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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[..X..] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
March 31, 2005
For the quarterly period ended.......................................
Or
[.....] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ________________ to _________________
Commission Name of Registrant, State of I.R.S. Employer
File Incorporation, Address and Identification
Number Telephone Number Number
- ---------- ---------------------------------- --------------
1-40 Pacific Enterprises 94-0743670
(A California Corporation)
101 Ash Street
San Diego, California 92101
(619) 696-2020
1-1402 Southern California Gas Company 95-1240705
(A California Corporation)
555 West Fifth Street
Los Angeles, California 90013
(213) 244-1200
No Change
- -----------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since
last report
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Sections 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past
90 days.
Yes...X... No.......
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes....... No..X....
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock outstanding:
Pacific Enterprises Wholly owned by Sempra Energy
Southern California Gas Company Wholly owned by Pacific Enterprises
2
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report contains statements that are not historical fact
and constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. The words
"estimates," "believes," "expects," "anticipates," "plans," "intends,"
"may," "could," "would" and "should" or similar expressions, or
discussions of strategy or of plans are intended to identify forward-
looking statements. Forward-looking statements are not guarantees of
performance. They involve risks, uncertainties and assumptions. Future
results may differ materially from those expressed in these forward-
looking statements.
Forward-looking statements are necessarily based upon various
assumptions involving judgments with respect to the future and other
risks, including, among others, local, regional and national economic,
competitive, political, legislative and regulatory conditions and
developments; actions by the California Public Utilities Commission,
the California State Legislature, and the Federal Energy Regulatory
Commission and other regulatory bodies in the United States; capital
markets conditions, inflation rates, interest rates and exchange rates;
energy and trading markets, including the timing and extent of changes
in commodity prices; the availability of natural gas; weather
conditions and conservation efforts; war and terrorist attacks;
business, regulatory, environmental and legal decisions and
requirements; the status of deregulation of retail natural gas and
electricity delivery; the timing and success of business development
efforts; the outcome of litigation; and other uncertainties, all of
which are difficult to predict and many of which are beyond the control
of the companies. Readers are cautioned not to rely unduly on any
forward-looking statements and are urged to review and consider
carefully the risks, uncertainties and other factors which affect the
companies' business described in this report and other reports filed by
the companies from time to time with the Securities and Exchange
Commission.
3
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
PACIFIC ENTERPRISES AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(Dollars in millions)
Three months ended
March 31,
------------------
2005 2004
------- -------
Operating revenues $ 1,241 $ 1,148
------- -------
Operating expenses
Cost of natural gas 801 721
Other operating expenses 215 210
Depreciation 66 74
Income taxes 48 44
Franchise fees and other taxes 33 33
------- -------
Total operating expenses 1,163 1,082
------- -------
Operating income 78 66
------- -------
Other income and (deductions)
Interest income 4 8
Regulatory interest, net (1) (3)
Allowance for equity funds used
during construction 1 1
Other, net (1) (1)
------- -------
Total 3 5
------- -------
Interest charges
Long-term debt 10 9
Other 2 3
------- -------
Total 12 12
------- -------
Net income 69 59
Preferred dividend requirements 1 1
------- -------
Earnings applicable to common shares $ 68 $ 58
======= =======
See notes to Consolidated Financial Statements.
4
PACIFIC ENTERPRISES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
March 31, December 31,
2005 2004
------------- -------------
ASSETS
Utility plant, at original cost $ 7,303 $ 7,254
Accumulated depreciation (2,899) (2,863)
------- -------
Utility plant, net 4,404 4,391
------- -------
Current assets:
Cash and cash equivalents 25 34
Accounts receivable - trade 508 673
Accounts receivable - other 27 14
Interest receivable 31 32
Due from unconsolidated affiliates 326 7
Income taxes receivable 51 31
Deferred income taxes 4 9
Regulatory assets arising from fixed-price
contracts and other derivatives 90 97
Other regulatory assets 30 26
Inventories 16 72
Other 6 10
------- -------
Total current assets 1,114 1,005
------- -------
Other assets:
Due from unconsolidated affiliates 448 396
Regulatory assets arising from fixed-price
contracts and other derivatives 32 52
Sundry 95 109
------- -------
Total other assets 575 557
------- -------
Total assets $ 6,093 $ 5,953
======= =======
See notes to Consolidated Financial Statements.
5
PACIFIC ENTERPRISES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
March 31, December 31,
2005 2004
------------- ------------
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock (600 million shares authorized;
84 million shares outstanding) $ 1,453 $ 1,453
Retained earnings 353 285
Accumulated other comprehensive income (loss) (4) (4)
------- -------
Total common equity 1,802 1,734
Preferred stock 80 80
------- -------
Total shareholders' equity 1,882 1,814
Long-term debt 860 864
------- -------
Total capitalization 2,742 2,678
------- -------
Current liabilities:
Short-term debt -- 30
Accounts payable - trade 199 314
Accounts payable - other 55 65
Due to unconsolidated affiliates 72 127
Interest payable 15 10
Regulatory balancing accounts, net 260 178
Fixed-price contracts and other derivatives 90 97
Customer deposits 57 49
Temporary LIFO liquidation 200 --
Other 274 259
------- -------
Total current liabilities 1,222 1,129
------- -------
Deferred credits and other liabilities:
Customer advances for construction 56 55
Postretirement benefits other than pensions 62 64
Deferred income taxes 124 123
Deferred investment tax credits 40 41
Regulatory liabilities arising from cost of
removal obligations 1,460 1,446
Other regulatory liabilities 72 67
Fixed-price contracts and other derivatives 34 52
Preferred stock of subsidiary 20 20
Deferred credits and other 261 278
------- -------
Total deferred credits and other liabilities 2,129 2,146
------- -------
Commitments and contingencies (Note 5)
Total liabilities and shareholders' equity $ 6,093 $ 5,953
======= =======
See notes to Consolidated Financial Statements.
6
PACIFIC ENTERPRISES AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Dollars in millions)
Three months ended
March 31,
------------------
2005 2004
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 69 $ 59
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 66 74
Deferred income taxes and investment tax credits 11 24
Net changes in other working capital components 330 482
Changes in other assets 2 --
Changes in other liabilities (7) (39)
----- -----
Net cash provided by operating activities 471 600
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (63) (62)
Affiliate loans (386) (350)
----- -----
Net cash used in investing activities (449) (412)
----- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Preferred dividends paid (1) (1)
Payments on long-term debt -- (175)
Decrease in short-term debt (30) --
----- -----
Net cash used in financing activities (31) (176)
----- -----
Increase (decrease) in cash and cash equivalents (9) 12
Cash and cash equivalents, January 1 34 32
----- -----
Cash and cash equivalents, March 31 $ 25 $ 44
===== =====
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest payments, net of amounts capitalized $ 6 $ 5
===== =====
Income tax payments, net of refunds $ 56 $ --
===== =====
See notes to Consolidated Financial Statements.
7
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(Dollars in millions)
Three months ended
March 31,
------------------
2005 2004
------- -------
Operating revenues $ 1,241 $ 1,148
------- -------
Operating expenses
Cost of natural gas 801 721
Other operating expenses 215 209
Depreciation 66 74
Income taxes 47 43
Franchise fees and other taxes 33 33
------- -------
Total operating expenses 1,162 1,080
------- -------
Operating income 79 68
------- -------
Other income and (deductions)
Interest income 2 1
Regulatory interest, net (1) (3)
Allowance for equity funds used
during construction 1 1
Other, net (1) (1)
------- -------
Total 1 (2)
------- -------
Interest charges
Long-term debt 10 9
Other 1 1
------- -------
Total 11 10
------- -------
Net income/earnings applicable to common shares $ 69 $ 56
======= =======
See notes to Consolidated Financial Statements.
8
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
March 31, December 31,
2005 2004
------------- ------------
ASSETS
Utility plant, at original cost $ 7,303 $ 7,254
Accumulated depreciation (2,899) (2,863)
------- -------
Utility plant, net 4,404 4,391
------- -------
Current assets:
Cash and cash equivalents 25 34
Accounts receivable - trade 508 673
Accounts receivable - other 25 13
Interest receivable 31 31
Due from unconsolidated affiliates 323 --
Deferred income taxes 11 17
Regulatory assets arising from fixed-price contracts
and other derivatives 90 97
Other regulatory assets 30 26
Inventories 16 72
Other 6 10
------- -------
Total current assets 1,065 973
------- -------
Other assets:
Regulatory assets arising from fixed-price contracts
and other derivatives 32 52
Sundry 72 86
------- -------
Total other assets 104 138
------- -------
Total assets $ 5,573 $ 5,502
======= =======
See notes to Consolidated Financial Statements.
9
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
March 31, December 31,
2005 2004
------------- ------------
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock (100 million shares authorized;
91 million shares outstanding) $ 866 $ 866
Retained earnings 542 523
Accumulated other comprehensive income (loss) (4) (4)
------- -------
Total common equity 1,404 1,385
Preferred stock 22 22
------- -------
Total shareholders' equity 1,426 1,407
Long-term debt 860 864
------- -------
Total capitalization 2,286 2,271
------- -------
Current liabilities:
Short-term debt -- 30
Accounts payable - trade 199 314
Accounts payable - other 55 65
Due to unconsolidated affiliates -- 55
Interest payable 15 10
Income taxes payable 43 63
Regulatory balancing accounts, net 260 178
Fixed-price contracts and other derivatives 90 97
Customer deposits 57 49
Temporary LIFO liquidation 200 --
Other 273 257
------- -------
Total current liabilities 1,192 1,118
------- -------
Deferred credits and other liabilities:
Customer advances for construction 56 55
Postretirement benefits other than pensions 62 64
Deferred income taxes 147 147
Deferred investment tax credits 40 41
Regulatory liabilities arising from cost
of removal obligations 1,460 1,446
Other regulatory liabilities 72 67
Fixed-price contracts and other derivatives 34 52
Deferred credits and other 224 241
------- -------
Total deferred credits and other liabilities 2,095 2,113
------- -------
Commitments and contingencies (Note 5)
Total liabilities and shareholders' equity $ 5,573 $ 5,502
======= =======
See notes to Consolidated Financial Statements.
10
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Dollars in millions)
Three months ended
March 31,
------------------
2005 2004
------ ------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 69 $ 56
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 66 74
Deferred income taxes and investment tax credits 11 24
Net changes in other working capital components 326 415
Changes in other assets 1 --
Changes in other liabilities (6) (19)
----- -----
Net cash provided by operating activities 467 550
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (63) (62)
Affiliate loan (333) (251)
----- -----
Net cash used in investing activities (396) (313)
----- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Common dividends paid (50) (50)
Payments on long-term debt -- (175)
Decrease in short-term debt (30) --
----- -----
Net cash used in financing activities (80) (225)
----- -----
Increase (decrease) in cash and cash equivalents (9) 12
Cash and cash equivalents, January 1 34 32
----- -----
Cash and cash equivalents, March 31 $ 25 $ 44
===== =====
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest payments, net of amounts capitalized $ 5 $ 4
===== =====
Income tax payments, net of refunds $ 56 $ --
===== =====
See notes to Consolidated Financial Statements.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. GENERAL
This Quarterly Report on Form 10-Q is that of Pacific Enterprises (PE)
and of Southern California Gas Company (SoCalGas)(collectively referred
to as the company or the companies). PE's common stock is wholly owned
by Sempra Energy, a California-based Fortune 500 holding company, and
PE owns all of the common stock of SoCalGas. The financial statements
herein are, in one case, the Consolidated Financial Statements of PE
and its subsidiary, SoCalGas, and, in the second case, the Consolidated
Financial Statements of SoCalGas and its subsidiaries, which comprise
less than one percent of SoCalGas' consolidated financial position and
results of operations.
Sempra Energy also indirectly owns all of the common stock of San Diego
Gas & Electric (SDG&E). SoCalGas and SDG&E are collectively referred to
herein as the California Utilities.
The accompanying Consolidated Financial Statements have been prepared
in accordance with the interim-period-reporting requirements of Form
10-Q. Results of operations for interim periods are not necessarily
indicative of results for the entire year. In the opinion of
management, the accompanying statements reflect all adjustments
necessary for a fair presentation. These adjustments are only of a
normal recurring nature.
Information in this Quarterly Report is unaudited and should be read in
conjunction with the Annual Report on Form 10-K for the year ended
December 31, 2004 (the Annual Report).
For the quarters ended March 31, 2005 and 2004, comprehensive income
was equal to earnings applicable to common shares.
The companies' significant accounting policies are described in Note 1
of the notes to Consolidated Financial Statements in the Annual Report.
The same accounting policies are followed for interim reporting
purposes.
SoCalGas accounts for the economic effects of regulation on utility
operations in accordance with Statement of Financial Accounting
Standards (SFAS) 71, Accounting for the Effects of Certain Types of
Regulation.
12
In accordance with SFAS 132 (revised), Employers' Disclosures about
Pensions and Other Postretirement Benefits, the following table provides
the components of benefit costs for the quarters ended March 31:
Other
Pension Benefits Postretirement Benefits
--------------------------------------------
(Dollars in millions) 2005 2004 2005 2004
- -------------------------------------------------------------------------------
Service cost $ 8 $ 8 $ 5 $ 5
Interest cost 25 23 11 12
Expected return on assets (25) (24) (9) (8)
Amortization of:
Transition obligation -- -- -- 2
Prior service cost 2 1 -- --
Actuarial loss 1 1 2 3
Regulatory adjustment (10) (8) 1 (2)
--------------------------------------------
Total net periodic benefit cost $ 1 $ 1 $ 10 $ 12
- -------------------------------------------------------------------------------
Note 5 of the notes to Consolidated Financial Statements in the Annual
Report discusses the company's expected contribution to its pension and
other postretirement benefit plans in 2005. For the quarter ended March
31, 2005, $1 million and $10 million of contributions have been made to
its pension plan and other postretirement benefit plans, respectively.
In accordance with Financial Accounting Standards Board (FASB) Staff
Position 106-2, the net periodic postretirement benefit costs for the
quarter ended March 31, 2005 were reduced by $3 million, before
regulatory adjustments, to reflect the expected subsidy as a result of
the Medicare Prescription Drug, Improvement and Modernization Act of
2003.
Asset-retirement obligations, as defined in SFAS 143, Accounting for
Asset Retirement Obligations, were as follows (dollars in millions):
2005 2004
- ------------------------------------------------------------------
Balance as of January 1 and March 31 $ 9 $ 11
- ------------------------------------------------------------------
At March 31, 2005 and December 31, 2004, the estimated removal costs
recorded as a regulatory liability were $1.5 billion and $1.4 billion,
respectively, for SoCalGas.
13
NOTE 2. NEW ACCOUNTING STANDARDS
Stock-Based Compensation: In December 2004, the FASB issued SFAS 123
(revised), a revision of SFAS 123, Accounting for Stock-Based
Compensation, which establishes the accounting for transactions in
which an entity exchanges its equity instruments for goods or services
received. This statement requires companies to measure and record the
cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award and gives
companies three alternative transition methods. Sempra Energy has not
determined the transition method it will use. The effective date of
this statement is January 1, 2006 for Sempra Energy.
FASB Interpretation No. 47, "Accounting for Conditional Asset
Retirement Obligations, an interpretation of FASB Statement No. 143"
(FIN 47): Issued in March 2005, FIN 47 clarifies that the term
conditional asset-retirement obligation as used in SFAS 143, Accounting
for Asset Retirement Obligations, refers to a legal obligation to
perform an asset-retirement activity in which the timing and/or method
of settlement are conditional on a future event that may or may not be
within the control of the entity. FIN 47 requires companies to
recognize a liability for the fair value of a conditional asset-
retirement obligation if the fair value of the obligation can be
reasonably estimated. FIN 47 is effective for the company's 2005 annual
report. The company has not determined the effect of FIN 47 on its
financial position or results of operations.
NOTE 3. FINANCIAL INSTRUMENTS
Accounting for Derivative Instruments and Hedging Activities
In accordance with SFAS 133 and related amendments SFAS 138 and 149
(collectively SFAS 133), derivative instruments and related hedges are
recognized as assets or liabilities on the balance sheet (measured at
fair value) and changes in their fair values are recognized in earnings
unless the derivative qualifies as an accounting hedge.
SFAS 133 provides for hedge accounting treatment when certain criteria
are met. For derivative instruments designated as fair value hedges,
the gain or loss is recognized in earnings in the period of change
together with the offsetting gain or loss on the item to which the risk
being hedged is related; therefore, there is no effect on net income.
For derivative instruments designated as cash flow hedges, the
effective portion of the derivative gain or loss is included in other
comprehensive income, but not in net income until the corresponding
hedged transaction is similarly reflected. Any ineffective portion is
reported in earnings immediately. There was no effect from cash flow
hedges on net income or other comprehensive income for the quarters
ended March 31, 2005 and 2004, respectively.
The company utilizes natural gas derivatives to manage commodity price
risk associated with servicing its load requirements. These contracts
allow the company to predict with greater certainty the effective
prices to be received by the company and the prices to be charged to
its customers. The use of derivative financial instruments is subject
14
to certain limitations imposed by company policy and regulatory
requirements.
The company classifies its forward contracts as follows:
Contracts that meet the definition of normal purchases and sales,
i.e., those that rarely settle by means other than physical delivery
of the commodities involved in the transaction, are eligible for the
normal purchases and sales exception of SFAS 133, whereby they are
accounted for under accrual accounting and recorded in Revenues or
Cost of Natural Gas on the Statements of Consolidated Income at the
time of delivery.
Natural Gas Purchases and Sales:
The unrealized gains and losses related to forward contracts are
offset by regulatory assets and liabilities on the Consolidated
Balance Sheets to the extent derivative gains and losses will be
recoverable or payable in future rates. If gains and losses are not
recoverable or payable through future rates, the company applies
hedge accounting if certain criteria are met. When a contract no
longer meets the hedging requirements of SFAS 133, the unrealized
gains and losses and the related regulatory asset or liability will
be amortized over the remaining contract life.
The transactions associated with fixed-price contracts and other
derivatives had no material impact on the Statements of Consolidated
Income for the quarters ended March 31, 2005 and 2004.
Market Risk
The company's policy is to use derivative physical and financial
instruments to reduce its exposure to fluctuations in interest rates
and commodity prices. Transactions involving these instruments are with
major exchanges and other firms believed to be credit-worthy. The use
of these instruments exposes the company to market and credit risk,
which may at times be concentrated with certain counterparties,
although counterparty nonperformance is not anticipated.
Interest-Rate Risk Management
As described in Note 3 of the notes to Consolidated Financial
Statements in the Annual Report, the company periodically enters into
interest-rate swap agreements to moderate its exposure to interest-rate
changes and to lower the overall cost of borrowing.
Energy Contracts
SoCalGas records transactions for natural gas contracts in Cost of
Natural Gas in the Statements of Consolidated Income. For open
contracts not expected to result in physical delivery, changes in the
market value of the contracts are recorded in these accounts during the
period the contracts are open, with an offsetting entry to a regulatory
asset or liability. The majority of the company's contracts result in
physical delivery.
15
NOTE 4. REGULATORY MATTERS
COST OF SERVICE FILINGS
In July 2004, the California Utilities filed with the California Public
Utilities Commission (CPUC) a proposed settlement of Phase II of their
cost of service proceedings, addressing attrition allowances and
performance-based incentive mechanisms. On March 17, 2005, the CPUC
approved the settlement and adopted related performance measures and
incentives.
The CPUC's decision establishes an indexing methodology for post-test-
year ratemaking which includes inflation adjustments and earnings-
sharing mechanisms. The decision is retroactive to January 1, 2005 and
is applicable to years 2005-2007. It eliminates earnings sharing that
would otherwise have been applicable for 2004 and incentive awards for
2004.
For the years 2005-2007, the California Utilities' authorized base-rate
revenues will be annually increased by the increase in the Consumer
Price Index, subject to minimum and maximum percentage increases that
vary with the particular utility and increase yearly. The annual
minimum percentage increases range from 2.0% to 3.3% and the annual
maximum percentage increases range from 3.0% to 4.3%. For these years,
any utility base-rate earnings that exceed the CPUC-authorized rate of
return on ratebase plus 0.5 percentage point will be shared with
customers, in proportions that vary with the amount of the excess,
beginning with customers' receiving 75% of the excess, declining to 25%
as the excess increases. The decision authorizes either utility to file
for a suspension of the indexing and sharing mechanisms if its base-
rate earnings for any year are at least 1.75 percentage points below
its authorized rate of return and authorizes others to file for a
suspension if either utility's base-rate earnings for any year are at
least 1.75 percentage points above its authorized rate of return. The
mechanisms will be automatically suspended for either utility if its
base-rate earnings for either 2005 or 2006 are at least 3 percentage
points above or below its authorized rate of return.
The decision also establishes formula-based performance measures for
customer service and reliability. These provide symmetrical annual
reward and penalty potentials aggregating approximately $8 million.
UTILITY RATEMAKING INCENTIVE AWARDS
Performance-Based Regulation (PBR), demand-side management (DSM) and
Gas Cost Incentive Mechanism (GCIM) awards are not included in the
company's earnings before CPUC approval of the award is received. No
incentive awards were approved during the first quarter of 2005.
On December 30, 2004, a joint settlement agreement between the
California Utilities and the CPUC's Office of Ratepayers Advocates
(collectively, the joint parties) was filed with the CPUC for
approval. The settlement agreement resolves all outstanding
shareholder earnings claims filed with the CPUC commencing in 2000
associated with DSM, energy efficiency and low-income energy
efficiency programs and those claims that would have been filed
through 2009 (for SoCalGas' DSM programs through 1999 and through
16
various dates for the efficiency programs). The proposed settlement is
for $14 million (including interest, franchise fees, uncollectible
amounts and awards earned in prior years that had not yet then been
requested). The $14 million would be included in 2005 income. The
joint parties requested expeditious approval of the settlement
agreement, without modification. A CPUC decision is expected in the
second or third quarter of 2005.
Other performance incentives pending CPUC approval at March 31, 2005
and, therefore, not included in the company's earnings were (dollars
in millions):
Program
-----------------------------------
GCIM Year 10 $ 2.4
2003 safety 0.5
-----------------------------------
Total $ 2.9
-----------------------------------
The cumulative amount of awards subject to refund based on the outcome
of the Border Price Investigation discussed in "Litigation" below is
$56.9 million, substantially all of which has been included in net
income.
NATURAL GAS MARKET OIR
The CPUC's Natural Gas Market Order Instituting Rulemaking (OIR) was
instituted in January 2004 and is being addressed in two phases. A
decision on Phase I was issued in September 2004; Phase II has had a
prehearing conference and is awaiting CPUC direction on further
proceedings. Further discussion of Phase I and Phase II is included in
the Annual Report.
In Phase I, the CPUC's objective was to develop a process enabling the
CPUC to review and approve new interstate capacity contracts before
they are executed. The Phase I decision directed SoCalGas and SDG&E to
file an application to establish proposals for transmission system
integration, firm access rights and off-system delivery services. In
Phase II, the CPUC will investigate the need for emergency natural gas
storage reserves and the role of utilities in backstopping the noncore
market, and address ratemaking policies. The focus of the OIR is the
period from 2006 to 2016. Since Natural Gas Industry Restructuring
(GIR), as discussed in the Annual Report, would end in August 2006 and
there is overlap between GIR and the OIR issues, a number of parties
(including SoCalGas) have requested the CPUC not to implement GIR.
CPUC INVESTIGATION OF COMPLIANCE WITH AFFILIATE RULES
In February 2003, the CPUC opened an investigation of the business
activities of SDG&E, SoCalGas and Sempra Energy to determine if they
have complied with statutes and CPUC decisions in the management,
oversight and operations of their companies.
Beginning in November 2004, the CPUC initiated an independent audit to
evaluate energy-related holding company systems and affiliate
activities undertaken by Sempra Energy within the service territories
17
of SDG&E and SoCalGas. A final audit report, covering years 1997
through 2003, is due on August 31, 2005. The scope of the audit will be
broader than the annual affiliate audit.
On May 2, 2005, the California Utilities filed with the CPUC the
results of the annual independent audit of the California Utilities'
transactions with other Sempra Energy affiliates. In response to a
finding of the auditor that utility procurement information was
improperly provided to an affiliated risk management consulting firm
employed by Sempra Energy, the California Utilities will adopt the
auditor's recommendation to perform risk management functions
themselves rather than utilizing Sempra Energy's Risk Management
Department.
NOTE 5. LITIGATION
Except for the matters referred to below, neither the company nor its
subsidiaries are party to, nor is their property the subject of, any
material pending legal proceedings other than routine litigation
incidental to their businesses. Further background on these matters is
provided in the Annual Report. At March 31, 2005, the company had
accrued $88 million to provide for the costs of legal proceedings, of
which $76 million related to cases arising from the 2000-2001
California energy crisis. Management believes that none of these
matters will have material adverse effect on the company's financial
condition.
California Energy Crisis
Dramatic increases in the prices of natural gas in California during
2000 and 2001 have resulted in many, often duplicative, governmental
investigations, regulatory proceedings and lawsuits involving numerous
energy companies seeking recovery of tens of billions of dollars for
allegedly unlawful activities asserted to have caused or contributed to
increased energy prices. The material proceedings that involve the
company are summarized below.
Class-action and individual antitrust and unfair competition lawsuits
filed in 2000 and thereafter, and currently consolidated in San Diego
Superior Court, allege that Sempra Energy, SoCalGas and SDG&E, along
with El Paso Natural Gas Company (El Paso) and several of its
affiliates, unlawfully sought to control natural gas and electricity
markets. In December 2003, the Court approved a settlement whereby the
applicable El Paso entities will pay approximately $1.6 billion to
resolve these claims (including cases involving unrelated claims not
applicable to Sempra Energy, SoCalGas or SDG&E). The proceeding against
Sempra Energy and the California Utilities has not been resolved and
continues to be litigated. The plaintiffs' damage claims, as revised,
assert damages of approximately $23 billion (after applicable
trebling). Trial is scheduled to commence on September 2, 2005.
Similar lawsuits were filed by the Attorneys General of Arizona and
Nevada, alleging that El Paso and certain Sempra Energy subsidiaries
unlawfully sought to control the natural gas market in their respective
states. The claims against the Sempra Energy defendants in the Arizona
lawsuit were settled in September 2004 for $150,000. The Nevada
Attorney General's lawsuit remains pending.
18
The company is cooperating with an investigation being conducted by the
California Attorney General into possible anti-competitive behavior in
the natural gas and electricity markets during 2000-2001. Several of
the company's senior officers have testified at investigational
hearings conducted by the California Attorney General's Office, and the
company expects additional hearings to be held.
In April 2003, Sierra Pacific Resources and its utility subsidiary
Nevada Power filed a lawsuit in U.S. District Court in Las Vegas
against major natural gas suppliers, and included Sempra Energy, the
California Utilities and other company subsidiaries, seeking recovery
of damages alleged to aggregate in excess of $150 million (before
trebling). The U.S. District Court dismissed the case in November 2004,
determining that this is a matter for the FERC to resolve. In January
2005, plaintiffs filed an appeal with the Ninth Circuit Court of
Appeals.
In July 2004, 12 antitrust actions were filed against the company
alleging that energy prices were unlawfully manipulated by defendants'
reporting artificially inflated natural gas prices to trade
publications and by entering into wash trades.
CPUC Border Price Investigation
In November 2002, the CPUC instituted an investigation into the
Southern California natural gas market and the price of natural gas
delivered to the California - Arizona border between March 2000 and
May 2001. A CPUC Administrative Law Judge-proposed decision highly
critical of SoCalGas' natural gas purchase, sales, hedging and storage
activities during the period has been rejected by the CPUC.
The portion of this investigation relating to the California Utilities
is still open. If the investigation were to determine that the conduct
of either of the California Utilities contributed to the natural gas
price spikes that occurred during the investigation period, the CPUC
may modify the party's natural gas procurement incentive mechanism,
reduce the amount of any shareholder award for the period involved,
and/or order the party to issue a refund to ratepayers. At March 31,
2005, the cumulative amount of shareholder awards, substantially all
of which has been included in net income, was $56.9 million.
The CPUC may hold additional rounds of hearings to consider whether
other companies, including other California utilities, contributed to
the natural gas price spikes or issue an order terminating the
investigation. No hearings have yet been scheduled and discovery is
ongoing.
19
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
financial statements contained in this Form 10-Q and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and "Risk Factors" contained in the Annual Report.
RESULTS OF OPERATIONS
Natural gas revenues increased as a result of higher natural gas costs,
which are passed on to customers.
Under the current regulatory framework, the cost of natural gas
purchased for customers and the variations in that cost are passed
through to the customers on a substantially concurrent basis. However,
SoCalGas' GCIM allows SoCalGas to share in the savings or costs from
buying natural gas for customers below or above market-based monthly
benchmarks. Further discussion is provided in Notes 1 and 9 of the
notes to Consolidated Financial Statements in the Annual Report.
The table below summarizes natural gas volumes and revenues by customer
class for the quarters ended March 31, 2005 and 2004.
Gas Sales, Transportation and Exchange
(Volumes in billion cubic feet, dollars in millions)
Transportation
Gas Sales & Exchange Total
--------------------------------------------------------------
Volumes Revenue Volumes Revenue Volumes Revenue
--------------------------------------------------------------
2005:
Residential 89 $ 886 -- $ 2 89 $ 888
Commercial and industrial 31 275 68 39 99 314
Electric generation plants -- -- 26 8 26 8
Wholesale -- -- 45 10 45 10
--------------------------------------------------------------
120 $ 1,161 139 $ 59 259 1,220
Balancing accounts and other 21
---------
Total $ 1,241
- -----------------------------------------------------------------------------------------
2004:
Residential 90 $ 851 1 $ 2 91 $ 853
Commercial and industrial 32 249 68 39 100 288
Electric generation plants -- -- 29 8 29 8
Wholesale -- -- 44 8 44 8
--------------------------------------------------------------
122 $ 1,100 142 $ 57 264 1,157
Balancing accounts and other (9)
---------
Total $ 1,148
- -----------------------------------------------------------------------------------------
20
Net income for SoCalGas increased by $13 million (23%) to $69 million
in 2005 due primarily to the CPUC's 2005 cost of service decision
eliminating 2004 revenue sharing, for which $11 million after-tax had
been accrued in 2004 pending the decision, and the favorable resolution
of income-tax issues in 2005.
CAPITAL RESOURCES AND LIQUIDITY
SoCalGas' operations are a major source of liquidity.
At March 31, 2005, the company had $25 million in unrestricted cash and
$800 million in available unused, committed lines of credit, of which
PE had $500 million for the sole purpose of providing loans to Sempra
Global, another subsidiary of Sempra Energy, and SoCalGas had $300
million.
Management believes that these amounts and cash flows from operations
and security issuances will be adequate to finance capital expenditures
and meet liquidity requirements and other commitments. Management
continues to regularly monitor SoCalGas' ability to finance the needs of
its operating, financing and investing activities in a manner consistent
with its intention to maintain strong, investment-quality credit
ratings.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by PE's operating activities decreased by $129 million
to $471 million for 2005. For SoCalGas, net cash provided by operating
activities decreased by $83 million to $467 million for 2005. The
changes were primarily due to a higher decrease in accounts payable in
2005.
For the quarter ended March 31, 2005, the company made pension and other
postretirement benefit plan contributions of $1 million and $10 million,
respectively.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used in PE's investing activities increased by $37 million to
$449 million for 2005. Net cash used in SoCalGas' investing activities
increased by $83 million to $396 million for 2005. The increases were
primarily due to higher advances to Sempra Energy in 2005.
Significant capital expenditures in 2005 are expected to be for
improvements to the distribution and transmission systems. These
expenditures are expected to be financed by cash flows from operations
and security issuances.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash used in PE's financing activities decreased by $145 million to
$31 million for 2005. Net cash used in SoCalGas' financing activities
also decreased by $145 million, to $80 million for 2005. The decreases
were attributable to payments on long-term debt in 2004 and a decrease
in short-term debt in 2005.
21
FACTORS INFLUENCING FUTURE PERFORMANCE
Performance of the companies will depend primarily on the ratemaking
and regulatory process, natural gas industry restructuring, and the
changing energy marketplace. These factors are discussed in Note 4 of
the notes to Consolidated Financial Statements.
CRITICAL ACCOUNTING POLICIES AND KEY NON-CASH PERFORMANCE INDICATORS
There have been no significant changes to the accounting policies
viewed by management as critical or to key non-cash performance
indicators for the company, as set forth in the Annual Report.
NEW ACCOUNTING STANDARDS
Stock-Based Compensation: In December 2004, the FASB issued SFAS 123
(revised), a revision of SFAS 123, Accounting for Stock-Based
Compensation. This statement requires companies to measure and record
the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award. The
effective date of this statement is January 1, 2006 for Sempra Energy.
FASB Interpretation No. 47, "Accounting for Conditional Asset
Retirement Obligations, an interpretation of FASB Statement No. 143"
(FIN 47): Issued in March 2005, FIN 47 clarifies that the term
conditional asset-retirement obligation as used in SFAS 143, Accounting
for Asset Retirement Obligations, refers to a legal obligation to
perform an asset-retirement activity in which the timing and/or method
of settlement are conditional on a future event that may or may not be
within the control of the entity. FIN 47 requires companies to
recognize a liability for the fair value of a conditional asset-
retirement obligation if the fair value of the obligation can be
reasonably estimated. FIN 47 is effective for the company's 2005 annual
report.
Further discussion is provided in Note 2 of the notes to Consolidated
Financial Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes in the risk issues affecting the
company subsequent to those discussed in the Annual Report.
As of March 31, 2005, the total Value at Risk of SoCalGas' positions
was not material.
ITEM 4. CONTROLS AND PROCEDURES
Company management is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined in
Exchange Act Rules 13a-15(f). The companies have designed and maintain
disclosure controls and procedures to ensure that information required
to be disclosed in the companies' reports is recorded, processed,
summarized and reported within the time periods specified in the rules
and forms of the Securities and Exchange Commission and is accumulated
and communicated to the companies' management, including their Chief
Executive Officers and Chief Financial Officers, as appropriate, to
22
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.
The companies evaluate the effectiveness of its internal control over
financial reporting based on the framework in Internal Control--
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Under the supervision and
with the participation of management, including the Chief Executive
Officers and the Chief Financial Officers, the companies evaluated the
effectiveness of the design and operation of the companies' disclosure
controls and procedures as of March 31, 2005, the end of the period
covered by this report. Based on that evaluation, the companies' Chief
Executive Officers and Chief Financial Officers concluded that the
companies' disclosure controls and procedures were effective at the
reasonable assurance level.
There has been no change in the companies' internal controls over
financial reporting during the companies' most recent fiscal quarter
that has materially affected, or is reasonably likely to materially
affect, the companies' internal controls over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except as described in Notes 4 and 5 of the notes to Consolidated
Financial Statements herein, neither the companies nor their
subsidiaries are party to, nor is their property the subject of, any
material pending legal proceedings other than routine litigation
incidental to their businesses.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 12 - Computation of ratios
12.1 Computation of Ratio of Earnings to Fixed Charges of
PE.
12.2 Computation of Ratio of Earnings to Fixed Charges of
SoCalGas.
Exhibit 31 -- Section 302 Certifications
31.1 Statement of PE's Chief Executive Officer pursuant
to Rules 13a-14 and 15d-14 of the Securities Exchange Act of
1934.
31.2 Statement of PE's Chief Financial Officer pursuant
to Rules 13a-14 and 15d-14 of the Securities Exchange Act of
1934.
23
31.3 Statement of SoCalGas' Chief Executive Officer pursuant to
Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934.
31.4 Statement of SoCalGas' Chief Financial Officer pursuant
to Rules 13a-14 and 15d-14 of the Securities Exchange Act of
1934.
Exhibit 32 -- Section 906 Certifications
32.1 Statement of PE's Chief Executive Officer pursuant
to 18 U.S.C. Sec. 1350.
32.2 Statement of PE's Chief Financial Officer pursuant
to 18 U.S.C. Sec. 1350.
32.3 Statement of SoCalGas' Chief Executive Officer pursuant
to 18 U.S.C. Sec. 1350.
32.4 Statement of SoCalGas' Chief Financial Officer pursuant
to 18 U.S.C. Sec. 1350.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed after December 31, 2004:
Current Reports on Form 8-K filed January 11, 2005 and January 18,
2005, discussing the current status of energy crisis litigation.
Current Report on Form 8-K filed February 23, 2005, filing as an
exhibit Sempra Energy's press release of February 23, 2005, giving the
financial results for the three months ended December 31, 2004.
Current Report on Form 8-K filed March 17, 2005, announcing the CPUC's
March 17, 2005, decision in Phase II of the California Utilities' cost
of service proceedings.
Current Report on Form 8-K filed May 4, 2005, filing as an exhibit
Sempra Energy's press release of May 4, 2005, giving the financial
results for the three months ended March 31, 2005.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by
the undersigned thereunto duly authorized.
PACIFIC ENTERPRISES
-------------------
(Registrant)
Date: May 4, 2005 By: /s/ F. H. Ault
----------------------------
F. H. Ault
Sr. Vice President and Controller
SOUTHERN CALIFORNIA GAS COMPANY
-------------------------------
(Registrant)
Date: May 4, 2005 By: /s/ S. D. Davis
---------------------------
S. D. Davis
Sr. Vice President-External Relations
and Chief Financial Officer