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| SRE > SEC Filings for SRE > Form 10-Q on 31-Jul-2009 | All Recent SEC Filings |
31-Jul-2009
Quarterly Report
You should read the following discussion in conjunction with the financial statements contained in this Form 10-Q, "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in our 2008 Annual Report on Form 10-K (Annual Report), and "Risk Factors" contained in our Annual Report and Part II of this Form 10-Q.
OVERVIEW
Sempra Energy is a Fortune 500 energy services holding company whose business units provide electric, natural gas and other energy products and services to their customers. Our operations are divided principally between the Sempra Utilities and Sempra Global. The Sempra Utilities consist of two California regulated public utility companies, 1) San Diego Gas & Electric Company (SDG&E) and 2) Southern California Gas Company (SoCalGas). Sempra Global consists of businesses engaged in providing energy products and services.
This report includes information for the following separate registrants:
§
Sempra Energy and its consolidated entities
§
SDG&E
§
Pacific Enterprises (PE), the holding company for SoCalGas
§
SoCalGas
References in this report to "we," "our" and "Sempra Energy Consolidated" are to Sempra Energy and its consolidated entities, collectively, unless otherwise indicated by the context.
PE's operations consist solely of those of SoCalGas and additional items (e.g., cash, intercompany accounts and equity) attributable to being a holding company for SoCalGas.
Below are the summary descriptions of our operating business units.
SEMPRA BUSINESS UNITS
The Sempra Utilities consist of SDG&E and SoCalGas.
SEMPRA UTILITIES
MARKET SERVICE TERRITORY
SAN DIEGO GAS & ELECTRIC § Serves the county of San
COMPANY (SDG&E) Provides electricity to Diego, CA and southern
A regulated public 3.4 million consumers (1.4 Orange County covering
utility; infrastructure million meters) 4,100 square miles
supports electric §
distribution and Provides natural gas to
transmission, and natural 3.1 million consumers
gas distribution (840,000 meters)
SOUTHERN CALIFORNIA GAS § Southern California and
COMPANY (SOCALGAS) Residential, commercial, portions of Central
A regulated public industrial, utility California (excluding San
utility; infrastructure electric generation and Diego County, the city of
supports natural gas wholesale customers Long Beach and the desert
distribution, transmission § area of San Bernardino
and storage Covers a population of County) covering 20,000
20.5 million (5.7 million square miles
meters)
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Sempra Global is a holding company for most of our subsidiaries that are not subject to California utility regulation. Sempra Global's principal business units, which provide energy-related products and services, are
§
Sempra Commodities
§
Sempra Generation
§
Sempra Pipelines & Storage
§
Sempra LNG
SEMPRA GLOBAL
MARKET GEOGRAPHIC REGION
SEMPRA COMMODITIES § §
RBS Sempra Commodities, a Natural gas; natural gas Global
joint venture with The liquids
Royal Bank of Scotland §
(RBS), is a commodities- Power
marketing business §
Petroleum and petroleum
products
§
Coal
§
Emissions
§
Ethanol
§
Base metals
SEMPRA GENERATION § §
Develops, owns and Wholesale electricity U.S.A.
operates electric power §
plants Mexico
SEMPRA PIPELINES & STORAGE § §
Develops, owns and Natural gas U.S.A.
operates, or holds § §
interests in, natural gas Electricity Mexico
pipelines and storage §
facilities, and natural Argentina
gas and electric service §
providers Chile
§
Peru
SEMPRA LNG § §
Develops, owns and Natural gas U.S.A.
operates receipt terminals §
for importing liquefied Mexico
natural gas (LNG)
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RESULTS OF OPERATIONS
We discuss the following in Results of Operations:
§
Overall results of our operations and factors affecting those results
§
Our business unit results
§
Significant changes in revenues, costs and earnings between periods
In the six months ended June 30, 2009, our earnings increased $28 million (6%) to $514 million primarily due to improved earnings at the Sempra Utilities, offset by lower earnings at Sempra Pipelines & Storage. The earnings at Sempra Pipelines & Storage were negatively impacted by a second quarter 2009 after-tax asset write-off of $64 million related to assets at its Liberty Gas Storage (Liberty) natural gas storage facility. We discuss the write-off in Note 10 of the Notes to Condensed Consolidated Financial Statements herein and in "Factors Influencing Future Performance - Sempra Pipelines & Storage - Liberty Gas Storage (Liberty)" below.
Diluted earnings per share for the first six months increased by $0.19 per share, $0.11 per share from increased earnings and $0.08 per share from a reduction in shares outstanding, primarily as a result of our $1 billion share repurchase in 2008.
In the three months ended June 30, 2009, our earnings decreased $46 million (19%) to $198 million primarily due to the asset write-off recorded at Sempra Pipelines & Storage and decreased earnings at Sempra Commodities. Diluted earnings per share for the three months decreased by $0.18 per share, primarily from decreased earnings.
The following table shows our earnings by business unit, which we discuss below in "Business Unit Results."
EARNINGS BY BUSINESS UNIT
(Dollars in millions)
Six months ended June 30,
2009 2008
Sempra Utilities:
SDG&E* $ 169 33 % $ 135 28 %
SoCalGas* 124 24 113 23
Sempra Global:
Sempra Commodities** 199 39 189 39
Sempra Generation 76 15 68 14
Sempra Pipelines & Storage 10 2 50 10
Sempra LNG (19) (4) (37) (8)
Parent and other*** (45) (9) (32) (6)
Earnings $ 514 100 % $ 486 100 %
Three months ended June 30,
2009 2008
Sempra Utilities:
SDG&E* $ 70 35 % $ 61 25 %
SoCalGas* 65 33 56 23
Sempra Global:
Sempra Commodities** 85 43 130 53
Sempra Generation 33 17 23 9
Sempra Pipelines & Storage (27) (14) 24 10
Sempra LNG (12) (6) (28) (11)
Parent and other*** (16) (8) (22) (9)
Earnings $ 198 100 % $ 244 100 %
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BUSINESS UNIT RESULTS
The following section is a discussion of earnings by business unit, as it appears in the table above.
BUSINESS UNIT EARNINGS -- SEMPRA UTILITIES
(Dollars in millions)
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SDG&E
SDG&E business unit earnings were
§
$169 million for the first six months of 2009 ($171 million before preferred dividends)
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$135 million for the first six months of 2008 ($137 million before preferred dividends)
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$70 million in the three months ended June 30, 2009 ($71 million before preferred dividends)
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$61 million in the three months ended June 30, 2008 ($62 million before preferred dividends)
The increase of $34 million (25%) in the first six months of 2009 was due to:
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$32 million higher authorized margin due to the implementation of the 2008 General Rate Case (GRC) decision in the third quarter of 2008;
§
$12 million higher California Public Utilities Commission (CPUC) authorized margin in excess of higher operation and maintenance expenses;
§
$10 million favorable impact from the resolution of litigation in 2009 as opposed to litigation settlement costs in 2008; and
§
$3 million higher favorable impact from the resolution of prior year's income tax issues; offset by
§
$16 million from the resolution of regulatory matters in 2009 ($9 million) that adversely impacted earnings compared to the resolution of regulatory matters in 2008 ($7 million) that favorably impacted earnings; and
§
$10 million due to lower regulatory awards in 2009.
In the three months ended June 30, 2009, SDG&E's earnings increased $9 million (15%) due to:
§
$16 million higher authorized margin due to the implementation of the 2008 GRC decision in the third quarter of 2008;
§
$10 million favorable impact from the resolution of prior year's income tax issues in 2009;
§
$4 million of litigation settlement costs in 2008; and
§
$2 million due to higher electric transmission margin in 2009; offset by
§
$16 million from the resolution of regulatory matters in 2009 ($9 million) that adversely impacted earnings compared to the resolution of regulatory matters in 2008 ($7 million) that favorably impacted earnings; and
§
$8 million due to lower regulatory awards in 2009.
SoCalGas
SoCalGas business unit earnings were
§
$124 million for the first six months of 2009 ($125 million before preferred dividends)
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$113 million for the first six months of 2008 ($114 million before preferred dividends)
§
$65 million in the three months ended June 30, 2009 ($66 million before preferred dividends)
§
$56 million in the three months ended June 30, 2008 ($57 million before preferred dividends)
The increase of $11 million (10%) in the first six months of 2009 was due to:
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$7 million higher CPUC authorized margins in excess of higher operation and maintenance expenses;
§
$7 million from a lower effective income tax rate primarily due to higher software development cost deductions in 2009; and
§
$7 million higher authorized margin due to the implementation of the 2008 GRC decision in the third quarter of 2008; offset by
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$5 million higher net interest expense;
§
$3 million higher net bad debt expense; and
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$3 million lower regulatory awards.
In the three months ended June 30, 2009, SoCalGas' earnings increased $9 million (16%) due to:
§
$5 million higher CPUC authorized margins in excess of higher operation and maintenance expenses;
§
$4 million from a lower effective income tax rate primarily due to higher software development cost deductions in 2009; and
§
$3 million higher authorized margin due to the implementation of the 2008 GRC decision in the third quarter of 2008; offset by
§
$3 million higher net interest expense.
BUSINESS UNIT EARNINGS (LOSSES) -- SEMPRA GLOBAL
(Dollars in millions)
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Sempra Commodities
Sempra Commodities recorded business unit earnings of:
§
$199 million for the first six months of 2009
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$189 million for the first six months of 2008
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$85 million in the three months ended June 30, 2009
§
$130 million in the three months ended June 30, 2008
Results for the first six months of 2009 and the second quarter of 2008 primarily represent our equity earnings from RBS Sempra Commodities, formed on April 1, 2008. Results for the first quarter of 2008, included in the 2008 six-month period, represent 100% of the commodities-marketing businesses' earnings until the formation of the joint venture. The first-quarter 2008 results included a $17 million write-down related to a counterparty credit issue.
The decrease of $45 million (35%) in the three months ended June 30, 2009 was due primarily to the following items recorded in the second quarter of 2008:
§
$67 million gain on the transaction with RBS; offset by
§
$30 million of expenses, primarily charges for litigation and an unfavorable impact of prior year's income tax issues.
Sempra Generation
Sempra Generation recorded business unit earnings of:
§
$76 million for the first six months of 2009
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$68 million for the first six months of 2008
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$33 million in the three months ended June 30, 2009
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$23 million in the three months ended June 30, 2008
The increase of $8 million (12%) in the first six months of 2009 included
§
$20 million improved mark-to-market earnings on forward contracts with RBS Sempra Commodities and other counterparties primarily due to a $21 million loss in 2008; offset by
§
$13 million lower earnings from operations primarily due to less favorable market pricing and scheduled plant maintenance.
The increase of $10 million (43%) in the three months ended June 30, 2009 included
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$23 million improved mark-to-market earnings on forward contracts with RBS Sempra Commodities and other counterparties primarily due to a $20 million loss in 2008; offset by
§
$8 million lower earnings from operations primarily due to less favorable market pricing; and
§
$5 million higher taxes resulting from a delay in the expected completion date of planned solar investments.
Sempra Pipelines & Storage
Sempra Pipelines & Storage recorded business unit earnings (losses) of:
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$10 million for the first six months of 2009
§
$50 million for the first six months of 2008
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$(27) million in the three months ended June 30, 2009
§
$24 million in the three months ended June 30, 2008
The decrease of $40 million (80%) in the first six months of 2009 was primarily due to:
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$64 million lower earnings from a write-off of assets at Liberty; and
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$14 million lower earnings due to foreign currency exchange-rate effects, primarily from its investment in Chile; offset by
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$14 million higher earnings from the commencement of LNG-related pipeline operations in Mexico in the second quarter of 2008;
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$11 million higher earnings from its investment in South America;
§
$6 million lower taxes on foreign income; and
§
$6 million earnings from the operations of Mobile Gas, acquired in October 2008.
The decrease of $51 million (213%) in the three months ended June 30, 2009 was primarily due to:
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$64 million lower earnings from the write-off of assets at Liberty; and
§
$7 million lower earnings due to foreign currency exchange-rate effects, primarily from its investment in Chile; offset by
§
$9 million higher earnings from its investment in South America;
§
$7 million higher earnings from the commencement of LNG-related pipeline operations in Mexico in the second quarter of 2008; and
§
$6 million lower taxes on foreign income.
Sempra LNG
Sempra LNG recorded losses of:
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$19 million for the first six months of 2009
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$37 million for the first six months of 2008
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$12 million in the three months ended June 30, 2009
§
$28 million in the three months ended June 30, 2008
The decrease in losses of $18 million (49%) in the first six months of 2009 included
§
$18 million improved mark-to-market results related to a natural gas marketing agreement with RBS Sempra Commodities primarily due to losses of $17 million in 2008; and
§
$11 million lower income tax expense related to Mexican currency translation and inflation adjustments; offset by
§
a $10 million after-tax cash payment received in the first quarter of 2008 for the early termination of a capacity agreement for the Cameron LNG receipt terminal.
The decrease in losses of $16 million (57%) in the three months ended June 30, 2009 included
§
$9 million improved mark-to-market results related to a natural gas marketing agreement with RBS Sempra Commodities primarily due to losses of $11 million in 2008; and
§
$7 million lower income tax expense related to Mexican currency translation and inflation adjustments.
Parent and Other
Losses for Parent and Other were
§
$45 million for the first six months of 2009
§
$32 million for the first six months of 2008
§
$16 million in the three months ended June 30, 2009
§
$22 million in the three months ended June 30, 2008
The increase in losses of $13 million (41%) in the first six months of 2009 was due to:
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$29 million higher net interest expense primarily from long-term debt issued in 2008; and
§
$9 million favorable impact of an interest adjustment in 2008 related to litigation reserves; offset by
§
$23 million lower income tax expense; and
§
$3 million higher investment gains on dedicated assets in support of our executive retirement and deferred compensation plans due to improved market conditions. This amount is net of the increase in deferred compensation liability associated with the investments.
The decrease in losses of $6 million (27%) in the three months ended June 30, 2009 was due to:
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$21 million lower income tax expense; and
§
$11 million higher investment gains on dedicated assets in support of our executive retirement and deferred compensation plans due to improved market conditions. This amount is net of the increase in deferred compensation liability associated with the investments; offset by
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$15 million higher net interest expense primarily from long-term debt issued in 2008, and to a lesser extent, higher interest rates on this long-term debt than on short-term debt replaced; and
§
$9 million favorable impact of an interest adjustment in 2008 related to litigation reserves.
CHANGES IN REVENUES, COSTS AND EARNINGS
This section contains a discussion of the differences between periods in the specific line items of the Condensed Consolidated Statements of Operations for Sempra Energy, SDG&E, PE and SoCalGas.
Sempra Utilities Revenues
The current regulatory framework permits the cost of natural gas purchased for core customers (primarily residential and small commercial and industrial customers) to be passed on to customers substantially as incurred. However, SoCalGas' Gas Cost Incentive Mechanism (GCIM) provides SoCalGas the opportunity to share in the savings and/or costs from buying natural gas for its core customers at prices below or above market-based monthly benchmarks. The mechanism permits full recovery of costs incurred when average purchase costs are within a price range around a monthly benchmark price. Any higher costs or savings realized outside this range are shared between the core customers and SoCalGas. We provide further discussion in Note 9 of the Notes to Condensed Consolidated Financial Statements herein.
The regulatory framework permits SDG&E to recover the actual cost incurred to generate or procure electricity based on annual estimates of the cost of electricity supplied to core customers. The differences in cost between estimates and actual are recovered in the next year through rates.
Sempra Utilities: Natural Gas Revenues and Cost of Natural Gas
The tables below show natural gas revenues for Sempra Energy, SDG&E and SoCalGas for the six-month periods ended June 30. The Sempra Energy amounts reflect SDG&E and SoCalGas revenues, net of intercompany transactions. Because the cost of natural gas is recovered in rates, changes in the cost are reflected in the changes in revenues.
SEMPRA ENERGY CONSOLIDATED
NATURAL GAS SALES, TRANSPORTATION AND EXCHANGE
(Volumes in billion cubic feet, dollars in millions)
Transportation
Natural Gas Sales and Exchange Total
Customer class Volumes Revenue Volumes Revenue Volumes Revenue
2009:
Residential 149 $ 1,280 1 $ 2 150 $ 1,282
Commercial and
industrial 62 413 130 104 192 517
Electric generation
plants - - 110 28 110 28
Wholesale - - 10 3 10 3
211 $ 1,693 251 $ 137 462 1,830
Other revenues 48
Balancing accounts* (5)
Total $ 1,873
2008:
Residential 160 $ 2,095 1 $ 2 161 $ 2,097
Commercial and
industrial 65 768 140 83 205 851
Electric generation
plants - - 122 44 122 44
Wholesale - - 11 4 11 4
225 $ 2,863 274 $ 133 499 2,996
Other revenues 73
Balancing accounts* 29
Total $ 3,098
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During the six months ended June 30, 2009, our natural gas revenues decreased by $1.2 billion (40%) to $1.9 billion, and the cost of natural gas decreased by $1.2 billion (61%) to $789 million. During the three months ended June 30, 2009, our natural gas revenues decreased by $524 million (40%) to $782 million, and the cost of natural gas decreased by $535 million (68%) to $249 million. The decreases in revenues and cost were primarily due to substantially lower natural gas prices in 2009. To a lesser extent, the decreases were due to lower sales volumes due to noticeably milder temperatures in 2009. We discuss the decrease in the cost of natural gas individually for SDG&E and SoCalGas below.
SDG&E
NATURAL GAS SALES, TRANSPORTATION AND EXCHANGE
(Volumes in billion cubic feet, dollars in millions)
Transportation
Natural Gas Sales and Exchange Total
Customer class Volumes Revenue Volumes Revenue Volumes Revenue
2009:
Residential 19 $ 188 - $ - 19 $ 188
Commercial and industrial 8 59 3 5 11 64
Electric generation plants - - 30 9 30 9
27 $ 247 33 $ 14 60 261
Other revenues 16
Balancing accounts (2)
Total* $ 275
2008:
Residential 20 $ 285 - $ - 20 $ 285
Commercial and industrial 9 104 4 5 13 109
Electric generation plants - - 32 12 32 12
29 $ 389 36 $ 17 65 406
Other revenues 12
Balancing accounts (2)
Total* $ 416
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During the six months ended June 30, 2009, SDG&E's natural gas revenues decreased by $141 million (34%) to $275 million, and the cost of natural gas decreased by $141 million (53%) to $124 million. During the three months ended June 30, 2009, SDG&E's natural gas revenues decreased by $75 million (44%) to $96 million, and the cost of natural gas decreased by $76 million (67%) to $37 million. For the first six months of 2009, SDG&E's average cost of natural gas was $4.59 per thousand cubic feet (Mcf) compared to $9.03 per Mcf for the first six months of 2008, a 49-percent decrease of $4.44 per Mcf, resulting in lower revenues and cost of $120 million. The average cost of natural gas for the second quarter of 2009 was $3.57 per Mcf compared to $10.72 per Mcf in the . . .
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