Sempra Energy 10-Q Summary
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 quarter and six months ended June 30, 2011, filed August 9, 2011. Sempra operates regulated California utilities and energy-related businesses, including generation, pipelines and storage, South American electric utilities, and LNG infrastructure.
On April 6, 2011, Sempra Pipelines & Storage acquired AEI’s interests in Chilquinta Energía in Chile and Luz del Sur in Peru, increasing ownership to 100% and approximately 76%, respectively, and began consolidating them.
Key financial metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $2,422 million | $2,008 million | $4,856 million | $4,542 million |
| Net income | $502 million | $205 million | $766 million | $305 million |
| Earnings attributable to common shareholders | $511 million | $222 million | $769 million | $328 million |
| Diluted EPS | $2.12 | $0.89 | $3.19 | $1.31 |
| Operating cash flow | Not separately provided | Not separately provided | $1,139 million | $1,307 million |
| Capital expenditures | Not separately provided | Not separately provided | $1,225 million | $839 million |
Q2 net income included a $277 million pretax and after-tax gain from remeasuring Sempra’s previously held equity interests in Chilquinta Energía and Luz del Sur at acquisition-date fair value. Excluding this gain, management stated that underlying earnings increased by approximately $12 million year over year.
Consolidated effective income tax rates were 16% in Q2 2011 versus 25% in Q2 2010, and 22% for the first six months versus 31% in the prior-year period. The lower rates primarily reflected the non-taxable remeasurement gain, income earned in lower-tax jurisdictions, and higher exclusions for equity-related allowance for funds used during construction.
Balance sheet, debt and liquidity
| Balance sheet item | June 30, 2011 | December 31, 2010 |
|---|---|---|
| Cash and cash equivalents | $392 million | $912 million |
| Total assets | $31,836 million | $30,283 million |
| Short-term debt | $453 million | $158 million |
| Current portion of long-term debt | $144 million | $349 million |
| Long-term debt | $9,648 million | $8,980 million |
| Total equity | $9,972 million | $9,238 million |
- Sempra Energy had $3.8 billion of committed credit facilities and $2.9 billion of unused capacity at June 30, 2011.
- Available funds included $392 million of unrestricted cash at Sempra Energy, $85 million at SDG&E, and $16 million at SoCalGas.
- Sempra issued $500 million of 2% notes and $300 million of floating-rate notes in March 2011, both maturing in 2014.
- Six-month financing cash flow was approximately breakeven for Sempra Energy, compared with $62 million of cash used in the prior-year period.
Material changes versus the prior comparable period
- Revenue increased 21% in Q2 and 7% year to date, primarily from consolidating the South American utilities and higher utility revenues.
- Six-month earnings increased $441 million, driven by the $277 million remeasurement gain, lower prior-year litigation expense, improved Sempra Pipelines & Storage results, and lower Parent and Other losses.
- Sempra Pipelines & Storage earnings rose to $337 million in Q2 from $39 million and to $391 million year to date from $77 million, primarily because of the acquisition and remeasurement gain.
- SDG&E earnings declined 5% in Q2 to $71 million but increased 1% year to date to $160 million.
- SoCalGas earnings declined 14% in Q2 to $59 million and 5% year to date to $127 million, reflecting higher employee benefit and operating costs and lower regulatory awards.
- Sempra Generation’s six-month earnings increased to $94 million from $1 million, mainly because 2010 included significant energy-crisis litigation and plant-related costs.
- Operating cash flow declined 13% to $1.139 billion while investing cash use increased 42% to $1.653 billion, reflecting the $611 million South American acquisition, higher capital spending, and increased restricted cash related to wildfire settlements.
- Common shares outstanding declined following completion of a $500 million share-forward repurchase program, which repurchased 9.6 million shares at an average price of $52.22.
Guidance, outlook, risks and unusual items
- Management expected approximately $3.8 billion of 2011 capital expenditures and investments, including $2.6 billion at the utilities and approximately $1.4 billion at other subsidiaries.
- Management expected the South American acquisition to be accretive to 2011 and future EPS, but the preliminary purchase accounting included $959 million of goodwill that remains subject to impairment testing.
- Sempra Generation’s Department of Water Resources contract was scheduled to expire in September 2011, and the El Dorado generation plant was expected to be sold to SDG&E on October 1, 2011. Management expected replacement or merchant sales to produce substantially lower earnings.
- SDG&E and SoCalGas filed 2012 general rate case applications. Revised requests sought revenue requirement increases of $231 million for SDG&E and $263 million for SoCalGas, with a CPUC decision expected around March 2012 and potential retroactive recovery to January 1, 2012.
- Pipeline safety reviews could require the utilities to invest several hundred million dollars annually over approximately ten years to test or replace certain transmission pipelines. Recovery would depend on future regulatory approvals.
- Wildfire litigation reserves were $549 million at June 30, 2011, including $422 million current. SDG&E estimated total wildfire settlements and outstanding claims at approximately $2 billion, exceeding insurance coverage and Cox settlement proceeds. Recovery from customers is expected but requires future regulatory action and could create significant cash-flow timing risk.
- Other contingencies include Sunrise Powerlink litigation, nuclear operating and insurance risks at San Onofre, pipeline safety regulation, LNG supply and permitting matters, and claims related to Liberty Gas Storage.
- Sempra retained $439 million of investment in the wind-down of RBS Sempra Commodities and reported $66 million of net trading liabilities supported by guarantees. Management did not anticipate capital calls but noted that some guarantees could continue for a prolonged period.
- The filing states that there were no material changes to previously disclosed risk factors. Management concluded that disclosure controls were effective, but excluded the newly acquired South American entities from its internal-control evaluation because insufficient time had elapsed since acquisition.
Most important facts for an investor to verify
- Separate recurring earnings from the $277 million nonrecurring acquisition-related remeasurement gain.
- Progress and final purchase-price allocation for Chilquinta Energía and Luz del Sur, including goodwill impairment exposure and the potential Luz del Sur tender offer of up to $164 million.
- Actual cash needs for the $3.8 billion 2011 capital program, debt maturities, and availability under revolving credit facilities.
- Resolution of wildfire claims, adequacy of the $549 million reserve, and CPUC approval of future customer recovery.
- Outcome of the 2012 general rate cases and pipeline safety proceedings, including whether requested capital expenditures will be recovered in rates.
- Impact of the expiring DWR contract and El Dorado sale on Sempra Generation’s earnings and cash flow.
- Future distributions and remaining liabilities or guarantees associated with RBS Sempra Commodities.
- Final assessments of internal controls for the acquired Chilean and Peruvian entities and any subsequent changes in accounting or purchase-price estimates.