<PAGE>PAGE 1
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 June 30, 1998
-------------------------------------
Commission file number 1-14201
---------------------------------------------
Sempra Energy
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 33-0732627
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Ash Street, San Diego, California 92101
- -------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(619) 696-2000
----------------------------------------------------------
(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
----- -----
Common stock outstanding on July 31, 1998: 239,830,918
---------------------
<PAGE>PAGE 2
PART I - FINANCIAL INFORMATION
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 Six Months
Ended June 30 Ended June 30
------------- --------------
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues and Other Income
Utility revenues:
Gas $ 654 $ 634 $ 1,415 $ 1,472
Electric 476 417 973 791
PX/ISO power 114 -- 114 --
Other operating revenues 87 75 164 154
Other income 4 4 19 14
------- ------- ------- -------
Total 1,335 1,130 2,685 2,431
------- ------- ------- -------
Expenses
Cost of gas distributed 189 169 519 570
PX/ISO power 112 -- 112 --
Purchased power 64 89 160 177
Electric fuel 36 39 67 78
Operating expenses 523 387 900 749
Depreciation and decommissioning 276 150 551 300
Franchise fees and other taxes 47 41 98 89
Preferred dividends of subsidiaries 2 3 6 8
------- ------- ------- -------
Total 1,249 878 2,413 1,971
------- ------- ------- -------
Income Before Interest and Income Taxes 86 252 272 460
Interest 48 52 103 103
------- ------- ------- -------
Income Before Income Taxes 38 200 169 357
Income taxes 7 88 51 147
------- ------- ------- -------
Net Income $ 31 $ 112 $ 118 $ 210
======= ======= ======= =======
Weighted Average Shares Outstanding (Basic)* 236,288 235,713 236,014 236,980
======= ======= ======= =======
Weighted Average Shares Outstanding (Diluted)* 236,938 236,332 236,663 237,599
======= ======= ======= =======
Net Income Per Share of Common Stock (Basic) $ 0.13 $ 0.48 $ 0.50 $ 0.89
======= ======= ======= =======
Net Income Per Share of Common Stock (Diluted) $ 0.13 $ 0.47 $ 0.50 $ 0.88
======= ======= ======= =======
Dividends Declared Per Common Share $ 0.46 $ 0.45 $ 0.78 $ 0.76
======= ======= ======= =======
* In thousands of shares
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>PAGE 3
<TABLE>
SEMPRA ENERGY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
(In millions of dollars)
<CAPTION>
June 30, December 31,
1998 1997
(Unaudited)
------------ ------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 407 $ 814
Accounts receivable - trade 556 633
Accounts and notes receivable - other 46 202
Energy trading assets 796 587
Inventories 115 111
Taxes receivable 94 --
Regulatory balancing accounts - net -- 297
Other 114 112
-------- --------
Total current assets 2,128 2,756
-------- --------
Property, plant and equipment 11,062 10,902
Less accumulated depreciation
and amortization (5,628) (5,360)
-------- --------
Total property, plant and
equipment - net 5,434 5,542
-------- --------
Investments and Other Assets
Regulatory assets 1,053 1,186
Nuclear decommissioning trusts 448 399
Investments and other assets 1,076 868
-------- --------
Total investments and other assets 2,577 2,453
-------- --------
Total assets $ 10,139 $ 10,751
======== ========
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>PAGE 4
<TABLE>
SEMPRA ENERGY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND SHAREHOLDERS' EQUITY
(In millions of dollars)
<CAPTION>
June 30, December 31,
1998 1997
(Unaudited)
- --------------------------------------------------------------------------
<S> <C> <C>
Liabilities
Current liabilities
Short-term debt $ 57 $ 354
Long-term debt due within one year 128 270
Accounts payable 510 300
Energy trading liabilities 761 557
Dividends and interest payable 43 121
Regulatory balancing accounts - net 51 --
Other 292 604
-------- -------
Total current liabilities 1,842 2,206
-------- -------
Long-term debt
Long-term debt 2,923 3,045
Debt of Employee Stock Ownership Plan 130 130
-------- -------
Total long-term debt 3,053 3,175
-------- -------
Deferred credits and other liabilities
Customer advances for construction 67 72
Post-retirement benefits other than pensions 239 248
Deferred income taxes 704 773
Deferred investment tax credits 151 123
Deferred credits and other liabilities 959 916
-------- -------
Total deferred credits and
other liabilities 2,120 2,132
-------- -------
Preferred stock of subsidiaries 204 279
-------- -------
Shareholders' Equity
Common stock 1,876 1,849
Retained earnings 1,090 1,157
Less deferred compensation relating to
Employee Stock Ownership Plan (46) (47)
-------- -------
Total shareholders' equity 2,920 2,959
-------- -------
Total liabilities and shareholders'
equity $ 10,139 $10,751
======== =======
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>PAGE 5
<TABLE>
SEMPRA ENERGY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS (Unaudited)
(In millions of dollars)
<CAPTION>
Six Months Ended June 30,
---------------------------
1998 1997
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 118 $ 210
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and decommissioning 551 300
Deferred income taxes and investment tax credits (47) 10
Other - net (84) 4
Net changes in other working capital components 292 81
---------- ---------
Net cash provided by operating activities 830 605
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends on common stock (230) (152)
Payment on long-term debt (376) (242)
Increase (decrease) in short-term debt (297) 3
Issuances of long-term debt 75 --
Sale of common stock 28 9
Redemption of common stock (1) (66)
Redemption of preferred stock of a subsidiary (75) (42)
--------- ---------
Net cash used in financing activities (876) (490)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (184) (194)
Contributions to decommissioning funds (11) (11)
Other - net (166) (6)
--------- ---------
Net cash used in investing activities (361) (211)
--------- ---------
Decrease in cash and cash equivalents (407) (96)
Cash and cash equivalents, beginning of period 814 430
--------- ---------
Cash and cash equivalents, end of period $ 407 $ 334
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income tax payments, net of refunds $ 202 $ 82
========= =========
Interest payments, net of amounts capitalized $ 113 $ 126
========= =========
Real estate investments acquired $ 35 $ 88
Cash paid (5) --
--------- ---------
Liabilities assumed $ 30 $ 88
========= =========
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>PAGE 6
SEMPRA ENERGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. GENERAL
This Quarterly Report on Form 10-Q is a filing of Sempra Energy.
Sempra Energy's subsidiaries include (i) Enova Corporation (Enova),
which in turn owns San Diego Gas & Electric Company (SDG&E) and
(ii) Pacific Enterprises, which in turn owns Southern California
Gas Company (SoCalGas). The financial statements presented herein
represent 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.
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 account 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 and incorporated herein by
reference. 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 the rate cap. (See further discussion
in Note 4.)
2. BUSINESS COMBINATION
On June 26, 1998 (pursuant to an October 1996 agreement) Enova and
PE combined the two companies into 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 and incorporated herein by
reference.
Expenses incurred in connection with the merger are $62 million and
$11 million, after-tax, for the six-month periods ended June 30,
1998 and 1997, respectively. These costs consist primarily of
<PAGE>PAGE 7
employee-related costs, and investment banking, legal, regulatory
and consulting fees.
Results for the first calendar month of combined operations (July
1998) consisted of revenues of $452 million and net income of $26
million.
3. COMPREHENSIVE INCOME
In conformity with generally accepted accounting principles, Sempra
Energy has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income." Comprehensive income for the
three-month and six-month periods ended June 30, 1998 and 1997 was
equal to net income.
4. 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 or 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, 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 source the customer chooses.
As discussed in Note 13 in the notes to supplemental consolidated
financial statements contained in the 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 stranded assets at June 30,
1998 is $800 million, consisting of $600 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 the rate cap (discussed
below). Generation plant additions made after December 20, 1995 are
not eligible for transition cost recovery. Instead, each utility
must file a separate application seeking a reasonableness review
thereof. The CPUC has approved an agreement between SDG&E and the
CPUC's Office of Ratepayer Advocates for the recovery of $13.6
million of SDG&E's $14.5 million in 1996 capital additions for the
Encina and South Bay power plants.
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 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 June 30, 1998 of $600 million ($200
million for fossil and $400 million for SONGS). The proceeds from
<PAGE>PAGE 8
the auction will be applied directly to SDG&E's transition costs.
SDG&E has proposed to the CPUC that the sale of its fossil plants
be completed by the end of 1998. 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 sale of the power plants are less than expected or if
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 becomes probable that SDG&E will be unable to recover
all of the transition costs.
AB 1890 requires a 10-percent reduction of residential and small
commercial customers' rates beginning in January 1998. AB 1890
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.
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 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. In May 1998 a statewide coalition of
California's investor-owned electric utilities and business groups
known as "Californians for Affordable and Reliable Electric
Services" (CARES) filed a lawsuit with the Third District Court of
Appeal to block the initiative. In July 1998 the Third District
Court of Appeal issued a one-sentence order refusing to grant
review of the lawsuit prior to the November balloting, the CARES
coalition filed a petition in the California Supreme Court seeking
to overturn the Third District Court of Appeal's denial and that
court rejected the CARES petition. Such ruling did not represent a
ruling on the merits of the arguments presented; rather, the ruling
was a decision by the court not to consider the merits of the
petition prior to the November balloting. SDG&E 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 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.
Upon voter approval of the initiative, a write-down of a portion of
SDG&E's generation-related assets might be required under
applicable accounting principles, depending on SDG&E's assessment
of both the probability that the initiative would be determined to
be invalid, in whole or in substantial part, through litigation and
the manner in which the initiative or such part as remains in
effect as of a final judgment would be interpreted and applied to
SDG&E. If the most onerous interpretations of the initiative's
<PAGE>PAGE 9
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.
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 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.
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 jointly 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.
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. As
of June 30, 1998 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
<PAGE>PAGE 10
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 release of a portion of this capacity to third
parties and the transport of replacement gas.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Supplemental Consolidated Financial Statements and the annual
Management's Discussion and Analysis included in the Current Report
on Form 8-K filed with the Securities and Exchange Commission on
June 30, 1998.
INFORMATION REGARDING FORWARD-LOOKING COMMENTS
The following discussion 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.
CAPITAL RESOURCES AND LIQUIDITY
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.
Expenditures for property, plant and equipment are estimated to be
$440 million in 1998 and will be financed primarily by internally
generated funds and largely will represent investment in utility
operations.
In April 1998 El Dorado Energy, a joint venture of Sempra Energy
Resources (a subsidiary of Sempra Energy) and Houston Industries
Power Generation, began construction on a 480-megawatt natural-gas-
fired power plant in Boulder City, Nevada. The $280 million
project, which is expected to be completed in the fourth quarter of
<PAGE>PAGE 11
1999, will employ an advanced combined-cycle gas-turbine
technology, enabling it to efficiently produce electricity for sale
into the wholesale market in the western United States.
Included in Other - net of the cash flows from investing activities
were investments of $140 million which represent additional
investment in Argentine utility operations and the acquisition of
CES/Way International, Inc. (see below).
Cash used for 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 of $147 million
of first mortgage bonds and repayment of $22 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.
The cash and cash equivalents at June 30, 1998 are available for
investment in new energy-related domestic and international
projects, the retirement of debt, and other corporate purposes.
CONSOLIDATED RESULTS OF OPERATIONS
The decreases in net income and net income per share are primarily
due to a lower base margin established at SoCalGas in the
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). In addition, international subsidiaries had
greater operating costs in 1998 compared to 1997 from efforts to
develop their operations. Partially offsetting the decrease were
lower interest expense due to lower debt levels and rewards
reflecting SDG&E's performance under its Gas Procurement PBR
mechanism and SoCalGas' performance under its Gas Cost Incentive
Mechanism. The increase in depreciation (matched with a
corresponding increase in electric revenues) is due to the
acceleration of depreciation of electric-generating assets
resulting from electric-industry restructuring.
The weighted average number of shares of common stock outstanding
in the 1998 periods decreased from the corresponding 1997 periods
due to the repurchases of common stock in 1997.
UTILITY OPERATIONS
Financial Results
Utility gas revenues increased 3 percent for the three-month period
ended June 30, 1998 and decreased 5 percent for the six-month
period ended June 30, 1998 compared to the corresponding periods in
1997. The decrease for the six-month period was primarily due to
the margin reduction established in SoCalGas' PBR and the lower
cost of gas. Utility electric revenues increased 23 percent for
the six months ended June 30, 1998 primarily due to the recovery of
stranded costs via the competition transition charge (CTC) in 1998
(see Note 4 of the notes to consolidated financial statements).
Cost of gas distributed increased 12 percent for the three-month
period ended June 30, 1998 and decreased 9 percent for the six-
month period ended June 30 1998. The changes are primarily due to
changes in the average cost of gas purchased. Under the current
<PAGE>PAGE 12
regulatory framework, changes in revenue resulting from changes in
core market volumes and cost of gas do not affect net income.
Purchased power decreased 29 percent and 10 percent for the three-
month and six-month periods ended June 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 decreased 8 percent, primarily due
to purchases from the ISO/PX, the replacement of natural-gas-fired
generation with lower-cost nuclear generation and decreases in
natural-gas prices, offset by increases in sales volumes.
Operating expenses increased 35 percent and 20 percent for the
three-month and six-month periods ended June 30, 1998 compared to
the corresponding periods in 1997 primarily due to the business
combination costs.
Income from operations decreased 66 percent and 41 percent for the
three-month and six-month periods ended June 30, 1998 compared to
1997. The decrease was primarily due to the base margin reduction
and the business combination costs.
The table below summarizes the components of utility gas and
electric volumes and revenues by customer class for the six-month
periods ended June 30, 1998 and 1997. Throughput, the total 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
(Revenues in millions of dollars, volume in billion cubic feet)
------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
1998:
Residential 175 $1,316 2 $ 7 177 $1,323
Commercial and industrial 54 318 167 145 221 463
Utility electric
generation 21 5 40 20 61 25
Wholesale and exchange 15 1 15 1
------------------- ------------------- ------------------
Total in rates 250 $1,639 224 $173 474 1,812
Balancing accounts and other (397)
-------
Total operating revenues $1,415
=======
1997:
Residential 146 $1,005 1 $ 5 147 $1,010
Commercial and industrial 55 345 158 135 213 480
Utility electric
generation 23 10 56 28 79 38
Wholesale and exchange 11 6 11 6
------------------- ------------------- ------------------
Total in rates 224 $1,360 226 $174 450 1,534
Balancing accounts and other (62)
------
Total operating revenues $1,472
======
</TABLE>
<PAGE>PAGE 13
<TABLE>
Electric Sales
<CAPTION>
1998 1997
------------------ -------------
Volumes Revenue Volumes Revenue
(Volumes in millions of kwhrs, revenues in millions of dollars)
------- ------- ------- -------
<S> <C> <C> <C> <C>
Six Months Ended June 30
Residential 3,011 $ 305 2,939 $ 325
Commercial 3,249 288 3,242 303
Industrial 1,683 112 1,775 120
Direct access 93 6 - -
Street lighting 43 4 41 4
Off-System sales 639 13 1,359 25
------------------ ----------------
Total in rates 8,718 728 9,356 777
Balancing accounts and other 246* 14
----- -----
Total operating revenues $ 974 $ 791
===== =====
* See "Utility Operations" above
</TABLE>
FACTORS INFLUENCING FUTURE PERFORMANCE
Performance of the Company 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.
In September 1996, the State of California enacted a law (AB 1890)
restructuring California's electric industry. The legislation
adopts the December 1995 California Public Utilities Commission
(CPUC) policy decision that restructures the industry to stimulate
competition and reduce rates. The impacts of AB 1890 on the
operations of the Company are described in Note 4 of the notes to
consolidated financial statements.
In November 1997 SDG&E announced a plan to auction its power plants
and other electric-generation assets, enabling it to continue to
concentrate its business on the transmission and distribution of
electricity and natural gas in a competitive marketplace. This is
described in Note 4 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 prior approval prior to acquiring or controlling any existing
California generation facilities in excess of 500 megawatts.
On July 16, 1997, the CPUC issued its final decision on SoCalGas'
application for PBR, which was filed with the CPUC in 1995. PBR
replaces the general rate case and certain other regulatory
proceedings through December 31, 2002. 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. Key elements of the
PBR include a reduction in base rates, an indexing mechanism that
<PAGE>PAGE 14
limits future rate increases to the inflation rate less a
productivity factor, a sharing mechanism with customers if earnings
exceed the authorized rate of return on rate base, and rate refunds
to customers if service quality deteriorates.
SoCalGas implemented the base-margin reduction on August 1, 1997,
and all other PBR elements on January 1, 1998. The CPUC intends
the PBR decision to be 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 the
company's 1998 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 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.
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 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, also
unchanged from 1997. SDG&E's generation and transmission operations
earn a combination of rates resulting from competitive activity and
regulated rates set outside the normal PBR process.
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 six-month periods ended June 30, 1998
and 1997 are $27 million and $3 million, respectively. The
increase is 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
acquired on December 31, 1997, recorded a net loss of $10 million
for the six-month period ended June 30, 1998. The loss was
primarily due to the amortization of costs associated with its
purchase.
In March 1998, the Company 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, the Company's
interest in the holding companies was increased to 21.5 percent.
The net losses for international operations was $4 million for the
six-month period ended June 30, 1998 compared to $3 million for the
corresponding period in 1997. The increased loss is primarily due
to increased expenses related to the evaluation of international
opportunities.
<PAGE>PAGE 15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than as discussed below and in SDG&E's Quarterly Report on
Form 10Q for the three-month period ended March 31, 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.
SONGS PERSONAL INJURY LITIGATION
As described in the "Legal Proceedings -- SONGS Personal Injury
Litigation" section in SDG&E's Annual Report on Form 10-K, seven
personal-injury radiation cases have been filed against various
parties in which plaintiffs allege that their various types of
leukemia or other forms of cancers were caused by radiation
exposure to "fuel fleas" (radioactive fuel particles). On May 28,
1998 the Ninth Circuit Court of Appeals affirmed the District
Court's decision in the McLandrich and Mettler cases granting
Southern California Edison's (Edison) motion of summary judgment.
The District Court had ruled that Edison is an employer and that
workers' compensation is plaintiff's exclusive remedy against
Edison. As a result of the Ninth Circuit's decision, the previous
stays in the McLandrich, Mettler and Knapp cases will be lifted and
these cases will proceed against SDG&E.
SONGS PRICING
As described in the "Legal Proceedings -- SONGS Pricing" section in
SDG&E's Annual Report on Form 10-K, on January 20, 1998 a hearing
was held before the U.S. District Court regarding SDG&E's motion to
dismiss the SONGS pricing litigation. On July 6, 1998 the U.S.
District Court dismissed the federal claims contained in
plaintiff's complaint with prejudice and dismissed the pendant
state-law claims without prejudice.
CANADIAN NATURAL GAS
SDG&E and Bow Valley settled their dispute, and on April 23, 1998
the parties filed a notice of discontinuance of action with the
Queen's Bench of Alberta.
<PAGE>PAGE 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 12 - Computation of ratios
12.1 Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends as required under
SDG&E's August 1993 registration of 5,000,000 shares of
Preference Stock (Cumulative).
Exhibit 27 - Financial Data Schedules
27.1 Financial Data Schedule for the six months ended
June 30, 1998.
(b) Reports on Form 8-K
A Current Report on Form 8-K filed on July 1, 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
seeks to overturn the Third District Court of Appeal's denial
to remove the Voter Initiative from the November 1998 ballot.
<PAGE>PAGE 17
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: August 14, 1998 By: /s/ F. H. Ault
----------------------------
F. H. Ault
Vice President and Controller
<TABLE> <S> <C>
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<NAME> SEMPRA ENERGY
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<S> <C>
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25
179
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0 <F1>
<EARNINGS-AVAILABLE-FOR-COMM> 118
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<F1> PREFERRED DIVIDEND OF SUBSIDIARY INCLUDED IN INTEREST EXPENSE
</TABLE>
