EX-13 25 ex13sreannualreport2009.htm EXHIBIT 13 Exhibit 13.1 - Sempra Energy 2009 Annual Report



Exhibit 13.1


SEMPRA ENERGY FINANCIAL REPORT
TABLE OF CONTENTS

 

 

Page

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

Our Business

2

Executive Summary

8

Business Strategy

8

Key Issues in 2009

8

Results of Operations

9

Overall Results of Operations of Sempra Energy and Factors Affecting the Results

9

Business Unit Results

10

Changes in Revenues, Costs and Earnings

14

Transactions with Affiliates

26

Book Value Per Share

26

Capital Resources and Liquidity

27

Cash Flows from Operating Activities

29

Cash Flows from Investing Activities

31

Cash Flows from Financing Activities

34

Factors Influencing Future Performance

41

Sempra Energy Overview

41

Litigation

42

Sempra Utilities – Industry Developments and Capital Projects

42

Sempra Global Investments

42

Market Risk

43

Critical Accounting Policies and Estimates, and Key Noncash Performance Indicators

46

New Accounting Standards

52

Information Regarding Forward-Looking Statements

53

Common Stock Data

54

Performance Graph – Comparative Total Shareholder Returns

55

Five-year Summaries

56

Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

60

Management's Report on Internal Control over Financial Reporting

60

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

60

Reports of Independent Registered Public Accounting Firm

61

Consolidated Financial Statements

 

Sempra Energy

69

San Diego Gas & Electric Company

76

Pacific Enterprises

82

Southern California Gas Company

88

Notes to Consolidated Financial Statements

94

Glossary

199

 

This Financial Report is a combined report for the following separate companies (each a separate Securities and Exchange Commission registrant):

 

 

Sempra Energy

Pacific Enterprises

San Diego Gas & Electric Company

Southern California Gas Company




 



MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following section of the 2009 Annual Report includes

§

A description of our business

§

An executive summary

§

A discussion and analysis of our operating results for 2007 through 2009

§

Information about our capital resources and liquidity

§

Major factors expected to influence our future operating results

§

A discussion of market risk affecting our businesses

§

A table of accounting policies that we consider critical to our financial condition and results of operations

You should read Management's Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the Consolidated Financial Statements included in this Annual Report.

OUR BUSINESS

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 other businesses engaged in providing energy products and services. (See Figure 1.)

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Figure 1: Sempra Energy's Business Units





 



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 its context.

PE's operations consist solely of those of SoCalGas and additional items (e.g., cash, intercompany accounts and equity) attributable to serving as a holding company for SoCalGas.

Below are the summary descriptions of our operating business units.

SEMPRA ENERGY BUSINESS UNITS


SEMPRA UTILITIES

 

 

 

MARKET

SERVICE TERRITORY

SAN DIEGO GAS & ELECTRIC COMPANY (SDG&E)

A regulated public utility; infrastructure supports electric generation, transmission and distribution, and natural gas distribution

§

Provides electricity to 3.5 million consumers (1.4 million meters)

§

Provides natural gas to 3.2 million consumers (845,000 meters)

Serves the county of San Diego, CA and an adjacent portion of southern Orange County covering 4,100 square miles

SOUTHERN CALIFORNIA GAS COMPANY (SOCALGAS)

A regulated public utility; infrastructure supports natural gas distribution, transmission and storage

§

Residential, commercial, industrial, utility electric generation and wholesale customers

§

Covers a population of 20.7 million (5.8 million meters)

Southern California and portions of central California (excluding San Diego County, the city of Long Beach and the desert area of San Bernardino County) covering 20,000 square miles


The Sempra Utilities consist of SDG&E and SoCalGas.

SDG&E

SDG&E provides electricity to 3.5 million consumers and natural gas to 3.2 million consumers. It delivers the electricity through 1.4 million meters in San Diego County and an adjacent portion of southern Orange County, California. SDG&E's electric energy is purchased from others or generated from its Palomar and Miramar I and II electric generation facilities and its 20-percent ownership interest in the San Onofre Nuclear Generating Station (SONGS). SDG&E also delivers natural gas through 845,000 meters in San Diego County and transports electricity and natural gas for others. SDG&E's service territory encompasses 4,100 square miles.

Sempra Energy indirectly owns all of the common stock of SDG&E. SDG&E also has issued publicly held preferred stock. The preferred stock has liquidation preferences totaling $79 million and represents less than 3% of the ordinary voting power of SDG&E shares.

SDG&E's financial statements include two variable interest entities (VIEs), Otay Mesa Energy Center LLC (Otay Mesa VIE) and Orange Grove Energy L.P. (Orange Grove VIE), as we discuss in Note 1 of the Notes to Consolidated Financial Statements. SDG&E has long-term power purchase agreements with both entities.

SoCalGas

SoCalGas is the nation's largest natural gas distribution utility.  It owns and operates a natural gas distribution, transmission, and storage system that supplies natural gas to approximately 20,000 square miles of service territory.  Its service territory extends from San Luis Obispo, California in the north to the Mexican border in the south, excluding San Diego County, the city of Long Beach and the desert area of San Bernardino County. SoCalGas provides natural gas service to residential, commercial, industrial, utility electric generation and wholesale customers through 5.8 million meters, covering a population of 20.7 million.


Sempra Energy owns all of the common stock of PE and PE owns all of the common stock of SoCalGas. PE and SoCalGas also have publicly held preferred stock, which represents less than 1% of the ordinary voting power of their shares. The PE and SoCalGas preferred stock have liquidation preferences totaling $80 million and $22 million, respectively.


SEMPRA GLOBAL

 

 

 

MARKET

GEOGRAPHIC REGION

SEMPRA COMMODITIES

Holds an interest in RBS Sempra Commodities LLP, a commodities-marketing business joint venture with The Royal Bank of Scotland (RBS)

§

Natural gas; natural gas liquids

§

Power

§

Petroleum and petroleum products

§

Coal

§

Emissions

§

Ethanol

§

Base metals

§

Global

SEMPRA GENERATION

Develops, owns and operates, or holds interests in, electric power plants and energy projects

§

Wholesale electricity

§

U.S.A.

§

Mexico

SEMPRA PIPELINES & STORAGE

Develops, owns and operates, or holds interests in, natural gas pipelines and storage facilities, and natural gas and electric service providers

§

Natural gas

§

Electricity

§

U.S.A.

§

Mexico

§

Argentina

§

Chile

§

Peru

SEMPRA LNG

Develops, owns and operates receipt terminals for the importation of liquefied natural gas (LNG) and sale of natural gas

§

Liquefied natural gas

§

Natural gas

§

U.S.A.

§

Mexico


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

A description of each business unit follows.

Sempra Commodities

Sempra Commodities holds our investment in RBS Sempra Commodities LLP (RBS Sempra Commodities), a joint venture with RBS. The partnership was formed on April 1, 2008 from our commodities-marketing businesses previously reported in this business unit. The partnership's commodities-trading businesses serve customers in the global markets for natural gas, natural gas liquids, power, petroleum and petroleum products, coal, emissions, ethanol and base metals. The board of RBS Sempra Commodities is comprised of seven directors, four of whom are representatives of RBS and three of whom are representatives of Sempra Energy. The consent of Sempra Energy is required before the partnership may take certain significant actions, including materially changing the scope of the partnership's businesses and entering into agreements of significant size or duration.

In November 2009, RBS announced its intention to divest its interest in RBS Sempra Commodities following a directive from the European Commission to dispose of certain assets. On February 16, 2010, Sempra Energy, RBS and the partnership entered into an agreement with J.P. Morgan Ventures Energy Corporation (J.P. Morgan Ventures), whereby J.P. Morgan Ventures will purchase the following businesses from the joint venture:



§

the global oil, metals, coal, emissions (other than emissions related to the joint venture’s North American power business), plastics, agricultural commodities and concentrates commodities trading and marketing business

§

the European power and gas business

§

the investor products business

RBS Sempra Commodities will retain its North American power and natural gas trading businesses and its retail energy solutions business.  These businesses have historically generated 40 to 60 percent of total earnings of the businesses in the partnership, and have averaged more than 50 percent.

Subject to obtaining various regulatory approvals and other conditions, the transaction is expected to close in the second quarter of 2010.  J.P. Morgan Ventures will pay an aggregate purchase price equal to the estimated book value at closing of the businesses purchased, generally computed on the basis of international financial reporting standards (IFRS) (as adopted by the European Union), plus an amount equal to $468 million. Sempra Energy will be entitled to 53-1/3 percent of the aggregate purchase price, and RBS will be entitled to 46-2/3 percent of the aggregate purchase price.  We estimate the proceeds that we receive from this transaction will approximate $835 million, excluding undistributed partnership earnings through November 2009.

In connection with the transaction, we and RBS entered into a letter agreement to negotiate, prior to closing of the transaction, definitive documentation to amend certain provisions of the Limited Liability Partnership Agreement dated April 1, 2008 between Sempra Energy and RBS. As RBS continues to be obligated to divest its remaining interest in the partnership, the letter agreement also provides for negotiating the framework for the entertaining of bids for the remaining part of the partnership’s business.

We provide further discussion about RBS Sempra Commodities and the pending transaction with J.P. Morgan Ventures in Notes 3, 4, 6 and 20 of the Notes to Consolidated Financial Statements. Sempra Commodities also includes the operating results of Sempra Rockies Marketing, which holds firm service capacity on the Rockies Express Pipeline.

Sempra Generation

Sempra Generation develops, owns and operates, or holds interests in, electric power plants serving wholesale electricity markets in North America. It sells electricity under long-term contracts and into the spot market and other competitive markets. Sempra Generation purchases natural gas to fuel its natural gas-fired power plants and may also purchase electricity in the open market to satisfy its contractual obligations. Sempra Generation also develops, owns and invests in renewable energy generation projects.

The following table provides information about each of Sempra Generation's power plants. Approximately 75% and 60% of this generating capacity is under long-term contracts with the California Department of Water Resources (DWR) and other parties through 2010 and 2011, respectively.


SEMPRA GENERATION POWER PLANTS

Capacity in Megawatts (MW)

Power Plant

Maximum Generating Capacity

 

        First

In Service

 

Location

Mesquite Power

1,250

 

2003

 

Arlington, AZ

Termoeléctrica de Mexicali

625

 

2003

 

Mexicali, Baja California, Mexico

El Dorado

490

(1)

2000

 

Boulder City, NV

Elk Hills (50% owned)

275

(2)

2003

 

Bakersfield, CA

Fowler Ridge II Wind Farm (50% owned)

100

(2)

2009

 

Benton County, IN

 

Total MW in operation

2,740

 

 

 

 

(1)

Includes 10 MW of solar generating capacity

(2)

Sempra Generation's share


Sempra Generation’s three 100%-owned facilities, Mesquite Power, Termoeléctrica de Mexicali and El Dorado, sell the majority of their output under long-term purchased-power contracts. The largest contract is with the DWR and provides for 1,200 MW to be supplied during all hours and an additional 400 MW during on-peak hours. This contract ends September 30, 2011. Sempra Generation also has other purchased-power contracts, primarily with RBS Sempra Commodities, to sell varying amounts of power through 2012. In addition to these contracts, Sempra Generation has a purchased-power contract expiring in December 2010 that permits the call for delivery of up to 300 MW of power, both during on-peak and off-peak hours, at a predetermined price. The remaining output of our 100%-owned facilities (excluding the El Dorado solar facility) is available to be sold into energy markets on a day-to-day basis.

The El Dorado facility (excluding the solar facility) will be sold at book value to SDG&E on October 1, 2011, which coincides with the end of the DWR contract.


Sempra Generation has a 20-year power purchase agreement with Pacific Gas and Electric (PG&E) for all of the output of its 10-MW El Dorado Energy Solar plant (El Dorado Solar).

Sempra Generation also has a 50% equity interest in Elk Hills, a merchant plant located in Bakersfield, California. Elk Hills offers its output into the California market on a daily basis.

In 2009, Sempra Generation invested $235 million and became an equal partner with BP Wind Energy, a wholly owned subsidiary of BP p.l.c., in the development of the 200-MW Fowler Ridge II Wind Farm (Fowler Ridge II) northwest of Indianapolis, Indiana. The project uses 133 General Electric wind turbines, each with the ability to generate 1.5 MW. Fowler Ridge II went into full commercial operation in December 2009. The project's entire power output has been sold under four long-term contracts, each for 50 MW and 20-year terms. Our investment in Fowler Ridge II is accounted for as an equity method investment.

Sempra Pipelines & Storage

Sempra Pipelines & Storage develops, owns and operates, or holds interests in, natural gas pipelines and storage facilities in the United States and Mexico, and in companies that provide natural gas or electric services in Argentina, Chile, Mexico and Peru. Sempra Pipelines & Storage is currently pursuing the sale of its interests in the Argentine utilities, which we discuss further in Note 4 of the Notes to Consolidated Financial Statements.

Sempra Pipelines & Storage's natural gas distribution utility that operates in three separate areas in Mexico had a customer count of 91,300 and sales volume of 52 million cubic feet per day in 2009. Sempra Pipelines & Storage's pipeline system in Mexico had a contracted capacity for up to 2,600 million cubic feet per day in 2009.

Sempra Pipelines & Storage also owns and operates, or holds interests in, natural gas underground storage and related pipeline facilities in Alabama and Mississippi (Sempra Midstream) and owns Mobile Gas Service Corporation (Mobile Gas), a small regulated natural gas distribution utility in Southwest Alabama. These businesses were formerly the operations of EnergySouth, which we acquired in October 2008.

Sempra Pipelines & Storage, Kinder Morgan Energy Partners, L.P. (KMP) and ConocoPhillips jointly own, through Rockies Express Pipeline LLC (Rockies Express), a natural gas pipeline, the Rockies Express Pipeline (REX), that links producing areas in the Rocky Mountain region to the upper Midwest and the eastern United States. Our participation in the pipeline is 25 percent. Sempra Rockies Marketing, part of our Sempra Commodities segment, has an agreement with Rockies Express for 200 million cubic feet per day of capacity on the REX, which has a total capacity of 1.8 billion cubic feet (Bcf) per day.  Sempra Rockies Marketing has released a portion of its capacity to RBS Sempra Commodities, and RBS Sempra Commodities has assisted Sempra Rockies Marketing with marketing the remaining capacity. REX-West, the segment of the pipeline which extends 713 miles from the Cheyenne Hub to Audrain County in Missouri, began interim service in January and full service in May 2008. REX-East, which extends 638 miles from Audrain County to Clarington in Ohio, was completed in November 2009.

Sempra LNG

Sempra LNG develops, owns and operates receipt terminals for importing LNG, and has supply and marketing agreements to purchase LNG and sell natural gas. Sempra LNG utilizes its LNG receipt terminals by entering into long-term firm capacity service agreements when able to do so. Under these agreements, customers pay Sempra LNG capacity reservation fees to use its facilities to receive, store and regasify the customer's LNG. Sempra LNG also may enter into short-term and/or long-term supply agreements to purchase LNG to be received, stored and regasified at its terminals for sale to other parties.

Sempra LNG’s Energía Costa Azul LNG receipt terminal in Baja California, Mexico began commercial operations in May 2008 and is capable of processing 1 Bcf of natural gas per day. The Energía Costa Azul facility currently generates revenue under a capacity services agreement with Shell México Gas Natural (Shell), expiring in 2028, that permits Shell to use one-half of the terminal's capacity. In April 2009, Shell assigned a portion of its terminal capacity at Energía Costa Azul to Gazprom Marketing & Trading Mexico, transferring all further rights and obligations with respect to the assigned capacity.

Sempra LNG has an LNG purchase agreement with Tangguh PSC Contractors (Tangguh PSC) for the supply of the equivalent of 500 million cubic feet of natural gas per day from Tangguh PSC's Indonesian liquefaction facility to the Energía Costa Azul receipt terminal at a price based on the Southern California border index price for natural gas. Sempra LNG has a 15-year contract to sell an average of approximately 150 million cubic feet per day of natural gas to Mexico’s national electric company, Comisión Federal de Electricidad (CFE) at prices that are based on the Southern California border index price. If natural gas volumes received from Tangguh PSC are not sufficient to satisfy the commitment to CFE, Sempra LNG may purchase natural gas from RBS Sempra Commodities.  Sempra LNG also has an agreement with RBS Sempra Commodities for RBS Sempra Commodities to market any volumes purchased from Tangguh PSC that are not sold to the CFE.


A nitrogen-injection facility at Energía Costa Azul placed in service by Sempra LNG in December 2009 allows the terminal to process LNG cargoes from a wider variety of sources and provides additional revenue from payments for capacity reservation fees and fees for nitrogen injection services.  

Sempra LNG’s Cameron LNG receipt terminal in Hackberry, Louisiana, began commercial operations in July 2009 and is capable of processing 1.5 Bcf of natural gas per day.  Cameron LNG generates revenue under a capacity services agreement for approximately 600 million cubic feet of natural gas per day through 2029. Sempra LNG also has a short-term LNG purchase agreement with Ras Laffan Liquefied Natural Gas Company Limited (RasGas) for the supply of up to 32 cargoes during 2010, at RasGas' option. The purchase price of cargoes from RasGas is based on market index prices located in the U.S. Gulf of Mexico. Sempra LNG has an agreement to sell natural gas to RBS Sempra Commodities at the Cameron Interstate Pipeline.

Sempra LNG also owns property in Port Arthur, Texas, that it is evaluating for potential development.

REGULATION OF SEMPRA UTILITIES AND OTHER BUSINESS UNITS

The Sempra Utilities are regulated by federal, state and local governmental agencies. The primary regulatory agency is the California Public Utilities Commission (CPUC). The CPUC regulates the Sempra Utilities' rates and operations in California, except for SDG&E's electric transmission operations. The Federal Energy Regulatory Commission (FERC) regulates SDG&E's electric transmission operations. The FERC also regulates interstate transportation of natural gas and various related matters.

The Nuclear Regulatory Commission regulates SONGS, in which SDG&E owns a 20-percent interest. Municipalities and other local authorities regulate the location of utility assets, including natural gas pipelines and electric lines. Sempra Energy's other business units are also regulated by the FERC, various state commissions, local governmental entities, and other similar authorities in countries other than the United States.  

EXECUTIVE SUMMARY

BUSINESS STRATEGY

Our ongoing focus is to enhance shareholder value and meet customer needs by developing and operating a stable portfolio of energy businesses with long-term, predictable cash flows.

The key components of our strategy include the following:

§

development of natural gas and renewable-energy infrastructure;

§

investment in our utilities; and

§

marketing energy commodities in North America.

We have based our strategy on a market view that recognizes that:

§

current and emerging state and federal policies support cleaner forms of energy

§

policy trends point toward three business priorities:

1.

cleaner fuels

§

natural gas

§

renewables

2.

enabling infrastructure

§

natural gas pipelines, storage and LNG receipt terminals

§

electric transmission and advanced meters

3.

managing volatility

§

focus on risk management

§

natural gas storage at a premium

As we execute our strategy, we remain focused on the escalating concerns about climate change and the future regulation of greenhouse gases. Our focus on clean fuels and energy efficiency is a sustainable model that results in a smaller carbon footprint.



KEY ISSUES IN 2009

Below are the key issues that affected our business in 2009; some of these issues may continue to affect our future results. Each issue includes the page number you may reference for additional details.

§

RBS, following a directive from the European Commission, announced its intention to divest its 51-percent share of RBS Sempra Commodities (5).

§

Sempra LNG's Cameron LNG receipt terminal began commercial operations in July 2009 (7).

§

Sempra LNG’s Energía Costa Azul nitrogen-injection facility was placed in service in December 2009 (7).

§

The Rockies Express-East pipeline was completed in November 2009 (7).

§

Sempra Pipelines & Storage completed its Cameron Interstate Pipeline project in June 2009 (32).

§

Sempra Generation invested $235 million and became an equal partner in Fowler Ridge II in 2009 (6).

§

The Otay Mesa Energy Center commenced commercial operations in October 2009 (103).

§

SDG&E installed approximately 355,000 advanced meters through December 31, 2009 and is on schedule to complete the full installation of approximately 1.4 million electric and 850,000 natural gas meters by the end of 2011 (179).

§

We increased quarterly dividends on our common shares to $0.39 per share ($1.56 per share annually) (37).

§

We recorded an asset write-off related to the Liberty Gas Storage (Liberty) project that reduced earnings by $64 million (103).

§

SDG&E entered into agreements to settle a significant portion of claims related to the 2007 California wildfire litigation; however, a substantial number of unresolved claims remain (181).

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



OVERALL RESULTS OF OPERATIONS OF SEMPRA ENERGY AND FACTORS AFFECTING THE RESULTS

The graphs below show our overall operations from 2005 to 2009.


OVERALL OPERATIONS OF SEMPRA ENERGY FROM 2005 TO 2009

(Dollars and shares in millions, except per share amounts)

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[a008.gif][a006.gif]



(1) Earnings for 2006 included $315 million in after-tax income from discontinued operations, primarily due to asset sales.


Our 2009 income from continuing operations attributable to common shares increased from 2008 due to:

§

improved results at Sempra LNG; and

§

higher earnings at the Sempra Utilities; offset by

§

lower earnings at Sempra Generation; and

§

higher losses at Parent and Other.

Improved operating results at Sempra Pipelines & Storage were negatively impacted by an after-tax write-off of $64 million related to the Liberty project in 2009.

Diluted earnings per share in 2009 increased by $0.09 per share, primarily from the reduction in shares outstanding from our $1 billion share repurchase in 2008 ($0.07 per share) and as a result of our increased earnings ($0.02 per share).

Our 2008 income from continuing operations attributable to common shares decreased due to:

§

lower earnings at Sempra Commodities due to our reduced ownership interest in the business; and

§

higher net losses at Parent and Other; offset by

§

improved results at the Sempra Utilities, Sempra Generation and Sempra Pipelines & Storage.



Our earnings in 2007 included losses from discontinued operations of $26 million.

Diluted earnings per share in 2008 increased by $0.27 per share, primarily as a result of the reduction in shares outstanding from our $1 billion share repurchase and from increased earnings. The impact from the share repurchase was a positive $0.20 per share.

The following table shows our earnings (losses) by business unit, which we discuss below in "Business Unit Results."


SEMPRA ENERGY EARNINGS (LOSSES) BY BUSINESS UNIT 2007-2009

(Dollars in millions)

 

 

Years ended December 31,

 

 

2009 

2008 

2007 

Sempra Utilities:

 

 

 

 

 

 

 

 

 

 

 

 

    SDG&E(1)

$

 344 

31 

%

$

 339 

31 

%

$

 283 

25 

%

    SoCalGas(1)

 

 273 

24 

 

 

 244 

22 

 

 

 230 

21 

 

Sempra Global:

 

 

 

 

 

 

 

 

 

 

 

 

    Sempra Commodities(2)

 

 345 

31 

 

 

 345 

31 

 

 

 499 

45 

 

    Sempra Generation

 

 162 

15 

 

 

 222 

20 

 

 

 162 

15 

 

    Sempra Pipelines & Storage

 

 101 

 

 

 106 

 

 

 64 

 

    Sempra LNG

 

 16 

 1 

 

 

 (46)

(4)

 

 

 (46)

(4)

 

Parent and other(3)

 

 (122)

(11)

 

 

 (97)

(9)

 

 

 (67)

(6)

 

Income from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

    attributable to common shares

 

 1,119 

 100 

 

 

 1,113 

 100 

 

 

 1,125 

 102 

 

Discontinued operations, net of income tax

 

 - 

 - 

 

 

 - 

 - 

 

 

 (26)

(2)

 

Earnings

$

 1,119 

 100 

%

$

 1,113 

 100 

%

$

 1,099 

 100 

%

(1)

After preferred dividends.

(2)

Includes our portion of RBS Sempra Commodities' joint venture earnings since the formation of the joint venture on April 1, 2008, and 100% of the commodities-marketing businesses prior to April 1, 2008. Also includes the operating results of Sempra Rockies Marketing, as well as interest, income taxes, cost allocations and other items associated with the joint venture.

(3)

Includes after-tax interest expense ($141 million in 2009, $85 million in 2008 and $82 million in 2007), intercompany eliminations recorded in consolidation and certain corporate costs incurred at Sempra Global.

BUSINESS UNIT RESULTS

The following section is a discussion of earnings (losses) by Sempra Energy business unit, as it appears in the table above.


EARNINGS BY BUSINESS UNIT – SEMPRA UTILITIES

(Dollars in millions)


[a010.gif]





SDG&E

Our SDG&E business unit recorded earnings of:

§

$344 million in 2009 ($349 million before preferred dividends)

§

$339 million in 2008 ($344 million before preferred dividends)

§

$283 million in 2007 ($288 million before preferred dividends)

In 2009, the increase of $5 million (1%) was due to:

§

$26 million net favorable impact from the resolution of litigation in 2009 compared to an increase in litigation reserves in 2008;

§

$21 million higher CPUC authorized margin in excess of higher operation and maintenance expenses; and

§

$8 million higher electric transmission margin; offset by

§

$21 million due to regulatory awards in 2008;

§

$9 million higher liability insurance premiums for wildfire coverage;

§

$7 million from the resolution of regulatory matters in 2008 that favorably impacted earnings;

§

$6 million lower favorable impact from the resolution of prior years' income tax issues; and

§

$6 million higher net interest expense.

In 2008, the increase of $56 million (20%) was due to:

§

$62 million increased CPUC authorized margin in excess of higher operation and maintenance expenses;

§

$14 million favorable effect from lower income tax rates on current operating activity in 2008 from an increase in tax deductions, as we discuss in "Income Taxes" below;

§

$8 million higher regulatory awards in 2008; and

§

$6 million higher electric transmission earnings in 2008 due to a higher rate base; offset by

§

$19 million lower favorable resolution of regulatory matters in 2008 ($7 million in 2008 compared to $26 million in 2007); and

§

$18 million due to higher litigation expenses in 2008 ($25 million in 2008 compared to $7 million in 2007).

SoCalGas

Our SoCalGas business unit recorded earnings of:

§

$273 million in 2009 ($274 million before preferred dividends)

§

$244 million in 2008 ($245 million before preferred dividends)

§

$230 million in 2007 ($231 million before preferred dividends)

In 2009, the increase of $29 million (12%) was due to:

§

$25 million higher CPUC authorized margin in excess of higher operation and maintenance expenses;

§

$12 million from a lower effective tax rate (excluding the impact of the resolution of prior years' income tax issues);

§

$7 million primarily due to litigation reserves recorded in 2008; and

§

$3 million higher noncore 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; and

§

$4 million lower favorable impact from the resolution of prior years' income tax issues ($1 million unfavorable in 2009 compared to $3 million favorable in 2008).

In 2008, the increase of $14 million (6%) was due to:

§

$18 million due to a lower effective tax rate, as we discuss in "Income Taxes" below;

§

$7 million favorable resolution of a regulatory matter in 2008;

§

$7 million from increased CPUC authorized margin in excess of higher operation and maintenance expenses; and

§

$3 million higher regulatory awards ($9 million in 2008 compared to $6 million in 2007); offset by

§

$8 million increase in litigation expenses;

§

$7 million lower noncore natural gas storage revenue in 2008 due to a new earnings sharing mechanism in effect for 2008 associated with the 2008 Biennial Cost Allocation Proceeding decision ($9 million in 2008 compared to $16 million in 2007), as we discuss in Note 16 of the Notes to Consolidated Financial Statements; and

§

$5 million higher bad debt expense in 2008.




EARNINGS (LOSSES) BY BUSINESS UNIT – SEMPRA GLOBAL

(Dollars in millions)


[a012.gif]




Sempra Commodities

Our Sempra Commodities business unit recorded earnings of:

§

$345 million in 2009

§

$345 million in 2008

§

$499 million in 2007

Results for 2009 and the second through the fourth quarters of 2008 primarily represent our equity earnings from RBS Sempra Commodities, the joint venture formed on April 1, 2008, as well as other items discussed below. Results for 2007 and the first quarter of 2008 represent 100% of the commodities-marketing businesses' earnings until the formation of the joint venture.

The results in 2009 included a $9 million improvement in Sempra Rockies Marketing and reflect our reduced ownership interest in the commodities-marketing businesses starting in April 2008. Results in 2008 included:

§

a $67 million gain on the transaction to form the joint venture with RBS; offset by

§

$34 million of expenses, primarily charges for litigation and an unfavorable impact of prior years' income tax issues; and

§

a $17 million write-down related to a counterparty credit issue.

The decrease in 2008 compared to 2007 of $154 million (31%) was due to our decreased ownership interest in the business, offset by the gain on the transaction with RBS.

Sempra Generation

Sempra Generation recorded earnings of:

§

$162 million in 2009

§

$222 million in 2008

§

$162 million in 2007

The decrease in 2009 of $60 million (27%) was due to:

§

a $31 million reduction in earnings from the effects of lower gas prices in 2009;

§

$4 million income tax expense in 2009 related to Mexican currency translation and inflation adjustments compared to a $14 million income tax benefit in 2008; and

§

$9 million solar investment tax credits in 2008.

The increase in 2008 of $60 million (37%) was due to:

§

$37 million higher earnings from operations, primarily due to scheduled plant maintenance in 2007;

§

$16 million lower income tax expense related to Mexican currency translation and inflation adjustments; and

§

$9 million solar investment tax credits in 2008.

Sempra Pipelines & Storage

Our Sempra Pipelines & Storage business unit recorded earnings of:

§

$101 million in 2009

§

$106 million in 2008

§

$64 million in 2007

The decrease in 2009 of $5 million (5%) was due to:

§

$64 million lower earnings from a write-off of assets at the Liberty project; offset by

§

$22 million lower taxes, primarily due to a favorable impact from the resolution of prior years' income tax issues ($13 million favorable in 2009 compared to $9 million unfavorable in 2008);

§

$17 million higher earnings from a full year of LNG-related pipeline operations in Mexico, which commenced in the second quarter of 2008;

§

$12 million higher earnings from its domestic natural gas distribution, pipelines and storage assets; and

§

$8 million higher earnings from its investments in South America, primarily due to improved operating results.

The increase of $42 million (66%) in 2008 was due to:

§

$30 million from Rockies Express-West, which began operations in the first quarter of 2008; and

§

$18 million of higher earnings from the commencement of LNG-related pipeline operations in Mexico in the second quarter of 2008.

Sempra LNG

Sempra LNG recorded earnings (losses) of:

§

$16 million in 2009

§

$(46) million in 2008

§

$(46) million in 2007

The improvement in earnings in 2009 of $62 million (135%) was due to:

§

$72 million higher earnings from the start-up of marketing and terminal operations, of which $37 million relates to revenues related to contractual customer obligations for non-delivery of cargoes and tax benefits from the reallocation of certain intercompany expenses, neither of which are expected to recur over the long term; offset by

§

a $10 million after-tax cash payment received in 2008 for the early termination of a capacity agreement for the Cameron LNG receipt terminal.

Although losses remained the same as 2007, 2008 included the following items compared to 2007:

§

$15 million lower mark-to-market losses related to a natural gas marketing agreement with RBS Sempra Commodities; and

§

a $10 million after-tax cash payment received for the early termination of a capacity agreement for the Cameron LNG receipt terminal; offset by

§

$22 million higher general and administrative and operating expenses, including $13 million of costs for LNG supplies for the Energía Costa Azul LNG receipt terminal.

Parent and Other

Losses for Parent and Other were

§

$(122) million in 2009

§

$(97) million in 2008

§

$(67) million in 2007

The increase in losses in 2009 of $25 million (26%) was primarily due to:

§

$64 million higher interest expense primarily from long-term debt issued in 2008 and 2009, partially offset by $18 million reduced interest expense on commercial paper borrowings due to lower interest rates;

§

$25 million in lower benefits from the resolution of prior years' income tax issues, primarily due to $19 million of benefits in 2008 compared to a $6 million expense in 2009;

§

$7 million in lower consolidated and parent tax benefits compared with 2008; and

§

$10 million favorable impact of an interest adjustment in 2008 related to litigation reserves; offset by

§

$18 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 $23 million in 2008. These amounts are net of the increase in deferred compensation liability associated with the investments; and

§

$19 million lower general and administrative expenses.

The increase in losses in 2008 of $30 million (45%) was primarily due to:

§

$23 million of investment losses in 2008 compared to $6 million of gains in 2007 on dedicated assets in support of our executive retirement and deferred compensation plans due to market declines in 2008. This amount is net of the reduction in deferred compensation liability associated with the investments;

§

$14 million gain from interest rate swaps in 2007; and

§

$8 million Mexican peso exchange losses, net of lower Mexican currency translation and inflation tax adjustments; offset by

§

$13 million lower income tax expense primarily from the higher favorable resolution of prior years' income tax issues in 2008; and

§

$10 million lower interest expense related to litigation reserves 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 Consolidated Statements of Operations for Sempra Energy, SDG&E, PE and SoCalGas.

Sempra Utilities Revenues

Sempra Utilities revenues are comprised of natural gas revenues at SDG&E and SoCalGas, and electric revenues at SDG&E. Intercompany revenues included in the separate revenues of each utility are eliminated in the Sempra Energy Consolidated Statements of Operations.

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. This mechanism permits full recovery of costs incurred when average purchase costs are within a price range around a monthly benchmark price. Any higher costs incurred or savings realized outside this range are shared between the core customers and SoCalGas. Through March 31, 2008, when SoCalGas assumed the purchasing for SDG&E's core customer natural gas requirements on a combined portfolio basis, SDG&E had a similar incentive mechanism that allowed cost sharing. We provide further discussion in Notes 1 and 16 of the Notes to Consolidated Financial Statements.

Sempra Utilities: Natural Gas Revenues and Cost of Natural Gas

The tables below show natural gas revenues for Sempra Energy, SDG&E and SoCalGas. The Sempra Energy Consolidated 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 AND TRANSPORTATION 2007-2009

(Volumes in billion cubic feet, dollars in millions)

 

 

 

 

 

 

 

 

 

Natural Gas Sales

Transportation

Total

Customer class

Volumes

Revenue

Volumes

Revenue

Volumes

Revenue

2009:

 

 

 

 

 

 

 

 

 

    Residential

 264 

$

 2,336 

 1 

$

 3 

 265 

$

 2,339 

    Commercial and industrial

 116 

 

 774 

 271 

 

 227 

 387 

 

 1,001 

    Electric generation plants

 - 

 

 - 

 265 

 

 67 

 265 

 

 67 

    Wholesale

 - 

 

 - 

 17 

 

 4 

 17 

 

 4 

 

 380 

$

 3,110 

 554 

$

 301 

 934 

 

 3,411 

    Other revenues

 

 

 

 

 

 

 

 

 105 

    Balancing accounts(1)

 

 

 

 

 

 

 

 

 285 

        Total

 

 

 

 

 

 

 

$

 3,801 

2008:

 

 

 

 

 

 

 

 

 

    Residential

 271 

$

 3,385 

 1 

$

 4 

 272 

$

 3,389 

    Commercial and industrial

 120 

 

 1,318 

 282 

 

 198 

 402 

 

 1,516 

    Electric generation plants

 - 

 

 - 

 300 

 

 106 

 300 

 

 106 

    Wholesale

 - 

 

 - 

 18 

 

 6 

 18 

 

 6 

 

 391 

$

 4,703 

 601 

$

 314 

 992 

 

 5,017 

    Other revenues

 

 

 

 

 

 

 

 

 146 

    Balancing accounts(1)

 

 

 

 

 

 

 

 

 256 

        Total

 

 

 

 

 

 

 

$

 5,419 

2007:

 

 

 

 

 

 

 

 

 

    Residential

 277 

$

 3,065 

 1 

$

 5 

 278 

$

 3,070 

    Commercial and industrial

 127 

 

 1,159 

 282 

 

 215 

 409 

 

 1,374 

    Electric generation plants

 - 

 

 1 

 264 

 

 112 

 264 

 

 113 

    Wholesale

 - 

 

 - 

 19 

 

 8 

 19 

 

 8 

 

 404 

$

 4,225 

 566 

$

 340 

 970 

 

 4,565 

    Other revenues

 

 

 

 

 

 

 

 

 90 

    Balancing accounts(1)

 

 

 

 

 

 

 

 

 214 

        Total

 

 

 

 

 

 

 

$

 4,869 

(1) We discuss balancing accounts and their effects in Note 1 of the Notes to Consolidated Financial Statements.


In 2009, our natural gas revenues decreased by $1.6 billion (30%) to $3.8 billion, and the cost of natural gas decreased by $1.7 billion (53%) to $1.5 billion. The decrease in revenues was primarily due to:

§

the decrease in cost of natural gas, which was caused primarily by lower natural gas prices; and

§

$24 million lower franchise fees at SoCalGas; offset by

§

$80 million higher recovery of CPUC-authorized costs, which revenues are fully offset in operation and maintenance expenses; and

§

$53 million higher authorized base margin at SoCalGas, in accordance with the CPUC's 2008 General Rate Case (2008 GRC) decision.

In 2008, our natural gas revenues increased by $550 million (11%) to $5.4 billion, and the cost of natural gas increased by $481 million (17%) to $3.2 billion. The increase in revenues was primarily due to:

§

the increase in cost of natural gas, which was caused primarily by higher natural gas prices;

§

$27 million higher authorized base margin in accordance with the CPUC's 2008 GRC decision;

§

$24 million due to revenue sharing in 2007 at SoCalGas. Effective with the adoption of the 2008 GRC, the Sempra Utilities are no longer subject to the performance-based regulation that required this revenue sharing; and

§

$12 million favorable resolution of a regulatory matter in 2008; offset by

§

$11 million lower noncore natural gas storage revenue in 2008.

We discuss the changes in the cost of natural gas individually for SDG&E and SoCalGas below.




SDG&E: NATURAL GAS SALES AND TRANSPORTATION 2007-2009

(Volumes in billion cubic feet, dollars in millions)

 

 

 

 

 

 

 

 

 

Natural Gas Sales

Transportation

Total

Customer class

Volumes

Revenue

Volumes

Revenue

Volumes

Revenue

2009:

 

 

 

 

 

 

 

 

 

    Residential

 30 

$

 304 

 - 

$

 - 

 30 

$

 304 

    Commercial and industrial

 15 

 

 100 

 7 

 

 10 

 22 

 

 110 

    Electric generation plants

 - 

 

 - 

 65 

 

 19 

 65 

 

 19 

 

 45 

$

 404 

 72 

$

 29 

 117 

 

 433 

    Other revenues

 

 

 

 

 

 

 

 

 33 

    Balancing accounts

 

 

 

 

 

 

 

 

 24 

        Total(1)

 

 

 

 

 

 

 

$

 490 

2008:

 

 

 

 

 

 

 

 

 

    Residential

 31 

$

 428 

 - 

$

 - 

 31 

$

 428 

    Commercial and industrial

 16 

 

 174 

 7 

 

 9 

 23 

 

 183 

    Electric generation plants

 - 

 

 - 

 68 

 

 26 

 68 

 

 26 

 

 47 

$

 602 

 75 

$

 35 

 122 

 

 637 

    Other revenues

 

 

 

 

 

 

 

 

 26 

    Balancing accounts

 

 

 

 

 

 

 

 

 26 

        Total(1)

 

 

 

 

 

 

 

$

 689 

2007:

 

 

 

 

 

 

 

 

 

    Residential

 32 

$

 405 

 - 

$

 - 

 32 

$

 405 

    Commercial and industrial

 16 

 

 160 

 5 

 

 7 

 21 

 

 167 

    Electric generation plants

 - 

 

 1 

 60 

 

 40 

 60 

 

 41 

 

 48 

$

 566 

 65 

$

 47 

 113 

 

 613 

    Other revenues

 

 

 

 

 

 

 

 

 13 

    Balancing accounts

 

 

 

 

 

 

 

 

 32 

        Total(1)

 

 

 

 

 

 

 

$

 658 

(1) Includes sales to affiliates of $1 million in 2009, $2 million in 2008 and $3 million in 2007.





In 2009, SDG&E's natural gas revenues decreased by $199 million (29%) to $490 million, and the cost of natural gas decreased by $209 million (50%) to $206 million. The decrease in natural gas revenues was primarily due to the decrease in cost of natural gas caused by lower natural gas prices, as we discuss below.

In 2008, SDG&E's natural gas revenues increased by $31 million (5%) to $689 million, and the cost of natural gas increased by $23 million (6%) to $415 million. The increases were primarily due to higher natural gas prices.

The average cost of natural gas was $4.61 per thousand cubic feet (Mcf) for 2009, $8.88 for 2008 and $8.06 for 2007. In 2009, the 48-percent decrease of $4.27 per Mcf resulted in lower revenues and cost of $190 million compared to 2008. In 2008, the 10-percent increase of $0.82 per Mcf resulted in higher revenues and cost of $38 million compared to 2007.


SOCALGAS: NATURAL GAS SALES AND TRANSPORTATION 2007-2009

(Volumes in billion cubic feet, dollars in millions)

 

 

 

 

 

 

 

 

 

Natural Gas Sales

Transportation

Total

Customer class

Volumes

Revenue

Volumes

Revenue

Volumes

Revenue

2009:

 

 

 

 

 

 

 

 

 

    Residential

 234 

$

 2,032 

 1 

$

 3 

 235 

$

 2,035 

    Commercial and industrial

 101 

 

 674 

 264 

 

 219 

 365 

 

 893 

    Electric generation plants

 - 

 

 - 

 200 

 

 48 

 200 

 

 48 

    Wholesale

 - 

 

 - 

 141 

 

 13 

 141 

 

 13 

 

 335 

$

 2,706 

 606 

$

 283 

 941 

 

 2,989 

    Other revenues

 

 

 

 

 

 

 

 

 105 

    Balancing accounts

 

 

 

 

 

 

 

 

 261 

        Total(1)

 

 

 

 

 

 

 

$

 3,355 

2008:

 

 

 

 

 

 

 

 

 

    Residential

 240 

$

 2,957 

 1 

$

 4 

 241 

$

 2,961 

    Commercial and industrial

 104 

 

 1,144 

 275 

 

 189 

 379 

 

 1,333 

    Electric generation plants

 - 

 

 - 

 232 

 

 80 

 232 

 

 80 

    Wholesale

 - 

 

 - 

 146 

 

 22 

 146 

 

 22 

 

 344 

$

 4,101 

 654 

$

 295 

 998 

 

 4,396 

    Other revenues

 

 

 

 

 

 

 

 

 142 

    Balancing accounts

 

 

 

 

 

 

 

 

 230 

        Total(1)

 

 

 

 

 

 

 

$

 4,768 

2007:

 

 

 

 

 

 

 

 

 

    Residential

 245 

$

 2,660 

 1 

$

 5 

 246 

$

 2,665 

    Commercial and industrial

 111 

 

 999 

 277 

 

 208 

 388 

 

 1,207 

    Electric generation plants

 - 

 

 - 

 204 

 

 72 

 204 

 

 72 

    Wholesale

 - 

 

 - 

 142 

 

 59 

 142 

 

 59 

 

 356 

$

 3,659 

 624 

$

 344 

 980 

 

 4,003 

    Other revenues

 

 

 

 

 

 

 

 

 97 

    Balancing accounts

 

 

 

 

 

 

 

 

 182 

        Total(1)

 

 

 

 

 

 

 

$

 4,282 

(1) Includes sales to affiliates of $43 million in 2009, $36 million in 2008 and $68 million in 2007.


In 2009, SoCalGas' natural gas revenues decreased by $1.4 billion (30%) to $3.4 billion, and the cost of natural gas decreased by $1.5 billion (53%) to $1.3 billion. The decrease in revenues was primarily due to:

§

the decrease in cost of natural gas, which was caused primarily by lower natural gas prices, as we discuss below; and

§

$24 million lower franchise fees; offset by

§

$74 million higher recovery of CPUC-authorized costs, which revenues are fully offset in operation and maintenance expenses; and

§

$53 million higher authorized base margin in accordance with the CPUC's 2008 GRC decision.



In 2008, SoCalGas' natural gas revenues increased by $486 million (11%) to $4.8 billion, and the cost of natural gas increased by $421 million (17%) to $2.8 billion. The increase in revenues in 2008 was primarily due to:

§

the increase in cost of natural gas, which was caused primarily by higher natural gas prices;

§

$24 million higher authorized base margin in accordance with the CPUC's 2008 GRC decision;

§

$24 million due to revenue sharing in 2007. Effective with the adoption of the 2008 GRC, SoCalGas is no longer subject to the performance-based regulation that required this revenue sharing;

§

$12 million favorable resolution of a regulatory matter in 2008; and

§

$6 million higher regulatory awards; offset by

§

$11 million lower noncore natural gas storage revenue in 2008.

The average cost of natural gas was $4.00 per Mcf for 2009, $8.26 for 2008 and $6.81 for 2007. In 2009, the 52-percent decrease of $4.26 per Mcf resulted in lower revenues and cost of $1.4 billion compared to 2008. In 2008, the 21-percent increase of $1.45 per Mcf resulted in higher revenues and cost of $499 million compared to 2007.

Sempra Utilities: Electric Revenues and Cost of Electric Fuel and Purchased Power

The table below shows electric revenues for Sempra Energy and SDG&E. Sempra Energy Consolidated amounts are net of intercompany transactions. Because the cost of electricity is substantially recovered in rates, changes in the cost are reflected in the changes in revenues.


ELECTRIC DISTRIBUTION AND TRANSMISSION 2007-2009

(Volumes in millions of kilowatt-hours, dollars in millions)

 

2009 

2008 

2007 

Customer class

Volumes

Revenue

Volumes

Revenue

Volumes

Revenue

Sempra Energy Consolidated:

 

 

 

 

 

 

 

 

 

Residential

 7,536 

$

 1,041 

 7,698 

$

 976 

 7,520 

$

 980 

Commercial

 7,061 

 

 890 

 7,254 

 

 843 

 7,154 

 

 852 

Industrial

 2,275 

 

 236 

 2,340 

 

 214 

 2,264 

 

 228 

Direct access

 3,119 

 

 106 

 3,235 

 

 101 

 3,220 

 

 118 

Street and highway lighting

 110 

 

 12 

 106 

 

 12 

 107 

 

 12 

 

 20,101 

 

 2,285 

 20,633 

 

 2,146 

 20,265 

 

 2,190 

Other revenues

 

 

 132 

 

 

 145 

 

 

 161 

Balancing accounts

 

 

 2 

 

 

 262 

 

 

 (167)

    Total

 

$

 2,419 

 

$

 2,553 

 

$

 2,184 

SDG&E:

 

 

 

 

 

 

 

 

 

Residential

 7,536 

$

 1,041 

 7,698 

$

 976 

 7,520 

$

 980 

Commercial

 7,061 

 

 890 

 7,254 

 

 843 

 7,154 

 

 852 

Industrial

 2,285 

 

 238 

 2,351 

 

 215 

 2,275 

 

 229 

Direct access

 3,119 

 

 106 

 3,235 

 

 101 

 3,220 

 

 118 

Street and highway lighting

 110 

 

 12 

 106 

 

 12 

 107 

 

 12 

 

 20,111 

 

 2,287 

 20,644 

 

 2,147 

 20,276 

 

 2,191 

Other revenues

 

 

 137 

 

 

 153 

 

 

 170 

Balancing accounts

 

 

 2 

 

 

 262 

 

 

 (167)

    Total(1)

 

$

 2,426 

 

$

 2,562 

 

$

 2,194 

(1) Includes sales to affiliates of $7 million in 2009, $9 million in 2008 and $10 million in 2007.


In 2009, electric revenues decreased by $134 million (5%) at Sempra Energy Consolidated and $136 million (5%) at SDG&E to $2.4 billion, and the cost of electric fuel and purchased power decreased by $228 million (25%) to $672 million. The decreased revenues in 2009 were primarily due to:

§

the decrease in cost of electric fuel and purchased power resulting from a net decrease in power procurement costs, primarily from lower prices and volumes; and

§

$36 million lower regulatory awards; offset by

§

$54 million higher authorized base margin on electric generation and distribution;

§

$35 million higher recovery of CPUC-authorized costs, which revenues are fully offset in operation and maintenance expenses; and

§

$32 million higher authorized transmission margin.

In 2008, electric revenues increased by $369 million (17%) at Sempra Energy Consolidated and $368 million (17%) at SDG&E to $2.6 billion, and the cost of electric fuel and purchased power increased by $201 million (29%) to $900 million. The increased revenues in 2008 were primarily due to:

§

the increase in cost of electric fuel and purchased power resulting from an increase in power procurement costs, both from higher prices and volumes;

§

$107 million higher authorized base margin on electric generation and distribution;

§

$55 million higher recovery of CPUC-authorized costs, which revenues are fully offset in operation and maintenance expenses;

§

$12 million higher regulatory awards; and

§

$8 million higher authorized transmission margin; offset by

§

$22 million from the favorable resolution of a regulatory matter in 2007.

We do not include in the Consolidated Statements of Operations the commodity costs (and the revenues to recover those costs) associated with long-term contracts that are allocated to SDG&E by the California DWR. However, we do include the associated volumes and distribution revenues in the table above. We provide further discussion of these contracts in Note 1 of the Notes to Consolidated Financial Statements.

Sempra Global and Parent: Revenues and Cost of Sales

The table below shows Sempra Global and Parent's Revenues and Cost of Sales.


SEMPRA GLOBAL AND PARENT: REVENUES AND COST OF SALES 2007-2009

(Dollars in millions)

 

 

Years ended December 31,

 

 

2009 

2008 

2007 

REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

    Sempra Generation

$

 1,106 

58 

%

$

 1,784 

64 

%

$

 1,476 

34 

%

    Sempra Pipelines & Storage

 

 465 

25 

 

 

 457 

16 

 

 

 314 

 

    Sempra LNG

 

 278 

15 

 

 

 74 

 

 

 (22)

(1)

 

    Sempra Commodities

 

 73 

 

 

 500 

18 

 

 

 2,674 

61 

 

    Parent and other(1)

 

 (36)

(2)

 

 

 (29)

(1)

 

 

 (57)

(1)

 

        Total revenues

$

 1,886 

 100 

%

$

 2,786 

 100 

%

$

 4,385 

 100 

%

COST OF SALES(2)

 

 

 

 

 

 

 

 

 

 

 

 

    Sempra Generation

$

 668 

68 

%

$

 1,304 

78 

%

$

 1,058 

81 

%

    Sempra Pipelines & Storage

 

 243 

25 

 

 

 348 

21 

 

 

 255 

20 

 

    Sempra LNG

 

 108 

11 

 

 

 47 

 

 

 - 

 - 

 

    Parent and other(1)

 

 (43)

(4)

 

 

 (28)

(2)

 

 

 (11)

(1)

 

        Total cost of natural gas, electric fuel and purchased power

$

 976 

 100 

%

$

 1,671 

 100 

%

$

 1,302 

 100 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Sempra Commodities

$

 61 

76 

%

$

 178 

98 

%

$

 988 

100 

%

    Sempra LNG

 

 16 

20 

 

 

 5 

 

 

 - 

 - 

 

    Sempra Pipelines & Storage

 

 2 

 

 

 - 

 - 

 

 

 - 

 - 

 

    Sempra Generation

 

 1 

 

 

 1 

 - 

 

 

 1 

 - 

 

    Parent and other(1)

 

 - 

 - 

 

 

 (2)

(1)

 

 

 (1)

 - 

 

        Total other cost of sales

$

 80 

 100 

%

$

 182 

 100 

%

$

 988 

 100 

%

(1)

Includes eliminations of intercompany activity.

(2)

Excludes depreciation, which is shown separately on the Consolidated Statements of Operations.


In 2009, our Sempra Global and Parent revenues decreased by $900 million (32%) to $1.9 billion. The decrease included

§

$678 million lower revenues at Sempra Generation, primarily due to decreased power sales and unfavorable market pricing; and

§

$427 million lower revenues from Sempra Commodities. The 2008 revenues of $500 million were primarily for periods prior to the formation of RBS Sempra Commodities; offset by

§

$204 million higher revenues at Sempra LNG, primarily due to a full year of operations at its Energía Costa Azul LNG receipt terminal and the start up of operations at its Cameron LNG receipt terminal.

In 2008, our Sempra Global and Parent revenues decreased by $1.6 billion (36%) to $2.8 billion. The decrease included

§

$2.2 billion lower revenues from Sempra Commodities. Revenues in 2008 and 2007 included $500 million and $2.7 billion, respectively, for Sempra Commodities. These revenues were primarily for periods prior to the formation of RBS Sempra Commodities; offset by

§

$308 million higher revenues at Sempra Generation, primarily due to increased power sales and favorable natural gas prices and merchant sales activity;

§

$143 million higher revenues at Sempra Pipelines & Storage, primarily from Mexican pipeline operations and the consolidation of EnergySouth starting in October 2008; and

§

$96 million higher revenues at Sempra LNG, including $74 million from the commencement of commercial operations at its Energía Costa Azul LNG receipt terminal in May 2008 and $22 million lower mark-to-market losses related to a natural gas marketing agreement with RBS Sempra Commodities.

In 2009, our cost of natural gas, electric fuel and purchased power decreased by $695 million (42%) to $976 million. The decrease in 2009 from 2008 was associated with lower revenues at Sempra Generation and Sempra Pipelines & Storage, offset by increased costs associated with the higher revenues at Sempra LNG.

Our cost of natural gas, electric fuel and purchased power increased by $369 million (28%) to $1.7 billion in 2008. The increase over 2007 was primarily associated with the higher revenues at Sempra Generation, Sempra Pipelines & Storage and Sempra LNG.

In 2009, our other cost of sales decreased by $102 million (56%) to $80 million. Compared to 2007, our other cost of sales decreased $806 million (82%) to $182 million in 2008. The decreases in 2009 and 2008 were primarily due to our reduced interest in our commodities-marketing businesses. Other cost of sales included $178 million in 2008 and $988 million in 2007 for Sempra Commodities, primarily for periods prior to the formation of RBS Sempra Commodities.

Operation and Maintenance

In the table below, we provide a breakdown of our business units' operation and maintenance expenses.


OPERATION AND MAINTENANCE 2007-2009

(Dollars in millions)

 

 

Years ended December 31,

 

 

2009 

2008 

2007 

Sempra Utilities:

 

 

 

 

 

 

 

 

 

 

 

 

    SDG&E

$

 961 

39 

%

$

 913 

36 

%

$

 807 

27 

%

    SoCalGas

 

 1,138 

46 

 

 

 1,078 

43 

 

 

 1,021 

34 

 

Sempra Global:

 

 

 

 

 

 

 

 

 

 

 

 

    Sempra Commodities

 

 13 

 

 

 248 

10 

 

 

 918 

30 

 

    Sempra Generation

 

 108 

 

 

 97 

 

 

 103 

 

    Sempra Pipelines & Storage

 

 83 

 

 

 62 

 

 

 42 

 

    Sempra LNG

 

 94 

 

 

 77 

 

 

 44 

 

Parent and other(1)

 

 77 

 

 

 61 

 

 

 97 

 

Total operation and maintenance

$

 2,474 

 100 

%

$

 2,536 

 100 

%

$

 3,032 

 100 

%

(1)

Includes intercompany eliminations recorded in consolidation.




Sempra Energy Consolidated

The decrease in our operation and maintenance expenses in 2009 included

§

$235 million from our reduced interest in our commodities-marketing businesses; and

§

$58 million lower litigation expense at the Sempra Utilities; offset by

§

$166 million higher recoverable expenses (offset in revenues) and other operational costs at the Sempra Utilities; and

§

higher operation and maintenance costs at other Sempra Global business units, including $21 million at Sempra Pipelines & Storage primarily from the consolidation of Mobile Gas, which we acquired in October 2008; and $17 million at Sempra LNG primarily due to a full year of operations at the Energía Costa Azul LNG receipt terminal, which commenced operations in May 2008, and the commencement of operations at the Cameron LNG receipt terminal in July 2009.

In 2008, our operation and maintenance expenses decreased due to $670 million lower expenses from our reduced interest in our commodities-marketing businesses, offset by higher recoverable expenses (offset in revenues), litigation expense and other operational costs at the Sempra Utilities.

SDG&E

In 2009, SDG&E's operation and maintenance expenses increased by $48 million (5%) due to:

§

$54 million higher other operational and maintenance costs, including:

§

$15 million higher liability insurance premiums for wildfire coverage and

§

$7 million at the Otay Mesa Energy Center (OMEC), which began operating in October 2009; and

§

$41 million higher recoverable expenses, including $23 million at SONGS and $13 million for the California Solar Initiative program; offset by

§

$47 million lower litigation expense.

In 2008, the increase in SDG&E operation and maintenance expenses of $106 million (13%) was due to:

§

$61 million higher recoverable expenses, including:

§

$35 million higher energy efficiency program expenses and

§

$16 million higher electric transmission expenses;

§

$32 million higher litigation expense; and

§

$13 million higher other operational costs.

SoCalGas

In 2009, SoCalGas' operation and maintenance expenses increased by $60 million (6%) due to:

§

$74 million higher recoverable expenses, primarily from contributions to employee benefit plans; offset by

§

$11 million lower litigation expense; and

§

$3 million lower other operational and maintenance costs.

In 2008, the increase in SoCalGas operation and maintenance expenses of $57 million (6%) was due to:

§

$41 million higher other operational costs, including:

§

$13 million higher materials and supplies costs,

§

$10 million higher labor and employee benefits costs and

§

$8 million higher bad debt expense;

§

$13 million higher litigation expense; and

§

$3 million higher recoverable expenses.



Gains on Sale of Assets

Sempra Energy Consolidated

Our net pretax gains on the sale of assets were

§

$3 million in 2009

§

$114 million in 2008

§

$6 million in 2007

The gains in 2008 included $109 million related to the sale of the commodities-marketing businesses into RBS Sempra Commodities, which we discuss in Note 3 of the Notes to Consolidated Financial Statements.

Write-off of Long-lived Assets

In 2009, we recorded a $132 million write-off related to certain assets at one of Sempra Pipelines & Storage’s Liberty Gas Storage natural gas storage projects. Sempra Energy's after-tax share of this write-off was $64 million. We discuss the write-off of the assets in Note 1 of the Notes to Consolidated Financial Statements.

Equity Earnings (Losses) Before Income Taxes

Sempra Energy Consolidated

The earnings from our investment in RBS Sempra Commodities, which was formed in April 2008, were $463 million in 2009 and $383 million in 2008. We provide additional information about this investment's earnings in Note 4 of the Notes to Consolidated Financial Statements.

Equity earnings (losses) before income taxes from our other equity method investments were

§

$36 million in 2009

§

$37 million in 2008

§

$(9) million in 2007

The increase in 2008 was primarily due to the start of operations of Rockies Express-West in the first quarter of 2008. Further details about our equity method investments are provided in Note 4 of the Notes to Consolidated Financial Statements.

Other Income (Expense), Net

Sempra Energy Consolidated

Other Income (Expense), Net, was

§

$149 million in 2009

§

$(109) million in 2008

§

$73 million in 2007

We include here the allowance for equity funds used during construction (AFUDC) at the Sempra Utilities, regulatory interest, gains and losses from our investments and interest rate swaps, and other sundry amounts.

The increase in other income, net, in 2009 was primarily due to:

§

$108 million increase from investment activity related to our executive retirement and deferred compensation plans in 2009 ($55 million of gains in 2009 compared to $53 million of losses in 2008);

§

a $27 million gain from interest rate swaps at Otay Mesa VIE in 2009 compared to a $54 million loss in 2008; and  

§

$57 million in Mexican peso exchange losses in 2008 (largely offset by foreign tax benefits arising from fluctuations in the U.S. dollar/Mexican peso exchange rate and inflation); offset by

§

$16 million cash payment received for the early termination of a capacity agreement for the Cameron LNG receipt terminal in 2008.

The increase in other expense, net, in 2008 was primarily due to:

§

$80 million decrease from investment activity related to our executive retirement and deferred compensation plans in 2008 ($53 million of losses in 2008 compared to $27 million of gains in 2007);

§

$57 million in Mexican peso exchange losses in 2008 (largely offset by foreign tax benefits arising from fluctuations in the U.S. dollar/Mexican peso exchange rate and inflation); and

§

$54 million loss from interest rate swaps at Otay Mesa VIE in 2008 compared to $7 million net gain in 2007 from interest rate swaps ($24 million gain from other interest rate swaps, offset by $17 million loss from Otay Mesa VIE interest rate swaps); offset by  

§

$16 million cash payment received for the early termination of a capacity agreement for the Cameron LNG receipt terminal in 2008.

SDG&E

Other Income (Expense), Net, was

§

$64 million in 2009

§

$(29) million in 2008

§

$(6) million in 2007

The change in 2009 was primarily due to a $27 million gain from interest rate swaps at Otay Mesa VIE in 2009 compared to a $54 million loss in 2008.

The increase in other expense, net, in 2008 included $37 million higher losses from interest rate swaps at Otay Mesa VIE ($54 million in 2008 compared to $17 million in 2007), offset by a $10 million increase in allowance for equity funds used during construction.

Further details of the components of Other Income (Expense), Net, appear in Note 1 of the Notes to Consolidated Financial Statements.

Interest Income

The table below shows the interest income for Sempra Energy Consolidated, SDG&E, PE and SoCalGas.


INTEREST INCOME 2007-2009

(Dollars in millions)

 

Years ended December 31,

 

2009 

2008 

2007 

Sempra Energy Consolidated

$

 21 

$

 45 

$

 72 

SDG&E

 

 1 

 

 6 

 

 8 

PE

 

 4 

 

 22 

 

 51 

SoCalGas

 

 3 

 

 11 

 

 27 


In 2009, Sempra Energy Consolidated's interest income decreased due to:

§

$5 million lower interest income from our reduced ownership interest in the commodities-marketing businesses;

§

$4 million associated with the remarketing of industrial development bonds in 2009 at Parent and Other;

§

$4 million from a decrease in a note receivable due from an unconsolidated subsidiary of Sempra Generation as a result of converting the note to equity; and

§

lower interest rates, offset by higher average short-term investment balances.

The decrease in PE's interest income in 2009 was primarily due to:

§

lower interest income at SoCalGas, which we discuss below; and

§

lower interest rates on notes receivable due from Sempra Energy to PE, partially offset by higher average balances on those notes.

The decrease in SoCalGas' interest income in 2009 was primarily due to:

§

decreased interest income from lower interest rates, partially offset by higher average short-term investment balances in 2009 compared to 2008; and

§

lower interest rates and lower average balances on notes receivable from Sempra Energy.

The decrease in SDG&E's interest income in 2009 was primarily due to lower interest rates, offset by higher average short-term investment balances.

In 2008, the decreases in interest income at Sempra Energy Consolidated, PE and SoCalGas were primarily due to lower average short-term investment balances and lower interest rates.



Interest Expense

The table below shows the interest expense for Sempra Energy Consolidated, SDG&E, PE and SoCalGas.


INTEREST EXPENSE 2007-2009

(Dollars in millions)

 

Years ended December 31,

 

2009 

2008 

2007 

Sempra Energy Consolidated

$

 367 

$

 253 

$

 272 

SDG&E

 

 104 

 

 96 

 

 96 

PE

 

 69 

 

 65 

 

 76 

SoCalGas

 

 68 

 

 62 

 

 70 


Sempra Energy Consolidated

Our interest expense increased by $114 million (45%) due to:

§

$73 million higher net interest expense at Parent and Other primarily from long-term debt issued in 2008 and 2009 and higher average commercial paper borrowings in 2009, partially offset by lower interest rates on the commercial paper;

§

long-term debt issued in 2009 at SDG&E and in 2008 at SoCalGas, partially offset by lower interest rates;

§

$18 million reduced interest expense related to litigation reserves in 2008; and

§

$17 million net lower capitalized interest, including $26 million lower capitalized interest at Sempra LNG due to completion of construction projects, offset by $7 million higher capitalized interest at Sempra Pipelines & Storage.

In 2008, the decrease was due to:

§

$18 million reduced interest expense related to energy crisis litigation reserves;

§

$13 million lower other short-term debt interest;

§

$30 million effect of the repayment of long-term debt in 2007 at Parent and Other; and

§

lower interest rates; offset by  

§

$35 million higher interest expense primarily from long-term debt issued by SDG&E in September 2007 and by Parent and Other in 2008; and

§

$5 million net lower capitalized interest, including a reduction in interest expense at Sempra LNG due to the start of commercial operations at the Energía Costa Azul LNG receipt terminal in May 2008, offset by higher capitalized interest for Sempra Pipelines & Storage's projects.



SDG&E

In 2009, SDG&E's interest expense increased $8 million primarily due to long-term debt issued in 2009, partially offset by lower interest rates. In 2008, $10 million higher interest from long-term debt issued in September 2007 was partially offset by $5 million lower short-term debt interest and $3 million higher capitalized interest.

PE and SoCalGas

In 2009, PE's and SoCalGas' interest expense increased $4 million and $6 million, respectively, primarily due to long-term debt issued by SoCalGas in the fourth quarter of 2008, partially offset by lower interest rates. In 2008, the decrease in PE's and SoCalGas' interest expense of $11 million and $8 million, respectively, was primarily the result of lower interest rates.



Income Taxes

The table below shows the income tax expense and effective income tax rates for Sempra Energy, SDG&E, PE and SoCalGas.


INCOME TAX EXPENSE AND EFFECTIVE INCOME TAX RATES 2007-2009

(Dollars in millions)

 

Years ended December 31,

 

 

 

2009 

 

2008 

 

2007 

 

 

 

Income Tax

 

Effective Income

 

 

Income Tax

 

Effective Income

 

 

Income Tax

 

Effective Income

 

 

 

 

Expense

 

Tax Rate

 

 

Expense

 

Tax Rate

 

 

Expense

 

Tax Rate

 

Sempra Energy Consolidated(1)

$

422 

 

29 

%

$

 438 

 

30 

%

$

 524 

 

34 

%

SDG&E(1)

 

177 

 

32 

 

 

161 

 

36 

 

 

135 

 

33 

 

PE(1)

 

145 

 

35 

 

 

141 

 

36 

 

 

165 

 

40 

 

SoCalGas

 

144 

 

34 

 

 

140 

 

36 

 

 

160 

 

41 

 

(1)

Effective income tax rates for 2008 and 2007 were adjusted for the retrospective adoption of ASC 810 (SFAS 160).


Sempra Energy Consolidated

In 2009, Sempra Energy's income tax expense decreased by $16 million (4%) due to a lower effective income tax rate, offset partially by higher pretax income. The lower effective tax rate resulted from:

§

higher pretax income in countries with lower statutory rates;

§

the impact of Otay Mesa VIE; and

§

higher deductions for self-developed software costs; offset by

§

higher income tax expense related to Mexican currency translation and inflation adjustments; and

§

the impact of noncontrolling interests.

In 2009, Sempra Energy received an income tax benefit of $35 million from the write-off of assets at Liberty, which we discuss in Note 1 of the Notes to Consolidated Financial Statements. This tax benefit was due to a non-recurring event in 2009.

In 2008, the decrease in income tax expense compared to 2007 was due to lower pretax income and a lower effective tax rate. The decrease in the effective tax rate was primarily due to:

§

higher favorable impact from the resolution of prior years' income tax issues in 2008;

§

lower income tax expense related to Mexican currency translation and inflation adjustments; and

§

larger tax deductions, primarily at the Sempra Utilities related to self-developed software costs; offset by

§

lower synthetic fuels credits generated in 2008 compared to 2007.

As the result of the implementation of Statement of Financial Accounting Standards (SFAS) No. 160 (Accounting Standards Codification (ASC) 810), Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51, as we discuss in Note 2 of the Notes to Consolidated Financial Statements we report as part of our pretax results the income or loss attributable to noncontrolling interests. However, we do not record income taxes for this income or loss, as our entities with noncontrolling interests are currently treated as partnerships for income tax purposes and thus we are only liable for income taxes on the portion of the earnings that are allocated to us.

As our entities with noncontrolling interests grow, and as we may continue to invest in such entities, the impact on our effective income tax rate may become more significant.

SDG&E

In 2009, SDG&E's income tax expense increased by $16 million (10%) due to higher pretax income, offset partially by a lower effective income tax rate. The lower effective tax rate was primarily due to:

§

the impact of Otay Mesa VIE; offset by

§

lower favorable impact from the resolution of prior years' income tax issues.

In 2008, the increase in income tax expense was due to higher pretax income and a higher effective income tax rate. The higher effective income tax rate was primarily due to:

§

the impact of Otay Mesa VIE in 2008; and

§

in 2007, the resolution of a regulatory matter resulted in pretax income of $27 million and income tax of $1 million, which reduced the 2007 effective tax rate by 2%; offset by 

§

an increase in tax deductions (primarily related to the equity portion of AFUDC and self-developed software costs).

SDG&E's results include the results of VIEs that are consolidated, and therefore, SDG&E's effective income tax rate is impacted by the effective income tax rate of the VIEs on a stand alone basis. This impact increased (decreased) SDG&E's effective income tax rate by (2)% in 2009, 4% in 2008 and 1% in 2007.

PE and SoCalGas

In 2009, PE's and SoCalGas' income tax expense increases were due to higher pretax income, offset primarily by larger deductions for self-developed software costs.

In 2008, the decrease in income tax expense was primarily due to lower pretax income, larger tax deductions (primarily for self-developed software costs) and the lower impact of state income taxes, net of federal income tax benefit.

Equity Earnings, Net of Income Tax

Sempra Energy Consolidated

Equity earnings of unconsolidated subsidiaries, net of income tax, were

§

$68 million in 2009

§

$63 million in 2008

§

$99 million in 2007



Equity earnings, net of income tax, were lower in 2008 due to a transaction in 2007. In February 2007, Sempra Commodities sold its interests in an equity method investment and a related cost-basis investment for cash and a 12.7-percent interest in a newly formed entity. The gain on this transaction was $30 million.  We provide further discussion of our equity method investments in Note 4 of the Notes to Consolidated Financial Statements.

Discontinued Operations

Sempra Energy Consolidated

Loss from discontinued operations was $26 million in 2007. We provide further discussion in Note 5 of the Notes to Consolidated Financial Statements.

(Earnings) Losses Attributable to Noncontrolling Interests

Sempra Energy Consolidated

Losses attributable to noncontrolling interests decreased $48 million in 2009 due to:

§

$27 million in gains on interest rate swaps in 2009 at Otay Mesa VIE compared to losses of $54 million in 2008; offset by

§

$33 million write-off of assets related to the Liberty project in 2009.

Losses attributable to noncontrolling interests in 2007 were from losses on interest rate swaps at Otay Mesa VIE.

SDG&E

Earnings attributable to noncontrolling interests were $24 million in 2009 compared to losses of $54 million in 2008, due primarily to $27 million in gains on interest rate swaps in 2009 at Otay Mesa VIE compared to losses of $54 million in 2008. Losses attributable to noncontrolling interests in 2007 were from losses on interest rate swaps at Otay Mesa VIE.

Earnings

We summarize variations in overall earnings in "Overall Results of Operations of Sempra Energy and Factors Affecting the Results" above. We discuss variations in earnings by business unit above in "Business Unit Results."

TRANSACTIONS WITH AFFILIATES

We provide information about our related party transactions in Note 1 of the Notes to Consolidated Financial Statements.

BOOK VALUE PER SHARE

Sempra Energy's book value per share on the last day of each year was

§

$36.54 in 2009

§

$32.75 in 2008

§

$31.93 in 2007

The increases in 2009 and 2008 were primarily the result of comprehensive income exceeding dividends. The increase in 2009 was offset by an increase in common stock primarily from issuances under our savings plans and from employee stock option exercises. The increase in 2008 compared to 2007 was also due to the reduction in common stock shares from a 2008 share repurchase program, partially offset by share repurchases, primarily under the share repurchase program, at prices greater than book value.




CAPITAL RESOURCES AND LIQUIDITY

We expect our cash flows from operations to fund a substantial portion of our capital expenditures and dividends.  In addition, we may meet our cash requirements through the issuance of short-term and long-term debt and the expected proceeds from the transaction to sell certain businesses within RBS Sempra Commodities, as we discuss below.  

Significant events affecting cash flows in 2009 were

§

Long-term debt issuances of $1.8 billion (excluding VIEs)

§

Long-term debt retirements of $535 million (including $100 million prepayment of notes payable due to an unconsolidated affiliate)

§

$625 million invested in Rockies Express

§

$235 million invested in Fowler Ridge II

§

$119 million prepayment of remaining installments due under a litigation settlement

We discuss these events in more detail later in this section.

Our committed lines of credit provide liquidity and support commercial paper.  They expire in August 2011.  At Sempra Energy, they are syndicated broadly among 20 different banks and at the Sempra Utilities, among 17 different banks.  No single bank has greater than an 11-percent share in any agreement.

The table below shows the amount of available funds at year-end 2009:


AVAILABLE FUNDS AT DECEMBER 31, 2009

(Dollars in millions)

 

 

Sempra Energy

 

 

 

 

Consolidated

SDG&E

PE/SoCalGas

Unrestricted cash and cash equivalents

$

 110 

$

 13 

$

 49 

Available unused credit(1)

 

 3,564 

 

 338 

 

 538 

(1)

Borrowings on the shared line of credit at SDG&E and SoCalGas, discussed in Note 6, are limited to $600 million for each utility and $800 million in total. SDG&E's available unused credit has been reduced by letters of credit outstanding of $25 million and outstanding variable-rate demand notes of $237 million supported by the line.  SoCalGas' availability reflects the impact of SDG&E's use of the combined credit available on the line.

Sempra Energy Consolidated

We believe that these available funds and cash flows from operations, distributions from equity method investments and security issuances, combined with current cash balances, will be adequate to:

§

finance capital expenditures

§

meet liquidity requirements

§

fund shareholder dividends

§

fund new business acquisitions or start-ups

As we discuss above under “Our Business—Sempra Energy Business Units—Sempra Commodities,” RBS Sempra Commodities has entered into an agreement to sell certain of its businesses in a transaction scheduled to close in the second quarter of 2010.  We estimate the proceeds that we receive from this transaction will approximate $835 million, excluding undistributed partnership earnings through November 2009.  We may use the proceeds to fund growth opportunities, to reduce debt or, if we exit the business entirely, for a possible repurchase of our common shares.

Both Sempra Energy and SDG&E issued long-term debt in 2009.  However, changing economic conditions could affect the availability and cost of both short-term and long-term financing.  If cash flows from operations were to be significantly reduced or we were to be unable to borrow under acceptable terms, we would reduce or postpone discretionary capital expenditures and investments in new businesses.  If these measures were necessary, they would primarily impact our Sempra Global businesses, as credit availability for the Sempra Utilities has not been significantly impacted by the credit crisis.  Discretionary expenditures at Sempra Global would include projects that we have not yet made firm commitments to build, primarily renewable generation facilities.  We continuously monitor our ability to finance the needs of our operating, investing and financing activities in a manner consistent with our intention to maintain strong, investment-quality ratings.

We have significant investments in several trusts to provide for future payments of pensions and other postretirement benefits, and nuclear decommissioning.  The value of the trust funds’ investments declined in 2008 and the first quarter of 2009 due to a decrease in the equity market and volatility in the fixed income market.  These markets continue to be volatile.  The decrease in asset values has not affected the funds’ abilities to make their required payments, however we expect funding requirements for pension and other postretirement benefit plans to increase.  At the Sempra Utilities, funding requirements are generally recoverable in rates.      

In November 2009, we prepaid the remaining installments due under the Continental Forge litigation settlement.  Under the settlement, prepayments are discounted at 7 percent, yielding a prepayment amount of $119 million.  Funding of the payment was $36 million by Sempra Energy, $28 million by SDG&E and $55 million by SoCalGas.

We discuss our principal credit agreements more fully in Note 6 of the Notes to Consolidated Financial Statements.

Sempra Utilities

The Sempra Utilities expect that cash flows from operations and debt issuances will continue to be adequate to meet utility capital expenditure requirements.  Due to the extended review period associated with the Sunrise Powerlink project and the resultant delay in initiating construction activities, SDG&E declared and paid a $150 million common dividend to Sempra Energy in the first quarter of 2009.  However, the level of future common dividends from SDG&E and SoCalGas may be reduced or eliminated during periods of increased capital expenditures.  The level of future common dividends from PE is dependent upon common dividends paid by SoCalGas.  Sempra Energy may from time to time make additional equity contributions to SDG&E and SoCalGas to support the Sempra Utilities’ capital expenditure programs.

Sempra Commodities

On April 1, 2008, we completed the formation of RBS Sempra Commodities, a partnership to own and operate Sempra Energy's commodities-marketing businesses, which generally comprised the Sempra Commodities business unit.  RBS is obligated to provide the joint venture with all growth capital, working-capital requirements and credit support.  However, we are providing transitional back-up guarantees and credit support, some of which may continue for a prolonged period of time. RBS has fully indemnified us for any claims or losses in connection with these arrangements.

We account for our investment in the partnership under the equity method.  RBS Sempra Commodities intends to distribute all of its net income on an annual basis, although the distributions are within the discretion of the board of directors of the partnership.  In limited cases, the partnership may retain earnings allocable to the partners to replenish capital depleted through losses.  In 2009 and 2008, we received cash distributions from the partnership of $407 million and $85 million, respectively.  

We discuss above under “Our Business – Sempra Energy Business Units – Sempra Commodities” the sale of certain businesses within RBS Sempra Commodities and anticipated changes to certain provisions of the partnership agreement entered into by RBS and Sempra Commodities upon the formation of the joint venture. The impact of the transaction on future cash flows will depend on many factors, including the final proceeds received from the transaction and the date at which the transaction closes, after which we will be receiving lower earnings from the joint venture.  The businesses being sold have historically generated 40 to 60 percent of total earnings of the businesses in the partnership, and have averaged more than 50 percent.  RBS’ obligation to support the capital needs of the joint venture, and the need for us to provide transitional back-up guarantees and credit support are expected to continue after the consummation of the transaction.

We provide additional information about RBS Sempra Commodities and the pending transaction with J.P. Morgan Ventures in Notes 3, 4, 6 and 20 of the Notes to Consolidated Financial Statements.

Sempra Generation

We expect Sempra Generation to require funds for the development of electric generation facilities, primarily renewable energy projects.  Projects at Sempra Generation may be financed through a combination of operating cash flow, project financing, funds from the parent and external borrowings.  Cash flows from operations at Sempra Generation are expected to decrease upon the expiration of their contract with the DWR in late 2011 due to less favorable pricing on replacement contracts.  Also, Sempra Generation may not be able to replace all of the lost revenue.

Some of Sempra Generation's long-term power sale contracts contain collateral requirements, although, the DWR contracts do not contain such requirements.  The collateral arrangements require Sempra Generation and/or the counterparty to post cash, guarantees or letters of credit to the other party for exposure in excess of established thresholds. Sempra Generation may be required to provide collateral when market price movements adversely affect the counterparty's cost of replacement energy supplies if Sempra Generation fails to deliver the contracted amounts. Sempra Generation had no outstanding collateral requirements under such contracts at December 31, 2009 and 2008.



Sempra Pipelines & Storage

Sempra Pipelines & Storage is expected to require funding from the parent or from external sources to fund projects and investments, including:

§

development and expansion of its natural gas storage projects

§

participation in the REX natural gas pipeline

Also, on February 24, 2010, Sempra Pipelines & Storage announced that it will acquire the Mexican pipeline and natural gas infrastructure assets of El Paso Corporation for $300 million. We discuss this transaction further in "Factors Influencing Future Performance – Sempra Global Investments."

Sempra LNG

Sempra LNG required funding from 2007 through 2009 for its development of the Energía Costa Azul and Cameron LNG receipt terminals.  As both of these facilities are now in service, Sempra LNG is expected to provide operating cash flow for further development within Sempra Global.

CASH FLOWS FROM OPERATING ACTIVITIES


CASH PROVIDED BY OPERATING ACTIVITIES

(Dollars in millions)

 

2009 

2009 Change

2008 

2008 Change

2007 

Sempra Energy Consolidated

$

 1,875 

$

 684 

 57 

%

$

 1,191 

$

 (907)

 (43)

%

$

 2,098 

SDG&E

 

 641 

 

 22 

 4 

 

 

 619 

 

 (41)

 (6)

 

 

 660 

PE

 

 433 

 

 (140)

 (24)

 

 

 573 

 

 81 

 16 

 

 

 492 

SoCalGas

 

 440 

 

 (128)

 (23)

 

 

 568 

 

 90 

 19 

 

 

 478 


Sempra Energy Consolidated

Cash provided by operating activities at Sempra Energy increased in 2009 due to:

§

a lower decrease in accounts payable ($332 million of the decrease in 2008 relates to Sempra Commodities prior to the formation of the joint venture RBS Sempra Commodities);

§

$322 million higher distributions received from RBS Sempra Commodities;

§

a decrease in inventory in 2009 compared to an increase in 2008, primarily at SoCalGas; and

§

an increase in overcollected regulatory balancing accounts in 2009 compared to a decrease in 2008; offset by

§

an accounts receivable increase in 2009 compared to a decrease in 2008, including $132 million at SoCalGas and smaller increases at each of our other businesses; and

§

$119 million prepayment of the six remaining installments due under the Continental Forge litigation.

The changes in Other Current Assets and Other Current Liabilities in 2009 at both Sempra Energy and SDG&E include $662 million in payments received from our liability insurance and $652 million of settlements paid related to the SDG&E 2007 wildfire litigation, respectively.  We discuss this litigation in Note 17 of the Notes to Consolidated Financial Statements.

The decrease in cash provided by operating activities at Sempra Energy in 2008 was due to:

§

a $297 million decrease in net income (adjusted for noncash items, including $383 million related to equity earnings from RBS Sempra Commodities);

§

a decrease of $303 million in net trading assets in 2007 compared to a $4 million increase in 2008 (prior to the sale of the commodities-marketing businesses to RBS Sempra Commodities);

§

a decrease in overcollected balancing accounts in 2008 compared to an increase in 2007, primarily at SDG&E; and

§

a decrease in accounts payable, primarily due to accruals for costs associated with the El Dorado outage at Sempra Generation at the end of 2007 and a decrease at Sempra Commodities in 2008 (prior to the sale of the commodities-marketing businesses to RBS Sempra Commodities); offset by

§

a decrease in accounts receivable, primarily at SoCalGas due to higher natural gas volumes in 2007 due to a colder winter in 2007 compared to 2008; and

§

$329 million lower net income tax payments due to 2007 overpayments applied to 2008 taxes and higher refunds received in 2008 as compared to 2007.

SDG&E

Cash provided by operating activities at SDG&E increased in 2009 primarily due to an increase in overcollected regulatory balancing accounts compared to a decrease in 2008 and $10 million in cash received from liability insurance, net of settlement payments, related to the 2007 wildfire litigation, as we discuss above under “Sempra Energy Consolidated.”  Over- and undercollected regulatory balancing accounts reflect the difference between customer billings and recorded or CPUC-authorized costs.  These differences are required to be balanced over time.

These inflows were offset by higher net income tax payments in 2009 and a lower decrease in inventory.  The lower decrease in inventory resulted from SoCalGas assuming procurement responsibility for SDG&E’s core natural gas customers effective April 2008.  As a result, SDG&E depleted its natural gas inventory at the end of the first quarter 2008.  Remaining inventory, comprised primarily of materials and supplies, stayed relatively unchanged in 2009.    

Cash provided by operating activities at SDG&E decreased in 2008 primarily due to a decrease in overcollected regulatory balancing accounts compared to an increase in 2007.  The decrease in overcollected regulatory balancing accounts was offset by other changes in working capital, principally inventory and lower net income tax payments.  The reduction in inventory in 2008 resulted from SoCalGas assuming procurement responsibility as discussed above.  Lower net income tax payments were due to 2007 overpayments applied to 2008 taxes and higher refunds received in 2008 as compared to 2007.    

PE and SoCalGas

Cash provided by operating activities at PE and SoCalGas decreased in 2009 due to changes at SoCalGas, primarily due to the effect on working capital balances of:

§

an increase in accounts receivable in 2009 compared to a decrease in 2008.  Customer receivables in 2009 were relatively unchanged from 2008, however, other accounts receivable increased in 2009 primarily due to natural gas storage transactions;

§

a decrease in accounts payable in 2009 compared to an increase in 2008 due to lower natural gas prices; and

§

the $55 million prepayment of remaining installments due under the Continental Forge litigation settlement; offset by

§

a decrease in inventory in 2009 compared to an increase in 2008 due to higher withdrawals from inventory in the fourth quarter of 2009 to supply core customers and unseasonably warm weather in the fourth quarter of 2008 resulting in lower than normal demand for natural gas by core customers.

Cash provided by operating activities at PE increased in 2008 primarily due to changes at SoCalGas, principally an increase in net income adjusted for noncash items ($89 million at PE and $91 million at SoCalGas), and a decrease in accounts receivable.  Accounts receivable decreased in 2008 and increased in 2007 due to lower natural gas prices and unseasonably warm weather in 2008, resulting in lower demand for natural gas for heating in the fourth quarter.

These increases were offset by an increase in inventory and a $40 million payment for the termination of an interest rate swap in 2008. The increase in inventory in 2008 resulted from SoCalGas assuming procurement responsibility for SDG&E’s core natural gas customers in 2008.

The table below shows the contributions to pension and other postretirement benefit plans for each of the past three years.


CONTRIBUTIONS TO PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS 2007-2009

(Dollars in millions)

 

Pension Benefits

 

Other Postretirement Benefits

 

2009 

2008 

2007 

 

2009 

2008 

2007 

Sempra Energy Consolidated

$

 185 

$

 66 

$

 35 

 

$

 45 

$

 40 

$

 45 

SDG&E

 

 58 

 

 38 

 

 27 

 

 

 16 

 

 16 

 

 15 

PE and SoCalGas

 

 76 

 

 1 

 

 1 

 

 

 28 

 

 22 

 

 28 





CASH FLOWS FROM INVESTING ACTIVITIES


CASH USED IN INVESTING ACTIVITIES

(Dollars in millions)

 

2009 

2009 Change

2008 

2008 Change

2007 

Sempra Energy Consolidated

$

 (2,672)

$

 286 

 12 

%

$

 (2,386)

$

 313 

 15 

%

$

 (2,073)

SDG&E

 

 (925)

 

 (15)

 (2)

 

 

 (940)

 

 233 

 33 

 

 

 (707)

PE

 

 (485)

 

 166 

 52 

 

 

 (319)

 

 (170)

 (35)

 

 

 (489)

SoCalGas

 

 (496)

 

 178 

 56 

 

 

 (318)

 

 (161)

 (34)

 

 

 (479)


Sempra Energy Consolidated

Cash used in investing activities at Sempra Energy increased in 2009 due to:

§

$475 million higher investments in Rockies Express;

§

$235 million invested in Fowler Ridge II;

§

$461 million net proceeds in 2008 from the transaction to form the RBS Sempra Commodities joint venture; and

§

$61 million lower proceeds from the remarketing of industrial development bonds in 2009; offset by

§

$495 million (net of $16 million cash acquired) for the acquisition of EnergySouth in 2008;

§

$338 million decrease in purchases of industrial development bonds in 2009; and

§

$149 million decrease in capital expenditures, primarily due to the completion of Sempra Global projects in 2009.

The increase in cash used in investing activities at Sempra Energy in 2008 was primarily due to the following outflows of cash:

§

$495 million for the acquisition of EnergySouth;

§

$150 million investment in Rockies Express; and

§

$413 million in purchases of industrial development bonds, offset by proceeds from remarketing $237 million of these bonds.

These outflows were partially offset by the net proceeds from the RBS transaction.  Total proceeds of $2.1 billion, which are net of $383 million of cash sold, were offset by our capital contribution of $1.6 billion to form the partnership.

SDG&E

Cash used in investing activities at SDG&E decreased slightly in 2009 primarily due to:

§

$24 million net proceeds from the remarketing of industrial development bonds in 2009 compared to $24 million net purchases in 2008; and

§

a $20 million decrease in loans to affiliates in 2009 compared to an increase of $33 million in 2008; offset by

§

a $71 million net increase in capital expenditures (a $109 million increase at SDG&E and $25 million increase at Orange Grove VIE, offset by a decrease of $63 million at Otay Mesa VIE).

The increase in cash used in investing activities at SDG&E in 2008 was primarily due to:

§

a $170 million increase in capital expenditures, including a $91 million increase at Otay Mesa VIE;

§

the net purchase of $24 million of industrial development bonds; and

§

a $33 million increase in loans to affiliates.

PE and SoCalGas

Cash used in investing activities at PE increased in 2009, primarily due to a $16 million increase in advances from SoCalGas to Sempra Energy compared to a $136 million decrease in 2008.

The decrease in cash used in investing activities at PE in 2008 was due to the reduction in outstanding advances from SoCalGas to Sempra Energy by $136 million in 2008.

CAPITAL EXPENDITURES AND INVESTMENTS

The table below shows our expenditures for property, plant and equipment, and for investments. We provide capital expenditure information by segment in Note 18 of the Notes to Consolidated Financial Statements.


SEMPRA ENERGY

CAPITAL EXPENDITURES AND INVESTMENTS/ACQUISITIONS

(Dollars in millions)

 

Property, plant and equipment

 

Investments and acquisition of subsidiaries

2009 

$

 1,912 

 

$

 939 

2008 

 

 2,061 

 

 

 2,675 

2007 

 

 2,011 

 

 

 121 

2006 

 

 1,907 

 

 

 257 

2005 

 

 1,377 

 

 

 86 


Sempra Energy Consolidated Capital Expenditures

Capital expenditures at the Sempra Utilities are discussed below.

At Sempra Global, the primary capital expenditures over the last three years were as follows:

Sempra LNG

Energía Costa Azul LNG Receipt Terminal. Energía Costa Azul began commercial operations in May 2008.  The nitrogen-injection facility was placed in service in December 2009.  Total expenditures for the project were $1.2 billion related to the terminal (including breakwater), the nitrogen-injection facility, and an expansion project, including:

§

$54 million in 2009

§

$228 million in 2008

§

$298 million in 2007

Cameron LNG Receipt Terminal. The Cameron LNG receipt terminal began commercial operations in July 2009.  Total costs of this project were approximately $900 million, excluding pre-expansion costs of $44 million.  Expenditures over the last three years are as follows:

§

$153 million in 2009

§

$152 million in 2008

§

$224 million in 2007  

Sempra Pipelines & Storage

In 2009, Sempra Pipelines & Storage completed its Cameron Interstate Pipeline project in Louisiana connecting the Cameron LNG receipt terminal with several interstate pipelines and in 2008, completed its expansion of existing pipelines in Baja California, Mexico, and the addition of a spur line to connect Sempra LNG’s Energía Costa Azul LNG receipt terminal to an existing Sempra Energy natural gas pipeline in Mexico with interconnections to the U.S. border. Sempra Pipelines & Storage also had capital expenditures for its natural gas storage projects.  Related expenditures were

Pipelines:

Natural gas storage:

§

$10 million in 2009

§

$127 million in 2009

§

$147 million in 2008

§

$34 million in 2008

§

$270 million through 2007

§

$217 million through 2007




Sempra Energy Investments and Acquisitions

In 2009, investments consisted primarily of:

§

$625 million for Rockies Express and $235 million for Fowler Ridge II

§

the purchase of $75 million in industrial development bonds

In 2008, investments and acquisitions consisted primarily of:

§

capital contribution of $1.6 billion to RBS Sempra Commodities and $150 million invested in Rockies Express

§

the acquisition of EnergySouth for $495 million (net of $16 million of cash acquired)

§

the purchase of $413 million in industrial development bonds

In 2007, investments consisted primarily of:

§

$100 million invested in Rockies Express

§

$21 million for purchases of available-for-sale securities and other investments

Purchase of Bonds Issued by Unconsolidated Affiliate

In November 2009, Sempra Pipelines & Storage purchased $50 million of 2.75% bonds issued by Chilquinta Energía S.A., a Chilean electric utility, that are denominated in Chilean Unidades de Fomento.  We discuss these bonds in Note 4 of the Notes to Consolidated Financial Statements.

Sempra Utilities Capital Expenditures and Investments

The Sempra Utilities' capital expenditures for property, plant and equipment were


(Dollars in millions)

2009 

2008 

2007 

SDG&E

$

 955 

$

 884 

$

 714 

SoCalGas

 

 480 

 

 454 

 

 457 


Capital expenditures at the Sempra Utilities in 2009 consisted primarily of:

SDG&E

§

$447 million of improvements to natural gas and electric distribution systems

§

$149 million of improvements to electric transmission systems

§

$114 million for the Sunrise Powerlink transmission line

§

$97 million for electric generation plants and equipment

§

$115 million at Otay Mesa VIE

§

$25 million at Orange Grove VIE

SoCalGas

§

$480 million of improvements to natural gas infrastructure

SDG&E also purchased $152 million and $488 million of industrial development bonds in 2009 and 2008, respectively.  We discuss these bonds in Note 6 of the Notes to Consolidated Financial Statements.

FUTURE CONSTRUCTION EXPENDITURES AND INVESTMENTS

The amounts and timing of capital expenditures are generally subject to approvals by the CPUC, the FERC and other regulatory bodies.  However, in 2010, we expect to make capital expenditures and investments of $3 billion, including:

§

$2.1 billion at the Sempra Utilities (excluding VIEs) for capital projects and plant improvements ($1.5 billion at SDG&E and $600 million at SoCalGas)

§

$900 million at our other subsidiaries for the development of natural gas storage facilities and pipelines, and renewable generation projects

The expected capital expenditures of $900 million at our other subsidiaries include approximately $150 million to $250 million for Copper Mountain Solar (a 48-MW solar generation facility under construction by Sempra Generation in Boulder City, Nevada), approximately $250 million to $300 million for Sempra Pipelines & Storage’s development of natural gas storage projects at Liberty, Bay Gas and Mississippi Hub, and $300 million for Sempra Pipelines & Storage's acquisition of Mexican pipeline and natural gas infrastructure assets that we discuss in "Factors Influencing Future Performance – Sempra Global Investments."

In 2010, the Sempra Utilities expect their capital expenditures to include:

§

$780 million for additions to SDG&E’s natural gas and electric distribution systems, advanced metering infrastructure and electric generation plant and equipment

§

$600 million at SoCalGas for improvements to distribution and transmission systems, and for advanced metering infrastructure

§

$540 million at SDG&E for the Sunrise Powerlink transmission line

§

$190 million for improvements to SDG&E’s electric transmission infrastructure

The Sempra Utilities expect to finance these expenditures and investments with cash flows from operations, cash on hand and debt issuances.  These amounts do not include expected capital expenditures of Otay Mesa VIE and Orange Grove VIE.

Over the next five years, the Sempra Utilities expect to make capital expenditures of:

§

$6.9 billion at SDG&E, at an average rate of $1.4 billion per year

§

$3.7 billion at SoCalGas, at an average rate of $750 million per year  

SDG&E’s estimated capital expenditures include $200 million for the transfer of Sempra Generation’s El Dorado facility in 2011.

Sempra Energy expects to make capital expenditures at its other subsidiaries of $4 billion, at an average rate of $800 million per year, over the next five years.

Capital expenditure amounts include capitalized interest. At the Sempra Utilities, the amounts also include the portion of AFUDC related to debt, but exclude the portion of AFUDC related to equity.  We provide further details about AFUDC in Note 1 of the Notes to Consolidated Financial Statements.

Periodically, we review our construction, investment and financing programs and revise them in response to changes in regulation, economic conditions, competition, customer growth, inflation, customer rates, the cost and availability of capital, and environmental requirements. We discuss these considerations in more detail in Notes 15, 16 and 17 of the Notes to Consolidated Financial Statements.

Our level of capital expenditures and investments in the next few years may vary substantially and will depend on the cost and availability of financing, regulatory approvals and business opportunities providing desirable rates of return.  We intend to finance our capital expenditures in a manner that will maintain our strong investment-grade ratings and capital structure.

CASH FLOWS FROM FINANCING ACTIVITIES


CASH FLOWS FROM FINANCING ACTIVITIES

(Dollars in millions)

 

2009 

2009 Change

2008 

2008 Change

2007 

Sempra Energy Consolidated

$

 576 

$

 (282)

 (33)

%

$

 858 

$

 1,164 

 380 

%

$

 (306)

SDG&E

 

 278 

 

 96 

 53 

 

 

 182 

 

 15 

 9 

 

 

 167 

PE

 

 (105)

 

 2 

 2 

 

 

 (107)

 

 48 

 31 

 

 

 (155)

SoCalGas

 

 (101)

 

 2 

 2 

 

 

 (103)

 

 48 

 32 

 

 

 (151)


Sempra Energy Consolidated

Cash from financing activities in 2009 decreased due to:

§

a $659 million decrease in short-term debt in 2009 compared to a $564 million increase in 2008;

§

$456 million higher debt payments; and

§

$94 million purchase of the remaining 40-percent interest in Mississippi Hub (as we discuss in Note 3 of the Notes to Consolidated Financial Statements); offset by

§

$996 million lower common stock repurchases in 2009;

§

a $445 million increase in issuances of debt (including $145 million short-term debt with maturities greater than 90 days); and

§

a $55 million increase in common stock issuances.

The increase in cash from financing activities at Sempra Energy in 2008 was primarily due to:

§

a $1.3 billion increase in issuances of debt; and

§

a $993 million decrease in debt payments; offset by

§

an $833 million increase in common stock repurchases (reflecting our $1 billion share repurchase program in 2008); and

§

a $248 million lower increase in short-term debt.

SDG&E

Cash provided by financing activities in 2009 increased due to:

§

a $246 million net increase in issuances of long-term debt in 2009 (increases of $299 million at SDG&E and $20 million at Orange Grove VIE, offset by a decrease of $73 million at Otay Mesa VIE); offset by

§

$150 million in common dividends paid in 2009.

Cash provided by financing activities at SDG&E in 2008 increased due to:

§

no payments on long-term debt in 2008, compared to $66 million in 2007; and

§

a $72 million decrease in short-term debt in 2007; offset by

§

a $120 million net decrease in the issuance of long-term debt in 2008 (a $250 million decrease at SDG&E, offset by an increase of $130 million by Otay Mesa VIE).

PE and SoCalGas

Cash used in financing activities at PE and SoCalGas in 2009 stayed relatively constant.  Net activity included

§

$350 million in common dividends paid in 2008; offset by

§

$250 million issuance of long-term debt in 2008; and

§

$100 million long-term debt payment in 2009.

Cash used in financing activities at PE and SoCalGas in 2008 decreased due to a $250 million issuance of long-term debt in 2008, offset by an increase of $200 million in common dividends paid.

LONG-TERM DEBT

Long-term balances (including the current portion of long-term debt) at December 31 were


(Dollars in millions)

2009 

2008 

2007 

Sempra Energy Consolidated

$

 8,033 

$

 6,954 

$

 4,560 

SDG&E

 

 2,668 

 

 2,144 

 

 1,958 

PE/SoCalGas

 

 1,294 

 

 1,370 

 

 1,113 


At December 31, 2009, the following information applies to long-term debt:


 

Sempra Energy

 

 

 

 

(Dollars in millions)

Consolidated

SDG&E

SoCalGas

Weighted average life to maturity, in years

 12.3 

 

 16.8 

 

 8.5 

 

Weighted average interest rate

 5.81 

%

 5.12 

%

 4.69 

%




Issuances of Long-Term Debt

Issuances of long-term debt over the last three years included the following:


(Dollars in millions)

 

Amount

 

Rate

 

Maturing

 

 

 

 

 

 

 

 

Sempra Energy

 

 

 

 

 

 

 

Notes, October 2009

$

750 

 

 6.00 

%

2039 

 

Notes, May 2009

 

750 

 

 6.50 

 

2016 

 

Notes, November 2008

 

250 

 

 8.90 

 

2013 

 

Notes, November 2008

 

500 

 

 9.80 

 

2019 

 

Notes, June 2008

 

500 

 

 6.15 

 

2018 

 

 

 

 

 

 

 

 

SDG&E(1)

 

 

 

 

 

 

 

First mortgage bonds, May 2009

 

300 

 

 6.00 

 

2039 

 

First mortgage bonds, September 2007

 

250 

 

 6.125 

 

2037 

 

 

 

 

 

 

 

 

SoCalGas

 

 

 

 

 

 

 

First mortgage bonds, November 2008

 

250 

 

 5.50 

 

2014 

(1)

In 2009, SDG&E's variable interest entities, Otay Mesa VIE and Orange Grove VIE (from the date of consolidation), had construction loan borrowings of $121 million and $20 million, respectively.  Otay Mesa VIE had $193 million and $63 million of construction loan borrowings in 2008 and 2007, respectively.


Sempra Energy used the proceeds from its issuances of long-term debt primarily for general corporate purposes, including the repayment of commercial paper and to repay maturing long-term notes.

The Sempra Utilities used the proceeds from their issuances of long-term debt for:

§

general working capital purposes,

§

to support their electric (at SDG&E) and natural gas (SDG&E and SoCalGas) capital expenditure programs,

§

to replenish amounts expended and fund future expenditures for the expansion and improvement of their utility plants, and

§

to repay commercial paper at SDG&E.

Payments on Long-Term Debt

Payments on long-term debt in 2009 included

§

$300 million of Sempra Energy 4.75-percent notes payable at maturity in May 2009

§

$100 million of SoCalGas variable rate first mortgage bonds at maturity in December 2009

Payments on long-term debt in 2007 primarily consisted of:

§

$600 million of Sempra Energy 4.621-percent notes payable at maturity in May 2007

§

$300 million of Sempra Energy variable rate notes payable with a maturity of May 2008 that were redeemed in August 2007

§

$66 million remaining outstanding balance of SDG&E’s rate-reduction bonds

In Note 6 of the Notes to Consolidated Financial Statements, we provide information about our lines of credit and additional information about debt activity.

Payments on Notes Payable to Unconsolidated Affiliate

Sempra Pipelines & Storage prepaid $100 million of notes payable due to Chilquinta Energía Finance Co. LLC in November 2009 and paid $60 million of notes payable at maturity in April 2008.




CAPITAL STOCK TRANSACTIONS

Sempra Energy

Cash provided by employee stock option exercises was

§

$47 million in 2009

§

$18 million in 2008

§

$32 million in 2007

During 2008, we repurchased 18.4 million shares of our common stock for $1 billion in a share repurchase program authorized in 2007. We discuss this repurchase program in Note 14 of the Notes to Consolidated Financial Statements.  

During 2007, we repurchased approximately 3 million shares of common stock for $161 million in connection with a share repurchase program authorized in 2005.  

DIVIDENDS

Sempra Energy

Sempra Energy paid dividends on common stock of:

§

$341 million in 2009

§

$339 million in 2008

§

$316 million in 2007

The increases were due to increases in the per-share quarterly dividend from $0.31 in 2007 to $0.35 in 2008 and to $0.39 in 2009.  The increase in 2009 was offset by $32 million due to our dividend reinvestment programs related to share-based compensation and retirement programs and $11 million due to the reduction in shares from the share repurchase program in 2008.

On December 18, 2009, Sempra Energy declared a quarterly dividend of $0.39 per share of common stock that was paid on January 15, 2010.

SDG&E paid a $150 million common dividend to Sempra Energy in the first quarter of 2009 due to a delay in capital expenditures resulting from the extended review period associated with the Sunrise Powerlink project.  SDG&E did not pay any common dividends to Sempra Energy in 2008 and 2007 to preserve cash to fund its capital expenditures program.

SoCalGas paid dividends to PE and PE paid corresponding dividends to Sempra Energy of:

§

$350 million in 2008

§

$150 million in 2007 (paid in January 2008)

Dividends paid by SoCalGas to PE are eliminated in Sempra Energy's and PE’s consolidated financial statements for all three years. Dividends paid by PE to Sempra Energy are eliminated in Sempra Energy’s consolidated financial statements for all three years.

The board of directors for each of Sempra Energy, SDG&E, PE and SoCalGas have the discretion to determine the payment and amount of future dividends. The CPUC's regulation of SDG&E's and SoCalGas' capital structures limits the amounts that are available for loans and dividends to Sempra Energy.  At December 31, 2009, Sempra Energy could have received combined loans and dividends of approximately $140 million from SoCalGas and $75 million from SDG&E.

CAPITALIZATION


TOTAL CAPITALIZATION AND DEBT-TO-CAPITALIZATION RATIOS

(Dollars in millions)

 

As of December 31, 2009

 

Sempra Energy

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

SDG&E

 

PE

 

SoCalGas

 

Total capitalization

$

 17,981 

 

$

 5,665 

 

$

 3,522 

 

$

 3,060 

 

Debt-to-capitalization ratio

 

 48 

%

 

 48 

%

 

 37 

%

 

 42 

%




Significant changes during 2009 that affected capitalization include the following:

§

Sempra Energy Consolidated:  comprehensive income exceeding dividends, a net increase in long-term debt, and increases in short-term borrowings, offset by Sempra Pipelines & Storage’s purchase of the remaining noncontrolling interest in Mississippi Hub

§

SDG&E:  comprehensive income exceeding dividends, increases in long-term debt and noncontrolling interests

§

PE and SoCalGas:  increase in comprehensive income, offset partially by a net decrease in long-term debt

We provide additional information about the significant changes in Notes 6 and 14 of the Notes to Consolidated Financial Statements and "Overall Results of Operations of Sempra Energy and Factors Affecting the Results" above.

COMMITMENTS

The following tables summarize principal contractual commitments at December 31, 2009 for Sempra Energy, SDG&E and PE/SoCalGas, respectively. We provide additional information about commitments above and in Notes 6, 9 and 17 of the Notes to Consolidated Financial Statements.


PRINCIPAL CONTRACTUAL COMMITMENTS OF SEMPRA ENERGY CONSOLIDATED

(Dollars in millions)

 

 

2010 

2011 and 2012

2013 and 2014

Thereafter

Total

Short-term debt

$

 618 

$

 - 

$

 - 

$

 - 

$

 618 

Long-term debt

 

 557 

 

 572 

 

 1,138 

 

 5,720 

 

 7,987 

Interest on debt(1)

 

 440 

 

 864 

 

 761 

 

 3,845 

 

 5,910 

Due to unconsolidated affiliate

 

 - 

 

 2 

 

 - 

 

 - 

 

 2 

Operating leases

 

 88 

 

 123 

 

 83 

 

 360 

 

 654 

Capital leases

 

 16 

 

 22 

 

 8 

 

 - 

 

 46 

Litigation settlements

 

 3 

 

 2 

 

 - 

 

 - 

 

 5 

Purchased-power contracts

 

 335 

 

 476 

 

 429 

 

 1,425 

 

 2,665 

Natural gas contracts

 

 1,162 

 

 448 

 

 93 

 

 176 

 

 1,879 

LNG contracts(2)

 

 1,659 

 

 2,040 

 

 2,142 

 

 18,215 

 

 24,056 

Construction commitments

 

 449 

 

 99 

 

 - 

 

 - 

 

 548 

SONGS decommissioning

 

 - 

 

 - 

 

 - 

 

 474 

 

 474 

Other asset retirement obligations

 

 35 

 

 36 

 

 36 

 

 732 

 

 839 

Pension and other postretirement benefit

 

 

 

 

 

 

 

 

 

 

    obligations(3)

 

 224 

 

 595 

 

 555 

 

 984 

 

 2,358 

Environmental commitments

 

 13 

 

 19 

 

 7 

 

 11 

 

 50 

Other

 

 17 

 

 21 

 

 17 

 

 20 

 

 75 

Totals

$

 5,616 

$

 5,319 

$

 5,269 

$

 31,962 

$

 48,166 

(1)

We calculate expected interest payments using the stated interest rate for fixed-rate obligations, including floating-to-fixed interest rate swaps. We calculate expected interest payments for variable-rate obligations, including fixed-to-floating interest-rate swaps, based on forward rates in effect at December 31, 2009.

(2)

Sempra LNG has LNG purchase agreements with Tangguh PSC and RasGas. The agreement with Tangguh PSC is for the supply of LNG equivalent to approximately 500 million cubic feet of natural gas per day from Tangguh PSC's Indonesian liquefaction facility to Sempra LNG’s Energía Costa Azul LNG receipt terminal at a price based on the Southern California border index. The expected payments under the contract are based on forward prices of the Southern California border index plus an estimated 1 percent escalation per year. Sempra LNG has a contract to sell a portion of the volumes purchased from Tangguh PSC to Mexico’s national electric company, CFE, at prices that are based on the Southern California border index for natural gas. The agreement with RasGas is for LNG cargoes to be delivered by RasGas to Sempra LNG’s Cameron LNG receipt terminal. Under this agreement, RasGas has the option to deliver and sell up to 32 cargoes to Sempra LNG in 2010, at a price based on market prices in the U.S. Gulf of Mexico. We provide more information about these contracts in Note 17 of the Notes to Consolidated Financial Statements.        

(3)

Amounts are after reduction for the Medicare Part D subsidy and only include expected payments to the plans for the next 10 years.





PRINCIPAL CONTRACTUAL COMMITMENTS OF SDG&E

(Dollars in millions)

 

 

2010 

2011 and 2012

2013 and 2014

Thereafter

Total

Short-term debt

$

 33 

$

 - 

$

 - 

$

 - 

$

 33 

Long-term debt

 

 40 

 

 22 

 

 152 

 

 2,434 

 

 2,648 

Interest on debt(1)

 

 133 

 

 278 

 

 280 

 

 1,798 

 

 2,489 

Operating leases

 

 20 

 

 36 

 

 29 

 

 58 

 

 143 

Capital leases

 

 5 

 

 10 

 

 5 

 

 - 

 

 20 

Purchased-power contracts

 

 335 

 

 476 

 

 429 

 

 1,425 

 

 2,665 

Construction commitments

 

 355 

 

 98 

 

 - 

 

 - 

 

 453 

El Dorado purchase agreement

 

 - 

 

 200 

 

 - 

 

 - 

 

 200 

SONGS decommissioning

 

 - 

 

 - 

 

 - 

 

 474 

 

 474 

Other asset retirement obligations

 

 5 

 

 10 

 

 10 

 

 91 

 

 116 

Pension and other postretirement benefit

 

 

 

 

 

 

 

 

 

 

    obligations(2)

 

 77 

 

 190 

 

 180 

 

 252 

 

 699 

Environmental commitments

 

 4 

 

 4 

 

 2 

 

 11 

 

 21 

Totals

$

 1,007 

$

 1,324 

$

 1,087 

$

 6,543 

$

 9,961 

(1)

SDG&E calculates expected interest payments using the stated interest rate for fixed-rate obligations, including floating-to-fixed interest rate swaps. SDG&E calculates expected interest payments for variable-rate obligations, including fixed-to-floating interest rate swaps, based on forward rates in effect at December 31, 2009.  

(2)

Amounts are after reduction for the Medicare Part D subsidy and only include expected payments to the plans for the next 10 years.


PRINCIPAL CONTRACTUAL COMMITMENTS OF PE AND SOCALGAS

(Dollars in millions)

 

 

2010 

2011 and 2012

2013 and 2014

Thereafter

Total

SoCalGas

 

 

 

 

 

 

 

 

 

 

Long-term debt

$

 - 

$

 507 

$

 250 

$

 511 

$

 1,268 

Interest on debt(1)

 

 60 

 

 106 

 

 74 

 

 349 

 

 589 

Natural gas contracts

 

 1,126 

 

 438 

 

 86 

 

 176 

 

 1,826 

Operating leases

 

 43 

 

 42 

 

 9 

 

 12 

 

 106 

Capital leases

 

 11 

 

 12 

 

 3 

 

 - 

 

 26 

Construction commitments

 

 47 

 

 1 

 

 - 

 

 - 

 

 48 

Environmental commitments

 

 9 

 

 14 

 

 5 

 

 - 

 

 28 

Pension and other postretirement benefit

 

 

 

 

 

 

 

 

 

 

    obligations(2)

 

 114 

 

 310 

 

 309 

 

 592 

 

 1,325 

Asset retirement obligations

 

 14 

 

 26 

 

 26 

 

 610 

 

 676 

 

Total SoCalGas

 

 1,424 

 

 1,456 

 

 762 

 

 2,250 

 

 5,892 

PE - operating leases

 

 7 

 

 - 

 

 - 

 

 - 

 

 7 

Total PE consolidated

$

 1,431 

$

 1,456 

$

 762 

$

 2,250 

$

 5,899 

(1)

SoCalGas calculates interest payments using the stated interest rate for fixed-rate obligations. SoCalGas calculates expected interest payments for variable-rate obligations, including fixed-to-floating interest rate swaps, based on forward rates in effect at December 31, 2009.

(2)

Amounts are after reduction for the Medicare Part D subsidy and only include expected payments to the plans for the next 10 years.


The tables exclude

§

contracts between consolidated affiliates

§

intercompany debt

§

individual contracts that have annual cash requirements less than $1 million

§

employment contracts  

The tables also exclude income tax liabilities of

§

$70 million for Sempra Energy

§

$14 million for SDG&E

§

$11 million for SoCalGas

These liabilities relate to uncertain tax positions and were excluded from the tables because we are unable to reasonably estimate the timing of future payments due to uncertainties in the timing of the effective settlement of tax positions.

We provide additional information about unrecognized tax benefits in Note 8 of the Notes to Consolidated Financial Statements.

OFF BALANCE-SHEET ARRANGEMENTS

Sempra Energy has provided guarantees aggregating $1.6 billion at December 31, 2009, to related parties, including the guarantee related to Rockies Express financing and continuing transitional guarantees related to RBS Sempra Commodities.  We discuss these guarantees further in Notes 6 and 17 of the Notes to Consolidated Financial Statements.



CREDIT RATINGS

The table below shows the credit ratings of Sempra Energy and its principal subsidiaries, which credit ratings remained at investment grade levels in 2009. Also in 2009, Moody's upgraded SDG&E's and SoCalGas' secured debt rating from A1 to Aa3. On January 22, 2010, Fitch downgraded the rating on SDG&E's and SoCalGas' preferred stock from A+ to A and the rating on Pacific Enterprises preferred stock from A to BBB+. On February 2, 2010, Fitch placed Sempra Energy and its rated subsidiaries on rating watch negative; it stated that the rating "is driven by uncertainty regarding the operation and ownership of Sempra Energy's commodity trading and marketing joint venture with The Royal Bank of Scotland (RBS)." On February 16, 2010, Moody's and Standard & Poor's affirmed their ratings and stable outlooks for the companies.


CREDIT RATINGS OF SEMPRA ENERGY AND PRINCIPAL SUBSIDIARIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Standard & Poor's

 

Moody's Investor Services, Inc.

 

Fitch

SEMPRA ENERGY

 

 

 

 

 

 

Unsecured debt

 

BBB+

 

Baa1

 

A

 

 

 

 

 

 

 

SDG&E

 

 

 

 

 

 

Secured debt

 

A+

 

Aa3

 

AA

Unsecured debt

 

A

 

A2

 

AA-

Preferred stock

 

BBB+

 

Baa1

 

A

Commercial paper

 

A-1

 

P-1

 

F-1+

 

 

 

 

 

 

 

SoCalGas

 

 

 

 

 

 

Secured debt

 

A+

 

Aa3

 

AA

Unsecured debt

 

A

 

A2

 

AA-

Preferred stock

 

BBB+

 

Baa1

 

A

Commercial paper

 

A-1

 

P-1

 

F-1+

 

 

 

 

 

 

 

PACIFIC ENTERPRISES

 

 

 

 

 

 

Preferred Stock

 

BBB+

 

--

 

BBB+

 

 

 

 

 

 

 

SEMPRA GLOBAL

 

 

 

 

 

 

Unsecured debt guaranteed by Sempra Energy

 

--

 

Baa1

 

A

Commercial paper guaranteed by Sempra Energy

 

A-2

 

P-2

 

F-1


FACTORS INFLUENCING FUTURE PERFORMANCE

SEMPRA ENERGY OVERVIEW

The Sempra Utilities' operations and Sempra Global's long-term contracts generally provide relatively stable earnings and liquidity. However, for the next few years, SDG&E and SoCalGas intend to limit their common stock dividends to reinvest their earnings in significant capital projects. Also, Sempra Generation's contract with the DWR, which provides a significant portion of Sempra Generation's revenues, ends in late 2011. Because it is unable to forecast with certainty future electricity prices and the cost of natural gas, contracts it enters into to replace the DWR contract, if obtained, or merchant (daily) sales may provide substantially lower earnings. Sempra Generation is also undertaking several projects for the construction of renewable generation facilities, with planned in-service dates ranging from late 2010 to 2011.

We expect that Sempra LNG and Sempra Pipelines & Storage will provide relatively stable earnings and liquidity from their current operations. Sempra Pipelines & Storage is also expected to provide earnings from construction programs when completed and other investments, but will require substantial funding for these investments. At Sempra Pipelines & Storage, we expect the write-off of certain assets of Liberty, as we discuss in Note 1 of the Notes to Consolidated Financial Statements, to have a minimal impact on future expected earnings. At Sempra LNG, until there are firm LNG supply or capacity services contracts that would utilize 100 percent of the capacity of Sempra LNG's Cameron receipt terminal, Sempra LNG will seek to purchase short-term LNG supplies, which may result in greater variability in revenues and earnings. Sempra LNG may also sell short-term capacity to third parties as opportunities arise.

The Sempra Utilities' performance will depend primarily on the ratemaking and regulatory process, environmental regulations, economic conditions, actions by the California legislature to address the state budget crisis and the changing energy marketplace. Their performance will also depend on the successful completion of capital projects that we discuss in various sections of this report. As the 2008 General Rate Case provides for fixed annual increases through 2011 rather than adjustments based on inflation indices as in the past, performance will depend on the Sempra Utilities' ability to manage costs, including bad debts. Starting in the third quarter of 2009, SDG&E's liability insurance premiums increased significantly, by approximately $40 million annually, due to the increased costs of wildfire coverage. In addition to the increased insurance premiums, Sempra Energy, including the Sempra Utilities, has substantially lower insurance coverage, particularly with respect to any future wildfire liabilities. The maximum loss recovery due to a wildfire incident from insurance carriers is now $400 million compared to $1.1 billion in the previous policy year. SDG&E filed a request with the CPUC in the third quarter of 2009 for recovery of the incremental insurance premiums, but without such recovery, our financial results could be adversely impacted.

In regard to the 2007 wildfire litigation, before giving effect to any amounts that it may recover from other defendants and potentially responsible parties, SDG&E expects that the aggregate costs that it may incur in resolving the remaining unreserved wildfire claims will substantially exceed its insurance coverage. If its liability for the three wildfires were to exceed the remaining insurance, SDG&E will file with the FERC and the CPUC to recover the excess amount from utility customers. SDG&E is continuing to evaluate the likelihood, amount and timing of any such recoveries.

If SDG&E were unable to conclude that recovery from utility customers is likely, either on a current basis or in the future, SDG&E's and therefore Sempra Energy's earnings would be materially adversely affected to the extent that it resolves wildfire claims or obtains sufficient information to establish reserves for amounts that exceed its remaining insurance, even though all or a portion of such amounts (including amounts already paid in settlements with homeowner insurers) may ultimately be recovered from other defendants and potentially responsible parties, or from utility customers in subsequent reporting periods. Cash flow would also be adversely affected by any delays in obtaining such recoveries. We provide additional information concerning these matters in Notes 16 and 17 of the Notes to Consolidated Financial Statements.

On April 1, 2008, we completed the formation of a partnership, RBS Sempra Commodities, to own and operate our commodities-marketing businesses, which generally comprised our Sempra Commodities segment. In November 2009, RBS announced its intention to divest its interest in the joint venture following a directive from the European Commission to dispose of certain assets. On February 16, 2010, Sempra Energy, RBS and the partnership entered into an agreement to sell certain businesses within the partnership. These businesses have historically generated 40 to 60 percent of total earnings of the businesses in the partnership, and have averaged more than 50 percent. Our joint venture partner, RBS, continues to be obligated to provide the partnership with all growth capital, working-capital requirements and credit support, as we discuss above in "Capital Resources and Liquidity – Sempra Commodities."

In connection with the pending transaction discussed above, we and RBS entered into a letter agreement to negotiate, prior to closing of the transaction, definitive documentation to amend certain provisions of the Limited Liability Partnership Agreement dated April 1, 2008 between Sempra Energy and RBS (Partnership Agreement) to, among other things:

§

Consider the distribution of excess cash of the partnership to us and RBS

§

Eliminate each partner’s preferred return (currently 15 percent per year) and to move to a 50/50 sharing of net income, if and when our invested capital is reduced to $950 million or less by the return of capital to the partners

§

Terminate the restrictions on the partners’ ability to transfer their partnership interests prior to April 2012 (but not the partners’ right of first offer and other rights, including our tag-along right with respect to the transfer of that interest or the requirement that any transferee be reasonably acceptable to us

As RBS continues to be obligated to divest its remaining interest in the partnership, the letter agreement also provides for negotiating the framework for the entertaining of bids for the remaining part of the partnership’s business.

Future earnings and distributions from the partnership will depend on the profitability and growth achieved in the businesses remaining in the joint venture, primarily the North American power and natural gas trading businesses, and the continued ability of RBS to provide capital and credit support for the partnership. We provide additional information in Notes 3, 4, 6 and 20 of the Notes to Consolidated Financial Statements.

We may be further impacted by depressed and rapidly changing economic conditions. Moreover, the dollar has fluctuated significantly compared to some foreign currencies, especially in Mexico and South America where we have significant operations. These factors, coupled with very low natural gas prices which affect profitability at Sempra Generation and Sempra LNG, could, if they remain unchanged, adversely affect profitability. Additionally, given the uncertainty of commodity markets and the lack of debt financing for energy infrastructure, which impact related hedging activity, growth at RBS Sempra Commodities could be dampened.

We discuss additional matters that could affect our future performance in Notes 15 through 17 of the Notes to Consolidated Financial Statements.

LITIGATION

We describe legal proceedings which could adversely affect our future performance in Note 17 of the Notes to Consolidated Financial Statements.

SEMPRA UTILITIES -- INDUSTRY DEVELOPMENTS AND CAPITAL PROJECTS

We describe capital projects, electric and natural gas regulation and rates, and other pending proceedings and investigations that affect our business in Notes 15 and 16 of the Notes to Consolidated Financial Statements.

SEMPRA GLOBAL INVESTMENTS

As we discuss in "Cash Flows From Investing Activities," our investments will significantly impact our future performance. In addition to the discussion below, we provide information about these investments in "Capital Resources and Liquidity."

Sempra Generation

Copper Mountain Solar

In July 2009, Sempra Generation announced that PG&E has contracted for 48 megawatts (MW) of solar power from Copper Mountain Solar, a new plant under development by Sempra Generation on land adjacent to the 10-MW El Dorado Energy Solar plant in Boulder City, Nevada.  The CPUC approved the 20-year contract in December 2009.  Construction has begun and is expected to be completed by late 2010.

Mesquite Solar

Mesquite Solar is a photovoltaic generation facility under development by Sempra Generation in Maricopa County, Arizona.  When fully developed, the project will be capable of producing approximately 400 to 600 MW of solar power.  Mesquite Solar will connect to the 500-kilovolt Hassayampa switchyard via our existing Mesquite Power natural gas generation plant.  Construction of the first phase of 150 MW is expected to begin by late 2010 and be completed by late 2011.

Sempra Pipelines & Storage

Natural Gas Storage Projects

Currently, Sempra Pipelines & Storage has 11.4 Bcf of working natural gas storage capacity that is fully contracted and operational.  We are in construction to increase operational capacity by 12.5 Bcf by the end of 2010 (for a total of 24 Bcf) and we plan to develop as much as 75 Bcf of total storage capacity by 2015.

Sempra Pipelines & Storage’s natural gas storage facilities and projects include

§

Bay Gas Storage Company (Bay Gas), a facility located 40 miles north of Mobile, Alabama, that provides underground storage and delivery of natural gas.  Sempra Pipelines & Storage owns 91 percent of the project.  It is the easternmost storage facility on the Gulf Coast, with direct service to the Florida market.

§

Mississippi Hub storage facility, currently under construction in Simpson County, Mississippi, an underground salt-dome natural gas storage project with planned direct interconnections to the natural gas production areas in eastern Texas, Oklahoma and Arkansas, as well as the Northeast market.

§

Liberty Gas Storage Expansion, a salt cavern facility in Cameron Parish, Louisiana.  Sempra Pipelines & Storage owns 75 percent of the project and ProLiance Transportation LLC (ProLiance) owns the remaining 25 percent.  The project’s location provides access to several LNG facilities in the area.

Acquisition of Mexican Pipeline and Natural Gas Infrastructure Assets

On February 24, 2010, Sempra Pipelines & Storage announced that it will acquire the Mexican pipeline and natural gas infrastructure assets of El Paso Corporation for $300 million.

The acquisition involves El Paso Corporation's wholly owned natural gas pipeline and compression assets in the Mexican border state of Sonora. The transaction also includes El Paso Corporation's 50-percent interest in a joint venture with PEMEX, the Mexican-state owned oil company. The joint venture operates two natural gas pipelines and a propane system in northern Mexico.

The pipeline and natural gas infrastructure assets being acquired are supported by customer contracts with an average duration of 13 years. Subject to approval by lenders and Mexican regulatory authorities, the acquisition is expected to be completed in the second quarter of 2010.

Sempra LNG

Energía Costa Azul LNG Receipt Terminal

Sempra LNG’s Energía Costa Azul LNG receipt terminal in Baja California, Mexico, with a capacity of 1 Bcf of natural gas per day, began commercial operations in May 2008.  Sempra LNG has received approvals from key governmental agencies to expand the terminal capacity to 2.5 Bcf per day.  The ultimate scope and timing of a proposed expansion project will depend on the outcome of negotiations for supply and/or terminal capacity agreements.

MARKET RISK

Market risk is the risk of erosion of our cash flows, earnings, asset values and equity due to adverse changes in prices for various commodities and in interest rates. Sempra Energy also may be adversely affected by changes in foreign-currency rates.

Risk Policies

Sempra Energy has policies governing its market risk management and trading activities. As required by CPUC and FERC affiliate compliance rules, Sempra Energy and the Sempra Utilities maintain separate and independent risk management committees, organizations and processes for each of the Sempra Utilities and for all non-CPUC regulated affiliates to provide oversight of these activities. The committees consist of senior officers who establish policy, oversee energy risk management activities, and monitor the results of trading and other activities to ensure compliance with our stated energy risk management and trading policies. These activities include, but are not limited to, daily monitoring of detailed information for market positions that create credit, liquidity and market risk. Independently from our energy procurement departments, the respective oversight organizations and committees separately monitor energy price risk management, and measure and report the credit, liquidity and market risk associated with these positions.

Along with other tools, we use Value at Risk (VaR) to measure our exposure to market risk. VaR is an estimate of the potential loss on a position or portfolio of positions over a specified holding period, based on normal market conditions and within a given statistical confidence interval. VaR is calculated independently by the respective risk management oversight organizations. We use historical and implied volatilities and correlations between instruments and positions in our calculations.

The Sempra Utilities use energy and natural gas derivatives to manage natural gas and energy price risk associated with servicing load requirements. The use of energy and natural gas derivatives is subject to certain limitations imposed by company policy and is in compliance with risk management and trading activity plans that have been filed with and approved by the CPUC. Any costs or gains/losses associated with the use of energy and natural gas derivatives are considered to be commodity costs. Commodity costs are generally passed on to customers as incurred. However, SoCalGas is subject to incentive mechanisms that reward or penalize the utility for commodity costs below or above certain benchmarks.

In 2008, we completed the formation of RBS Sempra Commodities, a partnership that owns and operates the commodities-marketing businesses previously held by us as subsidiaries. We now account for our investment in the partnership under the equity method. As a result, we no longer include on our Consolidated Balance Sheet the commodities and financial instruments related to these businesses that subjected us to commodities price risk and credit risk. However, the joint venture partnership is still subject to these risks, which could impact our portion of partnership earnings.

In addition, as a transitional measure, Sempra Energy continues to provide back-up guarantees and credit support for RBS Sempra Commodities, as we discuss above in "Capital Resources and Liquidity" and in Note 6 of the Notes to Consolidated Financial Statements.

We discuss revenue recognition in Notes 1 and 11 of the Notes to Consolidated Financial Statements and the additional market-risk information regarding derivative instruments in Note 11 of the Notes to Consolidated Financial Statements.

We have exposure to changes in commodity prices, interest rates and foreign currency rates and exposure to counterparty nonperformance. The following discussion of these primary market-risk exposures as of December 31, 2009, includes a discussion of how these exposures are managed.

Commodity Price Risk

Market risk related to physical commodities is created by volatility in the prices and basis of certain commodities. Our various subsidiaries are exposed, in varying degrees, to price risk, primarily to prices in the natural gas and electricity markets. Our policy is to manage this risk within a framework that considers the unique markets and operating and regulatory environments of each subsidiary.

Sempra Global is generally exposed to commodity price risk indirectly through its LNG, natural gas pipeline and storage, and power generating assets. Sempra Global may utilize commodity transactions in the course of optimizing these assets. These transactions are typically priced based on market indices, but may also include fixed price purchases and sales of commodities. Any residual exposure is monitored as described above.

The Sempra Utilities' market-risk exposure is limited due to CPUC-authorized rate recovery of the costs of commodity purchases, intrastate transportation, and storage activity. However, SoCalGas may, at times, be exposed to market risk as a result of incentive mechanisms that reward or penalize the utility for commodity costs below or above certain benchmarks for SoCalGas' Gas Cost Incentive Mechanism, which we discuss in Note 16 of the Notes to Consolidated Financial Statements. If commodity prices were to rise too rapidly, it is likely that volumes would decline. This decline would increase the per-unit fixed costs, which could lead to further volume declines. The Sempra Utilities manage their risk within the parameters of their market risk management framework. As of December 31, 2009, the total VaR of the Sempra Utilities' natural gas and electric positions was not material, and the procurement activities were in compliance with the procurement plans filed with and approved by the CPUC.

Interest Rate Risk

We are exposed to fluctuations in interest rates primarily as a result of our having issued short- and long-term debt. Subject to regulatory constraints, we periodically enter into interest rate swap agreements to moderate our exposure to interest rate changes and to lower our overall costs of borrowing.

The table below shows the nominal amount and the one-year VaR for long-term debt, excluding commercial paper classified as long-term debt and capital lease obligations, at December 31, 2009 and 2008:


 

Sempra Energy

 

 

 

 

 

Consolidated

SDG&E

PE/SoCalGas

 

Nominal

One-Year

Nominal

One-Year

Nominal

One-Year

(Dollars in millions)

Debt

VaR(1)

Debt

VaR(1)

Debt

VaR(1)

At December 31, 2009

 

 

 

 

 

 

 

 

 

 

 

 

    Utility fixed-rate

$

 3,067 

$

 369 

$

 1,954 

$

 273 

$

 1,113 

$

 97 

    Utility variable-rate

 

 848 

 

 43 

 

 698 

 

 43 

 

 150 

 

 - 

    Non-utility, fixed-rate and variable-rate

 

 4,075 

 

 392 

 

 - 

 

 - 

 

 - 

 

 - 

At December 31, 2008

 

 

 

 

 

 

 

 

 

 

 

 

    Utility fixed-rate

$

 3,023 

$

 657 

$

 1,910 

$

 430 

$

 1,113 

$

 229 

    Utility variable-rate

 

 486 

 

 64 

 

 236 

 

 69 

 

 250 

 

 6 

    Non-utility, fixed-rate and variable-rate

 

 2,829 

 

 467 

 

 - 

 

 - 

 

 - 

 

 - 

(1) After the effects of interest rate swaps.


At December 31, 2009, the total notional amount of interest rate swap transactions ranged from $75 million to $355 million at Sempra Energy and $285 million to $375 million at SDG&E (ranges relate to amortizing notional amounts). At December 31, 2009, SoCalGas' total notional amount of interest rate swap transactions was $150 million. We provide further information about interest rate swap transactions in Note 11 of the Notes to Consolidated Financial Statements.

We also are subject to the effect of interest rate fluctuations on the assets of our pension plans, other postretirement benefit plans, and SDG&E's nuclear decommissioning trusts. However, we expect the effects of these fluctuations, as they relate to the Sempra Utilities, to be passed on to customers.

Credit Risk

Credit risk is the risk of loss that would be incurred as a result of nonperformance of our counterparties' contractual obligations. We monitor credit risk through a credit-approval process and the assignment and monitoring of credit limits. We establish these credit limits based on risk and return considerations under terms customarily available in the industry.

As with market risk, we have policies that govern the management of credit risk which are administered by the respective credit departments for each of the Sempra Utilities and for all non-CPUC regulated affiliates and overseen by their separate risk management committees.

This oversight includes calculating current and potential credit risk on a daily basis and monitoring actual balances in comparison to approved limits. We avoid concentration of counterparties whenever possible, and we believe our credit policies significantly reduce overall credit risk. These policies include an evaluation of the following:

§

prospective counterparties' financial condition (including credit ratings)

§

collateral requirements under certain circumstances

§

the use of standardized agreements that allow for the netting of positive and negative exposures associated with a single counterparty

§

other security such as lock-box liens and downgrade triggers

We believe that we have provided adequate reserves for counterparty nonperformance.

As we describe in Note 17 of the Notes to Consolidated Financial Statements, Sempra Generation has a contract with the DWR to supply up to 1,900 MW of power to the state of California over 10 years, which began in 2001. This contract results in a significant potential nonperformance exposure with a single counterparty; however, this risk has been addressed and mitigated by the liquidated damages provision of the contract.

When they become operational, development projects at Sempra Global rely significantly on the ability of their suppliers to perform on long-term agreements and on our ability to enforce contract terms in the event of nonperformance. Also, the factors that we consider in evaluating a development project include negotiating customer and supplier agreements and, therefore, we rely on these agreements for future performance. We also may base our decision to go forward on development projects on these agreements.

As noted above under "Interest Rate Risk," we periodically enter into interest-rate swap agreements to moderate exposure to interest-rate changes and to lower the overall cost of borrowing. We would be exposed to interest-rate fluctuations on the underlying debt should a counterparty to the swap fail to perform.

Foreign Currency Rate Risk

We have investments in entities whose functional currency is not the U.S. dollar, exposing us to foreign exchange movements, primarily in Latin American currencies.

The Mexican subsidiaries have U.S. dollar receivables and payables that give rise to foreign exchange movements for accounting principles generally accepted in Mexico and tax purposes. In addition, monetary assets and liabilities are adjusted for inflation for Mexican tax purposes. The fluctuations in foreign currency and inflation are subject to Mexican taxes and expose us to significant fluctuations in tax expense from changes in the exchange and inflation rates in Mexico.

Our primary objective in reducing foreign currency risk is to preserve the economic value of our overseas investments and to reduce earnings volatility that would otherwise occur due to exchange-rate fluctuations.

Our net investment in our Latin American operating companies and the resulting cash flows are partially protected against normal exchange-rate fluctuations by rate-setting mechanisms that are intended to compensate for local inflation and currency exchange-rate fluctuations. In addition, we offset material cross-currency transactions and net income exposure through various means, including financial instruments and short-term investments.

Because we do not hedge our net investment in foreign countries, we are susceptible to volatility in other comprehensive income caused by exchange-rate fluctuations.

The effects of a hypothetical simultaneous 10 percent appreciation in the U.S. dollar from year-end 2009 levels against the currencies of Latin American countries in which we have operations and investments are as follows:


(Dollars in millions)

 

Hypothetical Effects

 

Translation of 2009 earnings to U.S. dollars

$

 (6)

 

Transactional exposures

 

 (3)

 

Translation of net assets of foreign subsidiaries and investments in foreign entities

 

 (60)





    



CRITICAL ACCOUNTING POLICIES AND ESTIMATES, AND KEY NONCASH PERFORMANCE INDICATORS

Management views certain accounting policies as critical because their application is the most relevant, judgmental, and/or material to our financial position and results of operations, and/or because they require the use of material judgments and estimates.

We describe our significant accounting policies in Note 1 of the Notes to Consolidated Financial Statements.  We discuss choices among alternative accounting policies that are material to our financial statements and information concerning significant estimates with the audit committee of the Sempra Energy board of directors.  


CRITICAL ACCOUNTING POLICIES

SEMPRA ENERGY, SDG&E AND SOCALGAS

CONTINGENCIES

Assumptions & Approach Used

 

We accrue losses for the estimated impacts of various conditions, situations or circumstances involving uncertain outcomes. For loss contingencies, we accrue the loss if an event has occurred on or before the balance sheet date and:


§

information available through the date we file our financial statements indicates it is probable that a loss has been incurred, given the likelihood of uncertain future events, and

§

the amounts of the loss can be reasonably estimated.


We do not accrue contingencies that might result in gains. We continuously assess contingencies for litigation claims, environmental remediation and other events.

Effect if Different
Assumptions Used

 

Details of our issues in this area are discussed in Note 17 of the Notes to Consolidated Financial Statements.




    




SEMPRA ENERGY, SDG&E AND SOCALGAS (CONTINUED)

REGULATORY ACCOUNTING

Assumptions & Approach Used

 

The Sempra Utilities record a regulatory asset if it is probable that, through the ratemaking process, the utility will recover that asset from customers. Similarly, regulatory liabilities are recorded for amounts recovered in rates in advance of the expenditure. The Sempra Utilities review probabilities associated with regulatory balances whenever new events occur, such as:


§

changes in the regulatory environment or the utility's competitive position

§

issuance of a regulatory commission order

§

passage of new legislation


To the extent that circumstances associated with regulatory balances change, the regulatory balances are adjusted accordingly.

Effect if Different
Assumptions Used

 

Details of the Sempra Utilities' regulatory assets and liabilities are discussed in Note 1 of the Notes to Consolidated Financial Statements.

INCOME TAXES

Assumptions & Approach Used

 

Our income tax expense and related balance sheet amounts involve significant management estimates and judgments. Amounts of deferred income tax assets and liabilities, as well as current and noncurrent accruals, involve judgments and estimates of the timing and probability of recognition of income and deductions by taxing authorities. When we evaluate the anticipated resolution of income tax issues, we consider


§

past resolutions of the same or similar issue

§

the status of any income tax examination in progress

§

positions taken by taxing authorities with other taxpayers with similar issues


The likelihood of deferred tax recovery is based on analyses of the deferred tax assets and our expectation of future taxable income, based on our strategic planning.

Effect if Different
Assumptions Used

 

Actual income taxes could vary from estimated amounts because of:

 

§

future impacts of various items, including changes in tax laws

§

our financial condition in future periods

§

the resolution of various income tax issues between us and taxing authorities


We discuss details of our issues in this area in Note 8 of the Notes to Consolidated Financial Statements.




    




SEMPRA ENERGY, SDG&E AND SOCALGAS (CONTINUED)

INCOME TAXES (CONTINUED)

Assumptions & Approach Used

 

For an uncertain position to qualify for benefit recognition, the position must have at least a "more likely than not" chance of being sustained (based on the position’s technical merits) upon challenge by the respective authorities. The term "more likely than not" means a likelihood of more than 50 percent. If we do not have a more likely than not position with respect to a tax position, then we do not recognize any of the potential tax benefit associated with the position. A tax position that meets the "more likely than not" recognition is measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon the effective resolution of the tax position.

Effect if Different
Assumptions Used

 

Unrecognized tax benefits involve management’s judgment regarding the likelihood of the benefit being sustained. The final resolution of uncertain tax positions could result in adjustments to recorded amounts and may affect our results of operations, financial position and cash flows.


We discuss additional information related to accounting for uncertainty in income taxes in Note 8 of the Notes to Consolidated Financial Statements.

DERIVATIVES

Assumptions & Approach Used

 

We value derivative instruments at fair value on the balance sheet. Depending on the purpose for the contract and the applicability of hedge accounting, the impact of instruments may be offset in earnings, on the balance sheet, or in other comprehensive income. We also use normal purchase or sale accounting for certain contracts. As discussed elsewhere in this report, whenever possible, we use exchange quotations or other third-party pricing to estimate fair values; if no such data is available, we use internally developed models and other techniques. The assumed collectability of derivative assets and receivables considers


§

events specific to a given counterparty

§

the tenor of the transaction

§

the credit-worthiness of the counterparty

Effect if Different
Assumptions Used

 

The application of hedge accounting to certain derivatives and the normal purchase or sale election is made on a contract-by-contract basis. Using hedge accounting or the normal purchase or sale election in a different manner could materially impact our results of operations. The effects of derivatives accounting have a significant impact on Sempra Energy’s consolidated balance sheet but have no significant effect on the Sempra Utilities' results of operations because of regulatory accounting principles and the application of the normal purchase or sale election. We provide details of our financial instruments in Note 11 of the Notes to Consolidated Financial Statements.



SEMPRA ENERGY, SDG&E AND SOCALGAS (CONTINUED)

DEFINED BENEFIT PLANS

Assumptions & Approach Used

 

To measure our pension and postretirement obligations, costs and liabilities, we rely on several assumptions. We consider current market conditions, including interest rates, in making these assumptions.  We annually review these assumptions prior to the beginning of each year and update when appropriate.


The critical assumptions used to develop the required estimates include the following key factors:


§

discount rate

§

expected return on plan assets

§

health-care cost trend rates

§

mortality rates

§

rate of compensation increases

§

payout elections (lump sum or annuity)

Effect if Different
Assumptions Used

 

The actuarial assumptions we use may differ materially from actual results due to:


§

return on plan assets

§

changing market and economic conditions

§

higher or lower withdrawal rates

§

longer or shorter participant life spans

§

more or fewer lump sum versus annuity payout elections made by plan participants

§

retirement rates


These differences, other than those related to the Sempra Utilities plans, where rate recovery offsets any effects of the assumptions on earnings, may result in a significant impact to the amount of pension and postretirement benefit expense we record. For the remaining plans, the approximate annual effect on earnings of a 25 basis point increase or decrease in the assumed discount rate would be $2 million and the effect of a 25 basis point increase or decrease in the assumed rate of return on plan assets would be less than $1 million.


We provide information about the impact of increases and decreases in the health-care cost trend rate in Note 9 of the Notes to Consolidated Financial Statements.




SEMPRA ENERGY AND SDG&E

ASSET RETIREMENT OBLIGATIONS

Assumptions & Approach Used

 

SDG&E’s legal asset retirement obligations (AROs) related to the decommissioning of SONGS are recorded at fair value based on a site specific study performed every three years. The fair value of the obligations includes:


§

estimated decommissioning costs, including labor, equipment, material and other disposal costs

§

inflation adjustment applied to estimated cash flows

§

discount rate based on a credit-adjusted risk-free rate

§

expected date of decommissioning

Effect if Different
Assumptions Used

 

Changes in these factors could materially affect the obligation recorded to reflect the ultimate cost associated with retiring the assets. For example, if the discount rate increased by 100 basis points, this would decrease the balance for the ARO by 18 percent. Conversely, a decrease in the discount rate by 100 basis points would increase the ARO by approximately 22 percent. However, due to regulatory recovery of SDG&E’s nuclear decommissioning expense, rate-making accounting treatment is applied to SDG&E’s nuclear decommissioning activities, so they have no impact on SDG&E’s reported earnings.


We provide additional detail in Note 7 of the Notes to the Consolidated Financial Statements.  



SEMPRA ENERGY

IMPAIRMENT TESTING OF LONG-LIVED ASSETS

Assumptions & Approach Used

 

Whenever events or changes in circumstances indicate that an asset's carrying amount may not be recoverable, we consider if the estimated future undiscounted cash flows are less than the carrying amount of the assets.  If so, we estimate the fair value of these assets to determine the extent to which cost exceeds fair value.  For these estimates, we may consider data from multiple valuation methods, including data from market participants. We exercise judgment to estimate the future cash flows and the useful lives of long-lived assets and to determine our intent to use the assets. Our intent to use or dispose of assets is subject to re-evaluation and can change over time.

Effect if Different
Assumptions Used

 

If an impairment test is required, the fair value of long-lived assets can vary if differing estimates and assumptions are used in the applied valuation techniques. We discuss impairment of long-lived assets in Note 1 of the Notes to Consolidated Financial Statements.

CARRYING VALUE OF EQUITY METHOD INVESTMENTS

Assumptions & Approach Used

 

We account for investments under the equity method when we have an ownership interest of 20 to 50 percent. The premium, or excess cost over the underlying carrying value of net assets, is referred to as equity method goodwill, which is included in the impairment testing of the equity method investment. We discuss goodwill related to unconsolidated subsidiaries in Note 4 of the Notes to Consolidated Financial Statements.


We consider whether the fair value of each equity investment as a whole, not the underlying net assets, has declined and whether that decline is other than temporary.  To help evaluate whether a decline in fair value below cost has occurred and if the decline is other than temporary, we may develop fair value estimates for the investment. Our fair value estimates are developed from the perspective of a knowledgeable market participant. In the absence of observable transactions in the marketplace for similar investments, we consider an income-based approach such as discounted cash flow analysis or, with less weighting, the replacement cost of the underlying net assets.  A discounted cash flow analysis may be based directly on anticipated future distributions from the investment, or may be performed based on free cash flows generated within the entity and adjusted for our ownership share total. When calculating estimates of fair or realizable values, we also consider whether we intend to hold or sell the investment. For certain held investments, critical assumptions include


§

the prospects for an energy trading enterprise

§

the appropriate risk-adjusted discount rate

§

the availability and costs of natural gas

§

competing fuels (primarily propane) and electricity

Effect if Different
Assumptions Used


The risk assumptions applied by other market participants to value the investments could vary significantly or the appropriate approaches could be weighted differently.  These differences could impact whether or not the fair value of the investment is less than its cost, and if so, whether that condition is other than temporary.  This could result in an impairment charge or a different amount of impairment charge, and, in cases where an impairment charge has been recorded, additional loss or gain upon sale.


We provide additional details in Note 4 of the Notes to Consolidated Financial Statements.




KEY NONCASH PERFORMANCE INDICATORS

A discussion of key noncash performance indicators related to each business unit follows:

Sempra Utilities

Key noncash performance indicators include number of customers, and natural gas volumes and electricity sold. Additional noncash performance indicators include goals related to safety, customer service, customer reputation, environmental considerations, on-time and on-budget completion of major projects and initiatives, and in the case of SDG&E, electric reliability. We discuss natural gas volumes and electricity sold in "Results of Operations – Changes in Revenues, Costs and Earnings" above.

Sempra Commodities

Prior to the sale of our commodities-marketing businesses to RBS Sempra Commodities as discussed in Note 3, Sempra Commodities did not use noncash performance factors. Its key indicators were profit margins by product line and by geographic area.

Sempra Generation

Key noncash performance indicators include plant availability factors at the generating plants. For competitive reasons, Sempra Generation does not disclose its plant availability factors. Additional noncash performance indicators include goals related to safety and environmental considerations.

Sempra Pipelines & Storage

Key noncash performance indicators for Sempra Pipelines & Storage's consolidated operations include natural gas sales volume, facility availability, capacity utilization, and for some Mexican pipeline operations, customer count. We discuss these above in "Our Business" and "Factors Influencing Future Performance." Additional noncash performance indicators include goals related to safety, environmental considerations, and regulatory compliance.

Sempra LNG

Key noncash performance indicators include plant availability and capacity utilization. We discuss these above in "Our Business" and "Factors Influencing Future Performance." Additional noncash performance indicators include goals related to safety, environmental considerations, and on-time and on-budget completion of development projects.

NEW ACCOUNTING STANDARDS

We discuss the relevant pronouncements that have recently become effective and have had or may have a significant effect on our financial statements in Note 2 of the Notes to Consolidated Financial Statements.




    



INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

We make statements in this report that are not historical fact and constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are necessarily based upon assumptions with respect to the future, involve risks and uncertainties, and are not guarantees of performance. These forward-looking statements represent our estimates and assumptions only as of the date of this report.

In this report, when we use words such as "believes," "expects," "anticipates," "plans," "estimates," "projects," "contemplates," "intends," "depends," "should," "could," "would," "may," "potential," "target," "goals," or similar expressions, or when we discuss our strategy, plans or intentions, we are making forward-looking statements.

Factors, among others, that could cause our actual results and future actions to differ materially from those described in forward-looking statements include

§

local, regional, national and international economic, competitive, political, legislative and regulatory conditions and developments;

§

actions by the California Public Utilities Commission, the California State Legislature, the California Department of Water Resources, the Federal Energy Regulatory Commission, the Federal Reserve Board, and other regulatory and governmental bodies in the United States and other countries in which we operate;

§

capital markets conditions and inflation, interest and exchange rates;

§

energy and trading markets, including the timing and extent of changes and volatility in commodity prices;

§

the availability of electric power, natural gas and liquefied natural gas;

§

weather conditions and conservation efforts;

§

war and terrorist attacks;

§

business, regulatory, environmental and legal decisions and requirements;

§

the status of deregulation of retail natural gas and electricity delivery;

§

the timing and success of business development efforts;

§

the resolution of litigation; and

§

other uncertainties, all of which are difficult to predict and many of which are beyond our control.

We caution you not to rely unduly on any forward-looking statements. You should review and consider carefully the risks, uncertainties and other factors that affect our business as described in this report and other reports that we file with the Securities and Exchange Commission.



COMMON STOCK DATA

SEMPRA ENERGY COMMON STOCK

Our common stock is traded on the New York Stock Exchange. At February 23, 2010, there were 42,000 record holders of our common stock.

The following table shows Sempra Energy quarterly common stock data:


 

First

Second

Third

Fourth

 

Quarter

Quarter

Quarter

Quarter

2009 

 

 

 

 

 

 

 

 

Market price

 

 

 

 

 

 

 

 

    High

$

 46.96 

$

 50.90 

$

 53.00 

$

 57.18 

    Low

$

 36.43 

$

 43.94 

$

 46.84 

$

 48.90 

 

 

 

 

 

 

 

 

 

2008 

 

 

 

 

 

 

 

 

Market price

 

 

 

 

 

 

 

 

    High

$

 63.00 

$

 59.96 

$

 58.99 

$

 51.21 

    Low

$

 48.58 

$

 53.02 

$

 43.35 

$

 34.29 

We declared dividends of $0.39 per share in each quarter of 2009. We declared dividends of $0.32 per share in the first quarter of 2008 and $0.35 per share in each of the remaining quarters of 2008.

PE, SOCALGAS AND SDG&E COMMON STOCK

Sempra Energy owns all of PE's issued and outstanding common stock. PE owns all of the common stock of SoCalGas. Enova Corporation, a wholly owned subsidiary of Sempra Energy, owns all of SDG&E’s issued and outstanding common stock.

Information concerning dividend declarations for PE, SoCalGas and SDG&E is included in each of their "Statements of Consolidated Comprehensive Income and Changes in Equity" set forth in the Consolidated Financial Statements.

DIVIDEND RESTRICTIONS

The payment and the amount of future dividends for Sempra Energy, SDG&E, PE, and SoCalGas are within the discretion of their boards of directors. As a result of their projected capital expenditure programs, SDG&E elected to suspend the payment of dividends on its common stock to Sempra Energy in 2008 and 2007, and SoCalGas elected to suspend the payment of dividends on its common stock in 2009. However, in 2009, SDG&E paid dividends on its common stock to Sempra Energy due to the extended review period associated with the Sunrise Powerlink project and the resultant delay in initiating construction activities. Future common dividends from SDG&E, PE and SoCalGas may be limited to reduce the amount of debt financing required during periods of increased capital expenditures.  The CPUC’s regulation of the Sempra Utilities’ capital structures limits the amounts that the Sempra Utilities can pay us in the form of loans and dividends.




PERFORMANCE GRAPH -- COMPARATIVE TOTAL SHAREHOLDER RETURNS

The following graph (Figure 2) compares the percentage change in the cumulative total shareholder return on Sempra Energy common stock for the five-year period ending December 31, 2009, with the performance over the same period of the Standard & Poor's 500 Index and the Standard & Poor's 500 Utilities Index.

These returns were calculated assuming an initial investment of $100 in our common stock, the S&P 500 Index and the S&P 500 Utilities Index on December 31, 2004, and the reinvestment of all dividends.



[i002.gif]


Figure 2: Comparison of Cumulative Five-Year Total Return







    



FIVE-YEAR SUMMARIES

The following tables present selected financial data of Sempra Energy, SDG&E, PE and SoCalGas for the five years ended December 31, 2009. The data is derived from the audited consolidated financial statements of each company. You should read this information in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes contained in this Annual Report.


FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA FOR SEMPRA ENERGY

(In millions, except for per share amounts)

 

At December 31 or for the years then ended

 

2009 

2008 

2007 

2006 

2005 

Sempra Energy Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sempra Utilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Natural gas

$

 3,801 

 

$

 5,419 

 

$

 4,869 

 

$

 4,763 

 

$

 5,253 

 

    Electric

 

 2,419 

 

 

 2,553 

 

 

 2,184 

 

 

 2,136 

 

 

 1,789 

 

Sempra Global and parent

 

 1,886 

 

 

 2,786 

 

 

 4,385 

 

 

 4,862 

 

 

 4,470 

 

    Total revenues

$

 8,106 

 

$

 10,758 

 

$

 11,438 

 

$

 11,761 

 

$

 11,512 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations(1)

$

 1,122 

 

$

 1,068 

 

$

 1,118 

 

$

 1,101 

 

$

 923 

 

Losses from continuing operations attributable to noncontrolling interests(1)

 

 7 

 

 

 55 

 

 

 17 

 

 

 - 

 

 

 - 

 

Preferred dividends of subsidiaries

 

 (10)

 

 

 (10)

 

 

 (10)

 

 

 (10)

 

 

 (10)

 

Income from continuing operations attributable to common shares(1)

$

 1,119 

 

$

 1,113 

 

$

 1,125 

 

$

 1,091 

 

$

 913 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income(1)

$

 1,122 

 

$

 1,068 

 

$

 1,092 

 

$

 1,416 

 

$

 930 

 

Earnings attributable to common shares(1)

$

 1,119 

 

$

 1,113 

 

$

 1,099 

 

$

 1,406 

 

$

 920 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attributable to common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Income from continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        Basic

$

 4.60 

 

$

 4.50 

 

$

 4.34 

 

$

 4.25 

 

$

 3.71 

 

        Diluted

$

 4.52 

 

$

 4.43 

 

$

 4.26 

 

$

 4.17 

 

$

 3.62 

 

    Earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        Basic

$

 4.60 

 

$

 4.50 

 

$

 4.24 

 

$

 5.48 

 

$

 3.74 

 

        Diluted

$

 4.52 

 

$

 4.43 

 

$

 4.16 

 

$

 5.38 

 

$

 3.65 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

$

 1.56 

 

$

 1.37 

 

$

 1.24 

 

$

 1.20 

 

$

 1.16 

 

Return on common equity

 

 13.2 

%

 

 13.6 

%

 

 13.9 

%

 

 20.6 

%

 

 16.7 

%

Effective income tax rate(1)

 

 29 

%

 

 30 

%

 

 34 

%

 

 33 

%

 

 4 

%

Price range of common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    High

$

 57.18 

 

$

 63.00 

 

$

 66.38 

 

$

 57.35 

 

$

 47.86 

 

    Low

 

 36.43 

 

 

 34.29 

 

 

 50.95 

 

 

 42.90 

 

 

 35.53 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average rate base

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    SoCalGas

$

 2,758 

 

$

 2,702 

 

$

 2,642 

 

$

 2,477 

 

$

 2,386 

 

    SDG&E

$

 4,362 

 

$

 4,050 

 

$

 3,846 

 

$

 3,474 

 

$

 2,902 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AT DECEMBER 31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

$

 2,295 

 

$

 2,476 

 

$

 9,964 

 

$

10,766 

 

$

12,827 

 

Total assets

$

28,512 

 

$

26,400 

 

$

28,717 

 

$

27,699 

 

$

28,246 

 

Current liabilities

$

 3,888 

 

$

 3,612 

 

$

 9,020 

 

$

 9,099 

 

$

11,253 

 

Long-term debt (excludes current portion)

$

 7,460 

 

$

 6,544 

 

$

 4,553 

 

$

 4,525 

 

$

 4,815 

 

Short-term debt(2)

$

 1,191 

 

$

 913