SEMPRA quarterly report, Q3 FY2011

Sempra Energy Form 10-Q Summary

Business context and reporting period

Combined quarterly report 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, 2011. Sempra operates regulated California utilities and energy businesses, including generation, pipelines and storage, LNG, and recently acquired electric utilities in Chile and Peru. Financial statements are unaudited and prepared under U.S. GAAP.

Key financial metrics

Metric	Q3 2011	Q3 2010	9M 2011	9M 2010
Total revenues	$2,576 million	$2,116 million	$7,432 million	$6,658 million
Net income	$326 million	$127 million	$1,092 million	$432 million
Earnings attributable to common shareholders	$296 million	$131 million	$1,065 million	$459 million
Diluted EPS	$1.22	$0.53	$4.40	$1.84
Operating cash flow	Not provided for quarter	Not provided for quarter	$1,643 million	$1,602 million
Capital expenditures	Not provided for quarter	Not provided for quarter	$2,031 million	$1,354 million

Calculated net margin was approximately 12.7% for the nine months ended September 30, 2011, compared with approximately 6.5% in the prior-year period. The comparison is significantly affected by acquisition-related and other unusual items.

• At September 30, 2011, cash and cash equivalents were $657 million, down from $912 million at December 31, 2010.
• Total debt comprised $641 million of short-term debt, $137 million of current long-term debt, and $10,033 million of long-term debt.
• Sempra had $3.8 billion of committed credit facilities and $2.7 billion of unused capacity. SDG&E and SoCalGas had $363 million and $563 million of available unused credit, respectively.
• Common dividends declared were $0.48 per share in the third quarter and $1.44 per share for the nine months, versus $0.39 and $1.17, respectively, in the comparable 2010 periods.
• Total assets were $32.6 billion and total equity was $10.0 billion at September 30, 2011.

Material changes versus the prior comparable period

• Third-quarter earnings attributable to common shareholders increased $165 million, primarily because 2010 included a $139 million after-tax write-down of the RBS Sempra Commodities investment. Improved results at the utilities, Sempra Pipelines & Storage, and Sempra LNG also contributed.
• Nine-month earnings increased $606 million. The increase included a $277 million non-taxable gain from remeasuring Sempra’s former equity interests in Chilquinta Energía and Luz del Sur upon acquiring control, the absence of 2010 energy-crisis litigation expense, and the 2010 RBS investment write-down.
• Revenue growth included the consolidation of the Chilean and Peruvian utilities acquired from AEI on April 6, 2011. The acquisition contributed $706 million of revenue and $92 million of earnings from the acquisition date through September 30, 2011.
• Sempra Pipelines & Storage earnings increased to $457 million for the nine months from $120 million, including the $277 million remeasurement gain and earnings from the acquired businesses.
• SDG&E earnings increased to $273 million from $264 million, while SoCalGas earnings declined to $208 million from $212 million.
• Capital expenditures rose $677 million to $2.031 billion, reflecting higher utility spending and South American investments. Investing cash outflows increased to $2.304 billion from $633 million.
• Sempra Energy issued $500 million of 2% notes and $300 million of floating-rate notes in March 2011. SDG&E issued $350 million of 3% first-mortgage bonds in August 2011.
• Sempra completed its $500 million share repurchase program in March 2011, repurchasing 9.6 million shares at an average price of $52.22.

Guidance, outlook, commentary, risks, and unusual items

• Management expected approximately $3.9 billion of 2011 capital expenditures and investments, including $2.7 billion at the Sempra Utilities and $1.4 billion at other subsidiaries.
• Management stated that cash flows, cash balances, credit facilities, debt issuance, and investment distributions were expected to be adequate to fund capital expenditures, dividends, liquidity needs, and acquisitions.
• Sempra Generation’s Department of Water Resources contract expired September 30, 2011. Management expects replacement contracts or merchant sales to generate substantially lower earnings, while the business invests in renewable projects.
• The 2007 wildfire litigation remained a major contingency. Wildfire reserves were $584 million at September 30, 2011, including $507 million current; total accrued liabilities for material legal proceedings were $625 million at Sempra Energy. Recovery of costs above insurance and third-party recoveries depends on future regulatory action.
• The utilities proposed a 10-year, $3.1 billion Phase 1 pipeline safety program for 2012–2022, including $2.5 billion for SoCalGas and $600 million for SDG&E. Cost recovery and funding remained subject to regulatory approval.
• SDG&E and SoCalGas requested 2012 revenue requirements approximately 14.3% above 2011 levels. Ratepayer advocates recommended reductions of approximately 5% compared with 2011, creating potential 2012 earnings and cash-flow pressure.
• SDG&E’s Sunrise Powerlink project was expected to enter service in the second half of 2012 and remained subject to ongoing litigation and appeals.
• Goodwill increased by $970 million from the South American acquisition. Goodwill impairment testing depends on future cash-flow, discount-rate, country-risk, and business-risk assumptions.
• Sempra expected to recover approximately $322 million of remaining investment in RBS Sempra Commodities, although distributions could extend into early 2012. Sempra retained certain guarantees and had $15 million of net trading liabilities supported by guarantees at September 30, 2011.
• Fitch downgraded Sempra Energy’s unsecured debt rating to BBB+ with a stable outlook in August 2011; the filing stated that SDG&E and SoCalGas ratings were unaffected.
• Other risks included commodity-price volatility, foreign-currency exposure, interest rates, regulatory decisions, nuclear operations at San Onofre, environmental requirements, cybersecurity, litigation, and access to capital markets.

Important facts for investors to verify

• Separate recurring earnings from the $277 million acquisition remeasurement gain, 2010 litigation charges, RBS investment write-downs, and other nonrecurring items.
• Progress and ultimate regulatory recovery of wildfire liabilities and the related $500 million regulatory asset.
• CPUC decisions on the 2012 general rate cases, pipeline safety spending, insurance-cost recovery, renewable procurement, and other incentive mechanisms.
• Post-expiration earnings and cash-flow effects of Sempra Generation’s DWR contract and the sale of the El Dorado facility to SDG&E on October 1, 2011.
• Integration performance, tariff reviews, currency exposure, and goodwill impairment risk associated with Chilquinta Energía and Luz del Sur.
• Funding needs for the $3.9 billion 2011 investment program, debt maturities, credit-rating effects, and the availability of revolving credit.
• Remaining RBS Sempra Commodities distributions, guarantees, indemnities, and potential capital calls.
• The filing text does not provide a consolidated adjusted or recurring earnings measure; investors should reconcile reported earnings independently.