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 September 30, 1998
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Commission file number 1-1402
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SOUTHERN CALIFORNIA GAS COMPANY
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(Exact name of registrant as specified in its charter)
California 95-1240705
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
555 West Fifth Street, Los Angeles, California 90013-1011
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(Address of principal executive offices)
(Zip Code)
(213) 244-1200
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
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Common stock outstanding: Wholly owned by Pacific Enterprises
ITEM 1. FINANCIAL STATEMENTS.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME (Unaudited)
(In millions of dollars)
Three Months Ended Nine Months Ended
September 30 September 30
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1998 1997 1998 1997
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Operating Revenues $ 520 $ 607 $1,762 $1,901
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Operating Expenses:
Cost of gas distributed 162 235 648 752
Operating and maintenance 164 172 575 505
Depreciation 64 63 190 188
Income taxes 39 43 95 140
Other taxes and franchise fees 20 22 73 71
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Total operating expenses 449 535 1,581 1,656
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Operating income 71 72 181 245
Other Income and (Deductions) 1 6 (2) 6
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Income Before Interest Charges
and Preferred Dividends 72 78 179 251
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Interest Charges:
Long-term debt 19 20 57 61
Other interest 1 3 5 4
Allowance for borrowed funds
used during construction (2) - (3) (1)
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Net interest charges 18 23 59 64
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Net Income 54 55 120 187
Dividends on Preferred Stock - 1 1 5
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Earnings Applicable to
Common Stock $ 54 $ 54 $ 119 $ 182
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See notes to consolidated financial statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
(In millions of dollars)
September 30, December 31,
1998 1997
(Unaudited)
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Utility plant - at original cost $6,043 $5,978
Accumulated depreciation 3,070 2,904
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Utility plant - net 2,973 3,074
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Current assets:
Cash and cash equivalents 6 -
Accounts and notes receivable 235 499
Regulatory balancing accounts - net 1 355
Deferred income taxes 96 11
Inventories 81 38
Other 10 14
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Total current assets 429 917
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Regulatory assets 224 214
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Total $3,626 $4,205
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See notes to consolidated financial statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
CAPITALIZATION AND LIABILITIES
(In millions of dollars)
September 30, December 31,
1998 1997
(Unaudited)
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Capitalization:
Common equity $1,324 $1,370
Preferred stock 21 97
Long-term debt 1,042 968
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Total capitalization 2,387 2,435
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Current liabilities:
Short-term debt 30 351
Long-term debt due within one year - 147
Accounts payable 381 417
Accrued interest 50 52
Accrued taxes 40 69
Other 61 78
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Total current liabilities 562 1,114
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Deferred credits:
Customer advances for construction 29 34
Deferred income taxes 385 373
Deferred investment tax credits 59 61
Other deferred credits 204 188
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Total deferred credits 677 656
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Total $3,626 $4,205
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See notes to consolidated financial statements.
SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS (Unaudited)
(In millions of dollars)
Nine Months Ended
September 30
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1998 1997
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Cash Flows From Operating Activities:
Net income $120 $187
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 190 188
Deferred income taxes 12 17
Other (17) (18)
Net change in working capital 431 (7)
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Net cash provided by operating
activities 736 367
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Cash Flows from Financing Activities:
Dividends paid (166) (183)
Payment on long-term debt (148) (100)
Increase (decrease) in short-term debt (321) 18
Issuance of long-term debt 75 -
Redemption of preferred stock (76) -
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Net cash used in financing activities (636) (265)
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Cash Flows from Investing Activities:
Expenditures for utility plant (84) (110)
Other - net (10) 21
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Net cash used in investing activities (94) (89)
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Increase (Decrease) in Cash and Cash Equivalents 6 13
Cash and Cash Equivalents, beginning of period - 14
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Cash and Cash Equivalents, end of period $ 6 $ 27
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Supplemental Disclosure of Cash Flow Information:
Income tax payments, net of refunds $ 61 $ 60
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Interest payments, net of amount capitalized $204 $113
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See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. GENERAL
This Quarterly Report on Form 10-Q is that of Southern California
Gas Company (SoCalGas), a subsidiary of Pacific Enterprises (PE),
which is a subsidiary of Sempra Energy. The financial statements
herein are the consolidated financial statements of SoCalGas and
its subsidiaries.
The accompanying consolidated financial statements have been
prepared in accordance with the interim-period-reporting
requirements of Form 10-Q. This Quarterly Report should be read in
conjunction with the Company's 1997 Annual Report on Form 10-K,
which includes the consolidated financial statements and notes
thereto, and the annual "Management's Discussion & Analysis of
Financial Condition and Results of Operations," its Quarterly
Reports on Form 10-Q for the three months ended March 31, 1998 and
for the three months ended June 30, 1998, and the Current Report on
Form 8-K filed by Sempra Energy (Commission no. 1-14201) with the
Securities and Exchange Commission on June 30, 1998 in connection
with the completion of the business combination of Pacific
Enterprises and Enova Corporation.
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 of a
normal recurring nature. Certain changes in classification have
been made to prior presentations to conform to the current
financial statement presentation.
In conformity with generally accepted accounting principles,
SoCalGas's accounting policies reflect the financial effects of
rate regulation authorized by the California Public Utilities
Commission (CPUC). SoCalGas applies the provisions of the Statement
of Financial Accounting Standards No. 71, "Accounting for the
Effects of Certain Types of Regulation" (SFAS 71). This statement
requires cost-based rate-regulated entities that meet certain
criteria to reflect the authorized recovery of costs due to
regulatory decisions in their financial statements. SoCalGas
continues to meet the criteria of SFAS 71 in accounting for its
regulated operations.
2. BUSINESS COMBINATION
On June 26, 1998 (pursuant to an October 1996 agreement) Enova and
PE completed a business combination in which the two companies
became subsidiaries of a new company named Sempra Energy. As a
result of the combination, (i) each outstanding share of common
stock of Enova was converted into one share of common stock of
Sempra Energy, (ii) each outstanding share of common stock of PE
was converted into 1.5038 shares of common stock of Sempra Energy
and (iii) the preferred stock and/or preference stock of SDG&E, PE
and SoCalGas remain outstanding. Additional information on the
business combination is discussed in the Current Report on Form 8-K
filed with the Securities and Exchange Commission by Sempra Energy
on June 30, 1998.
Expenses incurred in connection with the business combination are
$33 million, after tax, and $9 million, after tax, for the nine-
month periods ended September 30, 1998 and 1997, respectively. These
costs consist primarily of employee-related costs, and investment
banking, legal, regulatory and consulting fees.
In conjunction with the business combination, on September 30, 1998
Enova's and PE's ownership interests in certain non-utility
subsidiaries were transferred to Sempra Energy at book value.
3. MATERIAL CONTINGENCIES
GAS INDUSTRY RESTRUCTURING
The gas industry experienced an initial phase of restructuring
during the 1980s by deregulating 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 natural-
gas consumers.
On August 25, 1998 the Governor of California signed into law a
bill prohibiting the CPUC from enacting any gas industry
restructuring decision for core customers prior to January 1, 2000;
the CPUC continues to study the issue. During the implementation
moratorium, the CPUC will hold hearings throughout the state and
intends to give the California Legislature a draft ruling before
adopting a final market structure policy no earlier than January 1,
2000. SDG&E and SoCalGas will actively participate in this effort.
4. COMPREHENSIVE INCOME
In conformity with generally accepted accounting principles, the
Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income." Comprehensive income for the
three-month and nine-month periods ended September 30, 1998 and
1997 was equal to net income.
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 1997 Form 10-K.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q includes forward-looking statements within the
definition of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. The words "estimates",
"believes", "expects", "anticipates", "plans" and "intends,"
variations of such words, and similar expressions are intended to
identify forward-looking statements that involve risks and
uncertainties. These statements are necessarily based upon various
assumptions involving judgments with respect to the future
including, among others, national, regional and local economic,
competitive and regulatory conditions, technological developments,
inflation rates, interest rates, energy markets, weather
conditions, business and regulatory or legal decisions, and other
uncertainties, all of which are difficult to predict and many of
which are beyond the control of the Company. Accordingly, while the
Company believes that the assumptions are reasonable, there can be
no assurance that they will approximate actual experience, or that
the expectations will be realized.
BUSINESS COMBINATION
See Note 2 of the notes to consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Utility operations continue to be a major source of liquidity. In
addition, financing needs are met primarily through issuances of
short-term and long-term debt. These capital resources are expected
to remain available. Cash requirements include utility capital
expenditures, and repayments and retirements of long-term debt.
Major changes in cash flows not described elsewhere are described
below. Cash and cash equivalents at September 30, 1998 are
available for investment in new energy-related domestic and
international projects, the retirement of debt, and other corporate
purposes.
OPERATING ACTIVITIES
Cash flows from operations increased primarily due to gas costs'
being lower than amounts collected in rates (resulting in a
decrease in previously undercollected regulatory balancing
accounts) and an increase in gas volumes sold.
INVESTING ACTIVITIES
Capital expenditures are estimated to be $180 million for the full
year 1998 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.
FINANCING ACTIVITIES
Net cash used in financing activities increased from the
corresponding period in 1997 primarily due to greater short-term
debt repayments of $148 million and $321 million, respectively, and
the repurchase of preferred stock. On February 2, 1998, the
Company redeemed all outstanding shares of 7-3/4% Series Preferred
Stock for a total cost of $76 million, including unpaid dividends.
RESULTS OF OPERATIONS
UTILITY OPERATIONS
The table below compares SoCalGas' throughput and revenues by
customer class for the nine-month periods ended September 30, 1998
and 1997.
Transportation
Gas Sales and Exchanges Total
------------------- ------------------- -------------------
Throughput Revenue Throughput Revenue Throughput Revenue
(Throughput in billion cubic feet, revenue in millions of dollars)
------------------- ------------------- -------------------
Nine Months Ended
September 30, 1998:
Residential 189 $1,434 2 $ 9 191 $1,443
Commercial and industrial 58 342 232 196 290 538
Utility electric
generation 120 58 120 58
Wholesale and exchange 119 48 119 48
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Total in rates 247 $1,776 473 $311 720 2,087
Balancing accounts and other (325)
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Total operating revenues $1,762
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Nine Months Ended
September 30, 1997:
Residential 164 $1,160 2 $ 8 166 $1,168
Commercial and industrial 60 369 227 191 287 560
Utility electric
generation 128 61 128 61
Wholesale and exchange 107 49 107 49
------------------ ------------------- -------------------
Total in rates 224 $1,529 464 $309 688 1,838
Balancing accounts and other 63
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Total operating revenues $1,901
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The decrease in year-to-date operating revenues is primarily due to
the margin reduction established in PBR and lower prices for gas.
The increase in total throughput was primarily due to colder
weather in 1998 compared to 1997.
The decrease in the cost of natural gas is primarily due to a
decrease in the average cost of natural gas purchased for the nine-
month period ended September 30, 1998, compared to the
corresponding period of 1997. Under the current regulatory
framework, changes in revenue resulting from core market changes in
volumes and cost of natural gas do not affect net income.
YEAR 2000 ISSUES
Most companies are affected by the inability of many automated
systems and applications to process the year 2000 and beyond. The
Year 2000 issues are the result of computer programs and other
automated processes using two digits to identify a year, rather
than four digits. Any of the Company's computer programs that
include date-sensitive software may recognize a date using "00" as
representing the year 1900, instead of the year 2000, or "01" as
1901, etc., which could lead to system malfunctions. The Year 2000
issue impacts both Information Technology ("IT") systems and also
non-IT systems, including systems incorporating "embedded
processors". To address this problem, in 1996, both Pacific
Enterprises and Enova Corporation established company-wide Year
2000 programs. These programs have now been consolidated into
Sempra Energy's overall Year 2000 readiness effort. Sempra Energy
has established a central Year 2000 Program Office which reports to
the Company's Chief Information Technology Officer and reports
periodically to the audit committee of the Board of Directors.
The Company's State of Readiness
Sempra Energy is identifying all IT and non-IT systems (including
embedded systems) that might not be Year 2000 ready and
categorizing them in the following areas: IT applications, computer
hardware and software infrastructure, telecommunications, embedded
systems, and third parties. The Company is currently evaluating its
exposure in all of these areas. These systems and applications are
being tracked and measured through four key phases: inventory,
assessment, remediation/testing and Year 2000 readiness. The
Company is prioritizing so that critical systems are being assessed
and modified/replaced first. Critical systems are those
applications and systems, including embedded processor technology,
which, if not appropriately remediated, may have a significant
impact on energy delivery, revenue collection or the safety of
personnel, customers or facilities. The Company's Year 2000 testing
effort includes functional testing of Year 2000 dates and
validating that changes have not altered existing functionality.
The Company uses an independent, internal review process to verify
that the appropriate testing has occurred.
The Company's Year 2000 project is currently on schedule and the
company estimates that all critical systems will be Year 2000 Ready
by June 30, 1999. The Company defines "Year 2000 Ready" as suitable
for continued use into the year 2000 with no significant
operational problems.
Critical IT and non-IT applications have been inventoried and
assessed for Year 2000 Readiness, and detailed plans are in place
for required system modifications or replacements. Remediation and
testing activities are well underway with approximately 58 percent
of the systems currently Year 2000 Ready and are expected to be 100
percent by June 30, 1999. Inventory, assessment and testing
activities for embedded systems are well underway with
approximately 38 percent of the systems currently Year 2000 Ready.
Inventory and assessment for all Company systems are in progress
and expected to be completed by December 31, 1998.
Sempra Energy's current schedule for Year 2000 testing, readiness
and development of contingency plans is subject to change depending
upon the remediation and testing phases of the Company's compliance
effort and upon developments that may arise as the Company
continues to assess its computer-based systems and operations. In
addition, this schedule is dependent upon the efforts of third
parties, such as suppliers (including energy producers) and
customers. Accordingly, delays by third parties may cause the
Company's schedule to change.
The Costs to Address the Company's Year 2000 Issues
Sempra Energy's budget for the Year 2000 program is $48 million, of
which $33 million has been spent. As the Company continues to
assess its systems and as the remediation and testing efforts
progress, cost estimates may change. The Company's Year 2000
readiness effort is being funded entirely by operating cash flows.
The Risks of the Company's Year 2000 Issues
Based upon its current assessment and testing of the Year 2000
issue, the Company believes the reasonably likely worst case Year
2000 scenarios to have the following impacts upon Sempra Energy and
its operations. With respect to the Company's ability to provide
energy to its domestic utility customers, the Company believes that
the reasonably likely worst case scenario is for small, localized
interruptions of natural gas or electrical service which are
restored in a time frame that is within normal service levels. With
respect to services that are essential to Sempra Energy's
operations, such as customer service, business operations, supplies
and emergency response capabilities, the scenario is for minor
disruptions of essential services with rapid recovery and all
essential information and processes ultimately recovered.
To assist in preparing for and mitigating these possible scenarios,
Sempra Energy is a member of several industry-wide efforts
established to deal with Year 2000 problems affecting embedded
systems and equipment used by the nation's natural gas and electric
power companies. Under these efforts, participating utilities are
working together to assess specific vendors' system problems and to
test plans. These assessments will be shared by the industry as a
whole to facilitate Year 2000 problem solving.
A portion of this risk is due to the various Year 2000 Ready
schedules of critical third party suppliers and customers. The
Company is in the process of contacting its critical suppliers and
customers to survey their Year 2000 remediation programs. While
risks related to the lack of Year 2000 readiness by third parties
could materially and adversely affect the Company's business,
results of operations and financial condition, the Company expects
its Year 2000 readiness efforts to reduce significantly the
Company's level of uncertainty about the impact of third party Year
2000 issues on both its IT systems and non-IT systems.
The Company's Contingency Plans
Sempra Energy's contingency plans for Year-2000-related
interruptions are being incorporated in the Company's existing
overall emergency preparedness plans. To the extent appropriate,
such plans will include emergency backup and recovery procedures,
remediation of existing systems parallel with installation of new
systems, replacing electronic applications with manual processes,
identification of alternate suppliers and increasing inventory
levels. The Company expects these contingency plans to be completed
by the end of the second quarter in 1999. Due to the speculative
and uncertain nature of contingency planning, there can be no
assurances that such plans actually will be sufficient to reduce
the risk of material impacts on the Company's operations due to
Year 2000 issues.
FACTORS INFLUENCING FUTURE PERFORMANCE
Performance-Based Regulation (PBR)
To promote efficient operations and improved productivity and to
move away from reasonableness reviews and disallowances, the CPUC
has been encouraging utilities to use PBR. PBR has replaced the
general rate case and certain other regulatory proceedings for both
SoCalGas and SDG&E. Under PBR, regulators allow future income
potential to be tied to achieving or exceeding specific performance
and productivity measures, rather than relying solely on expanding
utility rate base in a market where the company already has a
highly developed infrastructure.
SoCalGas' PBR is in effect for five years; however, the CPUC
decision allows for the possibility that changes to the PBR
mechanism could be adopted in a decision to be issued in SoCalGas'
1999 Biennial Cost Allocation Proceeding (BCAP) application which
is anticipated to become effective August 1, 1999.
Cost of Capital
Under PBR, annual Cost of Capital proceedings were replaced by an
automatic adjustment mechanism if changes in certain indices exceed
established tolerances. For 1998, SoCalGas is authorized to earn a
rate of return on common equity of 11.6 percent and a 9.49 percent
return on rate base, the same as in 1997.
Biennial Cost Allocation Proceeding (BCAP)
In October 1998 SoCalGas filed its 1999 BCAP application requesting
that new rates become effective August 1, 1999 and remain in effect
through December 31, 2002. The application seeks an overall
decrease in gas rate revenues of $204 million.
Gas Cost Incentive Mechanism (GCIM)
Under the GCIM, SoCalGas can recover all costs within a "tolerance
band" above a benchmark price and refunds all savings within the
tolerance band below the benchmark price. Costs or savings outside
the tolerance band are shared equally between customers and
shareholders.
SoCalGas' natural-gas costs were below the specified GCIM benchmark
for the annual period ended March 1997. In June 1997 SoCalGas filed
a motion with the CPUC requesting a reward for shareholders under
the procurement portion of the incentive mechanism. A reward of $11
million was approved by the CPUC in June 1998 and is included in
income for the nine-month period ended September 30, 1998.
The CPUC has approved the use of natural-gas futures for managing
risks 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.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedules
27.1 Financial Data Schedule for the nine months ended
September 30, 1998.
(b) Reports on Form 8-K
A Current Report on Form 8-K filed on June 30, 1998 announced
the completion of the business combination between Enova
Corporation and Pacific Enterprises, and the related changes
in control.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SOUTHERN CALIFORNIA GAS COMPANY
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(Registrant)
By: /s/ Warren Mitchell
Date: October 30, 1998 ---------------------------
Warren Mitchell
Chairman and President
UT
