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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 September 30, 1999
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Commission file number 1-1402
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SOUTHERN CALIFORNIA GAS COMPANY
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(Exact name of registrant as specified in its charter)
California 95-1240705
- --------------------------------------------- ------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
555 West Fifth Street, Los Angeles, California 90013-1011
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(Address of principal executive offices)
(Zip Code)
(213) 244-1200
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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
----- -----
Common stock outstanding: Wholly owned by Pacific Enterprises
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME (Unaudited)
(Dollars in millions)
Three Months Ended
September 30,
----------------
1999 1998
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Operating Revenues $562 $520
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Expenses:
Cost of natural gas distributed 188 162
Operating expenses 179 164
Depreciation 65 64
Income taxes 42 39
Franchise payments and other taxes 20 20
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Total 494 449
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Operating Income 68 71
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Other Income and (Deductions):
Regulatory interest - net (6) --
Allowance for equity funds used during construction -- --
Income taxes on non-operating income (1) (4)
Other - net 8 5
----- -----
Total 1 1
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Income before interest charges and preferred dividends 69 72
Interest Charges:
Long-term debt 19 19
Other 2 (1)
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Total 21 18
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Net Income 48 54
Preferred Dividend Requirements -- --
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Earnings Applicable to Common Shares $ 48 $ 54
===== ======
See Notes to Consolidated Financial Statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME (Unaudited)
(Dollars in millions)
Nine Months Ended
September 30,
----------------
1999 1998
------ ------
Operating Revenues $1,793 $1,762
------ ------
Expenses:
Cost of natural gas distributed 685 648
Operating expenses 524 575
Depreciation 194 190
Income taxes 123 95
Franchise payments and other taxes 65 73
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Total 1,591 1,581
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Operating Income 202 181
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Other Income and (Deductions):
Regulatory interest - net (12) (1)
Allowance for equity funds used during construction 2 1
Income taxes on non-operating income -- (3)
Other - net 11 1
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Total 1 (2)
------ ------
Income before interest charges and preferred dividends 203 179
Interest Charges:
Long-term debt 56 57
Other 5 2
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Total 61 59
------ ------
Net Income 142 120
Preferred Dividend Requirements 1 1
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Earnings Applicable to Common Shares $141 $119
====== ======
See notes to Consolidated Financial Statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
Balance at
--------------------------
September 30, December 31,
1999 1998
(Unaudited)
--------- -----------
ASSETS:
Utility plant - at original cost $6,152 $6,063
Less accumulated depreciation (3,290) (3,111)
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Utility plant - net 2,862 2,952
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Current Assets:
Cash and cash equivalents 110 11
Accounts receivable 285 453
Due from affiliates 167 --
Deferred income taxes 192 157
Natural gas in storage 80 49
Materials and supplies 12 14
Prepaid expenses 19 14
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Total current assets 865 698
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Regulatory and other assets 183 184
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Total $3,910 $3,834
====== ======
See notes to Consolidated Financial Statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
Balance at
-----------------------------
September 30, December 31,
1999 1998
(Unaudited)
------------ -----------
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock $ 835 $ 835
Retained earnings 388 525
------ ------
Total common equity 1,223 1,360
Preferred stock 22 22
Long-term debt 939 967
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Total capitalization 2,184 2,349
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Current Liabilities:
Accounts payable - trade 191 153
Accounts payable - affiliates -- 111
Accounts payable - other 231 221
Regulatory balancing accounts
overcollected - net 283 129
Other taxes payable 26 31
Accrued income taxes 48 30
Interest accrued 32 46
Dividends payable 78 --
Long-term debt due within one year 105 75
Other 80 75
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Total current liabilities 1,074 871
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Customer advances for construction 27 31
Deferred income taxes - net 372 323
Deferred investment tax credits 56 58
Deferred credits and other liabilities 197 202
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Total deferred credits 652 614
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Commitments and contingent liabilities (Note 3)
Total $3,910 $3,834
====== ======
See notes to Consolidated Financial Statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (Unaudited)
(Dollars in millions)
Nine Months Ended
September 30,
------------------
1999 1998
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Cash Flows from Operating Activities:
Net income $ 142 $120
Adjustments to reconcile net income to
Net cash provided by operating activities:
Depreciation 194 190
Deferred income taxes 47 12
Other - net (4) (17)
Net change in other working capital components 29 431
---- ----
Net cash provided by operating
activities 408 736
---- ----
Cash Flows from Investing Activities:
Capital expenditures (106) (84)
Other - net (2) (10)
---- ----
Net cash used in investing activities (108) (94)
---- ----
Cash Flows from Financing Activities:
Redemption of preferred stock -- (76)
Issuance of long-term debt -- 75
Payment on long-term debt -- (148)
Decrease in short-term debt -- (321)
Dividends paid (201) (166)
---- ----
Net cash used in financing
activities (201) (636)
---- ----
Increase in Cash and Cash Equivalents 99 6
Cash and Cash Equivalents, January 1 11 --
---- ----
Cash and Cash Equivalents, September 30 $110 $ 6
==== ====
Supplemental Disclosure of Cash Flow Information:
Interest payments (net of amount capitalized) $ 75 $ 61
==== ====
Income tax payments (net of refunds) $ 100 $204
==== ====
See notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. GENERAL
This Quarterly Report on Form 10-Q is that of the Southern California
Gas Company (SoCalGas or the Company), the sole subsidiary of Pacific
Enterprises (PE). PE is a wholly owned subsidiary of Sempra Energy, a
California-based Fortune 500 energy services company. The financial
statements herein are 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 Company's significant accounting policies, as well as those of
its subsidiaries, are described in the notes to Consolidated
Financial Statements in the Company's 1998 Annual Report. The same
accounting policies are followed for interim reporting purposes.
This Quarterly Report should be read in conjunction with the
Company's 1998 Annual Report and its Quarterly Reports on Form 10-Q
for the three-month periods ended March 31, and June 30, 1999.
In conformity with generally accepted accounting principles,
SoCalGas' accounting policies reflect the financial effects of rate
regulation authorized by the California Public Utilities Commission
(CPUC). SoCalGas applies the provisions of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" (SFAS No. 71). This statement requires cost-
based rate-regulated entities that meet certain criteria to reflect
the authorized recovery of costs due to regulatory decisions in their
financial statements. SoCalGas continues to meet the criteria of SFAS
No. 71 in accounting for its regulated operations.
2. BUSINESS COMBINATIONS
PE/Enova
On June 26, 1998 (pursuant to an October 1996 agreement) Enova
Corporation(Enova), the parent company of San Diego Gas & Electric
(SDG&E), and PE completed a business combination in which the two
companies became subsidiaries of a new company named Sempra Energy.
As a result of the combination, (i) each outstanding share of common
stock of Enova was converted into one share of common stock of Sempra
Energy, (ii) each outstanding share of common stock of PE was
converted into 1.5038 shares of common stock of Sempra Energy and
(iii) the preferred stock and/or preference stocks of SDG&E, PE and
SoCalGas remained outstanding. Additional information on the business
combination is discussed in the Company's 1998 Annual Report.
No expenses were incurred in connection with the above for the nine
months and three months ended September 30, 1999. During the nine-
month and three-month periods ended September 30, 1998, expenses of
$33 million, after tax, and $1 million, after tax, respectively, were
incurred.
KN Energy
On February 22, 1999, Sempra Energy and KN Energy, Inc. (KN Energy)
announced that their respective boards of directors had approved
Sempra Energy's acquisition of KN Energy, subject to approval by the
shareholders of both companies and by various federal and state
regulatory agencies. On June 21, 1999, Sempra Energy and KN Energy
announced that they had agreed to terminate the proposed acquisition.
3. MATERIAL CONTINGENCIES
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.
In August 1998, California enacted a law prohibiting the CPUC from
enacting any natural gas industry restructuring decision for core
(residential and small commercial) customers prior to January 1,
2000; the CPUC continues to study the issue. During the
implementation moratorium, the CPUC has been holding hearings
throughout the state and intends to give the legislature a draft
ruling before adopting a final market-structure policy. SDG&E and
SoCalGas 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.
In October 1999, the State of California enacted a law (AB 1421)
which requires that 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 gas from a non-utility
provider. The law prohibits the CPUC from unbundling distribution-
related gas services (metering, billing, etc.) and after-meter
services (leak investigation, inspecting customer piping and
appliances, pilot relighting, carbon monoxide investigation, etc.)
for most customers. The objective is to preserve both customer safety
and customer choice.
4. COMPREHENSIVE INCOME AND OTHER SHAREHOLDERS' EQUITY
In conformity with generally accepted accounting principles, the
Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income." Comprehensive income for the
three-month and nine-month periods ended September 30, 1999 and 1998
was equal to net income.
5. SEGMENT INFORMATION
The Company has two separately managed reportable segments: natural
gas distribution and natural gas transmission/storage. The accounting
policies of the segments are the same as those described in the notes
to Consolidated Financial Statements in the Company's 1998 Annual
Report, and segment performance is evaluated by management based on
reported operating income. Intersegment transactions are generally
recorded the same as sales or transactions with third parties.
Interest expense and income tax expense are not allocated to the
reportable segments. Interest revenue is included in other income on
the Statements of Consolidated Income herein. It is not allocated to
the reportable segments. There were no significant changes in segment
assets for the nine months ended September 30, 1999.
- ---------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
----------------------------------------
(Dollars in millions) 1999 1998 1999 1998
- ---------------------------------------------------------------------
Revenues:
Distribution $ 434 $ 412 $1,441 $1,439
Transmission and storage 133 131 365 349
Other (5) (23) (13) (26)
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Total $ 562 $ 520 $1,793 $1,762
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Segment Income:
Distribution $ 88 $ 100 $ 281 $ 244
Transmission and storage 28 33 57 55
Other (6) (23) (13) (24)
----------------------------------------
Total segment income 110 110 325 275
Interest expense (21) (18) (61) (59)
Income tax expense (42) (39) (123) (95)
Nonoperating expense 1 1 -- (2)
----------------------------------------
Net income $ 48 $ 54 $ 141 $ 119
----------------------------------------
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 1998 Annual Report.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking
statements within the meaning of the Private Securities Litigation
Reform Act of 1995. The words "estimates," "believes," "expects,"
"anticipates," "plans" and "intends," variations of such words, and
similar expressions are intended to identify forward-looking
statements that involve risks and uncertainties which could cause
actual results to differ materially from those anticipated.
These statements are necessarily based upon various assumptions
involving judgments with respect to the future 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; energy markets; weather conditions; business,
regulatory or legal decisions; the pace of deregulation of retail
natural gas and electricity industries; 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. Accordingly, while the Company believes that the
assumptions are reasonable, there can be no assurance that they will
approximate actual experience, or that the expectations will be
realized. Readers 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. Readers are cautioned not to put undue reliance on any
forward-looking statements. For those statements, the Company claims
the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995.
BUSINESS COMBINATIONS
See Note 2 of the notes to Consolidated Financial Statements
regarding the PE/Enova business combination and the agreement to
terminate the KN Energy acquisition.
CAPITAL RESOURCES AND LIQUIDITY
The Company's 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. These capital
resources are expected to remain available. Major changes in cash
flows not described elsewhere are described below. Cash and cash
equivalents at September 30, 1999 are available for investment in
utility plant, the retirement of debt, and other corporate purposes.
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flows from operations decreased primarily due to payments on
behalf of affiliated companies, and less overcollections on
regulatory balancing accounts compared to 1998.
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures for property, plant and equipment are estimated
to be $150 million for the full year 1999 and will be financed
primarily by internally generated funds. These expenditures will
largely represent investment in rate base. 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 decreased primarily due to
greater long-term and short-term debt repayments and the redemption
of SoCalGas' preferred stock in 1998, partially offset by greater
dividends paid to Sempra Energy in 1999.
On February 2, 1998, SoCalGas redeemed all outstanding shares of its
7-3/4% Series Preferred Stock for a total cost of $75 million,
including unpaid dividends.
RESULTS OF OPERATIONS
SoCalGas' net income decreased for the three-month period ended
September 30, 1999, compared to the same period in 1998, primarily
due to lower earnings in the noncore market. SoCalGas' net income for
the nine-month period ended September 30, 1999 increased primarily
due to lower business-combination costs in 1999.
UTILITY OPERATIONS
The table below summarizes the components of natural gas volumes
and revenues by customer class for the nine months ended
September 30, 1999 and 1998.
Gas Sales, Transportation & Exchange
(Dollars in millions, volumes in billion cubic feet)
Gas Sales Transportation & Exchange Total
--------------------------------------------------------------
Throughput Revenue Throughput Revenue Throughput Revenue
--------------------------------------------------------------
1999:
Residential 201 $1,319 2 $ 6 203 $1,325
Commercial and industrial 63 334 227 175 290 509
Utility electric generation -- -- 128 52 128 52
Wholesale -- -- 111 43 111 43
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264 $1,653 468 $276 732 $1,929
Balancing accounts and other (136)
--------
Total $1,793
- -----------------------------------------------------------------------------------------
1998:
Residential 189 $1,434 2 $ 9 191 $1,443
Commercial and industrial 58 342 232 196 290 538
Utility electric generation -- -- 120 58 120 58
Wholesale -- -- 119 48 119 48
--------------------------------------------------------------
247 $1,776 473 $311 720 2,087
Balancing accounts and other (325)
--------
Total $1,762
- -----------------------------------------------------------------------------------------
Natural gas revenues increased 8 percent and 2 percent for the
three-month and nine-month periods ended September 30, 1999,
compared to the same periods in 1998. The increase for the three-
month period is primarily due to higher sales to residential
customers. The increase for the nine-month period is primarily
due to lower overcollections in 1999, partially offset by a
decrease in residential and commercial and industrial revenues.
The decrease in residential and commercial and industrial
revenues is due to lower gas rates.
Cost of natural gas distributed increased 16 percent and 6
percent for the three-month and nine-month periods ended
September 30, 1999 compared to the same periods in 1998. The
increase for the three-month period is primarily due to higher
natural gas prices, partially offset by lower total sales. The
increase for the nine-month period is primarily due to higher
natural gas prices and increased sales in 1999. Under the current
regulatory framework, changes in revenue resulting from core-
market changes in volumes and the cost of natural gas do not
affect net income.
Utility operating expenses increased 9 percent for the three-
month period ended September 30, 1999 compared to the same period
in 1998. Operating expenses decreased 9 percent for the nine-
month period ended September 30, 1999 compared to the same period
in 1998. The year-to-date decrease is primarily due to lower
business-combination costs. The increase for the quarter is due
to the timing of certain occupancy expenses.
YEAR 2000 ISSUES
Most companies are affected by the inability of many automated
systems and applications to process the year 2000 and beyond. The
Year 2000 issues are the result of computer programs and other
automated processes using two digits to identify a year, rather than
four digits. Any of the Company's computer programs that include
date-sensitive software may recognize a date using "00" as
representing the year 1900, instead of the year 2000, or "01" as
1901, etc., which could lead to system malfunctions. The Year 2000
issue impacts both Information Technology ("IT") systems and also
non-IT systems, including systems incorporating embedded processors.
To address this problem, in 1996, both Pacific Enterprises and Enova
Corporation established company-wide Year 2000 programs. These
programs were consolidated into Sempra Energy's overall Year 2000
readiness effort. Sempra Energy established a central Year 2000
Program Office, which reports to Sempra Energy's Chief Information
Technology Officer and reports periodically to the audit committee of
the Board of Directors.
The Company's State of Readiness
Sempra Energy has identified all significant IT and non-IT systems
(including embedded systems) that might not be Year 2000 ready and
categorized them in the following areas: IT applications, computer
hardware and software infrastructure, telecommunications, embedded
systems, and third parties. The Company evaluated its exposure in all
of these areas. These systems and applications are being tracked and
measured through four key phases: inventory, assessment,
remediation/testing, and Year 2000 readiness. The Company has
prioritized so that, when possible, critical systems were assessed
and modified/replaced first. Critical systems are those applications
and systems, including embedded processor technology, which, if not
appropriately remediated, may have a significant impact on energy
delivery, revenue collection, or the safety of personnel, customers
or facilities. The Company's Year 2000 testing effort includes
functional testing of Year 2000 dates and validating that changes
have not altered existing functionality. The Company uses an
independent, internal review process to verify that the appropriate
testing has occurred.
The Company's Year 2000 project is currently on schedule, with
critical energy delivery systems for both SoCalGas and SDG&E Year
2000 Ready since June 30, 1999. The Company defines "Year 2000 Ready"
as suitable for continued use into the year 2000 with no significant
operational problems.
Sempra Energy's current schedule for Year 2000 testing and readiness
for non-critical systems is to be completed by the end of 1999. In
certain cases, this schedule is dependent upon the efforts of third
parties, such as suppliers (including energy producers) and
customers. Accordingly, delays by third parties may cause the
Company's schedule to change. In addition, a continued readiness
management process has been implemented to monitor and review the
progress of Year 2000 readiness of the Company's systems.
The Costs to Address the Company's Year 2000 Issues
Sempra Energy's budget for the Year 2000 program is $48 million, of
which $44 million has been spent. As the Company continues to assess
its systems and as the remediation and testing efforts progress, cost
estimates may change. The Company's Year 2000 readiness effort is
being funded entirely by operating cash flows.
The Risks of the Company's Year 2000 Issues
Based upon its current assessment and testing of the Year 2000 issue,
the Company believes the reasonably likely worst case Year 2000
scenarios to have the following impacts upon Sempra Energy and its
operations. With respect to the Company's ability to provide energy
to its domestic utility customers, the Company believes that the
scenario is for small, localized interruptions of utility service
which are restored in a time frame that is within normal service
levels. With respect to services that are essential to Sempra
Energy's operations, such as customer service, business operations,
supplies and emergency response capabilities, the scenario is for
minor disruptions of essential services with rapid recovery and all
essential information and processes ultimately recovered.
To assist in preparing for and mitigating these possible scenarios,
Sempra Energy is a member of several industry-wide efforts
established to deal with Year 2000 problems affecting embedded
systems and equipment used by the nation's natural gas and electric
power companies. Successful contingency drills were held with eight
west-coast natural gas pipeline companies on August 24, 1999 and with
the North American Electric Reliability Council (NERC) on September
9, 1999.
Under these efforts, participating utilities are working together to
assess specific vendors' system problems and to test plans. These
assessments are being shared by the industry as a whole to facilitate
Year 2000 problem solving.
A portion of this risk is due to the various Year 2000 Ready
schedules of major suppliers and customers. The Company continues to
contact its major suppliers and customers to survey their Year 2000
remediation programs. While risks related to the lack of Year 2000
readiness by third parties could materially and adversely affect the
Company's business, results of operations and financial condition,
the Company expects its Year 2000 readiness efforts to reduce
significantly the Company's level of uncertainty about the impact of
third party Year 2000 issues on both its IT systems and its non-IT
systems.
The Company's Contingency Plans
The Company's contingency plans for Year-2000-related interruptions
have been completed and were submitted to the CPUC on July 1, 1999.
These plans will continue to be revised and improved during the
remainder of 1999. The contingency plans include emergency backup and
recovery procedures, replacing electronic applications with manual
processes, and identification of alternate suppliers, along with
increasing inventory levels. In addition, the following key
contingency actions will be taken.
? Only critical system changes will be implemented during
December 1999 and January 2000.
? An hour-by-hour plan will be developed to cover key
contingency actions.
? On-site staffing will be in place at key operational and
administrative locations.
? Designated standby staff will be on-call with thirty-minute
availability.
? Emergency Operations Centers will be activated on December
31, 1999.
? Walk-through drills are being held during the fourth quarter
of 1999.
Due to the speculative and uncertain nature of contingency planning,
there can be no assurances that such plans actually will be
sufficient to reduce the risk of material impacts on the Company's
operations due to Year 2000 issues.
FACTORS INFLUENCING FUTURE PERFORMANCE
Because of the ratemaking and regulatory process, electric and
natural gas industry restructuring, and the changing energy
marketplace, there are several factors that will influence the
Company's future financial performance. These factors are discussed
in this section.
Industry Restructuring
See discussion of industry restructuring in Note 3 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 both SoCalGas and
SDG&E. 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 rate base in a market where a utility already has a
highly developed infrastructure.
SoCalGas' PBR is in effect through December 31, 2002; however, the
CPUC decision allows for the possibility that changes to the 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 first quarter of 2000. See
additional discussion in "Biennial Cost Allocation Proceeding" below.
Cost of Capital
Under PBR, annual Cost of Capital proceedings were replaced by an
automatic adjustment mechanism if changes in certain indices exceed
established tolerances. For 1999, 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), unchanged from 1998.
Annual Earnings Assessment Proceeding
An application was filed in May 1999 to recover shareholder rewards
for the Demand Side Management (DSM) programs and incentives earned
for the energy-efficiency and low-income programs totaling $5
million. The revenue requirement increase is proposed to become
effective on January 1, 2000. The DSM rewards and low-income program
incentives will be collected and recorded in earnings over ten years.
The energy-efficiency program incentives are recovered in one year.
Rewards and incentives for these programs are subject to CPUC
approval. A final decision is expected during the first quarter of
2000.
The CPUC has extended interim utility administration of energy-
efficiency and low-income programs through December 31, 2001.
Biennial Cost Allocation Proceeding (BCAP)
The BCAP determines how a utility's costs are allocated among various
customer classes (residential, commercial, industrial, etc.).
SoCalGas filed the 1999 BCAP application in October 1998, with
hearings held during the first half of 1999. At the conclusion of
hearings, a joint BCAP recommendation was reached proposing, among
other things, an overall natural gas rate reduction of $229 million
for SoCalGas. A CPUC decision is expected during the first quarter of
2000.
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 1998. "ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations" herein includes
discussion of various risk issues.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except for the matters referred to in the Company's 1998 Annual
Report or referred to elsewhere in this Quarterly Report on Form 10-Q
for the three months ended September 30, 1999, neither the Company
nor any of its affiliates is a party to, nor is its property the
subject of, any material pending legal proceedings other than routine
litigation incidental to its businesses.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedules
27.1 Financial Data Schedule for the nine months ended
September 30, 1999.
(b) Reports on Form 8-K
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
SOUTHERN CALIFORNIA GAS COMPANY
-------------------------------
(Registrant)
By: /s/ Warren Mitchell
Date: November 12, 1999 ---------------------------
Warren Mitchell
Chairman and President
UT