UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
-------------------------------------
Commission file number 1-3779
---------------------------------------------
SAN DIEGO GAS & ELECTRIC COMPANY
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 95-1184800
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8326 Century Park Court, San Diego, California 92123
- -------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(619) 696-2000
----------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 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
----- -----
Common stock outstanding: Wholly owned by Enova Corporation
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<table>
SAN DIEGO GAS & ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions
<caption>
Three Months Ended
September 30,
------------------
2001 2000
------ ------
<s> <c> <c>
Operating Revenues
Electric $ 399 $ 645
Natural gas 51 86
------ ------
Total operating revenues 450 731
------ ------
Operating Expenses
Electric fuel and net purchased power 151 444
Cost of natural gas distributed 14 52
Operation and maintenance 113 105
Depreciation and amortization 52 53
Other taxes and franchise payments 19 26
Income taxes 39 18
------ ------
Total operating expenses 388 698
------ ------
Operating Income 62 33
------ ------
Other Income and (Deductions)
Interest income 5 16
Allowance for equity funds used during construction 2 2
Regulatory interest - net -- (4)
Taxes on non-operating income (3) (5)
Other - net 1 2
------ ------
Total 5 11
------ ------
Income Before Interest Charges 67 44
------ ------
Interest Charges
Long-term debt 20 21
Other 2 6
------ ------
Total 22 27
------ ------
Net Income 45 17
Preferred Dividend Requirements 2 2
------ ------
Earnings Applicable to Common Shares $ 43 $ 15
====== ======
See notes to Consolidated Financial Statements.
</table>
<table>
SAN DIEGO GAS & ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions
<caption>
Nine Months Ended
September 30,
------------------
2001 2000
------ ------
<s> <c> <c>
Operating Revenues
Electric $1,635 $1,467
Natural gas 581 309
------ ------
Total operating revenues 2,216 1,776
------ ------
Operating Expenses
Electric fuel and net purchased power 939 841
Cost of natural gas distributed 402 154
Operation and maintenance 345 277
Depreciation and amortization 154 157
Other taxes and franchise payments 65 62
Income taxes 119 101
------ ------
Total operating expenses 2,024 1,592
------ ------
Operating Income 192 184
------ ------
Other Income and (Deductions)
Interest income 17 44
Allowance for equity funds used during construction 3 5
Regulatory interest - net 6 (8)
Taxes on non-operating income (11) (13)
Other - net -- (4)
------ ------
Total 15 24
------ ------
Income Before Interest Charges 207 208
------ ------
Interest Charges
Long-term debt 63 61
Other 10 36
Allowance for borrowed funds used during construction (3) (1)
------ ------
Total 70 96
------ ------
Net Income 137 112
Preferred Dividend Requirements 5 5
------ ------
Earnings Applicable to Common Shares $ 132 $ 107
====== ======
See notes to Consolidated Financial Statements.
</table>
<table>
SAN DIEGO GAS & ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
Dollars in millions
<caption>
Balance at
--------------------------
September 30, December 31,
2001 2000
------------- ------------
<s> <c> <c>
ASSETS
Utility plant - at original cost $4,919 $4,778
Accumulated depreciation and decommissioning (2,591) (2,502)
------ ------
Utility plant - net 2,328 2,276
------ ------
Nuclear decommissioning trust 524 543
------ ------
Current assets
Cash and cash equivalents 389 256
Accounts receivable - trade 196 233
Accounts receivable - other 25 20
Due from affiliates 165 --
Income taxes receivable -- 236
Regulatory assets arising from fixed price contracts
and other derivatives 87 --
Inventories 71 50
Other 9 8
------ ------
Total current assets 942 803
------ ------
Other assets
Deferred taxes recoverable in rates 121 140
Regulatory assets arising from fixed price contracts
and other derivatives 621 --
Fixed price contracts and other derivatives 85 --
Regulatory assets 709 925
Deferred charges and other 50 47
------ ------
Total other assets 1,586 1,112
------ ------
Total assets $5,380 $4,734
====== ======
See notes to Consolidated Financial Statements.
</table>
<table>
SAN DIEGO GAS & ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
Dollars in millions
<caption>
Balance at
---------------------------
September 30, December 31,
2001 2000
------------- ------------
<s> <c> <c>
CAPITALIZATION AND LIABILITIES
Capitalization
Common stock $ 857 $ 857
Retained earnings 337 205
Accumulated other comprehensive income (loss) (3) (3)
------ ------
Total common equity 1,191 1,059
Preferred stock not subject to mandatory redemption 79 79
Preferred stock subject to mandatory redemption 25 25
Long-term debt 1,247 1,281
------ ------
Total capitalization 2,542 2,444
------ ------
Current liabilities
Accounts payable 117 407
Income taxes payable 34 --
Deferred income taxes 115 252
Regulatory balancing accounts - net 238 367
Customer refunds payable 128 --
Fixed price contracts and other derivatives 89 --
Current portion of long-term debt 93 66
Other 225 196
------ ------
Total current liabilities 1,039 1,288
------ ------
Deferred credits and other liabilities
Customer advances for construction 43 40
Deferred income taxes 608 502
Deferred investment tax credits 46 48
Fixed price contracts and other derivatives 621 --
Regulatory liabilities arising from fixed price
contracts and other derivatives 85 --
Deferred credits and other liabilities 396 412
------ ------
Total deferred credits and other liabilities 1,799 1,002
------ ------
Contingencies and commitments (Note 2)
Total liabilities and shareholders' equity $5,380 $4,734
====== ======
See notes to Consolidated Financial Statements.
</table
<table>
SAN DIEGO GAS & ELECTRIC COMPANY AND SUBSIDIARY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
Dollars in millions
<caption>
Nine Months Ended
September 30,
------------------
2001 2000
------ ------
<s> <c> <c>
Cash Flows from Operating Activities
Net income $ 137 $ 112
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 154 157
Customer refunds paid -- (378)
Deferred income taxes and investment tax credits (14) 35
Non-cash rate reduction bond expense 47 16
Other - net 35 4
Net changes in other working capital components 155 272
------ ------
Net cash provided by operating activities 514 218
------ ------
Cash Flows from Investing Activities
Capital expenditures (206) (207)
Loan repaid by (paid to) affiliate (154) 304
Contributions to decommissioning funds (4) (4)
Other - net (5) 24
------ ------
Net cash provided by (used in) investing
activities (369) 117
------ ------
Cash Flows from Financing Activities
Dividends paid (5) (405)
Issuance of long-term debt 93 12
Repayment of long-term debt (100) (69)
------ ------
Net cash used in financing activities (12) (462)
------ ------
Increase (decrease) in cash and cash equivalents 133 (127)
Cash and cash equivalents, January 1 256 337
------ ------
Cash and cash equivalents, September 30 $ 389 $ 210
====== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Income tax refunds - net $ 123 $ 8
====== ======
Interest payments, net of amounts capitalized $ 66 $ 94
====== ======
See notes to Consolidated Financial Statements.
</table>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
This Quarterly Report on Form 10-Q is that of San Diego Gas & Electric
Company (SDG&E or the Company), the common stock of which indirectly
is wholly owned by Sempra Energy, a California-based Fortune 500
energy services company. The financial statements herein are the
Consolidated Financial Statements of SDG&E and its sole subsidiary,
SDG&E Funding LLC.
The accompanying Consolidated Financial Statements have been prepared
in accordance with the interim-period-reporting requirements of Form
10-Q. Results of operations for interim periods are not necessarily
indicative of results for the entire year. In the opinion of
management, the accompanying statements reflect all adjustments
necessary for a fair presentation. These adjustments are only of a
normal recurring nature. Certain changes in classification have been
made to prior presentations to conform to the current financial
statement presentation.
The Company's significant accounting policies are described in the
notes to Consolidated Financial Statements in the Company's 2000
Annual Report. The same accounting policies are followed for interim
reporting purposes.
Information in this Quarterly Report is unaudited and should be read
in conjunction with the Company's 2000 Annual Report and March 31,
2001 and June 30, 2001 Quarterly Reports on Form 10-Q.
As described in the notes to Consolidated Financial Statements in the
Company's 2000 Annual Report, SDG&E accounts for the economic effects
of regulation on utility operations (excluding generation operations)
in accordance with Statement of Financial Accounting Standards (SFAS)
No. 71, "Accounting for the Effects of Certain Types of Regulation."
2. MATERIAL CONTINGENCIES
ELECTRIC INDUSTRY RESTRUCTURING
The restructuring of California's electric utility industry has
significantly affected the Company's electric utility operations. The
background of this issue is described in the Company's 2000 Annual
Report. Various developments since January 1, 2001 are described
herein.
In February 2001, the California Department of Water Resources (DWR)
began to purchase power from generators and marketers, who had
previously sold their power to the California Power Exchange (PX) and
Independent System Operator (ISO), and has entered into long-term
contracts for the purchase of a portion of the power requirements of
the state's population that is served by investor-owned utilities
(IOUs). SDG&E and the DWR entered into an agreement under which, as
amended, the DWR will continue to purchase power for SDG&E's customers
until December 31, 2002, subject to earlier termination upon six-
months' prior notice and the satisfaction of certain regulatory and
other conditions intended to assure SDG&E's timely recovery of costs
incurred in resuming power procurement for its customers (see MOU
discussion below).
The DWR is now purchasing SDG&E's full net short position (the power
needed by SDG&E's customers, other than that provided by SDG&E's
nuclear generating facilities or its previously existing purchase
power contracts). Therefore, increases in SDG&E's undercollections
from the June 30, 2001 balance of $786 million would result only from
these contracts and interest, offset by nuclear generation, the cost
of which is below the 6.5-cent customer rate cap. Any increases are
not expected to be material. The increase during the six-month period
ended June 30, 2001 was greater than expected in the future because
nuclear generation was reduced from February 2001 through May 2001 due
to a fire and the DWR agreement was not in effect until February 2001.
However, during the three-month period ended September 30, 2001, the
balance decreased to $684 million, primarily due to the application of
overcollections in certain other balancing accounts as further
discussed below.
On June 18, 2001 representatives of California Governor Davis, the
DWR, Sempra Energy and SDG&E entered into a Memorandum of
Understanding (MOU) contemplating the implementation of a series of
transactions and regulatory settlements and actions to resolve many of
the issues affecting SDG&E and its customers arising out of the
California energy crisis. The principal provisions of the MOU are
briefly mentioned below. This summary only highlights selected
provisions of the MOU and readers are urged to read the full text of
the MOU which was filed as Exhibit 99.1 to the Company's Current
Report on Form 8-K filed on June 19, 2001.
- -- The MOU contemplates, subject to requisite approvals of the
California Public Utilities Commission (CPUC), the elimination from
SDG&E's rate-ceiling balancing account of the above-mentioned
undercollected costs that otherwise would be recovered in future rates
charged to SDG&E customers; settlement of reasonableness reviews,
electricity purchase contract issues and various other regulatory
matters affecting SDG&E; the sale to the DWR of power purchased by
SDG&E under certain intermediate-term contracts; and various related
matters.
- -- The effective date of revised base rates for SDG&E and for
SoCalGas, an affiliated company also owned by Sempra Energy, is
delayed to 2004 from 2003. On October 10, 2001, the CPUC issued a
decision approving the delay to 2004. However, the decision also
denies the utilities' request to continue 50/50 allocation between
ratepayers and shareholders of estimated savings stemming from the
1998 merger between Pacific Enterprises (parent company of SoCalGas)
and Enova Corporation (parent company of SDG&E). Instead, the CPUC
ordered that 100 percent of the estimated 2003 merger benefits go to
ratepayers. The portion to be refunded to electric ratepayers will be
credited to the Transition Cost Balancing Account, based on the net
present value (NPV) in 2001 of the savings for 2003. Merger savings
related to 2001 and 2002 also will be so credited. The combined NPV is
estimated to be $39 million. Merger savings allocable to gas
ratepayers will be refunded through once-a-year bill credit, as has
been the case.
- -- Sempra Energy would make capital investments in SDG&E and SoCalGas
aggregating at least $3.0 billion during 2001 through 2006. The
utilities would receive their authorized rate of return on these
investments.
- -- The MOU also contemplates the sale of SDG&E's transmission system
to the DWR or other state agency for a purchase price of 2.3 times
SDG&E's net book value (purchase price of approximately $1.2 billion),
plus the discharge or assumption of related long-term debt. The sale
of the transmission system is not a condition to the implementation of
the other elements of the MOU, but the implementation of the other
elements is a condition to the transmission sale. SDG&E has no
compelling financial need to sell its transmission assets. In
addition, as the State of California will not be purchasing Southern
California Edison's or Pacific Gas & Electric's transmission systems,
it is unlikely that the state will pursue the purchase of SDG&E's
transmission system.
On August 2, 2001, the CPUC approved a $75 million reduction of the
rate-ceiling balancing account, as contemplated by the MOU, by the
application thereto of overcollections in certain other balancing
accounts. On October 10, 2001, as noted above, the CPUC approved a
delay in the effective date of revised base rates for both SDG&E and
SoCalGas, as contemplated by the MOU. On November 8, 2001, the CPUC
approved a $100 million reduction of the rate-ceiling balancing
account, as contemplated by the MOU, in settlement of the
reasonableness of SDG&E's electric procurement practices between July
1, 1999 through February 7, 2001.
The CPUC has deferred consideration of the remaining elements of the
MOU until a later meeting. Its next scheduled meeting is November 29,
2001. If the remaining elements of the MOU are approved substantially
as contemplated by the MOU, there will be no charge to SDG&E's
earnings associated with the MOU.
The agreement between SDG&E and DWR obligating the DWR to purchase
power for SDG&E's customers has been amended as to the conditions that
would result in the resumption by SDG&E of the procurement of the
residual net power requirements for its retail customers. This
procurement resumption shall occur upon the earlier of a date
determined by the DWR upon six months' prior written notice (once at
least one of the other two major California-based investor-owned
electric utilities has resumed procurement of its residual net short
(net short consists of the power and ancillary services required by a
utility's customers that are not provided by its previously existing
generation and purchase power contracts) and certain CPUC approvals,
including adoption of a satisfactory procurement cost recovery
mechanism, have occurred) or January 1, 2003. These conditions are
intended to assure SDG&E's timely recovery of costs incurred in
resuming power procurement for its customers.
SDG&E's prior request for a temporary 2.3 cents/kWh electric-rate
surcharge that SDG&E requested begin on March 1, 2001 has been
deferred pending the CPUC's action on the MOU. If the MOU is approved
by the CPUC, no rate increase will be necessary, except as required to
pass through, without markup, the rates to repay the DWR for its
purchases of power. In order to provide sufficient revenues for the
collection of the DWR revenue requirement, on September 20, 2001 the
CPUC issued a decision establishing rate increases for SDG&E's
electric customers in an average amount of approximately 1.46
cents/kWh. Residential customers whose electric power consumption does
not exceed 130 percent of baseline quantities, and certain low income
and medical customers are exempt from the increases.
Also on September 20, 2001, the CPUC suspended the ability of retail
electricity customers to choose their power provider ("direct access")
until at least the end of 2003 in order to improve the probability
that enough revenue would be available to the DWR to cover the state's
power purchases. The decision forbids new direct access contracts as
of September 20, 2001 and going forward. The decision defers action on
direct access contracts entered into prior to September 20, 2001.
On April 12, 2001, California law AB 43X took effect, extending the
temporary 6.5-cent rate cap to include SDG&E's large customers (the
only customer class not previously covered by the rate cap)
retroactive to February 7, 2001. The reduced future bills did not add
to the undercollection nor will the fourth quarter refunds of past
charges above 6.5 cents, since the purchases for these customers are
covered by the agreement between SDG&E and the DWR.
On June 18, 2001, the Federal Energy Regulatory Commission (FERC)
approved an expansion of its April 25, 2001 order which adopted
certain price restrictions during Stage 1, 2 and 3 shortage
situations, limiting prices to all generators to the cost of the
least-efficient plant whose generation is required at that time. The
order expanded price restrictions to 24 hours a day, seven days a week
through September 2002. Prices are linked to the price the least
efficient gas-fired plant was allowed to charge during Stage 1
emergencies under the April order. During non-emergency times, the
ceiling price will drop to 85 percent of the emergency price cap.
Critics have responded that this mechanism will be ineffective since,
among other things, it does not cover power brokers and marketers, and
the resultant price will still be relatively high. However, the
combination of successful conservation efforts, reduced air
conditioning load due to mild summer weather, additional power plants'
coming on line and lower prices for the natural gas that fuels most
power plants has currently caused wholesale energy prices to drop and
eased the California electric energy crisis. No rolling blackouts have
been ordered since May 8, 2001.
As discussed in the Company's 2000 Annual Report, the FERC has been
investigating prices charged to the California IOUs by various
electric suppliers. The FERC appears to be proceeding in the direction
of awarding to the California IOUs a partial refund of the amounts
charged. Any such refunds would reduce SDG&E's rate-ceiling balancing
account. A FERC decision is not expected before March 2002.
NATURAL GAS INDUSTRY RESTRUCTURING
The Company's 2000 Annual Report discusses various proposals and
actions related to natural gas industry restructuring. As discussed
therein, no significant impacts on the Company are expected when the
various issues are finalized. Various developments since January 1,
2001 are described herein.
In October 2001, a CPUC commissioner issued a revised Proposed
Decision (PD) which adopts, with some modification, many of the
provisions of the settlement proposal that SoCalGas and SDG&E were
parties to (one of several that arose during 1999 and 2000). On the
SoCalGas system these provisions include, among other things, the
unbundling of intrastate transmission and the implementation of a
system of firm, tradable intrastate transmission rights that are
viewed to be in the public interest. The revised PD also would
increase SoCalGas shareholder risks and rewards for unbundled storage
service, while at the same time granting SoCalGas greater flexibility
in charges for unbundled storage service. A CPUC decision could be
issued at any time, but there is no deadline for CPUC action and the
provisions of a final CPUC decision are uncertain.
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 $9.3 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 $36 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, possibly including 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 and six weeks, after a waiting period of 12 weeks.
Coverage is provided through a mutual insurance company 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 $6.7 million.
Both the public-liability and property insurance (including
replacement power coverage) include coverage for losses resulting from
acts of terrorism. This includes the risk-sharing arrangement with
other nuclear facilities.
LITIGATION
Lawsuits filed in 2000 and currently consolidated at the Federal Court
in Las Vegas seek class-action certification and allege that Sempra
Energy, SoCalGas, SDG&E and El Paso Energy Corp. acted to drive up the
price of natural gas for Californians by agreeing to stop a pipeline
project that would have brought new and less-expensive natural gas
supplies into California. Management believes the allegations are
without merit. On October 30, 2001, the Federal Court ruled that the
State Court is the appropriate jurisdiction for these lawsuits.
Except for the above, neither the Company nor its subsidiary is party
to, nor is their property the subject of, any material pending legal
proceedings other than routine litigation incidental to their
businesses.
Management believes that these matters will not have a material
adverse effect on the Company's results of operations, financial
condition or liquidity.
3. COMPREHENSIVE INCOME
The following is a reconciliation of net income to comprehensive
income.
Three-month Nine-month
periods ended periods ended
September 30, September 30,
-------------------------------
(Dollars in millions) 2001 2000 2001 2000
- ---------------------------------------------------------------
Net income $ 45 $ 17 $ 137 $ 112
Minimum pension liability
adjustments -- -- -- 2
-------------------------------
Comprehensive income $ 45 $ 17 $ 137 $ 114
- ---------------------------------------------------------------
4. FINANCIAL INSTRUMENTS
Adoption of SFAS 133
Effective January 1, 2001, the Company adopted SFAS 133, as amended by
SFAS 138 "Accounting for Certain Derivative Instruments and Certain
Hedging Activities." As amended, SFAS 133 requires that an entity
recognize all derivatives as either assets or liabilities in the
statement of financial position, measure those instruments at fair
value and recognize changes in the fair value of derivatives in
earnings in the period of change unless the derivative qualifies as an
effective hedge that offsets certain exposures.
$93 million in current assets, $5 million in noncurrent assets, $2
million in current liabilities, and $238 million in noncurrent
liabilities were recorded as of January 1, 2001, in the Consolidated
Balance Sheet as fixed-priced contracts and other derivatives. Due to
the regulatory environment in which SDG&E operates, regulatory assets
and liabilities were established to the extent that derivative gains
and losses are recoverable or payable through future rates. The effect
on earnings was minimal. The ongoing effects will depend on future
market conditions and on the Company's hedging activities.
Market Risk
The Company's policy is to use derivative financial instruments to
manage exposure to fluctuations in interest rates and energy prices.
Transactions involving these financial instruments are with credit-
worthy firms and major exchanges. The use of these instruments exposes
the Company to market and credit risk which may at times be
concentrated with certain counterparties, although counterparty
nonperformance is not anticipated.
Energy Derivatives
SDG&E utilizes derivative financial instruments to reduce exposure to
unfavorable changes in energy prices which are subject to significant
and often volatile fluctuation. Derivative financial instruments are
comprised of futures, forwards, swaps, options and long-term delivery
contracts. These contracts allow SDG&E to predict with greater
certainty the effective prices to be received and to be charged to its
customers.
If gains and losses are not recoverable or payable through future
rates, SDG&E will apply hedge accounting if certain criteria are met.
Interest-Rate Swap Agreements
The Company periodically enters into interest-rate swap and cap
agreements to moderate exposure to interest-rate changes and to lower
the overall cost of borrowing. At September 30, 2001, the Company had
one interest-rate swap agreement: a floating-to-fixed-rate swap
associated with $45 million of SDG&E's variable-rate bonds maturing in
2002. This swap does not qualify for hedge accounting and therefore
the gains and losses associated with the change in fair value are
recorded in the Statement of Consolidated Income. For the nine months
ended September 30, 2001, the impact to income was a $2.0 million
loss. Although this financial instrument does not meet the hedge
accounting criteria of SFAS 133, it continues to be effective in
achieving the risk management objectives for which it was intended.
Accounting for Derivative Activities
At September 30, 2001, $2 million in other current assets, $85 million
in noncurrent assets, $89 million in current liabilities and $621
million in noncurrent liabilities were recorded in the Consolidated
Balance Sheet for fixed-priced contracts and other derivatives.
Regulatory assets and liabilities were established to the extent that
derivative gains and losses are recoverable or payable through future
rates. As such, $87 million in current regulatory assets, $621 million
in noncurrent regulatory assets, $85 million in noncurrent regulatory
liabilities and $2 million in other current liabilities were recorded
in the Consolidated Balance Sheet as of September 30, 2001. For the
nine-month period ended September 30, 2001, $2 million in other
operating losses was recorded in the Statement of Consolidated Income.
Fair Value
The fair value of the Company's derivative financial instruments
(fixed-price contracts and other derivatives) is not materially
different from their carryings amounts. The fair values of fixed-price
contracts and other derivatives were estimated based on quoted market
prices. Information regarding the fair value of the Company's non-
derivative financial instruments is provided in Note 9 of the notes to
Consolidated Financial Statements in the 2000 Annual Report on Form
10-K.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
financial statements contained in this Form 10-Q and Management's
Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's 2000 Annual Report.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains statements that are not
historical fact and constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. The
words "estimates," "believes," "expects," "anticipates," "plans,"
"intends," "may," "would" and "should" or similar expressions, or
discussions of strategy or of plans are intended to identify forward-
looking statements. Forward-looking statements are not guarantees of
performance. They involve risks, uncertainties and assumptions. Future
results may differ materially from those expressed in these forward-
looking statements.
Forward-looking statements are necessarily based upon various
assumptions involving judgments with respect to the future and other
risks, including, among others, local, regional, national and
international economic, competitive, political, legislative and
regulatory conditions and developments; actions by the CPUC, the
California Legislature, the DWR, and the FERC; the financial condition
of other investor-owned utilities; capital market conditions,
inflation rates, interest rates and exchange rates; energy markets,
including the timing and extent of changes in commodity prices;
weather conditions and conservation efforts; business, regulatory and
legal decisions; the pace of deregulation of retail natural gas and
electricity delivery; the timing and success of business development
efforts; and other uncertainties -- all of which are difficult to
predict and many of which are beyond the control of the Company.
Readers are cautioned not to rely unduly on any forward-looking
statements and are urged to review and consider carefully the risks,
uncertainties and other factors which affect the Company's business
described in this quarterly report and other reports filed by the
Company from time to time with the Securities and Exchange Commission.
See also "Factors Influencing Future Performance" below.
EVENTS OF SEPTEMBER 11, 2001
The terrorist attacks of September 11 have not affected the Company's
operations and are not expected to have an effect on the Company's
future operations, except to the extent that they significantly affect
the general economy, or the business or geographic areas in which the
Company operates.
CAPITAL RESOURCES AND LIQUIDITY
Beginning in the third quarter of 2000 and continuing into the first
quarter of 2001, SDG&E's liquidity was adversely affected by the
undercollections that resulted from the price cap on electric rates.
Significant growth in these undercollections has ceased as a result of
an agreement with the DWR, under which the DWR is obligated to
purchase SDG&E's full net short position consisting of the power and
ancillary services required by SDG&E's customers that are not provided
by SDG&E's nuclear generating facilities or its previously existing
purchase power contracts. The agreement extends through December 31,
2002 and can be terminated earlier only upon the satisfaction of
regulatory and other conditions intended to assure SDG&E's timely
recovery of costs incurred in resuming power procurement for its
customers. Note 2 of the notes to Consolidated Financial Statements
provides additional information concerning this agreement.
Cash and cash equivalents at September 30, 2001 are available for
investment in utility plant, the retirement of debt and other
corporate purposes. Major changes in cash flows not described
elsewhere are described below.
CASH FLOWS FROM OPERATING ACTIVITIES
For the nine-month period ended September 30, 2001, the increase in
cash flows from operations compared to the corresponding period in
2000 was primarily due to the customer refunds paid in 2000 and an
income tax refund received during the first quarter of 2001 (none
received during the same period in 2000), partially offset by the
decrease in trade accounts payable in 2001 due to less purchased
electricity because of the DWR purchases.
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures for property, plant and equipment are estimated
to be $300 million for the full year 2001 and are being financed
primarily by internally generated funds. Construction, investment and
financing programs are continuously reviewed and revised in response
to changes in competition, customer growth, inflation, customer rates,
the cost of capital, and environmental and regulatory requirements.
For the nine months ended September 30, 2001, the increase in cash
flows used in investing activities compared to the corresponding
period in 2000 was primarily due to an increase in loans to Sempra
Energy during 2001.
CASH FLOWS FROM FINANCING ACTIVITIES
For the nine-month period ended September 30, 2001, cash flows used in
financing activities decreased from the corresponding period in 2000
due primarily to a decrease in common dividends paid during 2001.
During the first quarter of 2001, SDG&E remarketed $150 million of
variable-rate debt and $25 million of variable-rate unsecured bonds as
7.0 percent and 6.75 percent fixed-rate debt, respectively. At SDG&E's
option, the interest rate may resume floating at various dates between
December 1, 2003 and December 1, 2005. All other terms remain the
same.
In June and July 2001, SDG&E's one-year credit lines totaling $250
million were renewed and bear interest at various rates based on
market rates and SDG&E's credit rating. SDG&E did not renew a $35
million credit line that expired in June 2001.
RESULTS OF OPERATIONS
The Company's net income increased for the three-month and nine-month
periods ended September 30, 2001, compared to the same periods in
2000, primarily due to a nonrecurring $30-million, third quarter 2000,
aftertax charge for a potential regulatory disallowance related to the
acquisition of wholesale power in the deregulated California market.
Also contributing to net income were increased regulatory interest
income on increased undercollected balances and decreased interest
expense on rate reduction bond refunds that were paid to customers
during the third quarter of 2000. Earnings for the three-month period
ended September 30, 2001, were negatively affected by lower energy
sales due to mild weather and consumer conservation efforts, which
also had a minor impact on the nine-month results.
Seasonality
SDG&E's electric sales volume generally is higher in the summer due to
air-conditioning demands. Its natural gas sales volumes generally are
higher in the winter due to heating demands, although that difference
is lessening as the use of natural gas to fuel electric generation
increases.
The tables below summarize electric and natural gas volumes and
revenues by customer class for the nine-month periods ended September
30, 2001 and 2000.
<table>
Electric Distribution and Transmission
(Volumes in millions of Kwhrs, dollars in millions)
<caption>
2001 2000
------------------------------------------
Volumes Revenue Volumes Revenue
------------------------------------------
<s> <c> <c> <c> <c>
Residential 4,474 $ 606 4,778 $ 654
Commercial 4,597 664 4,740 643
Industrial 2,282 342 1,822 206
Direct access 1,656 61 2,579 82
Street and highway lighting 65 8 51 5
Off-system sales 1,391 332 561 20
------------------------------------------
14,465 2,013 14,531 1,610
Balancing accounts and other (378) (143)
------------------------------------------
Total 14,465 $1,635 14,531 $1,467
------------------------------------------
</table>
<table>
Gas Sales, Transportation and Exchange
(Volumes in billion cubic feet, dollars in millions)
<caption>
Gas Sales Transportation & Exchange Total
--------------------------------------------------------------------
Volumes Revenue Volumes Revenue Volumes Revenue
--------------------------------------------------------------------
<s> <c> <c> <c> <c> <c> <c>
2001:
Residential 26 $ 399 -- $ -- 26 $ 399
Commercial and industrial 14 205 20 15 34 220
Electric generation plants -- -- 59 16 59 16
--------------------------------------------------------------
40 $ 604 79 $ 31 119 635
Balancing accounts and other (54)
--------
Total $ 581
- -------------------------------------------------------------------------------------------
2000:
Residential 25 $ 191 -- $ -- 25 $ 191
Commercial and industrial 16 94 16 12 32 106
Electric generation plants -- -- 42 14 42 14
--------------------------------------------------------------
41 $ 285 58 $ 26 99 311
Balancing accounts and other ( 2)
--------
Total $ 309
- -------------------------------------------------------------------------------------------
</table>
The increase in electric revenues was primarily due to the effect of
higher electric commodity costs, which are passed on to customers
without markup, and increased off-system sales, partially offset by
the downward effect of the DWR's purchases of SDG&E's net short. DWR's
purchases of SDG&E's net short and the corresponding sale to SDG&E's
customers are excluded from SDG&E's income statement. Also partly
offsetting the increase are reductions in customer demand, arising
from conservation efforts encouraged by the State of California
program to give bill credits (funded by the DWR) to customers who
significantly reduce usage. It is uncertain when SDG&E's electric
volumes will return to levels of prior years.
The increase in natural gas revenues was primarily due to higher
natural gas prices.
The increase in electric fuel and net purchased power expense was
primarily due to the higher price of electricity as described in Note
2 of the notes to Consolidated Financial Statements and increased off-
system sales. Under the current regulatory framework, changes in on-
system prices normally do not affect net income, as explained in the
2000 Annual Report.
The increase in the cost of natural gas purchased for resale was
primarily due to higher natural gas prices. Under the current
regulatory framework, changes in core-market natural gas prices do not
affect net income since, as explained more fully in the 2000 Annual
Report, current or future customer rates normally recover the actual
cost of natural gas.
FACTORS INFLUENCING FUTURE PERFORMANCE
Note 2 of the notes to Consolidated Financial Statements describes
events in the deregulation of California's electric utility industry
and the effects thereof on SDG&E, including the suspension of direct
access.
Performance of the Company in the near future will depend primarily on
the ratemaking and regulatory process, electric and natural gas
industry restructuring, and the changing energy marketplace. These
factors are discussed in this section and in Note 2 of the notes to
Consolidated Financial Statements.
Performance-Based Regulation (PBR)
To promote efficient operations and improved productivity and to move
away from reasonableness reviews and disallowances, the CPUC has been
directing utilities to use PBR. PBR has replaced the general rate case
and certain other regulatory proceedings for the California utilities.
Under PBR, regulators require future income potential to be tied to
achieving or exceeding specific performance and productivity goals, as
well as cost reductions, rather than relying solely on expanding
utility plant in a market where a utility already has a highly
developed infrastructure.
In April 2001, SDG&E filed its 2000 PBR report with the CPUC. For
2000, SDG&E exceeded all six performance indicator benchmarks,
resulting in a request for a total net reward of $11.7 million. The
CPUC has not yet approved this report and these awards have not been
recorded. In addition, SDG&E achieved an actual 2000 rate of return of
8.70 percent which is below the authorized 8.75 percent. This results
in no sharing of earnings in 2000 under the PBR sharing mechanism (as
described in the Company's 2000 Annual Report).
SDG&E's PBR mechanism is in effect through December 31, 2002, at which
time the mechanisms will be updated. That update is described in the
Company's 2000 Annual Report. The PBR and Cost of Service (COS) cases
for SoCalGas and SDG&E were both due to be filed on December 21, 2001.
However, both SoCalGas' and SDG&E's PBR/COS cases were delayed by an
October 10, 2001 CPUC decision such that the resulting rates would be
effective in 2004 instead of 2003. The decision also denies the
utilities' request to continue 50/50 allocation between ratepayers and
shareholders of the estimated merger savings discussed above and,
instead, orders that 100 percent of the estimated 2003 merger benefits
go to ratepayers. The portion to be refunded to electric ratepayers
will be credited to the Transition Cost Balancing Account, based on
the net present value (NPV) in 2001 of the savings for 2003. Merger
savings related to 2001 and 2002 also will be so credited. The
combined NPV is estimated to be $39 million. Merger savings allocable
to gas ratepayers will be refunded through once-a-year bill credits, as
has been the case.
Biennial Cost Allocation Proceeding (BCAP)
Rates to recover the changes in the cost of natural gas transportation
services are determined in the BCAP. The BCAP adjusts rates to reflect
variances in customer demand from estimates previously used in
establishing customer natural gas transportation rates. The mechanism
substantially eliminates the effect on income of variances in market
demand and natural gas transportation costs. SDG&E filed its 2003 BCAP
on October 5, 2001.
Cost of Capital
Electric-industry restructuring has changed the method of calculating
the utility's annual cost of capital. In June 1999, the CPUC adopted a
10.6 percent return on common equity and an 8.75 percent return on
rate base for SDG&E's electric-distribution and natural gas
businesses. These rates will remain in effect through 2002. An
application is required to be filed by May 8, 2002, addressing ROE,
ROR and capital structure for 2003. The electric-transmission cost of
capital is determined under a separate FERC proceeding.
Utility Integration
On September 20, 2001 the CPUC approved Sempra Energy's request to
integrate the management teams of SoCalGas and SDG&E. Utility
operations/management was not, and is not expected to be, shifted to
the parent company. CPUC approval would be required if such a shift
were contemplated. The decision retains the separate identities of
both utilities and is not a merger. Instead, utility integration is a
reorganization that consolidates senior management functions of the
two utilities and returns to the utilities a significant portion of
shared support services currently provided by Sempra Energy's
centralized corporate center. Once implemented, the integration is
expected to result in more efficient and effective operations.
CPUC INVESTIGATION OF ENERGY-UTILITY HOLDING COMPANIES
The CPUC has initiated an investigation into the relationship between
California's investor-owned utilities and their parent holding
companies. Among the matters to be considered in the investigation are
utility dividend policies and practices and obligations of the holding
companies to provide financial support for utility operations. The
investigation is currently on hold while certain jurisdictional issues
are being resolved.
NEW ACCOUNTING STANDARDS
Effective January 1, 2001, the Company adopted SFAS 133 "Accounting
for Derivative Instruments and Hedging Activities" as amended by SFAS
138 "Accounting for Certain Derivative Instruments and Certain Hedging
Activities." The adoption of this new standard on January 1, 2001, did
not have a material impact on earnings. For further information
regarding the implementation of SFAS 133, see Note 4 of the notes to
Consolidated Financial Statements.
In July 2001 the Financial Accounting Standards Board (FASB) approved
three statements, SFAS 141 "Business Combinations," SFAS 142 "Goodwill
and Other Intangible Assets" and SFAS 143 "Accounting for Asset
Retirement Obligations."
- -- SFAS 141 provides guidance on the accounting for a business
combination at the date the combination is completed. It requires
the use of the purchase method of accounting for all business
combinations initiated after June 30, 2001. The pooling-of-interest
method is eliminated.
- -- SFAS 142 provides guidance on how to account for goodwill and other
intangible assets after the acquisition is complete. Goodwill and
certain other intangible assets will no longer be amortized and
will be tested in the aggregate for impairment at least annually.
Goodwill will not be tested on an acquisition-by-acquisition basis.
SFAS 142 applies to existing goodwill and other intangible assets,
beginning with fiscal years starting after December 15, 2001.
- -- SFAS 143 requires entities to record the fair value of a liability
for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity
capitalizes a cost by increasing the carrying amount of the related
long-lived asset. Over time, the liability is accreted to its
present value, and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability,
an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement.
In August 2001 the FASB approved SFAS 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" that replaces SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS 144 applies to all long-lived assets,
including discontinued operations. SFAS 144 requires that those long-
lived assets be measured at the lower of carrying amount or fair value
less cost to sell. Therefore, discontinued operations will no longer
be measured at net realizable value or include amounts for operating
losses that have not yet occurred. SFAS 144 also broadens the
reporting of discontinued operations to include all components of an
entity with operations that can be distinguished from the rest of the
entity and that will be eliminated from the ongoing operations of the
entity in a disposal transaction. The provisions of SFAS 144 are
effective for fiscal years beginning after December 15, 2001.
The Company has not yet determined the effect on its financial
statements of SFASs 141-144 or of the various subsequent guidance
concerning SFAS 133/138.
ITEM 3. MARKET RISK
There have been no significant changes in the risk issues affecting
the Company subsequent to those discussed in the Annual Report for
2000. As noted in that report, SDG&E may, at times, be exposed to
limited market risk in its natural gas purchase, sale and storage
activities as a result of activities under SDG&E's gas PBR. The risk
is managed within the parameters of the Company's market-risk
management and trading framework. However, to lessen the impact on
customers from the unprecedented natural gas price volatility at the
California border during the first quarter of 2001, SDG&E began
hedging a larger portion of its customer natural gas requirements than
in the past. As of March 31, 2001, the Value at Risk (VaR) of the
hedges was $7.5 million. During the second and third quarters of 2001,
the gas hedging activity at SDG&E was sharply reduced and, as of
September 30, 2001, the VaR of the SDG&E hedges was $200,000. This
represents the 50-percent shareholder portion under the PBR mechanism
and excludes the 50-percent portion subject to rate recovery. In
addition, certain fixed price contracts that traditionally have not
been considered derivatives, but now meet the derivative definition
under SFAS 133 (see "New Accounting Standards" above), are excluded
from the VaR amounts due to the offsetting regulatory asset or
liability.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except as otherwise described in this report, the Company's 2000
Annual Report, or its March 31, 2001 or June 30, 2001 Quarterly
Reports on Form 10-Q, neither the Company nor its subsidiary is party
to, nor is their property the subject of, any material pending legal
proceedings other than routine litigation incidental to their
businesses.
ITEM 5. OTHER INFORMATION
On November 6, 2001, the board of directors of the Company was
reconstituted with the following individuals now comprising all of the
incumbent directors:
Frank H. Ault, Senior Vice President and Controller of Sempra Energy;
Edwin A. Guiles, Group President - Regulated Business Units of Sempra
Energy and Chairman of SDG&E and SoCalGas; and Debra L. Reed,
President of SDG&E.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 12 - Computation of ratios
12.1 Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed after June 30, 2001:
Current Report on Form 8-K filed July 16, 2001 reported the current
status of California Public Utilities Commission review of the
Memorandum of Understanding with the State of California.
SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934,
SDG&E has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SAN DIEGO GAS & ELECTRIC COMPANY
(Registrant)
Date: November 13, 2001 By: /s/ D.L. Reed
-----------------------------
D.L. Reed
President