SEMPRA quarterly report, Q2 FY2012

Sempra Energy Form 10-Q Summary

Business context and reporting period

Combined quarterly report filed August 2, 2012 by Sempra Energy, San Diego Gas & Electric Company (SDG&E), and Southern California Gas Company (SoCalGas) for the three and six months ended June 30, 2012. Sempra operates regulated California utilities, South American utilities, Mexican energy infrastructure, renewable generation, natural-gas infrastructure, power generation, storage, and LNG businesses.

Effective January 1, 2012, Sempra realigned its reportable segments and retrospectively restated prior-period segment information. Sempra also changed its investment tax credit accounting from the flow-through method to the deferral method; the change reduced January 1, 2011 retained earnings by $37 million and adjusted historical periods.

Financial metrics

Metric	Q2 2012	Q2 2011	Six months 2012	Six months 2011
Total revenue	$2,089 million	$2,422 million	$4,472 million	$4,856 million
Earnings attributable to common shareholders	$62 million	$503 million	$298 million	$757 million
Diluted EPS	$0.25	$2.09	$1.21	$3.14
Net income	$74 million	$494 million	$325 million	$754 million
Cash flow from operations	Not separately provided for the quarter	Not separately provided for the quarter	$1,152 million	$1,139 million

Consolidated earnings margins based on earnings attributable to common shareholders were approximately 3.0% in Q2 2012 versus 20.8% in Q2 2011, and 6.7% for the first six months of 2012 versus 15.6% in the prior-year period.

• SDG&E: Q2 earnings attributable to common shares were $95 million, up from $71 million; six-month earnings were $200 million, up from $160 million. Six-month operating revenues were $1,614 million and net income was $213 million.
• SoCalGas: Q2 earnings attributable to common shares were $53 million, down from $59 million; six-month earnings were $119 million, down from $127 million. Six-month operating revenues were $1,600 million and net income was $120 million.
• Segment earnings: Sempra South American Utilities generated $38 million in Q2 and $78 million year to date; Sempra Mexico generated $43 million and $80 million; Sempra Renewables generated $24 million and $34 million; and Sempra Natural Gas reported losses of $193 million and $192 million.
• Balance sheet: At June 30, 2012, Sempra had $221 million of cash and cash equivalents, total assets of $34.2 billion, short-term debt of $713 million, current long-term debt of $698 million, long-term debt of $10.315 billion, and total equity of $10.293 billion.
• Liquidity: Committed credit facilities totaled approximately $4.1 billion, with $3.2 billion unused. Sempra, SDG&E, and SoCalGas had $221 million, $29 million, and $11 million of unrestricted cash, respectively. Management stated that available liquidity and expected operating cash flow were adequate for capital expenditures, dividends, acquisitions, and maturing debt.
• Capital spending: Six-month property, plant, and equipment expenditures were $1.517 billion, compared with $1.225 billion in 2011. Management expected approximately $3.1 billion of 2012 capital expenditures and investments.
• Dividends: Sempra declared $0.60 per common share in Q2 and $1.20 per share for the first six months, compared with $0.48 and $0.96 in the respective 2011 periods.

Material changes versus the prior comparable period

• Consolidated earnings declined primarily because 2011 included a $277 million pretax and after-tax remeasurement gain from acquiring additional interests in Chilquinta Energía and Luz del Sur, while 2012 included a $179 million after-tax noncash impairment of the Rockies Express investment.
• Sempra Natural Gas shifted from $47 million of Q2 2011 earnings to a $193 million Q2 2012 loss. The change reflected the Rockies Express impairment, lower power-generation earnings after expiration of the Department of Water Resources contract in September 2011, and weaker natural-gas and LNG economics.
• Consolidated revenue declined 14% in Q2 and 8% year to date, largely due to lower natural-gas commodity prices and reduced energy-related business revenue. Utility natural-gas revenues declined, but associated gas costs also declined because those costs are generally recovered through customer rates.
• SDG&E results benefited from Sunrise Powerlink-related AFUDC, recovery of incremental wildfire insurance premiums, recovery of prior spent-fuel storage costs, and earnings from the Desert Star generation facility acquired in October 2011.
• SoCalGas earnings declined as operating expenses and depreciation increased and the effective tax rate rose.
• Operating cash flow was broadly stable at Sempra but declined at SDG&E because 2011 included $300 million of wildfire-settlement proceeds. SoCalGas operating cash flow increased to $712 million from $436 million, aided by receivable collections and overcollected regulatory balancing accounts.
• Sempra issued $600 million of 2.3% notes due 2017; SDG&E issued $250 million of 4.3% first-mortgage bonds due 2042. Sempra also increased short-term debt by $241 million during the first six months.

Guidance, outlook, risks, contingencies, and unusual items

• Tax outlook: Management expected Sempra Energy’s 2012 effective tax rate to be approximately 28%, excluding items that cannot be reliably forecast. The filing projected approximately 30% to 32% for 2013–2016. SDG&E and SoCalGas expected approximately 36% for 2012.
• Regulatory proceedings: SDG&E and SoCalGas had pending 2012 general rate cases. Management expected a CPUC decision retroactive to January 1, 2012 in the fourth quarter. Requested 2012 revenue requirements were $1.849 billion for SDG&E and $2.112 billion for SoCalGas, while the Division of Ratepayer Advocates recommended reductions of approximately 5% from 2011 levels.
• SONGS outage: Both San Onofre nuclear units remained offline following steam-generator tube wear and required NRC approval before restart. SDG&E had approximately $463 million of net book investment, including construction work in progress and nuclear fuel, and had incurred approximately $25 million of replacement-power costs through June 30. A prolonged outage could lead to rate reductions, additional costs, and impaired recovery of investment.
• Wildfire litigation: SDG&E and Sempra had $476 million of wildfire litigation reserves at June 30, including $305 million current and $171 million long term. Regulatory and balancing-account assets related to wildfire costs totaled approximately $722 million. Recovery from customers depends on future regulatory actions and could be materially less or delayed.
• Pipeline safety: The California Utilities estimated Phase 1 of their pipeline safety enhancement plan at approximately $3.1 billion over 10 years. Recovery and rate-base treatment remained subject to CPUC proceedings.
• Capital projects: Sunrise Powerlink was energized and placed in service in June 2012 after approximately $1.8 billion of investment. The company also pursued renewable projects, natural-gas storage expansion, and a proposed Cameron LNG liquefaction project with estimated incremental investment of approximately $6 billion, primarily expected to be project-financed.
• Rockies Express valuation: The remaining investment was $477 million after the impairment. Fair value depended on highly uncertain assumptions regarding capacity contracts, refinancing, basis differentials, and revenues beyond 2019; further impairment remained possible.
• Other risks: Key exposures included commodity-price volatility, interest and foreign-exchange rates, regulatory approvals, nuclear operations, litigation, cybersecurity, natural disasters, access to capital, and potential collateral requirements under derivative contracts.

Most important facts for an investor to verify

• Whether the CPUC approved the 2012 SDG&E and SoCalGas rate cases and the ultimate revenue requirements and recovery of wildfire-related costs.
• The NRC and CPUC outcomes, restart timing, repair costs, and rate treatment for both SONGS units.
• Whether Rockies Express required additional impairment and whether its capacity contracts and refinancing supported future distributions.
• The sustainability of earnings after the expiration of the DWR power contract and the extent to which Sempra Natural Gas can replace lost generation and LNG economics.
• Actual 2012 capital expenditures, project-financing needs, debt maturities, credit-facility availability, and dividend policies at SDG&E and SoCalGas.
• Changes in natural-gas and power prices, renewable tax incentives, LNG export approvals, and the permitting and financing status of the Cameron LNG liquefaction project.
• The ultimate liability, insurance recoveries, regulatory recovery, and cash-flow timing associated with wildfire and other legal proceedings.