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, 2003
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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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Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes X No
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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 on July 31, 2003: 208,714,412
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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report contains statements that are not historical fact
and constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. The words
"estimates," "believes," "expects," "anticipates," "plans," "intends,"
"may," "would" and "should" or similar expressions, or discussions of
strategy or of plans are intended to identify forward-looking
statements. Forward-looking statements are not guarantees of
performance. They involve risks, uncertainties and assumptions. Future
results may differ materially from those expressed in these forward-
looking statements.
Forward-looking statements are necessarily based upon various
assumptions involving judgments with respect to the future and other
risks, including, among others, local, regional, national and
international economic, competitive, political, legislative and
regulatory conditions and developments; actions by the California
Public Utilities Commission, the California Legislature, the Department
of Water Resources, and the Federal Energy Regulatory Commission;
capital market conditions, inflation rates, interest rates and exchange
rates; energy and trading markets, including the timing and extent of
changes in commodity prices; weather conditions and conservation
efforts; war and terrorist attacks; business, regulatory and legal
decisions; the status of deregulation of retail natural gas and
electricity delivery; the timing and success of business development
efforts; and other uncertainties, all of which are difficult to predict
and many of which are beyond the control of the 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
report and other reports filed by the company from time to time with
the Securities and Exchange Commission.
ITEM 1. FINANCIAL STATEMENTS.
SEMPRA ENERGY
STATEMENTS OF CONSOLIDATED INCOME
(Dollars in millions, except per share amounts)
Three months ended
June 30,
------------------
2003 2002
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OPERATING REVENUES
California utilities:
Natural gas $ 929 $ 754
Electric 397 323
Other 514 411
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Total 1,840 1,488
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OPERATING EXPENSES
California utilities:
Cost of natural gas 480 305
Electric fuel and net purchased power 137 79
Other cost of sales 296 206
Other operating expenses 518 475
Depreciation and amortization 149 152
Franchise fees and other taxes 57 43
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Total 1,637 1,260
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Operating income 203 228
Other income - net 9 8
Interest income 10 10
Interest expense (71) (78)
Preferred dividends of subsidiaries (3) (3)
Trust preferred distributions by subsidiary (5) (5)
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Income before income taxes 143 160
Income taxes 27 15
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Income before extraordinary item 116 145
Extraordinary item, net of tax -- 2
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Net income $ 116 $ 147
======= =======
Weighted-average number of shares outstanding (thousands):
Basic 207,626 205,354
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Diluted 210,164 207,084
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Income before extraordinary item per share of common stock
Basic $ 0.56 $ 0.71
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Diluted $ 0.55 $ 0.70
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Net income per share of common stock
Basic $ 0.56 $ 0.72
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Diluted $ 0.55 $ 0.71
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Dividends declared per share of common stock $ 0.25 $ 0.25
======= =======
See notes to Consolidated Financial Statements.
SEMPRA ENERGY
STATEMENTS OF CONSOLIDATED INCOME
(Dollars in millions, except per share amounts)
Six months ended
June 30,
------------------
2003 2002
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OPERATING REVENUES
California utilities:
Natural gas $ 2,091 $ 1,634
Electric 792 604
Other 880 725
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Total 3,763 2,963
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OPERATING EXPENSES
California utilities:
Cost of natural gas 1,157 729
Electric fuel and net purchased power 300 140
Other cost of sales 515 338
Other operating expenses 963 890
Depreciation and amortization 297 300
Franchise fees and other taxes 113 87
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Total 3,345 2,484
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Operating income 418 479
Other income - net 4 27
Interest income 22 21
Interest expense (145) (147)
Preferred dividends of subsidiaries (6) (6)
Trust preferred distributions by subsidiary (9) (9)
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Income before income taxes 284 365
Income taxes 51 74
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Income before extraordinary item and cumulative effect of
change in accounting principle 233 291
Extraordinary item, net of tax -- 2
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Income before cumulative effect of change in accounting principle 233 293
Cumulative effect of change in accounting principle, net of tax (29) --
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Net income $ 204 $ 293
======= =======
Weighted-average number of shares outstanding (thousands):
Basic 207,013 205,105
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Diluted 208,882 206,729
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Income before extraordinary item and cumulative effect of
change of accounting principle per share of common stock
Basic $ 1.13 $ 1.42
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Diluted $ 1.12 $ 1.41
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Income before cumulative effect of change in accounting
principle per share of common stock
Basic $ 1.13 $ 1.43
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Diluted $ 1.12 $ 1.42
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Net income per share of common stock
Basic $ 0.99 $ 1.43
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Diluted $ 0.98 $ 1.42
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Dividends declared per share of common stock $ 0.50 $ 0.50
======= =======
See notes to Consolidated Financial Statements.
SEMPRA ENERGY
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
---------------------------
June 30, December 31,
2003 2002
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ASSETS
Current assets:
Cash and cash equivalents $ 325 $ 455
Accounts receivable - trade 714 754
Accounts and notes receivable - other 108 135
Due from unconsolidated affiliates 144 80
Deferred income taxes 77 20
Trading assets 4,853 5,064
Regulatory assets arising from fixed-price
contracts and other derivatives 146 151
Other regulatory assets 90 75
Inventories 129 134
Other 137 142
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Total current assets 6,723 7,010
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Investments and other assets:
Fixed-price contracts and other derivatives 36 42
Due from unconsolidated affiliate 54 57
Regulatory assets arising from fixed-price
contracts and other derivatives 740 812
Other regulatory assets 490 532
Nuclear-decommissioning trusts 534 494
Investments 1,446 1,313
Sundry 723 665
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Total investments and other assets 4,023 3,915
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Property, plant and equipment:
Property, plant and equipment 14,367 13,816
Less accumulated depreciation and amortization (6,890) (6,984)
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Total property, plant and equipment - net 7,477 6,832
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Total assets $18,223 $17,757
======= =======
See notes to Consolidated Financial Statements.
SEMPRA ENERGY
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
----------------------------
June 30, December 31,
2003 2002
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 311 $ 570
Accounts payable - trade 697 694
Accounts payable - other 52 50
Income taxes payable 4 22
Trading liabilities 4,141 4,094
Dividends and interest payable 136 133
Regulatory balancing accounts - net 666 578
Regulatory liabilities 11 18
Fixed-price contracts and other derivatives 151 153
Current portion of long-term debt 204 281
Other 622 654
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Total current liabilities 6,995 7,247
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Long-term debt 4,214 4,083
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Deferred credits and other liabilities:
Due to unconsolidated affiliate 162 162
Customer advances for construction 96 91
Post-retirement benefits other than pensions 138 136
Deferred income taxes 791 800
Deferred investment tax credits 87 90
Fixed-price contracts and other derivatives 827 813
Regulatory liabilities arising from asset
retirement obligations 241 --
Regulatory liabilities 117 121
Asset retirement obligations 309 --
Deferred credits and other liabilities 812 985
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Total deferred credits and other liabilities 3,580 3,198
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Preferred stock of subsidiaries 203 204
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Mandatorily redeemable trust preferred securities 200 200
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Commitments and contingent liabilities (Note 3)
SHAREHOLDERS' EQUITY
Preferred stock (50,000,000 shares authorized,
none issued) -- --
Common stock (750,000,000 shares authorized;
208,203,574 and 204,911,572 shares outstanding at
June 30, 2003 and December 31, 2002, respectively) 1,502 1,436
Retained earnings 1,962 1,861
Deferred compensation relating to ESOP (32) (33)
Accumulated other comprehensive income (loss) (401) (439)
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Total shareholders' equity 3,031 2,825
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Total liabilities and shareholders' equity $18,223 $17,757
======= =======
See notes to Consolidated Financial Statements.
SEMPRA ENERGY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Dollars in millions)
Six months ended
June 30,
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2003 2002
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 204 $ 293
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary item, net of tax -- (2)
Cumulative effect of change in accounting principle 29 --
Depreciation and amortization 297 300
Deferred income taxes and investment tax credits (25) (54)
Other - net 39 17
Net changes in other working capital components 248 145
Changes in other assets (48) 32
Changes in other liabilities 12 23
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Net cash provided by operating activities 756 754
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CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (441) (559)
Investments and acquisitions of affiliates,
net of cash acquired (134) (199)
Loan to unconsolidated affiliate (64) --
Dividends received from unconsolidated affiliates -- 9
Other - net -- (10)
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Net cash used in investing activities (639) (759)
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CASH FLOWS FROM FINANCING ACTIVITIES
Common stock dividends (104) (102)
Issuances of common stock 50 11
Repurchases of common stock (6) (4)
Issuances of long-term debt 400 800
Payments on long-term debt (339) (303)
Decrease in short-term debt (240) (462)
Other - net (8) (18)
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Net cash used in financing activities (247) (78)
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Decrease in cash and cash equivalents (130) (83)
Cash and cash equivalents, January 1 455 605
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Cash and cash equivalents, June 30 $ 325 $ 522
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest payments, net of amounts capitalized $ 136 $ 141
======= =======
Income tax payments, net of refunds $ 94 $ 24
======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Acquisition of subsidiaries:
Assets acquired $ -- $ 1,210
Cash paid -- (199)
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Liabilities assumed $ -- $ 1,011
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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 holding company. Sempra
Energy's subsidiaries include San Diego Gas & Electric Company (SDG&E),
Southern California Gas Company (SoCalGas) (collectively referred to
herein as the California Utilities); Sempra Energy Global Enterprises
(Global), which is the holding company for Sempra Energy Trading (SET),
Sempra Energy Resources (SER), Sempra Energy International (SEI),
Sempra Energy Solutions (SES) and other, smaller businesses; Sempra
Energy Financial (SEF); and additional smaller businesses. The
financial statements herein are the Consolidated Financial Statements
of Sempra Energy and its consolidated 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.
Information in this Quarterly Report is unaudited and should be read in
conjunction with the Annual Report on Form 10-K for the year ended
December 31, 2002 (Annual Report) and the Quarterly Report on Form 10-Q
for the three months ended March 31, 2003.
The company's significant accounting policies are described in Note 1
of the notes to Consolidated Financial Statements in the Annual Report.
The same accounting policies are followed for interim reporting
purposes.
As described in the notes to Consolidated Financial Statements in the
Annual Report, the California Utilities account for the economic
effects of regulation on utility operations (excluding generation
operations) in accordance with Statement of Financial Accounting
Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types
of Regulation".
COMPREHENSIVE INCOME
The following is a reconciliation of net income to comprehensive
income.
Three months Six months
ended ended
June 30, June 30,
---------------------------------
(Dollars in millions) 2003 2002 2003 2002
- -----------------------------------------------------------------
Net income $ 116 $ 147 $ 204 $ 293
Foreign currency adjustments 30 (34) 44 (128)
Minimum pension liability
adjustments -- (14) (6) (14)
Financial instruments -- 1 -- --
---------------------------------
Comprehensive income $ 146 $ 100 $ 242 $ 151
- -----------------------------------------------------------------
2. NEW ACCOUNTING STANDARDS
Emerging Issues Task Force (EITF) 98-10 "Accounting for Contracts
Involved in Energy Trading and Risk Management Activities": In
accordance with the EITF's rescission of Issue 98-10, the company no
longer recognizes energy-related contracts under mark-to-market
accounting unless the contracts meet the requirements stated under SFAS
133 "Accounting for Derivative Instruments and Hedging Activities,"
which is the case for a substantial majority of the company's
contracts. On January 1, 2003, the company recorded the initial effect
of rescinding Issue 98-10 as a cumulative effect of a change in
accounting principle, which reduced after-tax earnings by $29 million.
Only $18 million of the $29 million had been included in net income
through December 31, 2002. However, the $18 million was net of the
after-tax effect of income-based expenses, which are not considered in
calculating the cumulative effect of the accounting change. As the
underlying transactions are completed subsequent to December 31, 2002,
and the gains or losses are recorded, the entire $29 million, plus or
minus intervening changes in market value, will be included in the
calculation of net income. On a net basis, no such realization occurred
during the six months ended June 30, 2003. In addition, the ongoing
effect of rescinding EITF 98-10 negatively impacted after-tax earnings
for the three and six months ended June 30, 2003 by an additional $7
million and $16 million, respectively. Neither the cumulative nor the
ongoing effect impacts the company's cash flow or liquidity.
Emerging Issues Task Force 02-3 "Issues Involved in Accounting for
Derivative Contracts Held for Trading Purposes and Contracts Involved
in Energy Trading and Risk Management Activities": EITF 02-3 requires
gains and losses on trading contracts to be recorded on a net basis in
the income statement, effective for financial statements covering
periods ending after July 15, 2002. This required that SES change its
method of recording trading activities from gross to net, which had no
impact on previously recorded gross margin, net income or cash provided
by operating activities. SET required no change as it was already
recording revenues from trading activities net.
Statement of Financial Accounting Standards (SFAS) 142, "Goodwill and
Other Intangible Assets": In accordance with SFAS 142, recorded
goodwill is tested for impairment. As a result, during the first
quarter of 2002, SEI recorded a pre-tax charge of $6 million related to
the impairment of goodwill associated with its two domestic
subsidiaries. Impairment losses are reflected in other operating
expenses in the Statements of Consolidated Income.
During the first quarter of 2003 SEI purchased the remaining interests
in its Mexican subsidiaries, which resulted in the recording of an
addition to goodwill of $10 million.
The change in the carrying amount of goodwill (included in noncurrent
sundry assets on the Consolidated Balance Sheets) for the six months
ended June 30, 2003 are as follows:
(Dollars in millions) SET Other Total
- ------------------------------------------------------------------
Balance as of January 1, 2003 $ 141 $ 41 $ 182
Goodwill acquired during 2003 -- 10 10
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Balance as of June 30, 2003 $ 141 $ 51 $ 192
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SFAS 143, "Accounting for Asset Retirement Obligations": The adoption
of SFAS 143 on January 1, 2003 resulted in the recording of an addition
of $71 million to utility plant, representing the company's share of
the San Onofre Nuclear Generating Station (SONGS) estimated future
decommissioning costs (as discounted to the present value at the dates
the units began operation), and accumulated depreciation of $41 million
related to the increase to utility plant, for a net increase of $30
million. In addition, the company recorded a corresponding retirement
obligation liability of $309 million (which includes accretion of that
discounted value to December 31, 2002) and a regulatory liability of
$215 million to reflect that SDG&E has collected the funds from its
customers more quickly than SFAS 143 would accrete the retirement
liability and depreciate the asset. These liabilities, less the $494
million recorded as accumulated depreciation prior to January 1, 2003
(which represents amounts collected for future decommissioning costs),
comprise the offsetting $30 million.
On January 1, 2003, the company recorded additional asset retirement
obligations of $20 million associated with the future retirement of a
former power plant and three storage facilities.
In accordance with SFAS 143, Sempra Energy identified several other
assets for which retirement obligations exist, but whose lives are
indeterminate. A liability for these asset retirement obligations will
be recorded if and when a life is determinable.
The change in the asset retirement obligations for the six months ended
June 30, 2003 is as follows (dollars in millions):
Balance as of January 1, 2003 $ --
Adoption of SFAS 143 329
Accretion expense 11
Payments made (7)
------
Balance as of June 30, 2003 $ 333*
======
*A portion of the obligation is included in other current liabilities
on the Consolidated Balance Sheets.
Had SFAS 143 been in effect, the asset retirement obligation liability
would have been $315 million, $338 million, $363 million and $329
million as of January 1, 2000 and December 31, 2000, 2001 and 2002,
respectively.
Except for the items noted above, the company has determined that there
is no other material retirement obligation associated with tangible
long-lived assets.
Implementation of SFAS 143 has had no effect on results of operations
and is not expected to have a significant one in the future.
SFAS 148 "Accounting for Stock-Based Compensation -- Transition and
Disclosure": SFAS 148 requires quarterly disclosure of the effects that
would have been recorded if the financial statements applied the fair
value recognition principle of SFAS 123 "Accounting for Stock-Based
Compensation." The company accounts for stock-based employee
compensation plans under the recognition and measurement principles of
Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees," and related interpretations. For certain grants, no stock-
based employee compensation cost is reflected in net income, since each
option granted under those plans had an exercise price equal to the
market value of the underlying common stock on the date of grant. The
following table provides the pro forma effects of recognizing
compensation expense in accordance with SFAS 123:
Three months ended
June 30,
------------------------
2003 2002
------------------------
Net income as reported $ 116 $ 147
Stock-based employee compensation expense
reported in net income, net of tax 7 (2)
Total stock-based employee compensation
under fair value method for all awards,
net of tax (9) (1)
------------------------
Pro forma net income $ 114 $ 144
========================
Earnings per share:
Basic--as reported $ 0.56 $ 0.72
========================
Basic--pro forma $ 0.55 $ 0.70
========================
Diluted--as reported $ 0.55 $ 0.71
========================
Diluted--pro forma $ 0.54 $ 0.70
========================
Six months ended
June 30,
------------------------
2003 2002
------------------------
Net income as reported $ 204 $ 293
Stock-based employee compensation expense
reported in net income, net of tax 14 1
Total stock-based employee compensation
under fair value method for all awards,
net of tax (18) (6)
------------------------
Pro forma net income $ 200 $ 288
========================
Earnings per share:
Basic--as reported $ 0.99 $ 1.43
========================
Basic--pro forma $ 0.97 $ 1.40
========================
Diluted--as reported $ 0.98 $ 1.42
========================
Diluted--pro forma $ 0.96 $ 1.39
========================
SFAS 149 "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities": SFAS 149 amends and clarifies accounting for
derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS 133.
Sempra Energy is currently assessing the impact SFAS 149 will have on
its consolidated results of operations and financial position. It will
have no effect on cash flows.
SFAS 150 "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity": This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and
equity. SFAS 150 requires that certain mandatorily redeemable
financial instruments currently classified in the mezzanine section of
the balance sheet be reclassified as liabilities. The company will
adopt SFAS 150 in the third quarter of 2003 by changing its
presentation of $200 million and $24 million of mandatorily redeemable
trust preferred securities and preferred stock of subsidiaries,
respectively.
FASB Interpretation No. 45 (FIN 45), "Guarantor's Accounting and
Disclosure Requirements for Guarantees": FIN 45 elaborates on the
disclosures to be made in interim and annual financial statements of a
guarantor about its obligations under certain guarantees that it has
issued. It also clarifies that at the inception of a guarantee a
guarantor is required to recognize a liability for the fair value of
the obligation undertaken in issuing a guarantee. The only significant
guarantee for which disclosure is required is that of the synthetic
lease for the Mesquite Power Plant, which is also affected by FASB
Interpretation No. 46, as described below.
FASB Interpretation No. 46 (FIN 46), "Consolidation of Variable
Interest Entities": In January 2003, the FASB issued FIN 46, which
requires the primary beneficiary of a variable interest entity's
activities to consolidate the entity. The primary beneficiary is the
party that absorbs a majority of the expected losses and/or receives a
majority of the expected residual returns of the entity's activities.
The consolidation requirements of the interpretation apply immediately
to entities created after January 31, 2003. For pre-existing entities,
they apply beginning July 1, 2003. Sempra Energy has identified two
variable interest entities for which it is the primary beneficiary. One
of the variable interest entities relates to an investment in an
unconsolidated subsidiary, Atlantic Electric & Gas Limited, that
markets power and natural gas commodities to commercial and residential
customers in the United Kingdom. The other entity is the lessor of the
Mesquite Power Plant (Mesquite Power) described below. Accordingly,
effective in the third quarter of 2003, Sempra Energy will consolidate
these entities, which is estimated to increase total assets and total
liabilities by $650 million. The company does not expect a significant
impact to income before the cumulative effect of the change in
accounting principle and estimates that the cumulative effect of the
change will be a charge of $30 million.
Mesquite Power, located near Phoenix, Arizona, is a $662 million,
1,250-megawatt (mW) project that will provide electricity to wholesale
energy markets in the Southwest. Construction began in September 2001
and the first phase of commercial operations (50-percent of the plant's
total capacity) began in June 2003. The second phase of commercial
operations (the remaining 50 percent) is expected to begin in November
2003. Expenditures as of June 30, 2003 are $612 million. A synthetic
lease agreement provides financing for all project assets owned by the
lessor. Financing under the synthetic lease in excess of $280 million
requires 103 percent collateralization through the purchase of U.S.
Treasury obligations in similar amounts. As of June 30, 2003, the
company held $315 million of U.S. Treasury obligations, which is
included in investments on the Consolidated Balance Sheets.
3. MATERIAL CONTINGENCIES
ELECTRIC INDUSTRY REGULATION
The restructuring of California's electric utility industry has
significantly affected the company's electric utility operations. The
background of this issue is described in the Annual Report. Subsequent
developments are described herein.
The power crisis of 2000-2001 has caused the California Public
Utilities Commission (CPUC) to adjust its plan for restructuring the
electricity industry. In addition, several California state agencies,
including the CPUC, the Consumer Power and Conservation Financing
Authority, and the California Energy Commission, recently adopted an
Energy Action Plan for California. The plan calls for a continuation of
regulated electricity rates and existing direct access contracts,
increased conservation, more renewable energy, and a stable regulatory
environment that encourages private investment in the state.
Subsequent to the electric capacity shortages of 2000-2001, SDG&E's
service territory has had and continues to have an adequate supply of
electricity. However, various projections of electricity demand in
SDG&E's service territory indicate that, without additional electrical
generation or reductions in electrical usage, beginning in 2005
electricity demand could begin to outstrip available resources. SDG&E's
strategy for meeting this demand is to: (1) reduce power demand through
conservation and efficiency; (2) increase the supply of electricity
from renewable sources, including wind and solar; (3) establish new
transmission lines by 2008 to import more power; and (4) provide new
electric generation by 2005 to meet the expected shortfall. SDG&E has
issued a request for proposals (RFP) to meet the electric capacity
shortfall, estimated at 69 megawatts in 2005 and increasing annually by
100 megawatts. SDG&E is ahead of the interim schedule required by
California legislation in meeting the CPUC's requirement of obtaining
20 percent of its electricity from renewable sources by 2017.
There continues to be legislative and regulatory interest in returning
the California's investor-owned utilities (IOUs) to an ownership role
for generation. At present, there is no firm guidance or set of terms
and conditions under which this might take place that would provide
adequate customer and shareholder protections, and SDG&E continues to
state that these items must be in place before it would consider an
ownership position. In anticipation of possible direction on these
matters, SDG&E has required bidders to include both power purchase and
ownership options in their response to the RFP noted above for
additional local generation beginning in 2005.
Several legislative proposals relating to utility regulation have
failed to be enacted by the California Legislature. California Senate
Bill (SB) 429 would have subjected the company and other California
energy-utility holding companies to continuing authority of the CPUC to
enforce any condition placed upon their authorizations to acquire their
California utility subsidiaries, including obligations to give first
priority to the capital requirements of the utilities as determined by
the CPUC to be necessary to meet the utilities' obligations to serve.
It would also require that the CPUC order the holding companies to
infuse into the utility subsidiaries sufficient capital, of any type
deemed necessary by the CPUC, to enable the utilities to fulfill their
service obligations. SB 888 would repeal the provisions of Assembly
Bill (AB) 1890, which enabled electric industry restructuring in
September 1996.
California Governor Davis recently announced that he is seeking a $1-
billion electric rate reduction. SDG&E's portion of this is 13.51
percent or $135 million. This rate reduction will have no effect on
SDG&E's net income and net cash flows because customer savings are
coming from lower charges by the California Department of Water
Resources (DWR), and SDG&E is merely transmitting the electricity from
the DWR to the customers, acting as a conduit for the parties. In
accordance therewith, on July 1, 2003 the DWR submitted to the CPUC a
supplemental determination of its 2003 revenue requirement. The DWR's
supplemental determination contains a $1-billion reduction in its
revenue requirement for 2003. In order to make the corresponding rate
reduction available to ratepayers as soon as possible, and consistent
with the very limited scope of this phase of this proceeding, the
procedural schedule is being expedited. A draft decision is expected by
the end of August 2003, with a final decision by September 2003.
The CPUC has undertaken a proceeding and issued numerous decisions
establishing the framework, rules and processes that would govern
SDG&E's renewed responsibility of procuring electricity for its
customers. These include decisions (1) allocating to the customers of
California's IOUs the power from the long-term contracts entered into
by the DWR, with the DWR retaining the legal and financial
responsibility for the contracts; (2) adopting an Operating Agreement
between SDG&E and the DWR to govern the terms and conditions for
SDG&E's administration of DWR contracts; (3) adopting annual
procurement plans that include securing supplies to satisfy SDG&E's
additional power requirements; (4) consideration of a 20-year resource
plan to assess SDG&E's resource needs, emphasizing the next five years;
and (5) developing the criteria by which the acceptability and recovery
of procurement transactions will be determined, including possible
development of an incentive mechanism for procurement activities.
The DWR's Operating Agreement with SDG&E, approved by the CPUC, governs
SDG&E's relationship with the DWR now that SDG&E has assumed
administration of the allocated DWR contracts. The agreement provides
that SDG&E is acting as a limited agent on behalf of the DWR in
undertaking energy sales and natural gas procurement functions under
the DWR contracts allocated to its customers. Legal and financial risks
associated with these activities will continue to reside with the DWR.
However, in certain limited circumstances involving transactions in
which SDG&E, as DWR's limited agent, is selling DWR surplus energy
pursuant to the terms of the Operating Agreement, SDG&E may be
obligated to provide lines of credit in connection with the allocated
contracts. The risk associated with these lines of credit is considered
to be minimal. On April 17, 2003, SDG&E filed with the CPUC its natural
gas procurement plan related to certain DWR contracts. On July 10,
2003, the CPUC approved SDG&E's natural gas supply plan.
On July 11, 2003, the CPUC adopted a proposed decision continuing the
level of the Direct Access (DA) cost responsibility surcharge (CRS) cap
effective July 1, 2003 at 2.7 cents per kWh, subject to possible
revision in the next DA CRS cap review proceeding. In each periodic DA
CRS cap review proceeding, the cap is subject to adjustment to the
extent necessary to maintain the goal of refunding to utility customers
the full amounts to which they are entitled by the end of the DWR
contract term in 2011.
NATURAL GAS INDUSTRY RESTRUCTURING
As discussed in Note 14 of the notes to Consolidated Financial
Statements in the Annual Report, in December 2001 the CPUC issued a
decision related to natural gas industry restructuring, with
implementation anticipated during 2002. During 2002 the California
Utilities filed a proposed implementation schedule and revised tariffs
and rules required for implementation. However, on February 27, 2003,
the CPUC issued a resolution rejecting without prejudice those proposed
tariffs and rules. The resolution ordered SoCalGas to file a new
application, which would address detailed proposals for implementation
of the December 2001 decision, but also would allow reconsideration of
the December 2001 decision. SoCalGas filed such an application on June
30, 2003, and proposed some modifications to the provisions of the
December 2001 decision to respond to concerns that it could lead to
higher natural gas costs for consumers. These modifications include,
among other things, a proposal not to unbundle natural gas
transmission, a higher market price cap on receipt-point capacity
transactions in the secondary market, deferral of retail unbundling
provisions, and a proposal to litigate transmission and storage revenue
requirements in the Cost of Service case (see below). Modifications
would also remove SoCalGas' exposure to risk or reward for the sale of
receipt-point capacity. The filing proposes implementation of these
provisions on April 1, 2004 and continuing through August 31, 2006. If
the December 2001 decision is implemented, it is not expected to
adversely affect the California Utilities' earnings. A CPUC decision is
expected during 2004.
BORDER PRICE INVESTIGATION
In November 2002, the CPUC instituted an investigation into the
Southern California natural gas market and the price of natural gas
delivered to the California-Arizona (CA-AZ) border during the period of
March 2000 through May 2001. If the investigation determines that the
conduct of any respondent contributed to the natural gas price spikes
at the CA-AZ border during this period, the CPUC may modify the
respondent's applicable natural gas procurement incentive mechanism,
reduce the amount of any shareholder award for the period involved,
and/or order the respondent to issue a refund to ratepayers to offset
the higher rates paid. The California Utilities, included among the
respondents to the investigation, are fully cooperating in the
investigation and believe that the CPUC will ultimately determine that
they were not responsible for the high border prices during this
period. On August 1, 2003, the Administrative Law Judge (ALJ) issued a
revised schedule with hearings scheduled to begin in March 2004 and
with a Commission decision by late 2004.
CPUC INVESTIGATION OF COMPLIANCE WITH AFFILIATE RULES
On February 27, 2003, the CPUC opened an investigation of the business
activities of SDG&E, SoCalGas and Sempra Energy to ensure that they
have complied with relevant statutes and CPUC decisions in the
management, oversight and operations of their companies. The Assigned
Commissioner and ALJ issued a ruling which suspends the procedural
schedule until the CPUC completes an independent audit to evaluate
energy-related business activities undertaken by Sempra Energy within
the service territories of SDG&E and SoCalGas, relative to holding
company systems and affiliate activities. The audit is to consider
whether these activities pose any problems for ratepayers and whether
they are consistent with the CPUC's decision, rules or orders and/or
affiliate statutes. The objective of the audit is to analyze the
adequacy of the Affiliate Rules. In accordance with existing CPUC
requirements, the California Utilities' transactions with other Sempra
Energy affiliates have been audited by an independent auditing firm
each year, with results reported to the CPUC, and there have been no
material adverse findings in those audits.
COST OF SERVICE FILING
On May 22, 2003, the assigned CPUC Commissioner modified his previously
adopted procedural schedule on the California Utilities' Cost of
Service applications to expedite a decision by approximately one month,
permitting a decision by as early as March 2004. The assigned
Commissioner also provided for additional comments to be filed on the
California Utilities' request for interim relief for the period from
January 1, 2004 to the date of the Cost of Service decision and stated
that a decision on the request would be prepared for consideration of
the full Commission. On June 3, 2003, various parties filed reply
comments supporting or opposing the motion for January 1, 2004 interim
relief. The CPUC's Office of Ratepayer Advocates' (ORA) report on the
California Utilities' filing is due on August 8, 2003.
An October 10, 2001 decision denied the California Utilities' request
to continue equal sharing between ratepayers and shareholders of the
estimated savings for the 1998 Enova-PE business combination that
created Sempra Energy and, instead, ordered that all of the estimated
2003 merger savings go to ratepayers. This decision will adversely
affect 2003 net income by $24 million at SoCalGas and $11 million at
SDG&E.
MARKET INDEXED CAPITAL ADJUSTMENT MECHANISM (MICAM)
Under MICAM, automatic adjustments are made to SDG&E's cost of capital
based on when the April-September average of single-A utility bond
rates in any given calendar year varies more than 100 basis points from
a predetermined benchmark. When this occurs, SDG&E's return on common
equity (ROE) is adjusted by one-half of the change. SDG&E must file its
annual MICAM advice letter with the CPUC on October 15, reporting how
the year's April-September average of the utility bond yield compares
to the benchmark. Any resulting change in SDG&E's ROE would go into
effect January 1 of the following year. Due to a large general decline
in interest rates, it is likely that the existing MICAM mechanism would
trigger during 2003. However, if the CPUC approves an all-party
settlement previously filed, the likelihood of a trigger this year
would be less since the benchmark rate under the settlement was changed
to the double-A utility bond rate during a different time period which
produced a lower benchmark rate.
The current MICAM benchmark, based on the April-September 1996 single-A
utility bond yield, stands at 7.97%. The MICAM benchmark that would
take effect under the settlement agreement, 7.24%, is based on the
April-September 2002 double-A utility bond yield.
Single-A utility interest rates under the existing mechanism averaged
6.40% from April through June, and an ROE adjustment would occur if the
July through September rate averages 7.53% or lower. Double-A utility
interest rates under the settlement agreement averaged 6.26% from April
through June, and an ROE reduction would occur if the July through
September rate averages 6.20% or lower.
In both versions of MICAM, every percentage point of variance between
the April-September average and the benchmark in excess of the
threshold reduces SDG&E's authorized annual net income by $5 million.
PERFORMANCE-BASED REGULATION (PBR)
On July 15, 2003, the CPUC issued a Draft Resolution (DR) approving
SDG&E's 2001 and 2002 Distribution PBR Performance Reports. If the DR
is approved by the CPUC, SDG&E would be awarded $12.2 million for
exceeding PBR benchmarks on all six of its performance indicators in
2001. SDG&E would also be awarded $6.0 million for exceeding the PBR
benchmarks on five of its six performance indicators in 2002. The total
maximum reward (or penalty) SDG&E could earn in a given year under the
Distribution PBR mechanism is $14.5 million. A final CPUC decision is
expected during the third quarter of 2003.
On March 19, 2003, the ORA issued its Monitoring and Evaluation Report
on SDG&E's natural gas procurement activities in Year 9 (August 1, 2001
through July 31, 2002). The ORA analyzed and confirmed the PBR results
put forth by SDG&E, resulting in a Year 9 shared loss of $1.9 million
and a shareholder penalty of $1.4 million, both of which were recorded
in 2002. The ORA recommended the extension of the PBR mechanism, as
modified in Years 8 and 9, to Year 10 and beyond. The ORA has stated
that the CPUC's adoption of the natural gas procurement PBR mechanism
is beneficial both to ratepayers and to shareholders of SDG&E.
On July 10, 2003, the CPUC issued a decision relative to SDG&E's Year
11 Gas PBR application, which would extend the PBR mechanism with some
modification. The decision approved the Joint Parties' Motion for an
Order Adopting Settlement Agreement filed by SDG&E and the ORA, which
will apply to Year 10 and beyond. The effect of the modifications is to
reduce slightly the potential size of future PBR rewards or penalties.
SDG&E's request for a reward of $6.7 million for the PBR natural gas
procurement period ended July 31, 2001 (Year 8) was approved by the
CPUC on January 30, 2003. Since part of the reward calculation is based
on CA-AZ natural gas border price indices, the decision reserved the
right to revise the reward in the future, depending on the outcome of
the CPUC's border price investigation (see above) and the FERC's
investigation into alleged energy price manipulation (see below).
GAS COST INCENTIVE MECHANISM (GCIM)
SoCalGas' GCIM allows SoCalGas to receive a share of the savings it
achieves by buying natural gas for customers below monthly benchmarks.
The mechanism permits full recovery of all costs within a tolerance
band above the benchmark price and refunds savings within a tolerance
band below the benchmark price. The costs outside the tolerance band
are shared between customers and shareholders.
On June 25, 2003, the assigned CPUC commissioner issued two separate,
but essentially identical, Draft Decisions in SoCalGas' GCIM Year 7 and
Year 8 proceedings. A final CPUC decision is expected during the third
quarter of 2003. If the final decision agrees with the assigned
commissioner's Draft Decisions approving the shareholder rewards of
$30.8 million for Year 7 and $17.4 million for Year 8 (subject to
refund or adjustment as determined by the Commission in the Border
Price Investigation described above), the rewards would be included in
income in the third quarter of 2003.
On June 16, 2003, SoCalGas filed an application with the CPUC
requesting a $6.3 million shareholder reward for GCIM Year 9 (April 1,
2002 through March 31, 2003). The company's natural gas purchasing
activities resulted in a net savings of $33 million to ratepayers
during Year 9, which led to the requested shareholder reward.
Performance incentives rewards are not included in the company's
earnings until CPUC approval is received.
TRANSMISSION RATE INCREASE
On May 2, 2003, the FERC accepted SDG&E's request for modification of
its Transmission Owner Tariff to adopt a rate increase. The new
transmission rates are effective October 1, 2003, and will increase the
charges for retail transmission service by $32.3 million (27 percent).
SDG&E has proposed formula-based rates which would allow the company
over a 4 to 5 year period to recover all of its recorded costs as well
as an adopted ROE. Thus, SDG&E would earn no more or no less than the
FERC-adopted ROE for the predetermined period. These new rates are
subject to refund based on the FERC's final order. The FERC staff and
intervenor testimonies are due on August 29, 2003. Litigation of the
case would result in a decision by the end of 2004.
In August 2002 the FERC issued Opinion No. 458, which effectively
disallowed SDG&E's recovery of the differentials between certain costs
paid to SDG&E under existing transmission contracts (the "Participation
Agreements") and charges assessed to SDG&E under the ISO FERC tariff.
These charges are for transmission line losses and grid management
charges attributable to energy schedules on portions of the Southwest
Powerlink. As a result, SDG&E is incurring unreimbursed cost
differentials on an ongoing basis at a rate ranging between $4 million
and $8 million per year. SDG&E has petitioned the United States Court
of Appeals for review of these FERC orders. In addition, SDG&E is
challenging the propriety of the ISO charges as applied to the portions
of the Southwest Powerlink jointly owned with Arizona Public Service
Co. and the Imperial Irrigation District in proceedings before the
FERC, and in an arbitration under the ISO tariff, the result of which
may be appealed to FERC. To the extent SDG&E prevails in these matters,
the FERC may require the ISO to refund to SDG&E all or part of the
subject charges. SDG&E has also commenced a private arbitration to
reform the Participation Agreements to remove prospectively SDG&E's
obligation to provide services giving rise to unreimbursed ISO tariff
charges.
FERC ACTIONS
The FERC is investigating prices charged to buyers in the California
Power Exchange (PX) and Independent System Operator (ISO) markets by
various electric suppliers. It is seeking to determine the extent to
which individual sellers have yet to be paid for power supplied during
the period of October 2, 2000 through June 20, 2001 and to estimate the
amounts by which individual buyers and sellers paid and were paid in
excess of competitive market prices. Based on these estimates, the FERC
could find that individual net buyers, such as SDG&E, are entitled to
refunds and individual net sellers, such as SET, are required to
provide refunds. To the extent any such refunds are actually realized
by SDG&E, they would reduce SDG&E's rate-ceiling balancing account. To
the extent that SET is required to provide refunds, they could result
in payments by SET after adjusting for any amounts still owed to SET
for power supplied during the relevant period (or receipts if refunds
are less than amounts owed to SET).
In December 2002, a FERC ALJ issued preliminary findings indicating
that California owes power suppliers $1.2 billion (the $3.0 billion
that California still owes energy companies less $1.8 billion energy
companies charged California customers in excess of the FERC cap). On
March 26, 2003, the FERC largely adopted the ALJ's findings, but
expanded the basis for refunds by adopting a staff recommendation from
a separate investigation to change the natural gas proxy component of
the mitigated market clearing price that is used to calculate refunds.
The March 26 order estimates that the replacement formula for
estimating natural gas prices will increase the refund totals to more
than $3.0 billion. The precise number will not be available until the
ISO and PX recalculate the number through their settlement models based
on the final FERC instructions. California is seeking $8.9 billion in
refunds and has appealed the FERC's preliminary findings and requested
rehearing of the March 26 order. SET and other power suppliers have
joined in appeal of the FERC's preliminary findings and requested
rehearing.
SET had established reserves of $29 million for its likely share of the
original $1.8 billion. SET is unable to determine its share of the
additional refund amount. Accordingly, it has not recorded any
additional reserves but the company does not believe that any
additional amounts that SET may be required to pay would be material to
the company's financial position or liquidity.
In addition to the refund proceeding described above, the FERC is also
investigating whether there was manipulation of short-term energy
prices in the West that would constitute violations of applicable
tariffs and warrant disgorgement of associated profits. In this
proceeding, the FERC has authority to look at time periods outside of
the October 2, 2000 through June 20, 2001 period relevant to the refund
proceeding. In May 2002 the FERC ordered all energy companies engaged
in electric energy trading activities to state whether they had engaged
in various specific trading activities described as manipulating or
"gaming" the California energy markets.
On June 25, 2003, the FERC issued several orders requiring various
entities to show cause why they should not be found to have violated
California ISO and PX tariffs. First, the FERC directed 43 entities,
including SET and SDG&E, to show cause why they should not disgorge
profits from certain transactions between January 1, 2000 and June 20,
2001 that are asserted to have constituted gaming and/or anomalous
market behavior under the California ISO tariff. Second, the FERC
directed more than 20 entities, including SET, to show cause why their
activities during the period January 1, 2000 to June 20, 2001 through
partnerships, alliances or other arrangements did not constitute gaming
and/or anomalous market behavior in violation of the tariffs. Remedies
for confirmed violations could include disgorgement of profits and
revocation of market-based rate authority. The FERC has encouraged the
entities to settle the issues and SET has already had such discussions.
SET estimates that the total amount of revenues attributable to the
transactions involved in these inquiries is less than $10 million. The
ISO has calculated SDG&E's gains attributable to these issues at less
than $200,000.
In addition, the FERC determined that it was appropriate to initiate an
investigation into possible economic withholding in the California ISO
and PX markets. For this purpose, the FERC used an initial screen of
$250 per mW for all bids between May 1, 2000 and October 2, 2000. Both
SDG&E and SET received data requests from the FERC staff. The FERC
staff will prepare a report to the Commission, which will be the basis
to decide whether additional proceedings are warranted. SET and SDG&E
believe that their bids and bidding procedures were consistent with ISO
and PX tariffs and protocols and applicable FERC price caps.
On June 25, 2003, the FERC issued orders upholding the company's long-
term energy contract with the DWR, as well as contracts between the DWR
and other power suppliers. The order affirmed a previous FERC
conclusion that those advocating termination or alteration of the
contract would have to satisfy a "heavy" burden of proof, and cited its
long-standing policy to recognize the sanctity of contracts. In the
order, the Commission noted that Commission and court precedent clearly
establish that allegations that contracts have become uneconomic by the
passage of time do not render them contrary to the public interest
under the Federal Power Act. The Commission pointed out that the
contracts were entered into voluntarily in a market-based environment.
The Commission found no evidence of unfairness, bad faith or duress in
the original contract negotiations. It said there was no credible
evidence that the contracts placed the complainants in financial
distress or that ratepayers will bear an excessive burden. A number of
parties have applied to the FERC for a rehearing of the decision and
may ultimately appeal the decision to the federal courts.
NUCLEAR INSURANCE
SDG&E and the other co-owners of SONGS have insurance to respond to any
nuclear liability claims related to SONGS. The insurance policy
provides $300 million in coverage, which is the maximum amount
available. In addition to this primary financial protection, the Price-
Anderson Act provides for up to $9.25 billion of secondary financial
protection if the liability loss exceeds the insurance limit. Should
any of the licensed/commercial reactors in the United States experience
a nuclear liability loss which exceeds the $300 million insurance
limit, all utilities owning nuclear reactors could be assessed under
the Price-Anderson Act to provide the secondary financial protection.
SDG&E and the other co-owners of SONGS could be assessed up to $176
million under the Price-Anderson Act. SDG&E's share would be $36
million unless default occurs by any other SONGS co-owner. In the event
the secondary financial protection limit is insufficient to cover the
liability loss, the Price-Anderson Act provides for Congress to enact
further revenue-raising measures to pay claims. These measures could
include an additional assessment on all licensed reactor operators.
SDG&E and the other co-owners of SONGS have $2.75 billion of nuclear
property, decontamination and debris removal insurance.
The coverage also provides the SONGS owners up to $490 million for
outage expenses incurred because of accidental property damage. This
coverage is limited to $3.5 million per week for the first 52 weeks,
and $2.8 million per week for up to 110 additional weeks. Coverage is
also provided for the cost of replacement power, which includes
indemnity payments for up to three years, after a waiting period of 12
weeks. The insurance is provided through a mutual insurance company
owned by utilities with nuclear facilities. Under the policy's risk
sharing arrangements, insured members are subject to retrospective
premium assessments if losses at any covered facility exceed the
insurance company's surplus and reinsurance funds. Should there be a
retrospective premium call, SDG&E could be assessed up to $7.4 million.
Both the nuclear liability and property insurance programs include
industry aggregate limits for terrorism-related SONGS losses, including
replacement power costs.
ARGENTINE INVESTMENTS
During the second quarter of 2003, SEI recorded a $9 million credit to
"accumulated other comprehensive income" to reflect the increase in the
value of the Argentine peso relative to the U.S. dollar, resulting in
total credits of $33 million for the six months ended June 30, 2003. As
of June 30, 2003, SEI has adjusted its investment in its two
unconsolidated Argentine subsidiaries downward by $190 million as a
result of the devaluation of the Argentine peso since early 2002. On
September 6, 2002, SEI initiated proceedings under the 1994 Bilateral
Investment Treaty between the United States and Argentina for recovery
of the diminution of the value of its investments resulting from
Argentine governmental actions. SEI made a request for arbitration to
the International Centre for Settlement of Investment Disputes (ICSID)
and all arbitrators have been selected. The company's claim is due in
August 2003 and a decision is expected in late 2004.
LITIGATION
Lawsuits filed in 2000 and currently consolidated in San Diego Superior
Court seek class-action certification and damages, alleging that Sempra
Energy, SoCalGas and SDG&E, along with El Paso Energy Corp. (El Paso)
and several of its affiliates, unlawfully sought to control natural gas
and electricity markets. In March 2003, plaintiffs in these cases and
the applicable El Paso entities announced that they had reached a
settlement in principle of the class actions, certain of the individual
actions, claims asserted by the California Attorney General and by
other western states, and certain complaint proceedings filed with FERC
by the CPUC and the California Energy Oversight Board. On June 26,
2003, the settlement was filed for approval with the relevant state
courts and the FERC. The settlement provides more than $1.5 billion in
consideration to be received by customers, with no effect on the income
of the utilities processing the refunds. Of these funds, the settlement
provides the following allocation for each SDG&E and SoCalGas customer
group: SDG&E Electric Customers -- $60 million, SDG&E Core Gas -- $29
million and SoCalGas Core Gas -- $36 million. Non-core natural gas
customers will go through a claims process in the courts, by which they
can establish their harm and receive a fair share of the consideration.
A similar lawsuit has been filed by the Attorney General of Arizona
alleging that El Paso and certain Sempra Energy subsidiaries unlawfully
sought to control the natural gas market in Arizona. In April 2003,
Sierra Pacific and its utility subsidiary Nevada Power jointly filed a
lawsuit in U.S. District Court in Las Vegas against major natural gas
suppliers, including Sempra Energy, the California Utilities and other
company subsidiaries, seeking damages resulting from an alleged
conspiracy to drive up or control natural gas prices, eliminate
competition and increase market volatility, and breach of contract and
wire fraud.
Various lawsuits, which seek class-action certification, allege that
Sempra Energy and certain company subsidiaries (SDG&E, SET and SER,
depending on the lawsuit) unlawfully manipulated the electric-energy
market. In January 2003, the applicable Federal Court granted a motion
to dismiss a similar lawsuit on the grounds that the claims contained
in the complaint were subject to the Filed Rate Doctrine and were
preempted by the Federal Power Act. That ruling has been appealed in
the Ninth Circuit Court of Appeal and a decision is expected by first
quarter of 2004. Similar suits filed in Washington and Oregon were
voluntarily dropped by the plaintiffs without court intervention in
June 2003. In addition, in May 2003, the Port of Seattle filed an
action alleging that a number of energy companies, including Sempra
Energy and SET, unlawfully manipulated the electric energy market and
committed wire fraud. That action is pending a motion to dismiss in
Washington Federal District Court on the grounds that the claims
contained in the complaint were subject to the Filed Rate Doctrine and
were preempted by the Federal Power Act.
In the fourth quarter of 2002, Sempra Energy and SoCalGas were named as
defendants in a lawsuit filed in Los Angeles Superior Court against
various trade publications and other energy companies alleging that
energy prices were unlawfully manipulated by defendants' reporting
artificially inflated natural gas prices to trade publications. On July
8, 2003, the Superior Court granted the defendants' demurrer on the
grounds that the claims contained in the complaint were subject to the
Filed Rate Doctrine and were preempted by the Federal Power Act.
However, the Court has provided plaintiffs with an opportunity to amend
their claims. In May 2003, a similar action was filed in San Diego
Superior Court against Sempra Energy and SET, and has been removed to
Federal District Court.
In May 2003, the San Diego Superior Court granted SER's motion for
summary judgment in its complaint for declaratory judgment regarding
its contract with the DWR (and the DWR's cross-complaint seeking to
void the 10-year energy-supply contract). In the judgment, the court
determined that "(a) Sempra is entitled to provide electrical energy
from any source, including Market Sources, (b) Sempra is not in breach
of the Agreement as framed by the pleadings in this matter, (c) DWR is
obligated to take delivery and pay for deliveries under the Agreement,
and (d) Sempra has no obligation to complete any specific Project."
Once the court enters the judgment, which it has not yet done, the DWR
has 60 days to file a notice of appeal. If the state appeals the
judgment, SER will respond according to the briefing schedule
established by the appellate court. The DWR continues to accept all
scheduled power from SER and, although it has disputed billings in an
immaterial amount and the manner of certain deliveries, it has made all
payments that have been billed under the contract.
SER is a defendant in an action brought by Occidental Energy Ventures
Corporation (Occidental) with respect to the Elk Hills power project
being jointly developed by the two companies. Occidental alleges that
SER breached the joint development agreement by not providing that
Occidental would be a party to the contract with the DWR or receiving
its share of the proceeds from providing the DWR with power from Elk
Hills under the contract. The matter remains scheduled for arbitration
in the third quarter of 2003.
In May 2003 a Federal judge issued an order finding that the U.S.
Department of Energy's (DOE) abbreviated assessment of two Mexicali
power plants, including SER's TDM plant, failed to evaluate the plants'
environmental impact adequately and calls into question the U.S.
permits they received to build their cross-border transmission lines.
On July 8, 2003, the judge ordered the DOE to conduct additional
environmental studies and denied the plaintiffs' request for an
injunction blocking operation of the transmission lines, thus allowing
the continued operation of the TDM plant. The DOE has until May 15,
2004, to demonstrate why the court should not set aside the permits.
In 1999 Sempra Energy and PSEG Global each acquired a 44-percent
interest in Luz Del Sur, an electric distribution company based in
Peru. Local law required that electricity assets built with government
funds be purchased by the local utility and added to rate base. The
government financed 194 projects that were subsequently transferred to
Luz Del Sur. A dispute arose between the government and Luz Del Sur
over the amount of compensation due for the projects received by Luz
Del Sur. According to the government, the total amount owed relating to
these projects was approximately $36 million. Luz Del Sur argued that
the amount was less and the matter was settled with the government for
approximately $10 million. On May 12, 2003, following a change in the
government in Peru, a criminal charge was filed against certain
government officials, and utility officials as accomplices, including
the Chief Executive Officer and Chief Financial Officer of Luz Del Sur,
alleging that the settlements did not provide the government with
adequate compensation. Luz Del Sur is currently investigating this
matter.
Except for the matters referred to above, neither the company nor its
subsidiaries are party to, nor is their property the subject of, any
material pending legal proceedings other than routine litigation
incidental to their businesses.
Management believes that none of these matters will have a material
adverse effect on the company's financial condition or results of
operations.
INCOME TAX ISSUES
Section 29 Income Tax Credits
The Internal Revenue Service (IRS) has recently issued Announcement
2003-46, stating it has reason to question the scientific validity of
testing procedures and results related to Section 29 income tax
credits. The notice also announced that it would suspend the issuance
of new rulings until its review is complete and that rulings could be
revoked if the IRS did not determine that the test procedures
demonstrate a significant chemical change between the feedstock coal
and the synthetic fuel.
As part of its recently commenced normal audit program for the company
for the period 1998-2001, the IRS has notified the company of its
intention to audit the synthetic fuel operations of Sempra Energy
Trading and Sempra Energy Financial. Through June 30, 2003, the company
has recorded Section 29 income tax credits of $194 million, including
$28 million and $52 million during the three months and six months
ended June 30, 2003. For the second half of 2003, the company's 2003
forecast has included additional contributions to net income of $22
million from Section 29 income tax credits, net of operating costs of
the related facilities. The company believes retroactive disallowance
of Section 29 income tax credits is unlikely.
Luz del Sur
Peruvian income-tax authorities have challenged the valuation of Luz
del Sur's assets for tax depreciation purposes. If the Peruvian
government is successful in its challenge, income-tax deductions for
depreciation will be reduced, resulting in additional income taxes,
interest and penalties aggregating as much as $16 million for the
company's share for the period being questioned (1996 through 1999) and
$12 million for subsequent periods. The company believes that it has
substantial defenses to the imposition of any additional taxes.
Spanish Holding Company
The IRS has issued Notice 2003-50, stating that regulations will be
issued that will adversely affect foreign tax credit utilization by
companies with "stapled-stock" affiliates. The company's intermediate
parent company for many of its non-domestic subsidiaries is such a
company. The most adverse resolution of this issue could result in a
charge to net income of $13 million by the company.
The company is unable to predict the net effect of the ultimate
resolution of these income tax issues.
Pending Internal Revenue Service Matters
The company is in discussions with the IRS to resolve issues related to
various prior years' returns. A recently issued Revenue Ruling dealing
with utility balancing accounts, and recent discussions with the IRS
concerning this Ruling and another matter lead the company to believe
it will be entitled to record a reduction in previously recorded income
tax expense, accrue significant interest income on overpayments of tax
in certain prior periods and reverse recorded interest associated with
the reporting of these items in other prior periods. The company
expects that these matters will be favorably resolved before year end
and estimates that the resolution will increase reported 2003 earnings
in excess of $75 million.
QUASI-REORGANIZATION
In 1993, PE divested its merchandising operations and most of its oil
and natural gas exploration and production business. In connection with
the divestitures, PE effected a quasi-reorganization for financial
reporting purposes effective December 31, 1992. Management believes the
remaining balances of the liabilities established in connection with
the quasi-reorganization are adequate.
4. SEGMENT INFORMATION
The company is a holding company, whose subsidiaries are primarily
engaged in the energy business. It has four separately managed
reportable segments comprised of SoCalGas, SDG&E, SET and SER. The
California Utilities operate in essentially separate service
territories under separate regulatory frameworks and rate structures
set by the CPUC. SoCalGas is a natural gas distribution utility,
serving customers throughout most of southern California and part of
central California. SDG&E provides electric service to San Diego and
southern Orange counties, and natural gas service to San Diego county.
SET, based in Stamford, Connecticut, is a wholesale trader of physical
and financial energy products and other commodities, and a trader and
wholesaler of metals, serving a broad range of customers in the United
States, Canada, Europe and Asia. SER develops, owns and operates power
plants and natural gas storage, production and transportation
facilities within the western and southwestern United States and Baja
California, Mexico.
The accounting policies of the segments are described in the notes to
Consolidated Financial Statements in the company's 2002 Annual Report,
and segment performance is evaluated by management based on reported
income. California utility transactions are based on rates set by the
CPUC and FERC. Other than SER's completing the construction of
combined-cycle power plants, there were no significant changes in
segment assets during the six months ended June 30, 2003.
- -----------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
------------------- ------------------
(Dollars in millions) 2003 2002 2003 2002
- -----------------------------------------------------------------------
Operating Revenues:
Southern California Gas $ 820 $ 670 $ 1,828 $ 1,402
San Diego Gas & Electric 520 414 1,082 846
Sempra Energy Trading 305 192 528 398
Sempra Energy Resources 129 116 219 139
All other 82 103 132 188
Intersegment revenues (16) (7) (26) (10)
------------------------------------------
Total $ 1,840 $ 1,488 $ 3,763 $ 2,963
- -----------------------------------------------------------------------
Net Income (Loss):
Southern California Gas* $ 37 $ 51 $ 95 $ 111
San Diego Gas & Electric* 41 51 86 104
Sempra Energy Trading 35 21 17 63
Sempra Energy Resources 5 34 15 31
All other (2) (10) (9) (16)
------------------- ----------------------
Total $ 116 $ 147 $ 204 $ 293
- -----------------------------------------------------------------------
* after preferred dividends
- --------------------------------------------------------
Balance at
------------------------
June 30, December 31,
2003 2002
- --------------------------------------------------------
Assets:
Southern California Gas $ 3,967 $ 4,079
San Diego Gas & Electric 5,464 5,123
Sempra Energy Trading 5,441 5,614
Sempra Energy Resources 1,576 1,347
All other 2,786 2,580
Intersegment receivables (1,011) (986)
------------------------
Total $ 18,223 $ 17,757
- --------------------------------------------------------
5. FINANCIAL INSTRUMENTS
Note 10 of the notes to Consolidated Financial Statements in the Annual
Report discusses the company's financial instruments, including the
adoption of SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended by SFAS 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities." The effect is
to recognize all derivatives as assets or liabilities on the balance
sheet, measure those instruments at fair value, and recognize any
changes in fair value in earnings for the period that the change occurs
unless the derivative qualifies as an effective hedge that offsets
other exposures.
The company utilizes derivative financial instruments to manage its
exposure to unfavorable changes in commodity prices, which are subject
to significant and often volatile fluctuations. Derivative financial
instruments include futures, forwards, swaps, options and long-term
delivery contracts. These contracts allow the company to predict with
greater certainty the effective prices to be received or paid by the
company and, in the case of the California Utilities, their customers.
In accordance with SFAS 133, the California Utilities have elected to
account for contracts that are settled by physical delivery at
historical cost, with gains and losses reflected in the income
statement at the contract settlement date.
SET's and SES's derivative instruments are recorded at fair value
pursuant to SFAS 133 and are included in the Consolidated Balance
Sheets as trading assets or liabilities. Net gains and losses on these
derivative transactions are recorded in "Other operating revenues" in
the Statements of Consolidated Income. In October 2002, the EITF
reached a consensus to rescind Issue 98-10 "Accounting for Contracts
Involved in Energy Trading and Risk Management Activities," which was
the basis for fair value accounting used for recording energy-trading
activities by SET and SES. The consensus requires that all new energy-
related contracts entered into subsequent to October 25, 2002 should
not be accounted for pursuant to Issue 98-10. Instead, those contracts
should be accounted for at historical cost or the lower of cost or
market, unless the contracts meet the requirements for fair value
accounting under SFAS 133.
Energy transportation and storage contracts entered into by the company
on or after October 25, 2002 are recorded at cost. Energy commodity
inventory is being recorded at the lower of cost or market. The
company's base metals and concentrates inventory continue to be
recorded at fair value as provided by Accounting Research Bulletin
Number 43. On January 1, 2003, as a result of the rescission of EITF
98-10, SET and SES recorded a cumulative effect of a change in
accounting principle, which reduced after-tax earnings by $29 million,
related to the non-derivative contracts that were recorded at fair
value under EITF 98-10 but are not covered by SFAS 133. The ongoing
effect of EITF 98-10's rescission further reduced after-tax earnings
for the six months ended June 30, 2003 by $16 million, including $7
million for the three months ended June 30, 2003. Neither of these
effects impacted cash flow or liquidity.
The carrying values of SET's trading assets and trading liabilities
approximate the following:
June 30, December 31,
(Dollars in millions) 2003 2002
- ----------------------------------------------------------------------------
TRADING ASSETS:
Unrealized gains on swaps and forwards $1,401 $1,226
OTC commodity options purchased 528 480
Due from trading counterparties 1,007 1,279
Due from commodity clearing organizations
and clearing brokers 104 49
Resale agreements 44 --
Commodities owned 1,710 1,968
------ ------
Total trading assets $4,794 $5,002
====== ======
TRADING LIABILITIES:
Unrealized losses on swaps and forwards $1,088 $ 816
OTC commodity options written 463 569
Due to trading counterparties 1,345 1,196
Repurchase obligations 1,240 1,511
------ ------
Total trading liabilities $4,136 $4,092
====== ======
Fixed-price contracts and other derivatives on the Consolidated Balance
Sheets primarily reflect the California Utilities' derivative gains and
losses related to long-term delivery contracts for purchased power and
natural gas transportation. The California Utilities have established
regulatory assets and liabilities to the extent that these gains and
losses are recoverable or payable through future rates. Other
significant derivatives recorded on the balance sheet include a fixed-
to-floating interest rate swap agreement and a contingent purchase
price obligation arising from the company's acquisition of the proposed
Hackberry, La. LNG project. Payments under the swap agreement and
changes in interest rate (LIBOR) are reflected as adjustments to long-
term debt. The contingent payments under the proposed LNG project
purchase obligation are included in property, plant and equipment. The
changes in fixed-price contracts and other derivatives on the
Consolidated Balance Sheets for the six months ended June 30, 2003 were
primarily due to the contingent purchase price obligation arising from
the company's acquisition of the proposed Hackberry, La. LNG project,
partially offset by physical deliveries under long-term purchased-power
and natural gas transportation contracts. The transactions associated
with fixed-price contracts and other derivatives had no material impact
to the Statements of Consolidated Income for the six months ended June
30, 2003 or 2002.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
financial statements contained in this Form 10-Q and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" contained in the Annual Report.
RESULTS OF OPERATIONS
California Utility Revenues and Cost of Sales
Natural gas revenues increased to $2.1 billion for the six months ended
June 30, 2003 from $1.6 billion for the corresponding period in 2002,
and the cost of natural gas increased to $1.2 billion in 2003 from $729
million in 2002. Additionally, natural gas revenues increased to $929
million for the three months ended June 30, 2003 from $754 million for
the corresponding period in 2002, and the cost of natural gas increased
to $480 million in 2003 from $305 million in 2002. These changes were
primarily attributable to natural gas price increases, which are passed
on to customers, partially offset by reduced volumes.
Under the current regulatory framework, changes in core-market natural
gas prices for core customers (primarily residential and small
commercial and industrial customers) do not affect net income, since
core-customer rates generally recover the actual cost of natural gas on
a substantially concurrent basis and are fully balanced. However,
SoCalGas' GCIM allows SoCalGas to share in the savings or costs from
buying natural gas for customers below or above monthly benchmarks. The
mechanism permits full recovery of all costs within a tolerance band
above the benchmark price and refunds all savings within a tolerance
band below the benchmark price. The costs or savings outside the
tolerance band are shared between customers and shareholders. In
addition, SDG&E's gas procurement PBR mechanism provides an incentive
mechanism by measuring SDG&E's procurement of natural gas against a
benchmark price comprised of monthly natural gas indices, resulting in
shareholder rewards for costs achieved below the benchmark and
shareholder penalties when costs exceed the benchmark.
Electric revenues increased to $792 million for the six months ended
June 30, 2003 from $604 million for the same period in 2002, and the
cost of electric fuel and purchased power increased to $300 million in
2003 from $140 million in 2002. Additionally, electric revenues
increased to $397 million for the three months ended June 30, 2003 from
$323 million for the same period in 2002, and the cost of electric fuel
and purchased power increased to $137 million in 2003 from $79 million
in 2002. These changes were mainly due to the effect of the DWR's
purchasing the net short position of SDG&E during 2002, changes in
electric commodity costs, the increase in authorized distribution
revenue and higher volumes in 2003. Under the current regulatory
framework, changes in commodity costs do not affect net income. The
commodity costs associated with the DWR's purchases and the
corresponding sale to SDG&E's customers were not included in the
Statements of Consolidated Income as SDG&E was merely transmitting the
electricity from the DWR to the customers, acting as a conduit to pass
through the electricity from the DWR to the customers. During 2003,
costs associated with long-term contracts allocated to SDG&E from the
DWR were likewise not included in the income statement, since the DWR
retains legal and financial responsibility for these contracts.
The tables below summarize the natural gas and electric volumes and
revenues by customer class for the six months ended June 30, 2003 and
2002.
Gas Sales, Transportation and Exchange
(Volumes in billion cubic feet, dollars in millions)
Gas Sales Transportation & Exchange Total
---------------------------------------------------------------
Volumes Revenue Volumes Revenue Volumes Revenue
----------------------------------------------------------------
2003:
Residential 148 $ 1,361 1 $ 4 149 $ 1,365
Commercial and industrial 66 475 140 89 206 564
Electric generation plants -- 1 95 30 95 31
Wholesale -- -- 11 1 11 1
---------------------------------------------------------------
214 $ 1,837 247 $ 124 461 1,961
Balancing accounts and other 130
--------
Total $ 2,091
- -------------------------------------------------------------------------------------------
2002:
Residential 165 $ 1,123 1 $ 4 166 $ 1,127
Commercial and industrial 63 324 145 81 208 405
Electric generation plants -- -- 104 24 104 24
Wholesale -- -- 21 2 21 2
---------------------------------------------------------------
228 $ 1,447 271 $ 111 499 1,558
Balancing accounts and other 76
--------
Total $ 1,634
- -------------------------------------------------------------------------
Electric Distribution and Transmission
(Volumes in millions of kilowatt hours, dollars in millions)
2003 2002
-----------------------------------------
Volumes Revenue Volumes Revenue
-----------------------------------------
Residential 3,161 $ 366 3,072 $ 323
Commercial 2,922 333 2,853 294
Industrial 902 80 897 75
Direct access 1,565 37 1,693 54
Street and highway lighting 45 5 43 4
Off-system sales 33 1 -- --
-----------------------------------------
8,628 822 8,558 750
Balancing accounts and other (30) (146)
-----------------------------------------
Total 8,628 $ 792 8,558 $ 604
-----------------------------------------
Although commodity-related revenues from the DWR's purchasing of
SDG&E's net short position or from the DWR's allocated contracts are
not included in revenue, the associated volumes and distribution
revenue are included herein.
Other Operating Revenues
Other operating revenues, which consist primarily of revenues at
Global, increased to $880 million for the six months ended June 30,
2003 from $725 million for the same period of 2002. These changes were
primarily due to higher revenue at SET due to increased volumes and
increased coal sales related to Section 29 income tax credits, and
increased revenues from SER, which resulted mainly from higher sales of
electricity to the DWR under the contract which recommenced in April
2002, and sales by its Twin Oaks power plant, purchased in the fourth
quarter of 2002.
Other operating revenues increased to $514 million for the three-month
period ended June 30, 2003 from $411 million for the corresponding
period of 2002 due primarily to the increased revenue at SET resulting
from increased volumes and volatility in the energy commodity markets
and the increased coal sales.
Other Cost of Sales
Other cost of sales, which consists primarily of cost of sales at
Global, increased to $515 million for the six months ended June 30,
2003 from $338 million for the six months ended June 30, 2002, and
increased to $296 million for the three months ended June 30, 2003,
from $206 million for the same period in 2002. The increase for the
six-month period was primarily due to the increased sales as noted
above for SER, and the increased activity at SET. The increase for the
quarter was primarily due to the increased activity at SET.
Other Operating Expenses
Other operating expenses increased to $963 million for the six months
ended June 30, 2003 from $890 million for the same period in 2002. Of
the total balance, $682 million and $641 million in 2003 and 2002,
respectively, represent other operating expenses at the California
Utilities. The increase was due primarily to general operating cost
increases at SoCalGas and SER.
Other operating expenses increased to $518 million for the three months
ended June 30, 2003 from $475 million for the corresponding period of
2002. Of the total balance, $364 million and $360 million in 2003 and
2002, respectively, represent other operating expenses at the
California Utilities. The increase was primarily due to increased
operating costs at SET, SER and SoCalGas.
Other Income - Net
Other income, which primarily consists of equity earnings from
unconsolidated subsidiaries and interest on regulatory balancing
accounts, decreased to $4 million for the six months ended June 30,
2003 from $27 million for the six months ended June 30, 2002. The
decrease was primarily due to SEI's foreign exchange losses, compared
to its foreign exchange gains in the prior-year period and increased
equity losses at SER and other subsidiaries, offset partially by
increased equity earnings from SEI's Argentine subsidiaries.
Income Taxes
Income tax expense decreased to $51 million for the six months ended
June 30, 2003 from $74 million for the same period of 2002. The
effective income tax rates were 18.0 percent and 20.3 percent for the
six-month periods ended June 30, 2003 and 2002, respectively. The
change was primarily due to reduced pretax income and increased income
tax credits from synthetic fuel investments in 2003 (see discussion of
Section 29 credits in Note 3), offset partially by a $25 million
favorable resolution of income-tax issues at SDG&E in the second
quarter of 2002.
In connection with its affordable-housing investments, the company has
unused tax credits dating back to 1999, which the company fully expects
to utilize in future years. At June 30, 2003, the amount of these
unused tax credits was $172 million. In addition, at June 30, 2003, the
company has $46 million of alternative minimum tax credits with no
expiration date.
Income tax expense increased to $27 million for the second quarter of
2003 compared to $15 million for the second quarter of 2002, and the
effective income tax rate increased to 18.9 percent from 9.4 percent.
This change was due to the $25 million favorable resolution of SDG&E's
income-tax issues in 2002 discussed above.
Net Income
For the six months ended June 30, net income decreased to $204 million,
or $0.98 per diluted share of common stock, in 2003 from $293 million,
or $1.42 per diluted share in 2002. Excluding the effects of the
cumulative effect of the change in accounting principle in 2003 ($0.14
per diluted share, discussed in Note 2 of the notes to Consolidated
Financial Statements) and the extraordinary item in 2002 ($0.01 per
diluted share, discussed in the Annual Report), the change in net
income in 2003 was primarily due to the $25 million after-tax benefit
in 2002 discussed above, as well as lower income from SET and SoCalGas.
Net income for the second quarter was $116 million, or $0.55 per
diluted share for 2003, compared to $147 million or $0.71 per diluted
share in 2002. The change was primarily due to lower income from SER
and SoCalGas and the 2002 tax benefit discussed above, offset partially
by increased income from SET.
Net Income by Business Unit
Three months ended Six months ended
June 30, June 30,
(Dollars in millions) 2003 2002 2003 2002
- -------------------------------------------------------------------------------
California Utilities
Southern California Gas Company* $ 37 $ 51 $ 95 $ 111
San Diego Gas & Electric* 41 51 86 104
------ ------ ------ ------
Total Utilities 78 102 181 215
Global Enterprises
Sempra Energy Trading 35 21 17 63
Sempra Energy Resources 5 34 15 31
Sempra Energy International 18 9 25 17
Sempra Energy Solutions 8 5 7 6
------ ------ ------ ------
Total Global Enterprises 66 69 64 117
Sempra Energy Financial 8 7 19 14
Parent and other (36) (31) (60) (53)
------ ------ ------ ------
Consolidated $ 116 $ 147 $ 204 $ 293
====== ====== ====== ======
* after preferred dividends
- -------------------------------------------------------------------------------
SOUTHERN CALIFORNIA GAS COMPANY
SoCalGas recorded net income of $95 million and $111 million for the
six-month periods ended June 30, 2003 and 2002, respectively, and net
income of $37 million and $51 million for the three-month periods ended
June 30, 2003 and 2002, respectively. The change was primarily due to
the end of sharing of the merger savings (discussed in the Annual
Report) and increased operating expenses associated with legal costs
principally related to antitrust litigation, partially offset by
increased margins and other factors.
SAN DIEGO GAS & ELECTRIC
SDG&E recorded net income of $86 million and $104 million for the six-
month periods ended June 30, 2003 and 2002, respectively, and net
income of $41 million and $51 million for the three-month periods ended
June 30, 2003 and 2002, respectively. The decreases were primarily due
to income-tax effects, primarily the $25 million after-tax benefit from
the favorable resolution of prior years' income-tax issues recorded in
the second quarter of 2002, and the end of sharing of the merger
savings, partially offset by increased margins and increased output at
SONGs.
SEMPRA ENERGY TRADING
SET recorded net income of $17 million and $63 million for the six-
month periods ended June 30, 2003 and 2002, respectively, and net
income of $35 million and $21 million for the three-month periods ended
June 30, 2003 and 2002, respectively. For purposes of comparison with
the corresponding 2002 period, net income for the six months ended June
30, 2003 would have been $61 million if not for the repeal of EITF 98-
10 as described in Note 2 of the notes to Consolidated Financial
Statements. The repeal of EITF 98-10 adversely impacted SET's results
by a cumulative effect adjustment of $28 million and an additional $16
million related to operations for the six months ended June 30, 2003,
including $7 million for the three months ended June 30, 2003.
A summary of SET's net unrealized revenues for trading activities for
the six-month periods ended June 30, 2003 and 2002 follows:
(Dollars in millions) 2003 2002
- -----------------------------------------------------------------
Balance at beginning of period $ 180 $ 405
Cumulative effect adjustment (48) --
Additions 599 186
Realized (277) (184)
------------------------------------
Balance at June 30 $ 454 $ 407
====================================
The estimated fair values for SET's trading activities as of June 30,
2003, and the periods during which net unrealized revenues are expected
to be realized, are (dollars in millions):
Fair Market
Value at
June 30, /--Scheduled Maturity (in months)--/
Source of fair value 2003 0-12 13-24 25-36 >36
- -------------------------------------------------------------------------
Prices actively quoted $ 354 $ 407 $ (72) $ 12 $ 7
Prices provided by other
external sources (2) (5) (2) -- 5
Prices based on models
and other valuation
methods 26 7 5 1 13
------------------------------------------------
Over-the-counter (OTC)
revenue (1) 378 409 (69) 13 25
Exchange contracts (2) 76 19 38 13 6
------------------------------------------------
Total $ 454 $ 428 $ (31) $ 26 $ 31
================================================
(1) The present value of net unrealized revenue to be received or (paid) from
outstanding OTC contracts.
(2) Cash (paid) or received associated with open Exchange contracts.
- -------------------------------------------------------------------------
The following table summarizes the counterparty credit quality for SET.
These amounts are net of collateral in the form of customer margin
and/or letters of credit.
June 30, December 31,
(Dollars in millions) 2003 2002
- -----------------------------------------------------------------
Counterparty credit quality*
Commodity Exchanges $ 104 $ 49
AAA 46 69
AA 340 194
A 384 316
BBB 417 559
Below investment grade 393 504
---------------------------
Total $ 1,684 $ 1,691
===========================
* Except for commodity exchanges, counterparty credit quality is
determined by rating agencies or internal models intended to
approximate rating-agency determinations.
- -----------------------------------------------------------------
SET's Value at Risk (VaR) amounts are described in Item 3.
See also the discussion concerning the CPUC's prohibition of IOUs'
procuring electricity from their affiliates in "Electric Industry
Restructuring" in Note 13 of the Annual Report.
SEMPRA ENERGY RESOURCES
SER recorded net income of $15 million and $31 million for the six-
month periods ended June 30, 2003 and 2002, respectively, and net
income of $5 million and $34 million for the three-month periods ended
June 30, 2003 and 2002, respectively. The changes were primarily due to
the pricing structure of SER's contract with the DWR, increased
interest expense due to borrowings for the new power plants, and start-
up expenses related to the new power plants.
SEMPRA ENERGY INTERNATIONAL
SEI recorded net income of $25 million and $17 million for the six-
month periods ended June 30, 2003 and 2002, respectively, and net
income of $18 million and $9 million for the three-month periods ended
June 30, 2003 and 2002, respectively. The changes were primarily due to
increased equity earnings from its Argentine subsidiaries partially
offset by the effect of foreign currency losses in 2003.
SEMPRA ENERGY SOLUTIONS
SES recorded net income of $7 million and $6 million for the six-month
periods ended June 30, 2003 and 2002, respectively, and net income of
$8 million and $5 million for the three-month periods ended June 30,
2003 and 2002, respectively.
SEMPRA ENERGY FINANCIAL
SEF invests as a limited partner in affordable-housing properties.
SEF's portfolio includes 1,300 properties throughout the United States,
including Puerto Rico and the Virgin Islands. These investments are
expected to provide income tax benefits (primarily from income tax
credits) over 10-year periods. SEF also has an investment in a limited
partnership which produces synthetic fuel from coal. See discussion of
Section 29 income tax credits in Note 3 of the Notes to Consolidated
Financial Statements under "Income Tax Issues." Whether SEF will invest
in additional properties will depend on Sempra Energy's income tax
position.
SEF recorded net income of $19 million and $14 million for the six-
month periods ended June 30, 2003 and 2002, respectively, and net
income of $8 million and $7 million for the three-month periods ended
June 30, 2003 and 2002, respectively.
CAPITAL RESOURCES AND LIQUIDITY
The company's California Utility operations are the major source of
liquidity. Funding of other business units' capital expenditures is
largely dependent on the California Utilities' paying sufficient
dividends to Sempra Energy, which, in turn, depends on the sufficiency
of those earnings in excess of utility needs.
For additional discussion, see "Factors Influencing Future Performance-
- -Electric Industry Restructuring and Electric Rates" herein and Note 3
of the notes to Consolidated Financial Statements.
At June 30, 2003, the company had $325 million in cash and $2.3 billion
in unused, committed lines of credit available, of which $388 million
was supporting commercial paper and variable-rate debt. On July 10,
2003, the CPUC issued a decision authorizing SoCalGas to issue up to
$715 million of long-term debt, of which not less than $500 million
will be used for the retirement of currently outstanding debt or
preferred stock. The decision also grants SoCalGas an exemption from
the Competitive Bidding Rule and permits SoCalGas to enter into
interest-rate swaps, caps, collars and currency-exchange contracts.
Management believes these amounts, cash flows from operations and new
security issuances will be adequate to finance capital expenditure
requirements, shareholder dividends, any new business acquisitions or
start-ups, and other commitments. If cash flows from operations were
significantly reduced and/or the company was unable to issue new
securities under acceptable terms, neither of which is considered
likely, the company would be required to reduce non-utility capital
expenditures and investments in new businesses. Management continues to
regularly monitor the company's ability to adequately meet the needs of
its operating, financing and investing activities.
At the California Utilities, cash flows from operations and from new
and refunding debt issuances are expected to continue to be adequate to
meet utility capital expenditure requirements and provide significant
dividends to Sempra Energy.
SET provides or requires cash as the level of its net trading assets
fluctuates with prices, volumes, margin requirements (which are
substantially affected by credit ratings and price fluctuations) and
the length of its various trading positions. Its status as a source or
use of cash also varies with its level of borrowing from its own
sources. SET's intercompany borrowings were $316 million at June 30,
2003, down from $418 million at December 31, 2002. Company management
continuously monitors the level of SET's cash requirements in light of
the company's overall liquidity.
SER's projects are expected to be financed through a combination of the
existing synthetic lease, project financing, SER's borrowings and funds
from the company. Its capital expenditures over the next several years
may require some additional funding.
SEI is expected to require funding for its planned development of
liquefied natural gas (LNG) facilities and to continue the expansion of
its existing natural gas distribution operations in Mexico. While
internal funds are expected to be adequate for these purposes, the
company may decide to use project financing if that is more
advantageous.
SES is expected to require moderate amounts of cash in the near future
as its commodity and energy services businesses continue to grow.
SEF is expected to continue to be a net provider of cash through
reductions of consolidated income tax payments resulting from its
investments in affordable housing and synthetic fuel.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities totaled $756 million and $754
million for the six months ended June 30, 2003 and 2002, respectively.
Offsetting factors included the higher realization in net trading
assets in 2003 and greater compensation costs paid in 2002 versus the
increases in overcollected regulatory balancing accounts in 2002
(resulting from higher natural gas usage in 2002 and the reduced rate
of recovery of the AB265 undercollection in 2003) and higher income tax
payments in 2003.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used in investing activities totaled $639 million and $759
million for the six months ended June 30, 2003 and 2002, respectively.
The change in cash flows from investing activities was attributable to
a higher level of acquisition activity in 2002, lower capital
expenditures for the Termoelectrica de Mexicali (TDM) power plant in
2003, and loans to an unconsolidated subsidiary (Atlantic Electric &
Gas Limited) in 2003.
Capital expenditures for property, plant and equipment by the
California Utilities are estimated to be $750 million for the full year
2003 and are being financed primarily by internally generated funds and
security issuances. Construction, investment and financing programs are
continuously reviewed and revised in response to changes in
competition, customer growth, inflation, customer rates, the cost of
capital, and environmental and regulatory requirements. Capital
expenditures for property, plant and equipment by the company's other
businesses are estimated to be $550 million for the full year 2003, of
which $230 million is for SER's power plant construction and other
capital projects.
In April 2003, Sempra Energy LNG Corp., a newly created subsidiary
within the SEI business unit, completed its previously announced
acquisition of the proposed Hackberry, La. LNG project from a
subsidiary of Dynegy, Inc. Sempra Energy LNG Corp., paid Dynegy $20
million on April 23, 2003, for the first phase of the transaction,
which includes rights to the location, licensing and preliminary FERC
approval. Additional payments are contingent on meeting certain
benchmarks and milestones and the performance of the project, now known
as Cameron. The total cost of the project is expected to be
approximately $700 million. The project could begin commercial
operations in early 2007. Final FERC approval is expected by the end of
2003.
In connection with SEI's plans to develop Energia Costa Azul, an LNG
receiving terminal in Baja California, about 50 miles south of San
Diego, Mexico's national environmental agency issued the principal
onshore environmental permit to SEI in April 2003. The secondary
offshore environmental permit is pending and is expected by October
2003. Two other significant permits, an operating permit from Mexico's
Energy Regulatory Commission and a local land-use permit from the City
of Ensenada, are pending and expected to be received in the near
future. Energia Costa Azul will bring natural gas into northwestern
Mexico and southern California. The project is currently estimated to
cost $600 million and to commence commercial operations in early 2007.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash used in financing activities totaled $247 million and $78
million for the six months ended June 30, 2003 and 2002, respectively.
The change in cash flows from financing activities was attributable to
reduced long-term borrowings in 2003 partly offset by reduced
repayments of short-term debt in 2003.
In January 2003, the company issued $400 million of 10-year 6% notes
due February 2013. The bonds are not subject to a sinking fund and are
not redeemable prior to maturity except through a make-whole mechanism.
Proceeds were used to pay down commercial paper. These bonds were
assigned ratings of A- by the S&P rating agency, Baa1 by Moody's and A
by Fitch, Inc.
On January 15, 2003, $70 million of SoCalGas' $75 million 5.67% medium-
term notes were put back to the company. In March 2003, SER repaid $100
million outstanding under a line of credit. On April 7, 2003, SoCalGas
called its $100 million 7.375% first-mortgage bonds at a premium of
3.53 percent. In addition, during the six months ended June 30, 2003,
Sempra Energy Financial repaid $35 million of debt incurred to acquire
limited partnerships and SDG&E repaid $32 million of rate-reduction
bonds.
Dividends paid on common stock amounted to $104 million and $102
million for the six months ended June 30, 2003 and 2002, respectively.
In April 2003, PE amended its revolving line of credit and extended the
expiration date by an additional two years. The revolving credit
commitment, initially $500 million, declines semi-annually by $125
million until expiration on April 5, 2005 and is for the purpose of
funding loans by PE to Global. Borrowings under the agreement would
bear interest at rates varying with market rates, PE's credit ratings
and the amount of the borrowings outstanding. They would be guaranteed
by Sempra Energy and would be subject to mandatory repayment if
SoCalGas' unsecured long-term credit ratings were to cease to be at
least BBB by S&P and Baa2 by Moody's, if Sempra Energy's or SoCalGas'
debt-to-total capitalization ratio (as defined in the agreement) were
to exceed 65 percent, or if there were to be a change in law materially
and adversely affecting the ability of SoCalGas to pay dividends or
make distributions to PE. No borrowings have been made under this
agreement.
In May 2003, the California Utilities replaced their expiring $500
million, 364-day credit agreement with a substantially identical
agreement expiring on May 14, 2004. Under the agreement, each utility
may individually borrow up to $300 million, subject to a combined
borrowing limit for both utilities of $500 million. At the maturity
date, each utility may convert its then outstanding borrowings to a
one-year term loan, subject to having obtained any requisite regulatory
approvals. Borrowings under the agreement would be available for
general corporate purposes including back-up support for commercial
paper and variable-rate long-term debt, and would bear interest at
rates varying with market rates and the borrowing utility's credit
rating. The agreement requires each utility to maintain a debt-to-
total capitalization ratio (as defined in the agreement) of not to
exceed 60 percent. The rights, obligations and covenants of each
utility under the agreement are individual rather than joint with those
of the other utility, and a default by one utility would not constitute
default by the other.
FACTORS INFLUENCING FUTURE PERFORMANCE
Base results of the company in the near future will depend primarily on
the results of the California Utilities, while earnings growth and
variability will result primarily from activities at SET, SER, SEI and
other businesses. Recent developments concerning the factors
influencing future performance are summarized below. Note 3 of the
notes to Consolidated Financial Statements and the Annual Report
describe events in the deregulation of California's electric and
natural gas industries and various FERC, SET and income tax issues.
Income-Tax Issues
Resolution of the income-tax issues described in Note 3 of the notes to
Consolidated Financial Statements herein could have a material impact
on results of operations for 2003, or one or more future periods.
California Utilities
Electric Industry Restructuring and Electric Rates
Supply/demand imbalances and a number of other factors resulted in
abnormally high electric-commodity costs beginning in mid-2000 and
continuing into 2001. This caused SDG&E's customer bills to be
substantially higher than normal. In response, legislation enacted in
September 2000 imposed a ceiling on the cost of electricity that SDG&E
could pass on to its small-usage customers on a current basis. SDG&E
accumulated the amount that it paid for electricity in excess of the
ceiling rate in an interest-bearing balancing account, which it
continues to collect from its customers. During the six months ended
June 30, 2003, the balance in the balancing account declined from $215
million to $174 million.
Subsequent to the electric capacity shortages of 2000-2001, SDG&E's
service territory has had and continues to have an adequate supply of
electricity. However, various projections of electricity demand in
SDG&E's service territory indicate that, without additional electrical
generation or reductions in electrical usage, beginning in 2005
electricity demand could begin to outstrip available resources. SDG&E's
strategy for meeting this demand is to: (1) reduce power demand through
conservation and efficiency; (2) increase the supply of electricity
from renewable sources, including wind and solar; (3) establish new
transmission lines by 2008 to import more power; and (4) provide new
electric generation by 2005 to meet the expected shortfall. SDG&E has
issued a request for proposals to meet the electric capacity shortfall,
estimated at 69 megawatts in 2005. SDG&E is ahead of the interim
schedule required by California legislation in meeting the requirement
of obtaining 20 percent of its electricity from renewable sources by
2017.
Operating costs of SONGS Units 2 and 3, including nuclear fuel and
related financing costs, and incremental capital expenditures are
recovered through the Incremental Cost Incentive Pricing (ICIP)
mechanism which allows SDG&E to receive approximately 4.4 cents per
kilowatt-hour for SONGS generation. Any differences between these costs
and the incentive price affect net income. This mechanism expires on
December 31, 2003. For the year ended December 31, 2002, ICIP
contributed $50 million to SDG&E's net income. The CPUC has denied the
previously approved market-based pricing for SONGS beginning in 2004
and instead provided for traditional rate-making treatment, under which
the SONGS ratebase would begin at zero, essentially eliminating
earnings from SONGS until ratebase grows. The company has applied for
rehearing of this decision, which the CPUC has not yet ruled on. The
company is in the process of litigating the SONGS revenue requirement,
primarily in conjunction with the General Rate Case of Southern
California Edison (the operator and 75-percent owner of SONGS), for
rates that begin in January 2004. (SDG&E seeks to recover approximately
95 percent of its 2004 SONGS operating & maintenance and capital
revenue requirements in that case.) The remaining five percent of the
company's SONGS revenue requirement will be litigated in SDG&E's Cost
Of Service proceeding.
See additional discussion of this and related topics, including the
CPUC's adjustment to its plan for deregulation of electricity, in Note
3 of the notes to Consolidated Financial Statements.
Natural Gas Restructuring and Rates
As discussed in the Annual Report, in December 2001 the CPUC issued a
decision related to natural gas industry restructuring, with
implementation anticipated during 2002. During 2002 the California
Utilities filed a proposed implementation schedule and revised tariffs
and rules required for implementation. However, on February 27, 2003,
the CPUC issued a resolution rejecting without prejudice those proposed
tariffs and rules. The resolution ordered SoCalGas to file a new
application, which would address detailed proposals for implementation
of the December 2001 decision, but also would allow reconsideration of
the December 2001 decision. SoCalGas filed such an application on June
30, 2003, and proposed some modifications to the provisions of the
December 2001 decision to respond to concerns that it could lead to
higher natural gas costs for consumers. Modifications proposed by
SoCalGas would also remove SoCalGas' exposure to risk or reward for the
sale of receipt-point capacity. The filing proposes implementation of
these provisions on April 1, 2004 and continuing through August 31,
2006. If the December 2001 decision is implemented, it is not expected
to adversely affect the California Utilities' results of operations,
cash flows or financial position. A CPUC decision is expected during
2004.
CPUC Investigation of Compliance with Affiliate Rules
On February 27, 2003, the CPUC opened an investigation of the business
activities of SDG&E, SoCalGas and Sempra Energy to ensure that they
have complied with relevant statutes and CPUC decisions in the
management, oversight and operations of their companies. The Assigned
Commissioner and ALJ issued a ruling which suspends the procedural
schedule until the CPUC completes an independent audit to evaluate
energy-related business activities undertaken by Sempra Energy within
the service territories of SDG&E and SoCalGas, relative to holding
company systems and affiliate activities. The audit is to consider
whether these activities pose any problems for ratepayers and whether
they are consistent with the CPUC's decision, rules or orders and/or
affiliate statutes. The objective of the audit is to analyze the
adequacy of the Affiliate Rules. In accordance with existing CPUC
requirements, the California Utilities' transactions with other Sempra
Energy affiliates have been audited by an independent auditing firm
each year, with results reported to the CPUC, and there have been no
material adverse findings in those audits.
Cost of Service Filing
On May 22, 2003, the assigned CPUC Commissioner modified his previously
adopted procedural schedule on the California Utilities' Cost of
Service applications to expedite a decision by approximately one month,
permitting a decision by as early as March 2004. The assigned
Commissioner also provided for additional comments to be filed on the
California Utilities' request for interim relief for the period from
January 1, 2004 to the date of the Cost of Service decision and stated
that a decision on the request would be prepared for consideration of
the full Commission. On June 3, 2003, various parties filed reply
comments supporting or opposing the motion for January 1, 2004 interim
relief. The CPUC's Office of Ratepayer Advocates' (ORA) report on the
California Utilities' filing is due on August 8, 2003.
An October 10, 2001 decision denied the California Utilities' request
to continue equal sharing between ratepayers and shareholders of the
estimated savings for the 1998 Enova-PE business combination that
created Sempra Energy and, instead, ordered that all of the estimated
2003 merger savings go to ratepayers. This decision will adversely
affect 2003 net income by $24 million at SoCalGas and $11 million at
SDG&E.
Sempra Energy Global Enterprises
Electric-Generation Assets
As discussed in "Cash Flows From Investing Activities" above and in the
Annual Report, the company is involved in the development of several
electric-generation projects that will significantly impact the
company's future performance. SER has approximately 2,700 megawatts of
new generation in operation or under construction. The 550-megawatt Elk
Hills power project, 50 percent owned by SER and located near
Bakersfield, California, began commercial operations in July 2003. The
1,250-megawatt Mesquite Power Plant near Phoenix, Arizona, commenced
commercial operations at 50-percent capacity in June 2003 and is
expected to reach full capacity in November 2003. Termoelectrica de
Mexicali, a 600-megawatt power plant near Mexicali, Baja California,
Mexico, commenced operations in June 2003, contingent upon resolution
of the sufficiency issue of environmental impact studies and permits
(see additional discussion under "Cash Flows from Investing
Activities"). The 305-megawatt Twin Oaks Power Plant located near
Bremond, Texas, was acquired in October 2002. El Dorado Energy, a 480-
megawatt power plant near Las Vegas, Nevada, 50 percent owned by SER,
began commercial operation in May 2000. Electricity from the plants
will be available for markets in California, Arizona, Texas and Mexico.
SER's projected portfolio of plants in the western United States and
Baja California may be used to supply power to California under SER's
agreement with the DWR.
Investments
As discussed in "Cash Flows From Investing Activities" above and in the
Annual Report, the company's investments will significantly impact the
company's future performance. During 2002, SET completed acquisitions
that added base metals trading and warehousing to its trading business.
These acquisitions include Sempra Metals Limited and Henry Bath & Son
Limited. In addition, SET acquired assets of Sempra Metals &
Concentrates Corp. and the U.S. warehousing business of Henry Bath,
Inc. and SER acquired the Twin Oaks Power Plant.
SEI is in the process of developing Energia Costa Azul, an LNG
receiving terminal in Baja California, Mexico, expected to commence
commercial operations in early 2007.
In April 2003, Sempra Energy LNG Corp. acquired the proposed Hackberry,
La. LNG project, to be renamed Cameron LNG, which could begin
commercial operations in early 2007.
On September 6, 2002, SEI initiated proceedings under the 1994
Bilateral Investment Treaty between the United States and Argentina for
recovery of the diminution of the value of its investments resulting
from governmental actions. SEI has made a request for arbitration to
the International Center for Settlement of Investment Disputes (ICSID)
and all arbitrators have been selected. The company has filed a claim
for $258 million with ICSID and has presented additional information
that may provide a basis for a larger award. A decision is expected in
late 2004.
NEW ACCOUNTING STANDARDS
Relevant pronouncements that have recently become effective or that are
yet to be effective are SFAS 142, 143, 148, 149 and 150,
Interpretations 45 and 46, EITF 02-3, and the rescission of EITF 98-10.
See discussion in Note 2 of the notes to Consolidated Financial
Statements. Pronouncements that have or potentially could have a
material effect on future earnings are described below.
In October 2002, the EITF reached a consensus to rescind Issue 98-10
"Accounting for Contracts Involved in Energy Trading and Risk
Management Activities," the basis for mark-to-market accounting used
for recording certain trading activities by SET and SES. The consensus
provided that new contracts entered into subsequent to October 25, 2002
should not be accounted for under mark-to-market accounting unless the
contracts meet the requirements stated under SFAS 133 "Accounting for
Derivative Instruments and Hedging Activities," which is the case for a
substantial majority of the company's contracts. On January 1, 2003,
the company recorded the initial effect of rescinding Issue 98-10 as a
cumulative effect of a change in accounting principle, which reduced
after-tax earnings by $29 million. This is further described in Note 2
of the notes to Consolidated Financial Statements. One impact of the
rescission is that an enterprise that hedges its commodity risk on
items previously marked-to-market under Issue 98-10 but not covered by
SFAS 133 could have to record a loss on the hedges without being able
to record the corresponding gain on the hedged items, even though no
economic loss exists.
For SET, its earnings for the six months ended June 30, 2003 of $17
million were negatively impacted by $28 million of the cumulative-
effect adjustment and an additional $16 million related to operations
during the six-month period to reflect the ongoing effects of the
rescission of Issue 98-10. SES's six months ended June 30, 2003 results
were negatively impacted by the cumulative effect adjustment of $1
million to reflect the rescission of Issue 98-10.
SFAS 143, "Accounting for Asset Retirement Obligations" : SFAS 143,
issued in July 2001, addresses financial accounting and reporting for
legal obligations associated with the retirement of tangible 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. The company adopted SFAS 143 on January 1, 2003. See further
discussion in Note 2 of the notes to Consolidated Financial Statements.
FASB Interpretation No. 46 (FIN 46), "Consolidation of Variable
Interest Entities": In January 2003, the FASB issued FIN 46 to
strengthen existing accounting guidance that addresses when a company
should consolidate a variable interest entity (VIE) in its financial
statements. The consolidation requirements of the interpretation apply
immediately to VIEs created after January 31, 2003. For Sempra Energy,
the consolidation requirements apply to pre-existing VIEs beginning
July 1, 2003.
Sempra Energy has identified two VIEs, of which one is related to the
Mesquite Power Plant and one is related to an investment in an
unconsolidated subsidiary, Atlantic Electric & Gas Limited.
Accordingly, effective July 1, 2003, Sempra Energy will consolidate
these entities, which are expected to significantly increase total
assets and total liabilities by an estimated $650 million. However, the
company does not expect a significant impact to income before the
cumulative effect of a change in accounting principle and estimates
that the cumulative effect of the change will be a charge of $30
million. See Note 2 of the notes to Consolidated Financial Statements
for further discussion.
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.
The VaR for SET at June 30, 2003, and the average VaR for the six-month
period ended June 30, 2003, at the 95-percent and 99-percent confidence
intervals (one-day holding period) were as follows (in millions of
dollars):
95% 99%
------ ------
At June 30, 2003 $ 5.28 $ 7.45
Average for the six months ended 6/30/03 $ 7.79 $10.98
As of June 30, 2003, the total VaR of the California Utilities' and
SES's natural gas positions was not material.
ITEM 4. CONTROLS AND PROCEDURES
The company has designed and maintains disclosure controls and
procedures to ensure that information required to be disclosed in the
company's reports under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange
Commission and is accumulated and communicated to the company's
management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating these controls and procedures,
management recognizes that any system of controls and procedures, no
matter how well designed and operated, can provide only reasonable
assurance of achieving the desired objectives and necessarily applies
judgment in evaluating the cost-benefit relationship of other possible
controls and procedures. In addition, the company has investments in
unconsolidated entities that it does not control or manage and,
consequently, its disclosure controls and procedures with respect to
these entities are necessarily substantially more limited than those it
maintains with respect to its consolidated subsidiaries.
Under the supervision and with the participation of management,
including the Chief Executive Officer and the Chief Financial Officer,
the company within 90 days prior to the date of this report has
evaluated the effectiveness of the design and operation of the
company's disclosure controls and procedures. Based on that evaluation,
the company's Chief Executive Officer and Chief Financial Officer have
concluded that the controls and procedures are effective.
There have been no significant changes in the company's internal
controls or in other factors that could significantly affect the
internal controls subsequent to the date the company completed its
evaluation.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except as described in Note 3 of the notes to Consolidated Financial
Statements, 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 13-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
13, 2003, the shareholders of Sempra Energy elected four directors for
a three-year term expiring in 2006. The name of each nominee and the
number of shares voted for and withheld from the election of each
director were as follows:
Nominees Votes For Votes Withheld
- -------------------------------------------------------------
James G. Brocksmith, Jr. 156,575,103 18,417,791
Herbert L. Carter 151,116,141 23,876,753
William D. Jones 151,571,173 23,421,721
William G. Ouchi 147,565,155 27,427,739
Each of the following proposals received a majority of the votes cast
on the proposal and, accordingly, was approved by shareholders. The
results of the voting on the proposals were as follows:
A Compensation Committee proposal
recommending approval of the 2003 Percentage Percentage
Executive Incentive Plan. of Shares of Shares
Votes Outstanding Voted
----------- ------------ ------------
In Favor 144,196,405 69% 85%
Opposed 25,403,742 12% 15%
A shareholder proposal recommending
simple majority voting.
In Favor 82,924,874 40% 59%
Opposed 56,465,786 27% 41%
A shareholder proposal recommending
annual election of all directors.
In Favor 78,201,213 37% 56%
Opposed 61,349,322 29% 44%
The following proposal did not receive a majority of the votes cast on
the proposal and, accordingly, was not approved by shareholders. The
results of the voting on the proposal were as follows:
A shareholder proposal recommending
an independent Chairman of the Board.
Percentage Percentage
of Shares of Shares
Votes Outstanding Voted
----------- ------------ ------------
In Favor 57,376,389 27% 41%
Opposed 81,986,910 39% 59%
Additional information concerning the election of the board of
directors and other matters voted upon at the Annual Meeting is
contained in Sempra Energy's Notice of 2003 Annual Meeting of
Shareholders and Proxy Statement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10 - Material Contracts
10.1 2003 Executive Incentive Plan
10.2 Amended 1998 Long-Term Incentive Plan
Exhibit 12 - Computation of ratios
12.1 Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends.
Exhibit 31 - Section 302 Certification
31.1 Statement of Registrant's Chief Executive Officer pursuant
to Rules 13a-14 and 15d-14 of the Securities Exchange Act of
1934.
31.2 Statement of Registrant's Chief Financial Officer pursuant
to Rules 13a-14 and 15d-14 of the Securities Exchange Act of
1934.
Exhibit 32 - Section 906 Certification
32.1 Statement of Registrant's Chief Executive Officer pursuant
to 18 U.S.C. Sec. 1350.
32.2 Statement of Registrant's Chief Financial Officer pursuant
to 18 U.S.C. Sec. 1350.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed after March 31, 2003:
Current Report on Form 8-K filed May 1, 2003, filing as an exhibit
Sempra Energy's press release of May 1, 2003, giving the financial
results for the three months ended March 31, 2003.
Current Report on Form 8-K filed August 7, 2003, filing as an exhibit
Sempra Energy's press release of August 7, 2003, giving the financial
results for the three months ended June 30, 2003.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
SEMPRA ENERGY
-------------------
(Registrant)
Date: August 7, 2003 By: /s/ F. H. Ault
----------------------------
F. H. Ault
Sr. Vice President and Controller
Exhibit 10.1
SEMPRA ENERGY.
2003 EXECUTIVE INCENTIVE PLAN
I. PURPOSE
The purpose of the 2003 Sempra Energy Executive Incentive Plan
(the "Plan") is to attract and retain highly qualified individuals; to
obtain from each the best possible performance; to establish a
performance goal based on objective criteria; and to include in such
individual's compensation package an incentive component that is tied
directly to the achievement of those objectives. Such component is
intended to qualify as performance-based compensation under Section
162(m) of the Internal Revenue Code of 1986, as amended (the "Code"),
so as to be fully deductible by Sempra Energy and its subsidiary
companies (collectively, the "Company").
II. EFFECTIVE DATE; TERM
The Plan is effective as of January 1, 2003, subject to approval
by the affirmative vote of a majority of shares of Sempra Energy common
stock voting at Sempra Energy's 2003 annual meeting of stockholders,
and shall remain in effect until such time as it shall be terminated by
the Compensation Committee (the "Compensation Committee") of the Board
of Directors (the "Board of Directors") of Sempra Energy or any
successor thereto.
III. ELIGIBILITY AND PARTICIPATION
Eligibility to participate in the Plan is limited to officers or
employees of the Company who are or may be "covered employees" within
the meaning of Section 162(m) of the Code. Participants in the Plan
("Participants") shall be selected from time to time with respect to
each performance period by the Compensation Committee from those
eligible to participate in the Plan, which Participants shall be
designated in writing.
IV. BUSINESS CRITERIA
The Plan's performance goal shall be based upon the Company's
Operating Income for any performance period as shown on the Company's
audited statement of consolidated income ("Operating Income"). No
award shall be paid with respect to any performance period unless there
is positive Operating Income for such period.
V. PERFORMANCE GOAL
The Plan's performance goal shall be based on the Company's
Operating Income. For any performance period, the incentive
compensation pool (the "Incentive Pool") which shall be subject to be
awarded to Participants under the Plan shall be 1.5% of the Company's
Operating Income for the performance period, or such lesser percentage
of the Company's Operating Income that shall be determined by the
Compensation Committee.
Subject to the foregoing and to the limitations set forth in
Section VI, no awards shall be paid to Participants unless and until
the Compensation Committee makes a certification in writing with
respect to the attainment of the performance goal and the determination
of the Incentive Pool as required by Section 162(m) of the Code.
VI. DETERMINATION OF INCENTIVE POOL AND AWARDS
The Compensation Committee may grant an award to a Participant
which shall be payable if there is positive Operating Income. The
maximum award payable to the Company's Chief Executive Officer for a
performance period, shall be 30% of the Incentive Pool for such period
and the maximum award payable to any other individual Participants
shall be 17.5% of the Incentive Pool for such period. The maximum total
awards payable to all Participants for any performance period shall be
1.5% of the Company's Operating Income for such period.
The Compensation Committee shall have authority to exercise
discretion in determining the amount of the Incentive Pool and the
amount of the targeted award granted to each Participant at the
beginning of a performance period, provided that the Incentive Pool and
each targeted award shall not exceed the foregoing maximum limits. The
Compensation Committee shall determine the amount of the Incentive Pool
and the targeted awards for any performance period no later than the
latest time permitted by Section 162(m) of the Code (generally, for
performance periods of one year or more, no later than 90 days after
the commencement of the performance period) and while the performance
relating to the performance goal remains substantially uncertain within
the meaning of Section 162(m) of the Code.
The Compensation Committee shall have authority to exercise
discretion to reduce the amount of the Incentive Pool and of any
targeted award which shall be payable to any Participant at the end of
each performance period, subject to the terms, conditions and limits of
the Plan and of any other written commitment authorized by the
Compensation Committee. The Compensation Committee may at any time
establish (and once established, rescind, waive or amend) additional
conditions and terms of payment of awards (including but not limited to
the achievement of other financial, strategic or individual goals,
which may be objective or subjective) as it deems desirable in carrying
out the purposes of the Plan and may take into account such other
factors as it deems appropriate in administering any aspect of the
Plan. In determining the amount of any award to be granted or to be
paid to any Participant, the Compensation Committee shall give
consideration to the contribution which may be or has been made by the
Participant to achievement of the Company's established objectives and
such other matters as it shall deem relevant. However, the
Compensation Committee shall have no authority to increase the amount
of the Incentive Pool or the targeted award granted to any Participant
after the latest date permitted by Section 162(m) of the Code or to pay
an award under the Plan if the performance goal has not been satisfied.
The payment of an award to a Participant with respect to a
performance period shall be conditioned upon the Participant's
employment by the Company on the last day of the performance period;
provided, however, that in the discretion of the Compensation
Committee, awards may be paid to Participants who have died or have
become disabled or whose employment with the Company has been
terminated without cause prior to the last day of the performance
period, subject to all other terms and conditions of the Plan.
VII. FORM OF AWARDS
All awards shall be determined by the Compensation Committee and
shall be paid in cash or in Common Stock of the Company or in a
combination of cash and Common Stock, as determined by the Committee in
its discretion. Before the beginning of each performance period, each
Participant may elect that all or part of the Participant's award for
that period will be deferred and distributed at a later date under The
Sempra Energy Deferred Compensation and Excess Savings Plan subject to
the terms of the such plan or under any other plan designated by the
Committee that provides for the deferral of compensation by
Participants. Any shares of Common Stock paid to Participants under
the Plan shall be paid pursuant to the Company's 1998 Long Term
Incentive Plan or any other plan designated by the Compensation
Committee that provides for the award of Common Stock to Participants.
VIII. PAYMENT OF AWARDS
Awards may be paid at any time following the end of the
performance period; provided, however, that no awards shall be paid
unless and until the Compensation Committee certifies, in writing, that
the amounts payable with respect to each award, and all awards in the
aggregate, does not exceed the amount of the Incentive Pool and that
the amount payable to each Participant does not exceed the amount of
the maximum targeted award permitted by the Plan or the amount of
targeted award granted to the Participant at the beginning of the
performance period.
IX. SPECIAL AWARDS AND OTHER PLANS
Nothing contained in the Plan shall prohibit the Company from
granting awards or authorizing other compensation to any person under
any other plan or authority or limit the authority of the Company to
establish other special awards or incentive compensation plans
providing for the payment of incentive compensation to employees
(including those employees who are eligible to participate in the
Plan).
X. STOCKHOLDER APPROVAL
No awards shall be paid under the Plan unless and until Sempra
Energy's stockholders shall have approved the Plan and the performance
goal as required by Section 162(m) of the Code.
XI. ADMINISTRATION, AMENDMENT AND INTERPRETATION OF THE PLAN
The Compensation Committee shall administer the Plan. The
Compensation Committee shall consist solely of two or more members of
the board of directors who shall qualify as "outside directors" under
Section 162(m) of the Code. The Compensation Committee shall have full
power to construe and interpret the Plan, establish and amend rules and
regulations for its administration, and perform all other acts relating
to the Plan, including the delegation of administrative
responsibilities, that it believes reasonable and proper and in
conformity with the purposes of the Plan.
The Board of Directors shall have the right to amend the Plan
from time to time or to repeal it entirely or to direct the
discontinuance of awards either temporarily or permanently; provided,
however, that no amendment of the Plan that changes the maximum amount
of the Incentive Pool or the maximum percentage of the Incentive Pool
that may be payable to any Participant, as set forth in Section VI, or
materially amends the definition of Operating Income as used in Section
VI, shall be effective before approval by the affirmative vote of a
majority of shares voting at a meeting of the Company's stockholders.
Any decision made, or action taken, by the Compensation
Committee arising out of or in connection with the interpretation
and/or administration of the Plan shall be final, conclusive and
binding on all persons affected thereby.
XII. RIGHTS OF PLAN PARTICIPANTS
Neither the Plan, nor the adoption or operation of the Plan, nor
any documents describing or referring to the Plan (or any part hereof)
shall confer upon any Participant any right to continue in the employ
of the Company or shall interfere with or restrict in any way the
rights of the Company, which are hereby expressly reserved, to
discharge any Participant at any time for any reason whatsoever, with
or without cause.
No individual to whom an award has been made or any other party
shall have any interest in the cash or any other asset of the Company
prior to such amount being paid.
No right or interest of any Participant shall be assignable or
transferable, or subject to any claims of any creditor or subject to
any lien.
XIII. MISCELLANEOUS
The Company shall deduct all federal, state and local taxes
required by law or Company policy from any award paid hereunder.
In no event shall the Company be obligated to pay to any
Participant an award for any period by reason of the Company's payment
of an award to such Participant in any other period, or by reason of
the Company's payment of an award to any other Participant or
Participants in such period or in any other period. Nothing contained
in this Plan shall confer upon any person any claim or right to any
payments hereunder. Such payments shall be made at the sole discretion
of the Compensation Committee.
The Plan shall be unfunded. Amounts payable under the Plan are
not and will not be transferred into a trust or otherwise set aside.
The Company shall not be required to establish any special or separate
fund or to make any other segregation of assets to assure the payment
of any award under the Plan. Any accounts under the Plan are for
bookkeeping purposes only and do not represent a claim against the
specific assets of the Company.
It is the intent of the Company that the Plan and awards made
hereunder shall satisfy and shall be interpreted in a manner that
satisfies any applicable requirements as performance-based compensation
within the meaning of Section 162(m) of the Code. Any provision,
application or interpretation of the Plan that is inconsistent with
this intent to satisfy the standards in Section 162(m) of the Code
shall be disregarded.
Any provision of the Plan that is prohibited or unenforceable
shall be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions of the
Plan.
The Plan and the rights and obligations of the parties to the
Plan shall be governed by, and construed and interpreted in accordance
with, the law of the State of California (without regard to principles
of conflicts of law).
Exhibit 10.2
Sempra Energy
1998 Long Term Incentive Plan
1. Purpose. The purposes of the Sempra Energy 1998 Long Term
Incentive Plan (the ''Plan'') are to attract, retain and motivate
officers and other key employees of SEMPRA ENERGY, a California
corporation (the ''Company''), and its Subsidiaries (as hereinafter
defined), to compensate them for their contributions to the growth and
profits of the Company and to encourage ownership by them of stock of
the Company.
2. Definitions. For purposes of the Plan, the following terms
shall be defined as follows:
''Administrator'' means the individual or individuals to whom the
Committee delegates authority under the Plan in accordance with
Section 3(d).
''Affiliate'' and ''Associate'' have the respective meanings
ascribed to such terms in Rule l2b-2 promulgated under the Exchange
Act.
''Award'' means an award made pursuant to the terms of the Plan
to an Eligible Individual in the form of Stock Options, Stock
Appreciation Rights, Restricted Stock Awards, Restricted Stock
Units, Performance Share Awards, Stock Awards, Section 162(m)
Awards, dividend equivalents or other awards determined by the
Committee.
''Award Agreement'' means a written agreement or certificate
granting an Award. An Award Agreement shall be executed by an
officer on behalf of the Company and shall contain such terms and
conditions as the Committee deems appropriate and that are not
inconsistent with the terms of the Plan. The Committee may, in its
discretion, require that an Award Agreement be executed by the
Participant to whom the relevant Award is made.
''Beneficial Owner'' has the meaning set forth in Rule 13d-3
under the Exchange Act.
''Board'' means the Board of Directors of the Company.
A ''Change in Control'' of the Company shall be deemed to have
occurred when:
(i) Any Person is or becomes the Beneficial Owner, directly
or indirectly, of securities of the Company representing twenty
percent (20%) or more of the combined voting power of the
Company's then outstanding securities; or
(ii) The following individuals cease for any reason to
constitute a majority of the number of directors then serving:
individuals who, on the Effective Date, constitute the Board and
any new director (other than a director whose initial assumption
of office is in connection with an actual or threatened election
contest, including, but not limited to, a consent solicitation,
relating to the election of directors of the Company) whose
appointment or election by the Board or nomination for election
by the Company's shareholders was approved or recommended by a
vote of at least two-thirds (2/3) of the directors then still in
office who either were directors on the date hereof or whose
appointment, election or nomination for election was previously
so approved or recommended; or
(iii) There is consummated a merger or consolidation of the
Company or any direct or indirect subsidiary of the Company with
any other corporation, other than (A) a merger or consolidation
which would result in the voting securities of the Company
outstanding immediately prior to such merger or consolidation
continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity or
any parent thereof), in combination with the ownership of any
trustee or other fiduciary holding securities under an employee
benefit plan of the Company or any subsidiary of the Company, at
least sixty percent (60%) of the combined voting power of the
securities of the Company or such surviving entity or any parent
thereof outstanding immediately after such merger or
consolidation, or (B) a merger or consolidation effected to
implement a recapitalization of the Company (or similar
transaction) in which no Person is or becomes the beneficial
owner, directly or indirectly, of securities of the Company (not
including in the securities beneficially owned by such Person any
securities acquired directly from the Company or its affiliates
other than in connection with the securities acquired directly
from the Company or its affiliates other than in connection with
the acquisition by the Company or its affiliates of a business)
representing twenty percent (20%) or more of the combined voting
power of the Company's then outstanding securities; or
(iv) The shareholders of the Company approve a plan of
complete liquidation or dissolution of the Company or there is
consummated an agreement for the sale or disposition by the
company of all or substantially all of the Company's assets,
other than a sale or disposition by the Company of all or
substantially all of the Company's assets to an entity, at least
sixty percent (60%) of the combined voting power of the voting
securities of which are owned by shareholders of the Company in
substantially the same proportions as their ownership of the
Company immediately prior to such sale.
''Code'' means the Internal Revenue Code of 1986, as amended, and
the applicable rulings and regulations thereunder.
''Committee'' means the Compensation Committee of the Board, any
successor committee thereto or any other committee appointed by the
Board to administer the Plan.
''Common Stock'' means the common stock, with no par value, of
the Company.
''Eligible Individuals'' means the individuals described in
Section 6 who are eligible to receive Awards under the Plan.
''Exchange Act'' means the Securities Exchange Act of 1934, as
amended, and the applicable rulings and regulations thereunder.
''Fair Market Value'' means, in the event that the Common Stock
is traded on a recognized securities exchange, the closing price of
the Common Stock on the date set for valuation, or in the event that
the Common Stock is quoted by the National Association of Securities
Dealers Automated Quotations on National Market Issues system, an
amount equal to the average of the high and low prices of the Common
Stock on such quotations system on the date set for valuation or, if
no sales of Common Stock were made on said exchange or so quoted
such system on that date, the average of the high and low prices of
the Common Stock on the next preceding day on which sales were made
on such exchange or quotations system; or, if the Common Stock is
not so traded or quoted, that value determined, in its sole
discretion, by the Committee.
''Incentive Stock Option'' means a Stock Option which is an
''incentive stock option'' within the meaning of Section 422 of the
Code and designated by the Committee as an Incentive Stock Option in
an Award Agreement.
''Nonqualified Stock Option'' means a Stock Option which is not
an Incentive Stock Option.
''Parent'' means any corporation which is a ''parent
corporation'' within the meaning of Section 424(e) of the Code with
respect to the relevant entity.
''Participant'' means an Eligible Individual to whom an Award has
been granted under the Plan.
''Performance Period'' means a fiscal year of the Company or such
other period that may be specified by the Committee in connection
with the grant of a Section 162(m) Award.
''Performance Share Award'' means a conditional Award of shares
of Common Stock granted to an Eligible Individual pursuant to
Section 12 hereof.
''Person'' means any person, entity or ''group'' within the
meaning of Section 13(d)(3) or Section14(d)(2) of the Exchange Act,
except that such term shall not include (i) the Company or any of
its Subsidiaries, (ii) a trustee or other fiduciary holding
securities under an employee benefit plan of the Company or any of
its Affiliates, (iii) an underwriter temporarily holding securities
pursuant to an offering of such securities, (iv) a corporation
owned, directly or indirectly, by the shareholders of the Company in
substantially the same proportions as their ownership of stock of
the Company, or (v) a person or group as used in Rule 13dl(b) under
the Exchange Act.
''Restricted Stock Award'' means an Award of restricted shares of
Common Stock granted to an Eligible Individual pursuant to Section
10 hereof.
''Restricted Stock Units'' means an Award of restricted share
units as described in Section 11 hereof.
''Section 162(m) Participant'' means, for a given fiscal year of
the Company, any Participant who is a ''covered employee'' within
the meaning of the regulations promulgated under Section 162(m) of
the Code.
''Stock Appreciation Right'' means an Award to receive all or
some portion of the appreciation on shares of Common Stock granted
to an Eligible Individual pursuant to Section 9 hereof.
''Stock Award'' means an Award of shares of Common Stock granted
to an Eligible Individual pursuant to Section 13 hereof.
''Stock Option'' means an option to purchase shares of Common
Stock granted to an Eligible Individual pursuant to Section 8
hereof.
''Subsidiary'' means (i) any majority-owned subsidiary of the
Company and (ii) any other corporation or other entity in which the
Company, directly or indirectly, has an equity or similar interest
and which the Committee designates as a Subsidiary for the purposes
of the Plan.
''Substitute Award'' means an Award granted upon assumption of,
or in substitution for, outstanding equity awards previously granted
by a company or other entity in connection with a corporate
transaction, such as a merger, combination, consolidation or
acquisition of property or stock; provided, however, that in no
event shall the term ''Substitute Award'' be construed to refer to
an award made in connection with a cancellation and repricing of a
Stock Option.
3. Administration of the Plan.
(a) Power and Authority of the Committee. The Plan shall be
administered by the Committee, which shall have full power and
authority, subject to the express provisions hereof:
(i) to select Participants from among the Eligible
Individuals;
(ii) to grant Awards in accordance with the terms of the
Plan;
(iii) to determine the number of shares of Common Stock
subject to each Award or the cash amount payable in connection
with an Award;
(iv) to determine the terms and conditions of each Award,
including, without limitation, those related to vesting,
forfeiture, payment and exercisability, and the effect, if any,
of a Participant's termination of employment with the Company or,
subject to Section 19 hereof, of a Change in Control on the
outstanding Awards granted to such Participant, and including the
authority to amend the terms and conditions of an Award after the
granting thereof to a Participant in a manner that is not
prejudicial to the rights of such Participant;
(v) to accelerate the vesting or payment of any Award, the
lapse of restrictions on any Award or the date on which any Stock
Option or Stock Appreciation Right becomes exercisable;
(vi) to specify and approve the provisions of the Award
Agreements delivered to Participants in connection with their
Awards;
(vii) to construe and interpret any Award Agreement delivered
under the Plan;
(viii) subject to Section 20, to prescribe, amend and rescind
administrative rules and procedures relating to the Plan;
(ix) to vary the terms of Awards to take account of tax,
securities law and other regulatory requirements, including those
of foreign jurisdictions;
(x) subject to the provisions of the Plan and subject to such
additional limitations and restrictions as the Committee may
impose, to delegate to one or more officers of the Company some
or all of its authority under the Plan; and
(xi) to make all other determinations and to formulate such
procedures as may be necessary or advisable for the
administration of the Plan.
(b) Plan Construction and Interpretation. The Committee shall
have full power and authority, subject to the express provisions
hereof, to construe and interpret the terms of the Plan and any
Award Agreement entered into hereunder.
(c) Determinations of Committee Final and Binding. All
determinations by the Committee in carrying out and administering
the Plan and in construing and interpreting the Plan and any Award
Agreement shall be final, binding and conclusive for all purposes
and upon all persons interested herein.
(d) Delegation of Authority. The Committee may, but need not,
from time to time delegate some or all of its authority under the
Plan to an Administrator consisting of one or more members of the
Committee or of one or more officers of the Company; provided,
however, that the Committee may not delegate its authority (i) to
grant Awards to Eligible Individuals (A) who are subject on the date
of the grant to the reporting rules under Section 16(a) of the
Exchange Act, (B) who are Section 162(m) Participants or (C) who are
officers of the Company who are delegated authority by the Committee
hereunder, or (ii) under Sections 3(b) and 20 of the Plan. Any
delegation hereunder shall be subject to the restrictions and limits
that the Committee specifies at the time of such delegation or
thereafter. Nothing in the Plan shall be construed as obligating the
Committee to delegate authority to an Administrator, and the
Committee may at any time rescind the authority delegated to an
Administrator appointed hereunder or appoint a new Administrator.
At all times, the Administrator appointed under this Section 3(d)
shall serve in such capacity at the pleasure of the Committee. Any
action undertaken by the Administrator in accordance with the
Committee's delegation of authority shall have the same force and
effect as if undertaken directly by the Committee, and any reference
in the Plan to the Committee shall, to the extent consistent with
the terms and limitations of such delegation, be deemed to include a
reference to the Administrator.
(e) Liability of Committee. No member of the Committee shall
be liable for anything whatsoever in connection with the
administration of the Plan except such person's own willful
misconduct. Under no circumstances shall any member of the Committee
be liable for any act or omission of any other member of the
Committee. In the performance of its functions with respect to the
Plan, the Committee shall be entitled to rely upon information and
advice furnished by the Company's officers, the Company's
accountants, the Company's counsel and any other party the Committee
deems necessary, and no member of the Committee shall be liable for
any action taken or not taken in reliance upon any such advice.
4. Duration of Plan. The Plan shall remain in effect until it is
terminated by the Board of Directors (upon which Board action no
further awards may be granted hereunder) and thereafter until all
Awards previously granted under the Plan are satisfied by the issuance
of shares of Common Stock or the payment of cash or are terminated
under the terms of the Plan or under the Award Agreements entered into
in connection with the grant thereof. Notwithstanding the foregoing,
the Plan shall automatically terminate unless it is ratified by the
Company's shareholders every ten years following the Effective Date (as
defined in Section 21 (j)).
5. Shares of Stock Subject to the Plan. Subject to adjustment as
provided in Section 15(b) hereof, the number of shares of Common Stock
that may be granted under the Plan pursuant to Awards during each full
calendar year that the Plan is in effect shall not exceed, in the
aggregate, 1.5 % of the outstanding shares of Common Stock as of the
first day of the calendar year (the ''Section 5 Limit'').
Notwithstanding the foregoing, the number of shares of Common Stock
available for grant under the Plan during the 1998 calendar year shall
be 3.4 million shares. Such shares may be either authorized but
unissued shares, treasury shares or any combination thereof. For
purposes of determining the number of shares that remain available for
issuance under the Plan, the following rules shall apply:
(a) the number of Shares subject to outstanding Awards shall be
charged against the Section 5 Limit; and
(b) the Section 5 Limit shall be increased by:
(i) the number of shares subject to an Award (or portion
thereof) which lapses, expires or is otherwise terminated without
the issuance of such shares or is settled by the delivery of
consideration other than shares;
(ii) the number of shares tendered to pay the exercise price
of a Stock Option or other Award;
(iii) the number of shares withheld from any Award to satisfy
a Participant's tax withholding obligations or, if applicable, to
pay the exercise price of a Stock Option or other Award; and
(iv) the number of shares that were not made subject to
Awards during the previous year.
In addition, any shares underlying Substitute Awards shall not be
counted against the Section 5 Limit set forth in the first sentence
of this Section 5.
6. Eligible Individuals.
(a) Eligibility Criteria. Awards may be granted by the
Committee to individuals (''Eligible Individuals'') who are officers
or other key employees of the Company or a Subsidiary with the
potential to contribute to the future success of the Company or its
Subsidiaries and have a significant effect on the Company's growth
and profitability. Members of the Committee shall not be eligible to
receive Awards under the Plan. An individual's status as an
Administrator will not affect his or her eligibility to participate
in the Plan.
(b) Maximum Number of Shares Per Eligible Individual. In
accordance with the requirements imposed under Section 162(m) of the
Code, no Eligible Individual shall receive grants of Awards with
respect to an aggregate of more than 1,000,000 shares of Common
Stock in respect of any fiscal year of the Company.
7. Awards Generally. Awards under the Plan may consist of Stock
Options, Stock Appreciation Rights, Restricted Stock Awards,
Performance Share Awards, Section 162(m) Awards or other awards
determined by the Committee. The terms and provisions of an Award shall
be set forth in a written Award Agreement that is approved by the
Committee and delivered or made available to the Participant as soon as
practicable following the date of the Award. The vesting,
exercisability, payment and other restrictions applicable to an Award
(which may include, without limitation, restrictions on transferability
or provision for mandatory resale to the Company) shall be determined
by the Committee and set forth in the applicable Award Agreement.
Notwithstanding the foregoing, the Committee may accelerate (i) the
vesting or payment of any Award, (ii) the lapse of restrictions on any
Award or (iii) the date on which any Option or Stock Appreciation Right
first becomes exercisable. The Committee shall also have full authority
to determine and specify in the applicable Award Agreement the effect,
if any, that a Participant's termination of employment for any reason
will have on the vesting, exercisability, payment or lapse of
restrictions applicable to an outstanding Award. The date of a
Participant's termination of employment for any reason shall be
determined in the sole discretion of the Committee.
8. Stock Options.
(a) Terms of Stock Options Generally. Subject to the terms of
the Plan and the applicable Award Agreement, each Stock Option shall
entitle the Participant to whom such Stock Option was granted to
purchase the number of shares of Common Stock specified in the
applicable Award Agreement and shall be subject to the terms and
conditions established by the Committee in connection with the Stock
Option and specified in the applicable Award Agreement. Upon
satisfaction of the conditions to exercisability specified in the
applicable Award Agreement, a Participant shall be entitled to
exercise the Stock Option in whole or in part and to receive, upon
satisfaction or payment of the exercise price or an irrevocable
notice of exercise in the manner contemplated by Section 8(d) below,
the number of shares of Common Stock in respect of which the Stock
Option shall have been exercised. Stock Options may be either
Nonqualified Stock Options or Incentive Stock Options; provided,
however, that in no event shall the number of shares of Common Stock
that may be granted under the Plan pursuant to Incentive Stock
Options exceed, in the aggregate, 1,000,000 shares.
(b) Exercise Price. The exercise price per share of Common
Stock purchasable under a Stock Option shall be determined by the
Committee at the time of grant and set forth in the Award Agreement,
provided, that the exercise price per share of a Stock Option shall
be no less than 100% of the Fair Market Value per share on the date
of grant and such exercise price shall not thereafter be reduced
(other than adjustments pursuant to Section 18(b) to reflect changes
in outstanding Common Stock and the conversion of outstanding Stock
Options into Replacement Options pursuant to Section 19 in the event
of a Change in Control) by amendment, cancellation and regrant or
substitution of Stock Options or otherwise. Notwithstanding the
foregoing, the exercise price per share of a Stock Option that is a
Substitute Award may be less than the Fair Market Value per share on
the date of grant, provided that the excess of:
(i) the aggregate Fair Market Value (as of the date such
Substitute Award is granted) of the shares subject to the
Substitute Award; over
(ii) the aggregate exercise price thereof;
does not exceed the excess of:
(iii) the aggregate fair market value (as of the time
immediately preceding the transaction giving rise to the
Substitute Award, such fair market value to be determined by the
Committee) of the shares of the predecessor entity that were
subject to the grant assumed or substituted for by the Company;
over
(iv) the aggregate exercise price of such shares.
(c) Option Term. The term of each Stock Option shall be fixed
by the Committee and set forth in the Award Agreement; provided,
however, that a Stock Option that is an Incentive Stock Option shall
not be exercisable after the expiration of ten (10) years after the
date the Stock Option is granted.
(d) Method of Exercise. Subject to the provisions of the
applicable Award Agreement, the exercise price of a Stock Option may
be paid in cash or previously owned shares or a combination thereof
and, if the applicable Award Agreement so provides, in whole or in
part through the withholding of shares subject to the Stock Option
with a Fair Market Value equal to the exercise price. In accordance
with the rules and procedures established by the Committee for this
purpose, the Stock Option may also be exercised through a ''cashless
exercise'' procedure approved by the Committee involving a broker or
dealer approved by the Committee, that affords Participants the
opportunity to sell immediately some or all of the shares underlying
the exercised portion of the Stock Option in order to generate
sufficient cash to pay the Stock Option exercise price and/or to
satisfy withholding tax obligations related to the Stock Option.
(e) Deferral. In accordance with rules and procedures
established by the Committee, the Committee may permit a Participant
at or after the time of grant to defer receipt of the Common Stock
underlying a Stock Option to one or more dates elected by the
Participant, subsequent to the date on which such Stock Option is
exercised. Shares that are deferred in accordance with the preceding
sentence shall be noted in a bookkeeping account maintained by the
Company for this purpose and may periodically be credited with
dividends, dividend equivalents, notional interest or earnings in
accordance with procedures established by the Committee in its
discretion from time to time. Deferred amounts shall be paid in
cash, Common Stock or other property, as determined by the Committee
at or after the time of deferral, on the date or dates elected by
the Participant.
9. Stock Appreciation Rights. Stock Appreciation Rights shall be
subject to the terms and conditions established by the Committee in
connection with the Award thereof and specified in the applicable Award
Agreement. Upon satisfaction of the conditions to the payment specified
in the applicable Award Agreement, each Stock Appreciation Right shall
entitle a Participant to an amount, if any, equal to the Fair Market
Value of a share of Common Stock on the date of exercise over the Stock
Appreciation Right exercise price specified in the applicable Award
Agreement. At the discretion of the Committee, payments to a
Participant upon exercise of a Stock Appreciation Right may be made in
shares of Common Stock, cash or a combination thereof. A Stock
Appreciation Right may be granted alone or in addition to other Awards,
or in tandem with a Stock Option. If granted in tandem with a Stock
Option, a Stock Appreciation Right shall cover the same number of
shares of Common Stock as covered by the Stock Option (or such lesser
number of shares as the Committee may determine) and shall be
exercisable only at such time or times and to the extent the related
Stock Option shall be exercisable, and shall have the same term and
exercise price as the related Stock Option. Upon exercise of a Stock
Appreciation Right granted in tandem with a Stock Option, the related
Stock Option shall be canceled automatically to the extent of the
number of shares covered by such exercise; conversely, if the related
Stock Option is exercised as to some or all of the shares covered by
the tandem grant, the tandem Stock Appreciation Right shall be canceled
automatically to the extent of the number of shares covered by the
Stock Option exercised.
10. Restricted Stock Awards. Restricted Stock Awards shall
consist of one or more shares of Common Stock granted to an Eligible
Individual, and shall be subject to the terms and conditions
established by the Committee in connection with the Award and specified
in the applicable Award Agreement. The shares of Common Stock subject
to a Restricted Stock Award may, among other things, be subject to
vesting requirements or restrictions on transferability. Except as
otherwise provided by the Committee in its sole discretion, a
Participant shall have all of the rights of a shareholder of the
Company with respect to the shares of Common Stock underlying a
Restricted Stock Award, including the right to vote the shares and the
right to receive any cash dividends. Stock dividends issued with
respect to shares covered by a Restricted Stock Award shall be treated
as additional shares under the Restricted Stock Award and shall be
subject to the same terms and conditions that apply to the shares with
respect to which such dividends are issued. In no event shall the
number of shares of Common Stock granted in any calendar year under the
Plan in respect of Restricted Stock Awards exceed .5 % of the
outstanding shares of Common Stock as of the first day of the calendar
year. Notwithstanding the foregoing, the number of shares of Common
Stock available for Restricted Stock Awards under the Plan during the
1998 calendar year shall not exceed 1.1 million shares.
11. Restricted Stock Units. Restricted Stock Unit Awards shall
consist of a grant of units, each of which represents the right of the
Participant to receive one share of Common Stock, subject to the terms
and conditions established by the Committee in connection with the
Award and set forth in the applicable Award Agreement. Upon
satisfaction of the conditions to vesting and payment specified in the
applicable Award Agreement, Restricted Stock Units shall be payable, at
the discretion of the Committee, in Common Stock, in cash equal to the
Fair Market Value of the shares subject to such Restricted Stock Units,
or in a combination of Common Stock and cash.
12. Performance Share Awards. Performance Share Awards shall be
evidenced by an Award Agreement in such form and containing such terms
and conditions as the Committee deems appropriate and which are not
inconsistent with the terms of the Plan. Each Award Agreement shall set
forth the number of shares of Common Stock to be earned by a
Participant upon satisfaction of certain specified performance criteria
and subject to such other terms and conditions as the Committee deems
appropriate. Payment in settlement of a Performance Share Award shall
be made as soon as practicable following the conclusion of the
applicable performance period, or at such other time as the Committee
shall determine, in shares of Common Stock, in an equivalent amount of
cash or in a combination of Common Stock and cash, as the Committee
shall determine.
13. Stock Awards. Stock Awards shall consist of one or more
shares of Common Stock granted to an Eligible Individual, and shall be
subject to the terms and conditions established by the Committee in
connection with the Award and specified in the applicable Award
Agreement. The shares of Common Stock subject to a Stock Award may,
among other things, be subject to vesting requirements and restrictions
on transferability.
14. Other Awards. The Committee shall have the authority to
specify the terms and provisions of other forms of equity-based or
equity-related Awards not described above which the Committee
determines to be consistent with the purpose of the Plan and the
interests of the Company, which Awards may provide for cash payments
based in whole or in part on the value or future value of Common Stock,
for the acquisition or future acquisition of Common Stock, or any
combination thereof.
15. Section 162(m) Awards.
(a) Terms of Section 162(m) Awards Generally. In addition to
any other Awards under the Plan, the Company may make Awards that
are intended to qualify as ''qualified performance-based
compensation'' for purposes of Section 162(m) of the Code (''Section
162(m) Award''). Section 162(m) Awards may consist of Stock Options,
Stock Appreciation Rights, Restricted Stock Awards, Restricted Stock
Units, Performance Share Awards or Other Awards the vesting,
exercisability and/or payment of which is conditioned upon the
attainment for the applicable Performance Period of specified
performance targets related to designated performance goals for such
period selected by the Committee from among the performance goals
specified in Section 15(b) below. Section 162(m) Awards will be made
in accordance with the procedures specified in applicable Treasury
regulations for compensation intended to be ''qualified performance-
based compensation. ''
(b) Performance Goals. For purposes of this Section 15,
performance goals shall be limited to one or more of the following:
(i) net revenue; (ii) net earnings; (iii) operating earnings or
income; (iv) absolute and/or relative return on equity or assets;
(v) earnings per share; (vi) cash flow; (vii) pretax profits; (viii)
earnings growth; (ix) revenue growth; (x) book value per share; (xi)
stock price; (xii) economic value added; (xiii) total shareholder
return; (xiv) operating goals (including, but not limited to,
safety, reliability, maintenance expenses, capital expenses,
customer satisfaction and employee satisfaction); and (xv)
performance relative to peer companies, each of which may be
established on a corporate-wide basis or established with respect to
one or more operating units, divisions, acquired businesses,
minority investments, partnerships or joint ventures.
(c) Other Performance-Based Compensation. The Committee's
decision to make, or not to make, Section 162(m) Awards within the
meaning of this Section 15 shall not in any way prejudice the
qualification of any other Awards as performance-based compensation
under Section 162(m). In particular, Awards of Stock Options may,
pursuant to applicable regulations promulgated under Section 162(m),
be qualified as performance-based compensation for Section 162(m)
purposes without regard to this Section 15.
16. Dividend Equivalents. The Committee may provide that Awards
under the Plan earn dividend equivalents. Such dividend equivalents may
be paid currently or may be deferred and deemed reinvested in Common
Stock in the same manner as dividends reinvested pursuant to the terms
of the Sempra Dividend Reinvestment Plan. Any deferral of dividend
equivalents shall be subject to such restrictions and conditions as the
Committee may determine in its discretion, including, but not limited
to, performance-based vesting requirements.
17. Non-transferability. No Award granted under the Plan or any
rights or interests therein shall be sold, transferred, assigned,
pledged or otherwise encumbered or disposed of except by will or by the
laws of descent and distribution or pursuant to a ''qualified domestic
relations order'' (''QDRO'') as defined in the Code or Title I of the
Employee Retirement Income Security Act of 1974, as amended, and the
rules and regulations thereunder; provided, however, that the Committee
may, subject to such terms and conditions as the Committee shall
specify, permit the transfer of an Award to a Participant's family
members or to one or more trusts or partnerships established in whole
or in part for the benefit of one or more of such family members;
provided further, however, that the restrictions set forth in this
sentence shall not apply to the shares received in connection with an
Award after the date that the restrictions on transferability of such
shares set forth in the applicable Award Agreement have lapsed. During
the lifetime of a Participant, a Stock Option or Stock Appreciation
Right shall be exercisable only by, and payments in settlement of
Awards shall be payable only to, the Participant or, if applicable, the
''alternate payee'' under a QDRO or the family member or trust to whom
such Stock Option, Stock Appreciation Right or other Award has been
transferred in accordance with the previous sentence.
18. Recapitalization or Reorganization.
(a) Authority of the Company and Shareholders. The existence
of the Plan, the Award Agreements and the Awards granted hereunder
shall not affect or restrict in any way the right or power of the
Company or the shareholders of the Company to make or authorize any
adjustment, recapitalization, reorganization or other change in the
Company's capital structure or its business, any merger or
consolidation of the Company, any issue of stock or of options,
warrants or rights to purchase stock or of bonds, debentures,
preferred or prior preference stocks whose rights are superior to or
affect the Common Stock or the rights thereof or which are
convertible into or exchangeable for Common Stock, or the
dissolution or liquidation of the Company, or any sale or transfer
of all or any part of its assets or business, or any other corporate
act or proceeding, whether of a similar character or otherwise.
(b) Change in Capitalization. Notwithstanding any provision
of the Plan or any Award Agreement, in the event of any change in
the outstanding Common Stock by reason of a stock dividend,
recapitalization, reorganization, merger, consolidation, stock
split, combination or exchange of shares affecting the Common Stock,
the Committee shall make (i) such proportionate adjustments it
considers appropriate (in the form determined by the Committee in
its sole discretion) to prevent diminution or enlargement of the
rights of Participants under the Plan with respect to the aggregate
number of shares of Common Stock for which Awards in respect thereof
may be granted under the Plan, the number of shares of Common Stock
covered by each outstanding Award, and the exercise prices in
respect thereof and/or (ii) such other equitable adjustments as it
deems appropriate in the interests of the holders of Awards. The
Committee's determination as to what, if any, adjustments shall be
made shall be final and binding on the Company and all Participants.
19. Change in Control. In the event of a Change in Control (i)
all Stock Options or Stock Appreciation Rights then outstanding shall
automatically become fully vested and exercisable as of the date of the
Change in Control, (ii) all restrictions and conditions of all
Restricted Stock Awards then outstanding shall lapse as of the date of
the Change in Control, and (iii) all Performance Share Awards shall be
deemed to have been earned out in a manner set forth in the applicable
Award Agreement. In addition to the foregoing, in the case of a Change
in Control involving a merger of, or consolidation involving, the
Company in which the Company is (A) not the surviving corporation (the
''Surviving Entity'') or (B) becomes a wholly owned subsidiary of the
Surviving Entity or any Parent thereof, each outstanding Stock Option
granted under the Plan and not exercised (a ''Predecessor Option'')
will be converted into an option (a ''Replacement Option'') to acquire
common stock of the Surviving Entity or its Parent, which Replacement
Option will have substantially the same terms and conditions as the
Predecessor Option, with appropriate adjustments as to the number and
kind of shares and exercise prices. Notwithstanding the foregoing, in
the event of a Change in Control, the Committee expressly reserves the
discretion to cancel all outstanding Stock Options, effective as of the
date of the Change in Control, in exchange for a cash payment to be
made to each of the Participants within five business days following
the Change in Control in an amount equal to the excess of the fair
market value of the Company's Common Stock on the date of the Change in
Control over the exercise price of each such Stock Option, multiplied
by the number of shares that are subject to such option.
Notwithstanding the foregoing, in the event that the Company becomes a
party to a transaction that is intended to qualify for ''pooling of
interests'' accounting treatment and, but for one or more of the
provisions of this Plan or any Award Agreement would so qualify, then
this Plan and any Award Agreement shall be interpreted so as to
preserve such accounting treatment, and to the extent that any
provision of the Plan or any Award Agreement would disqualify the
transaction from pooling of interests accounting treatment (including,
if applicable, an entire Award Agreement), then such provision shall be
null and void. All determinations to be made in connection with the
preceding sentence shall be made by the independent accounting firm
whose opinion with respect to ''pooling of interests'' treatment is
required as a condition to the Company's consummation of such
transaction.
20. Amendment of the Plan. The Board or Committee may at any
time and from time to time terminate, modify, suspend or amend the Plan
in whole or in part; provided, however, that no such termination,
modification, suspension or amendment shall be effective without
shareholder approval if such approval is required to comply with any
applicable law or stock exchange rule; and provided further, that the
Board or Committee may not, without shareholder approval, increase the
Section 5 Limit except as provided in Section 18(b) above. No
termination, modification, suspension or amendment of the Plan shall,
without the consent of a Participant to whom any Award shall previously
have been granted, adversely affect his or her rights under such
Awards. Notwithstanding any provision herein to the contrary, the Board
or Committee shall have broad authority to amend the Plan or any Award
to take into account changes in applicable tax laws, securities laws,
accounting rules and other applicable state and federal laws.
21. Miscellaneous.
(a) Tax Withholding. No later than the date as of which an
amount first becomes includable in the gross income of the
Participant for applicable income tax purposes with respect to any
grant under the Plan, the Participant shall pay to the Company or
make arrangements satisfactory to the Committee regarding the
payment of any federal, state or local taxes of any kind required by
law to be withheld with respect to such amount. Unless otherwise
determined by the Committee, in accordance with rules and procedures
established by the Committee, the minimum required withholding
obligations may be settled with Common Stock, including Common Stock
that is part of the grant that gives rise to the withholding
requirement. The obligations of the Company under the Plan shall be
conditioned upon such payment or arrangements and the Company shall,
to the extent permitted by law, have the right to deduct any such
taxes from any payment of any kind otherwise due to the Participant.
(b) No Right to Grants or Employment. No Eligible Individual
or Participant shall have any claim or right to receive grants of
Awards under the Plan. Nothing in the Plan or in any Award Agreement
shall confer upon any employee of the Company or any Subsidiary any
right to continued employment with the Company or any Subsidiary, as
the case may be, or interfere in any way with the right of the
Company or a Subsidiary to terminate the employment of any of its
employees at any time, with or without cause.
(c) Unfunded Plan. The Plan is intended to constitute an
unfunded plan for incentive compensation. With respect to any
payments not yet made to a Participant by the Company, nothing
contained herein shall give any such Participant any rights that are
greater than those of a general creditor of the Company. In its sole
discretion, the Committee may authorize the creation of trusts or
other arrangements to meet the obligations created under the Plan to
deliver Common Stock or payments in lieu thereof with respect to
grants hereunder.
(d) Other Employee Benefit Plans. Amounts received by a
Participant with respect to any Award made pursuant to the
provisions of the Plan shall not be included in, nor have any effect
on, the determination of benefits under any other employee benefit
plan or similar arrangement provided by the Company.
(e) Securities Law Restrictions. The Committee may require
each Eligible Individual purchasing or acquiring shares of Common
Stock pursuant to a Stock Option or other Award under the Plan to
represent to and agree with the Company in writing that such
Eligible Individual is acquiring the shares for investment and not
with a view to the distribution thereof. All certificates for shares
of Common Stock delivered under the Plan shall be subject to such
stock-transfer orders and other restrictions as the Committee may
deem advisable under the rules, regulations, and other requirements
of the Securities and Exchange Commission or any exchange upon which
the Common Stock is then listed, and any applicable federal or state
securities law, and the Committee may cause a legend or legends to
be put on any such certificates to make appropriate reference to
such restrictions. No shares of Common Stock shall be issued
hereunder unless the Company shall have determined that such
issuance is in compliance with, or pursuant to an exemption from,
all applicable federal and state securities laws.
(f) Compliance with Rule 16b-3.
(i) The Plan is intended to comply with Rule 16b-3 under the
Exchange Act or its successor under the Exchange Act and the
Committee shall interpret and administer the provisions of the
Plan or any Award Agreement in a manner consistent therewith. To
the extent any provision of the Plan or Award Agreement or any
action by the Committee fails to so comply, it shall be deemed
null and void, to the extent permitted by law and deemed
advisable by the Committee. Moreover, in the event the Plan or an
Award Agreement does not include a provision required by Rule
16b-3 to be stated therein, such provision (other than one
relating to eligibility requirements, or the price and amount of
Awards) shall be deemed automatically to be incorporated by
reference into the Plan or such Award Agreement insofar as
Participants subject to Section 16 of the Exchange Act are
concerned.
(ii) Notwithstanding anything contained in the Plan or any
Award Agreement to the contrary, if the consummation of any
transaction under the Plan would result in the possible
imposition of liability on a Participant pursuant to Section
16(b) of the Exchange Act, the Committee shall have the right, in
its sole discretion, but shall not be obligated, to defer such
transaction to the extent necessary to avoid such liability.
(g) Award Agreement. In the event of any conflict or
inconsistency between the Plan and any Award Agreement, the Plan
shall govern, and the Award Agreement shall be interpreted to
minimize or eliminate any such conflict or inconsistency.
(h) Expenses. The costs and expenses of administering the
Plan shall be borne by the Company.
(i) Applicable Law. Except as to matters of federal law, the
Plan and all actions taken thereunder shall be governed by and
construed in accordance with the laws of the State of California
without giving effect to conflicts of law principles.
(j) Effective Date. The Plan shall be effective as of the
Effective Time of the business combination of Pacific Enterprises
and Enova Corporation, pursuant to which such corporations will
become subsidiaries of the Company (the ''Effective Date''), subject
to the approval by the Company's shareholders of the Plan at or
prior to the first annual meeting of the Company's shareholders
after the Effective Date. If shareholder approval is not obtained at
or prior to the first annual meeting of the shareholders of the
Company, the Plan and any Awards granted thereunder shall terminate
ab initio and be of no further force and effect.
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,
1999 2000 2001 2002 2003
-------- -------- -------- -------- --------
Fixed Charges and Preferred
Stock Dividends:
Interest $ 233 $ 308 $ 358 $ 350 $ 177
Interest portion of
annual rentals 10 8 6 6 2
Preferred dividends
of subsidiaries (1) 16 18 16 15 8
-------- -------- -------- -------- --------
Combined Fixed Charges
and Preferred Stock
Dividends for Purpose
of Ratio $ 259 $ 334 $ 380 $ 371 $ 187
======== ======== ======== ======== ========
Earnings:
Pretax income from
continuing operations $ 573 $ 699 $ 731 $ 721 $ 284
Total Fixed Charges
(from above) 259 334 380 371 187
Less:
Interest capitalized 1 3 11 29 19
Equity income (loss) of
unconsolidated subsidiaries
and joint ventures - 62 12 (55) -
-------- -------- -------- -------- --------
Total Earnings for
Purpose of Ratio $ 831 $ 968 $1,088 $1,118 $ 452
======== ======== ======== ======== ========
Ratio of Earnings
to Combined Fixed Charges
and Preferred Stock
Dividends 3.21 2.90 2.86 3.01 2.42
======== ======== ======== ======== ========
(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 31.1
CERTIFICATION
I, Stephen L. Baum, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Sempra Energy;
2. Based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this Quarterly Report;
3. Based on my knowledge, the financial statements and other financial
information included in this Quarterly Report fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this Quarterly Report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and we have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this Quarterly Report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this Quarterly Report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered
by this Quarterly Report, based on such evaluation; and
c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing
the equivalent function):
a) All significant deficiencies and material weaknesses in the
design or operation of internal controls over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls over financial reporting.
August 7, 2003
/S/ STEPHEN L. BAUM
Stephen L. Baum
Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION
I, Neal E. Schmale, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Sempra
Energy;
2. Based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this Quarterly Report;
3. Based on my knowledge, the financial statements and other financial
information included in this Quarterly Report fairly present in all
material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods
presented in this Quarterly Report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and we have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this Quarterly Report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this Quarterly
Report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the
period covered by this Quarterly Report, based on such
evaluation; and
c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing
the equivalent function):
a) All significant deficiencies and material weaknesses in the
design or operation of internal controls over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls over financial reporting.
August 7, 2003
/S/ NEAL E. SCHMALE
Neal E. Schmale
Chief Financial Officer
Exhibit 32.1
Statement of Chief Executive Officer
Pursuant to 18 U.S.C. Sec 1350, as created by Section 906 of the
Sarbanes-Oxley Act of 2002, the undersigned Chief Executive Officer of
Sempra Energy (the "Company") certifies that:
(i) the Quarterly Report on Form 10-Q of the Company filed with
the Securities and Exchange Commission for the quarterly
period ended June 30, 2003 (the "Quarterly Report") fully
complies with the requirements of Section 13(a) or Section
15(d), as applicable, of the Securities Exchange Act of
1934, as amended; and
(ii) the information contained in the Quarterly Report fairly
presents, in all material respects, the financial condition
and results of operations of the Company.
August 7, 2003
/S/ STEPHEN L. BAUM
______________________
Stephen L. Baum
Chief Executive Officer
Exhibit 32.2
Statement of Chief Financial Officer
Pursuant to 18 U.S.C. Sec 1350, as created by Section 906 of the
Sarbanes-Oxley Act of 2002, the undersigned Chief Financial Officer of
Sempra Energy (the "Company") certifies that:
(i) the Quarterly Report on Form 10-Q of the Company filed with
the Securities and Exchange Commission for the quarterly
period ended June 30, 2003 (the "Quarterly Report") fully
complies with the requirements of Section 13(a) or Section
15(d), as applicable, of the Securities Exchange Act of
1934, as amended; and
(ii) the information contained in the Quarterly Report fairly
presents, in all material respects, the financial condition
and results of operations of the Company.
August 7, 2003
/S/ NEAL E. SCHMALE
______________________
Neal E. Schmale
Chief Financial Officer
