01—Abstract
Summary
Summary of the 10-K filed February 24, 2009. Cited figures are marked; the original filing is the authoritative source.
Sempra Energy's FY2008 10-K (combined filing with SDG&E, Pacific Enterprises and SoCalGas) shows a company in transition: a largely regulated utility core, a restructured commodities business, and a growing but capital-intensive non-utility infrastructure build-out.
Consolidated 2008 revenues were $10.8 billiona (down from $11.4 billion) and net income was $1.113 billion, flat with 2007 at $1.099 billion, while diluted EPS rose to $4.43 from $4.16, helped by the $1 billion share repurchase that cut shares outstanding from roughly 261 million to 243 million. Income from continuing operations declined in underlying terms because the April 2008 formation of the RBS Sempra Commodities joint venture reduced Sempra's share of commodities-marketing earnings to equity-method treatment, which contributed $383 million of pretax equity earnings and a $67 million after-tax gain. The Sempra Utilities (SDG&E and SoCalGas) delivered the steadiest results: SDG&E net income rose 20% to $339 million and SoCalGas rose 6% to $244 million, supported by the 2008 General Rate Case that sets rates for 2008 through 2011 with roughly 3% annual revenue increases.
Sempra Generation (net income $222 millionb) and Sempra Pipelines & Storage ($106 million) improved, while Sempra LNG remained loss-making ($46 million loss) ahead of the Cameron and Energia Costa Azul terminals. Balance-sheet leverage increased: long-term debt rose to about $6.5 billion from $4.6 billion, and the debt-to-capitalization ratio at the consolidated level was about 47%.
Investors should weigh several concentrated risks: the DWR power contract with Sempra Generation (roughly 10% of revenues) expires in 2011 and is subject to ongoing litigation; SDG&E faces numerous lawsuits from the October 2007 San Diego wildfires with liability insurance of $1.1 billionc; the RBS joint venture depends on RBS's capital support, which is under strain after RBS came under UK government control; and large capital programs (about $2.5 billion planned for 2009, including $1.2 billion at non-utility subsidiaries) must be financed in tight credit markets. The board also raised the quarterly dividend to $0.39 per share in February 2009.
02—Key points
Key Highlights
- Consolidated 2008 net income of $1.113 billion, roughly flat versus $1.099 billion in 2007; diluted EPS of $4.43 versus $4.16, aided by the $1 billion share repurchase that reduced shares outstanding to about 243 million.
- Formation of the RBS Sempra Commodities joint venture (April 2008) generated $383 million of pretax equity earnings, a $67 million after-tax gain, and about $1.2 billion of net cash proceeds, while reducing consolidated revenues from commodities marketing.
- SDG&E net income increased 20% to $339 million and SoCalGas increased 6% to $244 million, driven by the 2008 General Rate Case covering 2008-2011.
- Sempra Generation net income rose to $222 million and Sempra Pipelines & Storage to $106 million; Sempra LNG posted a $46 million loss as Energia Costa Azul began operations in May 2008.
- Long-term debt increased to roughly $6.5 billion from $4.6 billion, with 2008 issuances including $500 million of 6.15% notes due 2018 and $750 million of 8.9% and 9.8% notes; 2009 debt maturities total about $410 million.
- Major exposures include the DWR contract (about 10% of 2008 revenues, ending 2011), SDG&E's wildfire litigation, the FERC refund and manipulation proceedings, and sizable guarantees of about $2.6 billion to related parties including RBS Sempra Commodities and Rockies Express.
- Quarterly common dividend increased to $0.39 per share in February 2009 (from $0.35), while management indicated no share repurchases are expected in 2009.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2008filed February 24, 2009Financial Statements
| Revenue | $10.76B |
| Interest Expense | $253.00M |
| Net Income | $1.11B |
| EPS (Basic) | $2.25 |
| EPS (Diluted) | $2.21 |
| Shares Outstanding (Basic) | 494.77M |
| Shares Outstanding (Diluted) | 502.32M |
05—Questions
Frequently Asked Questions
How did the RBS Sempra Commodities joint venture change Sempra's financial results?
On April 1, 2008, Sempra contributed its commodities-marketing businesses to a partnership with The Royal Bank of Scotland and received about $1.2 billion of net cash. Sempra now accounts for its $1.6 billion investment under the equity method, recording $383 million of pretax equity earnings in 2008 and a $67 million after-tax gain. This lowered reported revenues and cost of sales sharply (Sempra Commodities revenues fell from $2.7 billion to $0.5 billion) but reduced the company's direct exposure to commodity trading risk. Sempra still provides transitional back-up guarantees, and RBS has agreed to indemnify Sempra for related claims.
What are the biggest risks to Sempra's earnings after 2010?
The largest identified risk is the expiration of the DWR power sales contract at Sempra Generation in September 2011, which currently supplies a significant share of Sempra Generation's revenues and is subject to ongoing litigation. Replacement contracts may provide substantially lower revenue. Other risks include SDG&E's potential liability from the 2007 San Diego wildfires beyond its $1.1 billion insurance coverage, the outcome of FERC refund and manipulation proceedings, dependence on RBS's capital commitments to the joint venture, and the ability to finance about $2.5 billion of planned 2009 capital spending in a tight credit market.
Is Sempra's dividend secure, and how is it being funded?
Sempra raised its quarterly common dividend to $0.39 per share in February 2009, an 11% increase, and targets a payout of 35% to 40% of net income. Dividends are paid from subsidiary distributions and external financing. SDG&E has suspended common dividends to Sempra Energy for several years to fund its capital program, and CPUC rules limit how much SDG&E and SoCalGas can lend or pay to the parent (about $150 million was available from SDG&E at year-end 2008 and none from SoCalGas). Future dividend growth therefore depends on utility earnings recovery and holding-company cash flows.
How are the regulated utilities performing and what drives their growth?
SDG&E and SoCalGas are regulated by the California Public Utilities Commission. The 2008 General Rate Case set revenue requirements through 2011, with average annual increases of roughly 3% for each utility, and excluded earnings caps during that period. SDG&E's earnings growth came from higher authorized margins, transmission investment (earning an 11.35% ROE under the FERC formula rate), and the Sunrise Powerlink transmission project approved in December 2008 at a cost cap of $1.883 billion. Customer growth is slowing, with meter additions falling to 0.4% at SDG&E and 0.7% at SoCalGas in 2008, and both companies expect further declines in 2009.
What is the status of Sempra's debt and credit position?
At year-end 2008 consolidated long-term debt, including current maturities, was about $6.95 billion, and short-term debt was $503 million. Committed credit lines totaled $4.3 billion with $2.9 billion unused, and the lines expire in 2011 and are syndicated among about 20 banks. Standard & Poor's rated Sempra's unsecured debt BBB+, with SDG&E and SoCalGas rated A, and Moody's and Fitch maintained stable outlooks as of January 2009, though S&P had placed a negative outlook on most companies in July 2008. The consolidated debt-to-capitalization ratio was 47%, and management said it intends to maintain investment-grade ratings.
06—Continue