ENOVA CORPORATION PARENT COMPANY OF SDG&E
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
On December 6, 1995, San Diego Gas & Electric Company announced the
formation of Enova Corporation as the parent company for SDG&E, an
operating public utility, and unregulated subsidiaries. On January 1,
1996, Enova Corporation became the parent of SDG&E. SDG&E's
outstanding common stock was converted on a share-for-share basis
into Enova Corporation common stock. SDG&E's debt securities,
preferred stock and preference stock were unaffected and remain with
SDG&E. On January 31, 1996, SDG&E's ownership interests in its
subsidiaries were transferred to Enova Corporation at book value,
completing the parent company structure. The consolidated financial
statements include SDG&E and its subsidiaries and, therefore, also
reflect what is now Enova and its subsidiaries. Beginning on January 1,
1996, SDG&E's financial statements for periods prior to 1996 will be
restated to reflect the net results of non-utility subsidiaries as
discontinued operations in accordance with Accounting Principles Board
Opinion No. 30 "Reporting the Effects of a Disposal of a Segment of
Business."
SDG&E is engaged in electric and gas businesses. It generates and
purchases electric energy and distributes it to 1.2 million customers
in San Diego County and an adjacent portion of Orange County,
California. It also purchases and distributes natural gas to 700,000
customers in San Diego County and transports gas for others. SDG&E has
diversified into other businesses. Enova Financial, Inc., invests in
limited partnerships representing approximately 800 affordable-housing
projects located throughout the United States. Califia Company leases
computer equipment. The investments in Enova Financial and Califia are
expected to provide income tax benefits over the next several years.
Enova Energy, Inc., is an energy management consulting firm offering
services to utilities and large consumers. Pacific Diversified Capital
Company is the parent company for non-utility subsidiaries, Phase One
Development, Inc., which is engaged in real estate development, and
Enova Technologies, Inc. Enova Technologies, whose ownership was
transferred directly to Enova Corporation after December 31, 1995, is
in the business of developing new technologies generally related to
utilities and energy, including certain research transferred from the
utility. Enova International was formed after December 31, 1995, to
develop and operate natural gas and power projects outside the United
States. Additional information regarding SDG&E's subsidiaries is
described in Notes 1 and 3 of the notes to consolidated financial
statements.
OPERATING REVENUES Electric revenues did not change significantly in
1995 or in 1994, decreasing less than one percent each year. Gas
revenues decreased 10 percent in 1995, reflecting lower purchased-gas
prices and lower sales volume due to warmer weather and an increase in
customers' purchases of gas directly from other suppliers (for whom
SDG&E provides transportation).
Revenues from diversified operations increased in 1994, primarily
due to Califia's leasing activities.
OPERATING EXPENSES Electric fuel expense decreased 30 percent in 1995
and 18 percent in 1994. The decrease in 1995 was primarily due to
lower prices for natural gas and the shifting of energy supply sources
from generation to purchased power as a result of nuclear refuelings
during the year. The decrease in 1994 was due to lower prices for
natural gas and the replacement of fossil fuel generation with lower-
cost nuclear generation.
Purchased-power expenses decreased in 1995, reflecting a decrease
in purchased-power prices, offset by higher volumes. The 5 percent
increase in 1994 was primarily due to increased purchases from higher-
cost, independent power producers.
Gas purchased for resale decreased 23 percent in 1995 and 12
percent in 1994. The decrease in 1995 was primarily due to lower
prices for natural gas and lower sales volumes due to warmer weather
and an increase in customers' purchases of gas directly from other
suppliers (for whom SDG&E provides transportation). The decrease in
1994 was due to lower natural gas prices and lower sales volumes due
to customers' purchases of gas directly from others.
The changes in maintenance expenses reflect unusually low charges
in 1994, a year which included no nuclear plant refuelings.
OTHER INCOME AND DEDUCTIONS Other income and deductions increased in
1995 and decreased in 1994. These changes, including the change in
"Other-net," were primarily due to the 1994 writedowns described in
Note 2 of the notes to consolidated financial statements.
EARNINGS 1995 earnings per common share were $1.94, compared to $1.17
in 1994 and $1.81 in 1993. Earnings per common share from continuing
operations were $1.94 in 1995, compared with $1.71 in 1994 and $1.89
in 1993. Excluding the impact of writedowns of utility and non-utility
real property and other assets ($0.20 per share), 1994 earnings per
share from continuing operations were $1.91. The increase in earnings
in 1995 is due to numerous offsetting factors, including the increased
utility authorized rate of return and changes in incentive awards for
performance-based ratemaking and demand-side management programs. The
increase in earnings in 1994 was the result of several offsetting
factors, including lower operating and maintenance expense,
performance-based ratemaking awards and lower utility authorized
return.
18
Earnings per share for the quarter ended December 31, 1995, were
$0.50 compared to $0.47 for the same period in 1994. Earnings per
share from continuing operations for the quarter were $0.45 in 1995
and $0.49 in 1994. The latter decrease is due to numerous offsetting
factors, including changes in incentive awards for performance-based
ratemaking and demand-side management programs, and the increased
authorized rate of return.
Califia and Enova Financial's contributions to earnings for the
year were $0.17 in 1995, $0.15 in 1994 and $0.09 in 1993. The impact
of the remaining subsidiaries on earnings from continuing operations
was not material.
LIQUIDITY AND CAPITAL RESOURCES
Utility operations continue to be a major source of liquidity. In
addition, financing needs are met primarily through issuances of short-
term and long-term debt, 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, leasing and other investments; and
repayments and retirements of long-term debt. In addition to changes
described elsewhere, major changes in cash flows are described below.
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 changes related to regulatory balancing
accounts were due primarily to changes in prices for natural gas. The
changes related to income taxes (and other current assets) were due
primarily to the differences in timing of income tax payments related
to regulatory balancing account activity in 1994. The changes related
to accounts payable and other current liabilities were due primarily
to greater demand-side management activity in December 1995, lower
employee incentive compensation and lower construction activity in
December 1994.
Quarterly cash dividends of $0.39 per share have been declared
for each quarter during the year ended December 31, 1995. The dividend
payout ratio for the years ended December 31, 1995, 1994, 1993, 1992
and 1991 were 80 percent, 130 percent, 82 percent, 81 percent and 79
percent, respectively. The increase in the payout ratio for the year
ended December 31, 1994, was due to the writedowns recorded during
1994. Additional information regarding the writedowns is provided in
Notes 2 and 3 of the notes to consolidated financial statements. The
payment of future dividends is within the discretion of the directors
and is dependent upon future business conditions, earnings and other
factors. Net cash flows provided by operating activities currently are
sufficient to maintain the payment of dividends at the present level.
CASH FLOWS FROM FINANCING ACTIVITIES SDG&E had only short- and
intermediate-term financing needs during 1995 and does not expect to
issue any intermediate-term debt in 1996. The utility did not issue
stock or long-term debt in 1995, except for refinancings, and does not
plan any issuances in 1996, other than refinancings. Subsidiaries
Enova Financial, Califia, Pacific Diversified Capital and Phase One
Development repaid $40 million in long-term debt in 1995 during the
ordinary course of business. To date, it has not been determined
whether the nonutility subsidiaries will issue debt in 1996.
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.
1991 1992 1993 1994 1995 Goal
- -----------------------------------------------------------
Common equity 47% 47% 47% 48% 49% 45-48%
Preferred stock 5 5 4 4 4 5-7
Debt and leases 48 48 49 48 47 46-49
- -----------------------------------------------------------
Total 100% 100% 100% 100% 100% 100%
___________________________________________________________
In December 1995, Standard & Poor's and Moody's Investors Service
affirmed the ratings of SDG&E following the CPUC's decision on
restructuring California's electric utility industry. Moody's affirmed
its long-term bond rating of A1 and stable outlook. Standard & Poor's
affirmed its long-term bond rating of A+ and negative outlook.
Standard & Poor's said the outlook would remain negative pending
further study of the financial implications of the restructuring
decision, as well as the potential for modification or approval by the
governor and the California Legislature.
On December 19, 1995, the Securities and Exchange Commission
approved SDG&E's application to delist its preferred and preference
stock from the Pacific Stock Exchange. All SDG&E preferred and
preference stock is now listed on the American Exchange only.
On January 15, 1996, SDG&E redeemed its $7.20 series preference
stock. The entire $15 million issue was called for mandatory
redemption at $101 per share.
DERIVATIVES SDG&E's policy is to use derivative financial instruments
to reduce its exposure to fluctuations in interest rates and foreign
currency exchange rates. These financial instruments are with major
investment firms and, along with cash and cash equivalents and
accounts receivable, expose SDG&E to market and credit risks. These
risks may at times be concentrated with certain counterparties. SDG&E
presently contemplates use of similar instruments to reduce its
exposure to fluctuations in natural gas prices. SDG&E does not use
derivatives for trading or speculative purposes.
19
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 borrowing. These swap and cap agreements
generally remain off the balance sheet as they involve the exchange of
fixed- and variable-rate interest payments without the exchange of the
underlying principal amounts. The related gains or losses are
reflected in the income statement as part of interest expense. SDG&E
would be exposed to interest-rate fluctuations on the underlying debt
should other parties to the agreement not perform. Such non-
performance is not anticipated. At December 31, 1995, SDG&E had two
such agreements, including an index cap agreement on $75 million of
bonds maturing in 1996, and a floating-to-fixed-rate swap associated
with $45 million of variable-rate bonds maturing in 2002.
SDG&E's pension fund periodically uses foreign currency forward
contracts to reduce its exposure from exchange-rate fluctuations
associated with certain investments in foreign equity securities.
These contracts generally have maturities ranging from three to six
months. At December 31, 1995, the pension fund held forward Yen-U.S.
Dollar contracts totaling $20 million. SDG&E's pension fund is exposed
to credit loss if the counterparties fail to perform. Such non-
performance is not anticipated.
Additional information on derivative financial instruments is
provided in Note 9 of the notes to consolidated financial statements.
CASH FLOWS FROM INVESTING ACTIVITIES Cash used in investing activities
in 1995 included utility construction expenditures and payments to its
nuclear decommissioning trust. Construction expenditures, excluding
nuclear fuel and the allowance for equity funds used during
construction, were $221 million in 1995 and are estimated to be $220
million in 1996. The company 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
will depend heavily on the impact of the CPUC's industry restructuring
decision, on the timing of expenditures to comply with air emission
reduction and other environmental requirements, on the company's plan
to transport natural gas to Mexico and, on the scope of Enova
Technologies' investment in new technologies. These matters are
discussed below.
Payments to the nuclear decommissioning trust are expected to
continue until SONGS is decommissioned, which is not expected to occur
before 2013. 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 April 1995, the CPUC issued its decision on SDG&E's
May 1995 Energy Cost Adjustment Clause Application, approving an $81
million decrease in electric rates effective May 1, 1995. The decrease
reflects, among other things, lower fuel and purchased-power costs and
the return of previous overcollections from customers. The $81 million
ECAC decrease was combined with previously approved increases for cost
of capital ($31 million) and base rates ($41 million), resulting in an
authorized system average electric rate of $0.0987.
In October 1995, SDG&E filed its 1996 ECAC rate request with the
CPUC for an $18 million decrease in electric rates which, if approved,
would result in an authorized system average electric rate of $0.0967
on June 1, 1996. The request reflects lower forecasted prices for fuel
and purchased power, lower cost of capital, balancing account activity,
and inflation and customer growth based on SDG&E's performance-based
ratemaking Base Rates Mechanism formula. Settlement discussions are
currently ongoing among SDG&E, the CPUC's Division of Ratepayer
Advocates and other parties.
In December 1995, the CPUC found SDG&E operations to be
reasonable for the record period August 1, 1992, through July 31,
1993, except for $1.8 million associated with a wholesale transaction.
This is the last comprehensive reasonableness review, since
performance-based ratemaking (see below) limits such reviews to those
issues causing expenses to fall outside certain parameters.
GAS RATES In July 1995, the CPUC issued its decision on SDG&E's June
1995 application to lower core gas rates by $16 million, effective
August 1, 1995. The decrease was based on the decline in gas prices to
levels below the Biennial Cost Allocation Proceeding's price forecast
that became effective January 1, 1995, and lowered the gas portion of
a typical residential SDG&E natural gas bill by $1.60 per month or 6.5
percent.
In December 1995, the CPUC authorized SDG&E to implement a $21
million natural gas refund as a result of balancing account
overcollections from lower-than-expected natural gas commodity costs.
The typical customer's refund, distributed in February 1996, averaged
$22. In December 1995, the CPUC also authorized a $25 million natural
gas rate increase for residential and small-business customers. In
January 1996, the typical customer's gas bill increased approximately
$1.78 per month, primarily due to an increase in natural gas
transportation prices from Southern California Gas and an update of
balancing account activity.
20
PERFORMANCE-BASED RATEMAKING In December 1995, the CPUC issued its
decision, authorizing rewards of $3.7 million for electric generation
and dispatch (G&D) and $3.8 million for gas procurement based on first-
year (August 1993 through July 1994) results of performance-based
ratemaking (PBR). The CPUC also found SDG&E's nuclear and gas-storage
operations reasonable for the same period.
In October 1995, SDG&E filed reports with the CPUC on the results
of its electric generation and dispatch and gas procurement mechanisms
for the year ended July 31, 1995. SDG&E's fuel and purchased-power
expenses fell below the benchmarks for these mechanisms by a total of
$27.9 million ($2.8 million for G&D and $25.1 million for gas). In its
filing for a rate adjustment effective June 1, 1996, SDG&E requested a
total shareholder reward of $3.4 million ($0.8 million for G&D and
$2.6 million for gas) and that the remainder of these savings be given
to customers through lower rates.
In July 1995, the CPUC authorized $7 million in rewards to
shareholders as a result of SDG&E's exceeding CPUC-approved 1994
benchmarks under the base-rates PBR mechanism. Performance measures in
the base-rates mechanism measures include customer satisfaction,
national rates comparison, system reliability and employee safety.
These PBR rewards are recorded in advance of receipt only when
the entire reward will be collected in rates within 24 months of the
CPUC's approval.
The gas procurement and G&D mechanisms are effective under a
previously authorized two-year experiment that began in August 1993.
Both have been extended until the Division of Ratepayer Advocates and
the Commission Advisory and Compliance Division file their final
reports for the year ended July 31, 1995 (expected during the first
quarter of 1996). Thereafter, SDG&E will be applying for an extension
and modification in conjunction with the restructuring of California's
electric utility industry (see "Competition" below), and the existing
mechanisms are expected to remain in place until the CPUC acts on the
application. The base-rates mechanism was established as a 5-year
experimental mechanism that is intended to run from January 1994
through December 1998.
COST OF CAPITAL In November 1995, the CPUC issued its decision
authorizing SDG&E, Pacific Gas and Electric, Southern California
Edison, Southern California Gas and Sierra Pacific Power 11.60 percent
returns on common equity for 1996. (SDG&E's was 12.05 percent in
1995.) SDG&E's resulting rate of return on ratebase is 9.37 percent,
compared to 9.76 percent in 1995.
In October 1995, SDG&E filed a proposal with the CPUC to
implement a mechanism to establish its cost of capital beginning in
January 1997. Each October, SDG&E's authorized rate of return would be
adjusted if single A bond rates change by 1 percent or more from the
prior year's benchmark. A 100-basis-point change in single A bond
rates would result in a one-half percent change in SDG&E's return-on-
equity. In addition, SDG&E's embedded costs of debt and preferred
stock would be adjusted to reflect SDG&E's outstanding long-term debt
and preferred stock at each September 30 if the return-on-equity
adjustment described above is triggered. The adjustments would be
effective on January 1 of the following year. The proposal suggests a
3-year trial period during which SDG&E's authorized capital structure
would not change.
SAN ONOFRE NUCLEAR GENERATING STATION SDG&E is currently recovering its
existing capital investment in San Onofre Nuclear Generating Station
Unit 1 over a 4-year period that began in November 1992, when the CPUC
issued a decision to permanently shut down the unit. The decision
authorized Southern California Edison (majority owner and operator of
SONGS) and SDG&E to recover their investments in Unit 1, of which
SDG&E's share was $111 million. SDG&E is recovering its investment,
earning a return of 9.1 percent. At December 31, 1995, $18 million
remained to be recovered.
In January 1996, the CPUC approved the accelerated recovery of
SONGS Units 2 and 3 existing capital costs. The decision allows SDG&E
to recover its investment of approximately $750 million over an 8-year
period beginning in 1996, rather than over the anticipated operational
life of the units, which is expected to extend to 2013. During the 8-
year period, the authorized rate of return on the equity portion of
the investment will be 90 percent of SDG&E's embedded cost of debt and
the return on the debt-financed component will be at 7.52 percent
(SDG&E's 1995 authorized cost of debt). The decision includes a
performance incentive plan that encourages continued, efficient
operation of the plant during the 8-year period. During this period,
customers will pay about $0.04 per kilowatt-hour. This pricing
structure replaces the traditional method of recovering the units'
operating expenses and capital improvements. This is intended to make
the units more competitive with other sources.
COMPETITION
ELECTRIC - CALIFORNIA In December 1995, the CPUC issued its policy
decision on the restructuring of California's electric utility
industry to stimulate competition and reduce rates. Beginning in
January 1998, customers can buy their electricity through a power
exchange that will obtain power from the lowest-bidding suppliers.
The exchange is a spot market with visible pricing. Consumers also
may choose to continue
21
to purchase from their local utility under
regulated tariffs. As a third option, a cross section of all customer
groups (residential, industrial, commercial and agricultural) will be
able to go directly to any energy supplier and enter into private
contracts with generators, brokers or others (direct access).
As the direct access mechanism has many technical issues to be
resolved, a five-year phase-in is planned. All California electricity
customers of investor-owned utilities will have the option to purchase
generation services directly by 2003. Key points of the CPUC decision
as it relates to SDG&E include:
- An independent system operator (ISO) will schedule power
transactions and access to the state transmission system, enabling
competing power producers to have equal opportunity to deliver their
supplies. Participation in the power exchange or "pool-based"
wholesale electricity market will be voluntary for buyers and sellers,
except for the investor-owned utilities. The ISO and the power
exchange will be separate, independent entities under Federal Energy
Regulatory Commission jurisdiction.
- Utilities will be allowed to fully recover their "stranded"
costs incurred for facilities approved by the CPUC, purchased-power
and other contracts, and regulatory assets through the establishment
of a non-bypassable competition transition charge (CTC) which all
customers will be assessed.
- Utilities will continue to have the obligation to provide
distribution service to all customers and provide least-cost
generation service to those customers who do not choose the direct-
access option. Performance-based regulation rather than cost-of-
service regulation will be used to encourage efficient utility
operation.
- Utilities will continue to have direct control and operation of
the distribution business and procurement of generation services for
customers who continue to purchase from the utility, which will
continue to be regulated by the CPUC. Transmission facilities will be
owned by the utilities and operated by the ISO.
- For purposes of transition cost recovery, rates for customers
taking bundled utility service (energy, transmission and distribution
included into one rate) will be capped at levels consistent with
January 1, 1996, revenue requirements. Including the CTC, rates cannot
exceed the cap and, therefore, recovery of the CTC is limited by the
cap. If rates not including the CTC meet or exceed the cap for a
particular period, no CTC can be recouped, but rather will be
accumulated in a balancing account for future recovery (see below).
- The CPUC supports a non-bypassable surcharge to fund public
policy programs.
The decision identifies three primary sources of transition
costs: uneconomic utility-owned generating assets (that portion of
fossil units not recoverable in the energy price), existing purchased-
power obligations (including qualifying facilities), and regulatory
assets and obligations (including deferred operating costs and
deferred taxes). By September 1996, the utilities must identify and
value investments for inclusion in a transitional balancing account,
subject to CPUC review and approval. The transition-balancing account
can be adjusted through 2003 for errors or omissions. Collection of
any investment-related transition costs must be completed by 2005.
Thereafter, participation in the power exchange by investor-owned
utilities will be voluntary.
The decision allows for recovery of all remaining generation
investment costs, with a reduced rate of return on any investment-
related transition costs. The rate of return for the debt component
would be equal to the utility's embedded cost of debt and the rate of
return on the equity component would be equal to 90 percent of the
embedded cost of debt. SDG&E's authorized cost of debt is 7.52 percent
for 1995. The CPUC reduced the rate of return to reflect the
perception of lower risk, due to the non-bypassable CTC on
distribution customers, and the reduced risk that the plants will be
found no longer used and useful and removed from rate base.
The CPUC's concerns over market-power problems may require
investor-owned utilities to divest themselves of a substantial portion
of their generating assets. PG&E and Edison are required to file plans
to voluntarily divest themselves of at least 50 percent of their
fossil-fueled generating assets through a spin-off or sale to a non-
affiliated entity. SDG&E is not included in this requirement, as the
CPUC does not perceive these market-power problems in San Diego. In
order to encourage the voluntary divestiture or spin-off of a
utility's fossil generation, the decision provides for a 0.1 percent
increase in equity return for each 10 percent of fossil plants
disposed of in excess of the mandatory percentage.
In addition, the utilities are required to file plans with the
CPUC to implement direct access and new or revised PBR proposals.
Plans to establish the power exchange and ISO are also required to be
filed by the utilities with both the CPUC and the FERC, as the FERC
has jurisdiction over the exchange, the ISO and interstate
transmission.
The California Legislature has passed a resolution forming an
oversight committee to ensure the legislature's involvement in the
policies presented by the CPUC, and that the policies comply with
federal and state laws, and achieve the objectives both of competition
and the various social programs that are currently funded through
utility rates.
The CPUC is currently working on building a consensus on the new
market structure with the California Legislature, the governor,
utilities and customers.
ELECTRIC-FEDERAL In March 1995, the FERC issued a proposed rule that,
if adopted, would require all public utilities to offer wholesale
"open-access" transmission service on a nondiscriminatory basis. In
addition, public utilities would be
22
required to functionally price
their generation and transmission services separately. The FERC also
stated its belief that utilities should be allowed to recover the
costs of assets and obligations made uneconomic by the changed
regulatory environment. Although SDG&E's cost-recovery mechanisms are
not currently under the jurisdiction of the FERC, the recognition by
the FERC of the propriety of such cost recovery supports the CPUC's
similar position.
In October 1995, SDG&E filed for approval of its open-access
tariffs for its service territory with the FERC in conjunction with
its request for a marketing license for Enova Energy. In December
1995, the FERC issued a draft order approving SDG&E's open-access
tariff, but rejecting Enova Energy's filing. This limits Enova Energy
to cost-based rates. All non-rate terms and conditions were accepted
subject to the outcome of the FERC's restructuring rulemaking.
Final approval of the FERC's rule and the CPUC's industry-
restructuring plan would result in the creation of a bid-based
wholesale electricity spot market with open-access transmission. The
FERC is expected to issue a final rule during the first half of 1996.
GAS The ongoing restructuring of the gas utility industry has allowed
customers to bypass utilities as suppliers and, to a lesser extent, as
transporters of natural gas. Currently, non-utility electricity
producers and other large customers may use a utility's facilities to
transport gas purchased from non-utility suppliers. Also, smaller
customers may form groups to buy gas from another supplier. SDG&E
would face significant competition if a major pipeline were to operate
in or near SDG&E's service territory.
In September 1995, SDG&E signed an agreement with Pacific
Enterprises International, an affiliate of Southern California Gas,
and Proxima, a Mexican company, to develop and operate natural gas
distribution networks in Baja California, Mexico. Representing SDG&E
will be an Enova Corporation subsidiary, Enova International.
In November 1995, Mexico issued new regulations allowing
privately owned companies, including companies with foreign ownership,
to participate in infrastructure projects involving natural gas
transportation, storage and distribution. Previously, these activities
were conducted by the government-owned oil company, Pemex.
In November 1995, the three-company consortium submitted a
Statement of Interest to the Mexican government requesting a permit to
distribute natural gas in the city of Mexicali and surrounding areas.
Other companies have also expressed an interest in the project. Under
the new regulations, the government will conduct a bidding process
before a permit is issued. If the consortium is awarded the permit, it
will have an exclusive right to distribute natural gas in that region
for 12 years.
The proposed project would deliver gas to Mexicali through the
pipeline network of Southern California Gas in the Imperial Valley. The
initial capital will be $10 million to $15 million, and the initial
load will be about 10 million cubic feet per day, serving mostly
industrial customers. The proposed pipeline network would be
continuously expanded to serve residential and commercial customers.
EFFECTS OF REGULATION SDG&E currently accounts for the economic effects
of regulation in accordance with Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation," under which a regulated utility may record a regulatory
asset if it is probable that, through the rate-making process, the
utility will recover that asset from its customers. In the event that
recovery of specific costs through rates becomes unlikely or
uncertain, whether resulting from the effects of competition or
regulatory actions, it could result in the writeoff of portions of
these regulatory assets. In addition, once the restructuring
transition is final, SDG&E may not continue to meet the criteria for
applying SFAS 71 to all of its operations in the new regulatory
framework.
As the restructuring of the industry evolves, SDG&E will become
more vulnerable to competition. However, based on recent CPUC
decisions, recovery of stranded costs is provided for, including
recovery of investment in SONGS Units 2 and 3, and SDG&E does not
anticipate incurring a material charge against earnings for its
generating facilities, the related regulatory assets and other long-
term commitments. In addition, although California utilities' rates
are significantly higher than the national average, SDG&E has a lower
concentration of industrial customers and for 7 years has been the
lowest-cost provider among the investor-owned utilities in California,
which make its customers a less likely target for outside competitors.
RESOURCE PLANNING
BIENNIAL RESOURCE PLAN UPDATE PROCEEDING In December 1994, the CPUC
issued a decision ordering SDG&E, Pacific Gas and Electric and
Southern California Edison to proceed with the BRPU auction. SDG&E was
ordered to begin negotiating contracts (ranging from 17 to 30 years)
to purchase 500 mw of power from qualifying facilities at an estimated
cost of $4.8 billion beginning in 1997. In February 1995, the FERC
issued an order declaring the BRPU auction procedures unlawful under
federal law. In July 1995, the CPUC issued a ruling encouraging SDG&E,
PG&E and Edison to reach settlements with the auction winners.
Settlement discussions are ongoing. Additional information on
potential stranded costs and SDG&E's purchased-power commitments is
described in Notes 10 and 11 of the notes to consolidated financial
statements.
23
SOURCES OF FUEL AND ENERGY SDG&E's primary sources of fuel and
purchased power include natural gas from Canada and the Southwest,
surplus power from other utilities in the Southwest and the Northwest,
and uranium from Canada. SDG&E expects its fuel and purchased-power
costs to remain relatively low in the next few years due to the
continued availability of surplus power in the Southwest and the
continued availability of natural gas. Although short-term natural-gas
supplies are volatile due to weather and other conditions, these
sources should provide SDG&E with an adequate supply of low-cost
natural gas. SDG&E is currently involved in litigation concerning its
long-term contracts for natural gas with certain Canadian suppliers.
SDG&E has settled with one supplier. SDG&E cannot predict the outcome
of the litigation with the other suppliers, but does not expect that
an unfavorable outcome would have a material effect on its financial
condition or results of operations.
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 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. However, the CPUC's decision for restructuring the California
electric utility industry (see above) will change the way utility
rates are set and costs are recovered. Depending on the final outcome
of industry restructuring and the impact of competition, the costs of
compliance with future environmental regulations may not be fully
recoverable.
Capital expenditures to comply with environmental laws and
regulations were $4 million in 1995, $5 million in 1994 and $8 million
in 1993, and are expected to aggregate $38 million over the next 5
years. These expenditures primarily include the estimated cost of
retrofitting SDG&E's power plants to reduce air emissions. They do not
include potential expenditures to comply with water-discharge
requirements for the Encina, South Bay and SONGS power plants, which
are discussed below.
HAZARDOUS WASTES In May 1994, the CPUC approved a mechanism for
utilities to recover their costs to clean up hazardous waste
contamination at sites at which the utility may have responsibility or
liability under the law to conduct or participate in any required
cleanup. Basically, the mechanism allows utilities to recover 90
percent of their cleanup costs and any related costs of litigation
with responsible parties, and 70 percent of their costs related to
obtaining recovery of such cleanup costs from insurance carriers
providing coverage for such costs.
SDG&E disposes of its hazardous wastes at facilities owned and
operated by other entities. Operations at these facilities may result
in actual or threatened risks to the environment or public health.
Where the owner or operator of such a facility fails to complete any
corrective action required by regulatory agencies to abate such risks,
applicable environmental laws may impose an obligation on SDG&E and
others who disposed of hazardous wastes at the facility to undertake
corrective actions.
This type of obligation has been imposed upon SDG&E with respect
to the Rosen's Electrical Equipment Supply Company site located in
Pico Rivera, California. In December 1993, SDG&E received notification
that the California Department of Toxic Substances Control (DTSC)
considered SDG&E and eight other entities to be potentially
responsible parties (PRPs) liable for any required corrective action
regarding polychlorinated biphenyls contamination at the Rosen's site.
The site was operated between approximately 1948 and 1984. As a part
of its operations, Rosen's acquired and scrapped used electrical
transformers. SDG&E sold some of its used electrical transformers to
Rosen's. The DTSC considers SDG&E to be responsible for about 7
percent of the transformer-related contamination at the site. SDG&E is
continuing to investigate this matter. In December 1995, the DTSC
issued an Imminent and Substantial Endangerment Determination and
Remedial Action Order to SDG&E and 10 other PRPs requiring them to
assess and remove the risks of contamination from the site. However,
SDG&E and the other PRPs have been negotiating with Rosen's and the
DTSC to effect, before April 20, 1996, an alternative consent order
which would separate the development of the cleanup plan from the
actual cleanup. This would provide the PRPs with greater flexibility
to manage and implement the required actions. Based on available
information, SDG&E is unable to estimate the range of liability, if
any, it may have for the necessary corrective action at this site.
During the early 1900s SDG&E and its predecessors manufactured
gas from oil at its Station A facility and at two other small
facilities in Escondido and Oceanside. In 1995, SDG&E commenced an
environmental assessment of Station A. Some significant amounts of
residual by-products from the gas-manufacturing process have been
discovered on portions of the facility during the assessment. However,
the magnitude of such contamination has yet to be determined. The
assessment will be completed in 1996, at which time the extent of any
required remediation activities and a range of costs will be
determined. Sufficient information is not currently available to
estimate cleanup costs. The Escondido facility has been remediated at
a cost of approximately $3 million during the period of 1990 through
1993. A site closure letter for this
24
facility has been obtained from
the San Diego County Department of Environmental Health Services.
However, contaminants similar to the ones found on the Escondido site
have been observed on adjacent parcels of property. SDG&E will assess
these contaminants in 1996.
SDG&E has identified various other sites for which it may bear
some responsibility or liability for any corrective action that may be
required under federal, state or local environmental laws. SDG&E may
be held partially or indirectly responsible for remediation of some of
these sites. However, SDG&E is unable to estimate the extent of its
responsibility, if any, for remediation. Furthermore, the timing for
assessing the costs of remediation at these sites and the number and
identities of other parties that may also be responsible (and their
respective responsibilities and abilities to share in the cost of the
remediation) are also unknown.
ELECTRIC AND MAGNETIC FIELDS (EMF) SDG&E and other utilities are
involved in litigation concerning electric and magnetic fields. An
unfavorable outcome of this 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 EMFs emitted by utilities'
transmission lines and generating facilities. To respond to public
concerns, the CPUC has directed the California utilities to adopt a
low-cost EMF-reduction policy that requires reasonable design changes
to achieve noticeable reduction of EMF levels that are anticipated
from new projects. However, consistent with the major scientific
reviews of available research literature, the CPUC has indicated that
no health risk has been identified with exposure to EMFs.
AIR QUALITY In 1996, SDG&E must begin to comply with nitrogen dioxide
emission limits that the San Diego Air Pollution Control District
imposed on electric generating boilers through its Rule 69. Under the
initial rule, SDG&E would have been required to retrofit each of its
nine boilers with expensive pollution-control equipment to reduce
nitrogen dioxide emissions and to maintain the total nitrogen oxide
emissions from the entire system below a prescribed emissions cap
(having graduated emission reductions to be achieved through 2001).
The capital costs of compliance with the initial rule were expected to
be approximately $110 million. However, in December 1995, the district
amended the rule to remove the individual boiler retrofit
requirements, but retained the system-wide emissions cap with further
system-wide emission reductions to be achieved by 2005. The estimated
capital costs for compliance with the amended rule are approximately
$60 million. The California Air Resources Board (ARB) expressed
concern that the amendments to Rule 69 did not meet the requirements
of the California Clean Air Act. However, the ARB withheld any formal
objections pending its review of SDG&E's Rule 69 compliance plan to be
submitted in 1996. The ARB may seek to overturn some or all of the
Rule 69 amendments or to otherwise impose more restrictive emissions
limitations, which would cause SDG&E's Rule 69 compliance costs to
increase.
In 1990 the South Coast Air Quality Management District (AQMD)
passed a rule which will require SDG&E's older natural gas compressor
engines at its Moreno facility to either meet new stringent nitrogen
oxide emission levels or be converted to electric drive. In October
1993, the AQMD adopted a new program called RECLAIM, which replaced
existing rules and requires SDG&E's natural-gas compressor engines at
its Moreno facility to reduce their nitrogen oxide emission levels by
about 10 percent a year through 2003. This will be accomplished
through the installation of new emission-monitoring equipment,
operational changes to take advantage of low-emission engines and
engine retrofits. SDG&E has concluded negotiations with the AQMD that
resulted in the reclassification of three of these engines and
eliminated the need for certain expensive monitoring equipment for
those engines. The cost of complying with RECLAIM may be as much as $3
million.
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 applications
were submitted in 1993. These discharge permits are required to enable
SDG&E to discharge its cooling water and certain other treated and
nontreated nonhazardous wastewaters into the Pacific Ocean and into
San Diego Bay. The permits are, therefore, prerequisites to the
continued operation of its power plants as they are now configured.
Increasingly stringent cooling-water and wastewater discharge
limitations may be imposed in the future, and SDG&E may be required to
build additional facilities to comply with these requirements. Such
facilities could include wastewater treatment facilities, cooling
towers or offshore- discharge pipelines.
SDG&E anticipates that the regional board will issue a new permit
for SDG&E's South Bay power plant in 1996. Pending the regional
board's action, the previous permit remains effective.
The regional board issued SDG&E a new discharge permit for its
Encina power plant in November 1994. However, SDG&E's application for
an exception to certain thermal-discharge requirements is still
pending until the completion of thermal studies to be conducted in
1996. If SDG&E's exception application is denied, SDG&E could be
required to construct offshore-discharge facilities at a cost of up to
$75 million.
25
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 study concluded that some
environmental damage is 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. The new pricing structure
contained in the CPUC's decision regarding accelerated recovery of
SONGS Units 2 and 3 (see "San Onofre Nuclear Generating Station"
above) accommodates these added mitigation costs. In addition, SDG&E
and Edison have asked the California Coastal Commission to reconsider
and modify this mitigation plan to reduce the size of the artificial
reef and shorten the monitoring period. Negotiations are ongoing.
WOOD-POLE PRESERVATIVES The Pacific Justice Center (Pacific), a for-
profit law firm, and the Mateel Environmental Justice Foundation
(Mateel), a nonprofit corporation, claim that SDG&E and other
utilities and parties have violated California's Safe Drinking Water
and Toxic Enforcement Act (Proposition 65) by failing to warn persons
who may come into contact with the preservatives used in treated wood
utility poles and by allowing such preservatives to be released into
sources of drinking water. Some preservatives used in woodpoles are
included on California's list of chemicals known to cause cancer or
reproductive harm. Proposition 65 requires that prior warning be given
to individuals who may be exposed to such chemicals unless the
exposure will not pose a significant risk and that these substances
not be released into sources of drinking water in significant
quantities or otherwise in violation of the law. Violations of the
Proposition 65 warning requirement can result in penalties of up to
$2,500 per violation. SDG&E believes, on the basis of studies and
other information, that exposure to wood poles containing these
preservatives does not give rise to a significant risk and, therefore,
no warning is required and that significant quantities of these
preservatives are not released to any source of drinking water. SDG&E
and the other utilities and parties have responded to the claims by
denying their validity. In June 1995, Mateel, represented by
Pacific, filed a complaint in San Francisco Superior Court against
Pacific Bell, PG&E and two wood-pole manufacturers alleging the
violations noted above. Although SDG&E was not named in this lawsuit,
it is anticipated that Mateel may file a separate lawsuit against
SDG&E and other utilities on the same grounds. SDG&E is cooperating
with PG&E, Pacific Bell and others to achieve an effective and
favorable resolution of this matter.
NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." This statement, which is effective for 1996 financial
statements, requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In performing the review of recoverability, the entity
should estimate the future cash flows expected to result from the use
of the asset and its eventual disposition. As discussed above and in
Note 11 of the notes to consolidated financial statements, the CPUC
has issued a decision for restructuring the California electric
utility industry to stimulate competition and has indicated that the
California utilities will, within certain limits, be allowed recovery
of regulatory assets, the excess carrying amount of existing utility
plant and obligations under long-term purchased-power contracts over
fair-market value over a transition period that ends in 2005. As a
result of this and preliminary indications from the FERC on recovery
of transition costs arising from industry restructuring, SFAS 121 is
not currently expected to have an adverse impact on SDG&E's financial
condition or results of operations. However, this may change in the
future as restructuring, deregulation and competitive factors take
effect in the electric utility industry.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation." SFAS 123 is effective for 1996 financial
statements and establishes a fair-value-based method of accounting for
stock-based compensation plans. SFAS 123 provides a voluntary
alternative to the provisions of Accounting Principles Board Opinion
25, "Accounting for Stock Issued to Employees." However, it requires
pro forma disclosure of the stock-based compensation arrangement's
impact on net income and earnings per share as though SFAS 123's fair-
value provisions had been adopted. SDG&E currently issues restricted-
stock awards under its Long-Term Incentive Plan and expects to adopt
the disclosure-only requirement of SFAS 123. Additional information on
SDG&E's stock-based compensation plans is provided in Note 7 of the
notes to consolidated financial statements.
26
Responsibility Report for the Consolidated Financial Statements
SDG&E and Enova (collectively referred to as "SDG&E") are 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, that transactions are
executed in accordance with its objectives, and that 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 LLP, 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, the independent auditors and management 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.
DAVID R. KUZMA
Senior Vice President, Chief Financial Officer and Treasurer
Independent Auditors' Report
To the Shareholders and Board of Directors of Enova Corporation and
San Diego Gas & Electric Company:
We have audited the accompanying consolidated balance sheets and the
statements of consolidated capital stock and of long-term debt of San
Diego Gas & Electric Company and subsidiaries as of December 31, 1995
and 1994, and the related statements of consolidated 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, 1995. These consolidated 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, 1995 and
1994, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Diego, California
February 16, 1996
27
STATEMENTS OF CONSOLIDATED INCOME
In thousands except per share amounts
For the years ended December 31 1995 1994 1993
------------ ------------ ------------
Operating Revenues
Electric $1,503,926 $1,510,320 $1,514,608
Gas 310,142 346,183 346,658
Diversified operations 56,608 55,742 36,223
------------ ------------ ------------
Total operating revenues 1,870,676 1,912,245 1,897,489
------------ ------------ ------------
Operating Expenses
Electric fuel 100,256 143,339 174,444
Purchased power 341,727 342,612 325,966
Gas purchased for resale 113,355 146,579 165,876
Maintenance 91,740 70,776 81,788
Depreciation and decommissioning 278,239 262,238 245,144
Property and other taxes 45,566 44,746 44,902
General and administrative 210,207 207,908 204,290
Other 209,358 208,533 196,564
Income taxes 134,578 153,298 154,571
------------ ------------ ------------
Total operating expenses 1,525,026 1,580,029 1,593,545
------------ ------------ ------------
Operating Income 345,650 332,216 303,944
------------ ------------ ------------
Other Income and (Deductions)
Writedown of real estate -- (25,000) --
Allow for equity funds used
during construction 6,435 6,274 17,909
Taxes on nonoperating income (27) 17,299 202
Other - net (5,876) (19,117) 5,160
------------ ------------ ------------
Total other income and (deductions) 532 (20,544) 23,271
------------ ------------ ------------
Income Before Interest Charges 346,182 311,672 327,215
------------ ------------ ------------
Interest Charges
Long-term debt 95,523 92,770 92,596
Short-term debt and other 20,215 14,619 11,335
Allowance for borrowed funds
used during construction (2,865) (2,658) (4,245)
------------ ------------ ------------
Net interest charges 112,873 104,731 99,686
------------ ------------ ------------
Income From Continuing Operations 233,309 206,941 227,529
Discontinued Operations, Net Of Income Taxes 148 (63,464) (8,814)
------------ ------------ ------------
Net Income (before preferred
dividend requirements) 233,457 143,477 218,715
Preferred Dividend Requirements 7,663 7,663 8,565
------------ ------------ ------------
Earnings Applicable to Common Shares $ 225,794 $ 135,814 $ 210,150
============ ============ ============
Average Common Shares Outstanding 116,535 116,484 116,049
============ ============ ============
Earnings Per Common Share from
Continuing operations $ 1.94 $ 1.71 $ 1.89
============ ============ ============
Earnings Per Common Share $ 1.94 $ 1.17 $ 1.81
============ ============ ============
Dividends Declared Per Common Share $ 1.56 $ 1.52 $ 1.48
============ ============ ============
See notes to consolidated financial statements
28
CONSOLIDATED BALANCE SHEETS
In thousands of dollars
Balance at December 31 1995 1994
-------------- --------------
ASSETS
Utility plant - at original cost $5,533,554 $5,329,179
Accumulated depreciation and decommissioning (2,433,397) (2,180,087)
-------------- --------------
Utility plant-net 3,100,157 3,149,092
-------------- --------------
Investments and other property 532,289 465,918
-------------- --------------
Current assets
Cash and temporary investments 96,429 25,405
Accounts receivable 178,155 187,988
Notes receivable 34,498 31,806
Inventories 67,959 75,607
Other 41,012 34,022
-------------- --------------
Total current assets 418,053 354,828
-------------- --------------
Deferred taxes recoverable in rates 298,748 305,717
-------------- --------------
Deferred charges and other assets 321,193 322,881
-------------- --------------
Total $4,670,440 $4,598,436
============== ==============
CAPITALIZATION AND LIABILITIES
Capitalization (see Statements of Consolidated
Capital Stock and of Long-Term Debt)
Common equity $1,520,070 $1,474,430
Preferred stock not subject to mandatory redemption 93,475 93,493
Preferred stock subject to mandatory redemption 25,000 25,000
Long-term debt 1,350,094 1,339,201
-------------- --------------
Total capitalization 2,988,639 2,932,124
-------------- --------------
Current liabilities
Short-term borrowings -- 89,325
Long-term debt redeemable within one year 115,000 115,000
Current portion of long-term debt 36,316 35,031
Accounts payable 145,517 130,157
Dividends payable 47,383 46,200
Taxes accrued -- 5,519
Interest accrued 22,537 23,372
Regulatory balancing accounts overcollected-net 170,761 111,731
Other 125,438 113,815
-------------- --------------
Total current liabilities 662,952 670,150
-------------- --------------
Customer advances for construction 34,698 36,250
Accumulated deferred income taxes-net 523,335 513,592
Accumulated deferred investment tax credits 104,226 109,161
Deferred credits and other liabilities 356,590 337,159
Contingencies and commitments (Notes 10 and 11) -- --
-------------- --------------
Total $4,670,440 $4,598,436
============== ==============
See notes to consolidated financial statements
29
STATEMENTS OF CONSOLIDATED CASH FLOWS
In thousands of dollars
For the years ended December 31 1995 1994 1993
------------ ------------ ------------
Cash Flows from Operating Activities
Income from continuing operations $ 233,309 $ 206,941 $ 227,529
Adjustments to reconcile income from continuing
operations to net cash provided by operating activities
Writedown of real property and other assests -- 37,000 --
Depreciation and decommissioning 278,239 262,238 245,144
Amortization of deferred charges and other assets 12,068 12,944 12,309
Amortization of deferred credits and other
liabilities (32,975) (30,370) (18,616)
Allowance for equity funds used during construction (6,435) (6,274) (17,909)
Deferred income taxes and investment tax credits (30,748) (55,069) 49,511
Other-net 57,475 57,734 8,764
Changes in working capital components
Accounts and notes receivable 7,141 (9,110) (5,916)
Regulatory balancing accounts 59,030 78,552 (13,245)
Inventories 7,648 506 113
Other current assets (5,609) (1,518) 869
Interest and taxes accrued 11,642 18,284 (19,141)
Accounts payable and other current liabilities 26,983 (9,271) 19,999
Cash flows provided(used) by discontinued operations 6,148 3,790 (1,979)
----------- ------------- ------------
Net cash provided by operating activities 623,916 566,377 487,432
----------- ------------- ------------
Cash Flows from Financing Activities
Dividends paid (188,288) (183,492) (178,708)
Short-term borrowings-net (89,325) (27,872) 48,397
Issuance of long-term debt 124,641 -- 369,893
Repayment of long-term debt (165,871) (90,255) (522,983)
Sale (redemption) of common stock (241) (558) 38,850
Issuance of preferred stock -- -- 50,636
Redemption of preferred stock (18) -- (65,228)
------------ ------------ ------------
Net cash used by financing activities (319,102) (302,177) (259,143)
------------ ------------ ------------
Cash Flows from Investing Activities
Utility construction expenditures (220,748) (263,709) (354,391)
Withdrawals from construction trust funds - net -- 58,042 190,225
Contributions to decommissioning funds (22,038) (22,038) (22,038)
Leasing investments -- -- (19,729)
Other-net 3,874 (6,463) (9,898)
Discontinued operations 5,122 (17,338) (9,708)
------------ ------------ ------------
Net cash used by investing activities (233,790) (251,506) (225,539)
------------ ------------ ------------
Net increase 71,024 12,694 2,750
Cash and temporary investments, beginning of year 25,405 12,711 9,961
------------ ------------ ------------
Cash and temporary investments, end of year $ 96,429 $ 25,405 $ 12,711
============ ============ ============
Supplemental Schedule of Noncash Investing
and Financing Activities
Leasing investments $ -- $ -- $ 150,880
Real estate investments 50,496 28,311 84,278
------------ ------------ ------------
Total assets acquired 50,496 28,311 235,158
Cash paid (2,550) (452) (28,209)
------------ ------------ ------------
Liabilities assumed $ 47,946 $ 27,859 $ 206,949
============ ============ ============
See notes to consolidated financial statements
30
STATEMENTS OF CONSOLIDATED CHANGES IN
CAPITAL STOCK AND RETAINED EARNINGS
In thousands of dollars
For the years ended December 31, 1993, 1994, 1995
Preferred Stock
-----------------------------
Not Subject Subject to Premium on
to Mandatory Mandatory Common Capital Retained
Redemption Redemption Stock Stock Earnings
--------- --------- --------- --------- ---------
Balance, December 31, 1992 $ 62,493 $ 68,200 $287,585 $529,486 $624,368
Net income 218,715
Common stock sold (1,457,756 shares) 3,644 33,612
Long-term incentive plan activity-net 59 1,535
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
Net income 143,477
Long-term incentive plan activity-net 53 (611)
Dividends declared
Preferred stock (7,663)
Common stock (177,066)
- -------------------------- --------- --------- --------- --------- ---------
Balance, December 31, 1994 93,493 25,000 291,341 564,508 618,581
Net income 233,457
Long-term incentive plan activity-net 117 1,530
Preferred stock retired (880 shares) (18) 8
Dividends declared
Preferred stock (7,663)
Common stock (181,809)
- -------------------------- --------- --------- --------- --------- ---------
Balance, December 31, 1995 $ 93,475 $ 25,000 $291,458 $566,046 $662,566
========================== ========= ========= ========= ========= =========
See notes to consolidated financial statements.
31
STATEMENTS OF CONSOLIDATED CAPITAL STOCK
In thousands of dollars except call price
Balance at December 31 1995 1994
----------- ----------
COMMON EQUITY
Common stock, without par value, authorized
255,000,000 shares, outstanding: 1995,
116,583,358 shares; 1994, 116,536,535 shares $291,458 $291,341
Premium on capital stock 566,046 564,508
Retained earnings 662,566 618,581
----------- ----------
Total common equity $1,520,070 $1,474,430
=========== ==========
PREFERRED STOCK (A) Trading Call
Not subject to mandatory redemption Symbol(B) Price
$20 par value, authorized 1,375,000 shares --------- --------
5% Series, 375,000 shares outstanding SDOPrA $24.00 $7,500 $7,500
4.50% Series, 300,000 shares outstanding SDOPrB $21.20 6,000 6,000
4.40% Series, 325,000 shares outstanding SDOPrC $21.00 6,500 6,500
4.60% Series, 1995, 373,770 shares;
1994, 374,650 shares outstanding -- $20.25 7,475 7,493
Without par value (C)
$7.20 Series, 150,000 shares outstanding (D) SDOPrG $101.00 15,000 15,000
$1.70 Series, 1,400,000 shares outstanding -- $25.85(E) 35,000 35,000
$1.82 Series, 640,000 shares outstanding SDOPrH $26.00(E) 16,000 16,000
----------- ----------
Total not subject to mandatory redemption $93,475 $93,493
=========== ==========
Subject to mandatory redemption
Without par value (C)
$1.7625 Series, 1,000,000 shares outstanding(F) -- $25.00(E) $25,000 $25,000
----------- ----------
Total subject to mandatory redemption $25,000 $25,000
=========== ===========
(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 had
a liquidation value of $100 per share (see Note D).
(B) All listed shares are traded on the American Stock Exchange.
(C) Authorized 10,000,000 shares total (both subject to and not subject to
mandatory redemption).
(D) The $7.20 series was fully redeemed on January 15, 1996.
(E) The $1.70 and $1.7625 series are not callable until 2003; the $1.82 series
is not callable until 1998.
(F) The $1.7625 series has a sinking fund requirement to redeem 50,000 shares
per year from 2003 to 2007. The remaining 750,000 shares must be redeemed
in 2008.
See notes to consolidated financial statements.
32
STATEMENTS OF CONSOLIDATED LONG-TERM DEBT
In thousands of dollars
<Captions>
First Call
Balance at December 31 Date 1995 1994
----------------- ---------- ----------
First mortgage bonds
5.5% Series I, due March 1, 1997 4/15/67 $ 25,000 $ 25,000
4.00% Series CC, due May 1, 2008(A) 9/1/96 53,000 53,000
4.00% Series DD, due December 1, 2008(A) 9/1/96 27,000 27,000
9.25% Series EE, due September 1, 2020(B) 9/1/95 -- 74,350
3.95% Series FF, due December 1, 2007(A) 8/1/96 35,000 35,000
7.625% Series GG, due July 1, 2021(B) 7/1/96 44,250 44,250
7.375% Series HH, due December 1, 2021(B) 12/1/96 81,350 81,350
8.75% Series II, due March 1, 2023(B) 9/1/97 25,000 25,000
9.625% Series JJ, due April 15, 2020 4/15/00 100,000 100,000
6.8% Series KK, due June 1, 2015(A) Non-callable 14,400 14,400
8.5% Series LL, due April 1, 2022 4/1/02 60,000 60,000
7.625% Series MM, due June 15, 2002 Non-callable 80,000 80,000
6.1% and 6.4% Series NN, due September 1, 2018
and 2019(B) 9/1/02 118,615 118,615
Various % Series OO, due December 1, 2027(C) (C) 250,000 250,000
5.9% Series PP, due June 1, 2018(B) 6/1/03 70,795 70,795
Variable % Series QQ, due June 1, 2018(B) (D) 14,915 14,915
5.85% Series RR, due June 1, 2021(A) 6/1/03 60,000 60,000
5.9% Series SS, due September 1, 2018(B) 9/1/03 92,945 92,945
Variable % Series TT, due September 1, 2020(B) (D) 57,650 --
Variable % Series UU, due September 1, 2020(B) (D) 16,700 --
-------------- ---------- ----------
Total 1,226,620 1,226,620
---------- ----------
Capitalized leases 105,365 103,575
Debt incurred to acquire limited partnerships,
various rates, payable annually through 2005 142,198 109,473
Bank loans, various rates -- 17,298
Other long-term debt 33,558 40,177
Unamortized discount on long-term debt (6,331) (7,911)
Long-term debt redeemable within one year (115,000) (115,000)
Current portion of long-term debt (36,316) (35,031)
---------- ----------
Total $1,350,094 $1,339,201
========== ==========
(A) Issued to secure the company's obligation under a series of loan agreements with the
California Pollution Control Financing Authority under which the Authority loaned
proceeds from the sale of $115 million of variable-rate/demand (series CC, DD and FF) and
$74 million in fixed-rate (series KK and RR) tax-exempt pollution control revenue bonds to the
company to finance certain qualifying facilities associated with the company's 20 percent
interest in San Onofre Units 2 and 3.
(B) Issued to secure the company's obligation under a series of loan agreements with the City
of San Diego under which the city loaned the proceeds from the sale of $522 million in
industrial development revenue bonds to the company to finance certain qualifying facilities.
All series are tax-exempt except QQ and UU.
(C) Issued to secure the company's obligation under a loan agreement with the City of Chula
Vista under which the city loaned the proceeds from the sale of $250 million in tax-exempt
industrial development revenue bonds to the company to finance certain qualified facilities.
The first call date for $75 million is December 1, 2002. The remaining $175 million of the bonds
is currently variable rate and is callable at various dates within 1 year. Of this, $45 million is
subject to a floating-to-fixed rate swap, which expires December 15, 2002 (See Note 9).
(D) Callable at various dates within 1 year.
See notes to consolidated financial statements.
33
STATEMENTS OF CONSOLIDATED FINANCIAL
INFORMATION BY SEGMENTS OF BUSINESS
In thousands of dollars
At December 31 or for the
years then ended 1995 1994 1993
- ---------------------------------- ----------- ----------- -----------
Operating Revenues (A), (B) $1,870,676 $1,912,245 $1,897,489
=========== =========== ===========
Operating Income
Electric operations $ 263,346 $ 255,768 $ 242,143
Gas operations 51,654 50,375 46,071
Diversified operations (B) 30,650 26,073 15,730
----------- ----------- -----------
Total $ 345,650 $ 332,216 $ 303,944
=========== =========== ===========
Depreciation and Decommissioning
Electric operations $ 227,616 $ 220,811 $ 210,890
Gas operations 33,225 31,009 28,215
Diversified operations (B) 17,398 10,418 6,039
----------- ----------- -----------
Total $ 278,239 $ 262,238 $ 245,144
=========== =========== ===========
Utility Plant Additions (C)
Electric operations $ 171,151 $ 203,887 $ 291,456
Gas operations 49,597 59,822 62,935
----------- ----------- -----------
Total $ 220,748 $ 263,709 $ 354,391
=========== =========== ===========
Identifiable Assets
Utility plant-net
Electric operations $2,659,017 $2,725,624 $2,724,139
Gas operations 441,140 423,468 393,494
----------- ----------- -----------
Total 3,100,157 3,149,092 3,117,633
----------- ----------- -----------
Inventories
Electric operations 53,828 56,209 57,410
Gas operations 14,131 19,398 18,703
----------- ----------- -----------
Total 67,959 75,607 76,113
----------- ----------- -----------
Other identifiable assets
Electric operations 802,172 732,941 744,335
Gas operations 148,714 149,199 139,631
Diversified operations (B) 434,940 373,076 467,691
----------- ----------- -----------
Total 1,385,826 1,255,216 1,351,657
----------- ----------- -----------
Other Assets 116,498 118,521 97,481
----------- ----------- -----------
Total Assets $4,670,440 $4,598,436 $4,642,884
=========== =========== ===========
(A) The detail to operating revenues is provided in the Statements of
Consolidated Income. The gas operating revenues shown therein include
$9 million in 1995, $18 million in 1994 and $16 million in 1993,
representing the gross margin on sales to the electric segment. These
margins arose from interdepartmental transfers of $85 million in 1995,
$119 million in 1994 and $141 million in 1993, based on transfer pricing
approved by the California Public Utilities Commission in tariff rates.
(B) As discussed in Note 3, during 1995 SDG&E sold its investment in Wahlco
Environmental Systems, Inc. The sale of Wahlco is being accounted for
as a disposal of a segment of business and SDG&E's prior periods' financial
statements have been restated to reflect Wahlco as a discontinued operation.
(C) 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.
34
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS On December 6, 1995, San Diego Gas and Electric
Company announced the formation of Enova Corporation (Enova) as the
parent company for SDG&E, an operating public utility, and its
unregulated subsidiaries. On January 1, 1996, Enova became the parent
of SDG&E. SDG&E's outstanding common stock was converted on a
share-for-share basis into Enova common stock. SDG&E's debt securities,
preferred and preference stock were unaffected and remain with SDG&E.
On January 31, 1996, SDG&E's ownership interest in its non-utility
subsidiaries was transferred to Enova at book value, completing the
parent company structure.
The consolidated financial statements include SDG&E and its
subsidiaries and, therefore, also reflect what is now Enova
and its subsidiaries. The subsidiaries include Pacific
Diversified Capital, Enova Financial, Enova Energy and Califia
Company. The principal market for SDG&E's electric and gas business is
in San Diego County and an adjacent portion of Orange County,
California. SDG&E is subject to regulation by the California Public
Utilities Commission and the Federal Energy Regulatory Commission.
Califia and Enova Financial are engaged in non-utility investment
activities throughout the United States. Enova Energy is an energy-
management consulting firm offering services to utilities and large
consumers. Pacific Diversified Capital is the parent company for non-
utility subsidiaries, Phase One Development, which is engaged in real
estate development, and Enova Technologies, which is in the business
of developing new technologies generally related to utilities and
energy. In 1995, non-utility subsidiaries, excluding Wahlco
Environmental Systems, contributed 9 percent to operating income (8
percent in 1994). In June 1995, SDG&E sold its interest in Wahlco.
Prior periods have been restated to account for the net results of
Wahlco as discontinued operations in accordance with Accounting
Principles Board Opinion No. 30 "Reporting the Effects of a Disposal
of a Segment of Business." Additional information concerning Wahlco is
described in Note 3.
PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial
statements include the accounts of San Diego Gas & Electric Company
and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
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 costs minus salvage value, is charged to accumulated
depreciation. Information regarding industry restructuring and its
effect on utility plant is included in Note 11. Utility plant in
service by major functional categories at December 31, 1995, are:
electric generation $1.8 billion ($1.7 billion at December 31, 1994),
electric distribution $2.1 billion ($2.0 billion at December 31,
1994), electric transmission $0.7 billion ($0.7 billion at December
31, 1994), other electric $0.2 billion ($0.2 billion at December 31,
1994) and gas $0.7 billion ($0.7 billion at December 31, 1994).
Accumulated depreciation and decommissioning of electric and gas
utility plant in service at December 31, 1995, are $2.1 billion and
$0.3 billion, respectively ($1.9 billion and $0.3 billion at December
31, 1994).
Depreciation expense reflects the straight-line, remaining-useful-
life method. The provisions for depreciation as a percentage of
average depreciable utility plant (by major functional categories)
are: electric generation 4.04 in 1995 (4.04 in 1994, 4.03 in 1993),
electric distribution 4.36 in 1995 (4.35 in 1994, 4.35 in 1993),
electric transmission 3.21 in 1995 (3.24 in 1994, 3.26 in 1993), other
electric 5.89 in 1995 (5.88 in 1994, 5.80 in 1993) and gas 4.06 in
1995 (4.11 in 1994, 4.16 in 1993).
INVENTORIES Included in inventories at December 31, 1995, are SDG&E's
$42 million of materials and supplies ($44 million in 1994), and $26
million of fuel oil and natural gas ($32 million in 1994). Materials
and supplies are valued at average cost; fuel oil and natural gas are
valued by the last-in, first-out (LIFO) method.
OTHER CURRENT ASSETS Included in other current assets at December 31,
1995, is SDG&E's $18 million of investment in SONGS 1, which will be
recovered in 1996. At December 31, 1994, $28 million of SDG&E's SONGS
1 investment is included in other current assets and the $17 million
noncurrent portion of the investment is included in "Deferred Charges
and Other Assets" on the Consolidated Balance Sheets.
OTHER CURRENT LIABILITIES Included in other current liabilities at
December 31, 1995, is Califia's $34 million current portion of
deferred lease revenue ($32 million in 1994). The $54 million
noncurrent portion ($88 million in 1994) is included in "Deferred
Credits and Other Charges." Deferred lease revenues are amortized over
the lease terms, which expire in 1998.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFUDC) The allowance
represents the cost of funds used to finance the construction of
utility plant and is added to the cost of utility plant. AFUDC 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. The average rate used to compute AFUDC was 9.74 percent in
1995, 8.80 percent in 1994 and 9.57 percent in 1993.
EFFECTS OF REGULATION SDG&E's accounting policies conform with
generally accepted accounting principles for regulated enterprises and
reflect the policies of the California Public Utilities Commission and
the Federal Energy Regulatory Commission. SDG&E prepares its financial
statements in accordance with the provisions of Statement of Financial
Accounting Standards No. 71 "Accounting for the Effects of
35
Certain Types of Regulation," under which a regulated utility may
record a regulatory asset if it is probable that, through the
rate-making process, the utility will recover that asset from
customers. Regulatory liabilities represent future reductions in
revenues for amounts due customers. Additional information
concerning SDG&E's regulatory assets and liabilities is described
below in "Revenues and Regulatory Balancing Accounts" and in Note 11.
To the extent that a portion of SDG&E's operations are no longer subject to
SFAS 71, and recovery is no longer probable as a result
of changes in regulation and/or SDG&E's competitive position, the
related regulatory assets and liabilities would be written off. In
addition, a new standard effective for 1996 financial statements,
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," affects utility plant and
regulatory assets such that a loss must be recognized whenever a
regulator excludes all or part of an asset's cost from rate base. As
discussed in Note 11, the CPUC has issued a decision for
restructuring the California electric utility industry to stimulate
competition. The CPUC has indicated that the California utilities
will be allowed recovery of their existing utility plant and
regulatory assets over a transition period that ends in 2005. SDG&E
continues to evaluate the applicability of SFAS 71 as the electric
industry restructuring progresses.
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 CPUC. The balances
of these accounts represent amounts that will be recovered from, or
repaid to, customers by adjustments to future prices, generally over a
one-year cycle. It is uncertain whether the CPUC will continue to
allow these or some other form of balancing accounts once its electric
industry restructuring decision takes effect in 1998.
DEFERRED CHARGES AND OTHER ASSETS Deferred charges include SDG&E's
unrecovered premium on early retirement of debt and other regulatory-
related expenditures that SDG&E expects to recover in future rates.
These items are amortized as recovered in rates. Additional
information is included in Note 11.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
STATEMENTS OF CONSOLIDATED CASH FLOWS Temporary investments are highly
liquid investments with original maturities of 3 months or less.
BASIS OF PRESENTATION Certain-prior year amounts have been reclassified
to conform to the current year's format.
NOTE 2: WRITEDOWNS
In June 1994, SDG&E recorded writedowns related to the utility and its
subsidiaries. SDG&E recorded a $25 million writedown of various
commercial properties, including $19 million of subsidiary properties
in Colorado Springs and in San Diego, to reflect continuing declines
in commercial real estate values. SDG&E also recorded a $12 million
writedown of various non-earning utility assets, including the South
Bay Repower project. Other writedowns, associated with discontinued
operations, are described in Note 3.
NOTE 3: DISCONTINUED OPERATIONS -
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
On June 6, 1995, SDG&E sold its investment in Wahlco Environmental
Systems, Inc., for $5 million. The sale of Wahlco has been accounted
for as a disposal of a segment of business and SDG&E's prior periods'
financial statements have been restated to reflect Wahlco as a
discontinued operation. Discontinued operations consist of the
following:
Year Ended December 31 1995 1994 1993
- -----------------------------------------------------------
in millions of dollars
Revenues $24 $70 $82
Loss from operations before
income taxes - (70) (14)
Loss on disposal before
income taxes (12) - -
Income tax benefits 12 7 5
____________________________________________________________
The loss on disposal of Wahlco was recorded in 1995 and reflects the
sale of Wahlco and Wahlco's net operating losses after 1994. The loss
from discontinued operations for 1994 was primarily due to the $59
million writedown of Wahlco's goodwill and other intangible assets as
a result of the depressed air pollution-control market and increasing
competition. The 1995 income tax benefit includes the effects of the
1994 writedown to the extent recognizable thus far.
Wahlco's net assets (included in "Investments and Other Property"
on the Consolidated Balance Sheets) at December 31, 1994, are
summarized as follows:
Current assets $ 40.2
Non-current assets 18.9
Current liabilities (27.1)
Long-term debt and other liabilities (24.2)
- -------------------------------------------------------------
Net assets $ 7.8
_____________________________________________________________
NOTE 4: 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 10, combined aggregate maturities and sinking fund
requirements of long-term debt are $28 million for 1996, $55 million
for 1997, $31 million for 1998, $27 million for 1999 and $17 million
for 2000. SDG&E has CPUC authorization to issue an additional $138
million in long-term debt.
36
FIRST MORTGAGE BONDS First mortgage bonds are secured by a lien on
substantially all of SDG&E's utility plant. Additional first mortgage
bonds may be issued upon compliance with the provisions of the bond
indenture, which provides for, among other things, the issuance of an
additional $1.2 billion of first mortgage bonds at December 31, 1995.
Certain of the first mortgage bonds may be called at SDG&E's option.
First mortgage bonds totaling $379 million have variable interest
rate provisions. On $115 million, bondholders may elect to redeem
their bonds at the annual interest-adjustment dates. For purposes of
determining the aggregate maturities listed above, it is assumed that
these issues will not be redeemed before their scheduled maturity.
During 1995, SDG&E issued $74 million of first mortgage bonds and
retired $74 million of first mortgage bonds prior to scheduled
maturity.
OTHER DEBT At December 31, 1995, SDG&E had $280 million of bank lines
providing a committed source of long-term borrowings, of which no debt
was outstanding. Bank lines, unless renewed by SDG&E, expire in 2000.
Commitment fees are paid on the unused portion of the lines and there
are no requirements for compensating balances.
Loans of $161 million and $151 million at December 31, 1995, and
1994, respectively, are secured by subsidiary equipment and real
estate.
Interest payments, including those applicable to short-term
borrowings, amounted to $114 million in 1995, $102 million in 1994 and
$104 million in 1993.
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. At December 31, 1995, SDG&E had
such agreements, maturing in 1996 and 2002, with underlying debt
aggregating $120 million. See additional information in Note 9.
NOTE 5: SHORT-TERM BORROWINGS
At December 31, 1995, and 1994, short-term borrowings and weighted
average interest rates thereon were:
in millions of dollars 1995 1994
- ----------------------------------------------------------------------
Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------
Bank loans $-- -- $58 6.4%
Subsidiaries' bank
credit lines -- -- 31 7.1%
- ----------------------------------------------------------------------
Total $-- $89
______________________________________________________________________
In addition to the $280 million of long-term bank lines (see "Other
Debt" in Note 4), at December 31, 1995, SDG&E had $30 million of bank
lines available to support commercial paper. Commitment fees are paid
on the unused portion of the lines and there are no requirements for
compensating balances.
NOTE 6: FACILITIES UNDER JOINT OWNERSHIP
The San Onofre nuclear generating station and the Southwest Powerlink
transmission line are jointly owned with other utilities. SDG&E's
interests at December 31, 1995, were:
in millions of dollars
- ------------------------------------------------------
San Southwest
Project Onofre Powerlink
- ------------------------------------------------------
Percentage ownership 20 89
Utility plant in service $1,127 $ 216
Accumulated depreciation $ 397 $ 81
Construction work in progress $ 9 $ -
- ------------------------------------------------------
Each participant in the projects must provide its own financing. The
amounts specified above for San Onofre include nuclear production,
transmission and other facilities.
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 $343 million in current
dollars and is based on studies performed by outside consultants,
updated triennially. The most recent study was performed in 1993.
These costs are included in setting rates and are expected to be fully
recovered by 2013, the estimated last year of service.
The amount accrued each year is based on the amount allowed by
regulators and is currently being collected in rates. This amount and
the expected earnings of the trust fund are considered sufficient to
cover SDG&E's share of future decommissioning costs. The depreciation
and decommissioning expense reflected on the Statements of
Consolidated Income includes $22 million of decommissioning expense
for each of the years 1995, 1994 and 1993.
Decontamination objectives, work scope and procedures must meet
the requirements of the Nuclear Regulatory Commission, the
Environmental Protection Agency, the California Public Utilities Code
and the requirements of other regulatory bodies.
The amounts collected in rates are invested in externally managed
trust funds. In accordance with SFAS 115, Accounting for Certain
Investments in Debt and Equity Securities, the securities held by the
trust are considered held for sale and are adjusted to market value
($270 million at December 31, 1995, which is included in "Investments
and Other Property" on the Consolidated Balance Sheets and which
includes a $25 million unrealized gain). The corresponding accumulated
accrual is included in accumulated depreciation and decommissioning on
the Consolidated Balance Sheets.
The Financial Accounting Standards Board is currently reviewing
accounting for liabilities related to closure and removal of long-
lived assets, such as nuclear power plants, including the recognition,
measurement and classification of such costs. The Board could require,
among other things, that SDG&E's future balance sheets include a
liability for the estimated decommissioning costs, and a related
regulatory asset reflecting anticipated rate recovery of this
liability to the extent not already collected from customers. This is
not expected to have an adverse effect on results of operations.
37
Additional information regarding San Onofre is included in Notes
10 and 11.
NOTE 7: 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 projected unit credit
actuarial cost method. Net pension cost consisted of the following for
the year ended December 31:
in thousands of dollars 1995 1994 1993
- -----------------------------------------------------------------
Cost related to current service $ 14,598 $ 18,733 $ 18,233
Interest on projected
benefit obligation 30,760 33,254 29,745
Return on plan assets (132,674) (1,319) (39,351)
Net amortization and deferral 93,708 (34,253) 5,342
- -----------------------------------------------------------------
Cost pursuant to accounting
standards 6,392 16,415 13,969
Regulatory adjustment 608 (16,415) (13,969)
- -----------------------------------------------------------------
Net cost $7,000 $ - $ -
_________________________________________________________________
The plan's status was as follows at December 31:
in thousands of dollars 1995 1994
- -------------------------------------------------------------
Accumulated benefit obligation
Vested $357,089 $308,672
Nonvested 8,880 10,480
- -------------------------------------------------------------
Total $365,969 $319,152
- -------------------------------------------------------------
Plan assets at fair value $542,336 $424,455
Projected benefit obligation 481,450 417,625
- -------------------------------------------------------------
Plan assets less projected benefit
obligation 60,886 6,830
Unrecognized effect of accounting
change (1,139) (1,328)
Unrecognized prior service cost 11,869 12,956
Unrecognized actuarial gains (130,828) (71,278)
- --------------------------------------------------------------
Net liability $(59,212) $(52,820)
______________________________________________________________
The projected benefit obligation assumes a 7.25 percent actuarial
discount rate in 1995 (8.25 percent in 1994) and a 5.0 percent average
annual compensation increase. The expected long-term rate of return on
plan assets is 8.5 percent. The increase in the total accumulated
benefit obligation and projected benefit obligation is due primarily
to the decrease in the actuarial discount rate.
Eligible employees may make a contribution of 1 percent to 15
percent of their compensation 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' 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 $13 million in 1995, $6 million in 1994
and $6 million in 1993.
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. The plan terminates in April 2005. In each of the last 10
years, SDG&E issued approximately 45,000 shares to 65,000 shares of
stock to officers and key employees for $2.50 per share, subject to
buy back over 4 years 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 unamortized
transition obligation of approximately $35 million is being amortized
through 2012. SDG&E is recovering the cost of these benefits based
upon actuarial calculations and funding limitations. The amounts
expensed for these benefits were $5 million in 1995, in 1994 and in
1993.
NOTE 8: INCOME TAXES
SFAS 109, Accounting for Income Taxes, 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 $299 million at December 31, 1995 ($306 million at
December 31, 1994). This regulatory asset is expected to be recovered
in future rates and will be adjusted as it is recovered through the
ratemaking process and as tax rates and laws change. See additional
discussion regarding regulatory assets in Note 11.
Income tax payments totaled $148 million in 1995, $167 million in
1994 and $116 million in 1993.
Components of Accumulated Deferred Income Taxes
in thousands of dollars 1995 1994
- ------------------------------------------------------------------
Deferred tax liabilities
Differences in financial and
tax bases of utility plant $619,062 $626,957
Loss on reacquired debt 26,829 27,576
Other 66,411 60,056
- ------------------------------------------------------------------
Total deferred tax liabilities 712,302 714,589
- ------------------------------------------------------------------
Deferred tax assets
Unamortized investment tax credits 71,451 74,563
Equipment leasing activities 36,493 49,547
Regulatory balancing accounts 34,061 10,596
Other 143,892 133,748
- ------------------------------------------------------------------
Total deferred tax assets 285,897 268,454
- ------------------------------------------------------------------
Net deferred income tax liability 426,405 446,135
Current portion (net asset) 96,930 67,457
- ------------------------------------------------------------------
Non-current portion (net liability) $523,335 $513,592
__________________________________________________________________
38
Components of Income Tax Expense
in thousands of dollars 1995 1994 1993
- ---------------------------------------------------------------
Current
Federal $134,212 $149,361 $ 84,555
State 42,630 41,288 24,208
- --------------------------------------------------------------
Total current taxes 176,842 190,649 108,763
- --------------------------------------------------------------
Deferred
Federal (23,914) (37,605) 43,365
State (13,464) (12,897) 7,001
- --------------------------------------------------------------
Total deferred taxes (37,378) (50,502) 50,366
- --------------------------------------------------------------
Deferred investment
tax credits - net (4,859) (4,148) (4,760)
- --------------------------------------------------------------
Total income tax
expense $134,605 $135,999 $154,369
______________________________________________________________
Federal and state income taxes are allocated between operating income
and other income.
RECONCILIATION OF STATUTORY FEDERAL INCOME TAX RATE TO EFFECTIVE
INCOME TAX RATE
1995 1994 1993
- -------------------------------------------------------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
Depreciation 5.4 6.6 4.8
State income taxes - net of
federal income tax benefit 5.5 5.5 5.3
Tax credits (7.4) (5.4) (3.7)
Equipment leasing activities (3.3) (3.2) (1.7)
Repair allowance (3.0) (2.8) (2.0)
Allowance for funds used
during construction (0.7) (0.7) (1.9)
Other - net 5.1 4.7 4.6
- -------------------------------------------------------------
Effective income tax rate 36.6% 39.7% 40.4%
_____________________________________________________________
NOTE 9: FINANCIAL INSTRUMENTS
The carrying amounts and related estimated fair values of SDG&E's
financial instruments are as follows:
in millions of dollars 1995 1994
- -----------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- -----------------------------------------------------------------
Assets
Cash and temporary
investments $ 96.4 $ 96.4 $ 25.4 $ 25.4
Funds held in trust 270.2 270.2 201.9 201.9
Notes receivable 103.7 107.3 121.5 121.1
Investments in limited
partnerships and
other assets 206.0 220.7 170.2 182.5
- -----------------------------------------------------------------
Liabilities
Dividends payable 47.4 47.4 46.2 46.2
Short-term debt and
current portion
of long-term debt 142.8 142.8 231.0 230.1
Deposits from customers 55.8 51.5 56.2 50.2
Long-term debt 1,253.2 1,307.9 1,244.0 1,210.1
Preferred stock subject to
mandatory redemption 25.0 26.7 25.0 23.8
__________________________________________________________________
The estimated fair values may not be representative of actual amounts
that could have been realized as of year end or that will be realized
in the future.
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments.
CASH AND TEMPORARY INVESTMENTS AND DIVIDENDS PAYABLE The carrying
amount approximates fair value due to the short maturity of these
items.
NOTES RECEIVABLE The fair values of noncurrent notes receivable
(included in "Deferred Charges and Other Assets" on the Consolidated
Balance Sheets) are based on the present value of the estimated future
cash flows discounted at current rates available for similar notes.
The carrying amount of short-term notes receivable approximates fair
value due to the short maturities.
FUNDS HELD IN TRUST Funds held in trust consist of the SONGS
decommissioning trust (included in "Investments and Other Property" on
the Consolidated Balance Sheets). The fair values of the funds' assets
are based on quoted market values.
INVESTMENTS IN LIMITED PARTNERSHIPS AND OTHER ASSETS The fair values of
Enova Financial's investments in limited partnerships for affordable
housing projects, Califia's leasing investments and other assets
(included in "Investments and Other Property" on the Consolidated
Balance Sheets) acquired after 1993 are 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. Fair values of investments acquired
prior to 1993 are estimated based on the present value of the
estimated future cash flows, discounted at yields currently available
for similar investments.
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 amounts of deposits from residential
and commercial customers approximate fair value due to the short
maturity periods. The fair values of customer advances for
construction are based on the present values of the estimated future
cash flows discounted at current rates of return.
DEBT AND PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION The fair
values of SDG&E's first mortgage bonds and preferred stock issues are
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. The fair values of long-term notes payable are
based on the present values of the future cash flows, discounted at
current rates available for similar notes with comparable maturities.
The carrying amounts of short-term loans and notes payable approximate
fair value due to the short maturities.
39
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS SDG&E's policy is to use
derivative financial instruments to reduce its exposure to interest-
rate and foreign-currency fluctuations. SDG&E does not use derivatives
for trading or speculative purposes. These financial instruments are
with major investment firms and, along with cash and cash equivalents
and accounts receivable, expose SDG&E to market and credit risks and
may at times be concentrated with certain counterparties. SDG&E
presently contemplates use of similar instruments to reduce its
exposure to fluctuations in natural gas prices.
INTEREST RATE SWAP AND CAP AGREEMENTS 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 borrowing.
These swap and cap agreements generally remain off the balance sheet
as they involve the exchange of fixed- and variable-rate interest
payments without the exchange of the underlying principal amounts.
The related gains or losses are reflected in the income statement as
part of the expense item applicable to what is being hedged (e.g.,
interest expense). At December 31, 1995, SDG&E had two such
agreements, including an index cap agreement on $75 million of bonds
maturing in 1996, and a floating-to-fixed-rate swap associated with
another $45 million of variable-rate bonds maturing in 2002. SDG&E
expects to hold these derivative financial instruments to their
maturity. These cap and swap agreements have effectively fixed
interest rates on the underlying variable-rate debt at 6.1 percent and
5.4 percent, respectively. SDG&E would be exposed to interest-rate
fluctuations on the underlying debt should counterparties to the
agreement not perform. Such nonperformance is not anticipated. The
fair value of these derivative financial instruments is the estimated
amount that would be realized or paid upon termination of the
agreements based on quotes from dealers. These agreements, if
terminated, would result in an obligation of $3 million at December
31, 1995, compared to net proceeds to SDG&E of $2 million at December
31, 1994.
FOREIGN CURRENCY FORWARD EXCHANGE CONTRACTS SDG&E's pension fund
periodically uses foreign currency forward contracts to reduce its
exposure to exchange-rate fluctuations associated with certain
investments in foreign equity securities. These contracts generally
have maturities ranging from three to six months. At December 31,
1995, the pension fund held forward Yen - U.S. Dollar contracts
totaling $20 million ($27million in 1994). SDG&E's pension fund is
exposed to credit loss if the counterparties fail to perform. Such
nonperformance is not anticipated. The fair value of these derivative
financial instruments is the estimated amount that would be realized
or paid upon termination of the agreements based on quotes from
dealers. These agreements, if terminated, would result in net proceeds
to the pension fund of $2.7 million at December 31, 1995, compared to
a net obligation of $0.2 million at December 31, 1994.
NOTE 10: CONTINGENCIES AND COMMITMENTS
PURCHASED POWER CONTRACTS SDG&E buys electric power under several
short-term and long-term contracts. Purchases are for 2 percent to 10
percent of plant output under contracts with other utilities, and up
to 100 percent of plant output under contracts with independent power
producers and other non-utility suppliers. No one supplier provides
more than 4 percent of SDG&E's total system requirements. The
contracts expire on various dates between 1996 and 2024.
At December 31, 1995, the estimated future minimum payments under
the contracts were:
in millions of dollars
- -------------------------------------------
1996 $ 265
1997 172
1998 176
1999 175
2000 156
Thereafter 2,502
- -------------------------------------------
Total minimum payments $3,446
___________________________________________
These payments represent capacity charges and minimum energy
purchases. SDG&E is required to pay additional amounts for actual
purchases of energy under the contracts. Total payments, including
energy payments, under the contracts were $329 million in 1995, $325
million in 1994 and $305 million in 1993. See discussion of the CPUC's
decision on the Biennial Resource Plan Update proceeding in Note 11.
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 through August 1997. If a new agreement is not
reached by then, SoCal has a continuing obligation to deliver gas to
SDG&E under a CPUC-approved tariff. SDG&E's long-term contracts with
interstate pipelines for transportation capacity expire on various
dates between 2007 and 2023. SDG&E's contract with SoCal for 8 billion
cubic feet of natural gas storage capacity expires in 1998. SDG&E also
has four long-term gas supply contracts that expire between 2001 and
2004.
At December 31, 1995, the future minimum payments under natural
gas contracts were:
in millions of dollars
___________________________________________________
Transportation Natural
and Storage Gas
- ---------------------------------------------------
1996 $ 80 $ 20
1997 58 21
1998 18 21
1999 17 26
2000 17 27
Thereafter 289 82
- ---------------------------------------------------
Total minimum payments $479 $197
___________________________________________________
Total payments under the contracts were $95 million in 1995, $125
million in 1994 and $86 million in 1993.
40
LEASES Nuclear fuel, office buildings, a generating facility and other
properties are financed by long-term capital leases. Utility plant
included $189 million at December 31, 1995, and $173 million at
December 31, 1994, related to these leases. The associated accumulated
amortization was $86 million and $73 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 7 percent.
The minimum rental commitments payable in future years under all
noncancellable leases were:
in millions of dollars
- ---------------------------------------------------------
Operating Capitalized
Leases Leases
- ---------------------------------------------------------
1996 $ 55 $ 26
1997 49 27
1998 33 12
1999 9 12
2000 7 12
Thereafter 44 45
- ---------------------------------------------------------
Total future rental commitments $197 134
- ---------------------------------------------------------
Imputed interest (6% to 9%) (29)
- ---------------------------------------------------------
Net commitment $105
_________________________________________________________
Rental payments totaled $85 million in 1995, $91 million in 1994 and
$89 million in 1993.
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. Capital expenditures to comply with
environmental laws and regulations were $4 million in 1995 and $5
million in 1994, and are expected to be $38 million over the next 5
years. These expenditures primarily include the estimated cost of
retrofitting SDG&E's power plants to reduce air emissions.
SDG&E has identified, or has been associated with, various sites
which may require remediation under federal, state or local
environmental laws. SDG&E may be partially or indirectly responsible
for cleaning up these sites. SDG&E is unable to determine the extent
of its and/or others' responsibility for remediation of these sites
until assessments are completed. Environmental liabilities that may
arise from these assessments are recorded when environmental
assessments and/or remedial efforts are probable, and when the minimum
costs can be estimated. In 1994, the CPUC approved a mechanism
allowing utilities to recover their hazardous waste costs, including
those related to Superfund sites or similar sites requiring cleanup.
The decision allows recovery of 90 percent of cleanup costs and
related third-party litigation costs and 70 percent of the related
insurance litigation expenses. As discussed in Note 11, the California
Public Utilities Commission has issued a policy decision for
restructuring the California electric utility industry to stimulate
competition. The CPUC has indicated that the California utilities will
be allowed recovery of existing utility plant and regulatory assets
over a transition period that ends in 2005. Depending on the final
outcome of industry restructuring and the impact of competition, SDG&E
is uncertain whether the costs of compliance with environmental
regulations will continue to be recoverable in rates.
NUCLEAR INSURANCE SDG&E and the co-owners of the San Onofre units have
purchased primary insurance of $200 million, the maximum amount
available, for public liability claims. An additional $8.7 billion of
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 $32
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. In the event the public liability limit
stated above is insufficient, the Price-Anderson Act provides for
Congress to enact further revenue-raising measures to pay claims,
which could include an additional assessment on all licensed reactor
operators.
Insurance coverage is provided for up to $2.8 billion of property
damage and decontamination liability. Coverage is also provided for
the cost of replacement power, which includes indemnity payments for
up to 2 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 from these insurance programs, SDG&E could
be assessed retrospective premium adjustments of up to $9 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 ending in
2006. Each utility's share is based on its share of enrichment
services purchased from the DOE. SDG&E's share of the contribution is
$1 million per year.
LITIGATION SDG&E is involved in various legal matters 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 liquidity.
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, 1995, the aggregate unexpended amount
of this commitment was approximately $85 million. Capital expenditures
for underground conversions were $12 million in 1995, $11 million in
1994 and $22 million in 1993.
41
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.
NOTE 11: INDUSTRY RESTRUCTURING
In December 1995, the CPUC issued its policy decision on the
restructuring of California's electric utility industry to stimulate
competition and reduce rates. The decision provides that beginning in
January 1998, customers will be able to buy their electricity through
a power exchange that will obtain power from the lowest-bidding
suppliers. The exchange is a spot market with published pricing. An
independent system operator (ISO) will schedule power transactions and
access to the transmission system. Consumers also may choose to
continue to purchase their local utility under regulated tariffs. As a
third option, a cross section of all customer groups (residential,
industrial, commercial and agricultural) will be able to go directly
to any energy supplier and enter into private contracts with
generators, brokers or others (direct access).As the direct-access
mechanism has many technical issues to be resolved, a 5-year
phase-in is planned. All California electricity consumers will have
the option to purchase generation services directly by 2003. The
utilities will continue to provide transmission and distribution
services to customers who choose to purchase their energy from other
providers.
Utilities will be allowed to recover their "stranded" investment
costs incurred for CPUC-approved facilities through the establishment
of a non-bypassable competition transition charge (CTC). In addition
to $299 million of deferred taxes recoverable in rates, SDG&E has
approximately $215 million of other regulatory assets at December 31,
1995 (included in "Deferred Charges and Other Assets" on the
Consolidated Balance Sheets). Included in these amounts are
approximately $112 million related to generation operations, of which
$52 million is related to nuclear operations. Recovery periods
currently range from one to 30 years. It is estimated that at December
31, 1995, SDG&E had approximately $950 million of net generating plant
(including approximately $750 million of nuclear facilities) currently
being recovered in rates over various periods of time. Under the
CPUC's industry restructuring decision, to the extent these
investments exceed their market values, they must be recouped by 2005
via the CTC mechanism.
In addition, as described in Note 10, SDG&E has entered into
significant long-term purchased-power commitments with various
utilities and other providers totaling $3.4 billion. Also, under the
CPUC's Biennial Resource Plan Update decision, SDG&E may be required
to contract for an additional 500 megawatts of power over 17-year
terms at an estimated cost of $4.8 billion beginning in 1997. Prices
under these contracts could significantly exceed the future market
price. SDG&E is challenging the decision and the FERC has declared the
BRPU auction procedures unlawful under federal law. The CPUC has
issued a ruling encouraging SDG&E and other utilities to reach
settlements with the auction winners. Settlement discussions are
ongoing. However, under the CPUC's industry restructuring decision,
existing purchased-power obligations (including qualifying facilities)
would be recovered via the CTC mechanism. For purposes of CTC, rates
for customers choosing traditional utility service (instead of power
exchange or direct access) will be capped at January 1, 1996, levels.
Including the CTC, rates cannot exceed the cap and, therefore,
recovery of the CTC is limited by the cap.
Performance-based regulation will replace cost-of-service
regulation. SDG&E is currently participating in a performance-based
ratemaking process on an experimental basis which commenced in 1993
and runs through 1998.
The utilities are required to file plans with the CPUC to
implement direct access and new or revised PBR proposals. Plans to
establish the power exchange and ISO are also required to be filed by
the utilities with both the CPUC and the FERC, as the FERC has
jurisdiction over the exchange, the ISO and interstate transmission.
The CPUC is currently working on building a consensus on the new
market structure with the California Legislature, the governor,
utilities and customers. The California Legislature has passed a
resolution forming an oversight committee to ensure the legislature's
involvement in the policies presented by the CPUC, and that the
policies comply with federal and state laws and achieve the objectives
both of competition and of the various social programs that are
currently funded through utility rates.
As the restructuring of the industry evolves, SDG&E will become
more vulnerable to competition. However, based on recent CPUC
decisions, recovery of stranded costs is provided for, including
recovery of investment in SONGS Units 2 and 3. Due to the recent
decisions, SDG&E does not anticipate incurring a material charge
against earnings for its generating facilities, the related regulatory
assets and other long-term commitments. In addition, although
California utilities' rates are significantly higher than the national
average, SDG&E has a lower concentration of industrial customers and
for 7 years has been the lowest-cost provider among the investor-owned
utilities in California, which make its customers a less-likely target
for outside competitors.
As described in Note 1, SDG&E currently accounts for the economic
effects of regulation in accordance with Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation." Once the restructuring transition is final,
SDG&E may not continue to meet the criteria for applying SFAS 71 to
all of its operations in the new regulatory framework. In a non-SFAS
71 environment, additions to plant, among other things, would need to
be recovered through market prices.
42
QUARTERLY FINANCIAL DATA (UNAUDITED)
In thousands except per share amounts
- ---------------------------------------------------- --------- --------- ------------ -----------
Quarter ended March 31 June 30 September 30 December 31
- ---------------------------------------------------- --------- --------- ------------ -----------
1995
Operating revenues $477,955 $445,239 $478,689 $468,793
Operating expenses 384,300 365,751 388,387 386,588
- ---------------------------------------------------- --------- --------- ------------ -----------
Operating income 93,655 79,488 90,302 82,205
Other income and (deductions) 1,744 (499) (1,102) 389
Net interest charges 28,059 29,095 27,380 28,339
- ---------------------------------------------------- --------- --------- ------------ -----------
Income from continuing operations 67,340 49,894 61,820 54,255
Discontinued operations, net of income taxes (5,490) (678) -- 6,316
- ---------------------------------------------------- --------- --------- ------------ -----------
Net income (before preferred dividend requirements) 61,850 49,216 61,820 60,571
Preferred dividend requirements 1,916 1,915 1,916 1,916
- ---------------------------------------------------- --------- --------- ------------ -----------
Earnings applicable to common shares $ 59,934 $ 47,301 $ 59,904 $ 58,655
- ---------------------------------------------------- --------- --------- ------------ -----------
Average common shares outstanding 116,533 116,534 116,538 116,545
- ---------------------------------------------------- --------- --------- ------------ -----------
Earnings per common share from continuing operations $ 0.56 $ 0.41 $ 0.51 $ 0.45
- ---------------------------------------------------- --------- --------- ------------ ------------
Earnings per common share $ 0.51 $ 0.41 $ 0.51 $ 0.50
____________________________________________________ _________ _________ ____________ ____________
1994
Operating revenues $487,979 $444,050 $476,675 $503,541
Operating expenses 403,897 380,241 392,361 403,530
- ---------------------------------------------------- --------- --------- ------------ ------------
Operating income 84,082 63,809 84,314 100,011
Other income and (deductions) 2,880 (13,879) 2,935 (12,480)
Net interest charges 24,180 25,124 27,075 28,352
- ---------------------------------------------------- --------- --------- ------------ ------------
Income from continuing operations 62,782 24,806 60,174 59,179
Discontinued operations, net of income taxes (2,986) (58,025) (385) (2,068)
- ---------------------------------------------------- -------- -------- ------------ -------------
Net income (loss) (before preferred dividend requirements) 59,796 (33,219) 59,789 57,111
Preferred dividend requirements 1,916 1,915 1,916 1,916
- ---------------------------------------------------- --------- -------- ------------ -------------
Earnings (loss) applicable to common shares $ 57,880 $(35,134) $ 57,873 $ 55,195
- ---------------------------------------------------- --------- -------- ------------ -------------
Average common shares outstanding 116,492 116,473 116,475 116,496
- ---------------------------------------------------- --------- -------- ------------ -------------
Earnings per common share from continuing operations $ 0.52 $ 0.20 $ 0.50 $ 0.49
- ---------------------------------------------------- --------- -------- ------------ -------------
Earnings (loss) per common share $ 0.50 $ (0.30) $ 0.50 $ 0.47
____________________________________________________ _________ ________ ____________ _____________
These amounts are unaudited, but in the opinion of SDG&E reflect all adjustments necessary for a fair
presentation. Previously reported amounts have been restated to reflect discontinued operations.
Information for Item 5.
Quarterly Common Stock Data (Unaudited)
1995 1994
------- ------- ------- ------- ------- ------- ------- -------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- ------------ ------- ------- ------- ------- ------- ------- ------- -------
Market price
High 21 5/8 22 7/8 23 1/4 23 7/8 25 23 1/4 20 7/8 20 1/8
Low 19 1/8 20 1/8 20 3/4 21 7/8 21 1/2 17 1/2 18 18 5/8
Dividends
declared $0.39 $0.39 $0.39 $0.39 $0.38 $0.38 $0.38 $0.38
43