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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 2003
--------------------
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from
to
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SEMPRA ENERGY
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(Exact name of registrant as specified in its charter)
CALIFORNIA 1-14201 33-0732627
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(State of incorporation (Commission (I.R.S. Employer
or organization) File Number) Identification No.)
101 ASH STREET, SAN DIEGO, CALIFORNIA 92101
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (619)696-2000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
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Common stock, without par value New York and Pacific
Mandatorily redeemable trust preferred securities New York
Equity units, due 2007 New York
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ X ] No [ ]
Exhibit Index on page 44. Glossary on page 52.
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of January 31, 2004 was $7.1 billion.
Registrant's common stock outstanding as of January 31, 2004 was
227,231,411 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the 2003 Annual Financial Report to Shareholders are
incorporated by reference into Parts I, II, and IV.
Portions of the Proxy Statement prepared for the May 2004 annual meeting
of shareholders are incorporated by reference into Part III.
2
TABLE OF CONTENTS
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . 30
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . 31
Item 4. Submission of Matters to a Vote of Security Holders. . 32
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . 32
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . 32
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . 33
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk . . . . . . . . . . . . . . . . . 33
Item 8. Financial Statements and Supplementary Data. . . . . . 33
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . 33
Item 9A. Controls and Procedures. . . . . . . . . . . . . . . . 33
PART III
Item 10. Directors and Executive Officers of the Registrant . . 34
Item 11. Executive Compensation . . . . . . . . . . . . . . . . 35
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters. . . . . 35
Item 13. Certain Relationships and Related Transactions . . . . 35
Item 14. Principal Accountant Fees and Services . . . . . . . . 35
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . 36
Independent Auditors' Consent and Report on Schedule. . . . . . 38
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . 44
Glossary. . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Annual 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, national and
international economic, competitive, political, legislative and
regulatory conditions and developments; actions by the California Public
Utilities Commission (CPUC), the California Legislature, the California
Department of Water Resources (DWR), environmental and other regulatory
bodies in countries other than the United States, and the Federal Energy
Regulatory Commission (FERC); 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
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 report and other reports filed by the company from
time to time with the Securities and Exchange Commission.
4
PART I
ITEM 1. BUSINESS
Description of Business
A description of Sempra Energy and its subsidiaries (the company) is
given in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" of the 2003 Annual Report to Shareholders,
which is incorporated by reference. The company has four separately
managed reportable segments comprised of Southern California Gas Company
(SoCalGas), San Diego Gas & Electric (SDG&E), Sempra Energy Trading
(SET) and Sempra Energy Resources (SER). SoCalGas and SDG&E are
collectively referred to as "the California Utilities."
Company Website
The company's website address is http://www.sempra.com/investor.htm. The
company makes available free of charge through its website its annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and any amendments to those reports as soon as reasonably
practicable after such material is electronically filed with or
furnished to the Securities and Exchange Commission. The charters of the
company's board of directors' (the board) audit, compensation and
corporate governance committees, the board's corporate governance
guidelines and the code of business conduct and ethics for directors and
officers are posted on the company's website. Printed copies may be
obtained by writing to the company's Corporate Secretary at Sempra
Energy, 101 Ash Street, San Diego, CA 92101-3017.
RISK FACTORS
The following risk factors and all other information contained in this
report should be considered carefully when evaluating Sempra Energy and
its subsidiaries. These risk factors could affect the actual results of
Sempra Energy and its subsidiaries and cause such results to differ
materially from those expressed in any forward-looking statements of, or
made by or on behalf of, Sempra Energy or its subsidiaries. Other risks
and uncertainties, in addition to those that are described below, may
also impair their business operations. If any of the following risks
occurs, Sempra Energy's business, cash flows, results of operations and
financial condition could be seriously harmed. In addition, the trading
price of its securities could decline due to the occurrence of any of
these risks. These risk factors should be read in conjunction with the
other detailed information concerning Sempra Energy and its subsidiaries
set forth in the notes to Consolidated Financial Statements and in
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" incorporated by reference in this report.
Risks Related to the California Utilities
The California Utilities are subject to extensive regulation by state,
federal and local legislation and regulatory authorities, which may
adversely affect the operations, performance and growth of their
businesses.
The CPUC, which consists of five commissioners appointed by the Governor
of California for staggered six-year terms, regulates the California
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Utilities' rates and conditions of service, sales of securities, rates
of return, rates of depreciation, uniform systems of accounts,
examination of records and long-term resource procurement. The CPUC
conducts various reviews of utility performance (including
reasonableness and prudency reviews) and conducts audits and
investigations into various matters which may, from time to time, result
in disallowances and penalties adversely affecting earnings and cash
flows. The CPUC also regulates the relationship of utilities with their
affiliates and is currently conducting an investigation into this
relationship. Various proceedings involving the CPUC and relating to
the California Utilities' rates, costs, incentive mechanisms,
performance-based regulation and affiliate and holding company rule
compliance are discussed in the notes to Consolidated Financial
Statements and in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" incorporated by reference in this
report.
Periodically the California Utilities' rates are approved by the CPUC
based on forecasts of capital and operating costs. If the California
Utilities' actual capital and operating costs were to exceed the amount
included in its base rates approved by the CPUC, it would adversely
affect earnings and cash flows.
To promote efficient operations and improved productivity and to move
away from reasonableness reviews and disallowances, the CPUC adopted
Performance-Based Regulation (PBR) for SDG&E effective in 1994 and for
SoCalGas effective in 1997. 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. The three areas that are eligible for PBR
rewards are: operational incentives based on measurements of safety,
reliability and customer satisfaction; demand-side management (DSM)
rewards based on the effectiveness of the programs; and natural gas
procurement rewards. Although the California Utilities have received
significant PBR rewards in the past, there can be no assurance that the
California Utilities will receive rewards at similar levels in the
future, or at all. Additionally, if the California Utilities fail to
achieve certain minimum performance levels established under the PBR
mechanisms, they may be assessed financial disallowances or penalties
which could adversely affect their earnings and cash flows.
The FERC regulates the transmission and wholesale sales of electricity
in interstate commerce, transmission access and other similar matters
involving SDG&E.
The California Utilities may be impacted by new regulations, decisions,
orders or interpretations of the CPUC, FERC or other regulatory bodies.
New legislation, regulations, decisions, orders or interpretations could
change how the California Utilities operate, could affect their ability
to recover their various costs through rates or adjustment mechanisms,
or could require the California Utilities to incur additional expenses.
SDG&E may incur substantial costs and liabilities as a result of its
ownership of nuclear facilities.
SDG&E owns a 20% interest in the San Onofre Nuclear Generating Station
(SONGS), a 2,150 megawatt nuclear generating facility near San Clemente,
6
California. The Nuclear Regulatory Commission has broad authority under
federal law to impose licensing and safety-related requirements for the
operation of nuclear generation facilities. SDG&E's ownership interest
in SONGS subjects it to the risks of nuclear generation, which include:
- -- the potential harmful effects on the environment and human
health resulting from the operation of nuclear facilities
and the storage, handling and disposal of radioactive
materials;
- -- limitations on the amounts and types of insurance
commercially available to cover losses that might arise in
connection with nuclear operations; and
- -- uncertainties with respect to the technological and
financial aspects of decommissioning nuclear plants at the
end of their licensed lives.
The California Utilities' future results of operations and financial
condition may be materially adversely affected by the outcome of pending
litigation against them.
Lawsuits filed in 2000 and currently consolidated in San Diego Superior
Court seek class-action certification and damages, alleging Sempra
Energy and the California Utilities, along with El Paso Energy Corp. and
several of its affiliates, unlawfully sought to control natural gas
markets. Similar lawsuits have been filed by the Attorneys General of
Arizona and Nevada and by others. Although the California Utilities
expect to prevail in these cases, they have expended or accrued
substantial amounts to pay the costs of defending these claims. If the
plaintiffs in these cases were to prevail in their claims, the future
results of operations and financial condition of Sempra Energy and the
California Utilities may be materially adversely affected. In addition,
various other lawsuits are pending against SDG&E and other Sempra Energy
subsidiaries alleging that the companies unlawfully manipulated the
electric energy market.
In December 2002, the CPUC approved a settlement with SDG&E allocating
between SDG&E's customers and shareholders the profits from certain
intermediate-term power purchase contracts that SDG&E had entered into
during the early stages of California's electric utility industry
restructuring. As a result of the CPUC's decision, SDG&E recognized
additional after-tax income of $65 million in 2003. The Utility
Consumers' Action Network (UCAN) has appealed the decision and the
California Court of Appeals granted the petition for review.
These proceedings are discussed in the notes to Consolidated Financial
Statements and in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" incorporated by reference in this
report.
7
Risks Related to Sempra Energy's Electric Generation,
Energy Trading, Liquefied Natural Gas (LNG), Energy Solutions,
International and Other Businesses
Sempra Energy's businesses are exposed to market risk, and its financial
condition, results of operations, cash flows and liquidity may be
adversely affected by fluctuations in commodity market prices that are
beyond its control.
Sempra Energy Trading (SET) is a full-service trading company that
markets and trades physical and financial commodity products. Its
trading portfolios consist of physical and financial commodity contracts
including contracts for natural gas, electricity, petroleum products,
base metals and other commodities that are settled by the delivery of
the commodity or cash. Although SET generally seeks to structure its
trading contracts so that a substantial majority of its trading revenues
are realizable within 24 months and strives to maintain proper hedging
mechanisms for its trading book, at times SET may have unhedged trading
positions in the market, resulting from the management of its trading
portfolios or from its inability to hedge, in whole or in part,
particular risks.
Sempra Energy Resources (SER) generates and sells electricity on a long-
term basis, or into the spot market or other competitive markets, and
purchases natural gas for its power plants and sometimes purchases
electricity in the open market to satisfy its contractual obligations.
Sempra Energy Solutions (SES) procures electricity and natural gas for
its commercial and industrial customers. The market prices for these
commodities may fluctuate substantially over relatively short periods of
time.
Sempra Energy's sales and results of operations could be adversely
affected if the prevailing market prices for electricity, natural gas or
other commodities that are procured for power plants or to satisfy
contractual obligations (whether to trading counterparties or
otherwise), or that are provided to customers in regional markets and
other competitive markets in which the company competes, change in a
direction or manner that it does not anticipate.
Unanticipated changes in market prices for energy-related and other
commodities result from multiple factors, including: weather
conditions; seasonality; changes in demand; transmission or
transportation constraints or inefficiencies; availability of
competitively priced alternative energy sources; commodity production
levels; actions by OPEC (Organization of the Petroleum Exporting
Countries) with respect to the supply of crude oil; federal, state and
foreign energy and environmental regulation and legislation; natural
disasters, wars, embargoes and other catastrophic events; and
expropriation of assets by foreign countries.
In 2001 the FERC, which has jurisdiction over wholesale power and
transmission rates and independent system operators and other entities
that control transmission facilities or that administer wholesale power
sales in some of the markets in which the company operates, imposed
price limitations which resulted in unexpected moves in electricity
prices. The FERC may impose additional price limitations, bidding rules
8
and other mechanisms or terminate existing price limitations from time
to time in the future. Any such action by the FERC may result in prices
for electricity changing in an unanticipated direction or manner, and
may have an adverse effect on Sempra Energy's sales and results of
operations.
Sempra Energy and its subsidiaries cannot and do not attempt to fully
hedge their assets or positions against changes in commodity prices, and
their hedging procedures may not work as planned.
To lower financial exposure related to commodity price fluctuations,
Sempra Energy's subsidiaries routinely enter into contracts to hedge a
substantial portion of their purchase and sale commitments and
inventories of electricity, natural gas, crude oil, refined petroleum
products and other commodities. As part of this strategy, they
routinely utilize fixed-price, forward, physical purchase and sales
contracts, futures, financial swaps and option contracts traded in the
over-the-counter markets or on exchanges. However, the company does not
always cover the entire exposure of its assets or its positions to
market price volatility and the coverage will vary over time. To the
extent Sempra Energy or its subsidiaries have unhedged positions, or if
their hedging positions do not work as planned, fluctuating commodity
prices could have a material adverse effect on Sempra Energy's business,
results of operations, cash flows and financial condition.
Risk management procedures may not prevent losses.
Although Sempra Energy and its subsidiaries have risk management systems
and control systems in place that use advanced methodologies to quantify
risk, these systems may not prevent material losses. The risk
management procedures the company has in place may not always be
followed or may not always work as planned. In addition, daily value-
at-risk and loss limits are derived from historic price movements. If
prices significantly deviate from historic prices, the limits may not
protect the company from significant losses. As a result of these and
other factors, there can be no assurances that Sempra Energy's risk
management procedures will prevent losses that would negatively affect
its business, results of operations, cash flows and financial condition.
A downgrade in Sempra Energy's credit ratings could negatively affect
its energy trading and other non-utility businesses.
If Sempra Energy's credit ratings were to be downgraded, the business
prospects of its energy trading and other non-utility businesses, which
generally rely on the creditworthiness of Sempra Energy, would be
adversely affected. SET would be required to comply with various margin
or other credit enhancement obligations under many of the trading and
marketing contracts into which it has entered, substantially all of
which are guaranteed by Sempra Energy, and it may be able to continue to
trade only on less favorable terms. To meet liquidity requirements,
Sempra Energy and its subsidiaries maintain substantial unused committed
lines of credit for which borrowings are available without regard to
credit ratings. A ratings downgrade could require Sempra Energy to
divert to SET all or a portion of the liquidity that these lines would
otherwise provide for the expansion of Sempra Energy's other non-utility
businesses. In addition, if these lines were to become unavailable or to
be inadequate to meet SET's margin or other credit enhancement
9
requirements, SET's trading partners could exercise other remedies such
as liquidating and netting their exposures to SET, making it more
difficult or impossible for SET to manage effectively its remaining
trading positions or to continue its trading business, and Sempra Energy
and its subsidiaries may not have sufficient liquidity to meet their
obligations.
Sempra Energy's businesses depend on counterparties, customers and
suppliers performing in accordance with their agreements, and any
failure by them to perform could require the company to incur
substantial expenses and expose it to commodity price risk and
volatility, which could adversely affect Sempra Energy's liquidity, cash
flows and results of operations.
Sempra Energy's subsidiaries are exposed to the risk that
counterparties, customers and suppliers that owe money or energy as a
result of market transactions or other long-term agreements will not
perform their obligations under such agreements. Should they fail to
perform, the company may be required to acquire alternative hedging
arrangements or to honor the underlying commitment at then-current
market prices. In such event, Sempra Energy's subsidiaries may incur
additional losses to the extent of amounts already paid to such
counterparties or suppliers. In addition, the subsidiaries often extend
credit to counterparties and customers. While the company performs
significant credit analyses prior to extending credit, Sempra Energy and
its subsidiaries are exposed to the risk that they may not be able to
collect amounts owed to them.
If the DWR were to succeed in setting aside, or were to fail to perform
its obligations under its long-term power contract with SER, Sempra
Energy's business, results of operations and cash flows will be
materially adversely affected.
In 2001, SER entered into a 10-year power sales agreement with the DWR,
to supply up to 1,900 megawatts to the state. Sempra expects the
contract with the DWR will be a source of significant revenue over the
10-year period. The validity of the power sales agreement with the DWR
has been the subject of extensive litigation between the parties before
the FERC and in California courts. Although SER has prevailed in all of
these challenges to date, the plaintiffs in these actions have appealed
several of these rulings. Although SER expects to prevail in these
appeals, if the DWR were to succeed in setting aside its obligations
under the contract, or if the DWR fails or is unable to meet its
contractual obligations on a timely basis, it could have a material
adverse effect on Sempra Energy's business, results of operations, cash
flows and financial condition. These proceedings are described in the
notes to Consolidated Financial Statements and in "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" incorporated by reference in this report.
In the future, Sempra Energy and its subsidiaries may elect not to or
may not be able to enter into long-term supply and sales agreements or
long-term firm capacity agreements for their projects, which would
subject Sempra Energy's sales to increased volatility and its businesses
to increased competition.
10
The electric generation and wholesale power sales industries have become
highly competitive. As more plants are built and competitive pressures
increase, the wholesale pricing of electricity becomes more volatile.
Without the benefit of long-term power sales agreements, such as the 10-
year power sales agreement between SER and the DWR, Sempra Energy's
sales will be subject to increased price volatility, and it may be
unable to sell the power generated by SER's facilities or operate those
facilities profitably.
Sempra Energy LNG Corp. (SELNG) does not intend to commence significant
construction of its proposed LNG terminals without first entering into
long-term LNG supply agreements and corresponding natural gas sales
agreements, or long-term firm capacity service agreements, for a
substantial portion of the processing capacity of these facilities.
However, if these plans were to change and the company were to construct
its terminals without the benefit of such long-term agreements, its
sales would be subject to increased price volatility, and it may be
unable to sell the services of its LNG facilities or to operate the
facilities profitably. If the counterparties, customers or suppliers to
one or more of the key agreements for the LNG facilities were to fail or
become unable to meet their contractual obligations on a timely basis,
it could have a significant negative impact on Sempra Energy's business,
results of operations, cash flows and financial condition.
Business development activities may not be successful and projects under
construction may not commence operation as scheduled, which could
increase Sempra Energy's costs and impair its ability to recover its
investments.
The acquisition, development and construction of electric generating
facilities and LNG receiving terminals involve numerous risks. Sempra
Energy and its subsidiaries may be required to expend significant sums
for preliminary engineering, permitting, fuel supply, resource
exploration, legal and other expenses in preparation for competitive
bids which they may not win or before it can be established whether a
project is feasible, economically attractive or capable of being built.
Sempra Energy's success in developing a particular project is contingent
upon, among other things, negotiation of satisfactory engineering,
procurement and construction agreements, fuel supply and power sales
contracts (for generating facilities), LNG supply and natural gas sales
agreements or firm capacity service agreements (for LNG receiving
terminals), receipt of required governmental permits and timely
implementation and satisfactory completion of construction. Successful
completion of a particular project may also be adversely affected by
unforeseen engineering problems, construction delays and contractor
performance shortfalls, work stoppages, adverse weather conditions,
environmental and geological conditions, and other factors. If the
company is unable to complete the development of a facility, it
typically will not be able to recover its investment in the project.
Generation facilities and/or LNG terminals may not operate as planned,
which may adversely affect Sempra Energy's business, cash flows and
results of operations.
The operation of power plants and LNG receiving terminals involves many
risks, including the breakdown or failure of generation or
regasification and storage facilities or other equipment or processes,
11
labor disputes, fuel interruption and operating performance below
expected levels. In addition, weather-related incidents and other
natural disasters can disrupt generation, regasification and
transmission delivery systems. The occurrence of any of these events
could lead to operation of power plants or LNG terminals below their
expected capacity levels, which may result in lost revenues or increased
expenses, including higher maintenance costs and penalties, and could
adversely affect Sempra Energy's business, cash flows and results of
operations.
Competition among developers and operators of LNG terminals is rapidly
increasing, which may adversely affect the profitability of SELNG's
proposed LNG terminals.
Although there are only a limited number of LNG terminal facilities
operating in North America today, many companies have announced plans to
develop LNG facilities to serve the North American market. Some of
these competitors have more operating experience, more development
experience, larger staffs and greater financial resources than the
company. Industry analysts have predicted that if all of the proposed
LNG facilities in North America that have been announced by developers
are actually built, there will likely be substantial excess capacity for
such terminals in the near future. Excess capacity is likely to lead to
decreased prices for such services. Although its proposed LNG
facilities in Mexico and Louisiana are more advanced in the siting,
permitting and regulatory approval processes than the proposed projects
of most of its competitors, there can be no assurance that Sempra Energy
will be able to maintain that advantage.
Sempra Energy's subsidiaries rely on transmission and distribution
assets that they do not own or control to deliver electricity and
natural gas.
Sempra Energy's subsidiaries depend on transmission and distribution
facilities owned and operated by third parties to deliver the
electricity and natural gas they sell to wholesale markets, to supply
some of their electric generation facilities, and to provide retail
energy services to customers. SELNG also will rely on natural gas
transmission facilities to transport natural gas for customers of its
proposed LNG terminal facilities. If transmission is disrupted, or if
capacity is inadequate, the ability of Sempra Energy's subsidiaries to
sell and deliver their products and services may be hindered. As a
result, they may be responsible for damages incurred by their customers,
such as the additional cost of acquiring alternative supply at then-
current spot market rates.
Sempra Energy's businesses require numerous permits and other
governmental approvals from various federal, state, local and foreign
governmental agencies, and any failure to obtain or maintain required
permits or approvals could cause Sempra Energy's sales to decline and/or
its costs to increase.
The acquisition, ownership and operation of electric generation
facilities, natural gas pipelines and LNG receiving terminals require
numerous permits, approvals and certificates from federal, state, local
and foreign governmental agencies. All of the existing and planned
development projects of Sempra Energy's subsidiaries require multiple
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permits. They may not be able to obtain or maintain all required
regulatory approvals. If there is a delay in obtaining any required
regulatory approvals or if the company fails to obtain any required
approvals or to comply with any applicable laws or regulations, it may
not be able to operate its facilities, or it may be forced to incur
additional costs.
Sempra Energy's future results of operations, cash flows and financial
condition may be adversely affected by the outcomes of pending
litigation and other adversarial proceedings involving Sempra Energy and
some of its subsidiaries, including SET and SER.
Lawsuits have been filed by the Attorneys General of Arizona and Nevada,
alleging that Sempra Energy and some of its subsidiaries, along with El
Paso Energy and several of its affiliates, unlawfully sought to control
the natural gas markets in their respective states. Similar lawsuits
have been filed elsewhere. In addition, various lawsuits are pending
against Sempra Energy, SET, SER and other Sempra Energy subsidiaries,
alleging that the companies unlawfully manipulated the electric energy
market. Although the company expects to prevail in these cases, it has
expended or accrued substantial amounts to pay the costs of defending
these claims. If the plaintiffs in these cases were to prevail in their
claims, Sempra Energy's future results of operations, cash flows and
financial condition may be materially adversely affected. These
proceedings are discussed in the notes to Consolidated Financial
Statements and in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" incorporated by reference in this
report.
Sempra Energy's energy and energy trading businesses are subject to
complex government regulations and may be adversely affected by changes
in these regulations or in their interpretation or implementation.
In recent years, the regulatory environment applicable to the electric
power and natural gas industries has undergone significant changes, both
on a federal and state level, which have impacted the nature of these
industries and the manner in which their participants conduct their
businesses. These changes are ongoing, and Sempra Energy cannot predict
the future course of changes in this regulatory environment or the
ultimate affect that this changing regulatory environment will have on
its businesses. Moreover, existing regulations may be revised or
reinterpreted, and new laws and regulations may be adopted or become
applicable to the company and its facilities. Future changes in laws
and regulations may have a detrimental effect on Sempra Energy's
business, cash flows, financial condition and/or results of operations.
Sempra Energy's energy and energy trading operations are subject to
affiliate rules relating to transactions with the California Utilities.
These businesses could be adversely affected by changes in these rules
or by additional CPUC or FERC rules' further restricting their ability
to sell electricity or gas or to trade with the California Utilities.
Affiliate transaction rules also could require these businesses to
obtain the prior approval of the CPUC before entering into any such
transactions with the California Utilities. Any such restrictions or
approval requirements could adversely affect SER's and SEI's electric
generation plants or natural gas pipelines, SELNG's proposed LNG
receiving terminals, or SET trading operations.
13
Various proceedings, inquiries and investigations relating to the
business activities of SER and SET are currently pending before the
FERC. For a description of such proceedings, inquiries and
investigations, see the notes to Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" incorporated by reference in this report.
Sempra Energy's businesses have significant environmental compliance
costs, and future environmental compliance costs could adversely affect
Sempra Energy's profitability.
Sempra Energy's subsidiaries are subject to extensive federal, state,
local and foreign statutes, rules and regulations relating to
environmental protection. They are required to obtain numerous
governmental permits, licenses and other approvals to construct and
operate their businesses. Additionally, to comply with these legal
requirements, they must spend significant sums on environmental
monitoring, pollution control equipment and emissions fees. The company
also is generally responsible for all on-site liabilities associated
with the environmental condition of its electric generation facilities
and other energy projects which it has acquired or developed, regardless
of when the liabilities arose and whether they are known or unknown. If
Sempra Energy's subsidiaries fail to comply with applicable
environmental laws, they may be subject to penalties, fines and/or
curtailments of their operations.
The scope and extent of any new environmental regulations, including
their affects on operations, are difficult to predict. In addition,
existing environmental regulations could be revised or reinterpreted and
new laws and regulations could be adopted or become applicable to the
company and its facilities.
Sempra Energy's international businesses are exposed to different local,
regulatory and business risks and challenges, which could have a
material adverse effect on Sempra Energy's financial condition, cash
flows and results of operations.
Sempra Energy subsidiaries currently have interests in electricity
generation, natural gas transmission and LNG terminal projects in
Mexico, and also have trading, marketing and risk management operations
in Canada, Europe and Asia. Sempra Energy International (SEI) also has
electricity and natural gas distribution businesses in Argentina, Chile
and Peru. Having energy infrastructure projects, owning energy assets
and operating businesses in foreign jurisdictions subject the company to
significant political and financial risks which vary by country,
including:
- -- changes in foreign laws and regulations, including tax and
environmental laws and regulations;
- -- changes in U.S. laws and regulations, including tax and
environmental laws and regulations, related to foreign
operations;
- -- high rates of inflation;
- -- changes in government policies or personnel;
- -- trade restrictions;
14
- -- limitations on U.S. company ownership in foreign countries;
- -- permitting and regulatory compliance;
- -- changes in labor supply and labor relations in operations
outside the United States;
- -- adverse rulings by foreign courts or tribunals and difficulty
in enforcing contractual rights in foreign jurisdictions; and
- -- general political, economic and business conditions.
Sempra Energy's international businesses also are subject to foreign
currency risks. These risks arise from both volatility in foreign
currency exchange rates and devaluations of foreign currencies. In such
cases, an appreciation of the U.S. dollar against a local currency could
reduce the amount of cash and income received from those foreign
subsidiaries. For example, the devaluation of the Argentine peso
against the U.S. dollar in recent years (as well as the Argentine
government's unilateral, retroactive abrogation of utility agreements
early in 2002) has had a material adverse effect on SEI's two
unconsolidated subsidiaries in Argentina. On September 6, 2002, SEI
initiated arbitration proceedings under the 1994 Bilateral Investment
Treaty between the United States and Argentina for recovery of the
diminution of the value of its investments that has resulted from
Argentine governmental actions. SEI has claimed damages of at least
$258 million these proceedings, which are continuing. For a description
of legal proceedings relating to SEI's business operations in Argentina,
see the notes to Consolidated Financial Statements incorporated by
reference in this report. While SEI believes that it has contracts and
other measures in place to mitigate its most significant foreign
currency exchange risks, it has some exposure that is not fully
mitigated.
Other Risks Related to the Company
Sempra Energy's cash flows, ability to pay dividends and ability to meet
its debt obligations largely depend on the performance of its
subsidiaries.
Sempra Energy is a holding company and conducts its operations entirely
through its subsidiaries. Sempra Energy's California Utilities are its
major source of liquidity. Funding of other business units' capital
expenditures is largely dependent on the California Utilities' paying
sufficient dividends to Sempra Energy, which depends on the sufficiency
of utility earnings and cash flows in excess of utility needs. In
addition, Sempra Energy's cash flows, ability to meet its obligations to
creditors and its ability to pay dividends on its common stock are
largely dependent upon the earnings of the subsidiaries and the
distribution of such earnings to Sempra Energy in the form of dividends.
The subsidiaries are separate and distinct legal entities and could be
precluded from making such distributions under certain circumstances,
including as a result of legislation or regulation or in times of
financial distress.
Natural disasters, catastrophic accidents or acts of terrorism could
materially adversely affect Sempra Energy's business, earnings and cash
flows.
15
Like other major industrial facilities, Sempra Energy's generation
plants (including SONGS), electric transmission facilities, LNG
receiving terminals and storage facilities, chartered oil tankers and
natural gas pipelines may be damaged by natural disasters, catastrophic
accidents or acts of terrorism. Any such incidents could result in
severe business disruptions, significant decreases in revenues and/or
significant additional costs to the company, which could have a material
adverse effect on Sempra Energy's earnings and cash flows. Given the
nature and location of these facilities, any such incidents also could
cause fires, leaks, explosions, spills or other significant damage to
natural resources and/or property belonging to third parties, or
personal injuries, which could lead to significant claims against Sempra
Energy and its subsidiaries. Insurance coverage may become unavailable
for certain of these risks and the insurance proceeds received for any
loss of or damage to any of its facilities, or for any loss of or damage
to natural resources or property or personal injuries caused by its
operations, may be insufficient to cover the company's losses or
liabilities without materially adversely affecting the company's
financial condition, earnings and cash flows.
Sempra Energy could incur significant income tax expense and its results
of operations and cash flows may be materially adversely affected if the
Internal Revenues Service (IRS) denies or otherwise makes income tax
credits related to its coal and synthetic fuels businesses unusable.
Sempra Energy generates substantial income tax credits as a result of
synthetic fuel operations and affordable-housing investments. These
credits substantially reduce the company's income tax expense.
In 2003, the IRS questioned the scientific validity of the testing
procedures used to support synthetic fuel credits. The IRS has
completed its review of these procedures and resumed issuing letter
rulings based on its previous requirements, including one involving
operations owned by Sempra Energy. However, as part of its recently
commenced normal audit program for the company for the period 1998-2001,
the IRS has begun auditing the company's synthetic fuel operations. In
addition, a U.S. Senate subcommittee has initiated an investigation into
income tax credits, and Sempra Energy and other companies are responding
to subcommittee requests regarding their synthetic fuel operations.
Through December 31, 2003, Sempra Energy has recorded cumulative
synthetic fuel income tax credits of $256 million, including $106
million for the fiscal year ended December 31, 2003.
Although Sempra Energy believes the retroactive disallowance of its
synthetic fuel credits is unlikely, any such retroactive disallowance
could result in a significant liability for income tax credits
previously taken. In addition, Sempra Energy's use of income tax
credits in the future could be limited by any new IRS interpretations or
regulations or by any new income tax legislation.
GOVERNMENT REGULATION
The most significant government regulation affecting Sempra Energy is
that affecting its utility subsidiaries.
16
California Utility Regulation
The CPUC, which consists of five commissioners appointed by the Governor
of California for staggered six-year terms, regulates SDG&E's and
SoCalGas' rates and conditions of service, sales of securities, rate of
return, rates of depreciation, uniform systems of accounts, examination
of records, and long-term resource procurement. The CPUC conducts
various reviews of utility performance and conducts investigations into
various matters, such as deregulation, competition and the environment,
to determine its future policies. The CPUC also regulates the
relationship of utilities with their holding companies and is currently
conducting an investigation into this relationship.
The California Energy Commission (CEC) has discretion over electric
demand forecasts for the state and for specific service territories.
Based upon these forecasts, the CEC determines the need for additional
energy sources and for conservation programs. The CEC sponsors
alternative-energy research and development projects, promotes energy
conservation programs and maintains a state-wide plan of action in case
of energy shortages. In addition, the CEC certifies power-plant sites
and related facilities within California.
The CEC conducts a 20-year forecast of supply availability and prices
for every market sector consuming natural gas in California. This
forecast includes resource evaluation, pipeline capacity needs, natural
gas demand and wellhead prices, and costs of transportation and
distribution. This analysis is used to support long-term investment
decisions.
United States Utility Regulation
The FERC regulates the interstate sale and transportation of natural
gas, the transmission and wholesale sales of electricity in interstate
commerce, transmission access, the uniform systems of accounts, rates of
depreciation and electric rates involving sales for resale. Both the
FERC and the CPUC are currently investigating prices charged to the
California investor-owned utilities (IOUs) by various suppliers of
natural gas and electricity. See further discussion in Notes 13 and 14
of the notes to Consolidated Financial Statements of the 2003 Annual
Report to Shareholders, which is incorporated by reference.
The Nuclear Regulatory Commission (NRC) oversees the licensing,
construction and operation of nuclear facilities. NRC regulations
require extensive review of the safety, radiological and environmental
aspects of these facilities. Periodically, the NRC requires that newly
developed data and techniques be used to re-analyze the design of a
nuclear power plant and, as a result, requires plant modifications as a
condition of continued operation in some cases.
Local Regulation
SoCalGas has natural gas franchises with the 240 legal jurisdictions in
its service territory. These franchises allow SoCalGas to locate
facilities for the transmission and distribution of natural gas in the
streets and other public places. Some franchises have fixed terms, such
as that for the city of Los Angeles, which expires in 2012. Most of the
franchises do not have fixed terms and continue indefinitely. The range
17
of expiration dates for the franchises with definite terms is 2005 to
2048.
SDG&E has electric franchises with the two counties and the 26 cities in
its electric service territory, and natural gas franchises with the one
county and the 18 cities in its natural gas service territory. These
franchises allow SDG&E to locate facilities for the transmission and
distribution of electricity and/or natural gas in the streets and other
public places. The franchises do not have fixed terms, except for the
electric and natural gas franchises with the cities of Encinitas (2012),
San Diego (2021) and Coronado (2028), and the natural gas franchises
with the city of Escondido (2036) and the county of San Diego (2030).
The franchise agreement with the city of Chula Vista expired during 2003
but continues on a month-to-month basis while a new agreement is being
negotiated.
SEI's Mexican subsidiaries Distribuidora de Gas Natural (DGN) de
Mexicali, DGN de Chihuahua and DGN de La Laguna Durango build and
operate natural gas distribution systems in Mexicali, Chihuahua and the
La Laguna-Durango zone in north-central Mexico. These companies are
regulated by city and state government labor and environmental agencies.
Other Regulation
The company's unconsolidated utility affiliates have operations in
Argentina, Chile and Peru. These operations are subject to the local,
federal and other regulations of the countries and/or political
subdivisions in which they are located.
SET has trading locations in North America, Europe and Asia that are
subject to regulation as to operations and financial position. Among
other things, its operations are subject to the New York Mercantile
Exchange, the London Metals Exchange, the Commodity Futures Trading
Commission, the FERC and the National Futures Association.
Other subsidiaries are also subject to varying amounts of regulation by
various governments, including various states in the United States.
Licenses and Permits
The California Utilities obtain a number of permits, authorizations and
licenses in connection with the transmission and distribution of natural
gas. In addition, SDG&E obtains a number of permits, authorizations and
licenses in connection with the transmission and distribution of
electricity. Both require periodic renewal, which results in continuing
regulation by the granting agency.
The company's unregulated affiliates are also required to obtain
permits, authorizations and licenses in the normal course of business.
Some of these permits, authorizations and licenses require periodic
renewal. SER and its subsidiaries obtain a number of permits,
authorizations and licenses in connection with the construction and
operation of power generation facilities. In addition, SER obtains
permits in connection with wholesale distribution of electricity. SES
obtains permits in connection with the construction and operation of
various facilities and with the retail sale of electricity and natural
gas. SEI's Mexican subsidiaries obtain construction permits for their
18
distribution systems from the local governments where the service is
provided. SELNG obtains licenses and permits for LNG construction and
operations.
Other regulatory matters are described in Notes 13 and 14 of the notes
to Consolidated Financial Statements of the 2003 Annual Report to
Shareholders, which is incorporated by reference.
SOURCES OF REVENUE
Industry segment information is contained in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and in
Note 16 of the notes to Consolidated Financial Statements of the 2003
Annual Report to Shareholders, which is incorporated by reference.
Various information concerning revenue and revenue recognition is
provided in Note 1 of the notes to Consolidated Financial Statements of
the 2003 Annual Report to Shareholders.
NATURAL GAS OPERATIONS
Resource Planning and Natural Gas Procurement and Transportation
The company is engaged in the sale, distribution, storage and
transportation of natural gas through the California Utilities. The
company's resource planning, natural gas procurement, contractual
commitments and related regulatory matters are discussed below and in
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" and in Notes 14 and 15 of the notes to Consolidated
Financial Statements of the 2003 Annual Report to Shareholders, which is
incorporated by reference.
Customers
For regulatory purposes, customers are separated into core and noncore
customers. Core customers are primarily residential and small commercial
and industrial customers without alternative fuel capability. Noncore
customers consist primarily of electric generation (EG), wholesale,
large commercial, industrial and enhanced oil recovery customers.
Most core customers purchase natural gas directly from the California
Utilities. Core customers are permitted to aggregate their natural gas
requirement and purchase directly from brokers or producers. The
California Utilities continue to be obligated to purchase reliable
supplies of natural gas to serve the requirements of the core customers.
Natural Gas Procurement and Transportation
Most of the natural gas purchased and delivered by the California
Utilities is produced outside of California, primarily in the
southwestern U.S. and Canada. The California Utilities purchase natural
gas under short-term contracts primarily based on monthly spot-market
prices.
To ensure the delivery of the natural gas supplies to the distribution
system and to meet the seasonal and annual needs of customers, SoCalGas
is committed to firm pipeline capacity contracts that require the
payment of fixed reservation charges to reserve firm transportation
19
entitlements. SoCalGas releases and brokers excess capacity on a short-
term basis. Interstate pipeline companies, primarily El Paso Natural Gas
Company and Transwestern Pipeline Company, provide transportation
services into SoCalGas' intrastate transmission system for supplies
purchased by SoCalGas or its transportation customers from outside of
California. The last of these contracts expires in 2007. The rates that
interstate pipeline companies may charge for natural gas and
transportation services are regulated by the FERC.
SDG&E also has long-term natural gas transportation contracts with
various interstate pipelines which expire on various dates through 2023.
SDG&E currently purchases natural gas on a spot basis to fill its long-
term pipeline capacity and purchases additional spot market supplies
delivered directly to California for its remaining requirements. SDG&E
continues to evaluate its long-term pipeline capacity portfolio,
including the release of a portion of this capacity to third parties.
All of SDG&E's natural gas is delivered through SoCalGas pipelines under
a short-term transportation agreement authorized by the CPUC. In
addition, under a separate agreement expiring March 2005, SoCalGas
provides SDG&E 8 bcf of storage inventory capacity with firm injection
and withdrawal rights.
According to "Btu's Daily Gas Wire," the annual average spot price of
natural gas at the California/Arizona border was $5.10 per million
British thermal unit (mmbtu) in 2003 ($5.59 in December 2003), compared
with $3.14 per mmbtu in 2002 and $7.27 per mmbtu in 2001. A number of
factors associated with California's energy crisis from late 2000
through early 2001 resulted in higher natural gas prices during that
period. Prices for natural gas decreased in the later part of 2001 and
increased toward the end of 2002 and in 2003. The following table
summarizes the average commodity costs of natural gas sold for the last
three years, which are above previous levels:
Years ended December 31,
-------------------------------------
2003 2002 2001
-------------------------------------
Cost of natural gas $2,071 $1,381 $2,549
Volumes delivered (bcf) 394 406 410
Average cost of natural gas
(dollars per bcf) $ 5.26 $ 3.40 $ 6.22
With improved delivery capacity to California, the company expects
adequate resources to be available at prices that generally will follow
national natural gas pricing trends and volatility.
Natural Gas Storage
SoCalGas provides natural gas storage services for use by the core,
noncore and off-system customers. Core customers are allocated a portion
of SoCalGas storage capacity. Remaining customers can bid and negotiate
the desired amount of storage on a contract basis. The storage service
program provides opportunities for customers to store natural gas,
usually during the summer, to reduce winter purchases when natural gas
costs are generally higher. This allows customers to select the level of
20
service they desire to assist them to manage their fuel procurement and
transportation needs.
Demand for Natural Gas
The California Utilities face competition in the residential and
commercial customer markets based on the customers' preferences for
natural gas compared with other energy products. The demand for natural
gas by electric generators is influenced by a number of factors. In the
short-term, natural gas use by EGs is impacted by the availability of
alternative sources of generation. The availability of hydroelectricity
is highly dependent on precipitation in the western United States. In
addition, natural gas use is impacted by the performance of other
generation sources in the western United States, including nuclear and
coal, and other natural gas facilities outside the service area.
Natural gas use is also impacted by changes in end-use electricity
demand. For example, natural gas use generally increases during summer
heat waves. Over the long-term, natural gas use will be greatly
influenced by additional factors such as the location of new power plant
construction. More generation capacity currently is being constructed
outside Southern California than within the utility service area. This
new generation will likely displace the output of older, less efficient
local generation, reducing EG natural gas use.
Effective March 31, 1998, electric industry restructuring provided out-
of-state producers the option to purchase energy for California utility
customers. As a result, natural gas demand for electric generation
within Southern California competes with electric power generated
throughout the western United States. Although electric industry
restructuring has no direct impact on the California Utilities' natural
gas operations, future volumes of natural gas transported for electric
generating plant customers may be significantly affected to the extent
that regulatory changes divert electric generation from the California
Utilities' service area.
Growth in the natural gas markets is largely dependent upon the health
and expansion of the Southern California economy and prices of other
energy products. External factors such as weather, the price of
electricity, electric deregulation, the use of hydroelectric power,
competing pipelines and general economic conditions can result in
significant shifts in demand and market price. The California Utilities
added 83,000 and 75,000 new customer meters in 2003 and 2002,
respectively, representing growth rates of 1.4 percent and 1.2 percent
respectively. The California Utilities expect that their growth rate for
2004 will approximate that for 2003.
In the interruptible industrial market, customers are capable of burning
a fuel other than natural gas. Fuel oil is the most significant
competing energy alternative. The company's ability to maintain its
industrial market share is largely dependent on price. The relationship
between natural gas supply and demand has the greatest impact on the
price of the company's product. With the reduction of natural gas
production from domestic sources, the cost of natural gas from non-
domestic sources may play a greater role in the company's competitive
position in the future. The price of oil depends upon a number of
factors beyond the company's control, including the relationship between
supply and demand, and policies of foreign and domestic governments.
21
The natural gas distribution business is seasonal in nature as
variations in weather conditions generally result in greater revenues
during the winter months when temperatures are colder. As is prevalent
in the industry, the company injects natural gas into storage during the
summer months (usually April through October) for withdrawal storage
during the winter months (usually November through March) when customer
demand is higher.
ELECTRIC OPERATIONS
Customers
At December 31, 2003 the company had 1.3 million meters consisting of
1,150,000 residential, 136,000 commercial, 450 industrial, 1,800 street
and highway lighting, 8,000 direct access and 24 off-system. The
company's service area covers 4,100 square miles. The company added
18,000 new customer meters in 2003 and 20,000 in 2002, representing
growth rates of 1.4% and 1.6% respectively.
Resource Planning and Power Procurement
SDG&E's resource planning, power procurement and related regulatory
matters are discussed below and in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and in Note 13 of the
notes to Consolidated Financial Statements in the 2003 Annual Report to
Shareholders, which is incorporated by reference.
22
Electric Resources
Based on CPUC-approved purchased-power contracts currently in place with
SDG&E's various suppliers and SDG&E's 20-percent share of a generating
plant, as of December 31, 2003, the supply of electric power available
to SDG&E is as follows:
Megawatts
Generation: SONGS 430
-----
Purchased power contracts:
Expiration
Supplier Source date
- -------------------------------------------------------------
Long-term contracts:
Portland General
Electric (PGE) Coal December 2013 84
-----
DWR-allocated contracts:
Williams Energy
Marketing & Trading Natural gas December 2010 1,875
Sunrise Power Co. LLC Natural gas June 2012 572
Other Natural gas/wind 2004 to 2013 328
-----
Total 2,775
-----
Other contracts with Qualifying Facilities (QFs):
Applied Energy Inc. Cogeneration November 2019 107
Yuma Cogeneration Cogeneration May 2024 57
Goal Line Limited
Partnership Cogeneration February 2025 50
Other (73 contracts) Cogeneration Various 16
Total -----
230
-----
Other contracts with renewable sources:
Various (9 contracts) Bio-gas 5-15 year terms
starting in 2003 28
Various (1 contract) Bio-mass 5 year term
starting in 2003 49
Various (5 contracts) Wind 10-15 year terms
starting in 2003 159
-----
Total sources 236
-----
Total generation and contracted 3,755
=====
Under the contract with PGE, SDG&E pays a capacity charge plus a charge
based on the amount of energy received and or PGE's costs. Costs under
the contracts with QFs are based on SDG&E's avoided cost. Charges under
the remaining contracts are for firm and as-available energy and are
based on the amount of energy received. The prices under these contracts
are at the market value at the time the contracts were negotiated.
SONGS:
SDG&E owns 20 percent of the three nuclear units at SONGS (located south
of San Clemente, California). The cities of Riverside and Anaheim own a
total of 5 percent of Units 2 and 3. Southern California Edison (Edison)
owns the remaining interests and operates the units.
23
Unit 1 was removed from service in November 1992 when the CPUC issued a
decision to permanently shut it down. Storage and decommissioning of
Unit 1's spent nuclear fuel is now in progress.
Units 2 and 3 began commercial operation in August 1983 and April 1984,
respectively. SDG&E's share of the capacity is 214 megawatts (MW) of
Unit 2 and 216 MW of Unit 3.
SDG&E has fully recovered its SONGS capital investment through December
31, 2003.
Additional information concerning the SONGS units, nuclear
decommissioning and industry restructuring is provided below and in
"Environmental Matters" herein, and in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and in Notes
6, 13, 14 and 15 of the notes to Consolidated Financial Statements in
the 2003 Annual Report to Shareholders, which is incorporated by
reference.
Nuclear Fuel Supply
The nuclear-fuel cycle includes services performed by others under
various contracts through 2008, including mining and milling of uranium
concentrate, conversion of uranium concentrate to uranium hexafluoride,
enrichment services, and fabrication of fuel assemblies.
Spent fuel from SONGS is being stored on site, where storage capacity is
expected to be adequate at least through 2022, the expiration date of
the NRC operating license. Pursuant to the Nuclear Waste Policy Act of
1982, SDG&E entered into a contract with the U.S. Department of Energy
(DOE) for spent-fuel disposal. Under the agreement, the DOE is
responsible for the ultimate disposal of spent fuel. SDG&E pays a
disposal fee of $1.00 per megawatt-hour of net nuclear generation, or $3
million per year. The DOE projects that it will not begin accepting
spent fuel until 2010 at the earliest.
To the extent not currently provided by the contracts, the availability
and the cost of the various components of the nuclear-fuel cycle for
SDG&E's nuclear facilities cannot be estimated at this time.
Additional information concerning nuclear-fuel costs is provided in Note
15 of the notes to Consolidated Financial Statements in the 2003 Annual
Report to Shareholders, which is incorporated by reference.
Power Pools
SDG&E is a participant in the Western Systems Power Pool, which includes
an electric-power and transmission-rate agreement with utilities and
power agencies located throughout the United States and Canada. More
than 280 investor-owned and municipal utilities, state and federal power
agencies, energy brokers, and power marketers share power and
information in order to increase efficiency and competition in the bulk
power market. Participants are able to make power transactions on
standardized terms that have been pre-approved by FERC.
Transmission Arrangements
Pacific Intertie (Intertie): The Intertie, consisting of AC and DC
transmission lines, connects the Northwest with SDG&E, Pacific Gas &
Electric (PG&E), Edison and others under an agreement that expires in
July 2007. SDG&E's share of the Intertie is 266 MW.
Southwest Powerlink: SDG&E's 500-kilovolt Southwest Powerlink
transmission line, which is shared with Arizona Public Service Company
and Imperial Irrigation District, extends from Palo Verde, Arizona to
San Diego. SDG&E's share of the line is 970 MW, although it can be less,
depending on specific system conditions.
Mexico Interconnection: Mexico's Baja California Norte system is
connected to SDG&E's system via two 230-kilovolt interconnections with
firm capability of 408 MW in the north to south direction and 800 MW in
the south to north direction.
Due to electric-industry restructuring (see "Transmission Access"
below), the operating rights of SDG&E on these lines have been
transferred to the Independent System Operator (ISO).
24
Transmission Access
The FERC has established rules to implement the transmission-access
provisions of the National Energy Policy Act of 1992. These rules
specify procedures for others' requests for transmission service. In
October 1997, the FERC approved the California IOUs' transfer of control
of their transmission facilities to the ISO. In 1998, operation and
control of the transmission lines was transferred to the ISO.
Additional information regarding the ISO and transmission access is
provided below and in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the 2003 Annual Report to
Shareholders, which is incorporated by reference.
SEMPRA ENERGY GLOBAL ENTERPRISES
Sempra Energy Global Enterprises (Global) consists of most of the
businesses of Sempra Energy other than the California Utilities, and
serves a broad range of customers' energy needs. Global includes SET,
SER, SEI, SES, SELNG and several smaller business units. See below for
a discussion of each of these business units.
Additional information concerning these and other aspects of the
operations of Global Enterprises and Sempra Energy Financial (SEF) is
provided under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and in Notes 3 and 15 of the notes
to Consolidated Financial Statements in the 2003 Annual Report to
Shareholders, which is incorporated by reference.
SEMPRA ENERGY TRADING
SET is a full-service trading company that markets and trades physical
and financial commodity products, including natural gas, power,
petroleum products and base metals. SET combines trading, risk-
management and physical commodity expertise to provide innovative
solutions to its customers worldwide.
25
SEMPRA ENERGY RESOURCES
SER is an energy company engaged in the development, construction,
ownership and operation of power generation facilities and the sale of
electricity, primarily in the western United States.
In May 2001, SER entered into a ten-year agreement with the DWR to
supply up to 1,900 MW of electricity to the state. SER may deliver most
of this electricity from its plants in the western United States and
Baja California, Mexico. Sales under the contract comprise more than
two-thirds of the projected capacity of these facilities and the profits
therefrom are significant to the company's ability to increase its
earnings.
The company believes that SER's contract prices are just and reasonable,
but has offered to renegotiate certain aspects of the contract (which
would not affect the long-term profitability) in a manner mutually
beneficial to SER and the state. Although the contract is subject to
ongoing litigation and regulatory proceedings, both SER and the State of
California are performing under this contract. Information concerning
the litigation is provided in Note 15 of the notes to Consolidated
Financial Statements in the 2003 Annual Report to Shareholders, which is
incorporated by reference.
During 2003 construction was completed on the 1,250-megawatt Mesquite
Power plant, with commercial operations commencing at 50% capacity in
June 2003 and 100% capacity in December 2003. The project had been
initially financed through a synthetic lease agreement. As a result of
the implementation of Financial Accounting Standards Board (FASB)
Interpretation No. (FIN) 46, "Consolidation of Variable Interest
Entities an interpretation of ARB No. 51," the company consolidated
Mesquite Trust, the legal entity which owns Mesquite Power, in its
consolidated balance sheet as of December 31, 2003. In January 2004, SER
exercised the lease purchase option and acquired the power plant. See
further discussion on FIN 46 in Note 1 of the notes to Consolidated
Financial Statements in the 2003 Annual Report to Shareholders, which is
incorporated by reference. Additionally, during 2003, construction was
completed on Termoelectrica de Mexicali, a 600-megawatt power plant near
Mexicali, and the Elk Hills Power Project (Elk Hills), both of which
commenced commercial operations in July 2003.
In August 2003, SER obtained approval from the appropriate state
agencies to construct the Palomar Energy project, a 550-megawatt power
plant in Escondido, California. In October 2003, SDG&E announced that it
plans to purchase the power plant from SER when construction is
completed in 2006 if the CPUC approves the purchase. On October 3, 2003
SER entered into a cost reimbursement and sharing agreement with SDG&E
that became effective December 1, 2003.
In October 2002, SER purchased a 305-megawatt, coal-fired power plant
(renamed Twin Oaks Power) from Texas-New Mexico Power Company for $120
million. SER has a five-year contract to sell substantially all of the
output of the plant.
26
SEMPRA ENERGY LNG
In April 2003, SELNG completed its previously announced acquisition of
the proposed Cameron LNG project from a subsidiary of Dynegy, Inc. The
total cost of the project is expected to be $700 million. The project
could begin commercial operations in 2007. FERC approval was granted on
September 11, 2003. Other state and federal approvals required to
commence construction are in progress.
In December 2003, in connection with plans to develop Energia Costa
Azul, an LNG receiving terminal in Baja California, on the west coast of
Mexico, 50 miles south of San Diego, SELNG and Shell International Gas
Limited (Shell) announced plans to form a 50/50 joint venture to build,
own and operate the $600 million facility. The terminal would be
capable of supplying 1 billion cubic feet (bcf) of natural gas per day.
Shell and SELNG would share the investment costs of the terminal equally
and each would take 50 percent of the capacity in the terminal. 500
million cubic feet per day of natural gas from the terminal would be
used to meet the growing energy demands in western Mexico. Any surplus
gas from the facility would be used to provide new natural gas supplies
for the southwestern United States. The proposed joint venture would
combine the two separate Baja California LNG receiving terminals
proposed by Shell and SELNG into a single project, significantly
reducing the impact on the local environment. It is expected that
construction would begin in 2004 with terminal operations commencing in
2007.
In connection with this project, Mexico's national environmental agency
issued an environmental permit in April 2003. Three other significant
permits, an operating permit from Mexico's Energy Regulatory Commission,
a coastal zone use permit and a local land-use permit from the City of
Ensenada, were granted in 2003. The permit to construct marine
facilities is pending and is expected to be received in the near future.
See additional discussion concerning these projects in "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and in Notes 2 and 15 of the notes to Consolidated Financial
Statements in the 2003 Annual Report to Shareholders, which is
incorporated by reference.
SEMPRA ENERGY INTERNATIONAL
SEI develops, operates and invests in energy-infrastructure systems. SEI
has interests in natural gas and/or electric transmission and
distribution projects in Argentina, Chile, Mexico, Peru and the eastern
United States. SEI's interests in operations in South America are not
consolidated and, therefore, are not included in these discussions.
During the third quarter of 2003, SEI recorded a $77 million before-tax
write-down of the carrying value of the assets of Frontier Energy, a
small North Carolina utility subsidiary, as a result of reductions in
actual and previously anticipated sales of natural gas by the utility.
In the third quarter of 2002, SEI completed construction of the 140-mile
Gasoducto Bajanorte Pipeline that connects the Rosarito Pipeline south
of Tijuana, Mexico, with a pipeline built by PG&E Corporation that will
27
connect to Arizona. The 30-inch pipeline can deliver up to 500 million
cubic feet per day of natural gas to new generation facilities in Baja
California, including SER's Termoelectrica de Mexicali power plant
discussed above. Capacity on the pipeline is over 90 percent subscribed.
SEMPRA ENERGY SOLUTIONS
SES sells energy commodities and provides integrated energy-related
products and services to commercial, industrial, government and
institutional markets.
SEMPRA ENERGY FINANCIAL
SEF invests as a limited partner in affordable-housing properties. SEF's
portfolio includes 1,300 properties throughout the United States,
including Puerto Rico and the Virgin Islands. These investments are
expected to provide income tax benefits (primarily from income tax
credits) over 10-year periods. SEF also has invested in a limited
partnership that produces synthetic fuel from coal. Whether SEF will
invest in additional properties will depend on Sempra Energy's income
tax position.
RATES AND REGULATION -- CALIFORNIA UTILITIES
Information concerning rates and regulations applicable to the
California Utilities is provided in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and in Notes
1, 13 and 14 of the notes to Consolidated Financial Statements in the
2003 Annual Report to Shareholders, which is incorporated by reference.
ENVIRONMENTAL MATTERS
Discussions about environmental issues affecting the company are
included in Note 15 of the notes to Consolidated Financial Statements in
the 2003 Annual Report to Shareholders, which is incorporated by
reference. The following additional information should be read in
conjunction with those discussions.
Hazardous Substances
In 1994, the CPUC approved the Hazardous Waste Collaborative Memorandum
account, allowing California's IOUs to recover their hazardous waste
cleanup costs, including those related to Superfund sites or similar
sites requiring cleanup. Recovery of 90 percent of hazardous waste
cleanup costs and related third-party litigation costs and 70 percent of
the related insurance-litigation expenses is permitted. In addition, the
company has the opportunity to retain a percentage of any insurance
recoveries to offset the 10 percent of costs not recovered in rates.
Cleanup costs at sites related to electric generation were specifically
excluded from the collaborative by the CPUC.
During the early 1900s, the California Utilities and their predecessors
manufactured gas from coal or oil. The manufactured-gas plants (MGPs)
often have become contaminated with the hazardous residues of the
process. SoCalGas has identified 42 such sites at which it (together
with other users as to 21 of these sites) may have cleanup obligations.
Preliminary investigations, at a minimum, have been completed on 41 of
28
the sites. As of December 31, 2003, 26 of these sites have been
remediated, of which 20 have received certification from the California
Environmental Protection Agency. At December 31, 2003, SoCalGas'
estimated remaining investigation and remediation liability for the MGPs
is $42.9 million. SDG&E identified three former MGPs, remediation of
which was completed at two of the sites in 1998 and 2000. Closure
letters have been received for the two sites. At December 31, 2003
estimated remaining remediation liability on the third site is $5.8
million.
SDG&E sold its fossil-fuel generating facilities in 1999. As a part of
its due diligence for the sale, SDG&E conducted a thorough environmental
assessment of the facilities. Pursuant to the sale agreements for such
facilities, SDG&E and the buyers have apportioned responsibility for
such environmental conditions generally based on contamination existing
at the time of transfer and the cleanup level necessary for the
continued use of the sites as industrial sites. While the sites are
relatively clean, the assessments identified some instances of
significant contamination, principally resulting from hydrocarbon
releases, for which SDG&E has a cleanup obligation under the agreement.
Total costs to perform the necessary remediation were estimated at $11
million at the time of sale. These costs were offset against the sales
price for the facilities, together with other appropriate costs, and the
remaining net proceeds were included in the calculation of customer
rates. Remediation of the plants commenced in early 2001. During 2002,
cleanup was completed at several minor sites at a cost of $0.4 million.
In late 2002, additional assessments were started at the primary sites,
where cleanup commenced in 2003 and is expected to be completed by 2005.
In 2003, at a cost of $0.8 million, cleanup was completed at the site of
a power plant that was sold in 1999. Remaining costs to remediate these
sites are estimated at $8 million at December 31, 2003.
The California Utilities lawfully dispose of wastes at permitted
facilities owned and operated by other entities. Operations at these
facilities may result in actual or threatened risks to the environment
or public health. Under California law, businesses that arrange for
legal disposal of wastes at a permitted facility from which wastes are
later released, or threaten to be released, can be held financially
responsible for corrective actions at the facility.
The company and certain subsidiaries are currently named as potentially
responsible parties (PRPs) for one landfill site and two industrial
waste disposal sites, from which releases have occurred, as described
below.
At December 31, 2003, the company's estimated remaining investigation
and remediation liability related to hazardous waste sites, including
the MGPs, was $50.6 million, of which 90 percent is authorized to be
recovered through the Hazardous Waste Collaborative mechanism. This
estimated cost excludes remediation costs associated with SDG&E's former
fossil-fuel power plants. The company believes that any costs not
ultimately recovered through rates, insurance or other means will not
have a material adverse effect on the company's consolidated results of
operations or financial position.
Estimated liabilities for environmental remediation are recorded when
amounts are probable and estimable. Amounts authorized to be recovered
29
in rates under the Hazardous Waste Collaborative mechanism are recorded
as a regulatory asset.
Electric and Magnetic Fields (EMFs)
Although scientists continue to research the possibility that exposure
to EMFs causes adverse health effects, science has not demonstrated a
cause-and-effect relationship between exposure to the type of EMFs
emitted by power lines and other electrical facilities and adverse
health effects. Some laboratory studies suggest that such exposure
creates biological effects, but those effects have not been shown to be
harmful. The studies that have most concerned the public are
epidemiological studies, some of which have reported a weak correlation
between the proximity of homes to certain power lines and equipment and
childhood leukemia. Other epidemiological studies found no correlation
between estimated exposure and any disease. Scientists cannot explain
why some studies using estimates of past exposure report correlations
between estimated EMF levels and disease, while others do not.
To respond to public concerns, the CPUC has directed California IOUs to
adopt a low-cost EMF-reduction policy that requires reasonable design
changes to achieve noticeable reduction of EMF levels that are
anticipated from new projects. However, consistent with the major
scientific reviews of the available research literature, the CPUC has
indicated that no health risk has been identified.
Air and Water Quality
California's air quality standards are more restrictive than federal
standards. However, as a result of the sale of the company's fossil-fuel
generating facilities, the company's primary air-quality issue,
compliance with these standards now has less significance to the
company's operation, although that could change as SER owns and operates
more generating facilities.
The transmission and distribution of natural gas require the operation
of compressor stations, which are subject to increasingly stringent air-
quality standards. Costs to comply with these standards are recovered in
rates.
In connection with the issuance of operating permits, SDG&E and the
other owners of SONGS previously reached agreement with the California
Coastal Commission to mitigate the environmental damage to the marine
environment attributed to the cooling-water discharge from SONGS Units 2
and 3. This mitigation program includes an enhanced fish-protection
system, a 150-acre artificial kelp reef and restoration of 150 acres of
coastal wetlands. In addition, the owners must deposit $3.6 million with
the state for the enhancement of fish hatchery programs and pay for
monitoring and oversight of the mitigation projects. SDG&E's share of
the cost is estimated to be $34.0 million. These mitigation projects are
expected to be completed in 2007. Through December 31, 2003, SONGS
mitigation costs were recovered through the ICIP mechanism. SONGS
mitigation costs incurred after December 31, 2003, will be capitalized
and recovered from ratepayers over the remaining life of the SONGS
units, subject to CPUC approval in Edison's general rate case.
Additional information on SONGS cost recovery is provided in Note 13 of
30
the notes to Consolidated Financial Statements in the 2003 Annual Report
to Shareholders, which is incorporated by reference.
OTHER MATTERS
Research, Development and Demonstration (RD&D)
The SoCalGas RD&D portfolio is focused in five major areas: operations,
utilization systems, power generation, public interest and
transportation. Each of these activities provides benefits to customers
and society by providing more cost-effective, efficient natural gas
equipment with lower emissions, increased safety, and reduced operating
costs. The CPUC has authorized SoCalGas to recover its operating costs
associated with RD&D. SoCalGas' annual RD&D costs have averaged $6.9
million over the past three years.
For 2003, the CPUC authorized SDG&E to fund $1.2 million and $5.6
million for its natural gas and electric RD&D programs, respectively,
including $5.6 million to the CEC for its PIER (Public Interest Energy
Research) Program. SDG&E's annual RD&D costs have averaged $5.7 million
over the past three years.
Employees of Registrant
As of December 31, 2003, the company had 12,807 employees, compared to
12,197 at December 31, 2002.
Labor Relations
Field, technical and most clerical employees at SoCalGas are represented
by the Utility Workers' Union of America or the International Chemical
Workers' Council. The collective bargaining agreement for field,
technical and most clerical employees at SoCalGas covering wages, hours,
working conditions, medical and various benefit plans is in effect
through December 31, 2004.
Certain employees at SDG&E are represented by the Local 465
International Brotherhood of Electrical Workers. The current contract
runs through August 31, 2004. At some of its field job sites, SES
employs mechanics who are represented by the International Union of
Operating Engineers, Local 501. One collective bargaining agreement runs
through November 1, 2006 and the other expires on July 7, 2007.
ITEM 2. PROPERTIES
Electric Properties - SDG&E
SDG&E's interest in SONGS is described in "Electric Resources" herein.
At December 31, 2003, SDG&E's electric transmission and distribution
facilities included substations, and overhead and underground lines. The
electric facilities are located in San Diego, Imperial and Orange
counties and in Arizona, and consist of 1,805 miles of transmission
lines and 21,353 miles of distribution lines. Periodically, various
areas of the service territory require expansion to accommodate customer
growth.
31
Natural Gas Properties - California Utilities
At December 31, 2003, the California Utilities' natural gas facilities
included 3,014 miles of transmission and storage pipeline, 54,518 miles
of distribution pipeline and 51,672 miles of service piping. They also
included 13 transmission compressor stations and 4 underground storage
reservoirs, with a combined working capacity of 122 bcf.
Energy Properties - Other
At December 31, 2003, Sempra Energy completed the construction of three
additional power plants and commenced operations in California, Arizona
and Mexico. For additional information, see Notes 2 and 3 of the notes
to Consolidated Financial Statements of the 2003 Annual Report to
Shareholders, which is incorporated by reference from Item 8 herein.
At December 31 2003, SEI's operations in Mexico included 1,465 miles of
distribution pipeline, 163 miles of transmission pipeline and one
compressor station.
At December 31 2003, the company's two small natural gas utilities
located in the eastern United States owned 166 miles of transmission
lines and 206 miles of distribution lines.
Other Properties
The 21-story corporate headquarters building at 101 Ash Street, San
Diego is occupied pursuant to a capital lease with an original term
through 2005. The lease has four separate five-year renewal options.
SoCalGas leases approximately half of a 52-story office building in
downtown Los Angeles through 2011. The lease has six separate five-year
renewal options.
SDG&E occupies an office complex in San Diego pursuant to an operating
lease ending in 2007. The lease can be renewed for two five-year
periods.
Global leases office facilities at various locations in the U.S, Mexico
and Europe with the leases ending from 2004 to 2009. SELNG owns land to
develop a LNG receiving terminal in Baja California, Mexico. SELNG also
has a land lease to develop a LNG receiving terminal in Hackberry,
Louisiana. The lease expires in February 2005 and has five five-year
renewal options remaining.
The company owns or leases other offices, operating and maintenance
centers, shops, service facilities and equipment necessary in the
conduct of its business.
ITEM 3. LEGAL PROCEEDINGS
Except for the matters referred to in Notes 13, 14 and 15 of the notes
to Consolidated Financial Statements incorporated by reference in Item 8
or referred to elsewhere in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" incorporated by reference
in this Annual Report, neither the company nor its subsidiaries are
party to, nor is their property the subject of, any material pending
32
legal proceedings other than routine litigation incidental to their
businesses.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Sempra Energy common stock is traded on the New York and Pacific stock
exchanges. At January 31, 2004, there were 60,000 registered holders and
record holders of the company's common stock. The quarterly common stock
information required by Item 5 is included in the schedule of Quarterly
Financial Data of the 2003 Annual Report to Shareholders, which is
incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in millions) At December 31, or for the years then ended
- ------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
Income Statement Data:
Operating revenues $ 7,887 $ 6,048 $ 7,730 $ 6,760 $ 5,360
Operating income $ 939 $ 987 $ 997 $ 884 $ 763
Net income $ 649 $ 591 $ 518 $ 429 $ 394
Balance Sheet Data:
Total assets $22,009 $20,242 $17,476 $17,850 $13,312
Long-term debt $ 3,841 $ 4,083 $ 3,436 $ 3,268 $ 2,902
Short-term debt (a) $ 1,461 $ 851 $ 1,117 $ 936 $ 337
Shareholders' equity $ 3,890 $ 2,825 $ 2,692 $ 2,494 $ 2,986
Per Common Share Data:
Income before extraordinary item
and cumulative effect of changes
in accounting principles per
common share:
Basic $ 3.29 $ 2.80 $ 2.54 $ 2.06 $ 1.66
Diluted $ 3.24 $ 2.79 $ 2.52 $ 2.06 $ 1.66
Income before cumulative effect
of changes in accounting
principles per common share:
Basic $ 3.29 $ 2.88 $ 2.54 $ 2.06 $ 1.66
Diluted $ 3.24 $ 2.87 $ 2.52 $ 2.06 $ 1.66
Net income per common share:
Basic $ 3.07 $ 2.88 $ 2.54 $ 2.06 $ 1.66
Diluted $ 3.03 $ 2.87 $ 2.52 $ 2.06 $ 1.66
Dividends declared $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.56
Book value $ 17.17 $ 13.79 $ 13.16 $ 12.35 $ 12.58
(a) Includes long-term debt due within one year.
This data should be read in conjunction with the Consolidated Financial
Statements and the notes to Consolidated Financial Statements contained
33
in the 2003 Annual Report to Shareholders, which is incorporated by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by Item 7 is incorporated by reference from
pages 1 through 38 of the 2003 Annual Report to Shareholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 7A is incorporated by reference from
pages 30 through 33 of the 2003 Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is incorporated by reference from
pages 42 through 129 of the 2003 Annual Report to Shareholders. Item
15(a)1 includes a listing of financial statements included in the 2003
Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
ITEM 9A. CONTROLS AND PROCEDURES
The company has designed and maintains disclosure controls and
procedures to ensure that information required to be disclosed in the
company's 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 company's management, including its
Chief Executive Officer and Chief Financial Officer, 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. In
addition, the company has investments in unconsolidated entities that it
does not control or manage and, consequently, its disclosure controls
and procedures with respect to these entities are necessarily
substantially more limited than those it maintains with respect to its
consolidated subsidiaries.
Under the supervision and with the participation of management,
including the Chief Executive Officer and the Chief Financial Officer,
the company as of December 31, 2003 has evaluated the effectiveness of
the design and operation of the company's disclosure controls and
procedures. Based on that evaluation, the company's Chief Executive
Officer and Chief Financial Officer have concluded that the controls and
procedures are effective.
There have been no significant changes in the company's internal
controls or in other factors that could significantly affect the
34
internal controls subsequent to the date the company completed its
evaluation.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required on Identification of Directors is incorporated
by reference from "Election of Directors" in the Proxy Statement
prepared for the May 2004 annual meeting of shareholders. The
information required on the company's executive officers is provided
below.
EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age* Position
- ---------------------------------------------------------------------
Stephen L. Baum 62 Chairman, Chief Executive Officer and
President
Donald E. Felsinger 56 Group President, Sempra Energy Global
Enterprises
Edwin A. Guiles 54 Group President, Sempra Energy
Utilities
M. Javade Chaudhri 51 Executive Vice President and General
Counsel
Neal E. Schmale 57 Executive Vice President and Chief
Financial Officer
Frank H. Ault 59 Senior Vice President and Controller
Frederick E. John 57 Senior Vice President, External
Affairs and Communications
G. Joyce Rowland 49 Senior Vice President, Human Resources
* As of December 31, 2003.
Each Executive Officer has been an officer of the company or one of its
subsidiaries for more than five years, with the exception of Mr.
Chaudhri. Prior to joining the company in 2003, Mr. Chaudhri was Senior
Vice President and General Counsel of Gateway, Inc.
35
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from
"Election of Directors" and "Executive Compensation" in the Proxy
Statement prepared for the May 2004 annual meeting of shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Securities Authorized for Issuance Under Equity Compensation Plans
Information regarding securities authorized for issuance under equity
compensation plans as required by Item 12 is incorporated by reference
from "Share Ownership" and "Equity Compensation Plans" in the Proxy
Statement prepared for the May 2004 annual meeting of shareholders.
See additional discussion of stock-based compensation in Note 9 of the
notes to Consolidated Financial Statements of the 2003 Annual Report to
Shareholders, which is incorporated by reference.
Security Ownership of Certain Beneficial Owners
The security ownership information required by Item 12 is incorporated
by reference from "Share Ownership" in the Proxy Statement prepared for
the May 2004 annual meeting of shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding principal accountant fees and services as required
by Item 14 is incorporated by reference from "Proposal 3: Ratification
of Independent Auditors" in the Proxy Statement prepared for the May
2004 annual meeting of shareholders.
36
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial statements
Page in
Annual Report*
Statement of Management's Responsibility for
Consolidated Financial Statements. . . . . . . . . . . . . 40
Independent Auditors' Report . . . . . . . . . . . . . . . . 41
Statements of Consolidated Income for the years
ended December 31, 2003, 2002 and 2001 . . . . . . . . . . 42
Consolidated Balance Sheets at December 31,
2003 and 2002. . . . . . . . . . . . . . . . . . . . . . . 43
Statements of Consolidated Cash Flows for the
years ended December 31, 2003, 2002 and 2001 . . . . . . . 45
Statements of Consolidated Changes in
Shareholders' Equity for the years ended
December 31, 2003, 2002 and 2001 . . . . . . . . . . . . . 47
Notes to Consolidated Financial Statements . . . . . . . . . 48
*Incorporated by reference from the indicated pages of the 2003
Annual Report to Shareholders.
2. Financial statement schedules
The following document may be found in this report at the indicated page
number.
Schedule I--Condensed Financial Information of Parent. . . . 39
Any other schedules for which provision is made in Regulation S-X are
not required under the instructions contained therein or are
inapplicable.
3. Exhibits
See Exhibit Index on page 44 of this report.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed after September 30, 2003:
Current Report on Form 8-K filed October 9, 2003, announcing the
execution of an underwriting agreement for the issuance and sale of
common stock and reporting several recent developments related to credit
rating changes, litigation, and other events.
37
Current Report on Form 8-K filed November 6, 2003, filing as an exhibit
Sempra Energy's press release of November 6, 2003, giving the financial
results for the three months ended September 30, 2003.
Current Report on Form 8-K filed December 31, 2003, to update
information on the August 25, 2003 CPUC decision regarding the
allocation of profits from SDG&E's intermediate-term purchase power
contracts. Updates when the Court of Appeals will have a decision on the
petition submitted by an advocacy group for small consumers.
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 three months ended December 31, 2003.
38
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
To the Board of Directors and Shareholders of Sempra Energy:
We consent to the incorporation by reference in Registration Statement
Numbers 333-51309, 333-52192, 333-77843, 333-70640 and 333-103588 on
Form S-3 and Registration Statement Numbers 333-56161, 333-50806 and
333-49732 on Form S-8 of Sempra Energy of our report dated February 23,
2004, incorporated by reference in this Annual Report on Form 10-K of
Sempra Energy for the year ended December 31, 2003.
Our audits of the financial statements referred to in our aforementioned
report also included the financial statement schedule of Sempra Energy,
listed in Item 15. This financial statement schedule is the
responsibility of the company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/S/ DELOITTE & TOUCHE LLP
San Diego, California
February 24, 2004
39
Schedule I -- CONDENSED FINANCIAL INFORMATION OF PARENT
SEMPRA ENERGY
Condensed Statements of Income
(Dollars in millions, except per share amounts)
Years ended December 31,
2003 2002 2001
-------- -------- --------
Other income $ 126 $ 52 $ 52
Interest expense (187) (134) (130)
Trust preferred distributions (9) (18) (18)
Operating expenses (21) (14) (25)
Income tax benefits 57 38 55
-------- -------- --------
Loss before subsidiary earnings (34) (76) (66)
Subsidiary earnings before extraordinary
item and cumulative effect of changes in
accounting principles 729 651 584
-------- -------- --------
Income before extraordinary item
and cumulative effect of changes in
accounting principles 695 575 518
Extraordinary item, net of tax -- 16 --
-------- -------- --------
Income before cumulative effect of changes
in accounting principles, net of tax 695 591 518
Cumulative effect of changes in accounting
principles, net of tax (46) -- --
-------- -------- --------
Net income $ 649 $ 591 $ 518
======== ======== ========
Weighted-average number of shares
outstanding (thousands):
Basic 211,740 205,003 203,593
======== ======== ========
Diluted 214,482 206,062 205,338
======== ======== ========
Income before extraordinary item
and cumulative effect of changes in
accounting principles per share of
common stock
Basic $ 3.29 $ 2.80 $ 2.54
======== ======== ========
Diluted $ 3.24 $ 2.79 $ 2.52
======== ======== ========
Income before cumulative effect of
changes in accounting principles
per share of common stock
Basic $ 3.29 $ 2.88 $ 2.54
======== ======== ========
Diluted $ 3.24 $ 2.87 $ 2.52
======== ======== ========
Net income per share of common stock
Basic $ 3.07 $ 2.88 $ 2.54
======== ======== ========
Diluted $ 3.03 $ 2.87 $ 2.52
======== ======== ========
40
SEMPRA ENERGY
Condensed Balance Sheets
(Dollars in millions)
December 31,
2003 2002
-------- --------
Assets:
Cash and cash equivalents $ 59 $ 3
Due from affiliates 52 72
Other current assets 43 7
-------- --------
Total current assets 154 82
-------- --------
Investments in subsidiaries 5,518 4,995
Due from affiliates 2,521 1,730
Other assets 435 388
-------- --------
Total assets $ 8,628 $ 7,195
======== ========
Liabilities and Shareholders' Equity:
Current portion of long-term debt $ 525 $ 2
Income taxes payable 323 247
Due to affiliates 1,403 1,500
Other current liabilities 178 157
-------- --------
Total current liabilities 2,429 1,906
-------- --------
Long-term debt 1,900 2,043
Due to affiliate 200 --
Other long-term liabilities 209 421
Shareholders' equity 3,890 2,825
-------- --------
Total liabilities and shareholders' equity $ 8,628 $ 7,195
======== ========
41
SEMPRA ENERGY
Condensed Statements of Cash Flows
(Dollars in millions)
Years ended December 31,
2003 2002 2001
-------- -------- --------
Net cash provided by (used in)
operating activities $ (80) $ 144 $ (253)
-------- -------- --------
Dividends received from subsidiaries 250 100 340
Expenditures for property, plant and equipment (4) (12) (35)
Increase in investments and other assets -- (20) (30)
-------- -------- --------
Cash provided by investing activities 246 68 275
-------- -------- --------
Common stock dividends paid (207) (205) (203)
Repurchase of common stock (6) (16) (1)
Sale of common stock 549 13 41
Issuances of long-term debt 400 600 581
Payment on long-term debt -- (26) (84)
Loans to affiliates - net (842) (628) (345)
Other (4) (19) (2)
-------- -------- --------
Cash used in financing activities (110) (281) (13)
-------- -------- --------
Increase (decrease) in cash and cash equivalents 56 (69) 9
Cash and cash equivalents, January 1 3 72 63
-------- -------- --------
Cash and cash equivalents, December 31 $ 59 $ 3 $ 72
======== ======== ========
42
SEMPRA ENERGY
Note to Condensed Financial Statements
Long-term Debt
- -----------------------------------------------------------------
December 31,
(Dollars in millions) 2003 2002
- -----------------------------------------------------------------
Other long-term debt
5.60% equity units May 17, 2007 $ 600 $ 600
Notes payable at variable rates after a
fixed-to-floating rate swap (2.49%
at December 31, 2003) July 1, 2004 500 500
7.95% Notes March 1, 2010 500 500
6.0% Notes due February 1, 2013 400 --
6.95% Notes December 1, 2005 300 300
Employee Stock Ownership Plan
Bonds at 7.375% November 1, 2014 82 82
Bonds at variable rates (1.65% at
December 31, 2003) November 1, 2014 19 19
Capitalized leases 3 5
Market value adjustments for interest
rate swaps - net (expires July 1, 2004) 23 42
------------------------
Total $2,427 $2,048
------------------------
Less:
Current portion of long-term debt 525 2
Unamortized discount on long-term debt 2 3
------------------------
527 5
------------------------
Total $1,900 $2,043
- ------------------------------------------------------------------
Excluding market value adjustments for interest-rate swaps, maturities
of long-term debt are $502 million in 2004, $301 million in 2005, $600
million in 2007 and $1 billion thereafter.
Additional information on Sempra Energy's long-term debt is provided in
Note 5 of the notes to Consolidated Financial Statements in the 2003
Annual Report to Shareholders, which is incorporated by reference.
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, hereunto duly authorized.
SEMPRA ENERGY
By: /s/ Stephen L. Baum
Stephen L. Baum
Chairman, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report is signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Name/Title Signature Date
Principal Executive Officer:
Stephen L. Baum
Chairman, President
and Chief Executive Officer /s/ Stephen L. Baum February 20, 2004
Principal Financial Officer:
Neal E. Schmale
Executive Vice President and
Chief Financial Officer /s/ Neal E. Schmale February 20, 2004
Principal Accounting Officer:
Frank H. Ault
Senior Vice President and
Controller /s/ Frank H. Ault February 20, 2004
Directors:
Stephen L. Baum, Chairman /s/ Stephen L. Baum February 20, 2004
Hyla H. Bertea, Director /s/ Hyla H. Bertea February 20, 2004
James G. Brocksmith, Jr., Director /s/ James G. Brocksmith, Jr. February 20, 2004
Herbert L. Carter, Director /s/ Herbert L. Carter February 20, 2004
Richard A. Collato, Director /s/ Richard A. Collato February 20, 2004
Wilford D. Godbold, Jr., Director /s/ Wilford D. Godbold, Jr. February 20, 2004
William D. Jones, Director /s/ William D. Jones February 20, 2004
Richard G. Newman, Director /s/ Richard G. Newman February 20, 2004
William G. Ouchi, Director /s/ William G. Ouchi February 20, 2004
William C. Rusnack, Director /s/ William C. Rusnack February 20, 2004
William P. Rutledge, Director /s/ William P. Rutledge February 20, 2004
Thomas C. Stickel, Director /s/ Thomas C. Stickel February 20, 2004
Diana L. Walker, Director /s/ Diana L. Walker February 20, 2004
44
EXHIBIT INDEX
The Forms 8, 8-B/A, 8-K, S-4, 10-K and 10-Q referred to herein were
filed under Commission File Number 1-14201 (Sempra Energy), Commission
File Number 1-40 (Pacific Enterprises), Commission File Number 1-3779
(San Diego Gas & Electric), Commission File Number 1-1402 (Southern
California Gas Company), Commission File Number 1-11439 (Enova
Corporation) and/or Commission File Number 333-30761 (SDG&E Funding
LLC).
3.a The following exhibits relate to Sempra Energy and its subsidiaries
Exhibit 1 -- Underwriting Agreements
Enova Corporation and San Diego Gas & Electric Company
- ------------------------------------------------------
1.01 Underwriting Agreement dated December 4, 1997 (Incorporated by
reference from Form 8-K filed by SDG&E Funding LLC on
December 23, 1997 (Exhibit 1.1)).
Exhibit 3 -- Bylaws and Articles of Incorporation
Bylaws
Sempra Energy
- -------------
3.01 Amended and Restated Bylaws of Sempra Energy effective May 26,
1998 (Incorporated by reference from the Registration Statement
on Form S-8 Sempra Energy Registration No. 333-56161 dated June
5, 1998 (Exhibit 3.2)).
Articles of Incorporation
Sempra Energy
- -------------
3.02 Amended and Restated Articles of Incorporation of Sempra Energy
(Incorporated by reference to the Registration Statement on Form
S-3 File No. 333-51309 dated April 29, 1998, Exhibit 3.1).
Exhibit 4 -- Instruments Defining the Rights of Security Holders,
Including Indentures
The company agrees to furnish a copy of each such instrument to the
Commission upon request.
Enova Corporation and San Diego Gas & Electric Company
- ------------------------------------------------------
4.01 Mortgage and Deed of Trust dated July 1, 1940. (Incorporated
by reference from SDG&E Registration No. 2-49810, Exhibit 2A.)
4.02 Second Supplemental Indenture dated as of March 1, 1948.
(Incorporated by reference from SDG&E Registration No. 2-49810,
Exhibit 2C.)
45
4.03 Ninth Supplemental Indenture dated as of August 1, 1968.
(Incorporated by reference from SDG&E Registration No. 2-68420,
Exhibit 2D.)
4.04 Tenth Supplemental Indenture dated as of December 1, 1968.
(Incorporated by reference from SDG&E Registration No. 2-36042,
Exhibit 2K.)
4.05 Sixteenth Supplemental Indenture dated August 28, 1975.
(Incorporated by reference from SDG&E Registration No. 2-68420,
Exhibit 2E.)
4.06 Thirtieth Supplemental Indenture dated September 28, 1983.
(Incorporated by reference from SDG&E Registration No. 33-34017,
Exhibit 4.3.)
Pacific Enterprises and Southern California Gas
- -----------------------------------------------
4.07 First Mortgage Indenture of Southern California Gas Company to
American Trust Company dated as of October 1, 1940 (Registration
Statement No. 2-4504 filed by Southern California Gas Company on
September 16, 1940, Exhibit B-4).
4.08 Supplemental Indenture of Southern California Gas Company to
American Trust Company dated as of July 1, 1947 (Registration
Statement No. 2-7072 filed by Southern California Gas Company on
March 15, 1947, Exhibit B-5).
4.09 Supplemental Indenture of Southern California Gas Company to
American Trust Company dated as of August 1, 1955 (Registration
Statement No. 2-11997 filed by Pacific Lighting Corporation on
October 26, 1955, Exhibit 4.07).
4.10 Supplemental Indenture of Southern California Gas Company to
American Trust Company dated as of June 1, 1956 (Registration
Statement No. 2-12456 filed by Southern California Gas Company on
April 23, 1956, Exhibit 2.08).
4.11 Supplemental Indenture of Southern California Gas Company to
Wells Fargo Bank, National Association dated as of August 1, 1972
(Registration Statement No. 2-59832 filed by Southern California
Gas Company on September 6, 1977, Exhibit 2.19).
4.12 Supplemental Indenture of Southern California Gas Company to
Wells Fargo Bank, National Association dated as of May 1, 1976
(Registration Statement No. 2-56034 filed by Southern California
Gas Company on April 14, 1976, Exhibit 2.20).
4.13 Supplemental Indenture of Southern California Gas Company to
Wells Fargo Bank, National Association dated as of September 15,
1981 (Pacific Enterprises 1981 Form 10-K, Exhibit 4.25).
46
4.14 Supplemental Indenture of Southern California Gas Company to
Manufacturers Hanover Trust Company of California, successor to
Wells Fargo Bank, National Association, and Crocker National Bank
as Successor Trustee dated as of May 18, 1984 (Southern
California Gas Company 1984 Form 10-K, Exhibit 4.29).
4.15 Supplemental Indenture of Southern California Gas Company to
Bankers Trust Company of California, N.A., successor to Wells
Fargo Bank, National Association dated as of January 15, 1988
(Pacific Enterprises 1987 Form 10-K, Exhibit 4.11).
4.16 Supplemental Indenture of Southern California Gas Company to
First Trust of California, National Association, successor to
Bankers Trust Company of California, N.A. dated as of August 15,
1992 (Registration Statement No. 33-50826 filed by Southern
California Gas Company on August 13, 1992, Exhibit 4.37).
4.17 Supplemental Indenture of Southern California Gas Company to
U.S. Bank, N.A., successor to First Trust of California, N.A.,
dated as of October 1, 2002.
Exhibit 10 -- Material Contracts (Previously filed exhibits are
incorporated by reference from Forms 8-K, S-4, 10-K or
10-Q as referenced below).
Sempra Energy
- -------------
10.01 Energy Purchase Agreement between Sempra Energy Resources and
the California Department of Water Resources, executed
May 4, 2001 (2001 Form 10-K, Exhibit 10.01).
10.02 Form of Employment Agreement between Sempra Energy and
Stephen L. Baum (September 30, 2002 Form 10-Q,
Exhibit 10.1).
10.03 Amendment to Employment Agreement, effective December 1, 1998
(Employment agreement, dated as of October 12, 1996 between
Mineral Energy Company and Stephen L. Baum (Enova 8-K filed
October 15, 1996, Exhibit 10.2)).
10.04 Form of Employment Agreement between Sempra Energy and
Donald E. Felsinger (September 30, 2002 Form 10-Q,
Exhibit 10.2).
10.05 Amendment to Employment Agreement effective December 1, 1998
(Employment contract, dated as of October 12, 1996 between
Mineral Energy Company and Donald E. Felsinger (Enova 8-K filed
October 15, 1996, Exhibit 10.4)).
Enova Corporation and San Diego Gas & Electric Company
- ------------------------------------------------------
10.06 Operating Agreement between San Diego Gas & Electric and the
California Department of Water Resources dated April 17, 2003.
10.07 Servicing Agreement between San Diego Gas & Electric and the
California Department of Water Resources dated December 19, 2002.
10.08 Transition Property Purchase and Sale Agreement dated December
16, 1997 (Incorporated by reference from Form 8-K filed by SDG&E
Funding LLC on December 23, 1997 (Exhibit 10.1)).
47
10.09 Transition Property Servicing Agreement dated December 16, 1997
(Incorporated by reference from Form 8-K filed by SDG&E Funding
LLC on December 23, 1997 (Exhibit 10.2)).
Compensation
Sempra Energy
- -------------
10.10 2003 Sempra Energy Executive Incentive Plan B.
10.11 2003 Executive Incentive Plan (June 30, 2003 Form 10-Q, Exhibit
10.1).
10.12 Amended 1998 Long-Term Incentive Plan (June 30, 2003 Form 10-Q,
Exhibit 10.2).
10.13 Sempra Energy Executive Incentive Plan effective January 1, 2003
(2002 Form 10-K Exhibit 10.09).
10.14 Amended Sempra Energy Retirement Plan for Directors (2002 Form
10-K Exhibit 10.10).
10.15 Amended and Restated Sempra Energy Deferred Compensation and
Excess Savings Plan (September 30, 2002 Form 10-Q, Exhibit 10.3).
10.16 Form of Sempra Energy Severance Pay Agreement for Executives
(2001 Form 10-K, Exhibit 10.07).
10.17 Sempra Energy Executive Security Bonus Plan effective January 1,
2001 (2001 Form 10-K, Exhibit 10.08).
10.18 Sempra Energy Deferred Compensation and Excess Savings Plan
effective January 1, 2000 (2000 Form 10-K, Exhibit 10.07).
10.19 Sempra Energy 1998 Long Term Incentive Plan (Incorporated by
reference from the Registration Statement on Form S-8 Sempra
Energy Registration No. 333-56161 dated June 5, 1998 (Exhibit
4.1)).
10.20 Sempra Energy 1998 Non-Employee Directors' Stock Plan
(Incorporated by reference from the Registration Statement on
Form S-8 Sempra Energy Registration No. 333-56161 dated June 5,
1998 (Exhibit 4.2)).
Financing
Enova Corporation and San Diego Gas & Electric
- ----------------------------------------------
10.21 Loan agreement with the City of Chula Vista in connection
with the issuance of $25 million of Industrial Development
Bonds, dated as of October 1, 1997 (Enova 1997 Form 10-K,
Exhibit 10.34).
48
10.22 Loan agreement with the City of Chula Vista in connection
with the issuance of $38.9 million of Industrial Development
Bonds, dated as of August 1, 1996 (Enova 1996 Form 10-K,
Exhibit 10.31).
10.23 Loan agreement with the City of Chula Vista in connection
with the issuance of $60 million of Industrial Development
Bonds, dated as of November 1, 1996 (Enova 1996 Form 10-K,
Exhibit 10.32).
10.24 Loan agreement with City of San Diego in connection with
the issuance of $57.7 million of Industrial Development
Bonds, dated as of June 1, 1995 (June 30, 1995 SDG&E
Form 10-Q, Exhibit 10.3).
10.25 Loan agreement with the City of San Diego in connection with
the issuance of $92.9 million of Industrial Development
Bonds 1993 Series C dated as of July 1, 1993 (June 30, 1993
SDG&E Form 10-Q, Exhibit 10.2).
10.26 Loan agreement with the City of San Diego in connection with
the issuance of $70.8 million of Industrial Development Bonds
1993 Series A dated as of April 1, 1993 (March 31, 1993 SDG&E
Form 10-Q, Exhibit 10.3).
10.27 Loan agreement with the City of San Diego in connection with
the issuance of $118.6 million of Industrial Development
Bonds dated as of September 1, 1992 (Sept. 30, 1992 SDG&E
Form 10-Q, Exhibit 10.1).
10.28 Loan agreement with the City of Chula Vista in connection
with the issuance of $250 million of Industrial Development
Bonds, dated as of December 1, 1992 (1992 SDG&E Form 10-K,
Exhibit 10.5).
10.29 Loan agreement with the California Pollution Control Financing
Authority in connection with the issuance of $129.82 million
of Pollution Control Bonds, dated as of June 1, 1996
(Enova 1996 Form 10-K, Exhibit 10.41).
10.30 Loan agreement with the California Pollution Control
Financing Authority in connection with the issuance of $60
million of Pollution Control Bonds dated as of June 1, 1993
(June 30, 1993 SDG&E Form 10-Q, Exhibit 10.1).
10.31 Loan agreement with the California Pollution Control Financing
Authority, dated as of December 1, 1991, in connection with
the issuance of $14.4 million of Pollution Control Bonds
(1991 SDG&E Form 10-K, Exhibit 10.11).
49
Natural Gas Transportation
Enova Corporation and San Diego Gas & Electric
- ----------------------------------------------
10.32 Amendment to Firm Transportation Service Agreement, dated
December 2, 1996, between Pacific Gas and Electric Company
and San Diego Gas & Electric Company (1997 Enova Corporation
Form 10-K, Exhibit 10.58).
10.33 Firm Transportation Service Agreement, dated December 31,
1991 between Pacific Gas and Electric Company and San Diego
Gas & Electric Company (1991 SDG&E Form 10-K, Exhibit 10.7).
10.34 Firm Transportation Service Agreement, dated October 13, 1994
between Pacific Gas Transmission Company and San Diego Gas
& Electric Company (1997 Enova Corporation Form 10-K, Exhibit
10.60).
Nuclear
Enova Corporation and San Diego Gas & Electric
- ----------------------------------------------
10.35 Nuclear Facilities Qualified CPUC Decommissioning Master
Trust Agreement for San Onofre Nuclear Generating Station,
approved November 25, 1987 (1992 SDG&E Form 10-K, Exhibit 10.7).
10.36 Amendment No. 1 to the Qualified CPUC Decommissioning Master
Trust Agreement dated September 22, 1994 (see Exhibit 10.35
herein)(1994 SDG&E Form 10-K, Exhibit 10.56).
10.37 Second Amendment to the San Diego Gas & Electric Company
Nuclear Facilities Qualified CPUC Decommissioning Master
Trust Agreement for San Onofre Nuclear Generating Station
(see Exhibit 10.35 herein)(1994 SDG&E Form 10-K, Exhibit 10.57).
10.38 Third Amendment to the San Diego Gas & Electric Company
Nuclear Facilities Qualified CPUC Decommissioning Master
Trust Agreement for San Onofre Nuclear Generating Station
(see Exhibit 10.35 herein)(1996 SDG&E Form 10-K, Exhibit 10.59).
10.39 Fourth Amendment to the San Diego Gas & Electric Company
Nuclear Facilities Qualified CPUC Decommissioning Master
Trust Agreement for San Onofre Nuclear Generating Station
(see Exhibit 10.35 herein)(1996 SDG&E Form 10-K, Exhibit 10.60).
10.40 Fifth Amendment to the San Diego Gas & Electric Company
Nuclear Facilities Qualified CPUC Decommissioning Master
Trust Agreement for San Onofre Nuclear Generation Station
(see Exhibit 10.35 herein)(1999 SDG&E Form 10-K, Exhibit 10.26).
10.41 Sixth Amendment to the San Diego Gas & Electric Company
Nuclear Facilities Qualified CPUC Decommissioning Master
Trust Agreement for San Onofre Nuclear Generating Station
(see Exhibit 10.35 herein)(1999 SDG&E Form 10-K, Exhibit 10.27).
50
10.42 Seventh Amendment to the San Diego Gas & Electric Company
Nuclear Facilities Qualified CPUC Decommissioning Master
Trust Agreement for San Onofre Nuclear Generating Station
dated December 24, 2003 (see Exhibit 10.35 herein).
10.43 Nuclear Facilities Non-Qualified CPUC Decommissioning Master
Trust Agreement for San Onofre Nuclear Generating Station,
approved November 25, 1987 (1992 SDG&E Form 10-K, Exhibit 10.8).
10.44 First Amendment to the San Diego Gas & Electric Company
Nuclear Facilities Non-Qualified CPUC Decommissioning Master
Trust Agreement for San Onofre Nuclear Generating Station
(see Exhibit 10.43 herein)(1996 Form 10-K, Exhibit 10.62).
10.45 Second Amendment to the San Diego Gas & Electric Company
Nuclear Facilities Non-Qualified CPUC Decommissioning Master
Trust Agreement for San Onofre Nuclear Generating Station
(see Exhibit 10.43 herein)(1996 Form 10-K, Exhibit 10.63).
10.46 Third Amendment to the San Diego Gas & Electric Company
Nuclear Facilities Non-Qualified CPUC Decommissioning Master
Trust Agreement for San Onofre Nuclear Generating Station
(see Exhibit 10.43 herein)(1999 SDG&E Form 10-K, Exhibit 10.31).
10.47 Fourth Amendment to the San Diego Gas & Electric Company
Nuclear Facilities Non-Qualified CPUC Decommissioning Master
Trust Agreement for San Onofre Nuclear Generating Station
(see Exhibit 10.43 herein)(1999 SDG&E Form 10-K, Exhibit 10.32).
10.48 Fifth Amendment to the San Diego Gas & Electric Company
Nuclear Facilities Non-Qualified CPUC Decommissioning Master
Trust Agreement for San Onofre Nuclear Generating Station
dated December 24, 2003 (see Exhibit 10.43 herein).
10.49 Second Amended San Onofre Operating Agreement among Southern
California Edison Company, SDG&E, the City of Anaheim and
the City of Riverside, dated February 26, 1987 (1990 SDG&E
Form 10-K, Exhibit 10.6).
10.50 U. S. Department of Energy contract for disposal of spent
nuclear fuel and/or high-level radioactive waste, entered
into between the DOE and Southern California Edison Company,
as agent for SDG&E and others; Contract DE-CR01-83NE44418,
dated June 10, 1983 (1988 SDG&E Form 10-K, Exhibit 10N).
Exhibit 12 -- Statement re: Computation of Ratios
12.01 Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends for the years ended December
31, 2003, 2002, 2001, 2000, and 1999.
51
Exhibit 13 -- Annual Report to Security Holders
13.01 Sempra Energy 2003 Annual Report to Shareholders. (Such report,
except for the portions thereof which are expressly incorporated
by reference in this Annual Report, is furnished for the
information of the Securities and Exchange Commission and is not
to be deemed "filed" as part of this Annual Report).
Exhibit 21 -- Subsidiaries
21.01 Schedule of Significant Subsidiaries at December 31, 2003.
Exhibit 23 -- Independent Auditors' Consent, page 38.
Exhibit 31 -- Section 302 Certifications
31.1 Statement of Registrant's Chief Executive Officer pursuant
to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934.
31.2 Statement of Registrant's 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 Registrant's Chief Executive Officer pursuant
to 18 U.S.C. Sec. 1350.
32.2 Statement of Registrant's Chief Financial Officer pursuant
to 18 U.S.C. Sec. 1350.
52
GLOSSARY
AB California Assembly Bill
AB X1 A California Assembly bill authorizing the
California Department of Water Resources to
purchase energy for California consumers.
AEG Atlantic Electric & Gas Limited
AFUDC Allowance for Funds Used During Construction
ALJ Administrative Law Judge
APB Accounting Principles Board
APS Arizona Public Service Co.
ARB Accounting Research Bulletin
BCAP Biennial Cost Allocation Proceeding
Bcf One Billion Cubic Feet (of natural gas)
Calpine Calpine Corporation
CEC California Energy Commission
CEMA Catastrophic Event Memorandum Account
CFTC Commodity Futures Trading Commission
CPUC California Public Utilities Commission
CRS Cost Responsibility Surcharge
DA Direct Access
DGN Distribuidora de Gas Natural
DOE Department of Energy
DSM Demand-Side Management
DWR Department of Water Resources
Edison Southern California Edison Company
EITF Emerging Issues Task Force
El Paso El Paso Energy Corp.
Elk Hills Elk Hills Power Project
EG Electric Generation
EMFs Electric and Magnetic Fields
53
ERMG Energy Risk Management Group
ERMOC Energy Risk Management Oversight Committee
ESOP Employee Stock Ownership Plan
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
FIN FASB Interpretation No.
FSP FASB Staff Position
GCIM Gas Cost Incentive Mechanism
GIR Gas Industry Restructuring
Global Sempra Energy Global Enterprises
HOA Heads of Agreement
ICIP Incremental Cost Incentive Pricing
IID Imperial Irrigation District
Intertie Pacific Intertie
IOUs Investor-Owned Utilities
IRS Internal Revenue Service
ISO Independent System Operator
kWh Kilowatt Hour
LIFO Last-In First-Out inventory costing method
LNG Liquefied Natural Gas
Luz del Sur Luz del Sur S.A.A.
MGPs Manufactured-Gas Plants
mmbtu Million British Thermal Units (of natural gas)
Moody's Moody's Investor Services, Inc.
MW Megawatt
NRC Nuclear Regulatory Commission
Occidental Occidental Energy Ventures Corporation
OIR Order Instituting Ratemaking
54
OPEC Organization of the Petroleum Exporting Countries
ORA Office of Ratepayer Advocates
OTC Over the counter
PBR Performance-Based Regulation
PE Pacific Enterprises
PG&E PG&E Corporation
PGA Purchased Gas Balancing Account
PGE Portland General Electric Company
PIER Public Interest Energy Research
PPA Power Purchase Agreement
PRPs Potentially Responsible Parties
PSEG PSEG Global
PX Power Exchange
QFs Qualifying Facilities
RD&D Research, Development and Demonstration
RFP Request for Proposals
ROE Return on Equity
ROR Return on Ratebase
S&P Standard & Poor's
SDG&E San Diego Gas & Electric Company
SEC Securities and Exchange Commission
SELNG Sempra Energy LNG Corp.
SEF Sempra Energy Financial
SEI Sempra Energy International
SER Sempra Energy Resources
SES Sempra Energy Solutions
SET Sempra Energy Trading
SFAS Statement of Financial Accounting Standards
Shell Shell International Gas Limited
55
SoCalGas Southern California Gas Company
SONGS San Onofre Nuclear Generating Station
Southwest Powerlink A transmission line connecting San Diego
to Phoenix and intermediate points.
SPEs Special Purpose Entities
Sunat Peruvian tax authorities
TDM Termoelectrica de Mexicali
The Act Medicare Prescription Drug Improvement
Modernization Act
The Board Sempra Energy's Board of Directors
Trust ESOP Trust
UCAN Utility Consumers Action Network
VaR Value at Risk
VIEs Variable Interest Entities