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sempra energy 2003 Annual Report

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The 2003 annual report summarizes Sempra Energy's performance for the year. [1] Sempra Energy is a Fortune 500 energy services company based in San Diego, California with $7.9 billion in revenues and nearly 13,000 employees worldwide. [2] In 2003, Sempra Energy reported net income of $649 million, up 9.8% from 2002, and earnings per share of $3.03, up 5.6% from the previous year. [3] The report discusses progress made in resolving issues facing the company and outlines continued growth opportunities through projects such as new liquefied natural gas import terminals.

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2003 Annual Report Focus Strategy Results ▼ ▼
Based in San Diego, Sempra Energy is a Fortune 500 energy services company with 2003 revenues of $7.9 billion. Sempra Energy serves the largest customer base of any energy utility in the United States. With nearly 13,000 employees worldwide, the Sempra Energy companies develop energy infrastructure, operate utilities and provide related products and services to more than 10 million customers in the United States, Europe, Canada, Mexico, South America and Asia. Sempra Energy common shares trade on the New York Stock Exchange (NYSE) under the symbol “SRE.” Additional information is available on the Web at www.sempra.com. page At a Glance 2 Financial Highlights 4 Letter to Shareholders 5 Financial Strength 10 Sempra Energy Utilities 12 Sempra Energy Global Enterprises 16 Corporate Information 25
R E C O G N I Z I N G O P P O R T U N I T Y. A F O C U S E D S T R A T E G Y. C O N S I S T E N T R E S U LT S . T H I S I S S E M P R A E N E R G Y. focus ▼ Sempra Energy was founded in 1998 to capitalize on new opportunities in competitive energy markets. The company’s ongoing focus is to enhance shareholder value and meet customer needs by sustaining the financial strength, operational flexibility and skilled workforce needed to succeed in rapidly changing market conditions.
T O TA L A S S E T S $22 billion O P E R AT I N G R E V E N U E S $7.9 billion NET INCOME $649 million SEMPRA ENERGY AT A G L A N C E S E M P R A E N E R GY U T I L I T I E S Sempra Energy utilities—San Diego Gas & Electric and Southern California Gas Company—serve California customers from the state’s Central Valley to the Mexican border. More than a century of service in providing safe and reliable natural gas and electricity gives Sempra Energy’s California utilities their unique ability to meet the region’s energy needs. C R E D I T R AT I N G S San Diego Gas & Electric As of March 15, 2004 S&P Fitch Moody’s SDG&E serves 3.2 million consumers through 1.3 million electric meters and more than Sempra Energy 800,000 natural gas meters. The utility’s Unsecured Debt BBB+ A Baa1 Commercial Paper A-2 F1 P-2 service area spans 4,100 square miles. Trust Preferred Securities BBB- A- Baa2 Southern California Gas Company The nation’s largest natural gas distribution SDG&E utility, SoCalGas serves a population of Secured Debt A+ AA A1 19.2 million through 5.4 million meters. The Unsecured Debt A- AA- A2 Preferred Stock BBB+ A+ Baa1 company’s service territory encompasses Commercial Paper A-1 F1+ P-1 23,000 square miles. SoCalGas Secured Debt A+ AA A1 Unsecured Debt A- AA- A2 Preferred Stock BBB+ A+ Baa1 Commercial Paper A-1 F1+ P-1 page 2
SEMPRA ENERGY TOTAL RETURN 1999 – 2003 EARNINGS PER SHARE (in dollars) $1.66 $2.06 $2.52 $2.87 $3.03 52% 25% -3% -12% Sempra Dow S&P S&P Energy Jones 500 Utilities Industrial Index Index Average 1999 2000 2001 2002 2003 S E M P R A E N E R GY G L O B A L E N T E R P R I S E S The Sempra Energy Global Enterprises group acquires, develops and operates infrastructure assets related to the production and distribution of energy, including power plants, natural gas pipelines and liquefied natural gas (LNG) receipt facilities. The group also provides risk-management products and services that help customers manage their energy costs under changing market conditions. ENERGY-INFRASTRUCTURE BUSINESSES RISK-MANAGEMENT SERVICES AND FINANCIAL INVESTMENTS Sempra Energy Resources Sempra Energy Resources acquires, builds Sempra Energy Trading and operates power plants for the competitive Sempra Energy Trading provides worldwide market. marketing and risk-management services to wholesale customers for natural gas, power, Sempra Energy International petroleum products and base metals. Sempra Energy International develops, owns and manages utilities and natural gas pipelines, Sempra Energy Solutions principally in Mexico and South America, Sempra Energy Solutions offers energy- providing natural gas and electricity service management and consulting services to to more than 2.7 million customers. commercial and industrial businesses. Sempra Energy LNG Sempra Energy Financial Sempra Energy LNG plans, constructs and Sempra Energy Financial focuses on operates LNG infrastructure, including tax-advantaged investments in affordable terminals for the receipt and conversion housing and energy-related projects. of LNG back into natural gas. Sempra Fiber Links Sempra Fiber Links builds fiber-optic networks for telecommunications companies, utilizing the distribution infrastructure of natural gas utilities. page 3
FINANCIAL HIGHLIGHTS OPERATING REVENUES NET INCOME (dollars in millions) (dollars in millions) $5,360 $6,760 $7,730 $6,048 $7,887 $394 $429 $518 $591 $649 1999 2000 2001 2002 2003 1999 2000 2001 2002 2003 At December 31 or for the years then ended Percent (Dollars in millions, except per-share amounts) 2003 2002 change C O N S O L I D AT E D F I N A N C I A L D ATA Operating Revenues $ 7,887 $ 6,048 30.4% Net Income $ 649 $ 591 9.8 Net Income Per Share of Common Stock: Basic $ 3.07 $ 2.88 6.6 Diluted $ 3.03 $ 2.87 5.6 Weighted Average Number of Common Shares Outstanding (diluted, in millions) 214.5 206.1 4.1 Total Assets $ 22,009 $ 20,242 8.7 Common Dividends Declared Per Share $ 1.00 $ 1.00 — Debt to Total Capitalization 57% 60% Book Value Per Share $ 17.17 $ 13.79 24.5 Capital Expenditures & Investments $ 1,251 $ 1,643 -23.9 S TAT I S T I C S Natural Gas Throughput (a) (billions of cubic feet) 934 982 –4.9% Electric Energy On-System Sales (a) (billions of kilowatt hours) 18.4 17.7 4.0 Number of Customers (a) (millions of meters served) Natural Gas 6.2 6.1 1.6 Electricity 1.3 1.3 — Return on Common Equity Sempra Energy 19.3% 21.4% SoCalGas 15.6% 16.2% SDG&E 27.7% 18.2% Number of Employees (b) 12,807 12,197 5.0 (a) California utilities. (b) Excludes contract and part-time employees. page 4
FELLOW SHAREHOLDERS The past year marked the fifth anniversary of the merger that created Sempra Energy. I’m pleased that, for the fifth consecutive year, we produced outstanding results. Sempra Energy’s earnings per share have grown, on average, by nearly 20 percent annually since 1998. In 2003, we posted earnings of $649 million, up from $591 million in 2002. Earnings per diluted share were $3.03, a 6-percent increase over 2002. Sempra Energy’s outstanding financial performance derives from our ability to capitalize on new opportunities, our focused strategy and our consistent execution. I am particularly proud of Sempra Energy’s performance compared to many other energy companies in recent years. Our growth strategy is focused and methodical. We develop a deep understand- ing of markets and customer needs, apply a rigorous risk-management analysis of potential investments and nurture positive relationships with our key constituents, including the communities in which we operate. A clearer path ahead. In 2003, we saw significant progress toward resolving many of the major issues facing our company. Sempra Energy Resources’ long-term energy-supply contract with the California Department of Water Resources was upheld by both the Federal Energy Regulatory Commission (FERC) and a Superior Court of California. While these rulings are being appealed by the state, we expect the contract to continue to be upheld in all venues. Sempra Energy Trading also has entered into a settlement agreement related to the FERC’s investigation of marketers’ activities in Western U.S. energy markets from 2000 to 2001. page 5
“Sempra Energy’s outstanding financial performance derives from our ability to capitalize on new opportunities, our focused strategy and our consistent execution.” In 2003, we received key permits to proceed with the development of two lique- fied natural gas (LNG) receipt terminals—Energía Costa Azul in Baja California, Mexico, and Cameron LNG near Lake Charles, Louisiana. These are scheduled to be the first new LNG receipt facilities built in North America in the past two decades. We also entered into a preliminary agreement to bring a daily supply of 500 million cubic feet of natural gas to Energía Costa Azul from Indonesia. Additionally, Sempra Energy LNG announced its intention to form a 50/50 joint venture with Shell International Gas Limited to develop the Energía Costa Azul facility. In our home state of California, the California Public Utilities Commission (CPUC) has shown a willingness to put energy policy back on solid footing by acknowledging a more realistic balance between the interests of consumers and the financial health of the state’s utilities. Our solid foundation: Sempra Energy utilities. Sempra Energy utilities—San Diego Gas & Electric and Southern California Gas Company—provide a solid foundation for Sempra Energy through consistently strong earnings and cash flow. Both utilities again performed well in 2003, exceeding their authorized return on equity and earning operational incentives. SoCalGas reached an all-party settlement, and SDG&E, a multiparty settlement, in their respective Cost-of-Service rate cases pending before the CPUC. Approval of these settlements by the CPUC will allow the utilities to make the investments necessary to continue their long tradition of delivering safe and reliable energy, exceptional customer service and consistently strong earnings. It also will enable the utilities to expand their rate bases over time and ensure a reasonable return for our investors. page 6
Left: In 2003, the Sempra Energy utilities, SDG&E and SoCalGas, invested more than $760 million to expand their systems and maintain exceptional customer service. Right: When completed in 2007, the Cameron LNG receipt facility in Louisiana will process 1.5 billion cubic feet (bcf) per day of natural gas for markets in the United States. None of the utilities’ accomplishments would be possible without the determined efforts of thousands of dedicated employees. This was most evident during last fall’s devastating wildfires in California. I am proud of our employees, many of whom worked around the clock in difficult conditions to restore gas and electric service to more than 100,000 customers. New opportunities for growth. In 2003, Sempra Energy Global Enterprises continued to grow a well-balanced and profitable mix of businesses that develop energy infrastructure and offer risk-management services. Sempra Energy Resources, our wholesale power-generation unit, enjoyed a landmark year for both profitability and operational achievement. The company brought four new power plants online in the Pacific Southwest totaling 2,125 megawatts. The projects, which include Elk Hills, Termoeléctrica de Mexicali and Mesquite’s two generating units, were completed on time and under budget, with more than 80 percent of all capacity contracted forward through the year 2010. Sempra Energy International operates energy utilities and develops gas pipelines principally in Latin America. In Mexico, the company obtained 20-year contract commitments for nearly 100 percent of its Gasoducto Bajanorte natural gas pipeline capacity from major industrial users and power plants in the northern border region. Sempra Energy International’s expert market knowledge and project management experience in Mexico have helped shape the success of other Sempra Energy projects in the region, including the Termoeléctrica de Mexicali power plant in Mexicali and the Energía Costa Azul LNG receipt facility north of Ensenada. page 7
R E S P O N D I N G H E R O I C A L LY T O T H E CA L I FO R N I A W I L D F I R ES In October 2003, the worst fires in California history killed 20 people, burned 700,000 acres and destroyed nearly 3,600 homes — affecting 20 percent of SDG&E’s service territory and portions of SoCalGas’ territory. Employees of both utilities responded immediately and heroically, working around the clock to restore gas and electricity to more than 100,000 homes in record time. SDG&E replaced 3,500 transmission and distribution poles and more than 400 miles of electric wire The California Public Utilities Commission (CPUC) honored SDG&E damaged during the fires. Additionally, SDG&E rebuilt 14 substa- and SoCalGas, stating that their efforts “should remind us all that tions and 17 major transmission lines while SoCalGas conducted the public-service ethic associated with being a public-utility more than 400 service-restoration calls in the fire-affected areas. employee is real, and not just a marketing tagline.” In 2003, we formally established a new business unit, Sempra Energy LNG, to oversee our LNG operations. Plans for the Energía Costa Azul LNG terminal and for the Cameron LNG facility in Louisiana result from our recognition three years ago of the growing imbalance between natural gas supply and demand in North America. We determined that LNG would be critical in addressing this imbalance and launched efforts to develop an LNG regasification business. The company expects to break ground on both LNG receipt terminals in mid-2004 and begin operations in 2007. Working with our communities. In our LNG initiatives—as in other endeavors—we have worked closely with local communities and key constituents to identify and resolve potentially difficult issues. These community efforts are part of every major project we undertake. They help to build trust and establish long-term relationships. Working closely with local communities also helps to ensure that we can address concerns before they become problems. A good example was the decision to build the Mexicali power plant, Termoeléctrica de Mexicali, to meet strict California environmental standards, even though Mexico did not require us to do so. In 2003, Fortune magazine recognized Sempra Energy as one of America’s top five companies for minorities—one of only two companies consistently to achieve this distinction since the rankings were introduced in 1998. Also in 2003, Sempra Energy and its employees contributed more than $9 million and 40,000 hours of volunteer time to charitable causes. The character of our employees drives Sempra Energy’s success and enriches the communities we serve. page 8
“Our LNG business will shift into full gear this year, with construction on our two receipt terminals expected to be under way by mid-2004.” Looking forward. As the economy has rebounded, so too has the demand for energy. With our utilities’ expanding customer base, we plan new investments in electric generation, and gas and electric-transmission and distribution infra- structure. We expect these new investments to bring solid earnings from our utilities in the years ahead. Similarly, with long-term contracts in place, Sempra Energy Resources has a more predictable and stable business, contributing steady earnings to Sempra Energy. Our LNG business will shift into full gear this year, with construction on our two receipt terminals expected to be under way by mid-2004. On the following pages is an overview of the strategies we’re executing to capture the opportunities ahead of us, including the perspectives of some of the key members of our leadership team. On behalf of the nearly 13,000 employees of Sempra Energy, I thank you for your continued support. Sincerely, STEPHEN L. BAUM CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER page 9
S E M P R A E N E R GY PUTTING FINANCIAL STRENGTH TO WORK Sempra Energy’s commitment to building a highly profitable energy services company requires an uncommon atten- tion to financial stewardship. A financially strong company that invests wisely and manages its costs and risks prudently is able to capitalize on opportunities when they arise. CAPITAL EXPENDITURES & INVESTMENTS TOTAL ASSETS Sound investments and cost control. by major business units (dollars in millions) (dollars in billions) for 2003 The mark of any successful company is $13.3 $17.9 $17.5 $20.2 $22.0 the quality of its investments. Sempra Energy’s sound investments have enabled $444 the company to maintain a healthy $101 balance sheet, ample liquidity and solid, $298 $51 investment-grade credit ratings. $318 Sempra Energy’s debt structure fits the risk profile of its assets. This enables the company to manage effectively through 1999 2000 2001 2002 2003 changing market cycles, maintaining a SEMPRA ENERGY UTILITIES San Diego Gas & Electric stable capital-expenditure program and Southern California Gas Company the ability to provide shareholders with SEMPRA ENERGY GLOBAL ENTERPRISES Sempra Energy Trading a reliable dividend. Sempra Energy Resources Sempra Energy International Sempra Energy’s California utilities and their customers benefit from economies of scale, with the largest customer base of any energy utility in the United States. Sempra Energy Global Enterprises page 1 0
“We combine deep industry expertise develops assets that are technologically advanced and among the most cost- with rigorous risk management when we efficient in the industry. evaluate market opportunities. The result Risk management. has been superior shareholder returns.” Every business has risks. What distin- guishes Sempra Energy from others in the industry is how well the company identifies and manages those risks. Sempra Energy assumes only those risks that it can understand and manage effectively— a philosophy that permeates virtually NEAL E. SCHMALE every aspect of the company’s operations. EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL Sempra Energy’s experienced management OFFICER, SEMPRA ENERGY team recognizes that unexpected market, regulatory or political events often impact the best-laid plans, so flexibility is built into every business plan. The financial flexibility that evolves from a strong balance sheet, solid credit ratings, tight cost controls and a balanced portfolio of businesses enables the company to succeed under a broad range of economic scenarios. The result for Sempra Energy shareholders is a company that has provided superior returns since it was formed in 1998. page 1 1
SEMPRA ENERGY UTILITIES R E G U L AT E D U T I L I T Y C O M PA N I E S S E R V I N G C E N T R A L AND SOUTHERN CALIFORNIA “In our growing region, building and maintaining energy infrastructure allow us to continue to provide safe, reliable energy and exceptional service to our customers. We are committed to enhancing the quality of life in our region, while enhancing returns for our investors.” EDWIN A. GUILES GROUP PRESIDENT, SEMPRA ENERGY UTILITIES
strategy ▼ In 2003, Sempra Energy utilities—San Diego Gas & Electric (SDG&E) and Southern California Gas Company (SoCalGas)—refined their strategy of meeting customer needs by planning for the future and providing a full range of energy services. Delivering solid earnings and cash flow, Sempra Energy utilities form the core of the parent company’s financial strength.
SoCalGas is investing approximately $350 million over the next decade to enhance the integrity of its natural gas transmission pipeline system. results S E M P R A E N E R GY U T I L I T I E S ▼ Consistent with its mission to provide safe and reliable gas and electric service, while planning for the future energy needs of its In 2003, Sa n D i e g o G a s & E l e c t r i c customers, SDG&E returned to a full-service SDG&E extended service to some provider role in electricity, and both utilities 11,000 new gas and 18,000 new electric continued to maintain and deliver an customers, resulting in a total of 800,000 uninterrupted supply of gas. metered gas customers and 1.3 million In line with company practices, the utilities metered electric customers. work to safeguard their stability and Meeting the needs of customers and financial health by applying rigorous risk- providing high levels of service remain management principles when evaluating key focuses at SDG&E, which, in future investments and projected returns. 2003, resulted in the highest customer- SDG&E and SoCalGas continue to be leaders satisfaction levels since 1996. This in the utility industry, preserving perform- achievement was even more notable ance-based ratemaking (PBR), which allows due to such challenges as high call them to manage risk and align the interests volumes and extraordinary service needs of customers and shareholders so both can related to the firestorms in October 2003. share the benefits of exceptional performance. On January 1, 2003, a new California law Finally, delivering operational and service took effect restoring utilities to their prior excellence to customers is also top priority roles as full-service energy providers, at both utilities, as demonstrated by the responsible for planning and procuring exceptional response provided during the energy for their customers, as well as 2003 wildfires. (See page 8.) energy delivery. In late 2003, SDG&E filed its power- procurement plan with the CPUC to fulfill its expanded role, assure grid reliability in the coming years and deliver value to customers. The plan reflects the company’s commitment to create a balanced portfolio page 1 4
SDG&E crews work around the clock to maintain electric service and, in 2003, the company achieved its highest customer-satisfaction ratings in the past eight years. of resource types, calling for a new mix expanding its infrastructure, while earning of resources and conservation, including an 11.25-percent return on equity. energy from renewable resources such So u t h e r n Ca l i fo r n i a G a s Co m pa ny as biomass energy and solar thermal- In 2003, SoCalGas added 72,000 new generation technology. Purchasing locally customers, bringing its total metered generated electricity is an important part customer base to 5.4 million. As always, of the proposed plan, which includes customer service was a key focus, and ownership of the Palomar power plant survey results indicate that customer- being developed by Sempra Energy satisfaction results were well above their Resources, and a 10-year power-purchase target goals. contract with Calpine’s Otay Mesa plant. This procurement plan would add more In late 2003, SoCalGas reached an than $600 million to SDG&E’s rate base. all-party settlement agreement on its Cost-of-Service rate case. Another important CPUC filing was made in 2003 when SDG&E reached a multi- Additionally, the CPUC approved party settlement with the majority of $48 million, pretax, in incentives for parties in its Cost-of-Service rate case. SoCalGas’ gas purchasing for the two award years ended March 31, 2002. SDG&E also made important infrastructure Customers and shareholders benefit in investments to expand three electric- the rewards achieved through this transmission and substation systems. Gas Cost Incentive Mechanism program. The projects were designed to improve reliability and create better access to As part of its ongoing commitment to cost-effective generating resources, at a provide safe and reliable service, SoCalGas cost of about $66 million. In December has invested more than $1 billion since 2003, SDG&E became the first investor- the 1994 Northridge earthquake in an owned electric utility in the Western aggressive distribution-pipeline-replace- United States to put formula-based rates ment program and enhancements to its in place for its electric-transmission continuous monitoring system. SoCalGas revenue requirements. The Federal also will invest approximately $350 mil- Energy Regulatory Commission approved lion over the next 10 years to enhance the SDG&E’s plan, ensuring the recovery of integrity of its natural gas transmission all costs associated with maintaining and pipeline system. page 1 5
SEMPRA ENERGY GLOBAL ENTERPRISES I N F R A S T R U C T U R E A N D R I S K- M A N A G E M E N T B U S I N E S S E S TO MEET THE NEEDS OF ENERGY CUSTOMERS “We build and operate infrastructure, sell energy commodities and provide asset risk management, with the exper- tise to bring them all together. These diversified assets and competencies are the cornerstone of our success.” DONALD E. FELSINGER GROUP PRESIDENT, SEMPRA ENERGY GLOBAL ENTERPRISES
strategy ▼ The strategy of Sempra Energy Global Enterprises is to provide earnings growth and stable cash flows in competitive markets through complementary energy-infrastructure and risk-management businesses.
Sempra Energy Solutions helps customers, such as the Queen Mary in Long Beach, California, achieve energy-efficiency savings to reduce operating costs. results S E M P R A E N E R GY ▼ GLOBAL ENTERPRISES Sempra Energy Global Enterprises develops businesses that provide growth opportunities for Sempra Energy. These initiatives fall into two segments: 1) developing LNG infra- structure, energy generation, transmission, storage and delivery assets; and 2) providing risk-management services to wholesale, commercial and industrial energy customers. Sempra Energy Global Enterprises identifies long-term market opportunities by studying customer needs, demand trends, regulatory and environmental issues, and new technologies. page 1 8
El Dorado Energy Sempra Energy Global Enterprises' Elk Hills Power 480 MW Assets in the Pacific Southwest 550 MW and Gulf Region Mesquite I & II Palomar 1,250 MW Existing power plants Energy 550 MW Gasoducto Bajanorte Proposed power plant Termoeléctrica de Mexicali Twin Oaks Power Proposed LNG receipt terminals Transportadora 600 MW 305 MW de Gas Natural Mexicali Natural gas utilities Energía Natural gas pipelines Costa Azul Cameron * includes partnerships LNG Chihuahua Torreon D Sempra Energy Global Enterprises is developing a strategic portfolio of energy-infrastructure assets in the Pacific Southwest and U.S. Gulf Coast. E n e rg y- I nf ra st r u c tu re Bu s i n esses Customer interest in an expansion of Gasoducto Bajanorte and a new pipeline In 2003, Se m p ra E n e rg y Reso u rces connecting the existing system to markets Sempra Energy Resources brought four in Arizona is strong, with capacity requests new power plants online in the Pacific totaling more than 3 billion cubic feet Southwest. The company now has more (bcf) of natural gas per day. The company than 2,600 megawatts (MW) in operation. will move ahead with additional invest- More importantly, more than 80 percent ment once shippers have committed to of this capacity is under long-term contract buy capacity under long-term contracts. through 2010, demonstrating the increas- ing stability and predictability of Sempra Sempra Energy International owns Energy Resources’ earnings and cash flow. several natural gas distribution utilities Sempra Energy Resources continues to in Northern Mexico and partial interests assess new market opportunities in keep- in natural gas and electric distribution ing with its strategic growth philosophy. utilities in Argentina, Chile and Peru. Sempra Se m p ra E n e rg y I n te r n a t i o n a l In 2003, Sempra Se m p ra E n e rg y L N G Energy International’s Gasoducto Bajanorte Energy Global Enterprises established pipeline is in full operation, with the sys- Sempra Energy LNG, which is responsible tem nearly 100-percent subscribed through for the company’s LNG market initiatives, 2023. The pipeline, able to transport 500 including the development of Energía million cubic feet of natural gas per day, Costa Azul and Cameron LNG. Energía delivers clean-burning natural gas to the Costa Azul is a $600 million LNG receipt Baja California region of Mexico to fuel facility being developed just north of future economic growth. page 1 9
Sempra Energy’s move to import new supplies of liquefied natural gas in 2007 will help meet an expanding market for natural gas in North America. Ensenada in Baja California, Mexico, to Se m p ra F i b e r L i n ks Sempra Fiber Links process 1 bcf per day of natural gas. received patent approval notification for Cameron LNG is a $700 million receipt its fiber-in-gas (FIGSM) technology, which facility under development near Lake makes more efficient broadband connec- ▼ Charles, Louisiana, on the U.S. Gulf Coast, tions possible through safe installation of to process 1.5 bcf per day of natural gas. fiber-optic cable within active natural gas Construction on both projects is scheduled pipelines. Sempra Fiber Links completed to begin in 2004. an installation for Long Beach Energy, which is using the fiber to connect critical The two LNG facilities enjoy strategic buildings on its campus. Sempra Fiber sites close to existing transmission pipe- Links also received California regulatory lines. Energía Costa Azul would utilize approval for natural gas utilities in the Sempra Energy International’s Gasoducto state to begin using the FIGSM technology, Bajanorte pipeline to transport the regasi- clearing the way for installations to begin fied fuel to markets in Northern Mexico in existing SoCalGas and SDG&E pipelines. and the Southwestern United States. Additionally, Sempra Energy Trading will play an important role in helping to market the natural gas processed at the facilities. page 2 0
Sempra Energy Trading and Sempra Energy Solutions offer trading and risk-management services that provide customers with cash-flow certainty in volatile commodity markets. to expand its energy-related product base R i s k- M a n a g e m e n t Se r v i ces to take advantage of growing markets in Sempra Energy Se m p ra E n e rg y Tra d i n g Europe and Asia. Trading delivered another profitable year in 2003, and now counts more than 20 Despite a Se m p ra E n e rg y So l u t i o n s ▼ straight quarters of profitable performance, challenging year of high commodity prices excluding required accounting changes. and uncertainty about deregulation, Sempra Energy Trading offers a range Sempra Energy Solutions expanded its of risk-management services to help footprint in 2003 as customers continued customers better execute their commodity- to contract for energy services. The compa- procurement and asset-utilization strate- ny received several industry awards, gies. The short-term nature of Sempra including recognition as an outstanding Energy Trading’s portfolio—83 percent supplier to SBC Global Communications. of net unrealized revenue converts to In 2003, the unit also became the only cash within two years—demonstrates the energy marketer to receive ISO 9001:2000 liquidity and transparency of its contracts. certification, the new industry benchmark Sempra Energy Trading is one of the for operational excellence. In 2004, Sempra top five physical marketers of natural Energy Solutions looks to further expand gas in North America and one of the top its market position in an evolving retail marketers of base metals in the world. energy services market. The customer-focused company continues page 2 1
SENIOR MANAGEMENT TEAM S E M P R A E N E R GY C O R P O R AT E Stephen L. Baum Frank H. Ault Edwin A. Guiles Randall B. Peterson Thomas C. Sanger Chairman, President Senior Vice President Group President, Vice President, Corporate Secretary and Chief Executive and Controller Sempra Energy Human Capital Thomas S. Sayles Officer Utilities Services Vice President, Javade Chaudhri Executive Vice Governmental and Michael W. Allman Joseph A. Mark D. Randle Vice President, Audit President and General Vice President, Energy Community Affairs Householder Services Counsel Vice President, Risk Management Neal E. Schmale Corporate Tax Executive Vice Dennis V. Arriola Donald E. Felsinger G. Joyce Rowland Vice President, Group President, Senior Vice President, President and Chief Charles A. McMonagle Communications and Sempra Energy Vice President and Human Resources Financial Officer Investor Relations Global Enterprises Treasurer Kevin C. Sagara W. Davis Smith Vice President and Vice President and Associate General Associate General Counsel Counsel S E M P R A E N E R GY C O R P O R AT E Seated, from left: Michael Allman, Donald Felsinger, Edwin Guiles, Joseph Householder, Dennis Arriola Standing, from left: Charles McMonagle, Thomas Sayles, Neal Schmale, Joyce Rowland, Stephen Baum, Mark Randle, Javade Chaudhri, Frank Ault, Randall Peterson, Thomas Sanger S E M P R A E N E R GY G L O B A L E N T E R P R I S E S Donald E. Felsinger Darcel L. Hulse David A. Messer Richard S. Shapiro Group President President, Sempra President, Sempra Vice President, Energy LNG Energy Trading External Affairs Michael J. Clover President, Sempra Erbin B. Keith Michael R. Niggli Mark A. Snell Fiber Links President, Sempra President, Sempra Chief Financial Officer Energy Solutions Energy Resources Monica Haas Edward A. Steiger Director, Investments, Vice President, George S. Liparidis Steven J. Prince Sempra Energy President, Sempra Chairman and Chief Human Resources Financial Energy International Executive Officer, Sempra Energy Trading page 2 2
S E M P R A E N E R GY U T I L I T I E S Seated, from left: Richard Morrow, Lee Schavrien, Debra Reed, Edwin Guiles, W. Davis Smith, Anne Smith Standing, from left: Lee Stewart, William Reed, Margot Kyd, Steven Davis, James Avery, J. Chris Baker, Terry Fleskes, Pamela Fair, Roy Rawlings Not pictured: Lad Lorenz S E M P R A E N E R GY U T I L I T I E S Edwin A. Guiles J. Chris Baker Terry M. Fleskes Richard M. Morrow Lee Schavrien Group President Vice President, Vice President and Vice President, Vice President, Chief Information Controller Customer Services, Regulatory Affairs Debra L. Reed Technology Officer Major Markets President and Chief Margot A. Kyd Anne S. Smith Financial Officer Senior Vice President, Vice President, Steven D. Davis Roy M. Rawlings Senior Vice President, Business Solutions Senior Vice President, Customer Services, James P. Avery Customer Service and Distribution Operations Mass Markets Senior Vice President, Lad Lorenz External Relations Electric Transmission, Vice President, William L. Reed Lee M. Stewart SDG&E Regulatory Affairs Senior Vice President, Senior Vice President, Pamela J. Fair Vice President, Regulatory Affairs Gas Transmission Customer Operations S E M P R A E N E R GY GLOBAL ENTERPRISES Seated, from left: Darcel Hulse, Monica Haas, Mark Snell, Edward Steiger Standing, from left: George Liparidis, Kevin Sagara, Michael Niggli, Erbin Keith, Donald Felsinger, Michael Clover, Richard Shapiro Not pictured: David Messer, Steven Prince page 2 3
BOARD OF DIRECTORS Stephen L. Baum William D. Jones Chairman of the Board, President, Chief Executive President and Officer and Director, Chief Executive Officer, CityLink Investment Corporation Sempra Energy San Diego, California San Diego, California Richard G. Newman Chairman and Hyla H. Bertea Community Leader Chief Executive Officer, Corona del Mar, California AECOM Technology Corp. Los Angeles, California James G. Brocksmith Jr. Former Deputy Chairman William G. Ouchi, Ph.D. and Chief Operating Officer, Sanford and Betty Sigoloff U.S. Operations, Professor in Corporate Renewal, KPMG Peat Marwick LLP Anderson Graduate School Naples, Florida of Management, University of California, Los Angeles Herbert L. Carter, DPA Los Angeles, California Executive Vice Chancellor Emeritus and Trustee Professor William C. Rusnack of Public Administration, Former President and California State University Chief Executive Officer, System Premcor Inc. Long Beach, California St. Louis, Missouri Richard A. Collato William P. Rutledge Jr. President and Chairman, Chief Executive Officer, Communications and YMCA of San Diego County Power Industries San Diego, California Palo Alto, California Wilford D. Godbold Jr. Thomas C. Stickel Former President and Chief Chairman, Chief Executive Executive Officer, Officer and Founder, ZERO Corporation University Ventures Network Los Angeles, California and Virtual Capital of California LLC San Diego, California Diana L. Walker Of Counsel O’Melveny & Myers LLP Los Angeles, California page 2 4
C O R P O R AT E I N F O R M AT I O N Transfer Agent Investor Relations Direct Common Stock Investment Plan EquiServe Trust Company, N.A. Security analysts, portfolio P.O. Box 43069 Sempra Energy offers a Direct Common managers and other members Providence, RI 02940-3069 Stock investment plan as a simple, con- of the financial community Telephone: 877-773-6772 venient and affordable way to invest in should contact: Hearing Impaired (TDD): the company. Cash dividends from a Dennis V. Arriola 800-952-9245 participant’s account can be reinvested Vice President, Communications Internet: www.equiserve.com automatically in full or in part to pur- and Investor Relations chase additional shares, or participants Telephone: 619-696-2901 Shareholder Services may choose to receive all or a portion Fax: 619-696-2374 Investors with general questions of their cash dividends electronically or regarding Sempra Energy, by check. Participation in the Plan Stock Exchange Listing San Diego Gas & Electric, requires an initial investment of as little Sempra Energy Common Stock: Southern California Gas Co. as $500. The Plan allows optional cash Ticker Symbol: SRE or Pacific Enterprises securities investments of as little as $25 up to New York Stock Exchange should contact the company at: a maximum of $150,000 per calendar Pacific Stock Exchange year. Nonshareholders pay a $15 fee Sempra Energy for the initial cash investment in Sempra Energy Trust Shareholder Services Sempra Energy. Brokerage commissions Preferred Securities: 101 Ash Street incurred in the purchase of shares San Diego, CA 92101-3017 New York Stock Exchange Telephone: 877-736-7727 will be paid by Sempra Energy. The Sempra Energy Income Fax: 619-696-2374 Plan is offered only by the means of Equity Units: E-mail: investor@sempra.com a prospectus, which can be obtained New York Stock Exchange Internet: www.sempra.com by calling the Plan Administrator, EquiServe Trust Company, N.A., Pacific Enterprises News and Information at 877-773-6772, or through the Preferred Stock: Internet at www.equiserve.com. American Stock Exchange To hear corporate news reports Pacific Stock Exchange and stock updates or to request materials, call 877-773-6397. Southern California Gas Sempra Energy’s Annual Report Preferred Stock: to the Securities and Exchange Pacific Stock Exchange Commission (Form 10-K) San Diego Gas & Electric is available to shareholders Preferred Stock: at no charge by writing to American Stock Exchange Shareholder Services. This information, as well as corporate governance guidelines, codes of ethics and board committee charters, also are available on the company’s Web site at www.sempra.com. Sempra Energy’s Annual Report to the Securities Exchange Commission on Form 10-K, which includes as exhibits the certifications regarding the quality of the company’s public disclosure that are filed by Sempra Energy’s chief executive officer and chief financial Sempra Energy also offers a officer under the Sarbanes-Oxley Act of 2002, is available to shareholders at no charge by writing to the company’s Shareholder Services Department. quarterly Performance Report newsletter via e-mail for This report contains statements that are not historical fact and constitute forward-looking statements within the meaning of the Private Securities Legislation Reform Act of 1995. When the company uses words like “believes,” “expects,” “anticipates,” “intends,” those who register at “plans,” “estimates,” “may,” “could,” “would,” “should” or similar expressions, or when the company discusses its strategy or plans, www.sempra.com/subscribe. the company is making forward-looking statements. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Future results may differ materially from those expressed in the forward-looking statements. Forward-looking statements are necessarily based upon various assumptions involving judgments with respect to the future and other risks, including, among others: national, international, regional and local economic, competitive, political, legislative and regulatory conditions and developments; actions by the California Public Utilities Commission, the California State Legislature, the California Department of Water Resources and the Federal Energy Regulatory Commission; capital market conditions, inflation rates and interest rates; energy markets, including the timing and extent of changes in commodity prices; weather conditions; business, regulatory and legal decisions; the pace of deregulation of retail natural gas and electricity delivery; the timing and success of busi- ness development efforts; and other uncertainties, all of which are difficult to predict and many of which are beyond the company’s control. These risks and uncertainties are further discussed in the company’s reports filed with the Securities and Exchange Commission that are available through the EDGAR system without charge at its Web site, www.sec.gov.
101 Ash Street, San Diego, California 92101-3017 www.sempra.com © 2004 Sempra Energy. All copyright and trademark rights reserved.

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sempra energy 2003 Annual Report

  • 1. 2003 Annual Report Focus Strategy Results ▼ ▼
  • 2. Based in San Diego, Sempra Energy is a Fortune 500 energy services company with 2003 revenues of $7.9 billion. Sempra Energy serves the largest customer base of any energy utility in the United States. With nearly 13,000 employees worldwide, the Sempra Energy companies develop energy infrastructure, operate utilities and provide related products and services to more than 10 million customers in the United States, Europe, Canada, Mexico, South America and Asia. Sempra Energy common shares trade on the New York Stock Exchange (NYSE) under the symbol “SRE.” Additional information is available on the Web at www.sempra.com. page At a Glance 2 Financial Highlights 4 Letter to Shareholders 5 Financial Strength 10 Sempra Energy Utilities 12 Sempra Energy Global Enterprises 16 Corporate Information 25
  • 3. R E C O G N I Z I N G O P P O R T U N I T Y. A F O C U S E D S T R A T E G Y. C O N S I S T E N T R E S U LT S . T H I S I S S E M P R A E N E R G Y. focus ▼ Sempra Energy was founded in 1998 to capitalize on new opportunities in competitive energy markets. The company’s ongoing focus is to enhance shareholder value and meet customer needs by sustaining the financial strength, operational flexibility and skilled workforce needed to succeed in rapidly changing market conditions.
  • 4. T O TA L A S S E T S $22 billion O P E R AT I N G R E V E N U E S $7.9 billion NET INCOME $649 million SEMPRA ENERGY AT A G L A N C E S E M P R A E N E R GY U T I L I T I E S Sempra Energy utilities—San Diego Gas & Electric and Southern California Gas Company—serve California customers from the state’s Central Valley to the Mexican border. More than a century of service in providing safe and reliable natural gas and electricity gives Sempra Energy’s California utilities their unique ability to meet the region’s energy needs. C R E D I T R AT I N G S San Diego Gas & Electric As of March 15, 2004 S&P Fitch Moody’s SDG&E serves 3.2 million consumers through 1.3 million electric meters and more than Sempra Energy 800,000 natural gas meters. The utility’s Unsecured Debt BBB+ A Baa1 Commercial Paper A-2 F1 P-2 service area spans 4,100 square miles. Trust Preferred Securities BBB- A- Baa2 Southern California Gas Company The nation’s largest natural gas distribution SDG&E utility, SoCalGas serves a population of Secured Debt A+ AA A1 19.2 million through 5.4 million meters. The Unsecured Debt A- AA- A2 Preferred Stock BBB+ A+ Baa1 company’s service territory encompasses Commercial Paper A-1 F1+ P-1 23,000 square miles. SoCalGas Secured Debt A+ AA A1 Unsecured Debt A- AA- A2 Preferred Stock BBB+ A+ Baa1 Commercial Paper A-1 F1+ P-1 page 2
  • 5. SEMPRA ENERGY TOTAL RETURN 1999 – 2003 EARNINGS PER SHARE (in dollars) $1.66 $2.06 $2.52 $2.87 $3.03 52% 25% -3% -12% Sempra Dow S&P S&P Energy Jones 500 Utilities Industrial Index Index Average 1999 2000 2001 2002 2003 S E M P R A E N E R GY G L O B A L E N T E R P R I S E S The Sempra Energy Global Enterprises group acquires, develops and operates infrastructure assets related to the production and distribution of energy, including power plants, natural gas pipelines and liquefied natural gas (LNG) receipt facilities. The group also provides risk-management products and services that help customers manage their energy costs under changing market conditions. ENERGY-INFRASTRUCTURE BUSINESSES RISK-MANAGEMENT SERVICES AND FINANCIAL INVESTMENTS Sempra Energy Resources Sempra Energy Resources acquires, builds Sempra Energy Trading and operates power plants for the competitive Sempra Energy Trading provides worldwide market. marketing and risk-management services to wholesale customers for natural gas, power, Sempra Energy International petroleum products and base metals. Sempra Energy International develops, owns and manages utilities and natural gas pipelines, Sempra Energy Solutions principally in Mexico and South America, Sempra Energy Solutions offers energy- providing natural gas and electricity service management and consulting services to to more than 2.7 million customers. commercial and industrial businesses. Sempra Energy LNG Sempra Energy Financial Sempra Energy LNG plans, constructs and Sempra Energy Financial focuses on operates LNG infrastructure, including tax-advantaged investments in affordable terminals for the receipt and conversion housing and energy-related projects. of LNG back into natural gas. Sempra Fiber Links Sempra Fiber Links builds fiber-optic networks for telecommunications companies, utilizing the distribution infrastructure of natural gas utilities. page 3
  • 6. FINANCIAL HIGHLIGHTS OPERATING REVENUES NET INCOME (dollars in millions) (dollars in millions) $5,360 $6,760 $7,730 $6,048 $7,887 $394 $429 $518 $591 $649 1999 2000 2001 2002 2003 1999 2000 2001 2002 2003 At December 31 or for the years then ended Percent (Dollars in millions, except per-share amounts) 2003 2002 change C O N S O L I D AT E D F I N A N C I A L D ATA Operating Revenues $ 7,887 $ 6,048 30.4% Net Income $ 649 $ 591 9.8 Net Income Per Share of Common Stock: Basic $ 3.07 $ 2.88 6.6 Diluted $ 3.03 $ 2.87 5.6 Weighted Average Number of Common Shares Outstanding (diluted, in millions) 214.5 206.1 4.1 Total Assets $ 22,009 $ 20,242 8.7 Common Dividends Declared Per Share $ 1.00 $ 1.00 — Debt to Total Capitalization 57% 60% Book Value Per Share $ 17.17 $ 13.79 24.5 Capital Expenditures & Investments $ 1,251 $ 1,643 -23.9 S TAT I S T I C S Natural Gas Throughput (a) (billions of cubic feet) 934 982 –4.9% Electric Energy On-System Sales (a) (billions of kilowatt hours) 18.4 17.7 4.0 Number of Customers (a) (millions of meters served) Natural Gas 6.2 6.1 1.6 Electricity 1.3 1.3 — Return on Common Equity Sempra Energy 19.3% 21.4% SoCalGas 15.6% 16.2% SDG&E 27.7% 18.2% Number of Employees (b) 12,807 12,197 5.0 (a) California utilities. (b) Excludes contract and part-time employees. page 4
  • 7. FELLOW SHAREHOLDERS The past year marked the fifth anniversary of the merger that created Sempra Energy. I’m pleased that, for the fifth consecutive year, we produced outstanding results. Sempra Energy’s earnings per share have grown, on average, by nearly 20 percent annually since 1998. In 2003, we posted earnings of $649 million, up from $591 million in 2002. Earnings per diluted share were $3.03, a 6-percent increase over 2002. Sempra Energy’s outstanding financial performance derives from our ability to capitalize on new opportunities, our focused strategy and our consistent execution. I am particularly proud of Sempra Energy’s performance compared to many other energy companies in recent years. Our growth strategy is focused and methodical. We develop a deep understand- ing of markets and customer needs, apply a rigorous risk-management analysis of potential investments and nurture positive relationships with our key constituents, including the communities in which we operate. A clearer path ahead. In 2003, we saw significant progress toward resolving many of the major issues facing our company. Sempra Energy Resources’ long-term energy-supply contract with the California Department of Water Resources was upheld by both the Federal Energy Regulatory Commission (FERC) and a Superior Court of California. While these rulings are being appealed by the state, we expect the contract to continue to be upheld in all venues. Sempra Energy Trading also has entered into a settlement agreement related to the FERC’s investigation of marketers’ activities in Western U.S. energy markets from 2000 to 2001. page 5
  • 8. “Sempra Energy’s outstanding financial performance derives from our ability to capitalize on new opportunities, our focused strategy and our consistent execution.” In 2003, we received key permits to proceed with the development of two lique- fied natural gas (LNG) receipt terminals—Energía Costa Azul in Baja California, Mexico, and Cameron LNG near Lake Charles, Louisiana. These are scheduled to be the first new LNG receipt facilities built in North America in the past two decades. We also entered into a preliminary agreement to bring a daily supply of 500 million cubic feet of natural gas to Energía Costa Azul from Indonesia. Additionally, Sempra Energy LNG announced its intention to form a 50/50 joint venture with Shell International Gas Limited to develop the Energía Costa Azul facility. In our home state of California, the California Public Utilities Commission (CPUC) has shown a willingness to put energy policy back on solid footing by acknowledging a more realistic balance between the interests of consumers and the financial health of the state’s utilities. Our solid foundation: Sempra Energy utilities. Sempra Energy utilities—San Diego Gas & Electric and Southern California Gas Company—provide a solid foundation for Sempra Energy through consistently strong earnings and cash flow. Both utilities again performed well in 2003, exceeding their authorized return on equity and earning operational incentives. SoCalGas reached an all-party settlement, and SDG&E, a multiparty settlement, in their respective Cost-of-Service rate cases pending before the CPUC. Approval of these settlements by the CPUC will allow the utilities to make the investments necessary to continue their long tradition of delivering safe and reliable energy, exceptional customer service and consistently strong earnings. It also will enable the utilities to expand their rate bases over time and ensure a reasonable return for our investors. page 6
  • 9. Left: In 2003, the Sempra Energy utilities, SDG&E and SoCalGas, invested more than $760 million to expand their systems and maintain exceptional customer service. Right: When completed in 2007, the Cameron LNG receipt facility in Louisiana will process 1.5 billion cubic feet (bcf) per day of natural gas for markets in the United States. None of the utilities’ accomplishments would be possible without the determined efforts of thousands of dedicated employees. This was most evident during last fall’s devastating wildfires in California. I am proud of our employees, many of whom worked around the clock in difficult conditions to restore gas and electric service to more than 100,000 customers. New opportunities for growth. In 2003, Sempra Energy Global Enterprises continued to grow a well-balanced and profitable mix of businesses that develop energy infrastructure and offer risk-management services. Sempra Energy Resources, our wholesale power-generation unit, enjoyed a landmark year for both profitability and operational achievement. The company brought four new power plants online in the Pacific Southwest totaling 2,125 megawatts. The projects, which include Elk Hills, Termoeléctrica de Mexicali and Mesquite’s two generating units, were completed on time and under budget, with more than 80 percent of all capacity contracted forward through the year 2010. Sempra Energy International operates energy utilities and develops gas pipelines principally in Latin America. In Mexico, the company obtained 20-year contract commitments for nearly 100 percent of its Gasoducto Bajanorte natural gas pipeline capacity from major industrial users and power plants in the northern border region. Sempra Energy International’s expert market knowledge and project management experience in Mexico have helped shape the success of other Sempra Energy projects in the region, including the Termoeléctrica de Mexicali power plant in Mexicali and the Energía Costa Azul LNG receipt facility north of Ensenada. page 7
  • 10. R E S P O N D I N G H E R O I C A L LY T O T H E CA L I FO R N I A W I L D F I R ES In October 2003, the worst fires in California history killed 20 people, burned 700,000 acres and destroyed nearly 3,600 homes — affecting 20 percent of SDG&E’s service territory and portions of SoCalGas’ territory. Employees of both utilities responded immediately and heroically, working around the clock to restore gas and electricity to more than 100,000 homes in record time. SDG&E replaced 3,500 transmission and distribution poles and more than 400 miles of electric wire The California Public Utilities Commission (CPUC) honored SDG&E damaged during the fires. Additionally, SDG&E rebuilt 14 substa- and SoCalGas, stating that their efforts “should remind us all that tions and 17 major transmission lines while SoCalGas conducted the public-service ethic associated with being a public-utility more than 400 service-restoration calls in the fire-affected areas. employee is real, and not just a marketing tagline.” In 2003, we formally established a new business unit, Sempra Energy LNG, to oversee our LNG operations. Plans for the Energía Costa Azul LNG terminal and for the Cameron LNG facility in Louisiana result from our recognition three years ago of the growing imbalance between natural gas supply and demand in North America. We determined that LNG would be critical in addressing this imbalance and launched efforts to develop an LNG regasification business. The company expects to break ground on both LNG receipt terminals in mid-2004 and begin operations in 2007. Working with our communities. In our LNG initiatives—as in other endeavors—we have worked closely with local communities and key constituents to identify and resolve potentially difficult issues. These community efforts are part of every major project we undertake. They help to build trust and establish long-term relationships. Working closely with local communities also helps to ensure that we can address concerns before they become problems. A good example was the decision to build the Mexicali power plant, Termoeléctrica de Mexicali, to meet strict California environmental standards, even though Mexico did not require us to do so. In 2003, Fortune magazine recognized Sempra Energy as one of America’s top five companies for minorities—one of only two companies consistently to achieve this distinction since the rankings were introduced in 1998. Also in 2003, Sempra Energy and its employees contributed more than $9 million and 40,000 hours of volunteer time to charitable causes. The character of our employees drives Sempra Energy’s success and enriches the communities we serve. page 8
  • 11. “Our LNG business will shift into full gear this year, with construction on our two receipt terminals expected to be under way by mid-2004.” Looking forward. As the economy has rebounded, so too has the demand for energy. With our utilities’ expanding customer base, we plan new investments in electric generation, and gas and electric-transmission and distribution infra- structure. We expect these new investments to bring solid earnings from our utilities in the years ahead. Similarly, with long-term contracts in place, Sempra Energy Resources has a more predictable and stable business, contributing steady earnings to Sempra Energy. Our LNG business will shift into full gear this year, with construction on our two receipt terminals expected to be under way by mid-2004. On the following pages is an overview of the strategies we’re executing to capture the opportunities ahead of us, including the perspectives of some of the key members of our leadership team. On behalf of the nearly 13,000 employees of Sempra Energy, I thank you for your continued support. Sincerely, STEPHEN L. BAUM CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER page 9
  • 12. S E M P R A E N E R GY PUTTING FINANCIAL STRENGTH TO WORK Sempra Energy’s commitment to building a highly profitable energy services company requires an uncommon atten- tion to financial stewardship. A financially strong company that invests wisely and manages its costs and risks prudently is able to capitalize on opportunities when they arise. CAPITAL EXPENDITURES & INVESTMENTS TOTAL ASSETS Sound investments and cost control. by major business units (dollars in millions) (dollars in billions) for 2003 The mark of any successful company is $13.3 $17.9 $17.5 $20.2 $22.0 the quality of its investments. Sempra Energy’s sound investments have enabled $444 the company to maintain a healthy $101 balance sheet, ample liquidity and solid, $298 $51 investment-grade credit ratings. $318 Sempra Energy’s debt structure fits the risk profile of its assets. This enables the company to manage effectively through 1999 2000 2001 2002 2003 changing market cycles, maintaining a SEMPRA ENERGY UTILITIES San Diego Gas & Electric stable capital-expenditure program and Southern California Gas Company the ability to provide shareholders with SEMPRA ENERGY GLOBAL ENTERPRISES Sempra Energy Trading a reliable dividend. Sempra Energy Resources Sempra Energy International Sempra Energy’s California utilities and their customers benefit from economies of scale, with the largest customer base of any energy utility in the United States. Sempra Energy Global Enterprises page 1 0
  • 13. “We combine deep industry expertise develops assets that are technologically advanced and among the most cost- with rigorous risk management when we efficient in the industry. evaluate market opportunities. The result Risk management. has been superior shareholder returns.” Every business has risks. What distin- guishes Sempra Energy from others in the industry is how well the company identifies and manages those risks. Sempra Energy assumes only those risks that it can understand and manage effectively— a philosophy that permeates virtually NEAL E. SCHMALE every aspect of the company’s operations. EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL Sempra Energy’s experienced management OFFICER, SEMPRA ENERGY team recognizes that unexpected market, regulatory or political events often impact the best-laid plans, so flexibility is built into every business plan. The financial flexibility that evolves from a strong balance sheet, solid credit ratings, tight cost controls and a balanced portfolio of businesses enables the company to succeed under a broad range of economic scenarios. The result for Sempra Energy shareholders is a company that has provided superior returns since it was formed in 1998. page 1 1
  • 14. SEMPRA ENERGY UTILITIES R E G U L AT E D U T I L I T Y C O M PA N I E S S E R V I N G C E N T R A L AND SOUTHERN CALIFORNIA “In our growing region, building and maintaining energy infrastructure allow us to continue to provide safe, reliable energy and exceptional service to our customers. We are committed to enhancing the quality of life in our region, while enhancing returns for our investors.” EDWIN A. GUILES GROUP PRESIDENT, SEMPRA ENERGY UTILITIES
  • 15. strategy ▼ In 2003, Sempra Energy utilities—San Diego Gas & Electric (SDG&E) and Southern California Gas Company (SoCalGas)—refined their strategy of meeting customer needs by planning for the future and providing a full range of energy services. Delivering solid earnings and cash flow, Sempra Energy utilities form the core of the parent company’s financial strength.
  • 16. SoCalGas is investing approximately $350 million over the next decade to enhance the integrity of its natural gas transmission pipeline system. results S E M P R A E N E R GY U T I L I T I E S ▼ Consistent with its mission to provide safe and reliable gas and electric service, while planning for the future energy needs of its In 2003, Sa n D i e g o G a s & E l e c t r i c customers, SDG&E returned to a full-service SDG&E extended service to some provider role in electricity, and both utilities 11,000 new gas and 18,000 new electric continued to maintain and deliver an customers, resulting in a total of 800,000 uninterrupted supply of gas. metered gas customers and 1.3 million In line with company practices, the utilities metered electric customers. work to safeguard their stability and Meeting the needs of customers and financial health by applying rigorous risk- providing high levels of service remain management principles when evaluating key focuses at SDG&E, which, in future investments and projected returns. 2003, resulted in the highest customer- SDG&E and SoCalGas continue to be leaders satisfaction levels since 1996. This in the utility industry, preserving perform- achievement was even more notable ance-based ratemaking (PBR), which allows due to such challenges as high call them to manage risk and align the interests volumes and extraordinary service needs of customers and shareholders so both can related to the firestorms in October 2003. share the benefits of exceptional performance. On January 1, 2003, a new California law Finally, delivering operational and service took effect restoring utilities to their prior excellence to customers is also top priority roles as full-service energy providers, at both utilities, as demonstrated by the responsible for planning and procuring exceptional response provided during the energy for their customers, as well as 2003 wildfires. (See page 8.) energy delivery. In late 2003, SDG&E filed its power- procurement plan with the CPUC to fulfill its expanded role, assure grid reliability in the coming years and deliver value to customers. The plan reflects the company’s commitment to create a balanced portfolio page 1 4
  • 17. SDG&E crews work around the clock to maintain electric service and, in 2003, the company achieved its highest customer-satisfaction ratings in the past eight years. of resource types, calling for a new mix expanding its infrastructure, while earning of resources and conservation, including an 11.25-percent return on equity. energy from renewable resources such So u t h e r n Ca l i fo r n i a G a s Co m pa ny as biomass energy and solar thermal- In 2003, SoCalGas added 72,000 new generation technology. Purchasing locally customers, bringing its total metered generated electricity is an important part customer base to 5.4 million. As always, of the proposed plan, which includes customer service was a key focus, and ownership of the Palomar power plant survey results indicate that customer- being developed by Sempra Energy satisfaction results were well above their Resources, and a 10-year power-purchase target goals. contract with Calpine’s Otay Mesa plant. This procurement plan would add more In late 2003, SoCalGas reached an than $600 million to SDG&E’s rate base. all-party settlement agreement on its Cost-of-Service rate case. Another important CPUC filing was made in 2003 when SDG&E reached a multi- Additionally, the CPUC approved party settlement with the majority of $48 million, pretax, in incentives for parties in its Cost-of-Service rate case. SoCalGas’ gas purchasing for the two award years ended March 31, 2002. SDG&E also made important infrastructure Customers and shareholders benefit in investments to expand three electric- the rewards achieved through this transmission and substation systems. Gas Cost Incentive Mechanism program. The projects were designed to improve reliability and create better access to As part of its ongoing commitment to cost-effective generating resources, at a provide safe and reliable service, SoCalGas cost of about $66 million. In December has invested more than $1 billion since 2003, SDG&E became the first investor- the 1994 Northridge earthquake in an owned electric utility in the Western aggressive distribution-pipeline-replace- United States to put formula-based rates ment program and enhancements to its in place for its electric-transmission continuous monitoring system. SoCalGas revenue requirements. The Federal also will invest approximately $350 mil- Energy Regulatory Commission approved lion over the next 10 years to enhance the SDG&E’s plan, ensuring the recovery of integrity of its natural gas transmission all costs associated with maintaining and pipeline system. page 1 5
  • 18. SEMPRA ENERGY GLOBAL ENTERPRISES I N F R A S T R U C T U R E A N D R I S K- M A N A G E M E N T B U S I N E S S E S TO MEET THE NEEDS OF ENERGY CUSTOMERS “We build and operate infrastructure, sell energy commodities and provide asset risk management, with the exper- tise to bring them all together. These diversified assets and competencies are the cornerstone of our success.” DONALD E. FELSINGER GROUP PRESIDENT, SEMPRA ENERGY GLOBAL ENTERPRISES
  • 19. strategy ▼ The strategy of Sempra Energy Global Enterprises is to provide earnings growth and stable cash flows in competitive markets through complementary energy-infrastructure and risk-management businesses.
  • 20. Sempra Energy Solutions helps customers, such as the Queen Mary in Long Beach, California, achieve energy-efficiency savings to reduce operating costs. results S E M P R A E N E R GY ▼ GLOBAL ENTERPRISES Sempra Energy Global Enterprises develops businesses that provide growth opportunities for Sempra Energy. These initiatives fall into two segments: 1) developing LNG infra- structure, energy generation, transmission, storage and delivery assets; and 2) providing risk-management services to wholesale, commercial and industrial energy customers. Sempra Energy Global Enterprises identifies long-term market opportunities by studying customer needs, demand trends, regulatory and environmental issues, and new technologies. page 1 8
  • 21. El Dorado Energy Sempra Energy Global Enterprises' Elk Hills Power 480 MW Assets in the Pacific Southwest 550 MW and Gulf Region Mesquite I & II Palomar 1,250 MW Existing power plants Energy 550 MW Gasoducto Bajanorte Proposed power plant Termoeléctrica de Mexicali Twin Oaks Power Proposed LNG receipt terminals Transportadora 600 MW 305 MW de Gas Natural Mexicali Natural gas utilities Energía Natural gas pipelines Costa Azul Cameron * includes partnerships LNG Chihuahua Torreon D Sempra Energy Global Enterprises is developing a strategic portfolio of energy-infrastructure assets in the Pacific Southwest and U.S. Gulf Coast. E n e rg y- I nf ra st r u c tu re Bu s i n esses Customer interest in an expansion of Gasoducto Bajanorte and a new pipeline In 2003, Se m p ra E n e rg y Reso u rces connecting the existing system to markets Sempra Energy Resources brought four in Arizona is strong, with capacity requests new power plants online in the Pacific totaling more than 3 billion cubic feet Southwest. The company now has more (bcf) of natural gas per day. The company than 2,600 megawatts (MW) in operation. will move ahead with additional invest- More importantly, more than 80 percent ment once shippers have committed to of this capacity is under long-term contract buy capacity under long-term contracts. through 2010, demonstrating the increas- ing stability and predictability of Sempra Sempra Energy International owns Energy Resources’ earnings and cash flow. several natural gas distribution utilities Sempra Energy Resources continues to in Northern Mexico and partial interests assess new market opportunities in keep- in natural gas and electric distribution ing with its strategic growth philosophy. utilities in Argentina, Chile and Peru. Sempra Se m p ra E n e rg y I n te r n a t i o n a l In 2003, Sempra Se m p ra E n e rg y L N G Energy International’s Gasoducto Bajanorte Energy Global Enterprises established pipeline is in full operation, with the sys- Sempra Energy LNG, which is responsible tem nearly 100-percent subscribed through for the company’s LNG market initiatives, 2023. The pipeline, able to transport 500 including the development of Energía million cubic feet of natural gas per day, Costa Azul and Cameron LNG. Energía delivers clean-burning natural gas to the Costa Azul is a $600 million LNG receipt Baja California region of Mexico to fuel facility being developed just north of future economic growth. page 1 9
  • 22. Sempra Energy’s move to import new supplies of liquefied natural gas in 2007 will help meet an expanding market for natural gas in North America. Ensenada in Baja California, Mexico, to Se m p ra F i b e r L i n ks Sempra Fiber Links process 1 bcf per day of natural gas. received patent approval notification for Cameron LNG is a $700 million receipt its fiber-in-gas (FIGSM) technology, which facility under development near Lake makes more efficient broadband connec- ▼ Charles, Louisiana, on the U.S. Gulf Coast, tions possible through safe installation of to process 1.5 bcf per day of natural gas. fiber-optic cable within active natural gas Construction on both projects is scheduled pipelines. Sempra Fiber Links completed to begin in 2004. an installation for Long Beach Energy, which is using the fiber to connect critical The two LNG facilities enjoy strategic buildings on its campus. Sempra Fiber sites close to existing transmission pipe- Links also received California regulatory lines. Energía Costa Azul would utilize approval for natural gas utilities in the Sempra Energy International’s Gasoducto state to begin using the FIGSM technology, Bajanorte pipeline to transport the regasi- clearing the way for installations to begin fied fuel to markets in Northern Mexico in existing SoCalGas and SDG&E pipelines. and the Southwestern United States. Additionally, Sempra Energy Trading will play an important role in helping to market the natural gas processed at the facilities. page 2 0
  • 23. Sempra Energy Trading and Sempra Energy Solutions offer trading and risk-management services that provide customers with cash-flow certainty in volatile commodity markets. to expand its energy-related product base R i s k- M a n a g e m e n t Se r v i ces to take advantage of growing markets in Sempra Energy Se m p ra E n e rg y Tra d i n g Europe and Asia. Trading delivered another profitable year in 2003, and now counts more than 20 Despite a Se m p ra E n e rg y So l u t i o n s ▼ straight quarters of profitable performance, challenging year of high commodity prices excluding required accounting changes. and uncertainty about deregulation, Sempra Energy Trading offers a range Sempra Energy Solutions expanded its of risk-management services to help footprint in 2003 as customers continued customers better execute their commodity- to contract for energy services. The compa- procurement and asset-utilization strate- ny received several industry awards, gies. The short-term nature of Sempra including recognition as an outstanding Energy Trading’s portfolio—83 percent supplier to SBC Global Communications. of net unrealized revenue converts to In 2003, the unit also became the only cash within two years—demonstrates the energy marketer to receive ISO 9001:2000 liquidity and transparency of its contracts. certification, the new industry benchmark Sempra Energy Trading is one of the for operational excellence. In 2004, Sempra top five physical marketers of natural Energy Solutions looks to further expand gas in North America and one of the top its market position in an evolving retail marketers of base metals in the world. energy services market. The customer-focused company continues page 2 1
  • 24. SENIOR MANAGEMENT TEAM S E M P R A E N E R GY C O R P O R AT E Stephen L. Baum Frank H. Ault Edwin A. Guiles Randall B. Peterson Thomas C. Sanger Chairman, President Senior Vice President Group President, Vice President, Corporate Secretary and Chief Executive and Controller Sempra Energy Human Capital Thomas S. Sayles Officer Utilities Services Vice President, Javade Chaudhri Executive Vice Governmental and Michael W. Allman Joseph A. Mark D. Randle Vice President, Audit President and General Vice President, Energy Community Affairs Householder Services Counsel Vice President, Risk Management Neal E. Schmale Corporate Tax Executive Vice Dennis V. Arriola Donald E. Felsinger G. Joyce Rowland Vice President, Group President, Senior Vice President, President and Chief Charles A. McMonagle Communications and Sempra Energy Vice President and Human Resources Financial Officer Investor Relations Global Enterprises Treasurer Kevin C. Sagara W. Davis Smith Vice President and Vice President and Associate General Associate General Counsel Counsel S E M P R A E N E R GY C O R P O R AT E Seated, from left: Michael Allman, Donald Felsinger, Edwin Guiles, Joseph Householder, Dennis Arriola Standing, from left: Charles McMonagle, Thomas Sayles, Neal Schmale, Joyce Rowland, Stephen Baum, Mark Randle, Javade Chaudhri, Frank Ault, Randall Peterson, Thomas Sanger S E M P R A E N E R GY G L O B A L E N T E R P R I S E S Donald E. Felsinger Darcel L. Hulse David A. Messer Richard S. Shapiro Group President President, Sempra President, Sempra Vice President, Energy LNG Energy Trading External Affairs Michael J. Clover President, Sempra Erbin B. Keith Michael R. Niggli Mark A. Snell Fiber Links President, Sempra President, Sempra Chief Financial Officer Energy Solutions Energy Resources Monica Haas Edward A. Steiger Director, Investments, Vice President, George S. Liparidis Steven J. Prince Sempra Energy President, Sempra Chairman and Chief Human Resources Financial Energy International Executive Officer, Sempra Energy Trading page 2 2
  • 25. S E M P R A E N E R GY U T I L I T I E S Seated, from left: Richard Morrow, Lee Schavrien, Debra Reed, Edwin Guiles, W. Davis Smith, Anne Smith Standing, from left: Lee Stewart, William Reed, Margot Kyd, Steven Davis, James Avery, J. Chris Baker, Terry Fleskes, Pamela Fair, Roy Rawlings Not pictured: Lad Lorenz S E M P R A E N E R GY U T I L I T I E S Edwin A. Guiles J. Chris Baker Terry M. Fleskes Richard M. Morrow Lee Schavrien Group President Vice President, Vice President and Vice President, Vice President, Chief Information Controller Customer Services, Regulatory Affairs Debra L. Reed Technology Officer Major Markets President and Chief Margot A. Kyd Anne S. Smith Financial Officer Senior Vice President, Vice President, Steven D. Davis Roy M. Rawlings Senior Vice President, Business Solutions Senior Vice President, Customer Services, James P. Avery Customer Service and Distribution Operations Mass Markets Senior Vice President, Lad Lorenz External Relations Electric Transmission, Vice President, William L. Reed Lee M. Stewart SDG&E Regulatory Affairs Senior Vice President, Senior Vice President, Pamela J. Fair Vice President, Regulatory Affairs Gas Transmission Customer Operations S E M P R A E N E R GY GLOBAL ENTERPRISES Seated, from left: Darcel Hulse, Monica Haas, Mark Snell, Edward Steiger Standing, from left: George Liparidis, Kevin Sagara, Michael Niggli, Erbin Keith, Donald Felsinger, Michael Clover, Richard Shapiro Not pictured: David Messer, Steven Prince page 2 3
  • 26. BOARD OF DIRECTORS Stephen L. Baum William D. Jones Chairman of the Board, President, Chief Executive President and Officer and Director, Chief Executive Officer, CityLink Investment Corporation Sempra Energy San Diego, California San Diego, California Richard G. Newman Chairman and Hyla H. Bertea Community Leader Chief Executive Officer, Corona del Mar, California AECOM Technology Corp. Los Angeles, California James G. Brocksmith Jr. Former Deputy Chairman William G. Ouchi, Ph.D. and Chief Operating Officer, Sanford and Betty Sigoloff U.S. Operations, Professor in Corporate Renewal, KPMG Peat Marwick LLP Anderson Graduate School Naples, Florida of Management, University of California, Los Angeles Herbert L. Carter, DPA Los Angeles, California Executive Vice Chancellor Emeritus and Trustee Professor William C. Rusnack of Public Administration, Former President and California State University Chief Executive Officer, System Premcor Inc. Long Beach, California St. Louis, Missouri Richard A. Collato William P. Rutledge Jr. President and Chairman, Chief Executive Officer, Communications and YMCA of San Diego County Power Industries San Diego, California Palo Alto, California Wilford D. Godbold Jr. Thomas C. Stickel Former President and Chief Chairman, Chief Executive Executive Officer, Officer and Founder, ZERO Corporation University Ventures Network Los Angeles, California and Virtual Capital of California LLC San Diego, California Diana L. Walker Of Counsel O’Melveny & Myers LLP Los Angeles, California page 2 4
  • 27. C O R P O R AT E I N F O R M AT I O N Transfer Agent Investor Relations Direct Common Stock Investment Plan EquiServe Trust Company, N.A. Security analysts, portfolio P.O. Box 43069 Sempra Energy offers a Direct Common managers and other members Providence, RI 02940-3069 Stock investment plan as a simple, con- of the financial community Telephone: 877-773-6772 venient and affordable way to invest in should contact: Hearing Impaired (TDD): the company. Cash dividends from a Dennis V. Arriola 800-952-9245 participant’s account can be reinvested Vice President, Communications Internet: www.equiserve.com automatically in full or in part to pur- and Investor Relations chase additional shares, or participants Telephone: 619-696-2901 Shareholder Services may choose to receive all or a portion Fax: 619-696-2374 Investors with general questions of their cash dividends electronically or regarding Sempra Energy, by check. Participation in the Plan Stock Exchange Listing San Diego Gas & Electric, requires an initial investment of as little Sempra Energy Common Stock: Southern California Gas Co. as $500. The Plan allows optional cash Ticker Symbol: SRE or Pacific Enterprises securities investments of as little as $25 up to New York Stock Exchange should contact the company at: a maximum of $150,000 per calendar Pacific Stock Exchange year. Nonshareholders pay a $15 fee Sempra Energy for the initial cash investment in Sempra Energy Trust Shareholder Services Sempra Energy. Brokerage commissions Preferred Securities: 101 Ash Street incurred in the purchase of shares San Diego, CA 92101-3017 New York Stock Exchange Telephone: 877-736-7727 will be paid by Sempra Energy. The Sempra Energy Income Fax: 619-696-2374 Plan is offered only by the means of Equity Units: E-mail: investor@sempra.com a prospectus, which can be obtained New York Stock Exchange Internet: www.sempra.com by calling the Plan Administrator, EquiServe Trust Company, N.A., Pacific Enterprises News and Information at 877-773-6772, or through the Preferred Stock: Internet at www.equiserve.com. American Stock Exchange To hear corporate news reports Pacific Stock Exchange and stock updates or to request materials, call 877-773-6397. Southern California Gas Sempra Energy’s Annual Report Preferred Stock: to the Securities and Exchange Pacific Stock Exchange Commission (Form 10-K) San Diego Gas & Electric is available to shareholders Preferred Stock: at no charge by writing to American Stock Exchange Shareholder Services. This information, as well as corporate governance guidelines, codes of ethics and board committee charters, also are available on the company’s Web site at www.sempra.com. Sempra Energy’s Annual Report to the Securities Exchange Commission on Form 10-K, which includes as exhibits the certifications regarding the quality of the company’s public disclosure that are filed by Sempra Energy’s chief executive officer and chief financial Sempra Energy also offers a officer under the Sarbanes-Oxley Act of 2002, is available to shareholders at no charge by writing to the company’s Shareholder Services Department. quarterly Performance Report newsletter via e-mail for This report contains statements that are not historical fact and constitute forward-looking statements within the meaning of the Private Securities Legislation Reform Act of 1995. When the company uses words like “believes,” “expects,” “anticipates,” “intends,” those who register at “plans,” “estimates,” “may,” “could,” “would,” “should” or similar expressions, or when the company discusses its strategy or plans, www.sempra.com/subscribe. the company is making forward-looking statements. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Future results may differ materially from those expressed in the forward-looking statements. Forward-looking statements are necessarily based upon various assumptions involving judgments with respect to the future and other risks, including, among others: national, international, regional and local economic, competitive, political, legislative and regulatory conditions and developments; actions by the California Public Utilities Commission, the California State Legislature, the California Department of Water Resources and the Federal Energy Regulatory Commission; capital market conditions, inflation rates and interest rates; energy markets, including the timing and extent of changes in commodity prices; weather conditions; business, regulatory and legal decisions; the pace of deregulation of retail natural gas and electricity delivery; the timing and success of busi- ness development efforts; and other uncertainties, all of which are difficult to predict and many of which are beyond the company’s control. These risks and uncertainties are further discussed in the company’s reports filed with the Securities and Exchange Commission that are available through the EDGAR system without charge at its Web site, www.sec.gov.
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