Sempra Energy 2009 Q3 Form 10-Q Summary
Business context and reporting period
This combined, unaudited Form 10-Q covers Sempra Energy and its wholly owned or consolidated registrants San Diego Gas & Electric Company, Pacific Enterprises and Southern California Gas Company for the three and nine months ended September 30, 2009. Sempra operates regulated electric and natural-gas utilities and energy businesses including commodities, generation, pipelines and storage, and LNG.
Key financial metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | $1.853 billion, versus $2.692 billion | $5.650 billion, versus $8.465 billion |
| Net income | $302 million, versus $302 million | $816 million, versus $808 million |
| Earnings attributable to common shareholders | $317 million, versus $308 million | $831 million, versus $794 million |
| Diluted EPS | $1.27, versus $1.24 | $3.37, versus $3.13 |
| Operating cash flow | Not separately provided in the filing excerpt | $1.884 billion, versus $805 million |
| Capital expenditures | Not separately provided in the filing excerpt | $1.371 billion, versus $1.541 billion |
| Cash and cash equivalents at September 30 | $756 million, versus $331 million at December 31, 2008 |
Sempra’s approximate net-income margin was 16.3% for the quarter and 14.4% for the nine-month period. These figures are affected by regulated cost-recovery mechanisms, equity-method earnings and noncontrolling interests.
At September 30, Sempra reported short-term debt of $851 million, current maturities of long-term debt of $622 million and long-term debt of $6.845 billion. Committed credit lines totaled approximately $4.3 billion, of which $3.1 billion was unused. The company reported $756 million of unrestricted cash; SDG&E reported $291 million and PE/SoCalGas reported $418 million.
Material changes versus the prior comparable period
- Quarterly earnings increased 3% to $317 million, while nine-month earnings increased 5% to $831 million.
- Revenue declined primarily because of substantially lower natural-gas, electricity and power prices, milder weather, and the 2008 sale of the commodities-marketing businesses to RBS Sempra Commodities.
- RBS Sempra Commodities equity earnings increased to $105 million for the quarter and $384 million for the nine months, compared with a $4 million loss and $142 million, respectively, in the prior periods.
- Sempra Generation earnings declined to $43 million for the quarter and $119 million for the nine months, reflecting weaker market pricing, scheduled maintenance, lower mark-to-market gains and the absence of certain 2008 solar tax credits.
- Sempra Pipelines & Storage nine-month earnings declined to $64 million from $84 million, principally because of a $132 million pretax, $64 million after-tax write-off related to Liberty Gas Storage assets.
- Interest expense increased to $96 million for the quarter and $257 million for the nine months, primarily from debt issued in 2008 and 2009.
- Operating cash flow increased substantially, aided by $407 million of distributions from RBS Sempra Commodities and higher overcollections in regulatory balancing accounts.
- Sempra issued $750 million of 6.5% notes due 2016 in May 2009; SDG&E issued $300 million of 6.0% first mortgage bonds due 2039. Sempra issued an additional $750 million of 6.0% notes due 2039 in October 2009.
- The common dividend was increased to $0.39 per share quarterly, or $1.56 annually, an 11% increase.
Guidance, outlook, risks and unusual items
- Management expected 2009 capital expenditures and investments of approximately $2.9 billion, including $1.3 billion for the utilities and $1.6 billion for other subsidiaries. Financing was expected to come from operating cash flow, distributions, debt issuance and available credit.
- SDG&E’s Sunrise Powerlink project had a $1.883 billion authorized cost cap, $184 million invested at September 30, and an expected 2012 commercial operation date. Regulatory, environmental and legal challenges remained outstanding.
- SDG&E and Sempra Energy faced extensive litigation related to the 2007 California wildfires. At September 30, SDG&E had a $289 million reserve and a $266 million insurance receivable related to wildfire litigation. Settlements with insurers representing approximately 97% of insurer claims totaled about $910 million and were expected to be funded by insurance; remaining claims could exceed approximately $140 million of remaining insurance coverage.
- Management stated that additional wildfire liability might be sought for recovery through utility rates, but the success and timing of such recovery could not be predicted.
- Sempra continued to provide transitional guarantees for RBS Sempra Commodities, including $722 million of guaranteed net trading liabilities and a $344 million guarantee under a credit facility. RBS had indemnified Sempra for claims or losses associated with these arrangements.
- RBS announced plans to sell its interest in the commodities joint venture, although the joint-venture agreement restricted transfers until April 2012. RBS stated it would maintain liquidity and credit support.
- Other material uncertainties included regulatory approvals, commodity-price volatility, foreign-exchange movements, the expiration of Sempra Generation’s DWR contract in late 2011, LNG capacity utilization, Argentine investment recovery, pension funding and environmental or litigation outcomes.
- Management identified no material changes to previously reported risk factors. Disclosure controls and procedures were assessed as effective at the reasonable-assurance level.
Most important facts for investors to verify
- Reconcile reported earnings growth with the large revenue decline and quantify the contribution from RBS Sempra Commodities.
- Review the Liberty Gas Storage write-off and whether management’s statement that its future earnings impact will be minimal remains supportable.
- Track wildfire litigation settlements, remaining claims, insurance coverage, reserves and any requested rate recovery.
- Confirm the availability and covenant conditions of the $3.1 billion of unused credit capacity and the effect of subsequent debt issuance.
- Assess funding requirements and regulatory approvals for Sunrise Powerlink, renewable projects, LNG, storage and Rockies Express investments.
- Evaluate exposure to RBS credit support, joint-venture ownership changes and potential indemnification obligations.
- Review the pending DWR and FERC proceedings, Argentine arbitration recovery, pension contributions and regulatory rate-case outcomes.