SEMPRA quarterly report, Q3 FY2012

Sempra Energy 2012 Q3 Form 10-Q Summary

Business context and reporting period

Combined quarterly report filed November 6, 2012 for Sempra Energy, San Diego Gas & Electric Company (SDG&E), and Southern California Gas Company (SoCalGas), covering the three and nine months ended September 30, 2012. Sempra operates regulated California utilities, South American electric utilities, Mexican energy infrastructure, renewable generation, natural gas generation, storage, and LNG businesses.

Effective January 1, 2012, Sempra realigned its reportable segments and retrospectively restated historical segment information. Sempra also changed investment-tax-credit accounting from flow-through to deferral accounting; 2011 amounts were retrospectively adjusted.

Key financial metrics

Metric	Q3 2012	Q3 2011	9M 2012	9M 2011
Revenue	$2.507 billion	$2.576 billion	$6.979 billion	$7.432 billion
Earnings attributable to common shareholders	$268 million	$289 million	$566 million	$1.046 billion
Diluted EPS	$1.09	$1.20	$2.31	$4.32
Net income	$290 million	$319 million	$615 million	$1.073 billion
Operating cash flow	Not separately provided	Not separately provided	$1.688 billion	$1.643 billion

Revenue declined 3% in the quarter and 6% year to date. Earnings declined 7% in the quarter and 46% year to date. Approximate earnings margins were 10.7% versus 11.2% in Q3 2011 and 8.1% versus 14.1% for the first nine months of 2011.

• SDG&E earnings increased to $174 million in Q3 and $374 million for nine months, versus $113 million and $273 million, respectively.
• SoCalGas earnings declined to $71 million in Q3 and $190 million for nine months, versus $81 million and $208 million, respectively.
• Sempra South American Utilities earned $40 million in Q3 and $118 million for nine months, compared with $50 million and $386 million; the prior-year nine-month result included a $277 million acquisition-related remeasurement gain.
• Sempra Mexico earned $54 million in Q3 and $134 million for nine months, up from $47 million and $121 million.
• Sempra Renewables earned $13 million in Q3 and $47 million for nine months, up from $1 million and $9 million.
• Sempra Natural Gas recorded losses of $68 million in Q3 and $260 million for nine months, versus earnings of $41 million and $151 million.

At September 30, 2012, Sempra had $530 million of cash and cash equivalents, $584 million of short-term debt, $709 million of current maturities of long-term debt, and $11.193 billion of long-term debt. Total assets were $35.390 billion and total equity was $10.496 billion.

Sempra generated $1.688 billion of operating cash flow, used $2.576 billion in investing activities, and received $1.157 billion from financing activities during the first nine months. Capital expenditures for property, plant and equipment were $2.241 billion. Cash increased $278 million to $530 million.

Sempra reported approximately $4.1 billion of committed credit lines, with $3.5 billion unused at September 30, 2012. SDG&E had $656 million and SoCalGas had $658 million of available unused credit, subject to their shared facility limit. Credit ratings remained investment grade.

Material changes versus the prior comparable period

• Sempra Natural Gas results weakened substantially following expiration of the California Department of Water Resources power contract in September 2011, lower power and natural gas prices, and lower LNG earnings.
• Sempra recorded $100 million of additional pretax, $60 million after-tax, impairment of its 25% Rockies Express Pipeline investment in Q3 2012. Including the second-quarter charge, cumulative 2012 after-tax impairment was $239 million. The remaining carrying value was $369 million.
• SDG&E benefited from higher authorized transmission and generation revenues, Sunrise Powerlink operations, Desert Star generation, and lower wildfire litigation expense. Increased replacement-power costs and other operating expenses partially offset the benefit.
• Both California Utilities continued recording 2012 revenues primarily at 2011-authorized levels pending a CPUC decision on their 2012 general rate cases.
• Natural gas revenues declined primarily because of lower commodity prices and, at SoCalGas, lower demand associated with a warmer winter. Related gas costs declined correspondingly.
• The effective tax rate for Sempra Energy was 15% in Q3 and 8% for the first nine months, compared with 19% and 22%. The reduction reflected repair-related tax benefits, renewable-energy tax benefits, and a $54 million benefit related to life-insurance contracts held to maturity.
• New long-term debt issued included $600 million of Sempra notes in March, $500 million of Sempra notes in September, $250 million of SDG&E first mortgage bonds, and $350 million of SoCalGas first mortgage bonds.

Guidance, outlook, risks, contingencies, and unusual items

• Management expected approximately $3.3 billion of 2012 capital expenditures and investments, including approximately $1.9 billion at the California Utilities and $1.4 billion at other subsidiaries.
• Sempra expected a 2012 effective tax rate of approximately 26%, excluding items that cannot be reliably forecasted, compared with 30% in 2011. It projected approximately 30% to 32% for 2013–2016 on the same basis.
• SoCalGas expected to reduce or temporarily suspend common dividends over the next several years to support elevated capital investment. SDG&E did not expect to pay common dividends to Sempra in 2012, but expected to resume payments in 2013 following completion of Sunrise Powerlink construction.
• Both SONGS Units 2 and 3 remained offline following steam-generator tube-wear problems. SDG&E incurred approximately $54 million of replacement-power costs through September 30 and had a $485 million net book investment, including construction work in progress and nuclear fuel. CPUC proceedings could require refunds or disallowance of some revenue, costs, or investment.
• Wildfire litigation reserves were $411 million at September 30, while related regulatory assets were $326 million. SDG&E estimated that an after-tax charge of approximately $175 million would have been required if recovery from ratepayers were no longer probable or reasonably estimable. Recovery remains dependent on future regulatory action and could be delayed for years.
• The California Utilities’ 2012 GRC decisions, cost-of-capital proceedings, and pipeline-safety program remain material regulatory matters. The utilities estimated Phase 1 pipeline-safety costs at approximately $3.1 billion over 10 years, subject to ratemaking treatment.
• Sempra Natural Gas was developing a Cameron LNG liquefaction and export facility with estimated incremental investment of approximately $6 billion, primarily expected to be project-financed. Construction was planned to begin in 2013, subject to permits and milestones.
• Sempra had $181 million of U.S. Treasury renewable-energy grants receivable, expected to be collected in 2013. It also expected renewable projects, including Mesquite Solar and Copper Mountain Solar, to reach additional in-service milestones by year-end 2012.
• Other risks include commodity and foreign-exchange volatility, interest-rate exposure, regulatory changes, nuclear operations, environmental and safety requirements, litigation, cybersecurity, credit-market access, and possible obligations related to RBS Sempra Commodities.

Most important facts for investors to verify

• Whether the CPUC ultimately approved the 2012 GRC revenue requirements and how the decision affected 2012 or 2013 earnings and cash flow.
• Whether SDG&E recovered wildfire litigation costs from ratepayers and whether additional reserves or regulatory-asset impairments were required.
• The final regulatory treatment, restart prospects, repair costs, insurance recoveries, and potential refunds related to SONGS Units 2 and 3.
• Whether the Rockies Express impairment was sufficient and whether additional impairment or improved valuation occurred after September 30, 2012.
• Actual performance and financing requirements for Cameron LNG, renewable projects, pipeline-safety investments, and other major capital programs.
• Changes in leverage, debt maturities, credit facilities, dividend capacity, and the availability of cash held in foreign jurisdictions.