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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 March 31, 1994
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Commission file number 1-1402
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SOUTHERN CALIFORNIA GAS COMPANY
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(Exact name of registrant as specified in its charter)
California 95-1240705
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
555 West Fifth Street, Los Angeles, California 90013-1011
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(Address of principal executive offices)
(Zip Code)
(213) 244-1200
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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
---
The number of shares of common stock outstanding on April 29, 1994 was
91,300,000.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
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SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARY
CONDENSED STATEMENT OF CONSOLIDATED INCOME
(Thousands of Dollars)
Three Months Ended
March 31
--------------------
1994 1993
-------- --------
(Unaudited)
Operating Revenues $689,154 $758,721
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Operating expenses:
Cost of gas distributed 354,087 380,050
Operation and maintenance 146,062 182,144
Depreciation 57,640 55,505
Income taxes 32,798 36,167
Other taxes and franchise
payments 30,969 34,253
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Total 621,556 688,119
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Net operating revenue 67,598 70,602
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Other income and (deductions):
Interest income 278 765
Regulatory Interest 1,064 37
Allowance for equity funds used
during construction 713 1,196
Income taxes on non-operating
income 247 (931)
Other - net (1,461) (587)
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Total 841 480
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Interest charges and (credits):
Interest on long-term debt 22,257 25,859
Other interest 2,639 (200)
Allowance for borrowed funds
used during construction (406) (744)
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Total 24,490 24,915
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Net Income 43,949 46,167
Dividends on preferred stock 2,440 2,533
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Net income applicable to
Common Stock $ 41,509 $ 43,634
======== ========
See Notes to Condensed Consolidated Financial Statements.
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SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
(Thousands of Dollars)
March 31 December 31
1994 1993
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(Unaudited)
Utility Plant $5,456,551 $5,422,549
Less accumulated depreciation 2,256,402 2,205,043
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Utility plant - net 3,200,149 3,217,506
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Current Assets:
Cash and cash equivalents 33,721 14,533
Accounts and notes receivable - net 635,168 503,308
Regulatory accounts receivable 297,449 443,718
Gas in storage 2,832 53,114
Materials and supplies 23,283 20,618
Prepaid expenses 20,077 22,971
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Total current assets 1,012,530 1,058,262
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Deferred Charges 712,618 674,452
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Total $4,925,297 $4,950,220
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See Notes to Condensed Consolidated Financial Statements.
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SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
CAPITALIZATION AND LIABILITIES
(Thousands of Dollars)
March 31 December 31
1994 1993
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(Unaudited)
Capitalization:
Common equity:
Common stock $ 834,889 $ 834,889
Retained earnings 620,456 607,250
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Total common equity 1,455,345 1,442,139
Preferred stock 196,551 196,551
Long-term debt 1,235,899 1,235,622
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Total capitalization 2,887,795 2,874,312
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Current Liabilities:
Short-term debt 177,779 267,000
Accounts payable 413,983 417,001
Accounts payable-affiliates 509,510 513,306
Accrued taxes and franchise payments 110,544 21,907
Deferred income taxes 21,688 39,542
Accrued interest 39,724 35,007
Other accrued liabilities 107,212 129,372
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Total current liabilities 1,380,440 1,423,135
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Deferred Credits:
Customer advances for construction 45,290 45,493
Deferred income taxes 386,228 399,535
Deferred investment tax credits 72,237 72,993
Other deferred credits 153,307 134,752
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Total deferred credits 657,062 652,773
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Total $4,925,297 $4,950,220
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See Notes to Condensed Consolidated Financial Statements.
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SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARY
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
(Thousands of Dollars)
Three Months Ended
March 31
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1994 1993
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(Unaudited)
Cash Flows From Operating Activities:
Net income $ 43,949 $ 46,167
Items not requiring cash 48,756 58,948
Net change in other working capital
components 111,066 290,998
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Net Cash provided by operating
activities 203,771 396,113
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Cash Flows from Investing Activities:
Expenditures for utility plant (39,601) (47,701)
Increase in other assets (24,952) (10,665)
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Net cash used in investing activities (64,553) (58,366)
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Cash Flows from Financing Activities:
Dividends (30,809) (36,175)
Issuance of long-term debt 200,000
Payments of long-term debt (100,000)
Redemption of preferred stock (75,000)
Sale of preferred stock 75,000
Decrease in short-term debt (89,221) (215,000)
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Net Cash used in financing activities (120,030) (151,175)
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Increase in Cash and Cash Equivalents 19,188 186,572
Cash and Cash Equivalents - January 1 14,533 1,318
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Cash and Cash Equivalents - March 31 $ 33,721 $ 187,890
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Supplemental Disclosure of Cash Flow Information:
Cash paid during the period:
Interest (net of amount capitalized) $ 20,820 $ 17,285
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Income Taxes $ 30,872
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See Notes to Condensed Consolidated Financial Statements.
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SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF ACCOUNTING POLICIES
The accompanying condensed consolidated financial statements have been
prepared in accordance with the interim period reporting requirements of Form
10-Q. Reference is made to the Form 10-K for the year ended December 31,
1993 for additional information.
Results of operations for interim periods are not necessarily indicative of
results for the entire year. In order to match revenues and costs for
interim reporting purposes, the Company defers revenue related to costs which
are expected to be incurred later in the year. In the opinion of management,
the accompanying statements reflect all adjustments which are necessary for a
fair presentation. These adjustments are of a normal recurring nature.
Certain changes in account classification have been made in the prior years'
consolidated financial statements to conform to the 1994 financial statement
presentation.
2. RESTRUCTURING OF GAS SUPPLY CONTRACTS AND COMPREHENSIVE SETTLEMENT OF
REGULATORY ISSUES
RESTRUCTURING OF GAS SUPPLY CONTRACTS. The Company and its gas supply
affiliates have reached agreements with suppliers of California offshore and
Canadian natural gas for a restructuring of long-term gas supply contracts.
The cost of these supplies to the Company had been substantially in excess of
the Company's average delivered cost of gas. During 1993, these excess costs
totaled approximately $125 million.
The agreements substantially reduce the ongoing delivered costs of these gas
supplies and provide lump sump settlement payments of $375 million to the
suppliers. The expiration date for the Canadian gas supply contract has been
shortened from 2012 to 2003, and the supplier of California offshore gas
continues to have an option to purchase related gas treatment and pipeline
facilities owned by the Company's gas supply affiliate. The agreement with
the suppliers of Canadian gas is subject to certain Canadian regulatory and
other approvals.
COMPREHENSIVE SETTLEMENT OF REGULATORY ISSUES. The Company and a number of
interested parties (including the Division of Ratepayer Advocates (DRA) of
the CPUC, large noncore customers and ratepayer groups) proposed for CPUC
approval a comprehensive settlement (Comprehensive Settlement) of a number of
pending regulatory issues including partial rate recovery of restructuring
costs associated with the gas supply contracts discussed above. The
Comprehensive Settlement, upon approval by the CPUC, would permit the Company
to recover in utility rates approximately 80 percent of the contract
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SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
restructuring costs of $375 million and accelerated amortization of related
pipeline assets of its gas supply affiliates of approximately $130 million,
together with interest, over a period of approximately five years. In
addition to the gas supply issues, the Comprehensive Settlement addresses
noncore customer rates, reasonableness reviews, a gas cost incentive
mechanism and attrition. The Company reflected the impact of the
Comprehensive Settlement in its financial statements in 1993. The Company
has filed a financing application with the CPUC primarily for the borrowing
of $425 million to provide for funds needed under the Comprehensive
Settlement.
On April 20, 1994, the CPUC approved the Comprehensive Settlement, subject to
certain conditions. The Company is evaluating these conditions, but does not
currently believe they will have a material impact on the financial
statements of the Company.
3. GAS COST INCENTIVE MECHANISM
On March 16, 1994, the CPUC approved a new process for evaluating SoCalGas'
purchases, replacing the previous process of reasonableness reviews. The new
gas cost incentive mechanism (GCIM) is a three-year pilot program beginning
April 1, 1994. The GCIM essentially compares SoCalGas' cost of gas with a
benchmark level, which is the average price of 30-day firm spot supplies
delivered to the SoCalGas market area.
If SoCalGas' cost of gas exceeds the benchmark level by a tolerance band,
then the excess costs will be shared equally between ratepayers and
shareholders. Savings from gas purchased below the benchmark level will also
be shared equally between ratepayers and shareholders. For the first year of
the program, the GCIM provides a 4.5 percent tolerance band. For the second
and third years of the program, the tolerance band decreases to 4.0 percent.
4. COMMITMENTS AND CONTINGENT LIABILITIES
The Gas Company has identified and reported to California environmental
authorities 42 former gas manufacturing sites for which it (together with
other utilities as to 21 of the sites) may have remedial obligations under
environmental laws. In addition, the Company is one of a large number of
major corporations that have been named by federal authorities as potentially
responsible parties for environmental remediation of two other industrial
sites and a landfill site. These 45 sites are in various stages of
investigation or remediation. It is anticipated that the investigation, and
if necessary, remediation of these sites will be completed over a period of
from 10 years to 20 years.
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SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In November 1993, a collaborative settlement agreement between the Company
and other California energy utilities and the DRA was submitted to the CPUC
for approval. The settlement recommends a ratemaking mechanism that would
provide recovery of 90 percent of environmental investigation and remediation
costs without reasonableness review. In addition, the utilities would have
the opportunity to retain a percentage of any insurance recoveries to offset
the 10 percent of costs not recovered in rates. On May 4, 1994, the CPUC
adopted the cost sharing mechanism discussed above.
5. POSTEMPLOYMENT BENEFITS
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 112, Employers' Accounting for Postemployment
Benefits (SFAS 112). SFAS 112 requires the accrual of the obligation to
provide benefits to former or inactive employees after employment but before
retirement. The adoption of SFAS 112 had no impact on earnings since these
costs are currently recovered in rates as paid, and as such, have been
reflected as a regulatory asset. At March 31, 1994, the total postemployment
benefit liability was $39 million.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Southern California Gas Company (The Gas Company or the Company) is a
subsidiary of Pacific Enterprises (Parent) which owns 96 percent of the
Company's voting stock, including all of its issued and outstanding common
stock. The Gas Company is a public utility owning and operating a natural
gas transmission, storage and distribution system that serves almost 16
million persons through approximately 4.7 million meters in 535 cities and
communities throughout most of southern California and parts of central
California, a service area of 23,000 square miles. The Company is dedicated
to providing high quality gas service to residential, commercial, industrial,
utility electric generation (UEG) and wholesale customers. The Company is
subject to regulation by the California Public Utilities Commission (CPUC)
which, among other things, establishes rates the Company may charge for gas
service, including an authorized rate of return on investment. Management's
Discussion and Analysis of Financial Condition and Results of Operations
should be read in conjunction with the Condensed Consolidated Financial
Statements and the Company's Annual Report on Form 10-K.
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SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
RESULTS OF OPERATIONS
Net income for the three months ended March 31, 1994 decreased by $2 million
compared to 1993. The decrease in net income was due primarily to a
reduction in the Company's authorized rate of return on common equity from
11.9 percent in 1993 to 11.0 percent in 1994 partially offset by the growth
in rate base.
Operating revenues and cost of gas distributed for the three months ended
March 31, 1994 decreased by $70 million and $26 million, respectively
compared to the same period in 1993. The decreases reflect lower volumes of
gas sold to core customers as a result of warmer weather in 1994 and
decreases in authorized gas margin and the average unit cost of gas.
RECENT CPUC REGULATORY ACTIVITY The Company and a number of interested
parties (including the Division of Ratepayer Advocates of the CPUC, large
noncore customers and ratepayer groups) have proposed for CPUC approval a
comprehensive settlement (Comprehensive Settlement) of a number of pending
regulatory issues including partial rate recovery of restructuring costs
associated with gas supply contracts (See Note 2 of Notes to Condensed
Consolidated Financial Statements). The Comprehensive Settlement, upon
approval by the CPUC, would permit the Company to recover in utility rates
approximately 80 percent of the contract restructuring costs of $375 million
and accelerated depreciation of related pipeline assets of approximately $130
million, together with interest, over a period of approximately five years.
The Company has filed a financing application with the CPUC primarily for the
borrowing of $425 million to provide for funds needed under the Comprehensive
Settlement. On April 20, 1994, the CPUC announced it would approve the
Comprehensive Settlement provided certain conditions are accepted by the
Company. The Company is currently evaluating the effects of the conditions
on the proposed Comprehensive Settlement. For further discussion, see Note 2
of Notes to Condensed Consolidated Financial Statements.
In August 1993, the Company filed a $134 million rate increase with the CPUC.
Included in this BCAP filing is a rate structure designed to further reduce
subsidies by nonresidential core customers to residential customers by better
aligning residential rates with the cost of providing residential service.
The CPUC, in an interim decision, granted the Company a $121 million revenue
increase effective January 1, 1994. A final CPUC decision is expected in
late 1994.
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SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FACTORS INFLUENCING FUTURE PERFORMANCE. Based on existing ratemaking
policies, future Company earnings and cash flow will be determined primarily
by the allowed rate of return on common equity, the growth in rate base,
noncore pricing and the variance in gas volumes delivered to these customers
versus CPUC-adopted forecast deliveries, the recovery of gas and contract
restructuring costs if the Comprehensive Settlement is not implemented and
the ability of management to control expenses and investment in line with the
amounts authorized by the CPUC to be collected in rates. Also, the Company's
ability to earn revenues in excess of its authorized return from noncore
customers due to volume increases will be substantially eliminated for the
five years of the Comprehensive Settlement described above. This is because
forecasted deliveries in excess of the 1991 throughput levels used to
establish rates were contemplated in estimating the costs of the
Comprehensive Settlement at December 31, 1993. The impact of any future
regulatory restructuring and increased competitiveness in the industry,
including the continuing threat of customers bypassing the Company's system
and obtaining service directly from interstate pipelines, could also affect
the Company's future performance.
The Gas Company's earnings for 1994 will be affected by the reduction in the
authorized rate of return on common equity, reflecting the overall decline in
cost of capital, offset by higher rate base than in 1993. For 1994, the
Company is authorized to earn a rate of return on rate base of 9.22 percent
and an 11.00 percent rate of return on common equity compared to 9.99 percent
and 11.90 percent, respectively, in 1993. Rate base is expected to increase
by approximately 4 percent to 5 percent in 1994.
The Gas Company's operations are affected by a growing number of
environmental laws and regulations. These laws and regulations affect current
operations as well as future expansion and also require clean-up of
facilities no longer in use. Because of expected regulatory treatment, the
Company believes that compliance with these laws will not have a significant
impact on its financial statements. For further discussion of regulatory and
environmental matters, see Notes 2, 3, and 4 of Notes to Condensed
Consolidated Financial Statements.
On January 17, 1994, the Company's service area was struck by a major
earthquake. The result was a temporary disruption to approximately 150,000
customers and damage to some facilities. The financial impact of the damages
related to the earthquake not recovered by insurance is expected to be
recovered in rates under an existing balancing account mechanism, and should
have no impact on the Company's financial statements.
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SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CAPITAL EXPENDITURES. For the three months ended March 31, 1994, capital
expenditures were $40 million. Capital expenditures for utility plant are
expected to be $345 million in 1994 and will be financed by internally-
generated funds and by issuance of long-term debt.
LIQUIDITY
Regulatory accounts receivable decreased $146 million reflecting the recovery
through increased gas rates of prior undercollections under the regulatory
account procedures. As a result, the cash flows generated were available for
additional cash requirements. The decrease in gas in storage inventories of
$50 million was primarily due to the seasonal withdrawals required to meet
the Company's winter demand.
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports of Form 8-K filed during the quarter ended March 31, 1994 were
as follows:
Report Date Item Reported
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January 3, 1994 Item 5 - Other Events
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHERN CALIFORNIA GAS COMPANY
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(Registrant)
Ralph Todaro
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Ralph Todaro
Vice President-Finance and Controller
(Principal Accounting Officer and duly
authorized signatory)
Date: May 16, 1994
