01—Abstract
Summary
Summary of the 10-K filed March 13, 2001. Cited figures are marked; the original filing is the authoritative source.
Sempra Energy's FY2000 10-K reveals a company whose results were strong at the consolidated level but whose core California utility franchise faced serious financial stress.
Net income rose 9% to $429 milliona ($2.06 per diluted share) from $394 million ($1.66), driven mainly by Sempra Energy Trading (net income of $155 million vs. $19 million), with El Dorado Energy and international operations also contributing. Revenues and other income climbed to $7.1 billion from $5.4 billion, largely from trading and higher gas prices passed through to customers. The central investor concern is the California electricity crisis.
Under AB 265, SDG&E's small-usage customers face a 6.5 cent/kWh commodity rate ceiling, while wholesale costs ran far higher (15.51 cents/kWh in the second half of 2000). Undercollected costs reached $447 millionb at year-end 2000 and $605 million by January 31, 2001, and the filing expects them to reach about $700 million in March 2001. SDG&E has fully drawn its short-term credit lines, and the company drew down substantially all of its $1.3 billion in available credit facilities in late January and early February 2001.
Credit rating agencies have moved outlooks to negative. The state's AB 1 authorization for the Department of Water Resources to buy power for SDG&E customers is intended to halt the growth of undercollections, but the outcome depends on pending CPUC decisions and legislation. Capital structure also changed materially.
Sempra repurchased 36.1 million shares at $20c in a February 2000 self-tender, cutting shareholders' equity to $2.49 billion from $2.99 billion and lifting the debt-to-capitalization ratio to 59%. The quarterly dividend fell to $0.25 from $0.39, and annual dividends declared dropped to $1.00 from $1.56. Management plans significant growth capital, including $1.9 billion over five years for power plants, and is pursuing international gas distribution projects in Latin America and Nova Scotia.
02—Key points
Key Highlights
- Net income rose 9% to $429 million ($2.06 per diluted share) from $394 million ($1.66) in 1999, with Sempra Energy Trading contributing $155 million, up from $19 million.
- SDG&E's undercollected electric costs reached $447 million at December 31, 2000, and $605 million at January 31, 2001, under a 6.5 cent/kWh rate ceiling that has materially harmed cash flow and liquidity.
- Sempra drew down substantially all of its $1.3 billion in available credit facilities between January 24 and February 5, 2001, and SDG&E's access to capital markets is substantially impaired.
- Credit rating agencies have moved outlooks on most Sempra and SDG&E securities to negative, although the ratings themselves had not changed as of the filing.
- A $200 million self-tender in February 2000 repurchased 36.1 million shares at $20 per share, reducing shareholders' equity to $2.49 billion and raising the debt-to-capitalization ratio to 59%.
- Dividends were cut to $0.25 per quarter ($1.00 annualized) from $0.39, and CPUC regulation limits dividends to $924 million of retained earnings.
- Growth plans include the $360 million Elk Hills and $630 million Mesquite power projects, a $350 million Mexicali plant, and a $700-800 million Nova Scotia gas distribution system, with SER planning $1.9 billion in power plant spending over five years.
03—Questions
Frequently Asked Questions
Why did Sempra's earnings rise in 2000 even though its California utilities were under pressure?
Most of the increase came from Sempra Energy Trading, whose net income rose to $155 million from $19 million on higher natural gas and power volatility and greater trading volumes. El Dorado Energy, international operations, and equity earnings from unconsolidated subsidiaries also contributed. California utility earnings fell, partly due to a $50 million pretax charge at SDG&E for a potential regulatory disallowance on wholesale power purchases.
How serious is the SDG&E undercollection problem for investors?
It is significant. The 6.5 cent/kWh ceiling means SDG&E cannot pass through the full cost of electricity to small-usage customers on a current basis, and the gap was $605 million by January 31, 2001, with growth expected to reach about $700 million in March 2001. The company states that the undercollections are recoverable in future rates under the legislation, but timing and amount depend on pending CPUC and legislative actions. Management says it cannot determine whether its funding sources will be sufficient for planned capital spending.
Is the dividend safe after the 2000 cut?
The dividend was cut to $0.25 per quarter, or $1.00 annualized, from $0.39 per quarter. Management states that operating cash required in 2001 for dividends and debt payments will be met from operations and existing cash, but only if the high electricity cost and billing problems are resolved favorably. Dividend payments remain at the board's discretion, and CPUC limits restrict payouts to $924 million of retained earnings.
What was the purpose of the 2000 share repurchase and how did it change the balance sheet?
Sempra repurchased 36.1 million shares at $20 per share through a February 2000 self-tender offer, financed mainly by $500 million of 7.95% notes due 2010 and $200 million of mandatorily redeemable trust preferred securities. Shareholders' equity fell to $2.49 billion from $2.99 billion, and the debt-to-capitalization ratio rose to 59%. Book value per share declined to $12.35 from $12.58 because the buyback price exceeded book value.
What growth projects could drive future earnings?
Sempra Energy Resources plans to develop 5,000 to 10,000 megawatts within a decade, starting with Elk Hills (550 MW, $360 million) and Mesquite (1,200 MW, $630 million), both scheduled to begin construction in the second quarter of 2001. Sempra Energy International is building a 600-MW plant near Mexicali, a Nova Scotia gas distribution system costing $700-800 million over seven years, and a $230 million Arizona-to-Rosarito pipeline. These projects depend on access to financing, which the company describes as constrained.
04—Continue