01—Abstract
Summary
Summary of the 10-K filed February 26, 2010. Cited figures are marked; the original filing is the authoritative source.
Sempra Energy's 2009 combined Form 10-K (filed February 26, 2010) covers Sempra Energy and its subsidiaries SDG&E, Pacific Enterprises and SoCalGas.
Sempra reported 2009 earnings of $1,119 milliona, or $4.52 diluted EPS, essentially flat with $1,113 million ($4.43) in 2008, on total revenues of $8.1 billion, down from $10.8 billion as natural gas prices fell sharply. Utility earnings rose, with SDG&E at $344 million and SoCalGas at $273 million, while the Sempra Global businesses were mixed: Sempra Generation fell to $162 million, Sempra Commodities held at $345 million through its equity stake in RBS Sempra Commodities, and Sempra LNG swung to a $16 million profit. Parent and other losses widened to $122 million on higher interest expense.
The central investor issue is the pending sale of RBS Sempra Commodities businesses to J.P. Morgan Ventures, agreed February 16, 2010 and expected to close in Q2 2010. Sempra expects proceeds of roughly $835 millionb, but the businesses being sold have historically generated 40 to 60 percent of the partnership's earnings, so Sempra's future equity earnings from the joint venture are likely to fall materially.
Sempra is also exposed to SDG&E's 2007 wildfire litigation, where remaining insurance coverage is about $20 millionc after homeowner-insurer settlements and remaining unreserved claims are expected to substantially exceed insurance. Sempra intends to seek recovery of excess amounts from customers, but that outcome is uncertain. Longer term, Sempra plans substantial capital spending, about $3 billion in 2010 and roughly $11 billion over five years, funded by operations and debt.
Key growth projects include the Sunrise Powerlink transmission line, Cameron and Energia Costa Azul LNG terminals, natural gas storage, and renewable generation. The company is also reducing exposure to Sempra Generation's DWR power contract, which expires in late 2011 and is expected to produce lower earnings on replacement contracts. Credit ratings remained investment grade, with a negative Fitch watch tied to the RBS joint venture.
02—Key points
Key Highlights
- 2009 diluted EPS of $4.52 versus $4.43 in 2008; net earnings of $1,119 million, with total revenues down 25% to $8.1 billion on lower natural gas prices.
- Pending sale of RBS Sempra Commodities businesses to J.P. Morgan Ventures for a purchase price tied to book value plus $468 million; Sempra's share is 53-1/3%, with expected proceeds of about $835 million and expected close in Q2 2010.
- The businesses being sold historically generated 40 to 60 percent of the partnership's earnings, so Sempra's future equity earnings from the joint venture are expected to decline substantially.
- SDG&E 2007 wildfire litigation: $270 million reserve offset by a $273 million insurance receivable; remaining insurance coverage about $20 million; unreserved claims expected to exceed coverage, with potential recovery from customers still uncertain.
- Capital expenditures planned at about $3 billion in 2010, with roughly $6.9 billion at SDG&E and $3.7 billion at SoCalGas over five years, plus about $4 billion at other subsidiaries.
- Sempra Generation's DWR power contract (up to 1,900 MW) expires in late 2011 and will likely be replaced at less favorable pricing, lowering future earnings; the DWR also continues to litigate the contract.
- Dividend increased to $0.39 per quarter ($1.56 annualized); SDG&E and SoCalGas plan to limit common dividends to fund capital projects, and credit ratings remain investment grade.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2009filed February 26, 2010Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $8.11B$10.76B | −24.7% |
| Interest Expense | $367.00M$253.00M | +45.1% |
| Net Income | $1.12B$1.11B | +0.5% |
| EPS (Basic) | $2.30$2.25 | +2.2% |
| EPS (Diluted) | $2.26$2.21 | +2.0% |
| Shares Outstanding (Basic) | 486.68M494.77M | −1.6% |
| Shares Outstanding (Diluted) | 494.77M502.32M | −1.5% |
05—Questions
Frequently Asked Questions
Why did Sempra's revenue fall so sharply in 2009 while earnings held steady?
Total revenues fell about 25%, from $10.8 billion to $8.1 billion, mainly because natural gas prices dropped by roughly half, which lowered the cost of gas passed through to utility customers. Earnings stayed flat because the regulated utilities recover those commodity costs, and because the deconsolidation of the commodities-marketing businesses into the RBS joint venture moved their results to equity earnings, which were $463 million in 2009.
What is the impact of the sale of RBS Sempra Commodities businesses on Sempra's earnings?
Sempra will receive roughly $835 million in proceeds, but the sale removes businesses that historically produced 40 to 60 percent of the partnership's earnings. The retained North American power and natural gas trading businesses will continue to generate Sempra's share of income, but at a lower level. The transaction also requires Sempra to evaluate effects from goodwill allocation and IFRS/US GAAP differences, and the letter agreement with RBS contemplates eliminating RBS's 15% preferred return and moving to a 50/50 income split once Sempra's invested capital falls to $950 million or less.
How much financial exposure does SDG&E still face from the 2007 San Diego wildfires?
SDG&E has settled claims with homeowner insurers, paying or agreeing to pay 57.5% of about $1.6 billion, and has reserved $270 million for remaining wildfire liabilities, offset by a $273 million insurance receivable. About 2,500 plaintiffs and government entities have roughly $565 million in demands. Remaining insurance is about $20 million, so SDG&E expects unreserved costs to substantially exceed coverage before any recovery from Cox Communications or other parties. It plans to seek recovery of excess amounts from customers at the FERC and CPUC, but it has not concluded that such recovery is assured.
What are the main growth projects Sempra is investing in?
Key projects include the 120-mile Sunrise Powerlink transmission line (expected in service in 2012, with a $1.9 billion cost cap), natural gas storage projects at Liberty, Bay Gas and Mississippi Hub, the $300 million acquisition of El Paso's Mexican pipeline assets, Copper Mountain Solar and the first phase of Mesquite Solar, and expansion of the Energia Costa Azul LNG terminal. Sempra Pipelines & Storage also holds a 25% interest in the Rockies Express pipeline, in which it invested $625 million in 2009.
What risks does the DWR contract present for Sempra Generation?
The 10-year DWR contract, which supplies up to 1,900 MW, expires in late 2011 and produces a significant portion of Sempra Generation's revenue. Replacement contracts or merchant sales may produce substantially lower earnings. The DWR has also challenged the contract in courts, at the FERC, and in arbitration; in November 2009 a San Diego jury rejected the DWR's claims, though the DWR has appealed.
06—Continue