01—Abstract
Summary
Summary of the 10-K filed February 24, 2011. Cited figures are marked; the original filing is the authoritative source.
Sempra Energy's 2010 combined Form 10-K (filed February 24, 2011, jointly with SDG&E, Pacific Enterprises and SoCalGas) reports consolidated 2010 earnings attributable to common shares of $739 milliona, or $2.98 diluted EPS, down from $1,119 million ($4.52) in 2009.
The decline was driven primarily by a $139 millionb after-tax write-down of the investment in RBS Sempra Commodities, $87 million and $6 million of after-tax energy crisis litigation expense at Sempra Generation and Sempra Commodities, and a negative $314 million pretax equity result from the RBS joint venture. Partially offsetting these were improved results at Sempra Pipelines & Storage ($159 million vs. $101 million), Sempra LNG ($68 million vs. $16 million) and the Sempra Utilities, where SDG&E earned $369 million and SoCalGas $286 million. The company is largely exiting its commodities-marketing business.
Sempra and RBS divested substantially all of the RBS Sempra Commodities businesses in 2010 and early 2011, and Sempra expects its share of total proceeds to be $1.8 billion to $1.9 billionc, of which about $1 billion had been received by year-end. Management also flagged a sizable earnings headwind ahead: Sempra Generation's contract with the California Department of Water Resources, which contributed 8% of 2010 revenues, expires in September 2011, and replacement contracts are expected to produce substantially lower earnings at current market prices. Capital intensity is high, with about $3.8 billion of planned 2011 capital expenditures and roughly $5 billion of planned spending at the non-utility businesses over five years, including the roughly $875 million acquisition of AEI's interests in Chilquinta Energía and Luz del Sur.
The utilities face important regulatory events. SDG&E and SoCalGas filed 2012 General Rate Case requests, and bonus depreciation under the 2010 Tax Act is expected to reduce their rate base and the revenue increases ultimately approved. SDG&E also carries significant contingent exposure from the October 2007 San Diego County wildfires, where its settlements and estimated claims (about $1.9 billiond) exceed its $1.1 billion of liability insurance.
Management believes the excess is probably recoverable from customers, so it expects no significant earnings impact, though cash flow timing and the need for future regulatory approval remain risks. The board raised the quarterly dividend to $0.48 per share, targeting a 45% to 50% payout ratio.
02—Key points
Key Highlights
- Consolidated 2010 earnings attributable to common shares fell 34% to $739 million ($2.98 diluted EPS) from $1,119 million ($4.52) in 2009, largely due to a $139 million after-tax write-down of the RBS Sempra Commodities investment and about $93 million of after-tax energy crisis litigation settlement expense.
- Sempra and RBS sold substantially all RBS Sempra Commodities businesses in 2010 and early 2011; Sempra expects total proceeds of $1.8 billion to $1.9 billion, including roughly $1 billion already received, and its remaining investment balance was $787 million at year-end 2010.
- Sempra Generation's DWR power contract (8% of 2010 revenues) expires in September 2011, and replacement contracts or merchant sales are expected to produce substantially lower earnings at current market prices.
- SDG&E wildfire litigation: settlement and estimated claims of about $1.9 billion exceed $1.1 billion of liability insurance; management expects substantially all excess costs to be recovered from customers, with a $300 million Cox settlement receivable and $762 million of wildfire reserves on the balance sheet.
- Capital program is large: about $3.8 billion of planned 2011 capital spending, including $1.9 billion at SDG&E (Sunrise Powerlink, advanced meters) and $720 million at SoCalGas, plus the roughly $875 million AEI acquisition in South America.
- Pending 2012 General Rate Case requests (SDG&E seeking a $253 million increase and SoCalGas $280 million) face a likely reduction from bonus depreciation effects; final CPUC decisions are expected in late 2011.
- Board raised the quarterly common dividend to $0.48 per share ($1.92 annualized) from $0.39, with a target payout ratio of 45% to 50% of earnings; a $500 million share repurchase under an accelerated share acquisition program was expected to complete in Q1 2011.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2010filed February 24, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $9.00B$8.11B | +11.1% |
| Interest Expense | $436.00M$367.00M | +18.8% |
| Net Income | $709.00M$1.12B | −36.6% |
| EPS (Basic) | $1.45$2.30 | −37.0% |
| EPS (Diluted) | $1.43$2.26 | −36.7% |
| Shares Outstanding (Basic) | 489.47M486.68M | +0.6% |
| Shares Outstanding (Diluted) | 495.88M494.77M | +0.2% |
05—Questions
Frequently Asked Questions
Why did Sempra's 2010 earnings decline so sharply compared with 2009?
Earnings attributable to common shares fell to $739 million from $1,119 million. The main drivers were a $139 million after-tax write-down of the investment in RBS Sempra Commodities, after-tax energy crisis litigation expense of about $87 million at Sempra Generation and $6 million at Sempra Commodities, and a much lower equity contribution from the commodities joint venture (a pretax loss of $314 million in 2010 versus income of $463 million in 2009). Improved results at Sempra Pipelines & Storage, Sempra LNG and the Sempra Utilities partly offset these charges.
What is the status of the exit from the RBS Sempra Commodities joint venture?
In 2010 and early 2011, Sempra and RBS sold substantially all of the partnership's businesses in four transactions. Sempra expects its total share of proceeds and distributions to be $1.8 billion to $1.9 billion, including about $1.3 billion from completed transactions and $500 million to $600 million from cash, receivables and net margin still to be collected. Sempra is also providing transitional back-up guarantees, which buyers are obligated to replace and indemnify, and it has guaranteed $570 million of obligations to related parties at year-end 2010.
What risks does the expiration of the DWR contract pose to Sempra Generation?
Sempra Generation's 10-year agreement with the California Department of Water Resources, which supplies up to 1,900 MW, provided 8% of Sempra's 2010 revenues and terminates in September 2011. Management said that based on current market prices, replacement contracts or merchant sales would provide substantially lower earnings, and that Sempra Generation may not be able to replace all of the lost revenue. Cash flows from Sempra Generation are also expected to decline.
How significant is the SDG&E wildfire litigation for investors?
SDG&E faces numerous lawsuits from the October 2007 San Diego County wildfires. Its settlements and estimated claims of roughly $1.9 billion exceed its $1.1 billion of liability insurance and $444 million received or to be received from Cox Communications. Management concluded it is probable that customers will be required to cover substantially all reasonable costs above insurance, so it recorded a matching regulatory asset and expects no significant earnings impact. Investors should note that recovery requires future CPUC action, that cash flow timing may lag for years, and that a negative regulatory outcome would likely have a material adverse effect on Sempra's and SDG&E's cash flows and results.
What does the dividend increase and share repurchase mean for shareholders?
On February 18, 2011, the board raised the quarterly dividend to $0.48 per share, or $1.92 annually, up from $0.39, and targets a payout of 45% to 50% of earnings. The company also prepaid $500 million in September 2010 under a collared accelerated share acquisition program, expected to complete in Q1 2011, with roughly $500 million remaining under the board's repurchase authorization. Shares outstanding fell to about 240 million at year-end 2010 from 247 million a year earlier.
06—Continue