Sempra Energy 10-Q Summary
Business context and reporting period
This combined, unaudited Form 10-Q covers Sempra Energy, San Diego Gas & Electric Company, Pacific Enterprises and Southern California Gas Company for the quarter and six months ended June 30, 2009. Sempra Energy operates regulated California utilities, commodity-marketing activities through its RBS Sempra Commodities investment, power generation, pipelines and storage, and LNG businesses. The filing was signed July 31, 2009.
Financial performance and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $1.689 billion, down 33% from $2.503 billion | $3.797 billion, down 34% from $5.773 billion |
| Earnings attributable to Sempra common shareholders | $198 million, down 19% from $244 million | $514 million, up 6% from $486 million |
| Diluted EPS | $0.80, versus $0.98 | $2.09, versus $1.90 |
| Net cash from operating activities | Not separately provided | $1.525 billion, versus $865 million |
| Capital expenditures | Not separately provided | $938 million, versus $1.114 billion |
- Second-quarter earnings were pressured primarily by a $132 million pretax, $64 million after-tax write-off at Liberty Gas Storage and lower RBS Sempra Commodities earnings.
- Six-month earnings improved because of stronger SDG&E and SoCalGas results, higher RBS Sempra Commodities equity earnings and improved Sempra Generation and LNG results.
- Six-month consolidated pretax income was $674 million versus $796 million. Income-tax expense fell to $199 million from $329 million, reducing the effective tax rate to 30% from 41%.
- Interest expense increased to $161 million for the six months from $98 million, primarily because of debt issued in 2008.
- Cash and cash equivalents were $818 million at June 30, 2009, versus $331 million at December 31, 2008. Total assets were $27.922 billion and total equity was $8.732 billion.
- Short-term debt was $291 million, current maturities of long-term debt were $624 million, and long-term debt was $6.723 billion at June 30, 2009.
- Sempra Energy reported $4.3 billion of committed credit lines, including $3.6 billion of unused capacity. The company also issued $750 million of 6.50% notes due 2016; SDG&E issued $300 million of 6.00% first-mortgage bonds due 2039.
- The quarterly common dividend increased to $0.39 per share, or $1.56 annualized. Management identified a target payout ratio of 35% to 40% of earnings.
Material changes versus the prior comparable period
- Natural-gas revenues declined 40% in the first six months, primarily because of substantially lower gas prices and milder weather. The related cost of natural gas declined 61%; the changes largely flowed through regulated customer rates rather than operating margin.
- SDG&E earnings increased 25% to $169 million for the six months, supported by higher authorized margins from the 2008 general rate case, favorable litigation and tax-item comparisons, partly offset by lower regulatory awards.
- SoCalGas earnings increased 10% to $124 million, driven by higher authorized margins, lower effective taxes and general-rate-case benefits, partly offset by higher interest and bad-debt expense.
- RBS Sempra Commodities equity earnings were $279 million pretax for the six months, versus $146 million for the three months of the prior-year comparable period. Second-quarter business-unit earnings fell to $85 million from $130 million, partly because 2008 included a $67 million gain on the RBS transaction.
- Sempra Pipelines & Storage earnings fell to $10 million from $50 million for the six months and produced a second-quarter loss of $27 million, principally because of the Liberty write-off and foreign-currency effects.
- Operating cash flow increased by $660 million, aided by $375 million of distributions from RBS Sempra Commodities, lower receivables resulting from lower gas prices and working-capital changes. Investing cash use declined to $987 million from $1.158 billion.
- The filing reflects adoption of SFAS 160 retrospectively for certain prior periods and new derivative disclosures under SFAS 161; management stated that these adoptions did not materially affect results.
Guidance, outlook, risks and unusual items
- Management expected 2009 capital expenditures and investments of approximately $2.5 billion: $1.3 billion for the utilities and $1.2 billion for other subsidiaries. The latter included an expected $625 million contribution to Rockies Express, of which $213 million had been contributed by June 30.
- Management stated that operating cash flow, distributions from equity-method investments, debt issuance, cash balances and available credit were expected to fund capital expenditures, dividends and liquidity needs. It also noted that discretionary Sempra Global projects could be postponed if financing became unavailable or excessively costly.
- SDG&E's Sunrise Powerlink project had a CPUC-approved cost cap of $1.883 billion, with $154 million invested by June 30. Commercial operation was expected in 2012, subject to permits and appeals.
- SDG&E expected the 573-MW Otay Mesa Energy Center to enter commercial operation in the fourth quarter of 2009. The related VIE had $316 million of project-finance borrowings at June 30; SDG&E stated it had no additional explicit or implicit financial responsibility.
- SDG&E's 2007 wildfire litigation remained the most significant contingency. A $940 million reserve and matching insurance receivable were recorded, producing no 2009 earnings or cash-flow impact. By July 31, 2009, settlements covering approximately 80% of insurer-plaintiff claims totaled about $740 million and were expected to be funded by insurance. Additional claims remained unreserved and could exceed remaining insurance coverage.
- SDG&E expected annual wildfire and liability insurance premiums to increase by approximately $40 million beginning in the third quarter of 2009, while annual coverage declined from more than $1 billion to $400 million.
- Liberty Gas Storage development of the north facility was halted after subsurface and well-completion problems. The company had invested $263 million through June 30 and now expected to develop only the south facility.
- Other risks included regulatory approvals and rate recovery, commodity and energy-price volatility, foreign-currency movements, credit-market conditions, potential FERC refunds or disgorgement related to historic California energy markets, DWR litigation, pension funding, and RBS's ability to provide capital and support to the commodities partnership.
- The filing disclosed no material changes to the risk factors previously reported in the 2008 Form 10-K. Management concluded that disclosure controls and procedures were effective at a reasonable-assurance level.
Most important facts for an investor to verify
- Whether wildfire settlements and remaining claims remain fully covered by insurance and whether regulatory recovery of any excess liability is approved.
- The timing, final cost and regulatory status of Sunrise Powerlink, advanced metering, renewable projects and Rockies Express.
- Progress and remaining economics of the Liberty Gas Storage project after the $132 million write-off.
- RBS Sempra Commodities' profitability, distribution capacity, credit support and the duration of Sempra's transitional guarantees and indemnities.
- Debt maturities, interest expense, covenant compliance and continued availability of the $3.6 billion of unused committed credit.
- Actual 2009 capital expenditures versus the approximately $2.5 billion plan and the effect of lower gas and power prices on Sempra Generation and LNG.
- Potential FERC refunds, DWR claims, regulatory penalties and other litigation exposures not included in the wildfire reserve.