10-Q 1 pe10q601.txt 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [..X..] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 June 30, 2001 For the quarterly period ended....................................... Or [.....] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ________________ to _________________ Name of Commission Registrant IRS Employer File as specified State of Identification Number in its charter Incorporation Number ---------- -------------- -------------- -------------- 1-40 Pacific Enterprises California 94-0743670 1-1402 Southern California Gas Company California 95-1240705 555 West Fifth Street, Los Angeles, California 90013 ---------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrants' telephone number, including area code (213) 244-1200 ------------------- No Change ----------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes...X... No...... Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock outstanding: Pacific Enterprises Wholly owned by Sempra Energy Southern California Gas Company Wholly owned by Pacific Enterprises PACIFIC ENTERPRISES AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME Dollars in millions
Three Months Ended June 30, ---------------------- 2001 2000 ------- ------- Operating Revenues $ 927 $630 ------- ------- Operating Expenses Cost of natural gas distributed 533 264 Operating and maintenance 201 168 Depreciation and amortization 67 67 Income taxes 38 44 Other taxes and franchise payments 25 22 ------- ------- Total operating expenses 864 565 ------- ------- Operating Income 63 65 ------- ------- Other Income and (Deductions) Interest income 12 20 Allowance for equity funds used during construction 1 1 Regulatory interest - net (1) (5) Taxes on non-operating income (3) (2) Preferred dividends of subsidiaries (1) (1) Other - net 2 2 ------- ------- Total 10 15 ------- ------- Income Before Interest Charges 73 80 ------- ------- Interest Charges Long-term debt 16 16 Other 8 15 Allowance for borrowed funds used -- -- during construction ------- ------- Total 24 31 ------- ------- Net Income 49 49 Preferred Dividend Requirements 1 1 ------- ------- Earnings Applicable to Common Shares $ 48 $ 48 ======= ======= See notes to Consolidated Financial Statements.
PACIFIC ENTERPRISES AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME Dollars in millions Six Months Ended June 30, -------------------- 2001 2000 ------- ------- Operating Revenues $2,475 $1,328 ------- ------- Operating Expenses Cost of natural gas distributed 1,684 610 Operating and maintenance 389 318 Depreciation and amortization 132 131 Income taxes 80 88 Other taxes and franchise payments 59 50 ------- ------- Total operating expenses 2,344 1,197 ------- ------- Operating Income 131 131 ------- ------- Other Income and (Deductions) Interest income 29 28 Allowance for equity funds used during construction 2 1 Regulatory interest - net (6) (5) Taxes on non-operating income (5) (4) Preferred dividends of subsidiaries (1) (1) Other - net (2) 2 ------- ------- Total 17 21 ------- ------- Income Before Interest Charges 148 152 ------- ------- Interest Charges Long-term debt 33 35 Other 17 17 Allowance for borrowed funds used during construction (1) (1) ------- ------- Total 49 51 ------- ------- Net Income 99 101 Preferred Dividend Requirements 2 2 ------- ------- Earnings Applicable to Common Shares $ 97 $ 99 ======= ======= See notes to Consolidated Financial Statements. PACIFIC ENTERPRISES AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Dollars in millions Balance at --------------------------- June 30, December 31, 2001 2000 ----------- -------------- ASSETS Property, plant and equipment $6,442 $6,337 Accumulated depreciation (3,693) (3,571) ------- ------- Property, plant and equipment - net 2,749 2,766 ------- ------- Current assets Cash and cash equivalents 531 205 Accounts receivable - trade 296 589 Accounts receivable - other 5 83 Due from affiliate -- 214 Deferred income taxes 74 43 Fixed price contracts and other derivatives 474 -- Inventories 74 67 Other 26 84 ------- ------- Total current assets 1,480 1,285 ------- ------- Other assets Regulatory assets 92 108 Due from affiliates 413 617 Fixed price contracts and other derivatives 232 -- Other 78 52 ------- ------- Total other assets 815 777 ------- ------- Total assets $5,044 $4,828 ======= ======= See notes to Consolidated Financial Statements. PACIFIC ENTERPRISES AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Dollars in millions
Balance at --------------------------- June 30, December 31, 2001 2000 ----------- -------------- CAPITALIZATION AND LIABILITIES Capitalization Common Stock $1,282 $1,282 Retained earnings 72 165 Accumulated other comprehensive income (loss) -- (1) ------- ------- Total common equity 1,354 1,446 Preferred stock 80 80 Long-term debt 821 821 ------- ------- Total capitalization 2,255 2,347 ------- ------- Current liabilities Accounts payable - trade 421 368 Accounts payable - other 53 43 Regulatory balancing accounts - net 233 463 Income taxes payable 29 50 Dividends and interest payable 28 28 Current portion of long-term debt 120 120 Due to affiliates 163 365 Regulatory liabilities arising from fixed price contracts and other derivatives 410 -- Other 306 300 ------- ------- Total current liabilities 1,763 1,737 ------- ------- Deferred credits and other liabilities Customer advances for construction 16 16 Post-retirement benefits other than pensions 93 97 Deferred income taxes 226 224 Deferred investment tax credits 51 53 Regulatory liabilities 30 -- Regulatory liabilities arising from fixed price contracts and other derivatives 232 -- Deferred credits and other liabilities 358 334 Preferred stock of subsidiary 20 20 ------- ------- Total deferred credits and other liabilities 1,026 744 ------- ------- Contingencies and commitments (Note 2) Total liabilities and shareholders' equity $5,044 $4,828 ======= ======= See notes to Consolidated Financial Statements.
PACIFIC ENTERPRISES AND SUBSIDIARIES CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS Dollars in millions
Six Months Ended June 30, ------------------ 2001 2000 ----- ----- Cash Flows from Operating Activities Net income $ 99 $ 101 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 132 131 Deferred income taxes and investment tax credits 8 33 Other - net 47 24 Net changes in other working capital components 134 233 ----- ----- Net cash provided by operating activities 420 522 ----- ----- Cash Flows from Investing Activities Capital expenditures (114) (86) Loans repaid by (paid to) affiliates 215 (317) Other - net -- 14 ----- ----- Net cash provided by (used in) investing activities 101 (389) ----- ----- Cash Flows from Financing Activities Common dividends paid (190) -- Preferred dividends paid (2) (2) Other (3) -- ----- ----- Net cash used in financing activities (195) (2) ----- ----- Increase in cash and cash equivalents 326 131 Cash and cash equivalents, January 1 205 11 ----- ----- Cash and cash equivalents, June 30 $ 531 $ 142 ===== ===== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Income tax payments - net $ 130 $ 71 ===== ===== Interest payments, net of amounts capitalized $ 49 $ 78 ===== ===== See notes to Consolidated Financial Statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME Dollars in millions
Three Months Ended June 30, ------------------ 2001 2000 ------- ------- Operating Revenues $ 927 $ 630 ------- ------- Expenses Cost of natural gas distributed 533 264 Operation and maintenance 198 167 Depreciation and amortization 67 67 Income taxes 38 43 Other taxes and franchise payments 26 22 ------- ------- Total operating expenses 862 563 ------- ------- Operating Income 65 67 ------- ------- Other Income and (Deductions) Interest income 7 7 Allowance for equity funds used during construction 1 1 Regulatory interest - net (1) (5) Taxes on non-operating income (2) (2) ------- ------- Total 5 1 ------- ------- Income Before Interest Charges 70 68 ------- ------- Interest Charges Long-term debt 16 18 Other 6 2 ------- ------- Total 22 20 ------- ------- Net Income 48 48 Preferred Dividend Requirements 1 1 ------- ------- Earnings Applicable to Common Shares $ 47 $ 47 ======= ======= See notes to Consolidated Financial Statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME Dollars in millions
Six Months Ended June 30, ------------------ 2001 2000 ------- ------- Operating Revenues $2,475 $1,328 ------- ------- Expenses Cost of natural gas distributed 1,684 610 Operating and maintenance 384 317 Depreciation and amortization 132 131 Income taxes 82 87 Other taxes and franchise payments 59 50 ------- ------- Total operating expenses 2,341 1,195 ------- ------- Operating Income 134 133 ------- ------- Other Income and (Deductions) Interest income 16 11 Allowance for equity funds used during construction 2 1 Regulatory interest - net (6) (5) Taxes on non-operating income (4) (4) Other - net (1) -- ------- ------- Total 7 3 ------- ------- Income Before Interest Charges 141 136 ------- ------- Interest Charges Long-term debt 33 35 Other 9 4 Allowance for borrowed funds used during construction (1) (1) ------- ------- Total 41 38 ------- ------- Net Income 100 98 Preferred Dividend Requirements 1 1 ------- ------- Earnings Applicable to Common Shares $ 99 $ 97 ======= ======= See notes to Consolidated Financial Statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Dollars in millions
Balance at -------------------------- June 30, December 31, 2001 2000 ---------- ------------ ASSETS Utility plant - at original cost $6,419 $6,314 Accumulated depreciation (3,678) (3,557) ------ ------ Utility plant - net 2,741 2,757 ------ ------ Current assets Cash and cash equivalents 531 205 Accounts receivable - trade 296 589 Accounts receivable - other 5 83 Due from affiliates -- 214 Deferred income taxes 74 74 Fixed price contracts and other derivatives 474 -- Inventories 74 67 Other 25 80 ------ ------ Total current assets 1,479 1,312 ------ ------ Other assets Regulatory assets -- 12 Fixed price contracts and other derivatives 232 -- Other 58 35 ------ ------ Total other assets 290 47 ------ ------ Total assets $4,510 $4,116 ====== ====== See notes to Consolidated Financial Statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) Dollars in millions
Balance at -------------------------- June 30, December 31, 2001 2000 ---------- ------------ CAPITALIZATION AND LIABILITIES Capitalization Common stock $ 835 $ 835 Retained earnings 362 453 Accumulated other comprehensive income (loss) -- (1) ------ ------ Total common equity 1,197 1,287 Preferred stock 22 22 Long-term debt 821 821 ------ ------ Total capitalization 2,040 2,130 ------ ------ Current liabilities Accounts payable - trade 421 368 Accounts payable - other 53 44 Regulatory balancing accounts - net 233 463 Income taxes payable 29 90 Interest payable 26 26 Current portion of long-term debt 120 120 Regulatory liabilities arising from fixed price contracts and other derivatives 410 -- Other 327 300 ------ ------ Total current liabilities 1,619 1,411 ------ ------ Deferred credits and other liabilities Customer advances for construction 16 16 Deferred income taxes 326 314 Deferred investment tax credits 51 53 Regulatory liabilities 30 -- Regulatory liabilities arising from fixed price contracts and other derivatives 232 -- Deferred credits and other liabilities 196 192 ------ ------ Total deferred credits and other liabilities 851 575 ------ ------ Contingencies and commitments (Note 2) Total liabilities and shareholders' equity $4,510 $4,116 ====== ====== See notes to Consolidated Financial Statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS Dollars in millions
Six Months Ended June 30, ------------------ 2001 2000 ----- ----- Cash Flows from Operating Activities Net income $100 $ 98 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 132 131 Deferred income taxes and investment tax credits 10 26 Other - net 22 25 Net changes in other working capital components 134 269 ---- ---- Net cash provided by operating activities 398 549 ---- ---- Cash Flows from Investing Activities Capital expenditures (114) (86) Loan repaid by (paid to) affiliate 233 (231) ---- ---- Net cash provided by (used in) investing activities 119 (317) ---- ---- Cash Flows from Financing Activities - dividends paid (191) (101) ---- ---- Increase in cash and cash equivalents 326 131 Cash and cash equivalents, January 1 205 11 ---- ---- Cash and cash equivalents, June 30 $531 $142 ==== ==== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Income tax payments - net $137 $ 72 ==== ==== Interest payments, net of amounts capitalized $ 41 $ 40 ==== ==== See notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL This Quarterly Report on Form 10-Q is that of Pacific Enterprises (PE or the Company) and of Southern California Gas Company (SoCalGas)(collectively the companies). PE's common stock is wholly owned by Sempra Energy, a California-based Fortune 500 energy services company. SoCalGas' common stock is wholly owned by PE. The financial statements herein are, in one case, the Consolidated Financial Statements of PE and its subsidiary, SoCalGas, and, in the second case, the Consolidated Financial Statements of SoCalGas and its subsidiaries. The accompanying Consolidated Financial Statements have been prepared in accordance with the interim-period-reporting requirements of Form 10-Q. Results of operations for interim periods are not necessarily indicative of results for the entire year. In the opinion of management, the accompanying statements reflect all adjustments necessary for a fair presentation. These adjustments are only of a normal recurring nature. Certain changes in classification have been made to prior presentations to conform to the current financial statement presentation. The companies'significant accounting policies are described in the notes to Consolidated Financial Statements in the companies' 2000 Annual Report. The same accounting policies are followed for interim reporting purposes. Information in this Quarterly Report is unaudited and should be read in conjunction with the companies' 2000 Annual Report and March 31, 2001 Quarterly Report on Form 10-Q. As described in the notes to Consolidated Financial Statements in the companies' 2000 Annual Report, SoCalGas accounts for the economic effects of regulation on utility operations in accordance with Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71). 2. MATERIAL CONTINGENCIES NATURAL GAS INDUSTRY RESTRUCTURING The companies' 2000 annual reports discuss various proposals and actions related to this topic. As discussed therein, no significant impacts on the companies are expected when the various issues are finalized. This case is currently being held by the CPUC indefinitely. LITIGATION A 2000 lawsuit, which seeks class-action certification, alleges that Sempra Energy, SoCalGas, SDG&E and El Paso Energy Corp. acted to drive up the price of natural gas for Californians by agreeing to stop a pipeline project that would have brought new and less- expensive natural gas supplies into California. Management believes the allegations are without merit. Except for the above, neither the Company nor its subsidiaries are party to, nor is their property the subject of, any material pending legal proceedings other than routine litigation incidental to their businesses. Management believes that these matters will not have a material adverse effect on the Company's results of operations, financial condition or liquidity. QUASI-REORGANIZATION In 1993, PE divested its merchandising operations and most of its oil and gas exploration and production business. In connection with the divestitures, PE effected a quasi-reorganization for financial reporting purposes effective December 31, 1992. Management believes the remaining balances of the liabilities established in connection with the quasi-reorganization are adequate. 3. COMPREHENSIVE INCOME The following is a reconciliation of net income to comprehensive income.
Pacific Enterprises SoCalGas ----------------------------- ---------------------------- Three-month Six-month Three-month Six-month periods ended periods ended periods ended periods ended June 30, June 30, June 30, June 30, ----------------------------- ---------------------------- (Dollars in millions) 2001 2000 2001 2000 2001 2000 2001 2000 -------------------------------------------------------------------------------------- Net income $ 49 $ 49 $ 99 $101 $ 48 $ 48 $100 $ 98 Change in unrealized gain on marketable securities -- (12) -- 21 -- (12) -- 21 Minimum pension liability adjustments 1 -- 1 2 1 -- 1 2 ---------------------------------------------------------- Comprehensive income $ 50 $ 37 $100 $124 $ 49 $ 36 $101 $121 --------------------------------------------------------------------------------------
4. FINANCIAL INSTRUMENTS Adoption of SFAS 133 Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative Instruments and Hedging Activities" as amended by SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities." As amended, SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position, measure those instruments at fair value and recognize changes in the fair value of derivatives in earnings in the period of change unless the derivative qualifies as an effective hedge that offsets certain exposures. On January 1, 2001, $982 million in current assets, $1.1 billion in noncurrent assets, and $4 million in current liabilities were recorded as of January 1, 2001, in the Consolidated Balance Sheet as fixed-priced contracts and other derivatives. Due to the regulatory environment in which SoCalGas operates, regulatory assets and liabilities were established to the extent that derivative gains and losses are recoverable or payable through future rates. The effect on earnings was minimal. The ongoing effects will depend on future market conditions and the Company's hedging activities. Market Risk The companies' policy is to use derivative financial instruments to manage its exposure to fluctuations in interest rates and energy prices. Transactions involving these financial instruments are with credit-worthy firms and major exchanges. The use of these instruments exposes the Company to market and credit risk which may at times be concentrated with certain counterparties, although counterparty nonperformance is not anticipated. Energy Derivatives SoCalGas utilizes derivative financial instruments to reduce exposure to unfavorable changes in energy prices which are subject to significant and often volatile fluctuation. Derivative financial instruments are comprised of futures, forwards, swaps, options and long-term delivery contracts. These contracts allow SoCalGas to predict with greater certainty the effective prices to be received and delivered to their customers. Due to the regulatory environment in which SoCalGas operates, regulatory assets and liabilities are established to the extent that derivative gains and losses are recoverable or payable through future rates. As such, SoCalGas does not apply hedge accounting to energy derivatives. However, such contracts continue to be effective in achieving the risk management objectives for which they were intended. Accounting for Derivative Activities At June 30, 2001, $474 million in current assets and $232 million in noncurrent assets were recorded in the Consolidated Balance Sheet as fixed priced contracts and other derivatives. Regulatory assets and liabilities were established to the extent that derivative gains and losses are recoverable or payable through future rates. As such, $64 million in regulatory balancing accounts (i.e., overcollections), $410 million in current regulatory liabilities, and $232 million in noncurrent regulatory liabilities were recorded in the Consolidated Balance Sheet as of June 30, 2001. Fair Value The fair value of the Company's derivative financial instruments (fixed-priced contracts and other derivatives) is not materially different from their carryings amounts. The fair values of fixed- priced contracts and other derivatives were estimated based on quoted market prices. Information regarding the fair value of the Company's non-derivative financial instruments is provided in Note 8 of the notes to Consolidated Financial Statements in the 2000 Annual Report on Form 10-K. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the financial statements contained in this Form 10-Q and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the companies' 2000 Annual Report. INFORMATION REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains statements that are not historical fact and constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words "estimates," "believes," "expects," "anticipates," "plans," "intends," "may," "would" and "should" or similar expressions, or discussions of strategy or of plans are intended to identify forward- looking statements. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Future results may differ materially from those expressed in these forward-looking statements. Forward-looking statements are necessarily based upon various assumptions involving judgments with respect to the future and other risks, including, among others, local, regional, national and international economic, competitive, political, legislative and regulatory conditions and developments; actions by the CPUC, the California Legislature, and the FERC; the financial condition of other investor-owned utilities; capital market conditions, inflation rates, interest rates and exchange rates; energy markets, including the timing and extent of changes in commodity prices; weather conditions and conservation efforts; business, regulatory and legal decisions; the pace of deregulation of retail natural gas and electricity delivery; the timing and success of business development efforts; and other uncertainties -- all of which are difficult to predict and many of which are beyond the control of the Company. Readers are cautioned not to rely unduly on any forward-looking statements and are urged to review and consider carefully the risks, uncertainties and other factors which affect the Company's business described in this quarterly report and other reports filed by the Company from time to time with the Securities and Exchange Commission. See also "Factors Influencing Future Performance" below. CAPITAL RESOURCES AND LIQUIDITY Cash and cash equivalents at June 30, 2001 are available for investment in utility plant, the retirement of debt and other corporate purposes. Major changes in cash flows not described elsewhere are described below. CASH FLOWS FROM OPERATING ACTIVITIES For the six-month period ended June 30, 2001, the decrease in cash flows from operations compared to the corresponding period in 2000 was primarily due to the decrease in overcollected regulatory balancing accounts and lower accrued income taxes in 2001 reflecting tax payments made during the first quarter of 2001 (none were made during the same period in 2000) offset by the decrease in SoCalGas' trade accounts receivable due to seasonality. CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures for property, plant and equipment are estimated to be $300 million for the full year 2001 and are being financed primarily by internally generated funds. Construction, investment and financing programs are continuously reviewed and revised in response to changes in competition, customer growth, inflation, customer rates, the cost of capital, and environmental and regulatory requirements. During the second quarter of 2001, SoCalGas announced plans to add 11 percent more capacity to its transmission system by the end of the year. The expansion will help meet increased demand for natural gas from new and existing electric generation projects in Southern California. CASH FLOWS FROM FINANCING ACTIVITIES For the six-month period ended June 30, 2001, cash flows from financing activities decreased from the corresponding period in 2000 due primarily to an increase in common dividends paid during 2001. On June 6, 2001 the Company remarketed $81 million of debt of the Company's Employee Stock Ownership Plan (ESOP) as 7.375 percent fixed-interest-rate debt due May 3, 2004. On February 9, 2001, SoCalGas' $200 million credit line expired and was replaced on February 27, 2001, with a $170 million, one-year agreement. This agreement bears interest at various rates based on market rates and SoCalGas' credit rating. On April 18, 2001, PE entered into a $500-million revolving line of credit which bears interest at various rates based on market rates and PE's credit rating. RESULTS OF OPERATIONS The Company's net income remained flat for the three-month and six- month periods ended June 30, 2001, compared to the same periods in 2000. Seasonality SoCalGas' natural gas sales volumes generally are higher in the winter due to heating demands, although that difference is lessening as the use of natural gas to fuel electric generation increases. The table below summarizes natural gas volumes and revenues by customer class for the six-month periods ended June 30, 2001 and 2000. Gas Sales, Transportation and Exchange (Volumes in billion cubic feet, dollars in millions)
Gas Sales Transportation & Exchange Total -------------------------------------------------------------- Volumes Revenue Volumes Revenue Volumes Revenue -------------------------------------------------------------- 2001: Residential 151 $1,598 1 $ 3 152 $1,601 Commercial and industrial 49 445 122 93 171 538 Electric generation plants -- -- 188 47 188 47 Wholesale -- -- 90 18 90 18 -------------------------------------------------------------- 200 $2,043 401 $161 601 2,204 Balancing accounts and other 271 -------- Total $2,475 ------------------------------------------------------------------------------------------ 2000: Residential 136 $1,016 2 $ 8 138 $1,024 Commercial and industrial 44 282 160 124 204 406 Utility electric generation -- -- 99 38 99 38 Wholesale -- -- 74 26 74 26 -------------------------------------------------------------- 180 $1,298 335 $196 515 1,494 Balancing accounts and other (166) -------- Total $1,328 ------------------------------------------------------------------------------------------
The increase in natural gas revenues was primarily due to higher natural gas prices. The increase in the cost of natural gas distributed was primarily due to higher natural gas prices. Under the current regulatory framework, the cost of natural gas is passed on to customers without markup and changes in core-market natural gas prices do not affect net income since, as explained more fully in the 2000 Annual Report, current or future core customer rates normally recover the actual cost of natural gas on a substantially concurrent basis. FACTORS INFLUENCING FUTURE PERFORMANCE Performance of the companies in the near future will depend primarily on the ratemaking and regulatory process, electric and natural gas industry restructuring, and the changing energy marketplace. These factors are discussed in this section and in Note 2 of the notes to Consolidated Financial Statements. Performance-Based Regulation (PBR) To promote efficient operations and improved productivity and to move away from reasonableness reviews and disallowances, the CPUC has been directing utilities to use PBR. PBR has replaced the general rate case and certain other regulatory proceedings for the California utilities. Under PBR, regulators require future income potential to be tied to achieving or exceeding specific performance and productivity goals, as well as cost reductions, rather than relying solely on expanding utility plant in a market where a utility already has a highly developed infrastructure. SoCalGas' PBR mechanism is in effect through December 31, 2002, at which time the mechanisms will be updated. That update is described in the Company's 2000 Annual Report. The PBR and Cost of Service (COS) cases for SoCalGas and SDG&E are both due to be filed on December 21, 2001. However, under the MOU described in Note 2, both SoCalGas' and SDG&E's PBR/COS cases would be delayed such that the resulting rates would be effective in 2004 instead of 2003, if this portion of the MOU is approved by the CPUC. Cost of Capital For 2001, SoCalGas is authorized to earn a rate of return on common equity (ROE) of 11.6 percent and a 9.49 percent return on rate base (ROR), the same as in 2000 and 1999, unless interest-rate changes are large enough to trigger an automatic adjustment as discussed in the companies' 2000 annual reports. RELATIONSHIP WITH NON-UTILITY SUBSIDIARIES CPUC Investigation of Energy-Utility Holding Companies The CPUC has initiated an investigation into the relationship between California's investor-owned utilities and their parent holding companies. Among the matters to be considered in the investigation are utility dividend policies and practices and obligations of the holding companies to provide financial support for utility operations. NEW ACCOUNTING STANDARDS Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative Instruments and Hedging Activities" as amended by SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities." The adoption of this new standard on January 1, 2001, did not have a material impact on the Company's earnings. For further information regarding the Company's implementation of SFAS 133, see Note 4 above. In July 2001 the Financial Accounting Standards Board approved three statements, SFAS 141 "Business Combinations," SFAS 142 "Goodwill and Other Intangible Assets" and SFAS 143 " Accounting for Asset Retirement Obligations." SFAS 141 provides guidance on the accounting for a business combination at the date the combination is completed. It requires the use of the purchase method of accounting for all business combinations initiated after June 30, 2001. The pooling-of- interest method is eliminated. SFAS 142 provides guidance on how to account for goodwill and other intangible assets after the acquisition is complete. Goodwill and certain other intangible assets will no longer be amortized and will be tested in the aggregate for impairment at least annually. Goodwill will not be tested on an acquisition-by- acquisition basis. SFAS 142 applies to existing goodwill and other intangible assets, beginning with fiscal years starting after December 15, 2001. SFAS 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The effect of these standards on the Company's Consolidated Financial Statements has not yet been determined. ITEM 3. MARKET RISK There have been no significant changes in the risk issues affecting the Company subsequent to those discussed in the Annual Report for 2000. As noted in that report, SoCalGas may, at times, be exposed to limited market risk in its natural gas purchase, sale and storage activities as a result of activities under SoCalGas' Gas Cost Incentive Mechanism. The risk is managed within the parameters of the Company's market-risk management and trading framework. However, to lessen the impact on customers from the recent unprecedented natural gas price volatility at the California border, during the first quarter of 2001, SoCalGas began hedging a larger portion of its customer natural gas requirements than in the past. As of March 31, 2001, the Value at Risk (VaR) of the hedges was $1.8 million. During the second quarter of 2001, the gas hedging activity at SoCalGas was sharply reduced and, as of June 30, 2001, the VaR of the hedges was $0.6 million. This represents the 50-percent shareholder portion under the PBR mechanism and excludes the 50-percent portion subject to rate recovery. In addition, certain fixed price contracts that traditionally have not been considered derivatives, but now meet the derivative definition under SFAS 133 (see "New Accounting Standards" above), are excluded from the above-mentioned VaR amounts due to the offsetting regulatory asset or liability also recorded by the Company. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Except as otherwise described in this report, neither the Company nor its subsidiaries are party to, nor is their property the subject of, any material pending legal proceedings other than routine litigation incidental to their businesses. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 12 - Computation of ratios 12.1 Computation of Ratio of Earnings to Fixed Charges of PE. 12.2 Computation of Ratio of Earnings to Fixed Charges of SoCalGas. (b) Reports on Form 8-K There were no reports on Form 8-K filed after March 31, 2001. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly cause this report to be signed on their behalf by the undersigned thereunto duly authorized. PACIFIC ENTERPRISES ------------------- (Registrant) Date: August 9, 2001 By: /s/ F. H. Ault ---------------------------- F. H. Ault Sr. Vice President and Controller SOUTHERN CALIFORNIA GAS COMPANY ------------------------------- (Registrant) By: /s/ E.A. Guiles --------------------------- E.A. Guiles President 1 21