Sempra Energy Form 10-Q Summary
Business context and reporting period
This combined, unaudited Form 10-Q covers Sempra Energy, San Diego Gas & Electric Company (SDG&E), Pacific Enterprises and Southern California Gas Company (SoCalGas) for the three and nine months ended September 30, 2010. Sempra Energy operates regulated California utilities and energy businesses comprising commodities, generation, pipelines and storage, and LNG.
Key financial metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | $2.116 billion, versus $1.853 billion | $6.658 billion, versus $5.650 billion |
| Net income | $127 million, versus $302 million | $432 million, versus $816 million |
| Earnings attributable to common shareholders | $131 million, versus $317 million | $459 million, versus $831 million |
| Diluted EPS | $0.53, versus $1.27 | $1.84, versus $3.37 |
| Operating cash flow | Not separately provided for the quarter | $1.602 billion, versus $1.884 billion |
| Capital expenditures | Not separately provided for the quarter | $1.354 billion, versus $1.371 billion |
| Cash and equivalents at period end | $547 million, versus $110 million at December 31, 2009 | |
| Total debt on balance sheet | $8.919 billion, including $574 million short-term debt, $313 million current maturities and $8.032 billion long-term debt |
Net margin was approximately 6.0% for the quarter and 6.5% for the nine-month period, compared with approximately 16.3% and 14.4%, respectively, in the comparable 2009 periods. Sempra Energy had $4.3 billion of committed credit facilities and $3.4 billion of unused capacity at September 30, 2010. The utilities reported $332 million of cash and $338 million of available credit at SDG&E, and $72 million of cash and $538 million of available credit for PE/SoCalGas.
Material changes versus the prior comparable period
- Quarterly earnings declined 59% and nine-month earnings declined 45%, primarily because of a $305 million pretax, $139 million after-tax noncash write-down of the RBS Sempra Commodities investment and lower joint-venture earnings.
- RBS Sempra Commodities generated pretax equity losses of $281 million in the quarter and $290 million year to date, compared with pretax equity earnings of $105 million and $384 million in 2009. The joint venture was being divested; Sempra expected total proceeds and related distributions of $1.8 billion to $1.9 billion.
- Utility earnings were comparatively stable. SDG&E earnings declined 2% for the quarter and 5% year to date, while SoCalGas earnings increased 5% and 7%, respectively.
- Sempra Generation quarterly earnings increased to $56 million from $43 million, but nine-month earnings fell to $51 million from $119 million because of $86 million of after-tax energy-crisis litigation expense, maintenance downtime and less favorable market pricing.
- Sempra Pipelines & Storage nine-month earnings increased to $120 million from $64 million, aided by the absence of the 2009 Liberty Gas Storage write-off and a $48 million legal settlement, partially offset by a $24 million Argentine investment impairment.
- Sempra LNG improved to $50 million of nine-month earnings from a $19 million loss, reflecting growth from the Cameron LNG terminal, Energía Costa Azul and marketing operations.
- Operating cash flow decreased 15%, principally because distributions from RBS Sempra Commodities were $198 million through September 2010 versus $407 million in 2009. Investing cash use improved because of $849 million of RBS distributions, a $180 million Fowler Ridge capital return and lower Rockies Express contributions.
- Sempra prepaid $500 million under a collared accelerated share acquisition program and received 5.67 million shares during the quarter; the program could continue into the first quarter of 2011.
Guidance, outlook, commentary and risks
- Management expected approximately $3 billion of 2010 capital expenditures and investments, including $1.9 billion at the utilities and $1.1 billion at other subsidiaries. The filing does not provide formal earnings guidance.
- Sempra Generation’s Department of Water Resources contract was expected to expire in late 2011. Management warned that replacement contracts or merchant sales could produce substantially lower earnings.
- SDG&E expected Sunrise Powerlink to enter commercial operation in the second half of 2012. Investment in the project was $447 million at September 30, 2010, with an approved project cost cap of $1.9 billion, subject to continuing legal and regulatory challenges.
- SDG&E and SoCalGas filed preliminary 2012 general rate case proposals seeking revenue requirement increases of $246 million and $282 million, respectively. CPUC decisions were expected in late 2011, with rates effective January 1, 2012.
- SDG&E recorded $344 million of wildfire litigation reserves, partly offset by a $150 million insurance receivable, and a $311 million regulatory asset for costs expected to be recovered from customers. Recovery depends on future regulatory action and could materially affect cash flow and results if denied or delayed.
- The company recorded $184 million of litigation expense during the first nine months, including $163 million related to a proposed $410 million energy-crisis litigation settlement awaiting FERC approval.
- RBS Sempra Commodities remained subject to transition guarantees. Sempra’s guaranteed net trading liabilities were $561 million, although RBS had indemnified Sempra for claims or losses under the described arrangements.
- Other risks included commodity-price volatility, LNG supply and capacity utilization, regulatory decisions, environmental and legal proceedings, pension funding, nuclear insurance assessments, interest rates, foreign currency movements and new OTC derivatives regulation.
Most important facts for investors to verify
- Progress, proceeds and final costs of the RBS Sempra Commodities divestiture, including the pending asset sale and remaining guarantees.
- Resolution and regulatory recovery of SDG&E’s 2007 wildfire claims, reserves and $311 million regulatory asset.
- FERC approval and funding sources for the $410 million energy-crisis litigation settlement.
- SDG&E’s ability to replace the Department of Water Resources contract after late 2011 and the resulting earnings exposure.
- CPUC decisions on the 2012 general rate cases, wildfire cost recovery, renewable-energy compliance and major capital projects.
- Actual 2010 capital spending, debt maturities, credit-facility availability and cash proceeds from asset divestitures.
- Whether the reported earnings decline is predominantly noncash and transaction-related or reflects a continuing deterioration in operating performance.