How did Sempra's 2006 earnings compare with prior years, and how much came from one-time items?

Net income was $1.406 billion ($5.38 diluted EPS), up from $920 million ($3.65) in 2005. Continuing operations earned $1.091 billion, while discontinued operations contributed $315 million. Major one-time items included the $204 million after-tax gain on the Topaz sale, $342 million of gains on discontinued operations, and the $221 million Argentine impairment. The company's 2005 results carried $316 million of litigation expense, versus $2 million in 2006, which largely explains the earnings rebound.

Are the Sempra Utilities still the stable core of the business?

Yes. SoCalGas and SDG&E earned a combined $460 million in 2006 and had revenues of about $6.9 billion. Their earnings are governed by CPUC performance-based regulation and cost recovery mechanisms, which limit volatility. However, net income declined slightly from 2005 because 2005 included favorable tax resolutions and SDG&E's dividends to the parent were suspended while it financed the Palomar plant.

What are the main risks to future earnings?

The most significant risks are: (1) the DWR power sales contract, which is under arbitration and litigation and could be materially affected if the state succeeds in setting it aside, as the Ninth Circuit's December 2006 ruling remands the FERC review; (2) remaining California energy-crisis and antitrust lawsuits, with claims in the billions of dollars; (3) volatility at Sempra Commodities, which relies on trading margins and credit ratings; and (4) funding and execution risk for large LNG, pipeline, and transmission projects, including Sunrise Powerlink and Rockies Express, which require substantial capital before revenue begins.

How strong is Sempra's balance sheet and liquidity?

Sempra had $920 million of unrestricted cash and $6.2 billion of unused committed credit lines at year-end 2006. Long-term debt was $4.5 billion, with $681 million of current maturities. The debt-to-capitalization ratio was 41 percent, and the company repurchased shares under a $250 million program, with $162 million still authorized. Management says these resources are adequate for capital needs and dividends, although Sempra Commodities' margin requirements can fluctuate substantially and are sensitive to credit ratings.

What does Sempra plan to do with its LNG and pipeline investments?

Sempra LNG is building the Energia Costa Azul terminal in Baja California (expected online in early 2008, about $900 million cost) and the Cameron LNG terminal in Louisiana (about $750 million, expected late 2008). Port Arthur, Texas, has FERC approval but construction is contingent on securing binding long-term contracts. Sempra Pipelines & Storage holds a 25 percent stake in the Rockies Express pipeline, with cash contributions of about $90 million in 2007 and $300 million in 2008, and is developing the Liberty gas storage facility. These projects depend on long-term customer agreements, so their timing and returns remain uncertain.

SRE/SREA 10-K FY2006 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 23, 2007. Cited figures are marked; the original filing is the authoritative source.

Sempra Energy's 2006 Form 10-K (filed February 23, 2007) reports a strong year driven by non-recurring gains and lower litigation expense.

Operating revenues rose 2% to $11.8 billion^a, operating income climbed 64% to $1.785 billion, and net income increased 53% to $1.406 billion (diluted EPS $5.38, up 47%). Continuing operations earned $1.091 billion, while the reported figures include $315 million from discontinued operations, mainly the sales of Twin Oaks, SEPCO, and the energy-services businesses. Major 2006 gains included the Topaz power plant sale (about $204 million after tax), with partly offsetting charges such as a $221 million impairment on the Argentine utility investments that Sempra decided to sell in December 2006.

The Sempra Utilities (SoCalGas and SDG&E) remain the stable earnings base, with combined net income of $460 million^b, down from $473 million, reflecting the Palomar plant transfer to SDG&E and higher operating costs. Sempra Global is the main source of volatility: Sempra Commodities earned $504 million, while Sempra Pipelines & Storage posted a $165 million loss after its impairment. Management is pursuing a capital program of about $2.1 billion in 2007 and roughly $6.6 billion at the utilities over five years, mainly for LNG terminals (Energia Costa Azul, Cameron, Port Arthur), the Rockies Express pipeline, and the Sunrise Powerlink transmission line.

Balance sheet metrics are sound: shareholders' equity rose to $7.5 billion^c, book value reached $28.67 per share, and the debt-to-capitalization ratio was 41 percent. Investors should weigh ongoing exposure to California energy-crisis litigation (about $621 million in litigation reserves), the DWR contract dispute, and the Argentine write-down.

02—Key points

Key Highlights

Net income rose 53% to $1.406 billion, and diluted EPS rose 47% to $5.38, helped by Sempra Generation asset sales and lower litigation expense (about $56 million in 2006 versus $551 million in 2005).
Operating income increased 64% to $1.785 billion on revenues of $11.761 billion, though results include one-time gains and charges rather than purely recurring operations.
Continuing operations net income was $1.091 billion. Discontinued operations added $315 million, primarily from the Twin Oaks, SEPCO, and energy-services sales totaling roughly $560 million of gains and proceeds.
Sempra Pipelines & Storage recorded a $221 million pretax impairment on its Argentine investments, which it decided to sell in December 2006, producing a segment loss of $165 million.
Total assets were $28.9 billion, shareholders' equity was $7.5 billion, and book value per share was $28.67. The debt-to-capitalization ratio was 41 percent, and credit ratings remained investment grade with stable outlooks.
Litigation exposure remains significant: reserves for litigation totaled $621 million, including $519 million for the settlements of California energy-crisis class actions, and the DWR contract dispute continues before the courts and the FERC.
Planned 2007 capital expenditures and investments total $2.1 billion, and the dividend was raised to $0.31 per quarter (annualized $1.24).

03—Questions

Frequently Asked Questions

How did Sempra's 2006 earnings compare with prior years, and how much came from one-time items?
Net income was $1.406 billion ($5.38 diluted EPS), up from $920 million ($3.65) in 2005. Continuing operations earned $1.091 billion, while discontinued operations contributed $315 million. Major one-time items included the $204 million after-tax gain on the Topaz sale, $342 million of gains on discontinued operations, and the $221 million Argentine impairment. The company's 2005 results carried $316 million of litigation expense, versus $2 million in 2006, which largely explains the earnings rebound.
Are the Sempra Utilities still the stable core of the business?
Yes. SoCalGas and SDG&E earned a combined $460 million in 2006 and had revenues of about $6.9 billion. Their earnings are governed by CPUC performance-based regulation and cost recovery mechanisms, which limit volatility. However, net income declined slightly from 2005 because 2005 included favorable tax resolutions and SDG&E's dividends to the parent were suspended while it financed the Palomar plant.
What are the main risks to future earnings?
The most significant risks are: (1) the DWR power sales contract, which is under arbitration and litigation and could be materially affected if the state succeeds in setting it aside, as the Ninth Circuit's December 2006 ruling remands the FERC review; (2) remaining California energy-crisis and antitrust lawsuits, with claims in the billions of dollars; (3) volatility at Sempra Commodities, which relies on trading margins and credit ratings; and (4) funding and execution risk for large LNG, pipeline, and transmission projects, including Sunrise Powerlink and Rockies Express, which require substantial capital before revenue begins.
How strong is Sempra's balance sheet and liquidity?
Sempra had $920 million of unrestricted cash and $6.2 billion of unused committed credit lines at year-end 2006. Long-term debt was $4.5 billion, with $681 million of current maturities. The debt-to-capitalization ratio was 41 percent, and the company repurchased shares under a $250 million program, with $162 million still authorized. Management says these resources are adequate for capital needs and dividends, although Sempra Commodities' margin requirements can fluctuate substantially and are sensitive to credit ratings.
What does Sempra plan to do with its LNG and pipeline investments?
Sempra LNG is building the Energia Costa Azul terminal in Baja California (expected online in early 2008, about $900 million cost) and the Cameron LNG terminal in Louisiana (about $750 million, expected late 2008). Port Arthur, Texas, has FERC approval but construction is contingent on securing binding long-term contracts. Sempra Pipelines & Storage holds a 25 percent stake in the Rockies Express pipeline, with cash contributions of about $90 million in 2007 and $300 million in 2008, and is developing the Liberty gas storage facility. These projects depend on long-term customer agreements, so their timing and returns remain uncertain.

04—Continue

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