UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[..X..] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
June 30, 2003
For the quarterly period ended.......................................
Or
[.....] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ________________ to _________________
Commission Name of Registrant, State of IRS Employer
File Incorporation, Address and Identification
Number Telephone Number Number
---------- ---------------------------------- --------------
1-40 Pacific Enterprises 94-0743670
(A California Corporation)
101 Ash Street
San Diego, California 92101
(619) 696-2020
1-1402 Southern California Gas Company 95-1240705
(A California Corporation)
555 West Fifth Street
Los Angeles, California 90013
(213) 244-1200
No Change
-----------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since
last report
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Sections 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past
90 days. Yes...X... No......
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes...X... No......
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock outstanding:
Pacific Enterprises Wholly owned by Sempra Energy
Southern California Gas Company Wholly owned by Pacific Enterprises
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report contains statements that are not historical fact
and constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. The words
"estimates," "believes," "expects," "anticipates," "plans," "intends,"
"may," "would" and "should" or similar expressions, or discussions of
strategy or of plans are intended to identify forward-looking
statements. Forward-looking statements are not guarantees of
performance. They involve risks, uncertainties and assumptions. Future
results may differ materially from those expressed in these forward-
looking statements.
Forward-looking statements are necessarily based upon various
assumptions involving judgments with respect to the future and other
risks, including, among others, local, regional, national and
international economic, competitive, political, legislative and
regulatory conditions and developments; actions by the California
Public Utilities Commission, the California Legislature, and the
Federal Energy Regulatory Commission; capital market conditions,
inflation rates, interest rates and exchange rates; energy and trading
markets, including the timing and extent of changes in commodity
prices; weather conditions and conservation efforts; war and terrorist
attacks; business, regulatory and legal decisions; the status of
deregulation of retail natural gas and electricity delivery; the timing
and success of business development efforts; and other uncertainties,
all of which are difficult to predict and many of which are beyond the
control of the companies. Readers are cautioned not to rely unduly on
any forward-looking statements and are urged to review and consider
carefully the risks, uncertainties and other factors which affect the
companies' business described in this report and other reports filed by
the companies from time to time with the Securities and Exchange
Commission.
ITEM 1. FINANCIAL STATEMENTS.
PACIFIC ENTERPRISES AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(Dollars in millions)
Three months ended
June 30,
------------------
2003 2002
------- -------
OPERATING REVENUES $ 820 $ 670
------- -------
OPERATING EXPENSES
Cost of natural gas 421 269
Other operating expenses 223 210
Depreciation 72 68
Income taxes 27 42
Franchise fees and other taxes 25 23
------- -------
Total operating expenses 768 612
------- -------
Operating income 52 58
------- -------
Other income and (deductions)
Interest income 3 4
Regulatory interest - net (1) --
Allowance for equity funds used
during construction 2 2
Income taxes on non-operating income (1) --
Preferred dividends of subsidiaries (1) (1)
Other - net (5) 2
------- -------
Total (3) 7
------- -------
Interest charges
Long-term debt 10 10
Other 4 5
Allowance for borrowed funds used
during construction (1) --
------- -------
Total 13 15
------- -------
Net income 36 50
Preferred dividend requirements 1 1
------- -------
Earnings applicable to common shares $ 35 $ 49
======= =======
See notes to Consolidated Financial Statements.
PACIFIC ENTERPRISES AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(Dollars in millions)
Six months ended
June 30,
-----------------
2003 2002
------- -------
OPERATING REVENUES $ 1,828 $ 1,402
------- -------
OPERATING EXPENSES
Cost of natural gas 1,021 616
Other operating expenses 420 391
Depreciation 141 136
Income taxes 72 89
Franchise fees and other taxes 54 47
------- -------
Total operating expenses 1,708 1,279
------- -------
Operating income 120 123
------- -------
Other income and (deductions)
Interest income 5 6
Regulatory interest - net (1) (4)
Allowance for equity funds used
during construction 4 4
Income taxes on non-operating income (2) 3
Preferred dividends of subsidiaries (1) (1)
Other - net (2) 5
------- -------
Total 3 13
------- -------
Interest charges
Long-term debt 22 19
Other 9 9
Allowance for borrowed funds used
during construction (2) (1)
------- -------
Total 29 27
------- -------
Net income 94 109
Preferred dividend requirements 2 2
------- -------
Earnings applicable to common shares $ 92 $ 107
======= =======
See notes to Consolidated Financial Statements.
PACIFIC ENTERPRISES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
---------------------------
June 30, December 31,
2003 2002
----------- -------------
ASSETS
Utility plant - at original cost $6,860 $6,701
Accumulated depreciation (4,027) (3,914)
------ ------
Utility plant - net 2,833 2,787
------ ------
Current assets:
Cash and cash equivalents 12 22
Accounts receivable - trade 319 458
Accounts receivable - other 19 44
Due from unconsolidated affiliates 172 83
Income taxes receivable 55 97
Deferred income taxes 79 55
Regulatory assets arising from fixed-price
contracts and other derivatives 88 92
Other regulatory assets 14 --
Inventories 57 76
Other 18 20
------ ------
Total current assets 833 947
------ ------
Other assets:
Due from unconsolidated affiliates 213 419
Regulatory assets arising from fixed-price
contracts and other derivatives 191 233
Sundry 162 173
------ ------
Total other assets 566 825
------ ------
Total assets $4,232 $4,559
====== ======
See notes to Consolidated Financial Statements.
PACIFIC ENTERPRISES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
----------------------------
June 30, December 31,
2003 2002
----------- -------------
CAPITALIZATION AND LIABILITIES
Capitalization:
Common Stock (600,000,000 shares authorized;
83,917,664 shares outstanding) $1,349 $1,318
Retained earnings 128 286
------ ------
Total common equity 1,477 1,604
Preferred stock 80 80
------ ------
Total shareholders' equity 1,557 1,684
Long-term debt 562 657
------ ------
Total capitalization 2,119 2,341
------ ------
Current liabilities:
Accounts payable - trade 227 200
Accounts payable - other 30 36
Due to unconsolidated affiliates 87 96
Regulatory balancing accounts - net 200 184
Interest payable 26 25
Regulatory liabilities -- 16
Fixed-price contracts and other derivatives 93 96
Current portion of long-term debt 100 175
Customer deposits 124 108
Other 235 265
------ ------
Total current liabilities 1,122 1,201
------ ------
Deferred credits and other liabilities:
Customer advances for construction 39 37
Post-retirement benefits other than pensions 76 77
Deferred income taxes 205 176
Deferred investment tax credits 46 47
Regulatory liabilities 117 121
Fixed-price contracts and other derivatives 191 233
Deferred credits and other liabilities 297 306
Preferred stock of subsidiary 20 20
------ ------
Total deferred credits and other liabilities 991 1,017
------ ------
Contingencies and commitments (Note 3)
Total liabilities and shareholders' equity $4,232 $4,559
====== ======
See notes to Consolidated Financial Statements.
PACIFIC ENTERPRISES AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Dollars in millions)
Six months ended
June 30,
------------------
2003 2002
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 94 $ 109
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 141 136
Deferred income taxes and investment tax credits (12) (8)
Net changes in other working capital components 223 399
Changes in other assets (2) (1)
Changes in other liabilities (4) (14)
------- -------
Net cash provided by operating activities 440 621
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (135) (143)
Loan to/from affiliate - net 107 (298)
------- -------
Net cash used in investing activities (28) (441)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Common dividends paid (250) (100)
Preferred dividends paid (2) (2)
Payment of long-term debt (170) --
Decrease in short-term debt -- (50)
------- -------
Net cash used in financing activities (422) (152)
------- -------
Increase (decrease) in cash and cash equivalents (10) 28
Cash and cash equivalents, January 1 22 13
------- -------
Cash and cash equivalents, June 30 $ 12 $ 41
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest payments, net of amounts capitalized $ 26 $ 24
======= =======
Income tax payments, net of refunds $ 44 $ 74
======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
Assets contributed by Sempra Energy $ 48 $ --
Liabilities assumed (18) --
------- -------
Net assets contributed by Sempra Energy $ 30 $ --
======= =======
See notes to Consolidated Financial Statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(Dollars in millions)
Three months ended
June 30,
------------------
2003 2002
------- -------
OPERATING REVENUES $ 820 $ 670
------- -------
OPERATING EXPENSES
Cost of natural gas 421 269
Other operating expenses 226 208
Depreciation 72 68
Income taxes 28 44
Franchise fees and other taxes 25 23
------- -------
Total operating expenses 772 612
------- -------
Operating income 48 58
------- -------
Other income and (deductions)
Interest income 1 1
Regulatory interest - net (1) --
Allowance for equity funds used
during construction 2 2
Income taxes on non-operating income (1) 1
------- -------
Total 1 4
------- -------
Interest charges
Long-term debt 10 10
Other 2 --
Allowance for borrowed funds used
during construction (1) --
------- -------
Total 11 10
------- -------
Net income 38 52
Preferred dividend requirements 1 1
------- -------
Earnings applicable to common shares $ 37 $ 51
======= =======
See notes to Consolidated Financial Statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(Dollars in millions)
Six months ended
June 30,
-----------------
2003 2002
------- -------
OPERATING REVENUES $ 1,828 $ 1,402
------- -------
OPERATING EXPENSES
Cost of natural gas 1,021 616
Other operating expenses 421 386
Depreciation 141 136
Income taxes 73 92
Franchise fees and other taxes 54 47
------- -------
Total operating expenses 1,710 1,277
------- -------
Operating income 118 125
------- -------
Other income and (deductions)
Interest income 2 2
Regulatory interest - net (1) (4)
Allowance for equity funds used
during construction 4 4
Income taxes on non-operating income (2) 5
Other - net (1) --
------- -------
Total 2 7
------- -------
Interest charges
Long-term debt 22 19
Other 4 2
Allowance for borrowed funds used
during construction (2) (1)
------- -------
Total 24 20
------- -------
Net income 96 112
Preferred dividend requirements 1 1
------- -------
Earnings applicable to common shares $ 95 $ 111
======= =======
See notes to Consolidated Financial Statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
---------------------------
June 30, December 31,
2003 2002
------------ -------------
ASSETS
Utility plant - at original cost $6,860 $6,701
Accumulated depreciation (4,027) (3,914)
------ ------
Utility plant - net 2,833 2,787
------ ------
Current assets:
Cash and cash equivalents 12 22
Accounts receivable - trade 319 458
Accounts receivable - other 19 44
Due from unconsolidated affiliates 171 81
Income taxes receivable -- 28
Deferred income taxes 109 87
Regulatory assets arising from fixed-priced contracts
and other derivatives 88 92
Other regulatory assets 14 --
Inventories 57 76
Other 17 20
------ ------
Total current assets 806 908
------ ------
Other assets:
Regulatory assets arising from fixed-priced contracts
and other derivatives 191 233
Sundry 137 151
------ ------
Total other assets 328 384
------ ------
Total assets $3,967 $4,079
====== ======
See notes to Consolidated Financial Statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
---------------------------
June 30, December 31,
2003 2002
------------ -------------
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock (100,000,000 shares authorized;
91,300,000 shares outstanding) $ 866 $ 836
Retained earnings 527 482
------ ------
Total common equity 1,393 1,318
Preferred stock 22 22
------ ------
Total shareholders' equity 1,415 1,340
Long-term debt 562 657
------ ------
Total capitalization 1,977 1,997
------ ------
Current liabilities:
Accounts payable - trade 227 199
Accounts payable - other 30 36
Due to unconsolidated affiliates 22 31
Regulatory balancing accounts - net 200 184
Income taxes payable 15 --
Interest payable 21 24
Regulatory liabilities -- 16
Fixed-price contracts and other derivatives 93 96
Current portion of long-term debt 100 175
Customer deposits 124 108
Other 233 264
------ ------
Total current liabilities 1,065 1,133
------ ------
Deferred credits and other liabilities:
Customer advances for construction 39 37
Deferred income taxes 266 237
Deferred investment tax credits 46 47
Regulatory liabilities arising from deferred taxes 165 164
Other regulatory liabilities 28 37
Fixed-price contracts and other derivatives 191 233
Deferred credits and other liabilities 190 194
------ ------
Total deferred credits and other liabilities 925 949
------ ------
Contingencies and commitments (Note 3)
Total liabilities and shareholders' equity $3,967 $4,079
====== ======
See notes to Consolidated Financial Statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Dollars in millions)
Six months ended
June 30,
-------------------
2003 2002
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 96 $ 112
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 141 136
Deferred income taxes and investment tax credits (12) (12)
Net changes in other working capital components 224 396
Changes in other assets (1) --
Changes in other liabilities -- (12)
------- -------
Net cash provided by operating activities 448 620
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (135) (143)
Loan to/from affiliate - net (102) (298)
------- -------
Net cash used in investing activities (237) (441)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (51) (101)
Payments of long-term debt (170) --
Decrease in short-term debt -- (50)
------- -------
Net cash used in financing activities (221) (151)
------- -------
Increase (decrease) in cash and cash equivalents (10) 28
Cash and cash equivalents, January 1 22 13
------- -------
Cash and cash equivalents, June 30 $ 12 $ 41
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest payments, net of amounts capitalized $ 24 $ 22
======= =======
Income tax payments, net of refunds $ 44 $ 74
======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
Assets contributed by Sempra Energy $ 48 $ --
Liabilities assumed (18) --
------- -------
Net assets contributed by Sempra Energy $ 30 $ --
======= =======
See notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
This Quarterly Report on Form 10-Q is that of Pacific Enterprises (PE)
and of Southern California Gas Company (SoCalGas)(collectively referred
to as the company or the companies). PE's common stock is wholly owned
by Sempra Energy, a California-based Fortune 500 holding company, and
PE owns all of the common stock of SoCalGas. The financial statements
herein are, in one case, the Consolidated Financial Statements of PE
and its subsidiary SoCalGas, and, in the second case, the Consolidated
Financial Statements of SoCalGas and its subsidiaries, which comprise
less than one percent of SoCalGas' consolidated financial position and
results of operations.
Sempra Energy also indirectly owns all of the common stock of San Diego
Gas & Electric (SDG&E). SoCalGas and SDG&E are collectively referred to
herein as "the California Utilities."
The accompanying Consolidated Financial Statements have been prepared
in accordance with the interim-period-reporting requirements of Form
10-Q. Results of operations for interim periods are not necessarily
indicative of results for the entire year. In the opinion of
management, the accompanying statements reflect all adjustments
necessary for a fair presentation. These adjustments are only of a
normal recurring nature. Certain changes in classification have been
made to prior presentations to conform to the current financial
statement presentation.
Information in this Quarterly Report is unaudited and should be read in
conjunction with the Annual Report on Form 10-K for the year ended
December 31, 2002 (Annual Report) and the Quarterly Report on Form 10-Q
for the three months ended March 31, 2003.
The companies' significant accounting policies are described in Note 1
of the notes to Consolidated Financial Statements in the Annual Report.
The same accounting policies are followed for interim reporting
purposes.
As described in the notes to Consolidated Financial Statements in the
Annual Report, SoCalGas accounts for the economic effects of regulation
on utility operations in accordance with Statement of Financial
Accounting Standards (SFAS) No. 71, "Accounting for the Effects of
Certain Types of Regulation".
COMPREHENSIVE INCOME
The following is a reconciliation of net income to comprehensive
income.
Pacific Enterprises SoCalGas
----------------------------- ----------------------------
Three months Six months Three months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
----------------------------- ----------------------------
(Dollars in millions) 2003 2002 2003 2002 2003 2002 2003 2002
----------------------------------------------------------------------------------
Net income $ 36 $ 50 $ 94 $ 109 $ 38 $ 52 $ 96 $ 112
Financial instruments -- -- -- (1)* -- -- -- (1)*
-----------------------------------------------------------
Comprehensive income $ 36 $ 50 $ 94 $ 108 $ 38 $ 52 $ 96 $ 111
----------------------------------------------------------------------------------
* This did not affect the reported balance of accumulated other
comprehensive income related to this topic ($0 at the beginning and end of
the period) due to rounding.
2. NEW ACCOUNTING STANDARDS
SFAS 143, "Accounting for Asset Retirement Obligations": On January 1,
2003, the company recorded asset retirement obligations of $10 million
associated with the future retirement of three storage facilities.
The change in the asset retirement obligations for the six months ended
June 30, 2003 is as follows (dollars in millions):
Balance as of January 1, 2003 $ --
Adoption of SFAS 143 10
Accretion expense 1
------
Balance as of June 30, 2003 $ 11
======
Had SFAS 143 been in effect, the asset retirement obligation liability
would have been $8 million as of January 1 and December 31, 2000, $9
million as of December 31, 2001 and $10 million as of December 31,
2002.
Except for the items noted above, the company has determined that there
is no other material retirement obligation associated with tangible
long-lived assets.
Implementation of SFAS 143 has had no effect on results of operations
and is not expected to have a significant one in the future.
3. MATERIAL CONTINGENCIES
NATURAL GAS INDUSTRY RESTRUCTURING
As discussed in Note 9 of the notes to Consolidated Financial
Statements in the Annual Report, in December 2001 the CPUC issued a
decision related to natural gas industry restructuring, with
implementation anticipated during 2002. During 2002 the California
Utilities filed a proposed implementation schedule and revised tariffs
and rules required for implementation. However, on February 27, 2003,
the CPUC issued a resolution rejecting without prejudice those proposed
tariffs and rules. The resolution ordered SoCalGas to file a new
application, which would address detailed proposals for implementation
of the December 2001 decision, but also would allow reconsideration of
the December 2001 decision. SoCalGas filed such an application on June
30, 2003, and proposed some modifications to the provisions of the
December 2001 decision to respond to concerns that it could lead to
higher natural gas costs for consumers. These modifications include,
among other things, a proposal not to unbundle natural gas
transmission, a higher market price cap on receipt-point capacity
transactions in the secondary market, deferral of retail unbundling
provisions, and a proposal to litigate transmission and storage revenue
requirements in the Cost of Service case (see below). Modifications
would also remove SoCalGas' exposure to risk or reward for the sale of
receipt-point capacity. The filing proposes implementation of these
provisions on April 1, 2004 and continuing through August 31, 2006. If
the December 2001 decision is implemented, it is not expected to affect
the California Utilities' earnings adversely. A CPUC decision is
expected during 2004.
BORDER PRICE INVESTIGATION
In November 2002, the CPUC instituted an investigation into the
Southern California natural gas market and the price of natural gas
delivered to the California-Arizona (CA-AZ) border during the period of
March 2000 through May 2001. If the investigation determines that the
conduct of any respondent contributed to the natural gas price spikes
at the CA-AZ border during this period, the CPUC may modify the
respondent's applicable natural gas procurement incentive mechanism,
reduce the amount of any shareholder award for the period involved,
and/or order the respondent to issue a refund to ratepayers to offset
the higher rates paid. The California Utilities, included among the
respondents to the investigation, are fully cooperating in the
investigation and believe that the CPUC will ultimately determine that
they were not responsible for the high border prices during this
period. On August 1, 2003, the Administrative Law Judge (ALJ) issued a
revised schedule with hearings scheduled to begin in March 2004 and
with a Commission decision by late 2004.
CPUC INVESTIGATION OF COMPLIANCE WITH AFFILIATE RULES
On February 27, 2003, the CPUC opened an investigation of the business
activities of SDG&E, SoCalGas and Sempra Energy to ensure that they
have complied with relevant statutes and CPUC decisions in the
management, oversight and operations of their companies. The Assigned
Commissioner and ALJ issued a ruling which suspends the procedural
schedule until the CPUC completes an independent audit to evaluate
energy-related business activities undertaken by Sempra Energy within
the service territories of SDG&E and SoCalGas, relative to holding
company systems and affiliate activities. The audit is to consider
whether these activities pose any problems for ratepayers and whether
they are consistent with the CPUC's decision, rules or orders and/or
affiliate statutes. The objective of the audit is to analyze the
adequacy of the Affiliate Rules. In accordance with existing CPUC
requirements, the California Utilities' transactions with other Sempra
Energy affiliates have been audited by an independent auditing firm
each year, with results reported to the CPUC, and there have been no
material adverse findings in those audits.
COST OF SERVICE FILING
On May 22, 2003, the assigned CPUC Commissioner modified his previously
adopted procedural schedule on the California Utilities' Cost of
Service applications to expedite a decision by approximately one month,
permitting a decision by as early as March 2004. The assigned
Commissioner also provided for additional comments to be filed on the
California Utilities' request for interim relief for the period from
January 1, 2004 to the date of the Cost of Service decision and stated
that a decision on the request would be prepared for consideration of
the full Commission. On June 3, 2003, various parties filed reply
comments supporting or opposing the motion for January 1, 2004 interim
relief. The CPUC's Office of Ratepayer Advocates' (ORA) report on the
California Utilities' filing is due on August 8, 2003.
An October 10, 2001 decision denied the California Utilities' request
to continue equal sharing between ratepayers and shareholders of the
estimated savings for the 1998 Enova-PE business combination that
created Sempra Energy and, instead, ordered that all of the estimated
2003 merger savings go to ratepayers. This decision will adversely
affect 2003 net income by $24 million.
GAS COST INCENTIVE MECHANISM (GCIM)
SoCalGas' GCIM allows SoCalGas to receive a share of the savings it
achieves by buying natural gas for customers below monthly benchmarks.
The mechanism permits full recovery of all costs within a tolerance
band above the benchmark price and refunds savings within a tolerance
band below the benchmark price. The costs outside the tolerance band
are shared between customers and shareholders.
On June 25, 2003, the assigned CPUC commissioner issued two separate,
but essentially identical, Draft Decisions in SoCalGas' GCIM Year 7 and
Year 8 proceedings. A final CPUC decision is expected during the third
quarter of 2003. If the final decision agrees with the assigned
commissioner's Draft Decisions approving the shareholder rewards of
$30.8 million for Year 7 and $17.4 million for Year 8 (subject to
refund or adjustment as determined by the Commission in the Border
Price Investigation described above), the rewards would be included in
income in the third quarter of 2003.
On June 16, 2003, SoCalGas filed an application with the CPUC
requesting a $6.3 million shareholder reward for GCIM Year 9 (April 1,
2002 through March 31, 2003). The company's natural gas purchasing
activities resulted in a net savings of $33 million to ratepayers
during Year 9, which led to the requested shareholder reward.
Performance incentives rewards are not included in the company's
earnings until CPUC approval is received.
LITIGATION
Lawsuits filed in 2000 and currently consolidated in San Diego Superior
Court seek class-action certification and damages, alleging that Sempra
Energy, SoCalGas and SDG&E, along with El Paso Energy Corp. (El Paso)
and several of its affiliates, unlawfully sought to control natural gas
and electricity markets. In March 2003, plaintiffs in these cases and
the applicable El Paso entities announced that they had reached a
settlement in principle of the class actions, certain of the individual
actions, claims asserted by the California Attorney General and by
other western states, and certain complaint proceedings filed with FERC
by the CPUC and the California Energy Oversight Board. On June 26,
2003, the settlement was filed for approval with the relevant state
courts and the FERC. The settlement provides more than $1.5 billion in
consideration to be received by customers, with no effect on the income
of the utilities processing the refunds. Of these funds, the settlement
provides the following allocation for each SDG&E and SoCalGas customer
group: SDG&E Electric Customers -- $60 million, SDG&E Core Gas -- $29
million and SoCalGas Core Gas -- $36 million. Non-core natural gas
customers will go through a claims process in the courts, by which they
can establish their harm and receive a fair share of the consideration.
A similar lawsuit has been filed by the Attorney General of Arizona
alleging that El Paso and certain Sempra Energy subsidiaries unlawfully
sought to control the natural gas market in Arizona. In April 2003,
Sierra Pacific and its utility subsidiary Nevada Power jointly filed a
lawsuit in U.S. District Court in Las Vegas against major natural gas
suppliers, including Sempra Energy, the California Utilities and other
company subsidiaries, seeking damages resulting from an alleged
conspiracy to drive up or control natural gas prices, eliminate
competition and increase market volatility, and breach of contract and
wire fraud.
In the fourth quarter of 2002, Sempra Energy and SoCalGas were named as
defendants in a lawsuit filed in Los Angeles Superior Court against
various trade publications and other energy companies alleging that
energy prices were unlawfully manipulated by defendants' reporting
artificially inflated natural gas prices to trade publications. On July
8, 2003, the Superior Court granted the defendants' demurrer on the
grounds that the claims contained in the complaint were subject to the
Filed Rate Doctrine and were preempted by the Federal Power Act.
However, the Court has provided plaintiffs with an opportunity to amend
their claims.
Except for the matters referred to above, neither the company nor its
subsidiaries are party to, nor is their property the subject of, any
material pending legal proceedings other than routine litigation
incidental to their businesses.
Management believes that none of these matters will have a material
adverse effect on the company's financial condition or results of
operations.
PENDING INTERNAL REVENUE SERVICE MATTERS
The company is in discussions with the Internal Revenue Service (IRS)
to resolve issues related to various prior years' returns. A recently
issued Revenue Ruling dealing with utility balancing accounts, and
recent discussions with the IRS concerning this Ruling lead the company
to believe it will be entitled to reverse recorded interest associated
with the reporting of these items in prior periods. The company expects
that these matters will be favorably resolved before year end and
estimates that the resolution will increase reported 2003 earnings in
excess of $10 million.
QUASI-REORGANIZATION
In 1993, PE divested its merchandising operations and most of its oil
and natural gas exploration and production business. In connection with
the divestitures, PE effected a quasi-reorganization for financial
reporting purposes effective December 31, 1992. Management believes the
remaining balances of the liabilities established in connection with
the quasi-reorganization are adequate.
4. FINANCIAL INSTRUMENTS
Note 7 of the notes to Consolidated Financial Statements in the Annual
Report discusses the companies' financial instruments, including the
adoption of SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended by SFAS 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities." The effect is
to recognize all derivatives as assets or liabilities on the balance
sheet, measure those instruments at fair value, and recognize any
changes in fair value in earnings for the period that the change occurs
unless the derivative qualifies as an effective hedge that offsets
other exposures.
The company utilizes derivative financial instruments to manage its
exposure to unfavorable changes in commodity prices, which are subject
to significant and often volatile fluctuations. Derivative financial
instruments include futures, forwards, swaps, options and long-term
delivery contracts. These contracts allow the company to predict with
greater certainty the effective prices to be received by the company
and their customers. In accordance with SFAS 133, the company has
elected to account for contracts that are settled by physical delivery
at historical cost, with gains and losses reflected in the income
statement at the contract settlement date.
Fixed-price contracts and other derivatives on the Consolidated Balance
Sheets primarily reflect the company's derivative gains and losses
related to long-term delivery contracts for natural gas transportation.
The company has established regulatory assets and liabilities to the
extent that these gains and losses are recoverable or payable through
future rates. The changes in fixed-price contracts and other
derivatives on the Consolidated Balance Sheets for the six months ended
June 30, 2003 were primarily due to physical deliveries under long-term
natural gas transportation contracts. The transactions associated with
fixed-price contracts and other derivatives had no material impact to
the Statements of Consolidated Income for the six months ended June 30,
2003 or 2002.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
financial statements contained in this Form 10-Q and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" contained in the Annual Report.
RESULTS OF OPERATIONS
Natural gas revenues increased to $1.8 billion for the six months ended
June 30, 2003 from $1.4 billion for the corresponding period in 2002,
and the cost of natural gas increased to $1 billion in 2003 from $616
million in 2002. Additionally, natural gas revenues increased to $820
million for the three months ended June 30, 2003 from $670 million for
the corresponding period in 2002, and the cost of natural gas increased
to $421 million in 2003 from $269 million in 2002. These changes were
primarily attributable to natural gas price increases, which are passed
on to customers, partially offset by reduced volumes.
Under the current regulatory framework, changes in core-market natural
gas prices for core customers (primarily residential and small
commercial and industrial customers) do not affect net income, since
core-customer rates generally recover the actual cost of natural gas on
a substantially concurrent basis and are fully balanced. However,
SoCalGas' GCIM allows SoCalGas to share in the savings or costs from
buying natural gas for customers below or above monthly benchmarks. The
mechanism permits full recovery of all costs within a tolerance band
above the benchmark price and refunds all savings within a tolerance
band below the benchmark price. The costs or savings outside the
tolerance band are shared between customers and shareholders.
The table below summarizes natural gas volumes and revenues by customer
class for the six months ended June 30, 2003 and 2002.
Gas Sales, Transportation and Exchange
(Volumes in billion cubic feet, dollars in millions)
Gas Sales Transportation & Exchange Total
--------------------------------------------------------------
Volumes Revenue Volumes Revenue Volumes Revenue
--------------------------------------------------------------
2003:
Residential 129 $ 1,188 1 $ 4 130 $ 1,192
Commercial and industrial 58 411 138 86 196 497
Electric generation plants -- -- 67 18 67 18
Wholesale -- -- 68 13 68 13
--------------------------------------------------------------
187 $ 1,599 274 $ 121 461 1,720
Balancing accounts and other 108
--------
Total $ 1,828
-----------------------------------------------------------------------------------------
2002:
Residential 144 $ 968 1 $ 4 145 $ 972
Commercial and industrial 53 271 142 76 195 347
Electric generation plants -- -- 85 15 85 15
Wholesale -- -- 83 10 83 10
--------------------------------------------------------------
197 $ 1,239 311 $ 105 508 1,344
Balancing accounts and other 58
--------
Total $ 1,402
-----------------------------------------------------------------------------------------
SoCalGas recorded net income of $96 million and $112 million for the
six-month periods ended June 30, 2003 and 2002, respectively, and net
income of $38 million and $52 million for the three-month periods ended
June 30, 2003 and 2002, respectively. The change was primarily due to
the end of sharing of the merger savings (discussed in the Annual
Report) and increased operating expenses associated with legal costs
principally related to antitrust litigation, partially offset by
increased margins and other factors.
CAPITAL RESOURCES AND LIQUIDITY
SoCalGas' operations are the major source of liquidity. In addition,
working capital requirements can be met through the issuance of short-
term and long-term debt. Cash requirements primarily consist of capital
expenditures for utility plant. At June 30, 2003, the company had $12
million in cash and $800 million (of which PE had $500 million for the
sole purpose of providing loans to Sempra Energy Global Enterprises
(Global) and SoCalGas had $300 million) in unused, committed lines of
credit available. On July 10, 2003, the CPUC issued a decision
authorizing SoCalGas to issue up to $715 million of long-term debt, of
which not less than $500 million will be used for the retirement of
currently outstanding debt or preferred stock. The decision also
grants SoCalGas an exemption from the Competitive Bidding Rule and
permits the company to enter into interest-rate swaps, caps, collars
and currency-exchange contracts.
Management believes these amounts, cash flows from operations and new
debt issuances will be adequate to finance capital expenditure
requirements and other commitments. Management continues to regularly
monitor the company's ability to adequately meet the needs of its
operating, financing and investing activities.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities totaled $440 million and $621
million for the six months ended June 30, 2003 and 2002, respectively.
The decrease in cash flows from operations was primarily attributable
to an increase in overcollected regulatory balancing accounts in 2002
resulting from higher natural gas usage in 2002 and lower deposits from
customers in 2003.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used in investing activities totaled $28 million and $441
million for the six months ended June 30, 2003 and 2002, respectively.
The change in cash flows from investing activities was primarily due to
the repayments by Sempra Energy in 2003 of advances made to it in 2002.
Capital expenditures for property, plant and equipment are estimated to
be $350 million for the full year 2003 and are being financed primarily
by internally generated funds and security issuances. Construction,
investment and financing programs are continuously reviewed and revised
in response to changes in competition, customer growth, inflation,
customer rates, the cost of capital, and environmental and regulatory
requirements.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash used in financing activities totaled $422 million and $152
million for the six months ended June 30, 2003 and 2002, respectively.
The change in cash flows from financing activities was attributable to
the repayment of $70 million of medium-term notes in January 2003 and
$100 million of 7.375% first-mortgage bonds in April 2003. Dividends
paid to Sempra Energy were $250 million (including $50 million
dividended to PE by SoCalGas) and $100 million (all dividended to PE by
SoCalGas) for the first six months of 2003 and 2002, respectively. In
addition, repayments of short-term debt amounted to $50 million for the
first six months of 2002.
In April 2003, PE amended its revolving line of credit and extended the
expiration date by an additional two years. The revolving credit
commitment, initially $500 million, declines semi-annually by $125
million until expiration on April 5, 2005 and is for the purpose of
funding loans by PE to Global. Borrowings under the agreement would
bear interest at rates varying with market rates, PE's credit ratings
and the amount of the borrowings outstanding. They would be guaranteed
by Sempra Energy and would be subject to mandatory repayment if
SoCalGas' unsecured long-term credit ratings were to cease to be at
least BBB by S&P and Baa2 by Moody's, if Sempra Energy's or SoCalGas'
debt to total capitalization ratio (as defined in the agreement) were
to exceed 65 percent, or if there were to be a change in law materially
and adversely affecting the ability of SoCalGas to pay dividends or
make distributions to PE. No borrowings have been made under this
agreement.
In May 2003, SoCalGas and SDG&E replaced their expiring $500 million,
364-day credit agreement with a substantially identical agreement
expiring on May 14, 2004. Under the agreement, each utility may
individually borrow up to $300 million, subject to a combined borrowing
limit for both utilities of $500 million. At the maturity date, each
utility may convert its then outstanding borrowings to a one-year term
loan, subject to having obtained any requisite regulatory approvals.
Borrowings under the agreement would be available for general corporate
purposes including back-up support for commercial paper and variable-
rate long-term debt, and would bear interest at rates varying with
market rates and the borrowing utility's credit rating. The agreement
requires each utility to maintain a debt-to-total capitalization ratio
(as defined in the agreement) of not to exceed 60 percent. The rights,
obligations and covenants of each utility under the agreement are
individual rather than joint with those of the other utility, and a
default by one utility would not constitute default by the other.
FACTORS INFLUENCING FUTURE PERFORMANCE
Performance of the companies will depend primarily on the ratemaking
and regulatory process, electric and natural gas industry
restructuring, and the changing energy marketplace. These factors are
discussed in the Annual Report and in Note 3 of the notes to
Consolidated Financial Statements herein.
Income-Tax Issues
Resolution of the income-tax issues described in Note 3 of the notes to
Consolidated Financial Statements herein could have a material impact
on results of operations for 2003, or one or more future periods.
Natural Gas Restructuring and Rates
As discussed in the Annual Report, in December 2001 the CPUC issued a
decision related to natural gas industry restructuring, with
implementation anticipated during 2002. During 2002 the California
Utilities filed a proposed implementation schedule and revised tariffs
and rules required for implementation. However, on February 27, 2003,
the CPUC issued a resolution rejecting without prejudice those proposed
tariffs and rules. The resolution ordered SoCalGas to file a new
application, which would address detailed proposals for implementation
of the December 2001 decision, but also would allow reconsideration of
the December 2001 decision. SoCalGas filed such an application on June
30, 2003, and proposed some modifications to the provisions of the
December 2001 decision to respond to concerns that it could lead to
higher natural gas costs for consumers. Modifications proposed by
SoCalGas would also remove SoCalGas' exposure to risk or reward for the
sale of receipt-point capacity. The filing proposes implementation of
these provisions on April 1, 2004 and continuing through August 31,
2006. If the December 2001 decision is implemented, it is not expected
to affect adversely the California Utilities' results of operations,
cash flows or financial position. A CPUC decision is expected during
2004.
CPUC Investigation of Compliance with Affiliate Rules
On February 27, 2003, the CPUC opened an investigation of the business
activities of SDG&E, SoCalGas and Sempra Energy to ensure that they
have complied with relevant statutes and CPUC decisions in the
management, oversight and operations of their companies. The Assigned
Commissioner and ALJ issued a ruling which suspends the procedural
schedule until the CPUC completes an independent audit to evaluate
energy-related business activities undertaken by Sempra Energy within
the service territories of SDG&E and SoCalGas, relative to holding
company systems and affiliate activities. The audit is to consider
whether these activities pose any problems for ratepayers and whether
they are consistent with the CPUC's decision, rules or orders and/or
affiliate statutes. The objective of the audit is to analyze the
adequacy of the Affiliate Rules. In accordance with existing CPUC
requirements, the California Utilities' transactions with other Sempra
Energy affiliates have been audited by an independent auditing firm
each year, with results reported to the CPUC, and there have been no
material adverse findings in those audits.
Cost of Service Filing
On May 22, 2003, the assigned CPUC Commissioner modified his previously
adopted procedural schedule on the California Utilities' Cost of
Service applications to expedite a decision by approximately one month,
permitting a decision by as early as March 2004. The assigned
Commissioner also provided for additional comments to be filed on the
California Utilities' request for interim relief for the period from
January 1, 2004 to the date of the Cost of Service decision and stated
that a decision on the request would be prepared for consideration of
the full Commission. On June 3, 2003, various parties filed reply
comments supporting or opposing the motion for January 1, 2004 interim
relief. The CPUC's Office of Ratepayer Advocates' (ORA) report on the
California Utilities' filing is due on August 8, 2003.
An October 10, 2001 decision denied the California Utilities' request
to continue equal sharing between ratepayers and shareholders of the
estimated savings for the 1998 Enova-PE business combination that
created Sempra Energy and, instead, ordered that all of the estimated
2003 merger savings go to ratepayers. This decision will adversely
affect 2003 net income by $24 million.
NEW ACCOUNTING STANDARDS
New pronouncements that have recently become effective or that are yet
to be effective are SFAS 143, 148, 149 and 150, Interpretations 45 and
46, EITF 02-3, and the rescission of EITF 98-10. See discussion in Note
2 of the notes to Consolidated Financial Statements.
ITEM 3. MARKET RISK
There have been no significant changes in the risk issues affecting the
companies subsequent to those discussed in the Annual Report.
As of June 30, 2003, the total Value at Risk of SoCalGas' natural gas
positions was not material.
ITEM 4. CONTROLS AND PROCEDURES
The companies have designed and maintain disclosure controls and
procedures to ensure that information required to be disclosed in the
companies' reports under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange
Commission and is accumulated and communicated to the companies'
management, including their Chief Executive Officers and Chief Financial
Officers, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating these controls and procedures,
management recognizes that any system of controls and procedures, no
matter how well designed and operated, can provide only reasonable
assurance of achieving the desired objectives and necessarily applies
judgment in evaluating the cost-benefit relationship of other possible
controls and procedures.
Under the supervision and with the participation of management,
including the Chief Executive Officers and the Chief Financial Officers,
the companies within 90 days prior to the date of this report have
evaluated the effectiveness of the design and operation of the
companies' disclosure controls and procedures. Based on that evaluation,
the companies' Chief Executive Officers and Chief Financial Officers
have concluded that the controls and procedures are effective.
There have been no significant changes in the companies' internal
controls or in other factors that could significantly affect the
internal controls subsequent to the date the companies completed their
evaluations.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except as described in Note 3 of the notes to Consolidated Financial
Statements, neither the companies nor their subsidiaries are party to,
nor is their property the subject of, any material pending legal
proceedings other than routine litigation incidental to their
businesses.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10 - Material Contracts
10.1 2003 Executive Incentive Plan (June 30, 2003 Sempra
Energy 10-Q Exhibit 10.1)
10.2 Amended 1998 Long-Term Incentive Plan (June 30, 2003
Sempra Energy 10-Q Exhibit 10.2)
Exhibit 12 - Computation of ratios
12.1 Computation of Ratio of Earnings to Fixed Charges of PE.
12.2 Computation of Ratio of Earnings to Fixed Charges of
SoCalGas.
Exhibit 31 - Section 302 Certifications
31.1 Statement of PE's Chief Executive Officer pursuant
to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934.
31.2 Statement of PE's Chief Financial Officer pursuant
to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934.
31.3 Statement of SoCalGas' Chief Executive Officer pursuant
to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934.
31.4 Statement of SoCalGas' Chief Financial Officer pursuant
to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934.
Exhibit 32 - Section 906 Certifications
32.1 Statement of PE's Chief Executive Officer pursuant
to 18 U.S.C. Sec. 1350.
32.2 Statement of PE's Chief Financial Officer pursuant
to 18 U.S.C. Sec. 1350.
32.3 Statement of SoCalGas' Chief Executive Officer pursuant
to 18 U.S.C. Sec. 1350.
32.4 Statement of SoCalGas' Chief Financial Officer pursuant
to 18 U.S.C. Sec. 1350.
(b) Reports on Form 8-K
The following report on Form 8-K was filed after March 31, 2003:
Current Report on Form 8-K filed May 1, 2003, filing as an exhibit
Sempra Energy's press release of May 1, 2003, giving the financial
results for the three months ended March 31, 2003.
Current Report on Form 8-K filed August 7, 2003, filing as an exhibit
Sempra Energy's press release of August 7, 2003, giving the financial
results for the three months ended June 30, 2003.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by
the undersigned thereunto duly authorized.
PACIFIC ENTERPRISES
-------------------
(Registrant)
Date: August 7, 2003 By: /s/ F. H. Ault
----------------------------
F. H. Ault
Sr. Vice President and Controller
SOUTHERN CALIFORNIA GAS COMPANY
-------------------------------
(Registrant)
By: /s/ D.L. Reed
---------------------------
D.L. Reed
President and
Chief Financial Officer