Sempra Energy 2012 Form 10-K Summary
Business context and reporting period
This combined Form 10-K covers Sempra Energy, San Diego Gas & Electric Company (SDG&E), and Southern California Gas Company (SoCalGas) for the fiscal year ended December 31, 2012. It is an annual filing rather than a standalone fourth-quarter filing. Sempra’s principal operating units are SDG&E, SoCalGas, Sempra International, and Sempra U.S. Gas & Power. The businesses include regulated California electric and natural-gas utilities, international utilities, renewable and natural-gas generation, pipelines, storage, and LNG operations.
The filing states that historical segment disclosures were restated after Sempra changed its resource-allocation and performance-assessment approach for Sempra Mexico during the fourth quarter of 2012. The filing incorporates much of the consolidated financial and MD&A information by reference to the 2012 Annual Report; the supplied text does not include the consolidated income statement, consolidated balance sheet, or consolidated cash-flow statement amounts.
Financial metrics, liquidity, and capital structure
| Metric | 2012 | 2011 | Change or comment |
|---|---|---|---|
| Sempra Energy parent net income | $859 million | $1.331 billion | Down $472 million, or approximately 35% |
| Basic earnings per share | $3.56 | $5.55 | Down $1.99 |
| Diluted earnings per share | $3.48 | $5.51 | Down $2.03 |
| Parent operating cash flow | $(809) million | $(287) million | Greater cash use; parent-company measure |
| Dividends received from subsidiaries | $250 million | $50 million | Increase of $200 million |
| Cash and cash equivalents | $18 million | $11 million | Parent-company balance |
| Current portion of long-term debt | $652 million | $8 million | Increase primarily reflects near-term maturities |
| Long-term debt | $4.409 billion | $3.957 billion | Increase of $452 million |
| Total parent assets | $16.689 billion | $15.826 billion | Increase of $863 million |
| Common stock dividends paid | $550 million | $440 million | Increase of $110 million |
The parent issued $1.1 billion of long-term debt in 2012 and paid $8 million of long-term debt. Parent cash increased by $7 million to $18 million. Debt maturities disclosed for the parent are approximately $650 million in 2013, $800 million in 2014, $750 million in 2016, $600 million in 2017, and $2.3 billion thereafter. Parent liquidity and dividend capacity depend substantially on distributions from subsidiaries and access to external capital markets.
The supplied filing text does not provide clear consolidated Sempra revenue, consolidated net income, consolidated operating cash flow, consolidated margins, consolidated debt, or consolidated liquidity values. Accordingly, parent-company figures above should not be interpreted as consolidated results.
Material changes versus the prior comparable period
- Parent net income and earnings per share declined materially from 2011, while parent operating cash use increased.
- Parent long-term debt increased by $452 million, and the current portion rose to $652 million because of approaching maturities.
- Common stock dividends paid increased to $550 million.
- Sunrise Powerlink, a 117-mile, 500-kV transmission line, entered service in June 2012 and is designed to deliver up to 800 MW initially, with plans to reach 1,000 MW.
- Both SONGS Units 2 and 3 remained offline at December 31, 2012 following steam-generator tube wear and inspection issues. The outage began with a Unit 3 leak in January 2012 and additional Unit 2 issues identified during a February 2012 outage.
- The CPUC opened an investigation into the SONGS outage in November 2012. Related costs and revenues are subject to memorandum-account tracking and potential customer refunds.
- During the fourth quarter, Sempra revised segment allocation and performance-assessment practices for Sempra Mexico and restated historical segment disclosures.
- In December 2012, Sempra Natural Gas entered into an agreement to sell one 625-MW block of Mesquite Power, with closing expected in the first quarter of 2013.
Outlook, contingencies, and principal risks
- SONGS: Restart depended on NRC approval, while Unit 3 remained offline pending further study. The CPUC investigation could result in disallowances or refunds and could affect recovery of operating costs, replacement-power costs, capital expenditures, and returns on investment.
- Wildfire litigation: SDG&E reported approximately $2.4 billion of wildfire-related settlement, estimated future settlement, and defense costs through December 31, 2012, compared with $1.1 billion of liability insurance and approximately $824 million recovered from third parties. Regulatory assets included $364 million of excess wildfire costs, but future rate recovery requires regulatory approval. A potential after-tax charge of up to $190 million was disclosed for CPUC-regulated regulatory assets if recovery were no longer considered probable.
- Cameron LNG: Sempra was developing a proposed liquefaction project with expected total cost of approximately $6 billion to $7 billion, excluding capitalized interest and other financing costs. The project contemplated three trains, 13.5 million tonnes per annum of nameplate capacity, and approximately 12 million tonnes per annum of export capability. Financing, permits, non-FTA export authorization, and final tolling agreements remained uncertain.
- Regulation: California utility earnings and cost recovery are subject to CPUC, FERC, NRC, CEC, CARB, and other regulatory actions. The 33% California Renewables Portfolio Standard requires utilities to reach 33% renewable energy by 2020.
- Market exposure: Unregulated operations face commodity-price, interest-rate, foreign-exchange, counterparty, transmission, and contract-performance risks. Hedging does not cover all exposures.
- Environmental and operating risks: The company faces environmental compliance costs, greenhouse-gas regulation, pipeline and generation risks, natural disasters, nuclear risks, cybersecurity threats, and potential labor disruptions.
- Environmental liabilities: At year-end, estimated remaining hazardous-site remediation liabilities were $0.7 million for SDG&E and $15.9 million for SoCalGas. SDG&E also estimated $10 million of remaining SONGS marine-environment mitigation costs through 2050.
- International and joint-venture risks: Sempra reported limited control over several investments, including SONGS, Rockies Express, renewable-generation joint ventures, and a Mexico pipeline and propane joint venture. It also disclosed property-title disputes in Mexico involving its LNG terminal and Termoeléctrica de Mexicali facility.
Most important facts for investors to verify
- Obtain the incorporated 2012 Annual Report pages 2–71 and 83–223 to verify consolidated revenue, earnings, cash flow, margins, debt, liquidity, segment results, and capital expenditures.
- Review the SONGS regulatory investigation, NRC restart decisions, outage costs, replacement-power costs, and any potential customer refunds or cost disallowances.
- Assess the probability and timing of recovery of SDG&E’s wildfire-related regulatory assets and monitor changes in estimated litigation and defense costs.
- Reconcile parent debt maturities and refinancing needs with subsidiary cash distributions, credit facilities, ratings, and capital-market access.
- Review the Cameron LNG project’s final investment decision, permits, export authorization, financing, construction cost, and binding tolling agreements.
- Examine the effect of the Sempra Mexico segment reclassification on historical comparisons and reported segment performance.
- Review outstanding litigation, Mexico property-title disputes, guarantees, environmental obligations, and commitments in Notes 14 and 15 of the Annual Report.