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, 2002
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 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
ITEM 1. FINANCIAL STATEMENTS
PACIFIC ENTERPRISES AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
Dollars in millions
Three Months Ended
June 30,
------------------
2002 2001
------- -------
Operating Revenues $ 680 $ 927
------- -------
Operating Expenses
Cost of natural gas distributed 269 533
Other operating expenses 220 200
Depreciation 68 67
Income taxes 42 38
Other taxes and franchise payments 23 26
------- -------
Total operating expenses 622 864
------- -------
Operating Income 58 63
------- -------
Other Income and (Deductions)
Interest income 4 12
Regulatory interest - net (2) (1)
Allowance for equity funds used
during construction 2 1
Taxes on non-operating income -- (3)
Preferred dividends of subsidiaries (1) (1)
Other - net 2 2
------- -------
Total 5 10
------- -------
Interest Charges
Long-term debt 10 16
Other 3 8
------- -------
Total 13 24
------- -------
Net Income 50 49
Preferred Dividend Requirements 1 1
------- -------
Earnings Applicable to Common Shares $ 49 $ 48
======= =======
See notes to Consolidated Financial Statements.
PACIFIC ENTERPRISES AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
Dollars in millions
Six Months Ended
June 30,
-----------------
2002 2001
------- -------
Operating Revenues $ 1,402 $ 2,475
------- -------
Operating Expenses
Cost of natural gas distributed 616 1,684
Other operating expenses 391 389
Depreciation 136 132
Income taxes 89 80
Other taxes and franchise payments 47 59
------- -------
Total operating expenses 1,279 2,344
------- -------
Operating Income 123 131
------- -------
Other Income and (Deductions)
Interest income 6 29
Regulatory interest - net (1) (6)
Allowance for equity funds used
during construction 4 2
Taxes on non-operating income 3 (5)
Preferred dividends of subsidiaries (1) (1)
Other - net 5 (2)
------- -------
Total 16 17
------- -------
Interest Charges
Long-term debt 19 33
Other 12 17
Allowance for borrowed funds used
during construction (1) (1)
------- -------
Total 30 49
------- -------
Net Income 109 99
Preferred Dividend Requirements 2 2
------- -------
Earnings Applicable to Common Shares $ 107 $ 97
======= =======
See notes to Consolidated Financial Statements.
PACIFIC ENTERPRISES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Dollars in millions
Balance at
------------------------
June 30, December 31,
2002 2001
--------- ------------
ASSETS
Property, plant and equipment $6,716 $6,590
Accumulated depreciation (3,909) (3,793)
------ ------
Property, plant and equipment - net 2,807 2,797
------ ------
Current assets:
Cash and cash equivalents 41 13
Accounts receivable - trade 233 415
Accounts receivable - other 14 14
Due from unconsolidated affiliates 288 --
Income taxes receivable -- 20
Deferred income taxes 59 33
Regulatory assets arising from fixed-price
contracts and other derivatives 71 103
Fixed-price contracts and other derivatives 4 59
Inventories 19 42
Other 4 4
------ ------
Total current assets 733 703
------ ------
Other assets:
Due from unconsolidated affiliates 324 409
Regulatory assets arising from fixed-price
contracts and other derivatives 394 157
Sundry 143 125
------ ------
Total other assets 861 691
------ ------
Total assets $4,401 $4,191
====== ======
See notes to Consolidated Financial Statements.
PACIFIC ENTERPRISES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Dollars in millions
Balance at
------------------------
June 30, December 31,
2002 2001
--------- ------------
CAPITALIZATION AND LIABILITIES
Capitalization:
Common Stock (600,000,000 shares authorized;
83,917,664 shares outstanding) $1,318 $1,317
Retained earnings 184 177
------ ------
Total common equity 1,502 1,494
Preferred stock 80 80
------ ------
Total shareholders' equity 1,582 1,574
Long-term debt 510 579
------ ------
Total capitalization 2,092 2,153
------ ------
Current liabilities:
Short-term debt -- 50
Accounts payable - trade 204 160
Accounts payable - other 47 81
Due to unconsolidated affiliates 74 168
Regulatory balancing accounts - net 136 85
Interest payable 34 30
Regulatory liabilities 7 18
Fixed-price contracts and other derivatives 78 103
Current portion of long-term debt 175 100
Other 441 391
------ ------
Total current liabilities 1,196 1,186
------ ------
Deferred credits and other liabilities:
Customer advances for construction 27 24
Post-retirement benefits other than pensions 84 88
Deferred income taxes 131 110
Deferred investment tax credits 48 50
Regulatory liabilities 111 86
Fixed-price contracts and other derivatives 394 162
Deferred credits and other liabilities 298 312
Preferred stock of subsidiary 20 20
------ ------
Total deferred credits and other liabilities 1,113 852
------ ------
Contingencies and commitments (Note 2)
Total liabilities and shareholders' equity $4,401 $4,191
====== ======
See notes to Consolidated Financial Statements.
PACIFIC ENTERPRISES AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
Dollars in millions
Six Months Ended
June 30,
------------------
2002 2001
------ ------
Cash Flows from Operating Activities
Net Income $ 109 $ 99
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 136 132
Deferred income taxes and investment
tax credits (8) 8
Changes in other assets (1) (4)
Changes in other liabilities (14) 51
Net changes in other working capital components 399 134
----- -----
Net cash provided by operating activities 621 420
----- -----
Cash Flows from Investing Activities
Capital expenditures (143) (114)
Loan to affiliate - net (298) 215
----- -----
Net cash provided by (used in) investing
activities (441) 101
----- -----
Cash Flows from Financing Activities
Common dividends paid (100) (190)
Preferred dividends paid (2) (2)
Decrease in short-term debt (50) --
Other -- (3)
----- -----
Net cash used in financing activities (152) (195)
----- -----
Increase in cash and cash equivalents 28 326
Cash and cash equivalents, January 1 13 205
----- -----
Cash and cash equivalents, June 30 $ 41 $ 531
===== =====
Supplemental Disclosure of Cash Flow Information:
Interest payments, net of amounts capitalized $ 24 $ 49
===== =====
Income tax payments, net of refunds $ 74 $ 130
===== =====
See notes to Consolidated Financial Statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
Dollars in millions
Three Months Ended
June 30,
------------------
2002 2001
------- -------
Operating Revenues $ 680 $ 927
------- -------
Operating Expenses
Cost of natural gas distributed 269 533
Other operating expenses 218 198
Depreciation 68 67
Income taxes 44 38
Other taxes and franchise payments 23 26
------- -------
Total operating expenses 622 862
------- -------
Operating Income 58 65
------- -------
Other Income and (Deductions)
Interest income 1 7
Regulatory interest - net (2) (1)
Allowance for equity funds used
during construction 2 1
Taxes on non-operating income 1 (2)
------- -------
Total 2 5
------- -------
Interest Charges
Long-term debt 10 16
Other (2) 6
------- -------
Total 8 22
------- -------
Net Income 52 48
Preferred Dividend Requirements 1 1
------- -------
Earnings Applicable to Common Shares $ 51 $ 47
======= =======
See notes to Consolidated Financial Statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
Dollars in millions
Six Months Ended
June 30,
-----------------
2002 2001
------- -------
Operating Revenues $ 1,402 $ 2,475
------- -------
Operating Expenses
Cost of natural gas distributed 616 1,684
Other operating expenses 386 384
Depreciation 136 132
Income taxes 92 82
Other taxes and franchise payments 47 59
------- -------
Total operating expenses 1,277 2,341
------- -------
Operating Income 125 134
------- -------
Other Income and (Deductions)
Interest income 2 16
Regulatory interest - net (1) (6)
Allowance for equity funds used
during construction 4 2
Taxes on non-operating income 5 (4)
Other - net -- (1)
------- -------
Total 10 7
------- -------
Interest Charges
Long-term debt 19 33
Other 5 9
Allowance for borrowed funds used
during construction (1) (1)
------- -------
Total 23 41
------- -------
Net Income 112 100
Preferred Dividend Requirements 1 1
------- -------
Earnings Applicable to Common Shares $ 111 $ 99
======= =======
See notes to Consolidated Financial Statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Dollars in millions
Balance at
------------------------
June 30, December 31,
2002 2001
--------- ------------
ASSETS
Utility plant - at original cost $6,591 $6,467
Accumulated depreciation (3,823) (3,710)
------ ------
Utility plant - net 2,768 2,757
------ ------
Current assets:
Cash and cash equivalents 41 13
Accounts receivable - trade 233 415
Accounts receivable - other 14 14
Due from unconsolidated affiliates 289 --
Deferred income taxes 88 62
Regulatory assets arising from fixed-price
contracts and other derivatives 71 103
Fixed-price contracts and other derivatives 4 59
Inventories 19 42
Other 4 4
------ ------
Total current assets 763 712
------ ------
Other assets:
Regulatory assets arising from fixed-price
contracts and other derivatives 394 157
Sundry 155 136
------ ------
Total other assets 549 293
------ ------
Total assets $4,080 $3,762
====== ======
See notes to Consolidated Financial Statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Dollars in millions
Balance at
------------------------
June 30, December 31,
2002 2001
--------- ------------
CAPITALIZATION AND LIABILITIES
Capitalization:
Common Stock (100,000,000 shares authorized;
91,300,000 shares outstanding) $ 836 $ 835
Retained earnings 481 470
------ ------
Total common equity 1,317 1,305
Preferred stock 22 22
------ ------
Total shareholders' equity 1,339 1,327
Long-term debt 510 579
------ ------
Total capitalization 1,849 1,906
------ ------
Current liabilities:
Short-term debt -- 50
Accounts payable - trade 204 160
Accounts payable - other 47 81
Due to unconsolidated affiliates 12 24
Regulatory balancing accounts - net 136 85
Income taxes payable 57 32
Interest payable 30 29
Regulatory liabilities 7 18
Fixed-price contracts and other derivatives 78 103
Current portion of long-term debt 175 100
Other 440 390
------ ------
Total current liabilities 1,186 1,072
------ ------
Deferred credits and other liabilities:
Customer advances for construction 27 24
Deferred income taxes 200 183
Deferred investment tax credits 48 50
Regulatory liabilities 194 174
Fixed-price contracts and other derivatives 394 162
Deferred credits and other liabilities 182 191
------ ------
Total deferred credits and other liabilities 1,045 784
------ ------
Contingencies and commitments (Note 2)
Total liabilities and shareholders' equity $4,080 $3,762
====== ======
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,
------------------
2002 2001
------ ------
Cash Flows from Operating Activities
Net income $ 112 $ 100
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 136 132
Deferred income taxes and investment tax credits (12) 10
Changes in other assets -- (4)
Changes in other liabilities (12) 26
Net changes in other working capital components 396 134
------ ------
Net cash provided by operating activities 620 398
------ ------
Cash Flows from Investing Activities
Capital expenditures (143) (114)
Loan to affiliate - net (298) 233
------ ------
Net cash provided by (used in) investing
activities (441) 119
------ ------
Cash Flows from Financing Activities
Dividends paid (101) (191)
Decrease in short-term debt (50) --
------ ------
Net cash used in financing activities (151) (191)
------ ------
Increase in cash and cash equivalents 28 326
Cash and cash equivalents, January 1 13 205
------ ------
Cash and cash equivalents, June 30 $ 41 $ 531
====== ======
Supplemental Disclosure of Cash Flow Information:
Interest payments, net of amounts capitalized $ 22 $ 41
====== ======
Income tax payments, net of refunds $ 74 $ 137
====== ======
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
herein as the companies). PE's common stock is wholly owned by Sempra
Energy, a California-based Fortune 500 holding company, which also
indirectly owns the common stock of San Diego Gas & Electric (SDG&E).
SoCalGas and SDG&E are collectively referred to herein as "the California
utilities." SoCalGas' common stock is wholly owned by PE. 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.
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 companies' Annual Report on Form 10-K for the year
ended December 31, 2001 (Annual Report) and Quarterly Report on Form 10-Q
for the three months ended March 31, 2002.
The companies' significant accounting policies are described in Note 2 of
the notes to Consolidated Financial Statements in the companies' Annual
Report. The same accounting policies are followed for interim reporting
purposes.
As described in the notes to Consolidated Financial Statements in the
companies' Annual Report, SoCalGas accounts for the economic effects of
regulation on utility operations in accordance with Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain Types
of Regulation" (SFAS 71).
NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board (FASB) issued two
statements, SFAS 142 "Goodwill and Other Intangible Assets" and SFAS 143
"Accounting for Asset Retirement Obligations." The former is not presently
relevant to the companies.
SFAS 143 addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This applies to legal obligations
associated with the retirement of long-lived assets. It requires entities
to record the fair value of a liability for an asset retirement obligation
in the period in which it is incurred. When the liability is initially
recorded, the entity increases the carrying amount of the related long-
lived asset to reflect the future retirement cost. Over time, the liability
is accreted to its present value and paid, and the capitalized cost is
depreciated over the useful life of the related asset. SFAS 143 is
effective for financial statements issued for fiscal years beginning after
June 15, 2002. The companies have not yet determined the precise effect of
SFAS 143 on their Consolidated Balance Sheets, but have determined that it
will not have a material impact on their Statements of Consolidated Income.
In August 2001, the FASB issued SFAS 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" that replaces SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." The adoption of SFAS 144, which governs the determination of whether
the carrying value of certain assets, primarily property, plant and
equipment, should be reduced, has not affected the companies' financial
statements.
In June, 2002, a consensus was reached in Emerging Issues Task Force (EITF)
Issue 02-3, which codifies existing guidance on the recognition and
reporting of gains and losses on energy trading contracts and addresses
other aspects of the accounting for contracts involved in energy trading
and risk management activities. Most of the consensus is not applicable to
PE and SoCalGas, because of the way the companies conduct business and the
requirements of SFAS 71. However, at a later date, the EITF will also
address the application of fair value accounting in situations where there
is very little market information, including whether it is appropriate to
use fair-value accounting and, if so, how fair value should be determined.
2. MATERIAL CONTINGENCIES
GAS INDUSTRY RESTRUCTURING
As discussed in Note 15 of the notes to Consolidated Financial Statements
in the Annual Report, in December 2001 the CPUC issued a decision related
to gas industry restructuring, with implementation anticipated during 2002.
However, during the quarter ended June 30, 2002, implementation has been
delayed and the CPUC may order additional hearings.
CPUC INVESTIGATION OF ENERGY-UTILITY HOLDING COMPANIES
In January 2002, the CPUC issued a decision that broadly determined that a
holding company would be required to provide cash to a utility subsidiary
to cover its operating expenses and working capital to the extent they are
not adequately funded through retail rates. Also in January 2002, the CPUC
ruled that it had jurisdiction to create the holding company system and,
therefore, retains jurisdiction to enforce conditions to which the holding
companies had agreed. The company subsequently filed a request for
rehearing on the issues. On July 17, 2002, the CPUC denied a rehearing. The
company is planning to seek judicial review of the orders in the California
Court of Appeals. The company must file its appeal no later than August 21,
2002.
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. and several of
its affiliates, sought to maintain their positions in the natural gas
market by agreeing, among other things, to restrict the supply of natural
gas into Southern California. Management believes the allegations are
without merit.
Except for the matter referred to above, 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. Management believes that these matters will not have a
material adverse effect on the companies' financial condition or results of
operations.
In response to an inquiry by the Federal Energy Regulatory Commission
(FERC), SoCalGas has denied engaging in "wash" or "round trip" trading
transactions. It is also cooperating with the FERC and other governmental
agencies and officials in their various investigations of the California
energy markets.
QUASI-REORGANIZATION
In 1993, PEdivested its merchandising operations and most of its oil and
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.
3. 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) 2002 2001 2002 2001 2002 2001 2002 2001
- --------------------------------------------------------------------------------------
Net income $ 50 $ 49 $ 109 $ 99 $ 52 $ 48 $ 112 $100
Financial instruments
(Note 4) -- -- (1)* -- -- -- (1)* --
Minimum pension liability
adjustments -- 1 -- 1 -- 1 -- 1
----------------------------------------------------------
Comprehensive income $ 50 $ 50 $ 108 $100 $ 52 $ 49 $ 111 $101
- --------------------------------------------------------------------------------------
* 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.
4. FINANCIAL INSTRUMENTS
Note 8 of the notes to Consolidated Financial Statements in the companies'
Annual Report discusses the companies' financial instruments, including the
adoption of SFAS 133 and SFAS 138, accounting for derivative instruments
and hedging activities, market risk, interest-rate risk management, energy
derivatives and contracts, and fair value. Additional activity and
information since January 1, 2002 related to financial instruments are
described herein.
At June 30, 2002, $4 million in current assets, $3 million in sundry other
assets, $78 million in current liabilities and $394 million in deferred
credits and other liabilities were recorded in the Consolidated Balance
Sheets for fixed-priced contracts and other derivatives. Regulatory assets
and liabilities were established to the extent that derivative gains and
losses are recoverable or payable through future rates. As such, $71
million in current regulatory assets, $394 million in noncurrent regulatory
assets, and $1 million in current regulatory liabilities were recorded in
the Consolidated Balance Sheets as of June 30, 2002. For the six months
ended June 30, 2002, $2 million of losses were recorded in operating
revenues in the Statements of Consolidated Income. Additionally, a market
value adjustment of $6 million was made to long-term debt relating to a
fixed-to-floating interest rate swap agreement.
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
companies' Annual Report.
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 CPUC, the California Legislature, and the
FERC; 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 pace 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.
See also "Factors Influencing Future Performance" below.
CAPITAL RESOURCES AND LIQUIDITY
The companies' California utility operations have historically been a major
source of liquidity. See further discussion in the companies' Annual
Report.
CASH FLOWS FROM OPERATING ACTIVITIES
For the six-month period ended June 30, 2002, the increase in cash flows
from operations compared to the corresponding period in 2001 was primarily
due to increases in overcollected regulatory balancing accounts and
customer deposits in 2002 and greater income tax payments made during the
first six months of 2001 compared to the same period in 2002.
CASH FLOWS FROM INVESTING ACTIVITIES
For the six-month period ended June 30, 2002, the increase in cash flows
used in investing activities compared to the corresponding period in 2001
was primarily due to advances to Sempra Energy, which are payable on
demand, and increased capital expenditures.
Capital expenditures for property, plant and equipment are estimated to be
$300 million for the full year 2002 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
For the six-month period ended June 30, 2002, cash flows used in financing
activities decreased from the corresponding period in 2001 due primarily to
the decrease in common dividends paid, partially offset by the repayment of
short-term debt.
In May 2002, SDG&E and SoCalGas replaced their individual revolving lines
of credit with a combined revolving credit agreement under which each
utility may individually borrow up to $300 million, subject to a combined
borrowing limit for both utilities of $500 million. Each utility's
revolving credit line expires on May 16, 2003, at which time it may convert
its then outstanding borrowings to a one-year term loan subject to having
obtained any requisite regulatory approvals relating to long-term debt.
Borrowings under the agreement, which are available for general corporate
purposes including back-up support for commercial paper and variable-rate
long-term debt, would bear interest at rates varying with market rates and
the individual borrowing utility's credit rating. The agreement requires
each utility individually to maintain a debt-to-total capitalization ratio
(as defined in the agreement) of not to exceed 60%. 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 a default by the other. These lines of
credit were unused at June 30, 2002.
In April 2002, Fitch, Inc. confirmed its prior credit ratings of the
companies' debt; Standard & Poor's reduced its ratings of the companies'
secured debt one notch from AA- with a negative outlook to A+ with a stable
outlook and made corresponding adjustments in the ratings and outlook of
the companies' other debt including reducing PE's preferred stock from A-
to BBB+; and Moody's Investors Service, Inc., confirmed its prior ratings
of the debt of SoCalGas.
RESULTS OF OPERATIONS
The companies' net income increased for the three-month and six-month
periods ended June 30, 2002, compared to the corresponding period in 2001
primarily due to lower interest expense in 2002.
The table below summarizes natural gas volumes and revenues by customer
class for the six-month periods ended June 30, 2002 and 2001.
Gas Sales, Transportation and Exchange
(Volumes in billion cubic feet, dollars in millions)
Gas Sales Transportation & Exchange Total
--------------------------------------------------------------
Volumes Revenue Volumes Revenue Volumes Revenue
--------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------
2001:
Residential 151 $1,598 1 $ 3 152 $1,601
Commercial and industrial 49 445 122 93 171 538
Electric generation plants -- -- 188 47 188 47
Wholesale -- -- 90 18 90 18
--------------------------------------------------------------
200 $2,043 401 $161 601 2,204
Balancing accounts and other 271
--------
Total $2,475
- ------------------------------------------------------------------------------------------
The decrease in natural gas revenues was primarily due to lower natural
gas commodity prices and decreased transportation for electric
generation plants.
The decrease in the cost of natural gas distributed was primarily due to
lower natural gas commodity prices. Under the current regulatory
framework, the cost of natural gas is passed on to customers without
markup and changes in natural gas commodity prices do not affect net
income since, as explained more fully in the Annual Report, current or
future customer rates normally recover the actual commodity cost of
natural gas on a substantially concurrent basis, subject to the
mechanisms under performance-based ratemaking as explained in the Annual
Report.
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
companies' Annual Report.
Gas and Electric Rates
The CPUC has adopted a settlement proposed by SoCalGas in a recent case
involving review of its Gas Cost Incentive Mechanism (GCIM). The CPUC
decision finds that this mechanism, which allows SoCalGas to receive a
share of the savings it achieves in buying natural gas for core
customers, should continue indefinitely. Savings are determined by
comparing the actual cost of gas purchases to a benchmark of monthly
prices. SoCalGas has requested that the CPUC approve rewards of $30.8
million and $17 million for the last two completed program years. No
rewards will be included in SoCalGas' earnings until approved by the
CPUC. CPUC approval may be delayed pending the Commission's
investigation into the run-up in California border natural gas prices
during the winter of 2000-2001.
The California utilities will file applications with the CPUC in
December 2002 to set new base rates. A CPUC decision is expected in late
2003, with new rates to become effective in 2004.
The California utilities have earned rewards for successful
implementation of Demand-Side Management programs that have been
scheduled by the CPUC for payout over several years. In a recent ruling,
a CPUC Administrative Law Judge has indicated an intent to reanalyze the
uncollected portion of past rewards earned by utilities (which have not
been included in SoCalGas' income), and potentially recompute the amount
of the rewards. The California utilities will oppose the recomputation.
NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board (FASB) issued two
statements, SFAS 142 "Goodwill and Other Intangible Assets" and SFAS 143
"Accounting for Asset Retirement Obligations." The former is not
presently relevant to the companies. SFAS 143 addresses financial
accounting and reporting for obligations associated with the retirement
of tangible long-lived assets and the associated asset retirement costs.
In August 2001, the FASB issued SFAS 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets" that replaces SFAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." SFAS 144 applies to all long-lived assets, including
discontinued operations. See further discussion in Note 1 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 noted
in that report, SoCalGas may, at times, be exposed to limited market
risk in its natural gas purchase and sale activities as a result of
activities under SoCalGas' Gas Cost Incentive Mechanism. The risk is
managed within the parameters of the companies' market-risk management
and trading framework.
As of June 30, 2002, the total Value at Risk of SoCalGas' natural gas
positions was not material.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except as described in Note 2 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 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.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed after March 31, 2002.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly cause this report to be signed on their behalf by
the undersigned thereunto duly authorized.
PACIFIC ENTERPRISES
-------------------
(Registrant)
Date: August 13, 2002 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
EXHIBIT 12.1
PACIFIC ENTERPRISES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
Six
months
ended
June 30,
1997 1998 1999 2000 2001 2002
-------- -------- -------- -------- -------- ---------
Fixed Charges:
Interest $ 91 $ 84 $ 82 $ 72 $ 88 $ 31
Interest portion of
annual rentals 12 11 3 4 3 1
Preferred dividends
of subsidiaries (1) 13 2 2 2 2 2
-------- -------- -------- -------- -------- ---------
Total Fixed Charges
for Purpose of Ratio $116 $ 97 $ 87 $ 78 $ 93 $ 34
======== ======== ======== ======== ======== =========
Earnings:
Pretax income from
continuing operations $335 $274 $350 $396 $377 $195
Total Fixed Charges
(from above) 116 97 87 78 93 34
-------- -------- -------- -------- ------- ---------
Total Earnings for
Purpose of Ratio $451 $371 $437 $474 $470 $229
======== ======== ======== ======== ======= ==========
Ratio of Earnings
to Fixed Charges 3.89 3.82 5.02 6.08 5.05 6.74
======== ======== ======== ======== ======= ==========
(1) In computing this ratio, "Preferred dividends of subsidiaries" represents the
before-tax earnings necessary to pay such dividends, computed at the effective tax
rates for the applicable periods.
EXHIBIT 12.2
SOUTHERN CALIFORNIA GAS COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
For the six
months ended
June 30,
1997 1998 1999 2000 2001 2002
-------- -------- -------- -------- -------- --------
Fixed Charges:
Interest $ 88 $ 81 $ 62 $ 72 $ 70 $ 24
Interest portion of
annual rentals 5 4 3 4 3 1
-------- -------- -------- -------- -------- --------
Total Fixed Charges for
Purpose of Ratio $ 93 $ 85 $ 65 $ 76 $ 73 $ 25
======== ======== ======== ======== ======== ========
Earnings:
Pretax income from
continuing operations $416 $287 $383 $390 $377 $199
Total Fixed Charges
(from above) 93 85 65 76 73 25
-------- -------- -------- -------- -------- --------
Total Earnings for
Purpose of Ratio $509 $372 $448 $466 $450 $224
======== ======== ======== ======== ======== ========
Ratio of Earnings
To Fixed Charges 5.47 4.38 6.89 6.13 6.16 8.96
======== ======== ======== ======== ======== ========
