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
March 31, 1997
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 April 30, 1997:
Enova Corporation 113,616,714
-----------
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. . . . . . . . . . . . . . . . . . . 4
Statements of Cash Flows. . . . . . . . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . .10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . .17
Item 4. Submission of Matters to Vote . . . . . . . .18
Item 6. Exhibits and Reports on Form 8-K. . . . . . .19
Signature . . . . . . . . . . . . . . . . . . . . . .20
STATEMENTS OF INCOME (unaudited)
In thousands except per share amounts
Enova Corporation
and Subsidiaries SDG&E
---------------------- ------------------
For the three months ended March 31 1997 1996 1997 1996
--------------------------------------------
Operating Revenues
Electric $373,670 $367,293 $373,670 $367,293
Gas 120,966 84,649 120,966 84,649
Other 13,294 13,955 -- --
--------------------------------------------
Total operating revenues 507,930 465,897 494,636 451,942
--------------------------------------------
Operating Expenses
Electric fuel 39,681 23,824 39,681 23,824
Purchased power 87,750 71,623 87,661 71,623
Gas purchased for resale 67,881 35,498 67,761 35,498
Maintenance 21,966 14,814 21,966 14,814
Depreciation and decommissioning 85,707 71,188 80,622 66,814
Property and other taxes 11,712 11,834 11,626 11,834
General and administrative 44,601 45,638 39,070 45,170
Other 54,864 52,978 42,565 41,832
Income taxes 24,373 45,508 40,754 56,363
--------------------------------------------
Total operating expenses 438,535 372,905 431,706 367,772
--------------------------------------------
Operating Income 69,395 92,992 62,930 84,170
--------------------------------------------
Other Income and (Deductions)
Allowance for equity funds used
during construction 1,423 1,249 1,423 1,249
Taxes on nonoperating income 5,068 (455) 432 (455)
Other - net (405) 374 (1,691) 602
--------------------------------------------
Net other income and
(deductions) 6,086 1,168 164 1,396
--------------------------------------------
Income Before Interest Charges 75,481 94,160 63,094 85,566
--------------------------------------------
Interest Charges
Long-term debt 21,729 22,562 17,925 19,094
Short-term debt and other 3,872 4,467 3,872 4,467
Allowance for borrowed funds
used during construction (632) (567) (632) (567)
Preferred dividend requirements of
SDG&E 1,646 1,646 -- --
--------------------------------------------
Net interest charges 26,615 28,108 21,165 22,994
--------------------------------------------
Net Income 48,866 66,052 41,929 62,572
Preferred Dividend Requirements -- -- 1,646 1,646
--------------------------------------------
Earnings Applicable to Common Shares $48,866 $66,052 $40,283 $60,926
============================================
Average Common Shares Outstanding 116,452 116,570
=======================
Earnings Per Common Share $0.42 $0.57
=======================
Dividends Declared Per Common Share $0.39 $0.39
=======================
See notes to financial statements.
BALANCE SHEETS
In thousands of dollars
Enova Corporation
and Subsidiaries SDG&E
-------------------------- --------------------------
Balance at March 31, December 31, March 31, December 31,
1997 1996 1997 1996
(unaudited) (unaudited)
------------- ----------- ------------- -------------
ASSETS
Utility plant - at original cost $5,733,446 $5,704,464 $5,733,446 $5,704,464
Accumulated depreciation
and decommissioning (2,707,568) (2,630,093) (2,707,568) (2,630,093)
----------- ----------- ----------- -----------
Utility plant-net 3,025,878 3,074,371 3,025,878 3,074,371
----------- ----------- ----------- -----------
Investments and other property 727,592 650,188 347,808 337,520
----------- ----------- ----------- -----------
Current assets
Cash and temporary investments 131,238 173,079 54,375 81,409
Accounts receivable 183,776 186,529 184,735 187,986
Notes receivable 33,564 33,564 -- --
Inventories 53,201 63,437 52,112 63,078
Other 23,490 47,094 20,372 33,227
----------- ----------- ----------- -----------
Total current assets 425,269 503,703 311,594 365,700
----------- ----------- ----------- -----------
Deferred taxes recoverable in rates 182,875 189,193 182,875 189,193
----------- ----------- ----------- -----------
Deferred charges and other assets 222,696 231,782 193,700 193,732
----------- ----------- ----------- -----------
Total $4,584,310 $4,649,237 $4,061,855 $4,160,516
=========== =========== =========== ===========
CAPITALIZATION AND LIABILITIES
Capitalization
Common equity $1,506,742 $1,569,670 $1,328,940 $1,404,136
Preferred stock of SDG&E
Not subject to mandatory redemption 78,475 78,475 78,475 78,475
Subject to mandatory redemption 25,000 25,000 25,000 25,000
Long-term debt 1,522,271 1,479,338 1,283,342 1,284,816
----------- ----------- ----------- -----------
Total capitalization 3,132,488 3,152,483 2,715,757 2,792,427
----------- ----------- ----------- -----------
Current liabilities
Current portion of long-term debt 53,471 69,902 6,696 33,639
Accounts payable 120,967 175,815 120,734 174,884
Due to affiliates -- -- 3,850 7,214
Dividends payable 47,125 47,213 47,125 47,131
Interest and taxes accrued 32,177 21,259 62,586 12,824
Regulatory balancing accounts
overcollected-net 56,548 35,338 56,548 35,338
Other 146,959 158,317 92,885 110,743
----------- ----------- ----------- -----------
Total current liabilities 457,247 507,844 390,424 421,773
----------- ----------- ----------- -----------
Customer advances for construction 33,102 34,666 33,102 34,666
Accumulated deferred income taxes-net 508,480 497,400 493,316 487,119
Accumulated deferred investment
tax credits 63,795 64,410 63,795 64,410
Deferred credits and other liabilities 389,198 392,434 365,461 360,121
----------- ----------- ----------- -----------
Total $4,584,310 $4,649,237 $4,061,855 $4,160,516
=========== =========== ============ ============
See notes to financial statements.
STATEMENTS OF CASH FLOWS (unaudited)
In thousands of dollars
Enova Corporation
and Subsidiaries SDG&E
---------------------- ----------------------
For the three months ended March 31 1997 1996 1997 1996
---------- ---------- ---------- ----------
Cash Flows from Operating Activities
Net income $ 48,866 $ 66,052 $ 41,929 $ 62,572
Adjustments to reconcile income from continuing
operations to net cash provided by operating activities
Depreciation and decommissioning 85,707 71,188 80,622 66,814
Amortization of deferred charges and other assets 1,902 1,425 1,701 1,425
Amortization of deferred credits
and other liabilities (9,832) (8,768) (1,060) (292)
Allowance for equity funds used during construction (1,423) (1,249) (1,423) (1,249)
Deferred income taxes and investment tax credits 2,214 (29,087) 30 (27,864)
Other-net 340 (2,182) (2,140) (4,860)
Changes in working capital components
Accounts and notes receivable 2,753 4,917 3,251 8,778
Regulatory balancing accounts 21,210 9,403 21,210 9,403
Inventories 10,236 797 10,966 797
Other current assets (1,413) 1,029 814 968
Interest and taxes accrued 53,313 38,198 75,796 47,975
Accounts payable and other current liabilities (66,206) (41,633) (79,222) (48,908)
Cash used by discontinued operations -- -- -- (11,544)
---------- ---------- ---------- ----------
Net cash provided by operating activities 147,667 110,090 152,474 104,015
---------- ---------- ---------- ----------
Cash Flows from Financing Activities
Regular dividends paid (45,567) (45,467) (47,131) (47,383)
Special dividend paid -- -- (66,150) --
Short-term borrowings-net -- 3,400 -- 3,400
Issuances of long-term debt 279 2,300 -- --
Repayment of long-term debt (45,001) (11,758) (25,000) --
Repurchase of common stock (66,314) (480) -- --
Redemption of preferred stock -- (15,155) -- (15,155)
---------- ---------- ---------- ----------
Net cash used by financing activities (156,603) (67,160) (138,281) (59,138)
---------- ---------- ---------- ----------
Cash Flows from Investing Activities
Utility construction expenditures (34,074) (39,863) (34,074) (39,863)
Contributions to decommissioning funds (5,505) (5,505) (5,505) (5,505)
Other-net 6,674 (11,519) (1,648) (10,918)
---------- ---------- ---------- ----------
Net cash used by investing activities (32,905) (56,887) (41,227) (56,286)
---------- ---------- ---------- ----------
Net decrease (41,841) (13,957) (27,034) (11,409)
Cash and temporary investments, beginning of period 173,079 96,429 81,409 20,755
---------- ---------- ---------- ----------
Cash and temporary investments, end of period $131,238 $ 82,472 $ 54,375 $ 9,346
========== ========== ========== ==========
Supplemental disclosure of Cash Flow Information
Income tax payments (refunds) $(19,001) $ 51,260 $(19,001) $ 51,260
========== ========== ========== ==========
Interest payments, net of amounts capitalized $ 23,764 $ 24,124 $ 15,113 $ 18,779
========== ========== ========== ==========
Supplemental Schedule of Noncash Activities:
Investing and Financing
Real estate investments $ 74,641 $ 31,012 -- --
---------- ---------- ---------- ----------
Liabilities assumed $ 74,641 $ 31,012 -- --
========== ========== ========== ==========
Net assets of affiliates transferred to parent -- -- -- $150,095
========== ========== ========== ==========
See notes to financial statements.
ENOVA CORPORATION/SAN DIEGO GAS & ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited)
1. GENERAL
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 consolidated financial position and results of
operations for the periods covered by this report, consisting of
recurring accruals, have been made.
The Registrants' significant accounting policies, as well as those of
their subsidiaries, are described in the notes to consolidated financial
statements in Enova Corporation's 1996 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' 1996 Annual Report on Form 10-K which included the
financial statements and notes thereto. The "Management's Discussion &
Analysis of Financial Condition and Results of Operations" included in
the Registrants' 1996 Annual Report to Shareholders was incorporated by
reference into the Registrants' 1996 Annual Report on Form 10-K and
filed as an exhibit thereto.
2. BUSINESS COMBINATION
On March 11, 1997 the shareholders of both Enova Corporation and Pacific
Enterprises approved the proposed business combination. Shareholder
votes in favor of the combination totaled 76 percent of outstanding
shares for Enova and 79 percent for PE (96 percent and 98 percent of
total votes cast for Enova and PE, respectively). Consummation of the
combination is conditional upon the approvals of the California Public
Utilities Commission, the Federal Energy Regulatory Commission and
various other regulatory bodies.
On April 30, 1997 the FERC issued a decision stating that it has
jurisdiction over the proposed business combination and that it will
formally review the January 27, 1997 application to approve the merger
under the FERC's recently issued merger guidelines. The guidelines
provide, that within 60 to 90 days of the close of the comment period
(March 28 for Enova/PE), the FERC will: request additional information;
set issues for hearing; or approve or reject the merger.
Enova and PE submitted a joint Proponents' Environmental Assessment to
the CPUC stating that the plan of merger will not result in any
activities or operational changes that may cause a significant effect on
the environment. In April 1997 the CPUC issued a draft Negative
Declaration concluding that the plan of merger will not result in
significant effects on the environment and, therefore, no Environmental
Impact Report or mitigation is necessary. Under the current schedule,
the period during which the public may comment on the draft Negative
Declaration ends in May 1997 and the final version of the proposed
Negative Declaration will be published in June 1997. The Negative
Declaration will become final when it is certified by the Commission.
Effective April 1997 substantially all of the activities and certain
assets of Enova subsidiaries, Enova Energy and Enova Technologies, were
transferred to Energy Pacific, the joint venture between certain
unregulated subsidiaries of Enova and PE to provide integrated energy
and energy-related products and services.
3. MATERIAL CONTINGENCIES
INDUSTRY RESTRUCTURING -- CALIFORNIA PUBLIC UTILITIES COMMISSION
Electric industry restructuring is scheduled to commence on January 1,
1998. Discussion is ongoing as to whether direct access will be
available to all electric customers on that date as anticipated by
California law (AB 1890) or phased in over a longer period as expected
by the CPUC's electric restructuring policy decision. The CPUC's Direct
Access Working Group concluded that there are no technical or
operational barriers to justify limited direct access availability once
electric restructuring commences. A CPUC decision is expected in May
1997.
As discussed in Note 10 in the notes to consolidated financial
statements of the 1996 Annual Report to Shareholders, utilities will be
allowed a reasonable opportunity to recover their stranded costs through
December 31, 2001. SDG&E's transition cost application filed in October
1996 identifies transition costs totaling $2 billion (net present value
in 1998 dollars). These identified transition costs have been audited by
independent auditors selected by the CPUC. The auditors found SDG&E's
recorded and forecasted cost estimates reasonable and have identified
$73 million as requiring further action before being deemed a
recoverable transition cost. A draft decision issued in April 1997
includes guidance on the prioritization of recovery of the various
transition costs, on interest on over- and under-collected balances
during the interim, and on various related matters. A CPUC decision is
expected in October 1997. This proceeding will not include generation
plant additions made after December 20, 1995. Instead, each utility must
file a separate application seeking a reasonableness review thereof.
SDG&E expects to file such an application during the third quarter of
1997 addressing 1996 capital additions and another in early 1998 to
address 1997 additions.
AB 1890 provides for a 10-percent reduction of residential and small
commercial customers' rates beginning in January 1998 as a result of the
utilities' receiving the proceeds of rate-reduction bonds issued by an
agency of the State of California. SDG&E estimates that it will need
$600 million to $800 million of bond proceeds to enable it to effect a
sufficient decrease in rate base to result in the desired rate
reduction. These bonds will be repaid over 10 years by SDG&E's
residential and small commercial customers via a charge on their
electric bills. In May 1997 SDG&E will be filing an application with the
CPUC requesting authorization for the issuance of these rate-reduction
bonds. The Securities and Exchange Commission has ruled that these bonds
should be reflected on the utilities' balance sheets as debt.
In addition, the California legislation includes a rate freeze for all
customers. Until the earlier of March 31, 2002, or when transition cost
recovery is complete, SDG&E's system average rate will be frozen at June
10, 1996 levels (9.64 cents per kwh), except for the impact of fuel cost
changes and the 10-percent rate reduction. In any event, rates cannot be
increased above 9.985 cents per kwh. The rate cap will be reduced in
conjunction with the 10-percent rate reduction for residential and small
commercial customers. In January and February 1997, soaring natural-gas
prices resulted in electric rate increases that raised SDG&E's system
average rate from 9.64 cents per kwh to 9.985 cents per kwh. Natural-gas
prices have since decreased, but the mechanism, which is based on a 12-
month rolling average, continues to push SDG&E's system average rate
against the 9.985 cents-per-kwh rate cap.
SDG&E currently accounts for the economic effects of regulation in
accordance with SFAS No. 71, "Accounting for the Effects of Certain
Types of Regulation," as described in the notes to consolidated
financial statements in the 1996 Annual Report to Shareholders. The SEC
has indicated a concern that the California investor-owned utilities may
not meet the criteria of SFAS No. 71 with respect to their electric
generation net regulatory assets. Discussions are ongoing with the SEC,
which has requested discussion by the Emerging Issues Task Force of the
Financial Accounting Standards Board which the SEC may then interpret as
to application to the California utilities. Both bodies are expected to
act in mid-1997. If a decision is ultimately made that would result in
the discontinuation of the application of SFAS No. 71 for electric-
generation operations, the impact of a writeoff of these net regulatory
assets would not be material to SDG&E's results of operations, financial
position or liquidity.
INDUSTRY RESTRUCTURING -- FEDERAL ENERGY REGULATORY COMMISSION
On March 31, 1997 the utilities jointly filed plans with the FERC
detailing the structure of California's independent system operator that
will manage the state's transmission grid and outlining the development
of a power exchange to act as a spot market for trading electricity. In
November 1996 the FERC conditionally approved joint recommendations from
the utilities on the creation of an ISO and power exchange, but required
further information from the utilities as to how they would be
structured and operate. The FERC will be holding hearings during the
next few months.
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 $2.75 billion of property
damage and decontamination liability. Coverage is also provided for the
cost of replacement power, which includes indemnity payments for up to
three years, after a waiting period of 21 weeks. Coverage is provided
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 $5.1 million.
CANADIAN GAS
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 "Legal Proceedings" in the 1996
Annual Report on Form 10-K beginning on page 19. If the supply of
Canadian natural gas to SDG&E is not resumed to a level approximating
the related committed long-term pipeline capacity, SDG&E intends to
continue using the capacity in other ways.
ITEM 2.
ENOVA CORPORATION/SAN DIEGO GAS & ELECTRIC COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements
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
"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
statements 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
statements herein include political developments affecting state and
federal regulatory agencies, the pace and substance of electric industry
deregulation in California and in the United States, the existence of or
ability to create a market for rate-reduction bonds, the ability to
effect a coordinated and orderly implementation of both state
legislation and the CPUC's restructuring regulations, the consummation
and timing of the combination of Enova Corporation and Pacific
Enterprises, international political developments, 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 three months ended
March 31, 1997 compared to the corresponding period in 1996:
EARNINGS
Earnings per common share for the first quarter were $0.42 in 1997,
compared to $0.57 for the corresponding period in 1996. The decrease in
earnings in 1997 is primarily due to previously announced changes
related to the elimination of electric balancing accounts. Although no
significant effect is expected for any full year, quarterly earnings
will fluctuate significantly, depending on monthly or seasonal changes
in electric sales. Earnings are expected to be higher in high sales-
volume months and lower in others.
OPERATING EXPENSES
For the quarter ended March 31, 1997 electric fuel expense increased
from the corresponding period in 1996 primarily due to increased
natural-gas-fired generation and increases in natural gas prices, offset
by a decrease in nuclear generation as a result of SONGS Unit 2
refueling. This decrease in nuclear generation availability resulted in
an increase in purchased-power expense for the same period. Gas
purchased for resale increased due to increases in both natural gas
prices and sales volume.
In addition, for the quarter ended March 31, 1997 compared to the
corresponding period in 1996, maintenance expense increased due to the
additional costs incurred during SONGS Unit 2 refueling (see additional
discussion under "San Onofre Nuclear Generating Station Units 2 & 3,"
below). Depreciation and decommissioning expense increased due to the
accelerated recovery of SONGS Units 2 and 3 which commenced in April
1996. Additional information concerning the recovery of SONGS Units 2
and 3 is provided in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the 1996 Annual Report to
Shareholders on page 27. Income tax expense decreased due to the
decrease in operating income and the increase in income tax benefits
related to Enova Financial's increased investments in affordable-housing
projects.
OTHER
The tax benefits on nonoperating income for the quarter ended March 31,
1997 are due to the 1995 sale of Wahlco Environmental Systems, Inc.
Additional information concerning the sale of Wahlco is provided in Note
3 in the notes to consolidated financial statements of the 1996 Annual
Report to Shareholders.
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
competition and reduce rates. In addition, in September 1996 California
Governor Wilson signed into law a bill restructuring the industry. See
additional discussion of industry restructuring in Note 3 of the notes
to financial statements.
CONSUMER EDUCATION
The CPUC has approved a plan for the Consumer Education Program (CEP)
jointly submitted by California's investor-owned utilities. The plan
establishes a 19-member Electric Restructuring Education Group (EREG)
that will include one member from each IOU. The EREG will design and
implement the CEP. The initial funding of the CEP will be $20 million to
be provided by the IOUs in proportion to their 1995 kwh sales. These
funds will be recoverable through rates. The details of how these costs
will be recovered under the rate cap are still being finalized. The
CEP's objective will be to provide electric customers information to
help them compare and choose among electric products and services when
competition begins on January 1, 1998. The CEP's work is anticipated to
begin by September 1, 1997 and end by May 31, 1998.
PUBLIC POLICY PROGRAMS
The CPUC has established a new administrative structure and initial
funding levels to manage demand-side management, renewable-energy, low-
income assistance, and research and development programs beginning in
January 1998. The CPUC has formed independent boards to oversee a
competitive bidding process to administer demand-side management and
low-income assistance programs. Until the transition to a fully
competitive energy-services market is complete, customers will be
required to provide the funding. SDG&E will be funded $32 million
annually for demand-side management programs from January 1998 to
December 2001. SDG&E will contribute $12 million in renewables funding.
Low-income assistance funding will remain at 1996 authorized levels. The
California Energy Commission will be allocated most of the $63 million
authorized to administer the research and development programs, of which
SDG&E will contribute $4 million.
NATURAL-GAS RATES
In late 1996 natural-gas prices began rapidly increasing primarily due
to weather-related factors and low storage levels. As the price of
natural gas has increased beyond what SDG&E is authorized to charge for
it, a $26 million shortfall has resulted. SDG&E has requested permission
to raise gas rates by 5 cents per therm for 12 months beginning in the
summer of 1997. This would cost the average customer about $2 more per
month. SDG&E has also asked the CPUC to lift a two-year cap on natural-
gas rates that currently limits the amount that can be charged to 25
cents per therm.
PERFORMANCE-BASED RATEMAKING
Distribution PBR: On April 23, 1997 the CPUC issued a decision
instructing SDG&E to file a distribution PBR in the fourth quarter of
1997.
Base-Rates PBR: On April 23, 1997 the CPUC issued a decision suspending
the requirement for SDG&E's 1999 General Rate Case, provided the Base-
Rates PBR mid-course review agrees with that conclusion. The mid-course
review is currently in process.
Generation PBR: Pursuant to CPUC direction, SDG&E has filed to
withdraw its generation PBR application effective immediately. The CPUC
has acknowledged that an ISO contract will be developed for all must-run
generating units. Currently, all of SDG&E's plants are considered must
run. However, the ISO will evaluate this issue and make a determination
of which plants are must run as industry restructuring progresses.
BIENNIAL COST ALLOCATION PROGRAM
On April 23, 1997 the CPUC issued its decision on SDG&E's BCAP
application. The decision calls for an overall revenue decrease of $26
million for SDG&E. SDG&E's utility electric generation, noncore and core
customers will receive 15 percent, 24 percent and 3 percent decreases,
respectively.
SAN ONOFRE NUCLEAR GENERATION STATION UNITS 2 & 3
On April 10, 1997 the California Coastal Commission ruled that the SONGS
owners must provide 150 acres of wetlands restoration, 150 acres of kelp
reef and other mitigation. SDG&E's share of the cost is estimated to be
$23 million. The SONGS owners have the option of paying the actual cost
of the mitigation work or depositing the estimated cost in a trust and
ending their responsibility for actual mitigation costs. Analysis is
ongoing in order to determine how best to comply.
Cracked and dented tubes were found during the latest refueling of Unit
2. This delayed the restart of the unit and added to the cost of the
refueling. The problems and the resultant need to plug a small
percentage of the unit's tubes will trigger a mid-cycle review and pose
the possibilities that the reactor may be taken out of service prior to
2013 or that the reactor's license would not be extended to 2023 or an
interim date. The unit returned to service in April 1997.
Unit 3 was shut down in April 1997 for a 75-day scheduled refueling.
While conducting routine inspections, it was noted that, in several
areas, the thickness of the heat transfer tubes' structural supports was
significantly reduced, apparently due to erosion. The cause of this
condition is being investigated. One possible corrective action would be
to remove the affected tubes from service by plugging them. It is
anticipated that the plugging can be completed within the scheduled
refueling period. Unit 2, which recently went through inspection of its
steam generators, showed no signs of this type of erosion.
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 associated
with subsidiary activities related to the plan to distribute natural gas
in Mexico; 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
Besides the effects of other items discussed in this report, the only
significant changes in cash flows from operations for the three months
ended March 31, 1997 compared to the corresponding 1996 period were
related to the changes in regulatory balancing accounts and inventories.
Regulatory balancing accounts increased due to overcollections in the
gas fixed cost account as a result of higher than authorized sales
volumes. Inventories decreased due to use of storage gas as the result
of colder weather.
FINANCING ACTIVITIES
Enova Corporation anticipates that it will require only minimal amounts
of short-term debt in 1997, primarily for utility operations. Enova does
not expect to issue stock or long-term debt in 1997, other than for
SDG&E-related refinancings. In conjunction with electric industry
restructuring, rate-reduction bonds will be issued by an agency of the
State of California. Additional information concerning these bonds is
provided in Note 3 of the notes to financial statements, above.
Enova Financial repaid $20 million and issued $75 million of long-term
debt during the first quarter of 1997 during the ordinary course of
business. During that same period SDG&E repaid $25 million of long-term
debt.
SDG&E had short-term bank lines of $50 million and long-term bank lines
of $330 million with no short-term loans outstanding at March 31, 1997.
Commitment fees are paid on the unused portion of the lines. There are
no requirements for compensating balances.
On March 27, 1997 Enova Corporation repurchased three million shares of
its outstanding common stock.
Quarterly cash dividends of $0.39 per share were declared for the first
quarter of 1997 and for each quarter during the year ended December 31,
1996. The dividend payout ratio for the twelve months ended March 31,
1997 and years ended December 31, 1996, 1995, 1994, 1993 and 1992 were
85 percent, 79 percent, 80 percent, 130 percent, 82 percent and 81
percent, respectively. The increase in the payout ratio for the year
ended December 31, 1994 was due to the writedowns recorded during 1994.
For additional information regarding the writedowns, see Enova
Corporation's 1996 Annual Report on Form 10-K. The payment of future
dividends is within the discretion of the directors and is dependent
upon future business conditions, earnings and other factors. Enova's
directors have set a goal to reach a dividend payout of 60 percent to 70
percent of earnings through earnings growth and new investment. Net cash
flows provided by operating activities currently are sufficient to
maintain the payment of dividends at the anticipated 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.
March 31,
1992 1993 1994 1995 1996 1997
-----------------------------------------------------------
Common equity 47% 47% 48% 49% 50% 49%
Preferred stock 5 4 4 4 4 4
Debt and leases 48 49 48 47 46 47
-----------------------------------------------------------
Total 100% 100% 100% 100% 100% 100%
-----------------------------------------------------------
The following table lists key financial ratios for SDG&E.
Twelve Year
months ended ended
March 31, December 31,
1997 1996
----------------- -------------
Pretax interest coverage 4.9 X 5.2 X
Internal cash generation 115 % 127 %
Construction expenditures as
a percent of capitalization 7.5 % 7.4 %
DERIVATIVES: Registrants' policy is to use derivative financial
instruments to reduce its exposure to fluctuations in interest rates,
foreign currency exchange rates and natural gas prices. These financial
instruments are with major investment firms and 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 March 31, 1997 SDG&E had one interest-rate swap agreement: 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. These contracts generally have maturities ranging from three
to six months. Such contracts may expose the pension fund to credit loss
if the counterparties fail to perform.
Other than the interest-rate swap described above, there were no
derivative financial instruments outstanding at March 31, 1997.
INVESTING ACTIVITIES
Cash used in investing activities for the three months ended March 31,
1997 included utility construction expenditures and payments to the
SONGS decommissioning trust. Utility construction expenditures,
excluding nuclear fuel and the allowance for equity funds used during
construction, were $209 million in 1996 and are estimated to be $230
million in 1997. 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, and on the company's
plan to transport natural gas to Mexico. 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.
OTHER SIGNIFICANT BALANCE SHEET CHANGES
Besides the effects of items discussed in the preceding pages, there
were significant changes to the Registrants' balance sheets at March 31,
1997, compared to December 31, 1996. The increase in investments and
other property for Enova Corporation was due to Enova Financial's
affordable-housing investments. The decrease in other current assets
resulted from a shift in Enova's net deferred tax position from current
assets to current liabilities.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no significant subsequent developments in litigation
proceedings that were outstanding at December 31, 1996 and there have
been no significant new litigation proceedings since that date.
ITEM 4. - SUBMISSION OF MATTERS TO VOTE
ENOVA CORPORATION
The shareholders of Enova Corporation elected two Class II Directors at
the annual meeting on April 22, 1997. The name of each nominee and the
number of shares voted for or withheld were as follows:
Nominees Votes For Votes Withheld
- ------------------------------------------------------------------------
D.W. Derbes 91,787,857 3,011,101
R.H. Goldsmith 91,732,863 3,066,095
The results of the voting on a shareholder proposal that the Board of
Directors institute the additional criterion that before any officer
options and bonuses are granted, the Company's financial performance
should be in the top 30% of the Edison Electric Institute 100 Index of
Investor-Owned Electrics (EEI 100) were as follows:
In Favor 13,313,711
Opposed 56,631,748
Abstained 3,748,783
Broker Non-Vote 19,391,252
Additional information concerning the election of the board of directors
and the other proposal is contained in Enova Corporation's 1997 Proxy
Statement and Notice of Annual Meeting.
SAN DIEGO GAS & ELECTRIC COMPANY
The shareholders of San Diego Gas & Electric Company elected 11
directors at the annual meeting on April 22, 1997. The name of each
nominee and the number of preferred shares voted for or withheld are
summarized below. All 116,583,358 common shares, which are owned by
Enova Corporation, were voted for the nominees.
Nominees Votes For Votes Withheld
- ------------------------------------------------------------------------
Richard C. Atkinson 118,871,922 31,688
Stephen L. Baum 118,872,230 31,380
Ann Burr 118,871,030 32,580
Richard A. Collato 118,871,830 31,780
Daniel W. Derbes 118,871,830 31,780
Donald E. Felsinger 118,872,230 31,380
Richard H. Goldsmith 118,872,230 31,380
William D. Jones 118,871,830 31,780
Ralph R. Ocampo 118,871,830 31,780
Thomas A. Page 118,872,030 31,580
Thomas C. Stickel 118,872,030 31,580
Additional information concerning the election of the board of directors
is contained in SDG&E's 1997 Proxy Statement and Notice of Annual
Meeting.
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 as of January 27, 1997.
3.2 Restated Bylaws of San Diego Gas & Electric Company as of
January 27, 1997.
Exhibit 10 - Material Contracts
10.1 Form of Enova Corporation 1986 Long-Term Incentive Plan
Nonqualified Stock Option Agreement as Amended.
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 March 31,
1997 for Enova Corporation.
27.2 Financial Data Schedule for the quarter ended March 31,
1997 for SDG&E.
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed on January 29, 1997
announcing Enova Corporation's consolidated net income for the
year ended December 31, 1996.
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: May 2, 1997 By: /S/ F.H. Ault
------------------------------
(Signature)
F. H. AULT
Vice President and Controller