01—Abstract
Summary
Summary of the 10-K filed February 26, 2008. Cited figures are marked; the original filing is the authoritative source.
Sempra Energy's 2007 10-K shows a company with strong utility earnings, a large but volatile trading business being moved to a joint venture, and a significant LNG and pipeline development pipeline.
Consolidated net income fell 22% to $1.10 billiona ($4.16 diluted EPS) from $1.41 billion in 2006, but that comparison is distorted by 2006 asset-sale gains. Income from continuing operations rose 3% to $1.125 billion, led by higher earnings at SDG&E, and total operating revenues were $11.4 billion. Sempra Utilities net income rose to $513 million, and Sempra Global net income was $679 million.
The central strategic event is the pending transfer of Sempra Commodities to a partnership with The Royal Bank of Scotland (RBS Sempra Commodities LLP), expected to close in April 2008. Sempra's equity investment has been raised to $1.6b-1.7 billion, and the company expects roughly $1 billion of net cash proceeds at closing. RBS will assume credit support for the trading business, removing a major source of liquidity demands tied to Sempra's credit ratings.
Management plans to fund a $1 billionc share buyback afterward and to raise the quarterly dividend to $0.35 from $0.32. Risks remain material: a large litigation reserve base tied to the 2000-2001 California energy crisis, a pending Sunrise Powerlink transmission decision, a DWR power contract dispute, and multi-billion-dollar LNG and pipeline commitments. For investors, the filing presents a utility-anchored company that is de-risking its trading operations, with growth depending on successful execution of the Energía Costa Azul and Cameron LNG terminals and the Rockies Express pipeline, all expected to come online in 2008-2009.
02—Key points
Key Highlights
- Net income of $1.099 billion ($4.16 diluted EPS) in 2007, down 22% from 2006, mainly because 2006 included large discontinued-operations gains; income from continuing operations rose 3% to $1.125 billion.
- Sempra Utilities net income rose to $513 million, with SDG&E up to $283 million on a higher authorized ROE (11.1%, effective 2008) and higher transmission earnings.
- RBS joint venture to take over Sempra Commodities (expected close April 2008): Sempra's equity stake rises to $1.6-1.7 billion, with about $1 billion in net cash proceeds expected and RBS taking over trading credit support.
- Capital return plan after the RBS closing: a $1 billion share repurchase in 2008, up to $1.5-2 billion total through 2009, and a dividend increase to $0.35 per quarter with a 35-40% payout target.
- Capital spending of about $2.1 billion planned for 2008, with $7.1 billion at the utilities and $4.3 billion at other subsidiaries over five years, mainly for LNG terminals, pipelines and storage.
- Large legal exposure: $149 million in unresolved litigation reserves plus $452 million reserved for California energy crisis settlements, and a pending DWR contract arbitration and FERC refund proceedings.
- Balance sheet of $30.1 billion total assets, $4.6 billion long-term debt, $8.3 billion shareholders' equity, and $668 million of unrestricted cash, with $5.2 billion in available committed credit lines.
03—Questions
Frequently Asked Questions
Why did Sempra's net income fall in 2007 if continuing operations improved?
Net income declined to $1.099 billion from $1.406 billion mainly because 2006 included $315 million of after-tax income from discontinued operations, largely from the sales of Twin Oaks, Energy Services, Facilities Management and SEPCO. Income from continuing operations grew 3% to $1.125 billion, driven by SDG&E.
What is the RBS joint venture and how does it affect Sempra?
Sempra and The Royal Bank of Scotland agreed in July 2007 to form RBS Sempra Commodities LLP, which will buy and operate Sempra's commodity-marketing businesses at book value. Sempra will hold an equity interest of about $1.6-1.7 billion, use the equity method for accounting, and receive roughly $1 billion in cash at closing. RBS will provide growth capital and credit support, which reduces Sempra's exposure to rating-downgrade-triggered collateral calls. Closing is expected in April 2008, subject to regulatory approvals.
How much capital is Sempra returning to shareholders, and when?
After the RBS transaction closes, Sempra plans to start a $1 billion share repurchase program in 2008, with purchases continuing in 2009 up to a total of $1.5-2 billion. The company also expects to raise its quarterly dividend to $0.35 per share ($1.40 annually), up from $0.32, and target a 35-40% payout ratio of net income. Some of the later buybacks may require additional borrowing, including a possible hybrid capital issuance.
What are the largest risks to Sempra's earnings?
Key risks include regulatory decisions by the CPUC and FERC on rates and incentives, the outcome of pending litigation tied to the 2000-2001 California energy crisis, and the DWR contract dispute, which could affect Sempra Generation's revenue after the contract ends in 2011. Other risks include commodity price volatility, the timing of LNG terminal and pipeline projects, possible wildfire-related liability in San Diego, and potential increases in environmental and greenhouse-gas compliance costs.
What growth projects drive Sempra's future results?
The main projects are the Energía Costa Azul LNG receipt terminal in Baja California (1 Bcf/day, expected to start in the second quarter of 2008), the Cameron LNG terminal in Louisiana (completion expected in late 2008), the Rockies Express pipeline (25% stake, with full service in 2009), Liberty Gas Storage, and the proposed Sunrise Powerlink transmission line (estimated at $1.2-1.3 billion, with CPUC approval pending and earliest in-service in the first half of 2011).
04—Continue