ML13309A444
| ML13309A444 | |
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|---|---|
| Site: | San Onofre  |
| Issue date: | 12/31/1998 |
| From: | Baum S AFFILIATION NOT ASSIGNED |
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Bo r of Director-s
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Magement Team Corprat Ilformatn
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SEMPRA ENERGY SOLUTIONS Headquarters: Los Angeles Line of Business: Retail marketing of electricity and natural gas; energy management consulting; energy information services; efficiency con tracting and facility management Sempra Energy Solutions provides energy-related products and services to commercial, industrial, government, institu tional and consumer markets.
The company specializes in developing integrated solu tions for customers that include everything from the purchase of natural gas and electricity and energy-efficiency consulting to central plant operations and information management services. In 1998, Sempra Energy Solutions secured major new contracts with Lockheed Martin, PETCO Animal Supplies, Foodmaker, Inc. (the parent company of Jack-in-the-Box restaurants) and the San Diego Unified School District.
CES/Way International, a unit of Sempra Energy Solutions, is a leader in energy-efficiency contracting for government and institutional customers. CES/Way was one of six companies chosen by the U.S. Dept. of Energy to provide energy-effi ciency contracting for select federal facilities. CES/Way's cur rent projects and contract backlog are valued at $150 million.
SAN DIEGO GAS & ELECTRIC Headquarters: San Diego Line of Business: Electric and natural gas distribution San Diego Gas & Electric (SDG&E) traditionally enjoys high customer satisfaction ratings among the 3 million people to whom it provides electric and natural gas service in San Diego and southern Orange counties.
Adapting to its changing role in California's restructured electric-utility industry, SDG&E has shifted its focus to becoming a world-class energy delivery company. This new focus, along with regulatory obligations, spurred the company to begin selling its generating assets.
In late 1998, SDG&E signed sale agreements for both its San Diego-area fossil fuel power plants. The pending sale of the two plants at prices well above book value is expected to enable SDG&E to recover its competition transition costs this summer -
more than two years ahead of the schedule set by California regulators and legislators -
lowering electric rates for its customers and protecting the past investments of Sempra Energy's shareholders.
IIN v
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'lb accelerate the market development in California, Energy customers now expect a full slate of services.d San Diego Gas & Electric (SDG&E) is divesting itself of products delivered in a competitively priced, seamless and its generating assets. The high return the company will reliable manner. While there is a lot of talk nationwide receive on the pending sale of its two fossil fuel power about buying and selling electricity and gas, we believe that plants will benefit both our shareholders and SDG&E what brings the most long-term value to our customers is customers. SDG&E customers will enjoy lower electric astute management of their total energy supply chain.
rates since the competition transition charge on their A UNIQUE OPPORTUNITY bills is now expected to be paid off by July of this year -
In forming Sempra Energy more than two years ahead of the schedule set by state to create the model energy services company for the 21st legislators and regulators. Shareholders now have greater century -
and we are putting in place the infrastructure assurance that SDG&E will recover the stranded costs to support It. In addition to bringing all of our critical com authorized under California's electric industry restructur-puter systems into compliance with Year 2000 standards by ing plan. The divestiture of the two powNer plants also Jone of this year, we also are instituting enterprise software enables SDG&E to concentrate on developing its new companyvide. Enterprise software is a new, computer role in the marketplace as an energy delivery company.
based cohesive system binding together key functions of Operating under its pcrformance-based-regulation plan, the company to enhance customer service.
Southern California Gas Company (SoCalGas) is focusing on With the pending addition of KN Energy, we are creat maximizing efficiencies, increasing gas throughput in its sys-Ing a company with the resources, know-how and financial tem and expanding its customer base. Additionally, there are strength to sell, generate, trade, manage and deliver energy a growing number of gas bypass options for larger commer-anywhere in the world. We have a new organization and cial and industrial customers. SoCalGas is working hard to new leadership that builds on the century-old traditionOf retain their business and build on its base of 18 million performance, service excellence and community involve people served through 4.9 million meters.
ment of SDG&E and SoCalGas.
INTEGRATING SOLUTIONS IN THE Beinga new enterprise chartinga course in the new COMPETITIVE MARKET marketplace is exciting. We are putting the resources in The key to our future success will be our ability to inte-place to make this journey a success -
one that brings grate energy solutions for customers. We will do this by long-term value to ou, our shareholders.
combining the strengths of our competitive businesses to provide customers a complete energy services package.
Two good examples of the success we had with this approach are the contracts we recently won with Lockheed Richard D. Farman Martin for energy management services and with the Mexican Chairman and Chief Executive Officer government for supplying gas to the PresidenteiJudrez power plant in Rosarito, Baja California. In both cases, our competitive businesses will be joining forces to provide comprehensive solutions to the customer.
Stephen L. Baum Vice Chairman, President and Chief Operating Officer A
UNQUE PPORUNIT
.oCORE VALUES Any new enterprise needs to identify its core values. We are no exception. We have adopted values that we believe not only define us as leaders in the industry and in the communities we serve, but also enable us to build share holder value. Among the most important of these core values are our commitments to:
- Focus on the customer.
+ Practice open, honest communications.
- Encourage individual initiative and innovation among our employees.
- Support workforce and supplier diversity that reflects the communities we serve.
+ Deliver superior shareholder value.
In addition, we have established a corporate motto:
"Have fun, make money, be proud."
AGILITY A CRITICAL ATTRIBUTE The developing energy marketplace is characterized by a convergence of the electricity and gas businesses, along In the November 1998 elections, voters in both with the emergence of a broad range of competitive ener-California and Massachusetts overwhelmingly defeated gy-related services. Customers want the convenience of ballot initiatives seeking to overturn the states' deregula one-stop shopping, low-cost service and reliability.
non plans, ensuring that electric industry restructuring States are moving at varying speeds toward open mar-could progress and the utilities' recovery of stranded kets, with those in the West and Northeast leading the costs would be protected. The vote sent a critical message way. Since the transformation to competition is moving at to legislators and regulators in other states considering an uncertain pace, one of the most important attributes of energy deregulation plans: Energy competition should our new company is agility: Our strategic response must move forward.
be adaptable to the tempo of change in the marketplace.
UTILITIES FOCUS ON EFFICIENCY, Based in California -
a state leading the way in ener-MARKET PENETRATION gy deregulation -
we already have experience in the new Our formula for success relies on maintaining and marketplace that few other energy firms can hope to extending our solid foundation of utility service, while duplicate. California officially opened its electric market realizing growth from our new, competitive energy to competition April 1, 1998, ushering in a new era of services businesses.
choice for consumers and businesses.
CaionaadMsahstt vrhligydfae
Letter to Shareholders Energy and remain headquartered in San Diego -
would have revenues of about $9.9 billion, assets of $20 billion, more than 15,000 employees and a large geographic foot print that stretches from the Gulf Coast to Chicago and across the Rockies to California.
n June 26, 1998, Sempra Energy, a new The transaction, which will require the approval of Fortune 500 corporation, was created from the merger You, our shareholders, as well as KN Energy's shareholders of Pacific Enterprises and Enova Corporation. While many and several state and federal agencies, would allow the new companies spend years developing market muscle, we eombined company to aggressively pursue the consider began our new life with more than $10 billion in assets and able opportunities of the deregulated energy services
$6 billion in market capitalization, nearly 12,000 employ-marketplace. Both companies' strategic objectives, assets ees and 6 million metered customers, the largest customer and activities are complementary, and we believe this base of any energy services company in the United States.
combination will enhance shareholder value far faster Sempra Energy already is a major player in the energy than either company could achieve on a standalone basis.
services business, but our goals are much more ambitious.
Within the next decade, we aspire to be one of the top five energy services companies in the creation of shareholder value.
NYSE Ticker Symbol SRE KNE While our corporate earnings were impacted in 1998 by Headquarters San Diego Lakewood, Col.
merger-related transition costs, our balance sheet and Total Revenue
$5.5 billion
$4.4 billion credit ratings remain strong with $400 million in cash on Net Income
$294 million
$60 million hand at the end of last year. Sempra Energy earned Total Assets
$10 billion
$10 billion
$379 million, or $1.60 per diluted share, for the year, exldigbuies-ob]ntincot.Market Value
$6.1 billion
$1.7 billion excluding business-combination costs.
Employees 12,000 3,300 On February 22, 1999, we took a major step toward our goal of becoming one of the nation's premier energy ser-Customers central California Gulf Coast vices companies by announcing a definitive agreement to Statistical Information, as of December 31, 1998.
combine with KN Energy, the nation's second-largest nat ural gas pipeline and storage operator and sixth-largest integrated natural gas company. Based on 1998 results, the combined company -
rthich would be called Sempra
in'gacial Highlights At December 31 or for the year then ended (Dollars in millions except per share amounts) 1998 1997 Change CONSOLIDATED FINANCIAL DATA Revenues and Other Income S 5,525 S
5,127
+
7.8%
Net Income S
294 432 31.9%
Net Income Per Share of Common Stock Basic S
1.24 1.83 32.2%
Diluted S
1.24 1.82 31.9%
Diluted, Excluding Business-Combination Costs 1.60 1.91 16.2%
Weighted Average Number of Common Shares Outstanding (diluted, in millions) 237.1 237.2 Total Assets S 10,456 S 10,756 2.8%
Common Dividends Declared Per Share S
1.56 1.27
+ 22.8%
Dividend Payout Ratio (diluted) 125.8%
69.8%
+ 80.2%
Debt to Total Capitalization 50.4%
54.0%
6.6%
Book Value Per Share
$12.29 12.56 2.1%
STATISTICS Natural Gas Throughput (in billions of cubic feet) 962 930
+
3.4%
Average Cost of Natural Gas Purchased (per thousand cubic feet)
S 2.22 S
2.69 17.5%
Electric Energy On-System Sales (in billions of kilowatt hours) 17.2 16.7
+
3.0%
Average Cost of Electric Energy (per kilowatt hour) 3.074 2.644
+ 16.3%
Number of Meters (in millions)
Natural Gas 5.6 5.5
+
1.8%
'Electricity 1.2 1.2 Return on Common Equityv SoCalGas 14.1%
16.7%
15.5%
SDG&E 17.5%
16.3%
+
7.3%
Number of Employees(',
11,148 11,387 2.1%
(a) Excluding business-combination costs.
(b) Excludes contract and part-time employees.
OPERATING REVENUES UTILITY CUSTOMERS t\\
\\IIIt\\
DI)~l.%Rs E 6 \\
N EL.cIRIC
$5,500 7,500,000 5,000 6,00,000 4,50500 4,ooo 4,ooo,ooo 440 3,soo 1,soooo9 3,000 0
94 95 96 97 98 94 95 96 97 98
5EMPRA ENERGY INTERNATIONAL Headquarters: San Diego Line of Business: Energy-infrastructure investment, development and operations outside the United States Sempra Energy International is involved with energy-infra structure projects, including natural gas transmission and distribution systems and power generation facilities, outside the United States.
To date, Sempra Energy International has formed gas distribution partnerships in Mexico, Argentina and Uruguay.
These projects have helped boost economic development in those regions and provided cleaner environments by using natural gas as a replacement for other fuels.
In August 1998, the company was awarded a 10-year agree ment by the Mexican Federal Electric Commission to provide a complete energy supply package for the Presidente Judrez power plant in Rosarito, Baja California. The contract calls for delivery of up to 300 million cubic feet per day of natural gas, transportation services in the U.S. and construction of a 23 mile pipeline from the U.S.-Mexico border to the plant.
Delivery of natural gas is expected to begin in December 1999.
SEMPRA ENERGY UTILITY VENTURES Headquarters: Los Angeles Line of Business: Acquisition, development and operation of smaller regulated energy utilities Sempra Energy Utility Ventures acquires, develops and operates small-to medium-sized regulated energy utilities in the United States and Canada.
Currently, Sempra Energy Utility Ventures has several nat ural gas distribution projects under development. A subsidiary, Frontier Energy, is constructing a new natural gas distribution system to serve customers across seven counties in North Carolina. Gas started flowing to the first customers in December 1998. Sempra Energy Utility Ventures also teamed up with Bangor Hydro-Electric Company to form a joint venture, Bangor Gas. This new local distribution company will provide natural gas service to residential, commercial and industrial customers in a dozen communities in the greater Bangor area of central Maine.
Sempra Atlantic Gas, another Sempra Energy Utility Ventures unit, was formed in the spring of 1998 to pursue nat ural gas distribution opportunities in Canada.
CES/Way International "How do you keep our nation's most famous Lady lit for future generations?"
For generations, the Statue of Liberty has stood in New York Harbor, near Ellis Island, as a beacon for democracy, freedom and opportunity. Keeping the Lady's lights burning efficiently 8
became the job of Sempra Energy's CES/Way International unit. CES/Way installed a state-of-the-art, energy-management control system and the energy-efficient lighting at both the Statue of Liberty Monument and Ellis Island, which was the one-time port of entry for more than 12 million U.S. immigrants.
The result: The Monument became eligible for $1.3 million in rebates from its local utility and now saves $172,000 annually in energy costs. Additionally, this retrofitting helped reduce undesirable air emissions by more than two million pounds each year, while the special filters installed on the more than 1,200 lights help protect museum artifacts -
ultimately keeping our most famous Lady lit for many years to come.
Sempra Energy International Sempra Energy Trading "Can one small change energize a whole region?
iSi, se nora!
Sempra Energy International is leading the way in bringing much-needed natural gas to Baja California, Mexico, helping fuel economic development and improve the environment in the region. The company is providing a complete energy supply package for the PresidenteJudrez power plant in Rosarito to enable the plant operators to switch the generation fuel from oil to cleaner-burning natural gas and expand the plant's output by 1,300 megawatts. Sempra Energy International will own, design, construct and operate a 23-mile pipeline from the U.S.-Mexico border to the plant, which also will serve as the trunk line for a future natural gas distribution system in Tijuana, one of Mexico's fastest-growing urban centers. Currently, businesses and residents of Tijuana and most other cities in Baja California use propane gas to meet their energy needs. Under a 10-year,
$1 billion agreement, Sempra Energy Trading will procure up to 30M million cubic feet per day of natural gas to supply the pipeline -
and spark dynamic growth in the region.
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Sempra Energy Solutions "Sometimes scoring a goal isn't the most difficult feat.
Keeping the fans comfortable is."
Sempra Energy has entered into a 10-year energy agreement as a founding partner and energy services provider for the STAPLES Center in downtown Los Angeles. The new 20,000 seat sports and entertainment arena, which will serve as home to the Los Angeles Kings, Los Angeles Lakers and Los Angeles Clippers, is scheduled to open in the fall of 1999. Sempra 12 Energy Solutions will operate the entire energy infrastructure and provide energy procurement services for the arena. The,,
company also is helping design a cooling facility and related energy infrastructure for an entertainment district that is planned for development adjacent to the arena. The partnership with the STAPLES Center is Sempra Energy's first step in an aggressive nationwide campaign to build awareness around the new corporate brand. As a major STAPLES Center sponsor, Sempra Energy will have permanent signage and a customized interactive display in the arena's main concourse, along with an outdoor video display at the public Star Plaza area -
beaming Sempra Energy's name to sports fans across the country.
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Southern California Gas Company "Most of us have a few mouths to feed. How about 700,000?"
Sempra Energy's Southern California Gas Company (SoCalGas) unit is helping the Los Angeles Unified School District run one of the largest school meal programs in the nation more 15 efficiently. More than 140 million meals are provided annually to 700,000 students at 650 Los Angeles schools. The District owns and operates approximately 2,000 convection ovens and, each year, must purchase as many as 200 replacement ovens. One of many initiatives underway at SoCalGas is to help its customers make the best use of natural gas appliances.
SoCalGas assists the Los Angeles Unified School District in identifying more reliable and easy-to-repair ovens. At SoCalGas' Energy Resource Center, District officials can test the performance of natural gas cooking equipment by preparing sardple menu items and evaluating cooking quality and time, new de ign features and efficiency -
all to keep the meals cooking.
Sempra Energy Solutions CES/Way International Sempra Energy Trading "Do you realize how much electricity it takes to launch a rocket into space?"
Sempra Energy has developed a full range of energy-efficiency services that will help Lockheed Martin, one of the world's largest aerospace/defense firms, keep its facility costs from sky rocketing. CES/Way International will oversee energy-efficient retrofit projects that are expected to cut Lockheed Martin's 16 annual energy bills by as much as 20 percent at sites in 26 states in the eastern United States. Sempra Energy Trading will offer natural gas and electricity to the facilities where customers can choose third-party energy providers. Additionally, Sempra Energy Solutions will provide billing and information management services, and energy education and training to facilities management employees at all Lockheed Martin domestic facilities. Initial audits at 10 of these sites indicate about
$50 million in energy system retrofit opportunities, which could save Lockheed Martin about $9 million annually in enorgy costs at these facilities alone -
launching powerful savings.
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San Diego Gas & Electric "How do you keep a 256,000-square-foot health care facility from running a temperature?"
As part of its "Savings Through Design" program, Sempra Energy's San Diego Gas & Electric (SDG&E) unit teamed with Kaiser Permanente, the leading health care organization in the United States, to design an environmentally friendly, energy 19 efficient new $56 million Outpatient Medical Center in the.Otay Mesa area of San Diego. Design innovations include a cpmpletely automated lighting-control system that can be programmed to respond to time-of-day or daylight conditions.
Extensive use of natural daylight minimizes air-conditioning and lighting costs, while maintaining an open, spacious archi tecture. Two 400-ton chillers in the facility's central plant are engineered to use outside air for free cooling. The energy efficient design measures recommended by SDG&E will help Kaiser keep the focus on providing patients with quality cart -
and save the health care provider an expected
$130,000 annually.
Manaeniet'sBiscussion and Analysis ot inacia Cidition and Results of Operations2 forConoliate Financial Statemrents 3
Indeendet Aditors' Report 3
Conoliate Fnancial Statements 3
Nots t Cosoldated Hnanciai Statements 15 Quarerl Fiaa Data 7
Malgenent's Discussion and Analysis of Financial Condition and Results of Operations INTRODUCTION BUSINESS COMBINATIONS his section includes management's analysis of operating empra Energy was formed to serve as a holding company results from 1996 through 1998, and is intended to provide f
Pacific Enterprises (the parent corporation of the Southern information about the capital resources, liquidity and financial Ca nia Gas Company) and Enova Corporation (the parent performance of Sempra Energy and its subsidiaries (the company).
crporaion of San Diego Gas & Electric Company) in connection This section also focuses on the major factors expected to influ-usiness combination that became effective on June 26, ence future operating results and discusses investment and 1998 (the PE/Enova Business Combination). In January 1998, financing plans. It should be read in conjunction with the PE and Enova jointly acquired CES/Way International, Inc.
Consolidated Financial Statements included in this Annual Report.
Expenses incurred in connection with these business combinations The company is a California-based Fortune 500 energy are $85 million, afrertax, and $20 million, aftertax, for the services company whose principal subsidiaries are San Diego Gas years ended December 31, 1998, and 1997, respectively. These
& Electric (SDG&E), which provides electric and natural gas costs consist primarily of employee-related costs, and investment service to San Diego County and southern Orange Count, and banking, legal. regulatory and onsulting fees.
Southern California Gas Company (SoCalGas), the nation's largest In connection with the PE/Enova Business Combination, the natural gas distribution utility, serving 4.8 million meters through-holders of common stock of PE and Enova became the holders of out most of southern California and part of central California.
the company's common stock. PE's common shareholders Together, the two utilities serve approximately 7 million meters.
received 1.5038 shares of the companys common stock for each Sempra Energy Trading is engaged in the wholesale trading and share of PE common stock, and Enova's common shareholders marketing of natural gas, power and petroleum. Sempra Energy received one share of the company's common stock for each share Solutions is engaged in the buying and selling of natural gas for of Enova common stock. 'he preferred stock of PE remained large users, integrated energy-management services targeted at outstanding. The combination was approved by the shareholders 2
large governmental and commercial facilities, and consumer-mar-of both companies on March 11, 1997, and was a tax-free transac ket products and services. Sempra Energy Financial invests in tion. [he Consolidated Financial Statements of the company gave limited partnerships representing 1,250 affordable-housing prop-effect to the combination using the pooling-of-interests method erties throughout the United States. Through other subsidiaries, and are preserved as if the companies were combined during all thetcompany owns and operates interstate and offshore natural periods included therein.
gas pipelines and centralized heating and cooling for large CAPITAL RESOURCES AND LIQUIDITY building complexes, and is involved in domestic and international he company's utility operations continue to be a major energy-utility operations, nonutility electric generation and other source of liquidity. In addition, working capital requirements energy-related products and services.
are met primarily through the issuance of short-and long-term de Cash requirements primarily include capital investments in tc utility operations. Nonuility cash requirements include investments in Sempra Energy Resources, Sempra Energy 8tility Ventures, Sempra Energy Solutions, Sempra Energy Trading, CESiVav International, and other domestic and inter national ventures.
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Additional information on sources and uses of cash during CASH FLOWS FROM INVESTING ACTIVITIES the last three years is summarized in the following condensed ash flows from investing activities primarily represent statement of consolidated cash flows:
capital expenditures and investments in new businesses.
SOURCES AND (USES)
OF CASH Year Ended December 31 Capital expenditures were $41 million higher in 1998 than in (Dollars in millions) 1998 1997 1996 1997 due to greater capital spending at the company's corporate Operating Activities
$1,323
$ 918
$1,164 center related to facility improvements and equipment purchas Investing Activities:
es, and at SLG&E related to industry-restructuring needs and Capital expenditures (438)
(397)
(413) improvements to the electric distribution system, partially offset Acquisitions of subsidiaries (191)
(206)
(50) by lower capital spending at SoCalGas.
Other (50) 1 (51)
Capital expenditures were $16 million lower in 1997 than Total Investing Activities (679)
(602)
(514) in 1996 due to changes in the scope and timing of several major Financing Activities:
capital projects primarily related to information systems.
Common stock dividends (325)
(301)
(300)
SoCalGas had lower capital spending related to the customer Sale of common stock 34 17 8
information system's being completed in early 1996 and Repurchase of common stock (1)
(122)
(24) other nonrecurring computer system expenditures in 1996. The Redemption of preferred stock (75)
(225) decrease was partially offset by higher capital expenditures Long-term debt - net (356) 382 (155) related to the purchase of a data processing facility and a plant Short-term debt - net (311) 92 29 expansion at a nonutility subsidiary SDG&E's capital expendi Total Financing Activities (1,034) 68 (667) tures were lower due to changes in scope and timing of several Increase (decrease) in cash major capital projects.
and cash equivalents
$ (390)
$ 384
$ (17)
At SDG&E, payments to the nuclear-decommissioning trusts are expected to continue until San Onofre Nuclear 22 CASH FLOWS FROM OPERATING ACTIVITIES GeneratingStation (SONGS) is decommissioned, which is not he increase in cash flows from operating activities in he icrese n csh fowsfro opratig ativtie in expected to occur before 2013. Unit 1, although permanently 1998 was primarily due to lower working-capital requirements shut down in 1992, was scheduled to be decommissioned for natural gas operations in 1998. This was caused by higher concurrently with Units 2 and 3. However, SDG&E and the throughput compared to 1997, combined with natural gas costs other owners of SONGS have requested that the CPUC grant that were lower than amounts being collected in rates, which authority to begin decommisioning Unit 1 on January 1, 200Q.
resulted in overcollected regulatory balancing accounts at year-See Note 6 of the notes to the Consolidated Financial end 1998. This increase was partially offset by expenses Statements for additional information.
incurred in connection with the business combinations. The The decision of the CPUC approving the PE/Enova Business fluctuation in cash flows from operations was also affected by Combination required, among other things, that SDG&E electric-industry restructuring, including the acceleration of divest itself of all its fossil fueled generation facilities. In depreciation of electric-generating assets, offset by recovery of December 1998, SDG&E entered into agreements to accom stranded costs via the competition transition charge and the plish that. Completion is pending regulatory approvals and is 10-percent rate reduction reflected in customers' bills in 1998.
The decrease in cash flows from operating activities in 1997 was primarily due to greater working-capital requirements for natural gas operations in 1997. This was caused by natural gas costs being higher than amounts collected in rates, resulting in undercollected regulatory balancing accounts at year-end 1997. The cash flow from electric operations for 1997 was con sistent with results from 1996.
1997dueto reaer apitl sendng t te copan's orprat
exp eted during the first half of UTILITY CAPITAL Maine. The project is under construction and is expectcd to be 1999.
See "Electric-Generation EX PENDITURES operational in the fourth quarter of 1999. In December 1997, IN MILL IONS OF DOLLARS Assets" below for further discussion I
MILLION O
Sempra Energy Utility Ventures entcred into a partnership with A\\T DECEMBER 31.
1998 of the divestiture. Anticipated pro-Frontier Utilities of North Carolina to build and operate a ceeds from these plant assets, net of
$500
$55 million natural gas-distribution system in North Carolina.
the assets' book value, the costs of Gas delivery began in December 1998. Subsequent to December the sales and certain environmental 400 31, 1998, Sempra Energy Utilities Ventures acquired 100 cleanup costs, will be applied for percent ownership of the system accounting purposes directly to the 300 In May 1997, Sempra Energy Solutions, together with recovery of SDG&E's other transi-Conectiv Thermal Systems, Inc., formed two joint ventures to tion costs. On a cash basis, the pro-200 provide integrated energy-management services to commercial ceeds will be available for general and industrial customers. Specific projects of these joint corporate purposes. However, the 100 ventures are described in Note3 of the notes to Consolidated divestiture of the facilities will even-Financial Statements.
tually lead to reduced cash flow 0
As noted above, Sempra Energy Solutions acquired from operations.
CESWay International. Inc. (CES/WaY) in 1998. CES/Way Capital expenditures at the utilities are estimated to be provides energy-efficiency services, including energy audits,
$419 million in 1999. They will be financed primarily by inter-engineering design, project management, construction, financ nally generated funds and will largely represent investment in ing and contract maintenance.
utilit\\ operations. The level of capital expenditures in the next In March 1998. the company increased its existing i\\vest few years will depend heavily on the impact of electric-industry ment in two Argentine natural gas utility holding companies restructuring and the timing and extent of expenditures to from 12.5 percent to 21.5 percent by purchasing an additional comply with environmental requirements.
interest for $40 million.
INVESTMENTS Fluctuations in Sempra Energys level of invcstments in 23 In December 1997, PE and Enova jointly acquired Sempra Energy the next few years will depend primarily on the activities of its Trading for $225 million. In July 1998, Sempra Energy Trading subsidiaries other than SoCalGas and SDG&E.
pu<hased a subsidiary of Consolidated Natural Gas, a wholesale CASH FLOWS FROM FINANCING ACTIVITIES trading and commercial marketing operation, for $36 million to et cash used in financing activities increased in 1998 expand its operation in the Eastern United States.
due to greater short-and long-term debt repayments and the In December 1997, Sempra Energy Resources and Reliant redemption of preferred stock in 1998, and the issuance of rate Energy Power Generation formed El Dorado Energy, a joint reduction bonds in 1997, partially offset by the repurchase of venture to build, own and operate a natural gas power plant in common stock in 1997.
Boulder City, Nevada. Sempra Energy Resources invested Net cash was provided by financing activities in 1997 com
$19.7 million and $2.3 million in El Dorado Energy in 1998 and pared to net cash being used in 1996 due to the issuance of 1997, respectively. Total cost of the project is projected to be rate-reduction bonds and lower repayments of long-term debt in
$263 million. In October 1998, El Dorado Energy obtained a 1997, and the redemption of preferred stock in 1996, partially 15-year, $158-million, senior-secured-credit facility to finance offset by the redemption of common stock in 1997.
the project. This financing represents approximately 60 percent of the estimated total project costs.
In September 1997, Sempra Energy Utility Ventures formed a joint venture with Bangor Hydro to build, own and operate a $40 million natural gas distribution system in Bangor, GaAeieybgni eebr19.Sbeun oDcme 31A98 epaEeg tlte etrsaqie 0
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LONG-TERM DEBT On February 2,1998, SoCalGas redeemed all outstanditi1g In December 1997, S658 million of rate-reduction bonds were shares of its 7 3/4% Serics Preferred Stock at a cost of $25.09 issued on SDG&E's behalf at an average interest rate of per share, or $75.3 million including accrued dividends.
6.26 percent. A portion of the bond proceeds was used to retire DIVIDENDS variable-rate, taxable Industrial Development Bonds (IDBs).
Dividends paid on common stock amounted to $325 million in Additional information concerning the rate-reduction bonds is 1998, compared to approximately $300 million in 1997 and provided below under "Electric-Industry Restructuring." In 1998, 1996. The increase in 1998 is the result of the company's paying cash was used for the repayment of $247 million of first-mortgage dividends on its common stock at the rate previously paid by bonds, and $66 million of rate-reduction bonds. Short-term debt Enova, which, on an equivalent-share basis, is higher than the repayments included repayment of $94 million of debt issued to rate paid by PE.
finance SoCalGas' Comprehensive Settlement as discussed in Dividends are paid quarterly to shareholders. The payment of Note 14 of the notes to Consolidated Financial Statements.
future dividends and the amount thereof are within the discretion In 1997, cash was used for the repayment of $96 million of the board of directors.
of debt issued to finance the Comprehensive Settlement and CAPITALIZATION repayment of $252 million of SoCalGas' first-mortgage bonds.
he debt-to-capitalization ratio was 50 percent at year-end This was partially offset by the issuance of $120 million in 1998, below the 54-percent ratio in 1997. The decrease was pri medium-term notes and short-term borrowings used to finance madly due to the repayment of debt. The debt-to-capitalization working capital requirements at SoCalGas.
ratio increased to 54 percent in 1997 from 50 percent in 1996, SDG&E has $83 million of temporary investments that will primarily due to the issuance of SDG&E's rate-reduction bonds.
be maintained into the future to offset, for regulatory purposes, a CASH AND CASH EQUIVALENTS like amount of long-term debt. The specific debt series being off-ash and cash equivalents were 424 million at December set consists of variable-rate IDBs. The CPJC has approved 3, 1998 This cash is available for investment in energy-related specific ratemaking treatment which allows SDG&E to offset iimestic and international projects, and the retirement of debt 24 IDBs as long as there is at least a like amount of temporary invest-and ohr corporate purposes.
ments. If and when SDG&E requires all or a portion of the The company anticipates that cash required in 1999 for
$83 million of IDBs to meet future needs for long-term debt, such capital expenditures and dividend and debt payments will be as to finance new construction, the amount of investments which provided by cash generated from operating activities and existing are being maintained will be reduced below $83 million and the cash balances.
level of IDBs being offset will be reduced by the same amount.
In addition to cash from ongoing operations, the company STOCK PURCHASES AND REDEMPTIONS has multiyear credit agreements that permit term borrowings of The company, through PE and Enova, repurchased $1 million, up to $995 million, of which 43 million is outstanding at
$122 million and $24 million of common stock in 1998, 1997, and December 31, 1998. For further discussion, see Note 4 of the 1996, respectively. The stock repurchase programs of PE and Enova notes to Consolidated Financial Statements.
were suspended as a result of the PE/Enova Business Combination.
Ssmpra Energy does nhet have a stock-repurchase program.
RES ULTS OF OPERATIONS UTILITY OPERATIONS 1998 COMPARED TO 1997 o understand the operations and financial results of et income for 1998 decreased to $294 million, or $1.24 SoCalGas and SDG&E, it is important to understand the per share of common stock (diluted) in 1998, compared to ratemaking procedures that SoCalGas and SDG&E follow.
net income of $432 million, or $1.82 per share of common stock SoCalGas and SDG&E are regulated by the CPIC. It is thc (diluted) in 1997.
responsibility of the CPUC to determine that utilities operate The decrease in net income is primarily due to the costs in the best interests of their customers and have the opportunity associated with the business combinations, and a lower base to earn a reasonable return on investment. In response to utility margin established at SoCalGas in its Performance-Based industry restructuring, SoCalGas and SDG&E have received Regulation decision (SoCalGas PBR Decision) which became approval from the CPUC for PBR.
effective on August 1, 1997, as further described in Note 14 PBR replaces the general rate case (GRC) procedure and of the notes to Consolidated Financial Statements. Expenses certain other regulatory proceedings. Under ratemaking proce related to the business combinations were $85 million ($0.36 dures in effect prior to PBR, SoCalas and SLG&E typically per share) and $20 million ($0.08 per share), aftertax, for 1998 filed a GRC with the CPUC everv three years. In a GRC, the and 1997, respectively.
CPUC establishes a base margin, which is the amount of revenue Also contributing to lower net income for 1998 were signifi-to be collected from customers to recover authorized operating cant start-up costs at Sempra Energy Solutions and at Sempra expenses (other than the cost of fuel, natural gas and purchased Energy Trading as discussed under "Other Operations" below.
power), depreciation, taxes and return on rate base.
For the fourth quarter, net income decreased compared to Under PBR, regulators allow income potential to be tied to the prior fourth quarter due to PBR and Demand-Side achieving or exceeding specific performance and productivitV Management awards in the 1997 quarter, electric seasonalitV easures, rather than relying solel on cxpanding Utility rate effects compared to 1997, and the factors that affected the base in a market where a utility already has a highly developed annual comparison.
infrastructure. See additional discussion of PBR in Note 14 of Book value per share decreased to $12.29 from $12.56, the notes to Consolidated Financial Statements.
25 due to common dividends' exceeding the decreased net In September 1996, California enacted a law restructuring income in 1998.
California's electric-utility industry. The legislation adopted the 1997 COMPARED TO 1996 December 1995 CPUC policy decision restructuring the indus Net income for 1997 increased to $432 million, or $1.82 per try to stimulate competition and reduce rates. Beginning on share of common stock (diluted), compared to net income of March 31, 1998, customers were able to buy their electricity
$427 million, or $1.77 per share (diluted), in 1996. The increase through the California Power Exchange (PX) that obtains power in net income per share is due primarily to the repurchases of from qualifying facilities, nuclear units and, lastly, from the common stock, which caused the weighted average number of lowest-bidding suppliers. The PX serves as a wholesale power shares of common stock outstanding to decrease 2 percent in pool, allowing all energy producers to participate competitively.
1997. The increase in net income is primarily due to increased net The natural gas industry experienced an initial phase of income from utility operations, partially offset by costs related to restructuring during the 1980s by deregulating natural gas sales the PE/Enova Business Combination and the start-up of to noncore customers. In Januarv 1998, the CPUC initiated a unregulated operations.
project to assess the current market and regulatory framework Book value per share increased to $12.56 from $12.21, due to for California's natural gas industry. The general goals of the net income's exceeding the combined effect of common plan are to consider reforms to the current regulatory framework dividends and the stock repurchases.
emphasizing market-oriented policies.
SoabsadSGE oi motn oudrtn h
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See additional discussion of electric-industry and natural gas-industry restructuring below in "Electric-Industry Restructuriflf' and "Gas-Industry Restructuring" and in Note 14 of the notes to Consolidated Financial Statements.
The table below summarizes the components of utility natural gas and electric volumes and revenues by customer class for 1998, 1997, and 1996.
GAS SALES, TRANSPORTATION
& EXCHANGE Gas Sales Transportation & Exchange Total (Dollars in millions, volumes in billion cubic feet)
Throughput Revenue Throughput Revenue Throughput Revenue 1998:
Residential 304
$2,234 3
11 307
$2,245 Commercial and Industrial 102 571 329 277 431 848 Utility Electric Generation*
57 9
139 66 196 75 Wholesale 28 7
28 7
463
$2,814 499
$ 361 962 3,175 Balancing accounts and other (403)
Total
$2,772 1997:
Residential 268
$1,957 3
10 271
$1,967 Commercial and Industrial 102 617 332 273 434 890 Utility Electric Generation*
49 14 158 76 207 90 Wholesale 18 12 18 12 419
$2,588 511
$ 371 930 2,959 Balancing accounts and other 5
26 Total
$2,964 1996:
Residential 264
$1,809 3
10 267
$1,819 Commercial and Industrial 104 573 314 257 418 4830 Utility Electric Generation*
43 9
139 70 182 79 Wholesale 17 10 17 10 411
$2,391 473
$ 347 884 2,738 Balancing accounts and other (28)
Total
$2,710 The portion representing SDG&E's sales for electric generation includes margin only.
ELECTRIC DISTRIBUTION (Dollars in millions, volumes in millions of Kwhrs) 1998 1997 1996 Volumes Revenue Volumes Revenue Volumes Revenue Residential 6,282
$ 637 6,125
$ 684 5,936
$ 647 Commercial 6,821 643 6,940 680 6,467 625 Industrial 3,097 233 3,607 268 3,567 261
)irect access 964 44 Street and highway lighting 85 8
76 7
75 7
Off-system sales 706 15 4,919 116 650 13 17,955 1,580 21,667 1,755 16,695 1,553 Balancing accounts and other 285 14 38 Total 17,955
$1,865 21,667
$1,769 16,695
$1,591
190S COMPARED TO 1997 1997 COMPARED TO 1996 Utility natural gas revenues decreased 6 percent in 1998 primarily Utility natural gas rcvcnucs incrcased 9 percent in 1997 primar due to the lower natural gas margin established in the SoCalGas ily due to an increase in the average unit cost of natural gas, PBR Decision, a decrease in the average cost of natural gas and a which is recoverable in rates. To a lesser extent, the increase decrease in sales to utility electric-generation customers, partially was due to increased throughput to utility electric-generation offset by increased sales to residential customers due to colder customers due to increased demand for electricity. The increase weather in 1998.
was partially offset by an increase in customer purchases of Electric revenues increased 5 percent in 1998 compared to natural gas directly from other suppliers.
1997, primarily due to the recovery of stranded costs via the Utility electric revenues increased I1 percent in 1997, competition transition charge (CTC), and to alternate costs primarily due to an increase in sales for resale to other utilities incurred (including fuel and pur-5 0 URCES 0F and increased retail sales volume due to weather.
chased power) due to the delay REVENUES Utility cost of natural gas distributed increased 22 percent IN MILLIONS OF 1)01LARS from January 1 to March 31, 1998, A r1)FFi ii3 1
in 1997, largely due to an increase in the average cost f natural in the start-up of operations of the gas purchased and increases in sales volume.
PX and Independent System Purchased power increased 42 percent in 1997, primarily due Operator (ISO). These factors to increased volume, which resulted from lower nuclear-genera were partially offset by a decreasetion to refuelings at SONGS and increased use in retail revenue as a result of the of purchased power due to decreased purchased-power prices.
10-percent small-customer rate Operating expenses increased 15 percent in 1997, primarily reduction, which became effective due to the start-up of unregulated operations, partially offset in January 1998, and by a decrease by lower utility operatin expenses. [he extent of this offset in sales to other utilities, due to F F M
l"l was lessened by reduced costs in 1996 from favorable litigation
- PX/ISO) POWER the start-up of the PX. The OIS0 INI' settlements.
10-percent rate reduction and PX REVENU ES FACTORS INFLUENCING FUTURE PERFORMANCE 27 are described further under erformance of the company in the near future will "Factors Influencing Future Performance" and in Note 14 depend primarily on the results of SDG&E and SoCalGas.
of the notes to Consolidated Financial Statements.
Because of the ratemaking and regulatory process, electric Revenues from the ISO/PX reflect sales from the company's and natural gas-industry restructuring, and the changing energy power plants and from long-term purchased-power contracts to marketplace, there are several factors that will influence future the ISO/PX commencing April 1, 1998.
financial performance. These factors are summarized below.
The company's cost of natural gas distributed decreased 18 KN ENERGY ACQUISITION percent in 1998, largely due to a decrease in the average cost of On February 22, 1999, the company announced a definitive natural gas purchased, partially offset by increases in sales volume.
agreement to acquire KN Energy Inc., subject to approval by Purchased power decreased 34 percent in 1998 primarily the shareholders of both companies and by various regulatory as a result of ISO/PX purchases replacing short-term energy agencies. See Note 16 of the notes to Consolidated Financial sources commencing April 1, 1998.
Statements for additional information.
Depreciation and amortization expense increased 54 per-ELECTRIC-INDUSTRY RESTRUCTURING cent in 1998, primarily due to the recovery of stranded costs via As discussed above, in September 1996, California enacted a law the CTC. The earnings impact of the increase is offset by CTC restructuring California's electric-utility industry (AB 1890).
revenue (see above).
Consumers now have the opportunity to choose to continue to Operating expenses increased 16 percent in 1998, primarily purchase their electricity from the local utility under regulated due to the higher business-combination costs ($142 million in tariffs, to enter into contracts with other energy service providers 1998, compared to $30 million in 1997) and additional operating (direct access) or to buy their power from the PX that serves as a expenses due to start-up operations in 1998, including the wholesale power pool allowing all energy producers to participate acquisitions of Sempra Energy Trading and CES/Way.
competitively The local utility continues to provide distribution service regardless of which source the consumer chooses. See Note 14 of the notes to Consolidated Financial Statements for additional information.
anenrae ealslsvlm u owahr
TRANSITION COSTS TOTAL ASSETS As mentioned above, Sepra AB 1890 allows utilities, within certain limits, the opportunity IN MILLIONS (F
DOLLAR s Energy Resources and Reliant to recover their stranded costs incurred for certain above-Energy Power Generation formed market CPUC-approved facilities, contracts and obligations a joint venture to build, own and through the establishment of the CTC.
operate a natural gas power plant Utilities are allowed a reasonable opportunity to recover (El Dorado) in Boulder City, their stranded costs through December 31, 2001. Stranded costs Nevada. The joint venture plans include sunk costs, as well as ongoing costs the CPUC finds rea-to sell the plant's electricity into sonable and necessary to maintain generation facilities through the wholesale market, which, in December 31, 2001. These costs also include other items turn, sells to utilities throughout SDG&E has accrued under traditional cost-of-service regulation.
9,000 the Wesr United States. The Through December 31, 1998, SDG&E has recovered new plant will employ an transition costs of $500 million for nuclear generation and 8,500 advanced combined-cycle gas
$200 million for nonnuclear generation. Excluding the costs of turbine technology, enabling it purchased power and other costs whose recovery is not limited to become one of the most 94 95 96 97 98 to the pre-2002 period, the balance of SDG&E's stranded assets efficient and environmentally at December 31, 1998, is $600 million, consisting of $400 million friendly power plants in the nation. Its proximity to existing for the power plants and $200 million of related deferred taxes natural gas pipelines and electric transmission lines will allow and undercollections. During the 1998 - 2001 period, recovery of El Dorado to actively compete in the deregulated electric transition costs is limited by a rate cap. See Note 14 of the notes generation market. The project, funded equally by the company to Consolidated Financial Statements for additional information.
and Reliant, began in the first quarter of 1998, with an expected ELECTRIC-GENERATION ASSETS operational date set for the fourth quarter of 1999.
In November 1997, SDG&E adopted a plan to auction its ELECTRIC RATES 28 power plants and other electric-generating assets so that it could AB 1890 provides for a 10-percent reduction in rates for continue to concentrate its business on the transmission and residential and small commercial customers effective in January distribution of electricity and natural gas as California opens its 1998, and provided for the issuance of rate-reduction bonds by electric-utility industry to competition. This plan included an agency of the state of California to enable its investor-owned the divestiture of SDG&E's fossil-fueled power plants and utilities (IOUs) to achieve this rate reduction. In December combustion turbines, its 20-percent interest in SONGS and its 1997, $658 million of rate-reduction bonds were issued on portfolio of long-term purchased-power contracts. The power behalf of SDG&E at an average interest rate of 6.26 percent.
plants, including the interest in SONGS, have a net book value These bonds are being repaid over 10 years by SDG&E's resi as of December 31, 1998, of $400 million ($100 million for dential and small-commercial customers via a nonbypassable fossil and $300 million for SONGS).
charge on their electricity bills. In September 1997, SDG&E The March 1998 decision of the CPUC approving the PEFEnova and the other California IOUs received a favorable ruling by Business Combination required, among other things, the divesti-the Internal Revenue Service on the tax treatment of the bond ture by SDG&E of its fossil-fueled generation units. On December transaction. The ruling states, among other things, that the 11, 1998, SDG&E entered into agreements for the sale of its receipt of the bond proceeds does not result in gross income to South Bay Power Plant, Encina Power Plant and 17 combustion-SDG&E at the time of issuance, but rather the proceeds are tax turbine generators. The sales are subject to regulatory approval able over the life of the bonds. The Securities and Exchange and are expected to close during the first half of 1999. See Commission determined that these bonds should be reflected Note 14 of the notes to Consolidated Financial Statements for additional information.
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ENIRONMENTAL MATTERS During the early 1900s, SLX&E, SoCalGas and their pre he company's operations are conducted in accordance decessors manufactured gas from coal or oil, the sites of which with applicable federal, state and local environmental laws and have often become contaminated with the hazardous residual regulations governing such things as hazardous wastes, air and by-products of the process. SDG&E has identified three former water quality, and the protection of wildlife.
manufactured-gas plant sires. One of these sites has been These costs of compliance are normally recovered in customer remediated and a site-closure letter has been received from the rates. Whereas it is anticipated that the environmental costs asso-San Diego County Department of Environmental Health. An ciated with natural gas operations and with electric transmission environmental site assessment has been conducted and the and generation operations will continue to be recoverable in estimated cost to remediate the other two sites is $6 million.
rates,the restructuring of the California electric-utility industry, SoCalGas has identified 42 former manufactured-gas plant sites described above under "Electric-Industry Restructuring," will at which it (together with other utilities of these sites) may change the way utility rates are set and costs associated with have cleanup obligations. As of December 31, 1998, 12 of these electric generation are recovered. Capital costs related to environ-sites have been remediated and a certificate of closure has been mental regulatory compliance for electric generation are intended received from the California Environmental Protection Agency to be included in transition costs for recovery through 2001.
for 10 of the sites. A preliminary environmental site assessment lowever, depending on the final outcome of industry restructuring has been conducted on 39 of the sites and it is estimated that and the impact of competition, the costs of future compliance the cost for the remaining sites is $68 million. In addition, with environmental regulations may not be fully recoverable.
other company subsidiaries have been named as potentially Capital expenditures to comply with environmental laws responsible parties ("PRIs") in relation to two landfills and and regulations were S million in 1998. S5 million in 1997 and three industrial waste disposal sites, and it is estimated that
$9 million in 1996. and are not expected to be significant during the subsidiaries' share of the costs to remediate such sites Is the next five years. These projected expenditures primarily
$5 million. Ninety percent of SoCalGas and SIG&E's costs to consist of the estimated cost of reducing air emissions by retro-clean up the gas plants and to meet their PRP obligations, a fitting power plants. This estimate anticipates that SDG&E total estimated to be $75 million, is recoverable through the 31 completes the planned sale of its fossil-fueled power plants Hazardous Waste Collaborative mechanism.
during the first half of 1999. Additional information on SDG&E's As a part of its sale of the South Bay and Enema power divistiture of its electric generating assets is discussed above plants and 17 combustion turbines (described above), SIG&E under "Electric Generation Assets" and in Note 14 of the notes retained limited remediation obligations for contamination to Consolidated Financial Statements.
existing on these sites upon the closing of the sales. SDG&E's HAZARDOUS SUBSTANCES costs to perform its remediation obligations as a part of such In 1994, the CPtIC approved the Hazardous Waste Collaborative, sales is estimated to be $10 million. These costs are eligible for a mechanism which allows SoCalGas, SDG&E and other utilities inclusion in the CTC recovery process.
to recover, through rates, costs associated with the cleanup of AIR AND WATER QUALITY sites contaminated with hazardous waste. In general, utilities are California's air quality standards are more restrictive than federal allowed to recover 90 percent of their cleanup costs and any standards. However, due to the sale of the electric-generating related costs of litigation through rates. In early 1998, the CPUC power plants, the company's primary air-quality issue, compli modified this mechanism to exclude these costs related to ance with these standards will be less significant in the future.
electric-generation activities. These costs are now eligible for inclusion in the Competition Transition Cost (CTC) rccovery process described above.
mauatrdgspan ie.Oeo heestshsbe
In connection with the issuance of operating permits, SDG&E In March 1998, PE increased its existing investment iriNwo and the other owners of SONGS reached agreement with the Argentine natural gas utility holding companies (Sodigas California Coastal Commission to mitigate the environmental Pampeana S.A and Sodigas Sur S.A.) by purchasing an additional damage to the marine environment attributed to the cooling-water 9-percent interest for $40 million. With this purchase, PE's discharge from SONGS Units 2 and 3. This mitigation program interest in the holding companies was increased to 21.5 percent.
includes an enhanced fish-protection system, a 150-acre artificial The distribution companies serve 1.2 million customers in reef and restoration of 150 acres of coastal wetlands. In addition, central and southern Argentina, respectively, and have a combined the owners must deposit $3.6 million with the state for the sendout of 650 million cubic feet per day.
enhancement of marine fish hatchery programs and pay for moni-SEI is part of a binational consortium named Distribuidora toring and oversight of the mitigation projects. SDG&E's share of de Gas Natural de Mexicali, S. de R.L. de C.
(DGN-Mexicali),
the cost is estimated to be $23 million. The pricing structure a Mexican company that won the first license awarded to a contained in the CPUC's decision regarding accelerated recovery private company to build a natural gas distribution system in of SONGS Units 2 and 3 is expected to accommodate most of Mexico. On August 20, 1997, DGN-Mexicali began to deliver these added mitigation costs.
natural gas to customers in Mexicali, Baja California. DGN The environmental laws and regulations regarding natural Mexicali will invest up to $25 million to provide service to gas affect the operations of customers as well as the company's 25,000 customers during the first five years of operation. Proxima regulated natural gas entities. Increasingly complex administra-Gas, S.A. de C.V (Proxima), a group of prominent Mexican tive and reporting requirements of environmental agencies businesspeople, is the project partner. SEI owns a 60-percent applicable to commercial and industrial customers utilizing nat ural gas are not generally required of those using electricity.
de as aturat e Ciu h
rm de Cor DGN However, anticipated advancements in natural gas technologies Chihuahua) wi d
i rl e cit of are expected to enable natural gas equipment to remain corn-Ciuhawihdsrbtsntrlgst h
iyo arc xpetedto eabl naura gasequpmet toremin om-Chihuahua, Mexico and surrounding areas. On July 9, 1997, petitive with alternate energy sources.
DGN-Chihuahua assumed ownership of a 16-mile transmission 32 The transmission and distribution of natural gas require the pipeline serving 20 industrial customers. DGN-Chihuahua will Kid operation of compressor stations, which are subject to increas ingly stringent air-quality standards. Costs to comply with these in the first five years of operation. SEI owns a 95-percent standards are recovered in rates.
interest in DGN-Chihuahua.
INTERNATIONAL OPERATIONS OnAugust27, 1998,SElwasawardeda I0-yearagreementby empra Energy International (SEI) was formed in June the Mexican Federal Electric Commission to provide natural gas 1998, merging the international operations of PE and Enova.
for the Presidenteludrez power plant in Rosarito, Baja California.
Prior to the business combination, PE and Enova were already The contract includes provisions for delivery of up to 300 million partners in two natural gas distribution projects in Mexico. In cubic feet per day of natural gas transportation services in the addition, PE held an interest in two natural gas utility holding United States and construction of a 23-mile pipeline from the companies in Argentina.
U.S. - Mexico border to the plant. This pipeline will also serve SEI develops, operates and invests in energy-infrastructure other customers in the region. In today's dollars, future revenues systems and power-generation facilities outside the United under the contract could approach $1 billion.
States. SEI has interests in natural gas transmission and In May 1998, PE was awarded a concession by the government distribution projects in Mexico, Argentina and Uruguay and is of Uruguay to build a natural gas and propane distribution pursuing projects in other parts of Latin America and in Asia.
system to serve most of the country, excluding Montevideo. SEi is currently in discussions with regards to the terms of the con cession agreement with the Uruguayan government.
The net losses for international operations were $4 million and $9 million, aftertax, for 1998 and 1997, respectively.
sendut o 65 milion ubi fee perday
OTIFER OPERATIONS DERIVATIVE FINANCIAL INSTRUMENTS empra Energy Trading (SET), a leading natural gas he company's policy is to use derivative financial power marketing firm headquartered in Stamford, Connecticut, instruments to manage exposure to fluctuations in interest was jointly acquired by PE and Enova on December 31, 1997.
rates, foreign currency exchange rates and energy prices. The For the year ended December 31, 1998, SET recorded after-company also uses and trades derivative financial instruments tax income of $1 million from its operations and a net loss of in its energy trading and marketing activities. Transactions
$13 million after amortization of costs associated with the involving these financial instruments arc with reputable firms acquisition. Additional information concerning SET is provided and major exchanges. The use of these instruments may expose in Note 10 of the notes to Consolidated Financial Statements.
the company to market and credit risks. At times, credit risk Sempra Energy Solutions (Solutions), formed in 1997 as a may be concentrated with certain counterparties, although joint venture of PE and Enova, incorporates several existing counterparty nonperformance is not anticipated.
unregulated businesses from each of PE and Enova. It is Sempra Energy Trading derives a substantial portion of its pursuing a variety of opportunities, including buying and selling revenue from risk management and trading activities in natural natural gas for large users, integrated energy-management services gas, petroleum and electricity Profits are earned as SET acts as a targeted at large governmental and commercial facilities, and dealer in structuring and executing transactions that assist its consumer-market products and services such as earthquake customers in managing their energy-price risk. In addition, SET shutoff valves. CES/Way International, Inc. (CES/Way), which may, on a limited basis, take positions in energy markets based on was acquired by Solutions in January 1998, provides energy-eff-the expectation of future market conditions. These positions ciency services including energy audits, engineering design, project include options, forwards, futures and swaps. See Note 10 of the management, construction, financing and contract maintenance.
notes to Consolidated Financial Statements and the following Solutions' operating losses were $27 million and $14 million, "Market Risk Management Activities" section for additional infor aftertax, for the years ended December 31, 1998, and 1997, mation regarding SET's use of derivative financial instruments.
respectively. The losses are primarily due to start-up costs.
The company's regulated operations periodically enter into OTHER INCOME, INTEREST EXPENSE interest-rate swap and cap agreements to moderate exposure to AND INCOME TAXES interest-rate changes and to lower the overall cost of borrowing.
OTHER INCOME These swap and cap agreements generally remain off the balance ther income, which primarily consists of interest sheet as they involve the exchange of fixed-rate and variable income from short-term investments and regulatory-balancing rate interest payments without the exchange of the underlying accounts, decreased in 1998 to $44 million from $58 million in principal amounts. The related gains or losses are reflected in 1997. The decrease was a result of lower interest income from the income statement as part of interest expense. The company short-term investments. The increase to $58 million from would be exposed to interest-rate fluctuations on the underlying
$28 million in 1996 was due to higher interest from short-term debt should other parties to the agreement not perform. Such investments during much of 1997.
nonperformance is not anticipated. At December 31, 1998, INTEREST EXPENSE the notional amount of swap transactions associated with the Interest expense for 1998 increased slightly to $207 million regulated operations totaled $45 million. See Note 5 of the from $206 million in 1997. Interest expense for 1997 increased notes to Consolidated Financial Statements for further information to $206 million from $200 million in 1996, as a result of a regarding these swap transactions.
higher long-term debt balance.
The company's regulated operations use energy derivatives INCOME TAXES to manage natural gas price risk associated with servicing their load Income tax expense for 1998 was $138 million, less than the requirements. In addition, they make limited use of natural gas
$301 million for 1997. The effective income tax rate was 32 per-derivatives for trading purposes. These instruments include forward cent for 1998 and 41 percent for 1997. The decrease in income contracts, futures, swaps, options and other contracts, with tax expense is primarily due to the decrease in pretax income, maturities ranging from 30 days to 12 months. In the case of both combined with an increase in affordable-housing tax credits.
price-risk management and trading activities, the use of derivative financial instruments by the company's regulated operations is subject to certain limitations imposed by established company policy and regulatory requirements. See Note 10 of the notes to Consolidated Financial Statements and the "Risk Management Activities" section below for further information regarding the use of energy derivatives by the company's regulated operations.
MARKET RISK MANAGEMENT ACTIVITIES Aportionofthecompany'sborrowingsaredenominateain arket risk is the risk of erosion of the company's cash foreign currencies, which expose the company to market flows, net income and asset values due to adverse changes in risk associated with exchange-rate movements. The company's interest and foreign-currency rates, and in prices for equity and policy generally is to hedge major foreign-currency cash expo energy. The company has adopted corporate-wide policies sures through swap transactions. These contracts are entered governing its market-risk management and trading activities.
into with major international banks, thereby minimizing the An Energy Risk Management Oversight Committee, consisting of risk of credit loss.
senior corporate officers, oversees company-wide energy-price The VaR on the company's fixed-rare long-term debt is risk management and trading activities to ensure compliance estimated at approximately $312 million as of December 31, with the company's stated energy risk management and trading 1998, assuming a one-year holding period. The VaR attributable policies. In addition, all affiliates have groups that monitor to currency exchange rates nets to zero as a result of a currency and control energy-price risk management and trading activities swap that is directly matched to the company's Swiss franc independently from the groups responsible for creating or debt obligation, its only non-dollar-denominated debt.
actively managing these risks.
Along with other tools, the company uses Value at Risk Market risk related to physical commodities is based upon (VaR) to measure its exposure to market risk. VaR is an estimate potential fluctuations in natural gas, petroleum and electricity of the potential loss on a position or portfolio of positions over commodity exchange prices and basis. The company's market a specified holding period, based on normal market conditions risk is impacted by changes in volatility and liquidity in the and within a given statistical confidence level. The company markets in which these instruments are traded. The company's has adopted the variance/covariance methodology in its calcula-regulated and unregulated affiliates are exposed, in varying tion of VaR, and uses a 95 percent confidence level. Holding degrees, to price risk in the natural gas, petroleum and electricity periods are specific to the types of positions being measured, markets. The company's policy is to manage this risk within a and are determined based on the size of the position or port-framework that considers the unique markets, operating and 34 folios, market liquidity, tenor and other factors. Historical regulatory environment of each affiliate.
volatilities and correlations between instruments and positions SEMPRA ENERGY TRADING are used in the calculation.
Sempra Energy Trading derives a substantial portion of its rev The following is a discussion of the company's primary enue from risk management and trading activities in natural market-risk exposures as of December 31, 1998, including a gas, petroleum and electricity. As such, SET is exposed to price discussion of how these exposures are managed.
volatility in the domestic and international natural gas, petroie INTEREST-RATE RISK um and electricity markets. SET conducts these activities within The company is exposed to fluctuations in interest rates pri-a structured and disciplined risk management and control marily as a result of its fixed-rate long-term debt. The company framework that is based on clearly communicated policies and has historically funded utility operations through long-term procedures, position limits, active and ongoing management bond issues with fixed interest rates. With the restructuring of monitoring and oversight, clearly defined roles and responsibilities, the regulatory process, greater flexibility has been permitted and daily risk measurement and reporting.
within the debt-management process. As a result, recent debt Market risk of SET's portfolio is measured using a variety offerings have been selected with short-term maturities to take of methods, including VaR. SET computes the VaR of its portfolio advantage of yield curves or used a combination of fixed-and based on a three-day holding period. As of December 31, 1998, floating-rate debt. Interest-rate swaps, subject to regulatory the diversified VaR of SET's portfolio was $5.3 million.
constraints, may be used to adjust interest-rate exposures when SDG&E appropriate, based upon market conditions.
SL)G&E is exposed to market risk in its natural gas purchase, sale and storage activities whenever natural gas prices fall out side the PBR tolerance band. SDG&E manages this risk within the parameters of the company's market-risk management and trading framework. As of December 31, 1998, the total VaR of SDb&E's natural gas positions was not material.
SDG&E is exposed to market risk on its electricity purchases THE COMPANY'S STATE OF READINESS and sales under the electricity rate cap. See Note 14 of the Sempra Energy is identifying all IT and non-IT systems that might notes to Consolidated Financial Statements and the discussion not be Year 2000 ready and categorizing them in the following areas:
under "Factors Influencing Future Performance" for further IT applications, computer hardware and software infrastructure, information regarding the electricity rate cap.
telecommunications, embedded systems and third parties. The SOCALGAS company is currently evaluating its exposure in all of these areas.
SoCalGas is exposed to market risk on its natural gas purchase, sale These systems and applications are being tracked and measured and storage activities whenever natural gas prices fall outside the through four key phases: inventory, assessment, remediation/test Gas Cost Incentive Mechanism tolerance band. SoCalGas manages ing, and Year 2000 readiness. Those applications and systems, this risk within the parameters of the company's market risk man-which, if not appropriately remediated, may have a significant agement and trading framework. As of December 31, 1998, the impact on energy delivery, revenue collection or the safery of total VaR of SoCalGas' natural gas positions was not material.
personnel, customers or facilities, are being assessed and CREDIT RISK modified/replaced first. The testing effort includes functional test Credit risk relates to the risk of loss that would be incurred as ing of Year 2000 dates and validating that changes have not altered a result of nonperformance by counterparties pursuant to the existing functionality The company uses an independent, interal terms of their contractual obligations. The company avoids con-review process to verfy that the appropriate testing has occurred.
centration of counterparties and maintains credit policies with Inventory and assessment for all company systems were regard to counterparties that management believes significantly completed by January 1999 and ongoing inventory and assess minimize overall credit risk. These policies include an evalua-ment will be performed, as necessary, on any new applications.
tion of potential counterparties' financial condition (including The project is on schedule and the company estimates that by credit rating), collateral requirements under certain circum-June 30, 1999. all critical systems will be suitable for continued stances, and the use of standardized agreements that allow for use into the year 2000 with no significant operational problems.
the netting of positive and negative exposures associated with a The company's current schedule for Year 2000 testing, single counterparty.
readiness and development of contingency plans is subject The company monitors credit risk through a credit-approval to change depending upon the remediation and testing phases process and the assignment and monitoring of credit limits.
of the company's compliance effort and upon developments These credit limits are established based on risk and return that may arise as the company continues to assess its computer considerations under terms customarily available in the industry.
based systems and operations. In addition, this schedule is YEAR 2000 ISSUES dependent upon the efforts of third parties, such as suppliers ost companies are affected by the inability of many (including energy producers) and customers. Accordingly, delays automated systems and applications to process the year 2000 by third parties may cause the company's schedule to change.
and beyond. The Year 2000 issues are the result of computer pro-COSTS To ADDRESS THE COMPANY'S YEAR 2000 ISSUES grams and other automated processes using two digits to identify Sempra Energy's budget for the Year 2000 program is $48 million, a year, rather than four digits. Any of the company's computer of which $38 million has been spent. As the company continues programs that include date-sensitive software may recognize a to assess its systems and as the remediation and testing efforts date using "00" as representing the year 1900, instead of the year progress, cost estimates may change. The company's Year 2000 2000, or "01" as 1901, etc., which could lead to system malfunc-readiness effort is being funded entirely by operating cash flows.
tions. The Year 2000 issues impact both Information Technology THE RISKS OF THE COMPANY'S YEAR 2000 ISSUES (IT) systems and also non-IT systems, including systems incor-Based upon its current assessment and testing of the Year 2000 porating "embedded processors." To address this problem, in issue, the company believes the reasonably likely worst-case Year 1996, both Pacific Enterprises and Enova Corporation established 2000 scenarios would have the following impacts upon Sempra company-wide Year 2000 programs. These programs have now Energy and its operations. With respect to the company's ability been consolidated into the company's overall Year 2000 readiness effort. The company has established a central Year 2000 Program Office, which reports to the company's Chief Information Technology Officer and reports periodically to the audit commit tee of the board of directors.
to provide energy to its domestic utility customers, the company NEW ACCOUNTING STANDARDS believes that the reasonably likely worst-case scenario is for small, n April 1998, the American Institute of Certified Public localized interruptions of natural gas or electrical service which Accountants issued Statement of Position 98-5 "Reporting on are restored in a time frame that is within normal service levels.
the Costs of Start-up Activities." This statement is effective for With respect to services that are essential to Sempra Energy's 1999, but is not expected to have a significant effect on the operations, such as customer service, business operations, sup-company's Consolidated Financial Statements.
plies and emergency response capabilities, the scenario is for In June 1998, the Financial Accounting Standards Board minor disruptions of essential services with rapid recovery and all issued Statement of Financial Accounting Standards (SEAS) essential information and processes ultimately recovered.
No. 133 "Accounting for Derivative Instruments and Hedging To assist in preparing for and mitigating these possible Activities." This statement, which is effective January 1, 2000, scenarios, Sempra Energy is a member of several industry-wide requires that an entity recognize all derivatives as either assets efforts established to deal with Year 2000 problems affecting or liabilities in the statement of financial position, measure embedded systems and equipment used by the nation's natural those instruments at fair value and recognize changes in the fair gas and electric power companies. Under these efforts, partici-value of derivatives in earnings in the period of change unless pating utilities are working together to assess specific vendors' the derivative qualifics as an effective hedge that offsets certain system problems and to test plans. These assessments will be exposures. The effect of this standard on the company's shared by the industry as a whole to facilitate Year 2000 Consolidated Financial Statements has not yet been determined.
problem solving.
INFORMATION REGARDING A portion of this risk is due to the various Year 2000 FORWARD-LOOKING STATEMENTS schedules of critical third-party suppliers and customers. The his Annual Report includes forward-looking statements company is in the process of contacting its critical suppliers and within the definition of Section 27A of the Securities Act of customers to survey their Year 2000 remediation programs.
1933 and Section 21E of the Securities Exchange Act of 1934.
While risks related to the lack of Year 2000 readiness by third The words "estimates," "believes," "expects,"
anticipates,"
36 parties could materially and adversely affect the company's plans" and "intends," variations of such words, and similar business, results of operations and financial condition, the expressions, are intended to identify forward-looking statements company expects its Year 2000 readiness efforts to reduce that involve risks and uncertainties which could cause actual significantly the company's level of uncertainty about the results to differ materially from those anticipated. These stare impact of third party Year 2000 issues on both its IT systems ments are necessarily based upon various assumptions involving and non-IT systems.
judgments with respect to the future including, among others, COMPANY'S CONTINGENCY PLANS local, regional, national and international economic, comperirrve, Sempra Energy's contingency plans for interruptions related political, and regulatory conditions and developments, techno to Year 2000 issues are being incorporated into the company's logical developments, capital market conditions, inflation rates, existing overall emergency preparedness plans. To the extent interest rates, energy markets, weather conditions, business and appropriate, such plans will include emergency backup and regulatory or legal decisions, the pace of deregulation of retail recovery procedures, remediation of existing systems parallel natural gas and electricity industries, the timing and success of with installation of new systems, replacing electronic applica-business development efforts, and other uncertainties, all of tions with manual processes, identification of alternate suppliers which are difficult to predict and many of which are beyond the and increasing inventory levels. The company expects these control of the company Accordingly, while the company believes contingency plans to be completed by June 30, 1999. Due to contngecy lansto e cmplted y Jne 0, 199.1)u to that the assumptions are reasonable, there can be no assurance the speculative and uncertain nature of contingency planning, that they will approximate actual experience, or that the there can be no assurances that such plans actually will be suffi-expectations will be realized. Readers are urged to carefully cient to reduce the risk of material impacts on the company's review and consider the risks, uncertainties and other factors operations due to Year 2000 issues.
which affect the company's business described in this annual report and other reports filed by the company from time to time with the Securities and Exchange Commission.
Five-Year Summary For the years ended December 31 (Dollars in millions except per share amounts) 1998 1997 1996 1995 1994 REVENUES AND OTHER INCOME Gas
$ 2,772
$ 2,964
$2,710
$2,542
$2,948 Electric 1,865 1,769 1,591 1,504 1,510 PX/ISO 500 Other 388 394 223 155 81 Total
$ 5,525
$ 5,127
$4,524
$4,201
$4,539 Operating income 639 939
$ 927
$ 886
$ 867 Net income 294 432
$ 427
$ 401
$ 296 Net income per common share:
Basic
$ 1.24 1.83
$ 1.77
$ 1.67
$ 1.23 Diluted 1.24 1.82
$ 1.77
$ 1.67
$ 1.23 Dividends declared per common share
$ 1.56 1.27
$ 1.24
$ 1.22
$ 1.16 Pretax income/revenue 7.9%
14.5%
16.2%
16.0%
14.1%
Return on common equity 10.0%
14.7%
14.9%
14.6%
11.3%
Effective income tax rate 31.9%
41.1%
41.3%
39.7%
43.4%
Dividend payout ratio:
Basic 125.8%
69.4%
70.1%
73.1%
94.3%
Diluted 125.8%
69.8%
70.1%
73.1%
94.3%
Price range of common shares 295/u-23'/4 AT DECEMBER 31 Current assets
$ 2,458
$ 2,761
$1,592
$1,520
$1,566 Total assets
$10,456
$10,756
$9,762
$9,837
$9,931 Current liabilities
$ 2,466
$ 2,211
$1,572
$1,578
$1,704 Long-term debt (excludes current portion)
$ 2,795
$ 3,175
$2,704
$2,721
$2,889 Shareholders' equity
$ 2,913
$ 2,959
$2,930
$2,815
$2,684 Common shares outstanding (in millions) 237.0 235.6 240.0 240.6 240.0 Book value per common share
$ 12.29
$ 12.56
$12.21
$11.70
$11.18 Price/earnings ratio 20.5 Number of meters (in thousands):
Natural gas 5,639 5,551 5,501 5,436 5,388 Electricity 1,216 1,178 1,164 1,151 1,139
- Not presented as the formation of Sempra Energy was not completed until June 26, 1998.
Statement of Management Responsibility for Consolidated Financial Statements he consolidated financial statements have been prepared by Management believes that the control process enables it to meet management in accordance with generally accepted accounting prin-this responsibility.
ciples. The integrity and objectivity of these financial statements Management also recognizes its responsibility for fostering a and the other financial information in the Annual Report, including strong ethical climate so that the company's affairs are conducted the estimates and judgments on which they are based, are the according to the highest standards of personal and corporate conduct.
responsibility of management. The financial statements have been This responsibility is characterized and reflected in the company's audited by Deloitte & Touche LLP independent certified public code of corporate conduct, which is publicized throughout the accountants appointed by the board of directors. Their report is company The company maintains a systematic program to assess shown below. Management has made available to Deloitte & Touche compliance with this policy.
LLP all of the company's financial records and related data, as well The board of directors has an audit committee composed solely as the minutes of shareholders' and directors' meetings.
of directors who are not officers or employees. The committee Management maintains a system of internal accounting control recommends for approval by the full board the appointment of the which it believes is adequate to provide reasonable, but not absolute, independent auditors. The committee meets regularly with manage assurance that assets are properly safeguarded and accounted for, that ment, with the company's internal auditors and with the transactions are executed in accordance with management's authoriza-independent auditors. The independent auditors and the internal tion and are properly recorded and reported, and for the prevention and auditors periodically meet alone with the audit committee and have detection of fraudulent financial reporting. The concept of reasonable free access to the audit committee at any time.
assurance recognizes that the cost of a system of internal controls should not exceed the benefits derived and that management makes estimates and judgments of these cost/benefit factors.
Management monitors the system of internal control for com pliance through its own review and a strong internal auditing 38 program which also independently assesses the effectiveness of the Neal E. Schmale internal controls. In establishing and maintaining internal controls, Executive Vice President and Chief Financial Officer the company must exercise judgment in determining whether the benefits derived justify the costs of such controls.
Management acknowledges its responsibility to provide finan cial information (both audited and unaudited) that is representative of the company's operations, reliable on a consistent basis, and Frank H. Ault relevant for a meaningful financial assessment of the company.
Vice President and Controller Independent Auditors' Report TO0 T HE BO0A RD 0OF D IR E CTOR S A ND accounting principles used and significant estimates made by manage S HA REHOLDER S OF S EMPR A ENERGY:
ment, as well as evaluating the overall financial statement presentation.
e have audited the accompanying consolidated balance We believe that our audits provide a reasonable basis for our opinion.
sheets of Sempra Energy and subsidiaries (the "company") as of In our opinion, such consolidated financial statements present December 31, 1998, and 1997, and the related statements of con-fairly, in all material respects, the financial position of Sempra solidated income, changes in shareholders' equity, and cash flows for Energy and subsidiaries as of December 31, 1998, and 1997, and the each of the three years in the period ended D~eccmber 31, 1998.
results of their operations and their cash flows for each of the three These financial statements are the responsibility of the company's years in the period ended December 31, 1998, in conformity with management. Our responsibility is to express an opinion on these generally accepted accounting principles.
financial statements based on our audits.
We conducted our audits in accordance with generally accepted a
th auditing standards. Those standards require that we plan and pemform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes exam-San Diego, California iEng, on a test basis, evidence supporting the amounts and disclosures Januaty 27, 1999, except for Note 16 as to which the date is in the financial statements. An audit also includes assessing the February 22, 1999
Statements of Consolidated Income For the years ended December 31 (Dollars in millions, except per share amounts) 1998 1997 1996 REVENUES AND OTHER INCOME Utility revenues:
Natural gas S2,772
$2,964
$2,710 Electric 1,865 1,769 1,591 PX/ISO power 500 Other operating revenues 344 336 195 Other income 44 58 28 Total 5,525 5,127 4,524 EXPENSES Cost of natural gas distributed 954 1,168 958 PX/ISO power 468 Purchased power 292 441 311 Electric fuel 177 164 134 Operating expenses 1,872 1,615 1,405 Depreciation and amortization 929 604 587 Franchise payments and other taxes 182 178 180 Preferred dividends of subsidiaries 12 18 22 Total 4,886 4,188 3,597 INCOME BEFORE INTEREST AND INCOME TAXES 639 939 927 IN'T' ER ES T 207 206 200 INCOME BEFORE INCONIE TAXES 432 733 727 INCOME TAXES 138 301 300 NET INCOME S 294
$ 432
$ 427 NET INCOME PER SHARE OF COMMON STrOCK (BAsiCi)
S 1.24
$ 1.83
$ 1.77 NET' INCOME PER SHARE OF COMMON S'I'OCK (DILUTED)
$ 1.24
$ 1.82
$ 1.77 COINION DiviDENDs DECLARED PER SHARE S 1.56
$ 1.27
$ 1.24 See notes to Consolidated Financial Statements.
Consolidated Balance Sheets At December 31 (Dollars in millions) 1998 1997 ASSETS Current assets:
Cash and cash equivalents 424 814 Accounts receivable-trade 586 633 Accounts and notes receivable-other 159 202 Deferred income taxes 93 15 Energy trading assets 906 587 Inventories 151 111 Regulatory balancing accounts-net 297 Other 139 102 Total current assets 2,458 2,761 Investments and other assets:
Regulatory assets 980 1,186 Nuclear-decommissioning trusts 494 399 Investments 548 429 Other assets 535 439 40 Total investments and other assets 2,557 2,453 Property, plant and equipment:
Property, plant and equipment 11,235 10,902 Less accumulated depreciation and amortization (5,794)
(5,360)
Total property, plant and equipment-net 5,441 5,542 Total assets
$10,456
$10,756 See notes to Consolidated Financial Statements.
At December 31 (Dollars in millions) 1998 1997 LIABILITIES Current liabilities:
Short-term debt 43 354 Accounts payable-trade 702 625 Accrued income taxes 27 5
Energy trading liabilities 805 557 Dividends and interest payable 168 121 Regulatory balancing accounts-net 120 Long-term debt due within one year 330 270 Other 271 279 Total current liabilities 2,466 2,211 Long-term debt:
Long-term debt 2,795 3,045 Debt of Employee Stock Ownership Plan 130 Total long-term debt 2,795 3,175 Deferred credits and other liabilities:
Customer advances for construction 72 72 Post-retirement benefits other than pensions 240 248 41 Deferred income taxes 634 741 Deferred investment tax credits 147 155 Deferred credits and other liabilities 985 916 Total deferred credits and other liabilities 2,078 2,132 Preferred stock of subsidiaries 204 279 Commitments and contingent liabilities (Note 13)
SHAREHOLDERS' EQUITY Common stock 1,883 1,849 Retained earnings 1,075 1,157 Less deferred compensation relating to Employee Stock Ownership Plan (45)
(47)
Total shareholders' equity 2,913 2,959 Total liabilities and shareholders' equity
$10,456
$10,756 See notes to Consolidated Financial Statements.
Statements of Consolidated Cash Flows
..0 For the years ended December 31 (Dollars in millions) 1998 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES Net income S
294
$ 432
$ 427 Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 929 604 587 Deferred income taxes and investment tax credits (199)
(16) 26 Other-net (180) 62 56 Net changes in other working capital components 479 (164) 68 Net cash provided by operating activities 1,323 918 1,164 CASH FLOWS FROM INVESTING ACTIVITIES Expenditures for property, plant and equipment (438)
(397)
(413)
Acquisitions of subsidiaries (191)
(206)
(50)
Contributions to decommissioning trusts (22)
(22)
(22)
Other (28) 23 (29)
Net cash used in investing activities (679)
(602)
(514)
CASH FLOWS FROM FINANCING ACTIVITIES Common stock dividends (325)
(301)
(300) 42 Sale of common stock 34 17 8
l Repurchase of common stock (1)
(122)
(24)
Redemption of preferred stock (75)
(225)
Issuances of other long-term debt 75 140 304 Issuance of rate-reduction bonds 658 Payment on long-term debt (431)
(416)
(459)
Increase (decrease) in short-term debt-net (311) 92 29 Net cash provided by (used in) financing activities (1,034) 68 (667)
INCREASE (DECREASE)
IN CASH AND CASH EQUIVALENTS (390) 384 (17)
CASH AND CASH EQUIVALENTS, JANUARY 1
814 430 447 CASH AND CASH EQUIVALENTS, DECEMBER 31 424 814
$ 430 See notes to Consolidated Financial Statements.
Statments of Consolidated Cash Flows For the years ended December 31 (Dollars in millions) 1998 1997 1996 CHANGES IN OTHER WORKING CAPITAL COMPONENTS (Excluding cash and cash equivalents, short-term debt and long-term debt due within one year)
Accounts and notes receivable
$ 90
$(129)
$ (58)
Net trading assets (71)
Inventories (40)
(2) 32 Regulatory balancing accounts 417 48 9
Other current assets (26) 41 40 Accounts payable and other current liabilities 109 (122) 45 Net change in other working capital components
$479
$(164)
$ 68 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for:
Interest (net of amounts capitalized)
$211
$ 193
$205 Income taxes (net of refunds)
S$366 S 274
$268 SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES 43 Acquisitions of Sempra Energy Trading:
Assets acquired
$609 Cash paid (225)
Liabilities assumed
$384 Liabilities assumed for real estate investments
$ 36
$ 126
$ 97 Nonutility electric generation assets sold:
Book value of assets sold 77 Cash received (20)
Loss on sale (6)
Note receivable obtained
$ 51 See notes to Consolidated Financial Statements.
Statements of Consolidated Changes in Shareholders' Equity
- 4.
Deferred Compensation Total Common Retained Relating Shareholders' For the years ended December 31, 1998, 1997, and 1996 (Dollars in millions)
Stock Earnings to ESOP Equity Balance at December 31, 1995
$1,968
$ 899
$(52)
$2,815 Net income 427 427 Common stock dividends declared (300)
(300)
Sale of common stock 8
8 Repurchase of common stock (24)
(24)
Common stock released from ESOP 3
3 Long-term incentive plan 1
1 Balance at December 31, 1996 1,953 1,026 (49) 2,930 Net income 432 432 Common stock dividends declared (301)
(301)
Sale of common stock 17 17 Repurchase of common stock (122)
(122)
Common stock released from ESOP 2
2 Long-term incentive plan 1
1 4
Balance at December 31, 1997 1,849 1,157 (47) 2,959 Net income 294 294 Common stock dividends declared (376) 376)
Sale of common stock 34 34 Repurchase of common stock (1)
(1)
Common stock released from ESOP 2
2 Long-term incentive plan 1
1 Balance at December 31, 1998
$1,883
$1,075
$(45)
$2,913 See notes to Consolidated Financial Statements.
loAps to Consolidated Financial Statements therefore, are presented as if the companies were combined during all periods included therein. The per-share data BUSINESS shown on the Statements of Consolidated Income reflect COMBINATION the conversion of Enova common stock and of PE common On June 26, 1998, Enova Corporation (Enova) and Pacific stock into Sempra Energy common stock as described above.
Enterprises (PE) combined into a new company named All significant intercompany transactions, including Sempra Energy (the company). As a result of the combina-SoCalGas' sales of natural gas transportation and storage to tion, (i) each outstanding share of common stock of Enova SDG&E, have been eliminated. These sales amounted to was converted into one share of common stock of Sempra approximately $60 million in each of the years presented.
Energy, (ii) each outstanding share of common stock of PE The results of operations for PE and Enova as reported was converted into 1.5038 shares of common stock of as separate companies through June 30, 1998, are as follows:
Sempra Energy and (iii) the preferred stock and preference Six months stock of Enova's principal subsidiary, San Diego Gas &
ended June 30, Electric Company (SDG&E); PE; and PE's principal sub-(Dollars in millions) 1998 1997 1996 sidiary, Southern California Gas Company (SoCalGas)
PACIFIc ENTERPRISES remained outstanding. The combination was approved by Revenue and Other Income
$1,263
$2,777
$2,588 the shareholders of both companies on March 11, 1997, and Net Income S
50 S 180 S 196 was a tax-free transaction.
ENOVA As required by the March 1998 decision of the California Revenue and Other Income
$1,299
$2,224
$1,996 Public Utilities Commission (CPUC) approving the business Net Income 68
$ 252
$ 231 45 combination, SDG&E has entered into agreements to sell its fossil-fueled generation units. The sales are subject to regula tory approvals and are expected to close during the first half of 1999. Additional information concerning the sale of SDG&E's power plants is provided in Note 14. In addition, SoCalGas has sold its options to purchase the California
- PheRTY, LANT AND Ethis parilyreresents portions of the Kern River and Mojave Pipeline natural gas-SDG&E and SoCalGas to provide natural gas and utility transmission facilities. The Federal Energy Regulatory electric service. The cost of utility plant includes labor, Commission's (FERC) approval of the combination includes conditions that the combined company will not unfairly use any potential market power regarding natural gas transporta-retired depreciable utility plant, plus removal costs minus tion to fossil-fueled electric-generation plants. The FERC also specifically noted that the divestiture of SDG&E's ed fossl-feledgenraton pant wold eimiateany oncrns Information regarding electric-industry restructuring and its fossil-fueled generation plants would eliminate any concerns about vertical market power arising from transactions between SDG&E and SoCalGas.
The Consolidated Financial Statements are those of the company and its subsidiaries and give effect to the business combination using the pooling-of-interests method and,
effect on utility plant is included in Note 14. Utility plant right of setoff exists under a master netting arrangement,*
balances by major functional categories at December 31, enforceable by law. Revenues are recognized on a trade-date 1998, are: natural gas operations $7.0 billion, electric distrib-basis and include realized gains and losses, and the net ution $2.4 billion, electric transmission $0.7 billion, electric change in unrealized gains and losses.
generation $0.6 billion and other electric $0.3 billion. The Futures and exchange-traded option transactions are corresponding amounts at December 31, 1997, were recorded as contractual commitments on a trade-dare basis essentially the same. Accumulated depreciation and decom-and are carried at fair value based on closing exchange missioning of natural gas and electric utility plant in service quotations. Commodity swaps and forward transactions are at December 31, 1998, are $3.5 billion and $2.2 billion, accounted for as contractual commitments on a trade-date respectively, and at December 31, 1997, were $3.3 billion basis and are carried at fair value derived from dealer and $2.0 billion, respectively. Depreciation expense is based quotations and underlying commodity-exchange quotations.
on the straight-line method over the useful lives of the OTC options are carried at fair value based on the use of assets or a shorter period prescribed by the CPUC. The valuation models that utilize, among other things, current provisions for depreciation as a percentage of average depre-interest, commodity and volatility rates, as applicable. For ciable utility plant (by major functional categories) in 1998, long-dated forward transactions, where there are no dealer or 1997, and 1996, respectively are: natural gas operations 4.32, exchange quotations, fair values are derived using internally 4.31, 4.35, electric generation 6.49, 5.60, 5.60, electric distri-developed valuation methodologies based on available mar bution 4.49, 4.39, 4.38, electric transmission 3.31, 3.28, 3.25, ket information. Where market rates are not quoted, current and other electric 6.29, 6.02, 5.95. The increase for electric interest, commodity and volatility rates are estimated by generation in 1998 reflects the accelerated recovery of reference to current market levels. Given the nature, size generation facilities. See Note 14 for additional discussion and timing of transactions, estimated values may differ from 46 of generation facilities and industry restructuring.
realized values. Changes in the fair value are recorded INVENTORIES currently in income.
Included in inventories at December 31, 1998, are $61 million EFFECTS OF REGULATION of utility materials and supplies ($56 million in 1997), and SDG&E and SoCalGas accounting policies conform with
$78 million of natural gas and fuel oil ($47 million in 1997).
generally accepted accounting principles for regulated enter Materials and supplies are generally valued at the lower of prises and reflect the policies of the CPUC and the FERO.
average cost or market; fuel oil and natural gas are valued by The company's interstate natural gas transmission subsidiary the last-in first-out method.
follows accounting policies authorized by the FERC.
TRADING INSTRUMENTS SDG&E and SoCalGas have been preparing their Trading assets and trading liabilities are recorded on a financial statements in accordance with the provisions of trade-date basis at fair value and include option premiums Statement of Financial Accounting Standards (SFAS) No. 71, paid and received, and unrealized gains and losses from "Accounting for the Effects of Certain Types of Regulation,"
exchange-traded futures and options, over the counter under which a regulated utility may record a regulatory asset (OTC) swaps, forwards, and options. Unrealized gains and if it is probable that, through the ratemaking process, the losses on OTC transactions reflect amounts which would be utility will recover that asset from customers. Regulatory received from or paid to a third party upon settlement of the liabilities represent future reductions in rates for amounts contracts. Unrealized gains and losses on OTC transactions due to customers. To the extent that portions of the utility are reported separately as assets and liabilities unless a legal operations were no longer subject to SeAS No. 71, or recov ery was no longer probable as a result of changes in regulation or their competitive position, the related regulatory assets
and liabilities would be written off. In addition, SFAS No. 121, REGULATORY ASSETS "Accounting for the Impairment of Long-Lived Assets and for Regulatory assets include San Onofre Nuclear Generating Long-Lived Assets to Be Disposed Of," affects utility plant and Station (SONGS), unrecovered premium on early retirement regulatory assets such that a loss must be recognized whenever of debt, post-retirement benefit costs, deferred income taxes a regulator excludes all or part of an asset's cost from rate base.
recoverable in rates and other regulatory-related expenditures As discussed in Note 14, California enacted a law restructuring that the utilities expect to recover in future rates. See Note the electric-utility industry. The law adopts the December 14 for additional information.
1995 CPUC policy decision, and allows California electric utili-NUCLEAR-DECOMMISSIONINe LIABILITY ties the opportunity to recover existing utility plant and Deferred credits and other liabilities at December 31, 1998, regulatory assets over a transition period that ends in 2001.
include $146 million ($117 million in 1997) of accumulated In 1997, SDG&E ceased the application of SFAS No. 71 with decommissioning costs associated with SDG&E's SONGS respect to its electric-generation business. The application of Unit 1, which was permanently shut down in 1992. Additional SFAS No. 121 continues to be evaluated as industry restruc-information on SONGS Unit I decommissioning costs Is turing progresses. Additional information concerning regulatory included in Note 6. The corresponding liability for Units 2 and assets and liabilities is described below in *Revenues and 3 is included in accumulated depreciation and amortization.
Regulatory Balancing Accounts" and in Note 14.
COMPREHENSIVE INCOME REVENUES AND REGULATORY BALANCING ACCOUNTS In 1998, the company adopted SFAS No. 130, "Reporting Revenues from utility customers consist of deliveries to Comprehensive Income." This statement requires reporting customers and the changes in regulatory balancing accounts.
of comprehensive income and its components (revenues, The amounts included in regulatory balancing accounts at expenses, gains and losses) in any complete presentation of December 31, 1998, represent a $129 million net payable general-purpose financial statements. Comprehensive for SoCalGas combined with a $9 million net receivable for income describes all changes, except those resulting from SDG&E. The corresponding amounts at December 31, 1997, investments by owners and distributions to owners, in the were $355 million net receivable and $58 million net payable equity of a business enterprise from transactions and other for oCalGas and SDG&E, respectively.
events including, as applicable, foreign-currency items, mini Previously, earnings fluctuations from changes in the mum pension liability adjustments and unrealized gains and costs of fuel oil, purchased energy and natural gas, and losses on certain investments in debt and equity securities.
consumption levels for electricity and the majority of natural Comprehensive income was equal to net income for the gas were eliminated by balancing accounts authorized by years ended December 31, 1998, 1997, and 1996.
the CPUC. This is still the case for most natural gas opera-QUASI-REORGANIZATION tions. However, as a result of California's electric-restructuring In 1993, PE completed a strategic plan to refocus on its natural law, overcollections recorded in SDG&E's Energy Cost gas utility and related businesses. The strategy included the Adjustment Clause and Electric Revenue Adjustment divestiture of its merchandising operations and all of its oil and Mechanism balancing accounts were transferred to the Interim gas exploration and production business. In connection with Transition Cost Balancing Account, which is being applied to the divestitures, PE effected a quasi-reorganization for financial transition cost recovery, and fluctuations in costs and con-reporting purposes, effective December 31, 1992. Certain of sumption levels can affect earnings from electric operations.
the liabilities established in connection with discontinued oper Additional information on electric-industry restructuring is ations and the quasi-reorganization will be resolved in future included in Note 14.
years. Management believes the provisions previously estab lished for these matters are adequate at December 31, 1998.
USE OF ESTIMATES IN THE PREPARATION OF THE FINANCIAL STATEMENTS SET's business volume by adding large, commodity-tradins.
The preparation of the consolidated financial statements in contracts with local distribution companies, municipalities and conformity with generally accepted accounting principles major industrial corporations in the eastern United States.
requires management to make estimates and assumptions SEMPRA ENERGY RESOURCES that affect the reported amounts of assets and liabilities and In December 1997, Sempra Energy Resources (SER) in part disclosure of contingent assets and liabilities at the date nership with Reliant Energy Power Generation, formed of the financial statements and the reported amounts of El Dorado Energy. In April 1998, El Dorado Energy began revenues and expenses during the reporting period. Actual construction on a 480-megawatt power plant near Boulder City results could differ from those estimates.
Nevada. SER invested $2.3 million in 1997 and $19.7 million in STATEMENTS OF CONSOLIDATED CASH FLOWS 1998 on this $263-million project. In October 1998, El Dorado Cash equivalents are highly liquid investments with original Energy obtained a $158-million senior secured credit facility maturities of three months or less, or investments that are which entails both construction and 15-year term financing readily convertible to cash.
for the project. This financing represents approximately BASIS OF PRESENTATION 60 percent of estimated total project costs.
Certain prior-year amounts have been reclassified from the SEMPRA ENERGY UTILITY VENTURES predecessor companies' classifications to conform to the In September 1997, Sempra Energy Utility Ventures (SEUV) format of these financial statements.
formed a joint venture with Bangor Hydro to build, own NEW ACCOUNTING STANDARD and operate a $40-million natural gas distribution system in In June 1998, the Financial Accounting Standards Board Bangor, Maine. Construction began in June 1998. The new issued Statement of Financial Accounting Standards (SFAS)
Bangor Gas Company expects to begin deliveries in the 48 No. 133 'Accounting for Derivative Instruments and Hedging fourth quarter of 1999.
Activities." This statement, which is effective January 1, In December 1997, SEUV formed Frontier Energy with 2000, requires that an entity recognize all derivatives as Frontier Utilities of North Carolina to build and operate a either assets or liabilities in the statement of financial posi-
$55-million natural gas distribution system in North tion, measure those instruments at fair value and recognize Carolina. Natural gas delivery began in December 1998.
changes in the fair value of derivatives in earnings in the Subsequent to December 31, 1998, SEUV purchased period of change unless the derivative qualifies as an effec-Frontier Utilities' interest and acquired 100 percent owner tive hedge that offsets certain exposures. The effect of this ship of the system.
standard on the company's Consolidated Financial SEMPRA ENERGY SOLUTIONS Statements has not yet been determined.
In January 1998, Sempra Energy Solutions completed the acquisition of CES/Way International, a national leader in energy-service performance contracting headquartered in ACQUISITIONS Houston, Texas. CES/Way provides energy-efficiency services, AND JOINT VENTURES including energy audits, engineering design, project manage SEMPRA ENERGY TRADING In December 1997, PE and Enova ment, construction, financing and contract maintenance.
jointly acquired Sempra Energy Trading (SET) for
$225 million. SET is a wholesale-energy trading company based in Stamford, Connecticut. It participates in marketing and trading physical and financial energy products, including natural gas, power, crude oil and associated commodities.
In July 1998, SET purchased CNG Energy Services Corporation, a subsidiary of Pittsburgh-based Consolidated Natural Gas Company, for $36 million. The acquisition expands
U May 1997, Sempra Energy Solutions entered into a Electric Commission to provide a complete energy-supply joint venture agreement with Conectiv Thermal Systems, Inc.
package for a power plant in Rosarito, Baja California. The (formerly Atlantic Thermal System, Inc.) to form Atlantic-contract includes provisions for delivery of up to 300 million Pacific Las Vegas, with each receiving a 50-percent interest.
cubic feet per day uf natural gas, transportation services in Atlantic-Pacific Las Vegas provides integrated energy-the U.S. and construction of a 23-mile pipeline from the management services to commercial and industrial customers, U.S.-Mexico border to the plant. The pipeline is expected including the construction of facilities. In May 1997, Atlantic-to cost approximately $35 million and take a year to build.
Pacific Las Vegas entered into an energy-services agreement Delivery of natural gas is expected to commence in with three other parties to finance, own, operate and maintain December 1999.
an integrated thermal-energy production facility at the site of SEI also has interests in Argentina and Uruguay. In March the future Venetian Casino Resort in Las Vegas. Construction 1998, SEI increased its existing investment in two Argentine costs incurred to date are $48 million.
natural gas utility holding companies (Sodigas Pampeana S.A.
A second joint venture agreement was entered into with and Sodigas Sur S.A.) from 12.5 percent to 21.5 percent by Conectiv Thermal Systems to form Atlantic-Pacific Glendale purchasingan additional interest for $40 million.
in August 1997, with each receiving a 50-percent interest.
Atlantic-Pacific Glendale entered into an integrated energy management services agreement with Dreamworks Animation, SHORT-TERM LLC to develop, manage and finance the construction and BORROWINGS operation of a central chiller plant, emergency power genera-PE has a $300 million multiyear credit agreement. SotalGas tors and chilled-water distribution and circulation system at has an additional $400 million multiyear credit agreement.
Dreamworks' Glendale facilities. The cost of the project, These agreements expire in 2001 and bear interest at various completed in May 1998, was $7 million.
rates based on market rates and the companies' credit ratings.
INTERNATIONAL NATURAL GAS PROJECTS SoCalGas' lines of credit are available to support commercial Sempra Energy International (SEI) is a wholly owned sub-paper. At December 31, 1998, PE had $43 million of bank sidiary of Sempra Energy. Sempra Energy International and loans under the credit agreement outstanding, due and paid Proxima Gas S.A. de C.V, partners in the Mexican companies in January 1999. SoCalGas' bank line of credit was unused. At Distribuidora de Gas Natural (DGN) de Mexicali and December 31, 1997, both bank lines of credit were unused.
Distribuidora de Gas Natural de Chihuahua, arc the licensees SDG&E has $30 million of bank lines available to support to build and operate natural gas distribution systems in commercial paper and $265 million of bank lines available to Mexicali and Chihuahua. DGN-Mexicali will invest up to support variable-rate, long-term debt. The credit agreements
$25 million during the first five years of the 30-year license expire at varying dates from 1999 through 2000 and bear period. DGN-Chihuahua will invest up to $50 million over interest at various rates based on market rates and the compa the first five years of operation. DGN-Mexicali and DGN-ny's credit rating. SIG&E's bank lines of credit were unused Chihuahua assumed ownership of natural gas distribution at both December 31, 1998, and 1997.
facilities during the third quarter of 1997. SEl owns interests At December 31, 1998, there were no commercial-paper of 60 and 95 percent in the DGN-Mexicali and DGN-obligations outstanding. At December 31, 1997, SoCalGas had Chihuahua projects, respectively. In August 1998, SEI was
$354 million of commercial-paper obligations outstanding, of awarded a 10-year agreement by the Mexican Federal which approximately $94 million related to the restructuring costs associated with certain long-term gas-supply contracts under the Comprehensive Settlement. See Note 14 for additional information.
Excluding capital leases, which are described in Notes 13, maturities of long-term debt, including PE's Employees LONG-Stock Ownership Plan, are $271 million in 1999, $96 million TERM DEBT in 2000, $186 million in 2001, $193 million in 2002 and 1)ecember 31,
$241 million in 2003. SDG&E and SoCalGas have CPUC (Dollars in millions) 1998 1997 authorization to issue an additional $752 million in long LoNo-TERm DEBT term debt. Although holders of variable-rate bonds may elect First mortgage bonds to redeem them prior to scheduled maturity, for purposes 5.25% March 1, 1998 100 of determining the maturities listed above, it is assumed 7.625% June 15, 2002 28 80 the bonds will be held to maturity.
6.875% August 15, 2002 100 100 5.75% November 15, 2003 100 100 6.8% June 1, 2015 14 14 First-mortgage bonds are secured by a lien on substantially 5.9%June1,218 7
71 all utility plant. In addition, certain nonutility subsidiary 5.9% June 1, 201871 1
5.9% September 1, 2018 93 93 assets are pledged as collateral for SoCalGas' first-mortgage 6.1% and 6.4% September 1, 2018 and 2019 118 118 bonds. SDG&E and SoCalGas may issue additional first 9.625% April 15, 2020 10 54 mortgage bonds upon compliance with the provisions of Variable rates September 1, 2020 58 75 their bond indentures, which provide for, among other 5.85% June 1, 2021 60 60 things, the issuance of additional first-mortgage bonds 8.75% October 1, 2021 150 150 8.5% April 1, 2022 (1
be 7.375% March 1, 2023 100 100 During 1998, the company retired $247 million of first 50 7.5% June 15, 2023 125 125 mortgage bonds, of which $147 million was retired prior to 6.875% November 1, 2025 175 175 scheduled maturity.
Various rates )ecember 1, 2027 25(
250 Certain first-mortgage bonds may be called at SDG&E's total 1,462 1,709 or SoCalGas' option. SoCalGas has no variable-rate bonds.
Rate-reduction bonds 592 658 SDG&E has $188 million of bonds with variable interest-rate D)ebt incurred to acquire limited partnerships, I~eb inurre toacqire imied artnrshpsprovisions that are callable at various dates within one year.
secured by real estate, at 6.8% to 9.0%,
payable annually through 2008 305 313 Of the company's remaining callable bonds, $10 million are Various unsecured bonds at 4.15%
callable in the year 2000, $150 million in 2001, $203 million to 10% from 1998 to 2006 453 296 in 2002, and $624 million in 2003. $242 million of the bonds Various unsecured bonds at 5.9%
are not callable.
or at variable rates (4.3% to 5.0% at RATE-REDUCTION BONDS December 31, 1998) from 2014 to 202325 24 t~ecmbe 31 198) rom 014to 023254 254 In December 1997, $658 million of rate-reduction bonds Capitalized leases 76 106 were issued on behalf of SDG&E at an average interest rate Total 3,142 3,336
[,ess:.
of 6.26 percent. These bonds were issued to facilitate the Current portion of long-term debt 330 270 10-percent rate reduction mandated by California's electric Unamortized discount on long-term debt 17 21 restructuring law. See Note 14 for additional information.
347 291 These bonds are being repaid over 10 years by SiG&E's Total S2,79m $3,04 a
residential and small commercial customers via a charge on their electricity bills. These bonds are secured by the rev enue streams collected from customers and are not secured by, or payable from, utility assets.
UN SiCURED DEBT Various long-term obligations totaling $707 million are unse cured. During 1998, SoCalGas issued $75 million of unsecured FACILITIES UNDER debt in medium-term notes used to finance working capital JOINT OWNERSHIP requirements. Unsecured bonds totaling $124 million have SONGS and the Southwest Powerlink transmission line are variable-interest-rate provisions.
owned jointly with other utilities. The company's interests DEBT OF EMPLOYEE STOCK OWNERSHIP PLAN IESOP) AND TRusT at December 31, 1998, are:
The Trust covers substantially all of the company's former PE employees and is used to fund part of their retirement savings Project SONGS Powerlink program. It has an ESOP feature and holds approximately percentage ownership 20 89 3.1 million shares of the company's common stock. The vari-Regulatory assets able-rate ESOP debt held by the Trust bears interest at a rate Accumulat dere
$10 necessary to place or remarket the notes at par. The balance of Construction work in progress
$ 18 1
this debt was $130 million at December 31, 1998, and is included in the table above as part of the various unsecured bond at4.15perentto 1 pecent Prncial i du onin the Statements of Consolidated Income. Each participant bonds at 4.15 percent to 10 percent. Principal is due on Noveber30,1999 an ineres ispayble ontly.The in the project must provide its own financing. The amounts November 30, 1999, and interest is payable monthly. The company is obligated to make contributions to the Trust suffi-specified above for SONGS include nuclear production, transmission and other facilities. S511 million of substation cient to satisfy debt service requirements. As the company makes contributions to the Trust, these contributions, plus any by the company dividends paid on the unallocated shares of the company's common stock held by the Trust, will be used to repay the SONGS DECOMMISSIONING debt. As dividends are increased or decreased, required contri-Objectives, work scope and procedures for the future dis butions are reduced or increased, respectively. Interest on mantling and decontamination of the SONGS units must meet ESOP debt amounted to $6 million each in 1998, 1997, and the requirements of the Nuclear Regulatory Commission, the 1996. Dividends used for debt service amounted to $3 million Environmental Protection Agency the California Public each in 1998, 1997, and 1996, and are deductible only for Utilities Commission and other regulatory bodies.
federal income tax purposes.
The company's share of decommissioning costs for the CURRENCY INTEREST-RATE SWAPS SONGS units is estimated to be $425 million in today's SDG&E periodically enters into interest-rate swap and cap dollars and is based on a cost study completed in 1998. Cost agreements to moderate its exposure to interest-rate changes studies are performed and updated periodically by outside and to lower its overall cost of borrowings. At December 31, consultants. Although electric-industry restructuring legisla 1998, SDG&E had such an agreement, maturing in 2002, tion requires that stranded costs, which include SONGS' with underlying debt of $45 million.
costs, be amortized in rates by 2001, the recovery of decom missioning costs is allowed until the time that the costs are fully recovered.
The amount accrued each year is based on the amount allowed by regulators and is currently being collected in rates. This amount is considered sufficient to cover the com pany's share of future decommissioning costs.
Payments to the nuclear-decommissioning trusts are expected The components of income tax expense are as folloM:
to continue until SONGS is decommissioned, which is not D
expected to occur before 2013. Unit 1, although permanently CURRENT:
shut down in 1992, was scheduled to be decommissioned Federal
$278
$236
$183 concurrently with Units 2 and 3. However, the company and the State 89 63 65 other owners of SONGS have requested that the CPUC grant Total current taxes 367 299 248 authority to begin decommissioning Unit 1 on January 1, 2000.
DEFERRED:
The amounts collected in rates are invested in externally Federal (165) 1 52 managed trust funds. The securities held by the trust are State (38) 7 6
considered available for sale and shown on the Consolidated Total deferred taxes (223) 8 58 DEFERRED INVESTMENT TAX CREDITS-NET (6)
(6)
(6)
Balance Sheets adjusted to market value. The fair values reflect unrealized gains of $149 million and $89 million at December 31, 1998, and 1997, respectively.
The Financial Accounting Standards Board is reviewing result from the following:
the accounting for liabilities related to closure and removal (Dollars in millions) 1998 1997 of long-lived assets, such as nuclear power plants, including DEFERRED TAX LIABILITIES:
the recognition, measurement and classification of such Differces in financial and costs. The Board could require, among other things, that the tax bases of utility plant
$924
$1,063 company's future balance sheets include a liability for the Regulatory balancing accounts estimated decommissioning costs, and a related increase in Patrs e
7 21 the cost of the asset.
Other 71 53 52 Additional information regarding SONGS is included in Total deferred tax liabilities 1,121 1,39 Notes 13 and 14.
DEFERRED TAX ASSETS:
Unamortized investment tax credits 88 89 Comprehensive Settlement (see Note 14) 95 117 INCOME Postretirement benefits 76 90 TAXES Other deferred liabilities 102 1lO The reconciliation of the statutory federal income tax rate Other 177 204 to the effective income tax rate is as follows:
Total deferred tax assets 58 664 1998 1997 1996 Net deferred income tax liability 541 726 Statutory federal income tax rate 35.0%
35.0%
35.0%
Current portion (net asset) 93 15 Depreciation 6.3 7.1 6.2 Non-current portion (net liability)
S634
$ 741 State income taxes-net of federal income tax benefit 7.4 6.7 6.2 Tax credits (12.9)
(5.7)
(4.8)
Equipment leasing activities (1.5)
(1.1)
(1.4)
Capitalized expenses not deferred 0.2 (1.4)
(2.1)
Other-net (2.6) 0.5 2.2 Effective income tax rate 3T.9h p
41.1ol 41.3ls
EMPLOYEE BENEFIT PLANS The information presented below describes the plans of the company and its principal subsidiaries. In connection with the PE/Enova Business Combination described in Note 1, certain of these plans have been or will be replaced or modified, and numerous participants have been or will be transferred from the subsidiaries' plans to those of Sempra Energy.
PENSION AND OTHER POSTRETIREMENT BENEFITS The company sponsors several qualified and nonqualified pension plans and other postretirement benefit plans for its employees. The following tables provide a reconciliation of the changes in the plans' benefit obligations and fair value of assets over the two years, and a statement of the funded status as of each year end:
Pension Benefits Other Postretirement Benefits (Dollars in millions) 1998 1997 1998 1997 WEIGHTED-AVERAGE AssuMPTIONS AS OF DECEMBER 31:
I)iscount rate 6.75%
7.07%
6.75%
7.02%
Expected return on plan assets 8.50%
8.13%
8.50%
7.87%
Rate of compensation increase 5.00%
5.00%
5.010%
5.00%
Cost trend of covered health-care charges 8.00%"')
7.00%(21 CHANGE IN BENEFIT OBLIGATION:
Net benefit obligation at January 1
$2,117
$1,981
$ 531
$442 Service cost 55 53 13 15 Interest cost 148 144 36 35 53 Plan participants' contributions I
I Plan amendments 18 Actuarial (gain) loss (44) 54 57 Special termination benefits 63 13 3
2 Gross benefits paid (277)
(128)
(21)
(21)
Net benefit obligation at I)ecember 31 2,080 2,117 563 531 CHANGE IN PLAN ASSETS:
Fair value of plan assets at January 1 2,053 2,373 363 286 Actual return on plan assets 407 406 64 59 Employer contributions 13 2
36 38 Plan participants' contributions I
1 Gross benefits paid (277)
(128)
(21)
(21)
Fair value of plan assets at December 31 2,796 2,653 443 363 Funded status at I)ecember 31 716 536 (120)
(168)
Unrecognized net actuarial gain (926)
(733)
(107)
(66)
Unrecognized prior service cost 73 61 (13)
(14)
Unrecognized net transition obligation 3
4 Net liability at I)ecember 31 m
$ (134)
$ (132)
S(240)
$(248)
' Decreasing to ultimate trend of 6.50% in 2004.
) Decreasing to ultimate trend of 6.50% in 1998.
(')Approximates amounts recognized in the Consolidated Balance Sheets at December 31.
The following table provides the components of net periodic benefit cost for the plans:
Pension Benefits Other Postretirement Benefits (Dollars in millions) 1998 1997 1996 1998 1997 1996 Service cost
$ 55
$ 53
$ 58
$13
$15
$18 Interest cost 148 144 141 36 35 36 Expected return on assets (196)
(178)
(161)
(24)
(22)
(19)
Amortization of:
Transition obligation I
1 1
2 2
2 Prior service cost 6
5 5
(1)
(1)
(1)
Actuarial (gain) loss (23)
(18)
(4) 1 1
Special termination benefit 63 13 3
2 Settlement credit (30)
Regulatory adjustment (12) 9 12 12 Total net periodic benefit cost 24
$ 20
$ 28
$ 38
$ 44
$ 49 Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans.
A 1% change in assumed health care cost trend rates would have the following effects:
(Dollars in millions) 1% Increase 1% Decrease Effect on total of service and interest cost components of net periodic postretirement health care benefit cost
$11
$(10)
Effect on the health care component of the accumulated postretirement benefit obligation
$72
$(65) 54 The projected benefit obligation and accumulated bene-Employer contributions, after one year of completed service, fit obligation were $55 million and $45 million, respectively, are made in shares of company common stock. Employer as of December 31, 1998, and $53 million and $44 million, as contribution methods vary by plan, but generally the contribu of December 31, 1997. There were no pension plans with tion is equal to 50 percent of the first 6 percent of eligible base accumulated benefit obligations in excess of plan assets for salary contributed by employees. During 1998, the SDG&E 1998 or 1997.
plan contribution was age-based for represented employees.
Other postretirement benefits include medical benefits The employee's contributions, at the direction of the employ for retirees and their spouses (and Medicare Part B reim-ees, are primarily invested in company stock, mutual funds or bursement for certain retirees) and retiree life insurance.
guaranteed investment contracts. Employer contributions for SAVINGS PLANS the Sempra and SoCalGas plans are partially funded by the Sempra Energy and its subsidiaries offer savings plans, Pacific Enterprises Employee Stock Ownership Plan and Trust.
administered by plan trustees, to all eligible employees.
Annual expense for the savings plans was $14 million in 1998, Eligibility to participate in the various employer plans
$11 million in 1997 and $10 million in 1996.
ranges from one month to one year of completed service.
Employees may contribute, subject to plan provisions, from 1 percent to 15 percent of their regular earnings.
TFhe following information is presented after conversion Additional information on options outstanding at of PE stock into company stock as described in Note 1.
December 31, 1998, is as follows:
Stock option activity is summarized in the following tables.
OUTSTANDING OPTIONS OPTIONS WITH PERFORMANCE FEATURES Range of Number Average Average Exercise of Remaining Exercise Shares Average Options Prices Shares Life Price Under Exercise Exercisable Option Price at Year End
$12.80416.12 623,362 5.55
$15.29 December 31, 1995 846,188
$16.23
$1679420.36 1,584,272 7.47
$19.03 Granted 1,030,404 17.95
$24.10431.00 3,209,258 9.05
$25.82 December 31, 1996 1,876,592 17.17 282,063 5,416,892 8.19
$22.64 Granted 1,040,103 20.37 EXERCISABLE OPTIONS Exercised (359,288) 16.53 Cancelled (71,190) 20.37 Exercise of Exercise December 31, 1997 2,486,217 18.51 1,513,545 P
SP Granted 2,131,803 25.23
$12.80-$16.12 623,362
$15.29 Exercised (5 12(,59) 17.12 SI.79-S20.36 1,109,878
$18.46 Cancelled (509,301) 23.00
$24.11-$31.00 177,944
$26.70 December 31, 1998 3,596,660 S22.06 1,387,523 OPTIONS WITHOUT PERFORMANCE FEATURES The fair value of each option grant (including the divi Shares Aerage Options dend equivalent) was estimated on the date of grant using Under Exercise Exercisable the modified Black-Scholes option-pricing model. Weighted Option Price at Year End December 31, 1995 2,302,018
$18.14 1,200,183 average fair values for options granted in 1998, 1997, and 56 Exercised (304,520) 15.00 1996 were $8.20, $5.23 and $5.00, respectively.
Cancelled (125,417) 26.05 The assumptions that were used to determine these fair December 31, 1996 1,872,081 18.12 1,197,687 values are as follows:
Exercised (493,848) 14.94 Cancelled (14,737) 35.24 Year Ended December 31 December 31, 1997 1,363,496 19.08 1,363,496 1998 1997 1996 Granted 1.293,997 26.33 Stock price volatility 16 18%
19%
Exercised (596,629) 15.72 Risk-free rate of return 5.6%
6.4%
6.1%
Cancelled (240,632) 29.78 Annual dividend yield 0%
0%
0%
December 31, 1998 1,82(0,232 S23.92 523,661 Expected life 6 Nears 3.8. Years 4.3 Years Compensation expense for the stock option grants was
$11.7 million, $16.9 million and $5.5 million In 1998, 1997, and 1996, respectivem The differences between compensa tion cost included in net income and the related cost measured by the fair-value-based method defined in SFAS No. 123 are immaterial.
EMPLOYEE STOCK OWNERSHIP PLAN In 1998, 102,640 shares of Sempra Energy common The Pacific Enterprises Employee Stock Ownership Plan stock were awarded to officers. Under the predecessor plan, and Trust (Trust) covers substantially all employees of PE in each of the last 10 years, Enova awarded between 49,000 and SoCalGas and is used to partially fund their retirement and 75,000 shares to key executives. These awards are sub savings plan programs. All contributions to the Trust are ject to forfeiture over four years if certain corporate goals are made by the company, and there are no contributions made not met. Holders of this stock have voting rights and receive by the participants. As the company makes contributions to dividends prior to the time the restrictions lapse if, and to the ESOP, the ESOP debt service is paid and shares are the extent, dividends are paid on Sempra Energy common released in proportion to the total expected debt service.
stock. Compensation expense for the issuance of these Compensation expense is charged and equity is credited restricted shares was approximately $2 million in 1998, for the market value of the shares released. Income tax
$1 million in 1997 and 1 million in 1996.
deductions are allowed based on the cost of the shares.
In 1998, Sempra Energy granted 3,425,800 stock options.
Dividends on unallocated shares are used to pay debt service The option price is equal to the market price of common and are charged against liabilities. The Trust held 3.1 million stock at the date of grant. The grants, which vest over a and 3.3 million shares of company common stock, with fair four-year period, include options with and without perfor values of $77.9 million and $80.3 million, at December 31, mance-based features. The stock options expire in 10 years 1998, and 1997, respectively.
from the date of grant. All options granted prior to 1997 became immediately exercisable upon approval by PE's shareholders of the business combination with Enova. The STOCK-BASED options were originally scheduled to vest annually over a COMPENSATION service period ranging from three to five years.
Sempra Energy has stock-based compensation plans that Sempra Energy's plans allow for the granting of dividend align employee and shareholder objectives related to the equivalents based upon performance goals. This feature long-term growth of the company. The company's long-term provides grantees, upon exercise of the option, with the incentive stock compensation plan provides for aggregate opportunity to receive all or a portion of the cash dividends awards of Sempra Energy nonqualified stock options, incen-that would have been paid on the shares if the shares had tive stock options, restricted stock, stock appreciation rights, been outstanding since the grant date. Dividend equivalents performance awards, stock payments or dividend equivalents.
are payable only if corporate goals are met and, for grants In 1995, Statement of Financial Accounting Standards prior to July 1, 1998, if the exercise price exceeds the (SFAS) No. 123, "Accounting for Stock-Based Compensa-market value of the shares purchased. The percentage of tion," was issued. It encourages a fair-value-based method dividends paid as dividend equivalents will depend upon of accounting for stock-based compensation. As permitted the extent to which the performance goals are met.
by SFAS No. 123, the company adopted its disclosure-only requirements and continues to account for stock-based com pensation in accordance with the provisions of accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
SWAP AGREEMENTS The company periodically enters into interest-rare-swap and FINANCIAL cap agreements to moderate exposure to interest-rate INSTRUMENTS changes and to lower the overall cost of borrowing. These FAIR VALUE The fair values of the company's financial instru-agreements generally remain off the balance sheet as they ments (cash, temporary investments, funds held in trust, notes involve the exchange of fixed-and variable-rate interest pay receivable, investments in limited partnerships, dividends ments without the exchange of the underlying principal payable, short-and long-term debt, customer deposits, and amounts. The related gains or losses are reflected in the preferred stock of subsidiaries) are not materially different consolidated income statement as part of interest expense.
from the carrying amounts, except for long-term debt and At December 31, 1998, and 1997, SDG&E had one preferred stock of subsidiaries. The carrying amounts and fair interest-rate-swap agreement: a floating-to-fixed-rare swap values of long-term debt are $3.1 billion and $3.2 billion, associated with $45 million of variable-rate bonds maturing respectively, at December 31, 1998, and $3.4 billion and in 2002. SDG&E expects to hold this financial instrument
$3.5 billion at December 31, 1997. The carrying amounts and to its maturity. This swap agreement has effectively fixed fair values of subsidiaries' preferred stock are $204 million the interest rate on the underlying variable-rate debt at 5.4 and $182 million, respectively, at December 31, 1998, and percent. SDG&E would be exposed to Interest-rate fluctua
$279 million and $258 million, respectively, at December 31, tions on the underlying debt should the counrerparry to 1997. The fair values of the first-mortgage and other bonds the agreement not perform. Such nonperformance is not and preferred stock are estimated based on quoted market anticipated. This agreement, if terminated, would result in prices for them or for similar issues. The fair values of long-an obligation of 3 million at December 31, 1998, and term notes payable are based on the present value of the
$2 million at December 31, 1997. Additional information 57 future cash flows, discounted at rates available for similar notes on this topic is included in Note 5.
with comparable maturities. Included in long-term debt are ENERGY DERIVATIVES SDG&E's rate-reduction bonds. The carrying amounts and Information on derivative financial instruments of SET is pro fair values of the bonds are $592 million and $607 million, vided below. The company's regulated operations use energy respectively, at December 31, 1998.
derivatives for both price-risk management and trading OFr-BALANCE-SHEET FINANCIAL INSTRUMENTS purposes within certain limitations imposed by company poli The company's policy is to use derivative financial instru-cs and regulatory requirements. Energy derivatives are used ments to manage its exposure to fluctuations in interest to mitigate risk and better manage costs. These instruments rates, foreign-currency exchange rates and energy prices.
include forward contracts, swaps, options and other contracts Transactions involving these financial instruments expose which have maturities ranging from 30 days to 12 months.
the company to market and credit risks which may at times SoCalGas is subject to price risk on its natural gas put be concentrated with certain counterparties, although chases if its cost exceeds a 2-percent tolerance band above counterparty nonperformance is not anticipated. Additional the benchmark price. This is discussed further in Note 14.
information on this topic is discussed in Note 2.
SoCalGas becomes subject to price risk when positions are incurred during the buying, selling and storage of natural gas.
As a result of the Gas Cost Incentive Mechanism (GCIM),
SoCalGas enters into a certain amount of gas futures con tracts in the open market with the intent of reducing gas
costs within the GCIM tolerance band. The CPUC has SET also carries an inventory of financial instrumenti.
approved the use of gas futures for managing risk associated As trading strategies depend on both market making and with the GCIM. For the years ended December 31, 1998, proprietary positions, given the relationships between 1997, and 1996, gains and losses from natural gas futures con-instrumcnts and markets, those activities are managed in tracts are not material to SoCalGas' financial statements.
concert in order to maximize trading profits.
SEMPRA ENERGY TRADING SET's credit risk from financial instruments as of SET derives a substantial portion of its revenue from market December 31, 1998, is represented by the positive fair value making and trading activities, as a principal, in natural gas, of financial instruments after consideration of master netting petroleum and electricity. It quotes bid and offer prices to agreements and collateral. Credit risk disclosures, however, end users and other market makers. It also earns trading prof-relate to the net accounting losses that would be recognized its as a dealer by structuring and executing transactions that if all counrerparties completely failed to perform their obliga permit its counterparties to manage their risk profiles. In tions. Options written do not expose SET to credit risk.
addition, it takes positions in energy markets based on the Exchange-traded futures and options are not deemed to have expectation of future market conditions. These positions may significant credit exposure as thc exchanges guarantee that be offset with similar positions or may be offset in the every contract will be properly settled on a daily basis.
exchange-traded markets. These positions include options, The following table approximates the counterparry credit forwards, futures and swaps. These financial instruments rep-quality and cxposure of SET expressed in terms of net replace resent contracts with counterparties whereby payments are ment value (in millions of dollars):
linked to or derived from energy-market indices or on terms
- Futures, predetermined by the contract, which may or may not be forward and swap Purchased physically or financially settled by SET. For the year ended Counterparty credit quality:
contracts options Total December 31, 1998, substantially all of SET's derivative transactions were held for trading and marketing purposes.
41 14 55 Market risk arises from the potential for changes in the A
129 19 148 value of financial instruments resulting from fluctuations in BBB 290 26 316 natural gas, petroleum and electricity commodity-exchange Below investment grade 69 2
71 prices and basis. Market risk is also affected by changes in Exchanges 30 8
38
$591
$70
$661 volatility and liquidity in markets in which these instru ments are traded.
Financial instruments with maturities or repricing charac SET adjusts the book value of these derivatives to market teristics of 180 days or less, including cash and cash equivalents, each month with gains and losses recognized in earnings.
are considered to be short-term and, therefore, the carrying These instruments are included in other current assets on the values of these financial instruments approximate their fair Consolidated Balance Sheet. Certain instruments such as values. SET's commodities owned, trading assets and trading swaps are entered into and closed out within the same month liabilities are carried at fair value. The average fair values during and, therefore, do not have any balance-sheet impact. Gains the year, based on quarterly observation, for trading assets and losses are included in electric or natural gas revenue or expense, whichever is appropriate, in the Consolidated Income Statements.
andrading liabilities which are considered financial instru ments with off-balance-sheet risk approximate $952 million and $890 million, respectively. The fair values are net of the PREFERRED STOCK amounts offset pursuant to rights of setoff based on qualifying OF SUBSIDIARIES master netting arrangements with counterparties, and do not PACIFIC ENTERPRISES Call December31, include the effects of collateral held or pledged.
(Dollars in millions except call price)
Price 1998 1997 As of December 31, 1998, and 1997, SET's trading Cumulative preferred assets and trading liabilities approximate the following:
without par value:
Deceber 1,
$4.75 Dividend, 200,000 shares December 31, (Dlar n ilin) 98 97authorized and outstanding
$100.00)
$20 SZ20 (Dollars in millions) 1998 1997
$4.50 Dividend, 300,000 shares TRADING ASSETS authorized and outstanding
$100.00 30 30 Unrealized gains on swaps and forwards
$756
$497 Due from commodity clearing organization authorized and Outstanding
$101.50 10 10 and clearing brokers 75 41 S4.36 Dividend, 200,000 shares OTC commodity options purchased 45 33 authorized and outstanding 101.00 20 20 Due from trading counterparties 30 16
$4.75 Dividend, 253 shares Total
$906
$587 authorized and outstanding
$101.00 TRADING LIABILITIES Total
$80 80 Unrealized losses on swaps and forwards
$740
$487 All or ay part of every series of presently outstanding Due to trading counterparties 35 41 OTC commodity options written 30 29 PE preferred stock is subject to redemption at PE's option Total
$805
$557 at any time upon not less than 30 days' notice, at the applic Notinalamontsdo ot ecesariy rpreenttheable redemption price for each series, together with the 59_
Notional amounts do not necessarily represent the amounts exchanged by parties to the financial instruments and do not measure SET's exposure to credit or market preferences as to dividends. No shares of Unclassified or risks. The notional or contractual amounts are used to sum marize the volume of financial instruments, but do not reflect the extent to which positions may offset one another.
SOCALGAS December 31, Accordingly, SET is exposed to much smaller amounts (Dollars in millions) 1998 1997 potentially subject to risk. The notional amounts of SET's Not subject to mandatory redemption:
financial instruments are:
$25 par value, authorized 1,000,000 shares
_________________________________________________6% Series, 28,664 shares outstanding
$ 1 S I (Dollars in millions)
Total 6% Series A, 783,032 shares outstanding 19 19 Forwards and Wilthout par value, authorized 10,900,000 shares commodity swaps
$ 5,916 7.75% Series 75 Futures and exchange options 2,915
$20
$95 Options purchased 1,320 Options written 1,298 Total
$11,449
None of SoCalGas' series of preferred stock is callable.
whereas the no-par-value preferred stock is nonvoting and All series have one vote per share and cumulative preferences has a liquidation value of $25 per share. SDG&E is autho as to dividends. On February 2, 1998, SoCalGas redeemed all rized to issue 10,000,000 shares of no-par-value stock (both outstanding shares of 7.75% Series Preferred Stock at a price subject to and not subject to mandatory redemption). All per share of $25 plus $0.09 of dividends accruing to the date series are currently callable except for the $1.70 and $1.7625 of redemption. The total cost to SoCalGas was approximately series (callable in 2003). The $1.7625 series has a sinking
$75.3 million.
fund requirement to redeem 50,000 shares per year from SDG&E Cal December 31, SGECall Deebr3,2003 to 2007; the remaining 750,000 shares must be (Dollars in millions except call price)
Price 1998 1997 redeemed in 2008.
Not subject to mandatory redemption
$20 par value, authorized 1,375,000 shares:
SHAREHOLDERS EQUITY AND 5% Series, 375,000 EARNINGS PER SHARE shares outstanding
$24.00 S 8
$ 8 The company's outstanding stock options represent the only 4.50% Series, 300,000 4.50 Seies,300000forms of potential common stock at December 31, 1998, shares outstanding
$21.20 6
6 4.40% Series, 325,000 1997, and 1996. The reconciliation between basic and diluted shares outstanding
$21.00 7
7 EPS is as follows:
4.60% Series, 373,770 Income Shares Earnings shares outstanding
$20.25 7
7 (in millions)
(in thousands)
Per Share Without par value:
1998
$1.70 Series, 1,400,000 Basic
$294 236,423
$1.24 60 shares outstanding
$25.85 35 3-5 Effect of dilutive
$1.82 Series, 640,000 stock options 701 shares outstanding
$26.00 16 16 Diluted
$294 237,124
$1.24 Total not subject to 1997 mandatory redemption
$79
$79 Subject to mandatory redemption Without par value:
stock optitns 587
$1.7625 Series, 1,000,000
$1725Seie,
,00,00Diluted
$432 237,249
$1.82 shares outstanding
$25.00
$25
$25 1996 All series of SDG&E's preferred stock have cumulative Basic
$427 240,825
$1.77 preferences as to dividends. The $20 par value preferred Effect of dilutive stock has two votes per share on matters being voted upon stock options 332 Diluerea
$427-a-alepefre stok1innvoin
$1.7 by shareholders of SDG&E and a liquidation value at par, The company is authorized to issue 750,000,000 shares of no-par-value common stock and 50,000,000 shares of Preferred Stock. At December 31, 1998, there were 240,026,439 shares of common stock outstanding, compared to 235,598,111 shares outstanding at December 31, 1997.
No shares of Preferred Stock were issued and outstanding.
At December 31, 1998, the future minimum payments under natural gas contracts were:
COMMITMENTS Storage and AND CONTINGENCIES (Dollars in millions)
Transportation Natural Gas NATURAL GAS CONTRACTS The company buys natural gas under 1999
$ 193
$288 several short-term and long-term contracts. Short-term pur-2000 195 170 chases are based on monthly spot-market prices. SoCalGas 2001 197 175 2002 197 179 has commitments for firm pipeline capacity under contracts with pipeline companies that expire at various dates through Thereafter 587 the year 2006. These agreements provide for payments of an Total minimum payments
$1,562
$993 annual reservation charge. SoCalGas recovers such fixed charges in rates. chares n raes.contracts were $1.0 billion in 1998, $1.2 billion in 1997, SDG&E has long-term capacity contracts with interstate pipelines which expire on various dates between 2007 and 2023. SDG&E has long-term natural gas supply contracts (included in the table below) with four Canadian suppliers ovde s
a sixbion cubimet of atuags that expire between 2001 and 2004. SDG&E has been involved in neoitosadltgtonxihtesplescn storage capacity under an agreement expiring March 2000.
invlve innegotiations and litigation with the suppliers con Thlese agreements are not included in the above table.
cerning the contracts' terms and prices. SDG&E has settled with three of the suppliers. One of the three is delivering SDG&E buys electric power under several long-term contracts.
natural gas under the terms of the settlement agreement; The contracts expire on various dates between 1999 and 2025.
61 the other two have ceased deliveries. The fourth supplier has the the tw hae case deiveres.Thefouth uppierhas Under California's Electric-Industry Restructuring law, which is ceased deliveries pending legal resolution. A U.S. Court of Appeal has upheld a U.S. District Court's invalidation of the utilities (IOUs) are obligated to bid their power supply, includ contracts with two of these suppliers. If the supply of Canadian natural gas to SDG&E is not resumed to a level ingowned generationand prcha-er conracs inote approximating the related committed long-term pipeline Clfri oe xhne(X.A eut IGEssse apacritg thGe intedt conmtned usngter cpitylin requirements are met primarily through purchases from the PX capacity, SDG&E intends to continue using the capacity inminimum other ways, including the transport of replacement gas and the release of a portion of this capacity to third parties.under contracts were:
(Dollars in millions) 1999
$ 249 2000 211 2001 174 2002 136 2003 135 Thereafter 2,001 Total minimum payments
$2,906
These payments for actual purchases represent capacity Rent expense totaled $105 million in 1998, $137 mill6n charges and minimum energy purchases. SDG&E is required in 1997, and $146 million in 1996.
to pay additional amounts for actual purchases of energy that In connection with the quasi-reorganization described in exceed the minimum energy commitments. Total payments, Note 2, PE established reserves of $102 million to fair value including actual energy payments, under the contracts were operating leases related to its headquarters and other leases
$293 million in 1998, $421 million in 1997 and $296 million in at December 31, 1992. The remaining amount of these 1996. Payments under purchased-power contracts decreased reserves was $76 million at December 31, 1998. These leases in 1998 as a result of the purchases from the PX, which are reflected in the above table.
commenced April 1, 1998.
ENVIRONMENTAL ISSUES SDG&E has entered into agreements to sell its power The company believes that its operations are conducted in plants and other electric-generating resources (excluding accordance with federal, state and local environmental laws SONGS), and has announced a plan to auction its long-term and regulations governing hazardous wastes, air and water purchased power contracts. Additional information on this quality, land use, and solid waste disposal. SoCalGas and topic is provided in Note 14.
SDG&E incur significant costs to operate their facilities in LEASES compliance with these laws and regulations. The costs of The company has leases (primarily operating) on real and compliance with environmental laws and regulations gener personal property expiring at various dates from 1999 to 2030.
ally have been recovered in customer rates.
Certain leases on office facilities contain escalation clauses In 1994, the CPUC approved the Hazardous Waste requiring annual increases in rent ranging from 2 percent to Collaborative Memorandum account allowing utilities to 7 percent. The rentals payable under these leases are deter-recover their hazardous waste costs, including those related 62 mined on both fixed and percentage bases, and most leases to Superfund sites or similar sites requiring cleanup. Recovery contain options to extend, which are exercisable by the compa-of 90 percent of cleanup costs and related third-party litiga ny. The company also has nuclear fuel, office buildings, a tion costs and 70 percent of the related insurance-litigation generating facility and other properties that are financed by expenses is permitted. Environmental liabilities that may long-term capital leases. Utility plant includes $177 million at arise are recorded when remedial efforts are probable and December 31, 1998, and $198 million at December 31, 1997, the costs can be estimated.
related to these leases. The associated accumulated amortiza-The company's capital expenditures to comply with tion is $114 million and $102 million, respectively.
environmental laws and regulations were $1 million in 1998, The minimum rental commitments payable in future
$5 million in 1997, and $9 million in 1996, and are not years under all noncancellable leases are:
expected to be significant during the next five years. These Operating Capitalized expenditures primarily include the cost of retrofitting (Dollars in millions)
Leases Leases SDG&E's power plants to reduce air emissions. These costs 1999
$ 60 S 31 will be reduced significantly by SDG&E's sale of its non 2000 58 14 nuclear generating facilities. The company has been 2001 55 14 2001 5
14 associated with various sites which may require 2002 52 14 2003 51 11 Thereafter 380 9
Total future rental commitment
$656 93 Imputed interest (6% to 9%)
(17)
Net commitment 76
rehiediation under federal, state or local environmental laws.
Insurance coverage is provided for up to $2.8 billion of The company is unable to determine fully the extent of its property damage and decontamination liability. Coverage responsibility for remediation of these sites until assess-is also provided for the cost of replacement power, which ments are completed. Furthermore, the number of others includes indemnity payments for up to three years, after a that also may be responsible, and their ability to share in the waiting period of 17 weeks. Coverage is provided primarily cost of the cleanup, is not known. The company does not through mutual insurance companies owned by utilities with anticipate that such costs, net of the portion recoverable nuclear facilities. If losses at any of the nuclear facilities in rates, will be significant.
covered by the risk-sharing arrangements were to exceed the As discussed in Note 14, restructuring of the California accumulated funds available from these insurance programs, electric-utility industry will change the way utility rates are SDG&E could be assessed retrospective premium adjust set and costs are recovered. SDG&E asked that the collabora-ments of up to $6 million.
tive account be modified, and that electric-generation-related DEPARTMENT OF ENERGY DECOMMISSIONING cleanup costs be eligible for transition-cost recovery. The final The Energy Policy Act of 1992 established a fund for the outcome of this decision is that SDG&E's costs of compliance decontamination and decommissioning of the Department of with environmental regulations may be fully recoverable.
Energy nuclear-fuel-enrichment facilities. Utilities which have NUCLEAR INSURANCE used DOE enrichment services are being assessed a total of SDG&E and the co-owners of SONGS have purchased
$2.3 billion, subject to adjustment for inflation, over a 15-year primary insurance of $200 million, the maximum amount period ending in 2006. Each utility's share is based on its share available, for public-liability claims. An additional of enrichment services purchased from the DOE through
$8.7 billion of coverage is provided by secondary financial 1992. SDG&E's annual assessment is approximately S1 million.
protection required by the Nuclear Regulatory Commission This assessment is recovered through SONGS revenue.
and provides for loss sharing among utilities owning LITIGATION nuclear reactors if a costly accident occurs. SDG&E could The company is involved in various legal matters, including be assessed retrospective premium adjustments of up to those arising out of the ordinary course of business. Manage
$32 million in the event of a nuclear incident involving any ment believes that these matters will not have a material of the licensed, commercial reactors in the United States, if adverse effect on the company's results of operations, the amount of the loss exceeds $200 million. In the event financial condition or liquidity.
the public-liability limit stated above is insufficient, the ELECTRIC DISTRIBUTION SYSTEM CONVERSION Price-Anderson Act provides for Congress to enact further Under a CPUC-mandated program and through franchise revenue-raising measures to pay claims, which could include agreements with various cities, SDG&E is committed, in an additional assessment on all licensed reactor operators.
varying amounts, to converting overhead distribution facilities to underground. As of IDecember 31, 1998, the aggregate unexpended amount of this commitment was approximately
$104 million. Capital expenditures for underground conver sions were $17 million in 1998, $17 million in 1997, and
$15 million in 1996.
CONCENTRATION OF CREDIT RISK all energy producers to participate competitively The PX The company maintains credit policies and systems to obtains its power from qualifying facilities, from nuclear units minimize overall credit risk. These policies include, when and, lastly, from the lowest-bidding suppliers. The California applicable, the use of an evaluation of potential counterpar-investor-owned electric utilities (IOUs) are obligated to ties' financial condition and an assignment of credit limits.
sell their power supply, including owned-generation and These credit limits are established based on risk and return purchased-power contracts, to the PX The IOUs are also considerations under terms customarily available in the obligated to purchase from the PX the power that they dis industry. SDG&E and SoCalGas grant credit to their utility tribute. An Independent System Operator (ISO) schedules customers, substantially all of whom are located in their power transactions and access to the transmission system.
service territories, which together cover most of Southern The local utility continues to provide distribution service California and a portion of central California.
regardless of which source the consumer chooses. An exam SET monitors and controls its credit-risk exposures ple of these changes in the electric-utility environment is the through various systems which evaluate its credit risk, and U.S. Navy, SDG&E's largest customer. The U.S. Navy's through credit approvals and limits. To manage the level of contract to purchase energy from SDG&E was not renewed credit risk, SET deals with a majority of counterparties with when it expired on September 30, 1998. Instead, the U.S.
good credit standing, enters into master netting arrange-Navy elected to obtain energy through direct access and ments whenever possible and, where appropriate, obtains SDG&E continues to provide the distribution service.
collateral. Master netting agreements incorporate rights of Utilities are allowed a reasonable opportunity to recover setoff that provide for the net settlement of subject con-their stranded costs via a competition transition charge tracts with the same counterparty in the event of default.
(CTC) to customers through December 31, 2001. Stranded 64 costs include sunk costs, as well as ongoing costs the CPUC 64 finds reasonable and necessary to maintain generation facili REGULATORY ties through December 31, 2001. These costs also include MATTERS other items SDG&E has recorded under traditional cost-of ELECTRIC-INDUSTRY RESTRUCTURING In September 1996, service regulation. Certain stranded costs, such as those California enacted a law restructuring its electric-utility related to reasonable employee-related costs directly caused industry (AB 1890). The legislation adopts the December by restructuring, and purchased-power contracts (includig 1995 CPUC policy decision restructuring the industry to those with qualifying facilities) may be recovered beyond stimulate competition and reduce rates.
December 31, 2001. To the extent that the opportunity to Beginning on March 31, 1998, customers were given the recover stranded costs is reduced by the costs to accommo opportunity to choose to continue to purchase their electricity date the implementation of direct access and the ISOIPX from the local utility under regulated tariffs, to enter into during the rate freeze, those displaced stranded costs may contracts with other energy service providers (direct access) be recovered after December 31, 2001. Outside of those or to buy their power from the independent Power Exchange exceptions, stranded costs not recovered through 2001 will (PX) that serves as a wholesale power pool allowing not be collected from customers. Such costs, if any, would be written off as a charge against earnings. Nuclear decom missioning costs are noibypassable until fully recovered, but are not included as part of transition costs. Additional information is provided in Note 10.
Through December 31, 1998, SDG&E has recovered During the 1998-2001 period, recovery of transition costs transition costs of $500 million for nuclear generation and is limited by the rate freeze discussed below. Management
$200 million for nonnuclear generation. Excluding the costs believes that rates and the proceeds from the sale of electric of purchased power and other costs whose recovery is not generating assets will be sufficient to recover all of SDG&E's limited to the pre-2002 period, the balance of SDG&E's approved transition costs by December 31, 2001, not including stranded assets at December 31, 1998, is $600 million, con-the post-2001 purchased-power contracts payments that may sisting of $400 million for the power plants and $200 million be recovered after 2001. However, if 1998-2001 generation of related deferred taxes and undercollections.
costs, principally fuel costs, are greater than anticipated, In November 1997, SDG&E announced a plan to auction SDG&E may be unable to recover all of its approved transition its power plants and other electric-generating assets. This costs. This would result in a charge against earnings at the plan includes the divestiture of SDG&E's fossil power plants time it ceases to be probable that SDG&E will be able to and combustion turbines, its 20-percent interest in SONGS recover all of the transition costs.
and its portfolio of long-term purchased-power contracts.
AB 1890 requires a 10-percent reduction of residential The power plants, including the interest in SONGS, have a and small commercial customers' rates, beginning in January net book value as of December 31, 1998, of $400 million 1998, and provides for the issuance of rate-reduction bonds
($100 million for fossil and $300 million for SONGS) and a by an agency of the state of California to enable the IOUs to combined generating capacity of 2,400 megawatts. The pro-achieve this rate reduction. In December 1997, $658 million ceeds from the sales, net of the costs of the sales and certain of rate-reduction bonds were issued on behalf of SDG&E at environmental cleanup costs, will be applied directly to an average interest rate of 6.26 percent. These bonds are SDG&E's transition costs. The fossil-fuel assets' auction is being repaid over 10 years by SDG&E's residential and small being separated from the auction of SONGS and the pur-commercial customers via a nonbypassable charge on their chased-power contracts. In October 1998 the CPUC issued electric bills. In 1997, SDG&E formed a subsidiary, SDG&E an interim decision approving the commencement of the Funding LLC, to facilitate the issuance of the bonds. In fossil fuel assets' auction.
exchange for the bond proceeds, SDG&E sold to SDG&E On December 11, 1998, contracts were executed for the Funding LLC all of its rights to certain revenue streams sale of SDG&E's South Bay Power Plant, Encina Power collected from such customers. Consequently, the transaction Plant and 17 combustion-turbine generators. The South Bay is structured to cause such revenue streams not to be the Power Plant is being sold to the San Diego Unified Port property of SDG&E nor to be available to satisfy any claims District for $110 million. The Encina Power Plant and the of SDG&E's creditors.
combustion-turbine generators are being sold to a special-AB 1890 includes a rate freeze for all electric customers.
purpose entity owned equally by Dynegy Power Corp. and Until the earlier of March 31, 2002, or when transition-cost NRG Energy, Inc. for $356 million. The sales are subject to recovery is complete, SDG&E's system-average rate will be regulatory approval and are expected to close during the first frozen at the June 10, 1996, levels of 9.64 cents per kwh, half of 1999.
except for the impact of fuel-cost changes and the 10-percent rate reduction described above. Beginning in 1998, system average rates were fixed at 9.43 cents per kwh, which includes the maximum permitted increase related to fuel-cost increases and the mandatory rate reduction.
In early 1999, SDG&E filed with the CPUC for an inter-Thus far, electric-industry deregulation has been confitd im mechanism to deal with electric rates after the rate to generation. Transmission and distribution have remained freeze ends, noting the possibility that the SDG&E rate subject to traditional cost-of-service regulation. However, the freeze could end in 1999.
CPUC is exploring the possibility of opening up electric dis As discussed in Note 2, SDG&E has been accounting for tribution to competition. During 1999, the CPUC will be the economic effects of regulation in accordance with SFAS conducting a rulemaking, one objective of which may be to No. 71. The SEC indicated a concern that California's investor-develop a coordinated proposal for the state legislature owned utilities (IOUs) may not meet the criteria of SFAS No.
regarding how various distribution competition issues should 71 with respect to their electric-generation regulatory assets.
be addressed. SDG&E and SoCalGas will actively participate SDG&E has ceased the application of SFAS No. 71 to its in this effort.
generation business, in accordance with the conclusion of the GAS-INDUSTRY RESTRUCTURING Emerging Issues Task Force of the Financial Accounting The natural gas industry experienced an initial phase of Standards Board that the application of SFAS 71 should be restructuring during the 1980s by deregulating gas sales to discontinued when legislation is issued that determines that a noncore customers. On January 21, 1998, the CPUC released portion of an entity's business will no longer be subject to tradi-a staff report initiating a project to assess the current market tional cost-of-service regulation. The discontinuance of SFAS and regulatory framework for California's natural gas-industry.
No. 71 applied to the IOUs' generation business did not result The general goals of the plan are to consider reforms to the in a write-off of their net regulatory assets since the CPUC current regulatory framework emphasizing market-oriented has approved the recovery of these assets by the distribution policies benefiting California natural gas consumers.
portion of their operations, subject to the rate freeze.
On August 25, 1998, California adopted a law prohibiting 66 In October 1997, the FERC approved key elements of the CPIC from enacting any natural gas-industry restructur the California IOUs' restructuring proposal. This included ing decision for customers prior to January 1, 2000. During the the transfer by the IOUs of the operational control of their implementation moratorium, the CPUC will hold hearings transmission facilities to the ISO, which is under FERC juris-throughout the state and intends to give the California diction. The FERC also approved the establishment of the Legislature a report for its review detailing specific recommen California PX to operate as an independent wholesale power dations for changing the natural gas market within California.
pool. The IOUs pay to the PX an upfront restructuring SDG&E and SoCalGas will actively participate in this effort.
charge (in four annual installments) and an administrative-PERFORMANCE-BASED REGULATION (PBRI usage charge for each megawatt hour of volume transacted.
To promote efficient operations and improved productivity SDG&E's share of the restructuring charge is approximately and to move away from reasonableness reviews and disal
$10 million, which is being recovered as a transition cost.
lowances, the CPUC has been directing utilities to use PBR.
The IOUs have guaranteed $300 million of commercial loans PBR has replaced the general rate case and certain other to the ISO and PX for their development and initial start-up.
regulatory proceedings for both SoCalGas and SLX&E. Under SDG&E's share of the guarantee is $30 million.
PBR, regulators require future income potential to be tied to achieving or exceeding specific performance and productivity measures, as well as cost reductions, rather than relying solely on expanding utility rate base in a market where a utilisy already has a highly developed infrastructure.
'SoCalGas' PBR is in effect through December 31, 2002; Under SoCalGas' PBR, annual cost of capital proceed however, the CPUC decision allows for the possibility that ings are replaced by an automatic adjustment mechanism if changes to the PBR mechanism could be adopted in a decision changes in certain indices exceed established tolerances.
to be issued in SoCalGas' 1999 Biennial Cost Allocation The mechanism is triggered if the 12-month trailing average Proceeding, which is anticipated to become effective before of actual market interest rates increases or decreases by year-end 1999. Key elements of the SoCalGas PBR include an more than 150 basis points and is forecasted to continue to initial reduction in base rates, an indexing mechanism that lim-vary by at least 150 basis points for the next year. If this its future rate increases to the inflation rate less a productivity occurs, there would be an automatic adjustment of rates for factor, a sharing mechanism with customers if earnings exceed the change in the cost of capital according to a preestab the authorized rate of return on rate base, and rate refunds to lished formula which applies a percentage of the change to customers if service quality deteriorates. Specifically, the key various capital components.
elements of SoCalGas' PBR include the following:
SDG&E continues to participate in a PBR process for base
- Earnings up to 25 basis points in excess of the authorized rates for its electric and natural gas-distribution business. In rate of return on rate base are retained 100 percent by share-conjunction therevith, in Decembcr 1998, a Cost of Service holders. Earnings that exceed the authorized rate of return settlement agreement among SLX&E, the CPUCs Office of on rate base by greater than 25 basis points are shared Ratepayers' Advocates (ORA) and the Utility Consumers between customers and shareholders on a sliding scale that Action Network (UCAN) was approved by the CPUC, result begins with 75 percent of the additional earnings being ing in an authorized revenue increase of $12 million (an given back to customers and declining to 0 percent as electric-distribution increase of $18 million and a natural gas earned returns approach 300 basis points above authorized decrease of $6 million). The electric-distribution increase does amounts. There is no sharing if actual earnings fall below the not affect rates during the rate freeze and, therefore, reduces authorized rate of return. In 1999, SoCalGas is authorized to the amount available for transition cost recovery. Revised rates earn a 9.49 percent return on rate base, the same as in 1998.
were effective January 1, 1999.
- Revenue or base margin per customer is indexed based on In January 1999, an administrative law judge's proposed inflation less an estimated productivity factor of 2.1 percent decision was issued on SDG&E's distribution PBR application.
in the first year (1998), increasing 0.1 percent per year up to The proposed decision recommends a revenue-per-customer 2.5*percent in the fifth year (2002). This factor includes indexing mechanism (similar to the indexing mechanism in 1 percent to approximate the projected impact of a declin-SoCalGas' PBR) rather than the rate-indexing mechanism ing rate base.
proposed by SDG&E. In addition, the proposed decision rec
- The CPUC decision allows for pricing flexibility for residen-ommends much tighter earnings sharing bands (similar to tial and small commercial customers, with any shortfalls in SoCalGas'). The performance indicators are as adopted in the revenue being borne by shareholders and with any increase settlement agreement, including employee safety, electric in revenue shared between shareholders and customers.
reliability, customer satisfaction, call-center responsiveness and electric-system maintenance. SDG&E would be authorized to earn or be penalized up to a maximum of $14.5 million annual ly as a result of its performance in those areas.
COMPREHENSIVE SETTLEMENT OF NATURAL GAS REGULATORY ISSUES GAS COST INCENTIVE MECHANISM (GCIM). On April 1, 1994, In July 1994, the CPUC approved a comprehensive settlement SoCalGas implemented a new process for evaluating its natur for SoCalGas (Comprehensive Settlement) of a number of reg-al gas purchases, substantially replacing the previous process ulatory issues, including rate recovery of a significant portion of reasonableness reviews. Initially a three-year pilot program, of the restructuring costs associated with certain long-term in December 1998 the CPUC extended the (CIM program contracts with suppliers of California-offshore and Canadian indefinitely. Automatic annual extensions to the program will natural gas. In the past, the cost of these supplies had been continue unless the CPUC issues an order stating otherwise.
substantially in excess of SoCalGas' average delivered cost for GCIM compares SoCalGas'cost of natural gas with a all natural gas supplies. The restructured contracts substantial-benchmark level, which is the average price of 30-day firm ly reduced the ongoing delivered costs of these supplies. The spot supplies in the basins in which SoCalGas purchases the Comprehensive Settlement permits SoCalGas to recover in natural gas. The mechanism permits full recovery of all costs utility rates approximately 80 percent of the contract-restruc-within a "tolerance band" above the benchmark price and turing costs of $391 million and accelerated amortization of refunds all savings within a "tolerance band" below the bench related pipeline assets of approximately $140 million, together mark price. The costs or savings outside the "tolerance band" with interest, incurred prior to January 1, 1999. In addition to are shared equally between customers and shareholders.
the supply issues, the Comprehensive Settlement addressed The CPUC approved the use of natural gas futures for the following other regulatory issues:
managing risk associated with the GCIM. SoCalGas enters
- NONCORE CUSTOMER RATES. The Comprehensive Settlement into natural gas futures contracts in the open market on a lim changed the procedures for determining noncore rates to be ited basis to mitigate risk and better manage natural gas costs.
charged by SoCalGas for the five-year period commencing In June 1997, SoCalGas requested a shareholder award August 1, 1994. These rates are based upon SoCalGas' of $11 million, which was approved by the CPUC in June recorded throughput to these customers for 1991. SoCalGas 1998 and is included in pretax income in 1998. In June will bear the full risk of any declines in noncore deliveries 1998, SoCalGas filed its annual GCIM application with the from 1991 levels. Any revenue enhancement from deliveries CPUC requesting an award of $2 million for the annual in excess of 1991 levels will be limited by a crediting account period ended March 31, 1998. This request was approvedby mechanism that will require a credit to customers of the CPUC in December 1998 and is included in pretax 87.5 percent of revenues in excess of certain limits. These income in 1998.
annual limits above which the credit is applicable increase
- ATTRITION ALLOWANCES. The Comprehensive Settlement from $11 million to $19 million over the five-year period from authorized SoCalGas an annual allowance for increases in August 1, 1994, through July 31, 1999. SoCalGas' ability to operating and maintenance expenses. However, no attrition report as earnings the results from revenues in excess of allowance was authorized for 1997 and beyond, based on an SoCalGas' authorized return from noncore customers due to agreement reached as part of the PBR application.
volume increases has been limited for the five years begin-PE and SoCalGas recorded the impact of the Compre ning August 1, 1994, as a result of the Comprehensive hensive Settlement in 1993. Upon giving effect to liabilities Settlement. The 1999 Biennial Cost Allocation Proceeding previously recognized by the companies, the costs of the is intended to adopt measures to replace this aspect of the Comprehensive Settlement, including the restructuring of Comprehensive Settlement when it expires during 1999.
natural gas supply contracts, did not result in any future charge to PE's earnings.
BIENNIAL COST ALLOCATION PROCEEDING IBCAP)
In the second quarter of 1997, the CPUC issued a decision on SoCaoGas' 1996 BCAP filing.
In this decision, the CPUC considered SoCalGas' ROR of 8.01 percent. A CPUC decision is expected during relinquishments of interstate pipeline capacity on both the the second quarter of 1999. In 1998, SDG&E's electric and El Paso and Transwestern pipelines. This resulted in a reduc-natural gas-distribution operations were authorized to earn an tion in the pipeline demand charges allocated to SoCalGas' ROE of 11.6 percent and an ROR of 9.35 percent, unchanged customers and surcharges allocated to firm capacity holders from 1997. In addition, the authorized rates of return on through pipeline rate-case settlements adopted at the nuclear and nonnuclear generating assets are 7.14 percent FERC. However, the CPUC and FERC are reviewing and 6.75 percent, respectively.
the decision.
TRANSACTIONS BETWEEN UTILITIES AND AFFILIATED COMPANIES In October 1998, SoCalGas and SDG&E filed 1999 BCAP On December 16,1997, the CPUC adopted rules, effective applications requesting that new rates become effective January 1, 1998, establishing uniform standards of conduct gov August 1, 1999, and remain in effect through December 31, erning the manner in which IOUs conduct business with their 2002. The proposed beginning date follows the conclusion of energy-related affiliates. The objective of the affiliate-transac the Comprehensive Settlement (discussed above), and the tion rules is to ensure that these affiliates do not gain an unfair proposed end date aligns with the expiration of SoCalGas' and advantage over other competitors in the marketplace and that SDG&E's PBRs. The applications seek overall decreases in utility customers do not subsidize affiliate activities. The rules natural gas revenues of $204 million for SoCalGas and establish standards relating to nondiscrimination, disclosure
$9 million for SDG&E.
and information exchange, and separation of activities.
COST OF CAPITAL The CPUC excluded utility-to-utility transactions Under PBR, annual Cost of Capital proceedings were replaced between SDG&E and SoCalGas from the affiliate-transaction by an automatic adjustment mechanism if changes in certain rules in its March 1998 decision approving the business cor indices exceed established tolerances. For 1999, SoCalGas is bination of Enova and PE (see Note 1).
69 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 1998, unless interest-rate changes are large SEGMENT enough to trigger an automatic adjustment as discussed above INFORMATION under "Performance-Based Regulation." For SDG&E, electric-The company, primarily an energy services company, has industry restructuring is changing the method of calculating three separately managed reportable segments comprised the utility's annual cost of capital. In May 1998, SDG&E filed of SoCalGas, SDG&E and Sempra Energy Trading (SET).
with the CPUC its unbundled Cost of Capital application for The two utilities operate in essentially separate service 1999 rates. The application seeks approval to establish new, territories under separate regulatory frameworks and rate separate rates of return for SDG&E's electric-distribution and structures set by the CPUC. As described in Note 1, SDG&E natural gas businesses. The application proposes a 12.00 per-provides electric and natural gas service to San Diego and cent ROE, which would produce an overall ROR of 9.33 southern Orange counties. SoCalGas is a natural gas distribu percent. The ORA, UCAN and other intervenors have filed tion utility, serving customers throughout most of Southern testimony recommending significantly lower RORs. The ORA California and part of central California. SET is based in is recommending an electric ROR of 7.68 percent and a gas Stamford, Connecticut, and is engaged in the nationwide wholesale trading and marketing of natural gas, power and petroleum. The accounting policies of the segments are the same as those described in Note 2, and segment performance is evaluated by management based on reported net income.
Intersegment transactions generally are recorded the same as sales or transactions with third parties. Utility transactions are primarily based on rates set by the CPUC and FERC.
For the year ended At December 31, or fort December 31 the year then ended (Dollars in millions) 1998 1997 1996 (Dollars in millions) 1998 1997 1996 OPERATING REVENUES:
ASSETS:
Southern California Gas
$2,427
$2,641
$2,422 Southern California Gas
$ 3,834
$ 4,205
$4,354 San Diego Gas & Electric 2,749 2,167 1,939 San Diego Gas & Electric 4,257 4,654 4,161 Sempra Energy Trading 110 Sempra Energy Trading 1,225 846 Intersegment revenues (59)
(55)
(60)
All other 1,253 1,181 1,257 All other 254 316 195 Eliminations (113)
(130)
(10)
Total
$5,481
$5,069
$4,496 Total
$10,456
$10,756
$9,762 INTEREST REVENUE:
CAPITAL EXPENDITURES:
Southern California Gas i
4 16 5
Southern California Gas S
128 S
159
$ 197 San Diego Gas & Electric 40 9
7 San Diego Gas & Electric 227 197 209 Sempra Energy Trading 3
Sempra Energy Trading All other interest 3
21 23 Allother 83 41 7
Total interest 50 46 35 Total S
438 S
397 S 413 Sundry income (loss)
(6) 12 (7)
GEOGRAPHIC INFORMATION:
Total other income S
44 58 28 Long-lived assets:
DEPRECIATION AND AMORTIZATION:
United States S 5,849
$ 5,904
$6,647 Southern California Gas
$ 254
$ 251
$ 248 Latin America 140 67 50 San Diego Gas & Electric Total
$ 5,989
$ 5,971
$6,697 (See Note 14) 603 324 314 Operating Revenues:
Sempra Energy Trading 13 United States
$ 5,474
$ 5,058
$4,488 All other 59 29 25 Latin America 7
11 8
Total S 929
$ 604
$ 587 Total
$ 5,481
$ 5,069
$4,496 INTEREST EXPENSE:
Southern California Gas 80 87 86 San Diego Gas & Electric 116 86 91 Sempra Energy Trading 5
SUBSEQUENT All other 6
33 23 EVENT Total
$ 207
$ 206
$ 200 On February 22, 1999, the company and KN Energy, Inc. (KN INCOME TAX EXPENSE (BENEFIT):
Energy) announced that their respective boards of directors Southern California Gas
$ 128
$ 178
$ 148 approved the company's acquisition of KN Energy, subject to San Diego Gas & Electric 142 219 198 approval by the shareholders of both companies and by vari Sempra Energy Trading
()
(9) ous federal and state regulatory agencies. If the transaction is All other (123)
(96)
(46)
Total S 138
$ 301
$ 300 approved, holders of KN Energy common stock will receive NET INCOME:
1.115 shares of company common stock or $25 in cash, Southern California Gas
$ 158
$ 231
$ 193 or some combination thereof, for each share of KN Energy San Diego Gas & Electric 185 232 216 common stock. In the aggregate, the cash portion of the Sempra Energy Trading (13) transaction will constitute not more than 30 percent of the All other (36)
(31) 18 total consideration of $1.7 billion. The companies anticipate Total S 294
$ 432
$ 427 that the closing will occur in six to eight months. The transac tion will be treated as a purchase for accounting purposes.
itraiterly Financial Data (unaudited)
Quarter ended (Dollars in millions except per share amounts)
March 31 June 30 September 30 December 31 1998 Revenues and other income
$1,350
$1,335
$1,398
$1,442 Operating expenses 1,164 1,249 1,192 1,281 Operating income
$ 186 S 86
$ 206
$ 161 Net income 87 31 91 85 Average common shares outstanding (diluted) 236.4 236.9 237.4 237.6 Net income per common share (diluted)
$ 0.37
$ 0.13
$ 0.38
$ 0.36 1997 Rev enues and other income 51.301 S1,130
$1,251
$1,445 Operating expenses 1,093 878 1.018 1,199 Operating income S 208 S 252 5 233
$ 246 Net income S
98
$ 112 S 102
$ 120 Average common shares outstanding (diluted) 239.2 236.3 236.2 236.6 Net income per common share (diluted)
$ 0.41
$ 0.47 S 0.43
$ 0.51 Quarterly Common Stock Data (unaudited) 71 1998 1997 First Second Third Fourth First Second T hird Fourth Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Market price High 28 29'!
,Low 233/4 24'!
Dividends declared "
$0.32
$0.46
$0.39
$0.39
$0.31
$0.45
$0.19
$0.32
- Not presented as the formation of Sempra Energy was not completed until June 26, 1998.
(1) Prior to the formation of Sempra Energy on June 26, 1998, dividends declared represents the sum of dividends declared by Pacific Enterprises and Enova Corporation, divided by the sum of the combining companies' shares after the conversion of PE's shares into Sempra Energy shares as described in Note 1 to the notes to Consolidated Financial Statements.
Board of Directors Stephen L. Baum Daniel W Derbes William G. Ouchi, Ph.D.
Vice Chairman of the Board, President Vice Dean & Faculty Director of Executive President & Chief Operating Officer Signal Ventures Education Programs, Sempra Energy Solana Beach, California Sanford and Betty Sigoloft Ha H. Bertea Richard D. Farmanof Management HylaH. BrteaRicard
. FamanAnderson Graduate School of Management Community Leader Chairman of the Board &
University of California, Los Angeles Corona del Mar, California Chief Executive Officer Los Angeles, California Sempra Energy Ann L. Burr Richard J. Stegemcier Executive Vice President Wilford D. Godbold, Jr.
Chairman Emeritus Residential Telephony Former President &
Unocal Corporation Time Warner Cable Chief Executive Officer Brea, California Stamford, Connecticut ZERO Corporation Los Angeles, California Thomas C. Stickel Herbert L. Carter, Ph.D.
- Chairman, President Robert H. Goldsmith Chief Executive Officer& Founder California State University, Management Consultant University Ventures Network Dominguez Hills San Diego, California San Diego, California Executive Vice Chancellor Emeritus & Trustee William D. Jones Diana L. Walker Professor of Public Administration President, Partner California State University System Chief Executive Officer & Director O'Melveny & Myers 72 Long Beach, California CityLink Investment Corporation Los Angeles, California San Diego, California Richard A. Collato President & Chief Executive Officer Ignacio E. Lozano, Jr.
YMCA of San Diego County Chairman of the Board San Diego, California La Opini6n Los Angeles, California Ralph R. Ocampo, M.D.
Physician & Surgeon San Diego, California From left, front center: S. L Baum, R.D. Farman Second row: H. H. Bertea, R. R. Ocampo, M.D.,
WG. Ouchi, Ph.D., D.L Walker Third row: RH. Goldsmith, W. Jones, A.L Burr, R.A. Collato, fL. Carter, Ph.D., IE. Lozano, Jr.
Top row: D. W Derbes, WD. Godbold, Jr.,
TC. Stickel, R.J. Stegemeier
IEN&0
4N
Aapagement Team SEMPRA ENERGY FrankH.Ault SEMPRA ENERGY Richard D. Farman Vice President, INTERNATIONAL Chairman of the Board &
Controller Stephen L. Baum Chief Executive Officer Jerry W Deems Chairman & President (Acting)
Stephen L. Baum Vice President, DennIs V Arriola Vice Chairman, President &
Chief Information Technology Officer Executive Vice President Chief Operating Officer Charles A. McMonagle Stephen H. Del Regno Donald E. Felsinger Vice President, Senior Vice President - Development, Group President, Treasurer Asia Pacific Unregulated Affiliates Mark [. Randle George S. Liparidis Warren I. Mitchell Vice President, Senior Vice President Group President, Energy Risk Management Regulated Business Units William L. Reed SEMPRA ENERGY RESOURCES John R. Light Vice President, Executive Vice President - Legal, Chief Regulatory Officer DavidR ua General Counsel Thomas C. Sanger Neal E. Schmale Corporate Secretary SEMPRA ENERGY SOLUTIONS Executive Vice President - Finance, Thomas S. Savles Chief Financial Officer Vice President, Cham
& Pesiden Jerry D. Florence Governmental & Community Affairs 75 Senior Vice President, Dale Kelly-Cochrane Corporate Communications SAN DIEGO GAS & ELECTRIC President, Sempra Energy Information Solutions Frederick E. John Warren 1. Mitchell SenorVie PesdetChairman B. N. Tripathi Senior Vice President,President, External Affairs Edwin A. Guiles CES/Way International Margot A. Kyd President Senior Vice President,President Chief Administrative&
SOUTHERN CALIFORNIA GAS Environmental Officer C0MPANY SEMPRA ENERGY TRADING G. Joyce Rowland Warren 1. Mitchell Senior Vice President, Chairman & President Human Resources Chairman &
D)ebra L. Reed Chief Executive Officer Michael W Allman President, Vice President, Energy Distribution Services Corporate Planning & Development President Lee M. Stewart President, SEMPRA ENERGY UTILITY From left, front row: J.R. Light, D.E. Felsinger, VENTURES WI. Mitchell, N.E. Schmale Second row: S.J. Prince, L.M. Stewart, Sri elo G.J Rowland, J.D. Florence Nancy N. Ross Third row: E.A. Guiles, WG. Homan, M.A. Kyd, Vice President, D.L. Reed, FE. John, D.R. Kuzma Investments Top row: G.S. Liparidis, D. Kelly-Cochrane, E.B. Nelson
Corporate Information TRANSFER AGENT:
DIRECT COMMON STOCK INVESTMENT PLAN:
First Chicago Trust Company of New York, The company offers a Direct Common Stock Investment Plan a division of EquiServe as a simple, convenient and affordable way to invest in Sempra P.O. Box 2500 Energy. Cash dividends from a participant's account can be Jersey City, NJ 07303-2500 automatically reinvested in full or in part to purchase additional Telephone: 877-773-6772 shares, or participants may choose to receive all or a portion of Hearing Impaired (TDD): 201-222-4955 their cash dividends electronically or by check. Participation in Fax: 201-222-4861 the Plan requires an initial investment of as little as $500. The E-mail: fctc@em.fcnbd.com Plan allows optional cash investments of as little as 25 up to a Internet: http://www.equiserve.com maximum of $150,000 per calendar year. Nonshareholders pay a SHAREHOLDER SERVICES:
$15 fee for the initial cash investment in Sempra Energy.
Investors with general questions regarding Sempra Energy Brokerage commissions incurred in the purchase of shares will San Diego Gas & Electric, Southern California Gas Co. or be paid by Sempra Energy Pacific Enterprises stock should contact the company at:
The Plan is offered only by the means of a prospectus, Sempra Energy which can be obtained by calling the Plan Administrator, First Shareholder Services Chicago Trust Company of New York, at 877-773-6772, or 101 Ash Street through the Internet at http://wv.netstockdirect.com.
San Diego, CA 92101 CREDIT RATINGS:
Telephone: 877-736-7727 Teepoe:87-36777(As of March 1, 1999)
S&P Moody's Duff & Phelps Fax: 619-233-6875 76SEPAEEG 76 e-mail: investor@sempra.com Internet: http://www.sempra.com NEWS AND INFORMATION: To hear corporate news reports, SOCALGAS stock update or request materials, call 877-773-6397.
Secured Debt AA-Al AA Sempra Energy's annual report to the Securities and Exchange Unsecured Debt Commission (Form 10-K) is available to shareholders at no charge by writing to Shareholder Services.
INVESTOR RELATIONS: Security analysts, portfolio managers and PACIFIC ENTERPRISES other members of the financial community should contact:
PreferredStockA+_
A+
Clem Teng SDG&E Director of Investor Relations Secured Debt IA-Al AA Telephone: 619-696-2901 Unsecured Debt A+
A2 A+
Fax: 619-696-2374 Preferred Stock A+
a2 A
STOCK EXCHANGE LISTING:
Commercial Paper A-1+
P1 11+
Sempra Energy Common Stock:
Ticker Symbol: SRE New York Stock Exchange Pacific Stock Exchange Pacific Enterprises Preferred Stock:
American Stock Exchange Pacific Stock Exchange Southern California Gas Preferred Stock:
Pacific Stock Exchange San Diego Gas & Electric Preferred Stock:
American Stock Exchange