Sempra Energy 10-Q Summary — Quarter Ended March 31, 2012
Business Context and Reporting Period
This combined, unaudited Form 10-Q covers Sempra Energy, San Diego Gas & Electric Company (SDG&E), and Southern California Gas Company (SoCalGas) for the three months ended March 31, 2012. Sempra operates regulated California utilities, South American electric utilities, Mexican energy infrastructure, renewable generation, natural-gas infrastructure, LNG facilities, and related businesses.
Effective January 1, 2012, Sempra realigned its business segments and retrospectively restated historical segment information. It also changed its accounting for investment tax credits from the flow-through method to the deferral method, reducing retained earnings by $37 million as of January 1, 2011; the first-quarter 2012 impact was insignificant.
Key Financial Metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Sempra revenue | $2,383 million | $2,434 million | Down 2% |
| Sempra net income | $251 million | $260 million | Down 3% |
| Sempra earnings attributable to common shareholders | $236 million | $254 million | Down 7% |
| Basic EPS | $0.98 | $1.06 | Down $0.08 |
| Diluted EPS | $0.97 | $1.05 | Down $0.08 |
| Operating cash flow | $699 million | $805 million | Down 13% |
| Capital expenditures | $811 million | $607 million | Up 34% |
| Cash and cash equivalents at March 31 | $404 million | $1,219 million | Down $815 million year over year |
| Total assets at March 31 | $34.0 billion | $33.2 billion at December 31, 2011 | Up $796 million sequentially |
Consolidated operating margin, calculated from the reported statements, was approximately 15.0% of revenue before equity earnings, taxes, and other income items, compared with approximately 14.1% in the prior-year quarter. The filing does not present a company-defined consolidated operating margin.
At March 31, 2012, Sempra had $426 million of short-term debt, $713 million of current long-term debt, and $10.18 billion of long-term debt. Committed credit facilities totaled approximately $4.1 billion, with $3.4 billion unused. Sempra Energy had $404 million of unrestricted cash and available unused credit of approximately $3.477 billion.
Segment and Registrant Results
- SDG&E: Earnings attributable to common shares increased to $105 million from $89 million. The improvement reflected higher allowance for funds used during construction, recovery of incremental wildfire-insurance premiums, and $5 million from the Desert Star acquisition. SDG&E reported $834 million of revenue and $266 million of operating cash flow.
- SoCalGas: Earnings declined to $66 million from $68 million. Revenue decreased to $880 million from $1.056 billion, primarily because of lower natural-gas prices and volumes; operating income remained $119 million. Operating cash flow increased to $449 million from $371 million.
- Sempra South American Utilities: Earnings increased to $40 million from $22 million, principally because Chilquinta Energía and Luz del Sur were consolidated following the April 2011 acquisition of additional interests.
- Sempra Mexico: Earnings were $37 million versus $39 million. Lower LNG volumes and natural-gas prices reduced revenue.
- Sempra Renewables: Earnings increased to $10 million from $4 million, primarily due to deferred tax benefits from solar and wind assets placed in service.
- Sempra Natural Gas: Earnings fell to $1 million from $63 million. The principal driver was the September 30, 2011 expiration of the Department of Water Resources power contract, together with lower power-market pricing and a decline in natural-gas inventory value.
Material Changes Versus the Prior Comparable Period
- Utilities revenue increased $145 million, primarily because South American electric utilities were consolidated, but energy-related revenue fell $196 million to $292 million.
- Natural-gas revenue decreased $200 million and natural-gas cost decreased $211 million, mainly because of lower prices at SoCalGas.
- Operating and maintenance expense increased $32 million, mainly from the newly consolidated South American operations.
- Other income increased $32 million to $75 million, reflecting higher AFUDC, particularly for the Sunrise Powerlink project, and higher investment gains.
- Equity earnings declined to $11 million from $31 million because Chilean and Peruvian utilities were consolidated rather than accounted for under the equity method.
- Operating cash flow declined because the prior-year period included $300 million received from a wildfire litigation settlement and the current period included higher wildfire claim payments. Capital spending increased by $204 million.
- Financing activities provided $310 million, including $1.008 billion of debt issuance and $347 million of debt repayments. Sempra issued $600 million of 2.3% notes due 2017; SDG&E issued $250 million of 4.3% first-mortgage bonds due 2042.
Guidance, Outlook, Risks, and Unusual Items
- Management expected approximately $3.1 billion of 2012 capital expenditures and investments, including $2.1 billion for the California Utilities and $1.0 billion for other subsidiaries.
- Sempra projected a 2012 effective tax rate of approximately 29%, excluding items that cannot be reliably forecast, compared with 23% in 2011. It projected approximately 30% to 32% for 2013 through 2016 under the same exclusion.
- SDG&E and SoCalGas had pending 2012 general rate cases. The utilities requested revenue requirements of $1.849 billion and $2.112 billion, respectively, while intervening parties recommended reductions of approximately 5% from 2011 levels. A decision was expected in the second half of 2012 and was to be retroactive to January 1, 2012.
- Pipeline safety enhancements could require approximately $3.1 billion of Phase 1 investment over 10 years, subject to regulatory approval and cost recovery.
- Wildfire litigation reserves totaled $498 million at March 31, 2012, including $441 million current. SDG&E also recorded a $603 million regulatory asset based on its expectation of recovering qualifying costs from customers. Failure to obtain substantial recovery could materially affect liquidity, financial position, and results.
- Both SONGS Units 2 and 3 were offline following steam-generator tube-wear findings. Replacement power costs were approximately $12 million through March 31, 2012, and could increase during the summer if the outage continued. Restart required NRC approval.
- SoCalGas management indicated that common dividends could be reduced or temporarily suspended during a period of elevated capital investment. SDG&E did not expect to pay common dividends to Sempra Energy in 2012 but expected to resume payments in 2013 after Sunrise Powerlink construction was completed.
- Sempra Natural Gas faced materially lower earnings and cash flow after the DWR contract expired. The company was evaluating a Cameron LNG liquefaction project with estimated incremental investment of approximately $6 billion, subject to permits, financing, and commercial agreements.
- Other risks included commodity-price and foreign-exchange volatility, regulatory decisions, nuclear operations, environmental and permitting requirements, litigation, cybersecurity, credit-market conditions, potential impairment of the Rockies Express investment, and continuing obligations related to the wind-down of RBS Sempra Commodities.
Important Facts for Investors to Verify
- Whether CPUC decisions on the 2012 general rate cases and wildfire-cost recovery support the recorded regulatory assets and requested revenue requirements.
- The timing and cost of returning SONGS Units 2 and 3 to service, NRC requirements, replacement-power costs, and potential effects on SDG&E cash flow.
- The pace and funding of the planned $3.1 billion 2012 capital program and its effect on leverage, dividends, and credit ratings.
- Whether Sempra Natural Gas can replace the earnings and cash flow lost when the DWR contract expired.
- Final permits, financing, tolling commitments, and capital exposure for the proposed Cameron LNG liquefaction project.
- Future wildfire claims, settlement demands, recoveries from third parties, and the probability and timing of customer recovery.
- Potential impairment indicators for the Rockies Express investment and the $984 million of South American Utilities goodwill.
- The filing reports effective disclosure controls and no material changes in internal control over financial reporting; no material changes to previously disclosed risk factors were reported.