SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[..X..] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
June 30, 2001
For the quarterly period ended.......................................
Or
[.....] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ________________ to _________________
Name of
Commission Registrant IRS Employer
File as specified State of Identification
Number in its charter Incorporation Number
- ---------- -------------- -------------- --------------
1-40 Pacific Enterprises California 94-0743670
1-1402 Southern California
Gas Company California 95-1240705
555 West Fifth Street, Los Angeles, California 90013
- ---------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrants' telephone number, including area code (213) 244-1200
-------------------
No Change
- -----------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since
last report
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Sections 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......
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock outstanding:
Pacific Enterprises Wholly owned by Sempra Energy
Southern California Gas Company Wholly owned by Pacific Enterprises
PACIFIC ENTERPRISES AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
Dollars in millions
Three Months Ended
June 30,
----------------------
2001 2000
------- -------
Operating Revenues $ 927 $630
------- -------
Operating Expenses
Cost of natural gas distributed 533 264
Operating and maintenance 201 168
Depreciation and amortization 67 67
Income taxes 38 44
Other taxes and franchise payments 25 22
------- -------
Total operating expenses 864 565
------- -------
Operating Income 63 65
------- -------
Other Income and (Deductions)
Interest income 12 20
Allowance for equity funds used
during construction 1 1
Regulatory interest - net (1) (5)
Taxes on non-operating income (3) (2)
Preferred dividends of subsidiaries (1) (1)
Other - net 2 2
------- -------
Total 10 15
------- -------
Income Before Interest Charges 73 80
------- -------
Interest Charges
Long-term debt 16 16
Other 8 15
Allowance for borrowed funds used -- --
during construction ------- -------
Total 24 31
------- -------
Net Income 49 49
Preferred Dividend Requirements 1 1
------- -------
Earnings Applicable to Common Shares $ 48 $ 48
======= =======
See notes to Consolidated Financial Statements.
PACIFIC ENTERPRISES AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
Dollars in millions
Six Months Ended
June 30,
--------------------
2001 2000
------- -------
Operating Revenues $2,475 $1,328
------- -------
Operating Expenses
Cost of natural gas distributed 1,684 610
Operating and maintenance 389 318
Depreciation and amortization 132 131
Income taxes 80 88
Other taxes and franchise payments 59 50
------- -------
Total operating expenses 2,344 1,197
------- -------
Operating Income 131 131
------- -------
Other Income and (Deductions)
Interest income 29 28
Allowance for equity funds used
during construction 2 1
Regulatory interest - net (6) (5)
Taxes on non-operating income (5) (4)
Preferred dividends of subsidiaries (1) (1)
Other - net (2) 2
------- -------
Total 17 21
------- -------
Income Before Interest Charges 148 152
------- -------
Interest Charges
Long-term debt 33 35
Other 17 17
Allowance for borrowed funds used
during construction (1) (1)
------- -------
Total 49 51
------- -------
Net Income 99 101
Preferred Dividend Requirements 2 2
------- -------
Earnings Applicable to Common Shares $ 97 $ 99
======= =======
See notes to Consolidated Financial Statements.
PACIFIC ENTERPRISES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Dollars in millions
Balance at
---------------------------
June 30, December 31,
2001 2000
----------- --------------
ASSETS
Property, plant and equipment $6,442 $6,337
Accumulated depreciation (3,693) (3,571)
------- -------
Property, plant and equipment - net 2,749 2,766
------- -------
Current assets
Cash and cash equivalents 531 205
Accounts receivable - trade 296 589
Accounts receivable - other 5 83
Due from affiliate -- 214
Deferred income taxes 74 43
Fixed price contracts and other derivatives 474 --
Inventories 74 67
Other 26 84
------- -------
Total current assets 1,480 1,285
------- -------
Other assets
Regulatory assets 92 108
Due from affiliates 413 617
Fixed price contracts and other derivatives 232 --
Other 78 52
------- -------
Total other assets 815 777
------- -------
Total assets $5,044 $4,828
======= =======
See notes to Consolidated Financial Statements.
PACIFIC ENTERPRISES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Dollars in millions
Balance at
---------------------------
June 30, December 31,
2001 2000
----------- --------------
CAPITALIZATION AND LIABILITIES
Capitalization
Common Stock $1,282 $1,282
Retained earnings 72 165
Accumulated other comprehensive income (loss) -- (1)
------- -------
Total common equity 1,354 1,446
Preferred stock 80 80
Long-term debt 821 821
------- -------
Total capitalization 2,255 2,347
------- -------
Current liabilities
Accounts payable - trade 421 368
Accounts payable - other 53 43
Regulatory balancing accounts - net 233 463
Income taxes payable 29 50
Dividends and interest payable 28 28
Current portion of long-term debt 120 120
Due to affiliates 163 365
Regulatory liabilities arising from fixed price
contracts and other derivatives 410 --
Other 306 300
------- -------
Total current liabilities 1,763 1,737
------- -------
Deferred credits and other liabilities
Customer advances for construction 16 16
Post-retirement benefits other than pensions 93 97
Deferred income taxes 226 224
Deferred investment tax credits 51 53
Regulatory liabilities 30 --
Regulatory liabilities arising from fixed price
contracts and other derivatives 232 --
Deferred credits and other liabilities 358 334
Preferred stock of subsidiary 20 20
------- -------
Total deferred credits and other liabilities 1,026 744
------- -------
Contingencies and commitments (Note 2)
Total liabilities and shareholders' equity $5,044 $4,828
======= =======
See notes to Consolidated Financial Statements.
PACIFIC ENTERPRISES AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
Dollars in millions
Six Months Ended
June 30,
------------------
2001 2000
----- -----
Cash Flows from Operating Activities
Net income $ 99 $ 101
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 132 131
Deferred income taxes and investment
tax credits 8 33
Other - net 47 24
Net changes in other working capital components 134 233
----- -----
Net cash provided by operating activities 420 522
----- -----
Cash Flows from Investing Activities
Capital expenditures (114) (86)
Loans repaid by (paid to) affiliates 215 (317)
Other - net -- 14
----- -----
Net cash provided by (used in) investing
activities 101 (389)
----- -----
Cash Flows from Financing Activities
Common dividends paid (190) --
Preferred dividends paid (2) (2)
Other (3) --
----- -----
Net cash used in financing activities (195) (2)
- ----- -----
Increase in cash and cash equivalents 326 131
Cash and cash equivalents, January 1 205 11
----- -----
Cash and cash equivalents, June 30 $ 531 $ 142
===== =====
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Income tax payments - net $ 130 $ 71
===== =====
Interest payments, net of amounts capitalized $ 49 $ 78
===== =====
See notes to Consolidated Financial Statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
Dollars in millions
Three Months Ended
June 30,
------------------
2001 2000
------- -------
Operating Revenues $ 927 $ 630
------- -------
Expenses
Cost of natural gas distributed 533 264
Operation and maintenance 198 167
Depreciation and amortization 67 67
Income taxes 38 43
Other taxes and franchise payments 26 22
------- -------
Total operating expenses 862 563
------- -------
Operating Income 65 67
------- -------
Other Income and (Deductions)
Interest income 7 7
Allowance for equity funds used
during construction 1 1
Regulatory interest - net (1) (5)
Taxes on non-operating income (2) (2)
------- -------
Total 5 1
------- -------
Income Before Interest Charges 70 68
------- -------
Interest Charges
Long-term debt 16 18
Other 6 2
------- -------
Total 22 20
------- -------
Net Income 48 48
Preferred Dividend Requirements 1 1
------- -------
Earnings Applicable to Common Shares $ 47 $ 47
======= =======
See notes to Consolidated Financial Statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
Dollars in millions
Six Months Ended
June 30,
------------------
2001 2000
------- -------
Operating Revenues $2,475 $1,328
------- -------
Expenses
Cost of natural gas distributed 1,684 610
Operating and maintenance 384 317
Depreciation and amortization 132 131
Income taxes 82 87
Other taxes and franchise payments 59 50
------- -------
Total operating expenses 2,341 1,195
------- -------
Operating Income 134 133
------- -------
Other Income and (Deductions)
Interest income 16 11
Allowance for equity funds used
during construction 2 1
Regulatory interest - net (6) (5)
Taxes on non-operating income (4) (4)
Other - net (1) --
------- -------
Total 7 3
------- -------
Income Before Interest Charges 141 136
------- -------
Interest Charges
Long-term debt 33 35
Other 9 4
Allowance for borrowed funds used
during construction (1) (1)
------- -------
Total 41 38
------- -------
Net Income 100 98
Preferred Dividend Requirements 1 1
------- -------
Earnings Applicable to Common Shares $ 99 $ 97
======= =======
See notes to Consolidated Financial Statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Dollars in millions
Balance at
--------------------------
June 30, December 31,
2001 2000
---------- ------------
ASSETS
Utility plant - at original cost $6,419 $6,314
Accumulated depreciation (3,678) (3,557)
------ ------
Utility plant - net 2,741 2,757
------ ------
Current assets
Cash and cash equivalents 531 205
Accounts receivable - trade 296 589
Accounts receivable - other 5 83
Due from affiliates -- 214
Deferred income taxes 74 74
Fixed price contracts and other derivatives 474 --
Inventories 74 67
Other 25 80
------ ------
Total current assets 1,479 1,312
------ ------
Other assets
Regulatory assets -- 12
Fixed price contracts and other derivatives 232 --
Other 58 35
------ ------
Total other assets 290 47
------ ------
Total assets $4,510 $4,116
====== ======
See notes to Consolidated Financial Statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
Dollars in millions
Balance at
--------------------------
June 30, December 31,
2001 2000
---------- ------------
CAPITALIZATION AND LIABILITIES
Capitalization
Common stock $ 835 $ 835
Retained earnings 362 453
Accumulated other comprehensive income (loss) -- (1)
------ ------
Total common equity 1,197 1,287
Preferred stock 22 22
Long-term debt 821 821
------ ------
Total capitalization 2,040 2,130
------ ------
Current liabilities
Accounts payable - trade 421 368
Accounts payable - other 53 44
Regulatory balancing accounts - net 233 463
Income taxes payable 29 90
Interest payable 26 26
Current portion of long-term debt 120 120
Regulatory liabilities arising from fixed price
contracts and other derivatives 410 --
Other 327 300
------ ------
Total current liabilities 1,619 1,411
------ ------
Deferred credits and other liabilities
Customer advances for construction 16 16
Deferred income taxes 326 314
Deferred investment tax credits 51 53
Regulatory liabilities 30 --
Regulatory liabilities arising from fixed price
contracts and other derivatives 232 --
Deferred credits and other liabilities 196 192
------ ------
Total deferred credits and other liabilities 851 575
------ ------
Contingencies and commitments (Note 2)
Total liabilities and shareholders' equity $4,510 $4,116
====== ======
See notes to Consolidated Financial Statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
Dollars in millions
Six Months Ended
June 30,
------------------
2001 2000
----- -----
Cash Flows from Operating Activities
Net income $100 $ 98
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 132 131
Deferred income taxes and investment tax credits 10 26
Other - net 22 25
Net changes in other working capital components 134 269
---- ----
Net cash provided by operating activities 398 549
---- ----
Cash Flows from Investing Activities
Capital expenditures (114) (86)
Loan repaid by (paid to) affiliate 233 (231)
---- ----
Net cash provided by (used in) investing
activities 119 (317)
---- ----
Cash Flows from Financing Activities - dividends paid (191) (101)
---- ----
Increase in cash and cash equivalents 326 131
Cash and cash equivalents, January 1 205 11
---- ----
Cash and cash equivalents, June 30 $531 $142
==== ====
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Income tax payments - net $137 $ 72
==== ====
Interest payments, net of amounts capitalized $ 41 $ 40
==== ====
See notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
This Quarterly Report on Form 10-Q is that of Pacific Enterprises (PE
or the Company) and of Southern California Gas Company
(SoCalGas)(collectively the companies). PE's common stock is wholly
owned by Sempra Energy, a California-based Fortune 500 energy
services company. SoCalGas' common stock is wholly owned by PE. The
financial statements herein are, in one case, the Consolidated
Financial Statements of PE and its subsidiary, SoCalGas, and, in the
second case, the Consolidated Financial Statements of SoCalGas and
its subsidiaries.
The accompanying Consolidated Financial Statements have been prepared
in accordance with the interim-period-reporting requirements of Form
10-Q. Results of operations for interim periods are not necessarily
indicative of results for the entire year. In the opinion of
management, the accompanying statements reflect all adjustments
necessary for a fair presentation. These adjustments are only of a
normal recurring nature. Certain changes in classification have been
made to prior presentations to conform to the current financial
statement presentation.
The companies'significant accounting policies are described in the
notes to Consolidated Financial Statements in the companies' 2000
Annual Report. The same accounting policies are followed for interim
reporting purposes.
Information in this Quarterly Report is unaudited and should be read
in conjunction with the companies' 2000 Annual Report and March 31,
2001 Quarterly Report on Form 10-Q.
As described in the notes to Consolidated Financial Statements in the
companies' 2000 Annual Report, SoCalGas accounts for the economic
effects of regulation on utility operations in accordance with
Statement of Financial Accounting Standards No. 71, "Accounting for
the Effects of Certain Types of Regulation" (SFAS No. 71).
2. MATERIAL CONTINGENCIES
NATURAL GAS INDUSTRY RESTRUCTURING
The companies' 2000 annual reports discuss various proposals and
actions related to this topic. As discussed therein, no significant
impacts on the companies are expected when the various issues are
finalized. This case is currently being held by the CPUC
indefinitely.
LITIGATION
A 2000 lawsuit, which seeks class-action certification, alleges that
Sempra Energy, SoCalGas, SDG&E and El Paso Energy Corp. acted to
drive up the price of natural gas for Californians by agreeing to
stop a pipeline project that would have brought new and less-
expensive natural gas supplies into California. Management believes
the allegations are without merit.
Except for the 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 results of operations,
financial condition or liquidity.
QUASI-REORGANIZATION
In 1993, PE 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.
Pacific Enterprises SoCalGas
----------------------------- ----------------------------
Three-month Six-month Three-month Six-month
periods ended periods ended periods ended periods ended
June 30, June 30, June 30, June 30,
----------------------------- ----------------------------
(Dollars in millions) 2001 2000 2001 2000 2001 2000 2001 2000
- --------------------------------------------------------------------------------------
Net income $ 49 $ 49 $ 99 $101 $ 48 $ 48 $100 $ 98
Change in unrealized gain
on marketable securities -- (12) -- 21 -- (12) -- 21
Minimum pension liability
adjustments 1 -- 1 2 1 -- 1 2
----------------------------------------------------------
Comprehensive income $ 50 $ 37 $100 $124 $ 49 $ 36 $101 $121
- --------------------------------------------------------------------------------------
4. FINANCIAL INSTRUMENTS
Adoption of SFAS 133
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133 "Accounting for Derivative
Instruments and Hedging Activities" as amended by SFAS No. 138
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities." As amended, SFAS 133 requires that an entity recognize
all derivatives as either assets or liabilities in the statement of
financial position, measure those instruments at fair value and
recognize changes in the fair value of derivatives in earnings in the
period of change unless the derivative qualifies as an effective
hedge that offsets certain exposures.
On January 1, 2001, $982 million in current assets, $1.1 billion in
noncurrent assets, and $4 million in current liabilities were
recorded as of January 1, 2001, in the Consolidated Balance Sheet as
fixed-priced contracts and other derivatives. Due to the regulatory
environment in which SoCalGas operates, regulatory assets and
liabilities were established to the extent that derivative gains and
losses are recoverable or payable through future rates. The effect on
earnings was minimal. The ongoing effects will depend on future
market conditions and the Company's hedging activities.
Market Risk
The companies' policy is to use derivative financial instruments to
manage its exposure to fluctuations in interest rates and energy
prices. Transactions involving these financial instruments are with
credit-worthy firms and major exchanges. The use of these instruments
exposes the Company to market and credit risk which may at times be
concentrated with certain counterparties, although counterparty
nonperformance is not anticipated.
Energy Derivatives
SoCalGas utilizes derivative financial instruments to reduce exposure
to unfavorable changes in energy prices which are subject to
significant and often volatile fluctuation. Derivative financial
instruments are comprised of futures, forwards, swaps, options and
long-term delivery contracts. These contracts allow SoCalGas to
predict with greater certainty the effective prices to be received
and delivered to their customers.
Due to the regulatory environment in which SoCalGas operates,
regulatory assets and liabilities are established to the extent that
derivative gains and losses are recoverable or payable through future
rates. As such, SoCalGas does not apply hedge accounting to energy
derivatives. However, such contracts continue to be effective in
achieving the risk management objectives for which they were
intended.
Accounting for Derivative Activities
At June 30, 2001, $474 million in current assets and $232 million in
noncurrent assets were recorded in the Consolidated Balance Sheet as
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, $64
million in regulatory balancing accounts (i.e., overcollections),
$410 million in current regulatory liabilities, and $232 million in
noncurrent regulatory liabilities were recorded in the Consolidated
Balance Sheet as of June 30, 2001.
Fair Value
The fair value of the Company's derivative financial instruments
(fixed-priced contracts and other derivatives) is not materially
different from their carryings amounts. The fair values of fixed-
priced contracts and other derivatives were estimated based on quoted
market prices. Information regarding the fair value of the Company's
non-derivative financial instruments is provided in Note 8 of the
notes to Consolidated Financial Statements in the 2000 Annual Report
on Form 10-K.
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 companies' 2000 Annual Report.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q 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, and the FERC; the financial condition of
other investor-owned utilities; capital market conditions, inflation
rates, interest rates and exchange rates; energy markets, including
the timing and extent of changes in commodity prices; weather
conditions and conservation efforts; 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 quarterly 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
Cash and cash equivalents at June 30, 2001 are available for
investment in utility plant, the retirement of debt and other
corporate purposes. Major changes in cash flows not described
elsewhere are described below.
CASH FLOWS FROM OPERATING ACTIVITIES
For the six-month period ended June 30, 2001, the decrease in cash
flows from operations compared to the corresponding period in 2000
was primarily due to the decrease in overcollected regulatory
balancing accounts and lower accrued income taxes in 2001 reflecting
tax payments made during the first quarter of 2001 (none were made
during the same period in 2000) offset by the decrease in SoCalGas'
trade accounts receivable due to seasonality.
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures for property, plant and equipment are estimated
to be $300 million for the full year 2001 and are being financed
primarily by internally generated funds. 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.
During the second quarter of 2001, SoCalGas announced plans to add 11
percent more capacity to its transmission system by the end of the
year. The expansion will help meet increased demand for natural gas
from new and existing electric generation projects in Southern
California.
CASH FLOWS FROM FINANCING ACTIVITIES
For the six-month period ended June 30, 2001, cash flows from
financing activities decreased from the corresponding period in 2000
due primarily to an increase in common dividends paid during 2001.
On June 6, 2001 the Company remarketed $81 million of debt of the
Company's Employee Stock Ownership Plan (ESOP) as 7.375 percent
fixed-interest-rate debt due May 3, 2004.
On February 9, 2001, SoCalGas' $200 million credit line expired and
was replaced on February 27, 2001, with a $170 million, one-year
agreement. This agreement bears interest at various rates based on
market rates and SoCalGas' credit rating. On April 18, 2001, PE
entered into a $500-million revolving line of credit which bears
interest at various rates based on market rates and PE's credit
rating.
RESULTS OF OPERATIONS
The Company's net income remained flat for the three-month and six-
month periods ended June 30, 2001, compared to the same periods in
2000.
Seasonality
SoCalGas' natural gas sales volumes generally are higher in the
winter due to heating demands, although that difference is lessening
as the use of natural gas to fuel electric generation increases.
The table below summarizes natural gas volumes and revenues by
customer class for the six-month periods ended June 30, 2001 and
2000.
Gas Sales, Transportation and Exchange
(Volumes in billion cubic feet, dollars in millions)
Gas Sales Transportation & Exchange Total
--------------------------------------------------------------
Volumes Revenue Volumes Revenue Volumes Revenue
--------------------------------------------------------------
2001:
Residential 151 $1,598 1 $ 3 152 $1,601
Commercial and industrial 49 445 122 93 171 538
Electric generation plants -- -- 188 47 188 47
Wholesale -- -- 90 18 90 18
--------------------------------------------------------------
200 $2,043 401 $161 601 2,204
Balancing accounts and other 271
--------
Total $2,475
- ------------------------------------------------------------------------------------------
2000:
Residential 136 $1,016 2 $ 8 138 $1,024
Commercial and industrial 44 282 160 124 204 406
Utility electric generation -- -- 99 38 99 38
Wholesale -- -- 74 26 74 26
--------------------------------------------------------------
180 $1,298 335 $196 515 1,494
Balancing accounts and other (166)
--------
Total $1,328
- ------------------------------------------------------------------------------------------
The increase in natural gas revenues was primarily due to higher
natural gas prices.
The increase in the cost of natural gas distributed was primarily due
to higher natural gas prices. Under the current regulatory framework,
the cost of natural gas is passed on to customers without markup and
changes in core-market natural gas prices do not affect net income
since, as explained more fully in the 2000 Annual Report, current or
future core customer rates normally recover the actual cost of
natural gas on a substantially concurrent basis.
FACTORS INFLUENCING FUTURE PERFORMANCE
Performance of the companies in the near future will depend primarily
on the ratemaking and regulatory process, electric and natural gas
industry restructuring, and the changing energy marketplace. These
factors are discussed in this section and in Note 2 of the notes to
Consolidated Financial Statements.
Performance-Based Regulation (PBR)
To promote efficient operations and improved productivity and to move
away from reasonableness reviews and disallowances, the CPUC has been
directing utilities to use PBR. PBR has replaced the general rate
case and certain other regulatory proceedings for the California
utilities. Under PBR, regulators require future income potential to
be tied to achieving or exceeding specific performance and
productivity goals, as well as cost reductions, rather than relying
solely on expanding utility plant in a market where a utility already
has a highly developed infrastructure.
SoCalGas' PBR mechanism is in effect through December 31, 2002, at
which time the mechanisms will be updated. That update is described
in the Company's 2000 Annual Report. The PBR and Cost of Service
(COS) cases for SoCalGas and SDG&E are both due to be filed on
December 21, 2001. However, under the MOU described in Note 2, both
SoCalGas' and SDG&E's PBR/COS cases would be delayed such that the
resulting rates would be effective in 2004 instead of 2003, if this
portion of the MOU is approved by the CPUC.
Cost of Capital
For 2001, SoCalGas is authorized to earn a rate of return on common
equity (ROE) of 11.6 percent and a 9.49 percent return on rate base
(ROR), the same as in 2000 and 1999, unless interest-rate changes are
large enough to trigger an automatic adjustment as discussed in the
companies' 2000 annual reports.
RELATIONSHIP WITH NON-UTILITY SUBSIDIARIES
CPUC Investigation of Energy-Utility Holding Companies
The CPUC has initiated an investigation into the relationship between
California's investor-owned utilities and their parent holding
companies. Among the matters to be considered in the investigation
are utility dividend policies and practices and obligations of the
holding companies to provide financial support for utility
operations.
NEW ACCOUNTING STANDARDS
Effective January 1, 2001, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 133 "Accounting for
Derivative Instruments and Hedging Activities" as amended by SFAS
No. 138 "Accounting for Certain Derivative Instruments and Certain
Hedging Activities." The adoption of this new standard on January
1, 2001, did not have a material impact on the Company's earnings.
For further information regarding the Company's implementation of
SFAS 133, see Note 4 above.
In July 2001 the Financial Accounting Standards Board approved three
statements, SFAS 141 "Business Combinations," SFAS 142 "Goodwill and
Other Intangible Assets" and SFAS 143 " Accounting for Asset
Retirement Obligations." SFAS 141 provides guidance on the accounting
for a business combination at the date the combination is completed.
It requires the use of the purchase method of accounting for all
business combinations initiated after June 30, 2001. The pooling-of-
interest method is eliminated. SFAS 142 provides guidance on how to
account for goodwill and other intangible assets after the acquisition
is complete. Goodwill and certain other intangible assets will no
longer be amortized and will be tested in the aggregate for impairment
at least annually. Goodwill will not be tested on an acquisition-by-
acquisition basis. SFAS 142 applies to existing goodwill and other
intangible assets, beginning with fiscal years starting after December
15, 2001. SFAS 143 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
capitalizes a cost by increasing the carrying amount of the related
long-lived asset. Over time, the liability is accreted to its present
value each period, and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, an
entity either settles the obligation for its recorded amount or incurs
a gain or loss upon settlement. The effect of these standards on the
Company's Consolidated Financial Statements has not yet been
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 for
2000. As noted in that report, SoCalGas may, at times, be exposed to
limited market risk in its natural gas purchase, sale and storage
activities as a result of activities under SoCalGas' Gas Cost
Incentive Mechanism. The risk is managed within the parameters of the
Company's market-risk management and trading framework. However, to
lessen the impact on customers from the recent unprecedented natural
gas price volatility at the California border, during the first
quarter of 2001, SoCalGas began hedging a larger portion of its
customer natural gas requirements than in the past. As of March 31,
2001, the Value at Risk (VaR) of the hedges was $1.8 million. During
the second quarter of 2001, the gas hedging activity at SoCalGas was
sharply reduced and, as of June 30, 2001, the VaR of the hedges was
$0.6 million. This represents the 50-percent shareholder portion
under the PBR mechanism and excludes the 50-percent portion subject
to rate recovery. In addition, certain fixed price contracts that
traditionally have not been considered derivatives, but now meet the
derivative definition under SFAS 133 (see "New Accounting Standards"
above), are excluded from the above-mentioned VaR amounts due to the
offsetting regulatory asset or liability also recorded by the
Company.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except as otherwise described in this report, neither the Company nor
its subsidiaries are party to, nor is their property the subject of,
any material pending legal proceedings other than routine litigation
incidental to their businesses.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 12 - Computation of ratios
12.1 Computation of Ratio of Earnings to Fixed Charges of PE.
12.2 Computation of Ratio of Earnings to Fixed Charges of
SoCalGas.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed after March 31, 2001.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrants have duly cause this report to be signed on their
behalf by the undersigned thereunto duly authorized.
PACIFIC ENTERPRISES
-------------------
(Registrant)
Date: August 9, 2001 By: /s/ F. H. Ault
----------------------------
F. H. Ault
Sr. Vice President and Controller
SOUTHERN CALIFORNIA GAS COMPANY
-------------------------------
(Registrant)
By: /s/ E.A. Guiles
---------------------------
E.A. Guiles
President
1
21
Exhibit 12.1 SEC Coverage Ratios
EXHIBIT 12.1
PACIFIC ENTERPRISES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
| |
1996
- ------ |
1997
- ------ |
1998
- ------ |
1999
- ------ |
2000
- ------ |
For the six months ended June 30, 2001
- ------ |
|
Fixed Charges and Preferred Stock Dividends: |
|
|
|
|
|
|
|
Interest |
$99 |
$91 |
$84 |
$82 |
$72 |
$35 |
|
Interest Portion of Annual Rentals |
12 |
12 |
11 |
3 |
4 |
2 |
|
Preferred dividends of subsidiary (1) |
14
- ------ |
13
- ------ |
2
- ------ |
2
- ------ |
2
- ------ |
2
- ------ |
|
Total Fixed Charges and Preferred Stock For Purpose of Ratio |
$125
====== |
$116
====== |
$97
====== |
$87
====== |
$78
====== |
$39
====== |
|
Earnings: |
|
|
|
|
|
|
|
Pretax income from continuing operations |
$354 |
$335 |
$274 |
$350 |
$396 |
$184
|
|
Add: |
|
|
|
|
|
|
|
Fixed charges (from above) |
125 |
116 |
97 |
87 |
78 |
39 |
|
Less: Fixed charges capitalized |
2
- ------ |
1
- ------ |
1
- ------ |
2
- ------ |
2
- ------ |
1
- ------ |
|
Fixed charges net of capitalized charges |
123
- ------ |
115
- ------ |
96
- ------ |
85
- ------ |
76
- ------ |
38
- ------ |
|
Total Earnings for Purpose of Ratio |
$477
====== |
$450
====== |
$370
====== |
$435
====== |
$472
====== |
$222
====== |
|
Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends |
3.82
====== |
3.89
====== |
3.82
====== |
5.00
====== |
6.05
====== |
5.69
====== |
(1) In computing this ratio, "Preferred dividends of subsidiaries" represents the before-tax earnings necessary to pay such dividends, computed at the effective tax rates for the applicable periods.
Exhibit 12.2 Coverage Ratios
EXHIBIT 12.2
SOUTHERN CALIFORNIA GAS
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
| |
1996
- ------ |
1997
- ------ |
1998
- ------ |
1999
- ------ |
2000
- ------ |
For the six months ended June 30, 2001
- ------ |
|
Fixed Charges: |
|
|
|
|
|
|
|
Interest |
$88 |
$88 |
$81 |
$62 |
$72 |
$35 |
|
Interest Portion of Annual Rentals |
5
- ------ |
5
- ------ |
4
- ------ |
3
- ------ |
4
- ------ |
2
- ------ |
|
Total Fixed Charges For Purpose of Ratio |
$93
====== |
$93
====== |
$85
====== |
$65
====== |
$76
====== |
$37
====== |
|
Earnings: |
|
|
|
|
|
|
|
Pretax income from continuing operations |
$349
- ------ |
$416
- ------ |
$287
- ------ |
$383
- ------ |
$390
- ------ |
$185
- ------
|
|
Add: Fixed charges (from above) |
93 |
93 |
85 |
65 |
76 |
37 |
|
Less: Fixed charges capitalized |
2
- ------ |
1
- ------ |
1
- ------ |
2
- ------ |
2
- ------ |
1
- ------ |
|
Fixed charges net of
capitalized charges |
91
- ------ |
92
- ------ |
84
- ------ |
63
- ------ |
74
- ------ |
36
- ------ |
|
Total Earnings for Purpose of
Ratio |
$440
====== |
$508
====== |
$371
====== |
$446
====== |
$464
====== |
$221
====== |
|
Ratio of Earnings to Fixed Charges |
4.73
====== |
5.46
====== |
4.36
====== |
6.86
====== |
6.11
====== |
5.97
====== |
