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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, 1999
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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
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Ash Street, San Diego, California 92101
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(Address of principal executive offices)
(Zip Code)
(619) 696-2034
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
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Common stock outstanding on July 31, 1999: 240,342,064
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SEMPRA ENERGY
STATEMENTS OF CONSOLIDATED INCOME (Unaudited)
(Dollars in millions, except per share amounts)
Three Months Ended
June 30,
---------------
1999 1998
------ ------
Revenues and Other Income:
Utility revenues:
Natural gas $ 706 $ 654
Electric 646 476
Other operating revenues 159 87
Other income 6 4
------ ------
Total 1,517 1,221
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Expenses:
Cost of natural gas distributed 275 189
Purchased power - net 88 62
Electric fuel 21 36
Operating expenses 485 523
Depreciation and amortization 467 276
Franchise payments and other taxes 41 47
Preferred dividends of subsidiaries 3 2
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Total 1,380 1,135
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Income Before Interest and Income Taxes 137 86
Interest 54 48
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Income Before Income Taxes 83 38
Income Taxes 1 7
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Net Income $ 82 $ 31
====== ======
Net Income Per Share of Common Stock (Basic) $0.35 $0.13
====== ======
Net Income Per Share of Common Stock (Diluted) $0.35 $0.13
====== ======
Common Dividends Declared Per Share $0.39 $0.46
====== ======
See notes to Consolidated Financial Statements.
SEMPRA ENERGY
STATEMENTS OF CONSOLIDATED INCOME (Unaudited)
(Dollars in millions, except per share amounts)
Six Months Ended
June 30,
---------------
1999 1998
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Revenues and Other Income:
Utility revenues:
Natural gas $1,404 $1,415
Electric 1,006 973
Other operating revenues 270 164
Other income 28 19
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Total 2,708 2,571
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Expenses:
Cost of natural gas distributed 566 519
Purchased power - net 154 158
Electric fuel 57 67
Operating expenses 873 900
Depreciation and amortization 609 551
Franchise payments and other taxes 86 98
Preferred dividends of subsidiaries 6 6
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Total 2,351 2,299
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Income Before Interest and Income Taxes 357 272
Interest 112 103
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Income Before Income Taxes 245 169
Income Taxes 64 51
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Net Income $ 181 $ 118
====== ======
Net Income Per Share of Common Stock (Basic) $0.76 $0.50
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Net Income Per Share of Common Stock (Diluted) $0.76 $0.50
====== ======
Common Dividends Declared Per Share $0.78 $0.78
====== ======
See notes to Consolidated Financial Statements.
SEMPRA ENERGY
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
Balance at
------------------------
June 30, December 31,
1999 1998
(Unaudited)
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 656 $ 424
Accounts receivable - trade 386 586
Accounts and notes receivable - other 129 159
Deferred income taxes 111 93
Energy trading assets 1,066 906
Inventories 68 151
Other 196 139
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Total current assets 2,612 2,458
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Investments and other assets:
Regulatory assets 695 1,056
Nuclear-decommissioning trusts 507 494
Investments 1,059 548
Other assets 559 459
----------------------------
Total investments and other assets 2,820 2,557
----------------------------
Property, plant and equipment:
Property, plant and equipment 10,795 11,235
Less accumulated depreciation and amortization (5,521) (5,794)
----------------------------
Total property, plant and equipment - net 5,274 5,441
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Total assets $10,706 $10,456
===========================
See notes to Consolidated Financial Statements.
SEMPRA ENERGY
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
Balance at
------------------------
June 30, December 31,
1999 1998
(Unaudited)
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ -- $ 43
Accounts payable - trade 647 702
Energy trading liabilities 858 805
Dividends and interest payable 164 168
Regulatory balancing accounts - net 506 120
Long-term debt due within one year 334 330
Other 239 298
---------------------------
Total current liabilities 2,748 2,466
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Long-term debt 2,889 2,795
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Deferred credits and other liabilities:
Customer advances for construction 74 72
Post-retirement benefits other than pensions 234 240
Deferred income taxes 540 634
Deferred investment tax credits 111 147
Deferred credits and other liabilities 997 985
---------------------------
Total deferred credits and other liabilities 1,956 2,078
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Preferred stock of subsidiaries 204 204
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Commitments and contingent liabilities (Note 3)
Shareholders' Equity:
Common Stock 1,885 1,883
Retained earnings 1,069 1,075
Deferred compensation relating to
Employee Stock Ownership Plan (45) (45)
---------------------------
Total shareholders' equity 2,909 2,913
---------------------------
Total liabilities and shareholders' equity $10,706 $10,456
===========================
See notes to Consolidated Financial Statements.
SEMPRA ENERGY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (Unaudited)
(Dollars in millions)
Six Months Ended June 30,
------------------------
1999 1998
------- -------
Cash Flows From Operating Activities:
Net income $ 181 $ 118
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 609 551
Portion of depreciation arising from
sales of generating plants (295) --
Application of balancing accounts to stranded costs (62) (86)
Deferred income taxes (83) (47)
Non-cash rate reduction bond revenue (62) (40)
Other - net (35) 42
Net changes in other working capital components 462 292
-------------------------
Net cash provided by operating activities 715 830
-------------------------
Cash Flows From Investing Activities:
Net proceeds from sale of generating plants 454 --
Expenditures for property, plant and equipment (194) (184)
Investment in Chilquinta Energia (420) --
Other (156) (177)
-------------------------
Net cash used in investing activities (316) (361)
-------------------------
Cash Flows From Financing Activities:
Common stock dividends (187) (230)
Sale of common stock 2 28
Repurchase of common stock -- (1)
Redemption of preferred stock -- (75)
Issuance of long-term debt 189 75
Payment on long-term debt (128) (376)
Decrease in short-term debt - net (43) (297)
-------------------------
Net cash used in financing activities (167) (876)
-------------------------
Increase (decrease) in Cash and Cash Equivalents 232 (407)
Cash and Cash Equivalents, January 1 424 814
------------------------
Cash and Cash Equivalents, June 30 $ 656 $ 407
========================
Supplemental Disclosure of Cash Flow Information:
Interest payments (net of amounts capitalized) $ 115 $ 113
========================
Income tax payments (net of refunds) $ 147 $ 202
========================
Real estate investments acquired $ 37 $ 35
Cash paid (3) (5)
------------------------
Liabilities assumed $ 34 $ 30
========================
See notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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), and Southern California Gas Company (SoCalGas). 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, as well as those of
its subsidiaries, are described in the notes to Consolidated
Financial Statements in the Company's 1998 Annual Report. The same
accounting policies are followed for interim reporting purposes.
This Quarterly Report should be read in conjunction with the
Company's 1998 Annual Report and its Quarterly Report on Form 10-Q
for the three months ended March 31, 1999. The Company's 1998 Annual
Report includes the Consolidated Financial Statements and notes
thereto, and "Management's Discussion & Analysis of Financial
Condition and Results of Operations."
SDG&E and SoCalGas have been accounting for the economic effects of
regulation on all utility operations in accordance with Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects of
Certain Types of Regulation" (SFAS No. 71), as described in the notes
to Consolidated Financial Statements in the Company's 1998 Annual
Report. In conformity with generally accepted accounting principles
for regulated enterprises and the policies of the California Public
Utilities Commission (CPUC), SDG&E has ceased the application of SFAS
No. 71 to its generation business, in accordance with the conclusion
of the Financial Accounting Standards Board that the application of
SFAS No. 71 should be discontinued when legislation is issued that
determines that a portion of an entity's business will no longer be
subject to cost-based regulation. The discontinuance of SFAS No. 71
did not result in a write-off of SDG&E's generation assets, since the
CPUC approved the recovery of the stranded costs related to these
assets by the distribution portion of its business. (See further
discussion in Note 3.)
2. BUSINESS COMBINATIONS
PE/Enova
On June 26, 1998 (pursuant to an October 1996 agreement) Enova, the
parent corporation of San Diego Gas & Electric, and PE, the parent
corporation of the Southern California Gas Company, completed a
business combination in which the companies became subsidiaries of a
new company named Sempra Energy. As a result of the combination, (i)
each outstanding share of common stock of Enova was converted into
one share of common stock of Sempra Energy, (ii) each outstanding
share of common stock of PE was converted into 1.5038 shares of
common stock of Sempra Energy and (iii) the preferred stock and/or
preference stock of SDG&E, PE and SoCalGas remain outstanding.
Additional information on the business combination is discussed in
the Company's 1998 Annual Report.
KN Energy
On February 22, 1999, Sempra Energy and KN Energy, Inc. (KN Energy)
announced that their respective boards of directors had approved
Sempra Energy's acquisition of KN Energy, subject to approval by the
shareholders of both companies and by various federal and state
regulatory agencies. On June 21, 1999, Sempra Energy and KN Energy
announced that they had agreed to terminate the proposed acquisition.
Expenses incurred in connection with the above matters were $12.8
million, after tax, and $62 million, after tax, for the six-month
periods ended June 30, 1999 and 1998, respectively, of which $12.3
million, after tax, and $61 million, after tax, respectively,
occurred during the three months ended June 30, 1999 and 1998.
Chilquinta Energia S.A.
On June 10, 1999, the international subsidiaries of Sempra Energy and
Public Service Enterprise Group (PSEG) announced the finalization of
the joint purchase (on a 50/50 basis) of Chilquinta Energia S.A.
(Energia) from parent company Chilquinta S.A. for $840 million.
Sempra Energy and PSEG completed the acquisition of 90 percent of
Energia and will tender for the remaining 10 percent later this year.
Sempra Energy contributed cash of $260 million for the purchase of
stock and refinanced $160 million of Energia's long-term debt
outstanding. Sempra and PSEG have made an open market tender offer
for up to 25% of the outstanding shares of Luz Del Sur in which the
companies, through Energia, already own a minority stake. The offer
is expected to close on September 9, 1999. The offer is not being
made in the United States or to shareholders resident in the United
States.
3. MATERIAL CONTINGENCIES
ELECTRIC INDUSTRY RESTRUCTURING -- CALIFORNIA PUBLIC UTILITIES
COMMISSION
In September 1996, the State of California enacted a law
restructuring California's electric utility industry (AB 1890). The
legislation adopts the December 1995 CPUC policy decision that
restructures the industry to stimulate competition and reduce rates.
Beginning on March 31, 1998, customers were given the opportunity to
choose to continue to purchase their electricity from the local
utility under regulated tariffs, to enter into contracts with other
energy-service providers (direct access) or to buy their power from
the independent Power Exchange (PX) that serves as a wholesale power
pool allowing all energy producers to participate competitively. The
PX obtains its power from qualifying facilities, from nuclear units
and, lastly, from the lowest-bidding suppliers. The California
investor-owned electric utilities (IOUs) are obligated to sell their
power supply, including owned generation and purchased-power
contracts, to the PX. The IOUs are also obligated to purchase from
the PX the power that they distribute. SDG&E's obligation to bid into
and purchase from the PX after the conclusion of the rate freeze
continues during the interim post rate freeze period (discussed
below). An Independent System Operator (ISO) schedules power
transactions and access to the transmission system. The local utility
continues to provide distribution service regardless of which energy
source the customer chooses. Purchases from the PX/ISO are included
in purchased-power expenses and PX/ISO power revenues have been
netted therein on the Statements of Consolidated Income as presented.
Revenues from the PX/ISO reflect sales at market prices of energy
from SDG&E's power plants and from long-term purchased-power
contracts to the PX/ISO commencing April 1, 1998.
As discussed in the notes to Consolidated Financial Statements
contained in the Company's 1998 Annual Report, the IOUs have been
given a reasonable opportunity to recover their stranded costs via a
competition transition charge (CTC) to customers through December 31,
2001. In June 1999, SDG&E completed the recovery of its stranded
costs, other than the above-market portion of qualifying facilities
and other purchased-power contracts that were in effect at December
31, 1995. These costs will continue to be collected in rates.
Recovery of the stranded costs were effected by, among other things,
the sale of SDG&E's fossil power plants and combustion turbines.
During the quarter ended June 30, 1999, these sales were completed
for total net proceeds of $454 million. The South Bay Power Plant
sale to the San Diego Unified Port District for $110 million was
completed on April 23, 1999. Duke South Bay, a subsidiary of Duke
Energy Power Services, will manage the plant for the Port District.
The sale of Encina Power Plant and 17 combustion-turbine generators
to Dynegy Inc. and NRG Energy Inc. for $356 million was completed on
May 21, 1999. SDG&E will operate and maintain both facilities for the
new owners for the next two years.
Stranded costs included the cost of the San Onofre Nuclear Generating
Station (SONGS) as of December 31, 1995. SDG&E retains ownership of
its 20-percent interest in SONGS. Subsequent SONGS costs are
recoverable only from the sales of power produced therefrom, at rates
previously fixed by the CPUC through December 31, 2002 and as
determined by the market thereafter.
AB 1890 required a 10-percent reduction of residential and small
commercial customers' rates beginning in January 1998, and provided
for the issuance of rate-reduction bonds by an agency of the State of
California to enable the IOUs to achieve this rate reduction. In
December 1997, $658 million of rate-reduction bonds were issued on
SDG&E's behalf at an average interest rate of 6.26 percent. These
bonds are being repaid over 10 years by SDG&E's residential and small
commercial customers via a non-bypassable charge on their electric
bills. In 1997, SDG&E formed a subsidiary, SDG&E Funding LLC, to
facilitate the issuance of the bonds. In exchange for the bond
proceeds, SDG&E sold to SDG&E Funding LLC all of its rights to
revenue streams collected from such customers. Consequently, the
transaction is structured to cause such revenue streams not to be the
property of SDG&E nor to be available to satisfy any claims of
SDG&E's creditors.
AB 1890 includes a rate freeze for all customers. Beginning in 1998,
system-average rates were fixed at 9.43 cents per kwh. The rate
freeze would have stayed in place until January 1, 2002, however, in
connection with completion of SDG&E's stranded cost recovery
(described above), SDG&E filed with the CPUC for an interim mechanism
to deal with electric rates after the end of the rate freeze. SDG&E
is requesting authority to reduce base rates (the portion of the rate
that SDG&E controls) to all electric customers. If approved, base
electric rates will decrease beyond the original 10-percent rate
reduction described above. The portion of the electric rate
representing the commodity cost is simply passed through to customers
and will fluctuate with the price of electricity from the PX. Except
for the interim protection mechanism described below, customers will
no longer be protected from commodity price spikes.
In April 1999, SDG&E filed an all-party settlement (including energy
service providers, the CPUC's Office of Ratepayer Advocates (ORA),
and the Utility Consumers Action Network (UCAN)) detailing proposed
implementation plans for lifting the rate freeze. Included in the
settlement is an interim customer-protection mechanism for
residential and small commercial customers that would temporarily cap
rates between July 1999 and September 1999, regardless of how high
the PX price moves during that period. Any resulting undercollection
would be recovered through a balancing account mechanism for a period
of up to nine months subsequent to September 30, 1999. A CPUC
decision adopting the all-party settlement was issued in May 1999 and
became effective July 1, 1999. The interim rate-freeze period runs
until the CPUC issues its decision on the pending legal and policy
issues of ending the rate freeze. This decision is expected in
January 2000.
Thus far, electric-industry deregulation has been confined to
generation. Transmission and distribution have remained subject to
traditional cost-of-service regulation. However, the CPUC is
exploring the possibility of opening up electric distribution to
competition. During 1999, the CPUC will be conducting a rulemaking,
one objective of which may be to develop a coordinated proposal for
the state legislature regarding how various distribution competition
issues should be addressed. The Company will actively participate in
this effort.
ELECTRIC INDUSTRY RESTRUCTURING -- FEDERAL ENERGY REGULATORY
COMMISSION
In October 1997, the Federal Energy Regulatory Commission (FERC)
approved key elements of the California IOUs' restructuring proposal.
This included the transfer by the IOUs of the operational control of
their transmission facilities to the ISO, which is under FERC
jurisdiction. The FERC also approved the establishment of the
California PX to operate as an independent wholesale power pool. The
IOUs pay to the PX an up-front restructuring charge (in four annual
installments) and an administrative-usage charge for each megawatt-
hour of volume transacted. SDG&E's share of the restructuring charge
is approximately $10 million, which is being recovered as a
transition cost. The IOUs have guaranteed $300 million of commercial
loans to the ISO and PX for their development and initial start-up.
SDG&E's share of the guarantee is $30 million.
NATURAL GAS INDUSTRY RESTRUCTURING
The natural gas industry experienced an initial phase of
restructuring during the 1980s by deregulating natural gas sales to
noncore customers. On January 21, 1998, the CPUC released a staff
report initiating a project to assess the current market and
regulatory framework for California's natural gas industry. The
general goals of the plan are to consider reforms to the current
regulatory framework emphasizing market-oriented policies benefiting
California's natural gas consumers.
In August 1998, California enacted a law prohibiting the CPUC from
enacting any natural gas industry restructuring decision for core
customers prior to January 1, 2000; the CPUC continues to study the
issue. During the implementation moratorium, the CPUC will hold
hearings throughout the state and intends to give the legislature a
draft ruling before adopting a final market-structure policy. SDG&E
and SoCalGas will actively participate in this effort.
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 $9.5 billion of coverage is provided by the
Nuclear Regulatory Commission Secondary Financial Protection Program
and provides for loss sharing among utilities owning nuclear reactors
if a costly accident occurs. SDG&E could be assessed up to $36
million in the event of a nuclear incident involving any of the
licensed commercial reactors in the United States if the amount of
the loss exceeds $200 million. In the event the public-liability
limit stated above is insufficient, the Price-Anderson Act provides
for Congress to enact further revenue-raising measures to pay claims
which could include an additional assessment on all licensed reactor
operators.
Insurance coverage is provided for up to $2.75 billion of property
damage and decontamination liability. Coverage is also provided for
the cost of replacement power, which includes indemnity payments for
up to three years, after a waiting period of 17 weeks. Coverage is
provided primarily through mutual insurance companies 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 $4.5
million.
CANADIAN NATURAL GAS
SDG&E has been involved in negotiations and litigation with four
Canadian suppliers concerning contract terms and prices. SDG&E has
settled with all of the suppliers. One of the four is delivering
natural gas under the terms of the settlement agreement through 2003;
the other three have ceased deliveries and the contracts were
terminated. Although these contracts were intended to supply SDG&E to
a level approximating the related committed long-term pipeline
capacity, SDG&E intends to continue using the capacity in other ways,
including the transport of replacement natural gas and the release of
a portion of this capacity to third parties.
QUASI-REORGANIZATION
During 1993, PE completed a strategic plan to refocus on its natural
gas utility and related businesses. The strategy included the
divestiture of the Company's merchandising operations and all 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. Certain of the
liabilities established in connection with discontinued operations
and the quasi-reorganization will be resolved in future years.
Management believes the provisions previously established for these
matters are adequate.
4. COMPREHENSIVE INCOME
In conformity with generally accepted accounting principles, the
Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income." Comprehensive income for the
six-month periods ended June 30, 1999 and 1998 was equal to net
income.
5. SEGMENT INFORMATION
The Company, primarily an energy-services company, has three
separately managed reportable segments comprised of SDG&E, SoCalGas
and Sempra Energy Trading (SET). The two utilities operate in
essentially separate service territories under separate regulatory
frameworks and rate structures set by the CPUC. As described in the
notes to Consolidated Financial Statements in the Company's 1998
Annual Report, SDG&E provides electric and natural gas service to San
Diego and southern Orange counties. SoCalGas is a natural gas
distribution utility, serving customers throughout most of southern
California and part of central California. SET is based in Stamford,
Connecticut and is engaged in the wholesale trading and marketing of
natural gas, power and petroleum in the U.S. and in other countries.
The accounting policies of the segments are the same as those
described in the notes to Consolidated Financial Statements in the
Company's 1998 Annual Report, and segment performance is evaluated by
management based on reported net income. Intersegment transactions
generally are recorded the same as sales or transactions with third
parties. Utility transactions are primarily based on rates set by the
CPUC and FERC. There were no significant changes in segment assets
for the six months ended June 30, 1999, except as described in Note 3
regarding the sale of the Company's power plants. Segment information
of SoCalGas and SDG&E is provided in the Quarterly Report on Form 10-
Q for the six-month period ended June 30, 1999 of each of these
companies.
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Three months ended Six months ended
June 30, June 30,
----------------------------------------
(Dollars in millions) 1999 1998 1999 1998
- ---------------------------------------------------------------------
Operating Revenues:
San Diego Gas & Electric $ 740 $ 569 $1,201 $1,175
Southern California Gas 624 578 1,231 1,242
Sempra Energy Trading 109 24 182 33
Intersegment revenues (9) (15) (23) (26)
All other 53 65 117 147
----------------------------------------
Total $1,517 $1,221 $2,708 $2,571
----------------------------------------
Net Income:
San Diego Gas & Electric* $ 46 $ 25 $ 99 $ 74
Southern California Gas* 46 19 93 65
Sempra Energy Trading 3 2 4 (6)
All other (13) (15) (15) (15)
----------------------------------------
Total $ 82 $ 31 $ 181 $ 118
----------------------------------------
* after preferred dividends
6. SEMPRA ENERGY HOLDINGS
On May 5, 1999, Sempra Energy and its wholly owned subsidiary, Sempra
Energy Holdings (Holdings), jointly filed a shelf registration of
common stock, preferred stock and debt securities of Sempra Energy;
debt securities of Holdings; and certain other securities to be
offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933. Any debt securities issued by Holdings
will be guaranteed by Sempra Energy. Summarized financial information
of Holdings is provided below. Additional financial information of
Holdings is provided in Sempra Energy's Current Report on Form 8-K
filed May 5, 1999.
(Dollars in millions)
At June 30, At December 31,
1999 1998
------------- --------------
Current assets $1,368 $1,470
Non-current assets 1,103 544
Current liabilities 1,327 1,452
Non-current liabilities 310 140
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1999 1998 1999 1998
------------------ ------------------
Operating revenues $157 $124 $271 $235
Operating expenses 157 160 286 291
Net income (loss) 3 (27) (7) (38)
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 1998 Annual Report.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking
statements within the meaning of the Private Securities Litigation
Reform Act of 1995. The words "estimates," "believes," "expects,"
"anticipates," "plans" and "intends," variations of such words, and
similar expressions are intended to identify forward-looking
statements that involve risks and uncertainties which could cause
actual results to differ materially from those anticipated.
These statements are necessarily based upon various assumptions
involving judgments with respect to the future including, among
others, local, regional, national and international economic,
competitive, political and regulatory conditions and developments;
technological developments; capital market conditions; inflation
rates; interest rates; energy markets; weather conditions; business,
regulatory or legal decisions; the pace of deregulation of retail
natural gas and electricity industries; 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. Accordingly, while the Company believes that the
assumptions are reasonable, there can be no assurance that they will
approximate actual experience, or that the expectations will be
realized. Readers are urged to review and consider carefully the
risks, uncertainties and other factors which affect the Company's
business described in this quarterly report and other reports filed
by the Company from time to time with the Securities and Exchange
Commission. Readers are cautioned not to put undue reliance on any
forward-looking statements. For those statements, the Company claims
the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995.
BUSINESS COMBINATIONS
See Note 2 of the notes to Consolidated Financial Statements
regarding the PE/Enova business combination, the acquisition of
Chilquinta Energia S.A., and the agreement to terminate the KN Energy
acquisition.
CAPITAL RESOURCES AND LIQUIDITY
The Company's utility operations continue to be a major source of
liquidity. In addition, working capital requirements are met through
the issuance of short-term and long-term debt. These capital
resources are expected to remain available. Major changes in cash
flows not described elsewhere are described below. Cash and cash
equivalents at June 30, 1999 are available for investment in energy-
related domestic and international projects, utility plant, the
retirement of debt, and other corporate purposes.
CASH FLOWS FROM OPERATING ACTIVITIES
The decrease in cash flows from operations is primarily due to
transactions related to the recovery of stranded electric costs and
an increase in overcollections on regulatory balancing accounts.
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures for property, plant and equipment are estimated
to be $390 million for the full year 1999 and will be financed
primarily by internally generated funds and will largely represent
investment in utility operations. 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.
Included in cash flows from investing activities are the proceeds
from SDG&E's plant sales (see additional discussion in Note 3 of the
notes to Consolidated Financial Statements).
In June 1999, Sempra Energy and Public Service Enterprise Group
(PSEG) finalized the joint purchase (on a 50/50 basis) of Chilquinta
Energia S.A. This is described in Note 2 of the notes to
Consolidated Financial Statements.
In January 1998, PE and Enova jointly acquired CES/Way International,
Inc. for a total of $79 million. CES/Way provides energy-efficiency
services, including energy audits, engineering design, project
management, construction, financing and contract maintenance.
In March 1998, PE increased its existing investment in two Argentine
natural gas utility holding companies from 12.5 percent to 21.5
percent by purchasing an additional interest for $40 million.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash used in financing activities decreased primarily due to
greater long-term and short-term debt repayments and the repurchase
of preferred stock in 1998. In addition, long-term debt was issued
during 1999 related to the purchase of Chilquinta Energia S.A. (see
Note 2 for additional information).
Dividends paid on common stock were $187 million during the six-month
period ended June 30, 1999, compared to $230 million during the same
period in 1998. The decrease in 1999 is the result of the 1998 period
including three quarterly dividends on common stock of the
predecessor companies.
Dividends currently are paid quarterly to shareholders. The payment
of future dividends is within the discretion of the board of
directors.
On February 2, 1998, SoCalGas redeemed all outstanding shares of its
7-3/4% Series Preferred Stock for a total cost of $75 million,
including unpaid dividends.
RESULTS OF OPERATIONS
The increases in net income and net income per share for the three-
month and six-month periods ended June 30, 1999 are primarily due to
lower business combination costs in 1999.
Income tax expense decreased for the three-month period ended June
30, 1999, compared to the corresponding period in 1998, due to the
contribution to a local government agency of the land related to one
of the sold generating plants, partially offset by the increase in
income before taxes. (The reduced income tax expense was fully offset
by increased depreciation expense related to stranded costs.) Income
tax expense increased for the six-month period ended June 30, 1999,
compared to the corresponding period in 1998, due to the increase in
income before taxes, partially offset by the land contribution. The
land contribution also resulted in a significant decrease in the
Company's effective income tax rate.
UTILITY OPERATIONS
Utility natural gas revenues increased 8 percent for the three-month
period ended June 30, 1999 compared to the same period in 1998. This
is compared to a decrease of one percent for the six-month period
ended June 30, 1999. The increase for the second quarter was
primarily due to higher sales to residential customers due to colder
weather and customer growth, and higher sales to commercial and
industrial customers. The decrease for the six-month period was
primarily due to a decrease in the average cost of natural gas and
lower utility electric generating sales, partially offset by the
increase in sales.
Electric revenues increased 36 percent and 3 percent for the three-
month and six-month periods ended June 30, 1999 primarily due to the
sale by SDG&E of both its fossil-fueled power plants, partially
offset by the January 1998 application to stranded cost recovery of
the $130 million balance in the Interim Transition Cost Balancing
Account (ITCBA), which had been transferred from the then-
discontinued ECAC and ERAM balancing accounts at December 31, 1997.
In addition, there was a decrease in revenues as a result of a
decrease in sales to other utilities, due to the start-up of the PX.
The PX is described further under "Factors Influencing Future
Performance".
Cost of natural gas distributed increased 46 percent and 9 percent
for the three-month and six-month periods ended June 30, 1999. The
increases were primarily due to the higher sales partially offset
during the six months by lower prices. Under the current regulatory
framework, changes in revenue resulting from changes in core market
volumes and the cost of natural gas do not affect net income.
As discussed in Note 3, PX/ISO power revenues have been netted
against purchased-power expenses, including purchases from the
PX/ISO. The PX/ISO began operations in April 1998.
Depreciation and amortization increased 69 percent and 11 percent for
the three-month and six-month periods ended June 30, 1999, compared
to the same period in 1998. The increases were due to the accelerated
recovery of generation assets partially offset by the January 1998
application of the ITCBA to stranded cost recovery as discussed
above.
The tables below summarize the components of natural gas and electric
volumes and revenues by customer class for the six months ended June
30, 1999 and 1998.
Gas Sales, Transportation & Exchange
(Dollars in millions, volumes in billion cubic feet)
Gas Sales Transportation & Exchange Total
----------------------------------------------------------------------
Throughput Revenue Throughput Revenue Throughput Revenue
----------------------------------------------------------------------
1999:
Residential 187 $1,190 1 $ 4 188 $1,194
Commercial and industrial 60 301 161 131 221 432
Utility electric generation* 18 7 49 20 67 27
Wholesale -- -- 15 4 15 4
---------------------------------------------------------------
265 $1,498 226 $159 491 1,657
Balancing accounts and other (253)
--------
Total $1,404
- -------------------------------------------------------------------------------------------
1998:
Residential 175 $1,316 2 $ 7 177 $1,323
Commercial and industrial 54 318 167 145 221 463
Utility electric generation* 21 5 40 20 61 25
Wholesale -- -- 15 4 15 4
---------------------------------------------------------------
250 $1,639 224 $176 474 1,815
Balancing accounts and other (400)
---------
Total $1,415
- -------------------------------------------------------------------------------------------
* The portion representing SDG&E's sales for electric generation includes margin
only.
Electric Distribution
(Dollars in millions, volumes in millions of Kwhrs)
1999 1998
------------------------------------------
Volumes Revenue Volumes Revenue
------------------------------------------
Residential 3,134 $ 315 3,011 $ 305
Commercial 2,994 271 3,249 288
Industrial 968 69 1,683 112
Direct access 1,403 48 93 6
Street and highway lighting 38 3 43 4
Off-system sales 52 1 639 13
------------------------------------------
8,589 707 8,718 728
Balancing and other 299 245
------------------------------------------
Total 8,589 $1,006 8,718 $ 973
------------------------------------------
YEAR 2000 ISSUES
Most companies are affected by the inability of many automated
systems and applications to process the year 2000 and beyond. The
Year 2000 issues are the result of computer programs and other
automated processes using two digits to identify a year, rather than
four digits. Any of the Company's computer programs that include
date-sensitive software may recognize a date using "00" as
representing the year 1900, instead of the year 2000, or "01" as
1901, etc., which could lead to system malfunctions. The Year 2000
issue impacts both Information Technology ("IT") systems and also
non-IT systems, including systems incorporating embedded processors.
To address this problem, in 1996, both Pacific Enterprises and Enova
Corporation established company-wide Year 2000 programs. These
programs have now been consolidated into Sempra Energy's overall Year
2000 readiness effort. Sempra Energy has established a central Year
2000 Program Office, which reports to the Company's Chief Information
Technology Officer and reports periodically to the audit committee of
the Board of Directors.
The Company's State of Readiness
Sempra Energy has identified all significant IT and non-IT systems
(including embedded systems) that might not be Year 2000 ready and
categorizing them in the following areas: IT applications, computer
hardware and software infrastructure, telecommunications, embedded
systems, and third parties. The Company evaluated its exposure in all
of these areas. These systems and applications are being tracked and
measured through four key phases: inventory, assessment,
remediation/testing, and Year 2000 readiness. The Company has
prioritized so that, when possible, critical systems are being
assessed and modified/replaced first. Critical systems are those
applications and systems, including embedded processor technology,
which, if not appropriately remediated, may have a significant impact
on energy delivery, revenue collection or the safety of personnel,
customers or facilities. The Company's Year 2000 testing effort
includes functional testing of Year 2000 dates and validating that
changes have not altered existing functionality. The Company uses an
independent, internal review process to verify that the appropriate
testing has occurred.
The Company's Year 2000 project is currently on schedule, with
critical energy delivery systems for both SoCalGas and SDG&E Year
2000 Ready as of June 30, 1999. The Company defines "Year 2000 Ready"
as suitable for continued use into the year 2000 with no significant
operational problems.
Sempra Energy's current schedule for Year 2000 testing and readiness
for non-critical systems is to be completed by the fourth quarter of
1999. In certain cases, this schedule is dependent upon the efforts
of third parties, such as suppliers (including energy producers) and
customers. Accordingly, delays by third parties may cause the
Company's schedule to change. In addition, a continued readiness
management process has been implemented to monitor and review the
progress of Year 2000 readiness of the Company's systems.
The Costs to Address the Company's Year 2000 Issues
Sempra Energy's budget for the Year 2000 program is $48 million, of
which $43 million has been spent. As the Company continues to assess
its systems and as the remediation and testing efforts progress, cost
estimates may change. The Company's Year 2000 readiness effort is
being funded entirely by operating cash flows.
The Risks of the Company's Year 2000 Issues
Based upon its current assessment and testing of the Year 2000 issue,
the Company believes the reasonably likely worst case Year 2000
scenarios to have the following impacts upon Sempra Energy and its
operations. With respect to the Company's ability to provide energy
to its domestic utility customers, the Company believes that the
reasonably likely worst case scenario is for small, localized
interruptions of utility service which are restored in a time frame
that is within normal service levels. With respect to services that
are essential to Sempra Energy's operations, such as customer
service, business operations, supplies and emergency response
capabilities, the scenario is for minor disruptions of essential
services with rapid recovery and all essential information and
processes ultimately recovered.
To assist in preparing for and mitigating these possible scenarios,
Sempra Energy is a member of several industry-wide efforts
established to deal with Year 2000 problems affecting embedded
systems and equipment used by the nation's natural gas and electric
power companies. Under these efforts, participating utilities are
working together to assess specific vendors' system problems and to
test plans. These assessments will be shared by the industry as a
whole to facilitate Year 2000 problem solving.
A portion of this risk is due to the various Year 2000 Ready
schedules of critical third party suppliers and customers. The
Company continues to contact its critical suppliers and customers to
survey their Year 2000 remediation programs. While risks related to
the lack of Year 2000 readiness by third parties could materially and
adversely affect the Company's business, results of operations and
financial condition, the Company expects its Year 2000 readiness
efforts to reduce significantly the Company's level of uncertainty
about the impact of third party Year 2000 issues on both its IT
systems and its non-IT systems.
The Company's Contingency Plans
The Company's contingency plans for Year-2000-related interruptions
have been completed and were submitted to the CPUC on July 1, 1999.
These plans will continue to be revised and improved during the
remainder of 1999. The contingency plans include emergency backup and
recovery procedures, replacing electronic applications with manual
processes, and identification of alternate suppliers along with
increasing inventory levels. In addition, the following key
contingency actions will be taken.
- -- Only critical system changes will be implemented during
December 1999 and January 2000.
- -- An hour-by-hour plan will be developed to cover key
contingency actions.
- -- On-site staffing will be in place at key operational and
administrative locations.
- -- Designated standby staff will be on-call with thirty-minute
availability.
- -- Emergency Operations Centers will be activated on December
31, 1999.
- -- Walk-through drills will be held during the fourth quarter
of 1999.
Due to the speculative and uncertain nature of contingency planning,
there can be no assurances that such plans actually will be
sufficient to reduce the risk of material impacts on the Company's
operations due to Year 2000 issues.
FACTORS INFLUENCING FUTURE PERFORMANCE
The Company's performance in the near future will primarily depend on
the results of SDG&E and SoCalGas. Because of the ratemaking and
regulatory process, electric and natural gas industry restructuring,
and the changing energy marketplace, there are several factors that
will influence the Company's future financial performance. These
factors are discussed in this section and in "Other Operations" and
"International Operations" below.
Chilquinta Energia S.A. Acquisition
See Note 2 of the notes to Consolidated Financial Statements and
"International Operations" below for a discussion of the acquisition
of Chilquinta Energia S.A.
Industry Restructuring
See discussion of industry restructuring in Note 3 of the notes to
Consolidated Financial Statements.
Electric-Generation Assets and Electric Rates
Note 3 of the notes to Consolidated Financial Statements describes
regulatory and legislative actions that affect SDG&E's electric
rates, and the related sale of its fossil plants and recovery of the
cost of all SDG&E generation-related assets.
Performance-Based Regulation (PBR)
To promote efficient operations and improved productivity and to move
away from reasonableness reviews and disallowances, the CPUC has been
directing utilities to use PBR. PBR has replaced the general rate
case and certain other regulatory proceedings for both SoCalGas and
SDG&E. Under PBR, regulators require future income potential to be
tied to achieving or exceeding specific performance and productivity
goals, as well as cost reductions, rather than relying solely on
expanding utility rate base in a market where a utility already has a
highly developed infrastructure.
SoCalGas' PBR is in effect through December 31, 2002; however, the
CPUC decision allows for the possibility that changes to the PBR
mechanism could be adopted in a decision to be issued in SoCalGas'
1999 Biennial Cost Allocation Proceeding (BCAP) application which is
anticipated to become effective at year-end 1999. SDG&E continues to
participate in PBR for its electric distribution and natural gas
businesses. In December 1998, the CPUC approved SDG&E's Cost of
Service proceeding, resulting in an authorized revenue increase of
$12 million (an electric distribution increase of $18 million and a
natural gas decrease of $6 million). New rates became effective on
January 1, 1999. In January 1999, various proposed and alternate
decisions were released on the PBR design issues of SDG&E's
distribution PBR application. The proposed decision released by the
CPUC's Administrative Law Judge recommended, among other things, a
revenue-per-customer indexing mechanism rather than the rate-indexing
mechanism proposed by SDG&E and much tighter earnings sharing bands
than previously in effect for SDG&E. On May 13, 1999 the CPUC adopted
a decision incorporating the rate-indexing mechanism proposed by
SDG&E, but also approved the tighter sharing bands. The decision also
adopted an all-party settlement on various performance incentives,
allowing SDG&E the opportunity to accrue up to $14.5 million annually
in performance rewards or penalties. Certain intervenors are
requesting a rehearing of the rate-indexing mechanism.
Cost of Capital
Under PBR, annual Cost of Capital proceedings were replaced by an
automatic adjustment mechanism if changes in certain indices exceed
established tolerances. For 1999, SoCalGas is authorized to earn a
rate of return on common equity (ROE) of 11.6 percent and a 9.49
percent return on rate base (ROR), unchanged from 1998. For SDG&E,
electric-industry restructuring is changing the method of calculating
the utility's annual cost of capital. SDG&E's May 1998 application to
the CPUC for unbundled rates established new, separate rates of
return for SDG&E's electric distribution and natural gas businesses.
The application proposed a 12.00 percent ROE, which would produce an
overall ROR of 9.33 percent. A CPUC decision in June 1999 granted
SDG&E an ROE of 10.6 percent (overall ROR of 8.75 percent). This
resulted in annual revenue requirement reductions of $14.6 million
and $4.8 million for electric distribution and SDG&E gas sales,
respectively, effective July 1, 1999. SDG&E filed an Application for
Rehearing of this decision in July 1999, requesting that the ROE be
increased to 10.8 percent after correcting computational errors in
the original decision.
Biennial Cost Allocation Proceeding (BCAP)
The BCAP determines how a utility's costs are allocated among various
customer classes (residential, commercial, industrial, etc.). The
utilities filed the 1999 BCAP application in October 1998, with
hearings held during the first half of 1999. At the conclusion of
hearings, a joint BCAP recommendation was reached proposing, among
other things, an overall natural gas rate reduction of $229 million
for SoCalGas and $11 million for SDG&E. A CPUC decision is expected
in early 2000.
OTHER OPERATIONS
Sempra Energy Solutions (Solutions), formed in 1997 as a joint
venture of PE and Enova, incorporates several existing unregulated
businesses from each of PE and Enova. It is pursuing a variety of
opportunities, including buying and selling natural gas for large
users, integrated energy-management services targeted at large
governmental and commercial facilities, and consumer market products
and services. CES/Way International, Inc. (CES/Way), which was
acquired by Solutions in January 1998, provides energy-efficiency
services including energy audits, engineering design, project
management, construction, financing and contract maintenance.
Solutions' net losses were $11 million and $19 million for the three
and six-month periods ended June 30, 1999, compared to net losses of
$18 million and $27 million for the same periods in 1998. The losses
are primarily due to start-up costs.
Sempra Energy Trading Corp. (SET), a leading natural-gas power
marketing firm headquartered in Stamford, Connecticut, was jointly
acquired by PE and Enova on December 31, 1997. For the three and six-
month periods ended June 30, 1999, SET recorded after-tax income of
$3 million and $4 million, compared to net income of $2 million and a
net loss of $6 million for the same periods in 1998. The increase in
income was primarily due to greater penetration of all customer
segments resulting in higher volumes traded in 1999. In addition, new
European crude oil and natural gas trading contributed to 1999
earnings.
INTERNATIONAL OPERATIONS
On June 10, 1999 Sempra Energy announced the finalization of the
acquisition of a 50-percent interest in Chilquinta Energia S.A., as
described in Note 2 of the notes to Consolidated Financial
Statements.
Results for international operations for the three and six-month
periods ended June 30, 1999 were net income of $1 million and a net
loss of $1 million, respectively, compared to net losses of $1
million and $4 million for the same periods in 1998. The losses are
primarily due to expenses related to the evaluation of international
opportunities. The increase in net income during the three months
ended June 30, 1999 is primarily due to increased sales in Argentina,
as a result of colder weather, and lower operating costs.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except for the matters referred to in the Company's 1998 Annual
Report or referred to elsewhere in this Quarterly Report on Form 10-Q
for the six months ended June 30, 1999, neither the Company nor any
of its affiliates is a party to, nor is its property the subject of,
any material pending legal proceedings other than routine litigation
incidental to its businesses.
ITEM 4. SUBMISSION OF MATTERS TO VOTE
Sempra Energy's 16-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 4, 1999, the shareholders of Sempra Energy elected five
directors for a three-year term expiring in 2002. 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 203,205,326 8,544,424
Ann L. Burr 203,353,651 8,396,099
Richard A. Collato 203,347,298 8,402,452
Daniel W. Derbes 203,341,955 8,407,795
Ignacio E. Lozano, Jr. 202,892,606 8,857,144
The results of the voting on the following additional items, all of
which were approved, were as follows:
(a) A proposal to approve a Non-Employee Directors' Stock Plan.
In Favor 147,829,901
Opposed 26,325,417
Abstained 5,762,468
Broker Non-Vote 31,831,964
(b) A proposal to approve an Executive Incentive Plan for
executive officers.
In Favor 182,329,656
Opposed 23,468,861
Abstained 5,951,233
(c) A proposal to approve a Long Term Incentive Plan for officers
and other key employees of Sempra Energy and its subsidiaries.
In Favor 96,458,669
Opposed 77,611,943
Abstained 5,847,175
Broker Non-Vote 31,831,963
Additional information concerning the election of the board of
directors and the other proposals is contained in Sempra Energy's
Notice of 1999 Annual Meeting of Shareholders and Proxy Statement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 12 - Computation of ratios
12.1 Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends.
Exhibit 27 - Financial Data Schedules
27.1 Financial Data Schedule for the six months ended
June 30, 1999.
(b) Reports on Form 8-K
A Current Report on Form 8-K filed April 2, 1999 announced
the early termination of the waiting period under the Hart-
Scott-Rodino Antitrust Improvements Act of 1976, as amended,
with respect to the proposed acquisition of KN Energy.
A Current Report on Form 8-K filed April 14, 1999 announced
the approval by Chilquinta S.A.'s board of directors of the
offer by Sempra Energy and Public Service Enterprise Group to
acquire, on a 50-50 basis, Chilquinta S.A.'s subsidiary,
Chilquinta Energia S.A.
A Current Report on Form 8-K filed May 5, 1999 announced that
Sempra Energy Holdings would be filing a shelf registration
of debt securities to be offered pursuant to Rule 415 under
the Securities Act of 1933 and provided certain financial
information for Sempra Energy Holdings.
A Current Report on Form 8-K filed May 21, 1999 announced the
completion of the sales of SDG&E's Encina Power Plant, 17
combustion turbines, and South Bay Power Plant.
A Current Report on Form 8-K filed June 10, 1999 announced the
finalization of the joint purchase by Sempra Energy and Public
Service Enterprise Group of Chilquinta Energia S.A.
A Current Report on Form 8-K filed June 21, 1999 announced the
termination of the merger agreement between Sempra Energy and
KN Energy.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly cause this report to be signed on its behalf
by the undersigned thereunto duly authorized.
SEMPRA ENERGY
-------------------
(Registrant)
Date: August 12, 1999 By: /s/ F. H. Ault
----------------------------
F. H. Ault
Vice President and Controller
UT
EXHIBIT 12.1
SEMPRA ENERGY
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
(Dollars in millions)
Six Months
Ended
June 30,
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- --------
Fixed Charges and Preferred
Stock Dividends:
Interest $ 237 $ 227 $ 205 $ 209 $ 210 $ 114
Interest Portion of
Annual Rentals 35 32 28 25 20 9
Preferred dividends
of subsidiaries (1) 53 50 37 31 18 8
-------- -------- -------- -------- -------- --------
Total Fixed Charges
and Preferred Stock
Dividends For Purpose
of Ratio $ 325 $ 309 $ 270 $ 265 $ 248 $ 131
======== ======== ======== ======== ======== ========
Earnings:
Pretax income from
continuing operations $ 634 $ 665 $ 727 $ 733 $ 432 $ 245
Add:
Fixed charges
(from above) 325 309 270 265 248 131
Less: Fixed charges
capitalized 4 6 5 3 3 1
-------- -------- -------- -------- -------- --------
Fixed charges net of
capitalized charges 321 303 265 262 245 130
-------- -------- -------- -------- -------- --------
Total Earnings for
Purpose of Ratio $ 955 $ 968 $ 992 $ 995 $ 677 $ 375
======== ======== ======== ======== ======== ========
Ratio of Earnings
to Combined Fixed Charges
and Preferred Stock
Dividends 2.94 3.13 3.67 3.75 2.73 2.86
======== ======== ======== ======== ======== ========
(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.