SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[..X..] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
June 30, 1996
For the quarterly period ended.......................................
Or
[.....] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ________________ to _________________
Name of
Commission Registrant IRS Employer
File as specified State of Identification
Number in its charter Incorporation Number
- ---------- -------------- -------------- --------------
1-11439 ENOVA CORPORATION California 33-0643023
1-3779 SAN DIEGO GAS &
ELECTRIC COMPANY California 95-1184800
101 ASH STREET, SAN DIEGO, CALIFORNIA 92101
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrants' telephone number, including area code (619) 696-2000
-------------------
No Change
- -----------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since
last report
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Sections 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past
90 days. Yes...X... No......
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock outstanding June 30, 1996:
Enova Corporation 116,565,775
-----------
San Diego Gas & Electric Company Wholly owned by Enova Corporation
ENOVA CORPORATION
AND
SAN DIEGO GAS & ELECTRIC COMPANY
CONTENTS
Page No.
--------
PART I. FINANCIAL INFORMATION
Statements of Income. . . . . . . . . . . . . . . . . . . . .3
Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . .5
Statements of Cash Flows. . . . . . . . . . . . . . . . . . .6
Notes to Financial Statements . . . . . . . . . . . . . . . .7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . 20
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . 21
Signature . . . . . . . . . . . . . . . . . . . . . . . . . .22
2
STATEMENTS OF INCOME (unaudited)
In thousands except per share amounts
Enova Corporation
and Subsidiaries SDG&E
------------------- -----------------
For the three months ended June 30 1996 1995 1996 1995
--------- -------- -------- -------
Operating Revenues
Electric $376,971 $354,716 $376,971 $354,716
Gas 81,250 76,745 81,250 76,745
Diversified operations 12,746 13,778 -- --
-------- -------- -------- --------
Total operating revenues 470,967 445,239 458,221 431,461
-------- -------- -------- --------
Operating Expenses
Electric fuel 25,580 20,481 25,580 20,481
Purchased power 76,525 84,937 76,525 84,937
Gas purchased for resale 33,689 28,477 33,388 28,477
Maintenance 16,839 17,425 16,839 17,425
Depreciation and decommissioning 92,741 68,027 87,990 64,908
Property and other taxes 11,377 11,191 11,377 11,191
General and administrative 52,294 44,630 49,190 43,923
Other 50,423 52,547 38,601 41,751
Income taxes 36,974 38,036 48,889 43,979
-------- --------- -------- --------
Total operating expenses 396,442 365,751 388,379 357,072
-------- --------- -------- --------
Operating Income 74,525 79,488 69,842 74,389
-------- --------- -------- --------
Other Income and (Deductions)
Allowance for equity funds used
during construction 1,467 1,453 1,467 1,453
Taxes on nonoperating income 1,540 1,398 740 198
Other - net (2,996) (3,350) (3,091) (1,088)
-------- --------- -------- ---------
Total other income and
(deductions) 11 (499) (884) 563
-------- --------- -------- ---------
Income Before Interest Charges 74,536 78,989 68,958 74,952
-------- --------- -------- ---------
Interest Charges
Long-term debt 21,871 25,355 19,116 21,068
Short-term debt and other 4,897 4,411 4,897 4,804
Allowance for borrowed funds
used during construction (1,227) (671) (1,227) (671)
Preferred dividend requirements of
SDG&E 1,645 1,915 -- --
-------- --------- -------- --------
Net interest charges 27,186 31,010 22,786 25,201
-------- --------- -------- --------
Income From Continuing Operations 47,350 47,979 46,172 49,751
Discontinued Operations, net of
Income Taxes -- (678) -- (535)
-------- --------- -------- ---------
Net Income 47,350 47,301 46,172 49,216
Preferred Dividend Requirements -- -- 1,645 1,915
-------- --------- -------- --------
Earnings Applicable to Common Shares $47,350 $47,301 $44,527 $47,301
======== ========= ======== ========
Average Common Shares Outstanding 116,565 116,534
======== =========
Earnings Per Common Share from
Continuing Operations $0.41 $0.41
======== =========
Earnings Per Common Share $0.41 $0.41
======== =========
Dividends Declared Per Common Share $0.39 $0.39
======== =========
See notes to financial statements.
3
STATEMENTS OF INCOME (unaudited)
In thousands except per share amounts
Enova Corporation
and Subsidiaries SDG&E
-------------------- -------------------
For the six months ended June 30 1996 1995 1996 1995
---------- --------- ---------- --------
Operating Revenues
Electric $744,264 $734,004 $744,264 $734,004
Gas 165,899 161,323 165,899 161,323
Diversified operations 26,701 27,867 -- --
---------- -------- --------- --------
Total operating revenues 936,864 923,194 910,163 895,327
---------- -------- --------- --------
Operating Expenses
Electric fuel 49,404 44,329 49,404 44,329
Purchased power 148,148 171,201 148,148 171,201
Gas purchased for resale 69,187 63,142 68,886 63,142
Maintenance 31,653 36,708 31,653 36,708
Depreciation and decommissioning 163,929 135,845 154,804 129,372
Property and other taxes 23,211 22,679 23,211 22,679
General and administrative 97,932 85,587 94,360 84,377
Other 103,401 104,483 80,433 82,638
Income taxes 82,482 86,077 105,252 99,860
---------- --------- --------- ---------
Total operating expenses 769,347 750,051 756,151 734,306
---------- --------- --------- ---------
Operating Income 167,517 173,143 154,012 161,021
---------- --------- --------- ---------
Other Income and (Deductions)
Allowance for equity funds used
during construction 2,716 3,013 2,716 3,013
Taxes on nonoperating income 1,085 1,177 285 (23)
Other - net (2,622) (2,945) (2,489) (1,335)
--------- -------- --------- ---------
Total other income and
(deductions) 1,179 1,245 512 1,655
--------- --------- --------- ---------
Income Before Interest Charges 168,696 174,388 154,524 162,676
--------- --------- --------- ---------
Interest Charges
Long-term debt 44,433 49,646 38,210 42,122
Short-term debt and other 9,364 8,891 9,364 9,641
Allowance for borrowed funds
used during construction (1,794) (1,383) (1,794) (1,383)
Preferred dividend requirements of
SDG&E 3,291 3,831 -- --
--------- --------- --------- ---------
Net interest charges 55,294 60,985 45,780 50,380
--------- --------- --------- ---------
Income From Continuing Operations 113,402 113,403 108,744 112,296
Discontinued Operations, net of
Income Taxes -- (6,168) -- (1,230)
--------- --------- --------- ---------
Net Income 113,402 107,235 108,744 111,066
Preferred Dividend Requirements -- -- 3,291 3,831
--------- --------- --------- ---------
Earnings Applicable to Common Shares $113,402 $107,235 $105,453 $107,235
========= ========= ========= =========
Average Common Shares Outstanding 116,568 116,533
========= =========
Earnings Per Common Share from
Continuing Operations $0.97 $0.97
========= =========
Earnings Per Common Share $0.97 $0.92
========= =========
Dividends Declared Per Common Share $0.78 $0.78
========= =========
See notes to financial statements.
4
BALANCE SHEETS
In thousands of dollars
Enova Corporation
and Subsidiaries SDG&E
----------------------- -----------------------
Balance at June 30, December 31, June 30, December 31,
1996 1995 1996 1995
(unaudited) (unaudited)
------------ ---------- ----------- -----------
ASSETS
Utility plant - at original cost $5,600,584 $5,533,554 $5,600,584 $5,533,554
Accumulated depreciation
and decommissioning (2,479,654)(2,355,213) (2,479,654)(2,355,213)
--------- --------- --------- ---------
Utility plant - net 3,120,930 3,178,341 3,120,930 3,178,341
--------- --------- --------- ---------
Investments and other property 591,584 532,289 314,176 448,860
--------- --------- --------- ---------
Current assets
Cash and temporary investments 131,406 96,429 58,703 20,755
Accounts receivable 180,921 178,155 180,321 178,091
Due from affiliates -- -- 24,649 --
Notes receivable 35,090 34,498 -- --
Inventories 70,344 67,959 70,036 67,959
Other 44,488 41,012 13,460 29,419
--------- --------- --------- ---------
Total current assets 462,249 418,053 347,169 296,224
--------- --------- --------- ---------
Deferred taxes recoverable in rates 286,828 298,748 286,828 298,748
--------- --------- --------- ---------
Deferred charges and other assets 279,685 321,193 223,647 250,440
--------- --------- --------- ---------
Total $4,741,276 $4,748,624 $4,292,750 $4,472,613
========= ========= ========= =========
CAPITALIZATION AND LIABILITIES
Capitalization
Common equity $1,541,917 $1,520,070 $1,384,352 $1,520,070
Preferred stock of SDG&E
Not subject to mandatory redemption 78,475 93,475 78,475 93,475
Subject to mandatory redemption 25,000 25,000 25,000 25,000
Long-term debt 1,332,692 1,350,094 1,183,328 1,217,026
--------- ---------- --------- ---------
Total capitalization 2,978,084 2,988,639 2,671,155 2,855,571
--------- ---------- --------- ---------
Current liabilities
Long-term debt redeemable
within one year 115,000 115,000 115,000 115,000
Current portion of long-term debt 71,439 36,316 33,881 8,835
Accounts payable 137,360 145,517 137,173 145,273
Dividends payable 47,106 47,383 47,106 47,383
Interest and taxes accrued 23,088 22,537 19,480 23,621
Regulatory balancing accounts
overcollected-net 162,643 170,761 162,643 170,761
Other 138,336 125,438 87,511 90,119
--------- ---------- -------- ---------
Total current liabilities 694,972 662,952 602,794 600,992
--------- ---------- -------- ---------
Customer advances for construction 33,828 34,698 33,828 34,698
Accumulated deferred income taxes-net 556,209 523,335 561,570 536,324
Accumulated deferred investment
tax credits 101,566 104,226 101,566 104,226
Deferred credits and other liabilities 376,617 434,774 321,837 340,802
Contingencies (Note 2) -- -- -- --
--------- --------- --------- ---------
Total $4,741,276 $4,748,624 $4,292,750 $4,472,613
========= ========= ========= =========
See notes to financial statements.
5
STATEMENTS OF CASH FLOWS (unaudited)
In thousands of dollars
Enova Corporation
and Subsidiaries SDG&E
-------------------- --------------------
For the six months ended June 30 1996 1995 1996 1995
-------------------- --------------------
Cash Flows from Operating Activities
Income from continuing operations $113,402 $113,403 $108,744 $112,296
Adjustments to reconcile income from continuing
operations to net cash provided by operating activities
Depreciation and decommissioning 163,929 135,845 154,804 129,372
Amortization of deferred charges and other assets 2,873 6,392 2,873 6,392
Amortization of deferred credits
and other liabilities (17,537) (16,147) (585) (584)
Allowance for equity funds used during construction (2,716) (3,013) (2,716) (3,013)
Deferred income taxes and investment tax credits (23,146) (4,511) (23,573) (4,803)
Other-net 20,508 19,811 (697) (2,899)
Changes in working capital components
Accounts and notes receivable (3,358) 25,652 (2,230) 26,467
Regulatory balancing accounts (8,118) 11,011 (8,118) 11,011
Inventories (2,385) (2,775) (2,077) (2,775)
Other current assets (108) (1,935) 23 (1,852)
Interest and taxes accrued 36,783 36,623 51,152 42,878
Accounts payable and other current liabilities (9,662) (43,228) (10,708) (44,777)
Cash flows provided (used) by discontinued operations -- (168) (11,544) 13,078
--------------------- -------------------
Net cash provided by operating activities 270,465 276,960 255,348 280,791
--------------------- -------------------
Cash Flows from Financing Activities
Dividends paid (90,927) (89,732) (94,488) (93,563)
Short-term borrowings - net -- (89,325) -- (58,325)
Issuance of long-term debt 2,300 124,641 -- 123,734
Repayment of long-term debt (23,588) (100,695) (293) (74,922)
Redemption of common stock (480) (50) -- (50)
Redemption of preferred stock (15,155) -- (15,155) --
--------------------- -------------------
Net cash used by financing activities (127,850) (155,161) (109,936)(103,126)
--------------------- -------------------
Cash Flows from Investing Activities
Utility construction expenditures (85,743) (91,225) (85,743) (91,225)
Contributions to decommissioning funds (11,016) (11,016) (11,016) (11,016)
Other-net (10,879) 2,544 (990) (759)
Discontinued operations -- 5,122 (9,715) (48,670)
--------------------- -------------------
Net cash used by investing activities (107,638) (94,575) (107,464)(151,670)
-------------------- -------------------
Net increase 34,977 27,224 37,948 25,995
Cash and temporary investments, beginning of period 96,429 25,405 20,755 11,605
--------------------- -------------------
Cash and temporary investments, end of period $131,406 $52,629 $58,703 $37,600
===================== ===================
Supplemental disclosure of Cash Flow Information
Income tax payments $ 80,334 $47,240 $80,334 $47,240
===================== ===================
Interest payments, net of amounts capitalized $ 51,452 $59,411 $42,340 $49,649
===================== ===================
Supplemental Schedule of Noncash Investing
and Financing Activities
Real estate investments $ 47,367 $25,303 $ -- $ --
Cash paid -- (250) -- --
--------------------- -------------------
Liabilities assumed $ 47,367 $25,053 $ -- $ --
===================== ===================
Net assets of affiliates transferred to parent $ -- $ -- $150,069 $ --
===================== ===================
See notes to financial statements.
6
ENOVA CORPORATION/SAN DIEGO GAS & ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited)
1. GENERAL
On January 1, 1996 Enova Corporation became the parent of SDG&E and its
subsidiaries. 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. Additional information
concerning the effects of the parent company structure is provided in
Note 3 herein.
This Quarterly Report on Form 10-Q is a combined filing of Enova
Corporation and SDG&E. The financial statements presented herein
represent the consolidated statements of Enova Corporation and its
subsidiaries (including SDG&E), as well as the stand-alone statements of
SDG&E. Unless otherwise indicated, the "Notes to Financial Statements"
and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" herein pertain to Enova Corporation as a
consolidated entity.
The Registrants believe all adjustments necessary to present a fair
statement of the financial position and results of operations for the
periods covered by this report, consisting of recurring accruals, have
been made. Certain prior-year amounts have been reclassified for
comparability.
The Registrants' significant accounting policies are described in the
notes to consolidated financial statements in the 1995 Annual Report to
Shareholders. The same accounting policies are followed for interim
reporting purposes.
This quarterly report should be read in conjunction with the
Registrants' 1995 Annual Report on Form 10-K and its Quarterly Report on
Form 10-Q for the three months ended March 31, 1996. The consolidated
financial statements and Management's Discussion & Analysis of Financial
Condition and Results of Operations included in the 1995 Annual Report
to Shareholders were incorporated by reference into the 1995 Annual
Report on Form 10-K and filed as an exhibit thereto.
2. MATERIAL CONTINGENCIES
ELECTRIC INDUSTRY RESTRUCTURING -- 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. 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
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
7
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.
Within certain limits, utilities will be allowed to recover their
"stranded" costs incurred for CPUC-approved facilities through the
establishment of a non-bypassable competition transition charge (CTC)
over a transition period that ends in 2005. In addition to $287 million
of deferred taxes recoverable in rates, SDG&E has approximately $203
million of other regulatory assets at June 30, 1996 (included in
"Deferred Charges and Other Assets" on the Balance Sheets), offset by
$130 million of regulatory liabilities (included in "Accumulated
Deferred Investment Tax Credits" and "Deferred Credits and Other
Liabilities" on the Balance Sheets). Of these amounts (deferred taxes
and regulatory assets and liabilities), approximately $73 million is
related to generation operations, of which $58 million is related to
nuclear operations. Recovery periods currently range from one to 30
years.
It is estimated that at June 30, 1996, SDG&E had approximately $909
million of net generating plant (including approximately $709 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
recovered by 2005 through the CTC mechanism. In April 1996 the CPUC
approved the accelerated recovery of existing capital costs in San
Onofre Nuclear Generating Station (SONGS) Units 2 and 3 over an eight-
year period. In August 1996 the utilities' filings to the CPUC will
address sunk costs of non-nuclear generation and CTC rates for the
calendar year commencing January 1, 1998.
In addition, SDG&E has entered into significant long-term purchased-
power commitments with various utilities and other providers totaling
$3.3 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. The present value of ratepayer
payments beginning in 1997 over the life of these contracts is estimated
to be $2.3 billion. Prices under these contracts could significantly
exceed the future market price. Both purchased-power and BRPU
commitments are indexed to natural-gas prices and are subject to
significant fluctuation. SDG&E has challenged the CPUC's BRPU 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. SDG&E has
reached settlement with two auction winners. Settlement discussions with
three others are ongoing. Under the CPUC's industry restructuring
decision, purchased-power obligations (including existing qualifying
facilities contracts and the costs of settling BRPU planned projects)
would be recovered over the duration of the contracts through 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. Customers
choosing to purchase power directly or from the exchange will also be
obligated to pay CTC.
8
In April 1996 the CPUC issued an order in response to Pacific Gas and
Electric's motion for interim CTC recovery and its concerns over lost
revenues from large customers' choosing other suppliers before plans for
deregulation are finalized. The CPUC found that PG&E's request to
require customers to pay all of the CTC before leaving the system was
too severe a remedy in a competitive market, but that these customers
have the responsibility to pay their fair share of transition costs. The
CPUC deferred the setting of the interim CTC to a joint committee
process open to all parties. On April 12, 1996 SDG&E filed a motion
requesting that it also be afforded interim CTC treatment and that this
effort be consolidated with PG&E's and addressed by the joint committee.
The CPUC is currently reviewing the issue.
Performance-based regulation will replace cost-of-service regulation for
generation and distribution services. On an experimental basis SDG&E is
participating in a Performance-Based Ratemaking process for gas
procurement, electric generation and dispatch, and base rates. It began
in 1993 and runs through 1997. In July 1996 SDG&E filed a new generation
PBR proposal with the CPUC. Additional information concerning the
generation PBR proposal is provided in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" beginning on
page 14 herein.
California's three major investor-owned utilities have filed plans with
the CPUC to implement direct access and new or revised PBR proposals.
Plans to establish the power exchange and ISO have also been filed by
the utilities with the CPUC.
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. There have been several bills introduced in the
California Legislature related to various aspects of electric industry
restructuring, including CTC. A two-house conference committee met for
the first time in July 1996 to fashion legislation in response to the
CPUC's industry restructuring decision. The conference process will
continue through late August 1996.
As restructuring evolves, SDG&E will become more vulnerable to
competition. However, based on recent CPUC decisions, recovery of
stranded costs is provided for, subject to the January 1, 1996 rate cap
(see discussion on previous page). 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 is in its eighth year of being
the lowest-cost provider among the investor-owned utilities in
California.
SDG&E 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 entity
may record a regulatory asset if it is probable that, through the rate-
making process, the utility will recover that asset from customers.
9
Regulatory liabilities represent future reductions in revenues for
amounts due to customers. 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, among other things, additions to plant would need to be
recovered through market prices.
ELECTRIC INDUSTRY RESTRUCTURING -- FEDERAL
In April 1996 the FERC issued a final rule that will require all
utilities to offer wholesale "open-access" transmission service on a
nondiscriminatory basis and to share information about available
transmission capacity. In addition, utilities will be required to
functionally price their generation and transmission services separately
from each other. 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. In July 1996 SDG&E
filed open-access transmission tariffs that comply with the FERC's April
1996 rule described above. These tariffs immediately became effective.
In April 1996 California's three major investor-owned utilities filed
plans to establish the power exchange and ISO with the FERC, which has
jurisdiction over the exchange, the ISO and interstate transmission.
Federal legislation on electric industry restructuring was introduced in
July 1996. This legislation would make states establish rules to let all
residences, businesses and industries choose their own power suppliers
by December 15, 2000, or force states to give way to the FERC to open
the local market to competition after 2000.
NUCLEAR INSURANCE
SDG&E and the co-owners of SONGS 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 the 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, federal law provides for
Congress to enact further revenue-raising measures to pay claims. These
measures 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 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.
10
CANADIAN GAS
As discussed in the 1995 Annual Report on Form 10-K, SDG&E has long-term
pipeline capacity commitments related to its contracts for Canadian
natural gas supplies. These contracts are currently in litigation, as
described in Part II, Item 1, "Legal Proceedings," herein. If the supply
of Canadian natural gas to SDG&E is not resumed, SDG&E intends to use
the capacity in other ways.
3. DISCONTINUED OPERATIONS
ENOVA CORPORATION:
On June 6, 1995 Enova Corporation 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. Enova
Corporation's financial statements for prior periods have been restated
to reflect Wahlco as a discontinued operation in accordance with
Accounting Principles Board Opinion No. 30 "Reporting the Effects of a
Disposal of a Segment of Business." Enova Corporation's discontinued
operations are summarized in the table below:
Six Months Ended Year Ended
June 30, December 31,
1995 1995 1994 1993
- ------------------------------------------------------------------------
In millions of dollars
Revenues $24 $24 $70 $82
Loss from operations before
income taxes - - (70) (14)
Loss on disposal of Wahlco before
income taxes (10) (12) - -
Income tax benefits 4 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 as of December 31, 1995.
SDG&E:
SDG&E's financial statements for periods prior to 1996 have been
restated to reflect the results of its transferred subsidiaries
(described in Note 1 herein) and the sale of Wahlco as discontinued
operations. SDG&E's discontinued operations are summarized in the table
below.
Six Months Ended Year Ended
June 30, December 31
1995 1995 1994 1993
- ------------------------------------------------------------------------
In millions of dollars
Revenues $51 $81 $126 $119
Loss from operations before
income taxes (10) (24) (105) (19)
Loss on disposal of Wahlco
before income taxes (10) (12) - -
Income tax benefits 19 50 43 22
- ------------------------------------------------------------------------
11
The net assets of the subsidiaries (included in "Investments and Other
Property" on SDG&E's Balance Sheets) at December 31, 1995 are summarized
as follows:
- ---------------------------------------------------------------
In millions of dollars
Current assets $ 122
Non-current assets 286
Current liabilities ( 62)
Long-term debt and other liabilities (214)
- ---------------------------------------------------------------
Net assets $ 132
- ---------------------------------------------------------------
12
ITEM 2.
ENOVA CORPORATION/SAN DIEGO GAS & ELECTRIC COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW:
In January 1996 Enova Corporation became the parent of SDG&E, and
SDG&E's ownership interests in its subsidiaries were transferred to the
parent company. Effective January 1, 1996 SDG&E's financial statements
for periods prior to 1996 have been restated to reflect the net results
of subsidiaries as discontinued operations in accordance with Accounting
Principles Board Opinion No. 30 "Reporting the Effects of a Disposal of
a Segment of Business." For additional information see Notes 1 and 3 of
the notes to financial statements herein, and the 1995 Annual Report on
Form 10-K.
INFORMATION REGARDING FORWARD-LOOKING COMMENTS
This Quarterly Report on Form 10-Q includes forward-looking comments
within the definition of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. When used in the
following "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the words "estimates", "expects",
"anticipates", "plans" and similar expressions are intended to identify
forward-looking comments that involve risks and uncertainties.
Although the Registrants believe that their expectations are based on
reasonable assumptions, they can give no assurance that those
expectations will be realized. Important factors that could cause actual
results to differ materially from those in the forward-looking comments
herein include political developments affecting state and federal
regulatory agencies, the pace of electric industry deregulation in
California and in the United States, and the timing and extent of
changes in interest rates and prices for natural gas and electricity.
RESULTS OF OPERATIONS:
The following discussions reflect the results for the six months ended
June 30, 1996 compared to the corresponding period in 1995:
OPERATING REVENUES
Electric revenues increased for the six months ended June 30, 1996 from
the corresponding period in 1995 primarily due to increased sales volume
due to weather. Gas revenues and revenues from Enova Corporation's
diversified operations did not change significantly over that same
period.
OPERATING EXPENSES
Purchased-power expense decreased due to the availability of lower-cost
nuclear generation in 1996. Electric fuel expense increased primarily
due to increased nuclear and natural-gas-fired generation in 1996.
REGULATORY MATTERS:
CALIFORNIA PUBLIC UTILITIES COMMISSION'S INDUSTRY RESTRUCTURING
In December 1995 the CPUC issued its policy decision on the
restructuring of California's electric utility industry to stimulate
13
competition and reduce rates. See additional discussion of industry
restructuring in Note 2 of the notes to financial statements.
ELECTRIC RATES
In June 1996 the CPUC issued its decision on SDG&E's 1996 Energy Cost
Adjustment Clause application, approving a one-time $35 million refund
and a $22 million annual rate decrease. These result from lower fuel and
purchased-power costs, balancing account overcollections and the new
incremental cost incentive pricing covering SONGS 2 & 3. The rate change
lowers the typical residential customer's monthly electric bill by 2.1
percent, placing SDG&E's system average rate at 9.64 cents/kwh effective
June 1, 1996. SDG&E's authorized system average rate prior to the rate
change was 9.87 cents/kwh.
GAS RATES
In April 1996 SDG&E filed its application under the Biennial Cost
Allocation Proceeding, proposing a $42 million decrease in natural-gas
rates. If approved as filed, the monthly bill of a typical residential
natural-gas customer would decrease about 63 cents effective January
1997. The decrease results from lower transportation costs. The CPUC
Division of Ratepayer Advocates is recommending a decrease of $26
million primarily due to the DRA's recommended higher level of Southern
California Gas Company costs to be allocated to SDG&E. SDG&E's and SoCal
Gas' BCAP filings are being reviewed by the CPUC in tandem because a
significant portion of costs incurred by SDG&E are those allocated from
SoCal Gas, which provides transportation and storage services to SDG&E.
Hearings are scheduled for August 1996 and a final decision is expected
by December 1996.
In June 1996 the CPUC approved SDG&E's application to change its core
gas procurement rate on a monthly basis instead of annually in order to
better reflect market price changes in SDG&E's customer rates.
PERFORMANCE-BASED RATEMAKING
In May 1996 SDG&E filed an application with the CPUC for a $5.5 million
Base Rates PBR reward for 1995. All performance targets, consisting of
customer rates, employee safety, electric system reliability and
customer satisfaction, were met or exceeded. A decision is expected in
the third quarter of 1996.
A new generation PBR proposal was filed with the CPUC in July 1996. The
proposed mechanism contains two basic elements. It establishes a revenue
requirement to recover fixed operating costs necessary to maintain the
availability of the units needed for reliability in the San Diego area.
In addition, it establishes the bid price into the power exchange based
on the units' variable cost of production. By limiting SDG&E's
compensation to its fixed and variable costs, SDG&E's ability to
exercise market power by raising prices will be eliminated. The proposed
term of this mechanism is three years, beginning with the commencement
of the power exchange in 1998. The mechanism will replace the electric
generation and dispatch mechanism, including the purchased-power
portion, due to the fact that SDG&E will be purchasing all its energy
14
from the power exchange. In addition, the generation PBR will reduce the
revenue requirements of the base rates mechanism.
A distribution PBR proposal is planned to be filed once the FERC
provides criteria on differentiating transmission and distribution. This
is expected in late 1996.
COST OF CAPITAL
In June 1996 the CPUC approved the Market Indexed Capital Adjustment
Mechanism. The mechanism replaces the traditional cost of capital
proceeding with an automatic market-based adjustment based on several
variables, including the costs of long-term debt, equity and preferred
stock. The decision goes into effect January 1, 1998. It requires SDG&E
to participate in the 1997 cost of capital proceeding, which will
provide the basis for the MICAM, after which SDG&E will discontinue
participation in the annual proceeding. The decision also recommends
that MICAM be modified to reflect any changes resulting from industry
restructuring. SDG&E is required to file a report on the performance of
the mechanism in March 2000.
In May 1996 SDG&E filed its 1997 cost of capital application with the
CPUC, requesting an overall rate of return of 9.52 percent. SDG&E's 1996
authorized rate of return is 9.37 percent. The application reflects an
increase in the return on common equity from 11.60 percent to 11.85
percent due to higher interest rates and continuing uncertainty with
respect to industry restructuring. If approved, the increase in the rate
of return would result in a $6.5 million increase in revenues. Hearings
are scheduled for August 1996 and a decision is expected by late 1996.
DEMAND-SIDE MANAGEMENT
In May 1996 SDG&E filed its application for 1995 shareholder rewards
totaling $39 million from its DSM programs. This $30 million increase
over 1994 results is due to completion of several large government
projects. The rewards will be collected and recorded in earnings over a
ten-year period and are subject to CPUC approval. The DRA proposes to
reduce SDG&E's 1994 and 1995 DSM rewards based on the DRA's claim that
1994 reductions in energy volume were less than anticipated and that the
forecasted cost of energy used to calculate the 1995 DSM rewards is too
high. If the CPUC agrees, this would reduce SDG&E's 1994 DSM reward from
$9 million to $6 million and its 1995 DSM reward from $39 million to $13
million. Hearings are scheduled for August 1996 and a decision is
expected by late 1996.
ENVIRONMENTAL MATTERS
WOOD-POLE PRESERVATIVES
Mateel Environmental Justice Foundation voluntarily dismissed, without
prejudice, its complaint against Pacific Bell, PG&E and two wood-pole
manufacturers. The complaint alleged that utility-pole owners and
manufacturers failed to warn the public that the poles are treated with
hazardous chemicals. SDG&E was not directly involved in the litigation,
but is a member of the joint defense team comprised of the pole
manufacturers and all California utilities owning utility poles. The
15
complaint could be refiled by Mateel, depending on the outcome of
laboratory tests.
AIR QUALITY
The estimated capital costs to comply with the San Diego Air Pollution
Control District's Rule 69 has been revised to $62 million from $110
million. See additional discussion of Rule 69 in the 1995 Annual Report
on Form 10-K.
LIQUIDITY AND CAPITAL RESOURCES:
Utility operations continue to be a major source of liquidity. In
addition, financing needs are met primarily through the issuance of
short-term and long-term debt, and common and preferred stock. These
capital resources are expected to remain available. SDG&E's cash
requirements include plant construction and other capital expenditures.
Nonutility cash requirements include capital expenditures related to new
products; 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.
OPERATING ACTIVITIES
Depreciation and decommissioning expense increased during the six months
ended June 30, 1996 compared to the corresponding 1995 period due to the
accelerated recovery of SONGS Units 2 and 3 approved by the CPUC in
April 1996. See additional discussion in Note 2 on page 8.
FINANCING ACTIVITIES
Enova Corporation anticipates that it will require only minimal amounts
of short-term debt in 1996. Enova Corporation and its subsidiaries do
not expect to issue stock or long-term debt in 1996, other than for
SDG&E refinancings. Enova Financial repaid $20 million of long-term debt
in the ordinary course of business.
In May 1996 the CPUC approved SDG&E's request to issue up to $300
million of long-term debt to refinance previously issued long-term debt.
The decision also grants a two-year extension of a prior CPUC
authorization to issue $138 million of additional long-term debt and
$100 million of additional preferred stock.
In July 1996 SDG&E issued $130 million of Pollution Control Bonds at an
interest rate of 5.9 percent, due June 1, 2014. The funds obtained from
this issue will be used to refinance the following Pollution Control
Bonds: Series CC, DD and FF (all variable rate), Series 1979A (7.2
percent) and Series 1977A (6.375 percent). These refinancings are
planned to occur in August and September 1996. In addition, a $44
million variable-rate issue is planned for August 1996 in order to
refinance Series GG (7.625 percent).
At June 30, 1996 SDG&E had short-term bank lines of $30 million and
long-term bank lines of $280 million. Commitment fees are paid on the
unused portion of the lines. There are no requirements for compensating
balances.
16
Quarterly cash dividends of $0.39 per share were declared for each of
the first and second quarters of 1996 and for each quarter during the
year ended December 31, 1995. The dividend payout ratio for the twelve
months ended June 30, 1996 and years ended December 31, 1995, 1994,
1993, 1992 and 1991 were 78 percent, 80 percent, 130 percent, 82
percent, 81 percent and 79 percent, respectively. The high payout ratio
for the year ended December 31, 1994 was due to the writedowns recorded
during 1994. For additional information regarding the writedowns, see
the 1995 Annual Report on Form 10-K. The payment of future dividends is
at the discretion of Enova's 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.
SDG&E maintains its capital structure so as to obtain long-term
financing at the lowest possible 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.
June 30,
1991 1992 1993 1994 1995 1996
-----------------------------------------------------------
Common equity 47% 47% 47% 48% 49% 49%
Preferred stock 5 5 4 4 4 4
Debt and leases 48 48 49 48 47 47
-----------------------------------------------------------
Total 100% 100% 100% 100% 100% 100%
-----------------------------------------------------------
The following table lists key financial ratios for SDG&E.
Twelve Year
months ended ended
June 30, December 31,
1996 1995
----------------- -------------
Pretax interest coverage 4.6 X 4.5 X
Internal cash generation 113 % 115 %
Construction expenditures as
a percent of capitalization 7.6 % 7.7 %
DERIVATIVES: Registrants' policy is to use derivative financial
instruments to reduce 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 Registrants to market and credit risks.
These risks may at times be concentrated with certain counterparties,
although counterparty non-performance is not anticipated. Registrants do
not use derivatives for trading or speculative purposes.
At June 30, 1996 SDG&E had two interest-rate swap and cap agreements: an
index cap agreement maturing in 1996 on $75 million of bonds, and a
floating-to-fixed-rate swap maturing in 2002 associated with $45 million
of variable-rate bonds. 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. At June 30, 1996 there were no forward contracts
17
outstanding. Registrants contemplate use of similar instruments to
reduce exposure to fluctuations in natural gas prices.
INVESTING ACTIVITIES
For the six months ended June 30, 1996 cash used in SDG&E's investing
activities included utility construction expenditures and payments to
its nuclear decommissioning trust. Utility 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. SDG&E continuously reviews its construction, investment
and financing programs and revises them in response to changes in
competition, customer growth, inflation, customer rates, the cost of
capital, and environmental and regulatory requirements. Among other
things, the level of SDG&E's expenditures in the next few years will
depend heavily on the impact of the CPUC's industry restructuring
decision and on the timing of expenditures to comply with air emission
reduction and other environmental requirements. 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.
Enova Corporation's level of non-utility expenditures in the next few
years will depend primarily on the activities of its non-utility
subsidiaries, some of which are discussed below.
Enova International has formed two partnerships to participate in the
development of the natural-gas market in Mexico. These partnerships have
announced their active pursuit of two Northern Baja California projects:
1) construction and operation of a natural gas distribution network in
the capital city of Mexicali; and 2) construction of a natural-gas-fired
electric generating plant at Rosarito Beach, as well as a gas pipeline
to transport fuel from the US-Mexican border at San Diego to Rosarito
(approx. 20 miles). The proposal for the Mexicali gas distribution
system was presented in June 1996. Four proposals, including Enova
International's, were submitted and the award of the contract is
scheduled for August 1996.
Enova Corporation has informed the CPUC of its intent to invest in a
foreign utility and the CPUC has certified to the Securities and
Exchange Commission the CPUC's ability to protect SDG&E's ratepayers
from foreign-investment risk. The Commission Advisory and Compliance
Division is required to monitor Enova Corporation investments in foreign
affiliates and to report back to the CPUC if the investments exceed ten
percent of Enova Corporation's equity.
As discussed in the 1995 Annual Report to Shareholders, Enova
Corporation, through its Enova Technologies subsidiary, had formed an
alliance with Philips Home Services to establish an electronic consumer
network based on the Philips screen phone. That relationship has since
been terminated. Enova Technologies remains committed to the electronic
consumer network concept and is continuing to explore various
technologies for bringing interactive electronic commerce into
consumers' homes.
18
OTHER SIGNIFICANT BALANCE SHEET CHANGES
Besides the effects of items discussed in the preceding pages, there
were significant changes to Enova Corporation's and SDG&E's balance
sheets at June 30, 1996, compared to December 31, 1995. The increase in
investments and other property for Enova Corporation was due to Enova
Financial's affordable-housing investments. The decrease in investments
and other property for SDG&E was due to SDG&E's transfer of its
subsidiaries to Enova Corporation in January 1996. The increases in
other current assets and accumulated deferred income taxes were due to
differences in the timing of income tax payments. The decreases in
deferred charges and other assets and in deferred credits and other
liabilities were due primarily to a decrease in the projected pension
benefit obligation as a result of a lower assumed actuarial discount
rate.
19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no significant subsequent developments in the SONGS
Personal Injury, and Electric and Magnetic Fields (Covalt and North City
West) proceedings. Background information concerning these and the
following proceedings is contained in Enova Corporation's 1995 Annual
Report on Form 10-K and in its March 31, 1996 Quarterly Report on Form
10-Q.
Canadian Natural Gas
In May 1996 the U.S. District Court granted Canadian Hunter's and
Summit's motion to dismiss the case, finding that the Alberta Sales of
Goods Act rendered the gas purchase agreements between SDG&E and the
defendants voidable by either party. SDG&E expects this order will be
certified to the Ninth Circuit Court of Appeals by the District Court
Judge during the third quarter of 1996. On June 1, 1996 Canadian Hunter
ceased deliveries of gas under its agreement with SDG&E. Summit had
previously stopped deliveries.
SDG&E is unable to predict the ultimate outcome of these proceedings.
Public Service Company of New Mexico
There were no significant subsequent developments in the Public Service
Company of New Mexico complaint filed in 1993.
On March 18, 1996 SDG&E filed a second complaint with the FERC against
PNM, alleging in part that applying the same methodology as SDG&E had
used in the 1993 complaint, but based on more recent cost information,
results in charges under the 1985 power purchase agreement that are
unjust, unreasonable and discriminatory. SDG&E requested that the FERC
investigate the rates charged under the 1985 agreement and establish May
17, 1996 as the effective refund date. The relief, if granted, would
reduce annual demand charges paid by SDG&E to PNM by up to $12 million
per year. On April 26, 1996 PNM answered the second complaint and moved
that it be dismissed for the same reasons stated in its answer to the
1993 complaint.
SDG&E is unable to predict the ultimate outcome of this litigation.
20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 3 - Bylaws and Articles of Incorporation
3.1 Restated Bylaws of Enova Corporation.
3.2 Restated Bylaws of San Diego Gas & Electric Company.
Exhibit 12 - Computation of ratios
12.1 Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends as required under SDG&E's
August 1993 registration of 5,000,000 shares of Preference
Stock (Cumulative).
Exhibit 27 - Financial Data Schedules
27.1 Financial Data Schedule for the quarter ended June 30,
1996 for Enova Corporation.
27.2 Financial Data Schedule for the quarter ended June 30,
1996 for SDG&E.
(b) Reports on Form 8-K
None
21
SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this quarterly report to be signed on its
behalf by the undersigned thereunto duly authorized.
ENOVA CORPORATION
SAN DIEGO GAS & ELECTRIC COMPANY
(Registrants)
Date: July 25, 1996 By: /s/ F. H. Ault
------------------------------
(Signature)
F. H. AULT
Vice President and Controller
22