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
September 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
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PACIFIC ENTERPRISES AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
Dollars in millions
Three Months Ended
September 30,
----------------------
2001 2000
------- -------
Operating Revenues $ 561 $ 722
------- -------
Operating Expenses
Cost of natural gas distributed 163 349
Operating and maintenance 188 175
Depreciation and amortization 68 65
Other taxes and franchise payments 20 19
Income taxes 50 44
------- -------
Total operating expenses 489 652
------- -------
Operating Income 72 70
------- -------
Other Income and (Deductions)
Interest income 8 19
Allowance for equity funds used during construction 2 1
Regulatory interest - net (2) (4)
Taxes on non-operating income (1) (3)
Other - net (1) (8)
------- -------
Total 6 5
------- -------
Income Before Interest Charges 78 75
------- -------
Interest Charges
Long-term debt 17 17
Other 5 7
Allowance for borrowed funds used during
construction (1) (1)
------- -------
Total 21 23
Net Income 57 52
Preferred Dividend Requirements 1 1
------- -------
Earnings Applicable to Common Shares $ 56 $ 51
======= =======
See notes to Consolidated Financial Statements.
PACIFIC ENTERPRISES AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
Dollars in millions
Nine Months Ended
September 30,
--------------------
2001 2000
------- -------
Operating Revenues $3,036 $2,050
------- -------
Operating Expenses
Cost of natural gas distributed 1,847 959
Operating and maintenance 580 493
Depreciation and amortization 200 196
Other taxes and franchise payments 79 69
Income taxes 130 132
------- -------
Total operating expenses 2,836 1,849
------- -------
Operating Income 200 201
------- -------
Other Income and (Deductions)
Interest income 37 47
Allowance for equity funds used during construction 4 2
Regulatory interest - net (8) (9)
Taxes on non-operating income (5) (7)
Preferred dividends of subsidiaries (1) (1)
Other - net (1) (6)
------- -------
Total 26 26
------- -------
Income Before Interest Charges 226 227
------- -------
Interest Charges
Long-term debt 50 52
Other 22 24
Allowance for borrowed funds used during
construction (2) (2)
------- -------
Total 70 74
------- -------
Net Income 156 153
Preferred Dividend Requirements 3 3
------- -------
Earnings Applicable to Common Shares $ 153 $ 150
======= =======
See notes to Consolidated Financial Statements.
PACIFIC ENTERPRISES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Dollars in millions
Balance at
---------------------------
September 30, December 31,
2001 2000
------------- ------------
ASSETS
Property, plant and equipment $6,511 $6,337
Accumulated depreciation (3,754) (3,571)
------- -------
Property, plant and equipment - net 2,757 2,766
------- -------
Current assets
Cash and cash equivalents 164 205
Accounts receivable - trade 190 589
Accounts receivable - other 18 83
Due from affiliate 119 214
Income tax receivable 32 --
Deferred income taxes 43 43
Fixed price contracts and other derivatives 72 --
Regulatory assets arising from fixed price
contracts and other derivatives 56 --
Inventories 109 67
Other 8 84
------- -------
Total current assets 811 1,285
------- -------
Other assets
Regulatory assets 90 108
Regulatory assets arising from fixed price
contracts and other derivatives 138 --
Due from affiliates 412 617
Other 90 52
------- -------
Total other assets 730 777
------- -------
Total assets $4,298 $4,828
======= =======
See notes to Consolidated Financial Statements.
PACIFIC ENTERPRISES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Dollars in millions
Balance at
---------------------------
September 30, December 31,
2001 2000
------------ ------------
CAPITALIZATION AND LIABILITIES
Capitalization
Common Stock $1,282 $1,282
Retained earnings 127 165
Accumulated other comprehensive income (loss) 1 (1)
------- -------
Total common equity 1,410 1,446
Preferred stock 80 80
Long-term debt 722 821
------- -------
Total capitalization 2,212 2,347
------- -------
Current liabilities
Current portion of long-term debt 220 120
Accounts payable - trade 135 368
Accounts payable - other 78 43
Regulatory balancing accounts - net 114 463
Income taxes payable -- 50
Dividends and interest payable 32 28
Due to affiliates 146 365
Fixed price contracts and other derivatives 56 --
Other 329 300
------- -------
Total current liabilities 1,110 1,737
------- -------
Deferred credits and other liabilities
Customer advances for construction 18 16
Post-retirement benefits other than pensions 91 97
Deferred income taxes 244 224
Deferred investment tax credits 51 53
Regulatory liabilities 50 --
Fixed price contracts and other derivatives 140 --
Deferred credits and other liabilities 362 334
Preferred stock of subsidiary 20 20
------- -------
Total deferred credits and other liabilities 976 744
------- -------
Contingencies and commitments (Note 2)
Total liabilities and shareholders' equity $4,298 $4,828
======= =======
See notes to Consolidated Financial Statements.
PACIFIC ENTERPRISES AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
Dollars in millions
Nine Months Ended
September 30,
------------------
2001 2000
----- -----
Cash Flows from Operating Activities
Net income $ 156 $ 153
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 200 196
Deferred income taxes and investment
tax credits 18 41
Other - net 62 50
Net changes in other working capital components (179) 179
----- -----
Net cash provided by operating activities 257 619
----- -----
Cash Flows from Investing Activities
Capital expenditures (190) (130)
Loans repaid by (paid to) affiliates 88 (387)
----- -----
Net cash used in investing activities (102) (517)
----- -----
Cash Flows from Financing Activities
Common dividends paid (190) --
Preferred dividends paid (3) (3)
Repayment of long-term debt -- (30)
Other (3) --
----- -----
Net cash used in financing activities (196) (33)
----- -----
Increase (decrease) in cash and cash equivalents (41) 69
Cash and cash equivalents, January 1 205 11
----- -----
Cash and cash equivalents, September 30 $ 164 $ 80
===== =====
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Income tax payments - net $ 192 $ 105
===== =====
Interest payments, net of amounts capitalized $ 66 $ 98
===== =====
See notes to Consolidated Financial Statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
Dollars in millions
Three Months Ended
September 30,
------------------
2001 2000
------- -------
Operating Revenues $ 561 $ 722
------- -------
Operating Expenses
Cost of natural gas distributed 163 349
Operation and maintenance 188 175
Depreciation and amortization 68 65
Other taxes and franchise payments 20 19
Income taxes 49 45
------- -------
Total operating expenses 488 653
------- -------
Operating Income 73 69
------- -------
Other Income and (Deductions)
Interest income 4 9
Allowance for equity funds used during construction 2 1
Regulatory interest - net (2) (4)
Taxes on non-operating income (1) (2)
Other - net -- (2)
------- -------
Total 3 2
------- -------
Income Before Interest Charges 76 71
------- -------
Interest Charges
Long-term debt 17 17
Other 3 2
Allowance for borrowed funds used during construction (1) (1)
------- -------
Total 19 18
------- -------
Net Income 57 53
Preferred Dividend Requirements -- --
------- -------
Earnings Applicable to Common Shares $ 57 $ 53
======= =======
See notes to Consolidated Financial Statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
Dollars in millions
Nine Months Ended
September 30,
------------------
2001 2000
------- -------
Operating Revenues $3,036 $2,050
------- -------
Operating Expenses
Cost of natural gas distributed 1,847 959
Operating and maintenance 572 492
Depreciation and amortization 200 196
Other taxes and franchise payments 79 69
Income taxes 131 132
------- -------
Total operating expenses 2,829 1,848
------- -------
Operating Income 207 202
------- -------
Other Income and (Deductions)
Interest income 20 20
Allowance for equity funds used during construction 4 2
Regulatory interest - net (8) (9)
Taxes on non-operating income (5) (6)
Other - net (1) (2)
------- -------
Total 10 5
------- -------
Income Before Interest Charges 217 207
------- -------
Interest Charges
Long-term debt 50 52
Other 12 6
Allowance for borrowed funds used during construction (2) (2)
------- -------
Total 60 56
------- -------
Net Income 157 151
Preferred Dividend Requirements 1 1
------- -------
Earnings Applicable to Common Shares $ 156 $ 150
======= =======
See notes to Consolidated Financial Statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Dollars in millions
Balance at
--------------------------
September 30, December 31,
2001 2000
------------- ------------
ASSETS
Utility plant - at original cost $6,399 $6,314
Accumulated depreciation (3,675) (3,557)
------ ------
Utility plant - net 2,724 2,757
------ ------
Current assets
Cash and cash equivalents 164 205
Accounts receivable - trade 190 589
Accounts receivable - other 18 83
Due from affiliates 119 214
Deferred income taxes 73 74
Regulatory assets arising from fixed priced contracts
and other derivatives 56 --
Fixed price contracts and other derivatives 72 --
Inventories 109 67
Other 6 80
------ ------
Total current assets 807 1,312
------ ------
Other assets
Regulatory assets -- 12
Regulatory assets arising from fixed priced contracts
and other derivatives 138 --
Other 94 35
------ ------
Total other assets 232 47
------ ------
Total assets $3,763 $4,116
====== ======
See notes to Consolidated Financial Statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
Dollars in millions
Balance at
--------------------------
September 30, December 31,
2001 2000
------------- ------------
CAPITALIZATION AND LIABILITIES
Capitalization
Common stock $ 835 $ 835
Retained earnings 418 453
Accumulated other comprehensive income (loss) 1 (1)
------ ------
Total common equity 1,254 1,287
Preferred stock 22 22
Long-term debt 722 821
------ ------
Total capitalization 1,998 2,130
------ ------
Current liabilities
Current portion of long-term debt 220 120
Accounts payable - trade 135 368
Accounts payable - other 78 44
Regulatory balancing accounts - net 114 463
Income taxes payable 8 90
Interest payable 31 26
Fixed price contracts and other derivatives 56 --
Other 329 300
------ ------
Total current liabilities 971 1,411
------ ------
Deferred credits and other liabilities
Customer advances for construction 18 16
Deferred income taxes 335 314
Deferred investment tax credits 50 53
Regulatory liabilities 51 --
Fixed price contracts and other derivatives 140 --
Deferred credits and other liabilities 200 192
------ ------
Total deferred credits and other liabilities 794 575
------ ------
Contingencies and commitments (Note 2)
Total liabilities and shareholders' equity $3,763 $4,116
====== ======
See notes to Consolidated Financial Statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
Dollars in millions
Nine Months Ended
September 30,
------------------
2001 2000
----- -----
Cash Flows from Operating Activities
Net income $157 $151
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 200 196
Deferred income taxes and investment tax credits 18 38
Other - net 40 28
Net changes in other working capital components (179) 175
---- ----
Net cash provided by operating activities 236 588
---- ----
Cash Flows from Investing Activities
Capital expenditures (190) (130)
Loan repaid by (paid to) affiliate 104 (258)
---- ----
Net cash used in investing activities (86) (388)
---- ----
Cash Flows from Financing Activities
Dividends paid (191) (101)
Repayment of long-term debt -- (30)
---- ----
Net cash used in financing activities (191) (131)
---- ----
Increase (decrease) in cash and cash equivalents (41) 69
Cash and cash equivalents, January 1 205 11
---- ----
Cash and cash equivalents, September 30 $164 $ 80
==== ====
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Income tax payments - net $199 $107
==== ====
Interest payments, net of amounts capitalized $ 55 $ 55
==== ====
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 Reports. 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 Reports and March 31,
2001 and June 30, 2001 Quarterly Reports on Form 10-Q.
As described in the notes to Consolidated Financial Statements in the
companies' 2000 Annual Reports, SoCalGas accounts for the economic
effects of regulation on utility operations in accordance with
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting
for the Effects of Certain Types of Regulation."
2. MATERIAL CONTINGENCIES
NATURAL GAS INDUSTRY RESTRUCTURING
The companies' 2000 Annual Reports discuss various proposals and
actions related to natural gas industry restructuring. As discussed
therein, no significant impacts on the companies are expected when the
various issues are finalized. Various developments since January 1,
2001 are described herein.
A settlement agreement between SoCalGas and certain parties settling
the issue of retroactive refunding of costs in rates of ownership and
operation of one of SoCalGas' storage fields was approved by the
California Public Utilities Commission (CPUC) in June 2001. The
settlement provides for no retroactive refund of the costs in rates of
this field.
In October 2001, a CPUC commissioner issued a revised Proposed
Decision (PD) which adopts, with some modification, many of the
provisions of the settlement proposal that SoCalGas and SDG&E (an
affiliated company also owned by Sempra Energy) were parties to (one
of several that arose during 1999 and 2000). On the SoCalGas system
these provisions include, among other things, the unbundling of
intrastate transmission and the implementation of a system of firm,
tradable intrastate transmission rights that are viewed to be in the
public interest. The revised PD also would increase SoCalGas
shareholder risks and rewards for unbundled storage service, while at
the same time granting SoCalGas greater flexibility in charges for
unbundled storage service. A CPUC decision could be issued at any
time, but there is no deadline for CPUC action and the provisions of a
final CPUC decision are uncertain.
LITIGATION
Lawsuits filed in 2000 and currently consolidated at the Federal Court
in Las Vegas seek class-action certification and allege that Sempra
Energy, SoCalGas, SDG&E and El Paso Energy Corp. acted to drive up the
price of natural gas for Californians by agreeing to stop a pipeline
project that would have brought new and less-expensive natural gas
supplies into California. Management believes the allegations are
without merit. On October 30, 2001, the Federal Court ruled that the
State Court is the appropriate jurisdiction for these lawsuits.
Except for the above, neither the companies nor their 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 companies' 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 Nine-month Three-month Nine-month
periods ended periods ended periods ended periods ended
September 30, September 30, September 30, September 30,
----------------------------- ----------------------------
(Dollars in millions) 2001 2000 2001 2000 2001 2000 2001 2000
- --------------------------------------------------------------------------------------
Net income $ 57 $ 52 $156 $153 $ 57 $ 53 $157 $151
Change in unrealized gain
on marketable securities -- (14) -- 7 -- (14) -- 7
Minimum pension liability
adjustments -- 1 1 3 -- 1 1 3
Financial instruments
(Note 4) 1 -- 1 -- 1 -- 1 --
----------------------------------------------------------
Comprehensive income $ 58 $ 39 $158 $163 $ 58 $ 40 $159 $161
- --------------------------------------------------------------------------------------
4. FINANCIAL INSTRUMENTS
Adoption of SFAS 133
Effective January 1, 2001, the companies adopted SFAS 133, as amended
by SFAS 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.
$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 on the companies'
hedging activities.
Market Risk
The companies' policy is to use derivative financial instruments to
manage 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 companies 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
to be charged to its customers.
If gains and losses are not recoverable or payable through future
rates, SoCalGas will apply hedge accounting if certain criteria are
met.
In instances where hedge accounting is applied to energy derivatives,
cash flow hedge accounting is elected and, accordingly, changes in
fair values of the derivatives are included in other comprehensive
income. The entire balance of $1 million, currently included in
accumulated other comprehensive income, is expected to be reclassified
into income within the next 12 months. In instances where energy
derivatives do not qualify for hedge accounting, gains and losses are
recorded in the Statement of Consolidated Income.
Accounting for Derivative Activities
At September 30, 2001, $72 million in current assets, $56 million in
current liabilities, $140 million in noncurrent liabilities and $1
million in other 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, $56 million in current regulatory assets, $138 million
in noncurrent regulatory assets, $62 million in regulatory balancing
account liabilities, $4 million of current regulatory liabilities
(included in other current liabilities), $1 million of noncurrent
regulatory liabilities (included in deferred credits and other
liabilities) and $1 million of accumulated other comprehensive income
were recorded in the Consolidated Balance Sheet as of September 30,
2001. For the nine-month period ended September 30, 2001, a net $3
million was recorded in other operating income in the Statement of
Consolidated Income.
Fair Value
The fair value of the companies' derivative financial instruments
(fixed-price contracts and other derivatives) is not materially
different from their carryings amounts. The fair values of fixed-price
contracts and other derivatives were estimated based on quoted market
prices. Information regarding the fair value of the companies' non-
derivative financial instruments is provided in Note 8 of the notes to
Consolidated Financial Statements in the 2000 Annual Reports 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 companies. 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 companies' business described in this
quarterly report and other reports filed by the companies from time to
time with the Securities and Exchange Commission.
See also "Factors Influencing Future Performance" below.
EVENTS OF SEPTEMBER 11, 2001
The terrorist attacks of September 11 have not affected the companies'
operations and are not expected to have an effect on the companies'
future operations, except to the extent that they significantly affect
the general economy, or the business or geographic areas in which the
companies operate.
CAPITAL RESOURCES AND LIQUIDITY
Cash and cash equivalents at September 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 nine-month period ended September 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 due to a decrease in the spot gas price compared to
the average cost of gas, the decrease in trade accounts payable due to
lower September 2001 gas prices, 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), partially offset by
the decrease in SoCalGas' trade accounts receivable due to the lower
September 2001 gas prices passed on to its customers.
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.
For the nine months ended September 30, 2001, the decrease in cash
flows used in investing activities compared to the corresponding
period in 2000 was primarily due to loans being repaid by Sempra
Energy in 2001 versus being made to Sempra Energy in 2000, partially
offset by an increase in capital expenditures by SoCalGas.
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
In September 2001, SoCalGas filed a shelf registration for the public
offering of up to an additional $350 million of debt securities. Any
securities under this shelf registration are offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of
1933. At September 30, 2001, no debt securities had been issued under
this registration statement.
For the nine-month period ended September 30, 2001, cash flows used in
financing activities increased from the corresponding period in 2000
due primarily to an increase in common dividends paid during 2001.
In October 2001, $120 million of 6.38-percent, SoCalGas medium-term
notes matured. On November 7, 2001, SoCalGas called its $150 million,
8.75-percent, first mortgage bonds at a premium of 3.59 percent.
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 two-year revolving line of credit which
bears interest at various rates based on market rates and PE's credit
rating.
RESULTS OF OPERATIONS
The companies' net income increased slightly for the three-month and
nine-month periods ended September 30, 2001, compared to the same
periods in 2000. The increases were primarily due to the reduction of
operating expenses as a percentage of related revenues.
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 nine-month periods ended September 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 186 $1,864 2 $ 4 188 $1,868
Commercial and industrial 68 543 187 125 255 668
Electric generation plants -- -- 299 73 299 73
Wholesale -- -- 131 27 131 27
--------------------------------------------------------------
254 $2,407 619 $229 873 2,636
Balancing accounts and other 400
--------
Total $3,036
- ------------------------------------------------------------------------------------------
2000:
Residential 172 $1,373 2 $ 9 174 $1,382
Commercial and industrial 62 409 241 165 303 574
Utility electric generation -- -- 230 82 230 82
Wholesale -- -- 119 39 119 39
--------------------------------------------------------------
234 $1,782 592 $295 826 2,077
Balancing accounts and other (27)
--------
Total $2,050
- ------------------------------------------------------------------------------------------
The increases in natural gas revenues and the cost of natural gas
distributed were 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 companies' 2000 Annual Reports. The PBR and Cost of Service (COS)
cases for SoCalGas and SDG&E were both due to be filed on December 21,
2001. However, both SoCalGas' and SDG&E's PBR/COS cases were delayed
by an October 10, 2001 CPUC decision such that the resulting rates
would be effective in 2004 instead of 2003. The decision also denies
the utilities' request to continue 50/50 allocation between ratepayers
and shareholders of estimated savings stemming from the 1998 merger
between Pacific Enterprises (parent company of SoCalGas) and Enova
Corporation (parent company of SDG&E). Instead, the CPUC ordered that
100 percent of the estimated 2003 merger benefits go to ratepayers.
Gas Cost Incentive Mechanism (GCIM)
This mechanism for evaluating SoCalGas' natural gas purchases
substantially replaced the previous process of reasonableness
reviews. GCIM compares SoCalGas' cost of natural gas with a benchmark
level, which is the average price of 30-day firm spot supplies in the
basins in which SoCalGas purchases natural gas. The mechanism permits
full recovery of all costs within a tolerance band above the
benchmark price and refunds all savings within a tolerance band below
the benchmark price. The costs or savings outside the tolerance band
are shared equally between customers and shareholders. The CPUC
approved the use of natural gas futures for managing risk associated
with the GCIM.
In May 2001 the CPUC approved a $10 million shareholder award for the
year ended March 31, 2000. In June 2001 SoCalGas filed its annual
GCIM application with the CPUC, requesting a shareholder award of
$106 million for the year ended March 31, 2001. Notwithstanding this
request, SoCalGas stated that it would retroactively reduce the award
request to $31 million if the CPUC approves the settlement agreement
entered into in June 2001 between SoCalGas, the CPUC's Office of
Ratepayer Advocates and The Utilities Reform Network, a consumer-
based intervenor, on modifying the GCIM. A final CPUC decision is
expected in the first quarter of 2002.
Biennial Cost Allocation Proceeding (BCAP)
Rates to recover the changes in the cost of natural gas transportation
services are determined in the BCAP. The BCAP adjusts rates to reflect
variances in customer demand from estimates previously used in
establishing customer natural gas transportation rates. The mechanism
substantially eliminates the effect on income of variances in market
demand and natural gas transportation costs. SoCalGas filed its 2003
BCAP on September 21, 2001.
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.
Utility Integration
On September 20, 2001 the CPUC approved Sempra Energy's request to
integrate the management teams of SoCalGas and SDG&E. Utility
operations/management was not, and is not expected to be, shifted to
the parent company. CPUC approval would be required if such a shift
were contemplated. The decision retains the separate identities of
both utilities and is not a merger. Instead, utility integration is a
reorganization that consolidates senior management functions of the
two utilities and returns to the utilities a significant portion of
shared support services currently provided by Sempra Energy's
centralized corporate center. Once implemented, the integration is
expected to result in more efficient and effective operations.
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. The
investigation is currently on hold while certain jurisdictional issues
are being resolved.
NEW ACCOUNTING STANDARDS
Effective January 1, 2001, the companies adopted SFAS 133 "Accounting
for Derivative Instruments and Hedging Activities" as amended by SFAS
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 earnings. For further information
regarding the implementation of SFAS 133, see Note 4 of the notes to
Consolidated Financial Statements.
In July 2001 the Financial Accounting Standards Board (FASB) 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, 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.
In August 2001 the FASB approved SFAS 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" that replaces SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS 144 applies to all long-lived assets,
including discontinued operations. SFAS 144 requires that those long-
lived assets be measured at the lower of carrying amount or fair value
less cost to sell. Therefore, discontinued operations will no longer
be measured at net realizable value or include amounts for operating
losses that have not yet occurred. SFAS 144 also broadens the
reporting of discontinued operations to include all components of an
entity with operations that can be distinguished from the rest of the
entity and that will be eliminated from the ongoing operations of the
entity in a disposal transaction. The provisions of SFAS 144 are
effective for fiscal years beginning after December 15, 2001.
The companies have not yet determined the effect on its financial
statements of SFASs 141-144 or of the various subsequent guidance
concerning SFAS 133/138.
ITEM 3. MARKET RISK
There have been no significant changes in the risk issues affecting
the companies subsequent to those discussed in the Annual Reports for
2000. As noted in those reports, 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
companies' market-risk management and trading framework. However, to
lessen the impact on customers from the 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 and third
quarters of 2001, the gas hedging activity at SoCalGas was sharply
reduced and, as of September 30, 2001, the VaR of the SoCalGas hedges
was $200,000. 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 VaR amounts due to the offsetting
regulatory asset or liability.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except as otherwise described in this report, the companies' 2000
Annual Reports, or their March 31, 2001 or June 30, 2001 Quarterly
Reports on Form 10-Q, neither the companies nor their 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 5. OTHER INFORMATION
On November 6, 2001, the boards of directors of the companies were
reconstituted with the following individuals now comprising all of the
incumbent directors:
For PE: Stephen L. Baum, Chairman, Chief Executive Officer and
President of Sempra Energy; John R. Light, Executive Vice
President and General Counsel of Sempra Energy; and Neal E.
Schmale, Executive Vice President and Chief Financial Officer of
Sempra Energy.
For SoCalGas: Frank H. Ault, Senior Vice President and
Controller of Sempra Energy; Edwin A. Guiles, Group President -
Regulated Business Units of Sempra Energy and Chairman of SDG&E
and SoCalGas; and Debra L. Reed, President of SDG&E.
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 June 30, 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: November 13, 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
Pacific Enterprises Exhibit 12.1
EXHIBIT 12.1
PACIFIC ENTERPRISES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
| |
1996
- ------ |
1997
- ------ |
1998
- ------ |
1999
- ------ |
2000
- ------ |
For the nine months ended Sept 30, 2001
- ------ |
|
Fixed Charges and Preferred Stock Dividends: |
|
|
|
|
|
|
|
Interest |
$99 |
$91 |
$84 |
$82 |
$72 |
$72 |
|
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
====== |
$76
====== |
|
Earnings: |
|
|
|
|
|
|
|
Pretax income from continuing operations |
$354 |
$335 |
$274 |
$350 |
$396 |
$291
|
|
Add: |
|
|
|
|
|
|
|
Fixed charges (from above) |
125 |
116 |
97 |
87 |
78 |
76 |
|
Less: Fixed charges capitalized |
2
- ------ |
1
- ------ |
1
- ------ |
2
- ------ |
2
- ------ |
2
- ------ |
|
Fixed charges net of capitalized charges |
123
- ------ |
115
- ------ |
96
- ------ |
85
- ------ |
76
- ------ |
74
- ------ |
|
Total Earnings for Purpose of Ratio |
$477
====== |
$450
====== |
$370
====== |
$435
====== |
$472
====== |
$365
====== |
|
Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends |
3.82
====== |
3.88
====== |
3.81
====== |
5.00
====== |
6.05
====== |
4.80
====== |
(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.
SoCalGas Exhibit 12.2
EXHIBIT 12.2
SOUTHERN CALIFORNIA GAS COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
| |
1996
- ------ |
1997
- ------ |
1998
- ------ |
1999
- ------ |
2000
- ------ |
For the nine months ended Sept 30, 2000
- ------ |
|
Fixed Charges: |
|
|
|
|
|
|
|
Interest |
$88 |
$88 |
$81 |
$62 |
$72 |
$62 |
|
Interest Portion of Annual Rentals |
5
- ------ |
5
- ------ |
4
- ------ |
3
- ------ |
4
- ------ |
2
- ------ |
|
Total Fixed Charges For Purpose of Ratio |
$93
====== |
$93
====== |
$85
====== |
$65
====== |
$76
====== |
$64
====== |
|
Earnings: |
|
|
|
|
|
|
|
Pretax income from continuing operations |
$349
- ------ |
$416
- ------ |
$287
- ------ |
$383
- ------ |
$390
- ------ |
$292
- ------
|
|
Add: Fixed charges (from above) |
93 |
93 |
85 |
65 |
76 |
64 |
|
Less: Fixed charges capitalized |
2
- ------ |
1
- ------ |
1
- ------ |
2
- ------ |
2
- ------ |
2
- ------ |
|
Fixed charges net of
capitalized charges |
91
- ------ |
92
- ------ |
84
- ------ |
63
- ------ |
74
- ------ |
62
- ------ |
|
Total Earnings for Purpose of
Ratio |
$440
====== |
$508
====== |
$371
====== |
$446
====== |
$464
====== |
$354
====== |
|
Ratio of Earnings to Fixed Charges |
4.73
====== |
5.46
====== |
4.36
====== |
6.86
====== |
6.11
====== |
5.53
====== |
