01—Abstract
Summary
Summary of the 10-K filed February 28, 2012. Cited figures are marked; the original filing is the authoritative source.
Sempra Energy's 2011 combined Form 10-K (filed with SDG&E and SoCalGas) shows a year of strong reported earnings, driven largely by a non-recurring $277 milliona pre-tax, non-taxable remeasurement gain on its South American utilities.
Consolidated earnings attributable to common shares rose to $1,357 millionb ($5.62 diluted EPS) from $739 million ($2.98) in 2010, which was depressed by a $305 million pre-tax RBS Sempra Commodities write-down and $159 million of energy crisis litigation charges. Excluding these items, underlying performance was improved at the Sempra Utilities, Sempra LNG and Sempra Pipelines & Storage, while Sempra Generation earnings fell as its DWR power contract expired on September 30, 2011. The key forward-looking investor issues are regulatory and capital-intensity.
The 2012 General Rate Case requests for SDG&E ($235 millionc increase, 14.6%) and SoCalGas ($268 million increase, 14.5%) face opposition from ratepayer advocates seeking roughly a 5% cut, and a material reduction would hurt 2012 cash flows. Capital spending is heavy: about $2.8 billion in 2011 and roughly $3.1 billion planned for 2012, with a five-year utility plan of $5.8 billion at SDG&E and $5.0 billion at SoCalGas. SoCalGas expects its dividends to be reduced or suspended for several years, and SDG&E does not expect to pay common dividends to Sempra in 2012.
Sempra's dividend was nonetheless raised to $0.60d per quarter in February 2012. SDG&E also carries material legal and operational exposure: the 2007 San Diego County wildfire claims produced a $594 million regulatory asset that depends on future CPUC recovery, and the September 2011 outage and the SONGS steam generator leak in January 2012 are open risks. The company's effective tax rate is expected to rise to about 29% in 2012 because of a change in how solar investment tax credits are recognized, which lowers near-term reported net income by about $26 million in 2011 on a retroactive basis.
02—Key points
Key Highlights
- Reported 2011 earnings of $1.357 billion ($5.62 diluted EPS), up from $739 million ($2.98) in 2010, helped by a $277 million non-taxable remeasurement gain from the April 2011 acquisition of additional interests in Chilquinta Energía and Luz del Sur.
- Sempra Pipelines & Storage earnings rose to $527 million from $159 million, while Sempra Generation earnings fell to $137 million as the DWR contract expired September 30, 2011 and lower market pricing applies going forward.
- The 2012 GRC requests seek revenue increases of $235 million at SDG&E (14.6%) and $268 million at SoCalGas (14.5%), while intervenors recommend about a 5% reduction versus 2011, with a final CPUC decision expected in 2012 retroactive to January 1.
- Capital spending was about $2.8 billion in 2011 and is expected to be about $3.1 billion in 2012, including the Sunrise Powerlink (in service second half of 2012) and Pipeline Safety Enhancement Plan work, with the Phase 1 PSEP estimated at $3.1 billion over 2012 to 2022.
- SDG&E holds a $594 million regulatory asset for 2007 wildfire costs in excess of insurance and the $444 million Cox settlement, but recovery from customers requires future CPUC action and timing could strain cash flow.
- Sempra's quarterly dividend was increased to $0.60 per share in February 2012 (from $0.48), while SoCalGas expects dividends to be reduced or suspended temporarily and SDG&E does not plan common dividends to Sempra in 2012.
- The effective tax rate is projected to rise from 21% in 2011 to about 29% in 2012 due to the switch to the deferral method for solar investment tax credits, with the 2011 and 2010 restatement impacts estimated at $26 million and $30 million.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2011filed February 28, 2012Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $10.04B$9.00B | +11.5% |
| Interest Expense | $465.00M$436.00M | +6.7% |
| Net Income | $1.33B$709.00M | +87.7% |
| EPS (Basic) | $2.77$1.45 | +91.4% |
| EPS (Diluted) | $2.75$1.43 | +92.7% |
| Shares Outstanding (Basic) | 479.44M489.47M | −2.0% |
| Shares Outstanding (Diluted) | 483.05M495.88M | −2.6% |
05—Questions
Frequently Asked Questions
Why did Sempra's reported 2011 earnings nearly double, and how much of that is recurring?
Earnings rose to $1.357 billion from $739 million mainly because 2010 included a $305 million pre-tax ($139 million after-tax) write-down of the RBS Sempra Commodities investment and $93 million after-tax of energy crisis litigation expense. 2011 included a $277 million non-taxable remeasurement gain tied to the South American acquisitions, which is non-recurring. Investors should focus on the underlying operating improvements at the utilities and Sempra LNG, net of lower Sempra Generation earnings after the DWR contract ended.
What is the biggest regulatory risk to the utilities' 2012 earnings?
The 2012 General Rate Case is the key near-term item. The utilities requested increases of about 14.5% for SDG&E and SoCalGas, while the Division of Ratepayer Advocates recommends cutting revenue requirements by about 5% versus 2011. The filing states that a significantly lower authorized revenue requirement could materially hurt 2012 cash flows and results, since rates are only retroactively adjusted once the CPUC decides.
How significant is SDG&E's exposure to the 2007 wildfire litigation?
SDG&E has settled most homeowner insurer claims and has paid or reserved amounts exceeding its $1.1 billion liability insurance and $444 million Cox settlement. It recorded a $594 million regulatory asset for costs it expects to recover from customers, and it believes recovery is probable. However, the recovery needs future CPUC approval, and a negative outcome or payment timing differences could materially affect cash flows and results. About $596 million of wildfire reserves were recorded at year-end 2011.
How will the solar tax credit accounting change affect future reported earnings?
Starting in Q1 2012, Sempra Generation will switch from the flow-through method to the deferral method for investment tax credits on solar projects, which reduces the book basis of the assets and lowers depreciation. This raises future reported earnings but decreases 2011 and 2010 net income by an estimated $26 million and $30 million on a retroactive basis. The company expects its effective tax rate to rise to about 29% in 2012, with no change to cash flows.
Is the dividend sustainable given the heavy capital spending plans?
Sempra raised its quarterly dividend to $0.60 in February 2012, and its board has discretion over payments. However, the company plans roughly $3.1 billion in 2012 capital and investment spending and about $10.8 billion over five years at the utilities. SoCalGas expects its own dividends to Sempra to be reduced or suspended for several years, and SDG&E does not expect to pay a common dividend to Sempra in 2012, so Sempra's parent-level cash flow depends heavily on subsidiary distributions and external financing.
06—Continue