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Sempra Energy | Yes | X | No | |||||||||||||
San Diego Gas & Electric Company | Yes |
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Pacific Enterprises | Yes | No | X | |||||||||||||
Southern California Gas Company | Yes | No | X | |||||||||||||
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Sempra Energy | Yes |
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San Diego Gas & Electric Company | Yes | No | X | |||||||||||||
Pacific Enterprises | Yes | No | X | |||||||||||||
Southern California Gas Company | Yes | No | X | |||||||||||||
Indicate by check mark whether the | ||||||||||||||||
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Sempra Energy | Yes | X | No | |||||||||||||
San Diego Gas & Electric Company | Yes | No | ||||||||||||||
Pacific Enterprises | Yes | No | ||||||||||||||
Southern California Gas Company | Yes | No | ||||||||||||||
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a | ||||||||||||||||
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Large | Accelerated filer | Non-accelerated filer | Smaller reporting company | |||||||||||||
Sempra Energy | [ X ] | [ ] |
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San Diego Gas & Electric Company | [ ] |
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Pacific Enterprises | [ ] | [ ] | [ X ] | [ ] | ||||||||||||
Southern California Gas Company | [ ] | [ ] | [ X ] | [ ] | ||||||||||||
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Sempra Energy | Yes |
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Pacific Enterprises | Yes | No | X | |||||||||||||
Southern California Gas Company | Yes | No | X | |||||||||||||
Exhibit Index on page |
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Aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, | ||||||||||
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Sempra Energy | $12.1 billion (based on the price at which the common equity was last sold as of the last business day of the most recently completed second fiscal quarter) | |||||||||
San Diego Gas & Electric Company | $0 | |||||||||
Pacific Enterprises | $0 | |||||||||
Southern California Gas Company | $0 | |||||||||
Common Stock outstanding, without par value, as of February 23, 2010: | ||||||||||
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Sempra Energy | 247,003,443 shares | |||||||||
San Diego Gas & Electric Company | Wholly owned by Enova Corporation, which is wholly owned by Sempra Energy | |||||||||
Pacific Enterprises | Wholly owned by Sempra Energy | |||||||||
Southern California Gas Company | Wholly owned by Pacific Enterprises | |||||||||
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DOCUMENTS INCORPORATED BY REFERENCE: | ||||||||||
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Portions of the Sempra Energy Proxy Statement prepared for the | ||||||||||
Portions of the San Diego Gas & Electric Company, Southern California Gas Company and Pacific Enterprises Information Statement are incorporated by reference into Part III. | ||||||||||
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SEMPRA ENERGY FORM 10-K | |||
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Information Regarding Forward-Looking Statements | 3 | ||
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PART I |
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Item 1. | Business | 4 | |
Description of Business | 5 | ||
Company Websites | 5 | ||
Government Regulation | 5 | ||
California Natural Gas Utility Operations | 7 | ||
Electric Utility Operations | 9 | ||
Rates and Regulation – Sempra Utilities | 12 | ||
Sempra Global | 12 | ||
Environmental Matters | 14 | ||
Executive Officers of the Registrants | 15 | ||
Other Matters | 17 | ||
Item 1A. | Risk Factors |
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Item 1B. | Unresolved Staff Comments | 25 | |
Item 2. | Properties |
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Item 3. | Legal Proceedings |
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Item 4. | Submission of Matters to a Vote of Security Holders |
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PART II |
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Item 5. | Market for Registrant's Common Equity, |
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Item 6. | Selected Financial Data |
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Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
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Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
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Item 8. | Financial Statements and Supplementary Data |
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Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial |
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Item 9A. | Controls and Procedures |
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Item 9B. | Other Information | 28 | |
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PART III |
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Item 10. | Directors, Executive Officers and Corporate Governance |
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Item 11. | Executive Compensation |
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Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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Item 13. | Certain Relationships and Related Transactions, and Director Independence |
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Item 14. | Principal Accountant Fees and Services |
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SEMPRA ENERGY FORM 10-K |
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PART IV |
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Item 15. | Exhibits and Financial Statement Schedules |
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Sempra Energy: Consent of Independent Registered Public Accounting Firm and Report on Schedule | 31 | |||
San Diego Gas & Electric Company: Consent of Independent Registered Public Accounting Firm |
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Southern California Gas Company: Consent of Independent Registered Public Accounting Firm | 33 | |||
Pacific Enterprises: Report of Independent Registered Public Accounting Firm | 34 | |||
Schedule I – Sempra Energy Condensed Financial Information of Parent | 35 | |||
Schedule I – Pacific Enterprises Condensed Financial Information of Parent | 39 | |||
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Signatures |
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Exhibit Index |
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Glossary |
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This combined Form 10-K is separately filed by Sempra Energy, San Diego Gas & Electric Company, Pacific Enterprises and Southern California Gas Company. Information contained herein relating to any individual company is filed by such company on its own behalf. Each company makes representations only as to itself and makes no other representation whatsoever as to any other company.
You should read this report in its entirety as it pertains to each respective reporting company. No one section of the report deals with all aspects of the subject matter. Separate Item 6 and 8 sections are provided for each reporting company, except for the Notes to Consolidated Financial Statements. The Notes to Consolidated Financial Statements for all of the reporting companies are combined. All Items other than 6 and 8 are combined for the reporting companies.
3
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report containsWe make statements in this report that are not historical fact and constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. TheForward-looking statements are necessarily based upon assumptions with respect to the future, involve risks and uncertainties, and are not guarantees of performance. These forward-looking statements represent our estimates and assumptions only as of the date of this report.
In this report, when we use words "estimates,"such as "believes," "expects," "anticipates," "plans," "estimates," "projects," "contemplates," "intends," "depends," "should," "could," "would," "may," "could,"potential," "would" and "should""target," "goals," or similar expressions, or discussions ofwhen we discuss our strategy, plans or of plansintentions, we are intended to identifymaking forward-looking statements. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties
Factors, among others, that could cause our actual results and assumptions. Future results mayfuture actions to differ materially from those expresseddescribed in these forward-looking statements.statements include
§
Forward-looking statements are necessarily based upon various assumptions involving judgments with respect to the future and other risks, including, among others, local, regional, national and nationalinternational economic, competitive, political, legislative and regulatory conditions and developments;
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actions by the California Public Utilities Commission, the California State Legislature, the California Department of Water Resources, the Federal Energy Regulatory Commission, the Federal Reserve Board, and other regulatory and governmental bodies in the United States; States and other countries in which we operate;
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capital markets conditions and inflation, rates, interest rates and exchange rates;
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energy and trading markets, including the timing and extent of changes and volatility in commodity prices;
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the availability of electric power, natural gas and liquefied natural gas;
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weather conditions and conservation efforts;
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war and terrorist attacks;
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business, regulatory, environmental and legal decisions and requirements;
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the status of deregulation of retail natural ga sgas and electricity delivery;
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the timing and success of business development efforts;
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the resolution of litigation; and
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other uncertainties, all of which are difficult to predict and many of which are beyond the control of the company. Readers are cautionedour control.
We caution you not to rely unduly on any forward-looking statements and are urged tostatements. You should review and consider carefully the risks, uncertainties and other factors whichthat affect the company'sour business as described in this report and other reports filed by the company from time to timethat we file with the Securities and Exchange Commission.
4
PART I
ITEM 1. BUSINESS AND RISK FACTORS
Description of BusinessDESCRIPTION OF BUSINESS
AWe provide a description of San Diego Gas & Electric Company (SDG&E or the company) is givenSempra Energy and its subsidiaries in "Management's Discussion and Analysis of Financial Condition and Results of Operations" herein.
SDG&E’s common stock is wholly owned by Enova Corporation,in the 2009 Annual Report to Shareholders (Annual Report), which is a wholly owned subsidiary of incorporated by reference.
This report includes information for the following separate registrants:
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Sempra Energy a California-based Fortune 500and its consolidated entities
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San Diego Gas & Electric Company (SDG&E)
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Pacific Enterprises (PE), the holding company. The financial statements herein are the Consolidated Financial Statements of SDG&E, its sole subsidiary, SDG&E Funding LLC, and a variable interest entity of which it is the primary beneficiary. Sempra Energy also indirectly owns the common stock of company for Southern California Gas Company
§
Southern California Gas Company (SoCalGas).
References in this report to "we," "our" and "our company" are to Sempra Energy and its subsidiaries, collectively. SDG&E and SoCalGas are collectively referred to herein as "thethe Sempra Utilities."
Sempra Energy has five separately managed reportable segments consisting of SDG&E, SoCalGas, Sempra Commodities, Sempra Generation and Sempra Pipelines & Storage. Sempra Commodities, Sempra Generation, Sempra Pipelines & Storage, and an additional business unit, Sempra LNG (liquefied natural gas) are subsidiaries of Sempra Global. Sempra Global is a holding company for most of our subsidiaries that are not subject to California utility regulation.
SDG&E, PE and SoCalGas are subsidiaries of Sempra Energy. Sempra Energy directly or indirectly owns all the common stock and substantially all of the voting stock of each of the three companies.
Sempra Commodities - Pending Transaction
In April 2008, Sempra Energy formed a partnership with The Royal Bank of Scotland plc (RBS) to purchase and operate our commodities-marketing businesses, which generally comprised the Sempra Commodities segment. In November 2009, RBS announced its intention to divest its interest in this joint venture, RBS Sempra Commodities LLP (RBS Sempra Commodities), following a directive from the European Commission to dispose of certain assets. On February 16, 2010, Sempra Energy, RBS and the partnership entered into an agreement with J.P. Morgan Ventures Energy Corporation (J.P. Morgan Ventures), whereby J.P. Morgan Ventures will purchase the following businesses from the joint venture:
§
the global oil, metals, coal, emissions (other than emissions related to the joint venture’s North American power business), plastics, agricultural commodities and concentrates commodities trading and marketing business
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the European power and gas business
§
the investor products business
RBS Sempra Commodities will retain its North American power and natural gas trading businesses and its retail energy solutions business. These businesses have historically generated 40 to 60 percent of total earnings of the businesses in the partnership, and have averaged more than 50 percent.
Subject to obtaining various regulatory approvals and other conditions, the transaction is expected to close in the second quarter of 2010. J.P. Morgan Ventures will pay an aggregate purchase price equal to the estimated book value at closing of the businesses purchased, generally computed on the basis of international financial reporting standards (as adopted by the European Union), plus an amount equal to $468 million. Sempra Energy will be entitled to 53 -1/3 percent of the aggregate purchase price, and RBS will be entitled to 46-2/3 percent of the aggregate purchase price.
In connection with the transaction, we and RBS entered into a letter agreement to negotiate, prior to closing of the transaction, definitive documentation to amend certain provisions of the Limited Liability Partnership Agreement dated April 1, 2008 between Sempra Energy and RBS. As RBS continues to be obligated to divest its remaining interest in the partnership, the letter agreement also provides for negotiating the framework for the entertaining bids for the remaining part of the partnership’s business.
We provide further discussion about RBS Sempra Commodities and the pending transaction with J.P. Morgan Ventures in Notes 3, 4, 6 and 20 of the Notes to Consolidated Financial Statements. The partnership is also discussed in "Sempra Global – Competition - Sempra Commodities" below.
COMPANY WEBSITES
Company Websitewebsite addresses are:
The company's website address isSempra Energy – http://www.sdge.com and Sempra Energy’s website address iswww.sempra.com
SDG&E – http://www.sempra.com. The company makeswww.sdge.com
PE/SoCalGas – http://www.socalgas.com
We make available free of charge via a hyperlink on itsour website itsour annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.
Risk Factors
The following risk factors and all other information contained in this report should be considered carefully when evaluating the company. These risk factors could affect the actual resultscharters of the companyaudit, compensation and cause such results to differ materially from those expressed incorporate governance committees of Sempra Energy’s board of directors (the board), the board's corporate governance guidelines, and Sempra Energy's code of business conduct and ethics for directors and officers are posted on Sempra Energy's website.
SDG&E and SoCalGas make available free of charge via a hyperlink on their websites their annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any forward-looking statements made by or on behalf of the company. Other risks and uncertainties, in additionamendments to those that are described below, may also impair its business operations. If any of the following risks occurs, the company's business, cash flows, results of operations and financial condition could be seriously harmed. These risk factors should be read in conjunctionreports as soon as reasonably practicable after such material is electronically filed with the other detailed information concerningthe company set forth in the Notes to Consolidated Financial Statements and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" herein.
SDG&E is subject to extensive regulation by state, federal and local legislation and regulatory authorities, which may adversely affect the operations, performance and growth of its business.
The California Public Utilities Commission (CPUC), which consists of five commissioners appointed by the Governor of California for staggered six-year terms, regulates SDG&E's rates (except electric transmission rates, which are regulated by the Federal Energy Regulatory Commission (FERC)) and conditions of service, sales of securities, capital structure, rates of return, rates of depreciation, the uniform systems of accounts and long-term resource procurement. The CPUC conducts various reviews of utility performance (which may include reasonableness and prudency reviews of capital expenditures, natural gas and electricity procurement, and other costs, and reviews and audits of the company's records) and affiliate relationships and conducts audits and investigations into various matters which may, from time to time, result in disallowances and penalties adversely affecting earnings and cash flows. Various proceedings involving the CPUC and relating to SDG&E's rates, costs, incentive mechanisms and performance-based regulation are discussed in Notes 10 and 11 of the Notes to Consolidated Financial
5
Statements and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" herein.
The company may expend funds prior to receiving regulatory approval to proceed with a major capital project. If the project does not receive regulatory approval or management decides not to proceed with the project, the company may not be able to recover the amount expended for that project.
Periodically,SDG&E's rates are approved by the CPUC based on authorized capital expenditures and operating costs. If the company's actual capital expenditures and operating costs were to exceed the amount approved by the CPUC, it could adversely affect earnings and cash flows.
To promote efficient operations and improved productivity and to move away from reasonableness reviews and disallowances, the CPUC applies Performance-Based Regulation (PBR)furnished to the Sempra Utilities. Under PBR, regulators require future income potential to be tied to achieving or exceeding specific performanceSecurities and operating income goals, rather than relying solely on expanding utility plant to increase earnings. The areas that are eligible for PBR rewards are: operational incentives based on measurementsExchange Commission.
Printed copies of safety, reliability and customer service; energy efficiency rewards based on the effectivenessall of the programs; and natural gas procurement rewards. Although SDG&E has received PBR rewards in the past, there can be no assurance that it will receive rewards in the future, or that they would be of comparable amounts. Additionally, if the company fails to achieve certain minimum performance levels established under the PBR mechanisms, itthese materials may be asses sed financial disallowances or penalties which could negatively affect earnings and cash flows.
The FERC regulates electric transmission rates, the transmission and wholesale sales of electricity in interstate commerce, transmission access, the rates of return on transmission investments and other similar matters involving SDG&E.
The company may be adversely affectedobtained by new regulations, decisions, orders or interpretations of the CPUC, FERC or other regulatory bodies. New legislation, regulations, decisions, orders or interpretations could change how the company operates, could affect its abilitywriting to recover various costs through rates or adjustment mechanisms, or could require the company to incur additional expenses.
The construction and expansion of the company’s electric transmission and distribution facilities and natural gas pipelines require numerous permits and approvals from federal, state and local governmental agencies. If there are delays in obtaining required approvals, or if the company fails to obtain or maintain required approvals or to comply with applicable laws or regulations, its business, cash flows, results of operations and financial condition could be materially adversely affected.
SDG&E may incur substantial costs and liabilities as a result of its ownership of nuclear facilities.
SDG&E has a 20-percent ownership interest in the San Onofre Nuclear Generating Station (SONGS), a 2,150-megawatt (MW) nuclear generating facility near San Clemente, California. The Nuclear Regulatory Commission (NRC) has broad authority under federal law to impose licensing and safety-related requirements for the operation of nuclear generation facilities. SDG&E's ownership interest in SONGS subjects it to the risks of nuclear generation, which include:
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the potential harmful effects on the environment and human health resulting from the operation of nuclear facilities and the storage, handling and disposal of radioactive materials;
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limitations on the amounts and types of insurance commercially available to cover losses that might arise in connection with nuclear operations; and
6
·
uncertainties with respect to the technological and financial aspects of decommissioning nuclear plantsour Corporate Secretary at the end of their licensed lives.
The Sempra Utilities' future results of operations, financial condition and cash flows may be materially adversely affected by the outcome of pending litigation against them.
Sempra Energy, and the Sempra Utilities are defendants in numerous lawsuits. They have expended and continue to expend substantial amounts defending these lawsuits and in connection with related investigations and regulatory proceedings and have established reserves that they believe to be appropriate for their ultimate resolution. However, uncertainties inherent in complex legal proceedings make it difficult to estimate with any degree of certainty the costs and effects of resolving legal matters. Accordingly, costs ultimately incurred may differ materially from estimated costs and could materially adversely affect Sempra Energy's and the Sempra Utilities' business, cash flows, results of operations and financial condition.101 Ash Street, San Diego, CA 92101-3017.
These proceedings are discussed in Note 12 of the Notes to Consolidated Financial Statements and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" herein.
Future environmental compliance costs could adversely affect SDG&E's profitability.
SDG&E is subject to extensive federal, state and local statutes, rules and regulations relating to environmental protection, including, in particular, global warming and greenhouse gas (GHG) emissions. It is required to obtain numerous governmental permits, licenses and other approvals to construct and operate its business. The company also is generally responsible for all on-site liabilities associated with the environmental condition of its electric generation facilities and other energy projects, regardless of when the liabilities arose and whether they are known or unknown. If SDG&E fails to comply with applicable environmental laws, it may be subject to penalties, fines and/or curtailments of its operations.
The scope and effect of new environmental laws and regulations, including their effects on current operations and future expansions, are difficult to predict. Increasing international, national, regional and state-level concerns as well as new or proposed legislation and regulation may have substantial effects on operations, operating costs, and the scope and economics of proposed expansion. In particular, state-level laws and regulations as well as proposed national and international legislation and regulation relating to GHG emissions (including carbon dioxide, methane, nitrogen oxide, hydrofluorocarbon, perfluorocarbon and sulfur hexafluoride) may limit or otherwise adversely affect the operations of the company. The companymay be affected if costs are not recoverable in rates and because the effects of significantly tougher standards may cause rates to increase to levels that substantially reduce customer demand and growt h. In addition, the company may be subject to penalties if certain mandated renewable energy goals are not met. Further discussion of these matters is provided in Notes 10 and 12 of the Notes to Consolidated Financial Statements herein.
In addition, existing and future laws and regulation on mercury, nitrogen and sulfur oxides, particulates or other emissions could result in requirements for additional pollution control equipment or emission fees and taxes that could adversely affect the company. Moreover, existing rules and regulations may be interpreted or revised in ways that may adversely affect the company and its facilities and operations. Additional information on these matters is provided in Note 10 of the Notes to the Consolidated Financial Statements herein.
7
Natural disasters, catastrophic accidents or acts of terrorism could materially adversely affect the company's business, earnings and cash flows.
Like other major industrial facilities, the company's generation facilities, electric transmission and distribution facilities, and natural gas pipelines and storage facilities may be damaged by natural disasters, catastrophic accidents or acts of terrorism. Any such incidents could result in severe business disruptions, significant decreases in revenues or significant additional costs to the company, which could have a material adverse effect on the company's financial condition, earnings and cash flows. Given the nature and location of these facilities, any such incidents also could cause fires, leaks, explosions, spills or other significant damage to natural resources or property belonging to third parties, or personal injuries, which could lead to significant claims against the company. Insurance coverage may become unavailable for certain of these risks and the insurance proceeds received for any loss of or damage to any of its facilities, or for a ny loss of or damage to natural resources or property or personal injuries caused by its operations, may be insufficient to cover the company'slosses or liabilities without materially adversely affecting the company's financial condition, earnings and cash flows.
The company's cash flows, ability to pay dividends and ability to meet its debt obligations largely depend on the performance of its utility operations.
The company's utility operations are the major source of liquidity. The company's ability to pay dividends on its preferred stock and meet its debt obligations is largely dependent on the sufficiency of utility earnings and cash flows in excess of operational needs.
GOVERNMENT REGULATION
The most significant government regulation affecting Sempra Energy is the regulation of our utility subsidiaries.
California Utility Regulation
The CPUC, which Sempra Utilities are regulated in California by the California Public Utilities Commission (CPUC), the California Energy Commission (CEC), and the California Air Resources Board (CARB).
The California Public Utilities Commission:
§
consists of five commissioners appointed by the Governor of California for staggered, six-year terms, terms.
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regulates SDG&E's&E’s and SoCalGas’ rates and conditions of service, sales of securities, rates of return, capital structure, rates of depreciation, uniform systems of accounts and long-term resource procurement, except as described below underin "United States Utility Regulation." The CPUC also
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has jurisdiction over the proposed construction of major new electric transmission, electric distribution, and natural gas storage, transmission and distribution facilities. The CPUC facilities in California.
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conducts various reviews and audits of utility performance conducts audits forand compliance with regulatory guidelines, and conducts investigations into various matters, such as deregulation, competition and the environment, to determine its future policies. The CPUC also
§
regulates the interactions and transactions of the Sempra Utilities with Sempra Energy and its other affiliates. Further
We provide further discussion is provided in Note 11Notes 15 and 16 of the Notes to Consolidated Financial Statements herein.in the Annual Report.
The California Energy Commission (CEC) establishesSDG&E is also subject to regulation by the CEC, which publishes electric demand forecasts for the state and for specific service territories. Based upon these forecasts, the CEC CEC:
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determines the need for additional energy sources and for conservation programs. The CEC programs;
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sponsors alternative-energy research and development projects, projects;
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promotes energy conservation programs and programs;
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maintains a statewide plan of action in case of energy shortages. In addition, the CEC shortages; and
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certifies power-plant sites and related facilities within California.
The CEC conducts a 20-year forecast of supply availabilityavailable supplies and prices for every market sector consumingthat consumes natural gas in California. This forecast includes resource evaluation, pipeline capacity needs, natural gas demand and wellhead prices, and costs of transportation and distribution. This analysis is one of many resource materials used to support the Sempra Utilities’ long-term investment decisions.
The State of California requires certain California electric retail sellers, including SDG&E, to deliver 20 percent of their 2010 retail demand from renewable energy sources. The rules governing this requirement, administered by both the CPUC and the CEC, are generally known as the Renewables Portfolio Standard (RPS) Program. Certification of a generation project by the CEC as an Eligible
Renewable Energy Resource (ERR) allows the purchase of output from a generation facility to be counted towards fulfillment of the RPS Program requirements. This may affect the demand for output from renewables projects developed by Sempra Generation, particularly from California utilities. Final certification as an ERR for Sempra Generation’s El Dorado solar generation facility was approved in June 2009.
8
In September 2009, the Governor of California issued an Executive Order which directs the California utilities to procure 33 percent of their electric energy requirements from renewable sources by 2020. This Executive Order designates the CARB as the agency responsible for establishing the compliance rules and regulations for this program.
CaliforniaAssembly Bill 32, the California Global Warming Solutions Act of 2006, makes the California Air Resources Board (CARB) responsibleassigns responsibility to CARB for monitoring and establishing policies for reducing GHGgreenhouse gas (GHG) emissions. The bill requires CARB to develop and adopt a comprehensive plan for achieving real, quantifiable and cost-effective GHG emission reductions, including among other things, a statewide GHG emissions cap, mandatory reporting rules, and regulatory and market mechanisms to achieve reductions of GHG emissions. CARB is a part ofdepartment within the California Environmental Protection Agency, an organization which reports directly to the Governor's Office in the Executive Branch of California State Government. As the CARB formulates its plan, provisions of the plan may apply to the Sempra Utilities.
United States Utility Regulation
The Sempra Utilities are also regulated by the Federal Energy Regulatory Commission (FERC) and the Nuclear Regulatory Commission (NRC).
In the case of SDG&E, the FERC regulates the interstate sale and transportation of natural gas, the transmission and wholesale sales of electricity in interstate commerce, transmission access, rates of return on transmission investment, the uniform systems of accounts, rates of depreciation and electric rates involving sales for resale.
In the case of SoCalGas, the FERC regulates the interstate sale and transportation of natural gas and the uniform systems of accounts.
The NRC oversees the licensing, construction and operation of nuclear facilities in the United States.States, including the San Onofre Nuclear Generating Station (SONGS), in which SDG&E owns a 20-percent interest. NRC regulations require extensive review of the safety, radiological and environmental aspects of these facilities. Periodically, the NRC requires that newly developed data and techniques be used to reanalyze the design of a nuclear power plant and, as a result, requiresmay require plant modifications as a condition of continued operationoperation.
Sempra Pipelines & Storage operates Mobile Gas Service Corporation (Mobile Gas), a small natural gas distribution utility serving Southwest Alabama that is regulated by the Alabama Public Service Commission (APSC). The FERC regulates Mobile Gas’ interstate transportation of natural gas, the uniform systems of accounts, and rates of depreciation.
Local Regulation Within the U.S.
SoCalGas has natural gas franchises with the 243 separate counties and cities in some cases.
Local Regulation
its service territory. These franchises allow SoCalGas to locate, operate and maintain facilities for the transmission and distribution of natural gas. Most of the franchises have indefinite lives with no expiration date. Some franchises have fixed expiration dates, ranging from 2010 to 2048.
SDG&E has
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electric franchises with the two counties and the 26 cities in its electric service territory, and
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natural gas franchises with the one county and the 18 cities in its natural gas service territory.
These franchises allow SDG&E to locate, operate and maintain facilities for the transmission and distribution of electricity and/or natural gas in public places.gas. Most of the franchises have indefinite lives except forwith no expiration dates. Some franchises have fixed expiration dates, ranging from 2012 to 2035.
Sempra Generation, Sempra LNG and Sempra Pipelines & Storage have operations or development projects in Alabama, Arizona, California, Indiana, Louisiana, Mississippi, Nevada, Texas, and Hawaii. These entities are subject to state and local laws, and to regulations in the electricstates in which they operate.
Other Regulation
RBS Sempra Commodities is subject to regulation by the U.K. Financial Services Authority, the New York Mercantile Exchange, the Commodity Futures Trading Commission, the FERC, the London Metals Exchange, NYSE Euronext, the U.S. Federal Reserve Bank and the National Futures Association.
In the United States, the FERC regulates Sempra Generation’s, Sempra Pipelines & Storage’s and Sempra LNG’s operations. Sempra Pipelines & Storage also owns an interest in the Rockies Express Pipeline, a natural gas franchises withpipeline which operates in several states in the citiesUnited States and is subject to regulation by the FERC.
Sempra Pipelines & Storage’s Bay Gas Storage Company (Bay Gas) is regulated by the APSC and its intrastate storage contracts are subject to APSC approval. Bay Gas provides long-term services for customers that include storage and transportation of (with expiration datesnatural gas from interstate and intrastate sources. As an intrastate facility, Bay Gas is regulated by the FERC as indicated) Encinitas (2012), Chula Vista (2015), San Diego (2020) and Coronado (2028)a 311 facility, and the FERC has also approved market-based rates for interstate storage services and cost-based rates for transportation services.
Several of our segments operate in Mexico as follows:
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Sempra Generation owns and operates a natural gas-fired power plant in Baja California, Mexico
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Sempra Pipelines & Storage’s Mexican utilities build and operate natural gas franchises with the county of San Diego (2029)distribution systems in Mexicali, Chihuahua, and the La Laguna-Durango zone in north-central Mexico
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Sempra Pipelines & Storage transports gas between the U.S. border and Baja California, Mexico
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Sempra LNG owns and operates the Energía Costa Azul LNG receipt terminal located in Baja California, Mexico
These operations are subject to regulation by the Comisión Reguladora de Energía and by the labor and environmental agencies of city, of Escondido (2035).state and federal governments in Mexico.
Sempra Pipelines & Storage also has investments in South America that are subject to laws and regulations in the localities and countries in which they operate.
Licenses and Permits
SDG&E obtainsThe Sempra Utilities obtain numerous permits, authorizations and licenses in connection with the transmission and distribution of natural gas and electricity. Theyelectricity and the operation and construction of related assets. Because these permits, authorizations and licenses require periodic renewal, which results in continuing regulationthe Sempra Utilities are continuously regulated by the granting agency.agencies.
Our other subsidiaries are also required to obtain numerous permits, authorizations and licenses in the normal course of business. Some of these permits, authorizations and licenses require periodic renewal.
OtherSempraGeneration and its subsidiaries obtain a number of permits, authorizations and licenses in connection with the construction and operation of power generation facilities, and in connection with the wholesale distribution of electricity.
Sempra Pipelines & Storage’s Mexican subsidiaries obtain numerous permits, authorizations and licenses for their natural gas distribution and transmission systems from the local governments where the service is provided. Sempra Pipelines & Storage’s U.S. operations obtain licenses and permits for natural gas storage facilities and pipelines.
Sempra LNG obtains licenses and permits for the construction and operation of LNG facilities.
We describe other regulatory matters are described in Notes 1015 and 1116 of the Notes to Consolidated Financial Statements herein.in the Annual Report.
CALIFORNIA NATURAL GAS UTILITY OPERATIONS
The company is engaged in the purchase, saleSoCalGas and distribution ofSDG&E sell, distribute, and transport natural gas. SoCalGas purchases and stores natural gas for itself and SDG&E on a combined portfolio basis and provides natural gas storage services for others. The company'sSempra Utilities’ resource planning, natural gas procurement, contractual commitments, and related regulatory matters are discussed below andbelow. We also provide further discussion in the Annual Report in "Management's Discussion and Analysis of Financial Condition and Results of Operations"Operations," and in Notes 1116 and 1217 of the Notes to Consolidated Financial Statements herein.Statements.
Customers
For regulatory purposes, end-use customers are classified as either core or noncore customers. Core customers are primarily residential and small commercial and industrial customers, without alternative fuel
9
capability.customers. Noncore customers at SoCalGas consist primarily of electric generation, wholesale, large commercial, industrial, and enhanced oil recovery customers. Noncore customers at SDG&E consist primarily of electric generation, and large commercial and industrial customers.
Most core customers purchase natural gas directly from the company.SoCalGas or SDG&E. While core customers are permitted to aggregate their natural gas requirement and purchase directly from producers, marketers or brokers, or producers, the company continues to beSempra Utilities are obligated to provide reliable supplies of natural gas to serve the requirements of their core customers. Noncore customers are responsible for the procurement of their natural gas requirements.
In 2009, SoCalGas added 27,000 new customer natural gas meters at a growth rate of 0.5 percent; in 2008, it added 41,000 new meters at a growth rate of 0.7 percent. In 2009, SDG&E added 4,200 new customer natural gas meters at a growth rate of 0.5 percent; in
2008, it added 3,000 new meters at a growth rate of 0.4 percent. We expect levels to remain low in 2010, and both SoCalGas and SDG&E expect new meter growth in 2010 to be comparable to that in 2009.
Natural Gas Procurement and Transportation
Most of the natural gas purchased and delivered by the company is produced outside of California, primarily in the southwestern U.S., U.S. Rockies and Canada. Thecompany purchasesSoCalGaspurchases natural gas under short-term and long-term contracts which are primarily based on monthly spot-market prices.
SDG&E has natural gas transportation contracts with various interstate pipelines that expire on various dates between 2008 and 2023. SDG&E currentlyfor the Sempra Utilities’ core customers. SoCalGas purchases natural gas on a spot basis from Canada, the U.S. Rockies and the southwestern U.S. to fill its long-termmeet customer requirements and maintain pipeline capacityreliability. It also purchases some California natural gas production and purchases additional spot-market supplies delivered directly to California for its remaining requirements. AllNatural gas prices for substantially all contracts are based on published monthly bid-week indices.
To ensure the delivery of SDG&E'sthe natural gas is delivered throughsupplies to its distribution system and to meet the seasonal and annual needs of customers, SoCalGas has entered into firm interstate pipeline capacity contracts that require the payment of fixed reservation charges to reserve firm transportation rights. Interstate pipeline companies, primarily El Paso Natural Gas Company, Transwestern Pipeline Company, and Kern River Gas Transmission Company, provide transportation services into SoCalGas' pipelines under a long-termintrastate transmission system for supplies purchased by SoCalGas or its transportation agreement. In addition, under separate agreements expiring in March 2008, customers from outside of California. The FERC regulates the rates that interstate pipeline companies may charge for natural gas and transportation services.
SoCalGas has natural gas transportation contracts with various interstate pipelines. These contracts expire on various dates between 2010 and 2025.
Natural Gas Storage
SoCalGas provides SDG&E up to nine billion cubic feet (Bcf)natural gas storage services for core, noncore and non-end-use customers. The Sempra Utilities’ core customers are allocated a portion of SoCalGas' storage capacity. A December 2007 CPUC decision directs that, effective April 1, 2008,SoCalGas offers the remaining storage capacity for sale to others through an open bid process. The storage service program provides opportunities for these customers to purchase and store natural gas procurement for both SDG&E’s and SoCalGas’when natural gas core customers be combined into a single supply portfoliocosts are low, usually during the summer, thereby reducing purchases when natural gas costs are expected to be administered by SoCalGas. All SDG&E assets associated with it s core customer natural gas supply portfolio will be transferred or assignedhigher. This program allows customers to SoCalGas.better manage their fuel procurement and transportation needs.
Demand for Natural Gas
The company faces competitionGrowth in the residential and commercial customer markets based on the customers' preferences for natural gas compared with other energy products. In the non-core industrial market, some customers are capable of using alternate fuels which can affect the demand for natural gas. The company's ability to maintain its industrial market share isgas largely dependentdepends on the relative spread between energy prices. The demand for natural gas by electric generators is influenced by a number of factors. In the short-term, natural gas use by electric generators is impacted by the availability of alternative sources of generation. The availability of hydroelectricity is highly dependent on precipitation in the western U.S. and Canada. In addition, natural gas use is impacted by the performance of other generation sources in the western U.S., including nuclear and coal, renewable energy and other natural gas facilities outsi de the service area. Natural gas use is also impacted by changes in end-use electricity demand. For example, natural gas use generally increases during extended heat waves. Over the long-term, natural gas used to generate electricity will be influenced by additional factors such as the location of new power plant construction and the development of renewable energy resources. Recently, more generation capacity has been constructed outside Southern California than within SDG&E's service area. This new generation will displace the output of older, less-efficient local generation, reducing the use of natural gas for local electric generation. Over the next few years, however, construction and planned construction of smaller natural gas-fired peaking and other electric generation facilities within SDG&E’s service area are expected to result in a slight overall increase in the demand for local natural gas for electric generation.
Effective March 31, 1998, electric industry restructuring provided out-of-state producers the option to provide power to California utility customers. As a result, natural gas demand for electric generation within Southern California competes with electric power generated throughout the western U.S.
10
Natural gas transported for electric generating plant customers may be significantly affected to the extent that regulatory changes and electric transmission infrastructure investment divert electric generation from the company's service area.
Growth in the natural gas markets is largely dependent upon the health and expansion of the Southern California economy, and prices of otheralternative energy products.products, environmental regulations, renewable energy, legislation, and the effectiveness of energy efficiency programs. External factors such as weather, the price of electricity, electric deregulation, the use of hydroelectric power, development of renewable energy resources, development of new natural gas supply sources, and general economic conditions can also result in significant shifts in demand and market price.
The company added 5,000 and 8,000 new customer meters in 2007 and 2006, respectively, representing growth rates of 0.7 percent and 1.0 percent in 2007 and 2006, respectively. The slower growth in 2007 reflects a slowdownSempra Utilities face competition in the housing market.residential and commercial customer markets based on the customers' preferences for natural gas compared with other energy products. In the noncore industrial market, some customers are capable of securing alternate fuel supplies from other suppliers which can affect the demand for natural gas. The company expectsSempra Utilities’ ability to maintain their respective industrial market shares is largely dependent on the relative spread between delivered energy prices.
Natural gas demand for electric generation within Southern California competes with electric power generated throughout the western U.S. Natural gas transported for electric generating plant customers may be significantly affected to the extent that its growth rateregulatory changes and electric transmission infrastructure investment divert electric generation from the Sempra Utilities’ respective service areas. We provide additional information regarding electric industry restructuring in Note 15 of the Notes to Consolidated Financial Statements in the Annual Report.
Short-Term Demand. The demand for 2008natural gas by electric generators is influenced by a number of factors, including:
§
the availability of alternative sources of generation; for example, the availability of hydroelectricity is highly dependent on precipitation in the western U.S. and Canada;
§
the performance of other generation sources in the western U.S., including nuclear and coal, renewable energy and other natural gas facilities outside the service area; and
§
the changes in end-use electricity demand; for example, natural gas use generally increases during extended heat waves.
Long-Term Demand. The demand for natural gas used to generate electricity will approximate thatbe influenced by additional factors such as the location of 2007.new power plants and the development of renewable energy resources. Recently, more generation capacity has been constructed outside the Sempra Utilities' service area than within it. This new generation will displace the output of older, less-efficient local generation, thereby reducing the use of natural gas for local electric generation. Over the next few years, however, the construction of smaller natural gas-fired peaking and other electric generation facilities within the Sempra Utilities’ respective service areas are expected to result in a slight overall increase in the demand for local natural gas for electric generation.
The natural gas distribution business is seasonal, in nature and revenues generally are greater during the winter heating months. As is prevalent in the industry, the companySoCalGas injects natural gas into storage during the summer months (usually April through October) for withdrawal from storage during the winter months (usually November through March) when customer demand is higher.
ELECTRIC UTILITY OPERATIONSPART II
Customers
Item 5.
At December 31, 2007, the company had 1.4 million customer meters consistingMarket for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of 1,210,600 residential, 146,300 commercial, 500 industrial, 2,000 street and highway lighting and 5,400 direct access. The company's service area covers 4,100 square miles. The company added 10,000 new electric customer meters in 2007 and 17,000 in 2006, representing growth rates of 0.7 percent and 1.3 percent, respectively. The company expects that its growth rate for 2008 will approximate that of 2007.Equity Securities
27
Resource Planning and Power ProcurementItem 6.
Selected Financial Data
SDG&E's resource planning, power procurement and related regulatory matters are discussed in "Management's28
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations"Operations
28
Item 7A.
Quantitative and in Notes 10, 11 and 12 of the Notes to Consolidated Qualitative Disclosures About Market Risk
28
Item 8.
Financial Statements herein.and Supplementary Data
28
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
28
Item 9A.
Controls and Procedures
28
Item 9B.
Other Information
28
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
29
Item 11.
Executive Compensation
29
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
29
Item 13.
Certain Relationships and Related Transactions, and Director Independence
29
Item 14.
Principal Accountant Fees and Services
29
11
|
Based on CPUC-approved purchased-power contracts currently in place with its various suppliers, its Palomar and Miramar generating facilities and its 20-percent ownership interest in SONGS, the supply of electric power available to SDG&E as of December 31, 2007, is as follows:
Supplier |
| Source |
| Expiration date |
| MW | |||
PURCHASED-POWER CONTRACTS: |
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
DWR** -allocated contracts: |
|
|
|
|
|
| |||
| Bear Energy LP |
| Natural gas |
| 2008 to 2010 |
| 700 | * | |
| Sunrise Power Co. LLC |
| Natural gas |
| 2012 |
| 575 |
| |
| Other (5 contracts) |
| Natural gas/Wind |
| 2011 to 2013 |
| 264 |
| |
| Total |
|
|
|
|
| 1,539 |
| |
Other contracts with Qualifying Facilities (QFs): |
|
|
|
|
|
| |||
| Applied Energy Inc. |
| Cogeneration |
| 2019 |
| 107 |
| |
| Yuma Cogeneration |
| Cogeneration |
| 2024 |
| 53 |
| |
| Goal Line Limited Partnership |
| Cogeneration |
| 2025 |
| 50 |
| |
| Other (17 contracts) |
| Cogeneration |
| 2009 and thereafter |
| 56 |
| |
| Total |
|
|
|
|
| 266 |
| |
Other contracts with renewable sources: |
|
|
|
|
|
| |||
| Oasis Power Partners |
| Wind |
| 2019 |
| 60 |
| |
| Kumeyaay |
| Wind |
| 2025 |
| 50 |
| |
| Covanta Delano |
| Bio-mass |
| 2017 |
| 49 |
| |
| PPM Energy |
| Wind |
| 2018 |
| 25 |
| |
| WTE/FPL |
| Wind |
| 2019 |
| 17 |
| |
| Other (8 contracts) |
| Bio-gas/Hydro |
| 2012 to 2022 |
| 31 |
| |
| Total |
|
|
|
|
| 232 |
| |
Other long-term and tolling contracts: |
|
|
|
|
|
|
| ||
| Cabrillo Power I, LLC |
| Natural Gas |
| 2009 |
| 964 |
| |
| LSP South Bay, LLC |
| Natural Gas |
| 2009 |
| 704 |
| |
| Portland General Electric (PGE) |
| Coal |
| 2013 |
| 89 |
| |
| Enernoc |
| Demand Response/Dist. Generation |
| 2016 |
| 25 |
| |
| Total |
|
|
|
|
| 1,782 |
| |
Total contracted |
|
|
|
|
| 3,819 |
| ||
|
|
|
|
|
|
|
| ||
GENERATION: |
|
|
|
|
|
|
| ||
| Palomar |
| Natural Gas |
|
|
| 550 |
| |
| SONGS |
| Nuclear |
|
|
| 430 |
| |
| Miramar |
| Natural Gas |
|
|
| 45 |
| |
Total generation |
|
|
|
|
| 1,025 |
| ||
TOTAL CONTRACTED AND GENERATION |
|
|
| 4,844 |
| ||||
* | Effective January 1, 2008, the quantity will decrease to 325 MW. | ||||||||
** | Department of Water Resources |
Under the contract with PGE, SDG&E pays a capacity charge plus a charge based on the amount of energy received and/or PGE's non-fuel costs. Costs under most of the contracts with QFs are based on SDG&E's avoided cost. Charges under the remaining contracts are for firm and as-available energy and are based on the amount of energy received, or are tolls based on available
12
|
| ||
PART IV | |||
Item 15. | Exhibits and Financial Statement Schedules | 30 | |
Sempra Energy: Consent of Independent Registered Public Accounting Firm and Report on Schedule | 31 | ||
San Diego Gas
|
| ||
|
| ||
| 34 | ||
Schedule I – Sempra Energy Condensed Financial Information of | 35 | ||
Schedule I – Pacific Enterprises Condensed Financial Information of |
| ||
|
| ||
|
|
| |
|
| ||
|
| ||
|
This combined Form 10-K is separately filed by Sempra Energy, San Diego Gas & Electric Company, Pacific Enterprises and Southern California Gas Company. Information contained herein relating to any individual company is filed by such company on its own behalf. Each company makes representations only as to itself and makes no other representation whatsoever as to any other company.
You should read this report in its entirety as it pertains to each respective reporting company. No one section of the report deals with all aspects of the subject matter. Separate Item 6 and 8 sections are provided for each reporting company, except for the Notes to Consolidated Financial Statements. The Notes to Consolidated Financial Statements for all of the reporting companies are combined. All Items other than 6 and 8 are combined for the reporting companies.
13
build ISFSI storage capacity through 2022, the expiration date of the units' NRC operating license. Pursuant to the Nuclear Waste Policy Act of 1982, SDG&E entered into a contract with the U.S. Department of Energy (DOE) for spent-fuel disposal. Under the agreement, the DOE is responsible for the ultimate disposal of spent fuel from SONGS. SDG&E pays the DOE a disposal fee of $1.00 per megawatt-hour of net nuclear generation, or $3 million per year. The DOE projects that it will not begin accepting spent fuel until 2017 at the earliest.
Additional information concerning nuclear-fuel costs and the storage and movement of spent fuel is provided in Notes 10 and 12, respectively, of the Notes to Consolidated Financial Statements herein.
Power Pools
SDG&E is a participant in the Western Systems Power Pool, which includes an electric-power and transmission-rate agreement with utilities and power agencies located throughout the United States and Canada. More than 300 investor-owned and municipal utilities, state and federal power agencies, energy brokers and power marketers share power and information in order to increase efficiency and competition in the bulk power market. Participants are able to make power transactions on standardized terms that have been preapproved by the FERC.
Transmission Arrangements
SDG&E's 500-kV Southwest Powerlink transmission line, which is shared with Arizona Public Service Company and Imperial Irrigation District, extends from Palo Verde, Arizona, to San Diego. SDG&E's share of the line is 1,163 MW, although it can be less under certain system conditions.
Mexico's Baja California Norte system is connected to SDG&E's system via two 230-kV interconnections with firm capability of 408 MW in the north to south direction and 800 MW in the south to north direction.
SDG&E is in the approval phase for the Sunrise Powerlink, a new 500-kV transmission line between the existing Imperial Valley Substation and a new central substation to be located within the SDG&E system. The proposed rating of the Sunrise Powerlink is 1,000 MW. The project is subject to CPUC approval. Further discussion is provided in Note 10 of the Notes to Consolidated Financial Statements herein.
Transmission Access
The National Energy Policy Act governs procedures for others' requests for transmission service. The FERC approved the California investor-owned utilities' (IOUs) transfer of operation and control of their transmission facilities to the Independent System Operator (ISO) in 1998. Additional information regarding FERC, ISO and transmission issues is provided in Note 10 of the Notes to Consolidated Financial Statements herein.
14
ENVIRONMENTAL MATTERS
Discussions about environmental issues affecting the company are included in Notes 10 and 12 of the Notes to Consolidated Financial Statements herein. The following additional information should be read in conjunction with those discussions.
Hazardous Substances
In 1994, the CPUC approved the Hazardous Waste Collaborative mechanism, allowing California's IOUs to recover certain hazardous waste cleanup costs, including those related to Superfund sites or similar sites requiring cleanup. Rate recovery of 90 percent of hazardous waste cleanup costs and related third-party litigation costs, and 70 percent of the related insurance-litigation expenses is permitted. In addition, the company has the opportunity to retain a percentage of any insurance recoveries to offset the 10 percent of costs not recovered in rates.
At December 31, 2007, the company had accrued its estimated remaining investigation and remediation liability related to hazardous waste sites, including numerous locations that had been manufactured-gas plants, of $0.4 million, of which 90 percent is authorized to be recovered through the Hazardous Waste Collaborative mechanism. This estimated cost excludes remediation costs of $6 million associated with SDG&E's former fossil-fuel power plants. The company believes that any costs not ultimately recovered through rates, insurance or other means will not have a material adverse effect on the company's consolidated results of operations or financial position.
Estimated liabilities for environmental remediation are recorded when amounts are probable and estimable. Amounts authorized to be recovered in rates under the Hazardous Waste Collaborative mechanism are recorded as a regulatory asset.
Air and Water Quality
The transmission and distribution of natural gas require the operation of compressor stations, which are subject to increasingly stringent air-quality standards, such as those established by the CARB as discussed under "Government Regulation – California Utility Regulation" herein. Costs to comply with these standards are generally recovered in rates.
In connection with the issuance of operating permits, SDG&E and the other owners of SONGS previously reached an agreement with the California Coastal Commission to mitigate the environmental damage to the marine environment attributed to the cooling-water discharge from SONGS Units 2 and 3. SDG&E's share of the cost is estimated to be $36 million, of which $25 million had been incurred at December 31, 2007, and $11 million is accrued for the remaining costs through 2050. In May 2006, the CPUC adopted a decision in Edison's 2006 General Rate Case, in which decision SDG&E is no longer subject to a 50-percent disallowance of cost recovery going forward.
15
OTHER MATTERS
Employees of Registrant
As of December 31, 2007, the company had 4,774employees, compared to 4,758at December 31, 2006.
Labor Relations
Field, technical and some clerical employees at SDG&E are represented by Local 465 International Brotherhood of Electrical Workers. The collective bargaining agreement for these employees covering wages, hours and working conditions is in effect through August 31, 2008. For these same employees, the agreements covering health and welfare benefits and pension benefits are in effect through December 31, 2010 and December 4, 2009, respectively.
ITEM 2. PROPERTIES
Electric Properties
SDG&E owns two natural gas-fired power plants: a 550-MW electric generation facility (the Palomar generation facility) located in Escondido, California, and a 45-MW electric generation facility (the Miramar generation facility) located in San Diego, California. SDG&E's interest in SONGS is described in "Electric Resources" herein.
At December 31, 2007, SDG&E's electric transmission and distribution facilities included substations, and overhead and underground lines. These electric facilities are located in San Diego, Imperial and Orange counties of California and in Arizona, and consist of 1,886 miles of transmission lines and 22,056 miles of distribution lines. Periodically, various areas of the service territory require expansion to accommodate customer growth.
Natural Gas Properties
At December 31, 2007, SDG&E's natural gas facilities, which are located in San Diego and Riverside counties of California, consisted of the Moreno and Rainbow compressor stations, 166 miles of transmission pipelines, 8,335 miles of distribution mains and 6,292 miles of service lines.
Other Properties
SDG&E occupies an office complex in San Diego pursuant to two separate operating leases, both ending in December 2017. One lease has four five-year renewal options and the other lease has three five-year renewal options.
The company owns or leases other land, easements, rights of way, warehouses, offices, operating and maintenance centers, shops, service facilities and equipment necessary in the conduct of its business.
16
ITEM 3. LEGAL PROCEEDINGS
Except for the matters described in Note 12 of the Notes to Consolidated Financial Statements or referred to in "Management's Discussion and Analysis of Financial Condition and Results of Operations" herein, neither the company nor its subsidiary is party to, nor is their property the subject of, any material pending legal proceedings.
On July 13, 2007, SDG&E, one of its employees, and an SDG&E contractor were convicted in a federal jury trial on criminal charges of environmental violations in connection with the 2000 - 2001 dismantlement of a natural gas storage facility. SDG&E was also convicted of a related charge of making a false statement to a government agency. SDG&E is subject to a maximum fine of $2 million. On December 7, 2007, the trial court set aside all of the convictions and granted all of the defendants a new trial on all counts. The government has filed a notice of appeal.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
We make statements in this report that are not historical fact and constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are necessarily based upon assumptions with respect to the future, involve risks and uncertainties, and are not guarantees of performance. These forward-looking statements represent our estimates and assumptions only as of the date of this report.
In this report, when we use words such as "believes," "expects," "anticipates," "plans," "estimates," "projects," "contemplates," "intends," "depends," "should," "could," "would," "may," "potential," "target," "goals," or similar expressions, or when we discuss our strategy, plans or intentions, we are making forward-looking statements.
Factors, among others, that could cause our actual results and future actions to differ materially from those described in forward-looking statements include
§
local, regional, national and international economic, competitive, political, legislative and regulatory conditions and developments;
§
actions by the California Public Utilities Commission, the California State Legislature, the California Department of Water Resources, the Federal Energy Regulatory Commission, the Federal Reserve Board, and other regulatory and governmental bodies in the United States and other countries in which we operate;
§
capital markets conditions and inflation, interest and exchange rates;
§
energy and trading markets, including the timing and extent of changes and volatility in commodity prices;
§
the availability of electric power, natural gas and liquefied natural gas;
§
weather conditions and conservation efforts;
§
war and terrorist attacks;
§
business, regulatory, environmental and legal decisions and requirements;
§
the status of deregulation of retail natural gas and electricity delivery;
§
the timing and success of business development efforts;
§
the resolution of litigation; and
§
other uncertainties, all of which are difficult to predict and many of which are beyond our control.
We caution you not to rely unduly on any forward-looking statements. You should review and consider carefully the risks, uncertainties and other factors that affect our business as described in this report and other reports that we file with the Securities and Exchange Commission.
PART I
ITEM 1. BUSINESS
DESCRIPTION OF BUSINESS
We provide a description of Sempra Energy and its subsidiaries in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2009 Annual Report to Shareholders (Annual Report), which is incorporated by reference.
This report includes information for the following separate registrants:
§
Sempra Energy and its consolidated entities
§
San Diego Gas & Electric Company (SDG&E)
§
Pacific Enterprises (PE), the holding company for Southern California Gas Company
§
Southern California Gas Company (SoCalGas)
References in this report to "we," "our" and "our company" are to Sempra Energy and its subsidiaries, collectively. SDG&E and SoCalGas are collectively referred to as the Sempra Utilities.
Sempra Energy has five separately managed reportable segments consisting of SDG&E, SoCalGas, Sempra Commodities, Sempra Generation and Sempra Pipelines & Storage. Sempra Commodities, Sempra Generation, Sempra Pipelines & Storage, and an additional business unit, Sempra LNG (liquefied natural gas) are subsidiaries of Sempra Global. Sempra Global is a holding company for most of our subsidiaries that are not subject to California utility regulation.
SDG&E, PE and SoCalGas are subsidiaries of Sempra Energy. Sempra Energy directly or indirectly owns all the common stock and substantially all of the voting stock of each of the three companies.
Sempra Commodities - Pending Transaction
In April 2008, Sempra Energy formed a partnership with The Royal Bank of Scotland plc (RBS) to purchase and operate our commodities-marketing businesses, which generally comprised the Sempra Commodities segment. In November 2009, RBS announced its intention to divest its interest in this joint venture, RBS Sempra Commodities LLP (RBS Sempra Commodities), following a directive from the European Commission to dispose of certain assets. On February 16, 2010, Sempra Energy, RBS and the partnership entered into an agreement with J.P. Morgan Ventures Energy Corporation (J.P. Morgan Ventures), whereby J.P. Morgan Ventures will purchase the following businesses from the joint venture:
§
the global oil, metals, coal, emissions (other than emissions related to the joint venture’s North American power business), plastics, agricultural commodities and concentrates commodities trading and marketing business
§
the European power and gas business
§
the investor products business
RBS Sempra Commodities will retain its North American power and natural gas trading businesses and its retail energy solutions business. These businesses have historically generated 40 to 60 percent of total earnings of the businesses in the partnership, and have averaged more than 50 percent.
Subject to obtaining various regulatory approvals and other conditions, the transaction is expected to close in the second quarter of 2010. J.P. Morgan Ventures will pay an aggregate purchase price equal to the estimated book value at closing of the businesses purchased, generally computed on the basis of international financial reporting standards (as adopted by the European Union), plus an amount equal to $468 million. Sempra Energy will be entitled to 53 -1/3 percent of the aggregate purchase price, and RBS will be entitled to 46-2/3 percent of the aggregate purchase price.
In connection with the transaction, we and RBS entered into a letter agreement to negotiate, prior to closing of the transaction, definitive documentation to amend certain provisions of the Limited Liability Partnership Agreement dated April 1, 2008 between Sempra Energy and RBS. As RBS continues to be obligated to divest its remaining interest in the partnership, the letter agreement also provides for negotiating the framework for the entertaining bids for the remaining part of the partnership’s business.
We provide further discussion about RBS Sempra Commodities and the pending transaction with J.P. Morgan Ventures in Notes 3, 4, 6 and 20 of the Notes to Consolidated Financial Statements. The partnership is also discussed in "Sempra Global – Competition - Sempra Commodities" below.
COMPANY WEBSITES
Company website addresses are:
Sempra Energy – http://www.sempra.com
SDG&E – http://www.sdge.com
PE/SoCalGas – http://www.socalgas.com
We make available free of charge on our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. The charters of the audit, compensation and corporate governance committees of Sempra Energy’s board of directors (the board), the board's corporate governance guidelines, and Sempra Energy's code of business conduct and ethics for directors and officers are posted on Sempra Energy's website.
SDG&E and SoCalGas make available free of charge via a hyperlink on their websites their annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.
Printed copies of all of these materials may be obtained by writing to our Corporate Secretary at Sempra Energy, 101 Ash Street, San Diego, CA 92101-3017.
GOVERNMENT REGULATION
The most significant government regulation affecting Sempra Energy is the regulation of our utility subsidiaries.
California Utility Regulation
The Sempra Utilities are regulated in California by the California Public Utilities Commission (CPUC), the California Energy Commission (CEC), and the California Air Resources Board (CARB).
The California Public Utilities Commission:
§
consists of five commissioners appointed by the Governor of California for staggered, six-year terms.
§
regulates SDG&E’s and SoCalGas’ rates and conditions of service, sales of securities, rates of return, capital structure, rates of depreciation, and long-term resource procurement, except as described below in "United States Utility Regulation."
§
has jurisdiction over the proposed construction of major new electric transmission, electric distribution, and natural gas storage, transmission and distribution facilities in California.
§
conducts reviews and audits of utility performance and compliance with regulatory guidelines, and conducts investigations into various matters, such as deregulation, competition and the environment, to determine its future policies.
§
regulates the interactions and transactions of the Sempra Utilities with Sempra Energy and its other affiliates.
We provide further discussion in Notes 15 and 16 of the Notes to Consolidated Financial Statements in the Annual Report.
SDG&E is also subject to regulation by the CEC, which publishes electric demand forecasts for the state and for specific service territories. Based upon these forecasts, the CEC:
§
determines the need for additional energy sources and conservation programs;
§
sponsors alternative-energy research and development projects;
§
promotes energy conservation programs;
§
maintains a statewide plan of action in case of energy shortages; and
§
certifies power-plant sites and related facilities within California.
The CEC conducts a 20-year forecast of available supplies and prices for every market sector that consumes natural gas in California. This forecast includes resource evaluation, pipeline capacity needs, natural gas demand and wellhead prices, and costs of transportation and distribution. This analysis is one of many resource materials used to support the Sempra Utilities’ long-term investment decisions.
The State of California requires certain California electric retail sellers, including SDG&E, to deliver 20 percent of their 2010 retail demand from renewable energy sources. The rules governing this requirement, administered by both the CPUC and the CEC, are generally known as the Renewables Portfolio Standard (RPS) Program. Certification of a generation project by the CEC as an Eligible
Renewable Energy Resource (ERR) allows the purchase of output from a generation facility to be counted towards fulfillment of the RPS Program requirements. This may affect the demand for output from renewables projects developed by Sempra Generation, particularly from California utilities. Final certification as an ERR for Sempra Generation’s El Dorado solar generation facility was approved in June 2009.
In September 2009, the Governor of California issued an Executive Order which directs the California utilities to procure 33 percent of their electric energy requirements from renewable sources by 2020. This Executive Order designates the CARB as the agency responsible for establishing the compliance rules and regulations for this program.
CaliforniaAssembly Bill 32, the California Global Warming Solutions Act of 2006, assigns responsibility to CARB for monitoring and establishing policies for reducing greenhouse gas (GHG) emissions. The bill requires CARB to develop and adopt a comprehensive plan for achieving real, quantifiable and cost-effective GHG emission reductions, including a statewide GHG emissions cap, mandatory reporting rules, and regulatory and market mechanisms to achieve reductions of GHG emissions. CARB is a department within the California Environmental Protection Agency, an organization which reports directly to the Governor's Office in the Executive Branch of California State Government. As the CARB formulates its plan, provisions of the plan may apply to the Sempra Utilities.
United States Utility Regulation
The Sempra Utilities are also regulated by the Federal Energy Regulatory Commission (FERC) and the Nuclear Regulatory Commission (NRC).
In the case of SDG&E, the FERC regulates the interstate sale and transportation of natural gas, the transmission and wholesale sales of electricity in interstate commerce, transmission access, rates of return on transmission investment, the uniform systems of accounts, rates of depreciation and electric rates involving sales for resale.
In the case of SoCalGas, the FERC regulates the interstate sale and transportation of natural gas and the uniform systems of accounts.
The NRC oversees the licensing, construction and operation of nuclear facilities in the United States, including the San Onofre Nuclear Generating Station (SONGS), in which SDG&E owns a 20-percent interest. NRC regulations require extensive review of the safety, radiological and environmental aspects of these facilities. Periodically, the NRC requires that newly developed data and techniques be used to reanalyze the design of a nuclear power plant and, as a result, may require plant modifications as a condition of continued operation.
Sempra Pipelines & Storage operates Mobile Gas Service Corporation (Mobile Gas), a small natural gas distribution utility serving Southwest Alabama that is regulated by the Alabama Public Service Commission (APSC). The FERC regulates Mobile Gas’ interstate transportation of natural gas, the uniform systems of accounts, and rates of depreciation.
Local Regulation Within the U.S.
SoCalGas has natural gas franchises with the 243 separate counties and cities in its service territory. These franchises allow SoCalGas to locate, operate and maintain facilities for the transmission and distribution of natural gas. Most of the franchises have indefinite lives with no expiration date. Some franchises have fixed expiration dates, ranging from 2010 to 2048.
SDG&E has
§
electric franchises with the two counties and the 26 cities in its electric service territory, and
§
natural gas franchises with the one county and the 18 cities in its natural gas service territory.
These franchises allow SDG&E to locate, operate and maintain facilities for the transmission and distribution of electricity and/or natural gas. Most of the franchises have indefinite lives with no expiration dates. Some franchises have fixed expiration dates, ranging from 2012 to 2035.
Sempra Generation, Sempra LNG and Sempra Pipelines & Storage have operations or development projects in Alabama, Arizona, California, Indiana, Louisiana, Mississippi, Nevada, Texas, and Hawaii. These entities are subject to state and local laws, and to regulations in the states in which they operate.
Other Regulation
RBS Sempra Commodities is subject to regulation by the U.K. Financial Services Authority, the New York Mercantile Exchange, the Commodity Futures Trading Commission, the FERC, the London Metals Exchange, NYSE Euronext, the U.S. Federal Reserve Bank and the National Futures Association.
In the United States, the FERC regulates Sempra Generation’s, Sempra Pipelines & Storage’s and Sempra LNG’s operations. Sempra Pipelines & Storage also owns an interest in the Rockies Express Pipeline, a natural gas pipeline which operates in several states in the United States and is subject to regulation by the FERC.
Sempra Pipelines & Storage’s Bay Gas Storage Company (Bay Gas) is regulated by the APSC and its intrastate storage contracts are subject to APSC approval. Bay Gas provides long-term services for customers that include storage and transportation of natural gas from interstate and intrastate sources. As an intrastate facility, Bay Gas is regulated by the FERC as a 311 facility, and the FERC has also approved market-based rates for interstate storage services and cost-based rates for transportation services.
Several of our segments operate in Mexico as follows:
§
Sempra Generation owns and operates a natural gas-fired power plant in Baja California, Mexico
§
Sempra Pipelines & Storage’s Mexican utilities build and operate natural gas distribution systems in Mexicali, Chihuahua, and the La Laguna-Durango zone in north-central Mexico
§
Sempra Pipelines & Storage transports gas between the U.S. border and Baja California, Mexico
§
Sempra LNG owns and operates the Energía Costa Azul LNG receipt terminal located in Baja California, Mexico
These operations are subject to regulation by the Comisión Reguladora de Energía and by the labor and environmental agencies of city, state and federal governments in Mexico.
Sempra Pipelines & Storage also has investments in South America that are subject to laws and regulations in the localities and countries in which they operate.
Licenses and Permits
The Sempra Utilities obtain numerous permits, authorizations and licenses in connection with the transmission and distribution of natural gas and electricity and the operation and construction of related assets. Because these permits, authorizations and licenses require periodic renewal, the Sempra Utilities are continuously regulated by the granting agencies.
Our other subsidiaries are also required to obtain numerous permits, authorizations and licenses in the normal course of business. Some of these permits, authorizations and licenses require periodic renewal.
SempraGeneration and its subsidiaries obtain a number of permits, authorizations and licenses in connection with the construction and operation of power generation facilities, and in connection with the wholesale distribution of electricity.
Sempra Pipelines & Storage’s Mexican subsidiaries obtain numerous permits, authorizations and licenses for their natural gas distribution and transmission systems from the local governments where the service is provided. Sempra Pipelines & Storage’s U.S. operations obtain licenses and permits for natural gas storage facilities and pipelines.
Sempra LNG obtains licenses and permits for the construction and operation of LNG facilities.
We describe other regulatory matters in Notes 15 and 16 of the Notes to Consolidated Financial Statements in the Annual Report.
CALIFORNIA NATURAL GAS UTILITY OPERATIONS
SoCalGas and SDG&E sell, distribute, and transport natural gas. SoCalGas purchases and stores natural gas for itself and SDG&E on a combined portfolio basis and provides natural gas storage services for others. The Sempra Utilities’ resource planning, natural gas procurement, contractual commitments, and related regulatory matters are discussed below. We also provide further discussion in the Annual Report in "Management's Discussion and Analysis of Financial Condition and Results of Operations," and in Notes 16 and 17 of the Notes to Consolidated Financial Statements.
Customers
For regulatory purposes, end-use customers are classified as either core or noncore customers. Core customers are primarily residential and small commercial and industrial customers. Noncore customers at SoCalGas consist primarily of electric generation, wholesale, large commercial, industrial, and enhanced oil recovery customers. Noncore customers at SDG&E consist primarily of electric generation, and large commercial and industrial customers.
Most core customers purchase natural gas directly from SoCalGas or SDG&E. While core customers are permitted to purchase directly from producers, marketers or brokers, the Sempra Utilities are obligated to provide reliable supplies of natural gas to serve the requirements of their core customers. Noncore customers are responsible for the procurement of their natural gas requirements.
In 2009, SoCalGas added 27,000 new customer natural gas meters at a growth rate of 0.5 percent; in 2008, it added 41,000 new meters at a growth rate of 0.7 percent. In 2009, SDG&E added 4,200 new customer natural gas meters at a growth rate of 0.5 percent; in
2008, it added 3,000 new meters at a growth rate of 0.4 percent. We expect levels to remain low in 2010, and both SoCalGas and SDG&E expect new meter growth in 2010 to be comparable to that in 2009.
Natural Gas Procurement and Transportation
SoCalGaspurchases natural gas under short-term and long-term contracts for the Sempra Utilities’ core customers. SoCalGas purchases natural gas from Canada, the U.S. Rockies and the southwestern U.S. to meet customer requirements and maintain pipeline reliability. It also purchases some California natural gas production and additional supplies delivered directly to California for its remaining requirements. Natural gas prices for substantially all contracts are based on published monthly bid-week indices.
To ensure the delivery of the natural gas supplies to its distribution system and to meet the seasonal and annual needs of customers, SoCalGas has entered into firm interstate pipeline capacity contracts that require the payment of fixed reservation charges to reserve firm transportation rights. Interstate pipeline companies, primarily El Paso Natural Gas Company, Transwestern Pipeline Company, and Kern River Gas Transmission Company, provide transportation services into SoCalGas' intrastate transmission system for supplies purchased by SoCalGas or its transportation customers from outside of California. The FERC regulates the rates that interstate pipeline companies may charge for natural gas and transportation services.
SoCalGas has natural gas transportation contracts with various interstate pipelines. These contracts expire on various dates between 2010 and 2025.
Natural Gas Storage
SoCalGas provides natural gas storage services for core, noncore and non-end-use customers. The Sempra Utilities’ core customers are allocated a portion of SoCalGas' storage capacity. SoCalGas offers the remaining storage capacity for sale to others through an open bid process. The storage service program provides opportunities for these customers to purchase and store natural gas when natural gas costs are low, usually during the summer, thereby reducing purchases when natural gas costs are expected to be higher. This program allows customers to better manage their fuel procurement and transportation needs.
Demand for Natural Gas
Growth in the demand for natural gas largely depends on the health and expansion of the Southern California economy, prices of alternative energy products, environmental regulations, renewable energy, legislation, and the effectiveness of energy efficiency programs. External factors such as weather, the price of electricity, electric deregulation, the use of hydroelectric power, development of renewable energy resources, development of new natural gas supply sources, and general economic conditions can also result in significant shifts in demand and market price.
The Sempra Utilities face competition in the residential and commercial customer markets based on the customers' preferences for natural gas compared with other energy products. In the noncore industrial market, some customers are capable of securing alternate fuel supplies from other suppliers which can affect the demand for natural gas. The Sempra Utilities’ ability to maintain their respective industrial market shares is largely dependent on the relative spread between delivered energy prices.
Natural gas demand for electric generation within Southern California competes with electric power generated throughout the western U.S. Natural gas transported for electric generating plant customers may be significantly affected to the extent that regulatory changes and electric transmission infrastructure investment divert electric generation from the Sempra Utilities’ respective service areas. We provide additional information regarding electric industry restructuring in Note 15 of the Notes to Consolidated Financial Statements in the Annual Report.
Short-Term Demand. The demand for natural gas by electric generators is influenced by a number of factors, including:
§
the availability of alternative sources of generation; for example, the availability of hydroelectricity is highly dependent on precipitation in the western U.S. and Canada;
§
the performance of other generation sources in the western U.S., including nuclear and coal, renewable energy and other natural gas facilities outside the service area; and
§
the changes in end-use electricity demand; for example, natural gas use generally increases during extended heat waves.
Long-Term Demand. The demand for natural gas used to generate electricity will be influenced by additional factors such as the location of new power plants and the development of renewable energy resources. Recently, more generation capacity has been constructed outside the Sempra Utilities' service area than within it. This new generation will displace the output of older, less-efficient local generation, thereby reducing the use of natural gas for local electric generation. Over the next few years, however, the construction of smaller natural gas-fired peaking and other electric generation facilities within the Sempra Utilities’ respective service areas are expected to result in a slight overall increase in the demand for local natural gas for electric generation.
The natural gas distribution business is seasonal, and revenues generally are greater during the winter heating months. As is prevalent in the industry, SoCalGas injects natural gas into storage during the summer months (usually April through October) for withdrawal from storage during the winter months (usually November through March) when customer demand is higher.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All of the issued and outstanding common stock of SDG&E is owned by Enova Corporation, a wholly owned subsidiary of Sempra Energy. The information required by Item 5 concerning dividend declarations is included in the "Statements of Consolidated Comprehensive Income and Changes in Shareholders' Equity" set forth in Item 8 herein.
Dividend Restrictions
The payment and amount of future dividends are within the discretion of the company's board of directors. The CPUC's regulation of SDG&E'scapital structure limits the amounts that are available for loans and dividends to Sempra Energy from SDG&E. Additional information regarding these restrictions is provided in "Management's Discussion and Analysis of Financial Condition and Results of Operations" under "Capital Resources and Liquidity--Dividends" herein.
17
ITEM 6. SELECTED FINANCIAL DATA
|
| At December 31, or for the years then ended |
| ||||||||||||||||||
(Dollars in millions) |
|
| 2007 |
|
|
| 2006 |
|
|
| 2005 |
|
|
| 2004 |
|
|
| 2003 |
| |
Income Statement Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Operating revenues |
| $ | 2,852 |
|
| $ | 2,785 |
|
| $ | 2,512 |
|
| $ | 2,274 |
|
| $ | 2,308 |
|
| Operating income |
| $ | 500 |
|
| $ | 477 |
|
| $ | 393 |
|
| $ | 393 |
|
| $ | 515 |
|
| Dividends on preferred stock |
| $ | 5 |
|
| $ | 5 |
|
| $ | 5 |
|
| $ | 5 |
|
| $ | 6 |
|
| Earnings applicable to common shares |
| $ | 283 |
|
| $ | 237 |
|
| $ | 262 |
|
| $ | 208 |
|
| $ | 334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Total assets |
| $ | 8,508 |
|
| $ | 7,795 |
|
| $ | 7,492 |
|
| $ | 6,834 |
|
| $ | 6,461 |
|
| Long-term debt |
| $ | 1,958 |
|
| $ | 1,638 |
|
| $ | 1,455 |
|
| $ | 1,022 |
|
| $ | 1,087 |
|
| Short-term debt (a) |
| $ | -- |
|
| $ | 138 |
|
| $ | 66 |
|
| $ | 66 |
|
| $ | 66 |
|
| Preferred stock subject to mandatory redemption |
| $ | 14 |
|
| $ | 17 |
|
| $ | 19 |
|
| $ | 21 |
|
| $ | 24 |
|
| Shareholders’ equity |
| $ | 2,279 |
|
| $ | 1,994 |
|
| $ | 1,562 |
|
| $ | 1,376 |
|
| $ | 1,343 |
|
(a) | Includes long-term debt due within one year. |
Since SDG&E is a wholly owned subsidiary of Enova Corporation, per-share data is not provided.
This data should be read in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements contained herein.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
This section of the 2007 Annual Report includes management's discussion and analysis of operating results from 2005 through 2007, and provides information about the capital resources, liquidity and financial performance of San Diego Gas & Electric Company (SDG&E or the company). This section also focuses on the major factors expected to influence future operating results and discusses investment and financing activities and plans. It should be read in conjunction with the Consolidated Financial Statements included in this Annual Report.
The company is an operating public utility engaged in the electric business, serving 3.4 million consumers, and in the natural gas business, serving 3.1 million consumers. It distributes electric energy, purchased from others or generated from its Palomar and Miramar generating facilities and its 20-percent ownership interest in the San Onofre Nuclear Generating Station (SONGS), through 1.4 million meters in San Diego County and an adjacent portion of southern Orange County, California. It also purchases and distributes natural gas through 840,000 meters in San Diego County and transports electricity and natural gas for others. SDG&E's service territory encompasses 4,100 square miles. SDG&E's only subsidiary is SDG&E Funding LLC, which was formed to facilitate the issuance of SDG&E's rate-reduction bonds discussed in Note 3 of the Notes to Consolidated Financial Statements. The company's financial statements include a variable interest entity, Otay Mesa Energy Center LLC (OMEC LLC), as discussed in Note 1 of the Notes to Consolidated Financial Statements. SDG&E is a substantially wholly owned indirect subsidiary of Sempra Energy. SDG&E and its sister utility, Southern California Gas Company (SoCalGas), which distributes natural gas throughout most of Southern California and a portion of central California, are collectively referred to herein as "the Sempra Utilities."
RESULTS OF OPERATIONS
The following table shows net income for each of the last five years.
(Dollars in millions) |
|
|
2007 |
| $ 288 |
2006 |
| $ 242 |
2005 |
| $ 267 |
2004 |
| $ 213 |
2003 |
| $ 340 |
The company issubject to regulation by federal, state and local governmental agencies. The primary regulatory agency is the California Public Utility Commission (CPUC), which regulates utility rates and operations in California, except for SDG&E's electric transmission operations, which are regulated by the Federal Energy Regulatory Commission (FERC). The FERC also regulates interstate transportation of natural gas and various related matters. The Nuclear Regulatory Commission regulates nuclear generating plants. Municipalities and other local authorities regulate the location of utility assets, including natural gas pipelines and electric lines.
Electric Revenues and Cost of Electric Fuel and Purchased Power.Electric revenues increased by $47 million (2%) to $2.2 billion, and the cost of electric fuel and purchased power decreased by $22 million (3%) to $699 million in 2007. The increased revenue in 2007 was primarily due to $33 million from higher authorized transmission and electric generation margins, $22 million
19
from the resolution of a regulatory matter, a $24 million increase in authorized base margin on electric distribution and $12 million of higher revenues for recoverable expenses, which are fully offset in other operating expenses. The increases were offset by $20 million from the favorable resolution of a prior year cost recovery issue in 2006 and $22 million lower recovery of electric fuel and purchased power costs in 2007.
Electric revenues increased by $344 million (19%) to $2.1 billion, and the cost of electric fuel and purchased power increased by $97 million (16%) to $721 million in 2006 compared to 2005. The increase in revenue was due to $206 million of increased authorized distribution, generation and transmission base margins, $60 million of higher revenues for recoverable expenses, and the $20 million favorable resolution of a prior year cost recovery issue. The increases were offset by a $28 million demand-side management (DSM) awards settlement in 2005 and $23 million from the 2005 Internal Revenue Service (IRS) decision relating to the sale of SDG&E's former South Bay power plant. In addition, electric revenues and costs increased due to the commencement of commercial operations of the Palomar generating facility in 2006, which contributed $112 million to both 2006 revenues and costs, offset by lower purchased power costs.
Natural Gas Revenues and Cost of Natural Gas.Natural gas revenues increased by $20 million (3%) to $658 million, and the cost of natural gas increased $12 million (3%) to $392 million in 2007. The company's weighted average cost (including transportation charges) per million British thermal units (MMBtu) of natural gas was $7.17 in 2007, $6.94 in 2006 and $8.67 in 2005.
Natural gas revenues decreased by $71 million (10%) to $638 million, and the cost of natural gas decreased by $76 million (17%) to $380 million in 2006 compared to 2005. The decreases in 2006 were due to lower overall average costs of natural gas, which are passed on to customers, offset by higher volumes.
Although the current regulatory framework provides that the cost of natural gas purchased for customers and the variations in that cost are passed through to the customers on a substantially concurrent basis, SDG&E's natural gas procurement Performance-Based Regulation (PBR) mechanism allows the company to share in the savings or costs from buying natural gas for its customers below or above market-based monthly benchmarks. The mechanism permits full recovery of all costs within a tolerance band around the benchmark price. The costs or savings outside the tolerance band are shared between customers and shareholders. Further discussion is provided in Notes 1 and 11 of the Notes to Consolidated Financial Statements.
The tables below summarize the electric and natural gas volumes and revenues by customer class for the years ended December 31, 2007, 2006 and 2005.
20
Electric Distribution and Transmission
(Volumes in millions of kilowatt-hours, dollars in millions)
|
|
|
|
| 2007 | 2006 | 2005 | ||||||||||||
| Volumes | Revenue | Volumes | Revenue | Volumes | Revenue | |||||||||||||
Residential |
| 7,520 |
| $ | 980 |
| 7,501 |
| $ | 910 |
| 7,075 |
| $ | 738 | ||||
Commercial |
| 7,154 |
|
| 852 |
| 6,983 |
|
| 723 |
| 6,674 |
|
| 654 | ||||
Industrial |
| 2,275 |
|
| 229 |
| 2,261 |
|
| 181 |
| 2,159 |
|
| 142 | ||||
Direct access |
| 3,220 |
|
| 118 |
| 3,390 |
|
| 133 |
| 3,213 |
|
| 114 | ||||
Street and highway lighting |
| 107 |
|
| 12 |
| 102 |
|
| 10 |
| 93 |
|
| 11 | ||||
|
|
|
|
|
| 20,276 |
|
| 2,191 |
| 20,237 |
|
| 1,957 |
| 19,214 |
|
| 1,659 |
Balancing accounts and other |
|
|
|
| 3 |
|
|
|
| 190 |
|
|
|
| 144 | ||||
| Total |
|
|
|
|
|
| $ | 2,194 |
|
|
| $ | 2,147 |
|
|
| $ | 1,803 |
Although commodity costs associated with long-term contracts allocated to SDG&E from the California Department of Water Resources (and the revenues to recover those costs) are not included in the Statements of Consolidated Income, as discussed in Note 1 of the Notes to Consolidated Financial Statements, the associated volumes and distribution revenues are included in the above table.
Natural Gas Sales, Transportation and Exchange
(Volumes in billion cubic feet, dollars in millions)
|
|
|
|
|
|
|
|
|
|
| Transportation |
|
|
|
|
| |||||||
|
|
|
|
|
| Natural Gas Sales | and Exchange | Total | |||||||||||||||
|
|
|
|
|
| Volumes | Revenue | Volumes | Revenue | Volumes | Revenue | ||||||||||||
2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
| Residential |
| 32 |
| $ | 405 |
| -- |
| $ | -- |
| 32 |
| $ | 405 | |||||||
| Commercial and industrial |
| 16 |
|
| 160 |
| 5 |
|
| 7 |
| 21 |
|
| 167 | |||||||
| Electric generation plants |
| -- |
|
| 1 |
| 60 |
|
| 40 |
| 60 |
|
| 41 | |||||||
|
|
|
|
|
|
| 48 |
| $ | 566 |
| 65 |
| $ | 47 |
| 113 |
|
| 613 | |||
| Balancing accounts and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 45 | |||||||
|
| Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 658 | |||
2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
| Residential |
| 31 |
| $ | 397 |
| -- |
| $ | -- |
| 31 |
| $ | 397 | |||||||
| Commercial and industrial |
| 17 |
|
| 169 |
| 5 |
|
| 7 |
| 22 |
|
| 176 | |||||||
| Electric generation plants |
| -- |
|
| 2 |
| 65 |
|
| 44 |
| 65 |
|
| 46 | |||||||
|
|
|
|
|
|
| 48 |
| $ | 568 |
| 70 |
| $ | 51 |
| 118 |
|
| 619 | |||
| Balancing accounts and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 19 | |||||||
|
| Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 638 | |||
2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
| Residential |
| 31 |
| $ | 381 |
| -- |
| $ | -- |
| 31 |
| $ | 381 | |||||||
| Commercial and industrial |
| 17 |
|
| 174 |
| 4 |
|
| 5 |
| 21 |
|
| 179 | |||||||
| Electric generation plants |
| 1 |
|
| 3 |
| 59 |
|
| 39 |
| 60 |
|
| 42 | |||||||
|
|
|
|
|
|
| 49 |
| $ | 558 |
| 63 |
| $ | 44 |
| 112 |
|
| 602 | |||
| Balancing accounts and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 107 | |||||||
|
| Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 709 |
21
Other Operating Expenses.Other operating expenses were $797 million, $774 million and $603 million in 2007, 2006 and 2005, respectively. The increase in 2007 was due to $5 million higher recoverable expenses (offset in revenues) and $23 million higher other operational costs, offset by $5 million lower SONGS operating costs. The increase in 2006 compared to 2005 was due to $72 million higher recoverable expenses, $33 million related to the 2005 recovery of line losses and grid management charges arising from a favorable settlement with the Independent System Operator (ISO), an independent operator of California's wholesale transmission grid, $24 million higher SONGS operating costs and a $42 million increase in various other operational costs.
Litigation Expense.Litigation expense was $10 million,$3 million and$52 million for 2007, 2006 and 2005, respectively. The higher amount in 2005 was primarily due to an increase in litigation reserves related to a settlement of matters arising from the 2000 - 2001 California energy crisis. Note 12 of the Notes to Consolidated Financial Statements provides additional information concerning this matter.
Interest Income.Interest income was $8 million, $6 million and $23 million in 2007, 2006 and 2005, respectively. The decrease in 2006 compared to 2005 was primarily due to $12 million lower interest as a result of income tax audit settlements in 2005.
Interest Expense.Interest expense was $96 million, $97 million and $74 million in 2007, 2006 and 2005, respectively. The increase in 2006 compared to 2005 was primarily due to increased borrowings to finance the purchase of the Palomar generating facility and interest expense related to the accretion of the California energy crisis litigation settlement liability.
Income Taxes.Income tax expense was $135 million, $152 million and $89 million in 2007, 2006 and 2005, respectively. The corresponding effective income tax rates were 32 percent, 39 percent and 25 percent. The decrease in income tax expense in 2007 was primarily due to a lower effective tax rate resulting from higher favorable resolution of prior years' income tax issues. The decrease was partially offset by the effect of higher pretax income in 2007. The increase in 2006 expense compared to 2005 was due to the higher effective tax rate and higher pretax income. The increase in the effective tax rate in 2006 was due primarily to a $60 million favorable resolution of prior years' income tax issues in 2005, compared to $2 million unfavorable in 2006.
Net Income. SDG&E recorded net income of $288 million, $242 million and$267 million in 2007, 2006 and 2005, respectively. The increase in 2007 was primarily due to $18 million from the higher favorable resolution of prior years' income tax issues in 2007, $15 million from higher electric transmission earnings and $7 million due to the Palomar electric generation facility operating for twelve months in 2007 as compared to nine months in 2006. Net income in 2007 also included $26 million from the resolution of a regulatory item associated with the disposition of a power plant in a prior year. Regulatory items in 2006 included a $13 million resolution of a prior-year cost recovery issue, $8 million due to the CPUC authorization for retroactive recovery on SONGS revenues related to a computational error in the 2004 Cost of Service, and $4 million due to FERC approval to recover prior-year ISO charges in 2006.
The decrease in 2006 compared to 2005 was primarily due to $60 million associated with the favorable resolution of prior years' income tax issues in 2005, the $23 million recovery of costs in 2005 associated with an IRS decision relating to the sale of the South Bay power plant and $22 million related to a DSM awards settlement in 2005. These items were offset by a $42 million increase in earnings from electric generation activities including the commencement of commercial operation of the Palomar generating facility in 2006, $28 million due to the litigation expense in 2005 related to the California energy crisis matter and a $13 million increase in
22
earnings due to lower income tax expense primarily resulting from a lower effective tax rate in 2006 (excluding the effect of the resolution of prior years' income tax issues in 2005). Resolution of regulatory items was $25 million in 2006 as compared to $23 million in 2005. The 2005 regulatory item of $23 million resulted from FERC approval to recover prior-year ISO charges (as discussed further in Note 12 of the Notes to Consolidated Financial Statements).
CAPITAL RESOURCES AND LIQUIDITY
The company's utility operations generally are the major source of liquidity. In addition, cash requirements can be met through the issuance of short-term and long-term debt. Cash requirements primarily consist of capital expenditures for utility plant.
At December 31, 2007, the company had $158 million in unrestricted cash and cash equivalents and $500 million in available unused credit on itscommitted line, which is shared with SoCalGas and is discussed more fully in Note 3 of the Notes to Consolidated Financial Statements. Management believes thatthese amounts and cash flows from operations andsecurity issuances will be adequate to finance capital expenditures and meet liquidity requirements and other commitments. Forecasted capital expenditures for the next five years are discussed in"Future Capital Expenditures for Utility Plant."Management continues to regularly monitor the company's ability to finance the needs of its operating, investing and financing activities in a manner consistent with its intention to maintain strong, investment-quality credit ratings.
In connection with the purchase of the Palomar generating facility in 2006, the company received a $200 million capital contribution from Sempra Energy. As a result of the company's projected capital expenditure program, SDG&E has elected to suspend the payment of dividends on its common stock to Sempra Energy, and the level of future common dividends may be affected during periods of increased capital expenditures.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities totaled $660 million, $397 million and $338 million for 2007, 2006 and 2005, respectively. Cash provided by operating activities in 2007 increased by $263 million (66%). The change was primarily due to a $150 million increase in income from continuing operations (adjusted for noncash items) and a $133 million increase in overcollected regulatory balancing accounts in 2007 compared to a decrease of $14 million in 2006.
The increase in cash provided by operating activities in 2006 compared to 2005 was primarily due to a $138 million decrease in the reduction of overcollected regulatory balancing accounts in 2006 as compared to 2005 and a $95 million decrease in accounts receivable, partially offset by a $53 million decrease in other liabilities, a $50 million decrease in current liabilities, a $37 million increase in interest receivable and a $29 million increase in inventories.
The company made pension plan and other postretirement benefit plan contributions of $27 million and $15 million, respectively, during 2007, $30 million and $12 million, respectively, during 2006 and $21 million and $7 million, respectively, during 2005.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used in investing activities totaled $707 million, $1.1 billion and $458 million for 2007, 2006 and 2005, respectively. Cash used in investing activities in 2007 decreased by $360 million (34%) primarily due to the purchase of the Palomar generating facility and higher expenditures
23
for the Otay Metro Powerloop transmission project in 2006, partially offset by increased capital spending resulting from the October 2007 Southern California wildfires.
The increase in cash used in investing activities in 2006 compared to 2005 was primarily due to a $606 million increase in capital expenditures in 2006, including the purchase of the Palomar generating facility and higher expenditures for the Otay Metro Powerloop project.
Future Capital Expenditures for Utility Plant
Significant capital expenditures and investments in 2008 are expected to include $700 million for additions to the company's natural gas and electric distribution, electric transmission and generation systems, and advanced metering infrastructure. These expenditures are expected to be financed by cash flows from operations andsecurity issuances. These amounts exclude capital expenditures of OMEC LLC.
Over the next five years, the company expects to make capital expenditures of $5 billion at a rate ranging from $600 million to $1.3 billion per year.
The company has an application on file with the CPUC for the Sunrise Powerlink, a proposed new transmission power line between the San Diego region and the Imperial Valley of Southern California. The proposed line would be able to deliver 1,000 MW and is estimated to cost $1.2 billion. Additional information on the Sunrise Powerlink is provided in Note 10 of the Notes to Consolidated Financial Statements.
Capital expenditure amounts include the portion of AFUDC (allowance for funds used during construction) related to debt, and exclude the portion of AFUDC related to equity. AFUDC is discussed in Note 1 of the Notes to Consolidated Financial Statements.
Construction programs are periodically reviewed and revised by the company in response to changes in regulation, economic conditions, competition, customer growth, inflation, customer rates, the cost of capital and environmental requirements, as discussed in Notes 10 and 12 of the Notes to Consolidated Financial Statements.
The company intends to finance its capital expenditures in a manner that will maintain its strong investment-grade ratings and capital structure.
The amounts and timing of capital expenditures are subject to approvals by the CPUC, the FERC and other regulatory bodies.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cashprovided by financing activities totaled $167 million, $443 million and $347 million for 2007, 2006 and 2005, respectively. Cash provided by financing activities in 2007 decreased by $276 million (62%), primarily due to the $200 million capital contribution made by Sempra Energy in 2006 and a $98 million decrease in issuances of long-term debt in 2007.
The increase in cash provided by financing activities in 2006 compared to 2005 was primarily due to the $200 million capital contribution from Sempra Energy and a $72 million increase in short-term debt, offset by a $161 million increase in payments on long-term debt and an $89 million decrease in issuances of long-term debt. In addition, the company did not pay any common dividends in 2006 as compared to $75 million of common dividends paid in 2005.
24
Long-Term Debt
In September 2007, the company publicly offered and sold $250 million of 6.125-percent first mortgage bonds, maturing in 2037. The company’s variable interest entity, OMEC LLC, had construction loan borrowings of $63 million.
In September 2006, the company issued $161 million of variable-rate first mortgage bonds, maturing in 2018, and applied the proceeds in November 2006 to retire an identical amount of first mortgage bonds and related tax-exempt industrial development bonds of a similar weighted-average maturity. The bonds will secure the repayment of tax-exempt industrial development bonds of an identical amount, maturity and interest rate issued by the City of Chula Vista, the proceeds of which have been loaned to the company and will be repaid with payments on the first mortgage bonds.
In June 2006, the company publicly offered and sold $250 million of 6-percent first mortgage bonds, maturing in 2026.
In November 2005, the company publicly offered and sold $250 million of 5.30-percent first mortgage bonds, maturing in 2015. In May 2005, the company publicly offered and sold $250 million of 5.35-percent first mortgage bonds, maturing in 2035.
Payments on long-term debt in 2007 were $66 million, the remaining outstanding balance of rate-reduction bonds.
Payments on long-term debt in 2006 included $161 million of the company's first mortgage bonds and $66 million of rate-reduction bonds.
Payments on long-term debt in 2005 were $66 million related to the company's rate-reduction bonds.
Note 3 of the Notes to Consolidated Financial Statements provides information concerning lines of credit and further discussion of debt activity.
Dividends
The company did not pay any common dividends to Sempra Energy in 2007 and 2006 to preserve cash to fund the company’s capital expenditures program, but did pay $75 million of common dividends to Sempra Energy in 2005.
The payment and amount of future dividends are at the discretion of the company's board of directors. The CPUC's regulation of SDG&E'scapital structure limits the amounts that are available for loans and dividends to Sempra Energy from SDG&E. At December 31, 2007, the company could have provided a total (combined loans and dividends) of $29 million to Sempra Energy.
Capitalization
At December 31, 2007, total capitalization, including all debt, was $4.4 billion. The debt-to-capitalization ratio was 45 percent at December 31, 2007. Significant changes affecting capitalization during 2007 included an increase in long-term debt, reductions in short-term
25
borrowings, an increase in minority interest, and comprehensive income. Additional discussion related to the significant changes is provided in Note3 of the Notes to Consolidated Financial Statements and "Results of Operations" above.
Commitments
The following is a summary of the company's principal contractual commitments at December 31, 2007. Additional information concerning commitments is provided above and in Notes 2, 3, 6, 9 and 12 of the Notes to Consolidated Financial Statements.
(Dollars in millions) |
| 2008 |
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| 2009 and 2010 |
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| 2011 and 2012 |
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| Thereafter |
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| Total | ||
Long-term debt | $ | -- |
| $ | -- |
| $ | -- |
|
| $ | 1,958 |
| $ | 1,958 | |
Interest on debt (1) |
| 90 |
|
| 190 |
|
| 197 |
|
|
| 1,376 |
|
| 1,853 | |
Operating leases |
| 22 |
|
| 42 |
|
| 36 |
|
|
| 63 |
|
| 163 | |
Litigation reserves |
| 12 |
|
| 12 |
|
| 12 |
|
|
| 11 |
|
| 47 | |
Purchased-power contracts |
| 360 |
|
| 764 |
|
| 680 |
|
|
| 2,536 |
|
| 4,340 | |
Natural gas contracts (2) |
| 26 |
|
| 29 |
|
| 26 |
|
|
| 109 |
|
| 190 | |
Preferred stock subject to mandatory redemption |
| 14 |
|
| -- |
|
| -- |
|
|
| -- |
|
| 14 | |
Construction commitments |
| 7 |
|
| 8 |
|
| 1 |
|
|
| -- |
|
| 16 | |
SONGS decommissioning |
| 10 |
|
| 1 |
|
| -- |
|
|
| 400 |
|
| 411 | |
Other asset retirement obligations |
| 4 |
|
| 7 |
|
| 7 |
|
|
| 139 |
|
| 157 | |
Pension and postretirement benefit obligations (3) |
| 57 |
|
| 115 |
|
| 122 |
|
|
| 280 |
|
| 574 | |
Environmental commitments |
| 8 |
|
| 2 |
|
| 3 |
|
|
| 4 |
|
| 17 | |
Totals | $ | 610 |
| $ | 1,170 |
| $ | 1,084 |
|
| $ | 6,876 |
| $ | 9,740 | |
(1) | Expected interest payments were calculated using the stated interest rate for fixed rate obligations, including floating-to-fixed interest rate swaps. Expected interest payments were calculated based on forward rates in effect at December 31, 2007 for variable rate obligations. | |||||||||||||||
(2) | Upon the combination of the company's and SoCalGas' core natural gas portfolios, as discussed in Note 11 of the Notes to Consolidated Financial Statements, these commitments will be assigned or transferred to SoCalGas. | |||||||||||||||
(3) | Amounts are after reduction for the Medicare Part D subsidy and only include expected payments to the plans for the next 10 years. |
The table excludes intercompany debt and individual contracts that have annual cash requirements less than $1 million. The table also excludes income tax liabilities of $26 million recorded in accordance with Financial Accounting Standards Board (FASB) Interpretation (FIN) No. 48,Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (FIN 48), because the company is unable to reasonably estimate the timing of future payments of these liabilities due to uncertainties in the timing of the effective settlement of tax positions. Additional information on FIN 48 is provided in Note 2 of the Notes to Consolidated Financial Statements.
26
Credit Ratings
Credit ratings remained at investment grade levels in 2007. As of January 31, 2008, company credit ratings were as follows:
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As of January 31, 2008, the company has a stable ratings outlook from all three credit rating agencies.
FACTORS INFLUENCING FUTURE PERFORMANCE
Performance of the company will depend primarily on the ratemaking and regulatory process, electric and natural gas industry restructuring, and the changing energy marketplace. Performance will also depend on the CPUC’s final decision regarding the 2008 General Rate Case and the successful completion of capital projects which are discussed in various places in this report. These factors are discussed in Notes 10 and 11 of the Notes to Consolidated Financial Statements.
Litigation
Note 12 of the Notes to Consolidated Financial Statements describes litigation, the ultimate resolution of which could have a material adverse effect on future performance.
Industry Developments
Notes 10 and11 of the Notes to Consolidated Financial Statements describe electric and natural gas regulation and rates, and other pending proceedings and investigations.
Market Risk
Market risk is the risk of erosion of the company's cash flows, net income, asset values and equity due to adverse changes in prices for various commodities, and in interest rates.
The company has policies governing its market risk management and trading activities. The company maintains a risk management committee, organization and processes to provide oversight of these activities. The committee, consisting of senior officers, establishes policy for and oversees energy risk management activities and monitors the results of trading and other activities to ensure compliance with the company's stated energy risk management and trading policies. This includes monitoring daily, detailed information detailing positions regarding market positions that create credit, liquidity and market risk.Independently from the company’s energy procurement department, the oversight organization and committee monitor energy price risk management and measure and report the credit, liquidity and market risk associated with these positions.
Along with other tools, the company uses Value at Risk (VaR) to measure daily its exposure to market risk. VaR is an estimate of the potential loss on a position or portfolio of positions over a specified holding period, based on normal market conditions and within a given statistical confidence interval. The company has adopted the variance/covariance methodology in its calculation of VaR, and uses both the
27
95-percent and 99-percent confidence intervals. VaR is calculated independently by the risk management oversight organization. Historical and implied volatilities and correlations between instruments and positions are used in the calculation.
The company uses energy and natural gas derivatives to manage natural gas and energy price risk associated with servicing load requirements. The use of energy and natural gas derivatives is subject to certain limitations imposed by company policy and is in compliance with risk management and trading activity plans that have been filed and approved by the CPUC. Any costs or gains/losses associated with the use of energy and natural gas derivatives, which use is in compliance with CPUC approved plans, are considered to be commodity costs that are passed on to customers on a substantially concurrent basis.
Revenue recognition is discussed in Note 1 of the Notes to Consolidated Financial Statements and the additional market-risk information regarding derivative instruments is discussed in Note 8 of the Notes to Consolidated Financial Statements.
The following discussion of the company's primary market-risk exposures as of December 31, 2007 includes a discussion of how these exposures are managed.
Commodity Price Risk
Market risk related to physical commodities is created by volatility in the prices and basis of natural gas and electricity. The company's market risk is impacted by changes in volatility and liquidity in the markets in which these commodities or related financial instruments are traded. The company is exposed, in varying degrees, to price risk, primarily in the natural gas and electricity markets. The company's policy is to manage this risk within a framework that considers the unique markets and operating and regulatory environments.
The company's market-risk exposure is limited due to CPUC-authorized rate recovery of the costs of electric procurement and natural gas purchases, and intrastate transportation and storage activity. However, the company may, at times, be exposed to market risk as a result of SDG&E's natural gas PBR and electric procurement activities, which are discussed in Note 11 of the Notes to Consolidated Financial Statements. If commodity prices were to rise too rapidly, it is likely that volumes would decline. This would increase the per-unit fixed costs, which could lead to further volume declines. The company manages its risk within the parameters of its market risk management framework. As of December 31, 2007, the company's VaR was not material, and the procurement activities were in compliance with the procurement plans filed with and approved by the CPUC.
Interest Rate Risk
The company is exposed to fluctuations in interest rates primarily as a result of its short-term and long-term debt. Subject to regulatory constraints, interest-rate swaps may be used to adjust interest-rate exposures. The company periodically enters into interest-rate swap agreements to moderate its exposure to interest-rate changes and to lower its overall costs of borrowing.
At December 31, 2007, after the effects of interest-rate swaps, the company had $1.8 billion of fixed-rate, long-term debt and $168 million of variable-rate, long-term debt. Interest on fixed-rate utility debt is fully recovered in rates on a historical cost basis and interest on variable-rate debt is provided for in rates on a forecasted basis. At December 31, 2007, the company's fixed-rate, long-term debt, after the effects of interest-rate swaps, had a one-year VaR of $320 million and variable-rate, long-term debt, after the effects of interest-rate swaps, had a one-year VaR of $17 million.
28
At December 31, 2007, the total notional amount of interest-rate swap transactions ranges from $324 million to $628 million (ranges relate to amortizing notional amounts). Note 8 of the Notes to Consolidated Financial Statements provides further information regarding interest-rate swap transactions.
In addition, the company is subject to the effect of interest-rate fluctuations on the assets of its pension plans, other postretirement benefit plans and the nuclear decommissioning trusts. However, the effects of these fluctuations are expected to be passed on to customers.
Credit Risk
Credit risk is the risk of loss that would be incurred as a result of nonperformance by counterparties of their contractual obligations. As with market risk, the company has policies governing the management of credit risk that are administered by the company's credit department and overseen by its risk management committee. Using rigorous models, this oversight includes calculating current and potential credit risk on a daily basis and monitoring actual balances in comparison to approved limits. The company avoids concentration of counterparties whenever possible, and management believes its credit policies significantly reduce overall credit risk. These policies include an evaluation of prospective counterparties' financial condition (including credit ratings), collateral requirements under certain circumstances, the use of standardized agreements that allow for the netting of positive and negative exposures associated with a single counterparty, and other security such as lock-box liens and downgrade triggers. The company believes that adequate reserves have been provided for counterparty nonperformance.
The company monitors credit risk through a credit-approval process and the assignment and monitoring of credit limits. These credit limits are established based on risk and return considerations under terms customarily available in the industry.
As noted above under "Interest Rate Risk," the company periodically enters into interest-rate swap agreements to moderate exposure to interest-rate changes and to lower the overall cost of borrowing. The company would be exposed to interest-rate fluctuations on the underlying debt should counterparties to the agreement not perform.
29
CRITICAL ACCOUNTING POLICIES AND ESTIMATES AND KEY NONCASH PERFORMANCE INDICATORS
Certain accounting policies are viewed by management as critical because their application is the most relevant, judgmental and/or material to the company's financial position and results of operations, and/or because they require the use of material judgments and estimates.
The company's significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements. The most critical policies, all of which are mandatory under generally accepted accounting principles in the United States of America and the regulations of the Securities and Exchange Commission, are the following:
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Item 5.
30Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
27
Item 6.
Selected Financial Data
| 28 | |||
Item 7. |
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34
Choices among alternative accounting policies that are material to the company's financial statements and information concerning significant estimates have been discussed with the audit committee of the Sempra Energy board of directors.
Key noncash performance indicators for the company include number of customers and natural gas volumes and electricity sold. The information is provided in "Results of Operations."
NEW ACCOUNTING STANDARDS
Relevant pronouncements that have recently become effective and have had or may have a significant effect on the company's financial statements are described in Note 2 of the Notes to Consolidated Financial Statements.
35
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 7A is set forth under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations –
28
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk."Risk
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation of the company's consolidated financial statements and related information appearing in this report. Management believes that the consolidated financial statements fairly present the form and substance of transactions and that the financial statements reasonably present the company's financial position and results of operations in conformity with accounting principles generally accepted in the United States of America. Management also has included in the company's financial statements amounts that are based on estimates and judgments, which it believes are reasonable under the circumstances.
The board of directors of Sempra Energy, the company's parent company, has an Audit Committee composed of six non-management directors. The committee meets periodically with financial management and the internal auditors to review accounting, control, auditing and financial reporting matters.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Company management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of company management, including the principal executive officer and principal financial officer, the company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework inInternal Control -- Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the company's evaluation under the framework inInternal Control -- Integrated Framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2007. The effectiveness of the company’s internal control over financial reporting as of December 31, 2007, has been audited by Deloitte & Touche LLP, as stated in the ir report, which is included in Item 8.
Financial Statements and Supplementary Data
28
Item 9.
36Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
28
Item 9A.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMControls and Procedures
28
To the BoardItem 9B.
Other Information
28
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
29
Item 11.
Executive Compensation
29
Item 12.
Security Ownership of DirectorsCertain Beneficial Owners and Shareholders of San Diego Gas & Electric Company:
We have audited the internal control over financial reporting of San Diego Gas & Electric CompanyManagement and subsidiary (the "Company") as of December 31, 2007 based on criteria established inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reportingRelated Stockholder Matters
29
Item 13.
Certain Relationships and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we planRelated Transactions, and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testingDirector Independence
29
Item 14.
Principal Accountant Fees and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.Services
29
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting princ iples, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year
37
ended December 31, 2007 of the Company and our report dated February 25, 2008 expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s adoption of two new accounting standards in 2007.
/S/ DELOITTE & TOUCHE LLP
San Diego, CaliforniaFebruary 25, 2008
38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of San Diego Gas & Electric Company:
We have audited the accompanying consolidated balance sheets of San Diego Gas & Electric Company and subsidiary (the "Company") as of December 31, 2007 and 2006, and the related statements of consolidated income, comprehensive income and changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of San Diego Gas & Electric Company and subsidiary as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, the Company adopted Financial Accounting Standards Board ("FASB") Statement No. 157,Fair Value Measurements, effective January 1, 2007 and FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, effective January 1, 2007. As discussed in Note 6 to the consolidated financial statements, the Company adopted FASB Statement No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R), effective December 31, 2006.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2007, based on the criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2008 expressed an unqualified opinion on the Company's internal control over financial reporting.
/S/ DELOITTE & TOUCHE LLP
San Diego, CaliforniaFebruary 25, 2008
SEMPRA ENERGY FORM 10-K |
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SAN DIEGO GAS & ELECTRIC COMPANY AND SUBSIDIARY | |||||||||||||||||||
STATEMENTS OF CONSOLIDATED INCOME |
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| Years ended December 31, | ||||||||||||
(Dollars in millions) |
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| 2007 |
| 2006 |
| 2005 | ||||||||||
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Operating revenues |
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| Electric |
| $ | 2,194 |
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| $ | 2,147 |
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| $ | 1,803 |
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| Natural gas |
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| 658 |
|
|
| 638 |
|
|
| 709 |
| ||||||
| Total operating revenues |
|
| 2,852 |
|
|
| 2,785 |
|
|
| 2,512 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
| |||||||
| Cost of electric fuel and purchased power |
|
| 699 |
|
|
| 721 |
|
|
| 624 |
| ||||||
| Cost of natural gas |
|
| 392 |
|
|
| 380 |
|
|
| 456 |
| ||||||
| Other operating expenses |
|
| 797 |
|
|
| 774 |
|
|
| 603 |
| ||||||
| Depreciation and amortization |
|
| 301 |
|
|
| 291 |
|
|
| 264 |
| ||||||
| Franchise fees and other taxes |
|
| 155 |
|
|
| 140 |
|
|
| 119 |
| ||||||
| Litigation expense |
|
| 10 |
|
|
| 3 |
|
|
| 52 |
| ||||||
| Gains on sale of assets |
|
| (2 | ) |
|
| (1 | ) |
|
| (1 | ) | ||||||
| Impairment losses |
|
| -- |
|
|
| -- |
|
|
| 2 |
| ||||||
|
| Total operating expenses |
|
| 2,352 |
|
|
| 2,308 |
|
|
| 2,119 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Operating income |
|
| 500 |
|
|
| 477 |
|
|
| 393 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Other income, net |
|
| 11 |
|
|
| 8 |
|
|
| 14 |
| |||||||
Interest income |
|
| 8 |
|
|
| 6 |
|
|
| 23 |
| |||||||
Interest expense |
|
| (96 | ) |
|
| (97 | ) |
|
| (74 | ) | |||||||
Income before income taxes |
|
| 423 |
|
|
| 394 |
|
|
| 356 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Income tax expense |
|
| 135 |
|
|
| 152 |
|
|
| 89 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Net income |
|
| 288 |
|
|
| 242 |
|
|
| 267 |
| |||||||
Preferred dividend requirements |
|
| 5 |
|
|
| 5 |
|
|
| 5 |
| |||||||
Earnings applicable to common shares |
| $ | 283 |
|
| $ | 237 |
|
| $ | 262 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
See Notes to Consolidated Financial Statements. |
Page | |||
PART IV | |||
Item 15. | Exhibits and Financial Statement Schedules | 30 | |
Sempra Energy: Consent of Independent Registered Public Accounting Firm and Report on Schedule | 31 | ||
San Diego Gas & Electric Company: Consent of Independent Registered Public Accounting Firm | 32 | ||
Southern California Gas Company: Consent of Independent Registered Public Accounting Firm | 33 | ||
Pacific Enterprises: Report of Independent Registered Public Accounting Firm | 34 | ||
Schedule I – Sempra Energy Condensed Financial Information of Parent | 35 | ||
Schedule I – Pacific Enterprises Condensed Financial Information of Parent | 39 | ||
Signatures | 43 | ||
Exhibit Index | 47 | ||
Glossary | 56 | ||
This combined Form 10-K is separately filed by Sempra Energy, San Diego Gas & Electric Company, Pacific Enterprises and Southern California Gas Company. Information contained herein relating to any individual company is filed by such company on its own behalf. Each company makes representations only as to itself and makes no other representation whatsoever as to any other company.
You should read this report in its entirety as it pertains to each respective reporting company. No one section of the report deals with all aspects of the subject matter. Separate Item 6 and 8 sections are provided for each reporting company, except for the Notes to Consolidated Financial Statements. The Notes to Consolidated Financial Statements for all of the reporting companies are combined. All Items other than 6 and 8 are combined for the reporting companies.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
We make statements in this report that are not historical fact and constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are necessarily based upon assumptions with respect to the future, involve risks and uncertainties, and are not guarantees of performance. These forward-looking statements represent our estimates and assumptions only as of the date of this report.
In this report, when we use words such as "believes," "expects," "anticipates," "plans," "estimates," "projects," "contemplates," "intends," "depends," "should," "could," "would," "may," "potential," "target," "goals," or similar expressions, or when we discuss our strategy, plans or intentions, we are making forward-looking statements.
Factors, among others, that could cause our actual results and future actions to differ materially from those described in forward-looking statements include
§
local, regional, national and international economic, competitive, political, legislative and regulatory conditions and developments;
§
actions by the California Public Utilities Commission, the California State Legislature, the California Department of Water Resources, the Federal Energy Regulatory Commission, the Federal Reserve Board, and other regulatory and governmental bodies in the United States and other countries in which we operate;
§
capital markets conditions and inflation, interest and exchange rates;
§
energy and trading markets, including the timing and extent of changes and volatility in commodity prices;
§
the availability of electric power, natural gas and liquefied natural gas;
§
weather conditions and conservation efforts;
§
war and terrorist attacks;
§
business, regulatory, environmental and legal decisions and requirements;
§
the status of deregulation of retail natural gas and electricity delivery;
§
the timing and success of business development efforts;
§
the resolution of litigation; and
§
other uncertainties, all of which are difficult to predict and many of which are beyond our control.
We caution you not to rely unduly on any forward-looking statements. You should review and consider carefully the risks, uncertainties and other factors that affect our business as described in this report and other reports that we file with the Securities and Exchange Commission.
PART I
ITEM 1. BUSINESS
DESCRIPTION OF BUSINESS
We provide a description of Sempra Energy and its subsidiaries in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2009 Annual Report to Shareholders (Annual Report), which is incorporated by reference.
This report includes information for the following separate registrants:
§
Sempra Energy and its consolidated entities
§
San Diego Gas & Electric Company (SDG&E)
§
Pacific Enterprises (PE), the holding company for Southern California Gas Company
§
Southern California Gas Company (SoCalGas)
References in this report to "we," "our" and "our company" are to Sempra Energy and its subsidiaries, collectively. SDG&E and SoCalGas are collectively referred to as the Sempra Utilities.
Sempra Energy has five separately managed reportable segments consisting of SDG&E, SoCalGas, Sempra Commodities, Sempra Generation and Sempra Pipelines & Storage. Sempra Commodities, Sempra Generation, Sempra Pipelines & Storage, and an additional business unit, Sempra LNG (liquefied natural gas) are subsidiaries of Sempra Global. Sempra Global is a holding company for most of our subsidiaries that are not subject to California utility regulation.
SDG&E, PE and SoCalGas are subsidiaries of Sempra Energy. Sempra Energy directly or indirectly owns all the common stock and substantially all of the voting stock of each of the three companies.
Sempra Commodities - Pending Transaction
In April 2008, Sempra Energy formed a partnership with The Royal Bank of Scotland plc (RBS) to purchase and operate our commodities-marketing businesses, which generally comprised the Sempra Commodities segment. In November 2009, RBS announced its intention to divest its interest in this joint venture, RBS Sempra Commodities LLP (RBS Sempra Commodities), following a directive from the European Commission to dispose of certain assets. On February 16, 2010, Sempra Energy, RBS and the partnership entered into an agreement with J.P. Morgan Ventures Energy Corporation (J.P. Morgan Ventures), whereby J.P. Morgan Ventures will purchase the following businesses from the joint venture:
§
the global oil, metals, coal, emissions (other than emissions related to the joint venture’s North American power business), plastics, agricultural commodities and concentrates commodities trading and marketing business
§
the European power and gas business
§
the investor products business
RBS Sempra Commodities will retain its North American power and natural gas trading businesses and its retail energy solutions business. These businesses have historically generated 40 to 60 percent of total earnings of the businesses in the partnership, and have averaged more than 50 percent.
Subject to obtaining various regulatory approvals and other conditions, the transaction is expected to close in the second quarter of 2010. J.P. Morgan Ventures will pay an aggregate purchase price equal to the estimated book value at closing of the businesses purchased, generally computed on the basis of international financial reporting standards (as adopted by the European Union), plus an amount equal to $468 million. Sempra Energy will be entitled to 53 -1/3 percent of the aggregate purchase price, and RBS will be entitled to 46-2/3 percent of the aggregate purchase price.
In connection with the transaction, we and RBS entered into a letter agreement to negotiate, prior to closing of the transaction, definitive documentation to amend certain provisions of the Limited Liability Partnership Agreement dated April 1, 2008 between Sempra Energy and RBS. As RBS continues to be obligated to divest its remaining interest in the partnership, the letter agreement also provides for negotiating the framework for the entertaining bids for the remaining part of the partnership’s business.
We provide further discussion about RBS Sempra Commodities and the pending transaction with J.P. Morgan Ventures in Notes 3, 4, 6 and 20 of the Notes to Consolidated Financial Statements. The partnership is also discussed in "Sempra Global – Competition - Sempra Commodities" below.
COMPANY WEBSITES
Company website addresses are:
Sempra Energy – http://www.sempra.com
SDG&E – http://www.sdge.com
PE/SoCalGas – http://www.socalgas.com
We make available free of charge on our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. The charters of the audit, compensation and corporate governance committees of Sempra Energy’s board of directors (the board), the board's corporate governance guidelines, and Sempra Energy's code of business conduct and ethics for directors and officers are posted on Sempra Energy's website.
SDG&E and SoCalGas make available free of charge via a hyperlink on their websites their annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.
Printed copies of all of these materials may be obtained by writing to our Corporate Secretary at Sempra Energy, 101 Ash Street, San Diego, CA 92101-3017.
GOVERNMENT REGULATION
The most significant government regulation affecting Sempra Energy is the regulation of our utility subsidiaries.
California Utility Regulation
The Sempra Utilities are regulated in California by the California Public Utilities Commission (CPUC), the California Energy Commission (CEC), and the California Air Resources Board (CARB).
The California Public Utilities Commission:
§
consists of five commissioners appointed by the Governor of California for staggered, six-year terms.
§
regulates SDG&E’s and SoCalGas’ rates and conditions of service, sales of securities, rates of return, capital structure, rates of depreciation, and long-term resource procurement, except as described below in "United States Utility Regulation."
§
has jurisdiction over the proposed construction of major new electric transmission, electric distribution, and natural gas storage, transmission and distribution facilities in California.
§
conducts reviews and audits of utility performance and compliance with regulatory guidelines, and conducts investigations into various matters, such as deregulation, competition and the environment, to determine its future policies.
§
regulates the interactions and transactions of the Sempra Utilities with Sempra Energy and its other affiliates.
We provide further discussion in Notes 15 and 16 of the Notes to Consolidated Financial Statements in the Annual Report.
SDG&E is also subject to regulation by the CEC, which publishes electric demand forecasts for the state and for specific service territories. Based upon these forecasts, the CEC:
§
determines the need for additional energy sources and conservation programs;
§
sponsors alternative-energy research and development projects;
§
promotes energy conservation programs;
§
maintains a statewide plan of action in case of energy shortages; and
§
certifies power-plant sites and related facilities within California.
The CEC conducts a 20-year forecast of available supplies and prices for every market sector that consumes natural gas in California. This forecast includes resource evaluation, pipeline capacity needs, natural gas demand and wellhead prices, and costs of transportation and distribution. This analysis is one of many resource materials used to support the Sempra Utilities’ long-term investment decisions.
The State of California requires certain California electric retail sellers, including SDG&E, to deliver 20 percent of their 2010 retail demand from renewable energy sources. The rules governing this requirement, administered by both the CPUC and the CEC, are generally known as the Renewables Portfolio Standard (RPS) Program. Certification of a generation project by the CEC as an Eligible
Renewable Energy Resource (ERR) allows the purchase of output from a generation facility to be counted towards fulfillment of the RPS Program requirements. This may affect the demand for output from renewables projects developed by Sempra Generation, particularly from California utilities. Final certification as an ERR for Sempra Generation’s El Dorado solar generation facility was approved in June 2009.
In September 2009, the Governor of California issued an Executive Order which directs the California utilities to procure 33 percent of their electric energy requirements from renewable sources by 2020. This Executive Order designates the CARB as the agency responsible for establishing the compliance rules and regulations for this program.
CaliforniaAssembly Bill 32, the California Global Warming Solutions Act of 2006, assigns responsibility to CARB for monitoring and establishing policies for reducing greenhouse gas (GHG) emissions. The bill requires CARB to develop and adopt a comprehensive plan for achieving real, quantifiable and cost-effective GHG emission reductions, including a statewide GHG emissions cap, mandatory reporting rules, and regulatory and market mechanisms to achieve reductions of GHG emissions. CARB is a department within the California Environmental Protection Agency, an organization which reports directly to the Governor's Office in the Executive Branch of California State Government. As the CARB formulates its plan, provisions of the plan may apply to the Sempra Utilities.
United States Utility Regulation
The Sempra Utilities are also regulated by the Federal Energy Regulatory Commission (FERC) and the Nuclear Regulatory Commission (NRC).
In the case of SDG&E, the FERC regulates the interstate sale and transportation of natural gas, the transmission and wholesale sales of electricity in interstate commerce, transmission access, rates of return on transmission investment, the uniform systems of accounts, rates of depreciation and electric rates involving sales for resale.
In the case of SoCalGas, the FERC regulates the interstate sale and transportation of natural gas and the uniform systems of accounts.
The NRC oversees the licensing, construction and operation of nuclear facilities in the United States, including the San Onofre Nuclear Generating Station (SONGS), in which SDG&E owns a 20-percent interest. NRC regulations require extensive review of the safety, radiological and environmental aspects of these facilities. Periodically, the NRC requires that newly developed data and techniques be used to reanalyze the design of a nuclear power plant and, as a result, may require plant modifications as a condition of continued operation.
Sempra Pipelines & Storage operates Mobile Gas Service Corporation (Mobile Gas), a small natural gas distribution utility serving Southwest Alabama that is regulated by the Alabama Public Service Commission (APSC). The FERC regulates Mobile Gas’ interstate transportation of natural gas, the uniform systems of accounts, and rates of depreciation.
Local Regulation Within the U.S.
SoCalGas has natural gas franchises with the 243 separate counties and cities in its service territory. These franchises allow SoCalGas to locate, operate and maintain facilities for the transmission and distribution of natural gas. Most of the franchises have indefinite lives with no expiration date. Some franchises have fixed expiration dates, ranging from 2010 to 2048.
SDG&E has
§
electric franchises with the two counties and the 26 cities in its electric service territory, and
§
natural gas franchises with the one county and the 18 cities in its natural gas service territory.
These franchises allow SDG&E to locate, operate and maintain facilities for the transmission and distribution of electricity and/or natural gas. Most of the franchises have indefinite lives with no expiration dates. Some franchises have fixed expiration dates, ranging from 2012 to 2035.
Sempra Generation, Sempra LNG and Sempra Pipelines & Storage have operations or development projects in Alabama, Arizona, California, Indiana, Louisiana, Mississippi, Nevada, Texas, and Hawaii. These entities are subject to state and local laws, and to regulations in the states in which they operate.
Other Regulation
RBS Sempra Commodities is subject to regulation by the U.K. Financial Services Authority, the New York Mercantile Exchange, the Commodity Futures Trading Commission, the FERC, the London Metals Exchange, NYSE Euronext, the U.S. Federal Reserve Bank and the National Futures Association.
In the United States, the FERC regulates Sempra Generation’s, Sempra Pipelines & Storage’s and Sempra LNG’s operations. Sempra Pipelines & Storage also owns an interest in the Rockies Express Pipeline, a natural gas pipeline which operates in several states in the United States and is subject to regulation by the FERC.
Sempra Pipelines & Storage’s Bay Gas Storage Company (Bay Gas) is regulated by the APSC and its intrastate storage contracts are subject to APSC approval. Bay Gas provides long-term services for customers that include storage and transportation of natural gas from interstate and intrastate sources. As an intrastate facility, Bay Gas is regulated by the FERC as a 311 facility, and the FERC has also approved market-based rates for interstate storage services and cost-based rates for transportation services.
Several of our segments operate in Mexico as follows:
§
Sempra Generation owns and operates a natural gas-fired power plant in Baja California, Mexico
§
Sempra Pipelines & Storage’s Mexican utilities build and operate natural gas distribution systems in Mexicali, Chihuahua, and the La Laguna-Durango zone in north-central Mexico
§
Sempra Pipelines & Storage transports gas between the U.S. border and Baja California, Mexico
§
Sempra LNG owns and operates the Energía Costa Azul LNG receipt terminal located in Baja California, Mexico
These operations are subject to regulation by the Comisión Reguladora de Energía and by the labor and environmental agencies of city, state and federal governments in Mexico.
Sempra Pipelines & Storage also has investments in South America that are subject to laws and regulations in the localities and countries in which they operate.
Licenses and Permits
The Sempra Utilities obtain numerous permits, authorizations and licenses in connection with the transmission and distribution of natural gas and electricity and the operation and construction of related assets. Because these permits, authorizations and licenses require periodic renewal, the Sempra Utilities are continuously regulated by the granting agencies.
Our other subsidiaries are also required to obtain numerous permits, authorizations and licenses in the normal course of business. Some of these permits, authorizations and licenses require periodic renewal.
SempraGeneration and its subsidiaries obtain a number of permits, authorizations and licenses in connection with the construction and operation of power generation facilities, and in connection with the wholesale distribution of electricity.
Sempra Pipelines & Storage’s Mexican subsidiaries obtain numerous permits, authorizations and licenses for their natural gas distribution and transmission systems from the local governments where the service is provided. Sempra Pipelines & Storage’s U.S. operations obtain licenses and permits for natural gas storage facilities and pipelines.
Sempra LNG obtains licenses and permits for the construction and operation of LNG facilities.
We describe other regulatory matters in Notes 15 and 16 of the Notes to Consolidated Financial Statements in the Annual Report.
CALIFORNIA NATURAL GAS UTILITY OPERATIONS
SoCalGas and SDG&E sell, distribute, and transport natural gas. SoCalGas purchases and stores natural gas for itself and SDG&E on a combined portfolio basis and provides natural gas storage services for others. The Sempra Utilities’ resource planning, natural gas procurement, contractual commitments, and related regulatory matters are discussed below. We also provide further discussion in the Annual Report in "Management's Discussion and Analysis of Financial Condition and Results of Operations," and in Notes 16 and 17 of the Notes to Consolidated Financial Statements.
Customers
For regulatory purposes, end-use customers are classified as either core or noncore customers. Core customers are primarily residential and small commercial and industrial customers. Noncore customers at SoCalGas consist primarily of electric generation, wholesale, large commercial, industrial, and enhanced oil recovery customers. Noncore customers at SDG&E consist primarily of electric generation, and large commercial and industrial customers.
Most core customers purchase natural gas directly from SoCalGas or SDG&E. While core customers are permitted to purchase directly from producers, marketers or brokers, the Sempra Utilities are obligated to provide reliable supplies of natural gas to serve the requirements of their core customers. Noncore customers are responsible for the procurement of their natural gas requirements.
In 2009, SoCalGas added 27,000 new customer natural gas meters at a growth rate of 0.5 percent; in 2008, it added 41,000 new meters at a growth rate of 0.7 percent. In 2009, SDG&E added 4,200 new customer natural gas meters at a growth rate of 0.5 percent; in
2008, it added 3,000 new meters at a growth rate of 0.4 percent. We expect levels to remain low in 2010, and both SoCalGas and SDG&E expect new meter growth in 2010 to be comparable to that in 2009.
Natural Gas Procurement and Transportation
SoCalGaspurchases natural gas under short-term and long-term contracts for the Sempra Utilities’ core customers. SoCalGas purchases natural gas from Canada, the U.S. Rockies and the southwestern U.S. to meet customer requirements and maintain pipeline reliability. It also purchases some California natural gas production and additional supplies delivered directly to California for its remaining requirements. Natural gas prices for substantially all contracts are based on published monthly bid-week indices.
To ensure the delivery of the natural gas supplies to its distribution system and to meet the seasonal and annual needs of customers, SoCalGas has entered into firm interstate pipeline capacity contracts that require the payment of fixed reservation charges to reserve firm transportation rights. Interstate pipeline companies, primarily El Paso Natural Gas Company, Transwestern Pipeline Company, and Kern River Gas Transmission Company, provide transportation services into SoCalGas' intrastate transmission system for supplies purchased by SoCalGas or its transportation customers from outside of California. The FERC regulates the rates that interstate pipeline companies may charge for natural gas and transportation services.
SoCalGas has natural gas transportation contracts with various interstate pipelines. These contracts expire on various dates between 2010 and 2025.
Natural Gas Storage
SoCalGas provides natural gas storage services for core, noncore and non-end-use customers. The Sempra Utilities’ core customers are allocated a portion of SoCalGas' storage capacity. SoCalGas offers the remaining storage capacity for sale to others through an open bid process. The storage service program provides opportunities for these customers to purchase and store natural gas when natural gas costs are low, usually during the summer, thereby reducing purchases when natural gas costs are expected to be higher. This program allows customers to better manage their fuel procurement and transportation needs.
Demand for Natural Gas
Growth in the demand for natural gas largely depends on the health and expansion of the Southern California economy, prices of alternative energy products, environmental regulations, renewable energy, legislation, and the effectiveness of energy efficiency programs. External factors such as weather, the price of electricity, electric deregulation, the use of hydroelectric power, development of renewable energy resources, development of new natural gas supply sources, and general economic conditions can also result in significant shifts in demand and market price.
The Sempra Utilities face competition in the residential and commercial customer markets based on the customers' preferences for natural gas compared with other energy products. In the noncore industrial market, some customers are capable of securing alternate fuel supplies from other suppliers which can affect the demand for natural gas. The Sempra Utilities’ ability to maintain their respective industrial market shares is largely dependent on the relative spread between delivered energy prices.
Natural gas demand for electric generation within Southern California competes with electric power generated throughout the western U.S. Natural gas transported for electric generating plant customers may be significantly affected to the extent that regulatory changes and electric transmission infrastructure investment divert electric generation from the Sempra Utilities’ respective service areas. We provide additional information regarding electric industry restructuring in Note 15 of the Notes to Consolidated Financial Statements in the Annual Report.
Short-Term Demand. The demand for natural gas by electric generators is influenced by a number of factors, including:
§
the availability of alternative sources of generation; for example, the availability of hydroelectricity is highly dependent on precipitation in the western U.S. and Canada;
§
the performance of other generation sources in the western U.S., including nuclear and coal, renewable energy and other natural gas facilities outside the service area; and
§
the changes in end-use electricity demand; for example, natural gas use generally increases during extended heat waves.
Long-Term Demand. The demand for natural gas used to generate electricity will be influenced by additional factors such as the location of new power plants and the development of renewable energy resources. Recently, more generation capacity has been constructed outside the Sempra Utilities' service area than within it. This new generation will displace the output of older, less-efficient local generation, thereby reducing the use of natural gas for local electric generation. Over the next few years, however, the construction of smaller natural gas-fired peaking and other electric generation facilities within the Sempra Utilities’ respective service areas are expected to result in a slight overall increase in the demand for local natural gas for electric generation.
The natural gas distribution business is seasonal, and revenues generally are greater during the winter heating months. As is prevalent in the industry, SoCalGas injects natural gas into storage during the summer months (usually April through October) for withdrawal from storage during the winter months (usually November through March) when customer demand is higher.
ELECTRIC UTILITY OPERATIONS
Customers
SDG&E’s service area covers 4,100 square miles. At December 31, 2009, SDG&E had 1.4 million customer meters consisting of:
§
1,225,500 residential
§
146,700 commercial
§
500 industrial
§
2,000 street and highway lighting
§
4,500 direct access
In 2009, SDG&E added 7,000 new electric customer meters at a growth rate of 0.5 percent; in 2008, it added 7,400 new customers at a growth rate of 0.5 percent. Based on forecasts of new housing starts, SDG&E expects that its new meter growth rate in 2010 will be comparable to that in 2009.
Resource Planning and Power Procurement
SDG&E's resource planning, power procurement and related regulatory matters are discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in Notes 15, 16 and 17 of the Notes to Consolidated Financial Statements in the Annual Report.
Electric Resources
The supply of electric power available to SDG&E for resale is based on CPUC-approved purchased-power contracts currently in place with its various suppliers, its Palomar and Miramar generating facilities, its 20-percent ownership interest in SONGS and purchases on a spot basis. This supply as of December 31, 2009 is as follows:
SDG&E ELECTRIC RESOURCES | |||||||
Supplier |
| Source |
| Expiration date | Megawatts (MW) | ||
PURCHASED-POWER CONTRACTS: |
|
|
|
|
|
| |
Department of Water Resources (DWR)- |
|
|
|
|
|
| |
allocated contracts: |
|
|
|
|
|
| |
| JP Morgan |
| Natural gas |
| 2010 |
| 325 |
| Sunrise Power Co. LLC |
| Natural gas |
| 2012 |
| 570 |
| Other (5 contracts) |
| Natural gas/Wind |
| 2011 to 2013 |
| 259 |
| Total |
|
|
|
|
| 1,154 |
Other contracts with Qualifying Facilities (QFs)(1): |
|
|
|
|
|
| |
| Applied Energy Inc. |
| Cogeneration |
| 2019 |
| 116 |
| Yuma Cogeneration |
| Cogeneration |
| 2024 |
| 56 |
| Goal Line Limited Partnership |
| Cogeneration |
| 2025 |
| 50 |
| Other (18 contracts) |
| Cogeneration |
| 2009(2) and thereafter |
| 48 |
| Total |
|
|
|
|
| 270 |
Other contracts with renewable sources: |
|
|
|
|
|
| |
| Oasis Power Partners |
| Wind |
| 2019 |
| 60 |
| Kumeyaay |
| Wind |
| 2025 |
| 50 |
| Covanta Delano |
| Bio-mass |
| 2017 |
| 49 |
| Iberdrola Renewables |
| Wind |
| 2018 |
| 25 |
| WTE/FPL |
| Wind |
| 2019 |
| 17 |
| PacificCorp |
| Wind |
| 2010 |
| 200 |
| NaturEner |
| Wind |
| 2024 |
| 210 |
| Other (9 contracts) |
| Bio-gas/Hydro |
| 2012 to 2022 |
| 33 |
| Total |
|
|
|
|
| 644 |
Other long-term and tolling contracts(3): |
|
|
|
|
|
| |
| Cabrillo Power I, LLC |
| Natural gas |
| 2010 |
| 964 |
| Dynegy South Bay Holdings, LLC |
| Natural gas |
| 2009(4) |
| 704 |
| Otay Mesa Energy Center LLC |
| Natural gas |
| 2019 |
| 573 |
| Portland General Electric (PGE) |
| Coal |
| 2013 |
| 89 |
| Enernoc |
| Demand response/ |
|
|
|
|
|
|
| Distributed generation |
| 2016 |
| 25 |
| Total |
|
|
|
|
| 2,355 |
Total contracted |
|
|
|
|
| 4,423 | |
|
|
|
|
|
|
|
|
GENERATION: |
|
|
|
|
|
| |
| Palomar |
| Natural gas |
|
|
| 560 |
| SONGS |
| Nuclear |
|
|
| 430 |
| Miramar |
| Natural gas |
|
|
| 96 |
Total generation |
|
|
|
|
| 1,086 | |
TOTAL CONTRACTED AND GENERATION |
|
|
|
|
| 5,509 | |
(1) | A QF is a generating facility which meets the requirements for QF status under the Public Utility Regulatory Policies Act of 1978. It includes cogeneration facilities, which produce electricity and another form of useful thermal energy (such as heat or steam) used for industrial, commercial, residential or institutional purposes. It also includes small power production facilities, which are generating facilities whose primary energy source is renewable (hydro, wind, solar, etc.), biomass, waste, or geothermal resources. Small power production facilities are generally limited in size to 80 MW. | ||||||
(2) | One 25-MW contract expired effective January 1, 2010. | ||||||
(3) | Tolling contracts are purchased-power agreements under which we provide the fuel for generation to the energy supplier. | ||||||
(4) | This contract expired effective January 1, 2010. |
Under the contract with PGE, SDG&E pays a capacity charge plus a charge based on the amount of energy received and/or PGE's non-fuel costs. Costs under most of the contracts with QFs are based on SDG&E's avoided cost. Charges under the remaining contracts are for firm and as-available energy, and are based on the amount of energy received or are tolls based on available capacity. The prices under these contracts are based on the market value at the time the contracts were negotiated.
Natural Gas Supply
SDG&E buys natural gas under short-term contracts for its Palomar and Miramar generating facilities and for the Cabrillo Power I, LLC and Otay Mesa Energy Center LLC tolling contracts. Purchases are from various southwestern U.S. suppliers and are primarily based on published monthly bid-week indices. SDG&E's natural gas is delivered from southern California border receipt points to the SoCal CityGate pool via firm access rights which expire on March 31, 2011. The natural gas is then delivered from the SoCal CityGate pool to the generating facilities through SoCalGas' pipelines in accordance with a transportation agreement that expires on May 31, 2011. SDG&E has also contracted with SoCalGas for natural gas storage from April 1, 2009 to March 31, 2010.
SDG&E also buys natural gas as the California DWR's limited agent for the DWR-allocated contracts. Most of the natural gas deliveries for the DWR-allocated contracts are transported through the Kern River Gas Transmission Pipeline under a long-term transportation agreement. The DWR is financially responsible for the costs of gas and transportation.
SONGS
SDG&E has a 20-percent ownership interest in SONGS, which is located south of San Clemente, California. SONGS consists of two operating nuclear generating units: Units 2 and 3. Unit 1 is permanently shut down and is being decommissioned. The city of Riverside owns 1.79 percent of Units 2 and 3, and Southern California Edison (Edison), the operator of SONGS, owns the remaining interest.
Units 2 and 3 began commercial operation in August 1983 and April 1984, respectively. SDG&E's share of the capacity is 214 MW of Unit 2 and 216 MW of Unit 3.
Unit 1 was removed from service in November 1992 when the CPUC issued a decision to permanently shut it down. The decommissioning of Unit 1 is now in progress and its spent nuclear fuel is being stored on site in an independent spent fuel storage installation (ISFSI) licensed by the NRC.
SDG&E has fully recovered the capital invested through December 31, 2003 in SONGS and earns a return only on subsequent capital additions, including SDG&E’s share of costs associated with the steam generator replacement project, which is currently in progress.
We provide additional information concerning the SONGS units and nuclear decommissioning below in "Environmental Matters" and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 7, 15 and 17 of the Notes to Consolidated Financial Statements in the Annual Report.
Nuclear Fuel Supply
The nuclear fuel supply cycle includes materials and services (uranium oxide, conversion of uranium oxide to uranium hexafluoride, uranium enrichment services, and fabrication of fuel assemblies) performed by others under various contracts that extend through 2020. The supply contracts are index-priced and provide nuclear fuel supply through 2022, the expiration of SONGS’ NRC license.
Spent fuel from SONGS is being stored on site in both the ISFSI and spent fuel pools. With the completion of the current phase of Unit 1 decommissioning, the site has adequate space to build ISFSI storage capacity through 2022. Pursuant to the Nuclear Waste Policy Act of 1982, SDG&E entered into a contract with the U.S. Department of Energy (DOE) for spent-fuel disposal. Under the agreement, the DOE is responsible for the ultimate disposal of spent fuel from SONGS. SDG&E pays the DOE a disposal fee of $1.00 per megawatt-hour of net nuclear generation, or $3 million per year. It is uncertain when the DOE will begin accepting spent fuel from any nuclear generation facility.
We provide additional information concerning nuclear-fuel costs and the storage and movement of spent fuel in Notes 15 and 17, respectively, of the Notes to Consolidated Financial Statements in the Annual Report.
Power Pools
SDG&E is a participant in the Western Systems Power Pool, which includes an electric-power and transmission-rate agreement with utilities and power agencies located throughout the United States and Canada. More than 300 investor-owned and municipal utilities, state and federal power agencies, energy brokers and power marketers share power and information in order to increase efficiency and competition in the bulk power market. Participants are able to make power transactions on standardized terms, including market-based rates, preapproved by the FERC.
Transmission Arrangements
SDG&E's 500-kV Southwest Powerlink transmission line, which is shared with Arizona Public Service Company and Imperial Irrigation District, extends from Palo Verde, Arizona to San Diego, California. SDG&E's share of the line is 1,162 MW, although it can be less under certain system conditions.
Mexico's Baja California system is connected to SDG&E's system via two 230-kV interconnections with firm capability of 408 MW in the north to south direction and 800 MW in the south to north direction.
In December 2008, the CPUC approved SDG&E’s Sunrise Powerlink, a new 120-mile, 500-kV transmission line between the Imperial Valley and the San Diego region. The project is in the pre-construction phase, including final engineering, design and procurement activities. SDG&E expects the line to be in commercial operation in 2012. The Sunrise Powerlink is designed to have a path rating of 1,000 MW. We provide further discussion in Note 15 of the Notes to Consolidated Financial Statements in the Annual Report.
Transmission Access
The National Energy Policy Act governs procedures for requests for transmission service. The FERC approved the California investor-owned utilities' (IOUs) transfer of operation and control of their transmission facilities to the Independent System Operator (ISO) in 1998. We provide additional information regarding transmission issues in Note 15 of the Notes to Consolidated Financial Statements in the Annual Report.
RATES AND REGULATION – SEMPRA UTILITIES
We provide information concerning rates and regulation applicable to the Sempra Utilities in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in Notes 1, 15 and 16 of the Notes to Consolidated Financial Statements in the Annual Report.
SEMPRA GLOBAL
Sempra Global is a holding company for most of our subsidiaries that are not subject to California utility regulation. Sempra Global includes Sempra Commodities, Sempra Generation, Sempra Pipelines & Storage and Sempra LNG. We provide descriptions of these business units and information concerning their operations under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in Notes 1, 3, 4, 5, 17, 18 and 20 of the Notes to Consolidated Financial Statements in the Annual Report.
Competition
Sempra Energy’s non-utility businesses are among many others in the energy industry providing similar products and services. They are engaged in highly competitive activities that require significant capital investments and highly skilled and experienced personnel. Many of their competitors may have significantly greater financial, personnel and other resources than Sempra Global.
Sempra Commodities
Sempra Commodities is primarily comprised of our investment in RBS Sempra Commodities, a joint venture formed in April 2008. This business unit also includes Sempra Rockies Marketing, which holds firm service capacity on the Rockies Express Pipeline.
All aspects of RBS Sempra Commodities’ business are intensely competitive and are expected to remain so. Sources of competition include the following:
§
other brokers and dealers,
§
investment banking firms,
§
energy companies, and
§
other companies that offer similar products and services in the U.S. and globally.
RBS Sempra Commodities’ competition is based on a number of factors, including transaction execution, financing, products and services, innovation, reputation and price.
RBS Sempra Commodities also faces intense competition in attracting and retaining qualified employees. RBS Sempra Commodities’ ability to compete effectively will depend upon the ability to attract new employees and retain and motivate existing employees.
RBS Sempra Commodities’ competitors include Goldman Sachs, JPMorgan, Morgan Stanley and Barclay’s Capital.
The partnership is discussed in Notes 3, 4 and 20 of the Notes to the Consolidated Financial Statements. As we discuss above under “Description of Business,” on February 16, 2010, Sempra Energy, RBS and the partnership entered into an agreement to sell certain businesses within the partnership.
Sempra Generation
For sales of non-contracted power, Sempra Generation is subject to competition from energy marketers, utilities, industrial companies and other independent power producers. For a number of years, natural gas has been the fuel of choice for new power generation
facilities for economic, operational and environmental reasons. While natural gas-fired facilities will continue to be an important part of the nation’s generation portfolio, some regulated utilities are now constructing units powered by renewable resources, often with subsidies or under legislative mandate. These utilities generally have a lower cost of capital than most independent power producers and often are able to recover fixed costs through rate base mechanisms. This recovery allows them to build, buy and upgrade generation without relying exclusively on market clearing prices to recover their investments.
When Sempra Generation sells power not subject to long-term contract commitments, it is exposed to market fluctuations in prices based on a number of factors, including the amount of capacity available to meet demand, the price and availability of fuel, and the presence of transmission constraints. Additionally, generation from Sempra Generation’s renewable energy assets are exposed to fluctuations in naturally occurring conditions such as wind, weather and hours of sunlight. Some of Sempra Generation’s competitors, such as electric utilities and generation companies, have their own generation capacity, including natural gas, coal and nuclear generation. These companies, generally larger than Sempra Generation, may have a lower cost of capital and may have competitive advantages as a result of their scale and the location of their generation facilities.
Sempra Generation’s competitors include
§ Edison Mission Energy | § Reliant Energy |
§ FPL Energy LLC | § Mirant Energy |
§ Calpine | § Dynegy |
Sempra Pipelines & Storage
Within its market area, Sempra Pipelines & Storage’s natural gas storage facilities and pipelines compete with other storage facilities and pipelines (both regulated and unregulated systems). It competes primarily on the basis of price (in terms of storage and transportation fees), available capacity, and connections to downstream markets.
Sempra Pipelines & Storage’s competitors include
§ Iberdrola Renewables (Enstor) | § Kinder Morgan |
§ Spectra Energy | § Enterprise Product Partners LP |
§ Energy Transfer Partners LP | § Boardwalk Pipeline Partners |
§ Plains All-American LP | § El Paso Corporation |
§ The Williams Companies | § TransCanada |
§ Various independent midstream asset developers |
Sempra LNG
New supplies to meet North America’s natural gas demand may be developed from a combination of the following sources:
§
existing producing basins in the United States, Canada, and Mexico;
§
frontier basins in Alaska, Canada, and offshore North America;
§
areas currently restricted from exploration and development due to public policies, such as areas in the Rocky Mountains and offshore Atlantic, Pacific and Gulf of Mexico coasts;
§
previously inaccessible or uneconomic natural gas reserves through the use of new extraction techniques; and
§
LNG imported into LNG receipt terminals in operation or under development in the United States, Canada and Mexico.
In addition, the demand for energy currently met by natural gas could alternatively be met by other energy forms such as coal, hydroelectric, oil, wind, solar, geothermal, biomass and nuclear energy. Sempra LNG will, therefore, face competition from each of these energy sources.
Sempra LNG competes with other companies to construct and operate LNG receiving terminals and to purchase LNG. According to the FERC, as of December 31, 2009, there were 15 existing and operating LNG receipt terminals in North America. There are 3 LNG receipt terminals currently under construction. In addition, as of December 31, 2009, there were 63 LNG receipt terminals in 18 countries. There are also other proposed LNG receipt terminals worldwide with which Sempra LNG will compete to be the most economical delivery point for LNG supply of both long-term contracted and spot volumes.
Sempra LNG’s major domestic and international competitors include the following companies and their related LNG affiliates:
§ Cheniere Energy, Inc. | § Cheniere Energy Partners, L.P. |
§ Excelerate Energy, LLC | § Dominion Resources, Inc. |
§ GDF Suez S.A. | § Southern Union Company |
§ El Paso Corporation | § Royal Dutch Shell plc |
§ Eni, S.p.A. | § OAO Gazprom |
§ Chevron Corporation | § Statoil A.S.A. |
ENVIRONMENTAL MATTERS
We discuss environmental issues affecting us in Notes 15, 16 and 17 of the Notes to Consolidated Financial Statements in the Annual Report. You should read the following additional information in conjunction with those discussions.
Hazardous Substances
In 1994, the CPUC approved the Hazardous Waste Collaborative mechanism, allowing California's IOUs to recover hazardous waste cleanup costs for certain sites, including those related to certain Superfund sites. This mechanism permits the Sempra Utilities to recover in rates 90 percent of hazardous waste cleanup costs and related third-party litigation costs, and 70 percent of the related insurance-litigation expenses. In addition, the Sempra Utilities have the opportunity to retain a percentage of any recoveries from insurance carriers and other third parties to offset the cleanup and associated litigation costs not recovered in rates.
At December 31, 2009, we had accrued estimated remaining investigation and remediation liabilities of $1.5 million at SDG&E and $27.9 million at SoCalGas, both related to hazardous waste sites for which the Hazardous Waste Collaborative mechanism authorizes us to recover 90 percent of the costs. The accruals include costs for numerous locations, most of which had been manufactured-gas plants. This estimated cost excludes remediation costs of $5.9 million associated with SDG&E's former fossil-fuel power plants and other locations for which the cleanup costs are not being recovered in rates. We believe that any costs not ultimately recovered through rates, insurance or other means will not have a material adverse effect on our consolidated results of operations or financial position.
We record estimated liabilities for environmental remediation when amounts are probable and estimable. In addition, we record amounts authorized to be recovered in rates under the Hazardous Waste Collaborative mechanism as regulatory assets.
Air and Water Quality
The transmission and distribution of natural gas require the operation of compressor stations, which are subject to increasingly stringent air-quality standards, such as those established by the CARB. We discuss these standards in "Government Regulation – California Utility Regulation" above. The Sempra Utilities generally recover in rates the costs to comply with these standards.
In connection with the issuance of operating permits, SDG&E and the other owners of SONGS have an agreement with the California Coastal Commission to mitigate the environmental damage to the marine environment attributed to the cooling-water discharge from SONGS. SDG&E's share of the mitigation costs is estimated to be $47 million, of which $33 million had been incurred through December 31, 2009, and $14 million is accrued for the remaining costs through 2050. In 2008, an artificial kelp reef project was completed. The remaining costs are to complete a wetlands project and maintain both projects through 2050.
EXECUTIVE OFFICERS OF THE REGISTRANTS
Sempra Energy
Name | Age(1) | Position(1)(2) |
Donald E. Felsinger | 62 | Chairman and Chief Executive Officer |
Neal E. Schmale | 63 | President and Chief Operating Officer |
Javade Chaudhri | 57 | Executive Vice President and General Counsel |
Jessie J. Knight, Jr. (until April 3, 2010)(2) | 59 | Executive Vice President – External Affairs |
Debra L. Reed (effective April 3, 2010)(2) | 53 | Executive Vice President |
Mark A. Snell | 53 | Executive Vice President and Chief Financial Officer |
Joseph A. Householder | 54 | Senior Vice President, Controller and Chief Accounting Officer |
Charles A. McMonagle (until July 1, 2010)(3) | 60 | Senior Vice President and Treasurer |
G. Joyce Rowland | 55 | Senior Vice President – Human Resources |
(1) Ages and, except as otherwise noted, positions are as of February 25, 2010. | ||
(2) On April 3, 2010, the following organizational changes will be effective: § Mr. Knight will become the Chief Executive Officer of SDG&E and relinquish his position as Executive Vice President – External Affairs of Sempra Energy. § Ms. Reed will become an Executive Vice President of Sempra Energy and relinquish her positions with SDG&E, PE and SoCalGas. | ||
(3) Mr. McMonagle will retire effective July 1, 2010. |
Each officer has been an officer of Sempra Energy or its subsidiaries for more than the last five years, except for Mr. Knight. Prior to joining Sempra Energy in 2006, Mr. Knight was the President and Chief Executive Officer of the San Diego Regional Chamber of Commerce since 1999.
SDG&E, PE and SoCalGas
Name | Age(1) | Position(1)(2) |
SAN DIEGO GAS & ELECTRIC COMPANY | ||
Debra L. Reed (until April 3, 2010)(2) | 53 | Chairperson, President and Chief Executive Officer |
Jessie J. Knight, Jr. (effective April 3, 2010)(2) | 59 | Chief Executive Officer |
Michael R. Niggli | 60 | Chief Operating Officer |
Michael R. Niggli (effective April 3, 2010)(2) | 60 | President and Chief Operating Officer |
James P. Avery | 53 | Senior Vice President – Power Supply |
J. Chris Baker | 50 | Senior Vice President and Chief Information Officer |
Lee Schavrien (until April 3, 2010)(2) | 55 | Senior Vice President – Regulatory and Finance |
Lee Schavrien (effective April 3, 2010)(2) | 55 | Senior Vice President – Finance, Regulatory and Legislative Affairs |
Anne S. Smith (until April 3, 2010)(2) | 56 | Senior Vice President – Customer Services |
W. Davis Smith (until April 3, 2010)(2) | 60 | Senior Vice President and General Counsel |
W. Davis Smith (effective April 3, 2010)(2) | 60 | Vice President and General Counsel |
Lee M. Stewart (until April 3, 2010)(2) | 64 | Senior Vice President – Gas Operations |
Robert M. Schlax | 54 | Vice President, Controller, Chief Financial Officer and Chief Accounting Officer |
PACIFIC ENTERPRISES | ||
Debra L. Reed (until April 3, 2010)(2) | 53 | Chairperson, President and Chief Executive Officer |
Michael W. Allman (effective April 3, 2010)(2) | 49 | President and Chief Executive Officer |
Michael R. Niggli (until April 3, 2010)(2) | 60 | Chief Operating Officer |
Anne S. Smith (effective April 3, 2010)(2) | 56 | Chief Operating Officer |
Robert M. Schlax(3) | 54 | Vice President, Controller, Chief Financial Officer and Chief Accounting Officer |
SOUTHERN CALIFORNIA GAS COMPANY | ||
Debra L. Reed (until April 3, 2010)(2) | 53 | Chairperson, President and Chief Executive Officer |
Michael W. Allman (effective April 3, 2010)(2) | 49 | President and Chief Executive Officer |
Michael R. Niggli (until April 3, 2010)(2) | 60 | Chief Operating Officer |
Anne S. Smith (effective April 3, 2010)(2) | 56 | Chief Operating Officer |
J. Chris Baker | 50 | Senior Vice President and Chief Information Officer |
Michael Gallagher (effective May 1, 2010)(4) | 45 | Senior Vice President – Operations |
Lee Schavrien (until April 3, 2010)(2) | 55 | Senior Vice President – Regulatory and Finance |
Lee Schavrien (effective April 3, 2010)(2) | 55 | Senior Vice President – Finance, Regulatory and Legislative Affairs |
Anne S. Smith (until April 3, 2010)(2) | 56 | Senior Vice President – Customer Services |
W. Davis Smith (until April 3, 2010)(2) | 60 | Senior Vice President and General Counsel |
Lee M. Stewart(2)(5) | 64 | Senior Vice President – Gas Operations |
Robert M. Schlax(3) | 54 | Vice President Controller, Chief Financial Officer and Chief Accounting Officer |
(1) Ages and, except as otherwise noted, positions are as of February 25, 2010. | ||
(2) On April 3, 2010, the following organizational changes will be effective: § Ms. Reed will become an Executive Vice President of Sempra Energy and relinquish her positions with SDG&E, PE and SoCalGas. § Mr. Knight will become the Chief Executive Officer of SDG&E and relinquish his position as Executive Vice President – External Affairs of Sempra Energy. § Mr. Niggli will become the President and remain the Chief Operating Officer of SDG&E and relinquish his positions with PE and SoCalGas. § Mr. Schavrien will become the Senior Vice President – Finance, Regulatory and Legislative Affairs of SDG&E and SoCalGas. § Ms. Smith will become the Chief Operating Officer of PE and SoCalGas and relinquish her Senior Vice President positions with SDG&E and SoCalGas. § Mr. Smith will become Vice President and General Counsel of SDG&E and relinquish his positions with SoCalGas. § Mr. Allman will become the President and Chief Executive Officer of PE and SoCalGas and relinquish his position as Vice President of Sempra Energy. § Mr. Stewart will remain the Senior Vice President – Gas Operations of SoCalGas and relinquish his position with SDG&E. | ||
(3) Mr. Schlax will remain the Vice President, Controller, Chief Financial Officer and Chief Accounting Officer of SDG&E and relinquish his positions with PE and SoCalGas at a date yet to be determined. | ||
(4) Mr. Gallagher will become the Senior Vice President – Operations of SoCalGas effective May 1, 2010. | ||
(5) Mr. Stewart will retire from SoCalGas in late 2010. |
Each executive officer of SDG&E, PE and SoCalGas has been an officer or employee of Sempra Energy or its subsidiaries for more than the last five years, except for Messrs. Knight, Schlax and Gallagher. Prior to joining Sempra Energy in 2006, Mr. Knight was the President and Chief Executive Officer of the San Diego Regional Chamber of Commerce since 1999. Prior to joining SDG&E in 2005, Mr. Schlax was Chief Financial Officer, Treasurer and Vice President of Finance of Mercury Air Group, Inc. since 2002. Prior to joining Sempra Energy in 2006, from 1999 through 2006, Mr. Gallagher was a partner and director of Sterling Energy Operations, LLC, which provides management consulting services to electric/power companies.
OTHER MATTERS
Employees of Registrants
As of December 31, each company had the following number of employees:
| December 31, | |||
| 2009 | 2008 | ||
Sempra Energy Consolidated |
| 13,839 |
| 13,673 |
SDG&E |
| 5,067 |
| 4,833 |
SoCalGas |
| 7,136 |
| 7,188 |
Labor Relations
Field, technical and most clerical employees at SoCalGas are represented by the Utility Workers Union of America or the International Chemical Workers Union Council. The collective bargaining agreement for these employees covering wages, hours, working conditions, and medical and other benefit plans expires on September 30, 2011.
Field employees and some clerical and technical employees at SDG&E are represented by the International Brotherhood of Electrical Workers. The collective bargaining agreement for these employees covering wages, hours and working conditions is in effect through August 31, 2011. For these same employees, the agreement covering pension and savings plan benefits is in effect through December 4, 2010, and the agreement covering health and welfare benefits is in effect through December 31, 2011.
ITEM 1A. RISK FACTORS
When evaluating our company and its subsidiaries, you should consider carefully the following risk factors and all other information contained in this report. These risk factors could affect our actual results and cause such results to differ materially from those expressed in any forward-looking statements made by us or on our behalf. Other risks and uncertainties, in addition to those that are described below, may also impair our business operations. If any of the following occurs, our business, cash flows, results of operations and financial condition could be seriously harmed. In addition, the trading price of our securities could decline due to the occurrence of any of these risks. These risk factors should be read in conjunction with the other detailed information concerningour company set forth in the Notes to Consolidated Financial Statements and in "Management's Discussion and Analysis of Financial Condition and Results o f Operations" in the Annual Report.
Sempra Energy's cash flows, ability to pay dividends and ability to meet its debt obligations largely depend on the performance of its subsidiaries.
Sempra Energy's ability to pay dividends and meet its debt obligations depends on cash flows from its subsidiaries and, in the short term, its ability to raise capital from external sources. In the long term, cash flows from the subsidiaries depend on their ability to generate operating cash flows in excess of their own capital expenditures and long-term debt obligations. In addition, the subsidiaries are separate and distinct legal entities and could be precluded from making such distributions under certain circumstances, including as a result of legislation or regulation or in times of financial distress.
Our businesses may be adversely affected by conditions in the financial markets and economic conditions generally.
Our businesses are capital intensive and we rely significantly on long-term debt to fund a portion of our capital expenditures and refund outstanding debt, and on short-term borrowings to fund a portion of day-to-day business operations.
The credit markets and financial services industry have recently experienced a period of extreme world-wide turmoil characterized by the bankruptcy, failure, collapse or sale of many financial institutions and by extraordinary levels of government intervention and proposals for further intervention and additional regulation.
Limitations on the availability of credit and increases in interest rates or credit spreads may adversely affect our liquidity and results of operations. In difficult credit markets, we may find it necessary to fund our operations and capital expenditures at a higher cost or we may be unable to raise as much funding as we need to support business activities. This could cause us to reduce capital expenditures and could increase our cost of funding, both of which could reduce our short-term and long-term profitability.
The availability and cost of credit for our businesses may be greatly affected by credit ratings. If the credit ratings of SoCalGas or SDG&E were to be reduced, their businesses could be adversely affected and any reduction in Sempra Energy's ratings could adversely affect its non-utility subsidiaries.
Risks Related to All Sempra Energy Subsidiaries
Our businesses are subject to complex government regulations and may be adversely affected by changes in these regulations or in their interpretation or implementation.
In recent years, the regulatory environment that applies to the electric power and natural gas industries has undergone significant changes, on both federal and state levels. These changes have affected the nature of these industries and the manner in which their participants conduct their businesses. These changes are ongoing, and we cannot predict the future course of changes in this regulatory environment or the ultimate effect that this changing regulatory environment will have on our businesses. Moreover, existing regulations may be revised or reinterpreted, and new laws and regulations may be adopted or become applicable to us and our facilities. Our business is subject to increasingly complex accounting and tax requirements, and the laws and regulations that affect us may change in response to economic or political conditions. Compliance with these requirements could increase our operating costs, and new tax legislation, regulations or other interpretat ions could materially affect our tax expense. Future changes in laws and regulations may have a detrimental effect on our business, cash flows, financial condition and results of operations.
Our operations are subject to rules relating to transactions among the Sempra Utilities and other Sempra Energy operations. These rules are commonly referred to as the Affiliate Transaction Rules. These businesses could be adversely affected by changes in these rules or by additional CPUC or FERC rules that further restrict our ability to sell electricity or natural gas, or to trade with the Sempra Utilities and with each other. Affiliate Transaction Rules also could require us to obtain prior approval from the CPUC before entering into any such transactions with the Sempra Utilities. Any such restrictions or approval requirements could adversely affect the LNG receiving terminals, natural gas pipelines, electric generation facilities, or trading operations of our subsidiaries.
Sempra Generation has various proceedings, inquiries and investigations relating to its business activities currently pending before the FERC. A description of such proceedings, inquiries and investigations is provided in Note 17 of the Notes to Consolidated Financial Statements in the Annual Report.
Our businesses require numerous permits and other governmental approvals from various federal, state, local and foreign governmental agencies; any failure to obtain or maintain required permits or approvals could cause our sales to decline and/or our costs to increase.
All of our existing and planned development projects require multiple permits. The acquisition, ownership and operation of LNG receiving terminals, natural gas pipelines and storage facilities, and electric generation facilities require numerous permits, approvals and certificates from federal, state, local and foreign governmental agencies. Once received, approvals may be subject to litigation, and projects may be delayed or approvals reversed in litigation. If there is a delay in obtaining any required regulatory approvals or if we fail to obtain or maintain any required approvals or to comply with any applicable laws or regulations, we may not be able to operate our facilities, or we may be forced to incur additional costs.
Our businesses have significant environmental compliance costs, and future environmental compliance costs could adversely affect our profitability.
Weare subject to extensive federal, state, local and foreign statutes, rules and regulations relating to environmental protection, including, in particular, climate change and GHG emissions. We are required to obtain numerous governmental permits, licenses and other approvals to construct and operate our businesses. Additionally, to comply with these legal requirements, we must spend significant sums on environmental monitoring, pollution control equipment, mitigation costs and emissions fees. In addition, we are generally responsible for all on-site liabilities associated with the environmental condition of our electric generation facilities and other energy projects, regardless of when the liabilities arose and whether they are known or unknown. If we fail to comply with applicable environmental laws, we may be subject to penalties, fines and/or curtailments of our operations.
The scope and effect of new environmental laws and regulations, including their effects on our current operations and future expansions, are difficult to predict. Increasing international, national, regional and state-level concerns as well as new or proposed legislation and regulation may have substantial effects on our operations, operating costs, and the scope and economics of proposed expansion. In particular, state-level laws and regulations, as well as proposed national and international legislation and regulation relating to the control and reduction of GHG emissions (including carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulfur hexafluoride), may limit or otherwise adversely affect our operations. The implementation of recent California legislation and proposed federal legislation and regulation may adversely affect our unregulated businesses by imposing additional costs associated with emission limits, controls and the possible requirement of carbon taxes or the purchase of emissions credits. Similarly, the Sempra Utilities may be affected if costs are not recoverable in rates. The effects of existing and proposed greenhouse gas emission reduction standards may cause rates to increase to levels that substantially reduce customer demand and growth. In addition, SDG&E may be subject to penalties if certain mandated renewable energy goals are not met.
In addition, existing and future laws and regulation on mercury, nitrogen and sulfur oxides, particulates, or other emissions could result in requirements for additional pollution control equipment or emission fees and taxes that could adversely affect us. Moreover, existing rules and regulations may be interpreted or revised in ways that may adversely affect us and our facilities and operations.
We provide further discussion of these matters in Notes 15, 16 and 17 of the Notes to Consolidated Financial Statements in the Annual Report.
Natural disasters, catastrophic accidents or acts of terrorism could materially adversely affect our business, earnings and cash flows.
Like other major industrial facilities, ours may be damaged by natural disasters, catastrophic accidents, or acts of terrorism. Such facilities include
§ generation | § chartered LNG tankers |
§ electric transmission and distribution | § natural gas pipelines and storage |
§ LNG receipt terminals and storage |
Such incidents could result in severe business disruptions, significant decreases in revenues, or significant additional costs to us. Any such incident could have a material adverse effect on our financial condition, earnings and cash flows.
Depending on the nature and location of the facilities affected, any such incident also could cause fires, leaks, explosions, spills or other significant damage to natural resources or property belonging to third parties, or cause personal injuries. Any of these consequences could lead to significant claims against us. Insurance coverage may become unavailable for certain of these risks, and any insurance proceeds we receive may be insufficient to cover our losses or liabilities, which could materially adversely affect our financial condition, earnings and cash flows.
Our future results of operations, financial condition, and cash flows may be materially adversely affected by the outcome of pending litigation against us.
Sempra Energy and its subsidiaries are defendants in numerous lawsuits. We have spent, and continue to spend, substantial amounts defending these lawsuits, and in related investigations and regulatory proceedings. In particular, SDG&E is subject to numerous lawsuits arising out of San Diego County wildfires in 2007, and Sempra Generation is subject to extensive litigation regarding a major long-term power agreement. We discuss these and other litigation in Note 17 of the Notes to Consolidated Financial Statements in the Annual Report. The uncertainties inherent in legal proceedings make it difficult to estimate with any degree of certainty the costs and effects of resolving these matters. In addition, California juries have demonstrated an increasing willingness to grant large awards, including punitive damages, in personal injury, product liability, property damage and other claims. Accordingly, actual costs incurred may differ materially from insured or reserved amounts and could materially adversely affect our business, cash flows, results of operations and financial condition.
We discuss these proceedings in Note 17 of the Notes to Consolidated Financial Statements and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report.
Risks Related to the Sempra Utilities
The Sempra Utilities are subject to extensive regulation by state, federal and local legislative and regulatory authorities, which may adversely affect the operations, performance and growth of their businesses.
The CPUC regulates the Sempra Utilities' rates, except SDG&E's electric transmission rates, which are regulated by the FERC. The CPUC also regulates the Sempra Utilities':
§ conditions of service | § rates of depreciation |
§ capital structure | § long-term resource procurement |
§ rates of return | § sales of securities |
The CPUC conducts various reviews and audits of utility performance, compliance with CPUC regulations and standards, affiliate relationships and other matters. These reviews and audits may result in disallowances and penalties that could adversely affect earnings and cash flows. We discuss various CPUC proceedings relating to the Sempra Utilities' rates, costs, incentive mechanisms, and performance-based regulation in Notes 15 and 16 of the Notes to Consolidated Financial Statements and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report.
The Sempra Utilities may spend funds related to a major capital project prior to receiving regulatory approval. If the project does not receive regulatory approval or if management decides not to proceed with the project, they may not be able to recover all amounts spent for that project, which could adversely affect earnings and cash flows.
The CPUC periodically approves the Sempra Utilities' rates based on authorized capital expenditures, operating costs and an authorized rate of return on investment. If actual capital expenditures and operating costs were to exceed the amount approved by the CPUC, earnings and cash flows could be adversely affected.
The CPUC applies performance-based measures and incentive mechanisms to all California utilities. Under these, earnings potential above authorized base margins is tied to achieving or exceeding specific performance and operating goals, rather than relying solely on expanding utility plant to increase earnings. At the Sempra Utilities, the areas that are eligible for incentives are operational activities such as employee safety, energy efficiency programs and, at SoCalGas, natural gas procurement and unbundled natural gas storage and system operator hub services. Although the Sempra Utilities have received incentive awards in the past, there can be no assurance that theywill receive awards in the future, or that any future awards earned would be in amounts comparable to prior periods. Additionally, if the Sempra Utilities fail to achieve certain minimum performance levels established under such mechanisms, they may be assessed financial disallowances or penalties which could negatively affect earnings and cash flows.
The FERC regulates electric transmission rates, the transmission and wholesale sales of electricity in interstate commerce, transmission access, the rates of return on transmission investments, and other similar matters involving SDG&E.
The Sempra Utilitiesmay be adversely affected by new regulations, decisions, orders or interpretations of the CPUC, the FERC or other regulatory bodies. New legislation, regulations, decisions, orders or interpretations could change how theyoperate, could affect their ability to recover various costs through rates or adjustment mechanisms, or could require them to incur additional expenses.
The construction and expansion of the Sempra Utilities' natural gas pipelines, SoCalGas' storage facilities, and SDG&E's electric transmission and distribution facilities require numerous permits and approvals from federal, state and local governmental agencies. If there are delays in obtaining required approvals, or failure to obtain or maintain required approvals, or to comply with applicable laws
or regulations, the Sempra Utilities' business, cash flows, results of operations and financial condition could be materially adversely affected.
SDG&E may incur substantial costs and liabilities as a result of its ownership of nuclear facilities.
SDG&E has a 20-percent ownership interest in SONGS, a 2,150-MW nuclear generating facility near San Clemente, California, operated by Southern California Edison Company. The NRC has broad authority under federal law to impose licensing and safety-related requirements for the operation of nuclear generation facilities. SDG&E's ownership interest in SONGS subjects it to the risks of nuclear generation, which include
§
the potential harmful effects on the environment and human health resulting from the operation of nuclear facilities and the storage, handling and disposal of radioactive materials;
§
limitations on the amounts and types of insurance commercially available to cover losses that might arise in connection with nuclear operations; and
§
uncertainties with respect to the technological and financial aspects of replacing steam generators or other equipment, and the decommissioning of nuclear plants.
Risks Related to our Electric Generation, LNG, Pipelines & Storage, Commodities Marketing and Other Businesses
Our businesses are exposed to market risk, and our financial condition, results of operations, cash flows and liquidity may be adversely affected by fluctuations in commodity market prices that are beyond our control.
Sempra Generation generates electricity that it sells under long-term contracts and into the spot market or other competitive markets. It purchases natural gas to fuel its power plants and may also purchase electricity in the open market to satisfy its contractual obligations. As part of its risk management strategy, Sempra Generation may hedge a substantial portion of its electricity sales and natural gas purchases to manage its portfolio.
We buy energy-related and other commodities from time to time, for power plants or for LNG receipt terminals to satisfy contractual obligations with customers, in regional markets and other competitive markets in which we compete. Our revenues and results of operations could be adversely affected if the prevailing market prices for electricity, natural gas, LNG or other commodities that we buy change in a direction or manner not anticipated and for which we had not provided through purchase or sale commitments or other hedging transactions.
Unanticipated changes in market prices for energy-related and other commodities result from multiple factors, including:
§
weather conditions
§
seasonality
§
changes in supply and demand
§
transmission or transportation constraints or inefficiencies
§
availability of competitively priced alternative energy sources
§
commodity production levels
§
actions by the Organization of the Petroleum Exporting Countries with respect to the supply of crude oil
§
federal, state and foreign energy and environmental regulation and legislation
§
natural disasters, wars, embargoes and other catastrophic events
§
expropriation of assets by foreign countries
The FERC has jurisdiction over wholesale power and transmission rates, independent system operators, and other entities that control transmission facilities or that administer wholesale power sales in some of the markets in which we operate. The FERC may impose additional price limitations, bidding rules and other mechanisms, or terminate existing price limitations from time to time. Any such action by the FERC may result in prices for electricity changing in an unanticipated direction or manner and, as a result, may have an adverse effect on our sales and results of operations.
Business development activities may not be successful and projects under construction may not commence operation as scheduled, which could increase our costs and impair our ability to recover our investments.
The acquisition, development, construction and expansion of LNG receiving terminals, natural gas pipelines and storage facilities, electric generation facilities, and other energy infrastructure projects involve numerous risks. We may be required to spend significant sums for preliminary engineering, permitting, fuel supply, resource exploration, legal, and other expenses before we can determine whether a project is feasible, economically attractive, or capable of being built.
Success in developing a particular project is contingent upon, among other things:
§
negotiation of satisfactory engineering, procurement and construction agreements
§
negotiation of supply and natural gas sales agreements or firm capacity service agreements
§
receipt of required governmental permits
§
timely implementation and satisfactory completion of construction
Successful completion of a particular project may be adversely affected by:
§
unforeseen engineering problems
§
construction delays and contractor performance shortfalls
§
work stoppages
§
equipment supply
§
adverse weather conditions
§
environmental and geological conditions
§
other factors
If we are unable to complete the development of a facility, we typically will not be able to recover our investment in the project.
The operation of existing and future facilities also involves many risks, including the breakdown or failure of generation or regasification and storage facilities or other equipment or processes, labor disputes, fuel interruption, and operating performance below expected levels. In addition, weather-related incidents and other natural disasters can disrupt generation, regasification, storage and transmission systems. The occurrence of any of these events could lead to operating facilities below expected capacity levels, which may result in lost revenues or increased expenses, including higher maintenance costs and penalties. Such occurrences could adversely affect our business, cash flows and results of operations.
We may elect not to, or may not be able to, enter into long-term supply and sales agreements or long-term firm capacity agreements for our projects, which would subject our sales to increased volatility and our businesses to increased competition.
The electric generation and wholesale power sales industries have become highly competitive. As more plants are built and competitive pressures increase, wholesale electricity prices may become more volatile. Without the benefit of long-term power sales agreements, such as the 10-year power sales agreement between Sempra Generation and the DWR that expires in 2011, our sales may be subject to increased price volatility. As a result, we may be unable to sell the power generated by Sempra Generation's facilities or operate those facilities profitably.
Sempra LNG utilizes its receipt terminals by entering into long-term capacity agreements. Under these agreements, customers pay Sempra LNG capacity reservation fees to receive, store and regasify the customer's LNG. Sempra LNG also may enter into short-term and/or long-term supply agreements to purchase LNG to be received, stored and regasified at its terminals for sale to other parties. The long-term supply agreement contracts are expected to reduce our exposure to changes in natural gas prices through corresponding natural gas sales agreements or by tying LNG supply prices to prevailing natural gas price market price indices. However, if Sempra LNG is unable to obtain sufficient long-term agreements or if the counterparties, customers or suppliers to one or more of the key agreements for the LNG facilities were to fail or become unable to meet their contractual obligations on a timely basis, it could have a material adverse effect on our business, results of operations, cash flows and financial condition. In addition, reduced availability of LNG to the United States and Mexico due to inadequate supplies, increased demand and higher prices in other countries, abundant domestic supplies of natural gas and delays in the development of new liquefaction capacity could affect the timing of development of new LNG facilities and expansion of our existing LNG facilities. These conditions also are likely to delay attainment of full-capacity utilization at our facilities. Our potential LNG suppliers also may be subject to international political and economic pressures and risks, which may also affect the supply of LNG.
Sempra Pipelines & Storage's natural gas pipeline operations are dependent on supplies of LNG and/or natural gas from their transportation customers, which may include Sempra LNG facilities.
We provide information about these matters in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in Note 17 of the Notes to Consolidated Financial Statements in the Annual Report.
Our businesses depend on counterparties, business partners, customers, and suppliers performing in accordance with their agreements. If they fail to perform, we could incur substantial expenses and be exposed to commodity price risk and volatility, which could adversely affect our liquidity, cash flows and results of operations.
We are exposed to the risk that counterparties, business partners, customers, and suppliers that owe money or commodities as a result of market transactions or other long-term agreements will not perform their obligations under such agreements. Should they fail to
perform, we may be required to acquire alternative hedging arrangements or to honor the underlying commitment at then-current market prices. In such event, we may incur additional losses to the extent of amounts already paid to such counterparties or suppliers. In addition, we often extend credit to counterparties and customers. While we perform significant credit analyses prior to extending credit, we are exposed to the risk that we may not be able to collect amounts owed to us.
Sempra LNG's obligations and those of its suppliers for LNG supplies are contractually subject to 1) suspension or termination for "force majeure" events beyond the control of the parties; and 2) substantial limitations of remedies for other failures to perform, including limitations on damages to amounts that could be substantially less than those necessary to provide full recovery of costs for breach of the agreements.
If California's DWR were to succeed in setting aside, or were to fail to perform its obligations under its long-term power contract with Sempra Generation, our business, results of operations and cash flows will be materially adversely affected.
In 2001, Sempra Generation entered into a 10-year power sales agreement with the DWR to supply up to 1,900 MW to the state. The power sales agreement with the DWR continues to be the subject of extensive litigation between the parties before the FERC, in the courts and in arbitration proceedings. If the DWR were to succeed in setting aside its obligations under the contract, or if the DWR fails or is unable to meet its contractual obligations on a timely basis, it could have a material adverse effect on our business, results of operations, cash flows and financial condition. These proceedings are described in the Notes to Consolidated Financial Statements and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report. As described in Note 17 of the Notes to Consolidated Financial Statements, we unilaterally reduced our price to the DWR in connection with an agreement to settle other litigation.
We rely on transportation assets and services that we do not own or control to deliver electricity and natural gas.
We depend on electric transmission lines, natural gas pipelines, and other transportation facilities owned and operated by third parties to:
1) deliver the electricity and natural gas we sell to wholesale markets,
2) supply natural gas to our electric generation facilities, and
3) provide retail energy services to customers.
Sempra Pipelines & Storage also depends on natural gas pipelines to interconnect with their ultimate source or customers of the commodities they are transporting. Sempra LNG also relies on specialized ships to transport LNG to its facilities and on natural gas pipelines to transport natural gas for customers of the facilities. If transportation is disrupted, or if capacity is inadequate, our ability to sell and deliver our products and services may be hindered. As a result, we may be responsible for damages incurred by our customers, such as the additional cost of acquiring alternative natural gas supplies at then-current spot market rates.
We cannot and do not attempt to fully hedge our assets or contract positions against changes in commodity prices. Our hedging procedures may not work as planned.
To reduce financial exposure related to commodity price fluctuations, we may enter into contracts to hedge our known or anticipated purchase and sale commitments, inventories of natural gas and LNG, electric generation capacity, and natural gas storage and pipeline capacity. As part of this strategy, we may use forward contracts, physical purchase and sales contracts, futures, financial swaps, and options. We do not hedge the entire exposure to market price volatility of our assets or our contract positions, and the coverage will vary over time. To the extent we have unhedged positions, or if our hedging strategies do not work as planned, fluctuating commodity prices could have a material adverse effect on our business, results of operations, cash flows and financial condition.
Risk management procedures may not prevent losses.
Although we have in place risk management systems and control systems that use advanced methodologies to quantify and manage risk, these systems may not always prevent material losses. Risk management procedures may not always be followed as required by the companies or may not always work as planned. In addition, daily value-at-risk and loss limits are based on historic price movements. If prices significantly or persistently deviate from historic prices, the limits may not protect us from significant losses. As a result of these and other factors, there is no assurance that our risk management procedures will prevent losses that would negatively affect our business, results of operations, cash flows and financial condition.
Our international businesses are exposed to different local, regulatory and business risks and challenges, which could have a material adverse effect on our financial condition, cash flows and results of operations.
We have interests in electricity generation and transmission, natural gas distribution and transportation, and LNG terminal projects in Mexico. Sempra Pipelines & Storage has ownership interests in electricity and natural gas distribution businesses in Argentina, Chile and Peru. We have an ownership interest in RBS Sempra Commodities, which has trading, marketing and risk management operations
in Canada, Europe and Asia. Developing infrastructure projects, owning energy assets, and operating businesses in foreign jurisdictions subject us to significant political, legal and financial risks that vary by country, including:
§
changes in foreign laws and regulations, including tax and environmental laws and regulations, and U.S. laws and regulations related to foreign operations
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high rates of inflation
§
changes in government policies or personnel
§
trade restrictions
§
limitations on U.S. company ownership in foreign countries
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permitting and regulatory compliance
§
changes in labor supply and labor relations
§
adverse rulings by foreign courts or tribunals, challenges to permits, difficulty in enforcing contractual rights, and unsettled property rights and titles in Mexico and other foreign jurisdictions
§
general political, economic and business conditions
Our international businesses also are subject to foreign currency risks. These risks arise from both volatility in foreign currency exchange and inflation rates and devaluations of foreign currencies. In such cases, an appreciation of the U.S. dollar against a local currency could reduce the amount of cash and income received from those foreign subsidiaries. Fluctuations in foreign currency exchange and inflation rates may result in increased taxes in foreign countries. While Sempra Pipelines & Storage believes that it has contracts and other measures in place to mitigate its most significant foreign currency exchange risks, some exposure is not fully mitigated.
Other Risks
Sempra Energy has substantial investments and other obligations in businesses that it does not control or manage.
Sempra Energy is a partner with RBS in RBS Sempra Commodities, a commodities-marketing firm in which we invested $1.6 billion. RBS, which has been greatly affected by the world-wide turmoil in banking and is now indirectly controlled by the government of the United Kingdom, is obligated to provide all of the additional capital required for the operation and expansion of the commodities-marketing business. As we discuss above under “Description of Business,” on February 16, 2010, Sempra Energy, RBS and RBS Sempra Commodities entered into an agreement to sell certain businesses within the joint venture.
We also own a 25-percent interest in Rockies Express Pipeline LLC (Rockies Express), a joint venture which completed construction in 2009 of a 1,679-mile natural gas pipeline at an estimated cost of approximately $6.8 billion. Rockies Express is controlled by Kinder Morgan Energy Partners, which holds a 50-percent interest.
We have also guaranteed a portion of the debt and other obligations of RBS Sempra Commodities and debt of Rockies Express as we discuss in Note 6 of the Notes to Consolidated Financial Statements in the Annual Report. We also have smaller investments in other entities that we do not control or manage.
We do not control and have limited influence over these businesses and their management. In addition to the other risks inherent in these businesses, if their management were to fail to perform adequately or the other investors in the businesses were unable or otherwise failed to perform their obligations to provide capital and credit support for these businesses, it could have a material adverse effect on our results of operations, financial position and cash flows.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
ELECTRIC PROPERTIES – SDG&E
At December 31, 2009, SDG&E owns and operates three natural gas-fired power plants:
1.
a 560-MW electric generation facility (the Palomar generation facility) in Escondido, California
2.
a 47.6-MW electric generation peaking facility (the Miramar I generation facility) in San Diego, California
3.
a 48.6-MW electric generation peaking facility (the Miramar II generation facility) in San Diego, California
SDG&E has exercised its option to purchase the 480-MW El Dorado natural gas-fired power plant located in Boulder City, Nevada from Sempra Generation in 2011.
SDG&E's interest in SONGS is described above in "Electric Utility Operations– SONGS."
At December 31, 2009, SDG&E's electric transmission and distribution facilities included substations, and overhead and underground lines. These electric facilities are located in San Diego, Imperial and Orange counties of California and in Arizona. The facilities consist of 1,920 miles of transmission lines and 22,297 miles of distribution lines. Periodically, various areas of the service territory require expansion to accommodate customer growth.
NATURAL GAS PROPERTIES – SEMPRA UTILITIES
At December 31, 2009, SDG&E's natural gas facilities, which are located in San Diego and Riverside counties of California, consisted of the Moreno and Rainbow compressor stations, 168 miles of transmission pipelines, 8,419 miles of distribution mains and 6,342 miles of service lines.
At December 31, 2009, SoCalGas’ natural gas facilities included 2,899 miles of transmission and storage pipelines, 49,595 miles of distribution pipelines and 47,256 miles of service pipelines. They also included 11 transmission compressor stations and 4 underground natural gas storage reservoirs with a combined working capacity of 133.4 billion cubic feet (Bcf).
ENERGY PROPERTIES – SEMPRA GLOBAL
At December 31, 2009, Sempra Generation operates or owns interests in power plants in Arizona, California, Nevada, Indiana, Hawaii and Mexico with a total capacity of 2,740 MW. We provide additional information in "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and in Notes 3 and 4 of the Notes to Consolidated Financial Statements in the Annual Report.
Sempra Generation leases or owns property in Arizona, Nevada, Hawaii and Mexico for potential development of solar and wind electric generation facilities.
At December 31, 2009, Sempra Pipelines & Storage's operations in Mexico included 1,858 miles of distribution pipelines, 216 miles of transmission pipelines and 2 compressor stations.
In 2006, Sempra Pipelines & Storage and Proliance Transportation and Storage, LLC acquired three existing salt caverns representing 10 Bcf to 12 Bcf of potential natural gas storage capacity in Cameron Parish, Louisiana, with plans for development of a natural gas storage facility.
Sempra Pipelines & Storage operates Mobile Gas, a small natural gas distribution utility located in Mobile and Baldwin counties in Alabama. Its property consists of distribution mains, service lines and regulating equipment.
In Washington County, Alabama, Sempra Pipelines & Storage operates an 11.4 Bcf natural gas storage facility under a land lease, with plans to expand total working capacity to 27 Bcf. Sempra Pipelines & Storage also owns land in Simpson County, Mississippi,
with plans to develop natural gas storage with a working capacity of 30 Bcf. Portions of both these properties are currently under construction.
Sempra LNG operates its Energía Costa Azul LNG receipt terminal on land it owns in Baja California, Mexico and has a land lease in Hackberry, Louisiana, where it operates its Cameron LNG receipt terminal. Sempra LNG also owns land in Port Arthur, Texas, for potential development.
OTHER PROPERTIES
Sempra Energy occupies its 19-story corporate headquarters building in San Diego, California, pursuant to an operating lease that expires in 2015. The lease has two five-year renewal options.
SoCalGas leases approximately half of a 52-story office building in downtown Los Angeles, California, pursuant to an operating lease expiring in 2011. The lease has six five-year renewal options.
SDG&E occupies a six-building office complex in San Diego pursuant to two separate operating leases, both ending in December 2017. One lease has four five-year renewal options and the other lease has three five-year renewal options.
Sempra Global leases office facilities at various locations in the U.S. and Mexico with the leases ending from 2010 to 2035.
Sempra Energy, SDG&E and SoCalGas own or lease other land, easements, rights of way, warehouses, offices, operating and maintenance centers, shops, service facilities and equipment necessary in the conduct of their business.
ITEM 3. LEGAL PROCEEDINGS
We are not party to, and our property is not the subject of, any material pending legal proceedings (other than ordinary routine litigation incidental to our businesses) except for the matters 1) described in Notes 15, 16 and 17 of the Notes to Consolidated Financial Statements, or 2) referred to in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The common stock, related shareholder, and dividend restriction information required by Item 5 is included in "Common Stock Data" in the Annual Report.
PERFORMANCE GRAPH -- COMPARATIVE TOTAL SHAREHOLDER RETURNS
The performance graph required by Item 5 is provided in "Performance Graph – Comparative Total Shareholder Returns" in the Annual Report.
SEMPRA ENERGY EQUITY COMPENSATION PLANS
Sempra Energy has long term incentive plans that permit the grant of a wide variety of equity and equity-based incentive awards to directors, officers and key employees. At December 31, 2009, outstanding awards consisted of stock options, restricted stock, and restricted stock units held by 328 employees.
The following table sets forth information regarding our equity compensation plans at December 31, 2009.
|
| Number of shares to |
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| ||
|
| be issued upon |
| Number of | ||
|
| exercise of | Weighted-average | additional | ||
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| outstanding | exercise price of | shares remaining | ||
|
| options, warrants | outstanding options, | available for future | ||
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| and rights (A) | warrants and rights | issuance | ||
Equity compensation plans approved |
|
|
|
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| |
| by shareholders: |
|
|
|
|
|
| 2008 Long Term Incentive Plan | 5,898,447 | $ | 40.81 | 5,168,042 | (B) |
|
|
|
|
|
|
|
Equity compensation plans not approved |
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|
|
|
| |
| by shareholders: |
|
|
|
|
|
| 2008 Long Term Incentive Plan for |
|
|
|
|
|
| EnergySouth, Inc. Employees and |
|
|
|
|
|
| Other Eligible Individuals (C) | 18,900 | $ | 43.75 | 253,878 | (D) |
|
|
|
|
|
|
|
Total | 5,917,347 | $ | 40.93 | 5,421,920 |
| |
(A) | Consists solely of options to purchase shares of our common stock, all of which were granted at an exercise price of 100% of the grant date fair market value of the shares subject to the option. | |||||
(B) | The number of shares available for future issuance is increased by the number of shares withheld to satisfy related tax withholding obligations relating to stock option and other plan awards and by the number of shares subject to awards that lapse, expire or are otherwise terminated or are settled other than by the issuance of shares. | |||||
(C) | Adopted in connection with our acquisition of EnergySouth in October 2008 to utilize shares remaining available under the 2008 Incentive Plan of EnergySouth, Inc., which had been previously approved by EnergySouth shareholders. | |||||
(D) | The number of shares available for future issuance is increased by the number of shares subject to awards that terminate without the issuance of shares. |
We provide additional discussion of share-based compensation in Note 10 of the Notes to Consolidated Financial Statements in the Annual Report.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
On September 11, 2007, the Sempra Energy board of directors authorized the repurchase of Sempra Energy common stock provided that the amounts spent for such purposes do not exceed the greater of $2 billion or amounts spent to purchase no more than 40 million shares.
During 2008, we expended $1 billion to purchase a total of 18,416,241 shares. No shares were repurchased under this authorization during 2009. We discuss this repurchase in Note 14 of the Notes to Consolidated Financial Statements in the Annual Report.
We have remaining authority to expend up to the greater of up to $1 billion or amounts required to repurchase approximately 21.5 million shares under our board of directors' 2007 share repurchase authorization. In addition, we purchase shares of our common stock from holders of our restricted stock and restricted stock units in amounts sufficient to meet minimum statutory tax withholding requirements upon vesting. Other than such purchases, there were no purchases made by us of our common stock during the fourth quarter of 2009.
ITEM 6. SELECTED FINANCIAL DATA
The information required by Item 6 is included in "Five-year Summaries" in the Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information required by Item 7 is set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report, on pages 1 to 53.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 7A is set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations – Market Risk" in the Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is set forth on pages 69 through 198 of the Annual Report. Item 15(a)1 includes a listing of financial statements included.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
The information required by Item 9A is provided in "Controls and Procedures" in the Annual Report.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
SEMPRA ENERGY
We provide the information required by Item 10 with respect to executive officers for Sempra Energy in Part I, Item 1. Business under "Executive Officers of the Registrants – Sempra Energy." All other information required by Item 10 is incorporated by reference from "Corporate Governance" and "Share Ownership" in the Proxy Statement prepared for the May 2010 annual meeting of shareholders.
SDG&E, PE AND SOCALGAS
We provide the information required by Item 10 with respect to executive officers for SDG&E, PE and SoCalGas in Part I, Item 1. Business under "Executive Officers of the Registrants – SDG&E, PE and SoCalGas." All other information required by Item 10 is incorporated by reference from the Information Statement prepared for the June 2010 annual meetings of shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from "Corporate Governance" and "Executive Compensation," including "Compensation Discussion and Analysis" and "Compensation Committee Report" in the Proxy Statement prepared for the May 2010 annual meeting of shareholders for Sempra Energy and from the Information Statement prepared for the June 2010 annual meetings of shareholders for SDG&E, PE and SoCalGas.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Information regarding securities authorized for issuance under equity compensation plans as required by Item 12 is included in Item 5.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The security ownership information required by Item 12 is incorporated by reference from "Share Ownership" in the Proxy Statement prepared for the May 2010 annual meeting of shareholders for Sempra Energy and from the Information Statement prepared for the June 2010 annual meetings of shareholders for SDG&E, PE and SoCalGas.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 is incorporated by reference from "Corporate Governance" in the Proxy Statement prepared for the May 2010 annual meeting of shareholders for Sempra Energy and from the Information Statement prepared for the June 2010 annual meetings of shareholders for SDG&E, PE and SoCalGas.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding principal accountant fees and services, as required by Item 14, is incorporated by reference from "Proposals To Be Voted On - Proposal 2: Ratification of Independent Registered Public Accounting Firm" in the Proxy Statement prepared for the May 2010 annual meeting of shareholders for Sempra Energy and fromthe Information Statement prepared for the June 2010 annual meetings of shareholders for SDG&E, PE and SoCalGas.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
1. FINANCIAL STATEMENTS
| Page in Annual Report(1) | |||
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| Sempra Energy | San Diego | Pacific Enterprises | Southern California Gas Company |
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Management's Report On Internal Control Over Financial Reporting | 60 | 60 | 60 | 60 |
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Reports of Independent Registered Public Accounting Firm | 61 | 63 | 65 | 67 |
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Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007 | 69 | 76 | 82 | 88 |
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Consolidated Balance Sheets at December 31, 2009 and 2008 | 70 | 77 | 83 | 89 |
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Statements of Consolidated Cash Flows for the years ended December 31, 2009, 2008 and 2007 | 72 | 79 | 85 | 91 |
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Statements of Consolidated Comprehensive Income and Changes in Equity for the years ended December 31, 2009, 2008 and 2007 | 74 | 81 | 87 | 93 |
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Notes to Consolidated Financial Statements | 94 | 94 | 94 | 94 |
(1) Incorporated by reference from the indicated pages of the 2009 Annual Report to Shareholders, filed as Exhibit 13.1. |
2. FINANCIAL STATEMENT SCHEDULES
Sempra Energy
Schedule I--Sempra Energy Condensed Financial Information of Parent may be found on page 35.
Pacific Enterprises
Schedule I--Pacific Enterprises Condensed Financial Information of Parent may be found on page 39.
Any other schedule for which provision is made in Regulation S-X is not required under the instructions contained therein, is inapplicable or the information is included in the Consolidated Financial Statements and notes thereto.
3. EXHIBITS
See Exhibit Index on page 47 of this report.
(c) RBS Sempra Commodities LLP and Subsidiaries – Consolidated Financial Statements as of December 31, 2009 and 2008, and for the Year Ended December 31, 2009, and the Period From April 1, 2008 (Date of Commencement) to December 31, 2008, and Report of Independent Registered Public Accounting Firm are provided in Exhibit 99.1.
CONSENTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND REPORT ON SCHEDULE
SEMPRA ENERGY
To the Board of Directors and Shareholders of Sempra Energy:
We consent to the incorporation by reference in Registration Statement No. 333-153425 on Form S-3 and 333-56161, 333-50806, 333-49732, 333-121073, 333-128441, 333-151184, 333-155191, 333-129774 and 333-157567 on Form S-8 of our reports dated February 25, 2010, relating to the consolidated financial statements of Sempra Energy and subsidiaries (the "Company") and the effectiveness of the Company’s internal control over financial reporting, incorporated by reference in this Annual Report on Form 10-K of Sempra Energy for the year ended December 31, 2009.
Our audits of the financial statements referred to in our aforementioned report relating to the consolidated financial statements also included the financial statement schedule of the Company, listed in Item 15. This financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/S/ DELOITTE & TOUCHE LLP
San Diego, California
February 25, 2010
SAN DIEGO GAS & ELECTRIC COMPANY
To the Board of Directors and Shareholders of San Diego Gas & Electric Company:
We consent to the incorporation by reference in Registration Statement No. 333-133541 and 333-159046 on Form S-3 of our reports dated February 25, 2010, relating to the consolidated financial statements of San Diego Gas & Electric Company and subsidiary (the "Company") and the effectiveness of the Company's internal control over financial reporting, incorporated by reference in this Annual Report on Form 10-K of San Diego Gas & Electric Company for the year ended December 31, 2009.
/S/ DELOITTE & TOUCHE LLP
San Diego, California
February 25, 2010
SOUTHERN CALIFORNIA GAS COMPANY
To the Board of Directors and Shareholders of Southern California Gas Company:
We consent to the incorporation by reference in Registration Statement No. 333-134289 and 333-159041 on Form S-3 of our reports dated February 25, 2010, relating to the consolidated financial statements of Southern California Gas Company and subsidiaries (the "Company") and the effectiveness of the Company's internal control over financial reporting, incorporated by reference in this Annual Report on Form 10-K of Southern California Gas Company for the year ended December 31, 2009.
/S/ DELOITTE & TOUCHE LLP
San Diego, California
February 25, 2010
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PACIFIC ENTERPRISES
To the Board of Directors and Shareholders of Pacific Enterprises:
We have audited the consolidated financial statements of Pacific Enterprises and subsidiaries (the "Company") as of December 31, 2009 and 2008, and for each of the three years in the period ended December 31, 2009, and the Company’s internal control over financial reporting as of December 31, 2009, and have issued our reports thereon dated February 25, 2010; such consolidated financial statements and reports are included in your 2009 Annual Report to Shareholders and are incorporated by reference herein. Our audits also included the financial statement schedule of the Company listed in Item 15. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/S/ DELOITTE & TOUCHE LLP
San Diego, California
February 25, 2010
SCHEDULE I – SEMPRA ENERGY CONDENSED FINANCIAL INFORMATION OF PARENT
SEMPRA ENERGY | ||||||
CONDENSED STATEMENTS OF OPERATIONS | ||||||
(Dollars in millions, except per share amounts) | ||||||
| Years ended December 31, | |||||
| 2009 | 2008 | 2007 | |||
|
|
|
|
|
|
|
Interest income | $ | 140 | $ | 104 | $ | 166 |
Interest expense |
| (244) |
| (130) |
| (178) |
Operation and maintenance |
| (81) |
| (64) |
| (105) |
Other income (expense), net |
| 50 |
| (63) |
| 58 |
Income tax benefits |
| 89 |
| 93 |
| 38 |
Loss before equity in earnings of subsidiaries |
| (46) |
| (60) |
| (21) |
Equity in earnings of subsidiaries |
| 1,165 |
| 1,173 |
| 1,120 |
Net income/earnings | $ | 1,119 | $ | 1,113 | $ | 1,099 |
|
|
|
|
|
|
|
Basic net income/earnings per common share | $ | 4.60 | $ | 4.50 | $ | 4.24 |
Weighted-average number of shares outstanding (thousands) |
| 243,339 |
| 247,387 |
| 259,269 |
|
|
|
|
|
|
|
Diluted net income/earnings per common share | $ | 4.52 | $ | 4.43 | $ | 4.16 |
Weighted-average number of shares outstanding (thousands) |
| 247,384 |
| 251,159 |
| 264,004 |
See Notes to Condensed Financial Information of Parent (Sempra Energy). |
SEMPRA ENERGY | ||||
CONDENSED BALANCE SHEETS | ||||
(Dollars in millions) | ||||
| December 31, | December 31, | ||
| 2009 | 2008 | ||
Assets: |
|
|
|
|
Cash and cash equivalents | $ | 7 | $ | 12 |
Short-term investments |
| - |
| 152 |
Due from affiliates |
| 133 |
| 28 |
Income taxes receivable |
| 242 |
| 299 |
Other current assets |
| 18 |
| 9 |
Total current assets |
| 400 |
| 500 |
|
|
|
|
|
Investments in subsidiaries |
| 10,790 |
| 9,644 |
Due from affiliates |
| 2,972 |
| 2,365 |
Other assets |
| 820 |
| 811 |
Total assets | $ | 14,982 | $ | 13,320 |
|
|
|
|
|
Liabilities and shareholders' equity: |
|
|
|
|
Current portion of long-term debt | $ | 507 | $ | 300 |
Due to affiliates |
| 1,350 |
| 1,876 |
Other current liabilities |
| 379 |
| 307 |
Total current liabilities |
| 2,236 |
| 2,483 |
|
|
|
|
|
Long-term debt |
| 3,196 |
| 2,233 |
Other long-term liabilities |
| 543 |
| 635 |
Sempra Energy shareholders' equity |
| 9,007 |
| 7,969 |
Total liabilities and shareholders' equity | $ | 14,982 | $ | 13,320 |
See Notes to Condensed Financial Information of Parent (Sempra Energy). |
SEMPRA ENERGY | ||||||
CONDENSED STATEMENTS OF CASH FLOWS | ||||||
(Dollars in millions) | ||||||
| Years ended December 31, | |||||
| 2009 | 2008 | 2007 | |||
|
|
|
|
|
|
|
Net cash provided by operating activities | $ | 97 | $ | 173 | $ | 240 |
|
|
|
|
|
|
|
Dividends received from subsidiaries |
| 150 |
| 350 |
| 150 |
Expenditures for property, plant and equipment |
| (1) |
| (4) |
| (13) |
Expenditures for short-term investments |
| - |
| (640) |
| - |
Proceeds from sale of short-term investments |
| 152 |
| 488 |
| - |
Purchase of trust assets |
| (30) |
| (17) |
| (59) |
Proceeds from sales by trust |
| - |
| 2 |
| 21 |
Decrease (increase) in loans to affiliates, net |
| (1,285) |
| (149) |
| 532 |
Other |
| - |
| - |
| (4) |
Cash (used in) provided by investing activities |
| (1,014) |
| 30 |
| 627 |
|
|
|
|
|
|
|
Common stock dividends paid |
| (341) |
| (339) |
| (316) |
Issuances of common stock |
| 73 |
| 18 |
| 40 |
Repurchases of common stock |
| (22) |
| (1,018) |
| (185) |
Issuances of long-term debt |
| 1,492 |
| 1,247 |
| 82 |
Payments on long-term debt |
| (314) |
| (11) |
| (990) |
Increase (decrease) in loans from affiliates, net |
| 4 |
| (102) |
| 59 |
Other |
| 20 |
| 8 |
| 22 |
Cash provided by (used in) financing activities |
| 912 |
| (197) |
| (1,288) |
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents |
| (5) |
| 6 |
| (421) |
Cash and cash equivalents, January 1 |
| 12 |
| 6 |
| 427 |
Cash and cash equivalents, December 31 | $ | 7 | $ | 12 | $ | 6 |
See Notes to Condensed Financial Information of Parent (Sempra Energy). |
SEMPRA ENERGY
NOTES TO CONDENSED FINANCIAL INFORMATION OF PARENT
Note 1. Basis of Presentation
Sempra Energy accounts for the earnings of its subsidiaries under the equity method in this unconsolidated financial information.
Other Income (Expense), Net, on the Condensed Statements of Operations includes $55 million of gains in 2009, $53 million of losses in 2008, and $27 million of gains in 2007 associated with investment earnings or losses on dedicated assets in support of our executive retirement and deferred compensation plans. It also includes $57 million from Mexican peso exchange losses in 2008.
Equity in Earnings of Subsidiaries on the Condensed Statements of Operations includes a loss of $26 million in 2007 related to discontinued operations.
Because of its nature as a holding company, Sempra Energy classifies dividends received from subsidiaries as an investing cash flow.
Note 2. Long-Term Debt
| December 31, | December 31, | ||
(Dollars in millions) | 2009 | 2008 | ||
|
|
|
|
|
6.5% Notes June 1, 2016 | $ | 750 | $ | - |
6% Notes October 15, 2039 |
| 750 |
| - |
9.8% Notes February 15, 2019 |
| 500 |
| 500 |
6.15% Notes June 15, 2018 |
| 500 |
| 500 |
6% Notes February 1, 2013 |
| 400 |
| 400 |
Notes at variable rates after fixed-to-floating swap (3.71% at December 31, 2009) |
|
|
|
|
March 1, 2010 |
| 300 |
| 300 |
8.9% Notes November 15, 2013 |
| 250 |
| 250 |
7.95% Notes March 1, 2010 |
| 200 |
| 200 |
Employee Stock Ownership Plan |
|
|
|
|
Bonds at 5.781% (fixed rate to July 1, 2010) November 1, 2014 |
| 50 |
| 50 |
Bonds at variable rates (1.4% at December 31, 2009) November 1, 2014 |
| 7 |
| 22 |
4.75% Notes May 15, 2009 |
| - |
| 300 |
Market value adjustments for interest-rate swap, net (expiring March 1, 2010) |
| 7 |
| 15 |
|
| 3,714 |
| 2,537 |
Current portion of long-term debt |
| (507) |
| (300) |
Unamortized discount on long-term debt |
| (11) |
| (4) |
Total long-term debt | $ | 3,196 | $ | 2,233 |
Maturities of long-term debt, excluding market value adjustments for the interest-rate swap, are $500 million in 2010, $650 million in 2013, $57 million in 2014 and $2.5 billion thereafter.
Additional information on Sempra Energy's long-term debt is provided in Note 6 of the Notes to Consolidated Financial Statements in the Annual Report.
Note 3. Commitments and Contingencies
For contingencies and guarantees related to Sempra Energy, refer to Notes 6 and 17 of the Notes to Consolidated Financial Statements in the Annual Report.
SCHEDULE I – PACIFIC ENTERPRISES CONDENSED FINANCIAL INFORMATION OF PARENT
PACIFIC ENTERPRISES | ||||||
CONDENSED STATEMENTS OF OPERATIONS | ||||||
(Dollars in millions) | ||||||
| Years ended December 31, | |||||
| 2009 | 2008 | 2007 | |||
|
|
|
|
|
|
|
Interest and other income | $ | 1 | $ | 11 | $ | 23 |
Expenses, interest and income taxes |
| (9) |
| (7) |
| (15) |
Income (loss) before equity in earnings of subsidiaries |
| (8) |
| 4 |
| 8 |
Equity in earnings of subsidiaries |
| 273 |
| 244 |
| 230 |
Net income/earnings attributable to common shares | $ | 265 | $ | 248 | $ | 238 |
See Notes to Condensed Financial Information of Parent (Pacific Enterprises). |
PACIFIC ENTERPRISES | ||||
CONDENSED BALANCE SHEETS | ||||
(Dollars in millions) | ||||
| December 31, | December 31, | ||
| 2009 | 2008 | ||
Assets: |
|
|
|
|
Current assets | $ | 7 | $ | 72 |
Investment in subsidiary |
| 1,745 |
| 1,470 |
Due from affiliates, long-term |
| 513 |
| 457 |
Deferred charges and other assets |
| 35 |
| 37 |
Total assets | $ | 2,300 | $ | 2,036 |
|
|
|
|
|
Liabilities and shareholders' equity: |
|
|
|
|
Due to affiliates | $ | 84 | $ | 84 |
Other current liabilities |
| 4 |
| 1 |
Total current liabilities |
| 88 |
| 85 |
Long-term liabilities |
| 4 |
| 11 |
|
|
|
|
|
Equity: |
|
|
|
|
Preferred stock |
| 80 |
| 80 |
Common equity |
| 2,128 |
| 1,860 |
Total Pacific Enterprises shareholders' equity |
| 2,208 |
| 1,940 |
Total liabilities and shareholders' equity | $ | 2,300 | $ | 2,036 |
See Notes to Condensed Financial Information of Parent (Pacific Enterprises). |
PACIFIC ENTERPRISES | ||||||
CONDENSED STATEMENTS OF CASH FLOWS | ||||||
(Dollars in millions) | ||||||
| Years ended December 31, | |||||
| 2009 | 2008 | 2007 | |||
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities | $ | (7) | $ | 5 | $ | 14 |
|
|
|
|
|
|
|
Dividends received from subsidiaries |
| - |
| 350 |
| 150 |
Decrease (increase) in loans to affiliates, net |
| 12 |
| (1) |
| (9) |
Other |
| (1) |
| - |
| (1) |
Cash provided by investing activities |
| 11 |
| 349 |
| 140 |
|
|
|
|
|
|
|
Common stock dividends paid |
| - |
| (350) |
| (150) |
Preferred dividends paid |
| (4) |
| (4) |
| (4) |
Cash used in financing activities |
| (4) |
| (354) |
| (154) |
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
| - |
| - |
| - |
Cash and cash equivalents, January 1 |
| - |
| - |
| - |
Cash and cash equivalents, December 31 | $ | - | $ | - | $ | - |
See Notes to Condensed Financial Information of Parent (Pacific Enterprises). |
PACIFIC ENTERPRISES
NOTES TO CONDENSED FINANCIAL INFORMATION OF PARENT
Note 1. Basis of Presentation
Pacific Enterprises accounts for the earnings of its subsidiaries under the equity method in this unconsolidated financial information.
Because of its nature as a holding company, Pacific Enterprises classifies dividends received from subsidiaries as an investing cash flow.
Note 2. Commitments and Contingencies
For contingencies related to Pacific Enterprises, refer to Note 17 of the Notes to Consolidated Financial Statements in the Annual Report.
2. Financial statement schedules
Schedules for which provision is made in Regulation S-X are not required under the instructions contained therein, are inapplicable or the information is included in the Consolidated Financial Statements and notes thereto.
3. Exhibits
See Exhibit Index on page 91 of this report.
88
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of San Diego Gas & Electric Company:
We consent to the incorporation by reference in Registration Statements No. 33-45599, 33-52834, 333-52150, 33-49837, and 333-133541 on Form S-3 of our reports dated February 25, 2008, relating to the financial statements of San Diego Gas & Electric Company ("the Company") (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the Company's adoption of Financial Accounting Standards Board ("FASB") Statement No. 157,Fair Value Measurements, effective January 1, 2007, FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109,effective January 1, 2007, and FASB Statement No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R), effective December 31, 2006) and the effectiveness of the Company’s internal control over financial reporting, appearing in this Annual Report on Form 10-K of San Diego Gas & Electric Company for the year ended December 31, 2007.
/S/ DELOITTE & TOUCHE LLP
San Diego, CaliforniaFebruary 25, 2008
89
San Diego Gas & Electric Company: | |
SIGNATURES | |
| |
Pursuant to the requirements of Section 13 or 15(d) 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. | |
| |
| SAN DIEGO GAS & ELECTRIC COMPANY, |
|
|
| By: /s/ Debra L. Reed |
| Debra L. Reed |
| Date: February 25, 2010 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report is signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. | ||
Name/Title | Signature | Date |
Principal Executive Officer: |
|
|
Principal Financial and Accounting Officer: |
|
|
Directors: | ||
Debra L. Reed, Chairperson | /s/ Debra L. Reed | February 25, 2010 |
Michael R. Niggli, Director | /s/ Michael R. Niggli | February 25, 2010 |
|
|
|
|
Signature
Date
Pacific Enterprises: | |
SIGNATURES | |
Pursuant to the requirements of Section 13 or 15(d) 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. | |
PACIFIC ENTERPRISES, | |
By: /s/ Debra L. Reed | |
Debra L. Reed | |
Date: February 25, 2010 | |
Principal Executive Officer:Debra L. ReedChairperson, President and Chief Executive Officer
/s/ Debra L. Reed
February 26, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934, this report is signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. | ||
Name/Title | Signature | Date |
Principal Executive Officer: |
|
|
Principal Financial and Accounting Officer: |
|
|
Directors: | ||
Debra L. Reed, Chairperson | /s/ Debra L. Reed | February 25, 2010 |
Michael R. Niggli, Director | /s/ Michael R. Niggli | February 25, 2010 |
|
|
|
Principal Financial Officer:Dennis V. ArriolaSenior Vice President and
Chief Financial
Southern California Gas Company: | |
SIGNATURES | |
Pursuant to the requirements of Section 13 or 15(d) 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, | |
By: /s/ Debra L. Reed | |
Debra L. Reed | |
Date: February 25, 2010 |
/s/ Dennis V. Arriola
February 26, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934, this report is signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. | ||
Name/Title | Signature | Date |
Principal Executive Officer: |
|
|
Principal Financial and Accounting Officer: |
|
|
Directors: | ||
Debra L. Reed, Chairperson | /s/ Debra L. Reed | February 25, 2010 |
Michael R. Niggli, Director | /s/ Michael R. Niggli | February 25, 2010 |
|
|
|
Principal Accounting Officer:Robert M. SchlaxVice President, Controller and Chief Accounting Officer
/s/ Robert M. Schlax
February 26, 2008
Directors:
Debra L. Reed, Chairperson
/s/ Debra L. Reed
February 26, 2008
Michael R. Niggli, Director
/s/ Michael R. Niggli
February 26, 2008
Mark A. Snell, Director
/s/ Mark A. Snell
February 26, 2008
90
EXHIBIT INDEX | |
The Registration Statements and Forms S-8, 8-K, 10-K and 10-Q | |
| |
EXHIBIT 3 -- | |
Sempra Energy | |
3.1 | Amended and Restated Articles of Incorporation of Sempra Energy effective May 23, 2008 (Appendix B to the 2008 Sempra Energy Definitive Proxy Statement, filed on April 15, 2008). |
3.2 | Amended Bylaws of Sempra Energy effective December 4, 2007 (Sempra Energy Form 8-K filed on December 5, 2007, Exhibit 3(ii)). |
3.3 | Amended and Restated Bylaws of Sempra Energy effective May 26, 1998 (Registration Statement on Form S-8 Sempra Energy Registration Statement No. 333-56161 dated June 5, 1998, Exhibit 3.2). |
| |
|
|
| |
3.5 | Amended and Restated Bylaws of San Diego Gas & Electric effective May 14, |
| |
|
|
Pacific Enterprises / Southern California Gas Company | |
3.7 | Amended and Restated Bylaws of Pacific Enterprises effective May 12, 2002 (2007 PE Form 10-K, Exhibit 3.01). |
3.8 | Amended Bylaws of Southern California Gas Company effective August 3, 2003 (2007 SoCalGas Form 10-K, Exhibit 3.02). |
3.9 | Amended and Restated Bylaws of Southern California Gas Company effective May 14, 2002 (2007 SoCalGas Form 10-K, Exhibit 3.03). |
3.10 | Restated Articles of Incorporation of Pacific Enterprises (1996 PE Form 10-K, Exhibit 3.01). |
3.11 | Restated Articles of Incorporation of Southern California Gas Company (1996 SoCalGas Form 10-K, Exhibit 3.01). |
| |
The | |
| |
| Description of rights of Sempra Energy Common Stock (Amended and Restated Articles of Incorporation of Sempra Energy effective May 23, 2008, Exhibit 3.1 above). |
San Diego Gas & Electric Company | |
4.2 | Description of preferences of Cumulative Preferred Stock, Preference Stock (Cumulative) and Series Preference Stock |
| |
| Description of preferences of Preferred Stock, Preference Stock and Series Preferred Stock (Southern California Gas Company Restated Articles of Incorporation, Exhibit 3.11 above). |
Sempra Energy / San Diego Gas & Electric Company | |
4.4 | Mortgage and Deed of Trust dated July 1, 1940 |
| |
4.5 | Ninth Supplemental Indenture dated as of August 1, 1968 |
| |
4.6 | Sixteenth Supplemental Indenture dated August 28, 1975 |
| |
4.7 | Thirtieth Supplemental Indenture dated September 28, 1983 |
Sempra Energy / Pacific Enterprises / Southern California Gas Company | |
4.8 | First Mortgage Indenture of Southern California Gas Company to American Trust Company dated October 1, 1940 (Registration Statement No. 2-4504 filed by Southern California Gas Company on September 16, 1940, Exhibit B-4). |
4.9 | Supplemental Indenture of Southern California Gas Company to American Trust Company dated as of August 1, 1955 (Registration Statement No. 2-11997 filed by Pacific Lighting Corporation on October 26, 1955, Exhibit 4.07). |
4.10 | Supplemental Indenture of Southern California Gas Company to American Trust Company dated as of June 1, 1956 (Registration Statement No. 2-12456 filed by Southern California Gas Company on April 23, 1956, Exhibit 2.08). |
4.11 | Supplemental Indenture of Southern California Gas Company to American Trust Company dated as of December 1, 1956 (2006 Sempra Energy Form 10-K, Exhibit 4.09). |
4.12 | Supplemental Indenture of Southern California Gas Company to Wells Fargo Bank dated as of June 1, 1965 (2006 Sempra Energy Form 10-K, Exhibit 4.10). |
4.13 | Supplemental Indenture of Southern California Gas Company to Wells Fargo Bank, National Association dated as of August 1, 1972 (Registration Statement No. 2-59832 filed by Southern California Gas Company on September 6, 1977, Exhibit 2.19). |
4.14 | Supplemental Indenture of Southern California Gas Company to Wells Fargo Bank, National Association dated as of May 1, 1976 (Registration Statement No. 2-56034 filed by Southern California Gas Company on April 14, 1976, Exhibit 2.20). |
4.15 | Supplemental Indenture of Southern California Gas Company to Manufacturers Hanover Trust Company of California, successor to Wells Fargo Bank, National Association, and Crocker National Bank as Successor Trustee dated as of May 18, 1984 (Southern California Gas Company 1984 Form 10-K, Exhibit 4.29). |
EXHIBIT 10 -- | |
| |
| Form of Continental Forge and California Class Action Price Reporting Settlement Agreement dated as of January 4, 2006 (Form 8-K filed on January 5, 2006, Exhibit 99.1). |
| |
10.2 | Form of Nevada Antitrust Settlement Agreement dated as of January 4, 2006 (Form 8-K filed on January 5, 2006, Exhibit 99.2). |
Sempra Energy / Pacific Enterprises | |
10.3 | Indemnity Agreement, dated as of April 1, 2008, between Sempra Energy, Pacific Enterprises, Enova Corporation and The Royal Bank of Scotland plc (Sempra Energy March 31, 2008 Form 10-Q, Exhibit 10.2). |
10.4 | First Amendment to Indemnity Agreement, dated as of March 30, 2009, by and among Sempra Energy, Pacific Enterprises, Enova Corporation and The Royal Bank of Scotland plc. (Sempra Energy March 31, 2009 Form 10-Q, Exhibit 10.3). |
10.5 | Second Amendment to Indemnity Agreement, dated as of June 30, 2009, by and among Sempra Energy, Pacific Enterprises, Enova Corporation and The Royal Bank of Scotland plc. (Sempra Energy June 30, 2009 Form 10-Q, Exhibit 10.1). |
10.6 | Third Amendment to Indemnity Agreement, dated as of December 3, 2009, by and among Sempra Energy, Pacific Enterprises, Enova Corporation and The Royal Bank of Scotland plc. |
Sempra Energy | |
10.7 | Purchase and Sale Agreement, dated as of February 16, 2010, entered into by and among J.P. Morgan Ventures Energy Corporation, Sempra Energy Trading LLC, RBS Sempra Commodities LLP, Sempra Energy and The Royal Bank of Scotland plc. (Sempra Energy Form 8-K filed on February 19, 2010, Exhibit 10.1) |
10.8 | Letter Agreement, dated as of February 16, 2010, entered into by and between Sempra Energy and The Royal Bank of Scotland plc. (Sempra Energy Form 8-K filed on February 19, 2010, Exhibit 10.2) |
10.9 | Limited Liability Partnership Agreement, dated as of April 1, 2008, between Sempra Energy, Sempra Commodities, Inc., Sempra Energy Holdings, VII B.V., RBS Sempra Commodities LLP and The Royal Bank of Scotland plc (Sempra Energy March 31, 2008 Form 10-Q, Exhibit 10.1). |
10.10 | First Amendment to Limited Liability Partnership Agreement, dated as of April 6, 2009 and effective as of November 14, 2008, by and among The Royal Bank of Scotland plc, Sempra Energy, Sempra Commodities, Inc., Sempra Energy Holdings VII B.V. and RBS Sempra Commodities LLP. (Sempra Energy March 31, 2009 Form 10-Q, Exhibit 10.4). |
| Second Amendment to Limited Liability Partnership Agreement, dated as of April 6, 2009 and effective as of December 23, 2009, by and among The Royal Bank of Scotland plc, Sempra Energy, Sempra Commodities, Inc., Sempra Energy Holdings VII B.V. and RBS Sempra Commodities LLP. |
10.12 | Master Confirmation for Share Purchase Agreement, dated as of April 1, 2008, between Sempra Energy and Merrill Lynch International (June 30, 2008 Sempra Energy Form 10-Q, Exhibit 10.4). |
10.13 | First amendment to the Master Formation and Equity Interest Purchase Agreement, dated as of April 1, 2008, by and among Sempra Energy, Sempra Global, Sempra Energy Trading International, B.V. and The Royal Bank of Scotland plc (Sempra Energy March 31, 2008 Form 10-Q, Exhibit 10.3). |
10.14 | Master Formation and Equity Interest Purchase Agreement, dated as of July 9, 2007, by and among Sempra Energy, Sempra Global, Sempra Energy Trading International, B.V. and The Royal Bank of Scotland plc (Sempra Energy Form 8-K filed on July 9, 2007, Exhibit 10.2). |
10.15 | Energy Purchase Agreement between Sempra Energy Resources and the California Department of Water Resources, executed May 4, 2001 (2001 Sempra Energy Form 10-K, Exhibit 10.01). |
Sempra Energy / San Diego Gas & Electric Company | |
10.16 | Amended and Restated Operating Agreement between San Diego Gas & Electric and the California Department of Water Resources dated |
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Compensation | |
Sempra Energy / San Diego Gas & Electric Company / Pacific Enterprises / Southern California Gas Company | |
10.18 | Form of 2009 Sempra Energy Severance Pay Agreement. |
10.19 | Form of Sempra Energy 2008 Long Term Incentive Plan, 2009 Performance-Based Restricted Stock Unit Award (March 31, 2009 Sempra Energy Form 10-Q, Exhibit 10.1). |
10.20 | Form of Sempra Energy 2008 Long Term Incentive Plan, 2009 Nonqualified Stock Option Agreement (March 31, 2009 Sempra Energy Form 10-Q, Exhibit 10.2). |
10.21 | Sempra Energy 2008 Long Term Incentive Plan (Appendix A to the 2008 Sempra Energy Definitive Proxy Statement, filed on April 15, 2008). |
10.22 | Form of Indemnification Agreement with Directors and Executive Officers (June 30, 2008 Sempra Energy Form 10-Q, Exhibit 10.2). |
10.23 | Form of Sempra Energy 2008 Long Term Incentive Plan, 2008 Performance-Based Restricted Stock Unit Award (June 30, 2008 Sempra Energy Form 10-Q, Exhibit 10.3). |
10.24 | Form of Sempra Energy 2008 Long Term Incentive Plan, 2008 Nonqualified Stock Option Agreement (June 30, 2008 Sempra Energy Form 10-Q, Exhibit 10.4). |
10.25 | Sempra Energy Amended and Restated Executive Life Insurance Plan (2008 Sempra Energy Form 10-K, Exhibit 10.15). |
10.26 | Amendment and Restatement of the Sempra Energy Cash Balance Restoration Plan (2008 Sempra Energy Form 10-K, Exhibit 10.16). |
10.27 | Form of Amended and Restated Sempra Energy Severance Pay Agreement (2008 Sempra Energy Form 10-K, Exhibit 10.17). |
10.28 | Amendment and Restatement of the Sempra Energy 2005 Deferred Compensation Plan (2008 Sempra Energy Form 10-K, Exhibit 10.18). |
10.29 | Amendment and Restatement of the Sempra Energy Supplemental Executive Retirement Plan (2008 Sempra Energy Form 10-K, Exhibit 10.19). |
10.30 | Sempra Energy Executive Personal Financial Planning Program Policy Document (September 30, 2004 Sempra Energy Form 10-Q, Exhibit 10.11). |
10.31 | 2003 Sempra Energy Executive Incentive Plan B (2003 Sempra Energy Form 10-K, Exhibit |
10.32 | Sempra Energy Executive Incentive Plan effective January 1, 2003 (2002 Sempra Energy Form 10-K, Exhibit 10.09). |
10.33 | Amended and Restated Sempra Energy Deferred Compensation and Excess Savings Plan (September 30, 2002 Sempra Energy Form 10-Q, Exhibit 10.3). |
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10.34 | Sempra Energy Employee Stock Ownership Plan and Trust Agreement effective January 1, 2001 (September 30, 2008 Sempra Energy Form 10-Q, Exhibit 10.1). |
10.35 | Amendment to the Amended and Restated Sempra Energy Deferred Compensation and Excess Savings Plan (2008 Sempra Energy Form 10-K, Exhibit 10.25). |
10.36 | Sempra Energy Amended and Restated Executive Medical Plan. (2008 Sempra Energy Form 10-K, Exhibit 10.26). |
10.37 | Form of Sempra Energy 1998 Long Term Incentive Plan, 2008 Performance-Based Restricted Stock Unit Award (2007 Sempra Energy Form 10-K, Exhibit 10.09). |
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10.38 | Form of Sempra Energy 1998 Long Term Incentive Plan, 2008 Non-Qualified Stock Option Agreement (2007 Sempra Energy Form 10-K, Exhibit 10.10). |
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| Sempra Energy |
10.41 | Form of Sempra Energy 2008 Non-Employee Directors' Stock Plan, Nonqualified Stock Option Agreement (June 30, 2008 Sempra Energy Form 10-Q, Exhibit 10.5). |
10.42 | Sempra Energy Amended and Restated Sempra Energy Retirement Plan for Directors (June 30, 2008 Sempra Energy Form 10-Q, Exhibit 10.7). |
10.43 | Neal Schmale Restricted Stock Award Agreement (September 30, 2004 Sempra Energy Form 10-Q, Exhibit 10.8). |
10.44 | Form of Sempra Energy 1998 Non-Employee Directors' Stock Plan Non-Qualified Stock Option Agreement (2006 Sempra Energy Form 10-K, Exhibit 10.09). |
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10.45 | Sempra Energy |
10.18 Amended and Restated Sempra Energy Deferred Compensation and Excess Savings Plan (September 30, 2002 Sempra Energy Form 10-Q, Exhibit 10.3).
Nuclear | |
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| Nuclear Facilities Qualified CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station, approved November 25, 1987 (1992 SDG&E Form 10-K, Exhibit 10.7). |
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10.48 | Second Amendment to the San Diego Gas & Electric Company Nuclear Facilities Qualified CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station (see Exhibit |
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10.49 | Third Amendment to the San Diego Gas & Electric Company Nuclear Facilities Qualified CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station (see Exhibit |
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10.50 | Fourth Amendment to the San Diego Gas & Electric Company Nuclear Facilities Qualified CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station (see Exhibit |
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10.51 | Fifth Amendment to the San Diego Gas & Electric Company Nuclear Facilities Qualified CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station (see Exhibit |
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10.52 | Sixth Amendment to the San Diego Gas & Electric Company Nuclear Facilities Qualified CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station (see Exhibit |
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10.53 | Seventh Amendment to the San Diego Gas & Electric Company Nuclear Facilities Qualified CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station dated December 24, 2003 (see Exhibit |
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10.54 | Nuclear Facilities Non-Qualified CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station, approved November 25, 1987 (1992 SDG&E Form 10-K, Exhibit 10.8). |
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10.55 | First Amendment to the San Diego Gas & Electric Company Nuclear Facilities Non-Qualified CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station (see Exhibit |
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10.56 | Second Amendment to the San Diego Gas & Electric Company Nuclear Facilities Non-Qualified CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station (see Exhibit |
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10.57 | Third Amendment to the San Diego Gas & Electric Company Nuclear Facilities Non-Qualified CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station (see Exhibit |
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10.58 | Fourth Amendment to the San Diego Gas & Electric Company Nuclear Facilities Non-Qualified CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station (see Exhibit |
| Fifth Amendment to the San Diego Gas & Electric Company Nuclear Facilities Non-Qualified CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station dated December 24, 2003 (see Exhibit |
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10.61 | U. S. Department of Energy contract for disposal of spent nuclear fuel and/or high-level radioactive waste, entered into between the DOE and Southern California Edison Company, as agent for SDG&E and others; Contract DE-CR01-83NE44418, dated June 10, 1983 (1988 SDG&E Form 10-K, Exhibit 10N). |
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10.62 | San Onofre Unit No. 1 Decommissioning Agreement between Southern California Edison Company and San Diego Gas & Electric Company dated March 23, 2000. |
10.63 | First Amendment to the San Onofre Unit No. 1 Decommissioning Agreement between Southern California Edison Company and San Diego Gas & Electric Company dated January 22, 2010. |
EXHIBIT 12 -- | |
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| Sempra Energy Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends for the years ended December 31, 2009, 2008, 2007, 2006 |
San Diego Gas & Electric Company | |
12.2 | San Diego Gas & Electric Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends for the years ended December 31, 2009, 2008, 2007, 2006 and 2005. |
Pacific Enterprises | |
12.3 | Pacific Enterprises Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends for the years ended December 31, 2009, 2008, 2007, 2006 and 2005. |
Southern California Gas Company | |
12.4 | Southern California Gas Company Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends for the years ended December 31, 2009, 2008, 2007, 2006 and 2005. |
EXHIBIT 13 -- ANNUAL REPORT TO SECURITY HOLDERS | |
Sempra Energy / San Diego Gas & Electric Company / Pacific Enterprises / Southern California Gas Company | |
13.1 | Sempra Energy 2009 Annual Report to Shareholders. (Such report, except for the portions thereof which are expressly incorporated by reference in this Annual Report, is furnished for the information of the Securities and Exchange Commission and is not to be deemed "filed" as part of this Annual Report). |
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| Sempra Energy Code of Business Conduct and Ethics for Board of Directors and Senior Officers (also applies to directors and officers of San Diego Gas & Electric Company and Southern California Gas Company) (2006 |
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21.1 | Sempra Energy Schedule of Significant Subsidiaries at December 31, 2009. |
Pacific Enterprises | |
21.2 | Pacific Enterprises Schedule of Significant Subsidiaries at December 31, 2009. |
EXHIBIT 23 | |
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31.1 | Statement of |
31.2 | Statement of |
San Diego Gas & Electric Company | |
31.3 | Statement of San Diego Gas & Electric's Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934. |
31.4 | Statement of San Diego Gas & Electric's Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934. |
Pacific Enterprises | |
31.5 | Statement of Pacific Enterprise's Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934. |
31.6 | Statement of Pacific Enterprise's Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934. |
Southern California Gas Company | |
31.7 | Statement of Southern California Gas Company's Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934. |
31.8 | Statement of Southern California Gas Company's Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934. |
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32.1 | Statement of |
32.2 | Statement of |
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| Statement of San Diego Gas & Electric's Chief Executive Officer pursuant to 18 U.S.C. Sec. 1350. |
32.4 | Statement of San Diego Gas & Electric's Chief Financial Officer pursuant to 18 U.S.C. Sec. 1350. |
Pacific Enterprises | |
32.5 | Statement of Pacific Enterprise's Chief Executive Officer pursuant to 18 U.S.C. Sec. 1350. |
32.6 | Statement of Pacific Enterprise's Chief Financial Officer pursuant to 18 U.S.C. Sec. 1350. |
Southern California Gas Company | |
32.7 | Statement of Southern California Gas Company's Chief Executive Officer pursuant to 18 U.S.C. Sec. 1350. |
32.8 | Statement of Southern California Gas Company's Chief Financial Officer pursuant to 18 U.S.C. Sec. 1350. |
EXHIBIT 99 -- ADDITIONAL EXHIBITS | |
Sempra Energy | |
99.1 | RBS Sempra Commodities LLP and Subsidiaries – Consolidated Financial Statements as of December 31, 2009 and 2008, and for the Year Ended December 31, 2009, and the Period From April 1, 2008 (Date of Commencement) to December 31, 2008, and Report of Independent Registered Public Accounting Firm. |
EXHIBIT 101 -- INTERACTIVE DATA FILE | |
101.INS | XBRL Instance Document |
101.SCH | XBRL Taxonomy Extension Schema Document |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
GLOSSARY | ||||
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| LNG | Liquefied Natural Gas | |
APSC | Alabama Public Service Commission | Mobile Gas | Mobile Gas Service Corporation | |
Bay Gas | Bay Gas Storage Company | MW | Megawatt | |
Bcf | Billion Cubic Feet (of natural gas) |
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CARB | California Air Resources Board | PE | Pacific Enterprises | |
CEC | California Energy Commission |
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CPUC | California Public Utilities Commission |
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DOE | Department of Energy |
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DWR | Department of Water Resources | RBS Sempra Commodities | RBS Sempra Commodities LLP | |
Edison | Southern California Edison Company |
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| RPS | Renewables Portfolio Standard | |
FERC | Federal Energy Regulatory Commission
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| SDG&E | San Diego Gas & Electric Company |
GHG | Greenhouse Gas | Sempra Utilities |
Company and Southern California Gas Company | |
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| SoCalGas | Southern California Gas Company | |
ISFSI | Independent Spent Fuel Storage Installation | SONGS | San Onofre Nuclear Generating Station | |
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ISO | Independent System Operator | The | Sempra Energy’s board of directors | |
J.P. Morgan Ventures | J.P. Morgan Ventures Energy Corporation |
VaR
Value at Risk
VIE
Variable Interest Entity
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