01—Abstract
Summary
Summary of the 10-K filed March 19, 2002. Cited figures are marked; the original filing is the authoritative source.
Sempra Energy's 2001 Form 10-K shows a company whose results rose sharply on the back of its energy trading unit, while its California utilities remain under heavy regulatory and financial strain from the 2000-2001 electricity crisis.
Consolidated net income increased to $518 milliona ($2.52 per diluted share) from $429 million ($2.06) in 2000, and operating revenues rose to $8.0 billion from $7.0 billion. Sempra Energy Trading (SET) earned $196 million, driven by volatile energy markets in the first half of 2001 and higher trading volumes, while the California utilities' base earnings are expected to drive the company's core results going forward. Growth-oriented businesses were mixed: Sempra Energy Resources posted a $27 million net loss due to discounted power sales to the California Department of Water Resources (DWR), and International operations earned $25 million after a $25 million after-tax charge for surrendering its Nova Scotia gas franchise.
The key risk for investors is the regulatory outcome in California. In January 2002 the CPUC rejected the part of the June 2001 Memorandum of Understanding that would have let SDG&E keep profits on its favorably priced electricity purchase contracts; the CPUC estimates those profits at $363 millionb, versus the $219 million credit contemplated by the MOU. SDG&E is pursuing appeals and a federal lawsuit, and the timing of resolution will affect its cash flows.
The DWR contract, which covers up to 1,900 MW, has also been challenged by state officials, who asked FERC in February 2002 to abrogate or reform the rates. Sempra's credit ratings carry negative outlooks from S&P and Moody's, and SDG&E's carry negative outlooks from all three agencies. Leverage is elevated, with debt at about 60%c of total capitalization.
On the growth side, Sempra has about $1.1 billiond of capital expenditures in 2001 and expects a significantly higher level in 2002, including roughly $1.5 billion for California utility plant and SER power plant construction. Major projects include the 600 MW Termoelectrica de Mexicali, the 1,200 MW Mesquite Power Plant, and the 570 MW Elk Hills project, with the North Baja Pipeline due for completion in summer 2002.
Liquidity appears adequate, with $605 million in cash and $2.5 billion in unused committed credit lines at year-end 2001. Management expects capital expenditures to be partly financed through new securities issuances.
02—Key points
Key Highlights
- Net income rose 21% to $518 million ($2.52 diluted EPS) from $429 million ($2.06) in 2000, driven mainly by Sempra Energy Trading's $196 million net income
- Operating revenues increased 14% to $8.0 billion, while operating income rose 12% to $993 million
- Sempra Energy Resources posted a $27 million net loss because of discounted electricity sales to California's DWR under a 1,900 MW, ten-year contract, which state officials have challenged at FERC
- SDG&E faces a $219 million vs. $363 million dispute over electricity contract profits after the CPUC rejected part of the June 2001 MOU in January 2002; the outcome affects SDG&E's cash flows
- Capital expenditures reached $1.1 billion in 2001 and are expected to be significantly higher in 2002, with $3.9 billion planned at the California utilities over five years
- Credit outlooks are negative at S&P and Moody's for Sempra and at all three agencies for SDG&E; debt-to-capitalization is about 60%
- Year-end liquidity of $605 million cash and $2.5 billion of unused committed credit lines
03—Questions
Frequently Asked Questions
Why did Sempra's earnings increase in 2001?
Net income rose $89 million, mainly because Sempra Energy Trading earned $196 million, up from $155 million, on high energy-market volatility in the first half of 2001 and higher trading volumes. A $20 million after-tax gain on the sale of Energy America and the absence of a 2000 $30 million SDG&E regulatory charge also helped, partly offset by lower results at SER and SEI.
What is the biggest regulatory risk facing SDG&E?
In January 2002 the CPUC rejected the MOU's settlement on SDG&E's favorably priced intermediate-term power contracts. The MOU would have let SDG&E keep the profits in exchange for crediting $219 million to customers, but the CPUC estimates the profits at $363 million and says they belong to customers. SDG&E is pursuing a state Court of Appeals challenge and a federal suit alleging an unconstitutional taking, and the resolution will affect its cash flows from the rate-ceiling balancing account, which stood at $392 million at year-end 2001.
Why did Sempra Energy Resources report a loss, and how important is the DWR contract?
SER posted a $27 million net loss in 2001, largely because it sold electricity to California's DWR at discounted prices in the first phase of its ten-year contract for up to 1,900 MW. The company says the contract is central to its ability to grow earnings, since it covers more than two-thirds of the planned capacity. In February 2002 state officials asked FERC to find the rates unjust and to abrogate or reform the contracts. Sempra says it believes its prices are just and reasonable but has offered to renegotiate certain aspects without affecting long-term profitability. Deliveries resume at full price April 1, 2002.
How will Sempra fund its large construction program?
Management expects its $605 million of cash, cash flow from operations, and new security issuances to cover capital expenditures, dividends, acquisitions, and other commitments. The company has $2.5 billion of unused committed credit lines. SER's projects are expected to use a synthetic lease, project financing, and company funds, and Sempra expects 2002 capital spending to be financed partly through new securities. Total contractual commitments were about $11.9 billion at year-end 2001.
What does the dividend picture look like?
Dividends declared were $1.00 per share in 2001 and 2000, down from $1.56 in 1999, after a 2000 self-tender that bought back 36.1 million shares at $20. The dividend payout ratio was 39.7% on a diluted basis in 2001. The CPUC limits the California utilities' retained earnings available for dividends to the parent to $458 million at year-end 2001, and the board sets future dividends at its discretion.
04—Continue