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UNITED STATES
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
March 31, 2004
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 _________________
Commission Name of Registrant, State of IRS Employer
File Incorporation, Address and Identification
Number Telephone Number Number
- ---------- ---------------------------------- --------------
1-40 Pacific Enterprises 94-0743670
(A California Corporation)
101 Ash Street
San Diego, California 92101
(619) 696-2020
1-1402 Southern California Gas Company 95-1240705
(A California Corporation)
555 West Fifth Street
Los Angeles, California 90013
(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 by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
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
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report 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," "could," "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 and national economic,
competitive, political, legislative and regulatory conditions and
developments; actions by the California Public Utilities Commission,
the California Legislature, and the Federal Energy Regulatory
Commission; capital market conditions, inflation rates, interest rates
and exchange rates; energy and trading markets, including the timing
and extent of changes in commodity prices; weather conditions and
conservation efforts; war and terrorist attacks; business, regulatory
and legal decisions; the status 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 report and other reports filed by the
companies from time to time with the Securities and Exchange
Commission.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PACIFIC ENTERPRISES AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(Dollars in millions)
Quarters ended
March 31,
------------------
2004 2003
------- -------
Operating revenues $ 1,148 $ 1,008
------- -------
Operating expenses
Cost of natural gas 721 600
Other operating expenses 210 197
Depreciation 74 69
Income taxes 44 45
Franchise fees and other taxes 33 29
------- -------
Total operating expenses 1,082 940
------- -------
Operating income 66 68
------- -------
Other income and (deductions)
Interest income 8 2
Regulatory interest - net (3) --
Allowance for equity funds used
during construction 1 2
Income taxes on non-operating income -- (1)
Other - net (1) 3
------- -------
Total 5 6
------- -------
Interest charges
Long-term debt 9 12
Other 3 5
Allowance for borrowed funds used
during construction -- (1)
------- -------
Total 12 16
------- -------
Net income 59 58
Preferred dividend requirements 1 1
------- -------
Earnings applicable to common shares $ 58 $ 57
======= =======
See notes to Consolidated Financial Statements.
PACIFIC ENTERPRISES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
-----------------------------
March 31, December 31,
2004 2003
------------- -------------
ASSETS
Utility plant - at original cost $ 7,063 $ 7,008
Accumulated depreciation (2,784) (2,739)
------- -------
Utility plant - net 4,279 4,269
------- -------
Current assets:
Cash and cash equivalents 44 32
Accounts receivable - trade 422 509
Accounts receivable - other 14 36
Interest receivable 31 30
Due from affiliates 248 76
Income taxes receivable 82 103
Regulatory assets arising from fixed-price
contracts and other derivatives 90 85
Other regulatory assets 16 8
Inventories 19 74
Other 9 12
------- -------
Total current assets 975 965
------- -------
Other assets:
Due from affiliates 455 356
Regulatory assets arising from fixed-price
contracts and other derivatives 122 148
Sundry 142 150
------- -------
Total other assets 719 654
------- -------
Total assets $ 5,973 $ 5,888
======= =======
See notes to Consolidated Financial Statements.
PACIFIC ENTERPRISES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
-----------------------------
March 31, December 31,
2004 2003
------------- -------------
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock (600 million shares authorized;
84 million shares outstanding) $ 1,367 $ 1,367
Retained earnings 311 253
Accumulated other comprehensive income (loss) (3) (3)
------- -------
Total common equity 1,675 1,617
Preferred stock 80 80
------- -------
Total shareholders' equity 1,755 1,697
Long-term debt 769 762
------- -------
Total capitalization 2,524 2,459
------- -------
Current liabilities:
Accounts payable - trade 195 227
Accounts payable - other 42 44
Due to affiliates 110 121
Interest payable 23 18
Deferred income taxes 35 24
Regulatory balancing accounts - net 194 86
Fixed-price contracts and other derivatives 92 86
Current portion of long-term debt -- 175
Customer deposits 58 43
Other 401 262
------- -------
Total current liabilities 1,150 1,086
------- -------
Deferred credits and other liabilities:
Customer advances for construction 41 40
Postretirement benefits other than pensions 62 72
Deferred income taxes 166 154
Deferred investment tax credits 43 44
Regulatory liabilities arising from cost of
removal obligations 1,411 1,392
Other regulatory liabilities 108 108
Fixed-price contracts and other derivatives 122 148
Preferred stock of subsidiary 20 20
Deferred credits and other 326 365
------- -------
Total deferred credits and other liabilities 2,299 2,343
------- -------
Contingencies and commitments (Note 5)
Total liabilities and shareholders' equity $ 5,973 $ 5,888
======= =======
See notes to Consolidated Financial Statements.
PACIFIC ENTERPRISES AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Dollars in millions)
Quarters ended
March 31,
------------------
2004 2003
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 59 $ 58
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 74 69
Deferred income taxes and investment tax credits 24 (7)
Net changes in other working capital components 415 323
Changes in other liabilities (39) (2)
------- -------
Net cash provided by operating activities 533 441
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (62) (58)
Loans to/from affiliates - net (283) (195)
------- -------
Net cash used in investing activities (345) (253)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Preferred dividends paid (1) (1)
Payments on long-term debt (175) (70)
------- -------
Net cash used in financing activities (176) (71)
------- -------
Increase in cash and cash equivalents 12 117
Cash and cash equivalents, January 1 32 22
------- -------
Cash and cash equivalents, March 31 $ 44 $ 139
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest payments, net of amounts capitalized $ 5 $ 5
======= =======
Income tax refunds, net of payments $ -- $ 34
======= =======
See notes to Consolidated Financial Statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(Dollars in millions)
Quarters ended
March 31,
------------------
2004 2003
------- -------
Operating revenues $ 1,148 $ 1,008
------- -------
Operating expenses
Cost of natural gas 721 600
Other operating expenses 209 195
Depreciation 74 69
Income taxes 43 45
Franchise fees and other taxes 33 29
------- -------
Total operating expenses 1,080 938
------- -------
Operating income 68 70
------- -------
Other income and (deductions)
Interest income 1 1
Regulatory interest - net (3) --
Allowance for equity funds used
during construction 1 2
Income taxes on non-operating income -- (1)
Other - net (1) (1)
------- -------
Total (2) 1
------- -------
Interest charges
Long-term debt 9 12
Other 1 2
Allowance for borrowed funds used
during construction -- (1)
------- -------
Total 10 13
------- -------
Net income/earnings applicable to common shares $ 56 $ 58
======= =======
See notes to Consolidated Financial Statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
-----------------------------
March 31, December 31,
2004 2003
------------- -------------
ASSETS
Utility plant - at original cost $ 7,063 $ 7,008
Accumulated depreciation (2,784) (2,739)
------- -------
Utility plant - net 4,279 4,269
------- -------
Current assets:
Cash and cash equivalents 44 32
Accounts receivable - trade 422 509
Accounts receivable - other 11 35
Interest receivable 31 30
Due from affiliates 261 22
Income taxes receivable 37 57
Regulatory assets arising from fixed-priced contracts
and other derivatives 90 85
Other regulatory assets 16 8
Inventories 19 74
Other 7 9
------- -------
Total current assets 938 861
------- -------
Other assets:
Regulatory assets arising from fixed-priced contracts
and other derivatives 122 148
Sundry 119 127
------- -------
Total other assets 241 275
------- -------
Total assets $ 5,458 $ 5,405
======= =======
See notes to Consolidated Financial Statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
-----------------------------
March 31, December 31,
2004 2003
------------- -------------
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock (100 million shares authorized;
91 million shares outstanding) $ 866 $ 866
Retained earnings 498 491
Accumulated other comprehensive income (loss) (3) (3)
------- -------
Total common equity 1,361 1,354
Preferred stock 22 22
------- -------
Total shareholders' equity 1,383 1,376
Long-term debt 769 762
------- -------
Total capitalization 2,152 2,138
------- -------
Current liabilities:
Accounts payable - trade 195 227
Accounts payable - other 42 44
Due to affiliates 45 55
Interest payable 23 18
Deferred income taxes 27 15
Regulatory balancing accounts - net 194 86
Fixed-price contracts and other derivatives 92 86
Current portion of long-term debt -- 175
Customer deposits 58 43
Other 399 262
------- -------
Total current liabilities 1,075 1,011
------- -------
Deferred credits and other liabilities:
Customer advances for construction 41 40
Postretirement benefits other than pensions 62 --
Deferred income taxes 181 168
Deferred investment tax credits 43 44
Regulatory liabilities arising from cost
of removal obligations 1,411 1,392
Other regulatory liabilities 108 180
Fixed-price contracts and other derivatives 122 148
Deferred credits and other 263 284
------- -------
Total deferred credits and other liabilities 2,231 2,256
------- -------
Contingencies and commitments (Note 5)
Total liabilities and shareholders' equity $ 5,458 $ 5,405
======= =======
See notes to Consolidated Financial Statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Dollars in millions)
Quarters ended
March 31,
-------------------
2004 2003
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 56 $ 58
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 74 69
Deferred income taxes and investment tax credits 24 (6)
Net changes in other working capital components 415 324
Changes in other liabilities (19) (1)
------- -------
Net cash provided by operating activities 550 444
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (62) (58)
Loan to/from affiliate - net (251) (199)
------- -------
Net cash used in investing activities (313) (257)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (50) --
Payments on long-term debt (175) (70)
------- -------
Net cash used in financing activities (225) (70)
------- -------
Increase in cash and cash equivalents 12 117
Cash and cash equivalents, January 1 32 22
------- -------
Cash and cash equivalents, March 31 $ 44 $ 139
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest payments, net of amounts capitalized $ 4 $ 4
======= =======
Income tax refunds, net of payments $ -- $ 34
======= =======
See notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. GENERAL
This Quarterly Report on Form 10-Q is that of Pacific Enterprises (PE)
and of Southern California Gas Company (SoCalGas)(collectively referred
to as the company or the companies). PE's common stock is wholly owned
by Sempra Energy, a California-based Fortune 500 holding company, and
PE owns all of the common stock of SoCalGas. 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, which comprise
less than one percent of SoCalGas' consolidated financial position and
results of operations.
Sempra Energy also indirectly owns all of the common stock of San Diego
Gas & Electric (SDG&E). SoCalGas and SDG&E are collectively referred to
herein as "the California Utilities."
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 December 31, 2003 income tax liabilities have been reclassified
from Deferred Income Taxes to current Income Taxes Payable and to
Deferred Credits and Other Liabilities to conform to the current
presentation of these items.
Information in this Quarterly Report is unaudited and should be read in
conjunction with the Annual Report on Form 10-K for the year ended
December 31, 2003 (Annual Report).
The companies' significant accounting policies are described in Note 1
of the notes to Consolidated Financial Statements in the Annual Report.
The same accounting policies are followed for interim reporting
purposes.
For the quarters ended March 31, 2004 and 2003, comprehensive income
was equal to earnings applicable to common shares.
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."
NOTE 2. NEW ACCOUNTING STANDARDS
Stock-Based Compensation: On March 31, 2004, the Financial Accounting
Standards Board (FASB) issued a proposed Exposure Draft to amend SFAS
123, "Accounting for Stock-Based Compensation" and SFAS 95, "Statement
of Cash Flows" which provide the current guidance on accounting for
stock options and related items. It proposes that the new rules would
be effective for 2005. The proposed statement would eliminate the
choice of accounting for share-based compensation transactions using
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and instead generally would require that such
transactions be accounted for using a fair-value-based method. The
Draft would prohibit retroactive application and require that expense
be recognized only for those options that actually vest.
SFAS 132 (revised 2003), "Employers Disclosures about Pensions and
Other Postretirement Benefits": This statement revises employers'
disclosures about pension plans and other postretirement benefit plans.
It requires disclosures beyond those in the original SFAS 132 about the
assets, obligations, cash flows and net periodic benefit cost of
defined benefit pension plans and other defined postretirement plans.
In addition, the revised statement requires interim-period disclosures
regarding the amount of net periodic benefit cost recognized and the
total amount of the employers' contributions paid and expected to be
paid during the current fiscal year. It does not change the measurement
or recognition of those plans.
The following table provides the components of benefit costs for the
quarters ended March 31:
Other
Pension Benefits Postretirement Benefits
--------------------------------------------
(Dollars in millions) 2004 2003 2004 2003
- -------------------------------------------------------------------------------
Service cost $ 8 $ 8 $ 5 $ 4
Interest cost 23 22 12 11
Expected return on assets (24) (27) (8) (8)
Amortization of:
Transition obligation -- -- 2 2
Prior service cost 1 2 -- --
Actuarial loss 1 -- 3 1
Regulatory adjustment (8) (5) (2) 1
--------------------------------------------
Total net periodic benefit cost $ 1 $ -- $ 12 $ 11
- -------------------------------------------------------------------------------
Note 5 of the notes to Consolidated Financial Statements in the Annual
Report discusses the company's expected contribution to its pension
plan and other postretirement benefit plans in 2004. For the quarter
ended March 31, 2004, $12 million of contributions have been made to
its other postretirement benefit plans. There was no contribution made
to its pension plan for the quarter ended March 31, 2004.
SFAS 143, "Accounting for Asset Retirement Obligations": SFAS 143
requires entities to record the fair value of liabilities for legal
obligations related to asset retirements in the period in which they
are incurred. It also requires the reclassification of estimated
removal costs, which have historically been recorded in accumulated
depreciation, to a regulatory liability. At March 31, 2004 and December
31, 2003, the estimated removal costs recorded as a regulatory
liability were $1.4 billion at both dates.
The change in the asset retirement obligations for the quarter ended
March 31, 2004 is as follows (dollars in millions):
Balance as of January 1, 2004 $ 11
Accretion expense --
------
Balance as of March 31, 2004 $ 11*
======
* The current portion of the obligation is included in Other Current
Liabilities on the Consolidated Balance Sheets.
SFAS 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities": Effective July 1, 2003, SFAS 149 amended and
clarified accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS 133. Under SFAS 149 natural gas forward contracts
that are subject to unplanned netting generally do not qualify for the
normal purchases and normal sales exception. ("Netting" refers to
contract settlement by paying or receiving the monetary difference
between the contract price and the market price at the date on which
physical delivery would have occurred.) Implementation of SFAS 149 did
not have a material impact on reported net income. Additional
information on derivative instruments is provided in Note 3.
Emerging Issues Task Force (EITF) 03-11, "Reporting Realized Gains and
Losses on Derivative Instruments that are Subject to FASB Statement No.
133, Accounting for Derivative Instruments and Hedging Activities and
Not 'Held for Trading Purposes' as Defined in EITF Issue No. 02-3,
Issues Involved in Accounting for Derivative Contracts Held for Trading
Purposes and Contracts Involved in Energy Trading and Risk Management
Activities": During 2003, the EITF reached a consensus that determining
whether realized gains and losses on physically settled derivative
contracts not held for trading purposes should be reported in the
income statement on a gross or net basis is a matter of judgment that
depends on the relevant facts and circumstances. Adoption of EITF 03-11
in 2003 did not have and is not expected to have a significant impact
on the company's financial statements.
FASB Staff Position (FSP) 106-1, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003": Issued January 12, 2004, FSP 106-1 permits
a sponsor of a postretirement health care plan that provides a
prescription drug benefit to make a one-time election to defer
accounting for the effects of the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act). The company has
elected to defer the effects of the Act as provided by FSP 106-1 until
authoritative guidance on the accounting for the federal subsidy is
issued. Any measure of the accumulated postretirement benefit
obligation or net periodic postretirement benefit cost in the financial
statements or the accompanying notes does not reflect the impact of the
Act on the plans. At this time, specific authoritative guidance on the
accounting for the federal subsidy provided by the Act is pending and
that guidance could require the company to change previously reported
information.
NOTE 3. FINANCIAL INSTRUMENTS
As described in Note 7 of the notes to Consolidated Financial
Statements in the Annual Report, the company follows the guidance of
SFAS 133 as amended by SFAS 138 and 149 (collectively SFAS 133) to
account for its derivative instruments and hedging activities.
Derivative instruments and related hedges are recognized as either
assets or liabilities on the balance sheet, measured at fair value.
SFAS 133 provides for hedge accounting treatment when certain criteria
are met. For derivative instruments designated as fair value hedges,
the gain or loss is recognized in earnings in the period of change
together with the offsetting gain or loss on the hedged item
attributable to the risk being hedged. For derivative instruments
designated as cash flow hedges, the effective portion of the derivative
gain or loss is included in other comprehensive income, but not
reflected in the Statements of Consolidated Income until the
corresponding hedged transaction is settled. The ineffective portion is
reported in earnings immediately.
The company utilizes natural gas derivatives to manage commodity price
risk associated with servicing its load requirements. These contracts
allow the company to predict with greater certainty the effective
prices to be received by the company and the prices to be charged to
its customers. The company also periodically enters into interest-rate
swap agreements to moderate exposure to interest-rate changes and to
lower the overall cost of borrowing. The use of derivative financial
instruments is subject to certain limitations imposed by company policy
and regulatory requirements. The company classifies its forward
contracts as follows:
Contracts that meet the definition of normal purchase and sales
generally are long-term contracts that are settled by physical delivery
and, therefore, are eligible for the normal purchases and sales
exception of SFAS 133. The contracts are accounted for under accrual
accounting and recorded in Revenues or Cost of Natural Gas on the
Statements of Consolidated Income when physical delivery occurs. Due to
the adoption of SFAS 149, the company has determined that its natural
gas contracts entered into after June 30, 2003 generally do not qualify
for the normal purchases and sales exception. However, the effect of
this is minimal.
Fixed-priced Contracts and Other Derivatives
Fixed-priced Contracts and Other Derivatives on the Consolidated
Balance Sheets primarily reflect SoCalGas' unrealized gains and losses
related to long-term delivery contracts for natural gas transportation.
SoCalGas has established offsetting regulatory assets and liabilities
to the extent that these gains and losses are recoverable through
future rates. If gains and losses are not recoverable or payable
through future rates, the company applies hedge accounting if certain
criteria are met. When a contract no longer meets the requirements of
SFAS 133, the unrealized gains and losses and the related regulatory
asset or liability will be amortized over the remaining contract life.
The changes in Fixed-price Contracts and Other Derivatives on the
Consolidated Balance Sheets for the quarter ended March 31, 2004 were
primarily due to physical deliveries under long-term natural gas
transportation contracts.
The transactions associated with fixed-price contracts and other
derivatives had no material impact to the Statements of Consolidated
Income for the quarters ended March 31, 2004 and 2003.
NOTE 4. REGULATORY MATTERS
NATURAL GAS INDUSTRY RESTRUCTURING
As discussed in the Annual Report, in December 2001 the CPUC issued a
decision related to natural gas industry restructuring (GIR), with
implementation anticipated during 2002. On April 1, 2004, after many
delays and changes, the CPUC issued a decision that adopts tariffs to
implement the 2001 decision. However, by that same decision, the CPUC
stayed implementation of the GIR tariffs until it issues a decision in
Phase I of the Natural Gas Market Order Instituting Ratemaking (OIR)
(see below). At that time, the CPUC will reconcile the GIR market
structure with whatever structure results from the Phase I decision of
the Gas Market OIR. The stayed decision, if implemented, would unbundle
the costs of SoCalGas' backbone transmission system from rates and
result in revising noncore balancing account treatment to exclude the
balancing of SoCalGas' backbone transmission costs and place SoCalGas
at risk for throughput. The decision would create firm tradable rights
for the transmission system. Other noncore costs/revenues would
continue to be fully balanced until the decision in the next Biennial
Cost Allocation Proceeding (BCAP) (see below).
NATURAL GAS MARKET OIR
The Natural Gas Market OIR was approved on January 22, 2004, and will
be addressed in two concurrent phases. The schedule calls for a Phase I
decision by summer 2004 and a Phase II decision by the end of 2004.
Further discussion of Phase I and Phase II is included in the Annual
Report. The focus of the Gas OIR is 2006 to 2016. Since GIR (see above)
would end in August 2006 and there is overlap between GIR and the Gas
OIR issues, a number of parties (including SoCalGas) advised the CPUC
not to implement GIR.
The California Utilities have made comprehensive filings in the Gas OIR
outlining a proposed market structure that will help create access to
new natural gas supply sources (such as LNG) for California. In the
Phase I filing, SoCalGas and SDG&E proposed a framework to provide firm
tradable access rights for intrastate natural gas transportation;
provide SoCalGas with continued balancing account protection for
intrastate transmission and distribution revenues, thereby eliminating
throughput risk; and integrate the transmission systems of SoCalGas and
SDG&E so as to have common rates and rules. The California Utilities
have proposed that the investments necessary to access new sources of
supply be included in rate base. The estimated costs of these system
enhancements to access as much as 2 billion cubic feet per day of new
supplies are $200 million.
In addition, the California Utilities have filed a recommended
methodology and framework to be used by the CPUC for granting pre-
approval of new interstate transportation agreements. They expect to
receive a CPUC decision approving a methodology during the third
quarter of 2004.
COST OF SERVICE FILINGS
In 2002, the California Utilities filed Cost Of Service applications
with the CPUC, seeking rate increases reflecting forecasts of 2004
capital and operating costs, as further discussed in the Annual Report.
SoCalGas is requesting revenue increases of $45 million. On December
19, 2003, settlements were filed with the CPUC for SoCalGas that, if
approved, would resolve most of the cost of service issues. A CPUC
decision is likely in the second quarter of 2004. The SoCalGas
settlement would reduce rate revenues by $33 million from 2003 rate
revenues. A CPUC order has provided that the new rates will be
retroactive to January 1, 2004. Beginning in the first quarter of 2004,
SoCalGas is recognizing revenues consistent with the proposed
settlements.
SoCalGas has also filed for continuation through 2004 of existing
performance-based regulation (PBR) mechanisms for service quality and
safety that would otherwise expire at the end of 2003. In January 2004,
the CPUC issued a decision that extended 2003 service and safety
targets through 2004, but deferred action on applying any rewards or
penalties for performance relative to these targets to a decision to be
issued later in 2004 in a second phase of these applications. On April
2, 2004, the CPUC's Office of Ratepayers Advocates (ORA) filed its
report recommending that a Consumer Price Index with no productivity
factor or customer growth factor be used to change the California
Utilities' base margin, as opposed to the proposed Margin per Customer
proposal of the California Utilities, and that the pending decision be
in effect for five years. The ORA also proposed the possibility of
performance penalties, without the possibility of performance awards.
Hearings are scheduled for June 2004 with a final decision expected by
November 2004.
PERFORMANCE-BASED REGULATION
To promote efficient operations and improved productivity and to move
away from reasonableness reviews and disallowances, the CPUC adopted
PBR for SoCalGas effective in 1997. As further described in the Annual
Report, under PBR, regulators require future income potential to be
tied to achieving or exceeding specific performance and productivity
goals, rather than relying solely on expanding utility plant to
increase earnings. PBR, demand-side management (DSM) and Gas Cost
Incentive Mechanism (GCIM) rewards are not included in the company's
earnings before CPUC approval is received.
The only incentive reward approved during the first quarter of 2004 was
$6.3 million related to SoCalGas' Year 9 GCIM, which was approved on
February 26, 2004. This reward is subject to refund based on the
outcome of the Border Price Investigation described below. The
cumulative amount of rewards so subject is $54.5 million at March 31,
2004. At March 31, 2004, the only performance incentives pending CPUC
approval and, therefore, not included in the company's earnings were
$9.8 million of DSM/Energy Efficiency rewards and $0.5 million of 2003
safety awards.
COST OF CAPITAL
Effective January 1, 2003, SoCalGas' authorized rate of return on
common equity (ROE) is 10.82 percent and its return on ratebase is 8.68
percent. As discussed in the Annual Report, these rates will continue
to be effective until market interest-rate changes are large enough to
trigger an automatic adjustment or until the CPUC orders a periodic
review. The automatic adjustment occurs when the 12-month trailing
average of 30-year Treasury bond rates and the Global Insight forecast
of the 30-year Treasury bond rate 12 months ahead vary by greater than
150 basis points from the benchmark, which is currently 5.38 percent.
The 12-month trailing average was 4.93 percent at March 31, 2004. It
would have to exceed 6.88 percent or fall below 3.88 percent for an
automatic adjustment to occur.
BIENNIAL COST ALLOCATION PROCEEDING
The BCAP determines the allocation of authorized costs between
customer classes for natural gas transportation service provided by
the company and adjusts rates to reflect variances in customer demand
as compared to the forecasts previously used in establishing
transportation rates. SoCalGas filed with the CPUC its 2005 BCAP
application in September 2003, requesting updated transportation rates
effective January 1, 2005. In November 2003, an Assigned Commissioner
Ruling delayed the BCAP applications until a decision is issued in the
GIR implementation proceeding. As a result of the April 1, 2004
decision on GIR implementation as described in "Natural Gas Industry
Restructuring," the ALJ in the 2005 BCAP issued a ruling suspending
the BCAP schedule pending CPUC dismissal of the applications. It is
not known at this time when the California Utilities would be required
to file new BCAP applications. As a result of the deferrals and the
forecasted significant decline in noncore gas throughput on SoCalGas'
system, in December 2002 the CPUC issued a decision approving 100
percent balancing account protection for SoCalGas' risk on local
transmission and distribution revenues from January 1, 2003 until the
CPUC issues its next BCAP decision. SoCalGas is seeking to continue
this balancing account protection in the Gas OIR proceeding.
BORDER PRICE INVESTIGATION
In November 2002, the CPUC instituted an investigation into the
Southern California natural gas market and the price of natural gas
delivered to the California-Arizona border between March 2000 and May
2001. If the investigation determines that the conduct of any party to
the investigation, including the California Utilities, contributed to
the natural gas price spikes, the CPUC may modify the party's natural
gas procurement incentive mechanism, reduce the amount of any
shareholder award for the period involved, and/or order the party to
issue a refund to ratepayers. Hearings are scheduled to begin on June
14, 2004. At a later date, the CPUC will hold a second round of
hearings to consider whether Sempra Energy or any of its non-utility
subsidiaries contributed to the price spikes. Decisions are expected
by late 2004. The company believes that the CPUC will find that the
California Utilities acted in the best interests of its core customers
and that none of the Sempra Energy companies was responsible for the
price spikes. The ORA recently filed testimony supporting the GCIM and
the actions of SoCalGas during this period.
CPUC INVESTIGATION OF COMPLIANCE WITH AFFILIATE RULES
In February 2003, the CPUC opened an investigation of the business
activities of SDG&E, SoCalGas and Sempra Energy to determine if they
have complied with statutes and CPUC decisions in the management,
oversight and operations of their companies. In September 2003, the
CPUC suspended the procedural schedule until it completes an
independent audit to evaluate energy-related holding company systems
and affiliate activities undertaken by Sempra Energy within the service
territories of SDG&E and SoCalGas. The audit, covering years 1997
through 2003, is expected to be completed by March 2005. The scope of
the audit will be broader than the annual affiliate audit. In
accordance with existing CPUC requirements, the California Utilities'
transactions with other Sempra Energy affiliates have been audited by
an independent auditing firm each year, with results reported to the
CPUC, and there have been no material adverse findings in those audits.
CPUC INVESTIGATION OF ENERGY-UTILITY HOLDING COMPANIES
The CPUC has initiated an investigation into the relationship between
California's investor-owned utilities (IOUs) and their parent holding
companies. The CPUC broadly determined that it would require the
holding company to provide cash to a utility subsidiary to cover its
operating expenses and working capital to the extent they are not
adequately funded through retail rates. This would be in addition to
the requirement of holding companies to cover their utility
subsidiaries' capital requirements, as the IOUs previously acknowledged
in connection with the holding companies' formations. In January 2002
the CPUC ruled on jurisdictional issues, deciding that the CPUC had
jurisdiction to create the holding company system and, therefore,
retains jurisdiction to enforce conditions to which the holding
companies had agreed. The company's request for rehearing on the issues
was denied by the CPUC and the company subsequently filed appeals in
the California Court of Appeal. Oral argument was held on March 5, 2004
before the First District Court of Appeal and a written opinion from
the Court is expected by June 2004.
NOTE 5. CONTINGENCIES
LITIGATION
Except for the matters referred to below, neither the company nor its
subsidiaries are party to, nor is their property the subject of, any
material pending legal proceedings other than routine litigation
incidental to their businesses. Management believes that none of these
matters will have further material adverse effect on the company's
financial condition or results of operations.
Antitrust Litigation
Class-action and individual lawsuits filed in 2000 and currently
consolidated in San Diego Superior Court seek damages, alleging that
Sempra Energy, SoCalGas and SDG&E, along with El Paso Energy Corp. (El
Paso) and several of its affiliates, unlawfully sought to control
natural gas and electricity markets. In March 2003, plaintiffs in these
cases and the applicable El Paso entities (whose cases involved
additional issues not applicable to Sempra Energy, SoCalGas or SDG&E)
announced that they had reached a $1.5 billion settlement, of which
$125 million is allocated to customers of the California Utilities. The
Court approved that settlement in December 2003. The proceeding
against Sempra Energy and the California Utilities has not been
settled, is currently in discovery and continues to be litigated.
Natural Gas Cases: Similar lawsuits have been filed by the Attorneys
General of Arizona and Nevada, alleging that El Paso and certain Sempra
Energy subsidiaries unlawfully sought to control the natural gas market
in their respective states. In October 2003, the Nevada state court
denied defendants' motion to dismiss the complaint. On April 12, 2004,
the Sempra Energy defendants filed a motion for reconsideration. In
April 2003, Sierra Pacific Resources and its utility subsidiary Nevada
Power filed a lawsuit in U.S. District Court in Las Vegas against major
natural gas suppliers, including Sempra Energy, the California
Utilities and other Sempra Energy subsidiaries, seeking damages
resulting from an alleged conspiracy to drive up or control natural gas
prices, eliminate competition and increase market volatility, breach of
contract and wire fraud. On January 27, 2004, the U.S. District Court
dismissed the Sierra Pacific Resources case against all of the
defendants, determining that this is a matter for the FERC. Plaintiffs
have asked the court to reconsider its decision.
Price Reporting Practices
In the fourth quarter of 2002, Sempra Energy and SoCalGas were named as
defendants in a lawsuit filed in Los Angeles Superior Court against
various trade publications and other energy companies alleging that
energy prices were unlawfully manipulated by defendants' reporting
artificially inflated natural gas prices to trade publications. On July
8, 2003, the Superior Court granted the defendants' demurrer on the
grounds that the claims contained in the complaint were subject to the
Filed Rate Doctrine and were preempted by the Federal Power Act.
Plaintiffs filed an amended complaint, and in September 2003 defendants
filed a demurrer to the amended complaint, which was granted in part.
In December 2003, the plaintiffs dismissed both Sempra Energy and
SoCalGas from the lawsuit.
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 Annual Report.
RESULTS OF OPERATIONS
Natural gas revenues increased to $1.1 billion in 2004 from $1 billion
in 2003, and the cost of natural gas distributed increased to $721
million in 2004 from $600 million in 2003. These changes were primarily
attributable to natural gas cost increases, which are passed on to
customers, and increased volumes.
Under the current regulatory framework, the cost of natural gas
purchased for customers and the variations in that cost are passed
through to the customers on a substantially concurrent basis. However,
SoCalGas' Gas Cost Incentive Mechanism (GCIM) allows SoCalGas to share
in the savings or costs from buying natural gas for customers below or
above monthly benchmarks. 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 between customers and
shareholders.
The table below summarizes natural gas volumes and revenues by customer
class for the quarters ended March 31, 2004 and 2003.
Gas Sales, Transportation and Exchange
(Volumes in billion cubic feet, dollars in millions)
Transportation
Gas Sales & Exchange Total
--------------------------------------------------------------
Volumes Revenue Volumes Revenue Volumes Revenue
--------------------------------------------------------------
2004:
Residential 90 $ 851 1 $ 2 91 $ 853
Commercial and industrial 32 249 68 39 100 288
Electric generation plants -- -- 29 8 29 8
Wholesale -- -- 44 8 44 8
--------------------------------------------------------------
122 $ 1,100 142 $ 57 264 1,157
Balancing accounts and other (9)
---------
Total $ 1,148
- -----------------------------------------------------------------------------------------
2003:
Residential 76 $ 679 1 $ 2 77 $ 681
Commercial and industrial 33 227 69 38 102 265
Electric generation plants -- -- 39 11 39 11
Wholesale -- -- 37 6 37 6
--------------------------------------------------------------
109 $ 906 146 $ 57 255 963
Balancing accounts and other 45
---------
Total $ 1,008
- -----------------------------------------------------------------------------------------
Net income for SoCalGas decreased to $56 million in 2004 from $58
million in 2003, as higher 2004 revenues were offset by increased
operating costs.
CAPITAL RESOURCES AND LIQUIDITY
SoCalGas' operations are the major source of liquidity. In addition,
working capital requirements can be met through the issuance of short-
term and long-term debt. Cash requirements primarily consist of capital
expenditures for utility plant.
At March 31, 2004, the company had $44 million in cash and $675 million
in available unused, committed lines of credit (of which PE had $375
million for the sole purpose of providing loans to Sempra Energy Global
Enterprises, another subsidiary of Sempra Energy, and SoCalGas had $300
million).
Management believes that cash flows from operations and debt issuances
will be adequate to finance capital expenditure requirements and other
commitments. Management continues to regularly monitor SoCalGas' ability
to finance the needs of its operating, financing and investing
activities in a manner consistent with its intention to maintain strong,
investment-quality credit ratings.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by PE's operating activities totaled $533 million and
$441 million for the quarters ended March 31, 2004 and 2003,
respectively. Net cash provided by SoCalGas' operating activities
totaled $550 million and $444 million for the quarters ended March 31,
2004 and 2003, respectively. The increases were primarily attributable
to 2004's increase in overcollected regulatory balancing accounts and
lower accounts receivable, partially offset by income tax refunds in
2003.
For the quarter ended March 31, 2004, the company made no pension plan
contributions for the 2004 plan year.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used in PE's investing activities totaled $345 million and $253
million for the quarters ended March 31, 2004 and 2003, respectively.
Net cash used in SoCalGas' investing activities totaled $313 million and
$257 million for the quarters ended March 31, 2004 and 2003,
respectively. The change was primarily due to increased advances from
SoCalGas to Sempra Energy in 2004.
Significant capital expenditures in 2004 are expected to be for
improvements to the distribution and transmission systems. These
expenditures are expected to be financed by cash flows from operations
and security issuances.
In connection with the importation of additional sources of natural gas
into Southern California, for which the California Utilities have made
filings with the CPUC, the California Utilities could incur capital
expenditures estimated at $200 million in order to connect with new
delivery locations. The expenditures would be included in utility rate
bases.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash used in PE's financing activities totaled $176 million and $71
million for the quarters ended March 31, 2004 and 2003, respectively.
Net cash used in SoCalGas' financing activities totaled $225 million and
$70 million for the quarters ended March 31, 2004 and 2003,
respectively. The changes in PE's and SoCalGas' cash flows were
attributable to SoCalGas' redemption of $175 million of 6.875% first
mortgage bonds in January 2004 compared to repayment of $70 million of
medium-term notes in January 2003. Further, SoCalGas paid $50 million in
dividends to PE in 2004.
FACTORS INFLUENCING FUTURE PERFORMANCE
Performance of the companies will depend primarily on the ratemaking
and regulatory process, electric and natural gas industry
restructuring, and the changing energy marketplace. These matters,
including the pending cost of service filings and the CPUC's
investigation of compliance with affiliate rules are discussed in the
Annual Report and in Note 4 of the notes to Consolidated Financial
Statements herein.
CRITICAL ACCOUNTING POLICIES AND KEY NON-CASH PERFORMANCE INDICATORS
There have been no significant changes to the accounting policies
viewed by management as critical or key non-cash performance indicators
for the company's subsidiaries, as set forth in the Annual Report.
NEW ACCOUNTING STANDARDS
Relevant pronouncements that have recently become effective and have
had a significant effect on the company are Statement of Financial
Accounting Standards Number (SFAS) 143 and 149 as discussed in Note 2
of the notes to Consolidated Financial Statements. Pronouncements that
have or are likely to have a material effect on future earnings are
described below.
SFAS 143, "Accounting for Asset Retirement Obligations": SFAS 143
requires entities to record the fair value of liabilities for legal
obligations related to asset retirements in the period in which they
are incurred. It also requires the company to reclassify amounts
recovered in rates for future removal costs not covered by a legal
obligation from accumulated depreciation to a regulatory liability.
Further discussion is provided in Note 2 of the notes to Consolidated
Financial Statements.
SFAS 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities": SFAS 149 amends and clarifies accounting for
derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS 133.
Under SFAS 149 natural gas forward contracts that are subject to
unplanned netting do not qualify for the normal purchases and normal
sales exception. The company has determined that all natural gas
contracts are subject to unplanned netting and as such, these contracts
will be marked to market. Implementation of SFAS 149 on July 1, 2003
did not have a material impact on reported net income.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes in the risk issues affecting the
company subsequent to those discussed in the Annual Report.
As of March 31, 2004, the total Value at Risk of SoCalGas' positions
was not material.
ITEM 4. CONTROLS AND PROCEDURES
The companies have designed and maintain disclosure controls and
procedures to ensure that information required to be disclosed in the
companies' reports under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange
Commission and is accumulated and communicated to the companies'
management, including their Chief Executive Officers and Chief
Financial Officers, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating these controls and
procedures, management recognizes that any system of controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired objectives and
necessarily applies judgment in evaluating the cost-benefit
relationship of other possible controls and procedures.
Under the supervision and with the participation of management,
including the Chief Executive Officers and the Chief Financial
Officers, the companies as of March 31, 2004 have evaluated the
effectiveness of the design and operation of the companies' disclosure
controls and procedures. Based on that evaluation, the companies' Chief
Executive Officers and Chief Financial Officers have concluded that the
controls and procedures are effective.
There have been no significant changes in the companies' internal
controls over financial reporting or in other factors that could
significantly affect the internal controls subsequent to the date the
companies completed their evaluations.
ITEM 5. OTHER INFORMATION
Effective May 1, 2004, Debra L. Reed, President of SoCalGas and SDG&E,
also will become their Chief Operating Officer. Simultaneously, Steven
D. Davis, who remains Senior Vice President, External Relations, will
succeed her as Chief Financial Officer.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except as described in Notes 4 and 5 of the notes to Consolidated
Financial Statements, 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 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.
Exhibit 31 -- Section 302 Certifications
31.1 Statement of PE's Chief Executive Officer pursuant
to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934.
31.2 Statement of PE's Chief Financial Officer pursuant
to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934.
31.3 Statement of SoCalGas' Chief Executive Officer pursuant
to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934.
31.4 Statement of SoCalGas' Chief Financial Officer pursuant
to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934.
Exhibit 32 -- Section 906 Certifications
32.1 Statement of PE's Chief Executive Officer pursuant
to 18 U.S.C. Sec. 1350.
32.2 Statement of PE's Chief Financial Officer pursuant
to 18 U.S.C. Sec. 1350.
32.3 Statement of SoCalGas' Chief Executive Officer pursuant
to 18 U.S.C. Sec. 1350.
32.4 Statement of SoCalGas' Chief Financial Officer pursuant
to 18 U.S.C. Sec. 1350.
(b) Reports on Form 8-K
The following report on Form 8-K was filed after December 31, 2003:
Current Report on Form 8-K filed February 24, 2004, filing as an exhibit
Sempra Energy's press release of February 24, 2004, giving the financial
results for the quarter ended December 31, 2003.
Current Report on Form 8-K filed April 29, 2004, filing as an exhibit
Sempra Energy's press release of April 29, 2004, giving the financial
results for the quarter ended March 31, 2004.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by
the undersigned thereunto duly authorized.
PACIFIC ENTERPRISES
-------------------
(Registrant)
Date: April 29, 2004 By: /s/ F. H. Ault
----------------------------
F. H. Ault
Sr. Vice President and Controller
SOUTHERN CALIFORNIA GAS COMPANY
-------------------------------
(Registrant)
By: /s/ D.L. Reed
---------------------------
D.L. Reed
President and
Chief Financial Officer