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| SRE > SEC Filings for SRE > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-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 § §
Holds an interest in RBS Natural gas; natural gas Global
Sempra Commodities, a liquids
commodities-marketing §
business joint venture Power
with The Royal Bank of §
Scotland (RBS) Petroleum and petroleum
products
§
Coal
§
Emissions
§
Ethanol
§
Base metals
SEMPRA GENERATION § §
Develops, owns and Wholesale electricity North America
operates, or holds
interests in, electric
power plants and energy
projects
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 three months ended September 30, 2009, our earnings increased $9 million (3%) to $317 million primarily due to improved results at Sempra Commodities and Sempra Pipelines & Storage, offset by decreased earnings at Sempra Generation and the Sempra Utilities, and higher net losses at Parent and Other. Diluted earnings per share for the three months increased by $0.03 (2%) per share, primarily from the increased earnings.
The Sempra Utilities' third quarter 2008 earnings include adjustments of $33 million at SDG&E and $7 million at SoCalGas associated with the implementation of the 2008 General Rate Case (2008 GRC) decision, which was issued by the California Public Utilities Commission (CPUC) in the third quarter of 2008. Reported revenues and earnings for the first six months of 2008 associated with CPUC-regulated operations were based on the 2007 CPUC-authorized revenue established by the 2004 Cost of Service decision. The third-quarter 2008 adjustments reflect the authorized revenue established in the 2008 GRC for the period of January 1 through June 30, 2008.
In the nine months ended September 30, 2009, our earnings increased $37 million (5%) to $831 million primarily due to improved results at Sempra Commodities and the Sempra Utilities, offset by decreased earnings at Sempra Generation and Sempra Pipelines & Storage, and higher net losses at Parent and Other. The earnings at Sempra Pipelines & Storage were negatively impacted by a second quarter 2009 after-tax asset write-off of $64 million related to the Liberty Project. We discuss the write-off in Note 5 of the Notes to Condensed Consolidated Financial Statements herein.
Diluted earnings per share for the first nine months increased by $0.24 (8%) per share, $0.15 per share from increased earnings and $0.09 per share from a reduction in shares outstanding, primarily as a result of our $1 billion share repurchase in 2008.
The following table shows our earnings by business unit, which we discuss below in "Business Unit Results."
EARNINGS (LOSSES) BY BUSINESS UNIT
(Dollars in millions)
Three months ended September 30,
2009 2008
Sempra Utilities:
SDG&E* $ 108 34 % $ 123 40 %
SoCalGas* 74 23 77 25
Sempra Global:
Sempra Commodities** 75 24 (8) (3)
Sempra Generation 43 14 94 31
Sempra Pipelines & Storage 54 17 34 11
Sempra LNG - - 4 1
Parent and other*** (37) (12) (16) (5)
Earnings $ 317 100 % $ 308 100 %
Nine months ended September 30,
2009 2008
Sempra Utilities:
SDG&E* $ 277 33 % $ 258 32 %
SoCalGas* 198 24 190 24
Sempra Global:
Sempra Commodities** 274 33 181 23
Sempra Generation 119 14 162 20
Sempra Pipelines & Storage 64 8 84 11
Sempra LNG (19) (2) (33) (4)
Parent and other*** (82) (10) (48) (6)
Earnings $ 831 100 % $ 794 100 %
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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
§
$108 million in the three months ended September 30, 2009 ($110 million before preferred dividends)
§
$123 million in the three months ended September 30, 2008 ($125 million before preferred dividends)
§
$277 million in the nine months ended September 30, 2009 ($281 million before preferred dividends)
§
$258 million in the nine months ended September 30, 2008 ($262 million before preferred dividends)
In the three months ended September 30, 2009, SDG&E's earnings decreased $15 million (12%) due to:
§
$33 million higher authorized margin in 2008 due to the implementation of the 2008 GRC decision in the third quarter of 2008;
§
$10 million lower favorable impact from the resolution of prior years' income tax issues; and
§
$5 million higher liability insurance premiums for wildfire coverage; offset by
§
$17 million increase in litigation reserves in 2008;
§
$11 million higher CPUC authorized margin and lower operation and maintenance expenses; and
§
$9 million from the resolution of regulatory matters in 2009 that favorably impacted earnings.
The increase of $19 million (7%) in the nine months ended September 30, 2009 was due to:
§
$26 million net favorable impact from the resolution of litigation in 2009 as opposed to an increase in litigation reserves in 2008;
§
$23 million higher CPUC authorized margin and lower operation and maintenance expenses; and
§
$5 million higher electric transmission margin; offset by
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$12 million lower regulatory awards;
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$7 million from the resolution of regulatory matters in 2008 that favorably impacted earnings;
§
$7 million lower favorable impact from the resolution of prior years' income tax issues; and
§
$5 million higher liability insurance premiums for wildfire coverage.
SoCalGas
SoCalGas business unit earnings were
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$74 million in the three months ended September 30, 2009 (both before and after preferred dividends)
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$77 million in the three months ended September 30, 2008 (both before and after preferred dividends)
§
$198 million in the nine months ended September 30, 2009 ($199 million before preferred dividends)
§
$190 million in the nine months ended September 30, 2008 ($191 million before preferred dividends)
In the three months ended September 30, 2009, SoCalGas' earnings decreased $3 million (4%) due to:
§
$7 million higher authorized margin in 2008 due to the implementation of the 2008 GRC decision in the third quarter of 2008; and
§
$7 million from the resolution of a regulatory matter in 2008 that favorably impacted earnings; offset by
§
$8 million higher CPUC authorized margin and lower operation and maintenance expenses; and
§
$3 million lower bad debt expense.
The increase of $8 million (4%) in the nine months ended September 30, 2009 was due to:
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$15 million higher CPUC authorized margin and lower operation and maintenance expenses;
§
$10 million from a lower effective income tax rate primarily due to higher software development cost deductions and higher Medicare subsidy in 2009; and
§
$3 million higher non-core natural gas storage earnings; offset by
§
$7 million from the resolution of a regulatory matter in 2008 that favorably impacted earnings;
§
$7 million higher net interest expense due to higher average long-term debt outstanding in 2009; and
§
$5 million lower favorable impact from the resolution of prior years' income tax issues ($1 million unfavorable in 2009 compared to $4 million favorable in 2008).
BUSINESS UNIT EARNINGS (LOSSES) -- SEMPRA GLOBAL
(Dollars in millions)
[[Image Removed: [finaldraft_masterq30910q006.gif]]]
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Sempra Commodities
Sempra Commodities recorded business unit earnings (losses) of:
§
$75 million in the three months ended September 30, 2009
§
$(8) million in the three months ended September 30, 2008
§
$274 million in the nine months ended September 30, 2009
§
$181 million in the nine months ended September 30, 2008
Results in the nine months ended September 30, 2009 and the second and third quarters 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 nine-month period, represent 100 percent of the commodities-marketing businesses' earnings until the formation of the joint venture.
The increase of $83 million in the three months ended September 30, 2009 was primarily due to higher equity earnings from RBS Sempra Commodities.
The increase of $93 million (51%) in the nine months ended September 30, 2009 was due primarily to:
§
higher equity earnings from the joint venture;
§
$36 million of expenses in 2008, primarily charges for litigation and an unfavorable impact of prior year's income tax issues; and
§
a $17 million write-down in the first quarter of 2008 related to a counterparty credit issue; offset by
§
$67 million gain on the transaction with RBS in 2008.
Sempra Generation
Sempra Generation recorded business unit earnings of:
§
$43 million in the three months ended September 30, 2009
§
$94 million in the three months ended September 30, 2008
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$119 million in the nine months ended September 30, 2009
§
$162 million in the nine months ended September 30, 2008
The decrease of $51 million (54%) in the three months ended September 30, 2009 included
§
$27 million lower mark-to-market earnings on forward contracts with RBS Sempra Commodities and other counterparties, primarily due to a $28 million gain in 2008;
§
$12 million lower earnings from operations primarily due to less favorable market pricing; and
§
$8 million solar investment tax credits in 2008.
The decrease of $43 million (27%) in the nine months ended September 30, 2009 included
§
$24 million lower earnings from operations primarily due to less favorable market pricing and scheduled plant maintenance;
§
$8 million solar investment tax credits in 2008; and
§
$7 million mark-to-market gain on forward contracts with RBS Sempra Commodities and other counterparties in 2008.
Sempra Pipelines & Storage
Sempra Pipelines & Storage recorded business unit earnings of:
§
$54 million in the three months ended September 30, 2009
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$34 million in the three months ended September 30, 2008
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$64 million in the nine months ended September 30, 2009
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$84 million in the nine months ended September 30, 2008
The increase of $20 million (59%) in the three months ended September 30, 2009 was primarily due to:
§
$15 million lower taxes due to the favorable impact of the resolution of prior years' income tax issues in 2009; and
§
$6 million higher earnings from its investment in the Rockies Express Pipeline.
The decrease of $20 million (24%) in the nine months ended September 30, 2009 was primarily due to:
§
$64 million lower earnings from a write-off of assets at Liberty; and
§
$11 million lower earnings due to foreign currency exchange-rate effects, primarily from its investment in Chile; offset by
§
$23 million lower taxes, primarily due to the favorable impact of the resolution of prior years' income tax issues;
§
$19 million higher earnings from the commencement of LNG-related pipeline operations in Mexico in the second quarter of 2008; and
§
$12 million higher earnings from its investments in South America.
Sempra LNG
Sempra LNG recorded earnings (losses) of:
§
$0 million in the three months ended September 30, 2009
§
$4 million in the three months ended September 30, 2008
§
$(19) million in the nine months ended September 30, 2009
§
$(33) million in the nine months ended September 30, 2008
The decrease in earnings of $4 million in the three months ended September 30, 2009 included
§
$17 million lower mark-to-market earnings related to a natural gas marketing agreement with RBS Sempra Commodities, primarily due to a $13 million gain in 2008; offset by
§
$8 million higher income tax benefits related to a change in the effective tax rate; and
§
$5 million higher earnings from the start-up of terminal and marketing operations.
The decrease in losses of $14 million (42%) in the nine months ended September 30, 2009 included
§
$29 million higher income tax benefits related to a change in the effective tax rate and Mexican currency translation and inflation adjustments; offset by
§
$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; and
§
$4 million higher operating losses from the start-up of terminal and marketing operations.
Parent and Other
Losses for Parent and Other were
§
$37 million in the three months ended September 30, 2009
§
$16 million in the three months ended September 30, 2008
§
$82 million in the nine months ended September 30, 2009
§
$48 million in the nine months ended September 30, 2008
The increase in losses of $21 million (131%) in the three months ended September 30, 2009 was due to:
§
$40 million higher income tax expense; and
§
$16 million higher interest expense primarily from long-term debt issued in 2008 and 2009, partially offset by $5 million reduced interest expense on commercial paper borrowings due to lower interest rates; offset by
§
$7 million investment gains in 2009 on dedicated assets in support of our executive retirement and deferred compensation plans due to improved market conditions compared to investment losses of $8 million in 2008. These amounts are net of the increase in deferred compensation liability associated with the investments; and
§
$8 million Mexico peso exchange losses in 2008.
The increase in losses of $34 million (71%) in the nine months ended September 30, 2009 was due to:
§
$48 million higher interest expense primarily from long-term debt issued in 2008 and 2009, partially offset by $9 million reduced interest expense on commercial paper borrowings due to lower interest rates;
§
$25 million higher income tax expense; and
§
$10 million favorable impact of an interest adjustment in 2008 related to litigation reserves; offset by
§
$13 million investment gains in 2009 on dedicated assets in support of our executive retirement and deferred compensation plans due to improved market conditions compared to investment
losses of $4 million in 2008. These amounts are net of the increase in deferred compensation liability associated with the investments; and
§
$8 million Mexico peso exchange losses in 2008.
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 purchasing 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 nine-month periods ended September 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 187 $ 1,624 1 $ 2 188 $ 1,626
Commercial and
industrial 85 553 205 163 290 716
Electric generation
plants - - 203 51 203 51
Wholesale - - 12 3 12 3
272 $ 2,177 421 $ 219 693 2,396
Other revenues 75
Balancing accounts* 133
Total $ 2,604
2008:
Residential 199 $ 2,662 1 $ 3 200 $ 2,665
Commercial and
industrial 89 1,066 213 137 302 1,203
Electric generation
plants - - 218 80 218 80
Wholesale - - 13 5 13 5
288 $ 3,728 445 $ 225 733 3,953
Other revenues 113
Balancing accounts* 231
Total $ 4,297
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During the three months ended September 30, 2009, our natural gas revenues decreased by $468 million (39%) to $731 million, and the cost of natural gas decreased by $481 million (70%) to $208 million. During the nine months ended September 30, 2009, our natural gas revenues decreased by $1.7 billion (39%) to $2.6 billion, and the cost of natural gas decreased by $1.7 billion (63%) to $997 million. The primary factor contributing to the decreased natural gas revenues and cost of natural gas in both the third quarter and year-to-date periods was 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 23 $ 230 - $ - 23 $ 230
Commercial and industrial 11 76 5 7 16 83
Electric generation plants - - 45 13 45 13
34 $ 306 50 $ 20 84 326
Other revenues 25
Balancing accounts 2
Total* $ 353
2008:
Residential 25 $ 355 - $ - 25 $ 355
Commercial and industrial 12 142 5 7 17 149
. . .
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