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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, 1998
-------------------------------------
Commission file number 1-1402
---------------------------------------------
SOUTHERN CALIFORNIA GAS COMPANY
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
California 95-1240705
- --------------------------------------------- ------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
555 West Fifth Street, Los Angeles, California 90013-1011
---------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(213) 244-1200
----------------------------------------------------
(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
----- -----
Common stock outstanding: Wholly owned by Pacific Enterprises
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME (Unaudited)
(In millions of dollars)
Three Months Ended Six Months Ended
June 30 June 30
------------------- ------------------
1998 1997 1998 1997
------ ------- ------- ------
Operating Revenues $578 $575 $1,242 $1,303
---- ---- ------ ------
Operating Expenses:
Cost of gas distributed 185 167 486 517
Operating and maintenance 248 181 411 342
Depreciation 63 62 126 125
Income taxes 17 52 56 97
Other taxes and franchise fees 24 22 53 49
---- ---- ------ ------
Total operating expenses 537 484 1,132 1,130
---- ---- ------ ------
Operating income 41 91 110 173
---- ---- ------ ------
Other Income and (Deductions) (3) -- (3) --
---- ---- ------ ------
Income Before Interest Charges
and Preferred Dividends 38 91 107 173
---- ---- ------ ------
Interest Charges:
Long-term debt 18 20 38 41
Other interest 2 (1) 4 1
Allowance for borrowed funds
used during construction (1) -- (1) (1)
---- ---- ------ ------
Net interest charges 19 19 41 41
---- ---- ------ ------
Net Income 19 72 66 132
Dividends on Preferred Stock -- 2 1 4
---- ---- ------ ------
Earnings Applicable to
Common Stock $ 19 $ 70 $ 65 $ 128
==== ==== ====== ======
See notes to consolidated financial statements.
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SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
(In millions of dollars)
June 30, December 31,
1998 1997
(Unaudited)
----------- -----------
Utility Plant - at original cost $6,024 $5,978
Accumulated depreciation 3,019 2,904
------ ------
Utility plant - net 3,005 3,074
------ ------
Current Assets:
Cash and cash equivalents 42 --
Accounts and notes receivable 303 499
Regulatory balancing accounts - net -- 355
Deferred income taxes 55 11
Inventories 33 38
Other 3 14
------ ------
Total current assets 436 917
------ ------
Regulatory Assets 224 214
------ ------
Total $3,665 $4,205
====== ======
See notes to consolidated financial statements.
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SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
CAPITALIZATION AND LIABILITIES
(In millions of dollars)
June 30, December 31,
1998 1997
(Unaudited)
--------- -----------
Capitalization:
Common equity $1,271 $1,370
Preferred stock 21 97
Long-term debt 1,041 968
------ ------
Total capitalization 2,333 2,435
------ ------
Current Liabilities:
Short-term debt 46 351
Long-term debt due within one year -- 147
Accounts payable 356 417
Accrued interest 48 52
Accrued taxes 23 69
Regulatory balancing accounts - net 62 --
Other 118 78
------ ------
Total current liabilities 653 1,114
------ ------
Deferred Credits:
Customer advances for construction 30 34
Deferred income taxes 385 373
Deferred investment tax credits 59 61
Other deferred credits 205 188
------ ------
Total deferred credits 679 656
------ ------
Total $3,665 $4,205
====== ======
See notes to consolidated financial statements.
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SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS (Unaudited)
(In millions of dollars)
Six Months Ended
June 30
------------------
1998 1997
---- -----
Cash Flows From Operating Activities:
Net income $ 66 $132
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 126 125
Deferred income taxes 12 12
Other (15) (8)
Net change in other working capital
components 481 143
---- ----
Net cash provided by operating
activities 670 404
---- ----
Cash Flows from Financing Activities:
Dividends paid (110) (181)
Payment on long-term debt (149) (188)
Increase (decrease) in short-term debt (305) 1
Issuance of long-term debt 75 --
Redemption of preferred stock (75) --
---- ----
Net cash used in financing activities (564) (368)
---- ----
Cash Flows from Investing Activities:
Expenditures for utility plant (54) (78)
Other - net (10) 28
---- ----
Net cash used in investing activities (64) (50)
---- ----
Increase (Decrease) in Cash and Cash Equivalents 42 (14)
Cash and Cash Equivalents, beginning of period -- 14
---- ----
Cash and Cash Equivalents, end of period $ 42 $ --
==== ====
Supplemental Disclosure of Cash Flow Information:
Income tax payments, net of refunds $ 33 $ 93
==== ====
Interest payments, net of amount capitalized $ 45 $ 44
==== ====
See notes to consolidated financial statements.
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SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. GENERAL
This Quarterly Report on Form 10-Q is a filing of Southern
California Gas Company (SoCalGas), a wholly owned subsidiary of
Pacific Enterprises (PE). The financial statements presented herein
represent the consolidated financial statements of SoCalGas and its
subsidiaries.
The accompanying consolidated financial statements have been
prepared in accordance with the interim-reporting requirements of
Form 10-Q. This quarterly report should be read in conjunction
with SoCalGas' 1997 Annual Report on Form 10-K which includes the
financial statements and notes thereto, its Quarterly Report on
Form 10-Q for the three months ended March 31, 1998, and the
Current Report on Form 8-K filed by Sempra Energy (Commission no.
1-14201) with the Securities and Exchange Commission on June 30,
1998 in connection with the completion of the business combination
of Pacific Enterprises and Enova Corporation.
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 of a
normal recurring nature. Certain changes in account classification
have been made to prior presentations to conform to the current
financial statement presentation.
In conformity with generally accepted accounting principles, the
Company's accounting policies reflect the financial effects of rate
regulation authorized by the California Public Utilities Commission
(CPUC). The Company applies the provisions of the Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects
of Certain Types of Regulation" (SFAS 71). This statement requires
cost-based rate regulated entities that meet certain criteria to
reflect the authorized recovery of costs due to regulatory
decisions in their financial statements. The Company continues to
meet the criteria of SFAS 71 in accounting for its regulated
operations.
2. BUSINESS COMBINATION
On June 26, 1998 (pursuant to an October 1996 agreement) Enova
Corporation (Enova) and Pacific Enterprises (PE) combined the two
companies into 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 Enova's
principal subsidiary, San Diego Gas & Electric Company (SDG&E); PE;
and SoCalGas remain outstanding. Additional information on the
business combination is discussed in the Current Report on Form 8-K
filed by Sempra Energy (Commission no. 1-14201) on June 30, 1998
and incorporated herein by reference.
Expenses incurred in connection with the business combination are
$32 million and $7 million, after-tax, for the six-month periods
ended June 30, 1998 and 1997, respectively. These costs consist
primarily of employee-related costs, and investment banking, legal,
regulatory and consulting fees.
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3. 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
three-month and the six-month periods ended June 30, 1998 and 1997
was equal to net income.
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 1997 Form 10-K.
INFORMATION REGARDING FORWARD-LOOKING COMMENTS
The following discussion includes forward-looking statements within
the definition of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. 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. These statements are necessarily based upon
various assumptions involving judgments with respect to the future
including, among others, national, regional and local economic,
competitive and regulatory conditions, technological developments,
inflation rates, interest rates, energy markets, weather
conditions, business and regulatory or legal decisions, 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.
CAPITAL RESOURCES AND LIQUIDITY
Cash flows from operations for the six-month period ended June 30,
1998 increased $266 million from the corresponding period in 1997.
The increase is primarily due to gas costs' being lower than
amounts collected in rates (resulting in a decrease in previously
undercollected regulatory balancing accounts) and an increase in
gas volumes sold.
Capital expenditures for utility plant are expected to be $180
million in 1998 and will be financed primarily by internally-
generated funds.
Cash used for financing activities for the six-month period ended
June 30, 1998 increased $196 million from the corresponding period
in 1997. The increase is primarily due to greater short-term debt
repayments and the repurchase of preferred stock. On February 2,
1998, the Company redeemed all outstanding shares of 7-3/4% Series
Preferred Stock for a total cost of $75 million, including unpaid
dividends.
RESULTS OF OPERATIONS
The decreases in net income are primarily due to the lower base
margin established in the PBR decision (see below) and the
business-combination costs discussed in Note 2 of the notes to
consolidated financial statements.
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The table below compares the Company's throughput and revenues by
customer class for the six-month periods ended June 30, 1998 and
1997.
Transportation
Gas Sales and Exchanges Total
------------------- ------------------- -------------------
Throughput Revenue Throughput Revenue Throughput Revenue
(Revenues in millions of dollars, volume in billion cubic feet)
------------------- ------------------- -------------------
1998:
Residential 154 $1,153 2 $ 7 156 $1,160
Commercial and industrial 43 259 157 136 200 395
Utility electric
generation 40 20 40 20
Wholesale 74 30 74 30
Exchange 3 3
------------------- ------------------- -------------------
Total in rates 197 $1,412 276 $193 473 1,605
Balancing accounts and other (363)
-------
Total operating revenues $1,242
=======
1997:
Residential 128 $ 866 1 $ 5 129 $871
Commercial and industrial 44 280 149 124 193 404
Utility electric
generation 56 28 56 28
Wholesale 69 31 69 31
Exchange 2 1 2 1
------------------ ------------------- -------------------
Total in rates 172 $1,146 277 $189 449 1,335
Balancing accounts and other (32)
-------
Total operating revenues $1,303
=======
The decrease in year-to-date operating revenues is primarily due to
the margin reduction established in PBR (see below) and lower
prices for gas. The increase in total throughput was primarily due
to colder weather in 1998 compared to 1997.
The decrease in the cost of gas is primarily due to a decrease in
the average cost of gas purchased to $2.11 per thousand cubic feet
(MCF) for the six-month period ended June 30, 1998, compared to
$2.45 per MCF in the corresponding period of 1997. Under the
current regulatory framework, changes in revenue resulting from
changes in core market volumes and cost of gas do not affect net
income.
The increase in operating and maintenance expense is primarily due
to the favorable settlements of contingencies in the first half of
1997.
Recent CPUC Regulatory Activity
Under the Gas Cost Incentive Mechanism (GCIM), the Company can
recover all costs within a "tolerance band" above the benchmark
price and refunds all savings within the tolerance band below the
benchmark price. The cost of purchases or savings outside the
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tolerance band is shared equally between customers and
shareholders.
The Company's gas costs were below the specified GCIM benchmark for
the annual period ended March 1997. In June 1997 the Company filed
a motion with the CPUC requesting a reward for shareholders under
the procurement portion of the incentive mechanism. A reward of
$11 million was approved by the CPUC in June 1998 and is included
in income for the three-month period ended June 30, 1998.
The CPUC has approved the use of gas futures for managing risks
associated with the GCIM. The Company enters into gas futures
contracts in the open market on a limited basis to mitigate risk
and better manage gas costs.
Regulatory Activity Influencing Future Performance
On July 16, 1997, the CPUC issued its final decision on the
Company's application for Performance Based Ratemaking (PBR), which
was filed with the CPUC in 1995.
PBR replaces the general rate case and certain other regulatory
proceedings through December 31, 2002. Under PBR, regulators allow
future income potential to be tied to achieving or exceeding
specific performance and productivity measures, rather than relying
solely on expanding utility rate base in a market where the Company
already has a highly developed infrastructure. Key elements of the
PBR include a reduction in base rates, an indexing mechanism that
limits future rate increases to the inflation rate less a
productivity factor, a sharing mechanism with customers if earnings
exceed the authorized rate of return on rate base, and rate refunds
to customers if service quality deteriorates.
The Company implemented the base-margin reduction on August 1,
1997, and all other PBR elements on January 1, 1998. The CPUC
intends the PBR decision to be in effect for five years; however,
the CPUC decision allows for the possibility that changes to the
PBR mechanism could be adopted in a decision to be issued in the
Company's 1998 Biennial Cost Allocation Proceeding (BCAP)
application which is anticipated to become effective August 1,
1999.
Under PBR, annual Cost of Capital proceedings are replaced by an
automatic adjustment mechanism if changes in certain indices exceed
established tolerances. The mechanism is triggered if interest
rates increase or decrease by more than 150 basis points and are
forecasted to vary by at least 150 basis points for the next year.
If this occurs, there would be an automatic adjustment of rates for
the change in the cost of capital according to a pre-established
formula which applies a percentage of the change to various capital
components.
For 1998, the Company is authorized to earn a rate of return on
common equity of 11.6 percent and a 9.49 percent return on rate
base, the same as in 1997.
The Company has considered the effect of Statement of Financial
Accounting Standard No. 121 "Accounting for the Impairment of Long-
Lived Assets and Long-Lived Assets to Be Disposed Of" (SFAS 121) on
its financial statements, including the potential effect of
electric industry restructuring. Although the Company believes
that the volume of gas transported may be adversely impacted by
electric restructuring, it is not anticipated to result in an
impairment of assets as defined in SFAS 121 because the expected
undiscounted future cash flows from the gas transportation
infrastructure are greater than the assets' carrying amounts.
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PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedules
27.1 Financial Data Schedule for the six months ended
June 30, 1998 for SoCalGas.
(b) Reports on Form 8-K
A Current Report on Form 8-K filed on July 1, 1998 announced
the completion of the business combination between Enova
Corporation and Pacific Enterprises, and the related changes
in control.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SOUTHERN CALIFORNIA GAS COMPANY
-------------------------------
(Registrant)
/s/ Warren Mitchell
Date: August 14, 1998 By: ---------------------------
Warren Mitchell
Chairman and President
UT
