SEMPRA annual report, FY2009

Sempra Energy 2009 Form 10-K Summary

Business context and reporting period

This combined Form 10-K covers Sempra Energy, San Diego Gas & Electric Company (SDG&E), Pacific Enterprises and Southern California Gas Company (SoCalGas) for the fiscal year ended December 31, 2009. The filing was signed February 25, 2010. The business comprised regulated California utilities, power generation, commodities marketing, pipelines and storage, and liquefied natural gas operations.

Sempra Energy had five reportable segments: SDG&E, SoCalGas, Sempra Commodities, Sempra Generation, and Sempra Pipelines & Storage. The filing incorporates much of the consolidated financial discussion and financial statements by reference to the 2009 Annual Report to Shareholders.

Financial metrics, liquidity and capital structure

• Parent-company net income: $1.119 billion in 2009, compared with $1.113 billion in 2008 and $1.099 billion in 2007.
• Parent-company diluted earnings per share: $4.52 in 2009, compared with $4.43 in 2008 and $4.16 in 2007.
• Parent-company operating cash flow: $97 million in 2009, compared with $173 million in 2008.
• Dividends received from subsidiaries: $150 million in 2009, compared with $350 million in 2008.
• Parent-company year-end cash: $7 million, versus $12 million at December 31, 2008. Parent-company short-term investments declined to zero from $152 million.
• Parent-company debt: current and long-term debt totaled approximately $3.7 billion at December 31, 2009, compared with approximately $2.5 billion at year-end 2008. Long-term debt, net of current maturities and discounts, was $3.196 billion.
• Debt maturities: the filing identifies $500 million due in 2010, $650 million in 2013, $57 million in 2014 and $2.5 billion thereafter, excluding certain market-value adjustments.
• Parent-company financing: Sempra issued $1.492 billion of long-term debt in 2009 and repaid $314 million. It paid $341 million of common dividends.
• Consolidated financial statement detail: the supplied filing text does not provide clear consolidated revenue, consolidated net income, consolidated operating cash flow, consolidated margins, or consolidated liquidity balances; these amounts are incorporated by reference from the Annual Report.

Operations and material changes versus prior periods

• SoCalGas added approximately 27,000 natural gas meters in 2009, compared with 41,000 in 2008. SDG&E added approximately 4,200 natural gas meters, compared with 3,000 in 2008, and approximately 7,000 electric meters, compared with 7,400 in 2008.
• Sempra Energy consolidated employees increased to 13,839 at year-end 2009 from 13,673 in 2008. SDG&E employees increased to 5,067 from 4,833, while SoCalGas employees declined to 7,136 from 7,188.
• SDG&E had 5,509 MW of contracted and owned generation capacity at December 31, 2009, including 4,423 MW of contracted resources and 1,086 MW of owned generation.
• SDG&E’s electric resources included 430 MW attributable to its 20% interest in the San Onofre Nuclear Generating Station, 560 MW at Palomar and 96 MW at Miramar.
• SDG&E’s Sunrise Powerlink transmission project was in pre-construction and was expected to enter commercial operation in 2012, subject to project execution and regulatory conditions.
• At year-end, SoCalGas had four underground storage reservoirs with combined working capacity of 133.4 Bcf. Sempra Generation operated or owned interests in facilities totaling 2,740 MW.
• No shares were repurchased under the 2007 authorization during 2009, compared with $1.0 billion spent to repurchase 18.4 million shares in 2008. Approximately $1 billion of remaining authorization was reported.

Guidance, outlook, commentary and unusual items

• RBS announced its intention to divest its interest in the RBS Sempra Commodities joint venture. On February 16, 2010, an agreement was signed for J.P. Morgan Ventures to purchase specified global commodities, European power and gas, and investor-products businesses. Closing was expected in the second quarter of 2010, subject to regulatory approvals and other conditions.
• The purchase price for the businesses sold was expected to equal estimated book value at closing plus $468 million. Sempra Energy was entitled to 53-1/3% of the aggregate purchase price and RBS to 46-2/3%.
• The businesses retained by the joint venture historically generated approximately 40% to 60% of the partnership’s total earnings and averaged more than 50%, according to the filing. The transaction and future disposition of remaining businesses could materially change Sempra’s earnings mix.
• Management expected 2010 customer-meter growth at SDG&E and SoCalGas to remain low and generally comparable to 2009 levels.
• California renewable-energy requirements were increasing: SDG&E was subject to a 20% renewable-energy requirement for 2010, while a 2009 executive order directed California utilities toward 33% renewable energy by 2020. The filing noted potential effects on procurement costs, project demand and compliance exposure.
• Environmental liabilities included estimated remaining hazardous-waste remediation accruals of $1.5 million at SDG&E and $27.9 million at SoCalGas, plus $5.9 million of SDG&E remediation costs not being recovered in rates. SDG&E also accrued $14 million for its share of remaining SONGS marine-environment mitigation costs through 2050.

Principal risks and contingencies

• Cash available to Sempra Energy for dividends and debt service depends substantially on distributions and performance from subsidiaries. Regulatory or financial distress could restrict subsidiary distributions.
• The businesses are capital intensive and exposed to credit-market conditions, interest rates, credit spreads and credit ratings. Reduced access to financing could increase costs or limit capital expenditures.
• Utility earnings and cash flows are subject to CPUC, FERC, NRC and other regulatory decisions, including rate recovery, performance incentives, project approvals, affiliate-transaction rules and potential disallowances.
• Commodity-price volatility, hedging limitations, counterparty defaults, transmission constraints and changes in electricity, natural gas and LNG markets could materially affect results and liquidity.
• Significant litigation and regulatory matters include SDG&E wildfire-related claims and disputes concerning Sempra Generation’s long-term power agreement with the California Department of Water Resources. The filing states that these matters could materially affect results, cash flows and financial condition.
• SDG&E remains exposed to nuclear operating, decommissioning, spent-fuel storage and regulatory risks through its 20% ownership of SONGS. The timing of federal spent-fuel acceptance remained uncertain.
• Environmental and climate-related laws could require additional compliance spending, emissions controls, emissions credits or other costs that may not be fully recoverable through rates.
• Sempra reported a $1.6 billion investment in RBS Sempra Commodities, a 25% interest in Rockies Express Pipeline, and guarantees relating to certain joint-venture debt and obligations. Sempra does not control these businesses and has exposure to partner performance and capital requirements.

Investor verification checklist

1. Verify consolidated 2009 revenue, net income, operating cash flow, segment earnings, margins, capital expenditures and year-end liquidity in the incorporated Annual Report.
2. Review consolidated debt, maturities, credit facilities, guarantees and covenant capacity, rather than relying only on the parent-company debt schedule.
3. Assess the accounting treatment, closing conditions and expected proceeds from the 2010 sale of portions of RBS Sempra Commodities.
4. Review the status and potential financial exposure of the DWR power-contract litigation and SDG&E wildfire-related litigation.
5. Evaluate regulatory recovery of utility capital expenditures, environmental liabilities and renewable-energy compliance costs.
6. Confirm SONGS operating, steam-generator replacement, decommissioning and spent-fuel obligations.