&E’s weather stations provide real-time weather data, enhancing situational awareness for SDG&E operations personnel and increasing fire preparedness. Additionally, SDG&E provides this weather data to regional firefighting agencies, while contracting for supplemental firefighting resources, including a massive heli-tanker.
These investments in system hardening and improved fire preparedness are critical in helping to reduce SDG&E’s risk exposure as worsening drought conditions and climate change increase the probability of fires in California.
Another major initiative is the Pipeline Safety Enhancement Plan (PSEP), an ongoing program under which SoCalGas and SDG&E are pressure-testing, repairing and, in some cases, replacing older natural gas transmission pipelines in their 117,000-mile network. Our California utilities have spent approximately $1.7 billion on the program since 2011, and major PSEP investments are expected to continue over the next decade.
In July 2017, state regulators deemed SoCalGas’ Aliso Canyon storage facility safe to operate, allowing the first re-injections of natural gas at the facility in nearly two years. While Aliso Canyon is still only permitted to operate at less than one-third of its capacity, it remains a critical link in Southern California’s energy supply chain. Since SoCalGas sealed the leaking well at the facility in February 2016, the utility has conducted the most comprehensive safety testing in the industry, as well as implemented a broad range of safety measures, including new metal tubing in every operating well, around-the-clock pressure monitoring and an infrared methane detection system. SoCalGas also is conducting rigorous safety tests and implementing new safety enhancements at its three other natural gas storage facilities.
Enhancing Pipeline Safety
As part of the pipeline safety program, SoCalGas and SDG&E are modernizing the natural gas transmission pipelines in their 117,000-mile network.
“I take a great amount of pride in the work our crews are doing to modernize the natural gas system to help ensure that our customers can safely and reliably access the natural gas they prefer to use for heating, cooking and more.”Rick Phillips, senior director of SoCalGas, Pipeline Safety Enhancement Plan
Advancing Clean Energy
Clean energy is an increasing area of investment for both SoCalGas and SDG&E. California law calls for carbon emissions in the state to be reduced to 40 percent below 1990 levels by the year 2030 and, over the same period, for California’s investor-owned electric utilities to source 50 percent of their power from renewable energy. SDG&E already has increased the renewable energy in its supply portfolio to 43 percent, ranking it among the highest in the industry.
SoCalGas is pursuing increased development of renewable natural gas, which is natural gas produced by capturing methane emissions from organic sources, such as animal and food waste, garden and lawn clippings, paper and wood. Some studies estimate that California could supply as many as 20 percent of the residential gas customers in the state using renewable natural gas.
Since the transportation sector currently accounts for approximately 40 percent of California’s carbon emissions, SDG&E and SoCalGas have implemented aggressive programs to promote alternative-fuel vehicles. SDG&E is working to expand the infrastructure to support electric vehicles with a network of charging stations. Both utilities also have ambitious programs to encourage the conversion of heavy-duty vehicles — trucks and buses — from diesel fuel to natural gas or electricity.
Finally, SDG&E is working with third parties to develop large battery storage technology to help store the power from renewable energy during times of excess generation, so it can be used later when energy demand is high. In early 2017, SDG&E completed a 30-megawatt (MW) battery-storage facility — one of the largest of its kind — as well as a smaller facility.
Mitigating Fire Risk
Over the past decade, SDG&E has made significant strategic investments to harden its electric system and improve its fire preparedness. This includes building the largest utility weather network in the nation with 170 weather stations.
“We were on a mission to make a positive impact on the entire region in terms of reducing the threat of wildfires. Integrating weather science, big data and situational awareness into the operation of the power grid gives us an advantage in wildfire preparedness.”Brian D’Agostino, SDG&E’s meteorology program manager
The Market Opportunity in Mexico
On the infrastructure side of our business, our Mexican subsidiary, IEnova, has authored a dynamic growth story. With Mexico opening up its energy sector to private investment in 2014, IEnova now has more than $7.7 billion invested in assets in the country and ranks among the largest energy companies in Mexico.
IEnova is working to capitalize on some of the $45 billion in potential market opportunities in Mexico’s energy sector. The company continues to develop and operate an expanding network of natural gas pipelines. In November, IEnova completed the acquisition of Pemex’s 25-percent indirect equity interest in the Los Ramones II Norte natural gas pipeline. IEnova’s total indirect ownership in the 281-mile pipeline now is 50 percent. The pipeline is operational and one of the largest pipelines bringing U.S. natural gas to Mexico.
In July 2017, IEnova won a bid to develop its first liquid fuels terminals, part of what is expected to be a $10 billion market in Mexico. IEnova plans to develop three liquid fuels terminals, two of which will be in the high-consumption areas of Mexico City and Puebla, with the third located in the Port of Veracruz. IEnova has negotiated a long-term, firm, U.S. dollar-denominated capacity agreement with a Valero Energy Corp. subsidiary for these three terminals.
Dynamic Growth in Mexico
Sempra Energy’s Mexican subsidiary, IEnova, has grown to become one of the largest energy companies in Mexico.
“We are currently building eight energy projects in Mexico, from natural gas pipelines, to wind and solar plants and liquids storage terminals. Our position as a strategic partner in Mexico’s new energy market is just beginning. IEnova is eagerly working to capitalize on some of the $45 billion in potential market opportunities in Mexico’s energy sector.”Tania Ortiz Mena, IEnova’s chief development officer
Global Export of U.S. Natural Gas
For the first time in 60 years, the U.S. has become a net exporter of natural gas. This trend is driven by the plentiful supplies of domestic natural gas unearthed in shale formations and the development of technology to extract this gas economically. As Asia and Europe have become major consumers for U.S. natural gas, we and other companies have moved to develop LNG export terminals to process and ship domestic natural gas overseas.
We expect our Cameron LNG joint-venture project, located in Louisiana, to be one of the first new U.S. LNG liquefaction-export facilities to come online when it begins producing LNG in 2019. While the primary project contractor notified us and our partners last summer of construction delays, we expect Cameron LNG to generate significant earnings for Sempra Energy in 2020.
Industry analysts predict higher global demand for U.S. natural gas beyond 2020, especially in China. We currently have several developmental opportunities for new LNG export facilities in Louisiana, Texas and Mexico, with commercial discussions ongoing.
A LOOK BACK…AND AHEAD
The investments we are making in our utility and infrastructure businesses are fueling superior growth opportunities that should create long-term value for our shareholders.
Over the past 10 years, we have generated $16.4 billion in value for our shareholders through share appreciation and dividend growth. Our total return to shareholders, including reinvested dividends, during this period was 134 percent, better than both the Standard & Poor’s 500 Index and Standard & Poor’s 500 Utilities Index. Also, over the past decade, we have increased our dividend on common shares 165 percent. In February 2018, our board of directors approved another increase in our common dividend of approximately 9 percent.
In 2018, we are celebrating Sempra Energy’s 20th anniversary. What began as a combination of two proud, century-old Southern California utility franchises has blossomed into a diversified, global energy company. With the addition of Oncor, we now have more than 20,000 employees serving approximately 43 million consumers worldwide. And, we have remained committed to making positive contributions to the many communities where we operate.
Since 1998, we have nearly quadrupled our market value — approximately $29 billion as of March 9, 2018. Including the reinvestment of our dividends, an investment of $10,000 in Sempra Energy in 1998 was worth more than $75,000 as of March 9, 2018. We not only have created lasting value for you, our shareholders, but we have built a world-class organization. In the past year, Sempra Energy was recognized among Fortune magazine’s “World’s Most Admired Companies” and the Wall Street Journal’s “Management Top 250” best-managed companies.
On March 9, 2018, I notified our board of directors that I plan to step down as president and CEO in May 2018 and retire in December 2018. Our board has appointed Jeff Martin, our chief financial officer, to be my successor as CEO. Jeff will be a tremendous leader for Sempra Energy going forward. As I reflect on my 40 years at the company, including the past seven years as CEO, I could not be prouder of what we have collectively accomplished, nor could I be more excited about the opportunities ahead of us. I, too, am proud of the quality and depth of the management team that we have built to lead us in the future. Of course, none of our success would be possible without your investment in our company — so, thank you for your continued confidence in us and our mission, and your support of me during my tenure as CEO. It has been an honor and a privilege to serve you.
“The investments we are making are fueling superior growth opportunities.”
20 Years of Growth
|Market Value||$6.1 billion||$28.8 billion|
“An investment of $10,000 in Sempra Energy in 1998 was worth more than $75,000 as of March 2018.”
Sempra Energy®, based in San Diego, is a Fortune 500 energy services holding company with 2017 revenues of more than $11 billion. With the addition of Oncor, the Sempra Energy companies’ more than 20,000 employees serve approximately 43 million consumers worldwide.
Southern California Gas Company
SoCalGas has the largest customer base of any U.S. natural gas distribution utility, providing safe, reliable and affordable service to 21.8 million consumers.
San Diego Gas & Electric
SDG&E is an electric and natural gas utility that provides safe, reliable and clean energy to 3.6 million consumers in San Diego and southern Orange Counties.
Oncor Electric Delivery Company LLC†
Oncor is a regulated electric transmission and distribution company and the largest utility in Texas. Dallas-based Oncor provides safe and reliable service to more than 10 million Texans.
Sempra South American Utilities
The Sempra South American Utilities are Chilquinta Energía in Chile and Luz del Sur in Peru. Sempra South American Utilities invest in electric generation and transmission to provide energy service to approximately 7 million consumers.
Sempra Mexico includes IEnova, one of the largest private energy companies in Mexico. IEnova develops, builds, operates and invests in energy infrastructure in Mexico.
Sempra LNG & Midstream
Sempra LNG & Midstream develops, builds and invests in liquefied natural gas facilities and natural gas pipelines and storage.
Sempra Renewables is a leading U.S. developer of renewable energy. Together with its partners, the company owns, operates or has under construction nearly 2,600 megawatts of renewable capacity.
† The acquisition of Sempra Energy’s indirect, approximate 80-percent interest in Oncor was completed on March 9, 2018. Sempra Energy’s investment in Oncor will be included in a new reportable segment within the Sempra Utilities operating unit.
Capital investment planned from 2018 through 2022, including the $9.45 billion acquisition of a majority stake in Oncor.
Invested in assets in Mexico by subsidiary IEnova, one of the largest energy companies in Mexico.
Value generated for our shareholders over the past 10 years.*
In dividend on common shares since 2013.
*All 10-year metrics are for the period ending Dec. 31, 2017.
Comparative Total ReturnsTen years ended 12/31/17
Consolidated DataScroll to View More
|Dollars in millions, except per-share amounts||2015||2016||2017|
|Earnings Per Share of Common Stock:|
|Weighted Average Number of Common Shares Outstanding (Diluted, in millions)||250.9||251.2||252.3|
|Common Dividends Declared Per Share||$2.80||$3.02||$3.29|
|Debt to Total Capitalization||54%||53%||56%|
|Book Value Per Share||$47.56||$51.77||$50.40|
|Capital Expenditures & Investments||$3,3542||$5,7182||$4,219|
1 Sempra Energy adjusted earnings and adjusted diluted earnings per share are non-GAAP financial measures (GAAP represents accounting principles generally accepted in the United States of America). For an explanation and reconciliation of these non-GAAP financial measures to Sempra Energy earnings and diluted earnings per common share, the most directly comparable financial measures calculated in accordance with GAAP, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Adjusted Earnings and Adjusted Earnings Per Share” in the “Sempra Energy 2017 Form 10-K” included herein.
2 As adjusted for the adoption of Accounting Standards Update (ASU) 2016-15 and ASU 2016-18, which we discuss in Note 2 of the Notes to our Consolidated Financial Statements in the “Sempra Energy 2017 Form 10-K” included herein.
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News and Information
Sempra Energy’s Annual Report on Form 10-K filed with the Securities and Exchange Commission is available to shareholders at no charge by writing to Shareholder Services. This information, as well as our corporate governance guidelines, code of ethics and standing board committee charters, are also available on the company’s website at Sempra.com.
Security analysts, portfolio managers and other members of the financial community should contact: Patrick S. Billings Director – Investor Relations Telephone: 619-696-2901 Fax: 619-696-1868
Stock Exchange Listings
Sempra Energy Common Stock: Ticker Symbol: SRE New York Stock Exchange
Sempra Energy Preferred Stock: Ticker Symbol: SREPRA New York Stock Exchange
Direct Common Stock Investment Plan
Sempra Energy offers a Direct Common Stock Investment Plan as a simple, convenient and affordable way to invest in the company. Cash dividends from a participant’s account can be reinvested automatically in full or in part (but not less than 10 percent of each dividend) to purchase additional shares, or participants may choose to receive all or a portion of their cash dividends electronically or by check. Participation in the plan requires an initial investment of as little as $500. The plan allows additional cash investments of a minimum of $25 up to a maximum of $150,000 per calendar year. Brokerage commissions incurred in the purchase of shares will be paid by Sempra Energy. The plan is offered only by the means of a prospectus, which can be obtained by calling the plan administrator, American Stock Transfer & Trust Company, LLC, at 877‑773‑6772, or through the Internet at www.astfinancial.com.
Sempra Energy’s Annual Report on Form 10-K filed with the Securities and Exchange Commission, which includes as exhibits the certifications filed by Sempra Energy’s chief executive officer and chief financial officer under the Sarbanes-Oxley Act of 2002, is available to shareholders at no charge by writing to the company’s Shareholder Services Department.
Information Regarding Forward-Looking Statements
We make statements in this report that are not historical fact and constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are necessarily based upon assumptions with respect to the future, involve risks and uncertainties, and are not guarantees of performance. These forward-looking statements represent our estimates and assumptions only as of the filing date of our 2017 Annual Report on Form 10-K. We assume no obligation to update or revise any forward-looking statement as a result of new information, future events or other factors.
In this report, when we use words such as “believes,” “expects,” “anticipates,” “plans,” “estimates,” “projects,” “forecasts,” “contemplates,” “assumes,” “depends,” “should,” “could,” “would,” “will,” “confident,” “may,” “can,” “potential,” “possible,” “proposed,” “target,” “pursue,” “outlook,” “maintain,” or similar expressions or discussions of guidance, strategies, plans, goals, opportunities, projections, initiatives, objectives or intentions, we are making forward-looking statements.
Factors, among others, that could cause our actual results and future actions to differ materially from those described in any forward-looking statements include risks and uncertainties relating to: actions and the timing of actions, including decisions, new regulations, and issuances of permits and other authorizations by the California Public Utilities Commission (CPUC), U.S. Department of Energy, California Division of Oil, Gas, and Geothermal Resources, Federal Energy Regulatory Commission, U.S. Environmental Protection Agency, Pipeline and Hazardous Materials Safety Administration, Los Angeles County Department of Public Health, states, cities and counties, and other regulatory and governmental bodies in the United States and other countries in which we operate; the timing and success of business development efforts and construction projects, including risks in obtaining or maintaining permits and other authorizations on a timely basis, risks in completing construction projects on schedule and on budget, and risks in obtaining the consent and participation of partners; the resolution of civil and criminal litigation and regulatory investigations; deviations from regulatory precedent or practice that result in a reallocation of benefits or burdens among shareholders and ratepayers; approvals of proposed settlements or modifications of settlements; delays in, or disallowance or denial of, regulatory agency authorizations to recover costs in rates from customers (including with respect to amounts associated with the San Onofre Nuclear Generating Station facility and 2007 wildfires) or regulatory agency approval for projects required to enhance safety and reliability; the greater degree and prevalence of wildfires in California in recent years and risk that we may be found liable for damages regardless of fault, such as in cases where the doctrine of inverse condemnation applies, and risk that we may not be able to recover any such costs in rates from customers in California; the risk that rulings by the CPUC such as denying recovery for wildfire damages may raise our cost of capital and materially impair our ability to finance our operations; the availability of electric power, natural gas and liquefied natural gas, and natural gas pipeline and storage capacity, including disruptions caused by failures in the transmission grid, moratoriums or limitations on the withdrawal or injection of natural gas from or into storage facilities, and equipment failures; changes in energy markets; volatility in commodity prices; moves to reduce or eliminate reliance on natural gas; the impact on the value of our investments in natural gas storage and related assets from low natural gas prices, low volatility of natural gas prices and the inability to procure favorable long-term contracts for storage services; risks posed by actions of third parties who control the operations of our investments, and risks that our partners or counterparties will be unable or unwilling to fulfill their contractual commitments; weather conditions, natural disasters, accidents, equipment failures, computer system outages, explosions, terrorist attacks and other events that disrupt our operations, damage our facilities and systems, cause the release of greenhouse gases, radioactive materials and harmful emissions, cause wildfires and subject us to third-party liability for property damage or personal injuries, fines and penalties, some of which may not be covered by insurance (including costs in excess of applicable policy limits), may be disputed by insurers or may otherwise not be recoverable through regulatory mechanisms or may impact our ability to obtain satisfactory levels of insurance, to the extent that such insurance is available or not prohibitively expensive; cybersecurity threats to the energy grid, storage and pipeline infrastructure, the information and systems used to operate our businesses and the confidentiality of our proprietary information and the personal information of our customers and employees; capital markets and economic conditions, including the availability of credit and the liquidity of our investments; fluctuations in inflation, interest and currency exchange rates and our ability to effectively hedge the risk of such fluctuations; the impact of recent federal tax reform and uncertainty as to how it may be applied, and our ability to mitigate any adverse impacts; actions by credit rating agencies to downgrade our credit ratings or those of our subsidiaries or to place those ratings on negative outlook; changes in foreign and domestic trade policies and laws, including border tariffs, and revisions to international trade agreements, such as the North American Free Trade Agreement, that make us less competitive or impair our ability to resolve trade disputes; the ability to win competitively bid infrastructure projects against a number of strong and aggressive competitors; expropriation of assets by foreign governments and title and other property disputes; the impact on reliability of San Diego Gas & Electric Company’s (SDG&E) electric transmission and distribution system due to increased amount and variability of power supply from renewable energy sources; the impact on competitive customer rates due to the growth in distributed and local power generation and the corresponding decrease in demand for power delivered through SDG&E’s electric transmission and distribution system and from possible departing retail load resulting from customers transferring to Direct Access and Community Choice Aggregation or other forms of distributed and local power generation, and the potential risk of nonrecovery for stranded assets and contractual obligations; risks associated with the acquisition of our interest in Oncor Electric Delivery Company LLC (Oncor), including, but not limited to, any adverse impact of the acquisition on the credit ratings of Sempra Energy or Oncor, plans regarding future capital investments by Sempra Energy or Oncor, future return on equity or capital structure of Sempra Energy or Oncor, the risk that the anticipated benefits from the acquisition may not be fully realized or may take longer to realize than expected, the risk that we may be unable to obtain additional permanent equity financing for the acquisition on favorable terms, the risk that indebtedness Sempra Energy has incurred in connection with the acquisition may make it more difficult for Sempra Energy to repay or refinance our debt or take other actions that may decrease business flexibility and increase borrowing costs, and the risk that Oncor will eliminate or reduce its quarterly dividends due to its requirement to meet and maintain its regulatory capital structure, or because any of the three major credit rating agencies rates Oncor’s senior secured debt securities below BBB (or the equivalent) or Oncor’s independent directors or a minority member director determine it is in the best interest of Oncor to retain such amounts to meet future capital expenditures; and other uncertainties, some of which may be difficult to predict and are beyond our control.
We caution you not to rely unduly on any forward-looking statements. You should review and consider carefully the risks, uncertainties and other factors that affect our business as described in this report and other reports that we file with the Securities and Exchange Commission.