EXCERPT FROM TEN-YEAR SUMMARY PAGES 16-17
In millions of dollars except per share amounts
1993 1992 1991 1990 1989
-------- -------- -------- -------- --------
For the years ended December 31
Operating revenues $1,980.1 $1,870.9 $1,789.0 $1,771.9 $1,669.5
Operating income 293.7 296.3 315.5 314.0 284.8
Net income (before preferred
dividend requirements) 218.7 210.7 208.1 207.8 187.1
Earnings per common share 1.81 1.77 1.76 1.76 1.57
Dividends declared per common share 1.48 1.44 1.3875 1.35 1.35
At December 31
Total assets 4,702.2 4,199.8 3,747.6 3,656.6 3,546.5
Long-term debt and preferred stock
subject to mandatory redemption
(excludes current portion)*** 1,525.0 1,651.9 1,331.2 1,337.1 1,287.2
*Includes ($7.7) million from the cumulative effect of change in accounting
principle.
**Includes ($0.07) for cumulative effect of change in accounting principle.
***Includes long-term debt redeemable within one year.
This summary should be read in conjunction with the consolidated financial
statements and notes to consolidated financial statements contained elsewhere
in this report.
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
San Diego Gas & Electric Company is an operating public utility engaged in the
electric and gas businesses. SDG&E generates and purchases electric energy and
distributes it to 1.1 million customers in San Diego County and an adjacent
portion of Orange County, California. It also purchases natural gas and
distributes it to 690,000 customers in San Diego County. SDG&E also transports
electricity and gas for others.
SDG&E has diversified into other businesses. SDG&E owns an 80-percent share of
Wahlco Environmental Systems, which designs and manufactures air-pollution
control and power-efficiency equipment for electric utilities and other power
producers, refineries, and other manufacturers. Wholly owned Enova Corporation
invests in limited partnerships representing about 300 affordable-housing
projects located throughout the United States. Wholly owned Califia Company
leases computer equipment. The investments in Enova and Califia are expected to
provide income tax benefits over the next several years. Additional information
regarding SDG&E's subsidiaries is described in Note 2 of the notes to
consolidated financial statements.
REVENUES
Electric revenues increased 5 percent in 1993 and 7 percent in 1992. The 1993
increase reflects higher authorized costs and increased sales to other
utilities. The 1992 increase reflects higher authorized costs and higher
volumes as a result of warmer weather.
Gas revenues increased 3 percent in 1993 and decreased 1 percent in 1992. The
1993 increase reflects higher authorized costs, partially offset by lower sales
volume as a result of customers' purchases of gas directly from other
suppliers. The 1992 decrease reflects lower sales volume due to warmer weather
and customers' purchases of gas directly from other suppliers, partially offset
by higher authorized costs.
Revenues from diversified operations contributed 6 percent of SDG&E's
consolidated revenues in 1993, 5 percent in 1992 and 5 percent in 1991. The
1993 increase in revenues from diversified operations primarily resulted from
Califia's leasing activities. Wahlco's revenues remained the same in 1993 after
decreasing in 1992 due to lower sales of flue gas conditioning systems. The
market for flue gas conditioning systems has not developed in the United States
as a result of many companies' delaying decisions on how to comply with the
Clean Air Act. Wahlco also faces increasing competition from the availability
of federal pollution credits, suppliers of lower-cost alternative systems and
other options. In late 1993 Wahlco recorded a restructuring charge to reflect
the planned relocation of Wahlco's manufacturing operations in Canada and West
Virginia to its other U.S. facilities.
OPERATING EXPENSES
Purchased-power expense increased in 1993 due to purchases of short-term energy
to replace lower-cost nuclear generation resulting from the refueling of the
San Onofre Nuclear Generating Station Units 2 and 3 during 1993 and the
permanent shutdown of Unit 1 in late 1992. Electric fuel expense remained the
same in 1993, reflecting lower generation offset by higher prices for natural
gas. Electric fuel and purchased-power expense increased in 1992 primarily
due to higher volumes.
The decrease in gas purchased for resale in 1993 reflects the lower sales
volumes resulting from customers' purchases of gas directly from other
suppliers, partially offset by higher prices for natural gas. Gas purchased for
resale decreased in 1992 due to lower volumes and customers' purchases of gas
directly from other suppliers.
Other operating expenses increased in 1993 primarily due to higher utility
operating and maintenance expenses, higher subsidiary operating expenses
arising from Califia's increased leasing activities and higher depreciation as
a result of the accelerated recovery of SDG&E's remaining investment in SONGS
Unit 1. Other operating expenses increased in 1992 primarily due to new energy
conservation programs.
OTHER INCOME AND DEDUCTIONS
The only significant change in other income and deductions was the 1992
increase due to the shutdown of SONGS Unit 1 and the related rate recovery
of Unit 1 costs.
EARNINGS
In 1993 earnings per common share were $1.81, compared to earnings of
$1.77 in 1992 and $1.76 in 1991. The increase in earnings in 1993 is due
primarily to improved subsidiary results. The increase in earnings in 1992 is
due primarily to the rate recovery of SONGS Unit 1 costs and to the partial
restoration of the California Public Utilities Commission's 1989 Southwest
Powerlink disallowance, partially offset by subsidiary losses and the $15
million merger termination fee paid by Southern California Edison in 1991 and
the related income tax benefit from the merger expenses that SDG&E incurred in
prior years.
SDG&E's nonutility subsidiaries contributed 2 cents to earnings per common
share in 1993, reduced earnings by 12 cents per common share in 1992 and
contributed 5 cents per common share to earnings in 1991.
LIQUIDITY AND CAPITAL RESOURCES
Utility operations continue to be a major source of liquidity for SDG&E. In
addition, SDG&E's financing needs are met primarily through issuances of short-
and long-term debt and of common and preferred stock. These capital resources
are expected to remain available. Cash requirements include plant construction
and other capital expenditures, subsidiaries' affordable-housing and leasing
investments, and retirements of long-term debt.
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CASH FLOWS FROM OPERATING ACTIVITIES
The major changes in cash flows from operations among the three years result
from changes in regulatory balancing accounts, income taxes, and accounts
payable and other current liabilities. The change in cash flows related to
regulatory balancing accounts in 1993 compared to 1992 was due primarily to
higher prices for natural gas and the replacement of lower-cost nuclear
generation with purchased power and gas-fired generation due to the refueling
of SONGS Units 2 and 3 during 1993 and the shutdown of SONGS Unit 1 in
late 1992. The change in cash flows related to regulatory balancing accounts
in 1992 compared to 1991 was due primarily to the higher cost of fuel and
purchased power, partially offset by higher sales volume in 1992. The changes
in cash flows related to income taxes were due primarily to higher income
tax payments in 1992 in connection with a preliminary settlement with the
Internal Revenue Service on the timing of certain deductions in prior
years. The changes in cash flows related to accounts payable and other
liabilities were due primarily to 1991 gas-supplier refunds that were applied
to customers' bills in 1992.
CASH FLOWS FROM FINANCING ACTIVITIES
During 1993 SDG&E issued $370 million of first mortgage bonds and other
long-term debt, including $179 million of tax-exempt Industrial Development
Bonds issued through the City of San Diego and $60 million of tax-exempt
Pollution Control Bonds issued through the California Pollution Financing
Authority. The cash flows from these issuances and from operations were used
to refinance higher-cost IDBs, other first mortgage bonds and other
long-term debt. In addition, SDG&E reacquired preferred stock at a cost of
$65 million and issued $51 million of preferred stock at a lower dividend
rate. SDG&E plans to issue $55 million of preferred stock in 1994. Through
its employee savings and common stock investment plans, SDG&E issued
$39 million of common stock in 1993 and plans no such issues in 1994.
SDG&E's utility capital structure is one factor that has enabled it to obtain
long-term financing at attractive rates. The following table shows the
percentages of capital represented by the various components. The capital
structures are net of the construction funds held by a trustee in 1992 and
1993.
1989 1990 1991 1992 1993 Goal
---------------------------------------------------
Common equity 45% 45% 47% 47% 47% 45-48%
Preferred stock 6 6 5 5 4 5-7
Debt and leases 49 49 48 48 49 46-49
---------------------------------------------------
Total 100% 100% 100% 100% 100% 100%
During 1993 the major credit-rating agencies issued statements indicating that
competition and changes in regulation are subjecting utilities to greater
risks. In October 1993 Standard & Poor's Corporation, after completing a review
of the industry, concluded that more stringent risk-assessment standards were
appropriate and revised ratings outlooks for about one-third of the utilities
from "stable" to "negative." SDG&E's outlook is rated "negative." However,
SDG&E's long-term debt ratings have not changed since 1985. Moody's Investors
Service and Standard & Poor's recently reaffirmed their ratings of Aa3 and A+,
respectively, for SDG&E's long-term debt.
CASH FLOWS FROM INVESTING ACTIVITIES
Sources of cash for investing activities in 1993 included $190 million
withdrawn from the construction trust fund, into which $248 million of
proceeds from issuances of IDBs was deposited in 1992. Cash used in
investing activities in 1993 included utility construction expenditures,
payments to the nuclear decommissioning trust, and subsidiaries' leasing
activities and investments in affordable-housing projects. Construction
expenditures, excluding nuclear fuel and the allowance for equity funds used
during construction, were $354 million in 1993 and are estimated to be about
$260 million in 1994. SDG&E continuously reviews its construction, investment
and financing programs and revises them in response to changes in competition,
customer growth, inflation, customer rates, the cost of capital, and
environmental and regulatory requirements. Among other things, the level of
expenditures in the next few years after 1994 will depend heavily on the timing
of expenditures to comply with air emission reduction and other environmental
requirements, and on whether SDG&E proceeds with its proposed South Bay Repower
project and its plan to transport natural gas to Mexico. These matters are
discussed below.
Payments to the nuclear decommissioning trust are expected to continue until
the units are decommissioned, which is not expected to occur before 2014.
Although Unit 1 was permanently shut down in 1992, it is expected to be
decommissioned concurrently with Units 2 and 3.
REGULATORY MATTERS
ELECTRIC RATES
In December 1993 the CPUC issued decisions on the 1994 Cost of Capital and
Operational Attrition proceedings, authorizing returns on equity from 10.85
percent to 11.1 percent for the six energy utilities under the CPUC's
jurisdiction. This is a decrease from 1993 authorized returns which ranged
from 11.8 percent to 11.95 percent. The CPUC lowered the rates of return
of California utilities due to its concern for California's poor economy. The
CPUC authorized a 10.85 percent return on equity for SDG&E (compared to 11.85
percent for 1993), for an overall rate of return of 9.03 percent (compared to
9.94 percent for 1993). The CPUC also authorized an attrition increase which
19
results in a $1 million increase in electric and gas rates when combined with
the effects of the Cost of Capital decision. The attrition increase reflects
expected higher operating and maintenance expenses, capital expenditures and
other non-fuel costs associated with SDG&E's 1994 operations. The CPUC's
decision was effective January 1, 1994.
On July 21, 1993 the CPUC issued its decision on the forecast phase of SDG&E's
1993 Energy Cost Adjustment Clause proceeding, approving a $53 million increase
in electric rates effective August 1, 1993. The increase reflects higher fuel
and purchased-power expenses and the recovery of SDG&E's remaining investment
in SONGS Unit 1.
On September 29, 1993 SDG&E filed its 1994 ECAC application and has requested
an increase of $56 million in electric rates to cover expected higher fuel and
purchased-power expenses, and recovery of prior undercollections from
customers. A CPUC decision is expected in May 1994 with rates effective June 1,
1994. The CPUC is reviewing the reasonableness of SDG&E's fuel and
purchased-power expenses and operations for the ECAC periods from August 1,
1991 to July 31, 1993. CPUC decisions are expected in 1994. Included will be
the CPUC's assessment of SDG&E's administration of its 75-megawatt
purchased-power contract with Portland General Electric for the three years
ended July 31, 1992.
GAS RATES
During 1992 the CPUC initiated its Gas Bypass Rulemaking proceeding
to consider rules allowing utilities to discount prices to avoid losing
customers who would otherwise have their gas transported by others. The CPUC
may also eliminate balancing account coverage for transportation costs
associated with noncore customers, which would increase utilities' risk of
recovering certain costs. A CPUC decision is expected in 1994.
On May 19, 1993 the CPUC issued its Long-Run Marginal Cost decision, requiring
a larger portion of gas transportation costs to be allocated to residential
customers, thereby lowering rates for large industrial customers. The decision
is intended to help California industries become more competitive, and
will reduce the large industrial customers' incentives to leave utilities'
systems. The decision reduced SDG&E's annual payments to Southern California
Gas Company by $5 million, effective June 1, 1993, and results in significantly
lowered rates for SDG&E's large industrial customers, with only slightly
increased rates for SDG&E's residential customers.
The Federal Energy Regulatory Commission's Order 636 required interstate
pipeline companies to make pipeline capacity directly available to retail and
wholesale customers by November 1, 1993. In addition, the CPUC's Gas Capacity
Brokering decision required SoCal Gas to make its long-term rights to
interstate capacity available to its retail and wholesale customers beginning
in August 1993. As a result SDG&E reduced its commitment to SoCal Gas for firm
interstate pipeline capacity to reflect its core customer demand, allowing
SDG&E to bid for capacity to meet its noncore customer demand as needed on a
short-term basis (core customers are primarily residential and commercial
customers).
In September 1993 SDG&E filed its Biennial Cost Allocation Proceeding
application to recover higher expected natural gas prices and to recover prior
undercollections of gas costs. On January 1, 1994 the CPUC approved a portion
of SDG&E's application, authorizing a $10 million increase in SDG&E's gas rates
to reflect SoCal Gas's request for interim rate relief to recover stranded
costs associated with SoCal Gas's long-term interstate transportation
contracts. A decision on the remainder of the BCAP application is expected in
late 1994.
SAN ONOFRE NUCLEAR GENERATING STATION UNIT 1
In November 1992 the CPUC issued a decision to permanently shut down SONGS
Unit 1. The decision authorized Edison and SDG&E to recover their investments
in Unit 1, of which SDG&E's share was $111 million, over a four-year period.
SDG&E is authorized to recover its investment earning a return of 9.1 percent.
PERFORMANCE-BASED RATEMAKING
In October 1992 SDG&E applied to the CPUC to implement performance-based
ratemaking, requesting incentive regulation for: 1) gas procurement and
transportation; 2) electric generation and purchased power; 3) base rates and
4) long-term electric-resource procurement.
On June 23, 1993 the CPUC approved the first two mechanisms on a two-year
experimental basis beginning August 1, 1993. These mechanisms will measure
SDG&E's ability to purchase and transport natural gas and to generate energy or
purchase short-term energy at the lowest possible cost, by comparing SDG&E's
performance against various market benchmarks. SDG&E's shareholders and
customers will share in any savings or excess costs within predetermined
ranges.
Under the proposed base-rate mechanism, SDG&E would forego its 1996 General
Rate Case (although SDG&E's annual cost of capital proceeding would be
continued) and utilize the proposed base-rate mechanism for a five-year period
beginning in May 1994. The mechanism has three components, which incorporate a
range of possible shareholder benefits and risks. The first is a formula
similar to the current attrition mechanism used to determine SDG&E's annual
revenue requirement for operating, maintenance and capital expenditures. The
second consists of a set of indicators which determine performance standards
for customer rates, employee safety, electric system reliability and customer
satisfaction. The third component establishes a revenue-sharing mechanism based
on SDG&E's rate of return.
20
On December 7, 1993 SDG&E; the CPUC's Division of Ratepayer Advocates; and the
U.S. Navy, SDG&E's largest customer, filed testimony agreeing on the base-rate
mechanism. However, the Utility Consumers' Action Network, a utility-customer
advocate group, filed with the CPUC a request for modification of SDG&E's
proposal. The City of San Diego has filed a request to participate in the
proceeding. On January 14, 1994 SDG&E filed rebuttal testimony to UCAN's
petition. Hearings were concluded on January 28, 1994. A CPUC decision is
expected in the second quarter of 1994.
SDG&E expects the long-term electric-resource procurement mechanism to be
addressed after proceedings on the base-rate mechanism. This proposal, which
does not have a risk-sharing mechanism, calls for a bidding system, under which
SDG&E would compete with other utilities and nonutility producers to provide
long-term generating resources, including long-term purchased capacity, to
SDG&E customers. This mechanism would replace the Biennial Resource Plan Update
proceeding with a market-based approach to long-term electric-resource
procurement. The CPUC would have final approval of the resources selected by
SDG&E.
RESOURCE PLANNING
During the period 1994 through 1997, SDG&E is projecting an electric load
growth of 1 percent to 1.5 percent per year for both sales and peak demand. The
combination of load growth and terminating purchased-power contracts results in
a need for additional capacity.
In June 1993 the CPUC issued its final decision on the BRPU proceeding,
requiring SDG&E to competitively bid for 491 mw of capacity beginning in 1997,
including alternatives to SDG&E's proposed 291-mw Encina Repower project. The
decision also required a minimum of 100 mw to be supplied from renewable
resources such as geothermal, solar- and wind-generated power. On December 9,
1993 SDG&E announced the preliminary list of successful bids, of which the
majority were cogeneration projects and the remainder were wind, geothermal,
solar and biomass projects. Based on preliminary assessments, several of the
bids that represented alternatives to the Encina Repower project were priced
lower than SDG&E's proposal. The winning bids were scheduled to be announced in
May 1994. However, on December 21, 1993 SDG&E filed a Petition for Modification
of the BRPU decision, indicating that SDG&E's customers would be required to
pay up to $800 million in excess energy costs over a 30-year period under the
CPUC's bidding rules. These include the "second-price auction" rule, which
requires SDG&E to reject the lowest bid prices and use the next higher range of
bid prices as the basis for paying for BRPU energy. SDG&E's petition requests
that it pay for the 491 mw of capacity at the lowest bid prices. The petition
also requests that SDG&E be allowed to procure replacement capacity if a
selected bidder is unable to perform under the bid terms.
SDG&E is considering the addition of 500 mw of capacity to its system by either
repowering its South Bay power plant or by purchasing capacity from others.
SDG&E has filed an application with the CPUC for a Certificate of Public
Convenience and Necessity, requesting approval of the South Bay Repower project
and recovery of the project's capital costs and operating and maintenance
expenses in the same manner as a typical qualifying nonutility producer selling
power to SDG&E under a purchased-power contract. SDG&E would be at risk if it
exceeds the proposed cost of construction, financing and operation of the
plant. SDG&E would also be at risk to meet certain performance standards
measuring the plant's efficiency and output.
SDG&E also initiated a competitive bidding process to assess alternatives to
the South Bay Repower project. Bids were submitted by independent power
producers, cogenerators and others. In November 1993 SDG&E announced the
preliminary results of the competitive bidding process. The South Bay Repower
project was found to be competitive based on standardized guidelines
established for all bidders. However, the CPUC is evaluating SDG&E's
application to determine whether the South Bay Repower project would be the
most cost-effective means of supplying additional capacity to SDG&E in 1997.
The project also requires approval by the California Energy Commission. SDG&E
is reconsidering its application and is curtailing preliminary expenditures on
the project pending CPUC resolution of issues arising from the BRPU auction and
clearer direction on how utilities should plan to meet their needs for
additional generating capacity.
COMPETITION
SDG&E faces significant challenges as competition emerges in the electric and
gas industries as a result of ongoing restructuring by federal and state
regulatory authorities. These challenges include price competition, customers'
bypass of SDG&E's electric and gas systems, nonutility generation, transmission
access, retail wheeling, unfavorable economic conditions in California, and
reduced customer growth within SDG&E's service territory.
The CPUC is considering reforming the electric utility industry in California
and has identified several alternatives. One alternative would be to adopt
limited reform by establishing a performance-based ratemaking mechanism, but no
longer assuring utilities' recovery of fuel and other costs. This would be
accomplished through the elimination of balancing accounts and rate adjustment
mechanisms, which stabilize utilities' revenues for fluctuations in sales
volumes and adjust future rates for variance from forecasted costs for fuel and
purchased power. A second alternative would be to adopt retail wheeling in
21
California, allowing commercial and industrial customers to procure energy from
producers other than their local utility. A third alternative would involve a
complete restructuring of the electric industry, which would require utilities
to divest of their power plants and become "common carrier" transmission and
distribution facilities and which would require customers to procure their
energy from others, using the utilities only for transmission.
The CPUC is also considering other means of enhancing competition, by allowing
others to offer services typically performed by utilities. For example, the
CPUC has ordered a test program to see if others could effectively provide
lower-cost energy conservation services to utilities' customers.
The National Energy Policy Act was passed in 1992 to increase competition in
the wholesale electric-generation market and to lower energy prices by easing
restrictions on independent power production and by establishing a new class of
electricity providers called "exempt wholesale generators." This allows both
utilities and nonutility producers to operate generating facilities in more
than one state with fewer restrictions imposed by the federal government. In
certain circumstances the act also authorizes the FERC to require a utility to
provide transmission service for others over its existing facilities or to
build new facilities, if necessary. Recent CPUC decisions also will affect
SDG&E's use of its transmission system. As a result of the CPUC's BRPU
decision, SDG&E will be responsible for upgrading its transmission system and
arranging for the transmission of power to its system from other producers.
Several states are considering adopting retail wheeling, which will allow other
producers to sell energy to a utility's retail customers. However, many issues
and complications still need to be resolved.
As the restructuring of the electric industry evolves, SDG&E will become more
vulnerable to competition. California utilities' rates are significantly higher
than the national average. SDG&E's industrial customers pay electricity prices
that are among the highest in the Southwest. However, since 1989 SDG&E has been
the lowest-cost provider of electricity among the major, investor-owned
California utilities. In addition, SDG&E has a lower concentration of
industrial customers, making its customers a less likely target for outside
competitors. Furthermore, about 50 percent of SDG&E's capacity needs are met
through purchased power, which limits SDG&E's risk of recovering its power
plant investment.
Restructuring of the gas utility industry at the federal and state levels has
allowed customers to bypass utilities as suppliers of natural gas. Nonutility
electric producers may now use a utility's facilities to transport gas
purchased from nonutility suppliers. Also, smaller customers may form groups to
buy gas from another supplier.
SOURCES OF FUEL AND ENERGY
SDG&E's primary sources of fuel and energy include surplus energy from other
utilities in the Southwest and the Northwest, natural gas from Canada and the
Southwest, and uranium from Canada and Germany. SDG&E expects its purchased
fuel and energy costs to remain relatively low in the next few years due to
the continued availability of surplus energy in the Southwest and the
availability of natural gas. During 1993 SDG&E began receiving low-cost gas
from Canada. SDG&E is currently involved in litigation concerning the
contracts for this gas. SDG&E cannot predict the outcome of the litigation
but does not expect that even an unfavorable outcome would have a material
effect on its financial condition or results of operations. SDG&E also
purchases a significant portion of its gas supplies from short-term sources in
the Southwest. Although short-term natural gas supplies and prices remain
volatile due to weather and other conditions, these sources should provide
SDG&E with an adequate supply of low-cost natural gas.
PROPOSED TRANSPORTATION OF GAS TO MEXICO
In 1993 SDG&E and SoCal Gas submitted a joint proposal to transport natural
gas to Mexico. The project is subject to approval by Mexico and various
federal, state and local agencies, and involves the construction of an
80-mile pipeline from SoCal Gas's service territory to the Mexican border.
In August 1993 the FERC issued a permit to SDG&E and SoCal Gas, allowing
them to make natural gas available to Mexico at the Tijuana border. The
project's plans include providing gas to the nearby Rosarito power
plant, which would be expanded and converted from oil-fired to gas-fired,
thereby reducing air pollution in Mexico and California. Mexico has also
expressed interest in obtaining gas at another border crossing to serve the
area's industrial customers. As a result, a related application was filed with
the FERC for permission to transport gas to Mexicali through SoCal Gas's
existing systems in the Imperial Valley. Competing proposals have been
submitted by others. SDG&E would face significant competition if one of the
other proposals is selected and a major pipeline begins operating near SDG&E's
service territory.
CUSTOMER GROWTH
Due to the continuing recession in California, customer growth has remained
low, increasing about 1 percent annually in 1993 and 1992. The cutbacks in
defense spending and construction have contributed to the loss of jobs in San
Diego County. Fewer commercial businesses are being established in California
due to the high cost of taxes and regulations.
ENVIRONMENTAL MATTERS
SDG&E's operations are conducted in accordance with federal, state and local
environmental laws and regulations governing hazardous wastes, air and water
quality, land use, and solid waste disposal. SDG&E incurs significant costs to
operate its facilities in compliance with these laws and regulations, and to
22
clean up the environment as a result of prior operations of SDG&E or of others.
The costs of compliance with environmental laws and regulations are normally
recovered in customer rates. The CPUC is expected to continue allowing the
recovery of such costs, subject to reasonableness reviews.
Capital expenditures to comply with environmental laws and regulations were $8
million for 1993 and $4 million for 1992. The estimated capital expenditures
for the next 5 years are $31 million in 1994, $35 million in 1995, $32 million
in 1996, $24 million in 1997 and $13 million in 1998. These expenditures
primarily include the estimated cost of retrofitting SDG&E's power plants to
reduce air emissions and exclude potential expenditures to comply with
water-discharge requirements for the Encina, South Bay and SONGS power plants.
HAZARDOUS WASTES
In 1993 the CPUC, the U.S. Environmental Protection Agency and the California
Environmental Protection Agency prepared the Hazardous Substance Cleanup
Cost Recovery Collaborative Report. Its proposed procedure would allow
utilities to recover 90 percent of hazardous-waste cleanup costs from
customers. Until such a procedure is adopted, SDG&E will continue to seek
recovery of these costs pursuant to a reasonableness review process by the
CPUC.
In 1992 the U.S. Environmental Protection Agency named SDG&E as a potentially
responsible party, for the North American Environmental, Inc. site in
Clearfield, Utah. The EPA is evaluating the extent of the site's contamination
and potential cleanup costs. The individual liability among the PRPs has not
been determined. As a result, SDG&E's ultimate liability, if any, cannot be
determined. The contractor who had disposed of SDG&E's hazardous wastes at the
site has agreed to indemnify SDG&E against liability for cleanup costs, if any,
associated with the site.
On December 6, 1993 SDG&E received notification that the California Department
of Toxic Substances Control had assumed responsibility for remediation
activities at the Rosen's Electrical Equipment Supply Company site in Pico
Rivera, California. PCB contamination was previously found on and near the
site. SDG&E sold transformers to Rosen's in the early 1980s and has been
identified as a PRP for the site under California law. SDG&E, seven other named
PRPs and others may be held liable for the cost of assessment and cleanup of
the site. The state has indicated that SDG&E may be held responsible for about
7 percent of the hazardous waste at the site. SDG&E is investigating this
matter. Based on available information, SDG&E is unable to estimate the range
of liability, if any, it may have for remediating this site.
SDG&E has identified or has been associated with various other sites which
require remediation under federal, state or local environmental laws. SDG&E
will be held partially or indirectly responsible for cleaning up some of these
sites. SDG&E cannot determine the extent of its responsibility for remediation
of these sites. Furthermore, the timing for assessing the costs of cleanup at
these sites and the number of others that may also be responsible and their
ability to share in the cost of the cleanup is unknown.
ELECTRIC AND MAGNETIC FIELDS
SDG&E and other utilities are involved in litigation concerning electric
and magnetic fields. An unfavorable outcome of EMF litigation could
have a significant impact on the future operations of the electric utility
industry, especially if relocation of existing power lines is ultimately
required. To date, science has demonstrated no cause-and-effect relationship
between cancer and exposure to the type of electric and magnetic fields
emitted by utilities' transmission lines and generating facilities.
In November 1993 the CPUC adopted an interim policy regarding EMFs. Consistent
with the major scientific reviews of available research literature, the CPUC
concluded that no health risk has been identified with exposure to EMFs.
However, to respond to public concern and scientific uncertainty, the CPUC
created a public education program and a research program and directed
utilities to adopt a low-cost EMF-reduction policy for new projects. The latter
program, which will be implemented until science provides more direction,
entails reasonable design changes to achieve noticeable reduction of EMF
levels anticipated from new projects.
EMISSION ALLOWANCES
In 1996 SDG&E must begin to comply with nitrogen oxide emission limits imposed
by the San Diego Air Pollution Control District. Full compliance is required
by 2001. The cost of compliance includes retrofitting SDG&E's power plants
and is estimated to be $130 million in capital costs and increased operating
costs.
WATER QUALITY
In 1989 SDG&E submitted applications to the San Diego Regional Water
Quality Control Board to renew the discharge permits for its South Bay
and Encina power plants. Supplemental renewal applications were submitted in
1993. SDG&E anticipates that the Water Quality Board and the U.S. Environmental
Protection Agency will make their determinations in 1994 regarding SDG&E's
applications. The permits are required to enable SDG&E to discharge its cooling
water and its treated in-plant waste water and are, therefore, prerequisites to
the continued operation of its power plants.
In addition, increasingly stringent cooling water and treated waste water
discharge limitations may be imposed, and SDG&E may be required to build
additional facilities to comply with these requirements. Such facilities could
include waste water treatment facilities, cooling towers or offshore discharge
pipelines.
23
The California Coastal Commission required a study of the offshore impact on
the marine environment from the cooling water discharge by SONGS Units 2 and 3.
The Marine Review Committee, acting on behalf of the Coastal Commission,
concluded there is some environmental damage caused by the discharge. To
mitigate the environmental damage, the California Coastal Commission ordered
Edison and SDG&E to improve the plant's fish-protection system, build a
300-acre artificial reef to help restore kelp beds, and restore 150 acres of
coastal wetlands. SDG&E may be required to incur capital costs of up to $30
million to comply with this order.
Responsibility Report for the Consolidated Financial Statements
SDG&E is responsible for the consolidated financial statements and
other data in this annual report. To meet its responsibility for
the reliability of the consolidated financial statements, SDG&E has
developed a system of internal accounting controls and engages a
firm of independent auditors. The board of directors of SDG&E
carries out its responsibility for the consolidated financial
statements through its audit committee, composed of directors who
are not officers or employees of SDG&E.
Management maintains the system of internal accounting controls,
which it believes is adequate to provide reasonable, but not
absolute, assurance that its assets are safeguarded, transactions
are executed in accordance with its objectives, and the financial
records and reports are reliable for preparing the consolidated
financial statements in accordance with generally accepted
accounting principles.
The concept of reasonable assurance recognizes that the cost of a
system of internal accounting controls should not exceed the
benefits derived and that management makes estimates and judgments
of these cost/benefit factors. The system of internal accounting
controls is supported by an extensive program of internal audits,
selection and training of qualified personnel, and written policies
and procedures.
SDG&E's independent auditors, Deloitte & Touche, are engaged to
audit SDG&E's consolidated financial statements in accordance with
generally accepted auditing standards for the purpose of expressing
their opinion as to whether SDG&E's consolidated financial
statements are presented fairly, in all material respects, in
accordance with generally accepted accounting principles.
The audit committee discusses with SDG&E's internal auditors and
the independent auditors the overall scope and specific plans for
their respective audits. The committee also discusses SDG&E's
consolidated financial statements and the adequacy of SDG&E's
internal controls. The committee met twice during the fiscal year
with the internal auditors and the independent auditors without
management present, to discuss the results of their examinations,
their evaluations of SDG&E's internal controls, and the overall
quality of SDG&E's financial reporting. The internal auditors and
the independent auditors have full and free access to the committee
throughout the year.
SDG&E's management has prepared the consolidated financial
statements and other data in this annual report. In the opinion of
SDG&E, the consolidated financial statements, which include amounts
based on estimates and judgments of management, have been prepared
in conformity with generally accepted accounting principles.
Frank H. Ault
Vice President and Controller
24
STATEMENTS OF CONSOLIDATED INCOME
In thousands except per share amounts
For the years ended December 31 1993 1992 1991
----------- ----------- -----------
Operating Revenues
Electric . . . . . . . . . . . . . . $1,514,608 $1,447,118 $1,357,554
Gas . . . . . . . . . . . . . . . . . 346,658 336,992 338,161
Diversified operations . . . . . . . 118,849 86,790 93,297
----------- ----------- -----------
Total operating revenues . . . . . 1,980,115 1,870,900 1,789,012
----------- ----------- -----------
Operating Expenses
Electric fuel . . . . . . . . . . . . 174,444 174,849 151,012
Purchased power . . . . . . . . . . . 325,966 311,046 304,833
Gas purchased for resale . . . . . . 165,876 167,385 183,274
Maintenance . . . . . . . . . . . . . 81,788 73,040 68,134
Depreciation and decommissioning . . 250,619 213,661 195,360
Property and other taxes . . . . . . 44,902 45,769 44,795
Other . . . . . . . . . . . . . . . . 494,369 439,569 395,449
Income taxes . . . . . . . . . . . . 148,477 149,274 130,641
----------- ----------- -----------
Total operating expenses . . . . . 1,686,441 1,574,593 1,473,498
----------- ----------- -----------
Operating Income . . . . . . . . . . . 293,674 296,307 315,514
----------- ----------- -----------
Other Income and (Deductions)
Allowance for equity funds used
during construction . . . . . . . . 17,909 7,547 6,083
Taxes on nonoperating income . . . . 202 (3,177) (473)
Other - net . . . . . . . . . . . . . 8,229 16,294 (6,751)
----------- ----------- -----------
Total other income and (deductions) 26,340 20,664 (1,141)
----------- ----------- -----------
Income Before Interest Charges . . . . 320,014 316,971 314,373
----------- ----------- -----------
Interest Charges
Long-term debt . . . . . . . . . . . 93,402 100,776 98,802
Short-term debt and other . . . . . . 12,142 9,123 10,705
Allowance for borrowed funds used
during construction . . . . . . . . (4,245) (3,585) (3,194)
----------- ----------- -----------
Net interest charges . . . . . . . 101,299 106,314 106,313
----------- ----------- -----------
Net Income (before preferred dividend
requirements) . . . . . . . . . . . . 218,715 210,657 208,060
Preferred Dividend Requirements . . . . 8,565 9,600 10,535
----------- ----------- -----------
Earnings Applicable to Common Shares . $ 210,150 $ 201,057 $ 197,525
Average Common Shares Outstanding . . . 116,049 113,806 111,988
Earnings Per Common Share . . . . . . . $ 1.81 $ 1.77 $ 1.76
Dividends Declared Per Common Share . . $ 1.48 $ 1.44 $ 1.3875
See notes to consolidated financial statements.
25
CONSOLIDATED BALANCE SHEETS
In thousands of dollars
Balance at December 31 1993 1992
------------ ------------
ASSETS
Utility plant - at original cost . . . . . . . . $5,134,251 $4,818,867
Accumulated depreciation and decommissioning . . (2,016,618) (1,840,175)
------------ ------------
Utility plant-net . . . . . . . . . . . . . . 3,117,633 2,978,692
------------ ------------
Investments and other property . . . . . . . . . 464,101 299,010
------------ ------------
Current assets
Cash and temporary investments . . . . . . . . 17,450 11,079
Accounts receivable . . . . . . . . . . . . . 205,712 198,743
Notes receivable . . . . . . . . . . . . . . . 29,201 11,291
Inventories . . . . . . . . . . . . . . . . . 84,922 87,065
Other . . . . . . . . . . . . . . . . . . . . 40,810 45,849
------------ ------------
Total current assets . . . . . . . . . . . 378,095 354,027
------------ ------------
Construction funds held by trustee . . . . . . . 58,042 248,267
Goodwill . . . . . . . . . . . . . . . . . . . . 53,921 56,013
Deferred taxes recoverable in rates . . . . . . 311,564 294,818
Deferred charges and other assets . . . . . . . 318,880 263,745
------------ ------------
Total . . . . . . . . . . . . . . . . . . $4,702,236 $4,494,572
============ ============
CAPITALIZATION AND LIABILITIES
Capitalization (see Statements of Consolidated
Capital Stock and of Long-Term Debt)
Common equity . . . . . . . . . . . . . . . $1,516,240 $1,441,439
Preferred stock
Not subject to mandatory redemption . . . . 93,493 62,493
Subject to mandatory redemption . . . . . . 25,000 68,200
Long-term debt . . . . . . . . . . . . . . . 1,411,948 1,495,734
------------ ------------
Total capitalization . . . . . . . . . . . 3,046,681 3,067,866
------------ ------------
Current liabilities
Short-term borrowings . . . . . . . . . . . . 131,197 82,749
Long-term debt redeemable within one year . . 88,000 88,000
Current portion of long-term debt . . . . . . 76,161 24,152
Accounts payable . . . . . . . . . . . . . . . 166,622 156,155
Dividends payable . . . . . . . . . . . . . . 44,962 43,298
Taxes accrued . . . . . . . . . . . . . . . . 36,830 43,656
Interest accrued . . . . . . . . . . . . . . . 20,396 24,778
Regulatory balancing accounts overcollected-net 33,179 46,424
Other . . . . . . . . . . . . . . . . . . . . 104,353 80,729
------------ ------------
Total current liabilities . . . . . . . . 701,700 589,941
------------ ------------
Customer advances for construction . . . . . . . 41,729 49,698
Accumulated deferred income taxes-net . . . . . 520,076 495,844
Accumulated deferred investment tax credits . . 114,159 119,258
Deferred credits and other liabilities . . . . . 277,891 171,965
Contingencies and commitments (Notes 2 and 9) . _ _
------------ ------------
Total . . . . . . . . . . . . . . . . . . $4,702,236 $4,494,572
============ ============
See notes to consolidated financial statements.
26
STATEMENTS OF CONSOLIDATED CASH FLOWS
In thousands of dollars
For the years ended December 31 1993 1992 1991
--------- -------- --------
Cash Flows from Operating Activities
Net Income . . . . . . . . . . . . . . . . . . . . . . . $218,715 $210,657 $208,060
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and decommissioning . . . . . . . . . . 250,619 213,661 195,360
Amortization of deferred charges and other assets . . 11,141 1,923 1,402
Allowance for equity funds used during construction . (17,909) (7,547) (6,083)
Deferred income taxes and investment tax credits . . 45,606 (11,031) (11,377)
Other-net . . . . . . . . . . . . . . . . . . . . . . 3,564 (2,752) 764
Changes in working capital components net
of effects from purchases of subsidiaries
Accounts and notes receivable . . . . . . . . . . . . (10,479) (1,326) (25,340)
Regulatory balancing accounts . . . . . . . . . . . . (13,245) 24,647 35,786
Inventories . . . . . . . . . . . . . . . . . . . . . 4,616 7,401 9,857
Other current assets . . . . . . . . . . . . . . . . 5,039 (2,360) 681
Accrued interest and taxes . . . . . . . . . . . . . (19,141) (30,682) 26,959
Accounts payable and other current liabilities . . . 19,691 (16,952) 40,984
--------- --------- ---------
Net cash provided by operating activities . . . . . 498,217 385,639 477,053
--------- --------- ---------
Cash Flows from Financing Activities
Dividends paid . . . . . . . . . . . . . . . . . . . (178,708) (172,211) (164,436)
Short-term borrowings-net . . . . . . . . . . . . . . 48,448 38,781 (22,138)
Issuance of long-term debt . . . . . . . . . . . . . 369,893 509,200 38,792
Repayment of long-term debt . . . . . . . . . . . . . (531,526) (236,994) (20,595)
Sale of common stock . . . . . . . . . . . . . . . . 38,850 58,176 11,712
Issuance of preferred stock . . . . . . . . . . . . . 50,636 24,733 -
Redemption of preferred stock . . . . . . . . . . . . (65,228) (40,195) (3,000)
--------- --------- ---------
Net cash provided (used) by financing activities . (267,635) 181,490 (159,665)
--------- --------- ---------
Cash Flows from Investing Activities
Utility construction expenditures . . . . . . . . . . (354,391) (280,281) (254,953)
Withdrawals from (contributions to)
construction trust funds-net . . . . . . . . . . . 190,225 (248,267) -
Contributions to decommissioning funds . . . . . . . (22,038) (22,038) (22,038)
Purchase of assets and subsidiaries . . . . . . . . . (3,887) (7,833) (16,115)
Sale of assets . . . . . . . . . . . . . . . . . . . 2,709 3,952 -
Other-net . . . . . . . . . . . . . . . . . . . . . . (36,829) (18,499) (18,895)
--------- --------- ---------
Net cash used by investing activities . . . . . . . (224,211) (572,966) (312,001)
--------- --------- ---------
Net increase (decrease) . . . . . . . . . . . . . . . . . 6,371 (5,837) 5,387
Cash and temporary investments beginning of period . . . . 11,079 16,916 11,529
--------- --------- ---------
Cash and temporary investments end of period . . . . . . . $ 17,450 $ 11,079 $ 16,916
========= ========= =========
Supplemental Schedule of Noncash Investing
and Financing Activities
Subsidiaries' acquisitions
Assets acquired . . . . . . . . . . . . . . . . . . $235,158 $115,054 $ 23,747
Cash paid . . . . . . . . . . . . . . . . . . . . . (28,209) (14,368) (6,917)
--------- --------- ---------
Liabilities assumed . . . . . . . . . . . . . . . . $206,949 $100,686 $ 16,830
========= ========= =========
See notes to consolidated financial statements.
27
STATEMENTS OF CONSOLIDATED CHANGES IN CAPITAL STOCK AND RETAINED EARNINGS
Preferred Stock
---------------------------
Not Subject to Subject to
Mandatory Mandatory Common Premium on Retained
Redemption Redemption Stock Capital Stock Earnings
- --------------------------------------------------------------------------------
In thousands of dollars
For the years ended December 31, 1991, 1992, 1993
- --------------------------------------------------------------------------------
Balance, December 31, 1990 $87,493 $55,000 $279,745 $469,743 $546,127
Net income 208,060
Common stock sold (598,232 shares) 1,495 10,217
Vesting of previously restricted shares 559
Sinking fund requirement (3,000)
Dividends declared
Preferred stock (10,524)
Common stock (155,436)
- --------------------------------------------------------------------------------
Balance, December 31, 1991 87,493 52,000 281,240 480,519 588,227
Net income 210,657
Common stock sold (2,537,756 shares) 6,345 50,625
Vesting of previously restricted shares 1,206
Preferred stock sold (1,000,000 shares) 25,000 (267)
Preferred stock retired (1,070,000 shares)(25,000) (7,000) (2,597) (940)
Sinking fund requirement (1,800)
Dividends declared
Preferred stock (9,533)
Common stock (164,043)
- --------------------------------------------------------------------------------
Balance, December 31, 1992 62,493 68,200 287,585 529,486 624,368
Net income 218,715
Common stock sold (1,481,241 shares) 3,703 33,209
Vesting of previously restricted shares 1,938
Preferred stock sold (2,040,000 shares) 51,000 (364)
Preferred stock retired (633,700 shares)(20,000) (43,200) 850 (2,878)
Dividends declared
Preferred stock (8,526)
Common stock (171,846)
- --------------------------------------------------------------------------------
Balance, December 31, 1993 $93,493 $25,000 $291,288 $565,119 $659,833
==================================================
See notes to consolidated financial statements.
28
STATEMENTS OF CONSOLIDATED CAPITAL STOCK
In thousands of dollars except call price
Balance at December 31 1993 1992
----------- -----------
COMMON EQUITY
Common stock, without par value, authorized
255,000,000 shares, outstanding: 1993,
116,515,073 shares; 1992, 115,033,832 shares $ 291,288 $ 287,585
Premium on capital stock 565,119 529,486
Retained earnings 659,833 624,368
----------- -----------
Total common equity $1,516,240 $1,441,439
PREFERRED STOCK (A) Call
Not subject to mandatory redemption Price
$20 par value, authorized 1,375,000 shares ---------
5% Series, 375,000 shares outstanding $ 24.00 $ 7,500 $ 7,500
4 1/2% Series, 300,000 shares outstanding 21.20 6,000 6,000
4.40% Series, 325,000 shares outstanding 21.00 6,500 6,500
4.60% Series, 374,650 shares outstanding 20.25 7,493 7,493
Without par value (B)
$7.20 Series, 150,000 shares outstanding 101.00 15,000 15,000
$1.70 Series, 1,400,000 shares outstanding 25.85(D) 35,000 -
$1.82 Series, 640,000 shares outstanding 26.00(D) 16,000 -
$7.80 Series, outstanding: 1992,
200,000 shares - - 20,000
--------- -------- --------
Total not subject to mandatory redemption $93,493 $62,493
-------- --------
Subject to mandatory redemption
Without par value (B)
$1.7625 Series, 1,000,000 shares outstanding(C) $ 25.00(D) $25,000 $25,000
$7.05 Series, outstanding: 1992, 433,700 shares - - 43,370
Current sinking fund requirement - (170)
-------- --------
Total subject to mandatory redemption $25,000 $68,200
======== ========
(A) All series of preferred stock have cumulative preferences as to dividends.
The $20 par value preferred stock has two votes per share, whereas the no
par value preferred stock is nonvoting. The $20 par value preferred stock
has a liquidation value at par. The no par value preferred stock has a
liquidation value of $25 per share, except for the $7.20 series, which has
a liquidation value of $100 per share.
(B) Authorized 10,000,000 shares total (both subject to and not subject to
mandatory redemption).
(C) The $1.7625 series has a sinking fund requirement to redeem 50,000 shares
per year from 2003 to 2007. The remaining shares must be redeemed in 2008.
(D) The $1.70 and $1.7625 series are not callable until 2003; the $1.82 series
is not callable until 1998.
See notes to consolidated financial statements.
29
STATEMENTS OF CONSOLIDATED LONG-TERM DEBT
In thousands of dollars
Balance at December 31 1993 1992
----------- -----------
First mortgage bonds
5 1/2%, due 1994 - 1997 . . . . . . . . . . . . $ 33,468 $ 33,868
7 5/8%, due 2002 . . . . . . . . . . . . . . . 80,000 80,000
2.9% - 4.25%, due 2007 - 2008* . . . . . . . . 115,000 115,000
5.85% - 6.8%, due 2015 - 2021 . . . . . . . . 356,755 133,015
3.3%, due 2018* . . . . . . . . . . . . . . . 14,915 -
7 3/8% - 9 5/8%, due 2020 - 2023 . . . . . . . 384,950 384,950
1.3% - 3.9%, due 2027* . . . . . . . . . . . . 250,000 250,000
Series retired in 1993 . . . . . . . . . . . - 412,035
----------- -----------
Total . . . . . . . . . . . . . . . . . . 1,235,088 1,408,868
----------- -----------
Capitalized leases . . . . . . . . . . . . . . . 124,782 124,875
Other long-term debt, 3.0%-9.67%, due 1994-2001* 224,559 88,305
Unamortized discount on long-term debt . . . . . (8,320) (14,162)
Long-term debt redeemable within one year . . . (88,000) (88,000)
Current portion of long-term debt . . . . . . . (76,161) (24,152)
----------- -----------
Total . . . . . . . . . . . . . . . . . . $1,411,948 $1,495,734
=========== ===========
*Interest rates on $453 million of these notes are variable and tied to various
financial indices.
See notes to consolidated financial statements.
30
STATEMENTS OF CONSOLIDATED FINANCIAL INFORMATION BY SEGMENTS OF BUSINESS
In thousands of dollars
At December 31 or for the years then ended 1993 1992 1991
- -------------------------------------------------------------------------------
Operating Revenues* $1,980,115 $1,870,900 $1,789,012
---------- ---------- ----------
Operating Income
Electric operations . . . . . . . . . . $ 263,643 $ 270,172 $ 266,402
Gas operations . . . . . . . . . . . . 24,571 37,234 37,405
Diversified operations . . . . . . . . 5,460 (11,099) 11,707
---------- ---------- ----------
Total . . . . . . . . . . . . . . . $ 293,674 $ 296,307 $ 315,514
---------- ---------- ----------
Depreciation and Decommissioning
Electric operations . . . . . . . . . . $ 210,890 $ 178,513 $ 164,194
Gas operations . . . . . . . . . . . . 28,215 27,667 25,536
Diversified operations . . . . . . . . 11,514 7,481 5,630
---------- ---------- ----------
Total . . . . . . . . . . . . . . . $ 250,619 $ 213,661 $ 195,360
---------- ---------- ----------
Utility Plant Additions**
Electric operations . . . . . . . . . . $ 291,456 $ 236,918 $ 210,958
Gas operations . . . . . . . . . . . . 62,935 43,363 43,995
---------- ---------- ----------
Total . . . . . . . . . . . . . . . $ 354,391 $ 280,281 $ 254,953
---------- ---------- ----------
Identifiable Assets
Utility plant-net
Electric operations . . . . . . . . . $2,724,139 $2,623,058 $2,692,492
Gas operations . . . . . . . . . . . 393,494 355,634 339,307
---------- ---------- ----------
Total . . . . . . . . . . . . . . . 3,117,633 2,978,692 3,031,799
---------- ---------- ----------
Inventories
Electric operations . . . . . . . . . 57,410 62,170 65,358
Gas operations . . . . . . . . . . . 18,703 14,056 19,508
Diversified operations . . . . . . . 8,809 10,839 9,349
---------- ---------- ----------
Total . . . . . . . . . . . . . . . 84,922 87,065 94,215
---------- ---------- ----------
Other identifiable assets
Electric operations . . . . . . . . . 744,335 861,236 533,833
Gas operations . . . . . . . . . . . 139,631 175,156 109,829
Diversified operations . . . . . . . 504,359 288,914 188,712
---------- ---------- ----------
Total . . . . . . . . . . . . . . . 1,388,325 1,325,306 832,374
---------- ---------- ----------
Other Assets . . . . . . . . . . . . . . 111,356 103,509 88,286
---------- ---------- ----------
Total Assets . . . . . . . . . . . . . . $4,702,236 $4,494,572 $4,046,674
========== ========== ==========
*The detail to operating revenues is provided in the Statements of Consolidated
Income. The gas operating revenues shown therein include $16 million in 1993,
$17 million in 1992 and $10 million in 1991, representing the gross margin on
sales to the electric segment. These margins arose from interdepartmental
transfers of $141 million in 1993, $142 million in 1992 and $116 million in
1991, based on transfer pricing approved by the California Public Utilities
Commission in tariff rates.
**Excluding allowance for equity funds used during construction.
Utility income taxes and corporate expenses are allocated between electric and
gas operations in accordance with regulatory accounting requirements.
See notes to consolidated financial statements.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 Summary of Accounting Policies
UTILITY PLANT AND DEPRECIATION
Utility plant represents the buildings, equipment and other facilities used
to provide electric and gas service. The cost of utility plant includes
labor, material, contract services and other related items, and an allowance
for funds used during construction. The cost of retired depreciable utility
plant, plus removal expenses minus salvage value is charged to accumulated
depreciation.
Depreciation expense reflects the straight-line remaining useful life method.
The provisions for depreciation approximated 4.13 percent of average
depreciable utility plant in 1993, 3.99 percent in 1992 and 3.98 percent in
1991.
INVENTORIES
At December 31, 1993 inventories include $55 million of materials and
supplies ($57 million in 1992), and $30 million of fuel oil and natural gas
($30 million in 1992). Materials and supplies are valued at average cost, and
fuel oil and natural gas are valued by the last-in first-out, or LIFO,
method.
OTHER CURRENT ASSETS
Included in other current assets at December 31, 1993 is $26 million of
investment in SONGS 1 which will be recovered in 1994. The noncurrent portion
of the $88 million investment is included in "Deferred Charges and Other
Assets" on the Consolidated Balance Sheets.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION
The allowance represents the cost of funds used to finance the construction
of utility plant and is added to the cost of utility plant. AFDC also
increases income, partly as an offset to interest charges shown in the
Statements of Consolidated Income, although it is not a current source of
cash.
REVENUES AND REGULATORY BALANCING ACCOUNTS
Revenues from utility customers consist of deliveries to customers and the
changes in regulatory balancing accounts. Earnings fluctuations from changes
in the costs of fuel oil, purchased energy and natural gas, and consumption
levels for electricity and the majority of natural gas are eliminated by
balancing accounts authorized by the California Public Utilities Commission.
The balances of these accounts represent amounts that will be recovered from,
or repaid to, customers by adjustments to future prices.
GOODWILL
Goodwill arose from the acquisition of certain businesses by Pacific
Diversified Capital (see Note 2). It is being amortized on a straight-line
basis over 40 years. The accumulated amortization at December 31, 1993 was
$7.7 million ($6.1 million in 1992).
DEFERRED CHARGES AND OTHER ASSETS
Deferred charges include unrecovered premium on early retirement of debt and
other regulatory-related expenditures that SDG&E will recover in future
rates. These items are amortized as recovered in rates.
STATEMENTS OF CONSOLIDATED CASH FLOWS
Temporary investments are highly liquid investments with original maturities
of three months or less.
OTHER
Certain prior year amounts have been reclassified for comparability. In
addition, certain prior year amounts have been restated to give retroactive
effect to the adoption of Statement of Financial Accounting Standard (SFAS)
No. 109, Accounting for Income Taxes.
2 INVESTMENT IN NON-REGULATED SUBSIDIARIES
The consolidated financial statements include the accounts of San Diego Gas &
Electric and its wholly owned subsidiaries: Califia Company, Enova
Corporation and Pacific Diversified Capital Company. Califia and Enova are
engaged in non-utility investment activities. Pacific Diversified Capital is
a holding company owning Phase One Development, Inc. and 80 percent of Wahlco
Environmental Systems, Inc.
INVESTMENT IN WAHLCO ENVIRONMENTAL SYSTEMS, INC.
SDG&E's investment in and advances to Wahlco aggregate $72 million at
December 31, 1993. At December 31, 1993 Wahlco had consolidated net assets
of $73 million (including $54 million of goodwill). During the years ended
December 31, 1991, 1992 and 1993, Wahlco's net income (loss) was $12 million,
($13 million) and ($11 million). During those years Wahlco's cash flow
provided by (used in) operations was $7 million, ($7 million) and ($12
million). Historically, Wahlco's primary and most profitable product line
has been flue gas conditioning equipment, which is sold to utilities with
coal-fired generating plants. Since the passage of the 1990 Clean Air Act
Amendments, Wahlco's prospects for future profitability have been
significantly associated with the size and timing of flue gas conditioning
equipment orders from utilities responding to that legislation.
Phase I of that legislation requires certain utilities to submit compliance
plans to the Environmental Protection Agency by February 28, 1993 and to be
in compliance by January 1, 1995. Phase II requires the remaining utilities
with coal-fired generation to be in compliance by January 1, 2000.
Thus far, sales of and orders for flue gas conditioning equipment have not
reached anticipated levels. Therefore, SDG&E is considering alternative
strategies relative to Wahlco, which may result in a charge to SDG&E's future
earnings.
32
3 LONG-TERM DEBT
Amounts and due dates of long-term debt are shown on the Statements of
Consolidated Long-Term Debt. Excluding capital leases, which are described in
Note 9, combined aggregate maturities and sinking fund requirements of
long-term debt are $68 million for 1994, $45 million for 1995, $34 million
for 1996, $49 million for 1997 and $21 million for 1998. SDG&E has CPUC
authorization to issue an additional $263 million in debt.
FIRST MORTGAGE BONDS
First mortgage bonds are secured by a lien on substantially all utility
plant. Additional first mortgage bonds may be issued upon compliance with the
provisions of the bond indenture. Certain of the first mortgage bonds may be
called at SDG&E's option.
First mortgage bonds totaling $380 million have variable interest rate
provisions. On $115 million, bondholders may elect to redeem their bonds at
the annual interest adjustment dates. Redemption of $27 million of these
cannot occur before 1995. For purposes of determining the aggregate
maturities listed above, it is assumed that these issues will not be redeemed
before scheduled maturity.
During 1993 SDG&E issued $239 million of first mortgage bonds and retired
$412 million of first mortgage bonds prior to scheduled maturities.
OTHER DEBT
At December 31, 1993 SDG&E had two $50 million bank lines providing a
committed source of long-term borrowings, of which $60 million was
outstanding. Bank lines, unless renewed by SDG&E, expire in 1994 and 1995. A
commitment fee is paid on the unused portion of the lines and there are no
requirements for compensating balances.
Loans of $149 million and $69 million at December 31, 1993 and 1992,
respectively, are secured by subsidiary equipment, real estate and other
investments.
INTEREST
Interest payments, including those applicable to short-term borrowings,
amounted to $106 million in 1993, $108 million in 1992 and $107 million in
1991. Interest payments of $34 million in 1992 on income taxes in connection
with a preliminary settlement with the Internal Revenue Service are included
with income taxes in Note 7.
SDG&E periodically enters into interest rate swap and cap agreements to
moderate its exposure to interest rate changes and to lower its overall cost
of borrowings (see Note 8). At December 31, 1993 SDG&E had such agreements,
maturing in 1996 and 2002, with underlying debt aggregating $120 million.
These agreements have effectively fixed interest rates on the underlying
variable rate debt at 5.4% to 6.3%. SDG&E is exposed to potential losses
should other parties to the agreement not perform. Such nonperformance is not
anticipated.
4 SHORT-TERM BORROWINGS
At December 31, 1993 and 1992 short-term borrowings and weighted average
interest rates for the outstanding balances were:
In millions of dollars 1993 1992
- -----------------------------------------------------------------------------
Balance Interest Rate Balance Interest Rate
Bank loans $ 91 3.4% $ - -
Subsidiaries' bank credit line 40 5.2% 14 6.0%
Commercial paper - - 69 3.7%
Total $131 $83
- -----------------------------------------------------------------------------
At December 31, 1993 SDG&E had various bank lines, aggregating $150 million,
available to support commercial paper and bank loans. SDG&E's subsidiaries
had a bank credit line that provided for borrowings up to $40 million at the
prime rate. A commitment fee is paid on the unused portion of the lines.
There were no requirements for compensating balances.
5 FACILITIES UNDER JOINT OWNERSHIP
The San Onofre nuclear power plant and the Southwest Powerlink transmission
line are jointly owned with other utilities. SDG&E's interests at December
31, 1993 were:
In millions of dollars
- -----------------------------------------------------------------------------
Project San Southwest
Onofre Powerlink
- -----------------------------------------------------------------------------
Ownership interest (%) 20 89
Utility plant in service $1,083 $210
Accumulated depreciation $ 335 $ 67
Construction work in progress $ 21 $ -
- -----------------------------------------------------------------------------
Each participant in the projects must provide its own financing.
SDG&E's share of operating expenses is included in its Statements of
Consolidated Income.
SDG&E's share of future dismantling and decontamination costs for the San
Onofre units is estimated to be $322 million. These costs are included in
setting rates and are expected to be fully recovered by 2014, the estimated
last year of service. SDG&E invests in externally managed trust funds the
amounts collected in rates. At December 31, 1993 the trust funds had a market
value of $191 million, which includes $10.7 million in unrealized gains and
which is included in "Investments and Other Property" on the Consolidated
Balance Sheets. The securities held by the trust are adjusted to market value
in accordance with SFAS 115, Accounting for Certain Investments in Debt and
Equity Securities, issued in May 1993 and implemented by SDG&E as of
December 31, 1993. Additional information regarding San Onofre is included
in Note 9.
36
6 EMPLOYEE BENEFIT PLANS
SDG&E has a defined-benefit pension plan, which covers substantially all
utility employees. Benefits are related to the employees' compensation. Plan
assets consist primarily of common stocks and bonds.
SDG&E funds the plan based on the aggregate cost actuarial method. Net
pension cost consisted of the following for the year ended December 31:
In thousands of dollars 1993 1992 1991
- -----------------------------------------------------------------------------
Cost related to current service $18,233 $17,838 $17,054
Interest on projected benefit obligation 29,745 27,933 24,725
Return on plan assets (39,351) (23,267) (71,388)
Other (8,627) (25,325) 35,199
Net cost (benefit) $ - $(2,821) $ 5,590
- -----------------------------------------------------------------------------
The plan's status was as follows at December 31:
In thousands of dollars 1993 1992
- -----------------------------------------------------------------------------
Accumulated benefit obligation
Vested $304,053 $259,292
Nonvested 10,616 9,380
Total $314,669 $268,672
Plan assets at fair value $435,371 $404,894
Projected benefit obligation 457,710 393,906
Plan assets less projected
benefit obligation (22,339) 10,988
Unrecognized effect of accounting change (1,835) (2,064)
Unrecognized prior service cost 14,043 15,130
Unrecognized actuarial losses (gains) 10,131 (24,054)
Amount recognized as an asset $ - $ -
- ----------------------------------------------------------------------------
The projected benefit obligation assumes a 7.5 percent actuarial discount
rate in 1993 (8.0 percent in 1992) and a 6.0 percent average annual salary
increase. The expected long-term rate of return on plan assets is 8.5
percent. The impact of decreasing the actuarial discount rate was to increase
the accumulated benefit obligation and projected benefit obligation by
approximately $22 million and $38 million, respectively.
Eligible employees may make a contribution of 1 percent to 15 percent of
their base pay to SDG&E's savings plan for investment in mutual funds or in
SDG&E common stock. SDG&E contributes amounts equal to up to 3 percent of
participants' base compensation for investment in SDG&E common stock.
SDG&E's expense for the pension and the savings plans and a supplemental
retirement plan for a limited number of key employees was approximately $4
million in 1993, $1 million in 1992 and $9 million in 1991.
SDG&E has a long-term incentive stock compensation plan that provides for
aggregate awards of up to 2,700,000 shares of common stock over a 10-year
period ending in 1996. In each of the last eight years SDG&E issued
approximately 40,000 shares to 60,000 shares of stock to officers and key
employees for $2.50 per share, subject to buy-back if certain corporate goals
are not met.
SDG&E provides certain health and life insurance benefits to retired utility
employees. Prior to 1993, SDG&E expensed these benefits when paid and such
amounts were normally recovered in rates. Effective January 1, 1993, SDG&E
adopted SFAS 106, Employers' Accounting for Postretirement Benefits Other
Than Pensions, which requires that these benefits be accrued during the
employee's years of service, up to the year of benefit eligibility. The
transition obligation of approximately $47 million is being amortized over 20
years. SDG&E will recover the cost of these benefits based upon actuarial
calculations and funding limitations. The amounts expensed for these benefits
were $5 million in 1993, $4 million in 1992 and $3 million in 1991.
7 INCOME TAXES
SDG&E has adopted SFAS 109, Accounting for Income Taxes, retroactive to
January 1, 1989.
SFAS 109 requires the use of the balance sheet method of accounting for
income taxes. Under this method, a deferred tax asset or liability represents
the tax effect of temporary differences between the financial statement and
tax bases of assets and liabilities and is measured using the latest enacted
tax rates.
As a result of adopting SFAS 109, SDG&E recorded additional deferred income
taxes related to the allowance for funds used during construction and other
temporary differences for which deferred income taxes had not been provided.
Existing deferred income taxes were reduced due to intervening income tax
rate reductions, and a deferred income tax asset related to unamortized
investment tax credits was recorded. The net effect of these changes is
almost entirely offset by a regulatory asset of $312 million at December 31,
1993 ($295 million at December 31, 1992). This regulatory asset is expected
to be recovered in future rates and will be adjusted as it is recovered
through the ratemaking process as tax rates and laws change.
Also as a result of adopting SFAS 109, 1989 net income was decreased by $8
million, or $0.07 per share. This decrease results from the write-down of
deferred tax assets initially recorded at prior tax rates in excess of
current tax rates. These excess deferred taxes will not be recovered in
future rates.
Effective January 1, 1993, the federal statutory tax rate increased to 35
percent from 34 percent. This change increased SDG&E's net deferred tax
liability by approximately $14 million. The impact on income tax expense was
not significant.
34
Income tax payments totaled $116 million in 1993, $192 million in 1992 and
$115 million in 1991.
COMPONENTS OF ACCUMULATED DEFERRED INCOME TAXES
In thousands of dollars 1993 1992
- ---------------------------------------------------------------------------
Deferred tax liabilities
Differences in book and tax bases
of utility plant $650,429 $611,408
Loss on reacquired debt 28,572 13,761
Other 86,126 70,598
Total deferred tax liabilities 765,127 695,767
Deferred tax assets
Unamortized investment tax credits 79,479 80,102
Equipment leasing activities 61,533 26,247
Other 118,673 114,470
Total deferred tax assets 259,685 220,819
Net deferred income tax liability 505,442 474,948
Current portion of deferred income taxes 14,634 20,896
Accumulated deferred income taxes-net $520,076 $495,844
- ---------------------------------------------------------------------------
COMPONENTS OF INCOME TAX EXPENSE
In thousands of dollars 1993 1992 1991
- ---------------------------------------------------------------------------
Current
Federal $ 79,848 $134,635 $107,959
State 22,821 28,847 34,532
Total current taxes 102,669 163,482 142,491
Deferred
Federal 43,365 (2,248) 1,106
State 7,001 (3,638) (7,519)
Total deferred taxes 50,366 (5,886) (6,413)
Deferred investment tax credits-net (4,760) (5,145) (4,964)
Total income tax expense $148,275 $152,451 $131,114
- ---------------------------------------------------------------------------
Federal and state income taxes are allocated between operating income and
other income.
RECONCILIATION OF STATUTORY FEDERAL INCOME TAX RATE TO EFFECTIVE RATE
In thousands of dollars 1993 1992 1991
- ---------------------------------------------------------------------------
Income before federal
income taxes $337,168 $337,899 $312,161
Statutory federal income tax rate 35.0% 34.0% 34.0%
Depreciation 5.0 3.7 4.2
Tax credits (3.9) (2.8) (2.1)
Allowance for funds used
during construction (1.9) (0.7) (0.6)
Equipment leasing activities (1.8) - -
Other-net 2.7 3.5 (2.2)
Effective federal income
tax rate 35.1% 37.7% 33.3%
- ----------------------------------------------------------------------------
8 FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107, Disclosures About Fair Market Value of Financial Instruments,
requires disclosure of the fair value of financial instruments, whether
recognized in the statement of financial position, for which it is
practicable to estimate fair value. The following methods and assumptions
were used to estimate the fair value of each class of financial instruments.
CASH AND TEMPORARY INVESTMENTS, NOTES RECEIVABLE, AND DIVIDENDS PAYABLE
The carrying amount approximates fair value due to the short maturity of
those instruments.
FUNDS HELD IN TRUST
Funds held in trust include construction trust funds and the SONGS
decommissioning trust (included in "Construction Funds held by Trustee" and
"Investments and Other Property," respectively, on the Consolidated Balance
Sheets). The fair value of the funds held in trust was based on quoted market
values.
INVESTMENTS IN LIMITED PARTNERSHIPS AND NONCURRENT NOTES RECEIVABLE
The fair value of investments in limited partnerships and noncurrent notes
receivable (included in "Investments and Other Property" and "Deferred
Charges and Other Assets," respectively, on the Consolidated Balance Sheets)
was estimated to approximate carrying value due to the relatively short
periods of time between the purchase dates and the valuation date and the
relative market stability during those periods.
OTHER ASSETS
Included in other assets are GNMA and FNMA marketable securities whose fair
values are based upon market quotes for the same or similar financial
instruments.
DEPOSITS FROM CUSTOMERS
Deposits from customers include deposits from residential and commercial
customers (included in "Other Current Liabilities" on the Consolidated
Balance Sheets) and customer advances for construction. The carrying amount
of deposits from residential and commercial customers approximates fair value
due to the short maturity period. The fair value of customer advances for
construction was estimated by discounting future cash flows.
DEBT AND PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
The fair value of SDG&E's debt and preferred stock issues was estimated based
on quoted market prices for them or for similar issues, or on the current
rates offered to SDG&E for debt and stock of the same maturities.
INTEREST RATE CAP AND SWAP AGREEMENTS
The fair value of the agreements at December 31, 1993 is the amount required
to terminate them, which was estimated at $4 million. There were no estimated
termination costs at December 31, 1992.
36
The carrying amounts and related estimated fair values of SDG&E's financial
instruments were as follows:
In millions of dollars 1993 1992
- -----------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- -----------------------------------------------------------------------------
Assets
Cash and temporary
investments $ 17.5 $ 17.5 $ 11.1 $ 11.1
Funds held in trust 249.4 251.2 396.1 401.4
Notes receivable 149.9 149.9 65.6 65.6
Investments in limited
partnerships 113.8 113.8 42.0 42.0
Other 36.3 36.8 27.1 27.3
Liabilities
Dividends payable 45.0 45.0 43.3 43.3
Short-term and
current portion of
long-term debt 247.2 247.2 185.9 186.0
Deposits from customers 60.4 55.0 65.9 58.1
Long-term debt 1,295.3 1,380.5 1,337.6 1,439.7
Preferred stock subject to
mandatory redemption 25.0 27.3 68.4 69.1
- -----------------------------------------------------------------------------
9 CONTINGENCIES AND COMMITMENTS
PURCHASED POWER CONTRACTS
SDG&E buys electric power under several long-term contracts. Purchases may be
made of 2 percent to 10 percent of plant output under these contracts, except
for one contract under which SDG&E may purchase 74 percent of plant output,
providing approximately 2 percent of SDG&E's total system requirements. The
contracts expire on various dates between 1995 and 2019.
At December 31, 1993 the future minimum payments under the contracts were:
In millions of dollars
- -----------------------------------------------------------------------------
1994 $ 196
1995 194
1996 178
1997 144
1998 149
Thereafter 752
-------
Total minimum payments $1,613
These payments represent capacity charges and minimum energy purchases. If
SDG&E exercises its option to extend the applicable contract, total minimum
payments would increase by approximately $51 million. SDG&E is required to
pay additional amounts for actual deliveries of energy under the contracts.
Total payments, including energy payments, under the contracts were $258
million in 1993, $253 million in 1992 and $245 million in 1991.
NATURAL GAS CONTRACTS
SDG&E has a contract with Southern California Gas Company that provides SDG&E
with intrastate transportation capacity on SoCal's gas pipelines and with
capacity in its storage facilities through August 1995. Implementation of
FERC Order 636 (Capacity Reallocation) in 1993 made it possible for SDG&E to
obtain directly interstate pipeline capacity, which had been provided by
SoCal under the contract.
SDG&E's long-term contracts with interstate pipelines for transportation
capacity became effective in 1993 and expire on various dates between 1995
and 2023. SDG&E also has four long-term gas supply contracts, which became
effective in 1993. The contracts expire between 2001 and 2004. These gas
supply contracts are intended to supply 16 percent of SDG&E's natural gas
requirements.
At December 31,1993 the future minimum payments under natural gas contracts
were:
In millions of dollars
- ---------------------------------------------------------------------------
Transportation Natural
and Storage Gas
- ---------------------------------------------------------------------------
1994 $ 84 $ 42
1995 65 45
1996 20 48
1997 19 51
1998 18 54
Thereafter 271 294
------- -------
Total minimum payments $477 $534
- ---------------------------------------------------------------------------
Total payments under the contracts were $86 million in 1993, $80 million in
1992 and $83 million in 1991.
LEASES
Nuclear fuel, office buildings, a generating facility and other properties
are financed by long-term capital leases. Utility plant included $193 million
at December 31, 1993 and $209 million at December 31, 1992 related to these
leases. The associated accumulated amortization was $74 million and
$91 million, respectively. SDG&E also leases office facilities, computer
equipment and vehicles under operating leases. Certain leases on office
facilities contain escalation clauses requiring annual increases in rent
ranging from 2 percent to 2 1/2 percent.
The minimum rental commitments payable in future years under all
noncancellable leases were:
In millions of dollars
- ----------------------------------------------------------------------------
Operating Capitalized
Leases Leases
- ----------------------------------------------------------------------------
1994 $ 61 $ 26
1995 56 28
1996 56 12
1997 49 12
1998 33 12
Thereafter 36 68
Total future rental commitments $291 158
Imputed interest (6% to 9%) (33)
Net commitment $125
- ---------------------------------------------------------------------------
Rental payments totaled $91 million in 1993, $57 million in 1992 and $58
million in 1991. The increase from 1992 to 1993 was due to Califia's leasing
activities.
ENVIRONMENTAL ISSUES
SDG&E's operations are conducted in accordance with federal, state and local
environmental laws and regulations governing hazardous wastes, air and water
quality, land use, and solid waste disposal. SDG&E incurs significant costs
to operate its facilities in compliance with these laws and regulations. The
costs of compliance with environmental laws and regulations are normally
recovered in customer rates. The CPUC is expected to continue allowing the
recovery of such costs, subject to reasonableness reviews.
SDG&E has identified, or has been associated with, various sites which
require remediation under federal, state or local environmental laws. SDG&E
may be partially or indirectly responsible for cleaning up these sites. SDG&E
cannot determine the extent of its responsibility for remediation for these
sites. Furthermore, the timing for assessing the costs of cleanup at these
sites, and the number of others who may be also responsible and their ability
to share in the cost of the cleanup, is not known.
Environmental liabilities are recorded when environmental assessments and/or
remedial efforts are probable, and at least the minimum costs can be
reasonably estimated. Generally, the timing of these accruals coincides with
the earlier of completion of a feasibility study or SDG&E's commitment to a
formal plan of action.
NUCLEAR INSURANCE
Public liability claims that could arise from a nuclear incident are limited
by law to $9.4 billion for each licensed nuclear facility. For this exposure,
SDG&E and the co-owners of the San Onofre units have purchased primary
insurance of $200 million, the maximum amount available. The remaining
coverage is provided by secondary financial protection required by the
Nuclear Regulatory Commission and provides for loss sharing among utilities
owning nuclear reactors if a costly accident occurs. SDG&E could be assessed
retrospective premium adjustments of up to $50 million in the event of a
nuclear incident involving any of the licensed, commercial reactors in the
United States, if the amount of the loss exceeds $200 million.
Insurance coverage is provided for up to $2.8 billion of property damage and
decontamination liability. Coverage also is provided for the cost of
replacement power, which includes indemnity payments for up to two years,
after a waiting period of 21 weeks. Coverage is provided primarily through
mutual insurance companies owned by utilities with nuclear facilities. If
losses at any of the nuclear facilities covered by the risk-sharing
arrangements were to exceed the accumulated funds available for these
insurance programs, SDG&E could be assessed retrospective premium adjustments
of up to $8 million.
DEPARTMENT OF ENERGY DECOMMISSIONING
The Energy Policy Act of 1992 established a fund for the decontamination and
decommissioning of the Department of Energy nuclear fuel enrichment
facilities. Utilities using the DOE services are contributing a total of $2.3
billion, subject to adjustment for inflation, over a 15-year period beginning
in 1993. Each utility's share is based on its share of enrichment services
purchased from the DOE. SDG&E's share of the contribution is estimated to be
$1 million per year.
LITIGATION
SDG&E is involved in various legal matters, including those arising out of
the ordinary course of business. Management believes that these matters will
not have a material adverse effect on SDG&E's results of operations,
financial condition or cash flows.
DISTRIBUTION SYSTEM CONVERSION
Under a CPUC-mandated program and through franchise agreements with various
cities, SDG&E is committed in varying amounts to convert overhead
distribution facilities to underground. As of December 31, 1993 the aggregate
unexpended amount of this commitment was approximately $85 million. SDG&E
expended approximately $22 million in 1993, $18 million in 1992 and $15
million in 1991 under this program.
CONCENTRATION OF CREDIT RISK
SDG&E grants credit to its utility customers, substantially all of whom are
located in its service territory, which covers all of San Diego County and
the southern portion of Orange County.
37
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF SAN DIEGO GAS & ELECTRIC COMPANY:
We have audited the accompanying consolidated balance sheets and the
consolidated statements of capital stock and long-term debt of San Diego Gas
& Electric Company and subsidiaries as of December 31, 1993 and 1992, and the
related consolidated statements of income, changes in capital stock and retained
earnings, cash flows, and financial information by segments of business for
each of the three years in the period ended December 31, 1993. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of San Diego Gas & Electric
Company and subsidiaries as of December 31, 1993 and 1992, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1993 in conformity with generally accepted accounting
principles.
As discussed in Note 2 to the consolidated financial statements, the
Company is considering alternative strategies related to its 80 percent-owned
subsidiary, Wahlco Environmental Systems, Inc., which may result in a charge
to the Company's future earnings.
Deloitte & Touche
San Diego, California
February 25, 1994
36
QUARTERLY FINANCIAL DATA (UNAUDITED)
In thousands except per share amounts
- ---------------------------------------------------------------------------------------------------------
Quarter ended March 31 June 30 September 30 December 31
1992
Operating revenues $471,333 $436,556 $487,802 $475,209
Operating expenses 392,921 367,713 411,740 402,219
Operating income 78,412 68,843 76,062 72,990
Other income (expense) 2,379 (234) 5,162 13,357
Net interest charges 26,447 27,074 26,532 26,261
Net income (before preferred dividend requirements) 54,344 41,535 54,692 60,086
Preferred dividend requirements 2,607 2,582 2,541 1,870
Earnings applicable to common shares $ 51,737 $ 38,953 $ 52,151 $ 58,216
Average common shares outstanding 112,800 113,476 114,134 114,800
Earnings per common share $ 0.46 $ 0.34 $ 0.46 $ 0.51
- ---------------------------------------------------------------------------------------------------------
1993
Operating revenues $492,343 $467,260 $495,035 $525,477
Operating expenses 414,557 398,881 418,178 454,825
Operating income 77,786 68,379 76,857 70,652
Other income 7,122 1,249 7,464 10,505
Net interest charges 26,331 25,399 25,223 24,346
Net income (before preferred dividend requirements) 58,577 44,229 59,098 56,811
Preferred dividend requirements 2,182 2,181 2,282 1,920
Earnings applicable to common shares $ 56,395 $ 42,048 $ 56,816 $ 54,891
Average common shares outstanding 115,450 115,908 116,335 116,489
Earnings per common share $ 0.49 $ 0.36 $ 0.49 $ 0.47
- ---------------------------------------------------------------------------------------------------------
These amounts are unaudited, but in the opinion of SDG&E reflect all adjustments
necessary for a fair presentation.
39