Net income in the third quarter 2005 included the effects of several items, including $71 million from the favorable resolution of prior-years' tax issues, a $38 million gain from the sale of Sempra Commodities' natural gas storage assets, and a $27 million benefit at San Diego Gas & Electric (SDG&E) from an electric-transmission-cost settlement. The quarterly results were negatively affected by a $189 million after-tax effect from an increase in reserves at the parent company and several of its subsidiaries, almost entirely for continuing litigation.
Excluding the impact of discontinued operations and the items listed above, net income would have been $275 million, or $1.07 per diluted share. In the prior-year's period, net income was $227 million, or $0.96 per diluted share, excluding the effects of a $9 million gain from the sale of property and $5 million in tax issues that negatively affected earnings.
For the first nine months of 2005, Sempra Energy's earnings were $565 million, or $2.26 per diluted share, up 3 percent over $549 million, or $2.36 per diluted share, for the same period in 2004.
``Our strong operating results in the third quarter, especially from our commodity operations, have contributed to an improved outlook for the rest of the year,'' said Stephen L. Baum, chairman and chief executive officer of Sempra Energy. ``We are raising our 2005 GAAP earnings-per-share guidance to $3.40 to $3.60 from $3.20 to $3.40.''
Sempra Energy's revenues in the third quarter 2005 were $2.7 billion, compared with $2.2 billion in the year-ago quarter, based on higher volatility in commodity prices that led to increased margins in natural gas and power sales at Sempra Commodities.
During the first nine months of 2005, Sempra Energy's capital expenditures totaled $1 billion -- more than half of which have been invested in SDG&E and Southern California Gas Co. (SoCalGas) -- compared with approximately $850 million during the same period last year.
``With energy supplies tight in North America, we continue to invest in natural gas and electric infrastructure to bring new supplies to market,'' said Baum.
Third-quarter earnings for SDG&E rose to $102 million in 2005 from $60 million in 2004, due primarily to a $39 million tax benefit and the $27 million electric-transmission-cost settlement, offset by the effect of a $27 million after-tax increase in litigation reserves.
Net income for SoCalGas in the third quarter 2005 was $36 million, compared with $68 million in the third quarter 2004, due primarily to the effect of a $53 million after-tax increase in litigation reserves, partially offset by an $18 million tax benefit. Third-quarter 2004 results included a $9 million gain from a property sale.
SDG&E recently signed several major power-purchase contracts for renewable energy. Last month, the utility entered into an agreement with enXco of Escondido, Calif., for 205.5 megawatts (MW) of wind power with deliveries beginning in 2007-08. In September 2005, SDG&E contracted with Stirling Energy Systems of Arizona for 300 MW of solar power under a 20-year agreement and with San Diego-based Covanta for approximately 4 MW of power from a local landfill gas facility under a 10-year agreement.
``With these new contracts, SDG&E is well on its way to achieving its goal of meeting 20 percent of its customers' needs by 2010 with renewable energy and developing a balanced portfolio of energy resources,'' said Baum.
Sempra Commodities posted strong quarterly results, earning $161 million in the third quarter 2005, up from $46 million in the same period last year. The bulk of the company's growth during the quarter came from its North American and European natural gas and power sales. The results for the quarter also included a $16 million tax benefit, the $38 million gain related to the sale of its natural gas storage assets and the effect of a $14 million after-tax increase in litigation reserves.
Sempra Generation's third-quarter net income was $30 million in 2005, compared with $64 million in 2004. Third-quarter 2005 earnings were affected by higher development costs, $19 million from temporary mark-to-market losses on forward sales and the effect of a $5 million after-tax increase in litigation reserves. Third-quarter 2004 results included approximately $7 million in temporary mark-to-market gains.
Sempra Pipelines & Storage
Based on improved performance at the company's distribution operations outside the United States, Sempra Pipelines & Storage's net income more than doubled to $19 million in the third quarter 2005 from $7 million in the same period last year.
During the quarter, Sempra Pipelines & Storage entered into a Memorandum of Understanding with Kinder Morgan Energy Partners, L.P. to pursue development of a proposed new 1,700-mile natural gas pipeline that would link producing areas in the Rocky Mountain region to the upper Midwest and eastern United States. As designed, the pipeline would have capacity of up to 2 billion cubic feet per day. Initially, Kinder Morgan would own two-thirds of the equity in the proposed pipeline and Sempra Pipelines & Storage would own one-third.
Sempra LNG reported a third-quarter loss of $5 million in 2005, compared with a loss of $4 million last year.
``With construction of our Louisiana and Mexico liquefied natural gas (LNG) terminals now under way and our Texas LNG terminal in the latter stages of permitting, we continue to make good progress toward becoming North America's leading importer of LNG,'' said Baum. ``LNG remains a key to expanding domestic supplies and helping to stabilize natural gas prices in the future.''
Last month, Sempra LNG announced that it is proceeding with detailed negotiations to deliver Algerian natural gas to the U.S. Gulf Coast. The negotiations follow a Heads of Agreement (HOA) signed earlier this year with Sonatrach S.A., one of the world's leading energy firms. The non-binding HOA contemplates a 20-year agreement to import the equivalent of 250 million cubic feet per day (MMcfd) to 500 MMcfd of Algerian liquefied natural gas to Sempra LNG's Cameron LNG receipt terminal.
On Oct. 29, 2005, Sempra Energy, SoCalGas and SDG&E announced that the companies had entered into a legal settlement with the County of Los Angeles and 11 other plaintiffs that fully resolved their claims related to the Continental Forge case. Terms of the agreement were not disclosed.
``This settlement represents a very small part of the overall litigation related to the energy crisis,'' said Baum. ``We are pleased with the mutually agreeable settlement.''
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