01—Abstract
Summary
Summary of the 10-K filed February 26, 2003. Cited figures are marked; the original filing is the authoritative source.
Sempra Energy's 2002 Form 10-K shows a company with improving earnings and a heavy growth agenda, anchored by its California utilities.
Consolidated net income rose to $591 milliona, or $2.87 per diluted share, from $518 million ($2.52) in 2001. Operating revenues fell to $6.02 billion from $7.73 billion, largely because natural gas and electric commodity prices dropped and the state's Department of Water Resources (DWR) took over SDG&E's power purchases, which removed those costs and revenues from Sempra's income statement. Operating income was roughly flat at $987 million.
Earnings were helped by lower income taxes (effective rate 20.2% vs. 29.1%), lower interest expense, and a $16 millionb extraordinary gain tied to Sempra Energy Trading's acquisitions of metals businesses. Sempra Energy Resources (SER), the power-plant developer, swung to $60 million of net income from a $27 million loss, mainly because its DWR contract sales resumed at favorable rates. The main investor issues are regulatory and concentration risk.
The California utilities remain the base of earnings, but their results depend on CPUC and FERC decisions on electric rate recovery, the AB 265 undercollection, the profit-sharing dispute over SDG&E's power contracts, and the natural gas industry restructuring that has been delayed. SER's large DWR contract, which supplies up to 1,900 MW for ten years, is under legal challenge from California and the DWR itself, and it is central to the company's earnings growth. Sempra Energy Trading's earnings are volatile and tied to energy market swings, and the company faces a sizable pipeline of new projects, including about $1.3 billionc of planned 2003 capital expenditures and a $600 million Baja California LNG terminal.
On the balance sheet, total assets grew to $17.8 billion, long-term debt rose to $4.1 billiond, and the debt-to-capitalization ratio stood at 59%. Shareholders' equity was $2.8 billion, or $13.79 book value per share. Management reports $455 million in cash and $2.25 billion of unused credit lines, and it issued $600 million of equity units in 2002 and $400 million of 6% notes in early 2003.
The company also faces Argentine currency losses that reduced equity by $223 million, with an international arbitration claim pending. Overall, the filing points to solid recovery in earnings but significant regulatory and project-execution risk.
02—Key points
Key Highlights
- Net income rose 14% to $591 million ($2.87 diluted EPS) from $518 million ($2.52) in 2001, including a $16 million extraordinary gain from SET's metals acquisitions
- Operating revenues fell to $6.02 billion from $7.73 billion, mainly because of lower gas and electric commodity prices and the DWR's purchase of SDG&E's net short position
- Sempra Energy Resources swung to $60 million net income from a $27 million loss, driven by DWR contract sales at favorable rates and business interruption insurance recovery
- Sempra Energy Trading earnings fell to $126 million from $196 million as 2001's energy market volatility did not repeat
- Dividend held at $1.00 per share; the dividend payout ratio was about 36% of 2002 earnings
- About $1.3 billion of planned 2003 capital expenditures, with SER's 1,250 MW Mesquite and 600 MW Termoelectrica de Mexicali plants due to begin operations in 2003 and 2004
- Pending legal and regulatory risks include the CPUC rehearing request on the $173 million SDG&E profit-sharing settlement, FERC review of SER's DWR contract, and Argentine arbitration over $223 million of equity losses
03—Questions
Frequently Asked Questions
Why did Sempra's revenues decline in 2002 even though earnings increased?
Revenues dropped from $7.73 billion to $6.02 billion mainly because natural gas and electric commodity prices fell from their 2001 crisis levels, and because the DWR began buying SDG&E's net short power position, so those commodity sales and costs no longer flow through Sempra's income statement. These changes reduce revenue without reducing net income, since utility commodity costs are generally passed through to customers under the current regulatory framework.
How much of Sempra's earnings depends on the California utilities versus the unregulated businesses?
The California utilities (SoCalGas and SDG&E) contributed $415 million of the $591 million consolidated net income in 2002. Global enterprises, including trading, SER, SEI and SES, contributed $195 million, and Sempra Energy Financial added $36 million. Parent and other businesses lost $55 million. The company itself states that base results depend primarily on the utilities, while growth and volatility come from SET, SER, SEI and other businesses.
What are the biggest regulatory risks to Sempra's future earnings?
Key risks include the CPUC's pending rehearing on the profit-sharing settlement for SDG&E's power contracts, the outcome of the 2003 cost-of-service and performance-based rate cases, the reduced SONGS earnings after the CPUC denied market-based pricing from 2004, a 2003 reduction in merger savings retained by shareholders worth $35 million, and the FERC and California challenges to SER's DWR contract. The natural gas restructuring decision is also on hold, and the company cannot yet predict the outcome of the CPUC's border price investigation.
How strong is Sempra's balance sheet and liquidity position?
At year-end 2002 Sempra had $455 million of cash and $2.25 billion of unused committed credit lines, and total long-term debt was $4.1 billion. The debt-to-total-capitalization ratio was 59%, and the company's credit ratings are investment grade with stable outlooks from S&P, Moody's and Fitch. Management says operating cash flow, new security issuances and the credit lines will cover capital spending and dividends, though the company's plan to fund growth depends on access to capital markets.
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