UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
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Commission file number 1-14201
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Sempra Energy
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(Exact name of registrant as specified in its charter)
California 33-0732627
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Ash Street, San Diego, California 92101
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(Address of principal executive offices)
(Zip Code)
(619) 696-2034
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 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
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Common stock outstanding on July 31, 2001: 206,836,453
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SEMPRA ENERGY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
Dollars in millions, except per share amounts
Three Months Ended
June 30,
---------------
2001 2000
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Revenues and Other Income
California utility revenues:
Natural gas $1,112 $ 716
Electric 432 473
Other operating revenues 518 321
Other income 31 26
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Total 2,093 1,536
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Expenses
Cost of natural gas distributed 669 316
Electric fuel and net purchased power 203 264
Operating expenses 733 530
Depreciation and amortization 139 144
Franchise payments and other taxes 50 40
Preferred dividends of subsidiaries 3 3
Trust preferred distributions by subsidiary 5 4
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Total 1,802 1,301
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Income before interest and income taxes 291 235
Interest 90 76
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Income before income taxes 201 159
Income taxes 64 49
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Net income $ 137 $ 110
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Weighted-average number of shares outstanding:
Basic* 203,400 201,386
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Diluted* 205,963 201,484
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Net income per share of common stock (basic) $ 0.67 $ 0.55
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Net income per share of common stock (diluted) $ 0.66 $ 0.55
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Common Dividends Declared Per Share $ 0.25 $ 0.25
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*In thousands of shares
See notes to Consolidated Financial Statements.
SEMPRA ENERGY AND SUBSIDARIES
STATEMENTS OF CONSOLIDATED INCOME
Dollars in millions, except per share amounts
Six Months Ended
June 30,
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2001 2000
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Revenues and Other Income
California utility revenues:
Natural gas $2,993 $1,537
Electric 1,236 822
Other operating revenues 1,088 593
Other income 95 50
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Total 5,412 3,002
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Expenses
Cost of natural gas distributed 2,060 706
Electric fuel and net purchased power 788 397
Operating expenses 1,469 1,029
Depreciation and amortization 281 278
Franchise payments and other taxes 108 91
Preferred dividends of subsidiaries 6 6
Trust preferred distributions by subsidiary 9 6
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Total 4,721 2,513
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Income before interest and income taxes 691 489
Interest 180 149
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Income before income taxes 511 340
Income taxes 196 117
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Net income $ 315 $ 223
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Weighted-average number of shares outstanding:
Basic* 202,846 214,834
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Diluted* 204,455 214,920
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Net income per share of common stock (basic) $ 1.55 $ 1.04
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Net income per share of common stock (diluted) $ 1.54 $ 1.04
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Common Dividends Declared Per Share $ 0.50 $ 0.50
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*In thousands of shares
See notes to Consolidated Financial Statements.
SEMPRA ENERGY
CONSOLIDATED BALANCE SHEETS
Dollars in millions
Balance at
--------------------------
June 30, December 31,
2001 2000
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ASSETS
Current assets:
Cash and cash equivalents $ 1,588 $ 637
Accounts receivable - trade 709 994
Accounts and notes receivable - other 113 213
Due from unconsolidated affiliates 58 --
Income taxes receivable -- 24
Energy trading assets 2,976 4,083
Fixed price contracts and other derivatives 485 --
Regulatory assets arising from fixed price contracts
and other derivatives 23 --
Inventories 150 145
Other 224 329
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Total current assets 6,326 6,425
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Investments and other assets:
Regulatory assets 1,120 1,174
Nuclear-decommissioning trusts 538 543
Investments in unconsolidated affiliates 1,201 1,288
Fixed price contracts and other derivatives 321 --
Other assets 533 456
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Total investments and other assets 3,713 3,461
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Property, plant and equipment:
Property, plant and equipment 12,159 11,889
Less accumulated depreciation and amortization (6,362) (6,163)
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Property, plant and equipment - net 5,797 5,726
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Total assets $15,836 $15,612
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See notes to Consolidated Financial Statements.
SEMPRA ENERGY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
Dollars in millions
Balance at
--------------------------
June 30, December 31,
2001 2000
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 1,199 $ 568
Accounts payable - trade 935 1,162
Accounts payable - other 86 117
Income taxes payable 45 --
Deferred income taxes 61 110
Energy trading liabilities 2,082 3,619
Dividends and interest payable 136 124
Regulatory balancing accounts - net 489 830
Current portion of long-term debt 258 368
Fixed price contracts and other derivatives 25 --
Regulatory liabilities arising from fixed price
contracts and other derivatives 422 --
Other 773 569
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Total current liabilities 6,511 7,467
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Long-term debt 3,676 3,268
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Deferred credits and other liabilities:
Due to unconsolidated affiliate 161 --
Customer advances for construction 58 56
Post-retirement benefits other than pensions 151 152
Deferred income taxes 920 826
Deferred investment tax credits 98 101
Regulatory liabilities arising from fixed price
contracts and other derivatives 321 --
Deferred credits and other liabilities 823 844
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Total deferred credits and other liabilities 2,532 1,979
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Preferred stock of subsidiaries 204 204
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Mandatorily redeemable trust preferred securities 200 200
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Commitments and contingent liabilities (Note 2)
SHAREHOLDERS' EQUITY
Common stock 1,446 1,420
Retained earnings 1,375 1,162
Deferred compensation relating to ESOP (37) (39)
Accumulated other comprehensive income (loss) (71) (49)
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Total shareholders' equity 2,713 2,494
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Total liabilities and shareholders' equity $15,836 $15,612
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See notes to Consolidated Financial Statements.
SEMPRA ENERGY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
Dollars in millions
Six Months Ended
June 30,
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2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 315 $ 223
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 281 278
Deferred income taxes and investment tax credits -- 38
Equity in loss of unconsolidated
subsidiaries and joint ventures 3 --
Gain on sale of Energy America (33) --
Other - net (62) (40)
Net change in other working capital components (273) 313
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Net cash provided by operating activities 231 812
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CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (378) (290)
Net proceeds from sale of Energy America 51 --
Other - net 56 (25)
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Net cash used in investing activities (271) (315)
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CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in short-term debt - net 628 (182)
Issuance of long-term debt 675 504
Payment on long-term debt (372) (85)
Loan from unconsolidated affiliate 160 --
Common dividends (101) (144)
Repurchase of common stock -- (722)
Issuance of trust preferred securities -- 200
Other 1 (9)
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Net cash provided by (used in) financing
activities 991 (438)
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Change in cash and cash equivalents 951 59
Cash and cash equivalents, January 1 637 487
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Cash and cash equivalents, June 30 $1,588 $ 546
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest payments, net of amounts capitalized $ 169 $ 172
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Income tax payments (refunds) - net $ 36 $ (58)
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See notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
This Quarterly Report on Form 10-Q is that of Sempra Energy (the
Company), a California-based Fortune 500 energy services company.
Sempra Energy's principal subsidiaries are San Diego Gas & Electric
Company (SDG&E), Southern California Gas Company (SoCalGas)
(collectively referred to herein as the California utilities), Sempra
Energy Trading and Sempra Energy International. The financial
statements herein are the Consolidated Financial Statements of Sempra
Energy and its subsidiaries.
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.
The Company's significant accounting policies are described in the
notes to Consolidated Financial Statements in the Company's 2000
Annual Report. The same accounting policies are followed for interim
reporting purposes.
Information in this Quarterly Report is unaudited and should be read
in conjunction with the Company's 2000 Annual Report and March 31,
2001 Quarterly Report on Form 10-Q.
As described in the notes to Consolidated Financial Statements in the
Company's 2000 Annual Report, the California utilities account for
the economic effects of regulation on utility operations (excluding
generation operations) in accordance with Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" (SFAS No. 71).
2. MATERIAL CONTINGENCIES
ELECTRIC INDUSTRY RESTRUCTURING
The restructuring of California's electric utility industry
significantly affected the Company's electric utility operations. The
background of this issue is described in the company's 2000 Annual
Report. Various developments since January 1, 2001 are described
herein.
In February 2001, the California Department of Water Resources (DWR)
began to purchase power from the generators and marketers, who had
previously sold their power to the California Power Exchange (PX) and
Independent System Operator (ISO), and has entered into long-term
contracts for the purchase of a portion of the power requirements of
the state's population that is served by investor-owned utilities
(IOUs). SDG&E and the DWR entered into an agreement, as amended,
under which the DWR will continue to purchase power for SDG&E's
customers until December 31, 2002, subject to earlier termination
upon six-months' prior notice and the satisfaction of certain
regulatory and other conditions intended to assure SDG&E's timely
recovery of costs incurred in resuming power procurement for its
customers (see MOU discussion below).
The DWR is now purchasing SDG&E's full net short position (the power
needed by SDG&E's customers, other than that provided by SDG&E's
nuclear generating facilities or its previously existing purchase
power contracts). Therefore, future increases in SDG&E's
undercollections from the June 30, 2001 balance of $786 million would
result only from these contracts and interest, offset by nuclear
generation, the cost of which is below the 6.5-cent customer rate
cap. These increases are not expected to significantly affect SDG&E's
or Sempra Energy's liquidity. The increase during the six-month
period ended June 30, 2001 was greater than expected in the future
because nuclear generation was reduced from February 2001 through May
2001 due to a fire and the DWR agreement was not in effect until
February 2001.
On June 18, 2001 representatives of California Governor Davis, the
DWR, Sempra Energy and SDG&E entered into a Memorandum of
Understanding (MOU) contemplating the implementation of a series of
transactions and regulatory settlements and actions to resolve many
of the issues affecting SDG&E and its customers arising out of the
California energy crisis. The principal provisions of the MOU are
briefly summarized below. This summary only highlights selected
provisions of the MOU and readers are urged to read the full text of
the MOU which was filed as Exhibit 99.1 to the Company's Current
Report on Form 8-K filed on June 19, 2001.
- -- The MOU contemplates, subject to requisite approvals of the
California Public Utilities Commission (CPUC), the elimination from
SDG&E's rate ceiling balancing account of the approximately $750
million (the last reported balance at the time of the MOU discussion)
of undercollected costs that otherwise would be recovered in future
rates charged to SDG&E customers; settlement of reasonableness
reviews, electricity purchase contract issues and various other
regulatory matters affecting SDG&E; the sale to the DWR of power
purchased by SDG&E under certain intermediate term contracts; and
various related matters.
- -- The effective date of SDG&E's and SoCalGas' revised base rates
would be delayed to 2004 from 2003.
- -- Sempra Energy would make capital investments in SDG&E and SoCalGas
aggregating at least $3.0 billion during 2001 through 2006. The
utilities would receive their authorized rate of return on these
investments.
- -- The MOU also contemplates the sale of SDG&E's transmission system
to the DWR or other state agency for a purchase price of 2.3 times
SDG&E's net book value, plus the discharge or assumption of related
long-term debt (purchase price of approximately $1.2 billion).
Implementation of this element of the MOU would require enabling
legislation as well as approval by the Federal Energy Regulatory
Commission (FERC). The sale of the transmission system is not a
condition to the implementation of the other elements of the MOU, but
the implementation of the other elements is a condition to the
transmission sale. SDG&E has no compelling financial need to sell its
transmission assets.
Governor Davis recently stated that, if a contemplated purchase of
Southern California Edison's transmission system by the State of
California is not approved by the state legislature, the purchase of
SDG&E's transmission assets contemplated by the MOU may not be
pursued.
The agreement between SDG&E and DWR obligating the DWR to purchase
power for SDG&E's customers has been amended as to the conditions
that would result in the resumption by SDG&E of the procurement of
the residual net power requirements for its retail customers. This
procurement resumption shall occur upon the earlier of January 1,
2003 or a date determined by the DWR upon 180 days prior written
notice, but not before at least one of the other two major
California-based investor-owned electric utilities has resumed
procurement of its residual net short and certain CPUC approvals,
including adoption of a satisfactory procurement cost recovery
mechanism, have occurred. These conditions are intended to assure
SDG&E's timely recovery of costs incurred in resuming power
procurement for its customers.
On August 2, 2001, the CPUC approved a reduction of the rate ceiling
balancing account by the application thereto of overcollections in
certain other balancing accounts. The amount of the reduction depends
on balances in those other accounts, but is expected to be
approximately $70 million. On that date the CPUC also targeted all
other components for resolution at its meetings on or before October
25, 2001.
SDG&E's prior request for a temporary 2.3 cents/kWh electric-rate
surcharge that SDG&E requested begin on March 1, 2001 has been
deferred pending the CPUC's action on the MOU. If the MOU is approved
by the CPUC, no rate increase will be necessary, except as required
to pass through, without markup, the rates to repay the DWR for its
purchases of power. A pending case before the CPUC would, if
approved, establish rate increases for SDG&E's electric customers in
an average amount of approximately 3 cents/kWh in order to provide
sufficient revenues for the collection of the DWR revenue
requirement. Residential customers whose electric power consumption
does not exceed 130 percent of baseline quantities, as well as
certain low income and medical customers, would be exempt from the
increases. A CPUC decision is expected during the third quarter of
2001.
On April 12, 2001, California law AB 43X took effect, extending the
temporary 6.5-cent rate cap to include SDG&E's large customers (the
only customer class not previously covered by the rate cap)
retroactive to February 7, 2001. This law is not expected to add to
the undercollection since the purchases for these customers are
covered by the agreement between SDG&E and the DWR.
On June 18, 2001, the FERC approved an expansion of its April 25,
2001 order which adopted certain price restrictions during Stage 1, 2
and 3 shortage situations, limiting prices to all generators to the
cost of the least-efficient plant whose generation is required at
that time. The new order expands price restrictions to 24 hours a
day, seven days a week through September 2002. Prices are linked to
the price the least efficient gas-fired plant was allowed to charge
during Stage 1 emergencies under the April order. During non-
emergency times, the ceiling price will drop to 85 percent of the
emergency price cap. Various observers have responded that this
proposal will be ineffective since, among other things, it does not
cover power brokers and marketers, and the resultant price will still
be relatively high.
NATURAL GAS INDUSTRY RESTRUCTURING
The Company's 2000 annual report discusses various proposals and
actions related to this topic. As discussed therein, no significant
impacts on the Company are expected when the various issues are
finalized. This case is currently being held by the CPUC
indefinitely.
NUCLEAR INSURANCE
SDG&E and the co-owners of SONGS have purchased primary insurance of
$200 million, the maximum amount available, for public-liability
claims. An additional $9.3 billion of coverage is provided by
secondary financial protection required by the Nuclear Regulatory
Commission and provides for loss sharing among utilities owning
nuclear reactors if a costly accident occurs. SDG&E could be assessed
retrospective premium adjustments of up to $36 million in the event
of a nuclear incident involving any of the licensed, commercial
reactors in the United States, if the amount of the loss exceeds $200
million. In the event the public-liability limit stated above is
insufficient, the Price-Anderson Act provides for Congress to enact
further revenue-raising measures to pay claims, which could include
an additional assessment on all licensed reactor operators.
Insurance coverage is provided for up to $2.75 billion of property
damage and decontamination liability. Coverage is also provided for
the cost of replacement power, which includes indemnity payments for
up to three years and six weeks, after a waiting period of 12 weeks.
Coverage is provided through a mutual insurance company owned by
utilities with nuclear facilities. If losses at any of the nuclear
facilities covered by the risk-sharing arrangements were to exceed
the accumulated funds available from these insurance programs, SDG&E
could be assessed retrospective premium adjustments of up to $3.4
million.
LITIGATION
A 2000 lawsuit, which seeks class-action certification, alleges that
Sempra Energy, SoCalGas, SDG&E and El Paso Energy Corp. acted to
drive up the price of natural gas for Californians by agreeing to
stop a pipeline project that would have brought new and less-
expensive natural gas supplies into California. Management believes
the allegations are without merit.
Various 2000 lawsuits, which seek class-action certification and
which are expected to be consolidated, allege that Company
subsidiaries unlawfully manipulated the electric-energy market.
Management believes the allegations are without merit.
Sempra Energy Trading (SET) is involved in a contractual dispute
with Pacific Gas and Electric (PG&E) relating to SET's obligations
to deliver certain quantities of natural gas to PG&E. SET believes
that its obligations to deliver these quantities were extinguished
(prior to PG&E's chapter 11 bankruptcy filing) by its exercise of a
contractual right to set off these obligations against amounts owed
by PG&E to SET under other contracts. PG&E has asserted that the
setoff was not permissible under the agreement and that SET remains
obligated to deliver the natural gas that is the subject of the
dispute. Pursuant to a Stipulation between SET and PG&E which was
approved by the U.S. Bankruptcy Court administering PG&E's
bankruptcy proceeding, SET is delivering to PG&E the portion of the
disputed gas that was originally scheduled to be delivered during
the period of June through December 2001, in exchange for SET's
administrative claim for payment for such gas if a court or other
tribunal determines SET's exercise of its setoff rights was
permissible. As to the disputed gas that was originally scheduled
for delivery by SET for the period prior to June 2001, PG&E has
asserted that it is entitled to receive approximately $46 million to
"cash out" this gas, which is 150 percent of the asserted market
value of the gas in dispute, plus additional daily charges totaling
approximately $220 million as of July 1, 2001, and which PG&E
contends are continuing to accrue at a rate of approximately $2.7
million per day since that date. In addition, the U.S. Bankruptcy
Court administering PG&E's bankruptcy proceedings granted SET's
motion for relief from an automatic stay in bankruptcy so that
arbitration of this dispute can proceed as contemplated by the
agreement between the parties.
Except for the 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 these matters will not have a
material adverse effect on the Company's results of operations,
financial condition or liquidity.
QUASI-REORGANIZATION
In 1993, PE divested 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.
Three-month Six-month
periods ended periods ended
June 30, June 30,
-------------------------------
(Dollars in millions) 2001 2000 2001 2000
- ---------------------------------------------------------------
Net income $ 137 $ 110 $ 315 $ 223
Change in unrealized gain
on marketable securities -- (12) -- 21
Foreign currency adjustments (12) (30) (13) 9
Minimum pension liability
adjustments (8) -- (8) 1
Financial instruments (Note 5) (1) -- (1) --
-------------------------------
Comprehensive income $ 116 $ 68 $ 293 $ 254
- ---------------------------------------------------------------
4. SEGMENT INFORMATION
The Company is primarily an energy-services company and has three
reportable segments comprised of SDG&E, SoCalGas and Sempra Energy
Trading (SET). The two utilities operate in essentially separate
service territories under separate regulatory frameworks and rate
structures set by the CPUC. As described in the notes to Consolidated
Financial Statements in the Company's 2000 Annual Report, SDG&E
provides electric and natural gas service to San Diego County and
electric service to southern Orange County. SoCalGas is a natural gas
distribution utility, serving customers throughout most of southern
California and part of central California. SET is based in Stamford,
Connecticut and is engaged in the wholesale trading and marketing of
natural gas, power and petroleum in the U.S. and in other countries.
The accounting policies of the segments are the same as those
described in the notes to Consolidated Financial Statements in the
Company's 2000 Annual Report, and segment performance is evaluated by
management based on reported net income. Intersegment transactions
are generally recorded in the same manner as sales or transactions
with third parties. Utility transactions are based primarily on rates
set by the CPUC and the Federal Energy Regulatory Commission (FERC).
There were no significant changes in segment assets during the six-
month period ended June 30, 2001, except for the increase due to the
adoption of Statement of Financial Accounting Standards (SFAS) No.
133 "Accounting for Derivative Instruments and Hedging Activities"
(as described in Note 5) and the decrease in energy trading assets,
both as shown on the Consolidated Balance Sheets.
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Three-month periods Six-month periods
ended June 30, ended June 30,
----------------------------------------
(Dollars in millions) 2001 2000 2001 2000
- ---------------------------------------------------------------------
Operating Revenues:
San Diego Gas & Electric $ 624 $ 574 $1,766 $1,045
Southern California Gas 927 630 2,475 1,328
Sempra Energy Trading 316 192 674 368
Intersegment revenues (8) (8) (13) (14)
Other 203 122 415 225
----------------------------------------
Total $2,062 $1,510 $5,317 $2,952
- ---------------------------------------------------------------------
Net Income:
San Diego Gas & Electric* $ 37 $ 40 $ 89 $ 92
Southern California Gas* 47 47 99 97
Sempra Energy Trading 69 40 155 58
Other (16) (17) (28) (24)
----------------------------------------
Total $ 137 $ 110 $ 315 $ 223
- ---------------------------------------------------------------------
* after preferred dividends
- --------------------------------------------------
Balance at
--------------------
June 30, December 31,
2001 2000
- --------------------------------------------------
Assets:
San Diego Gas & Electric $ 4,793 $ 4,734
Southern California Gas 4,510 4,116
Sempra Energy Trading 3,488 4,689
Other 3,045 2,073
--------------------
Total $15,836 $15,612
- --------------------------------------------------
5. FINANCIAL INSTRUMENTS
Adoption of SFAS 133
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133 "Accounting for Derivative
Instruments and Hedging Activities" as amended by SFAS No. 138
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities." As amended, SFAS 133 requires that an entity recognize
all derivatives as either assets or liabilities in the statement of
financial position, measure those instruments at fair value and
recognize changes in the fair value of derivatives in earnings in the
period of change unless the derivative qualifies as an effective
hedge that offsets certain exposures.
On January 1, 2001, $1.1 billion in current assets, $1.1 billion in
noncurrent assets, $6 million in current liabilities, and $238
million in noncurrent liabilities were recorded as of January 1,
2001, in the Consolidated Balance Sheet as fixed-priced contracts and
other derivatives. Due to the regulatory environment in which
SoCalGas and SDG&E operate, regulatory assets and liabilities were
established to the extent that derivative gains and losses are
recoverable or payable through future rates. The effect on earnings
was minimal. The ongoing effects will depend on future market
conditions and the Company's hedging activities.
Market Risk
The Company's policy is to use derivative financial instruments to
manage its exposure to fluctuations in interest rates, foreign-
currency exchange rates and energy prices. The Company also uses and
trades derivative financial instruments in its energy trading and
marketing activities. Transactions involving these financial
instruments are with credit-worthy firms and major exchanges. The use
of these instruments exposes the Company to market and credit risk
which may at times be concentrated with certain counterparties,
although counterparty nonperformance is not anticipated.
Energy Derivatives
SoCalGas and SDG&E utilize derivative financial instruments to reduce
exposure to unfavorable changes in energy prices which are subject to
significant and often volatile fluctuation. Derivative financial
instruments are comprised of futures, forwards, swaps, options and
long-term delivery contracts. These contracts allow SoCalGas and
SDG&E to predict with greater certainty the effective prices to be
received and delivered to their customers.
Due to the regulatory environment in which SoCalGas and SDG&E
operate, regulatory assets and liabilities are established to the
extent that derivative gains and losses are recoverable or payable
through future rates. As such, SoCalGas and SDG&E do not apply hedge
accounting to energy derivatives. However, such contracts continue to
be effective in achieving the risk management objectives for which
they were intended.
Swap Agreements
The Company periodically enters into interest-rate swap and cap
agreements to moderate exposure to interest-rate changes and to lower
the overall cost of borrowing. At June 30, 2001, the Company had two
interest-rate swap agreements: a floating-to-fixed-rate swap
associated with $45 million of variable-rate bonds maturing in 2002
and a fixed-to-floating-rate swap associated with $500 million of
fixed rate notes due in 2004. Although these financial instruments do
not meet the hedge accounting criteria of SFAS 133, they continue to
be effective in achieving the risk management objectives for which
they were intended.
Accounting for Derivative Activities
At June 30, 2001, $485 million in current assets, $321 million in
noncurrent assets and $25 million in current liabilities were
recorded in the Consolidated Balance Sheet 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, $23 million in
current regulatory assets, $64 million in regulatory balancing
accounts, $422 million in current regulatory liabilities and $321
million in noncurrent regulatory liabilities were recorded in the
Consolidated Balance Sheet as of June 30, 2001. For the six-month
period ended June 30, 2001, $3 million in other operating losses was
recorded in the Consolidated Statement of Income as an offset to
other income.
Sempra Energy Trading
SET derives a substantial portion of its revenue from market making
and trading activities, as a principal, in natural gas, electricity,
petroleum and petroleum products. At June 30, 2001, substantially all
of SET's derivative transactions were held for trading and marketing
purposes. SET marks these derivatives to market each month, with
gains and losses recognized in earnings in accordance with the
Financial Accounting Standards Board's Emerging Issues Task Force
Issue No. 98-10, "Accounting for Contracts Involved in Energy Trading
and Risk Management Activities." As such, the Company's adoption of
SFAS 133 on January 1, 2001, had no impact on SET's earnings.
Fair Value
The fair value of the Company's derivative financial instruments
(fixed-priced contracts and other derivatives) is not materially
different from their carryings amounts. The fair values of fixed-
priced contracts and other derivatives were estimated based on quoted
market prices. Information regarding the fair value of the Company's
non-derivative financial instruments is provided in Note 10 of the
notes to Consolidated Financial Statements in the 2000 Annual Report
on Form 10-K.
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 Company's 2000 Annual Report.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains statements that are not
historical fact and constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995
including statements regarding SDG&E's ability to finance
undercollected costs on reasonable terms and retain its financial
strength, estimates of future accumulated undercollected costs, and
plans to obtain future financing. 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, the DWR, and the FERC (including those with
respect to the Memorandum of Understanding among Sempra Energy, SDG&E
and the DWR); the financial condition of other investor-owned
utilities; capital market conditions, inflation rates, interest rates
and exchange rates; energy markets, including the timing and extent
of changes in commodity prices; weather conditions and conservation
efforts; 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 Company. 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 Company's business described in this
quarterly report and other reports filed by the Company from time to
time with the Securities and Exchange Commission.
See also "Factors Influencing Future Performance" below.
CAPITAL RESOURCES AND LIQUIDITY
The Company's California utility operations are a major source of
liquidity. However, beginning in the third quarter of 2000 and
continuing into the first quarter of 2001, SDG&E's liquidity and its
ability to make funds available to Sempra Energy were adversely
affected by the undercollections that have resulted from the price cap
on electric rates. Significant growth in these undercollections has
ceased as a result of an agreement with the DWR, under which the DWR
is obligated to purchase SDG&E's full net short position consisting of
the power and ancillary services required by SDG&E's customers that
are not provided by SDG&E's nuclear generating facilities or its
previously existing purchase power contracts. The agreement extends
through December 31, 2002 and can be earlier terminated only upon the
satisfaction of regulatory and other conditions intended to assure
SDG&E's timely recovery of costs incurred in resuming power
procurement for its customers. Note 2 of the notes to Consolidated
Financial Statements provides additional information concerning this
agreement. Continued DWR purchases of SDG&E's full net short position
or timely rate recovery of electricity procurement costs remain
necessary to continue obtaining financing and provide adequate
liquidity.
Cash and cash equivalents at June 30, 2001 are available for
investment in utility plant, the retirement of debt, energy-related
domestic and international projects and other corporate purposes.
Major changes in cash flows not described elsewhere are described
below.
CASH FLOWS FROM OPERATING ACTIVITIES
For the six-month period ended June 30, 2001, the decrease in cash
flows from operations compared to the corresponding period in 2000
was primarily due to SDG&E's continuing undercollection of purchased-
power costs, as described in Note 2 of the notes to Consolidated
Financial Statements and the decrease in trade accounts payable due
to less purchased electricity, because of the DWR purchases. In
addition, the decrease in overcollected regulatory balancing
accounts, lower accrued income taxes in 2001 reflecting tax payments
made during the first quarter of 2001 (none were made during the same
period in 2000) and the decrease in trading liabilities, offset by
the decrease in SoCalGas' trade accounts receivable due to
seasonality contributed to the decrease in cash flows from
operations.
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures for property, plant and equipment by the
California utilities are estimated to be $700 million for the full
year 2001 and are being financed primarily by internally generated
funds. 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. Capital
expenditures for property, plant and equipment by the Company's other
business are estimated to be $900 million for the full year 2001.
During the second quarter of 2001, SoCalGas announced plans to add 11
percent more capacity to its transmission system by the end of the
year. The expansion will help meet increased demand for natural gas
from new and existing electric generation projects in Southern
California.
Sempra Energy Resources (SER) is planning to develop approximately
3,000 megawatts of generation by 2004, including a 570-megawatt power
plant near Bakersfield, California; a 1,250-megawatt project located
near Phoenix, Arizona; a 600-megawatt plant near Mexicali, Mexico;
and a 600-megawatt expansion of the El Dorado Energy plant near Las
Vegas, Nevada.
On July 25, 2001, the Company signed a commitment letter for an
underwritten, syndicated $400 million, three-year revolving credit
facility for its contemplated power projects. This agreement bears
interest at various rates based on market rates and the Company's
credit rating.
CASH FLOWS FROM FINANCING ACTIVITIES
For the six-month period ended June 30, 2001, cash flows from
financing activities increased from the corresponding period in 2000
due primarily to the drawdown of lines of credit in January and
February of 2001, which was greater than the borrowings in the three-
month period ended March 31, 2000 to finance the repurchase of 36.1
million shares of the Company's common stock.
On June 29, 2001 the Company issued $500 million of three-year notes
due July 1, 2004 at an interest rate of 6.80 percent. Also on June
29, 2001, the Company entered into a fixed-to-floating-rate swap
associated with the $500 million three-year notes. Under the swap,
the interest rate on the underlying fixed-rate debt varies (weighted-
average rate of LIBOR plus 1.329 percent). The swap expires on July
1, 2004.
Between January 24 and February 5, 2001, the Company drew down
substantially all ($1.3 billion) of its available credit facilities
in order to enhance its liquidity in view of the current California
electric industry situation. In May 2001 SDG&E repaid its entire
balance of $250 million and in August 2001 Sempra Energy Global
Enterprises repaid its balance of $1.1 billion.
On June 6, 2001 the Company remarketed $81 million of debt of the
Company's Employee Stock Ownership Plan (ESOP) as 7.375 percent
fixed-interest-rate debt due May 3, 2004.
During the first quarter of 2001, SDG&E remarketed $150 million of
variable-rate debt and $25 million of variable-rate unsecured bonds
as 7.0 percent and 6.75 percent fixed-interest-rate debt,
respectively. All other terms remain the same and the interest rate
may resume floating in the future at the Company's option.
On February 9, 2001, SoCalGas' $200 million credit line expired and
was replaced on February 27, 2001, with a $170 million, one-year
agreement. This agreement bears interest at various rates based on
market rates and SoCalGas' credit rating. On April 18, 2001, PE
entered into a $500-million revolving line of credit which bears
interest at various rates based on market rates and PE's credit
rating.
In connection with the common stock repurchase, the Company reduced
its quarterly dividend per share to $0.25 from its previous level of
$0.39, commencing with the dividend payable in the second quarter of
2000.
RESULTS OF OPERATIONS
Net income and other operating revenues increased for the three-month
and six-month periods ended June 30, 2001, compared to the same
periods in 2000. The increases were primarily due to higher earnings
at Sempra Energy Trading arising from expanded markets and product
lines, and from increased volatility in the U.S. natural gas and
electric power markets. Also contributing to the increase in net
income for the six-month period was the sale of the Company's 72.5-
percent ownership interest in Energy America for $56 million in
January 2001. Net income per share increased for the same period due
to the increased net income and the effects of the Company's 2000
common stock purchases described above.
The Company's other income increased for the three-month and six-
month periods ended June 30, 2001, compared to the corresponding
periods in 2000, primarily due to increased interest income on
increased short-term investments and, for the six-month period,
the gain on the sale of Energy America.
Income tax expense increased for the three-month and six-month
periods ended June 30, 2001, compared to the same periods in 2000,
primarily due to higher income before taxes, and for the six-month
period, an additional expense recorded in the first quarter of 2001
related to the position of the Internal Revenue Service on a prior
year's deduction.
The Company's operating expenses increased for the three-month and
six-month periods ended June 30, 2001, compared to the same periods
in 2000, primarily due to increased activity at Sempra Energy Trading
and Sempra Energy Solutions.
UTILITY OPERATIONS
Seasonality
SDG&E's electric sales volume generally is higher in the summer due to air-
conditioning demands. Both California utilities' natural gas sales volumes
generally are higher in the winter due to heating demands, although that
difference is lessening as the use of natural gas to fuel electric
generation increases. Sales volumes of the company's South American
affiliates (not included in the following table, since they are not majority
owned) are also affected by seasonality, but the timing of its increases and
decreases is opposite of those in California since the seasons are reversed
in the Southern Hemisphere.
The tables below summarize the natural gas and electric volumes and revenues
by customer class for the six-month periods ended June 30, 2001 and 2000.
Gas Sales, Transportation and Exchange
(Volumes in billion cubic feet, dollars in millions)
Gas Sales Transportation & Exchange Total
----------------------------------------------------------------------
Volumes Revenue Volumes Revenue Volumes Revenue
----------------------------------------------------------------------
2001:
Residential 172 $1,950 1 $ 3 173 $1,953
Commercial and industrial 60 618 132 103 192 721
Electric generation plants -- -- 227 58 227 58
Wholesale -- -- 11 6 11 6
---------------------------------------------------------------
232 $2,568 371 $170 603 2,738
Balancing accounts and other 255
--------
Total $2,993
- --------------------------------------------------------------------------------------------
2000:
Residential 156 $1,164 2 $ 8 158 $1,172
Commercial and industrial 56 345 169 132 225 477
Utility electric generation -- -- 118 43 118 43
Wholesale -- -- 14 12 14 12
---------------------------------------------------------------
212 $1,509 303 $195 515 1,704
Balancing accounts and other (167)
--------
Total $1,537
- --------------------------------------------------------------------------------------------
The increase in natural gas revenue was primarily due to higher natural
gas prices.
The increase in the cost of natural gas distributed was primarily due
to higher natural gas prices. Under the current regulatory framework,
changes in core-market natural gas prices do not affect net income
since, as explained more fully in the 2000 Annual Report, current or
future core customer rates normally recover the actual cost of
natural gas on a substantially concurrent basis.
Electric Distribution and Transmission
(Volumes in millions of Kwhrs, dollars in millions)
2001 2000
------------------------------------------
Volumes Revenue Volumes Revenue
------------------------------------------
Residential 2,993 $ 405 3,130 $ 332
Commercial 2,961 462 2,913 274
Industrial 1,532 272 1,139 84
Direct access 1,032 36 1,744 59
Street and highway lighting 44 5 33 3
Off-system sales 952 214 253 11
------------------------------------------
9,514 1,394 9,212 763
Balancing and other (158) 59
------------------------------------------
Total 9,514 $1,236 9,212 $ 822
------------------------------------------
The increase in electric revenues was primarily due to the effect
of higher electric commodity costs, which are passed on to
customers without markup, and increased off-system sales.
The increase in electric fuel and net purchased power expense was
primarily due to the higher price of electricity as described in
Note 2 of the notes to Consolidated Financial Statements and
increased off-system sales. Under the current regulatory
framework, changes in on-system prices normally do not affect net
income, as explained in the 2000 Annual Report.
FACTORS INFLUENCING FUTURE PERFORMANCE
Since the operating results of the California utilities, subject to
regulatory actions, are usually fairly stable, earnings growth and
fluctuations will depend primarily on activities at SET, Sempra
Energy International (SEI), Sempra Energy Resources (SER) and other
businesses. The factors influencing future performance are summarized
below.
Note 2 of the notes to Consolidated Financial Statements describes
events in the deregulation of California's electric utility industry
and the effects thereof on SDG&E.
Latin American Investments
As described in the Company's 2000 Annual Report, in 1999 and 2000
Sempra Energy International expanded its investments in South
America, acquiring interests in Chilquinta Energia S.A. and Luz del
Sur S.A.A., and increasing its interest in Sodigas Pampeana S.A. and
Sodigas Sur S.A. It also increased its plant investment in three
natural gas distribution utilities in northern Mexico, constructed a
natural gas pipeline in northern Baja California and announced plans
to participate in a larger natural gas pipeline in Northern Mexico,
in conjunction with its construction of a natural gas fired electric
generation plant in northern Baja California.
Performance-Based Regulation (PBR)
To promote efficient operations and improved productivity and to move
away from reasonableness reviews and disallowances, the CPUC has been
directing utilities to use PBR. PBR has replaced the general rate
case and certain other regulatory proceedings for the California
utilities. Under PBR, regulators require future income potential to
be tied to achieving or exceeding specific performance and
productivity goals, as well as cost reductions, rather than relying
solely on expanding utility plant in a market where a utility already
has a highly developed infrastructure.
In April 2001, SDG&E filed its 2000 PBR report with the CPUC. For
2000, SDG&E exceeded all six performance indicator benchmarks,
resulting in a request for a total net reward of $11.7 million. In
addition, SDG&E achieved an actual 2000 rate of return of 8.70
percent which is below the authorized 8.75 percent. This results in
no sharing of earnings in 2000 under the PBR sharing mechanism (as
described in the Company's 2000 Annual Report).
The utilities' PBR mechanisms are in effect through December 31,
2002, at which time the mechanisms will be updated. That update is
described in the Company's 2000 Annual Report. The PBR and Cost of
Service (COS) cases for SoCalGas and SDG&E are both due to be filed
on December 21, 2001. However, under the MOU described in Note 2,
both SoCalGas' and SDG&E's PBR/COS cases would be delayed such that
the resulting rates would be effective in 2004 instead of 2003, if
this portion of the MOU is approved by the CPUC.
Cost of Capital
For 2001, SoCalGas is authorized to earn a rate of return on common
equity (ROE) of 11.6 percent and a 9.49 percent return on rate base
(ROR), the same as in 2000 and 1999, unless interest-rate changes are
large enough to trigger an automatic adjustment as discussed in the
Company's 2000 Annual Report. For SDG&E, electric-industry
restructuring has changed the method of calculating the utility's
annual cost of capital. In June 1999, the CPUC adopted a 10.6 percent
ROE and an 8.75 percent ROR for SDG&E's electric-distribution and
natural gas businesses. These rates remain in effect for 2000 and
2001. SDG&E is working on a petition to modify SDG&E's last cost of
capital proceeding which requires the 2002 application, to seek a
delay in the required filing due date due to the current uncertainty
in California's electricity market. SDG&E was granted an extension of
time to file its 2002 cost of capital application to 60 days after
the CPUC issues a decision on the petition to modify described above.
The electric-transmission cost of capital is determined under a
separate FERC proceeding.
RELATIONSHIP WITH NON-UTILITY SUBSIDIARIES
The Company believes that several of its non-utility subsidiaries may
not be properly valued by the equity market at this time, as a result
of the inclusion of these businesses within the overall Sempra Energy
enterprise. Accordingly, the Company is seeking on an ongoing basis
to evaluate and potentially implement strategies intended to increase
the value of one or more of these subsidiaries. These strategies may
include, for example, an initial public offering, a spin-off, a
split-off, a business combination or other sale of stock or assets
involving one or more of these businesses, or a combination of some
of these strategic transactions.
CPUC Investigation of Energy-Utility Holding Companies
The CPUC has initiated an investigation into the relationship between
California's investor-owned utilities and their parent holding
companies. Among the matters to be considered in the investigation
are utility dividend policies and practices and obligations of the
holding companies to provide financial support for utility
operations.
TRADING OPERATIONS
SET, a leading natural gas, petroleum and power marketer
headquartered in Stamford, Connecticut, was acquired on December 31,
1997. In addition to the transactions described below in "Market
Risk," SET also enters into long-term structured transactions. For
the three-month and six-month periods ended June 30, 2001, SET
recorded net income of $69 million and $155 million, respectively,
compared to net income of $40 million and $58 million, respectively,
for the corresponding periods of 2000. The increase in net income
was primarily due to increased volatility in the U.S. natural gas
and electric power markets, higher trading volumes and growing
demand for structured price-risk-management products.
INTERNATIONAL OPERATIONS
Results for SEI were net income of $14 million and $19 million,
respectively, for the three-month and six-month periods ended June
30, 2001, compared to net income of $7 million and $12 million,
respectively, for the corresponding periods of 2000. The increase was
due to improved operations and demand growth in Chile and Peru and a
favorable electricity rate decision affecting Chilquinta Energia S.A.
in Chile. Accounting for international operations has resulted in
foreign currency translation adjustments, as shown in Note 3 of the
notes to Consolidated Financial Statements.
SEMPRA ENERGY RESOURCES
SER develops power plants for the competitive market, as well as owning
natural gas storage, production and transportation assets. SER recorded
net losses of $9 million and $5 million, respectively, for the three-
month and six-month periods ended June 30, 2001, compared to net income
of $2 million and $1 million, respectively, for the corresponding
periods of 2000. The losses in 2001 are primarily due to early power
sales to California at a discount (under the DWR contract described
below) with the expectation that gains in later years of the contract
will warrant the early losses. Also contributing to the losses was an
extended outage at the El Dorado Energy plant.
On May 4, 2001, SER entered into a ten-year agreement with the DWR to
supply the DWR with up to 1,900 megawatts during peak-usage periods.
SER intends to deliver this electricity from its projected portfolio
of plants in the western United States, which are expected to
generate approximately 3,000 megawatts by 2004. Sales to the DWR are
expected to comprise more than half of the projected capacity of
these facilities. SER may reduce the amount of power it is required
to deliver to the DWR if it does not build one or more of the
generation plants. SER began providing 250 megawatts of summer
capacity to the DWR on June 1, 2001. This electricity is being
supplied through market purchases and SER's 240-megawatt share of the
El Dorado generating facility which began commercial operation in May
2000. In December 2000, SER obtained regulatory approvals to
construct a 570-megawatt power plant near Bakersfield, California,
and a 1,250-megawatt power plant near Phoenix, Arizona. Additional
projects contemplated include a 600-megawatt power plant near
Mexicali, Mexico and a 600-megawatt expansion of the El Dorado Energy
plant.
OTHER OPERATIONS
Sempra Energy Solutions (SES) provides integrated energy-related
products and services to commercial, industrial, government,
institutional and consumer markets. SES recorded net income of $2
million in the three-month period ending June 30, 2001 and a net
loss of $4 million in the six-month period ending June 30, 2001,
compared to net losses of $5 million and $10 million, respectively,
for the corresponding periods of 2000. The losses are primarily
attributable to ongoing costs of expanding SES's customer base.
Sempra Energy Financial (SEF) invests as a limited partner in
affordable-housing properties and alternative-fuel projects. SEF's
portfolio includes 1,300 properties throughout the United States.
These investments are expected to provide income-tax benefits
(primarily from income-tax credits) over 10-year periods. SEF
recorded net income of $6 million and $14 million, respectively, for
the three-month and six-month periods ended June 30, 2001, compared
to net income of $7 million and $15 million, respectively, for the
corresponding periods of 2000. SEF's future investment policy is
dependent on the Company's future domestic income-tax position.
NEW ACCOUNTING STANDARDS
Effective January 1, 2001, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 133 "Accounting for
Derivative Instruments and Hedging Activities" as amended by SFAS
No. 138 "Accounting for Certain Derivative Instruments and Certain
Hedging Activities." The adoption of this new standard on January
1, 2001, did not have a material impact on the Company's earnings.
For further information regarding the Company's implementation of
SFAS 133, see Note 5 above.
In July 2001 the Financial Accounting Standards Board approved three
statements, SFAS 141 "Business Combinations," SFAS 142 "Goodwill and
Other Intangible Assets" and SFAS 143 " Accounting for Asset
Retirement Obligations." SFAS 141 provides guidance on the accounting
for a business combination at the date the combination is completed.
It requires the use of the purchase method of accounting for all
business combinations initiated after June 30, 2001. The pooling-of-
interest method is eliminated. SFAS 142 provides guidance on how to
account for goodwill and other intangible assets after the acquisition
is complete. Goodwill and certain other intangible assets will no
longer be amortized and will be tested in the aggregate for impairment
at least annually. Goodwill will not be tested on an acquisition-by-
acquisition basis. SFAS 142 applies to existing goodwill and other
intangible assets, beginning with fiscal years starting after December
15, 2001. SFAS 143 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
capitalizes a cost by increasing the carrying amount of the related
long-lived asset. Over time, the liability is accreted to its present
value each period, and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, an
entity either settles the obligation for its recorded amount or incurs
a gain or loss upon settlement. The effect of these standards on the
Company's Consolidated Financial Statements has not yet been
determined.
ITEM 3. MARKET RISK
There have been no significant changes in the risk issues affecting
the Company subsequent to those discussed in the Annual Report for
2000. As noted in that report, the California utilities may, at
times, be exposed to limited market risk in their natural gas
purchase, sale and storage activities as a result of activities under
SDG&E's gas PBR or SoCalGas' Gas Cost Incentive Mechanism. The risk
is managed within the parameters of the Company's market-risk
management and trading framework. However, to lessen the impact on
customers from the recent unprecedented natural gas price volatility
at the California border, during the first quarter of 2001, the
California utilities began hedging a larger portion of their customer
natural gas requirements than in the past. As of March 31, 2001, the
Value at Risk (VaR) of the SDG&E and SoCalGas hedges was $7.5 million
and $1.8 million, respectively. During the second quarter of 2001,
the gas hedging activity at the California utilities was sharply
reduced and, as of June 30, 2001, the VaR of the SDG&E and SoCalGas
hedges was $0.75 million and $0.6 million, respectively. This
represents the 50-percent shareholder portion under the PBR mechanism
and excludes the 50-percent portion subject to rate recovery. In
addition, certain fixed price contracts that traditionally have not
been considered derivatives, but now meet the derivative definition
under SFAS 133 (see "New Accounting Standards" above), are excluded
from the above-mentioned VaR amounts due to the offsetting regulatory
asset or liability also recorded by the Company. SET's VaR as of June
30, 2001, was $8.3 million.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except as otherwise described in this report, 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.
ITEM 4. SUBMISSION OF MATTERS TO VOTE
Sempra Energy's 12-member board of directors is divided into three
classes whose terms are staggered so that the term of one class
expires at each Annual Meeting of Shareholders. At the annual meeting
on May 1, 2001, the shareholders of Sempra Energy elected four
directors for a three-year term expiring in 2003. Two shareholder
proposals were approved, the first recommending a simple majority
vote rule on all issues that are submitted to shareholder vote, and
the second recommending that the entire board of directors be elected
each year. Details of the votes are provided in the Company's
Quarterly Report on Form 10-Q for the three-month period ended March
31, 2001.
Additional information concerning the election of the board of
directors and the shareholder proposals is contained in Sempra
Energy's Notice of 2001 Annual Meeting of Shareholders and Proxy
Statement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 12 - Computation of ratios
12.1 Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed after March 31, 2001:
Current Report on Form 8-K filed April 27, 2001, filing as an exhibit
Sempra Energy's press release of April 26, 2001, giving the financial
results for the three-month period ended March 31, 2001.
Current Report on Form 8-K filed June 19, 2001 announced the
Memorandum of Understanding with the State of California, Sempra
Energy Trading's dispute with Pacific Gas and Electric and Sempra
Energy Resources' contract with the California Department of Water
Resources.
Current Report on Form 8-K filed June 29, 2001 announced the executed
underwriting agreement for the issuance and sale of $500,000,000
aggregate principal amount of 6.80 % Notes due 2004.
Current Report on Form 8-K filed July 16, 2001 reported the current
status of California Public Utilities Commission review of the
Memorandum of Understanding with the State of California.
Current Report on Form 8-K filed July 27, 2001, filing as an exhibit
Sempra Energy's press release of July 26, 2001, giving the financial
results for the three-month period ended June 30, 2001.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly cause this report to be signed on its behalf
by the undersigned thereunto duly authorized.
SEMPRA ENERGY
-------------------
(Registrant)
Date: August 9, 2001 By: /s/ F. H. Ault
----------------------------
F. H. Ault
Sr. Vice President and Controller
1
4
1
10
1
28
EXHIBIT 12.1
SEMPRA ENERGY
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
(Dollars in millions)
For the six
Months ended
June 30,
1996 1997 1998 1999 2000 2001
-------- -------- -------- -------- -------- --------
Fixed Charges and Preferred
Stock Dividends:
Interest $ 205 $ 209 $ 210 $ 233 $ 305 $ 193
Interest Portion of
Annual Rentals 28 25 20 10 8 4
Preferred dividends
of subsidiaries (1) 37 31 18 16 18 10
-------- -------- -------- -------- -------- --------
Total Fixed Charges
and Preferred Stock
Dividends For Purpose
of Ratio $ 270 $ 265 $ 248 $ 259 $ 331 $ 207
======== ======== ======== ======== ======== ========
Earnings:
Pretax income from
continuing operations $ 727 $ 733 $ 432 $ 573 $ 699 $ 511
Add:
Fixed charges
(from above) 270 265 248 259 331 207
Less:
Fixed charges
capitalized 5 3 3 5 5 4
Equity income (loss) of
unconsolidated subsidiaries
and joint ventures - - - - 62 (3)
-------- -------- -------- -------- -------- --------
Total Earnings for
Purpose of Ratio $ 992 $ 995 $ 677 $ 827 $ 963 $ 717
======== ======== ======== ======== ======== ========
Ratio of Earnings
to Combined Fixed Charges
and Preferred Stock
Dividends 3.67 3.75 2.73 3.19 2.91 3.46
======== ======== ======== ======== ======== ========
(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.
