Business Context and Reporting Period
Sempra Energy filed a combined, unaudited Form 10-Q for the quarter ended March 31, 2010, covering Sempra Energy, San Diego Gas & Electric Company, Pacific Enterprises and Southern California Gas Company. The businesses comprise regulated California utilities and Sempra Global operations in commodities, generation, pipelines and storage, and LNG.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Total revenue | $2.534 billion | $2.108 billion | +20% |
| Net income | $100 million | $325 million | -69% |
| Earnings attributable to Sempra common shareholders | $106 million | $316 million | -66% |
| Diluted EPS | $0.42 | $1.29 | -$0.87 |
| Operating cash flow | $888 million | $1.139 billion | -22% |
| Capital expenditures and investments | $496 million | $522 million | -5% |
| Cash and cash equivalents | $222 million | $110 million at December 31, 2009 | +$112 million |
| Total debt, including current maturities | $8.437 billion | $8.651 billion at December 31, 2009 | -$214 million |
| Dividends declared per common share | $0.39 | $0.39 | Unchanged |
Consolidated earnings included $168 million of litigation expense, compared with a $7 million favorable litigation adjustment in the prior-year quarter. Interest expense increased to $109 million from $82 million. The effective tax rate increased to 42% from 26%, partly because of a $16 million write-down of deferred tax assets related to retiree healthcare tax treatment.
Business Unit Earnings
| Business unit | Q1 2010 | Q1 2009 |
|---|---|---|
| SDG&E | $83 million | $99 million |
| SoCalGas | $65 million | $59 million |
| Sempra Commodities | $(5) million | $114 million |
| Sempra Generation | $(53) million | $43 million |
| Sempra Pipelines & Storage | $38 million | $37 million |
| Sempra LNG | $32 million | $(7) million |
| Parent and other | $(54) million | $(29) million |
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by higher natural gas prices and increased Sempra LNG activity, including Cameron LNG operations. Natural gas revenue increased 24% to approximately $1.4 billion, while natural gas cost increased 40% to $758 million.
- Profitability declined sharply because RBS Sempra Commodities produced substantially lower equity earnings, Sempra Generation recorded significant litigation expense, and consolidated interest expense increased.
- RBS Sempra Commodities equity earnings fell to $7 million from $153 million. The partnership reported $10 million of GAAP net income versus $236 million in the prior-year quarter.
- Sempra Generation recorded an after-tax litigation charge of $84 million related to a proposed energy-crisis litigation settlement and experienced higher maintenance-related downtime.
- Sempra LNG improved to $32 million of earnings from a $7 million loss, including $11 million of revenues related to counterparty non-delivery obligations that management said are not expected to recur over the long term.
- SDG&E earnings declined 16% because of higher wildfire litigation reserves, higher wildfire insurance premiums and a tax-related deferred-asset write-down. SoCalGas earnings increased 10% due primarily to higher authorized margin and regulatory awards.
- Operating cash flow declined because Sempra did not receive a comparable RBS Sempra Commodities distribution; Q1 2009 included a $305 million distribution.
Liquidity, Debt and Capital Allocation
- Sempra Energy reported $3.3 billion of available unused credit under $4.3 billion of committed credit lines, in addition to $222 million of unrestricted cash.
- SDG&E and SoCalGas had $314 million and $514 million, respectively, of available unused credit. SDG&E also had $237 million of variable-rate demand notes and $24 million of commercial paper supported by its credit facility.
- Cash flow from operations funded a substantial portion of capital spending and dividends. Consolidated financing cash flow was negative $280 million, including $507 million of debt repayments, a $294 million increase in short-term debt, and $86 million of common dividends paid.
- Management expected approximately $3.0 billion of 2010 capital expenditures and investments, including $2.1 billion at the regulated utilities and $900 million at other subsidiaries.
- Management expected proceeds of approximately $835 million from the planned sale of certain RBS Sempra Commodities businesses, subject to closing conditions, with potential uses including growth investment, debt reduction or share repurchases.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide formal consolidated earnings guidance. Management expected cash flows, available credit and financing capacity to fund capital expenditures, dividends and liquidity needs while maintaining investment-grade ratings.
- The RBS Sempra Commodities transaction with J.P. Morgan Ventures was expected to close in summer 2010. The sale excluded the partnership’s North American power and natural gas trading and retail energy solutions businesses, which were being marketed separately.
- SDG&E’s 2007 wildfire litigation remained a significant contingency. Wildfire reserves were $300 million, partly offset by a $194 million insurance receivable; SDG&E had recorded a $107 million regulatory asset for amounts expected to be recovered from customers. Recovery depends on future regulatory action and could materially affect cash flow if not approved.
- Sempra Energy and related parties had an agreement in principle to resolve substantially all specified energy-crisis litigation for $410 million, funded largely from existing reserves and receivables. The filing recorded a $159 million pretax first-quarter charge and noted that required regulatory approvals remained.
- Sunrise Powerlink had accumulated investment of $289 million at March 31, 2010, a project cost cap of $1.9 billion, and an expected commercial operation date in 2012. The project remained subject to permitting and legal challenges.
- Management identified risks from regulatory decisions, commodity prices, natural gas and electricity availability, weather, interest and foreign-exchange rates, financing conditions, litigation, environmental requirements and the expiration of Sempra Generation’s DWR contract in late 2011.
- On April 30, 2010, after the reporting period, Sempra Pipelines & Storage completed the acquisition of Mexican pipeline and natural gas infrastructure assets for $300 million, or $260 million net of cash acquired and debt assumed.
Investor Verification Checklist
- Verify the final outcome, timing and cash funding of the proposed RBS Sempra Commodities business sale and any subsequent disposition of the remaining businesses.
- Monitor wildfire claims, insurance recoveries, regulatory-asset balances and CPUC decisions affecting customer recovery.
- Assess the final settlement and regulatory approval status of the energy-crisis litigation agreement.
- Compare actual 2010 capital spending with the approximately $3.0 billion plan, including Sunrise Powerlink and other utility projects.
- Evaluate the effect of the late-2011 DWR contract expiration on Sempra Generation earnings and replacement-contract economics.
- Review debt maturities, short-term borrowings, credit-facility availability and the use of proceeds from asset sales.
- Confirm the financial impact of the April 30, 2010 Mexican infrastructure acquisition in subsequent filings.