01—Abstract
Summary
Summary of the 10-K filed February 25, 2004. Cited figures are marked; the original filing is the authoritative source.
Sempra Energy's fiscal 2003 10-K reports net income of $649 milliona, up 9.8% from $591 million in 2002, with diluted EPS of $3.03 (up 5.6%).
Operating income declined to $939 millionb from $987 million, so the earnings gain was driven largely by unusual items rather than core operations. The biggest one-time boosts were $118 million from favorable resolution of IRS income-tax issues and $65 million after-tax from the CPUC-approved SDG&E intermediate-term power contract settlement. Offsetting charges included a $77 million pre-tax Frontier Energy write-down, a $24 million AEG write-down, and $85 million of pre-tax California energy crisis litigation and SoCalGas sublease costs.
Excluding these items, the filing indicates core operations were modestly higher in 2003 (roughly $53 millionc net income improvement, though operating income was down). The California Utilities (SoCalGas and SDG&E) remain the stable earnings base, contributing $543 million of net income, while Global Enterprises contributed $209 million, with Sempra Energy Trading (SET) earnings falling to $98 million and Sempra Energy Resources (SER) rising to $94 million on DWR contract volumes and new plants. Total assets grew to $22.0 billion, shareholders' equity rose to $3.89 billion after a $448 million common stock offering, and book value per share increased to $17.17.
Debt-to-capitalization was 55%, and credit ratings were lowered during 2003 but remain investment grade with stable outlooks. Key risks for investors include the DWR power contract (up to 1,900 MW, under appeal), pending antitrust and market-manipulation litigation tied to the California energy crisis, FERC refund and gaming proceedings, the IRS audit of synthetic fuel tax credits (cumulative $256 milliond recorded), and the potential impact of a credit-rating downgrade on SET's trading business. Growth depends on new projects, including the Mesquite, TDM, and Elk Hills plants, the planned Palomar plant, and LNG terminals in Mexico and Louisiana, which carry execution and permitting risk.
02—Key points
Key Highlights
- Net income rose 9.8% to $649 million; diluted EPS of $3.03, up 5.6%, but operating income fell to $939 million from $987 million
- Earnings were boosted by non-recurring items: $118 million from IRS tax settlements and $65 million after-tax from the SDG&E power contract settlement
- Offsetting charges included $77 million pre-tax Frontier Energy and $24 million pre-tax AEG asset write-downs, plus $85 million of California litigation and sublease costs
- California Utilities contributed $543 million of net income (SDG&E $334M, SoCalGas $209M); Global Enterprises contributed $209M
- SER's 2,670 MW of operating capacity and its 1,900 MW DWR contract are key growth and revenue drivers, though the contract is under appeal
- Shareholders' equity rose to $3.89 billion and book value per share to $17.17, helped by a $448 million common stock offering in October 2003
- Credit ratings declined in 2003 but remain investment grade with stable outlooks; debt-to-capitalization is 55% and $2.1 billion of committed credit lines are available
03—Questions
Frequently Asked Questions
Did Sempra's earnings growth in 2003 come from core operations?
Only partly. Operating income actually declined to $939 million from $987 million. The net income increase was driven mainly by non-operating or one-time items, including $118 million from favorable IRS tax settlements and a $65 million after-tax SDG&E power contract settlement. Investors should look at underlying operating trends, which were mixed.
What is the main risk to Sempra's Sempra Energy Resources (SER) earnings?
SER's 10-year, up-to-1,900 MW power sales contract with California's DWR is a major revenue source. Its validity has been challenged in court and before FERC. SER has prevailed so far, but the plaintiffs have appealed, and an adverse outcome could materially affect Sempra's business, cash flows, and financial condition.
How exposed is Sempra to the California energy crisis litigation?
Sempra and its utilities face consolidated class-action and damages lawsuits in San Diego Superior Court, along with suits by the Arizona and Nevada Attorneys General and electricity market manipulation claims. Sempra says it expects to prevail and has spent or accrued substantial defense costs, but adverse rulings could materially affect results. FERC refund and gaming investigations also remain open.
Could a credit rating downgrade hurt Sempra's trading business?
Yes. A downgrade could require Sempra Energy Trading (SET) to post additional margin or credit enhancements under contracts guaranteed by Sempra, potentially limit its trading terms, and divert liquidity away from other non-utility growth. Sempra has $2.1 billion of unused committed credit lines, but these could be inadequate in a downgrade scenario.
What growth projects could drive Sempra's future earnings?
Key projects include the 1,250 MW Mesquite plant (commercial in 2003 and bought out of its synthetic lease in January 2004), the 600 MW TDM plant in Mexico, the 550 MW Elk Hills joint venture, the planned 550 MW Palomar plant to be sold to SDG&E, and LNG terminals in Baja California (Energia Costa Azul) and Louisiana (Cameron LNG). These projects face permitting, financing, and contracting risks, and the company expects about $1.1 billion of capital spending in 2004.
04—Continue