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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 June 30, 1994, or
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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 July 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 Six Months Ended
June 30 June 30
------------------- -----------------
1994 1993 1994 1993
------ ------ ------ ------
(Unaudited)
Operating Revenues $630,298 $633,440 $1,319,452 $1,392,161
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Operating Expenses:
Cost of gas distributed 251,027 237,196 605,114 617,246
Operation and maintenance 192,270 209,143 338,332 391,287
Depreciation 58,077 56,797 115,717 112,302
Income taxes 32,987 36,574 65,785 72,741
Other taxes and franchise
payments 27,843 24,883 58,812 59,136
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Total 562,204 564,593 1,183,760 1,252,712
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Net Operating Revenue 68,094 68,847 135,692 139,449
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Other Income and (Deductions):
Interest income 702 575 980 1,340
Regulatory interest 985 637 2,049 674
Allowance for equity funds used
during construction 771 1,302 1,484 2,498
Income taxes on non-operating
income (1,211) (515) (964) (1,446)
Other - net (1,126) (1,703) (2,587) (2,290)
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Total 121 296 962 776
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Interest Charges and (Credits):
Interest on long-term debt 22,254 23,311 44,511 49,170
Other interest 609 (820) 3,248 (1,020)
Allowance for borrowed funds
used during construction (436) (810) (842) (1,554)
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Total 22,427 21,681 46,917 46,596
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Net Income 45,788 47,462 89,737 93,629
Dividends on Preferred Stock 2,565 2,437 5,005 4,970
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Net Income Applicable to
Common Stock $ 43,223 $ 45,025 $ 84,732 $ 88,659
======== ======== ========= ==========
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)
June 30 December 31
1994 1993
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(Unaudited)
Utility Plant $5,502,189 $5,422,549
Less accumulated depreciation 2,300,251 2,205,043
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Utility plant - net 3,201,938 3,217,506
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Current Assets:
Cash and cash equivalents 34,365 14,533
Accounts and notes receivable - net 312,148 503,308
Regulatory accounts receivable 379,200 443,718
Gas in storage 10,943 53,114
Materials and supplies 21,180 20,618
Prepaid expenses 15,992 22,971
Deferred income taxes 23,220
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Total current assets 797,048 1,058,262
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Deferred Charges 711,425 674,452
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Total $4,710,411 $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)
June 30 December 31
1994 1993
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(Unaudited)
Capitalization:
Common equity:
Common stock $ 834,889 $ 834,889
Retained earnings 635,376 607,250
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Total common equity 1,470,265 1,442,139
Preferred stock 196,551 196,551
Long-term debt 1,205,400 1,235,622
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Total capitalization 2,872,216 2,874,312
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Current Liabilities:
Short-term debt 179,778 267,000
Accounts payable 402,727 417,001
Accounts payable-affiliates 326,046 513,306
Accrued taxes and franchise payments 76,273 21,907
Deferred income taxes 39,542
Long-term debt due within one year 31,005 5
Accrued interest 32,612 35,007
Other accrued liabilities 122,077 129,367
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Total current liabilities 1,170,518 1,423,135
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Deferred Credits:
Customer advances for construction 46,205 45,493
Deferred income taxes 398,250 399,535
Deferred investment tax credits 71,481 72,993
Other deferred credits 151,741 134,752
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Total deferred credits 667,677 652,773
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Total $4,710,411 $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)
Six Months Ended
June 30
-----------------
1994 1993
------ ------
(Unaudited)
Cash Flows From Operating Activities:
Net income $ 89,737 $ 93,629
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 115,718 112,302
Deferred income taxes 10,393 8,324
Other (2,136) (3,939)
Net change in other working capital
components 83,829 165,729
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Net cash provided by operating
activities 297,541 376,045
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Cash Flows from Investing Activities:
Expenditures for utility plant ( 98,708) (115,902)
Increase in other assets ( 30,072) (22,391)
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Net cash used in investing activities (128,780) (138,293)
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Cash Flows from Financing Activities:
Dividends ( 61,707) (70,401)
Issuance of long-term debt 356,000
Payments of long-term debt (336,669)
Redemption of preferred stock (75,000)
Sale of preferred stock 75,000
Decrease in short-term debt ( 87,222) (188,000)
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Net cash used in financing activities (148,929) (239,070)
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Increase in Cash and Cash Equivalents 19,832 (1,318)
Cash and Cash Equivalents - January 1 14,533 1,318
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Cash and Cash Equivalents - June 30 $ 34,365 $
======== =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period:
Interest (net of amount capitalized) $53,507 $54,681
======= ========
Income Taxes $30,819 $127,708
======= ========
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 revenues 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
approvals.
COMPREHENSIVE SETTLEMENT OF REGULATORY ISSUES. The Company and a number of
interested parties (including the Division of Ratepayer Advocates (DRA) of
the California Public Utilities Commission (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 was approved by the
CPUC on July 20, 1994 and will permit the Company to recover in utility
rates approximately 80 percent of the contract restructuring costs of $375
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SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 obtained authorization from the CPUC for the borrowing
of up to $425 million primarily to provide for funds needed under the
Comprehensive Settlement.
3. GAS COST INCENTIVE MECHANISM
On March 16, 1994, the CPUC approved a new process for evaluating SoCalGas'
gas 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. As of June 30, 1994, five gas manufacturing sites
had been remediated and certified by California environmental authorities.
One industrial site had also been removed from the list of environmental
liabilities through settlement and subsequent release by the committee of
responsible parties and federal authorities. There are 37 gas manufacturing
sites which remain to be investigated or remediated, in addition to one
landfill site and one industrial disposal site. 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 recommended 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 June 30, 1994, the total postemployment
benefit liability was $40 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.
RESULTS OF OPERATIONS
Net income for the three and six months ended June 30, 1994 decreased by $2
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SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
million and $4 million, respectively, compared to the same periods in 1993.
The decrease for both the three months and six months ended June 30, 1994 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 and higher earnings from the noncore
market.
Operating revenues for the three and six months ended June 30, 1994 decreased
$3 million and $73 million, respectively, when compared to the same periods
in 1993. The decreases in operating revenues for the three and six months
ended June 30, 1994 reflect decreases in authorized gas margin and the
average unit cost of gas partially offset by an increase in noncore volumes
transported. Cost of gas distributed for the three months ended June 30,
1994 increased $14 million compared to 1993. Cost of gas distributed for the
six months ended June 30, 1994 decreased $12 million compared to 1993. The
increase in cost of gas distributed for the three months ended June 30, 1994
reflects an increase in volumes sold to core customers as a result of colder
weather in 1994 partially offset by a decrease in the average unit cost of
gas. The decrease in cost of gas distributed for the six months ended June
30, 1994, reflects lower volumes of gas sold to core customers in 1994 and a
decrease in 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) 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 was
approved by the CPUC on July 20, 1994 and will 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 obtained auhtorization from the
CPUC for the borrowing of up to $425 million primarily to provide for funds
needed under the Comprehensive Settlement.
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 throughput 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 beginning August 1, 1994 per
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.
In April, the CPUC announced it will review the structure of California's
electric utility service, a review that could lead to significant changes in
the way California's investor-owned electric utilities do business. The
CPUC's proposal has no immediate effect on the Company's operations, although
future volumes of natural gas the Company transports for electric utilities
could be affected. The Company is closely monitoring the process and has
taken an active role in the proceedings because of its considerable
experience with natural gas deregulation and because the treatment of some
electric utility regulatory issues could have indirect implications for the
Company.
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
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SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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.
CAPITAL EXPENDITURES. For the six months ended June 30, 1994, capital
expenditures were $99 million. Capital expenditures for utility plant are
expected to be approximately $300 million in 1994 and will be financed by
internally-generated funds and by issuance of long-term debt.
LIQUIDITY
Regulatory accounts receivable decreased $65 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
$42 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) There were no reports on Form 8-K filed during the quarter ended June
30, 1994.
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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)
/s/ Ralph Todaro
- - -------------------------------
Ralph Todaro
Vice President-Finance and Controller
(Principal Accounting Officer and duly
authorized signatory)
Date: August 12, 1994
