Sempra Energy Form 10-Q Summary
Business context and reporting period
Combined quarterly report for Sempra Energy, San Diego Gas & Electric Company, Pacific Enterprises and Southern California Gas Company, covering the three months ended March 31, 2011. Sempra operates regulated California utilities through SDG&E and SoCalGas and nonutility businesses through Sempra Generation, Sempra Pipelines & Storage and Sempra LNG. The financial statements are unaudited and prepared under U.S. GAAP.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Sempra revenue | $2.434 billion | $2.534 billion | Down 4% |
| Income before taxes | $342 million | $139 million | Up $203 million |
| Net income | $264 million | $100 million | Up 164% |
| Earnings attributable to common shareholders | $258 million | $106 million | Up 143% |
| Diluted EPS | $1.07 | $0.42 | Up $0.65 |
| Dividends declared per share | $0.48 | $0.39 | Up $0.09 |
| Cash from operating activities | $805 million | $888 million | Down 9% |
| Capital expenditures | $607 million | $446 million | Up 36% |
Net income margin was approximately 10.8% in Q1 2011 versus approximately 3.9% in Q1 2010. The improvement largely reflected the absence of substantial 2010 litigation expense, rather than revenue growth.
- SDG&E earnings attributable to common shares were $89 million versus $83 million; operating revenues were $840 million versus $742 million.
- SoCalGas earnings were $68 million versus $65 million; operating revenues were $1.056 billion versus $1.182 billion, primarily reflecting lower natural gas prices.
- Sempra Generation earned $44 million versus a $51 million loss, mainly because of lower litigation expense and lower maintenance costs.
- Sempra Pipelines & Storage earned $54 million versus $38 million, benefiting from the Mexican pipeline acquisition and stronger Chilean and Peruvian investment results.
- Sempra LNG earned $33 million versus $32 million.
Balance sheet, debt and liquidity
- At March 31, 2011, cash and cash equivalents were $1.219 billion, compared with $912 million at December 31, 2010. Restricted cash was $318 million, substantially related to wildfire litigation funds.
- Total assets were $30.696 billion and total equity was $9.403 billion.
- Short-term debt was $566 million, current long-term debt was $89 million and long-term debt was $9.174 billion. Total reported debt was approximately $9.8 billion, excluding other debt-like obligations.
- Sempra had $3.8 billion of committed credit lines and $2.8 billion of available unused credit. Sempra Energy and its principal subsidiaries remained investment grade.
- In March 2011, Sempra issued $500 million of 2% notes and $300 million of floating-rate notes, both maturing in 2014.
- SDG&E received a $200 million capital contribution from Sempra Energy. SoCalGas repaid $250 million of long-term debt and paid a $50 million common dividend.
Material changes versus the prior comparable period
- Common earnings increased $152 million, or 143%, to $258 million. The principal driver was $168 million of Q1 2010 litigation expense, including $159 million related to energy crisis litigation.
- Sempra Global and parent revenue declined $69 million, primarily from lower power sales at Sempra Generation and lower natural gas sales and prices at Sempra LNG.
- Natural gas costs and related utility revenues declined with lower commodity prices; SoCalGas’s average gas cost fell 25% to $4.36 per Mcf and SDG&E’s fell 12% to $4.83 per Mcf.
- Operating cash flow declined despite higher earnings, reflecting working-capital comparisons, income tax payments in 2011 versus a refund in 2010, and wildfire-related settlements.
- Capital spending increased by $161 million, led by SDG&E infrastructure and Sunrise Powerlink expenditures.
- The company completed a $500 million accelerated share repurchase program in March 2011, repurchasing 9.6 million shares at an average price of $52.22.
- Effective January 1, 2011, the former Sempra Commodities segment was moved to Parent and Other, and Sempra Rockies Marketing was included in Sempra Generation; prior-period segment data was revised.
Outlook, contingencies and unusual items
- Sempra expects approximately $3.8 billion of 2011 capital expenditures and investments, including $2.6 billion for the utilities and approximately $1.4 billion for other subsidiaries and the South American acquisition.
- On April 6, 2011, Sempra Pipelines & Storage acquired AEI’s interests in Chilquinta Energía in Chile and Luz del Sur in Peru for $875 million plus $13 million of working-capital adjustments. Purchase accounting was incomplete at the filing date; management expected the transaction to be accretive to 2011 EPS.
- Sempra received a $329 million distribution from RBS Sempra Commodities on April 15, 2011 and expected to recover approximately $779 million of remaining investment proceeds during 2011. The partnership’s remaining activities may involve future expenses, indemnities and potential capital calls, although management did not anticipate capital calls.
- SDG&E’s 2007 wildfire litigation reserves were $683 million at March 31, 2011, including $489 million current. Remaining claims and recoveries are uncertain. Management expects substantially all reasonably incurred uninsured costs to be recoverable from customers, but recovery requires future regulatory action and could materially affect cash flows if not approved.
- SDG&E’s Department of Water Resources contract expires in September 2011, and the El Dorado generation facility is expected to be transferred to SDG&E on October 1, 2011. Replacement power sales may generate substantially lower earnings.
- The utilities face regulatory uncertainty regarding the 2012 General Rate Case, wildfire cost recovery, pipeline safety requirements, renewable portfolio standards and nuclear facility oversight. A final GRC decision was expected around March 2012.
- Management expects 2011 pension contributions of $266 million to pension plans and $76 million to other postretirement plans on a consolidated basis.
- Material risks include commodity-price volatility, interest and foreign-exchange exposure, regulatory approvals, litigation, environmental requirements, construction execution, LNG supply and capacity utilization, and potential changes to derivatives regulation.
Important facts for investors to verify
- Whether regulators permit recovery of remaining wildfire litigation costs and how reserves, restricted cash and regulatory assets change.
- The final purchase accounting, financing and earnings contribution from the Chile and Peru acquisition.
- The earnings impact after expiration of the DWR contract and completion of the El Dorado transfer.
- Progress, cost and regulatory approvals for Sunrise Powerlink, renewable projects and other planned capital investments.
- The outcome of the 2012 utility rate cases, pipeline safety proceedings and wildfire insurance-cost recovery requests.
- The timing and amount of further RBS Sempra Commodities distributions and the continued exposure under trading guarantees and indemnities.
- Whether operating cash flow can fund the substantial capital program while maintaining investment-grade credit ratings and dividends.