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, 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 July 31, 2002: 204,828,575
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ITEM 1. FINANCIAL STATEMENTS.
SEMPRA ENERGY
STATEMENTS OF CONSOLIDATED INCOME
Dollars in millions except per-share amounts
Three Months Ended
June 30,
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2002 2001
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OPERATING REVENUES
California utilities:
Natural gas $ 762 $ 1,112
Electric 318 319
Other 414 464
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Total 1,494 1,895
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OPERATING EXPENSES
Cost of natural gas distributed 305 669
Electric fuel and net purchased power 79 90
Other operating expenses 683 675
Depreciation and amortization 152 139
Franchise payments and other taxes 43 50
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Total 1,262 1,623
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Operating Income 232 272
Other income - net 16 27
Preferred dividends of subsidiaries (3) (3)
Trust preferred distributions by subsidiary (5) (5)
Interest expense (76) (90)
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Income before income taxes 164 201
Income taxes 17 64
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Net income $ 147 $ 137
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Weighted-average number of shares outstanding:
Basic* 205,354 203,400
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Diluted* 207,084 205,963
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Net income per share of common stock (basic) $ 0.72 $ 0.67
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Net income per share of common stock (diluted) $ 0.71 $ 0.66
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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
STATEMENTS OF CONSOLIDATED INCOME
Dollars in millions except per-share amounts
Six Months Ended
June 30,
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2002 2001
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OPERATING REVENUES
California utilities:
Natural gas $ 1,630 $ 2,993
Electric 596 1,110
Other 728 911
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Total 2,954 5,014
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OPERATING EXPENSES
Cost of natural gas distributed 729 2,060
Electric fuel and net purchased power 140 662
Other operating expenses 1,215 1,259
Depreciation and amortization 300 281
Franchise payments and other taxes 87 108
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Total 2,471 4,370
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Operating Income 483 644
Other income - net 51 62
Preferred dividends of subsidiaries (6) (6)
Trust preferred distributions by subsidiary (9) (9)
Interest expense (150) (180)
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Income before income taxes 369 511
Income taxes 76 196
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Net income $ 293 $ 315
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Weighted-average number of shares outstanding:
Basic* 205,105 202,846
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Diluted* 206,729 204,455
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Net income per share of common stock (basic) $ 1.43 $ 1.55
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Net income per share of common stock (diluted) $ 1.42 $ 1.54
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Common dividends declared per share $ 0.50 $ 0.50
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*In thousands of shares
See notes to Consolidated Financial Statements.
SEMPRA ENERGY
CONSOLIDATED BALANCE SHEETS
Dollars in millions
Balance at
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June 30, December 31,
2002 2001
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ASSETS
Current assets:
Cash and cash equivalents $ 522 $ 605
Accounts receivable - trade 521 660
Accounts and notes receivable - other 104 130
Due from unconsolidated affiliates 54 57
Income taxes receivable -- 98
Trading assets 4,681 2,740
Fixed-price contracts and other derivatives 7 57
Regulatory assets arising from fixed-price
contracts and other derivatives 135 193
Other regulatory assets 74 73
Inventories 74 124
Other 160 71
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Total current assets 6,332 4,808
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Investments and other assets:
Fixed-price contracts and other derivatives 38 27
Regulatory assets arising from fixed-price
contracts and other derivatives 1,024 830
Other regulatory assets 863 1,005
Nuclear-decommissioning trusts 521 526
Investments 1,201 1,169
Sundry 622 574
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Total investments and other assets 4,269 4,131
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Property, plant and equipment:
Property, plant and equipment 13,336 12,806
Less accumulated depreciation and amortization (6,825) (6,589)
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Total property, plant and equipment - net 6,511 6,217
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Total assets $17,112 $15,156
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See notes to Consolidated Financial Statements.
SEMPRA ENERGY
CONSOLIDATED BALANCE SHEETS
Dollars in millions
Balance at
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June 30, December 31,
2002 2001
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 423 $ 875
Accounts payable - trade 604 702
Accounts payable - other 66 114
Income taxes payable 7 --
Deferred income taxes 14 70
Trading liabilities 3,594 1,793
Dividends and interest payable 144 139
Regulatory balancing accounts - net 744 660
Regulatory liabilities 9 19
Fixed-price contracts and other derivatives 138 195
Current portion of long-term debt 284 242
Other 748 715
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Total current liabilities 6,775 5,524
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Long-term debt 3,902 3,436
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Deferred credits and other liabilities:
Due to unconsolidated affiliate 162 160
Customer advances for construction 68 67
Post-retirement benefits other than pensions 143 145
Deferred income taxes 840 847
Deferred investment tax credits 92 95
Fixed-price contracts and other derivatives 1,024 835
Regulatory liabilities 110 86
Deferred credits and other liabilities 899 865
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Total deferred credits and other liabilities 3,338 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;
205,421,877 and 204,475,362 shares outstanding
at June 30, 2002 and December 31, 2001, respectively) 1,446 1,495
Retained earnings 1,665 1,475
Deferred compensation relating to ESOP (34) (36)
Accumulated other comprehensive income (loss) (384) (242)
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Total shareholders' equity 2,693 2,692
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Total liabilities and shareholders' equity $17,112 $15,156
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See notes to Consolidated Financial Statements.
SEMPRA ENERGY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
Dollars in millions
Six Months Ended
June 30,
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2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 293 $ 315
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 300 281
Deferred income taxes and investment tax credits (54) --
Equity in losses of unconsolidated affiliates (8) 3
Gain on sale of Energy America -- (33)
Gain on sale of assets (8) --
Gain on fixed-price contracts and other derivatives (5) --
Changes in other assets 77 (245)
Changes in other liabilities 23 77
Net changes in other working capital components 136 (167)
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Net cash provided by operating activities 754 231
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CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (559) (378)
Investments and acquisitions of affiliates,
net of cash acquired (99) --
Dividends received from unconsolidated affiliates 9 --
Net proceeds from sale of Energy America -- 51
Other - net (110) 56
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Net cash used in investing activities (759) (271)
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CASH FLOWS FROM FINANCING ACTIVITIES
Common stock dividends (102) (101)
Repurchase of common stock (4) --
Issuances of common stock 11 --
Issuances of long-term debt 800 675
Payments on long-term debt (303) (372)
Increase(decrease)in short-term debt - net (462) 628
Loan from unconsolidated affiliate -- 160
Other (18) 1
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Net cash provided by (used in) financing
activities (78) 991
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Change in cash and cash equivalents (83) 951
Cash and cash equivalents, January 1 605 637
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Cash and cash equivalents, June 30 $ 522 $1,588
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SEMPRA ENERGY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
Dollars in millions
Six Months Ended
June 30,
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2002 2001
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest payments, net of amounts capitalized $ 141 $ 169
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Income tax payments - net $ 24 $ 36
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SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Acquisition of subsidiaries:
Assets acquired $1,210 $ --
Cash paid for capital stock (199) --
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Liabilities assumed $1,011 $ --
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See notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
This Quarterly Report on Form 10-Q is that of Sempra Energy (the
company), a California-based Fortune 500 holding company. Sempra
Energy's subsidiaries include San Diego Gas & Electric Company (SDG&E),
Southern California Gas Company (SoCalGas) (collectively referred to
herein as the California utilities), Sempra Energy Trading (SET), Sempra
Energy Resources (SER), Sempra Energy International (SEI), Sempra Energy
Solutions (SES) and Sempra Energy Financial (SEF). The financial
statements herein are the Consolidated Financial Statements of Sempra
Energy and its consolidated subsidiaries.
The accompanying Consolidated Financial Statements have been prepared in
accordance with the interim-period-reporting requirements of Form 10-Q.
Results of operations for interim periods are not necessarily indicative
of results for the entire year. In the opinion of management, the
accompanying statements reflect all adjustments necessary for a fair
presentation. These adjustments are only of a normal recurring nature.
Certain changes in classification have been made to prior presentations
to conform to the current financial statement presentation.
Information in this Quarterly Report is unaudited and should be read in
conjunction with the company's Annual Report on Form 10-K for the year
ended December 31, 2001 (Annual Report) and Quarterly Report on Form 10-
Q for the three months ended March 31, 2002.
The company's significant accounting policies are described in Note 2 of
the notes to Consolidated Financial Statements in the company's Annual
Report. The same accounting policies are followed for interim reporting
purposes.
As described in the notes to Consolidated Financial Statements in the
company's Annual Report, SDG&E accounts 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 71).
EARNINGS PER SHARE
Diluted net income per share of common stock is less than basic net
income per share of common stock due to the effect of applicable common
stock options.
EQUITY UNITS
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 contract to
purchase for $25 on May 17, 2005, between .8190 and .9992 of a share of
the company's common stock, with the precise number determined by the
then-prevailing market prices. The company used the net proceeds of the
offering primarily 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 the company's
principal subsidiaries other than the California utilities. The Equity
Units are recorded as long-term debt in the Consolidated Balance Sheets
and the issuance costs were allocated between debt and equity issuance
costs.
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 $6 million and $12 million
for the three and six months ended June 30, 2001, 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 first quarter
of 2002, SEI recorded a pre-tax charge of $6 million related to the
impairment of goodwill related to its two domestic subsidiaries.
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
June 30,
2002 2001
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Reported net income $ 147 $ 137
Add: goodwill amortization,
net of tax 3
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Pro forma adjusted net income $ 147 $ 140
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Reported basic earnings
per share $0.72 $0.67
Add: goodwill amortization,
net of tax .02
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Pro forma adjusted basic
earnings per share $0.72 $0.69
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Reported diluted earnings
per share $0.71 $0.66
Add: goodwill amortization,
net of tax .02
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Pro forma adjusted diluted
earnings per share $0.71 $0.68
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Six Months Ended
June 30,
2002 2001
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Reported net income $ 293 $ 315
Add: goodwill amortization,
net of tax 7
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Pro forma adjusted net income $ 293 $ 322
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Reported basic earnings
per share $1.43 $1.55
Add: goodwill amortization,
net of tax .04
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Pro forma adjusted basic
earnings per share $1.43 $1.59
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Reported diluted earnings
per share $1.42 $1.54
Add: goodwill amortization,
net of tax .03
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Pro forma adjusted diluted
earnings per share $1.42 $1.57
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Included in the Consolidated Balance Sheets at June 30, 2002 and
December 31, 2001 were $167 million and $173 million, respectively, of
unamortized goodwill related to consolidated subsidiaries, primarily SET
(included in sundry assets), and, on both dates, $248 million (before
foreign currency translation adjustments) of unamortized goodwill
related to unconsolidated subsidiaries, primarily those located in South
America (included in investments). Unamortized other intangible assets
were not material at June 30, 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
$521 million at June 30, 2002 represents amounts collected for future
decommissioning costs and earnings thereon, and has a corresponding
offset in accumulated depreciation ($369 million related to SONGS Units
2 and 3) and deferred credits ($152 million related to SONGS Unit 1).
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." The adoption of SFAS 144, which governs the determination
of whether the carrying value of certain assets, primarily property,
plant and equipment, should be reduced, has not affected the company's
financial statements.
In June, 2002, a consensus was reached in Emerging Issues Task Force
(EITF) Issue 02-3, which codifies existing guidance on the recognition
and reporting of gains and losses on energy trading contracts and
addresses other aspects of the accounting for contracts involved in
energy trading and risk management activities. Among other things, the
consensus requires that mark-to-market gains and losses on energy
trading contracts should be shown net in the income statement, effective
for financial statements issued for periods ending after July 15, 2002.
This requires that SES change its method of recording trading activities
from gross to net. All other Sempra Energy subsidiaries were already
recording trading activities net and require no change. The company is
not early-adopting this consensus; however, SES is changing to the net
method immediately. At a later date, the EITF will also address the
application of fair value accounting in situations where there is very
little market information, including whether it is appropriate to use
fair-value accounting and, if so, how fair value should be determined.
2. MATERIAL CONTINGENCIES
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 $314 million at June 30, 2002. SDG&E has filed an
application with the California Public Utilities Commission (CPUC) for a
rate surcharge. However, even at current rates and allocation of those
rates between the California Department of Water Resources (DWR) and
SDG&E, the balance is expected to be completely recovered by mid 2005.
Also at issue is the ownership of certain power sale profits. As
previously discussed in Note 14 of the notes to Consolidated Financial
Statements in the Annual Report, the CPUC rejected portions of a
memorandum of understanding with respect to a settlement of regulatory
issues related to electricity contracts held by SDG&E. The proposed
settlement would have granted SDG&E ownership of its power sale profits
in exchange for crediting $219 million to customers to offset the rate-
ceiling balancing account. Instead, the CPUC asserted that all the
profits associated with the contracts (which the CPUC estimated to be
$363 million) should accrue to the benefit of customers. The company
believes the CPUC's calculation of these profits is incorrect. Moreover,
the company believes that all profits associated with the contracts
properly are for the benefit of SDG&E shareholders rather than
customers. Accordingly, SDG&E has challenged the CPUC's disallowance of
profits from the contracts in both the California Court of Appeals and
in Federal District Court.
These court proceedings have been held in abeyance pending the CPUC's
consideration of another proposed settlement that has been negotiated
with the CPUC legal division and is the subject of ongoing public
hearings. The settlement, if approved by the CPUC, would dispose of all
issues relating to the contracts by allocating an additional $24 million
of power sale profits to customers by a reduction of the rate-ceiling
balancing account. The settlement, if approved, would not adversely
affect SDG&E's financial position, liquidity or results of operations.
If the settlement is not approved, SDG&E intends to proceed with its
previously instituted litigation seeking the allocation of all power
sale profits to shareholders.
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 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 of 7.96 cents/kWh (the 6.5-cent
commodity rate ceiling, plus an amount sufficient to repay the DWR for
its purchases of power for utility customers, and a 0.7-cent/kWh
"competition transition charge" rate. The excess, if any, of the system
average rate over actual costs is used to reduce the undercollection
balance described above. Incremental Cost Incentive Pricing (ICIP) is
continued for SONGS through 2003. When ICIP is replaced with traditional
rate-setting mechanisms in 2004, the SONGS ratebase will start at zero,
resulting in no significant earnings until new plant additions at SONGS
accumulate to significant amounts. SDG&E has requested a rehearing of
this decision as it is contrary to the market-based pricing contemplated
in the overall mechanism adopted by the CPUC in 1996. Market-based
treatment would provide positive earnings if the plant's operating costs
were below the revenues produced by sales to the competitive market.
Since early 2001, the DWR has procured power for each of the California
IOUs because of their actual or imminent inability to finance the
procurement themselves. In March of 2002, the CPUC established the
allocation of the power and the related cost responsibility among the
California electric utilities for power sold by DWR. SDG&E's allocation
results in its overall rates being comparable to those of the other two
California electric utilities, Southern California Edison and Pacific
Gas and Electric, although this allocation could change in future years.
SDG&E and the DWR have an agreement under which the DWR will continue to
purchase power for SDG&E's customers through December 31, 2002. The
company has received notice from the DWR of its intent to cancel this
agreement effective January 1, 2003. The CPUC intends for the utilities
to take the procurement function back from DWR by the beginning of 2003,
and is now considering how the power from the long-term contracts signed
by DWR should be allocated to the customers of each of the utilities for
purposes of determining the amount of additional power each utility will
be required to procure in 2003 and thereafter to fill out its resource
needs. The California Legislature has passed Assembly Bill 57 (AB 57),
which, if signed into law by the governor, would require the CPUC to
make this determination, and to establish procedures that will allow
utilities to recover their electric procurement costs in a timely
fashion without the need for retrospective reasonableness reviews. AB 57
is currently awaiting the Governor's signature. SDG&E believes that the
return to the procurement function will have no adverse impact on its
financial position or results of operations if it is accomplished in
conformance with AB 57.
GAS INDUSTRY RESTRUCTURING
As discussed in Note 15 of the notes to Consolidated Financial
Statements in the Annual Report, in December 2001 the CPUC issued a
decision related to gas industry restructuring, with implementation
anticipated during 2002. However, during the quarter ended June 30,
2002, implementation has been delayed and the CPUC may order additional
hearings.
CPUC INVESTIGATION OF ENERGY-UTILITY HOLDING COMPANIES
In January 2002, the CPUC issued a decision that broadly determined that
a holding company would be required to provide cash to a utility
subsidiary to cover its operating expenses and working capital to the
extent they are not adequately funded through retail rates. Also in
January 2002, the CPUC ruled that it had jurisdiction to create the
holding company system and, therefore, retains jurisdiction to enforce
conditions to which the holding companies had agreed. The company
subsequently filed a request for rehearing on the issues. On July 17,
2002, the CPUC denied a rehearing. The company is planning to seek
judicial review of the orders in the California Court of Appeals. The
company must file its appeal no later than August 21, 2002.
NUCLEAR INSURANCE
SDG&E and the other 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 other 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 other 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's and the other co-owners' losses resulting from acts of
terrorism.
LITIGATION
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. 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 on-going
settlement judge proceedings that began in May 2002. If settlement is
not reached, the FERC expects to issue a final decision by May 2003.
Additional information regarding the contract between SER and the DWR is
included under "Sempra Energy Resources" in Management's Discussion and
Analysis of Financial Condition and Results of Operation.
Lawsuits filed in 2000 and currently consolidated in San Diego Superior
Court seek class-action certification and damages, alleging that Sempra
Energy, SoCalGas and SDG&E, along with El Paso Energy Corp. and several
of its affiliates, sought to maintain their positions in the natural gas
market by agreeing, among other things, to restrict the supply of
natural gas into Southern California.
Various 2000 lawsuits, which seek class-action certification, allege
that certain company subsidiaries unlawfully manipulated the electric-
energy market. These lawsuits were consolidated in San Diego Superior
Court, by order of the Judicial Council, but have recently been removed
to Federal Court where motions to remand are pending. Similar lawsuits,
filed recently, are expected to be consolidated with the existing
matters in San Diego.
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.
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. The FERC has
dismissed the complaint. The California Attorney General's office has
filed a request for rehearing.
Management believes the above allegations are without merit.
In connection with its investigation into California energy prices, in
May 2002 the Federal Energy Regulatory Commission (FERC) ordered all
energy companies engaged in electric energy trading activities to state
whether they had engaged in "death star," "load shift," "wheel out,"
"ricochet," "inc-ing load" and various other specific trading activities
as described in memos prepared by attorneys retained by Enron
Corporation and in which it was asserted that Enron was manipulating or
"gaming" the California energy markets. In response to the inquiry,
Sempra Energy's electricity trading companies have denied using any of
these strategies. SDG&E did disclose and explain a single de minimus
100-MW transaction for the export of electricity out of California. In
response to a related FERC inquiry they and SoCalGas have also denied
engaging in "wash" or "round trip" trading activities. The companies are
also cooperating with the FERC and other governmental agencies and
officials in their various investigations of the California energy
markets.
On May 28, 2002, SER filed a complaint for declaratory judgment in San
Diego Superior Court regarding the DWR contract. Among other relief, SER
is seeking a binding declaration from the court that, contrary to DWR's
stated position, SER is meeting the terms of the agreement and that DWR
is obligated to take delivery of and pay for wholesale electric power,
as provided for under the agreement. In response to SER's complaint for
a declaratory judgment, on July 2, 2002, the DWR filed a cross-complaint
against SER, seeking to void the 10-year energy-supply contract by
alleging that SER misrepresented its intentions regarding the Elk Hills
Power Plant as well as the other plants currently under construction.
The DWR continues to accept all scheduled power from SER and has made
all payments for such power. The construction of the Elk Hills Power
Plant is on schedule to begin operating in the spring of 2003.
SET is a defendant in the action at the 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 June 30, 2002, SET remains due approximately $100 million from energy
sales made in 2000 and 2001 through the California Independent System
Operator and the California Power Exchange markets. The collection of
these receivables depends on satisfactory resolution of the financial
difficulties being experienced by the California IOUs as a result of the
California electric industry crisis. SET has submitted relevant claims
in both the Pacific Gas and Electric and California Power Exchange
bankruptcy proceedings. The company believes adequate reserves have been
recorded.
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
has reduced the carrying value of its investment to $100 million by
reducing shareholders' equity by $250 million, which is included in
accumulated other comprehensive income (loss). These non-cash
adjustments, which began at the end of 2001 and continued through June
30, 2002, did not affect net income, but did reduce comprehensive income
and increase accumulated other comprehensive income (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 non-recurring 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 currency
adjustments relating to SEI's Argentine investments previously recorded
in other comprehensive income.
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 Six Months
Ended Ended
June 30, June 30,
---------------------------------
(Dollars in millions) 2002 2001 2002 2001
- -----------------------------------------------------------------
Net income $ 147 $ 137 $ 293 $ 315
Foreign currency adjustments (34) (12) (128) (13)
Minimum pension liability
adjustments (14) (8) (14) (8)
Financial instruments (Note 5) 1 (1) -- (1)
---------------------------------
Comprehensive income $ 100 $ 116 $ 151 $ 293
- -----------------------------------------------------------------
4. SEGMENT INFORMATION
The company is a holding company, whose subsidiaries are primarily
engaged in the energy business. It 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 Note 16 of 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,
electricity, petroleum, petroleum products and other commodities, and a
trader and wholesaler of metals, serving a broad range of customers in
the United States, Canada, Europe and Asia.
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 six months ended June 30, 2002, except for the
increase in trading assets, as shown on the Consolidated Balance Sheets,
due to the acquisitions referred to in the SET section of Management's
Discussion and Analysis.
- -----------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------------------
(Dollars in millions) 2002 2001 2002 2001
- -----------------------------------------------------------------------------
Operating Revenues:
Southern California Gas $ 680 $ 927 $ 1,402 $ 2,475
San Diego Gas & Electric 407 511 834 1,640
Sempra Energy Trading 198 326 404 691
Intersegment revenues (7) (8) (10) (13)
Other 216 139 324 221
-------------------------------------------------
Total $ 1,494 $ 1,895 $ 2,954 $ 5,014
- -----------------------------------------------------------------------------
Net Income:
Southern California Gas* $ 51 $ 47 $ 111 $ 99
San Diego Gas & Electric* 51 37 104 89
Sempra Energy Trading 21 69 63 155
Other 24 (16) 15 (28)
-------------------------------------------------
Total $ 147 $ 137 $ 293 $ 315
- -----------------------------------------------------------------------------
* after preferred dividends
- --------------------------------------------------------
Balance at
------------------------
June 30, December 31,
2002 2001
- --------------------------------------------------------
Assets:
Southern California Gas $ 4,080 $ 3,762
San Diego Gas & Electric 5,491 5,444
Sempra Energy Trading 5,087 2,997
All other 2,454 2,953
-----------------------
Total $17,112 $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 and SFAS 138, accounting for
derivative instruments and hedging activities, market risk, interest-
rate risk management, energy derivatives and contracts, and fair value.
Additional activity and information since January 1, 2002 related to
financial instruments are described herein.
At June 30, 2002, $7 million in current assets, $38 million in other
assets, $138 million in current liabilities and $1,024 million in
deferred credits and other liabilities were recorded in the Consolidated
Balance Sheets for fixed-priced contracts and other derivatives.
Regulatory assets and liabilities were established to the extent that
derivative gains and losses are recoverable or payable through future
rates. As such, $135 million in current regulatory assets, $1,024
million in noncurrent regulatory assets, and $3 million in current
regulatory liabilities were recorded in the Consolidated Balance Sheets
as of June 30, 2002. For the six months ended June 30, 2002, $6 million
of income was recorded in other operating revenues, $2 million of losses
were recorded in natural gas operating revenues and $1 million of income
was recorded in non-operating revenues in the Statements of Consolidated
Income. Additionally, a market value adjustment of $10 million was made
to long-term debt relating to two fixed-to-floating interest rate swap
agreements.
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. 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. The company has received notice from the DWR of its intent to
cancel this agreement effective January 1, 2003. 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 the rates under the rate
ceiling. In addition, AB 57, if signed into law by the governor, would
provide for rates that would reflect the costs of power. See further
discussion in the company's Annual Report and the discussion of AB 57
above.
SET provides cash to or requires cash from Sempra Energy as the level of
its net trading assets fluctuates with prices, volumes, margin
requirements (which are substantially affected by credit ratings and
price fluctuations) and the length of its various trading positions. Its
status as a source or use of Sempra Energy cash also depends on its
level of borrowing from its own sources.
CASH FLOWS FROM OPERATING ACTIVITIES
For the six-month period ended June 30, 2002, the increase in cash flows
from operations compared to the corresponding period in 2001 was
primarily due to SDG&E's undercollection of purchased-power costs, the
balance of which decreased to $392 million at December 31, 2001 and $314
million at June 30, 2002 from a high in mid-2001 of $750 million. In
addition, the increase in cash flows from operations in 2002 was
attributable to the increase in overcollected regulatory balancing
accounts, partially offset by the tax effect associated with these
balancing accounts.
CASH FLOWS FROM INVESTING ACTIVITIES
For the six-month period ended June 30, 2002, the increase in cash flows
used in investing activities compared to the corresponding period in
2001 was primarily due to increased capital expenditures and, as
reflected in "other-net" on the Condensed Statements of Consolidated
Cash Flows, required investments used to secure project funding made
under synthetic leasing agreements.
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 $1 billion for the full year 2002, including amounts
under SER's synthetic lease agreement and the investment in Twin Oaks
Power (described below).
In June 2002, SER signed an agreement to acquire a 305-megawatt, coal-
fired power plant from Texas-New Mexico Power Company for $120 million
(to be renamed Twin Oaks Power). Simultaneously, SER signed a five-year
contract to sell substantially all of the output of the plant and will
be assigned an 18-year coal supply contract, to become effective upon
the closing of the transaction. The closing, subject to timely obtaining
of requisite regulatory approvals, is expected by the end of 2002.
Recently, SET completed three acquisitions that add base metals trading
and warehousing to its trading business. On February 4, 2002, SET
completed the acquisition of London-based Sempra Metals Limited
(formerly Enron Metals Limited), a leading metals trader on the London
Metals Exchange, for $145 million (subject to completion of an audit).
On April 26, 2002, SET completed the acquisition of the metals
concentrates business of New York-based Sempra Metals Concentrates
(formerly Enron Metals & Commodity Corp.), a leading global trader of
copper, lead and zinc concentrates, for $24 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 $30
million. These acquisitions are expected to contribute to Sempra
Energy's earnings in 2002.
CASH FLOWS FROM FINANCING ACTIVITIES
For the six-month period ended June 30, 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 contract to
purchase for $25 on May 17, 2005, between .8190 and .9992 of a share of
the company's common stock, with the precise number determined by the
then-prevailing market price. The company used the net proceeds of the
offering primarily to repay a portion of its short-term debt, including
the repayment of $200 million borrowed by SER in April 2002 and other
debt used to finance the capital expenditure program for Sempra Energy
Global Enterprises.
In March 2000, the company's board of directors authorized the optional
expenditure of up to $100 million to repurchase shares of common stock
from time to time in the open market or in privately negotiated
transactions. Through June 30, 2002, the company had acquired 222,400
shares under this authorization (162,400 in July 2000 and 60,000 in
November 2001). In July 2002, the company acquired an additional 674,400
shares.
In May 2002, SDG&E and SoCalGas replaced their individual revolving
lines of credit with a combined revolving credit agreement under which
each utility may individually borrow up to $300 million, subject to a
combined borrowing limit for both utilities of $500 million. Each
utility's revolving credit line expires on May 16, 2003, at which time
it may convert its then outstanding borrowings to a one-year term loan
subject to having obtained any requisite regulatory approvals relating
to long-term debt. Borrowings under the agreement, which are available
for general corporate purposes including back-up support for commercial
paper and variable-rate long-term debt, would bear interest at rates
varying with market rates and the individual borrowing utility's credit
rating. The agreement requires each utility individually to maintain a
debt-to-total capitalization ratio (as defined in the agreement) of not
to exceed 60%. The rights, obligations and covenants of each utility
under the agreement are individual rather than joint with those of the
other utility, and a default by one utility would not constitute a
default by the other. These lines of credit were unused at June 30,
2002.
In April 2002, Fitch, Inc. confirmed its prior credit ratings of the
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 six-month period
ended June 30, 2002, compared to the corresponding period in 2001,
primarily due to lower income in 2002 from SET as described below and
the 2001 gain on sale of Energy America, partially offset by the income-
tax matters referred to in the following paragraph and lower interest
expense in 2002. Net income and net income per share increased for the
three-month period ended June 30, 2002, compared to the corresponding
period in 2001, primarily due to improved results at the California
utilities and at SER, partially offset by reduced earnings at SET. The
decreases in SET's earnings were primarily due to decreased volatility
in energy commodity markets and decreased energy commodity prices during
2002.
Income tax expense decreased for the three-month and six-month periods
ended June 30, 2002, compared to the corresponding period in 2001,
primarily due to the lower income noted above, favorable resolution of
income-tax issues in the second quarter of 2002, and higher tax 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 for the three-month and six-month
periods ended June 30, 2002, compared to the corresponding period in
2001, was primarily due to a decrease in average outstanding debt,
decreased interest rates in 2002 and the effects of the interest-rate
swaps, partially offset by an increase in short-term debt interest
expense.
The decreases in other operating revenues and operating expenses for the
three-month and six-month periods ended June 30, 2002, compared to the
corresponding period in 2001, were primarily due to decreased volatility
in energy commodity markets during 2002 at SET, partially offset by
SER's sales to the DWR that commenced in April 2002 under its long-term
contract.
UTILITY OPERATIONS
The tables below summarize the natural gas and electric volumes and
revenues by customer class for the six-month periods ended June 30, 2002
and 2001.
Gas Sales, Transportation and Exchange
(Volumes in billion cubic feet, dollars in millions)
Gas Sales Transportation & Exchange Total
----------------------------------------------------------------------
Volumes Revenue Volumes Revenue Volumes Revenue
----------------------------------------------------------------------
2002:
Residential 165 $1,123 1 $ 4 166 $1,127
Commercial and industrial 63 324 145 85 208 409
Electric generation plants -- -- 104 20 104 20
Wholesale -- -- 21 2 21 2
---------------------------------------------------------------
228 $1,447 271 $111 499 1,558
Balancing accounts and other 72
--------
Total $1,630
- --------------------------------------------------------------------------------------------
2001:
Residential 172 $1,950 1 $ 3 173 $1,953
Commercial and industrial 60 618 124 102 184 720
Electric generation plants -- -- 235 59 235 59
Wholesale -- -- 11 6 11 6
---------------------------------------------------------------
232 $2,568 371 $170 603 2,738
Balancing accounts and other 255
--------
Total $2,993
- --------------------------------------------------------------------------------------------
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 commodity prices. Under the current regulatory framework,
changes in natural gas commodity prices do not affect net income since, as
explained more fully in the company's Annual Report, current or future
customer rates normally recover the actual commodity cost of natural gas on
a substantially concurrent basis, subject to the mechanisms under
performance-based ratemaking as explained in the Annual Report.
Electric Distribution and Transmission
(Volumes in millions of kWhrs, dollars in millions)
2002 2001
------------------------------------------
Volumes Revenue Volumes Revenue
------------------------------------------
Residential 3,072 $ 323 2,993 $ 405
Commercial 2,853 294 2,961 462
Industrial 897 75 1,532 272
Direct access 1,693 54 1,032 36
Street and highway lighting 43 4 44 5
Off-system sales -- -- 413 88
------------------------------------------
8,558 750 8,975 1,268
Balancing and other (154) (158)
------------------------------------------
Total 8,558 $ 596 8,975 $1,110
------------------------------------------
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 and the DWR's purchases of
SDG&E's net short position beginning in February 2001. Under the current
regulatory framework, changes in commodity costs normally do not affect
net income, as explained in the Annual Report, subject to the mechanisms
under performance-based ratemaking as explained in the Annual Report.
SEMPRA ENERGY TRADING
SET recorded net income of $63 million and $155 million for the six-
month periods ended June 30, 2002 and 2001, respectively, and net income
of $21 million and $69 million for the three-month periods ended June
30, 2002 and 2001, respectively. The decrease in net income was
primarily due to decreased volatility in energy commodity markets and
decreased energy commodity prices during 2002.
For the six-month period ended June 30, 2002, SET recorded net revenues
of $404 million compared to $691 million for the corresponding period in
2001. SET's gross revenues were $16.3 billion and $18.1 billion for the
six-month periods ended June 30, 2002 and 2001, respectively. SET has
historically recorded trading activities net, as will be required of all
trading companies in the future, based on a consensus issued by the
Emerging Issues Task Force in June 2002.
The following tables summarize SET's trading margin by geographical
region and by product line for the six-month periods ended June 30, 2002
and 2001.
Six Months Ended
June 30
Trading Margin (dollars in millions) 2002 2001
- --------------------------------------------------------------------
Geographical:
North America $ 153 $ 416
Europe/Asia 84 71
------------------------
Total $ 237 $ 487
========================
Product Line:
Gas $ 117 $ 147
Power 50 233
Oil/Crude & Products 40 105
Metals & other 30 2
------------------------
Total $ 237 $ 487
========================
The estimated fair values for SET's trading activities as of June 30,
2002, and the periods during which unrealized revenues are expected to
be realized, are (dollars in millions):
Fair Market
Value at
June 30 /--Scheduled Maturity (in months)--/
Source of fair value 2002 0-12 13-24 25-36 >36
- ----------------------------------------------------------------------------
Exchange prices $ (75) $ (49) $ (2) $ (23) $ (1)
Prices actively quoted 458 241 164 55 (2)
Prices provided by other
external sources (6) (15) (8) -- 17
Prices based on models
and other valuation
methods 30 2 6 3 19
--------------------------------------------------
Total $ 407 $ 179 $ 160 $ 35 $ 33
==================================================
100.0% 44.0% 39.3% 8.6% 8.1%
The following table summarizes the counterparty credit quality and
exposure for SET. These exposures are net of collateral in the form of
customer margin and/or letters of credit.
June 30 December 31
(Dollars in millions) 2002 2001
- --------------------------------------------------------------------
Commodity Exchanges $ 180 $ 133
Investment Grade* 1,097 1,211
Below Investment Grade* 317 335
-------------------------
Total $1,594 $1,679
=========================
* As determined by rating agencies or internal models intended to
approximate rating-agency determinations.
- --------------------------------------------------------------------
A summary of SET's unrealized revenues for trading activities for the
three-month and six-month periods ending June 30, 2002 (in millions of
dollars) follows:
Three Months Six Months
Ended Ended
June 30, 2002 June 30, 2002
- ----------------------------------------------------------------------
Balance at beginning of period $ 617 $ 405
Additions 47 186
Realized 257 184
------------------------------------
Balance at June 30, 2002 $ 407 $ 407
====================================
SEMPRA ENERGY INTERNATIONAL
Results for SEI were net income of $17 million and $19 million for the
six-month periods ended June 30, 2002 and 2001, respectively, and net
income of $9 million and $14 million for the three-month periods ended
June 30, 2002 and 2001, respectively. The decreases in net income were
primarily due to reduced earnings from operations in Argentina, Peru and
Mexico. A discussion of the Argentine economic issue is included in Note
2 of the notes to Consolidated Financial Statements.
The North Baja Pipeline, which will extend 215 miles from Arizona across
Baja California, Mexico, is on schedule to begin service in the third
quarter of 2002 and is expected to contribute to earnings by the fourth
quarter of 2002.
SEMPRA ENERGY RESOURCES
Results for SER were net income of $31 million for the six-month period
ended June 30, 2002, compared with a net loss of $5 million for the
corresponding period in 2001, and net income of $34 million and a net
loss of $9 million for the three-month periods ended June 30, 2002 and
2001, respectively. The improvements were primarily due to sales to the
DWR that commenced in April 2002 under its long-term contract. Losses in
2001 related to development costs of new generation projects and selling
power to the DWR at below cost in June 2001.
SER has an agreement with the DWR to supply the DWR with up to 1,900
megawatts of electricity over a ten-year period ending in September
2011. The company's ability to increase its earnings is significantly
dependent on results to be provided by the DWR agreement. As previously
reported, the CPUC and the California Electricity Oversight Board have
filed complaints with the FERC alleging that the agreement, as well as
other agreements entered into by the DWR with other electricity
suppliers, do not provide just and reasonable rates, and seeking to
abrogate or reform the agreements. 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, which are ongoing. If
settlement is not reached, the FERC expects to issue a final decision by
May 2003.
The DWR has recently asserted that SER has materially defaulted in its
obligations under the agreement by failing to use commercially
reasonable efforts to achieve simple cycle operation at SER's Elk Hills
power project. SER is continuing to construct the Elk Hills project for
combined cycle operations as well as other power projects sufficient to
provide the electricity to be delivered under the agreement. However,
the company believes that the agreement permits SER to fulfill its
delivery obligations through market sources, which SER has done and the
power from which the DWR has accepted, rather than SER owned or operated
power plants and, accordingly, that the DWR assertions are without
merit.
Although the contract is subject to ongoing litigation and regulatory
proceedings, both SER and the State of California are performing under
this contract, which is scheduled to end on September 30, 2011.
Information concerning the litigation is provided in Note 2 of the notes
to Consolidated Financial Statements.
In June 2002, SER signed an agreement to acquire a 305-megawatt, coal-
fired power plant from Texas-New Mexico Power Company for $120 million
(to be renamed Twin Oaks Power). Simultaneously, SER signed a five-year
contract to sell substantially all of the output of the plant and will
be assigned an 18-year coal supply contract, to become effective upon
the closing of the transaction. The closing, subject to timely obtaining
of requisite regulatory approvals, is expected by the end of 2002.
SER also has contracted for two turbine sets (each consisting of two gas
turbines and one steam turbine), beyond those required for its plants
currently under construction. Six additional sites, two of which are
already fully permitted, are being evaluated for potential power plant
locations. SER intends to use these turbine sets at two of these sites.
OTHER OPERATIONS
SES recorded net income of $6 million for the six-month period ending
June 30, 2002, compared with a net loss of $4 million for the
corresponding period in 2001, and net income of $5 million and $2
million for the three-month periods ended June 30, 2002 and 2001,
respectively. The improvement resulted from increased commodity sales.
SEF invests in limited partnerships, which own 1,300 affordable-housing
properties throughout the United States, Puerto Rico and the Virgin
Islands, and tax-advantaged coal-pelletizing facilities. These
investments are expected to provide income-tax benefits, primarily from
income-tax credits. SEF recorded net income of $14 million for each of
the six-month periods ended June 30, 2002 and 2001, and net income of $7
million and $6 million for the three-month periods ended June 30, 2002
and 2001, respectively, which include impairment write downs. 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 completed three acquisitions that add base
metals trading and warehousing to its trading business. These
acquisitions are Sempra Metals Limited (formerly Enron Metals Limited),
Sempra Metals Concentrates (formerly Enron Metals & Commodity Corp.) and
Henry Bath, and are further described in "Cash Flows From Investing
Activities." These acquisitions are expected to contribute to Sempra
Energy's earnings in 2002. In addition, in June 2002, SER announced
execution of an agreement to acquire a 305-megawatt coal-fired power
plant from Texas-New Mexico Power Company for $120 million (to be
renamed Twin Oaks Power). Simultaneously, SER signed a five-year
contract to sell substantially all of the output of the plant and will
be assigned an 18-year coal supply contract, both to become effective
with the close of the transaction, which is subject to regulatory
approvals and which is expected by the end of 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. SER has approximately 2,400 megawatts of new
generation in operation or under construction. The 570-megawatt Elk
Hills power project, 50 percent owned by SER and located near
Bakersfield, California, is expected to begin commercial operations in
March 2003. The 1,200-megawatt Mesquite Power Plant near Phoenix,
Arizona, is expected to commence commercial operations in June 2003.
Termoelectrica de Mexicali, a 600-megawatt power plant near Mexicali,
Baja California, Mexico, is expected to commence commercial operations
in the summer of 2003. Electricity from the plants will be available for
markets in California, Arizona and Mexico. 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, under "Sempra Energy Resources,"
concerning SER's contract with the DWR.
The end of ICIP (see Note 2 of the notes to Consolidated Financial
Statements) will return SONGS to traditional rate-setting mechanisms in
2004, resulting in no significant earnings until new plant additions at
SONGS accumulate to significant amounts. SDG&E has requested a
rehearing of this decision as it is contrary to the market-based
pricing contemplated in the overall mechanism adopted by the CPUC in
1996. Market-based treatment would provide positive earnings if the
plant's operating costs were below the revenues produced by sales to
the competitive market.
Gas and Electric Rates
On May 8, 2002, SDG&E filed its 2003 Cost of Capital application with
the CPUC, requesting an increase in its authorized return on equity from
10.6 percent to 12.5 percent. If adopted, this change would result in a
revenue requirement increase of $30.7 million ($24.2 million electric
and $6.5 million gas), effective January 1, 2003. The CPUC's Office of
Ratepayer Advocates has recommended a return of 10.5 percent. The CPUC
is expected to rule on the matter by the end of the year.
The CPUC has adopted a settlement proposed by SoCalGas in a recent case
involving review of its Gas Cost Incentive Mechanism (GCIM). The CPUC
decision finds that this mechanism, which allows SoCalGas to receive a
share of the savings it achieves in buying natural gas for core
customers, should continue indefinitely. Savings are determined by
comparing the actual cost of gas purchases to a benchmark of monthly
prices. SoCalGas has requested that the CPUC approve rewards of $30.8
million and $17 million for the last two completed program years. No
rewards will be included in SoCalGas' earnings until approved by the
CPUC. CPUC approval may be delayed pending the Commission's
investigation into the run-up in California border natural gas prices
during the winter of 2000-2001.
SDG&E has a Gas Procurement PBR mechanism that allows SDG&E to receive a
share of the savings it achieves by buying natural gas for customers
below a monthly benchmark. In March 2002, SDG&E requested a reward of $7
million for the PBR natural gas procurement period ending July 31, 2001.
No reward will be included in SDG&E's earnings until it is approved by
the CPUC, which is expected by the end of 2002.
On June 17, 2002, SDG&E amended its March 21, 2002 joint application
with Southern California Edison requesting the CPUC to set contribution
levels for the San Onofre Nuclear Generating Station (SONGS) nuclear
decommissioning trust funds. SDG&E requested a rate increase to cover
its share of total projected increased decommissioning costs for SONGS.
If approved, the current annual contribution to SDG&E's trust funds
would increase to $11.5 million annually from $4.9 million. Prior to
August 1999, SDG&E's annual contribution had been $22 million.
In July 2002, the CPUC Energy Division issued a Draft Resolution (DR)
approving SDG&E's 2000 Performance-Based Ratemaking (PBR) report. The DR
approves SDG&E's request for a total net reward of $11.7 million, as
well as SDG&E's actual 2000 rate of return (applicable only to electric
distribution and gas transportation) of 8.74 percent, which is below the
authorized 8.75 percent. This results in no sharing of earnings in 2000
under the PBR sharing mechanism described in the company's Annual
Report. A final CPUC decision is expected by the end of the third
quarter 2002. The financial results herein do not include the pending
award.
The California utilities will file applications with the CPUC in
December 2002 to set new base rates. A CPUC decision is expected in late
2003, with new rates to become effective in 2004.
The California utilities have earned rewards for successful
implementation of Demand-Side Management programs that have been
scheduled by the CPUC for payout over several years. In a recent ruling,
a CPUC Administrative Law Judge has indicated an intent to reanalyze the
uncollected portion of past rewards earned by utilities (which have not
been included in the California utilities' income), and potentially
recompute the amount of the rewards. The California utilities will
oppose the recomputation.
NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board (FASB) issued two
statements, SFAS 142 "Goodwill and Other Intangible Assets" and SFAS 143
"Accounting for Asset Retirement Obligations." SFAS 142 provides
guidance on how to account for goodwill and other intangible assets
after an acquisition is complete. It is described in detail in Note 1 of
the notes to Consolidated Financial Statements. 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.
In June, 2002, a consensus was reached in Emerging Issues Task Force (EITF)
Issue 02-3, which codifies existing guidance on the recognition and
reporting of gains and losses on energy trading contracts and addresses
other aspects of the accounting for contracts involved in energy trading and
risk management activities. Among other things, the consensus requires that
mark-to-market gains and losses on energy trading contracts should be shown
net in the income statement, effective for financial statements issued for
periods ending after July 15, 2002. This requires that SES change its method
of recording trading activities from gross to net. All other Sempra Energy
subsidiaries were already recording trading activities net and require no
change. At a later date, the EITF will also address the application of fair
value accounting when there is very little market information, including
whether it is appropriate to use fair value and, if so, how fair value
should be determined.
ITEM 3. MARKET RISK
There have been no significant changes in the risk issues affecting the
company subsequent to those discussed in the Annual Report. As noted in
that report, the California utilities may, at times, be exposed to
limited market risk in their natural gas purchase and sale 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 June 30, 2002, and
the average VaR for the six-month period ended June 30, 2002, at the 95-
percent and 99-percent confidence intervals (one-day holding period)
were as follows (in millions of dollars):
95% 99%
------ ------
At June 30, 2002 $4.7 $6.7
Average for the six months ended 6/30/02 5.9 8.4
As of June 30, 2002, the total VaR of the California utilities' and
SES's natural gas positions was not material.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except as described in Note 2 of the notes to Consolidated Financial
Statements, neither the 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 12 - Computation of ratios
12.1 Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed after March 31, 2002:
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.
Current Report on Form 8-K filed July 24, 2002, filing as an exhibit
Sempra Energy's press release of July 23, 2002, giving the financial
results for the three-month period ended June 30, 2002.
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 13, 2002 By: /s/ F. H. Ault
----------------------------
F. H. Ault
Sr. Vice President and Controller
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,
1997 1998 1999 2000 2001 2002
-------- -------- -------- -------- -------- ---------
Fixed Charges and Preferred
Stock Dividends:
Interest $ 209 $ 210 $ 233 $ 308 $ 358 $ 165
Interest portion of
annual rentals 25 20 10 8 6 2
Preferred dividends
of subsidiaries (1) 31 18 16 18 16 7
-------- -------- -------- -------- -------- ---------
Combined Fixed Charges
and Preferred Stock
Dividends for Purpose
of Ratio $ 265 $ 248 $ 259 $ 334 $ 380 $ 174
======== ======== ======== ======== ======== =========
Earnings:
Pretax income from
continuing operations $ 733 $ 432 $ 573 $ 699 $ 731 $ 369
Total Fixed Charges
(from above) 265 248 259 334 380 174
Less:
Interest capitalized 2 1 1 3 11 3
Equity income (loss) of
unconsolidated subsidiaries
and joint ventures - - - 62 12 (5)
-------- -------- -------- -------- -------- ---------
Total Earnings for
Purpose of Ratio $ 996 $ 679 $ 831 $ 968 $1,088 $ 545
======== ======== ======== ======== ======== =========
Ratio of Earnings
to Combined Fixed Charges
and Preferred Stock
Dividends 3.76 2.74 3.21 2.90 2.86 3.13
======== ======== ======== ======== ======== =========
(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.
