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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, 2003
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," "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 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.
ITEM 1. FINANCIAL STATEMENTS.
PACIFIC ENTERPRISES AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
Dollars in millions
Three Months Ended
March 31,
------------------
2003 2002
------- -------
OPERATING REVENUES $ 1,008 $ 732
------- -------
OPERATING EXPENSES
Cost of natural gas distributed 600 347
Other operating expenses 197 181
Depreciation 69 68
Income taxes 45 47
Franchise fees and other taxes 29 24
------- -------
Total operating expenses 940 667
------- -------
Operating Income 68 65
------- -------
Other Income and (Deductions)
Interest income 2 2
Regulatory interest - net -- (4)
Allowance for equity funds used
during construction 2 2
Income taxes on non-operating income (1) 3
Other - net 3 3
------- -------
Total 6 6
------- -------
Interest Charges
Long-term debt 12 9
Other 5 4
Allowance for borrowed funds used
during construction (1) (1)
------- -------
Total 16 12
------- -------
Net Income 58 59
Preferred Dividend Requirements 1 1
------- -------
Earnings Applicable to Common Shares $ 57 $ 58
======= =======
See notes to Consolidated Financial Statements.
PACIFIC ENTERPRISES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Dollars in millions
----------------------------
March 31, December 31,
2003 2002
------------- ------------
ASSETS
Utility plant - at original cost $6,750 $6,701
Accumulated depreciation (3,973) (3,914)
------ ------
Utility plant - net 2,777 2,787
------ ------
Current assets:
Cash and cash equivalents 139 22
Accounts receivable - trade 451 458
Accounts receivable - other 26 44
Due from unconsolidated affiliates 281 83
Income taxes receivable 10 97
Deferred income taxes 69 55
Regulatory assets arising from fixed-price
contracts and other derivatives 90 92
Inventories 26 76
Other 8 20
------ ------
Total current assets 1,100 947
------ ------
Other assets:
Due from unconsolidated affiliates 416 419
Regulatory assets arising from fixed-price
contracts and other derivatives 212 233
Sundry 169 173
------ ------
Total other assets 797 825
------ ------
Total assets $4,674 $4,559
====== ======
See notes to Consolidated Financial Statements.
PACIFIC ENTERPRISES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Dollars in millions
-----------------------------
March 31, December 31,
2003 2002
------------- -------------
CAPITALIZATION AND LIABILITIES
Capitalization:
Common Stock (600,000,000 shares authorized;
83,917,664 shares outstanding) $1,318 $1,318
Retained earnings 343 286
------ ------
Total common equity 1,661 1,604
Preferred stock 80 80
------ ------
Total shareholders' equity 1,741 1,684
Long-term debt 662 657
------ ------
Total capitalization 2,403 2,341
------ ------
Current liabilities:
Accounts payable - trade 294 200
Accounts payable - other 69 36
Due to unconsolidated affiliates 85 96
Regulatory balancing accounts - net 191 184
Interest payable 35 25
Regulatory liabilities -- 16
Fixed-price contracts and other derivatives 97 96
Current portion of long-term debt 100 175
Customer deposits 127 108
Other 268 265
------ ------
Total current liabilities 1,266 1,201
------ ------
Deferred credits and other liabilities:
Customer advances for construction 38 37
Post-retirement benefits other than pensions 78 77
Deferred income taxes 184 176
Deferred investment tax credits 46 47
Regulatory liabilities 127 121
Fixed-price contracts and other derivatives 212 233
Deferred credits and other liabilities 300 306
Preferred stock of subsidiary 20 20
------ ------
Total deferred credits and other liabilities 1,005 1,017
------ ------
Contingencies and commitments (Note 3)
Total liabilities and shareholders' equity $4,674 $4,559
====== ======
See notes to Consolidated Financial Statements.
PACIFIC ENTERPRISES AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
Dollars in millions
Three Months Ended
March 31,
------------------
2003 2002
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 58 $ 59
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 69 68
Deferred income taxes and investment tax credits (7) 16
Changes in other liabilities (2) (12)
Net changes in other working capital components 323 343
------- -------
Net cash provided by operating activities 441 474
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (58) (70)
Loan to/from affiliate - net (195) (200)
------- -------
Net cash used in investing activities (253) (270)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Common dividends paid -- (100)
Preferred dividends paid (1) (1)
Payment of long-term debt (70) --
Decrease in short-term debt -- (50)
------- -------
Net cash used in financing activities (71) (151)
------- -------
Increase in cash and cash equivalents 117 53
Cash and cash equivalents, January 1 22 13
------- -------
Cash and cash equivalents, March 31 $ 139 $ 66
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest payments, net of amounts capitalized $ 5 $ 13
======= =======
Income tax refunds $ 34 $ --
======= =======
See notes to Consolidated Financial Statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
Dollars in millions
Three Months Ended
March 31,
------------------
2003 2002
------- -------
OPERATING REVENUES $ 1,008 $ 732
------- -------
OPERATING EXPENSES
Cost of natural gas distributed 600 347
Other operating expenses 195 178
Depreciation 69 68
Income taxes 45 48
Franchise fees and other taxes 29 24
------- -------
Total operating expenses 938 665
------- -------
Operating Income 70 67
------- -------
Other Income and (Deductions)
Interest income 1 1
Regulatory interest - net -- (4)
Allowance for equity funds used
during construction 2 2
Income taxes on non-operating income (1) 4
Other - net (1) --
------- -------
Total 1 3
------- -------
Interest Charges
Long-term debt 12 9
Other 2 2
Allowance for borrowed funds used
during construction (1) (1)
------- -------
Total 13 10
------- -------
Earnings Applicable to Common Shares $ 58 $ 60
======= =======
See notes to Consolidated Financial Statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Dollars in millions
---------------------------
March 31, December 31,
2003 2002
------------ ------------
ASSETS
Utility plant - at original cost $6,750 $6,701
Accumulated depreciation (3,973) (3,914)
------ ------
Utility plant - net 2,777 2,787
------ ------
Current assets:
Cash and cash equivalents 139 22
Accounts receivable - trade 451 458
Accounts receivable - other 26 44
Due from unconsolidated affiliates 279 81
Income taxes receivable -- 28
Deferred income taxes 99 87
Regulatory assets arising from fixed-priced contracts
and other derivatives 90 92
Inventories 26 76
Other 8 20
------ ------
Total current assets 1,118 908
------ ------
Other assets:
Regulatory assets arising from fixed-priced contracts
and other derivatives 212 233
Sundry 144 151
------ ------
Total other assets 356 384
------ ------
Total assets $4,251 $4,079
====== ======
See notes to Consolidated Financial Statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Dollars in millions
---------------------------
March 31, December 31,
2003 2002
------------ ------------
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock (100,000,000 shares authorized;
93,300,000 shares outstanding) $ 836 $ 836
Retained earnings 540 482
------ ------
Total common equity 1,376 1,318
Preferred stock 22 22
------ ------
Total shareholders' equity 1,398 1,340
Long-term debt 662 657
------ ------
Total capitalization 2,060 1,997
------ ------
Current liabilities:
Accounts payable - trade 294 199
Accounts payable - other 69 36
Due to unconsolidated affiliates 20 31
Regulatory balancing accounts - net 191 184
Income taxes payable 59 --
Interest payable 31 24
Regulatory liabilities -- 16
Fixed-price contracts and other derivatives 97 96
Current portion of long-term debt 100 175
Customer deposits 127 108
Other 268 264
------ ------
Total current liabilities 1,256 1,133
------ ------
Deferred credits and other liabilities:
Customer advances for construction 38 37
Deferred income taxes 244 237
Deferred investment tax credits 46 47
Regulatory liabilities arising from deferred taxes 164 164
Other regulatory liabilities 41 37
Fixed-price contracts and other derivatives 212 233
Deferred credits and other liabilities 190 194
------ ------
Total deferred credits and other liabilities 935 949
------ ------
Contingencies and commitments (Note 3)
Total liabilities and shareholders' equity $4,251 $4,079
====== ======
See notes to Consolidated Financial Statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
Dollars in millions
Three Months Ended
March 31,
-------------------
2003 2002
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 58 $ 60
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 69 68
Deferred income taxes and investment tax credits (6) 13
Changes in other liabilities (1) (10)
Net changes in other working capital components 324 342
------- -------
Net cash provided by operating activities 444 473
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (58) (70)
Loan to/from affiliate - net (199) (200)
------- -------
Net cash used in investing activities (257) (270)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid -- (100)
Payments of long-term debt (70) --
Decrease in short-term debt -- (50)
------- -------
Net cash used in financing activities (70) (150)
------- -------
Increase in cash and cash equivalents 117 53
Cash and cash equivalents, January 1 22 13
------- -------
Cash and cash equivalents, March 31 $ 139 $ 66
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest payments, net of amounts capitalized $ 4 $ 11
======= =======
Income tax refunds $ 34 $ --
======= =======
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)
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 changes in classification have been made to prior presentations
to conform to the current financial statement presentation.
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, 2002 (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.
As described in the notes to Consolidated Financial Statements in the
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 71).
COMPREHENSIVE INCOME
The following is a reconciliation of net income to comprehensive income.
Pacific Enterprises SoCalGas
------------------- -------------------
Three months Three months
ended March 31, ended March 31,
------------------- -------------------
(Dollars in millions) 2003 2002 2003 2002
- ---------------------------------------------------------------------
Net income $ 58 $ 59 $ 58 $ 60
Financial instruments
(Note 4) -- (1) -- (1)
-----------------------------------------
Comprehensive income $ 58 $ 58 $ 58 $ 59
- ---------------------------------------------------------------------
2. NEW ACCOUNTING STANDARDS
SFAS 143, "Accounting for Asset Retirement Obligations":
On January 1, 2003, the company recorded asset retirement obligations of $10
million associated with the future retirement of three storage facilities.
The change in the asset retirement obligations for the three months
ended March 31, 2003 is as follows (dollars in millions):
Balance as of January 1, 2003 $ --
Adoption of SFAS 143 10
Accretion expense 1
------
Balance as of March 31, 2003 $ 11
======
Except for the items noted above, the company has determined that there
are no other material retirement obligations associated with tangible
long-lived assets.
3. MATERIAL CONTINGENCIES
NATURAL GAS INDUSTRY RESTRUCTURING
As discussed in Note 9 of the notes to Consolidated Financial Statements
in the Annual Report, in December 2001 the CPUC issued a decision
related to natural gas industry restructuring, with implementation
anticipated during 2002. During 2002 the California Utilities filed a
proposed implementation schedule and revised tariffs and rules required
for implementation. However, on February 27, 2003, the CPUC issued a
resolution rejecting without prejudice those proposed tariffs and rules.
The resolution ordered SoCalGas to file a new application, which would
address detailed proposals for implementation of the December 2001
decision, but also would allow reconsideration of the December 2001
decision. SoCalGas is required to file this new application by June 30,
2003, but has filed a petition for modification requesting the CPUC
defer the filing of this application until October 15, 2003. If the
December 2001 decision is implemented, it is not expected to adversely
affect the California Utilities' earnings.
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 (CA-AZ) border during the period of March 2000
through May 2001. If the investigation determines that the conduct of
any respondent contributed to the natural gas price spikes at the CA-AZ
border during this period, the CPUC may modify the respondent's
applicable natural gas procurement incentive mechanism, reduce the
amount of any shareholder award for the period involved, and/or order
the respondent to issue a refund to ratepayers to offset the higher
rates paid. The California Utilities, included among the respondents to
the investigation, are fully cooperating in the investigation and
believe that the CPUC will ultimately determine that they were not
responsible for the high border prices during this period. Hearings have
been scheduled for the Fall of 2003 and a decision is expected in 2004.
CPUC INVESTIGATION OF COMPLIANCE WITH AFFILIATE RULES
On February 27, 2003, the CPUC opened an investigation of the business
activities of SDG&E, SoCalGas and Sempra Energy to ensure that they have
complied with relevant statutes and CPUC decisions in the management,
oversight and operations of their companies. The CPUC will evaluate
energy-related business activities undertaken by Sempra Energy within
the service territories of SDG&E and SoCalGas, relative to holding
company systems and affiliate activities. In accordance with a December
16, 1997 CPUC order, the California Utilities' transactions with other
Sempra Energy affiliates have been audited each year and there have been
no adverse findings in those audits.
COST OF SERVICE
Although the California Utilities requested that a decision in their
Cost of Service applications be effective January 1, 2004, the CPUC
commissioner assigned to the applications has adopted a procedural
schedule that would prevent the CPUC from issuing a decision before the
second quarter of 2004. The California Utilities have filed a motion
seeking reconsideration of this ruling. The motion also seeks
authorization to implement an interim rate increase on January 1, 2004
to reflect an anticipated cost of service decision with any increase in
rates to be subject to refund upon the final determination by the CPUC.
GAS COST INCENTIVE MECHANISM (GCIM)
On March 18, 2003, a CPUC commissioner issued a scoping memorandum in
SoCalGas' GCIM Year 7 and Year 8 proceedings, delaying decisions on GCIM
Year 7 and Year 8 until certain issues in the Border Price Investigation
are resolved (see above). This makes it unlikely that the anticipated
rewards will be recorded in 2003 earnings. SoCalGas has requested that
the CPUC approve rewards of $30.8 million and $17.4 million for GCIM
Years 7 and 8, respectively.
FERC ACTIONS
In response to a FERC inquiry regarding natural gas trading, the
California Utilities have denied engaging in "wash" or "round trip"
trading activities. The companies are also cooperating with the FERC and
other governmental agencies and officials in their various
investigations of the California energy markets.
LITIGATION
Lawsuits filed in 2000 and currently consolidated in San Diego Superior
Court seek class-action certification and damages, alleging that Sempra
Energy, SoCalGas and SDG&E, along with El Paso Energy Corp. 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 Corp. entities announced that they had reached a
settlement in principle of the class actions, certain of the individual
actions, claims asserted by the California Attorney General and by other
western states, and certain complaint proceedings filed with FERC by the
CPUC and the California Energy Oversight Board. The terms of the
settlement remain subject to approval by the relevant state courts and
the FERC. One of the settlement terms provides that El Paso will assist
the plaintiffs in their litigation against the remaining defendants.
In April 2003, Sierra Pacific and its utility subsidiary Nevada Power
jointly filed a lawsuit in U.S. District Court in Las Vegas against
major natural gas suppliers, including Sempra Energy and the California
Utilities, seeking damages resulting from an alleged conspiracy to drive
up or control natural gas prices, eliminate competition and increase
market volatility.
Except for the matters referred to 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 none of these matters will have a material
adverse effect on the company's financial condition or results of
operations.
QUASI-REORGANIZATION
In 1993, PE divested its merchandising operations and most of its oil
and natural 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.
4. FINANCIAL INSTRUMENTS
Note 7 of the notes to Consolidated Financial Statements in the Annual
Report discusses the companies' financial instruments, including the
adoption of SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," which recognizes all
derivatives as either assets or liabilities on the balance sheet,
measures those instruments at fair value, and recognizes any changes in
the fair value of derivatives in earnings for the period that the change
occurs unless the derivative qualifies as an effective hedge that
offsets certain exposure.
The company utilizes derivative financial instruments to manage its
exposure to unfavorable changes in commodity prices, which are subject
to significant and often volatile fluctuations. Derivative financial
instruments include futures, forwards, swaps, options and long-term
delivery contracts. These contracts allow the company to predict with
greater certainty the effective prices to be received by the company
and, in the case of the California Utilities, their customers. As
allowed under SFAS 133, the company has elected to take the normal
purchases and sales exception for certain contracts that are settled by
physical delivery. These contracts are accounted for at historical cost
with gains and losses reflected in the income statement at the contract
settlement date.
Fixed-price contracts and other derivatives on the Consolidated Balance
Sheets primarily reflect the company's derivative gains and losses
related to long-term delivery contracts for natural gas transportation.
The company has established regulatory assets and liabilities to the
extent that these gains and losses are recoverable or payable through
future rates. The changes in fixed-price contracts and other derivatives
on the consolidated balance sheets for the three months ended March 31,
2003 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 three months ended March 31,
2003 or 2002.
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 billion in 2003 from $732 million
in 2002, and the cost of natural gas distributed increased to $600
million in 2003 from $347 million in 2002. These changes were primarily
attributable to natural gas cost increases, which are passed on to
customers, partially offset by reduced volumes.
Under the current regulatory framework, changes in core-market natural
gas prices (natural gas purchased for customers that are primarily
residential and small commercial and industrial customers without
alternative fuel capability) or consumption levels do not affect net
income, since core customer rates generally recover the actual cost of
natural gas on a substantially concurrent basis and consumption levels
are fully balanced. However, SoCalGas' 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 three months ended March 31, 2003 and 2002.
Gas Sales, Transportation and Exchange
(Volumes in billion cubic feet, dollars in millions)
Gas Sales Transportation & Exchange Total
--------------------------------------------------------------
Volumes Revenue Volumes Revenue Volumes Revenue
--------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------
2002:
Residential 95 $ 586 1 $ 2 96 $ 588
Commercial and industrial 29 145 71 31 100 176
Electric generation plants -- -- 43 7 43 7
Wholesale -- -- 45 3 45 3
--------------------------------------------------------------
124 $ 731 160 $ 43 284 $ 774
Balancing accounts and other (42)
--------
Total $ 732
- -----------------------------------------------------------------------------------------
Net income for SoCalGas decreased to $58 million in 2003 compared to $60
million in 2002, primarily due to the end of sharing of the merger
savings (discussed in the Annual Report) partially offset by increased
margins and other factors.
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, 2003, the company had $139
million in cash and $800 million in unused, committed lines of credit
available (of which PE had $500 million for the sole purpose of
providing loans to Sempra Energy Global Enterprises (Global) and
SoCalGas had $300 million).
Management believes these amounts, cash flows from operations, and new
debt issuances will be adequate to finance capital expenditure
requirements, and other commitments. Management continues to regularly
monitor the company's ability to adequately meet the needs of its
operating, financing and investing activities.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities totaled $441 million and $474
million for the three months ended March 31, 2003 and 2002,
respectively. The decrease in cash flows from operations was primarily
attributable to deferred taxes.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used in investing activities totaled $253 million and $270
million for the three months ended March 31, 2003 and 2002,
respectively.
Capital expenditures for property, plant and equipment are estimated to
be $350 million for the full year 2003 and are being financed primarily
by internally generated funds and security issuances. 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 totaled $71 million and $151
million for the three months ended March 31, 2003 and 2002,
respectively. The change in cash flows from financing activities was
attributable to the repayment of $70 million of medium-term notes in
January 2003. In addition, in the first quarter of 2002, dividends paid
to Sempra Energy and repayments of short-term debt amounted to $100
million and $50 million, respectively.
On April 7, 2003, the company called its $100 million 7.375% first-
mortgage bonds at a premium of 3.53 percent.
In April 2003, PE amended its revolving line of credit and extended the
expiration date by an additional two years. The revolving credit
commitment, initially $500 million, declines semi-annually by $125
million until expiration on April 5, 2005 and is for the purpose of
funding loans by PE to Global. Borrowings under the agreement would bear
interest at rates varying with market rates, PE's credit ratings and the
amount of the borrowings outstanding. They would be guaranteed by Sempra
Energy and would be subject to mandatory repayment if SoCalGas'
unsecured long-term credit ratings were to cease to be at least BBB by
S&P and Baa2 by Moody's, if Sempra Energy's or SoCalGas' debt to total
capitalization ratio (as defined in the agreement) were to exceed 65%,
or if there were to be a change in law materially and adversely
affecting the ability of SoCalGas to pay dividends or make distributions
to PE. No borrowings have been made under this agreement.
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 factors are discussed in the
Annual Report and in Note 3 of the notes to Consolidated Financial
Statements herein.
Natural Gas Restructuring and Gas Rates
As discussed in the Annual Report, in December 2001 the CPUC issued a
decision related to natural gas industry restructuring, with
implementation anticipated during 2002. During 2002 the California
Utilities filed a proposed implementation schedule and revised tariffs
and rules required for implementation. However, on February 27, 2003,
the CPUC issued a resolution rejecting without prejudice those proposed
tariffs and rules. The resolution ordered SoCalGas to file a new
application, which would address detailed proposals for implementation
of the December 2001 decision, but also would allow reconsideration of
the December 2001 decision. SoCalGas is required to file this new
application by June 30, 2003, but has filed a petition for modification
requesting the CPUC defer the filing of this application until October
15, 2003. If the December 2001 decision is implemented, it is not
expected to adversely affect the California Utilities' earnings.
Cost of Service
Although the California Utilities requested that a decision in their
Cost of Service applications be effective January 1, 2004, the CPUC
commissioner assigned to the applications has adopted a procedural
schedule that would prevent the CPUC from issuing a decision before the
second quarter of 2004. The California Utilities have filed a motion
seeking reconsideration of this ruling. The motion also seeks
authorization to implement an interim rate increase on January 1, 2004
to reflect an anticipated cost of service decision with any increase in
rates to be subject to refund upon the final determination by the CPUC.
NEW ACCOUNTING STANDARDS
New pronouncements that have recently become effective or that are yet
to be effective are SFAS 143 and 148, Interpretations 45 and 46, EITF
02-3, and the rescission of EITF 98-10. SFAS 143 requires accounting and
disclosure changes concerning legal obligations related to future asset
retirements. SFAS 148 amends SFAS 123 and adds two additional transition
methods to the fair value method of accounting for stock-based
compensation. Interpretation 45 clarifies that a guarantor is required
to recognize a liability for the fair value of obligations undertaken in
issuing guarantees. Interpretation 46 addresses consolidation by
business enterprises of variable-interest entities (previously referred
to as "special-purpose entities" in most cases). See further discussion
in Note 2 of the notes to Consolidated Financial Statements.
ITEM 3. MARKET RISK
There have been no significant changes in the risk issues affecting the
companies subsequent to those discussed in the Annual Report.
As of March 31, 2003, the total Value at Risk of SoCalGas' natural gas
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 within 90 days prior to the date of this report 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 or in other factors that could significantly affect the
internal controls subsequent to the date the companies completed their
evaluations.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except as described in Note 3 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.
99.1 Statements of PE's Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Sec. 1350, as
created by Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Statements of SoCalGas' Chief Executive Officer
and Chief Financial Officer pursuant to 18 U.S.C. Sec. 1350, as
created by Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The following report on Form 8-K was filed after December 31, 2002:
Current Report on Form 8-K filed May 1, 2003, filing as an exhibit
Sempra Energy's press release of May 1, 2003, giving the financial
results for the three months ended March 31, 2003.
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: May 5, 2003 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
CERTIFICATIONS
I, Stephen L. Baum, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Pacific
Enterprises;
2. Based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this Quarterly Report;
3. Based on my knowledge, the financial statements and other financial
information included in this Quarterly Report fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this Quarterly Report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Quarterly Report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this Quarterly Report (the "Evaluation
Date"); and
c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this Quarterly Report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
May 5, 2003
/S/ STEPHEN L. BAUM
Stephen L. Baum
Chief Executive Officer
I, Neal E. Schmale, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Pacific
Enterprises;
2. Based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this Quarterly Report;
3. Based on my knowledge, the financial statements and other financial
information included in this Quarterly Report fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this Quarterly Report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Quarterly Report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this Quarterly Report (the "Evaluation
Date"); and
c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this Quarterly Report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
May 5, 2003
/S/ NEAL E. SCHMALE
Neal E. Schmale
Chief Financial Officer
I, Edwin A. Guiles, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Southern
California Gas Company;
2. Based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this Quarterly Report;
3. Based on my knowledge, the financial statements and other financial
information included in this Quarterly Report fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this Quarterly Report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Quarterly Report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this Quarterly Report (the "Evaluation
Date"); and
c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this Quarterly Report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
May 5, 2003
/S/ EDWIN A. GUILES
Edwin A. Guiles
Chief Executive Officer
I, Debra L. Reed, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Southern
California Gas Company;
2. Based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this Quarterly Report;
3. Based on my knowledge, the financial statements and other financial
information included in this Quarterly Report fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this Quarterly Report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Quarterly Report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this Quarterly Report (the "Evaluation
Date"); and
c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this Quarterly Report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
May 5, 2003
/S/ DEBRA L. REED
Debra L. Reed
Chief Financial Officer