Debra L. Reed
Chairman and Chief Executive Officer
Fellow Shareholders
In 2012, we enjoyed one of the best years in Sempra Energy's history. We met our key financial and operational objectives, advanced our strategic plan and grew our dividend. We were the top-performing stock in our sector and generated a total shareholder return of 34 percent, compared with 1 percent for the S&P 500 Utilities Index and 16 percent for the S&P 500 Index. Over the past decade, our total return has been 305 percent, nearly double the total return of the S&P 500 Utilities Index and triple that of the S&P 500 Index.
I attribute our recent and long-term success to a simple philosophy: We do what we say we're going to do. We invest for the long term in solid energy infrastructure assets. We focus on developing, managing and operating these assets as efficiently and safely as possible to ensure healthy long-term returns for you, our shareholders. I believe this approach has earned us the confidence of our stakeholders and, in turn, created new investment opportunities for us.
Strategic Plan
As I mentioned in last year's Annual Report, our strategic plan is concentrated on three principal growth platforms:- U.S. and Latin American utilities;
- Natural gas infrastructure;
- And renewable energy.
These platforms are based on several market trends. In the U.S. and worldwide, environmental concerns and expanding supplies of natural gas are driving a fundamental fuel shift to natural gas and renewables, and away from coal and oil.
Due to the rapid development of unconventional sources of natural gas (mostly tapped from shale rock), the U.S. now has an estimated 100-year supply and is projected to be a net gas exporter by 2020. On a parallel track, over the next 30 years, renewable energy consumption in the U.S. is expected to triple.
Latin America — especially Mexico, Chile and Peru, where we have significant operations — is experiencing robust economic growth. In fact, 60 percent of the global economic growth over the next decade is forecasted to be in emerging international markets. To meet growing energy demand, an estimated $17 trillion of new investment will be required globally to upgrade infrastructure in the electric power sector alone.
Finally, with U.S. utilities aging, analysts estimate that $1 trillion in new investment will be required over the next decade to upgrade their infrastructure, improve disaster preparedness, and reinforce pipeline safety and security.
Operations Review
Our two California utilities, San Diego Gas & Electric (SDG&E) and Southern California Gas Co. (SoCalGas), are making major investments in new infrastructure and technology.A primary area of focus is pipeline safety. The California Public Utilities Commission (CPUC) has directed the state's utilities to file plans for testing or replacement of their natural gas transmission pipelines to meet newly adopted safety standards. SoCalGas and SDG&E, which have proposed a two-phase plan covering approximately 4,000 miles of pipelines, expect a decision by the CPUC later this year.
SoCalGas' other major capital project is its Advanced Meter Infrastructure, adding digital modules to nearly 6 million meters. Installations of the modules began earlier this year and are expected to continue over the next five years. The enhanced meters will increase operational efficiencies and reduce costs, and provide customers with additional information to manage their energy use.
In June 2012, SDG&E completed the largest project in its history, the Sunrise Powerlink, a new 117-mile, 500-kilovolt transmission line. The line, which connects San Diego to Imperial Valley, an area ripe for development of renewable energy, is critical for electric reliability in the region.
SDG&E moved quickly to energize the Sunrise Powerlink to help compensate for the loss of power from the San Onofre Nuclear Generating Station (SONGS). The nuclear plant has been out of commission since January 2012, due to a leak in a steam generator tube and a subsequent ongoing regulatory review. Historically, SONGS has supplied about 20 percent of the power used by SDG&E customers. The Sunrise Powerlink has provided a critical pathway for importing replacement power and green energy.
Southern California Edison is the majority owner and operator of SONGS (SDG&E owns a 20-percent stake in the plant). We believe that SONGS should be brought back online only when it is safe to do so, and we are working with Southern California Edison and regulators to ensure that our customers and shareholders are treated fairly in the process.
Infrastructure Investments
We have a number of excellent growth opportunities at our two other principal subsidiaries, Sempra International and Sempra U.S. Gas & Power. In October 2012, Sempra International announced that its Sempra Mexico unit had been awarded two contracts by the Comisión Federal de Electricidad (CFE), Mexico's state-owned electric utility, to construct, own and operate a 510-mile, $1 billion natural gas pipeline network connecting the northwestern Mexican states of Sonora and Sinaloa. The first leg of the new pipeline, which will run from southern Arizona to Sonora, is expected to be in operation in 2014, and the second segment, running from Sonora to Sinaloa, in 2016. Additionally, both segments of the pipeline are fully contracted by Sempra Mexico with CFE under 25-year firm capacity contracts denominated in U.S. dollars.
Sempra International's two South American electric utilities — Luz del Sur and Chilquinta Energía — also have large infrastructure projects underway. Luz del Sur is building a 98-megawatt (MW) hydroelectric plant in southern Peru. Meanwhile, Chilquinta Energía and another utility are developing two 220-kilovolt transmission lines in Chile. Luz del Sur and Chilquinta Energía are seeing annual customer growth of 3.6 percent and 2.3 percent, respectively, compared with our U.S. utilities, whose annual customer growth is currently less than 1 percent.
Sempra U.S. Gas & Power added more than 500 MW of renewable energy to its generation portfolio in 2012, completing several wind and solar projects. With a total of nearly 850 MW of green power produced at facilities in Arizona, Colorado, Hawaii, Indiana, Kansas, Nevada and Pennsylvania, the company has become one of the largest U.S. developers of renewable energy. All of this power has been sold forward under long-term contracts of 20 or more years.
Also, in a move to reduce risk, Sempra U.S. Gas & Power continued its exit from the merchant generation business with the sale of half of its 1250-MW Mesquite Power natural gas-fired power plant to Salt River Project. Negatively impacting 2012 results, Sempra U.S. Gas & Power wrote down $239 million on its 25-percent ownership stake in the Rockies Express Pipeline, due to the investment's lower current market value. This value was derived, in large part, from the price tendered in project partner Kinder Morgan's sale of its majority stake in the pipeline in November 2012.
Increased U.S. natural gas supplies are spurring many companies, including us, to look at exporting to nations with a growing appetite for natural gas, such as Japan and Korea. We believe that, over time, U.S. gas exports will make infrastructure assets — such as liquefaction facilities, natural gas storage and pipelines — more valuable as they will be an integral part of the supply chain to get the gas to new markets. In 2012, we entered into commercial development agreements with Mitsubishi Corporation, Mitsui & Co., Ltd. and a subsidiary of GDF SUEZ S.A. to jointly develop a liquefaction facility at the site of Cameron LNG, our Louisiana liquefied natural gas terminal. We expect to finalize commercial agreements and receive all necessary regulatory approvals by the end of this year, and then begin construction shortly thereafter.
A Look Ahead
With Don Felsinger's retirement in November 2012 and the board of directors' decision to appoint me as his successor, our executive leadership transition now is complete. I feel fortunate to be surrounded by so many talented and dedicated people at all levels of our company. Our collective goal is to continue to move Sempra Energy forward along a solid growth path, executing on our strategy, while operating our businesses efficiently, safely and reliably. We understand that our future success is a direct result of how well we perform today.For you, our shareholders, our commitment remains the same: We want to provide
you with an investment that offers both attractive income and growth potential. Our
five-year target is to deliver compound annual growth in earnings of 6 percent to 8 percent or more, along with an increasing dividend. Earlier this year, our board authorized a 5-percent increase in our dividend to $2.52 per share from $2.40 per share, on an annualized basis.
Thank you for investing in Sempra Energy — we know you have many investment options. We value your trust and will continue to work diligently to grow your investment in the coming years.
Sincerely,
Debra L. Reed
Chairman and Chief Executive Officer