UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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Commission file number 1-14201
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Sempra Energy
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(Exact name of registrant as specified in its charter)
California 33-0732627
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Ash Street, San Diego, California 92101
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(Address of principal executive offices)
(Zip Code)
(619) 696-2000
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(Registrant's telephone number, including area code)
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 (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
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Common stock outstanding on October 19, 1998: 240,014,103
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ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
SEMPRA ENERGY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME (Unaudited)
(In millions of dollars except per share amounts)
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Revenues and Other Income
Utility revenues:
Gas $ 583 $ 680 $ 1,998 $ 2,152
Electric 481 484 1,454 1,275
PX/ISO power 252 -- 366 --
Other operating revenues 67 73 231 227
Other income 15 14 34 28
------- ------- ------- -------
Total 1,398 1,251 4,083 3,682
------- ------- ------- -------
Expenses
Cost of gas distributed 165 240 684 810
PX/ISO power 219 -- 331 --
Purchased power 72 135 232 312
Electric fuel 70 46 137 124
Operating expenses 415 396 1,315 1,145
Depreciation and decommissioning 207 152 758 452
Franchise fees and other taxes 41 44 139 133
Preferred dividends of subsidiaries 3 5 9 13
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Total 1,192 1,018 3,605 2,989
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Income Before Interest and Income Taxes 206 233 478 693
Interest 58 52 161 155
------- ------- ------- -------
Income Before Income Taxes 148 181 317 538
Income taxes 57 79 108 226
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Net Income $ 91 $ 102 $ 209 $ 312
======= ======= ======= =======
Weighted Average Shares Outstanding (Basic)* 236,752 235,637 236,253 236,527
======= ======= ======= =======
Weighted Average Shares Outstanding (Diluted)* 237,413 236,246 236,914 237,136
======= ======= ======= =======
Net Income Per Share of Common Stock (Basic) $ 0.38 $ 0.43 $ 0.88 $ 1.32
======= ======= ======= =======
Net Income Per Share of Common Stock (Diluted) $ 0.38 $ 0.43 $ 0.88 $ 1.31
======= ======= ======= =======
Dividends Declared Per Common Share $ 0.39 $ 0.19 $ 1.17 $ 0.95
======= ======= ======= =======
* In thousands of shares
See notes to consolidated financial statements.
</TABLE>
<TABLE>
SEMPRA ENERGY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
(In millions of dollars)
<CAPTION>
September 30, December 31,
1998 1997
(Unaudited)
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<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 459 $ 814
Accounts receivable - trade 404 633
Accounts and notes receivable - other 222 202
Energy trading assets 1,384 587
Inventories 155 111
Taxes receivable 32 -
Regulatory balancing accounts - net - 297
Other 126 112
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Total current assets 2,782 2,756
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Property, plant and equipment 11,145 10,902
Less accumulated depreciation
and amortization (5,701) (5,360)
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Total property, plant and
equipment - net 5,444 5,542
-------- --------
Investments and other assets
Regulatory assets 1,001 1,186
Nuclear decommissioning trusts 432 399
Investments and other assets 1,088 868
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Total investments and other assets 2,521 2,453
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Total assets $ 10,747 $ 10,751
======== ========
See notes to consolidated financial statements.
</TABLE>
<TABLE>
SEMPRA ENERGY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND SHAREHOLDERS' EQUITY
(In millions of dollars)
<CAPTION>
September 30, December 31,
1998 1997
(Unaudited)
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<S> <C> <C>
Liabilities
Current liabilities
Short-term debt $ - $ 354
Long-term debt due within one year 127 270
Accounts payable 586 625
Energy trading liabilities 1,279 557
Dividends and interest payable 170 121
Regulatory balancing accounts - net 19 -
Other 296 279
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Total current liabilities 2,477 2,206
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Long-term debt
Long-term debt 2,894 3,045
Debt of Employee Stock Ownership Plan 130 130
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Total long-term debt 3,024 3,175
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Deferred credits and other liabilities
Customer advances for construction 69 72
Post-retirement benefits other than pensions 228 248
Deferred income taxes 660 773
Deferred investment tax credits 150 123
Deferred credits and other liabilities 1,016 916
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Total deferred credits and
other liabilities 2,123 2,132
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Preferred stock of subsidiaries 204 279
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Shareholders' Equity
Common stock 1,878 1,849
Retained earnings 1,087 1,157
Less deferred compensation relating to
Employee Stock Ownership Plan (46) (47)
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Total shareholders' equity 2,919 2,959
-------- -------
Commitments and contingent liabilities (Note 3)
Total liabilities and shareholders'
equity $ 10,747 $10,751
======== =======
See notes to consolidated financial statements.
</TABLE>
<TABLE>
SEMPRA ENERGY AND SUBSIDIARIES
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS (Unaudited)
(In millions of dollars)
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 209 $ 312
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and decommissioning 758 452
Deferred income taxes and investment tax credits (86) (8)
Other - net (16) 3
Net changes in working capital 321 20
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Net cash provided by operating activities 1,186 779
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CASH FLOWS FROM FINANCING ACTIVITIES
Dividends on common stock (230) (230)
Payment on long-term debt (399) (228)
Increase (decrease) in short-term debt (354) 19
Issuances of long-term debt 75 -
Sale of common stock 30 11
Redemption of common stock (1) (108)
Redemption of preferred stock of a subsidiary (75) -
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Net cash used in financing activities (954) (536)
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CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (276) (277)
Contributions to decommissioning funds (16) (16)
Other - net (295) 56
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Net cash used in investing activities (587) (237)
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Increase (Decrease) in cash and cash equivalents (355) 6
Cash and cash equivalents, beginning of period 814 430
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Cash and cash equivalents, end of period $ 459 $ 436
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income tax payments, net of refunds $ 258 $ 161
========= =========
Interest payments, net of amount capitalized $ 163 $ 165
========= =========
Investments acquired $ 37 $ 101
Cash paid (7) -
--------- ---------
Liabilities assumed $ 30 $ 101
========= =========
See notes to consolidated financial statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. GENERAL
This Quarterly Report on Form 10-Q is that of Sempra Energy.
Sempra Energy's subsidiaries include (i) Enova Corporation (Enova),
the parent company of San Diego Gas & Electric Company (SDG&E), and
(ii) Pacific Enterprises (PE), the parent company of Southern
California Gas Company (SoCalGas). The financial statements herein
are the consolidated financial statements of Sempra Energy and its
subsidiaries.
The accompanying consolidated financial statements have been
prepared in accordance with the interim-period-reporting
requirements of Form 10-Q. This Quarterly Report should be read in
conjunction with Sempra Energy's annual supplemental consolidated
financial statements and notes thereto, and the annual
"Management's Discussion & Analysis of Financial Condition and
Results of Operations", both of which are included in the Current
Report on Form 8-K filed with the Securities and Exchange
Commission on June 30, 1998 and the Company's Quarterly Report on
Form 10-Q for the three months ended June 30, 1998.
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 of a
normal recurring nature. Certain changes in classification have
been made to prior presentations to conform to the current
financial statement presentation.
SDG&E and SoCalGas have been accounting for the economic effects of
regulation on all of their utility operations in accordance with
SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation," as described in the notes to supplemental consolidated
financial statements in the Current Report on Form 8-K filed by
Sempra Energy on June 30, 1998. SDG&E has ceased the application of
SFAS No. 71 to its generation business, in accordance with the
conclusion of the Financial Accounting Standards Board that the
application of SFAS No. 71 should be discontinued when legislation
is issued that determines that a portion of an entity's business
will no longer be regulated. The discontinuance of SFAS No. 71 has
not resulted in a write-off of SDG&E's generation assets, since the
California Public Utilities Commission (CPUC) has approved the
recovery of the stranded costs related to these assets by the
distribution portion of its business, subject to a rate cap. (See
further discussion in Note 3.)
The new revenue and expense captions on the Consolidated Statements
of Income (both entitled "PX/ISO Power") relate to the new
regulatory requirements concerning the way power is purchased by
and sold by the distribution and generation, respectively,
operations of SDG&E. This is discussed in Note 3.
2. BUSINESS COMBINATION
On June 26, 1998 (pursuant to an October 1996 agreement) Enova and
PE completed a business combination in which the two companies
became subsidiaries of a new company named Sempra Energy. As a
result of the combination, (i) each outstanding share of common
stock of Enova was converted into one share of common stock of
Sempra Energy, (ii) each outstanding share of common stock of PE
was converted into 1.5038 shares of common stock of Sempra Energy
and (iii) the preferred stock and/or preference stock of SDG&E, PE
and SoCalGas remain outstanding. Additional information on the
business combination is discussed in the Current Report on Form 8-K
filed with the Securities and Exchange Commission by Sempra Energy
on June 30, 1998.
Expenses incurred in connection with the business combination are
$67 million, after tax, and $15 million, after tax, for the nine-
month periods ended September 30, 1998 and 1997, respectively.
These costs consist primarily of employee-related costs, and
investment banking, legal, regulatory and consulting fees.
In conjunction with the business combination, on September 30, 1998
Enova's and PE's ownership interests in certain non-utility
subsidiaries were transferred to Sempra Energy at book value.
3. MATERIAL CONTINGENCIES
ELECTRIC INDUSTRY RESTRUCTURING -- CALIFORNIA PUBLIC UTILITIES
COMMISSION
In September 1996 the State of California enacted a law
restructuring California's electric utility industry (AB 1890). The
legislation adopts the December 1995 CPUC policy decision that
restructures the industry to stimulate competition and reduce
rates.
Beginning on March 31, 1998 customers were given the opportunity to
choose to continue to purchase their electricity from the local
utility under regulated tariffs, to enter into contracts with other
energy-service providers (direct access) or to buy their power from
the independent Power Exchange (PX) that serves as a wholesale
power pool allowing all energy producers to participate
competitively. The PX obtains its power from qualifying facilities,
from nuclear units and, lastly, from the lowest-bidding suppliers.
The California investor-owned electric utilities (IOUs) are
obligated to bid their power supply, including owned generation and
purchased-power contracts, into the PX. An Independent System
Operation (ISO) schedules power transactions and access to the
transmission system. The local utility continues to provide
distribution service regardless of which energy source the customer
chooses. An example of these changes in the electric-utility
environment is the U.S. Navy, SDG&E's largest customer. The U.S.
Navy's contract to purchase energy from SDG&E was not renewed when
it expired on September 30, 1998. Instead, the U.S. Navy elected to
obtain energy through direct access and SDG&E continues to provide
the distribution service.
As discussed in Note 13 in the notes to supplemental consolidated
financial statements contained in Sempra Energy's Current Report on
Form 8-K filed with the Securities and Exchange Commission on June
30, 1998, the IOUs have been given a reasonable opportunity to
recover their stranded costs via a competition transition charge
(CTC) to customers through December 31, 2001. Excluding the costs
of purchased power and other costs whose recovery is not limited to
the pre-2002 period, the balance of SDG&E's stranded assets at
September 30, 1998 is $700 million, consisting of $500 million for
the power plants (see the following paragraph) and $200 million of
related deferred taxes and undercollections. During the 1998-2001
period, recovery of transition costs is limited by a rate cap
(discussed below).
In November 1997 SDG&E announced a plan to auction its power plants
and other generation assets. This plan includes the divestiture of
SDG&E's fossil power plants and combustion turbines, its 20-percent
interest in the San Onofre Nuclear Generating Station (SONGS) and
its portfolio of long-term purchased-power contracts. The power
plants have a net book value as of September 30, 1998 of $500
million ($300 million for SONGS and $200 million for fossil plants)
and a combined generating capacity of 2,400 megawatts. The
proceeds from the sales will be applied directly to SDG&E's
transition costs. The fossil-fuel assets auction is being separated
from the auction of SONGS and the purchased-power contracts. In
October 1998 the CPUC issued a draft decision approving the
commencement of the fossil-fuel assets auction. SDG&E expects the
sale of its fossil plants to be completed in the first quarter of
1999.
SDG&E and the San Diego Unified Port District have signed a
Memorandum of Understanding contemplating the purchase by the Port
District of the 693-MW South Bay Power Plant for $112 million and
SDG&E will donate the related site to the Port District, realizing
a significant income-tax benefit and resulting in full recovery of
the plant's carrying amount. As a result of this transaction, the
South Bay Power Plant has been removed from the auction. First-
round bids on SDG&E's remaining fossil plant, Encina, and the
combustion turbines were submitted in September 1998. Final,
binding bids are due on December 1.
Management believes that the rates within the rate cap and the
proceeds from the sale of electric-generating assets will be
sufficient to recover all of SDG&E's approved transition costs by
December 31, 2001, not including the post-2001 purchased-power
contract payments that may be recovered after 2001 (see discussion
above). However, if the proceeds from the sales are less than
expected or if 1998-2001 generation costs, principally fuel costs,
are greater than anticipated, SDG&E may be unable to recover all of
its approved transition costs. This would result in a charge
against earnings at the time it ceases to be probable that SDG&E
will be able to recover all of the transition costs (see below).
AB 1890 requires a 10-percent reduction of residential and small
commercial customers' rates beginning in January 1998, and provided
for the issuance of rate-reduction bonds by an agency of the State
of California to enable the IOUs to achieve this rate reduction. In
December 1997 $658 million of rate-reduction bonds were issued on
SDG&E's behalf at an average interest rate of 6.26 percent. These
bonds are being repaid over 10 years by SDG&E's residential and
small commercial customers via a non-bypassable charge on their
electric bills. In 1997 SDG&E formed a subsidiary, SDG&E Funding
LLC, to facilitate the issuance of the bonds. In exchange for the
bond proceeds, SDG&E sold to SDG&E Funding LLC all of its rights to
revenue streams collected from such customers. Consequently, the
transaction is structured to cause such revenue streams not to be
the property of SDG&E nor to be available to satisfy any claims of
SDG&E's creditors.
AB 1890 includes a rate freeze for all customers. Until the earlier
of March 31, 2002, or when transition cost recovery is complete,
SDG&E's system average rate will be frozen at the June 10, 1996
levels of 9.64 cents per kilowatt-hour (kwh), except for the impact
of certain fuel cost changes and the 10-percent rate reduction
described above. Beginning in 1998 system-average rates were fixed
at 9.43 cents per kwh, which includes the maximum-permitted
increase related to fuel cost increases and the mandatory rate
reduction.
In June 1998 a coalition of consumer groups received verification
that its electric restructuring ballot initiative received the
needed signatures to qualify for the November 3, 1998 California
ballot. The initiative seeks to amend or repeal AB 1890 in various
respects, including requiring utilities to provide a 10-percent
reduction in electricity rates charged to residential and small
commercial customers in addition to the 10-percent rate reduction
that became effective on January 1, 1998. Among other things, the
initiative would require that this rate reduction be achieved
through the elimination or reduction of CTC payments and prohibit
the collection of the charge on customer bills that would finance
the rate reduction. The Company cannot predict the outcome on the
vote of the initiative; and the effect of the initiative on SDG&E's
business, if passed by the voters, could be uncertain for some
time. If the initiative is passed by the voters, SDG&E and the
other IOUs intend to challenge it as unconstitutional and to seek
an immediate stay of its implementation. If the initiative were to
be upheld by the courts in whole or in parts, it could have a
material adverse effect on SDG&E's results of operations and
financial position. If the initiative is passed by the voters and
SDG&E is unable to determine that recovery of the related assets is
probable, through invalidation of the initiative or otherwise, it
would write down the assets to the amount, if any, probable of
recovery. If the most onerous interpretations of the initiative's
provisions are applied, and it is assumed that SDG&E's nuclear-
generation facilities have zero market value and that SDG&E's
fossil-generation assets have a market value equal to their
carrying amounts, the potential write-down of SDG&E's generation-
related assets could amount to as much as approximately $400
million after taxes. In addition, the annual after-tax earnings
reductions could be as large as approximately $50 million in 1999,
followed by declining amounts for some years thereafter.
If the initiative (known as "Proposition 9") ultimately is
overturned by the courts but had not been stayed by the courts
pending the litigation process, the likelihood of full recovery of
stranded assets (see above) will be diminished unless the courts or
the CPUC provide for relief for the fact that a portion of the
four-year period for stranded-asset recovery will have passed.
ELECTRIC INDUSTRY RESTRUCTURING -- FEDERAL ENERGY REGULATORY
COMMISSION
In October 1997 the FERC approved key elements of the California
IOUs' restructuring proposal. This included the transfer by the
IOUs of the operational control of their transmission facilities to
the ISO, which is under FERC jurisdiction. The FERC also approved
the establishment of the California PX to operate as an independent
wholesale power pool. The IOUs pay to the PX an up-front
restructuring charge (in four annual installments) and an
administrative-usage charge for each megawatt-hour of volume
transacted. SDG&E's share of the restructuring charge is
approximately $10 million, which is being recovered as a transition
cost. The IOUs have guaranteed $300 million of commercial loans to
the ISO and PX for their development and initial start-up. SDG&E's
share of the guarantee is $30 million.
GAS INDUSTRY RESTRUCTURING
The gas industry experienced an initial phase of restructuring
during the 1980s by deregulating gas sales to noncore customers. On
January 21, 1998 the CPUC released a staff report initiating a
project to assess the current market and regulatory framework for
California's natural-gas industry. The general goals of the plan
are to consider reforms to the current regulatory framework
emphasizing market-oriented policies benefiting California natural-
gas consumers.
On August 25, 1998 the Governor of California signed into law a
bill prohibiting the CPUC from enacting any gas industry
restructuring decision for core customers prior to January 1, 2000;
the CPUC continues to study the issue. During the implementation
moratorium, the CPUC will hold hearings throughout the state and
intends to give the California Legislature a draft ruling before
adopting a final market structure policy no earlier than January 1,
2000. SDG&E and SoCalGas will actively participate in this effort.
QUASI-REORGANIZATION
In 1993 PE completed a strategic plan to refocus on its natural-gas
utility and related businesses. The strategy included the
divestiture of its merchandising operations and all of its oil and
gas exploration and production business. In connection with the
divestitures, PE effected a quasi-reorganization for financial
reporting purposes, effective December 31, 1992. Certain of the
liabilities established in connection with discontinued operations
and the quasi-reorganization will be resolved in future years.
Management believes the provisions previously established for these
matters are adequate.
NUCLEAR INSURANCE
SDG&E and the co-owners of the SONGS units have purchased primary
insurance of $200 million, the maximum amount available, for public
liability claims. An additional $8.7 billion of coverage is
provided by secondary financial protection required by the Nuclear
Regulatory Commission and provides for loss sharing among utilities
owning nuclear reactors if a costly accident occurs. SDG&E could be
assessed retrospective premium adjustments of up to $32 million in
the event of a nuclear incident involving any of the licensed,
commercial reactors in the United States, if the amount of the loss
exceeds $200 million. In the event the public-liability limit
stated above is insufficient, the Price-Anderson Act provides for
Congress to enact further revenue-raising measures to pay claims,
which could include an additional assessment on all licensed
reactor operators.
Insurance coverage is provided for up to $2.75 billion of property
damage and decontamination liability. Coverage is also provided for
the cost of replacement power, which includes indemnity payments
for up to three years, after a waiting period of 17 weeks. Coverage
is provided through mutual insurance companies owned by utilities
with nuclear facilities. If losses at any of the nuclear facilities
covered by the risk-sharing arrangements were to exceed the
accumulated funds available from these insurance programs, SDG&E
could be assessed retrospective premium adjustments of up to $6
million.
CANADIAN GAS
SDG&E has long-term pipeline capacity commitments related to its
contracts for Canadian natural-gas supplies. Certain of these
supply contracts are in litigation, while others have been settled.
If the supply of Canadian natural gas to SDG&E is not resumed to a
level approximating the related committed long-term pipeline
capacity, SDG&E intends to continue using the capacity in other
ways, including the transport of replacement gas and the release of
a portion of this capacity to third parties.
4. COMPREHENSIVE INCOME
In conformity with generally accepted accounting principles, the
Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income." Comprehensive income for the
three-month and nine-month periods ended September 30, 1998 and
1997 was equal to net income.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
financial statements contained in this Form 10-Q and Management's
Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's Form 8-K filed on June 30,
1998.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q includes forward-looking statements within the
definition of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. The words "estimates",
"believes", "expects", "anticipates", "plans" and "intends,"
variations of such words, and similar expressions are intended to
identify forward-looking statements that involve risks and
uncertainties. These statements are necessarily based upon various
assumptions involving judgments with respect to the future
including, among others, national, regional and local economic,
competitive and regulatory conditions, technological developments,
inflation rates, interest rates, energy markets, weather
conditions, business and regulatory or legal decisions, and other
uncertainties, all of which are difficult to predict and many of
which are beyond the control of the Company. Accordingly, while the
Company believes that the assumptions are reasonable, there can be
no assurance that they will approximate actual experience, or that
the expectations will be realized.
BUSINESS COMBINATION
See Note 2 of the notes to consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Utility operations continue to be a major source of liquidity.
Liquidity has been favorably impacted by the issuance of Rate
Reduction Bonds (see Note 3 of the notes to consolidated financial
statements). In addition, financing needs are met primarily through
issuances of short-term and long-term debt. These capital resources
are expected to remain available (see Note 3 of the notes to
consolidated financial statements concerning Proposition 9, the
passage of which could materially and adversely affect the
Company's ability to finance its activities). Cash requirements
include utility capital expenditures, and repayments and
retirements of long-term debt. Major changes in cash flows not
described elsewhere are described below. Cash and cash equivalents
at September 30, 1998 are available for investment in new energy-
related domestic and international projects, the retirement of
debt, and other corporate purposes.
OPERATING ACTIVITIES
Cash flows from operations increased primarily due to gas costs'
being lower than amounts collected in rates (resulting in a
decrease in previously undercollected regulatory balancing
accounts) and an increase in gas volumes sold. This fluctuation in
cash flows from operations was also affected by electric-industry
restructuring, including the acceleration of depreciation of
electric-generating assets, offset by recovery of stranded costs
via the competition transition charge and the 10-percent rate
reduction reflected in customers' bills in 1998.
INVESTING ACTIVITIES
Expenditures for property, plant and equipment are estimated to be
$440 million for the full year 1998 and will be financed primarily
by internally generated funds and largely will represent investment
in utility operations. Construction, investment and financing
programs are continuously reviewed and revised in response to
changes in competition, customer growth, inflation, customer rates,
the cost of capital, and environmental and regulatory requirements.
Among other things, the level of utility expenditures in the next
few years will depend heavily on the impacts of industry
restructuring and the sale of SDG&E's Encina and South Bay power
plants and other electric-generation assets, as well as the timing
and extent of expenditures to comply with air-quality emission
reduction and other environmental requirements (also see Note 3 of
the notes to consolidated financial statements concerning
Proposition 9).
In April 1998 El Dorado Energy, a joint venture of Sempra Energy
Resources and Houston Industries Power Generation, began
construction on a 480-megawatt natural-gas-fired power plant in
Boulder City, Nevada. The $263 million project, which is expected
to be completed in the fourth quarter of 1999, will employ an
advanced combined-cycle gas-turbine technology, enabling the
efficient production of electricity for sale into the wholesale
market in the western United States. During the nine months ended
September 30, 1998, Sempra Energy Resources expended $33 million on
this project. In October 1998 El Dorado Energy obtained a $158-
million senior secured credit facility, which entails both
construction and 15-year term financing for the project. This
financing represents approximately 60 percent of the estimated
total project cost. In addition, Sempra Energy Resources is working
with New Milford, Connecticut in anticipation of building a $250-
million, 500-MW, combined-cycle power plant at the site of the
former Rocky River gravel mine. Approvals are pending.
In July 1998 Sempra Energy Trading purchased CNG Energy Services, a
unit of the Consolidated Natural Gas Company, for $38 million to
expand its Eastern United States volume of business.
In August 1998 Sempra Energy International was awarded a 10-year
agreement by the Mexican Federal Electric Commission to supply
natural gas to the Presidente Juarez electric power plant in
Rosarito, Mexico. The contract includes provisions for delivery of
up to 300 million cubic feet per day of natural gas, transportation
services in the United States and construction of a 23-mile
pipeline from the U.S.-Mexico border to the plant. In addition, in
October 1998 Sempra Energy International received FERC approval to
build the 350-million-cubic-feet-per-day pipeline. The pipeline is
expected to generate about $1 billion in revenues by supplying
natural gas through that line for the next 10 years. At the end of
the 10-year period, Sempra Energy International will own the
pipeline and rates will be renegotiated. The pipeline is expected
to cost about $40 million and take over a year to build. Delivery
of natural gas is expected to commence in December 1999.
Sempra Energy Utility Ventures' natural-gas local-distribution-
company development projects continue to make progress. Frontier
Energy, a project in North Carolina, is expected to deliver gas to
its first customers by the end of 1998. The Bangor Gas distribution
system in Maine is being built and is expected to be ready to
receive gas from the transmission line when it is completed in mid
1999.
FINANCING ACTIVITIES
Net cash used in financing activities increased due to greater
long-term and short-term debt repayments and the repurchase of
preferred stock, partially offset by the repurchase of common stock
in 1997. Long-term debt repayments included SDG&E's tender offer
purchase of $147 million of first mortgage bonds and repayment of
$42 million of rate-reduction bonds. This, coupled with the $32
million of variable-rate, taxable IDBs retired previously and the
$83 million of debt offset (for regulatory purposes) by temporary
assets, completes the anticipated debt-related use of rate-
reduction bond proceeds. On February 2, 1998, SoCalGas redeemed
all outstanding shares of 7 3/4% Series Preferred Stock for a total
cost of $75 million, including unpaid dividends.
Dividends are currently paid quarterly to shareholders. The payment
of future dividends is within the discretion of the board of
directors and is dependent upon future business conditions,
earnings and other factors. Net cash flows provided by operating
activities currently are sufficient to maintain the payment of
dividends at the current level. However, the level of dividends
paid may be affected by the outcome of Proposition 9 (see Note 3 of
the notes to consolidated financial statements).
RESULTS OF OPERATIONS
The decreases in net income and net income per share for the nine
months ended September 30, 1998 are primarily due to a lower base
margin established at SoCalGas in its Performance Based Regulation
(PBR) decision which became effective on August 1, 1997, and costs
associated with the business combination between Enova and PE.
Also contributing to lower net income were losses at Sempra Energy
Solutions and Sempra Energy Trading (see below). The increase in
depreciation (matched with a corresponding increase in electric
revenues, offset by lower off-system sales) is due to the
acceleration of depreciation of electric-generating assets
resulting from electric-industry restructuring. For the three
months ended September 30, 1998 the increase in electric revenues
was offset by lower off-system and retail sales, resulting in
electric revenues being relatively unchanged.
Income tax expense decreased for the three-month and nine-month
periods ended September 30, 1998, compared to the corresponding
periods in 1997, due to the decreases in income before taxes. The
decreases in income before taxes, coupled with a relatively
unchanged level of income-tax credits, results in decreases in the
Company's income-tax rates.
UTILITY OPERATIONS
Utility gas revenues decreased 14 percent and 7 percent for the
three-month and nine-month periods ended September 30, 1998,
respectively, compared to the corresponding periods in 1997. The
decreases were primarily due to the lower cost of natural gas and
the margin reduction established in SoCalGas' PBR. Utility
electric revenues increased 14 percent for the nine months ended
September 30, 1998 primarily due to the recovery of stranded costs
via the competition transition charge (CTC) in 1998, offset by
lower off-system sales. For the three-month period ended September
30, 1998, the increase in utility electric revenues due to stranded
cost recovery via the CTC was offset by lower off-system and retail
sales to the extent where electric revenues were relatively
unchanged compared to the corresponding period in 1997. PX/ISO
power revenues appear for the first time in 1998 as a result of the
PX/ISO start up on April 1, 1998. See Note 3 of the notes to
consolidated financial statements for additional discussion of
electric-industry restructuring.
Cost of gas distributed decreased 31 percent and 16 percent for the
three-month and nine-month periods ended September 30, 1998,
respectively. The decreases are primarily due to changes in the
average cost of natural gas purchased. Under the current
regulatory framework, changes in revenue resulting from changes in
core market volumes and cost of natural gas do not affect net
income.
Purchased power decreased 47 percent and 26 percent for the three-
month and nine-month periods ended September 30, 1998,
respectively, compared to the corresponding periods in 1997,
primarily as the result of purchases from the ISO/PX replacing
short-term energy sources. Electric fuel expense increased 52
percent and 10 percent for the three-month and nine-month periods
ended September 30, 1998, respectively, primarily due to increases
in volumes resulting from record power usage in August and
September of 1998. SDG&E reported an all-time record for
electricity usage on August 31, 1998 of 3,960 MW.
Operating expenses increased 5 percent and 15 percent for the
three-month and nine-month periods ended September 30, 1998,
respectively, compared to the corresponding periods in 1997
primarily due to the business combination costs.
Depreciation and decommissioning increased 36 percent and 68
percent for the three-month and nine-month periods ended September
30, 1998, respectively, compared to the corresponding periods in
1997 due to the acceleration of depreciation of electric-generating
assets resulting from electric-industry restructuring.
Income from operations decreased 12 percent and 31 percent for the
three-month and nine-month periods ended September 30, 1998,
respectively, compared to 1997. The decreases were primarily due to
the base margin reduction and the business combination costs.
The table below summarizes the components of utility natural gas
and electric volumes and revenues by customer class for the nine-
month periods ended September 30, 1998 and 1997. Throughput, the
total natural gas sales and transportation volumes moved through
the utilities' systems, increased in 1998, primarily because of
colder weather. Electric volumes decreased in 1998 primarily due
to a decrease in sales for resale to other utilities resulting from
industry restructuring.
<TABLE>
<CAPTION>
Transportation
Gas Sales and Exchanges Total
------------------- ------------------- -------------------
Throughput Revenue Throughput Revenue Throughput Revenue
(Throughput in billion cubic feet, revenue in millions of dollars)
------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Nine Months Ended
September 30, 1998:
Residential 215 $1,632 2 $ 9 217 $1,641
Commercial and industrial 73 422 247 209 320 631
Utility electric
generation 45 93* 120 58 165 151*
Wholesale and exchange 20 4 20 4
------------------- ------------------- ------------------
Total in rates 333 $2,147 389 $280 722 2,427
Balancing accounts and other (429)
-------
Total operating revenues $1,998
=======
Nine Months Ended
September 30, 1997:
Residential 187 $1,332 2 $ 8 189 $1,340
Commercial and industrial 76 455 240 205 316 660
Utility electric
generation 40 117* 128 61 168 178*
Wholesale and exchange 17 9 17 9
------------------- ------------------- ------------------
Total in rates 303 $1,904 387 $283 690 2,187
Balancing accounts and other (35)
------
Total operating revenues $2,152
======
* That portion representing SDG&E's sales
for utility electric generation includes
margin only.
</TABLE>
<TABLE>
Electric Sales
<CAPTION>
1998 1997
------------------ ----------------
Volumes Revenue Volumes Revenue
(Volumes in millions of Kwhrs, revenue in millions of dollars)
------- ------- ------- -------
<S> <C> <C> <C> <C>
Nine Months Ended September 30:
Residential 4,766 $ 484 4,588 $ 512
Commercial 5,195 500 5,255 525
Industrial 2,496 190 2,699 207
Direct access 438 30 - -
Street lighting 64 6 62 5
Off-system sales 661 14 2,951 69
------------------ ----------------
Total in rates 13,620 1,224 15,555 1,318
Balancing accounts and other 230* (43)
----- -----
Total operating revenues $1,454 $1,275
===== =====
* See "Utility Operations" above
</TABLE>
YEAR 2000 ISSUES
Most companies are affected by the inability of many automated
systems and applications to process the year 2000 and beyond. The
Year 2000 issues are the result of computer programs and other
automated processes using two digits to identify a year, rather
than four digits. Any of the Company's computer programs that
include date-sensitive software may recognize a date using "00" as
representing the year 1900, instead of the year 2000, or "01" as
1901, etc., which could lead to system malfunctions. The Year 2000
issue impacts both Information Technology ("IT") systems and also
non-IT systems, including systems incorporating "embedded
processors". To address this problem, in 1996, both Pacific
Enterprises and Enova Corporation established company-wide Year
2000 programs. These programs have now been consolidated into
Sempra Energy's overall Year 2000 readiness effort. Sempra Energy
has established a central Year 2000 Program Office which reports to
the Company's Chief Information Technology Officer and reports
periodically to the audit committee of the Board of Directors.
The Company's State of Readiness
Sempra Energy is identifying all IT and non-IT systems (including
embedded systems) that might not be Year 2000 ready and
categorizing them in the following areas: IT applications, computer
hardware and software infrastructure, telecommunications, embedded
systems, and third parties. The Company is currently evaluating its
exposure in all of these areas. These systems and applications are
being tracked and measured through four key phases: inventory,
assessment, remediation/testing and Year 2000 readiness. The
Company is prioritizing so that critical systems are being assessed
and modified/replaced first. Critical systems are those
applications and systems, including embedded processor technology,
which, if not appropriately remediated, may have a significant
impact on energy delivery, revenue collection or the safety of
personnel, customers or facilities. The Company's Year 2000 testing
effort includes functional testing of Year 2000 dates and
validating that changes have not altered existing functionality.
The Company uses an independent, internal review process to verify
that the appropriate testing has occurred.
The Company's Year 2000 project is currently on schedule and the
company estimates that all critical systems will be Year 2000 Ready
by June 30, 1999. The Company defines "Year 2000 Ready" as suitable
for continued use into the year 2000 with no significant
operational problems.
Critical IT and non-IT applications have been inventoried and
assessed for Year 2000 Readiness, and detailed plans are in place
for required system modifications or replacements. Remediation and
testing activities are well underway with approximately 58 percent
of the systems currently Year 2000 Ready and are expected to be 100
percent by June 30, 1999. Inventory, assessment and testing
activities for embedded systems are well underway with
approximately 38 percent of the systems currently Year 2000 Ready.
Inventory and assessment for all Company systems are in progress
and expected to be completed by December 31, 1998.
Sempra Energy's current schedule for Year 2000 testing, readiness
and development of contingency plans is subject to change depending
upon the remediation and testing phases of the Company's compliance
effort and upon developments that may arise as the Company
continues to assess its computer-based systems and operations. In
addition, this schedule is dependent upon the efforts of third
parties, such as suppliers (including energy producers) and
customers. Accordingly, delays by third parties may cause the
Company's schedule to change.
The Costs to Address the Company's Year 2000 Issues
Sempra Energy's budget for the Year 2000 program is $48 million, of
which $33 million has been spent. As the Company continues to
assess its systems and as the remediation and testing efforts
progress, cost estimates may change. The Company's Year 2000
readiness effort is being funded entirely by operating cash flows.
The Risks of the Company's Year 2000 Issues
Based upon its current assessment and testing of the Year 2000
issue, the Company believes the reasonably likely worst case Year
2000 scenarios to have the following impacts upon Sempra Energy and
its operations. With respect to the Company's ability to provide
energy to its domestic utility customers, the Company believes that
the reasonably likely worst case scenario is for small, localized
interruptions of natural gas or electrical service which are
restored in a time frame that is within normal service levels. With
respect to services that are essential to Sempra Energy's
operations, such as customer service, business operations, supplies
and emergency response capabilities, the scenario is for minor
disruptions of essential services with rapid recovery and all
essential information and processes ultimately recovered.
To assist in preparing for and mitigating these possible scenarios,
Sempra Energy is a member of several industry-wide efforts
established to deal with Year 2000 problems affecting embedded
systems and equipment used by the nation's natural gas and electric
power companies. Under these efforts, participating utilities are
working together to assess specific vendors' system problems and to
test plans. These assessments will be shared by the industry as a
whole to facilitate Year 2000 problem solving.
A portion of this risk is due to the various Year 2000 Ready
schedules of critical third party suppliers and customers. The
Company is in the process of contacting its critical suppliers and
customers to survey their Year 2000 remediation programs. While
risks related to the lack of Year 2000 readiness by third parties
could materially and adversely affect the Company's business,
results of operations and financial condition, the Company expects
its Year 2000 readiness efforts to reduce significantly the
Company's level of uncertainty about the impact of third party Year
2000 issues on both its IT systems and non-IT systems.
The Company's Contingency Plans
Sempra Energy's contingency plans for Year-2000-related
interruptions are being incorporated in the Company's existing
overall emergency preparedness plans. To the extent appropriate,
such plans will include emergency backup and recovery procedures,
remediation of existing systems parallel with installation of new
systems, replacing electronic applications with manual processes,
identification of alternate suppliers and increasing inventory
levels. The Company expects these contingency plans to be completed
by the end of the second quarter in 1999. Due to the speculative
and uncertain nature of contingency planning, there can be no
assurances that such plans actually will be sufficient to reduce
the risk of material impacts on the Company's operations due to
Year 2000 issues.
FACTORS INFLUENCING FUTURE PERFORMANCE
Performance of Sempra Energy in the near future will primarily
depend on the results of SDG&E and SoCalGas. Because of the
ratemaking and regulatory process, electric and gas industry
restructuring, and the changing energy marketplace, there are
several factors that will influence future financial performance.
These factors are summarized below.
California Public Utilities Commission's Industry Restructuring
See discussion of industry restructuring, and particularly the
discussion of Proposition 9, in Note 3 of the notes to consolidated
financial statements.
Auction Of Electric Generation Assets
In November 1997 SDG&E announced a plan to auction its power plants
and other electric-generation assets, enabling it to continue to
concentrate on the transmission and distribution of electricity and
natural gas in a competitive marketplace. This is described in Note
3 of the notes to consolidated financial statements. In addition,
the March 1998 CPUC decision approving the Enova/PE business
combination requires, among other things, the divestiture by SDG&E
of its gas-fired generation units. Further, in March 1998, Enova
and PE reached an agreement with the U.S. Department of Justice
(DOJ) to gain clearance for the business combination under the
Hart-Scott-Rodino Antitrust Act. Under such agreement, Enova
committed to follow through on its plan to divest SDG&E's fossil-
fuel power plants, and Sempra is required to obtain DOJ's approval
prior to acquiring or controlling any existing California
generation facilities in excess of 500 megawatts.
Performance-Based Regulation (PBR)
To promote efficient operations and improved productivity and to
move away from reasonableness reviews and disallowances, the CPUC
has been encouraging utilities to use PBR. PBR has replaced the
general rate case and certain other regulatory proceedings for both
SoCalGas and SDG&E. Under PBR, regulators allow future income
potential to be tied to achieving or exceeding specific performance
and productivity measures, rather than relying solely on expanding
utility rate base in a market where the company already has a
highly developed infrastructure.
SoCalGas' PBR is in effect for five years; however, the CPUC
decision allows for the possibility that changes to the PBR
mechanism could be adopted in a decision to be issued in SoCalGas'
1999 Biennial Cost Allocation Proceeding (BCAP) application which
is anticipated to become effective August 1, 1999. SDG&E continues
to participate in a PBR process for base rates for its electric and
natural-gas distribution business. In conjunction therewith, SDG&E
is currently involved in a Cost of Service rate proceeding, with
revised rates expected to be effective January 1, 1999. SDG&E's
application requests an increase in revenue requirements for
electric-distribution and natural-gas operations. The electric
distribution increase does not affect rates and, therefore, if
approved, reduces the amount available for transition cost
recovery. In August 1998 a signed settlement agreement among SDG&E,
the ORA and the Utility Consumers' Action Network (UCAN) was
submitted to the CPUC requesting a combined increase of $12 million
(an electric distribution increase of $18 million and a natural-gas
decrease of $6 million). A CPUC decision is expected by year end
1998.
Cost of Capital
Under PBR, annual Cost of Capital proceedings were replaced by an
automatic adjustment mechanism if changes in certain indices exceed
established tolerances. For 1998, SoCalGas is authorized to earn a
rate of return on common equity of 11.6 percent and a 9.49 percent
return on rate base, the same as in 1997. SDG&E's electric and
natural-gas distribution operations are authorized to earn a rate
of return on common equity of 11.6 percent and a rate of return on
rate base of 9.35 percent, unchanged from 1997. In addition, the
authorized rates of return on nuclear and non-nuclear generating
assets are 7.14 percent and 6.75 percent, respectively. However,
electric industry restructuring is changing the method of
calculating SDG&E's annual cost of capital. In May 1998 SDG&E filed
with the CPUC its unbundled Cost of Capital application for 1999
rates. The application seeks approval to establish new, separate
rates of return for SDG&E's electric-distribution and natural-gas
businesses. The application proposes a 12.00% ROE, which would
produce an overall ROR of 9.33%. The ORA, UCAN and other
intervenors have filed testimony recommending significantly lower
RORs. The ORA is recommending an electric ROR of 7.68% and a gas
ROR of 8.01%. A CPUC decision is expected by early 1999.
Biennial Cost Allocation Proceeding (BCAP)
In October 1998 SoCalGas and SDG&E filed 1999 BCAP applications
requesting that new rates become effective August 1, 1999 and
remain in effect through December 31, 2002. The applications seek
overall decreases in gas revenues for SoCalGas and SDG&E of $204
million and $9 million, respectively.
OTHER OPERATIONS
Sempra Energy Solutions (Solutions), formed in 1997 and owned
equally by PE and Enova, incorporates several existing unregulated
businesses from each of PE and Enova. It is pursuing a variety of
opportunities, including buying and selling natural gas for large
users, integrated energy-management services targeted at large
governmental and commercial facilities, and consumer market
products and services such as earthquake shutoff valves. CES/Way
International, Inc. (CES/Way) acquired by Solutions in January
1998, provides energy-efficiency services including energy audits,
engineering design, project management, construction, financing and
contract maintenance.
Solutions' net losses for the nine-month periods ended September
30, 1998 and 1997 are $31 million and $3 million, respectively.
Solutions' net losses for the three-month periods ended September
30, 1998 and 1997 are $4 million and $3 million, respectively. The
increases are primarily due to the write off of a portion of
CES/Way's acquisition costs (due to the death of CES/Way's former
principal), and other start-up costs.
Sempra Energy Trading Corp., a leading natural-gas and power
marketing firm headquartered in Greenwich, Connecticut, which was
jointly acquired by PE and Enova on December 31, 1997, recorded net
losses of $11 million and $2 million for the nine-month and three-
month periods ended September 30, 1998, respectively. The losses
were primarily due to the amortization of costs associated with the
acquisition.
In March 1998, PE increased its existing investment in two
Argentine natural-gas utility holding companies (Sodigas Pampeana
S.A and Sodigas Sur S.A.) by purchasing an additional 9-percent
interest for $40 million. With this purchase, PE's interest in the
holding companies was increased to 21.5 percent. The net losses for
international operations was $3 million for the nine-month period
ended September 30, 1998.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than as discussed in SDG&E's Quarterly Reports on Form 10-Q
for the three-month periods ended March 31 and June 30, 1998, there
have been no significant subsequent developments in litigation
proceedings that were outstanding at December 31, 1997 and there
have been no significant new litigation proceedings since that
date.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedules
27.1 Financial Data Schedule for the nine months ended
September 30, 1998.
(b) Reports on Form 8-K
A Current Report on Form 8-K filed on June 30, 1998 announced
the completion of the business combination between Enova
Corporation and Pacific Enterprises, and the related changes
in control.
A Current Report on Form 8-K filed on July 15, 1998 discussed
the Voter Initiative which qualified for the November 1998
ballot (seeking to amend or repeal California electric
industry restructuring legislation in various respects) and
disclosed the potential impact on SDG&E.
A Current Report on Form 8-K filed on July 27, 1998 discussed
the California Supreme Court denial of the petition which
sought to overturn the Third District Court of Appeal's
denial to remove the Voter Initiative from the November 1998
ballot.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly cause this report to be signed on its
behalf by the undersigned thereunto duly authorized.
SEMPRA ENERGY
-------------------
(Registrant)
Date: October 30, 1998 By: /s/ F. H. Ault
----------------------------
F. H. Ault
Vice President and Controller
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