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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 March 31, 2000
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Commission file number 1-14201
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Sempra Energy
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(Exact name of registrant as specified in its charter)
California 33-0732627
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Ash Street, San Diego, California 92101
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(Address of principal executive offices)
(Zip Code)
(619) 696-2034
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
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Common stock outstanding on April 30, 2000: 204,267,240
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ITEM 1. FINANCIAL STATEMENTS.
SEMPRA ENERGY
STATEMENTS OF CONSOLIDATED INCOME
Dollars in millions except per-share amounts
Three months ended
March 31,
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2000 1999
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Revenues and Other Income
Utility revenues:
Natural gas $ 821 $ 698
Electric 349 360
Other operating revenues 272 111
Other income 24 22
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Total 1,466 1,191
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Expenses
Cost of natural gas distributed 390 291
Electric fuel and net purchased power 133 101
Operating expenses 499 389
Depreciation and amortization 134 142
Franchise payments and other taxes 51 45
Preferred dividends by subsidiaries 3 3
Trust preferred distributions by subsidiaries 2 --
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Total 1,212 971
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Income Before Interest and Income Taxes 254 220
Interest 73 58
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Income Before Income Taxes 181 162
Income taxes 68 63
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Net Income $ 113 $ 99
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Weighted-average number of shares outstanding (Basic)* 228,291 237,065
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Weighted-average number of shares outstanding (Diluted)* 228,371 237,408
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Net Income Per Share of Common Stock (Basic) $ 0.49 $ 0.42
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Net Income Per Share of Common Stock (Diluted) $ 0.49 $ 0.42
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Common Dividends Declared Per Share $ 0.25 $ 0.39
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*In thousands of shares
See notes to Consolidated Financial Statements.
SEMPRA ENERGY
CONSOLIDATED BALANCE SHEETS
Dollars in millions
Balance at
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March 31, December 31,
2000 1999
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ASSETS
Current assets:
Cash and cash equivalents $ 640 $ 487
Accounts receivable - trade 549 428
Accounts and notes receivable - other 120 129
Income taxes receivable -- 144
Energy trading assets 2,050 1,539
Inventories 70 148
Other 124 165
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Total current assets 3,553 3,040
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Investments and other assets:
Regulatory assets 647 670
Nuclear-decommissioning trusts 545 551
Investments 1,287 1,164
Other assets 473 451
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Total investments and other assets 2,952 2,836
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Property, plant and equipment:
Property, plant and equipment 11,264 11,127
Less accumulated depreciation and amortization (5,838) (5,733)
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Total property, plant and equipment - net 5,426 5,394
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Total assets $11,931 $11,270
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See notes to Consolidated Financial Statements.
SEMPRA ENERGY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
Dollars in millions
Balance at
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March 31, December 31,
2000 1999
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LIABILITIES
Current liabilities:
Short-term debt $ -- $ 182
Accounts payable 807 727
Accrued income taxes 57 --
Deferred income taxes 70 67
Energy trading liabilities 1,870 1,365
Dividends and interest payable 109 154
Regulatory balancing accounts - net 577 357
Long-term debt due within one year 153 155
Other 308 320
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Total current liabilities 3,951 3,327
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Long-term debt 3,349 2,902
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Deferred credits and other liabilities:
Customer advances for construction 70 72
Post-retirement benefits other than pensions 200 204
Deferred income taxes 641 615
Deferred investment tax credits 105 106
Deferred credits and other liabilities 811 854
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Total deferred credits and other liabilities 1,827 1,851
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Preferred stock of subsidiaries 204 204
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Mandatorily redeemable trust preferred securities 200 --
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Commitments and contingent liabilities (Note 3)
SHAREHOLDERS' EQUITY
Common stock 1,412 1,966
Retained earnings 996 1,101
Deferred compensation relating to ESOP (41) (42)
Accumulated other comprehensive income 33 (39)
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Total shareholders' equity 2,400 2,986
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Total liabilities and shareholders' equity $11,931 $11,270
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See notes to Consolidated Financial Statements.
SEMPRA ENERGY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
Dollars in millions
Three Months Ended
March 31,
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2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 113 $ 99
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 134 142
Deferred income taxes and investment tax credits 13 4
Other - net (75) (64)
Net change in other working capital components 472 267
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Net cash provided by operating activities 657 448
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CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (131) (73)
Other ( 11) (35)
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Net cash used in investing activities (142) (108)
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CASH FLOWS FROM FINANCING ACTIVITIES
Common dividends (94) (94)
Sale of common stock 1 3
Repurchase of common stock (722) --
Issuance of madatorily redeemable trust
preferred securities 200 --
Issuance of long-term debt 504 10
Payments on long-term debt (69) (56)
Decrease in short-term debt - net (182) (5)
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Net cash used in financing activities (362) (142)
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Increase in Cash and Cash Equivalents 153 198
Cash and Cash Equivalents, January 1 487 424
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Cash and Cash Equivalents, March 31 $ 640 $ 622
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest payments, net of amounts capitalized $ 100 $ 63
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Income tax payments (refunds) - net $ (124) $ 24
====== ======
See notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
This Quarterly Report on Form 10-Q is that of Sempra Energy (the
Company), a California-based Fortune 500 energy services company.
Sempra Energy's principal subsidiaries are San Diego Gas & Electric
Company (SDG&E) and Southern California Gas Company (SoCalGas),
collectively referred to herein as the California utilities. The
financial statements herein are the Consolidated Financial Statements
of Sempra Energy and its subsidiaries.
The accompanying Consolidated Financial Statements have been prepared
in accordance with the interim-period-reporting requirements of Form
10-Q. Results of operations for interim periods are not necessarily
indicative of results for the entire year. In the opinion of
management, the accompanying statements reflect all adjustments
necessary for a fair presentation. These adjustments are only of a
normal recurring nature. Certain changes in classification have been
made to prior presentations to conform to the current financial
statement presentation.
The Company's significant accounting policies are described in the
notes to Consolidated Financial Statements in the Company's 1999
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 Company's 1999 Annual Report.
The California utilities have been accounting 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), as
described in the notes to Consolidated Financial Statements in the
Company's 1999 Annual Report. In conformity with generally accepted
accounting principles for regulated enterprises and the policies of
the California Public Utilities Commission (CPUC), SDG&E does not
apply SFAS No. 71 to its generation business, as discussed further in
Note 3.
2. MAJOR FINANCIAL TRANSACTIONS
Common Stock Repurchase
On February 25, 2000, the Company completed a self tender offer,
purchasing 36.1 million shares of its outstanding common stock at $20
per share. The Company issued $500 million of long-term 7.95% notes
due 2010 and $200 million of 8.9% mandatorily redeemable trust
preferred securities to finance substantially all of the purchase.
Additional Common Stock Repurchases Authorized
On March 9, 2000 the Company's Board of Directors authorized the
expenditure of up to $100 million to repurchase additional shares of
common stock from time to time in the open market or in privately
negotiated transactions. Authorization of the stock repurchase does
not obligate the Company to acquire any particular amount of common
stock or within any specific timeframe, and no additional shares were
repurchased during the three-month period ended March 31, 2000.
Reduction in Common Dividends
Dividends currently are paid quarterly to shareholders. The payment
of future dividends is within the discretion of the board of
directors. In January 2000 the Company reduced the quarterly dividend
on shares of its common stock to $0.25 per share ($1.00 annualized
rate) from its previous level of $0.39 per share ($1.56 annualized
rate) commencing with the dividend payable in the second quarter of
2000.
Chilquinta Energia S.A. and Luz del Sur S.A.
On June 10, 1999, Sempra Energy International (SEI) and Public
Service Enterprise Group (PSEG) purchased (on a 50/50 basis)
Chilquinta Energia S.A. (Energia), primarily a Chilean electric
distribution company, for $840 million. SEI invested $260 million for
the purchase of stock and refinanced $160 million of Energia's
outstanding long-term debt. In September 1999, SEI and PSEG completed
their acquisition of 47.5 percent of the outstanding shares of Luz
del Sur S.A., a Peruvian electric distribution company. SEI's share
of the transaction was $108 million in cash. This acquisition,
combined with the 37-percent already owned through Energia, increased
the companies' total joint ownership to 84.5 percent of Luz del Sur
S.A.
KN Energy
On June 21, 1999, Sempra Energy and KN Energy, Inc. (KN) announced
that they had agreed to terminate an agreement for the acquisition of
KN by Sempra Energy. Expenses incurred in connection with the
proposed acquisition were $0.5 million, after tax, for the three-
month period ended March 31, 1999.
3. MATERIAL CONTINGENCIES
ELECTRIC INDUSTRY RESTRUCTURING -- CALIFORNIA PUBLIC UTILITIES
COMMISSION
In September 1996, the State of California enacted a law
restructuring California's electric utility industry (AB 1890). The
legislation adopted the December 1995 CPUC policy decision
restructuring the industry to stimulate competition and reduce rates.
Beginning on March 31, 1998, customers were given the opportunity to
choose to continue to purchase their electricity from the local
utility under regulated tariffs, to enter into contracts with other
energy-service providers (direct access) or to buy their power from
the independent Power Exchange (PX) that serves as a wholesale power
pool allowing all energy producers to participate competitively. The
PX obtains its power from qualifying facilities, from nuclear units
and, lastly, from the lowest-bidding suppliers. California's
investor-owned utilities (IOUs) are obligated to sell their power
supply, including owned generation and purchased-power contracts, to
the PX. The IOUs are also obligated to purchase from the PX the power
that they distribute. An Independent System Operator (ISO) schedules
power transactions and access to the transmission system. The local
utility continues to provide distribution service regardless of the
source from which the customer chooses to purchase electricity.
Purchases by SDG&E from the PX/ISO are included in purchased-power
expenses and revenues from sales to the PX/ISO have been netted
therein on the Statements of Consolidated Income. Revenues from the
PX/ISO reflect sales to its PX/ISO at market prices of energy from
SDG&E's power plants and from its long-term purchased-power
contracts.
As discussed in the notes to Consolidated Financial Statements
contained in the Company's 1999 Annual Report, AB 1890 allowed the
IOUs a reasonable opportunity to recover their stranded costs via a
competition transition charge (CTC) to customers through December 31,
2001. In June 1999, SDG&E completed the recovery of its stranded
costs, other than the future above-market portion of qualifying
facilities and other purchased-power contracts that were in effect at
December 31, 1995, and San Onofre Nuclear Generating Station (SONGS)
costs as described below, both of which will continue to be collected
in rates. Recovery of the other stranded costs was effected by, among
other things, the sale of SDG&E's South Bay and Encina fossil power
plants and combustion turbines during the quarter ended June 30,
1999. SDG&E will operate and maintain both plants for the new owners
until April 2001 and May 2001, respectively.
Stranded costs included the cost of SONGS as of December 31, 1995.
SDG&E retains ownership of its 20-percent interest in SONGS.
Subsequent SONGS costs are recoverable only from the sales to the PX
of power produced from SONGS, at rates previously fixed by the CPUC
through December 31, 2003 and at market rates thereafter. If approved
by the CPUC, SDG&E is planning to auction its interest in SONGS. A
major issue being addressed is how to handle the decommissioning
trust to ensure that adequate funding is available at the time the
plant is decommissioned.
AB 1890 also required a 10-percent reduction of residential and small
commercial customers' rates, beginning in January 1998, and provided
for the issuance of rate-reduction bonds by an agency of the State of
California to enable the IOUs to achieve this rate reduction. In
December 1997, $658 million of rate-reduction bonds were issued on
SDG&E's behalf at an average interest rate of 6.26 percent. These
bonds are being repaid over 10 years by SDG&E's residential and small
commercial customers via a non-bypassable charge on their electric
bills. In 1997, SDG&E formed a subsidiary, SDG&E Funding LLC, to
facilitate the issuance of the bonds. In exchange for the bond
proceeds, SDG&E sold to SDG&E Funding LLC all of its rights to the
revenue streams collected from such customers related to the non-
bypassable charge. Consequently, the transaction is structured to
cause such revenue streams not to be the property of SDG&E nor to be
available to satisfy any claims of SDG&E's creditors.
The sizes of the rate-reduction bond issuances were set so as to make
the IOUs neutral as to the 10-percent rate reduction, and were based
on a four-year period to recover stranded costs. Because SDG&E
recovered its stranded costs in only 18 months (due to the greater-
than-anticipated plant-sale proceeds), the bond sale proceeds were
greater than needed. Accordingly, SDG&E will return to its customers
over $400 million of surplus bond proceeds. The timing of the return
will differ from the timing of the collection, but the specific
timing of the repayment and the interest rate thereon are the subject
of a CPUC proceeding. This refund will not affect SDG&E's net income,
except to the extent that the interest associated with the refund
differs from the return earned by the Company on the funds to be
refunded. The refund does not affect the bonds and their repayment
schedule.
On March 17, 2000 a proposed decision was issued in this proceeding
which would require SDG&E to refund the surplus bond proceeds over
the remaining life of the bonds at an interest rate of 12.63 percent.
An April 21, 2000 alternate decision would, if adopted, require SDG&E
to refund the surplus bond proceeds over a very short period of time
(the next feasible billing cycle) at the 12.63 percent interest rate.
A final decision regarding this refund is expected in the second
quarter of 2000.
AB 1890 also includes a rate freeze for all IOU customers. Beginning
in 1998, SDG&E's system-average rates were fixed at 9.43 cents per
kwh. The rate freeze was to have stayed in place until January 1,
2002. However, in connection with completion of its stranded cost
recovery, SDG&E filed with the CPUC for a mechanism to structure
electric rates after the end of the rate freeze. SDG&E received
approval to reduce base rates (the non-commodity portion of rates) to
all electric customers, effective July 1, 1999. The portion of the
electric rate representing the commodity cost is passed through to
customers and fluctuates with the price of electricity from the PX.
As a result, although base rates are now below those implicit in the
rate freeze, total rates charged by SDG&E may be above or below those
set by the rate freeze depending on the cost of electricity.
The CPUC is currently deliberating on the legal, ratemaking and
policy issues of ending the rate freeze for all the IOUs, including
post-rate freeze ratemaking. One issue in this proceeding is a joint
proposal by SDG&E and several other parties that would limit SDG&E's
obligation to purchase from the PX to 80 percent of the electricity
required by its utility default customers, and to establish an
electric commodity performance-based regulation (PBR) mechanism,
which would measure SDG&E's effectiveness in procuring electricity on
behalf of its utility default commodity customers and the
administration of its above-market purchased-power contracts. On
March 17, 2000, a proposed decision was issued in this proceeding
which does not adopt the proposed SDG&E electric commodity PBR
mechanism and does not allow reapplication until such time as all
three California IOUs have completed stranded cost recovery. An April
17, 2000 alternate decision also rejects the proposed commodity PBR
mechanism. A final decision on this issue is expected during the
second quarter of 2000.
Thus far, electric-industry restructuring has been confined to
generation. Transmission and distribution have remained subject to
traditional cost-of-service regulation. However, the CPUC is
exploring the possibility of opening up electric distribution to
competition. During 2000, the CPUC will consider whether any changes
should be made in electric distribution regulation. A CPUC staff
report on this issue is expected to be submitted to the CPUC in the
second quarter of 2000. SDG&E and its affiliate, Southern California
Gas Company, will actively participate in this effort and will argue
in support of competition intended to maximize benefits to customers
rather than to protect competitors.
ELECTRIC INDUSTRY RESTRUCTURING -- FEDERAL ENERGY REGULATORY
COMMISSION
On December 20, 1999 the Federal Energy Regulatory Commission (FERC)
issued "Order 2000". As described in the Company's 1999 Annual
Report, the rule discusses the formation of Regional Transmission
Organizations, grid management, transmission pricing reform and
related matters. The impact of Order 2000 on SDG&E depends on the
results of this process and other implementation issues.
Transmission Access Charge
On March 31, 2000 the ISO filed with the FERC a transmission access
charge (TAC) which separates the transmission systems in California
into two groups (high and low voltage) as the basis for allocating
the costs of maintaining the transmission systems among the various
transmission owners. SDG&E voted against the TAC and plans to file a
protest with the FERC during the second quarter of 2000. If the FERC
approves the TAC, Internal Revenue Service regulations may require
SDG&E to refinance the industrial development bonds that support its
transmission and distribution facilities. If this occurs, SDG&E's
estimated annual pretax cost of replacing the bonds with debt, the
interest on which is taxable to the holders, would be approximately
$13 million, most of which would be recovered in rates. A FERC
decision is not expected before 2001.
NATURAL GAS INDUSTRY RESTRUCTURING
The natural gas industry experienced an initial phase of
restructuring during the 1980s by deregulating natural gas sales to
noncore customers. On January 21, 1998, the CPUC released a staff
report initiating a project to assess the current market and
regulatory framework for California's natural gas industry. The
general goals of the plan are to consider reforms to the current
regulatory framework emphasizing market-oriented policies benefiting
California's natural gas consumers.
The CPUC has held hearings throughout the state and intends to give
the legislature a draft ruling before adopting a final market-
structure policy. The California utilities have been actively
participating in this effort and have argued in support of
competition intended to maximize benefits to customers rather than to
protect competitors. During this process various large customers on
the California utilities' systems are in the process of negotiating a
restructuring of intrastate transmission receipt points, balancing
policies and storage rights. The California utilities and other
interested parties are expected to file a settlement with the CPUC on
these matters in the second quarter of 2000 with evidentiary hearings
before the CPUC in June 2000. A CPUC decision is not expected until
late 2000.
In October 1999, the State of California enacted a law (AB 1421)
which requires that natural gas utilities provide "bundled basic gas
service" (including transmission, storage, distribution, purchasing,
revenue-cycle services and after-meter services) to all core
customers, unless the customer chooses to purchase natural gas from a
non-utility provider. The law prohibits the CPUC from unbundling
distribution-related natural gas services (including meter reading
and billing) and after-meter services (including leak investigation,
inspecting customer piping and appliances, pilot relighting and
carbon monoxide investigation) for most customers. The objective is
to preserve both customer safety and customer choice.
NUCLEAR INSURANCE
SDG&E and the co-owners of SONGS have purchased primary insurance of
$200 million, the maximum amount available, for public-liability
claims. An additional $9.3 billion of coverage is provided by
secondary financial protection required by the Nuclear Regulatory
Commission and provides for loss sharing among utilities owning
nuclear reactors if a costly accident occurs. SDG&E could be assessed
retrospective premium adjustments of up to $36 million in the event
of a nuclear incident involving any of the licensed, commercial
reactors in the United States, if the amount of the loss exceeds $200
million. In the event these coverages are insufficient, the Price-
Anderson Act provides for Congress to enact further revenue-raising
measures to pay claims, which could include an additional assessment
on all licensed reactor operators.
Insurance coverage is provided for up to $2.8 billion of property
damage and decontamination liability. Coverage is also provided for
the cost of replacement power, which includes indemnity payments for
up to three years and six weeks, after a waiting period of 12 weeks.
Coverage is provided primarily through mutual insurance companies
owned by utilities with nuclear facilities. If losses at any of the
nuclear facilities covered by the risk-sharing arrangements were to
exceed the accumulated funds available from these insurance programs,
SDG&E could be assessed retrospective premium adjustments of up to $5
million.
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. Unitary tax issues
and certain other liabilities established in connection with the
quasi-reorganization were favorably resolved in November 1999. Excess
reserves of $80 million resulting from the favorable resolution of
these issues were added to shareholders' equity at that time. Other
liabilities established in connection with discontinued operations
and the quasi-reorganization will be resolved in future years.
Management believes the provisions for these matters are adequate.
4. COMPREHENSIVE INCOME
Comprehensive income for the three-month periods ended March 31, 2000
and March 31, 1999 was $187 million and $99 million, respectively.
The difference between net income and comprehensive income for the
three-month period ended March 31, 2000 was due to foreign currency
translation adjustments of $39 million, minimum pension liability
adjustments and $34 million of unrealized gains on marketable
securities that are classified as available-for-sale (although they
cannot be sold until November 2000). For the three-month period ended
March 31, 1999 comprehensive income was equal to net income.
As was the case for the three-month period ended March 31, 2000, it
is likely that comprehensive income in future periods will differ
significantly from net income and will be more volatile than net
income.
5. SEGMENT INFORMATION
The Company is primarily an energy-services company and has three
separately managed reportable segments comprised of SDG&E, SoCalGas
and Sempra Energy Trading (SET). The two utilities operate in
essentially separate service territories under separate regulatory
frameworks and rate structures set by the CPUC. As described in the
notes to Consolidated Financial Statements in the Company's 1999
Annual Report, SDG&E provides electric and natural gas service to San
Diego and southern Orange counties. SoCalGas is a natural gas
distribution utility, serving customers throughout most of southern
California and part of central California. SET is based in Stamford,
Connecticut and is engaged in the wholesale trading and marketing of
natural gas, power and petroleum in the U.S. and in other countries.
The accounting policies of the segments are the same as those
described in the notes to Consolidated Financial Statements in the
Company's 1999 Annual Report, and segment performance is evaluated by
management based on reported net income. Intersegment transactions
generally are recorded the same as sales or transactions with third
parties. Utility transactions are based primarily on rates set by the
CPUC and FERC. There were no significant changes in segment assets
during the three-month period ended March 31, 2000. Information
concerning SoCalGas' own segments is provided in its Annual Report on
Form 10-K and Quarterly Reports on Form 10-Q.
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Three months ended
March 31,
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(Dollars in millions) 2000 1999
- --------------------------------------------------
Operating Revenues:
San Diego Gas & Electric $ 471 $ 461
Southern California Gas 698 607
Sempra Energy Trading 176 73
Intersegment revenues (11) (14)
Other 108 42
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Total $1,442 $1,169
- ---------------------------------------------------
Net Income:
San Diego Gas & Electric* $ 52 $ 53
Southern California Gas 50 47
Sempra Energy Trading 18 1
Other (7) (2)
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Total $ 113 $ 99
- ----------------------------------------------------
* after preferred dividends
6. SEMPRA ENERGY HOLDINGS
Sempra Energy Holdings (SEH), a wholly owned subsidiary of Sempra
Energy, has a $500 million credit agreement that expires in October
2000 and is available to support commercial paper. Borrowings under
the agreement would bear interest at various rates based on market
rates and Sempra Energy's credit rating. At March 31, 2000, SEH had
no borrowings or commercial paper obligations outstanding. Borrowings
and the commercial paper would be guaranteed by Sempra Energy.
On May 5, 1999, SEH filed a shelf registration for the issuance of
debt securities, guaranteed by Sempra Energy, to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933. At March 31, 2000, SEH had not issued any securities
under the registration statement.
Summarized financial information of SEH is provided below.
(Dollars in millions)
At March 31, At December 31,
2000 1999
------------- --------------
Current assets $2,604 $2,271
Non-current assets 1,386 1,317
Current liabilities 2,487 2,124
Non-current liabilities 493 502
Three Months Ended
March 31,
------------------
2000 1999
------------------
Operating revenues $283 $114
Operating expenses 272 129
Net income (loss) 14 (10)
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 1999 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" and "should" or similar expressions, or discussions
of strategy or of plans are intended to identify forward-looking
statements that involve risks, uncertainties and assumptions. Future
results may differ materially from those expressed in the forward-
looking statements.
These 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 and regulatory conditions and
developments; technological developments; capital market conditions;
inflation rates; interest rates; exchange rates; energy markets,
including the timing and extent of changes in commodity prices;
weather conditions; business, regulatory or 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.
MAJOR FINANCIAL TRANSACTIONS
See Note 2 of the notes to Consolidated Financial Statements
concerning common stock repurchases, a reduction in common dividends,
the acquisitions of Chilquinta Energia S.A. and Luz del Sur S.A., and
the agreement to terminate the KN Energy acquisition.
The effect of the stock repurchases, which did not affect the number
of common shares outstanding until March 9, 2000, was to increase
earnings per share by $0.01. The impact of the repurchases on future
periods is dependent on the amount of future net income and cannot be
predicted, and could even be negative if net income fell to the level
where the cost of the repurchases' financing had a greater impact on
earnings per share than did the reduction in the number of shares.
However, if the repurchase had taken place on January 1, 1999 and
been financed at the cost of the actual repurchase in 2000, the
impact would have been to increase 1999's earnings per share by
$0.12.
CAPITAL RESOURCES AND LIQUIDITY
The Company's California utility operations continue to be a major
source of liquidity. In addition, working capital requirements are
met through the issuance of short-term and long-term debt. Major
changes in cash flows not described elsewhere are described below.
Cash and cash equivalents at March 31, 2000 are available for
investment in utility plant, the retirement of debt, energy-related
domestic and international projects and other corporate purposes.
Approximately $514 million of the cash and cash equivalents at March
31, 2000 is that of the California utilities.
CASH FLOWS FROM OPERATING ACTIVITIES
The increase in cash flows from operations is primarily due to higher
income tax refunds and lower income tax payments in the three-month
period ended March 31, 2000, and increases in accounts payable in the
three-month period ended March 31, 2000 compared to decreases in
accounts payable in the three-month period ended March 31, 1999.
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures for property, plant and equipment by the
California utilities are estimated to be $530 million for the full
year 2000 and will be 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.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash used in financing activities increased primarily due to
greater short-term debt repayments in the three-month period ended
March 31, 2000 compared to the corresponding period in 1999.
As described in Note 2 of the notes to Consolidated Financial
Statements, the Company purchased 36.1 million shares of its
outstanding common stock at $20.00 per share. The Company issued $500
million of notes and $200 million of preferred securities to finance
substantially all of the purchase.
As described in Note 2 of the notes to Consolidated Financial
Statements, the Company announced a reduction of its quarterly
dividend per share to $0.25 from its previous level of $0.39
commencing with the dividend payable in the second quarter of 2000.
RESULTS OF OPERATIONS
The increase in net income and net income per share for the three-
month period ended March 31, 2000 is primarily due to higher earnings
at Sempra Energy Trading and Sempra Energy International.
UTILITY OPERATIONS
The tables below summarize the components of natural gas and electric
volumes and revenues for Sempra Energy by customer class for the three-
month periods ended March 31, 2000 and 1999.
Gas Sales, Transportation & Exchange
For the three months ended March 31
(Dollars in millions, volumes in billion cubic feet)
Gas Sales Transportation & Exchange Total
----------------------------------------------------------------------
Throughput Revenue Throughput Revenue Throughput Revenue
----------------------------------------------------------------------
2000:
Residential 102 $ 720 1 $ 6 103 $ 726
Commercial and industrial 31 194 98 84 129 278
Utility electric generation -- -- 35 11 35 11
Wholesale -- -- 9 7 9 7
---------------------------------------------------------------
133 $ 914 143 $108 276 1,022
Balancing accounts and other (201)
--------
Total $ 821
- --------------------------------------------------------------------------------------------
1999:
Residential 115 $ 724 1 $ 1 116 $ 725
Commercial and industrial 32 178 84 68 116 246
Utility electric generation* 12 5 16 7 28 12
Wholesale -- -- 8 2 8 2
---------------------------------------------------------------
159 $ 907 109 $ 78 268 985
Balancing accounts and other (287)
---------
Total $ 698
- --------------------------------------------------------------------------------------------
* The portion representing SDG&E's sales to its electric plants includes margin only.
Natural gas revenues increased 18 percent for the three-month period
ended March 31, 2000 compared to the same period in 1999. The increase
is primarily due to higher natural gas prices.
Electric Distribution & Transmission
(Dollars in millions, volumes in millions of Kwhrs)
For the three months ended March 31
2000 1999
------------------------------------------
Volumes Revenue Volumes Revenue
------------------------------------------
Residential 1,680 $ 169 1,685 $ 170
Commercial 1,427 120 1,518 125
Industrial 564 37 489 31
Direct access 879 28 657 21
Street and highway lighting 19 2 19 2
Off-system sales 104 3 26 -
------------------------------------------
4,673 359 4,394 349
Balancing and other (10) 11
------------------------------------------
Total 4,673 $ 349 4,394 $ 360
------------------------------------------
Cost of natural gas distributed increased 34 percent for the
three-month period ended March 31, 2000 compared to the
corresponding period in 1999. The increase was primarily due to
higher natural gas prices. Under the current regulatory
framework, changes in core-market natural gas prices do not
affect net income.
Depreciation and amortization expense decreased 6 percent for the
three-month period ended March 31, 2000, compared to the
corresponding period in 1999 due to the sale of SDG&E's fossil
power plants and combustion turbines.
Net income at SoCalGas increased slightly due to reduced
operating expenses. Net income at SDG&E decreased slightly due to
decreased rate base and authorized rate of return on equity, and
increased interest expense on rate reduction bond refunds (all of
which began in mid 1999 and which are related to industry
restructuring) offset by the elimination of a regulatory
balancing account at the end of 1999. With the elimination of the
balancing account, SDG&E's net income now fluctuates with changes
in natural gas demand, due to seasonal and other factors. During
the three-month period ended March 31, 2000, this resulted in a
$14 million increase in net income. This was based on a timing
difference that likely will reverse later in the year.
FACTORS INFLUENCING FUTURE PERFORMANCE
Base results of the Company in the near future will depend primarily
on the results of the California utilities. Earnings growth and
fluctuations will depend on changes in the utility industry and
activities at SEI, SET and other businesses. Because of the
ratemaking and regulatory process, electric- and natural gas-industry
restructuring, the changing energy marketplace and developments in
the businesses other than the California utilities, there are several
factors that will influence future financial performance. These
factors are summarized below.
Chilquinta Energia S.A. Acquisition
See Note 2 of the notes to Consolidated Financial Statements and
"International Operations" below for a discussion of the 1999
acquisitions of Chilquinta Energia S.A. and Luz del Sur S.A.
Industry Restructuring
See discussion of industry restructuring in Note 3 of the notes to
Consolidated Financial Statements.
Electric-Generation Assets and Electric Rates
Note 3 of the notes to Consolidated Financial Statements describes
regulatory and legislative actions that affect SDG&E's electric
rates.
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. Each utility's PBR mechanism
is scheduled to be updated at December 31, 2002, to reflect, among
other things, changes in costs and volumes.
Changes to the SoCalGas PBR mechanism could be adopted in a decision
to be issued in SoCalGas' 1999 Biennial Cost Allocation Proceeding
application, which is expected to become effective during the second
quarter of 2000. See additional discussion in "Biennial Cost
Allocation Proceeding" below.
Key elements of the mechanisms include an initial 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
or awards if service quality exceeds set standards. Specifically, the
key elements of the mechanisms include the following:
- -- Earnings up to 25 basis points in excess of the authorized rate of
return on rate base are retained 100 percent by shareholders.
Earnings that exceed the authorized rate of return on rate base by
greater than 25 basis points are shared between customers and
shareholders on a sliding scale that begins with 75 percent of the
additional earnings being given back to customers and declining to 0
percent as earned returns approach 300 basis points above authorized
amounts. There is no sharing if actual earnings fall below the
authorized rate of return. In 1999, SDG&E and SoCalGas were
authorized to earn 9.05 percent and 9.49 percent, respectively, on
rate base. For 2000, the authorized return is 8.75 percent for SDG&E
and 9.49 percent for SoCalGas.
- -- Base rates are indexed based on inflation less an estimated
productivity factor.
- -- SDG&E would be authorized to earn or be penalized up to a maximum
of $14.5 million annually as a result of its performance related to
employee safety, electric reliability, customer satisfaction, and
call-center responsiveness. The SoCalGas mechanism authorizes
penalties of up to $4 million annually, or more in certain, limited
situations.
- -- SoCalGas' mechanism allows for pricing flexibility for residential
and small-commercial customers, with any shortfalls in revenue being
borne by shareholders and with any increase in revenue shared between
shareholders and customers.
- -- Annual cost of capital proceedings are replaced by an automatic
adjustment mechanism. If changes in certain indices exceed
established tolerances, there would be an automatic adjustment of
rates for the change in the cost of capital according to a formula
which applies a percentage of the change to various capital
components.
Cost of Capital
For 2000, 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 1999, unless interest-rate changes are large
enough to trigger an automatic adjustment as discussed in the
Company's 1999 Annual Report. For SDG&E, electric-industry
restructuring has changed the method of calculating the utility's
annual cost of capital. In June 1999, the CPUC adopted a 10.6 percent
ROE and an 8.75 percent ROR for SDG&E's electric-distribution and
natural gas businesses. The electric-transmission cost of capital is
determined under a separate FERC proceeding.
Biennial Cost Allocation Proceeding (BCAP)
The BCAP determines how a utility's natural gas transportation costs
are allocated among various customer classes (residential,
commercial, industrial, etc.). In October 1998, the California
utilities filed 1999 BCAP applications requesting that new rates
become effective August 1, 1999, and remain in effect through
December 31, 2002. On April 20, 2000, the CPUC issued a decision
adopting overall decreases in natural gas revenues of $210 million
for SoCalGas and $37 million for SDG&E. The decrease has no effect on
net income.
Gas Cost Incentive Mechanism (GCIM)
This mechanism for evaluating SoCalGas' natural gas purchases
substantially replaced the previous process of reasonableness
reviews. In December 1998 the CPUC extended the GCIM program
indefinitely.
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. SoCalGas enters into natural gas futures
contracts in the open market on a limited basis to mitigate risk and
better manage natural gas costs.
In June 1999, SoCalGas filed its annual GCIM application with the
CPUC, requesting an award of $8 million for the annual period ended
March 31, 1999. A CPUC decision is expected during the second quarter
of 2000.
INTERNATIONAL OPERATIONS
As discussed in Note 2 of the notes to Consolidated Financial
Statements, Sempra Energy invested in two additional utility
companies in South America during 1999.
Results for international operations for the three-month period ended
March 31, 2000 were net income of $5 million compared to a loss of $6
million for the corresponding period in 1999. (The 1999 loss has been
restated to reflect the current configuration of this business unit,
which now includes two small, domestic natural gas utilities.) The
increase in net income is primarily due to income from Chilquinta
Energia S.A. and Luz del Sur S.A.
Accounting for international operations has resulted in foreign
currency translation adjustments, as discussed in Note 4 of the notes
to Consolidated Financial Statements.
OTHER OPERATIONS
Sempra Energy Trading Corp. (SET) is a leading natural-gas power
marketing firm headquartered in Stamford, Connecticut. For the three-
month period ended March 31, 2000, SET recorded net income of $18
million compared to $1 million for the same period in 1999. The
increase in income was primarily due to greater penetration of all
customer segments and increased volatility in energy prices,
resulting in higher volumes traded in the three-month period ended
March 31, 2000. In addition, new European crude oil and natural gas
trading contributed significantly to increased earnings.
Sempra Energy Financial (SEF) invests as a limited partner in
affordable-housing properties and alternative-fuel projects. SEF's
portfolio includes over 1,250 properties throughout the United
States. These investments are expected to provide income-tax benefits
(primarily from income-tax credits) over 10-year periods. For the
three-month period ended March 31, 2000, SEF recorded net income of
$8 million, compared to $7 million for the corresponding period in
1999. This is expected to decline as the various 10-year periods
expire, unless SEF makes sufficient new investments. SEF's future
investment policy is dependent on the Company's future income-tax
position.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 133
"Accounting for Derivative Instruments and Hedging Activities." As
amended, SFAS 133, which is effective for the company on January
1, 2001, 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. The effect of this standard 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 on
Form 10-K for 1999.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 4. SUBMISSION OF MATTERS TO VOTE
Sempra Energy's 14-member board of directors is divided into three
classes whose terms are staggered so that the term of one class
expires at each Annual Meeting of Shareholders. At the annual meeting
on May 2, 2000, the shareholders of Sempra Energy elected five
directors for a three-year term expiring in 2003. The name of each
nominee and the number of shares voted for or withheld were as
follows:
Nominees Votes For Votes Withheld
- -------------------------------------------------------------
Herbert L. Carter 170,743,338 7,911,048
Wilford D. Godbold, Jr. 170,954,807 7,699,579
William D. Jones 170,918,438 7,735,948
Ralph R. Ocampo 170,829,870 7,824,516
William G. Ouchi 171,028,489 7,625,897
A shareholder proposal regarding voting approval requirements,
recommending a simple majority vote rule on all issues that are
submitted to shareholder vote, was not approved. The vote on the
proposal was as follows:
In Favor 59,266,212
Opposed 83,954,401
Abstained 6,918,028
Broker Non-Vote 28,515,745
Additional information concerning the election of the board of
directors and the shareholder proposal is contained in Sempra
Energy's Notice of 2000 Annual Meeting of Shareholders and Proxy
Statement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 12 - Computation of ratios
12.1 Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends.
Exhibit 27 - Financial Data Schedules
27.1 Financial Data Schedule for the three-month period ended
March 31, 2000.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed after December 31, 1999:
Current report on Form 8-K filed January 28, 2000 and Amended Current
Report on Form 8-K/A filed February 8, 2000 reported earnings for the
year ended December 31, 1999 and announced a tender offer to purchase
common shares and a dividend reduction.
Current Report on Form 8-K filed February 18, 2000 and Current Report
on Form 8-K filed February 22, 2000 announced the sale of
$200,000,000 of 8.9% Cumulative Quarterly Income Preferred Securities
(Series A) and the execution of an underwriting agreement for the
issuance and sale of $500,000,000 aggregate principal amount 7.95%
Notes due 2010.
Current Report on Form 8-K filed March 9, 2000 reported the final
results of the tender offer to purchase common shares.
Current Report on Form 8-K filed March 30, 2000 reporting the analyst
conference discussion of strategic initiatives.
Current Report on Form 8-K filed April 27, 2000 reporting the
Company's press release of that date giving the financial results for
the three-month period ended March 31, 2000.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly cause this report to be signed on its behalf
by the undersigned thereunto duly authorized.
SEMPRA ENERGY
-------------------
(Registrant)
Date: May 3, 2000 By: /s/ F. H. Ault
----------------------------
F. H. Ault
Vice President and Controller
UT
SEMPRA ENERGY
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
(Dollars in millions)
For the three
Months Ended
March 31,
1995 1996 1997 1998 1999 2000
--------- --------- -------- -------- -------- --------
Fixed Charges and Preferred
Stock Dividends:
Interest $ 227 $ 205 $ 209 $ 210 $ 233 77
Interest Portion of
Annual Rentals 32 28 25 20 10 2
Preferred dividends
of subsidiaries (1) 50 37 31 18 16 5
--------- --------- -------- -------- -------- --------
Total Fixed Charges
and Preferred Stock
Dividends For Purpose
of Ratio $ 309 $ 270 $ 265 $ 248 $ 259 $ 84
========= ======== ======== ======== ======== ========
Earnings:
Pretax income from
continuing operations $ 665 $ 727 $ 733 $ 432 $ 573 181
Add:
Fixed charges
(from above) 309 270 265 248 259 84
Less: Fixed charges
capitalized 6 5 3 3 5 -
--------- -------- -------- -------- -------- --------
Fixed charges net of
capitalized charges 303 265 262 245 254 84
--------- -------- -------- -------- -------- --------
Total Earnings for
Purpose of Ratio $ 968 $ 992 $ 995 $ 677 $ 827 $ 265
========= ======== ======== ======== ======== ========
Ratio of Earnings
to Combined Fixed Charges
and Preferred Stock
Dividends 3.13 3.67 3.75 2.73 3.19 3.15
========= ======== ======== ======== ======== ========
(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.