Sempra Energy Form 10-Q Summary
Business context and reporting period
Combined unaudited quarterly report for Sempra Energy, San Diego Gas & Electric Company, Pacific Enterprises and Southern California Gas Company for the three and six months ended June 30, 2010, filed August 3, 2010. Sempra Energy operates regulated California utilities through SDG&E and SoCalGas and nonregulated energy businesses through Sempra Global, including commodities, generation, pipelines and storage, and LNG.
Key financial metrics
| Metric | Three months ended June 30, 2010 | Three months ended June 30, 2009 | Six months ended June 30, 2010 | Six months ended June 30, 2009 |
|---|---|---|---|---|
| Revenue | $2,008 million | $1,689 million | $4,542 million | $3,797 million |
| Net income | $205 million | $189 million | $305 million | $514 million |
| Earnings attributable to Sempra common shareholders | $222 million | $198 million | $328 million | $514 million |
| Diluted EPS | $0.89 | $0.80 | $1.31 | $2.09 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $1,307 million | $1,525 million |
| Capital expenditures | Not separately provided for the quarter | Not separately provided for the quarter | $839 million | $938 million |
Second-quarter earnings increased 12% year over year, while six-month earnings declined 36%. The six-month effective income tax rate was 31% versus 30% in 2009; the second-quarter rate was 25% versus 35%.
At June 30, 2010, Sempra Energy reported cash and cash equivalents of $188 million, total assets of $29.1 billion, short-term debt of $923 million, current maturities of long-term debt of $307 million, long-term debt of $7.6 billion, and total equity of $9.4 billion. Committed credit lines totaled $4.3 billion, of which $3.1 billion was unused. The weighted-average interest rate on short-term debt was 0.47%.
Material changes versus prior comparable periods
- Revenue increased 19% in the second quarter and 20% year to date, primarily because of higher natural-gas prices, higher regulated-cost recovery, increased utility margins, and stronger Sempra LNG activity.
- Second-quarter earnings benefited from improved Sempra Pipelines & Storage, Sempra LNG and Sempra Generation results. Sempra Commodities contributed approximately break-even results versus $85 million of earnings in the prior-year quarter.
- Year-to-date earnings were reduced by $161 million of litigation expense related to an agreement in principle to settle energy-crisis litigation, including $85 million at Sempra Generation and $12 million at Sempra Commodities after tax.
- RBS Sempra Commodities equity results declined to a $16 million pretax loss in the quarter and a $9 million pretax loss year to date, versus pretax earnings of $126 million and $279 million, respectively, in 2009.
- Year-to-date operating cash flow declined $218 million, largely because distributions from RBS Sempra Commodities were $198 million versus $375 million in the first half of 2009.
- Cash used in investing increased to $1.17 billion, including $285 million net for the Mexican pipeline and natural-gas infrastructure acquisition and $839 million of capital expenditures.
- In April 2010, Sempra Pipelines & Storage acquired Mexican infrastructure assets from El Paso for $307 million, or $292 million net of cash acquired, including $18 million of preliminary goodwill.
- SDG&E issued $250 million of 5.35% first-mortgage bonds due 2040 and recorded $183 million of capital-lease obligations for two 25-year power-purchase agreements.
- The prior-year period included a $132 million pretax, $64 million after-tax share, write-off related to the Liberty Gas Storage project; no comparable write-off was recorded in 2010.
Outlook, commentary, risks and unusual items
- Sempra expected 2010 capital expenditures and investments of approximately $2.9 billion, including $2.0 billion at the utilities and $900 million at other subsidiaries.
- On July 1, 2010, certain RBS Sempra Commodities businesses were sold to J.P. Morgan for $1.6 billion. Sempra expected its share of proceeds to approximate $1 billion and planned to use $500 million for an accelerated share repurchase program, with remaining proceeds potentially used for additional repurchases, growth or debt reduction.
- Sempra Generation’s DWR contract was expected to expire in late 2011, creating a risk of lower future earnings if replacement contracts or merchant sales are less favorable.
- SDG&E expected Sunrise Powerlink to enter commercial operation in the second half of 2012. The project had a $1.9 billion cost cap and $366 million invested at June 30, 2010, but remained subject to legal and regulatory challenges.
- SDG&E’s 2007 wildfire litigation reserves were $241 million, offset by a $150 million insurance receivable. A $191 million regulatory asset represented amounts expected to be recovered from customers beyond insurance and third-party recoveries. Recovery requires future regulatory action and failure to obtain it could materially affect cash flow and results.
- Sempra Energy had $527 million of reserves for material legal proceedings on a consolidated basis. The filing stated that actual costs could differ materially from recorded reserves and insurance coverage.
- The company and RBS continued to market the remaining RBS Sempra Commodities businesses. Sempra also had $632 million of net trading liabilities supported by its guarantees at June 30, 2010, although RBS had indemnified Sempra for related claims or losses.
- Management identified risks from regulatory decisions, commodity prices, weather, energy-market volatility, interest rates, foreign currency, environmental and legal matters, pension funding, nuclear operations and financing availability.
- July 2010 federal derivatives legislation could increase capital, margin and compliance requirements and raise the cost of over-the-counter energy hedging.
Most important facts for investors to verify
- Completion accounting, cash proceeds, guarantees and ultimate earnings impact of the July 1, 2010 RBS Sempra Commodities transaction.
- Progress and final terms of the proposed $410 million energy-crisis litigation settlement and required FERC approval.
- Remaining wildfire claims, reserve adequacy, insurance recoveries and CPUC approval of customer recovery.
- Regulatory and litigation status, cost recovery and schedule for Sunrise Powerlink and other major utility projects.
- Future earnings and liquidity after expiration of the DWR contract and disposition of the remaining commodities businesses.
- Debt maturities, credit-line renewals in August 2011, capital spending requirements and planned use of sale proceeds.
- Exposure to commodity prices, interest-rate swaps, derivatives collateral requirements and changes in derivatives regulation.