UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
-------------------------------------
Commission file number 1-1402
---------------------------------------------
SOUTHERN CALIFORNIA GAS COMPANY
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
California 95-1240705
- --------------------------------------------- ------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
555 West Fifth Street, Los Angeles, California 90013-1011
---------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(213) 244-1200
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
----- -----
Common stock outstanding: Wholly owned by Pacific Enterprises
ITEM 1. FINANCIAL STATEMENTS.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
Dollars in millions
Three months ended
March 31,
-----------------
2000 1999
------- -------
Operating Revenues $ 698 $ 607
------- ------
Expenses
Cost of natural gas distributed 346 256
Operation and maintenance 150 152
Depreciation 64 64
Income taxes 44 41
Other taxes and franchise payments 28 25
------- ------
Total 632 538
------- ------
Operating Income 66 69
------- ------
Other Income and (Deductions)
Interest income 4 2
Regulatory interest - (4)
Allowance for equity funds used during construction - 1
Taxes on nonoperating income (2) 1
Other - net - (1)
------- ------
Total 2 (1)
------- ------
Income Before Interest Charges 68 68
------- ------
Interest Charges
Long-term debt 17 19
Other interest 2 2
Allowance for borrowed funds used during construction (1) -
------- ------
Total 18 21
------- ------
Earnings Applicable to Common Shares $ 50 $ 47
======= ======
See notes to Consolidated Financial Statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Dollars in millions
Balance at
--------------------------
March 31, December 31,
2000 1999
---------- ------------
ASSETS
Utility plant - at original cost $6,209 $6,177
Accumulated depreciation (3,403) (3,342)
------ ------
Utility plant - net 2,806 2,835
------ ------
Current assets
Cash and cash equivalents 158 11
Accounts receivable - trade (less allowance for
doubtful receivables of $18 at March 31, 2000 and
$16 at December 31, 1999) 359 285
Accounts and notes receivable - other 13 14
Due from affiliates 197 73
Deferred income taxes 25 25
Inventories 16 79
Prepaid expenses 13 15
------ ------
Total current assets 781 502
------ ------
Regulatory assets 154 155
Investments and other assets 140 40
------ ------
Total $3,881 $3,532
====== ======
See notes to Consolidated Financial Statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
Dollars in millions
Balance at
--------------------------
March 31, December 31,
2000 1999
---------- ------------
CAPITALIZATION AND LIABILITIES
Capitalization
Common stock $ 835 $ 835
Retained earnings 397 447
Accumulated other comprehensive income 42 6
------ ------
Total common equity 1,274 1,288
Preferred stock 22 22
Long-term debt 939 939
------ ------
Total capitalization 2,235 2,249
------ ------
Current liabilities
Accounts payable - trade 150 159
Accounts payable - other 342 227
Regulatory balancing accounts overcollected - net 335 165
Other taxes payable 52 28
Accrued income taxes 39 4
Interest accrued 33 29
Current portion of long-term debt 30 30
Other 71 84
------ ------
Total current liabilities 1,052 726
------ ------
Customer advances for construction 24 27
Deferred income taxes - net 352 319
Deferred investment tax credits 55 56
Deferred credits and other liabilities 163 155
------ ------
Total deferred credits 594 557
------ ------
Contingencies and commitments (Note 2)
Total $3,881 $3,532
====== ======
See notes to Consolidated Financial Statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
Dollars in millions
Three Months Ended
March 31,
------------------
2000 1999
------ ------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 50 $ 47
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 64 64
Deferred income taxes 12 38
Deferred investment tax credits (1) (1)
Other (14) (16)
Net change in other working capital components 176 204
------ ------
Net cash provided by operating activities 287 336
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (40) (32)
Other - net -- (3)
------ ------
Net cash used in investing activities (40) (35)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (100) --
------ ------
Net cash used in financing activities (100) --
------ ------
Increase (decrease) in Cash and Cash Equivalents 147 301
Cash and Cash Equivalents, January 1 11 11
------ ------
Cash and Cash Equivalents, March 31 $ 158 $ 312
====== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest payments, net of amount capitalized $ 14 $ 19
====== ======
Income tax payments, net of refunds $ -- $ 53
====== ======
See notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
This Quarterly Report on Form 10-Q is that of the Southern California
Gas Company (SoCalGas or the Company), the sole subsidiary of Pacific
Enterprises (PE). PE's common stock is wholly owned by Sempra Energy, a
California-based Fortune 500 energy services company. The financial
statements herein are the Consolidated Financial Statements of SoCalGas
and its subsidiaries, whose operations are not material to the
consolidated financial statements.
The accompanying Consolidated Financial Statements have been prepared in
accordance with the interim-period-reporting requirements of Form 10-Q.
Results of operations for interim periods are not necessarily indicative
of results for the entire year. In the opinion of management, the
accompanying statements reflect all adjustments necessary for a fair
presentation. These adjustments are only of a normal recurring nature.
Certain changes in classification have been made to prior presentations
to conform to the current financial statement presentation.
The Company's significant accounting policies are described in the notes
to Consolidated Financial Statements in the Company's 1999 Annual
Report. The same accounting policies are followed for interim reporting
purposes.
Information in this Quarterly Report is unaudited and should be read in
conjunction with the Company's 1999 Annual Report.
SoCalGas has been accounting for the economic effects of regulation on
utility operations in accordance with Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation" (SFAS No. 71), as described in the notes to Consolidated
Financial Statements in the Company's 1999 Annual Report.
2. MATERIAL CONTINGENCIES
NATURAL GAS INDUSTRY RESTRUCTURING
The natural gas industry experienced an initial phase of restructuring
during the 1980s by deregulating natural gas sales to noncore customers.
On January 21, 1998, the CPUC released a staff report initiating a
project to assess the current market and regulatory framework for
California's natural gas industry. The general goals of the plan are to
consider reforms to the current regulatory framework emphasizing market-
oriented policies benefiting California's natural gas consumers.
The CPUC has held hearings throughout the state and intends to give the
legislature a draft ruling before adopting a final market-structure
policy. SoCalGas and its affiliate, San Diego Gas & Electric Company,
have been actively participating in this effort and have argued in
support of competition intended to maximize benefits to customers rather
than to protect competitors. During this process various large customers
on the California utilities' systems are in the process of negotiating a
restructuring of intrastate transmission receipt points, balancing
policies and storage rights. SoCalGas, SDG&E and other interested
parties are expected to file a settlement with the CPUC on these matters
in the second quarter of 2000 with evidentiary hearings before the CPUC
in June 2000. A CPUC decision is not expected until late 2000.
In October 1999, the State of California enacted a law (AB 1421) which
requires that natural gas utilities provide "bundled basic gas service"
(including transmission, storage, distribution, purchasing, revenue-
cycle services and after-meter services) to all core customers, unless
the customer chooses to purchase natural gas from a non-utility
provider. The law prohibits the CPUC from unbundling distribution-
related natural gas services (including meter reading and billing) and
after-meter services (including leak investigation, inspecting customer
piping and appliances, pilot relighting and carbon monoxide
investigation) for most customers. The objective is to preserve both
customer safety and customer choice.
3. COMPREHENSIVE INCOME
Comprehensive income for the three-month periods ended March 31, 2000
and March 31, 1999 was $87 million and $ 47 million, respectively. The
difference between net income and comprehensive income for the three-
month period ended March 31, 2000 was due to minimum pension liability
adjustments and $34 million of unrealized gains on marketable securities
that are classified as available-for-sale (although they cannot be sold
until November 2000). For the three-month period ended March 31, 1999
comprehensive income was equal to earnings applicable to common shares.
As was the case for the three-month period ended March 31, 2000, it is
likely that comprehensive income in future periods will differ
significantly from net income and will be more volatile than net income
as long as the available-for-sale securities are held.
4. SEGMENT INFORMATION
The Company has two separately managed reportable segments: natural gas
distribution and natural gas transmission/storage. The accounting
policies of the segments are the same as those described in the notes to
Consolidated Financial Statements in the Company's 1999 Annual Report,
and segment performance is evaluated by management based on reported
operating income. Intersegment transactions are generally recorded the
same as sales or transactions with third parties. Interest expense and
income tax expense are not allocated to the reportable segments.
Interest revenue is included in other income on the Statements of
Consolidated Income herein. It is not allocated to the reportable
segments. There were no significant changes in segment assets during the
three-month period ended March 31, 2000.
- --------------------------------------------------
Three months ended
March 31,
---------------------
(Dollars in millions) 2000 1999
- --------------------------------------------------
Revenues:
Distribution $ 607 $ 517
Transmission and storage 128 102
Other (37) (12)
---------------------
Total $ 698 $ 607
---------------------
Segment Income:
Distribution $ 110 $ 109
Transmission and storage 35 12
Other (35) (11)
---------------------
Total segment income 110 110
Interest expense (18) (21)
Income tax expense (46) (40)
Nonoperating income (expense) 4 (2)
---------------------
Net income $ 50 $ 47
---------------------
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
financial statements contained in this Form 10-Q and Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in the Company's 1999 Annual Report.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains statements that are not
historical fact and constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. The
words "estimates," "believes," "expects," "anticipates," "plans,"
"intends," "may" and "should" or similar expressions, or discussions of
strategy or of plans are intended to identify forward-looking statements
that involve risks, uncertainties and assumptions. Future results may
differ materially from those expressed in the forward-looking
statements.
These statements are necessarily based upon various assumptions
involving judgments with respect to the future and other risks,
including, among others, local, regional, national and international
economic, competitive, political and regulatory conditions and
developments; technological developments; capital market conditions;
inflation rates; interest rates; energy markets, including the timing
and extent of changes in commodity prices; weather conditions; business,
regulatory or legal decisions; the pace of deregulation of retail
natural gas and electricity delivery; the timing and success of business
development efforts; and other uncertainties -- all of which are
difficult to predict and many of which are beyond the control of the
Company. Readers are cautioned not to rely unduly on any forward-looking
statements and are urged to review and consider carefully the risks,
uncertainties and other factors which affect the Company's business
described in this quarterly report and other reports filed by the
Company from time to time with the Securities and Exchange Commission.
CAPITAL RESOURCES AND LIQUIDITY
The Company's California utility operations continue to be a major
source of liquidity. In addition, working capital requirements are met
through the issuance of short-term and long-term debt. Major changes in
cash flows not described elsewhere are described below. Cash and cash
equivalents at March 31, 2000 are available for investment in utility
plant, the retirement of debt and other corporate purposes.
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flows from operations decreased primarily due to the increase in
accounts receivable resulting from higher natural gas prices and the
return to ratepayers of previously overcollected regulatory balancing
accounts.
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures for property, plant and equipment are estimated to
be $220 million for the full year 2000 and will be financed primarily by
internally generated funds. Construction, investment and financing
programs are continuously reviewed and revised in response to changes in
competition, customer growth, inflation, customer rates, the cost of
capital, and environmental and regulatory requirements.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash used in financing activities increased in the three-month
period ended March 31, 2000 due to dividends paid to parent.
RESULTS OF OPERATIONS
SoCalGas' net income increased for the three-month period ended March
31, 2000 compared to the same period in 1999, primarily due to reduced
operating expenses.
The table below summarizes the components of natural gas volumes and
revenues for SoCalGas by customer class for the three months ended
March 31, 2000 and 1999.
Gas Sales, Transportation & Exchange
(Dollars in millions, volumes in billion cubic feet)
For the three months ended March 31
Gas Sales Transportation & Exchange Total
--------------------------------------------------------------
Throughput Revenue Throughput Revenue Throughput Revenue
--------------------------------------------------------------
2000:
Residential 89 $ 625 1 $ 6 90 $ 631
Commercial and industrial 25 160 83 73 108 233
Utility electric generation -- -- 30 11 30 11
Wholesale -- -- 41 14 41 14
--------------------------------------------------------------
114 $ 785 155 $104 269 $ 889
Balancing accounts and other (191)
--------
Total $ 698
- ------------------------------------------------------------------------------------------
1999:
Residential 100 $ 619 1 $ 1 101 $ 620
Commercial and industrial 25 144 77 62 102 206
Utility electric generation -- -- 16 7 16 7
Wholesale -- -- 45 16 45 16
--------------------------------------------------------------
125 $ 763 139 $ 86 264 849
Balancing accounts and other (242)
--------
Total $ 607
- ------------------------------------------------------------------------------------------
Natural gas revenues increased 15 percent for the three-month period
ended March 31, 2000, compared to the corresponding period in 1999.
The increase is primarily due to higher natural gas prices.
Cost of natural gas distributed increased 35 percent for the three-
month period ended March 31, 2000 compared to the corresponding
period in 1999. The increase is primarily due to higher natural gas
prices. Under the current regulatory framework, changes in core-
market natural gas prices do not affect net income.
Net income at SoCalGas increased slightly due to reduced
operating expenses.
FACTORS INFLUENCING FUTURE PERFORMANCE
Performance of the Company in the near future will depend primarily
on the ratemaking and regulatory process, electric and natural gas
industry restructuring, and the changing energy marketplace. These
factors are discussed in this section.
Industry Restructuring
See discussion of industry restructuring in Note 2 of the notes to
Consolidated Financial Statements.
Performance-Based Regulation (PBR)
To promote efficient operations and improved productivity and to move
away from reasonableness reviews and disallowances, the CPUC has been
directing utilities to use PBR. PBR has replaced the general rate
case and certain other regulatory proceedings for the California
utilities. Under PBR, regulators require future income potential to
be tied to achieving or exceeding specific performance and
productivity goals, as well as cost reductions, rather than relying
solely on expanding utility plant in a market where a utility already
has a highly developed infrastructure. The utility's PBR mechanism is
scheduled to be updated at December 31, 2002, to reflect, among other
things, changes in costs and volumes.
Changes to the SoCalGas PBR mechanism could be adopted in a decision
to be issued in SoCalGas' 1999 Biennial Cost Allocation Proceeding
application, which is expected to become effective during the second
quarter of 2000. See additional discussion in "Biennial Cost
Allocation Proceeding" below.
Key elements of the mechanisms include an initial reduction in base
rates, an indexing mechanism that limits future rate increases to the
inflation rate less a productivity factor, a sharing mechanism with
customers if earnings exceed the authorized rate of return on rate
base, and rate refunds to customers if service quality deteriorates.
Specifically, the key elements of the mechanisms include the
following:
- -- Earnings up to 25 basis points in excess of the authorized rate of
return on rate base are retained 100 percent by shareholders.
Earnings that exceed the authorized rate of return on rate base by
greater than 25 basis points are shared between customers and
shareholders on a sliding scale that begins with 75 percent of the
additional earnings being given back to customers and declining to 0
percent as earned returns approach 300 basis points above authorized
amounts. There is no sharing if actual earnings fall below the
authorized rate of return. In 1999, SoCalGas was authorized to earn
9.49 percent on rate base. For 2000, the authorized return is again
9.49 percent.
- -- Base rates are indexed based on inflation less an estimated
productivity factor.
- -- The mechanism authorizes penalties of up to $4 million annually,
or more in certain, limited situations, related to performance
involving employee safety, customer satisfaction, and call-center
responsiveness.
- -- A mechanism allows for pricing flexibility for residential and
small-commercial customers, with any shortfalls in revenue being
borne by shareholders and with any increase in revenue shared between
shareholders and customers.
- -- Annual cost of capital proceedings are replaced by an automatic
adjustment mechanism. If changes in certain indices exceed
established tolerances, there would be an automatic adjustment of
rates for the change in the cost of capital according to a formula
which applies a percentage of the change to various capital
components.
Cost of Capital
For 2000, SoCalGas is authorized to earn a rate of return on common
equity (ROE) of 11.6 percent and a 9.49 percent return on rate base
(ROR), the same as in 1999, unless interest-rate changes are large
enough to trigger an automatic adjustment as discussed in the
Company's 1999 Annual Report.
Biennial Cost Allocation Proceeding (BCAP)
The BCAP determines how a utility's natural gas transportation costs
are allocated among various customer classes (residential,
commercial, industrial, etc.). In October 1998, the California
utilities filed 1999 BCAP applications requesting that new rates
become effective August 1, 1999, and remain in effect through
December 31, 2002. On April 20, 2000, the CPUC issued a decision
adopting overall decreases in natural gas revenues of $210 million
for SoCalGas. The decrease has no effect on net income.
Gas Cost Incentive Mechanism (GCIM)
This mechanism for evaluating SoCalGas' natural gas purchases
substantially replaced the previous process of reasonableness
reviews. In December 1998 the CPUC extended the GCIM program
indefinitely.
GCIM compares SoCalGas' cost of natural gas with a benchmark level,
which is the average price of 30-day firm spot supplies in the basins
in which SoCalGas purchases natural gas. The mechanism permits full
recovery of all costs within a tolerance band above the benchmark
price and refunds all savings within a tolerance band below the
benchmark price. The costs or savings outside the tolerance band are
shared equally between customers and shareholders.
The CPUC approved the use of natural gas futures for managing risk
associated with the GCIM. SoCalGas enters into natural gas futures
contracts in the open market on a limited basis to mitigate risk and
better manage natural gas costs.
In June 1999, SoCalGas filed its annual GCIM application with the
CPUC, requesting an award of $8 million for the annual period ended
March 31, 1999. A CPUC decision is expected during the second quarter
of 2000.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 133
"Accounting for Derivative Instruments and Hedging Activities." As
amended, SFAS 133, which is effective for the company on January
1, 2001, requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial
position, measure those instruments at fair value and recognize
changes in the fair value of derivatives in earnings in the period
of change unless the derivative qualifies as an effective hedge
that offsets certain exposures. The effect of this standard on the
company's Consolidated Financial Statements has not yet been
determined.
ITEM 3. MARKET RISK
There have been no significant changes in the risk issues affecting
the Company subsequent to those discussed in the Annual Report on
Form 10-K for 1999.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor its subsidiaries are party to, nor is their
property the subject of, any material pending legal proceedings other
than routine litigation incidental to their businesses.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedules
27.1 Financial Data Schedule for the three-month period ended
March 31, 2000.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed after December 31, 1999.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
SOUTHERN CALIFORNIA GAS COMPANY
-------------------------------
(Registrant)
By: /s/ Warren Mitchell
Date: May 3, 2000 ---------------------------
Warren Mitchell
Chairman and President