Solid Q2 for Sempra Energy

Sempra Energy (SRE - Analyst Report) posted strong second-quarter results with earnings of $1.06 per share that topped the Zacks Consensus EPS estimate by 11.6% or 11 cents. This is commendable since GAAP EPS fell to eighty cents lower than the year-ago EPS of ninety-eight cents due to an asset write-off charge of twenty-six cents per share.
 
Sempra Energy is an energy services holding company involved in the sale, distribution, storage and transportation of natural gas. The company operates through two segments – Sempra Utilities and Sempra Global.
 
Quarterly Results

The Southern California-based company’s revenue, however, declined by a third year-over-year to $1.7 billion due to lower demand in the quarter. The downside came from both Sempra Utilities and Sempra Global.

This, coupled with the asset write-off from the Liberty gas storage project, brought net earnings down by 19%. However, year-ago earnings had included a $37 million gain from the Sempra Commodities RBS transaction, which closed on April 1, 2008.

Fortunes were mixed for Sempra Energy’s business units with the utilities (SoCalGas and SDG&E) witnessing upside in earnings due to higher operating margins and regulatory awards. Also, Sempra Generation’s earnings witnessed an upside year-over-year despite lower market prices due to the absence of mark-to-market losses on forward contracts. Lastly Sempra LNG also made up much of its downside year over year.

The trend reversed for Sempra Commodities where earnings tumbled by $45 million year over year. However, this was solely due to gain on the sale of the business to the joint venture with RBS in the year-ago quarter.

Sempra’s resilience came from oil and metals businesses while weak natural gas prices are expected to hinder growth till the end of the fiscal. Similarly, Sempra Pipelines & Storage due to the write-off related to the Liberty Gas Storage registered a $27 million loss in the quarter from a $24 million profit in the year-ago period.

Sempra Energy is vigorously expanding and expects to spend $2.5 billion on capital expansion programs in fiscal 2009. The company plans to finance this through a prudent mix of internal accruals and external debt.

After the end of the first half of 2009, cash & cash equivalents shot up to $818 million from $331 million in the year-ago quarter. The company also has more than $3.6 billion in unutilized lines of credit spread over 20 different banks. It also issued $1.1 billion of new long term debt at 6 – 6.5% coupon rate for the purpose.
 
Guidance

Sempra Energy reaffirmed its 2009 EPS guidance of $4.35 – $4.60, in line with the Zacks Consensus Estimate of $4.49. We expect the company’s revenue to decline to $9.2 billion from $10.8 billion in fiscal 2008.
 
Looking ahead, a base of stable earnings, steady progress at its LNG terminals and Sunrise Powerlink transmission line, ongoing installations of smart meter, and plans to construct the largest operational photovoltaic solar-power facility in North America, collectively support the bullish outlook for Sempra Energy.

However, higher borrowing costs, tightening credit markets, uncertainties in commodity markets and low natural gas prices will affect the future performance of the company. We currently have a Neutral rating on Sempra Energy.