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, 2000
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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) 696-2034
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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 July 31, 2000: 204,141,740
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
SEMPRA ENERGY
STATEMENTS OF CONSOLIDATED INCOME
Dollars in millions, except per share amounts
<CAPTION>
Three Months Ended
June 30,
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2000 1999
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<S> <C> <C>
Revenues and Other Income
Utility revenues
Natural gas $ 716 $ 706
Electric 473 646
Other operating revenues 298 159
Other income 49 6
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Total 1,536 1,517
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Expenses
Cost of natural gas distributed 316 275
Electric fuel and net purchased power 264 109
Operating expenses 530 485
Depreciation and amortization 144 467
Other taxes and franchise payments 40 41
Preferred dividends of subsidiaries 3 3
Trust preferred distributions by subsidiary 4 --
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Total 1,301 1,380
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Income Before Interest and Income Taxes 235 137
Interest 76 54
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Income Before Income Taxes 159 83
Income Taxes 49 1
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Net Income $ 110 $ 82
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Weighted-average number of shares outstanding (Basic)* 201,386 237,157
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Weighted-average number of shares outstanding (Diluted)* 201,484 237,455
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Net Income Per Share of Common Stock (Basic and Diluted) $0.55 $0.35
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Common Dividends Declared Per Share $0.25 $0.39
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*In thousands of shares
See notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
SEMPRA ENERGY
STATEMENTS OF CONSOLIDATED INCOME
Dollars in millions, except per share amounts
<CAPTION>
Six Months Ended
June 30,
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2000 1999
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<S> <C> <C>
Revenues and Other Income
Utility revenues
Natural gas $1,537 $1,404
Electric 822 1,006
Other operating revenues 570 270
Other income 73 28
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Total 3,002 2,708
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Expenses
Cost of natural gas distributed 706 566
Electric fuel and net purchased power 397 211
Operating expenses 1,029 873
Depreciation and amortization 278 609
Franchise payments and other taxes 91 86
Preferred dividends of subsidiaries 6 6
Trust preferred distributions by subsidiary 6 --
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Total 2,513 2,351
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Income Before Interest and Income Taxes 489 357
Interest 149 112
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Income Before Income Taxes 340 245
Income Taxes 117 64
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Net Income $ 223 $ 181
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Weighted-average number of shares outstanding (Basic)* 214,834 237,111
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Weighted-average number of shares outstanding (Diluted)* 214,920 237,444
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Net Income Per Share of Common Stock (Basic and Diluted) $1.04 $0.76
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Common Dividends Declared Per Share $0.50 $0.78
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*In thousands of shares
See notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
SEMPRA ENERGY
CONSOLIDATED BALANCE SHEETS
Dollars in millions
<CAPTION>
Balance at
------------------------
June 30, December 31,
2000 1999
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<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 546 $ 487
Accounts receivable 589 552
Income taxes receivable -- 144
Energy trading assets 3,119 1,539
Inventories 79 147
Other 138 146
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Total current assets 4,471 3,015
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Investments and other assets
Regulatory assets 879 606
Nuclear decommissioning trusts 551 551
Investments 1,245 1,164
Other assets 470 460
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Total investments and other assets 3,145 2,781
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Property, plant and equipment
Property, plant and equipment 11,406 11,127
Less accumulated depreciation and amortization (5,975) (5,733)
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Total property, plant and equipment - net 5,431 5,394
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Total assets $13,047 $11,190
===========================
See notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
SEMPRA ENERGY
CONSOLIDATED BALANCE SHEETS
Dollars in millions
<CAPTION>
Balance at
------------------------
June 30, December 31,
2000 1999
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<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt $ -- $ 182
Accounts payable 670 546
Income taxes payable 26 --
Deferred income taxes 76 67
Energy trading liabilities 2,757 1,365
Dividends and interest payable 119 154
Regulatory balancing accounts - net 497 346
Customer refunds payable 388 --
Current portion of long-term debt 153 155
Other 431 421
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Total current liabilities 5,117 3,236
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Long-term debt 3,313 2,902
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Deferred credits and other liabilities
Customer advances for construction 70 72
Post-retirement benefits other than pensions 198 204
Deferred income taxes 641 615
Deferred investment tax credits 104 106
Deferred credits and other liabilities 780 865
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Total deferred credits and other liabilities 1,793 1,862
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Preferred stock of subsidiaries 204 204
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Mandatorily redeemable trust preferred securities 200 --
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Commitments and contingent liabilities (Note 3)
SHAREHOLDERS' EQUITY
Common Stock 1,412 1,966
Retained earnings 1,057 1,101
Deferred compensation relating to ESOP (40) (42)
Accumulated other comprehensive income (9) (39)
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Total shareholders' equity 2,420 2,986
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Total liabilities and shareholders' equity $13,047 $11,190
===========================
See notes to Consolidated Financial Statements.
</table
</TABLE>
<TABLE>
SEMPRA ENERGY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
Dollars in millions
<CAPTION>
Six Months Ended June 30,
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2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 223 $ 181
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 278 609
Portion of depreciation arising from
sales of generating plants -- (295)
Application of balancing accounts to stranded costs -- (62)
Deferred income taxes and investment tax credits 38 (83)
Non-cash rate reduction bond revenue 11 (62)
Other - net (51) (35)
Net changes in other working capital components 313 462
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Net cash provided by operating activities 812 715
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CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (290) (194)
Investment in Chilquinta Energia -- (420)
Net proceeds from sale of generating plants -- 466
Other (25) (168)
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Net cash used in investing activities (315) (316)
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CASH FLOWS FROM FINANCING ACTIVITIES
Common dividends (144) (187)
Repurchase of common stock (722) --
Issuance of preferred securities 200 --
Issuance of long-term debt 504 189
Payments on long-term debt (85) (128)
Decrease in short-term debt - net (182) (43)
Other (9) 2
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Net cash used in financing activities (438) (167)
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Increase (decrease) in Cash and Cash Equivalents 59 232
Cash and Cash Equivalents, January 1 487 424
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Cash and Cash Equivalents, June 30 $ 546 $ 656
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest payments, net of amounts capitalized $ 172 $ 115
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Income tax payments (refunds) - net $ (58) $ 147
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Real estate investments acquired $ -- $ 37
Cash paid -- (3)
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Liabilities assumed $ -- $ 34
========================
See notes to Consolidated Financial Statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
This Quarterly Report on Form 10-Q is that of Sempra Energy (the
Company), a California-based Fortune 500 energy services company.
Sempra Energy's principal subsidiaries are San Diego Gas & Electric
Company (SDG&E), Southern California Gas Company (SoCalGas)
(collectively referred to herein as the California utilities), Sempra
Energy Trading and Sempra Energy International. 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. Results of operations for interim periods are not necessarily
indicative of results for the entire year. In the opinion of
management, the accompanying statements reflect all adjustments
necessary for a fair presentation. These adjustments are only of a
normal recurring nature. Certain changes in classification have been
made to prior presentations to conform to the current financial
statement presentation.
The Company's significant accounting policies are described in the
notes to Consolidated Financial Statements in the Company's 1999
Annual Report. The same accounting policies are followed for interim
reporting purposes.
Information in this Quarterly Report is unaudited and should be read
in conjunction with the Company's 1999 Annual Report.
As described in the notes to Consolidated Financial Statements in the
Company's 1999 Annual Report, the California utilities account for
the economic effects of regulation on utility operations (excluding
generation operations) in accordance with Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" (SFAS No. 71).
2. MAJOR FINANCIAL TRANSACTIONS
Common Stock Repurchase
On February 25, 2000, the Company completed a self tender offer,
purchasing 36.1 million shares of its outstanding common stock at $20
per share. The Company issued $500 million of long-term 7.95% notes
due 2010 and $200 million of 8.9% mandatorily redeemable trust
preferred securities to finance substantially all of the repurchase.
Additional Common Stock Repurchases Authorized
On March 9, 2000, the Company's Board of Directors authorized the
expenditure of up to $100 million to repurchase additional shares of
common stock from time to time in the open market or in privately
negotiated transactions. Authorization of the stock repurchase does
not obligate the Company to acquire any particular amount of common
stock or within any specific timeframe. Through July 31, 2000 the
Company acquired 162,000 shares under this authorization (all in July
2000).
Reduction in Common Dividends
Dividends currently are paid quarterly to shareholders. The payment
of future dividends is within the discretion of the board of
directors. In January 2000 the Company reduced the quarterly dividend
on shares of its common stock to $0.25 per share ($1.00 annualized
rate) from its previous level of $0.39 per share ($1.56 annualized
rate) commencing with the dividend payable in the second quarter of
2000.
Investments in South America
On June 10, 1999, Sempra Energy International (SEI) and Public
Service Enterprise Group (PSEG) purchased (on a 50/50 basis)
Chilquinta Energia S.A. (Energia), primarily a Chilean electric
distribution company, for $840 million. SEI invested $260 million for
the purchase of stock and refinanced $160 million of Energia's
outstanding long-term debt. In September 1999, SEI and PSEG completed
their acquisition of 47.5 percent of the outstanding shares of Luz
del Sur S.A., a Peruvian electric distribution company. SEI's share
of the transaction was $108 million in cash. This acquisition,
combined with the 37 percent already owned through Energia, increased
the companies' total joint ownership to 84.5 percent of Luz del Sur
S.A.
On July 11, 2000 the Company announced an agreement to purchase, for
approximately $140 million, an additional 21.5-percent interest in
two Argentine natural gas utility holding companies (Sodigas Pampeana
S.A. and Sodigas Sur S.A.). Completion of the transaction, scheduled
for the fourth quarter of 2000, would increase the Company's
investment in the two Argentine companies from 21.5 percent to 43
percent.
KN Energy
On June 21, 1999, Sempra Energy and KN Energy, Inc. (KN) announced
that they had agreed to terminate an agreement for the acquisition of
KN by Sempra Energy. Expenses incurred in connection with the
proposed acquisition were $11 million, after tax, for both the three-
month and six-month periods ended June 30, 1999.
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 adopted the December 1995 policy decision of the
California Public Utility Commission (CPUC) that was intended to
restructure 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. California's
investor-owned utilities (IOUs) are obligated to sell their power
supply, including owned generation and purchased-power contracts, to
the PX. The IOUs are also obligated to purchase from the PX the power
that they distribute. An Independent System Operator (ISO) schedules
power transactions and access to the transmission system. The local
utility continues to provide distribution service regardless of the
source from which the customer chooses to purchase electricity.
Purchases by SDG&E from the PX/ISO are included in purchased-power
expenses and revenues from sales to the PX/ISO have been netted
therein on the Statements of Consolidated Income. Revenues from the
PX/ISO reflect sales to the PX/ISO at market prices of energy from
SDG&E's power plants and from its long-term purchased-power
contracts.
As discussed in the notes to Consolidated Financial Statements
contained in the Company's 1999 Annual Report, AB 1890 allowed the
IOUs a reasonable opportunity to recover their stranded costs via a
competition transition charge (CTC) to customers through December 31,
2001. In June 1999, SDG&E completed the recovery of its stranded
costs, other than the future above-market portion of qualifying
facilities and other purchased-power contracts that were in effect at
December 31, 1995, and San Onofre Nuclear Generating Station (SONGS)
costs as described below, which will both continue to be collected in
rates. Recovery of the other stranded costs was effected by, among
other things, the sale of SDG&E's South Bay and Encina fossil power
plants and combustion turbines during the quarter ended June 30,
1999. SDG&E will operate and maintain both plants for the new owners
until April 2001 and May 2001, respectively.
Stranded costs included the cost of SONGS as of December 31, 1995.
SDG&E retains ownership of its 20-percent interest in SONGS.
Subsequent SONGS costs are recoverable only from the sales to the PX
of power produced from SONGS, at rates previously fixed by the CPUC
through December 31, 2003 and at market rates thereafter. If approved
by the CPUC, SDG&E is planning to auction its interest in SONGS. A
major issue being addressed is the management of the decommissioning
trust to ensure that adequate funding is available at the time the
plant is decommissioned.
AB 1890 also required 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 the
revenue streams collected from such customers related to the non-
bypassable charge. 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.
The sizes of the rate-reduction bond issuances were set so as to make
the IOUs neutral as to the 10-percent rate reduction, and were based
on a four-year period to recover stranded costs. Because SDG&E
recovered its stranded costs in only 18 months (due to the greater-
than-anticipated plant-sale proceeds), the bond sale proceeds were
greater than needed. Accordingly, SDG&E will return to its customers
$388 million of surplus bond proceeds. Pursuant to a June 8, 2000
CPUC decision, this refund, included in current liabilities at June
30, 2000, will take place during the third quarter of 2000.
AB 1890 also includes a rate freeze for all IOU customers. The rate
freeze was to have stayed in place until January 1, 2002. However, in
connection with completion of its stranded cost recovery, SDG&E filed
with the CPUC and received approval to reduce base rates (the non-
commodity portion of rates) to all electric customers, effective July
1, 1999. The portion of the electric rate representing the commodity
cost is passed through to customers with no markup and fluctuates
with the price of electricity from the PX. As a result, although base
rates are now below those implicit in the rate freeze, total rates
charged by SDG&E may be above or below those set by the rate freeze
depending on the cost of electricity.
A number of factors, including recent supply/demand conditions, have
resulted in abnormally high commodity prices, which are expected to
continue through the heavy air-conditioning season in the
southwestern United States. This has caused SDG&E's monthly customer
bills to be substantially higher than normal. SDG&E and others have
proposed various methods of responding to these high rates.
On June 28, 2000 the ISO Board of Governors approved the reduction of
the wholesale price cap for electricity in California from $750 per
megawatt hour (MWh) to $500 per MWh. Subsequently, on August 1, 2000,
they approved an additional reduction of the price cap from $500 per
MWh to $250 per MWh. In a filing the following day, SDG&E requested
that the Federal Energy Regulatory Commission (FERC) place an
emergency order capping the price electricity generators offer to the
PX/ISO wholesale markets at $250 per MWh. However, three large power-
generating companies have requested a FERC ruling that any attempt to
limit wholesale electricity prices be judged unjust and unreasonable
and that the ISO be ordered to compensate them for actual damages and
lost opportunity costs.
On August 3, 2000 the CPUC approved a proposal by SDG&E to accelerate
the refund to its electric customers of $100 million of certain
balancing account overcollections to partially offset the high
monthly bills. This is in addition to the $388 million return to
residential and small commercial customers of surplus bond proceeds
referred to above.
In addition, the CPUC denied a proposal by others to place a ceiling
on electric rates for residential and small commercial customers. It
also ordered SDG&E not to disconnect the service of any customers who
do not pay their high bills through November 2000, and directed SDG&E
to expand its level pay plan to all customers who request it. This
would allow a customer to level out payments over a year. The CPUC
agreed to study the issues and hold hearings and did not rule out a
rate freeze in the future. In addition, the CPUC granted SDG&E
expanded authority to participate in the PX's Block Forward Market
which allows SDG&E to utilize futures contracts to hedge electricity
prices and purchase electricity for extended periods at fixed prices.
On August 9, 2000 the California governor issued a press release
calling on the CPUC to establish a one -or two-year rate reduction
and stabilization plan to cut electricity rates by about one-half for
SDG&E residential and business customers, but still allow SDG&E to
eventually recover the prices paid for wholesale power.
In response, a CPUC commissioner has issued a proposed decision
which, if adopted by the CPUC, would impose an interim rate freeze on
SDG&E's electric rates for residential, small commercial and lighting
customers. Under the proposed decision these rates would be frozen
through December 2003 at 110 percent of June 30, 1998 levels. A
balancing account would be established to record related
undercollections resulting from the frozen rates with undercollected
amounts to be recovered in a manner (not specified in the proposed
decision) intended to make SDG&E whole.
A second CPUC commissioner has proposed an alternate decision which
would impose a similar rate freeze only on monthly volumes of
electricity used by the lowest-volume 70 percent of customers (500
kwh for residential customers and 1,500 kwh for commercial
customers). This is intended to encourage conservation. The alternate
proposal would also automatically switch all SDG&E customers to a
level-pay plan, except for those customers who specifically indicate
that they do not want to participate in this billing arrangement.
This alternate proposal would provide for the deferred billings to be
accumulated in an existing balancing account, to be recovered in a
manner intended to make SDG&E whole.
The proposed decisions will be reviewed by the CPUC, which may accept
either one (with or without modification) or reject them both, in
rendering a final decision on the matter. The CPUC has scheduled a
special meeting on August 21, 2000 to address this matter.
The California State Senate has approved emergency legislation to
roll back and freeze rates at July 1999 levels in the San Diego area
(effective June 1, 2000) and sent it to the State Assembly for its
action. The bill requires the CPUC to initiate a proceeding to assess
alternatives for recovering undercollections resulting from the rate
freeze.
The FERC is investigating the electric bulk power markets and
California's attorney general is investigating whether there has been
market manipulation. Various proposals have included application of
any refunds from power suppliers, arising from such investigations,
to help defray any billings deferred as a result of adoption of
certain of the proposals.
The proposed legislation, the proposed CPUC decisions and other
proposals to respond to the high electricity rates would, if adopted,
adversely affect the timing of revenue collections by SDG&E and
related cash flows. They could also adversely affect the ultimate
collectibility of these revenues, which are intended to recover the
costs of electricity purchased by SDG&E to serve its customers. The
Company is unable to predict whether any of these proposals will be
adopted or their ultimate impact on SDG&E. However, SDG&E will
vigorously oppose, through regulatory proceedings and otherwise, any
proposal that does not assure the ultimate collectibility of its full
costs of providing electricity service.
The CPUC is currently deliberating on the legal, ratemaking and
policy issues of ending the rate freeze for all the IOUs, including
post-rate freeze ratemaking. The CPUC has now permitted SDG&E to
purchase energy through the PX or a mixture of the PX and any other
qualified exchange, if a qualified exchange is authorized by future
advice letter filings. A "qualified exchange" is defined as one that
provides continuous trading in either a bid/ask or second price
auction type market, equal nondiscriminatory access and a mechanism
for timely, anonymous price transparency. The CPUC also made numerous
changes in cost allocations among customer classes, adjusted various
ratemaking mechanisms, granted SDG&E's request to close certain
balancing accounts, and ordered hourly pricing to be implemented for
customers with hourly meters. The CPUC rejected as premature an SDG&E
proposal for an incentive mechanism for commodity prices.
Thus far, electric-industry restructuring has been confined to
generation. Transmission and distribution have remained subject to
traditional cost-of-service regulation. However, the CPUC is
exploring the possibility of opening up electric distribution to
competition. During 2000, the CPUC will consider whether any changes
should be made in electric distribution regulation. A CPUC staff
report on this issue was submitted to the CPUC in July 2000, with
dissenting opinions recommending against changing electric
distribution regulation at this time due to the current state of
electric-industry restructuring.
The recent electricity supply/demand conditions have combined with
other factors to affect natural gas supplies and prices. The lack of
surplus natural gas production and the current need to store gas for
the coming winter competes directly with the need to use gas supplies
to generate electricity to meet demand. On August 1, 2000 SDG&E
requested that the CPUC allow San Diego County's two major fossil-
fuel power plants to use alternative fuels such as oil to generate
electricity when demand for natural gas exceeds supply. The new
operators of the power plants, which SDG&E sold in 1999, apparently
intend to protest the proposal, citing potential supply interruptions
and increased pollution.
ELECTRIC INDUSTRY RESTRUCTURING -- FEDERAL ENERGY REGULATORY
COMMISSION
On December 20, 1999, the Federal Energy Regulatory Commission (FERC)
issued "Order 2000". As described in the Company's 1999 Annual
Report, the rule discusses the formation of Regional Transmission
Organizations, grid management, transmission pricing reform and
related matters. The impact of Order 2000 on SDG&E depends on the
results of this process and other implementation issues.
Transmission Access Charge
On March 31, 2000, the ISO filed with the FERC a transmission access
charge (TAC) which separates the transmission systems in California
into two groups (high and low voltage) as the basis for allocating
the costs of maintaining the transmission systems among the various
transmission owners. SDG&E voted against the TAC and filed a protest
with the FERC in April 2000. In June 2000, the FERC approved the TAC
subject to refund and settlement agreement. Settlement efforts among
all parties are ongoing. Resolution is not expected before 2001. Once
the TAC is in effect, Internal Revenue Service (IRS) regulations may
require SDG&E to refinance the industrial development bonds that
support its transmission facilities, the face value of which totals
$168 million. If this occurs, SDG&E's estimated annual pretax cost of
replacing the bonds with debt, the interest on which is taxable to
the holders, would be $4 million, most of which would be recovered in
rates. SDG&E recently submitted a request for a private letter ruling
from the IRS. In addition, pending federal legislation could resolve
this issue.
NATURAL GAS INDUSTRY RESTRUCTURING
The natural gas industry experienced an initial phase of
restructuring during the 1980s by deregulating natural 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's natural gas consumers.
In July 1999, after hearings, the CPUC issued a decision stating
which gas regulatory changes it found most promising, encouraging
parties to submit settlements addressing those changes, and providing
for further hearings if necessary.
In October 1999, the State of California enacted a law (AB 1421)
which requires that natural gas utilities provide "bundled basic gas
service" (including transmission, storage, distribution, purchasing,
revenue-cycle services and after-meter services) to all core
customers, unless the customer chooses to purchase natural gas from a
non-utility provider. The law prohibits the CPUC from unbundling most
distribution-related natural gas services (including meter reading)
and after-meter services (including leak investigation, inspecting
customer piping and appliances, pilot relighting and carbon monoxide
investigation) for core customers. The objective is to preserve both
customer safety and customer choice.
Between late 1999 and April 2000, several conflicting settlements
were filed by various groups of parties that address the changes the
CPUC found promising in July 1999. Hearings were held in May and June
of 2000, and a CPUC decision is expected by year-end 2000. The
principal issues in dispute include: whether firm, tradable rights to
capacity on SoCalGas' major gas transmission lines should be created,
with SoCalGas at risk for market demand for the recovery of the cost
of these facilities; the extent to which SoCalGas' storage services
should be further unbundled and SoCalGas be put at greater risk for
recovery of storage costs; the manner in which interstate pipeline
capacity held by SoCalGas to serve core markets should be allocated
to core customers who purchase gas from energy service providers
other than SoCalGas; and the recovery of the utilities' costs to
implement whatever regulatory changes are adopted. Additional
proposals include improving the access of energy service providers to
sell gas supply to core customers of SoCalGas and SDG&E.
Consistent with Sempra Energy's corporate policies favoring the
unbundling of commodity and nonessential services, the California
utilities are supporting changes that they believe will provide
greater customer choice in utility services and greater access to gas
supply service from energy service providers in the core market.
However, a coalition of gas-fired electric generators and consumer
groups has also proposed the CPUC require SoCalGas to absorb 25
percent of the above-market cost of some capacity SoCalGas has
contracted for on interstate pipelines. SoCalGas is actively opposing
this proposal, contending that regulatory changes developed after the
capacity was committed should not be considered in evaluating the
propriety of the commitment.
Certain parties contend that the restructuring process is an
appropriate venue for addressing whether SoCalGas should refund
retroactively to September 1999 the cost in rates of ownership and
operation of one SoCalGas storage field. SoCalGas is also actively
opposing this proposal and the propriety of this venue for its
resolution.
NUCLEAR INSURANCE
SDG&E and the co-owners of SONGS have purchased primary insurance of
$200 million, the maximum amount available, for public-liability
claims. An additional $9.3 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 $36 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 these coverages are 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 and six weeks, after a waiting period of 12 weeks.
Coverage is provided primarily through a mutual insurance company
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 $5
million.
QUASI-REORGANIZATION
In 1993, PE divested its merchandising operations and most 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. Unitary tax issues
and certain other liabilities established in connection with the
quasi-reorganization were favorably resolved in November 1999. Excess
reserves of $80 million resulting from the favorable resolution of
these issues were added to shareholders' equity at that time. Other
liabilities established in connection with discontinued operations
and the quasi-reorganization will be resolved in future years.
Management believes the provisions for these matters are adequate.
4. COMPREHENSIVE INCOME
Comprehensive income for the three-month periods ended June 30, 2000
and 1999 was $68 million and $82 million, respectively. Comprehensive
income for the six-month periods ended June 30, 2000 and 1999 was
$254 million and $181 million, respectively. For the 2000 periods,
the following is a reconciliation of net income to comprehensive
income.
Three months Six months
ended ended
(Dollars in millions) June 30, 2000 June 30, 2000
--------------------------------------------------------------------
Net income $ 110 $ 223
Change in unrealized gain on
marketable securities (12) 21
Foreign currency adjustments (30) 9
Minimum pension liability adjustments -- 1
--------------------------------
Comprehensive income $ 68 $ 254
--------------------------------------------------------------------
For the 1999 periods, comprehensive income was equal to net income.
As was the case for the three-month and six-month periods ended June
30, 2000, it is likely that comprehensive income in future periods
will differ significantly from net income and will be more volatile
than net income.
5. SEGMENT INFORMATION
The Company is primarily an energy-services company and has three
separately managed reportable segments comprised of SDG&E, SoCalGas
and Sempra Energy Trading (SET). The two utilities operate in
essentially separate service territories under separate regulatory
frameworks and rate structures set by the CPUC. As described in the
notes to Consolidated Financial Statements in the Company's 1999
Annual Report, SDG&E provides electric and natural gas service to San
Diego County and electric service to southern Orange County. SoCalGas
is a natural gas distribution utility, serving customers throughout
most of southern California and part of central California. SET is
based in Stamford, Connecticut and is engaged in the wholesale
trading and marketing of natural gas, power and petroleum in the U.S.
and in other countries. The accounting policies of the segments are
the same as those described in the notes to Consolidated Financial
Statements in the Company's 1999 Annual Report, and segment
performance is evaluated by management based on reported net income.
Intersegment transactions generally are recorded the same as sales or
transactions with third parties. Utility transactions are based
primarily on rates set by the CPUC and FERC. There were no
significant changes in segment assets during the six-month period
ended June 30, 2000. Information concerning SoCalGas' own segments is
provided in its Annual Report on Form 10-K and Quarterly Reports on
Form 10-Q.
---------------------------------------------------------------------
Three-month periods Six-month periods
ended June 30, ended June 30,
----------------------------------------
(Dollars in millions) 2000 1999 2000 1999
---------------------------------------------------------------------
Operating Revenues:
San Diego Gas & Electric $ 574 $ 740 $1,045 $1,201
Southern California Gas 630 624 1,328 1,231
Sempra Energy Trading 207 109 383 182
Intersegment revenues (3) (9) (14) (23)
Other 79 47 187 89
----------------------------------------
Total $1,487 $1,511 $2,929 $2,680
---------------------------------------------------------------------
Net Income:
San Diego Gas & Electric* $ 40 $ 46 $ 92 $ 99
Southern California Gas* 47 46 97 93
Sempra Energy Trading 40 3 58 4
Other (17) (13) (24) (15)
----------------------------------------
Total $ 110 $ 82 $ 223 $ 181
---------------------------------------------------------------------
* after preferred dividends
6. SEMPRA ENERGY GLOBAL ENTERPRISES
Sempra Energy Global Enterprises (SEGE), formerly named Sempra Energy
Holdings, a wholly owned subsidiary of Sempra Energy, has a $500
million credit agreement that expires in October 2000 and is
available to support commercial paper. Borrowings under the agreement
would bear interest at various rates based on market rates and Sempra
Energy's credit rating. At June 30, 2000, SEGE had no borrowings or
commercial paper obligations outstanding. Borrowings and the
commercial paper would be guaranteed by Sempra Energy.
On May 5, 1999, SEGE and certain affiliates filed a shelf
registration for the issuance of up to $1.1 billion of securities,
guaranteed by Sempra Energy, to be offered on a delayed or continuous
basis pursuant to Rule 415 under the Securities Act of 1933. At June
30, 2000, other affiliates had issued $0.7 billion of securities
under this registration statement; SEGE has not issued any securities
under the registration statement.
Summarized financial information of SEGE is provided below.
(Dollars in millions)
At June 30, At December 31,
2000 1999
------------- --------------
Current assets $3,860 $2,271
Non-current assets 1,285 1,317
Current liabilities 3,477 2,124
Non-current liabilities 628 502
----------------------------------------
Three-month periods Six-month periods
ended June 30, ended June 30,
----------------------------------------
2000 1999 2000 1999
----------------------------------------
Operating revenues $294 $157 $577 $271
Operating expenses 293 157 565 286
Net income (loss) 40 3 54 (7)
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 1999 Annual Report.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains statements that are not
historical fact and constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. The
words "estimates," "believes," "expects," "anticipates," "plans,"
intends," "may" and "should" or similar expressions, or discussions
of strategy or of plans are intended to identify forward-looking
statements that involve risks, uncertainties and assumptions. Future
results may differ materially from those expressed in the forward-
looking statements.
These statements are necessarily based upon various assumptions
involving judgments with respect to the future and other risks,
including, among others, local, regional, national and international
economic, competitive, political and regulatory conditions and
developments; technological developments; capital market conditions;
inflation rates; interest rates; exchange rates; energy markets,
including the timing and extent of changes in commodity prices;
weather conditions; business, regulatory or legal decisions; the pace
of deregulation of retail natural gas and electricity delivery; the
timing and success of business development efforts; and other
uncertainties -- all of which are difficult to predict and many of
which are beyond the control of the Company. Readers are cautioned
not to rely unduly on any forward-looking statements and are urged to
review and consider carefully the risks, uncertainties and other
factors which affect the Company's business described in this
quarterly report and other reports filed by the Company from time to
time with the Securities and Exchange Commission.
See also "Factors Influencing Future Performance" below.
MAJOR FINANCIAL TRANSACTIONS
See Note 2 of the notes to Consolidated Financial Statements
concerning common stock repurchases, a reduction in common dividends,
South American investments and the agreement to terminate the KN
Energy acquisition.
The effect of the self-tender stock repurchase, which did not affect
the number of common shares outstanding until March 9, 2000, was to
increase earnings per share by $0.05 for each of the three-month and
six-month periods ended June 30, 2000, respectively. The impact of
this repurchase on future periods is dependent on the amount of
future net income and cannot be predicted, and could even be negative
if net income fell to the level where the cost of the repurchases'
financing had a greater impact on earnings per share than did the
reduction in the number of shares. However, if the repurchase had
taken place on January 1, 1999 and been financed at the cost of the
actual repurchase in 2000, the impact would have been to increase
1999's earnings per share by $0.12.
CAPITAL RESOURCES AND LIQUIDITY
The Company's California utility operations continue to be the major
source of liquidity. In addition, working capital requirements are
met through the issuance of short-term and long-term debt. Cash and
cash equivalents at June 30, 2000 are available for investment in
utility plant, the retirement of debt, energy-related domestic and
international projects and other corporate purposes. Approximately
$450 million of the cash and cash equivalents at June 30, 2000 is
that of the California utilities. Major changes in cash flows not
described elsewhere are described below.
CASH FLOWS FROM OPERATING ACTIVITIES
For the six-month period ended June 30, 2000, the increase in cash
flows from operations is primarily due to higher income tax refunds
and increases in accounts payable, offset by an increase in net
energy trading assets.
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures for property, plant and equipment by the
California utilities are estimated to be $500 million for the full
year 2000 and will be financed primarily by internally generated
funds. Construction, investment and financing programs are
continuously reviewed and revised in response to changes in
competition, customer growth, inflation, customer rates, the cost of
capital, and environmental and regulatory requirements.
CASH FLOWS FROM FINANCING ACTIVITIES
For the six-month period ended June 30, 2000, the decrease in cash
flows from financing activities is primarily due to greater short-
term debt repayments in 2000 compared to the corresponding period in
1999.
As described in Note 2 of the notes to Consolidated Financial
Statements, the Company repurchased 36.1 million shares of its
outstanding common stock at $20.00 per share. The Company issued $500
million of notes and $200 million of preferred securities to finance
substantially all of the repurchase.
As described in Note 2 of the notes to Consolidated Financial
Statements, the Company announced a reduction of its quarterly
dividend per share to $0.25 from its previous level of $0.39
commencing with the dividend payable in the second quarter of 2000.
In May 2000, SDG&E called its 9-5/8 percent First Mortgage Bonds due
in 2020 at a cost of $104.04 per bond, or $10 million including
accrued interest.
RESULTS OF OPERATIONS
Net income increased 34 percent and 23 percent for the three-month
and six-month periods ended June 30, 2000, respectively, compared to
the same periods in 1999, primarily due to higher earnings at Sempra
Energy Trading and Sempra Energy International. Net income per share
increased 57 percent and 37 percent for the same periods due to the
increased net income and the effects of the Company's common stock
purchases described in Note 2 of the notes of Consolidated Financial
Statements.
UTILITY OPERATIONS
The tables below summarize the natural gas and electric volumes and
revenues by customer class for the six-month periods ended June 30,
2000 and 1999.
<TABLE>
Sempra Energy
Gas Sales, Transportation and Exchange
For the six-month periods ended June 30
(Volumes in billion cubic feet, dollars in millions)
<CAPTION>
Gas Sales Transportation & Exchange Total
----------------------------------------------------------------------
Volumes Revenue Volumes Revenue Volumes Revenue
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2000:
Residential 156 $1,164 2 $ 8 158 $1,172
Commercial and industrial 56 345 169 132 225 477
Utility electric generation -- -- 118 43 118 43
Wholesale -- -- 14 12 14 12
---------------------------------------------------------------
212 $1,509 303 $195 515 1,704
Balancing accounts and other (167)
--------
Total $1,537
--------------------------------------------------------------------------------------------
1999:
Residential 187 $1,190 1 $ 4 188 $1,194
Commercial and industrial 60 301 161 131 221 432
Utility electric generation* 18 7 49 20 67 27
Wholesale -- -- 15 4 15 4
---------------------------------------------------------------
265 $1,498 226 $159 491 1,657
Balancing accounts and other (253)
---------
Total $1,404
--------------------------------------------------------------------------------------------
* For the months prior to the sale of its electric plants, the portion of revenue
related to SDG&E's sales to the plants includes margin only.
</TABLE>
Natural gas revenues increased 9 percent for the six-month period ended
June 30, 2000 compared to the same period in 1999. The increase is
primarily due to higher natural gas prices.
<TABLE>
Sempra Energy
Electric Distribution and Transmission
For the six-month periods ended June 30
(Volumes in millions of Kwhrs, dollars in millions)
<CAPTION>
2000 1999
------------------------------------------
Volumes Revenue Volumes Revenue
------------------------------------------
<S> <C> <C> <C> <C>
Residential 3,130 $ 332 3,134 $ 315
Commercial 2,913 274 2,994 271
Industrial 1,139 84 968 69
Direct access 1,744 59 1,403 48
Street and highway lighting 33 3 38 3
Off-system sales 253 11 52 1
------------------------------------------
9,212 763 8,589 707
Balancing and other 59 299
------------------------------------------
Total 9,212 $ 822 8,589 $1,006
------------------------------------------
</TABLE>
Electric revenues decreased 18 percent for the six-month period ended
June 30, 2000 compared to the same period in 1999. The decrease is
primarily due to the decrease in base electric rates (the non-commodity
portion) from the completion of stranded cost recovery (described in
Note 3 of the notes to Consolidated Financial Statements), offset by the
effect of higher prices, as discussed below.
Cost of natural gas distributed increased 25 percent for the six-
month period ended June 30, 2000 compared to the corresponding period
in 1999. The increase was primarily due to higher natural gas prices.
Under the current regulatory framework, changes in core-market
natural gas prices do not affect net income since, as explained more
fully in the 1999 Annual Report, current or future customer rates
normally recover the actual cost of natural gas.
Electric fuel and net purchased power expense increased 88 percent
for the six-month period ended June 30, 2000 compared to the
corresponding period in 1999. The increase was primarily due to the
higher price of electricity from the PX reflecting the recent
supply/demand conditions described in Note 3 of the notes to
Consolidated Financial Statements. Under the current regulatory
framework, changes in on-system prices do not affect net income, as
explained in the 1999 Annual Report.
Operating expenses increased 18 percent for the six-month period
ended June 30, 2000 compared to the same period in 1999. The increase
is primarily due to increased operating expenses at Sempra Energy
Trading, offset by reduced operating expenses at SoCalGas and SDG&E.
Depreciation and amortization expense decreased 54 percent for the
six-month period ended June 30, 2000, compared to the corresponding
period in 1999 due to the sale of SDG&E's fossil power plants and
combustion turbines.
Net income at SoCalGas increased slightly for the three-month and
six-month periods ended June 30, 2000, compared to the same
periods in 1999, due to reduced operating and maintenance
expenses. Net income at SDG&E decreased for the three-month and
six-month periods ended June 30, 2000, compared to the same
periods in 1999, due to decreased rate base and authorized rate
of return on equity, and increased interest expense on rate
reduction bond refunds (all of which began in mid 1999 and which
are related to industry restructuring) offset by the elimination
of a regulatory balancing account at the end of 1999. With the
elimination of the balancing account, SDG&E's net income now
fluctuates with changes in natural gas demand, due to seasonal
and other factors. During the six-month period ended June 30,
2000, this resulted in a $10 million increase in net income. This
was based on a timing difference that likely will reverse later
in the year.
FACTORS INFLUENCING FUTURE PERFORMANCE
Base results of the Company in the near future will depend primarily
on the results of the California utilities. Earnings growth and
fluctuations will depend on changes in the utility industry and
activities at SEI, SET and other businesses. "Other Operations" below
notes the volatility in the earnings of SET. As SET and/or similar
operations become increasingly more significant to the Company's
results, it is likely that consolidated results will be more volatile
than in prior periods. In addition, the ratemaking and regulatory
process, electric- and natural gas-industry restructuring, changing
energy marketplace, developments in the businesses other than the
California utilities, and other factors will influence future
financial performance. These factors are summarized below.
As noted in Note 3 of the notes to Consolidated Financial Statements,
a number of factors, including recent supply/demand conditions, have
resulted in abnormally high commodity prices, which are expected to
continue through the heavy air-conditioning season in the
southwestern United States. This has caused SDG&E's monthly customer
bills to be substantially higher than normal. SDG&E and others have
proposed various methods of responding to these high rates.
On June 28, 2000 the ISO Board of Governors approved the reduction of
the wholesale price cap for electricity in California from $750 per
megawatt hour (MWh) to $500 per MWh. Subsequently, on August 1, 2000,
they approved an additional reduction of the price cap from $500 per
MWh to $250 per MWh. In a filing the following day, SDG&E requested
that the Federal Energy Regulatory Commission (FERC) place an
emergency order capping the price electricity generators offer to the
PX/ISO wholesale markets at $250 per MWh. However, three large power-
generating companies have requested a FERC ruling that any attempt to
limit wholesale electricity prices be judged unjust and unreasonable
and that the ISO be ordered to compensate them for actual damages and
lost opportunity costs.
On August 3, 2000 the CPUC approved a proposal by SDG&E to accelerate
the refund to its electric customers of $100 million of certain
balancing account overcollections to partially offset the high
monthly bills. This is in addition to the $388 million return to
residential and small commercial customers of surplus bond proceeds
referred to above.
In addition, the CPUC denied a proposal by others to place a ceiling
on electric rates for residential and small commercial customers. It
also ordered SDG&E not to disconnect the service of any customers who
do not pay their high bills through November 2000, and directed SDG&E
to expand its level pay plan to all customers who request it. This
would allow a customer to level out payments over a year. The CPUC
agreed to study the issues and hold hearings and did not rule out a
rate freeze in the future. In addition, the CPUC granted SDG&E
expanded authority to participate in the PX's Block Forward Market
which allows SDG&E to utilize futures contracts to hedge electricity
prices and purchase electricity for extended periods at fixed prices.
On August 9, 2000 the California governor issued a press release
calling on the CPUC to establish a one- or two-year rate reduction
and stabilization plan to cut electricity rates by about one-half for
SDG&E residential and business customers, but still allow SDG&E to
eventually recover the prices paid for wholesale power.
In response, a CPUC commissioner has issued a proposed decision
which, if adopted by the CPUC, would impose an interim rate freeze on
SDG&E's electric rates for residential, small commercial and lighting
customers. Under the proposed decision these rates would be frozen
through December 2003 at 110 percent of June 30, 1998 levels. A
balancing account would be established to record related
undercollections resulting from the frozen rates with undercollected
amounts to be recovered in a manner (not specified in the proposed
decision) intended to make SDG&E whole.
A second CPUC commissioner has proposed an alternate decision which
would impose a similar rate freeze only on monthly volumes of
electricity used by the lowest-volume 70 percent of customers (500
kwh for residential customers and 1,500 kwh for commercial
customers). This is intended to encourage conservation. The alternate
proposal would also automatically switch all SDG&E customers to a
level-pay plan, except for those customers who specifically indicate
that they do not want to participate in this billing arrangement.
This alternate proposal would provide for the deferred billings to be
accumulated in an existing balancing account, to be recovered in a
manner intended to make SDG&E whole.
The proposed decisions will be reviewed by the CPUC, which may accept
either one (with or without modification) or reject them both, in
rendering a final decision on the matter. The CPUC has scheduled a
special meeting on August 21, 2000 to address this matter.
The California State Senate has approved emergency legislation to
roll back and freeze rates at July 1999 levels in the San Diego area
(effective June 1, 2000) and sent it to the State Assembly for its
action. The bill requires the CPUC to initiate a proceeding to assess
alternatives for recovering undercollections resulting from the rate
freeze.
The FERC is investigating the electric bulk power markets and
California's attorney general is investigating whether there has been
market manipulation. Various proposals have included application of
any refunds from power suppliers, arising from such investigations,
to help defray any billings deferred as a result of adoption of
certain of the proposals.
The proposed legislation, the proposed CPUC decisions and other
proposals to respond to the high electricity rates would, if adopted,
adversely affect the timing of revenue collections by SDG&E and
related cash flows. They could also adversely affect the ultimate
collectibility of these revenues, which are intended to recover the
costs of electricity purchased by SDG&E to serve its customers. The
Company is unable to predict whether any of these proposals will be
adopted or their ultimate impact on SDG&E. However, SDG&E will
vigorously oppose, through regulatory proceedings and otherwise, any
proposal that does not assure the ultimate collectibility of its full
costs of providing electricity service.
See Note 3 of the notes to Consolidated Financial Statements for
further discussion.
South American Acquisitions
See Note 2 of the notes to Consolidated Financial Statements and
"International Operations" below for a discussion of the 1999
acquisitions of Chilquinta Energia S.A. and Luz del Sur S.A. and the
recent increase in the Company's Argentine investments.
Industry Restructuring
See discussion of industry restructuring in Note 3 of the notes to
Consolidated Financial Statements.
Electric-Generation Assets and Electric Rates
Note 3 of the notes to Consolidated Financial Statements describes
regulatory and legislative actions that affect SDG&E's electric
rates.
Performance-Based Regulation (PBR)
To promote efficient operations and improved productivity and to move
away from reasonableness reviews and disallowances, the CPUC has been
directing utilities to use PBR. PBR has replaced the general rate
case and certain other regulatory proceedings for the California
utilities. Under PBR, regulators require future income potential to
be tied to achieving or exceeding specific performance and
productivity goals, as well as cost reductions, rather than relying
solely on expanding utility plant in a market where a utility already
has a highly developed infrastructure. Each utility's PBR mechanism
is scheduled to be updated at December 31, 2002, to reflect, among
other things, changes in costs and volumes.
Key elements of the mechanisms include an initial reduction in base
rates, an indexing mechanism that 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
or awards if service quality exceeds set standards. Specifically, the
key elements of the mechanisms include the following:
-- Earnings up to 25 basis points in excess of the authorized rate of
return on rate base are retained 100 percent by shareholders.
Earnings that exceed the authorized rate of return on rate base by
greater than 25 basis points are shared between customers and
shareholders on a sliding scale that begins with 75 percent of the
additional earnings being given back to customers and declining to 0
percent as earned returns approach 300 basis points above authorized
amounts. There is no sharing if actual earnings fall below the
authorized rate of return. In 1999, SDG&E and SoCalGas were
authorized to earn 9.05 percent and9.49 percent, respectively, on
rate base. For 2000, the authorized return is 8.75 percent for SDG&E
and 9.49 percent for SoCalGas.
-- Base rates are indexed based on inflation less an estimated
productivity factor.
-- SDG&E would be authorized to earn or be penalized up to a maximum
of $14.5 million annually as a result of its performance related to
employee safety, electric reliability, customer satisfaction, and
call-center responsiveness. The SoCalGas mechanism authorizes
penalties of up to $4 million annually, or more in certain, limited
situations.
-- A SoCalGas mechanism allows for pricing flexibility for
residential and small-commercial customers, with any shortfalls in
revenue being borne by shareholders and with any increase in revenue
shared between shareholders and customers.
-- Annual cost of capital proceedings are replaced by an automatic
adjustment mechanism. If changes in certain indices exceed
established tolerances, there would be an automatic adjustment of
rates for the change in the cost of capital according to a formula
which applies a percentage of the change to various capital
components.
Cost of Capital
For 2000, SoCalGas is authorized to earn a rate of return on common
equity (ROE) of 11.6 percent and a 9.49 percent return on rate base
(ROR), the same as in 1999, unless interest-rate changes are large
enough to trigger an automatic adjustment as discussed in the
Company's 1999 Annual Report. For SDG&E, electric-industry
restructuring has changed the method of calculating the utility's
annual cost of capital. In June 1999, the CPUC adopted a 10.6 percent
ROE and an 8.75 percent ROR for SDG&E's electric-distribution and
natural gas businesses. The electric-transmission cost of capital is
determined under a separate FERC proceeding.
Biennial Cost Allocation Proceeding (BCAP)
The BCAP determines how a utility's natural gas transportation costs
are allocated among various customer classes (residential,
commercial, industrial, etc.). In October 1998, the California
utilities filed 1999 BCAP applications requesting that new rates
become effective August 1, 1999, and remain in effect through
December 31, 2002. On April 20, 2000, the CPUC issued a decision
adopting overall decreases in natural gas revenues of $210 million
for SoCalGas and $37 million for SDG&E for transportation rates
effective June 1, 2000. Since the decrease reflects anticipated
changes in corresponding costs, it has no effect on net income.
Gas Cost Incentive Mechanism (GCIM)
This mechanism for evaluating SoCalGas' natural gas purchases
substantially replaced the previous process of reasonableness
reviews. GCIM compares SoCalGas' cost of natural gas with a benchmark
level, which is the average price of 30-day firm spot supplies in the
basins in which SoCalGas purchases natural gas. The mechanism permits
full recovery of all costs within a tolerance band above the
benchmark price and refunds all savings within a tolerance band below
the benchmark price. The costs or savings outside the tolerance band
are shared equally between customers and shareholders.
The CPUC approved the use of natural gas futures for managing risk
associated with the GCIM. SoCalGas enters into natural gas futures
contracts in the open market on a limited basis to mitigate risk and
better manage natural gas costs.
In June 1999, SoCalGas filed its annual GCIM application with the
CPUC, requesting an award of $8 million for the annual period ended
March 31, 1999. On June 8, 2000 the CPUC approved the $8 million
award and deferred decision regarding extending the GCIM beyond March
31, 2000 until an evaluation is performed by the Commission staff.
The evaluation report is expected in January 2001.
In June 2000, SoCalGas filed its annual GCIM application with the
CPUC, requesting an award of $10 million for the annual period ended
March 31, 2000. A CPUC decision is expected during the first quarter
of 2001.
INTERNATIONAL OPERATIONS
On July 11, 2000 the Company announced an agreement to purchase, for
approximately $140 million, an additional 21.5-percent interest in
two Argentine natural gas utility holding companies (Sodigas Pampeana
S.A. and Sodigas Sur S.A.). Completion of the transaction, scheduled
for the fourth quarter of 2000, would increase the Company's
investment in the two Argentine companies from 21.5 percent to 43
percent.
As discussed in Note 2 of the notes to Consolidated Financial
Statements, Sempra Energy invested in two additional utility
companies in South America during 1999.
Results for international operations for the three-month and six-
month periods ended June 30, 2000 were net income of $7 million and
$12 million, respectively, compared to losses of $2 million and $8
million, respectively, for the corresponding period in 1999. (The
1999 loss has been restated to reflect the current configuration of
this business unit, which now includes two small, domestic natural
gas utilities.) The increase in net income is primarily due to income
from Chilquinta Energia S.A. and Luz del Sur S.A.
Accounting for international operations has resulted in foreign
currency translation adjustments, as discussed in Note 4 of the notes
to Consolidated Financial Statements.
OTHER OPERATIONS
Sempra Energy Trading (SET) is a leading energy trading and marketing
firm headquartered in Stamford, Connecticut. SET engages primarily in
natural gas, petroleum and power marketing (domestic and
international). For the three-month and six-month periods ended June
30, 2000, SET recorded net income of $40 million and $58 million,
respectively, compared to $3 million and $4 million, respectively,
for the corresponding periods in 1999. The increase in income was
primarily due to increased volatility in energy prices and greater
penetration of all customer segments, resulting in higher volumes
traded in the six-month period ended June 30, 2000. In addition,
natural gas and petroleum trading contributed significantly to
increased earnings in 2000. During the three-month period ended June
30, 2000, SET further expanded its international operations with the
opening of an office in Singapore.
Sempra Energy Financial (SEF) invests as a limited partner in
affordable-housing properties and alternative-fuel projects. SEF's
portfolio includes over 1,250 properties throughout the United
States. These investments are expected to provide income-tax benefits
(primarily from income-tax credits) over 10-year periods. For the
three-month and six-month periods ended June 30, 2000, SEF recorded
net income of $7 million and $15 million, respectively, compared to
$7 million and $14 million, respectively, for the corresponding
periods in 1999. This is expected to decline as the various 10-year
periods expire, unless SEF makes sufficient new investments. SEF's
future investment policy is dependent on the Company's future
domestic income-tax position.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 133
"Accounting for Derivative Instruments and Hedging Activities." As
amended, SFAS 133, which is effective for the company on January
1, 2001, requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial
position, measure those instruments at fair value and recognize
changes in the fair value of derivatives in earnings in the period
of change unless the derivative qualifies as an effective hedge
that offsets certain exposures. The effect of this standard on the
company's Consolidated Financial Statements has not yet been
determined.
In December 1999, the Securities Exchange Commission (SEC) staff
issued Staff Accounting Bulletin (SAB) 101 " Revenue Recognition.
SABs are not rules issued by the SEC. Rather, they represent
interpretations and practices followed by the SEC's staff in
administering the disclosure requirements of the federal
securities laws. SAB 101 provides guidance on the recognition,
presentation and disclosure of revenue in financial statements; it
does not change the existing rules on revenue recognition. SAB 101
sets forth the basic criteria that must be met before revenue
should be recorded. Implementation of SAB 101 is required by the
fourth quarter of 2000 and will have no effect on the company's
Consolidated Financial Statements.
ITEM 3. MARKET RISK
There have been no significant changes in the risk issues affecting
the Company subsequent to those discussed in the Annual Report on
Form 10-K for 1999. The diversified Value at Risk used to measure
market risk of SET's portfolio increased to $6.3 million at June 30,
2000 as compared to $2.6 million at December 31, 1999 due to
increased natural gas prices, combined with increased price
volatility in the power markets.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor its subsidiaries are party to, nor is their
property the subject of, any material pending legal proceedings other
than routine litigation incidental to their businesses.
ITEM 4. SUBMISSION OF MATTERS TO VOTE
Sempra Energy's 14-member board of directors is divided into three
classes whose terms are staggered so that the term of one class
expires at each Annual Meeting of Shareholders. At the annual meeting
on May 2, 2000, the shareholders of Sempra Energy re-elected five
directors for a three-year term expiring in 2003. A shareholder
proposal regarding voting approval requirements, recommending a
simple majority vote rule on all issues that are submitted to
shareholder vote, was not approved. Details of the votes are provided
in the Company's Quarterly Report on Form 10-Q for the three-month
period ended March 31, 2000.
Additional information concerning the election of the board of
directors and the shareholder proposal is contained in the Company's
Notice of 2000 Annual Meeting of Shareholders and Proxy Statement.
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.
Exhibit 27 - Financial Data Schedules
27.1 Financial Data Schedule for the six-month period ended
June 30, 2000.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed after March 31, 2000:
Current Report on Form 8-K filed April 28, 2000, filing as an exhibit
the Company's press release of April 27, 2000 giving the financial
results for the three-month period ended March 31, 2000.
Current Report on Form 8-K filed August 2, 2000, filing as an exhibit
the Company's press release of July 27, 2000 giving the financial
results for the three-month period ended June 30, 2000.
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 11, 2000 By: /s/ F. H. Ault
----------------------------
F. H. Ault
Vice President and Controller
