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 March 31, 2002
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Commission file number 1-14201
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Sempra Energy
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(Exact name of registrant as specified in its charter)
California 33-0732627
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Ash Street, San Diego, California 92101
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(Address of principal executive offices)
(Zip Code)
(619) 696-2034
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
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Common stock outstanding on April 30, 2002: 205,330,190
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ITEM 1. FINANCIAL STATEMENTS.
SEMPRA ENERGY
STATEMENTS OF CONSOLIDATED INCOME
Dollars in millions except per-share amounts
Three Months Ended
March 31,
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2002 2001
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OPERATING REVENUES
California utilities:
Natural gas $ 868 $1,881
Electric 278 791
Other 379 570
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Total 1,525 3,242
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OPERATING EXPENSES
Cost of natural gas distributed 424 1,391
Electric fuel and net purchased power 61 572
Other operating expenses 597 707
Depreciation and amortization 148 142
Franchise payments and other taxes 44 58
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Total 1,274 2,870
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Operating Income 251 372
Other income - net 35 35
Preferred dividends of subsidiaries (3) (3)
Trust preferred distributions by subsidiary (4) (4)
Interest expense (74) (90)
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Income before income taxes 205 310
Income taxes 59 132
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Net income $ 146 $ 178
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Weighted-average number of shares outstanding:
Basic* 204,853 202,285
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Diluted* 206,416 203,033
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Net income per share of common stock (basic) $ 0.71 $ 0.88
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Net income per share of common stock (diluted) $ 0.71 $ 0.88
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Common dividends declared per share $ 0.25 $ 0.25
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*In thousands of shares
See notes to Consolidated Financial Statements.
SEMPRA ENERGY
CONSOLIDATED BALANCE SHEETS
Dollars in millions
Balance at
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March 31, December 31,
2002 2001
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ASSETS
Current assets:
Cash and cash equivalents $ 740 $ 605
Accounts receivable - trade 543 660
Accounts and notes receivable - other 201 130
Due from unconsolidated affiliates 34 57
Income taxes receivable 61 98
Trading assets 4,912 2,740
Fixed-price contracts and other derivatives 13 57
Regulatory assets arising from fixed-price
contracts and other derivatives 160 193
Other regulatory assets 75 73
Inventories 66 124
Other 98 71
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Total current assets 6,903 4,808
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Investments and other assets:
Fixed-price contracts and other derivatives 12 27
Regulatory assets arising from fixed-price
contracts and other derivatives 918 830
Other regulatory assets 917 1,005
Nuclear-decommissioning trusts 522 526
Investments 1,075 1,169
Sundry 566 574
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Total investments and other assets 4,010 4,131
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Property, plant and equipment:
Property, plant and equipment 13,073 12,806
Less accumulated depreciation and amortization (6,708) (6,589)
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Total property, plant and equipment - net 6,365 6,217
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Total assets $ 17,278 $15,156
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See notes to Consolidated Financial Statements.
SEMPRA ENERGY
CONSOLIDATED BALANCE SHEETS
Dollars in millions
Balance at
--------------------------
March 31, December 31,
2002 2001
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 1,038 $ 875
Accounts payable - trade 563 702
Accounts payable - other 138 114
Deferred income taxes 31 70
Trading liabilities 3,618 1,793
Dividends and interest payable 136 139
Regulatory balancing accounts - net 764 660
Regulatory liabilities 13 19
Fixed-price contracts and other derivatives 171 195
Current portion of long-term debt 314 242
Other 679 715
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Total current liabilities 7,465 5,524
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Long-term debt 3,496 3,436
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Deferred credits and other liabilities:
Due to unconsolidated affiliate 160 160
Customer advances for construction 68 67
Post-retirement benefits other than pensions 144 145
Deferred income taxes 884 847
Deferred investment tax credits 94 95
Fixed-price contracts and other derivatives 920 835
Regulatory liabilities 99 86
Deferred credits and other liabilities 846 865
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Total deferred credits and other liabilities 3,215 3,100
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Preferred stock of subsidiaries 204 204
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Mandatorily redeemable trust preferred securities 200 200
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Commitments and contingent liabilities (Note 2)
SHAREHOLDERS' EQUITY
Common stock(750,000,000 shares authorized;
205,117,002 and 204,475,362 shares outstanding
at March 31, 2002 and December 31,2001, respectively) 1,500 1,495
Retained earnings 1,570 1,475
Deferred compensation relating to ESOP (35) (36)
Accumulated other comprehensive income (loss) (337) (242)
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Total shareholders' equity 2,698 2,692
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Total liabilities and shareholders' equity $17,278 $15,156
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See notes to Consolidated Financial Statements.
SEMPRA ENERGY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
Dollars in millions
Three Months Ended
March 31,
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2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 146 $ 178
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 148 142
Deferred income taxes and investment tax credits 3 9
Equity in losses of unconsolidated affiliates 7 2
Gain on sale of Energy America -- (34)
Gain on sale of assets (2) --
Changes in other assets 74 (336)
Changes in other liabilities (12) 13
Net changes in other working capital components (187) 88
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Net cash provided by operating activities 177 62
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CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (243) (160)
Acquisition of Sempra Metals Limited,
net of cash acquired (46) --
Dividends received from unconsolidated affiliates 8 --
Net proceeds from sale of Energy America -- 49
Other - net (6) 27
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Net cash used in investing activities (287) ( 84)
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CASH FLOWS FROM FINANCING ACTIVITIES
Common stock dividends (51) (50)
Repurchase of common stock (3) --
Issuances of common stock 4 --
Issuances of long-term debt 200 93
Payments on long-term debt (57) (169)
Increase in short-term debt - net 152 964
Other -- (15)
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Net cash provided by financing activities 245 823
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Change in cash and cash equivalents 135 801
Cash and cash equivalents, January 1 605 637
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Cash and cash equivalents, March 31 $ 740 $1,438
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest payments, net of amounts capitalized $ 77 $ 85
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Income tax payments (refunds) - net $ -- $ (29)
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SEMPRA ENERGY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
Dollars in millions
Three Months Ended
March 31,
----------------
2002 2001
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SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Acquisition of Sempra Metals Limited:
Assets acquired $ 1,871 $ --
Cash paid for capital stock (145) --
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Liabilities assumed $ 1,726 $ --
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See notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
This Quarterly Report on Form 10-Q is that of Sempra Energy (the
company), a California-based Fortune 500 energy services company.
Sempra Energy's principal subsidiaries are San Diego Gas & Electric
Company (SDG&E), Southern California Gas Company (SoCalGas)
(collectively referred to herein as the California utilities), Sempra
Energy Trading, Sempra Energy Resources and Sempra Energy
International. The financial statements herein are the Consolidated
Financial Statements of Sempra Energy and its subsidiaries.
The accompanying Consolidated Financial Statements have been prepared
in accordance with the interim-period-reporting requirements of Form
10-Q. Results of operations for interim periods are not necessarily
indicative of results for the entire year. In the opinion of
management, the accompanying statements reflect all adjustments
necessary for a fair presentation. These adjustments are only of a
normal recurring nature. Certain changes in classification have been
made to prior presentations to conform to the current financial
statement presentation.
The company's significant accounting policies are described in the
notes to Consolidated Financial Statements in the company's Annual
Report on Form 10-K for the year ended December 31, 2001 (Annual
Report). The same accounting policies are followed for interim
reporting purposes.
Information in this Quarterly Report is unaudited and should be read
in conjunction with the company's Annual Report.
As described in the notes to Consolidated Financial Statements in the
company's Annual Report, the California utilities account for the
economic effects of regulation on utility operations (excluding
generation operations) in accordance with Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" (SFAS No. 71).
NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board (FASB) issued
two statements, SFAS 142 "Goodwill and Other Intangible Assets" and
SFAS 143 "Accounting for Asset Retirement Obligations."
SFAS 142 provides guidance on how to account for goodwill and other
intangible assets after an acquisition is complete, and is effective
for fiscal years that start after December 15, 2001. SFAS 142 calls
for amortization of goodwill to cease and requires goodwill and
certain other intangibles to be tested for impairment at least
annually. Amortization of goodwill, including the company's share of
amounts recorded by unconsolidated subsidiaries, was $24 million, $35
million and $32 million in 2001, 2000 and 1999, respectively. In
accordance with the transitional guidance of SFAS 142, recorded
goodwill attributable to the company was tested for impairment by
comparing the fair value to its carrying value. Fair value was
determined using a discounted cash flow methodology. As a result,
during the three-month period ended March 31, 2002, Sempra Energy
International (SEI) recorded a pre-tax charge of $6 million related to
the impairment of goodwill. Impairment losses are reflected in other
operating expenses in the Statements of Consolidated Income.
Had the company been accounting for its goodwill under SFAS 142 for
all periods presented, the company's net income and earnings per share
would have been as follows (dollars in millions, except for per share
amounts):
Three Months Ended
March 31
2002 2001
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Reported net income $ 146 $ 178
Add: goodwill amortization,
net of tax -- 4
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Pro forma adjusted net income $ 146 $ 182
=====================
Reported basic and diluted
earnings per share $0.71 $0.88
Add: goodwill amortization,
net of tax -- .02
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Pro forma adjusted basic and
diluted earnings per share $0.71 $0.90
=====================
Included in the Consolidated Balance Sheets at March 31, 2002 and
December 31, 2001 were $167 million and $173 million, respectively, of
unamortized goodwill related to consolidated subsidiaries (included in
sundry assets) and, on both dates, $248 million of unamortized
goodwill related to unconsolidated subsidiaries (included in
investments). Unamortized other intangible assets were not material at
March 31, 2002 and December 31, 2001.
SFAS 143 addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This applies to legal obligations
associated with the retirement of long-lived assets. It requires
entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. When the
liability is initially recorded, the entity increases the carrying
amount of the related long-lived asset to reflect the future
retirement cost. Over time, the liability is accreted to its present
value and paid, and the capitalized cost is depreciated over the
useful life of the related asset. SFAS 143 is effective for financial
statements issued for fiscal years beginning after June 15, 2002.
Upon adoption of SFAS 143, the company estimates that it would record
an addition of $540 million to utility plant representing the
company's share of the San Onofre Nuclear Generating Station (SONGS)
estimated future decommissioning costs, and a corresponding retirement
obligation liability of $540 million. The nuclear decommissioning
trusts balance of $522 million at March 31, 2002 represents amounts
collected for future decommissioning costs and has a corresponding
offset in accumulated depreciation. Any difference between the amount
of capitalized cost that would have been recorded and depreciated and
the amounts collected in the nuclear decommissioning trusts will be
recorded as a regulatory asset or liability. Except for SONGS, the
company has not yet determined the effect of SFAS 143 on its financial
statements.
In August 2001, the FASB issued SFAS 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" that replaces SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS 144 applies to all long-lived assets,
including discontinued operations. SFAS 144 requires that those long-
lived assets classified as held for sale be measured at the lower of
carrying amount or fair value less cost to sell. Discontinued
operations will no longer be measured at net realizable value or
include amounts for operating losses that have not yet occurred. SFAS
144 also broadens the reporting of discontinued operations to include
all components of an entity with operations that can be distinguished
from the rest of the entity and that will be eliminated from the
ongoing operations of the entity in a disposal transaction. The
provisions of SFAS 144 are effective for fiscal years beginning after
December 15, 2001. The adoption of SFAS 144 has not affected the
company's financial statements.
2. MATERIAL CONTINGENCIES
ELECTRIC INDUSTRY RESTRUCTURING
The restructuring of California's electric utility industry
significantly affected the company's electric utility operations. The
background of this issue is described in the company's Annual Report.
Subsequent developments are described herein.
SDG&E's undercollection balance has been reduced from $392 million at
December 31, 2001, to $338 million at March 31, 2002. At current
rates, which include no new positive settlements with the California
Public Utilities Commission (CPUC), the balance is expected to be
completely recovered by mid 2005.
On March 21, 2002, the CPUC affirmed its decision prohibiting new
direct access contracts after September 20, 2001, but rejected a
proposal to make the prohibition retroactive to July 1, 2001.
Contracts in place as of September 20, 2001 may be renewed or
assigned to new parties. In a separate proceeding, the CPUC will
examine the use of exit fees as a means of recovering from direct
access customers the adverse effects on the California Department of
Water Resources (DWR) of direct access customer departures from
utility procurement.
On April 4, 2002, the CPUC approved a plan that determines how much
ratepayer revenue the state's investor-owned utilities (IOUs) can
collect in 2002 for utility retained generation. SDG&E continues to
collect the system average rate (the 6.5-cent commodity rate ceiling
plus an amount to repay the DWR for its purchases of power, as
described in the company's Annual Report). The excess, if any, of the
rate ceiling over actual costs is used to reduce the undercollection
balance described above. Incremental Cost Incentive Pricing (ICIP) is
continued for SONGS through 2003. In addition to keeping the ICIP in
place, the decision retains the reduced rate of return authorized for
the SONGS ratebase, both part of an overall mechanism adopted by the
CPUC in 1996.
NUCLEAR INSURANCE
SDG&E and the co-owners of SONGS have purchased primary insurance of
$200 million, the maximum amount available, for public-liability
claims. An additional $9.3 billion of coverage is provided by
secondary financial protection required by the Nuclear Regulatory
Commission and provides for loss sharing among utilities owning
nuclear reactors if a costly accident occurs. SDG&E and the co-owners
of SONGS could be assessed retrospective premium adjustments of up to
$176 million (SDG&E's share is $36 million unless default occurs by
any co-owner) in the event of a nuclear incident involving any of the
licensed, commercial reactors in the United States, if the amount of
the loss exceeds $200 million. In the event the public-liability limit
stated above is insufficient, the Price-Anderson Act provides for
Congress to enact further revenue-raising measures to pay claims,
which could include an additional assessment on all licensed reactor
operators.
Insurance coverage is provided for up to $2.75 billion of property
damage and decontamination liability. Coverage is also provided for
the cost of replacement power, which includes indemnity payments for
up to three years and six weeks, after a waiting period of 12 weeks.
Coverage is provided through a mutual insurance company owned by
utilities with nuclear facilities. If losses at any of the nuclear
facilities covered by the risk-sharing arrangements were to exceed the
accumulated funds available from these insurance programs, SDG&E could
be assessed retrospective premium adjustments of up to $7.4 million.
Both the public-liability and property insurance include coverage for
SDG&E and co-owners' losses resulting from acts of terrorism.
LITIGATION
Lawsuits filed in 2000 and currently consolidated in San Diego
Superior Court seek class-action certification and allege that Sempra
Energy, SoCalGas, SDG&E and El Paso Energy Corp. acted to drive up
the price of natural gas for Californians by agreeing to restrict
pipeline capacity into California. Management believes the
allegations are without merit.
Various 2000 lawsuits, which seek class-action certification and
which have been consolidated in San Diego Superior Court, allege that
certain company subsidiaries unlawfully manipulated the electric-
energy market. Management believes the allegations are without merit.
Sempra Energy Trading (SET) is a defendant in the action at the
Federal Energy Regulatory Commission (FERC) concerning rates charged
certain utilities by sellers of electricity. Management does not
expect any adverse findings that would be material to the company's
financial condition.
At December 31, 2001, SET was due approximately $100 million from the
California Independent System Operator, which had scheduled power
transactions and access to the transmission system. The collection of
these receivables may depend on satisfactory resolution of the
financial difficulties being experienced by the California IOUs as a
result of the California electric industry crisis. The company
believes adequate reserves have been recorded.
Sempra Energy Resources (SER) is a defendant in an action brought by
Occidental Energy Ventures (Occidental) with respect to the Elk Hills
power project being jointly developed by the two companies.
Occidental alleges that SER breached the joint venture agreement by
not providing that Occidental would be a party to the contract with
the DWR or receiving its share of the price from providing power to
the DWR under the contract from Elk Hills. Management believes the
allegations are without merit.
SER is a defendant in an action brought by the CPUC and the
California Electricity Oversight Board at the FERC alleging that
because of the dysfunctional energy market in California, the long-
term power contracts entered into by the DWR should be revised or set
aside as being unjust and unreasonable. Management believes the
allegations are without merit. On April 24, 2002, the FERC ordered
hearings on the complaints. The order requires the complainants to
satisfy a "heavy" burden of proof to support a revision of the
contracts, and cited the FERC's long-standing policy to recognize the
sanctity of contracts from which it has deviated only in "extreme
circumstances." A date for the hearing has not been set pending the
completion of FERC-ordered settlement judge proceedings but the FERC
announced that it expects to issue a final decision by May 2003.
SER, SET and SDG&E, along with all other sellers in the western power
market, have been named defendants in a complaint filed at the FERC
by the California Attorney General's office seeking refunds for
electricity purchases based on alleged violations of FERC tariffs.
Management believes the allegations are without merit.
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 these matters
will not have a material adverse effect on the company's financial
condition or results of operations.
ARGENTINE INVESTMENTS
SEI has a $350 million investment in Argentina through its ownership
of approximately 40 percent of two natural gas operating utilities. As
a result of the continuing decline in the value of the Argentine peso,
SEI recorded a $94 million currency adjustment reduction to
shareholders' equity for these investments during the first quarter of
2002. A similar, $155 million reduction in shareholders' equity was
recorded during the fourth quarter of 2001. These non-cash adjustments
did not affect net income, but did reduce comprehensive income and
increase accumulated other comprehensive loss.
The related Argentine economic decline and government responses
(including Argentina's recent unilateral, retroactive abrogation of
utility agreements) are continuing to adversely affect the operations
of SEI's two unconsolidated Argentine utilities. SEI has notified the
Argentine government that it intends to file 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 the
government actions. If it were to become probable that SEI would not
recover at least the difference between its pre-currency-adjustment
carrying value of these investments over their diminished value, SEI
would at that time record a charge against net income equal to the
shortfall. However, the effect on shareholders' equity of any such
charge would be reduced or eliminated to the extent of previously
recorded currency adjustments relating to SEI's Argentine investments.
QUASI-REORGANIZATION
In 1993, Pacific Enterprises (PE), parent company of SoCalGas,
divested its merchandising operations and most of its oil and gas
exploration and production business. In connection with the
divestitures, PE effected a quasi-reorganization for financial
reporting purposes effective December 31, 1992. Management believes
the remaining balances of the liabilities established in connection
with the quasi-reorganization are adequate.
3. COMPREHENSIVE INCOME
The following is a reconciliation of net income to comprehensive
income.
Three months
ended
March 31,
--------------
(Dollars in millions) 2002 2001
- ----------------------------------------------
Net income $ 146 $ 178
Foreign currency adjustments (94) 1*
Financial instruments (Note 5) (1) --
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Comprehensive income $ 51 $ 179
- ----------------------------------------------
* This did not affect the reported balance of accumulated other
comprehensive income due to rounding.
4. SEGMENT INFORMATION
The company, primarily an energy services company, has three
separately managed reportable segments comprised of SoCalGas, SDG&E
and SET. The two utilities operate in essentially separate service
territories under separate regulatory frameworks and rate structures
set by the CPUC. As described in the notes to Consolidated Financial
Statements in the company's Annual Report, SDG&E provides electric
service to San Diego and southern Orange counties and natural gas
service to San Diego county. SoCalGas is a natural gas distribution
utility, serving customers throughout most of southern California and
part of central California. SET, based in Stamford, Connecticut, is a
wholesale trader of physical and financial energy products, including
natural gas, power, crude oil and associated commodities, and a trader
and wholesaler of metals, serving a broad range of customers in the
United States, Canada, Europe and Asia.
The accounting policies of the segments are the same as those
described in the notes to Consolidated Financial Statements in the
company's Annual Report, and segment performance is evaluated by
management based on reported net income. Utility transactions are
primarily based on rates set by the CPUC and the FERC. There were no
significant changes in segment assets during the three months ended
March 31, 2002, except for the increase in trading assets, as shown on
the Consolidated Balance Sheets and as discussed in Note 6.
- ------------------------------------------------
Three-month periods
ended March 31,
-------------------
(Dollars in millions) 2002 2001
- ------------------------------------------------
Operating Revenues:
Southern California Gas $ 722 $1,548
San Diego Gas & Electric 427 1,129
Sempra Energy Trading 206 358
Intersegment revenues (3) (5)
Other 173 212
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Total $1,525 $3,242
- ------------------------------------------------
Net Income:
Southern California Gas* $ 60 $ 51
San Diego Gas & Electric* 53 52
Sempra Energy Trading 42 86
Other (9) (11)
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Total $ 146 $ 178
- ------------------------------------------------
* after preferred dividends
- ------------------------------------------------
Balance at
--------------------
March 31, December 31,
2002 2001
- --------------------------------------------------
Assets:
Southern California Gas $ 4,053 $ 3,762
San Diego Gas & Electric 5,328 5,444
Sempra Energy Trading 5,309 3,114
Other 2,588 2,836
--------------------
Total $17,278 $15,156
- --------------------------------------------------
5. FINANCIAL INSTRUMENTS
Note 10 of the notes to Consolidated Financial Statements in the
company's Annual Report discusses the company's financial
instruments, including the adoption of SFAS 133, accounting for
derivative instruments and hedging activities, market risk, interest-
rate risk management, energy derivatives and contracts, and fair
value. Additional activity and information since January 1, 2002
related to financial instruments are described herein.
At March 31, 2002, $13 million in current assets, $12 million in
noncurrent assets, $171 million in current liabilities and $920
million in noncurrent liabilities were recorded in the Consolidated
Balance Sheets for fixed-priced contracts and other derivatives.
Regulatory assets and liabilities were established to the extent that
derivative gains and losses are recoverable or payable through future
rates. As such, $160 million in current regulatory assets, $918
million in noncurrent regulatory assets, $2 million in regulatory
balancing account liabilities and $2 million in current regulatory
liabilities were recorded in the Consolidated Balance Sheets as of
March 31, 2002. For the three months ended March 31, 2002, $2 million
of losses were recorded in Other Operating Income in the Statements
of Consolidated Income. Additionally, $10 million was a market value
adjustment to long-term debt related to two fixed-to-floating
interest rate swap agreements.
6. RECENT TRANSACTIONS
Recently, SET announced three acquisitions that will add base metals
trading and warehousing to its trading business. On February 4, 2002,
SET completed the acquisition of London-based Enron Metals Limited, a
leading metals trader on the London Metals Exchange, for $145 million
(subject to completion of an audit). The company has been renamed
Sempra Metals Limited. Its primary asset, $1.5 billion of base
metals, of which $1.4 billion arises from sale and repurchase
transactions, is included in Trading Assets in the March 31, 2002
consolidated balance sheet, along with $160 million of other
commodities from SET's ongoing trading activities. On April 26, 2002,
SET completed the acquisition of the metals concentrates business of
New York-based Enron Metals & Commodity Corp., a leading global
trader of copper, lead and zinc concentrates, for $44 million. Also
in April 2002, SET completed the acquisition of the U.S. warehousing
business of Henry Bath, Inc. and the European and Asian assets of the
Liverpool, England-based Henry Bath Limited and subsidiaries, which
provide warehousing services for non-ferrous metals in Europe and
Asia, for a total of $36 million. These acquisitions are expected to
contribute to Sempra Energy's earnings in 2002.
In April and May of 2002, the company publicly offered and sold $600
million in "Equity Units." Each unit consists of $25 principal amount
of the company's 5.60% senior notes due May 17, 2007 and a purchase
contract to purchase the company's common stock on May 17, 2005. The
company intends to use the net proceeds of the offering to repay a
portion of its short-term debt, including debt used to finance the
capital expenditure program for Sempra Energy Global Enterprises, the
holding company for most of Sempra Energy's unregulated subsidiaries.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
financial statements contained in this Form 10-Q and Management's
Discussion and Analysis of Financial Condition and Results of
Operations contained in the company's Annual Report.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report contains statements that are not historical fact
and constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. The words
"estimates," "believes," "expects," "anticipates," "plans," "intends,"
"may," "would" and "should" or similar expressions, or discussions of
strategy or of plans are intended to identify forward-looking
statements. Forward-looking statements are not guarantees of
performance. They involve risks, uncertainties and assumptions. Future
results may differ materially from those expressed in these forward-
looking statements.
Forward-looking statements are necessarily based upon various
assumptions involving judgments with respect to the future and other
risks, including, among others, local, regional, national and
international economic, competitive, political, legislative and
regulatory conditions and developments; actions by the CPUC, the
California Legislature, the DWR and the FERC; capital market
conditions, inflation rates, interest rates and exchange rates; energy
and trading markets, including the timing and extent of changes in
commodity prices; weather conditions and conservation efforts; war and
terrorist attacks; business, regulatory and legal decisions; the pace
of deregulation of retail natural gas and electricity delivery; the
timing and success of business development efforts; and other
uncertainties, all of which are difficult to predict and many of which
are beyond the control of the 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.
See also "Factors Influencing Future Performance" below.
CAPITAL RESOURCES AND LIQUIDITY
The company's California utility operations have historically been a
major source of liquidity. However, beginning in the third quarter of
2000 and continuing into the first quarter of 2001, SDG&E's liquidity
and its ability to make funds available to Sempra Energy were
adversely affected by the electric cost undercollections resulting
from a temporary ceiling on electric rates legislatively imposed in
response to high electric costs. Significant growth in these
undercollections has ceased as a result of an agreement with the DWR,
under which the DWR is obligated to purchase SDG&E's full net short
position consisting of the power and ancillary services required by
SDG&E's customers that are not provided by SDG&E's nuclear generating
facilities or its previously existing purchase power contracts. The
agreement extends through December 31, 2002. In addition, the CPUC is
conducting proceedings intended to establish guidelines and procedures
for the eventual resumption of electricity procurement by SDG&E and
the other California IOUs. Electric costs are now below and are
expected to remain below the rates under the rate ceiling. See further
discussion in the company's Annual Report.
CASH FLOWS FROM OPERATING ACTIVITIES
For the three-month period ended March 31, 2002, the increase in cash
flows from operations compared to the corresponding period in 2001
was primarily due to SDG&E's undercollection of purchased-power costs
that peaked at $747 million in March of 2001 and which decreased to
$392 million at December 31, 2001 and $338 million at March 31, 2002.
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures for property, plant and equipment by the
California utilities are estimated to be $700 million for the full
year 2002 and are being financed primarily by internally generated
funds and security issuances. Construction, investment and financing
programs are continuously reviewed and revised in response to changes
in competition, customer growth, inflation, customer rates, the cost
of capital, and environmental and regulatory requirements. Capital
expenditures for property, plant and equipment by the company's other
business are estimated to be $900 million for the full year 2002.
Recently, SET announced three acquisitions that will add base metals
trading and warehousing to its trading business. On February 4, 2002,
SET completed the acquisition of London-based Enron Metals Limited, a
leading metals trader on the London Metals Exchange, for $145 million
(subject to completion of an audit). The company has been renamed
Sempra Metals Limited. On April 26, 2002, SET completed the
acquisition of the metals concentrates business of New York-based
Enron Metals & Commodity Corp., a leading global trader of copper,
lead and zinc concentrates, for $44 million. Also in April 2002, SET
completed the acquisition of the U.S. warehousing business of Henry
Bath, Inc. and the European and Asian assets of the Liverpool,
England-based Henry Bath Limited and subsidiaries, which provide
warehousing services for non-ferrous metals in Europe and Asia, for a
total of $36 million. These acquisitions are expected to contribute
to Sempra Energy's earnings in 2002.
CASH FLOWS FROM FINANCING ACTIVITIES
For the three-month period ended March 31, 2002, cash flows from
financing activities decreased from the corresponding period in 2001
due primarily to the above-normal drawdowns of lines of credit in the
2001 period.
In April and May of 2002, the company publicly offered and sold $600
million in "Equity Units." Each unit consists of $25 principal amount
of the company's 5.60% senior notes due May 17, 2007 and a purchase
contract to purchase the company's common stock on May 17, 2005. The
company intends to use the net proceeds of the offering to repay a
portion of its short-term debt, including debt used to finance the
capital expenditure program for Sempra Energy Global Enterprises.
In April 2002, Fitch, Inc. confirmed its prior credit ratings of the
company's senior unsecured debt at A with a stable outlook as well as
confirming its prior ratings of the company's other debt and that of
its subsidiaries; Standard & Poor's reduced its ratings of the
company's senior unsecured debt from A with a negative outlook to A-
with a stable outlook, and made corresponding adjustments in the
ratings and outlook of the company's other debt and that of its
subsidiaries; and Moody's Investors Service, Inc., which currently
rates the company's senior unsecured debt at A2 with a negative
outlook, confirmed its prior ratings of the debt of SoCalGas and the
short-term debt and variable rate demand bonds of SDG&E, but placed
its ratings of the debt of Sempra Energy and the other debt of Sempra
Energy's subsidiaries under review for possible downgrade.
RESULTS OF OPERATIONS
Net income and net income per share decreased for the three-month
period ended March 31, 2002, compared to the corresponding period in
2001, primarily due to reduced income in 2002 from SET as described
below and the 2001 gain on sale of Energy America, partially offset
by lower interest expense in 2002.
Income tax expense decreased for the three-month period ended March
31, 2002, compared to the corresponding period in 2001, primarily due
to lower income before taxes in 2002 and an additional expense
recorded in the first quarter of 2001 related to the position of the
Internal Revenue Service on a prior year's deduction.
The decrease in interest expense was primarily due to a decrease
in outstanding debt.
The decreases in other operating revenues and operating expenses
were primarily due to decreased volatility in energy commodity
markets during 2002 at SET and lower energy commodity prices
during 2002 at SER.
UTILITY OPERATIONS
The tables below summarize the natural gas and electric volumes and revenues
by customer class for the three-month periods ended March 31, 2002 and 2001.
Gas Sales, Transportation and Exchange
(Volumes in billion cubic feet, dollars in millions)
Gas Sales Transportation & Exchange Total
----------------------------------------------------------------------
Volumes Revenue Volumes Revenue Volumes Revenue
----------------------------------------------------------------------
2002:
Residential 108 $ 686 1 $ 2 109 $ 688
Commercial and industrial 34 175 73 36 107 211
Electric generation plants -- -- 53 9 53 9
Wholesale -- -- 11 1 11 1
---------------------------------------------------------------
142 $ 861 138 $ 48 280 909
Balancing accounts and other (41)
--------
Total $ 868
- --------------------------------------------------------------------------------------------
2001:
Residential 118 $1,328 1 $ 2 119 $1,330
Commercial and industrial 34 360 65 63 99 423
Electric generation plants -- -- 118 31 118 31
Wholesale -- -- 8 4 8 4
---------------------------------------------------------------
152 $1,688 192 $100 344 1,788
Balancing accounts and other 93
--------
Total $1,881
- --------------------------------------------------------------------------------------------
The decrease in natural gas revenue is primarily due to lower natural
gas prices and decreased transportation for electric generation
plants.
The decrease in the cost of natural gas distributed was primarily
due to lower natural gas prices. Under the current regulatory
framework, changes in core-market natural gas prices do not
affect net income since, as explained more fully in the company's
Annual Report, current or future core customer rates normally
recover the actual cost of natural gas on a substantially
concurrent basis.
Electric Distribution and Transmission
(Volumes in millions of Kwhrs, dollars in millions)
2002 2001
------------------------------------------
Volumes Revenue Volumes Revenue
------------------------------------------
Residential 1,658 $ 174 1,654 $ 225
Commercial 1,425 138 1,506 255
Industrial 419 33 765 170
Direct access 803 24 587 19
Street and highway lighting 22 2 22 3
Off-system sales -- -- 424 89
------------------------------------------
4,327 371 4,958 761
Balancing and other (93) 30
------------------------------------------
Total 4,327 $ 278 4,958 $ 791
------------------------------------------
The decreases in electric revenues and in electric fuel and net
purchased power expense were primarily due to the effect of lower
electric commodity costs, which are passed on to customers
without markup, and decreased off-system sales. Under the current
regulatory framework, changes in on-system prices normally do not
affect net income, as explained in the Annual Report.
SEMPRA ENERGY TRADING
SET, headquartered in Stamford, Connecticut and acquired on December
31, 1997, is a wholesale trader of physical and financial energy
products, including natural gas, power, crude oil and associated
commodities, and a trader and wholesaler of metals, serving a broad
range of customers in the United States, Canada, Europe and Asia. In
addition to the transactions described below in "Market Risk," SET
also enters into long-term structured transactions. SET recorded net
income of $42 million and $86 million for the three-month periods
ended March 31, 2002 and 2001, respectively. The decrease in net
income was primarily due to decreased volatility in energy commodity
markets and energy commodity prices during 2002.
For the three-month period ended March 31, 2002, SET recorded net
revenues of $206 million compared to $358 million for the
corresponding period in 2001. SET's gross revenues were $6.7 billion
and $9.5 billion for the three-month periods ended March 31, 2002
and 2001, respectively.
The following tables summarize SET's trading margin by geographical
region and by product line for the three-month periods ended March
31, 2002 and 2001.
Three Months Ended
March 31
Trading Margin (dollars in millions) 2002 2001
- --------------------------------------------------------------------
Geographical:
North America $ 90 $ 217
Europe/Asia 47 32
------------------------
Total $ 137 $ 249
========================
Product Line:
Gas $ 67 $ 59
Power 23 148
Oil/Crude & Products 39 43
Metals and other 8 (1)
------------------------
Total $ 137 $ 249
========================
The estimated fair values for SET's trading activities as of March
31, 2002, and the periods during which unrealized revenues are
expected to be realized, are (dollars in millions):
Fair Market
Value at
March 31 /--Expected Realization (in months)--/
Source of fair value 2002 0-12 13-24 25-36 >36
- ----------------------------------------------------------------------------
Exchange prices $ (112) $ (85) $ (27) $ -- $ --
Prices actively quoted 744 541 212 (9) --
Prices provided by other
external sources (11) (15) (8) (6) 18
Prices based on models
and other valuation
methods (4) (30) 5 20 1
--------------------------------------------------
Total $ 617 $ 411 $ 182 $ 5 $ 19
==================================================
100.0% 66.6% 29.5% 0.8% 3.1%
The following table summarizes the counterparty credit quality and
exposure for SET expressed in terms of percentage of total trading
assets. These exposures are net of collateral in the form of
customer margin and/or letters of credit.
March 31 December 31
2002 2001
- --------------------------------------------------------------------
Commodity Exchanges 12 % 8 %
Investment Grade 64 % 72 %
Below Investment Grade 24 % 20 %
- --------------------------------------------------------------------
SEMPRA ENERGY INTERNATIONAL
SEI develops, operates and invests in energy-infrastructure systems.
SEI has interests in natural gas and/or electric transmission and
distribution projects in Argentina, Chile, Mexico, Peru and the
eastern United States, and is pursuing other projects, primarily in
Mexico. Results for SEI were net income of $8 million and $5 million
for the three-month periods ended March 31, 2002 and 2001,
respectively. The increase in net income was primarily due to
increased profitability of the company's utility operations in
Mexico, Chile and Peru. Argentina's economic problems had no material
impact on SEI's earnings for the first quarter 2002. A discussion of
the Argentine issue is included in Note 2 of the notes to
Consolidated Financial Statements.
SEMPRA ENERGY RESOURCES
SER develops, owns and operates power plants for the competitive
market, and owns natural gas storage, production and transportation
assets. Results for SER were a net loss of $3 million for the three-
month period ended March 31, 2002, compared with net income of $4
million for the corresponding period in 2001. The loss was primarily
due to lower energy commodity prices in 2002 and development costs
for new power plants.
In accordance with SER's May 2001 agreement with the DWR to supply up
to 1,900 megawatts of power to the state of California, sales to the
DWR resumed on April 1, 2002. SER continues to perform all
obligations under this contract, which is scheduled to end on
September 30, 2011. Subsequent to the state's signing of this
contract and electricity-supply contracts with other vendors, various
state officials have contended that the rates called for by the
contracts are too high. These rates substantially exceed current
spot-market prices for electricity, but are substantially lower than
those prevailing at the time the contracts were signed. The company
believes that its contract prices were fair, but has offered to
renegotiate certain aspects of its contract (which would not affect
the long-term profitability) in a manner mutually beneficial to SER
and the state. In February 2002, the CPUC and the California
Electricity Oversight Board petitioned the FERC to determine that the
contracts do not provide just and reasonable rates, and to abrogate
or reform the contracts. On April 24, 2002, the FERC ordered hearings
on the complaints. The order requires the complainants to satisfy a
"heavy" burden of proof to support a revision of the contracts, and
cited the FERC's long-standing policy to recognize the sanctity of
contracts from which it has deviated only in "extreme circumstances."
A date for the hearing has not been set pending the completion of
settlement judge proceedings that are scheduled to begin on May 16,
2002, but the FERC order announced that it expects to issue a final
decision by May 2003.
OTHER OPERATIONS
Sempra Energy Solutions (SES) provides integrated energy-related
products and services to commercial, industrial, government,
institutional and consumer markets. SES recorded net income of $1
million for the three-month period ending March 31, 2002, compared
with a net loss of $6 million for the corresponding period in 2001.
The improvement resulted from a growing customer base and increased
profit margins on energy-procurement contracts.
Sempra Energy Financial (SEF) invests as a limited partner in
affordable-housing properties and alternative-fuel projects. SEF's
portfolio includes 1,300 properties throughout the United States,
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 recorded net income of $7 million and $8 million
for the three-month periods ended March 31, 2002 and 2001,
respectively. SEF's future investment policy is dependent on the
company's future domestic income-tax position.
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
volatility will result primarily from activities at SET, SEI, SER and
other businesses. Recent developments concerning the factors
influencing future performance are summarized below. Note 2 of the
notes to Consolidated Financial Statements and the company's Annual
Report describe events in the deregulation of California's electric
and natural gas industries.
Investments
As described in the company's Annual Report, the company has various
investments and projects that will impact the company's future
performance. Recently, SET announced three acquisitions that will add
base metals trading and warehousing to its trading business. These
acquisitions are Enron Metals Limited (renamed Sempra Metals
Limited), Enron Metals & Commodity Corp. and Henry Bath, and are
further described in Note 6 of the notes to Consolidated Financial
Statements. These acquisitions are expected to contribute to Sempra
Energy's earnings in 2002.
Electric-Generation Assets
As described in the company's Annual Report, the company is involved
in the development of several electric-generation projects that will
impact the company's future performance. The power plants that SER is
building in Arizona, California and Mexico are on schedule to commence
operations by the end of 2003. The company has approximately 2,400
megawatts of new generation in operation or under construction. The
570-megawatt Elk Hills power project, near Bakersfield, California, is
about 50 percent complete and on schedule to begin commercial
operations in March 2003. SER's projected portfolio of plants in the
western United States and Baja California, Mexico, will supply power
to the state of California under SER's agreement with the DWR. See
further discussion above related to SER and its contract with the DWR.
NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board (FASB) issued
two statements, SFAS 142 "Goodwill and Other Intangible Assets" and
SFAS 143 "Accounting for Asset Retirement Obligations." SFAS 142
provides guidance on how to account for goodwill and other intangible
assets after an acquisition is complete. SFAS 143 addresses financial
accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset
retirement costs. In August 2001, the FASB issued SFAS 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets" that replaces
SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS 144 applies to all long-
lived assets, including discontinued operations.
See further discussion in Note 1 of the notes to Consolidated
Financial Statements.
ITEM 3. MARKET RISK
There have been no significant changes in the risk issues affecting
the company subsequent to those discussed in the Annual Report. As
noted in that report, the California utilities may, at times, be
exposed to limited market risk in their natural gas purchase, sale
and storage activities as a result of activities under SDG&E's gas
Performance-Based Regulation mechanism or SoCalGas' Gas Cost
Incentive Mechanism. The risk is managed within the parameters of the
company's market-risk management and trading framework. The Value at
Risk (VaR) for SET at March 31, 2002, and the average VaR for the
three-month period ended March 31, 2002, at the 95-percent and 99-
percent confidence interval (one-day holding period) were as follows
(in millions of dollars):
95% 99%
------ ------
At March 31, 2002 $9.1 $12.9
Average for the three months ended 3/31/02 6.5 9.1
As of March 31, 2002, the total VaR of the California utilities'
natural gas positions was not material.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except as otherwise described in this report, neither the company nor
its subsidiaries are party to, nor is their property the subject of,
any material pending legal proceedings other than routine litigation
incidental to their businesses.
ITEM 4. SUBMISSION OF MATTERS TO VOTE
Sempra Energy's 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 7, 2002, the shareholders of Sempra Energy elected four
directors for a three-year term expiring in 2005. The name of each
nominee and the number of shares voted for or withheld were as
follows:
Nominees Votes For Votes Withheld
- -------------------------------------------------------------
Hyla H. Bertea 174,408,869 7,777,141
Richard A. Collato 174,627,255 7,558,755
William C. Rusnack 175,215,622 6,970,388
William P. Rutledge 175,332,597 6,853,413
The results of the voting on the following shareholder proposals,
which were submitted from the floor at the annual meeting on May 7,
2002, were as follows:
(a) A proposal recommending that the company's independent auditors
not perform any work for the company in addition to auditing.
In Favor 10,420
Opposed 182,175,590
(b) A proposal recommending that the company name annually the
directors who have philanthropic links to the company and the latest
annual sum.
In Favor 10,420
Opposed 182,175,590
Additional information concerning the election of the board of
directors is contained in Sempra Energy's Notice of 2002 Annual
Meeting of Shareholders and Proxy Statement.
ITEM 5. OTHER INFORMATION
A new collective bargaining agreement for field, technical and most
clerical employees at SoCalGas represented by the Utility Workers'
Union of America or the International Chemical Workers' Council has
been negotiated. The new agreement on wages, hours and working
conditions is in effect through December 31, 2004.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 12 - Computation of ratios
12.1 Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed after December 31, 2001:
Current Report on Form 8-K filed January 28, 2002, filing as an
exhibit Sempra Energy's press release of January 24, 2002, giving the
financial results for the year ended December 31, 2001.
Current Report on Form 8-K filed April 29, 2002, filing as an exhibit
Sempra Energy's press release of April 23, 2002, giving the financial
results for the three-month period ended March 31, 2002.
Current Report on Form 8-K filed April 30, 2002, announcing the public
offering of Sempra Energy's Equity Units.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly cause this report to be signed on its behalf
by the undersigned thereunto duly authorized.
SEMPRA ENERGY
-------------------
(Registrant)
Date: May 9, 2002 By: /s/ F. H. Ault
----------------------------
F. H. Ault
Sr. Vice President and Controller
1
3
1
17
1
25
EXHIBIT 12.1
SEMPRA ENERGY
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
(Dollars in millions)
Three
months
ended
March 31,
1997 1998 1999 2000 2001 2002
-------- -------- -------- -------- -------- ---------
Fixed Charges and Preferred
Stock Dividends:
Interest $ 209 $ 210 $ 233 $ 308 $ 358 $ 82
Interest portion of
annual rentals 25 20 10 8 6 1
Preferred dividends
of subsidiaries (1) 31 18 16 18 16 5
-------- -------- -------- -------- -------- ---------
Combined Fixed Charges
and Preferred Stock
Dividends for Purpose
of Ratio $ 265 $ 248 $ 259 $ 334 $ 380 $ 88
======== ======== ======== ======== ======== =========
Earnings:
Pretax income from
continuing operations $ 733 $ 432 $ 573 $ 699 $ 731 $ 205
Total Fixed Charges
(from above) 265 248 259 334 380 88
Less Interest capitalized (2) (1) (1) (3) (11) (2)
Equity income (loss) of
unconsolidated subsidiaries
and joint ventures - - - 62 12 (17)
-------- -------- -------- -------- -------- ---------
Total Earnings for
Purpose of Ratio $ 996 $ 679 $ 831 $ 968 $1,088 $ 308
======== ======== ======== ======== ======== =========
Ratio of Earnings
to Combined Fixed Charges
and Preferred Stock
Dividends 3.76 2.74 3.21 2.90 2.86 3.50
======== ======== ======== ======== ======== =========
(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.
