The past year was one of significant transition and change for our company.
In late 2009, the European Commission required the Royal Bank of Scotland (RBS) to sell its stake in our RBS Sempra Commodities joint venture. This caused us to reconsider our continued involvement in commodities trading. After thorough analysis, we concluded that we should exit the joint venture at the same time as RBS.
Due largely to investor uncertainty about the timing and financial impact of our exit from the commodities trading business, our stock underperformed in 2010. Now, with the completion of the sale of the joint venture, we have narrowed our business focus, reduced our risk profile and embarked on a plan to reinvest the $1.8 billion to $1.9 billion in proceeds.
In 2010, our earnings were $739 million, or $2.98 per share, compared with earnings of $1.12 billion, or $4.52 per share, in 2009. Excluding the results of Sempra Commodities, our full-year earnings per share rose 14 percent in 2010.
We are deploying the proceeds from our joint-venture sale to repurchase stock and grow our core businesses. In the third quarter 2010, we launched a $500 million share-repurchase program. The remaining sale proceeds will help fund an ambitious capital plan to support San Diego Gas & Electric (SDG&E), Southern California Gas Co. (SoCalGas) and our three infrastructure businesses, Sempra Generation, Sempra Pipelines & Storage and Sempra LNG.
As an example, we plan to use some proceeds from the asset sales to finance the expansion of Sempra Pipelines & Storage’s holdings in South America. Sempra Pipelines & Storage is negotiating the acquisition of its partner’s stakes in Chilquinta Energía and Luz del Sur, two electric utilities jointly owned since 1999. Both utilities have been consistently profitable and offer opportunities for additional investment in the future.
With concentrated focus on utilities and contracted energy infrastructure, our risk profile has been reduced. We now expect a more predictable earnings stream, enabling us to significantly raise our dividends to shareholders. Earlier this year, we announced an increase in our dividend of 23 percent. Also, our board of directors established a new targeted dividend payout ratio of 45 percent to 50 percent of earnings.
2010: Year in Review
In December 2010, both SDG&E and SoCalGas successfully initiated their general rate cases with the California Public Utilities Commission. Plans call for their new rates to be effective in January 2012.
SDG&E received the last of its required major regulatory approvals for the $1.9 billion Sunrise Powerlink project last July and began construction of the 117-mile, 500-kilovolt transmission line. Sunrise Powerlink supports California’s requirement that 33 percent of the state’s power be derived from renewable energy sources by 2020. When the power line is completed in 2012, it will provide greater grid reliability, as well as a critical new pathway for solar, wind and geothermal energy to reach SDG&E’s customers.
By the end of this year, SDG&E will have replaced substantially all of its customers’ 2.3 million electric and natural gas meters with “smart” meters. These new digital meters, which enable two-way communication, are central to development of a smart energy grid. The smart grid employs the latest technologies to improve system reliability and efficiency, integrate traditional and new, renewable energy resources and provide customers more control over their energy use.
SoCalGas received state regulatory approval for its $1 billion advanced metering program and will start retrofitting its customers’ nearly 6 million meters with wireless communications devices in 2012. Advanced metering will enable SoCalGas to collect customer usage information electronically — thus increasing operational efficiency — while providing customers with timely access to their usage data.
Several tragic natural gas incidents over the past year have heightened international awareness of pipeline safety. Safety is a top priority — we have rigorous programs in place to monitor and maintain our pipelines and our other natural gas assets, both domestically and internationally. We have an excellent safety record in all of our natural gas operations.
As federal and state policymakers focus on raising renewable energy requirements nationwide to reduce carbon emissions, Sempra Generation has become a major developer of solar and wind power. Late last year, the company completed its 48-megawatt (MW) Copper Mountain Solar project in Nevada, the largest photovoltaic solar plant in the U.S. The solar power from this project has been sold to Pacific Gas & Electric under a 20-year purchase agreement, along with 150 MW from the first phase of Sempra Generation’s planned Mesquite Solar project outside Phoenix under a similar agreement (subject to regulatory approval). Mesquite Solar I is slated for completion in 2013. In 2010, Sempra Generation also acquired a 50-percent stake in Cedar Creek II, a 250-MW Colorado wind farm project that should be operational this summer.
Most renewable resources, however, are “intermittent,” meaning they are not always available. Thus, we believe natural gas remains the most important fuel in the developing low-carbon economy. It is the cleanest-burning and among the most reliable fossil fuels for power generation. That’s why natural gas continues to be a major emphasis of our business strategy. New gas finds in the U.S. and abroad have bolstered global supplies, ensuring that natural gas will be the fossil fuel of choice for decades to come.
In 2010, Sempra Pipelines & Storage made significant progress in developing its natural gas storage assets. In August, the company started operations of the first cavern at its Mississippi facility and, in October, it put into service an additional cavern at its Alabama facility. In total, Sempra Pipelines & Storage could develop as much as 75 billion cubic feet of new storage capacity in the U.S. Gulf Coast region.
Sempra LNG completed its first full year of operations in 2010. About two-thirds of the capacity of the company’s two receipt terminals in Mexico and Louisiana is under contract for 20 years. Additionally, Sempra LNG has negotiated shorter-term agreements with major liquefied natural gas suppliers to fill some of the remaining capacity at the terminals.
A Look Ahead
Early in 2010, we decided to restructure our corporate organization, with an eye toward reducing administrative costs while returning more autonomy and accountability to our operating subsidiaries.
Beyond the immediate efficiencies gained, this corporate reorganization will have a positive long-term impact on our management capabilities. Neal Schmale, our chief operating officer, reaches retirement age this year and I plan to retire in 2012 at age 65. Thus, we are providing an increased level of responsibility and new cross-training opportunities for many of our most promising leaders to facilitate the smooth transition to a strong, new leadership team in the future.
We have set a high standard of performance and have been recognized as a leader in our industry. In 2010, we were once again named one of Fortune magazine’s “Most Admired” companies and also earned recognition from Corporate Responsibility magazine as one of the “100 Best Corporate Citizens.” Additionally, SoCalGas and SDG&E ranked in the top tier in industry surveys for customer satisfaction and service reliability.
We are proud of this recognition and our solid record of corporate responsibility. Last year, through our subsidiaries and the Sempra Energy Foundation — our charitable giving arm — we contributed nearly $14 million to non-profit organizations and to people in need. Included in these contributions was aid for victims of the devastating earthquakes in Haiti, Chile and Baja California, Mexico.
On behalf of our 13,500 employees, please accept my sincere thanks for your continued support. I appreciate that you have many investment options and have placed your faith in our company.
Sincerely,
Donald E. Felsinger
Chairman and Chief Executive Officer
Donald E. Felsinger
Chairman and
Chief Executive Officer