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
For the period ended June 30, 1994
Or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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.)
101 ASH STREET, SAN DIEGO, CALIFORNIA 92101
. . . . .
(Address of principal executive offices) (Zip Code)
(619) 696-2000
Registrant's telephone number, including area code
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 July 31, 1994 116,472,395
PART I - FINANCIAL INFORMATION
SAN DIEGO GAS & ELECTRIC COMPANY
STATEMENTS OF CONSOLIDATED INCOME
(In thousands except per share amounts)
Three Months Ended
June 30,
1994 1993
---------- ----------
(Unaudited)
Operating Revenues
Electric . . . . . . . . . . . $352,013 $351,807
Gas . . . . . . . . . . . . 78,260 80,522
Diversified operations . . . . . . 32,707 34,931
---------- ----------
Total operating revenues . . . . . 462,980 467,260
---------- ----------
Operating Expenses
Electric fuel . . . . . . . . . 33,490 39,139
Purchased power . . . . . . . . 81,442 78,360
Gas purchased for resale . . . . . 31,071 35,421
Maintenance . . . . . . . . . . 16,209 19,262
Depreciation and decommissioning . . . 65,976 61,589
Property and other taxes . . . . . 11,119 11,227
Other . . . . . . . . . . . . 134,971 118,736
Income taxes . . . . . . . . . 28,474 35,147
---------- ----------
Total operating expenses . . . . . 402,752 398,881
---------- ----------
Operating Income 60,228 68,379
---------- ----------
Other Income and (Deductions)
Writedown of intangibles. . . . . . (59,116) --
Writedown of real estate. . . . . . (25,000) --
Allowance for equity funds used
during construction . . . . . . . 2,155 4,742
Taxes on nonoperating income . . . . 12,738 (508)
Other--net . . . . . . . . . . 1,058 (2,985)
---------- ----------
Total other income and (deductions) . (68,165) 1,249
---------- ----------
Income Before Interest Charges (7,937) 69,628
---------- ----------
Interest Charges
Long-term debt . . . . . . . . . 22,860 23,445
Short-term debt and other . . . . . 3,486 3,035
Allowance for borrowed funds used
during construction . . . . . . . (1,064) (1,081)
---------- ----------
Net interest charges . . . . . . 25,282 25,399
---------- ----------
Net Income (before preferred dividend
requirements) . . . . . . . . . (33,219) 44,229
Preferred Dividend Requirements . . . 1,915 2,181
---------- ----------
Earnings Applicable to Common Shares . . ($35,134) $42,048
========== ==========
Average Common Shares Outstanding . . . 116,473 115,908
========== ==========
Earnings Per Common Share . . . . . ($0.30) $0.36
========== ==========
Dividends Declared Per Common Share . . $0.38 $0.37
========== ==========
See notes to consolidated financial statements.
2
PART I - FINANCIAL INFORMATION
SAN DIEGO GAS & ELECTRIC COMPANY
STATEMENTS OF CONSOLIDATED INCOME
(In thousands except per share amounts)
Six Months Ended
June 30,
1994 1993
---------- ----------
(Unaudited)
Operating Revenues
Electric . . . . . . . . . . . $727,917 $720,648
Gas . . . . . . . . . . . . . 177,110 180,112
Diversified operations . . . . . . 62,371 58,843
---------- ----------
Total operating revenues . . . . . 967,398 959,603
---------- ----------
Operating Expenses
Electric fuel. . . . . . . . . . 68,366 81,640
Purchased power . . . . . . . . . 162,967 158,046
Gas purchased for resale . . . . . . 80,745 90,094
Maintenance . . . . . . . . . . 32,570 34,903
Depreciation and decommissioning . . . 131,173 122,315
Property and other taxes . . . . . . 22,496 22,837
Other . . . . . . . . . . . . 253,108 225,543
Income taxes . . . . . . . . . . 75,613 78,060
---------- ----------
Total operating expenses . . . . . 827,038 813,438
---------- ----------
Operating Income . . . . . . . . . 140,360 146,165
---------- ----------
Other Income and (Deductions)
Writedown of intangibles . . . . . . (59,116) --
Writedown of real estate . . . . . . (25,000) --
Allowance for equity funds used during
construction. . . . . . . . . . 4,840 10,076
Taxes on nonoperating income . . . . 12,202 (1,132)
Other--net . . . . . . . . . . 3,024 (573)
---------- ----------
Total other income and (deductions) . . (64,050) 8,371
---------- ----------
Income Before Interest Charges . . . . 76,310 154,536
---------- ----------
Interest Charges
Long-term debt . . . . . . . . . 45,504 48,603
Short-term debt and other . . . . . 6,467 5,371
Allowance for borrowed funds used
during construction . . . . . . . (2,238) (2,244)
---------- ----------
Net interest charges . . . . . . . 49,733 51,730
---------- ----------
Net Income (before preferred dividend
requirements). . . . . . . . . . 26,577 102,806
Preferred Dividend Requirements . . . . 3,831 4,363
---------- ----------
Earnings Applicable to Common Shares . . $22,746 $98,443
========== ==========
Average Common Shares Outstanding . . . 116,482 115,680
========== ==========
Earnings Per Common Share . . . . . . $0.20 $0.85
========== ==========
Dividends Declared Per Common Share . . $0.76 $0.74
========== ==========
See notes to consolidated financial statements.
3
SAN DIEGO GAS & ELECTRIC COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
June 30, December 31,
1994 1993
-------------- -------------
(Unaudited)
ASSETS
Utility plant--at original cost . . . $5,227,379 $5,134,251
Accumulated depreciation and
decommissioning . . . . . . . . (2,093,865) (2,016,618)
------------- -------------
Utility plant--net . . . . . . . 3,133,514 3,117,633
------------- -------------
Investments and other property . . . 450,093 464,101
------------- -------------
Current assets
Cash and temporary investments . . . 14,154 17,450
Accounts receivable . . . . . . 186,723 205,712
Notes receivable . . . . . . . 30,475 29,201
Inventories . . . . . . . . . 94,086 84,922
Other . . . . . . . . . . . 37,983 40,810
------------- -------------
Total current assets . . . . . 363,421 378,095
------------- -------------
Construction funds held by trustee . . -- 58,042
Goodwill . . . . . . . . . . -- 53,921
Deferred taxes recoverable in rates . 293,496 311,564
Deferred charges and other assets . . 284,136 318,880
------------- -------------
Total . . . . . . . . . . . $4,524,660 $4,702,236
============= =============
CAPITALIZATION AND LIABILITIES
Capitalization
Common equity . . . . . . . . $1,449,526 $1,516,240
Preferred stock not subject to
mandatory redemption . . . . . . 93,493 93,493
Preferred stock subject to
mandatory redemption . . . . . . 25,000 25,000
Long-term debt . . . . . . . . 1,370,227 1,411,948
------------- -------------
Total capitalization . . . . . 2,938,246 3,046,681
------------- -------------
Current liabilities
Short-term borrowings . . . . . . 70,000 131,197
Long-term debt
redeemable within one year . . . . 88,000 88,000
Current portion of long-term debt . . 100,488 76,161
Accounts payable . . . . . . . 116,576 166,622
Dividends payable . . . . . . . 46,175 44,962
Taxes accrued . . . . . . . . 68,274 36,830
Interest accrued . . . . . . . 19,944 20,396
Regulatory balancing accounts
overcollected -- net . . . . . . 39,686 33,179
Other . . . . . . . . . . . 112,869 104,353
------------- -------------
Total current liabilities . . . . 662,012 701,700
------------- -------------
Customer advances for construction . . 39,523 41,729
Accumulated deferred income taxes--net. 497,541 520,076
Accumulated deferred investment
tax credits . . . . . . . . . 111,610 114,159
Deferred credits and other liabilities 275,728 277,891
------------- -------------
Total $4,524,660 $4,702,236
============= =============
See notes to consolidated financial statements.
4
SAN DIEGO GAS & ELECTRIC COMPANY
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In thousands of dollars)
Six Months Ended
June 30,
1994 1993
---------- ----------
(Unaudited)
Cash Flows From Operating Activities
Net Income . . . . . . . . . . . . $26,577 $102,806
Adjustments to reconcile net income to
net cash provided by operating activities
Writedown of intangibles . . . . . . . 59,116 --
Writedown of real estate . . . . . . . 25,000 --
Depreciation and decommissioning . . . . 131,173 122,315
Amortization of deferred charges
and other assets . . . . . . . . . 6,704 2,040
Amortization of deferred credits
and other liabilities. . . . . . . . (16,149) (6,100)
Allowance for equity funds
used during construction. . . . . . . (4,840) (10,076)
Deferred income taxes
and investment tax credits . . . . . . (13,569) (20,869)
Other--net . . . . . . . . . . . 36,540 2,050
Changes in working capital components:
Accounts and notes receivable . . . . . 17,715 (6,077)
Regulatory balancing accounts . . . . . 6,507 672
Inventories . . . . . . . . . . . (9,164) (14,488)
Other current assets . . . . . . . . 2,827 2,984
Accrued interest and taxes . . . . . . 31,679 50,941
Accounts payable
and other current liabilities . . . . . (41,530) (3,712)
---------- ----------
Net cash provided by operating activities 258,586 222,486
---------- ----------
Cash Flows From Financing Activities
Dividends paid . . . . . . . . . . (91,140) (88,231)
Short-term borrowings--net. . . . . . . (61,197) (45,812)
Issuances of long-term debt . . . . . . -- 248,012
Repayment of long-term debt . . . . . . (18,141) (316,147)
Sale (redemption) of common stock . . . . (938) 25,171
Redemption of preferred stock . . . . . -- (170)
---------- ----------
Net cash used by financing activities . . (171,416) (177,177)
---------- ----------
Cash Flows From Investing Activities
Utility construction expenditures . . . . (134,690) (127,224)
Withdrawals from construction
trust funds - net . . . . . . . . . 58,042 96,855
Contributions to decommissioning funds . . (11,016) (11,016)
Other--net . . . . . . . . . . . . (2,802) (3,366)
---------- ----------
Net cash used by investing activities . . (90,466) (44,751)
---------- ----------
Net increase (decrease) . . . . . . . . (3,296) 558
Cash and temporary investments,
beginning of period . . . . . . . . . 17,450 11,079
---------- ----------
Cash and temporary investments,
end of period . . . . . . . . . . . $14,154 $11,637
========== ==========
Supplemental Disclosures of Cash Flow Information
Income tax payments . . . . . . . . . $39,041 $40,434
========== ==========
Interest payments,
net of amounts capitalized . . . . . . $50,185 $55,881
========== ==========
Supplemental Schedule of Noncash Investing and
Financing Activities
Real estate investments acquired . . . . $5,586 $41,326
Cash paid . . . . . . . . . . . (52) (150)
---------- ----------
Liabilities assumed . . . . . . . . $5,534 $41,176
========== ==========
See notes to consolidated financial statements.
5
DIEGO GAS & ELECTRIC COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. GENERAL
SDG&E believes 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. Certain prior year amounts have been reclassified
for comparability.
SDG&E's significant accounting policies are described in the notes
to consolidated financial statements in its 1993 Annual Report to
Shareholders. SDG&E follows the same accounting policies for interim
reporting purposes.
This quarterly report should be read in conjunction with SDG&E's 1993
Annual Report on Form 10-K and its Quarterly Report on Form 10-Q for
the three months ended March 31, 1994. The consolidated financial
statements and Management's Discussion & Analysis of Financial
Condition and Results of Operations included in SDG&E's 1993 Annual
Report to Shareholders were incorporated by reference into SDG&E's
1993 Annual Report on Form 10-K and filed as an exhibit thereto.
2. MATERIAL CONTINGENCIES
INVESTMENT IN WAHLCO ENVIRONMENTAL SYSTEMS, INC.
SDG&E's investment in and advances to Wahlco aggregate $30 million
at June 30, 1994 after the writedown of Wahlco's goodwill and other
assets as described below and in Note 3. At June 30, 1994, Wahlco
had consolidated net assets of $10 million. During the years ended
December 31, 1991, 1992 and 1993, Wahlco's net income (loss) was $12
million, ($13 million) and ($11 million). During those years Wahlco's
cash flow provided by (used in) operations was $7 million, ($7
million) and ($12 million). For the six months ended June 30, 1994
Wahlco had a net loss but its operations provided a positive cash
flow.
Historically, Wahlco's primary and most profitable product line has
been flue gas conditioning equipment, which is sold to utilities with
coal-fired generating plants. Since the passage of the 1990 Clean Air
Act Amendments, Wahlco's prospects for future profitability have been
significantly associated with the size and timing of flue gas
conditioning equipment orders from utilities responding to that
legislation. Phase I of that legislation requires certain utilities
to submit compliance plans to the Environmental Protection Agency by
February 28, 1993 and to be in compliance by January 1, 1995. Phase
II requires the remaining utilities with coal-fired generation to be
in compliance by January 1, 2000.
Thus far, sales of and orders for flue gas conditioning equipment
(Wahlco's primary and most profitable product line) have not reached
anticipated levels in the United States as a result of many
companies' delaying decisions on how to comply with the Clean Air
Act. In late 1993 Wahlco recorded a restructuring charge to reflect
the planned relocation of Wahlco's manufacturing operations in Canada
and West Virginia to its other U.S. facilities. Wahlco faces
increasing competition from the availability of federal pollution
credits; aggressive pricing strategies by competitors; alternative
methods, such as fuel blending; and other options. This trend has
continued through the second quarter of 1994. In response to the
effect of poor market conditions on its operations, Wahlco has
reduced the number of employees by one-third and reduced its
manufacturing square footage by about one-half. SDG&E continues to
consider alternative strategies relative to its investment in Wahlco.
Continued operating losses or the implementation of other strategies
could lead to the further writeoff of a significant portion of
SDG&E's remaining investment in Wahlco, resulting in a further
adverse effect on SDG&E's earnings.
6
SAN DIEGO GAS & ELECTRIC COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SAN ONOFRE NUCLEAR GENERATING STATION UNITS 2 & 3
The CPUC's Division of Ratepayer Advocates' March 1994 report on
Southern California Edison's 1995 General Rate Case proceeding
suggested that the cost of continuing to operate SONGS 2 & 3 would
be more expensive than alternative resources and that the units
should be shut down by 1998. As an alternative recommendation, the
DRA proposed a performance-based pricing mechanism that would tie
recovery of the cost of operating the SONGS units to their
performance. In addition, the CPUC's proposal to restructure the
electric utility industry and allow competition has raised concerns
about SDG&E's recovery of its remaining investment in SONGS without
imposing large rate increases on customers.
NUCLEAR INSURANCE
Public liability claims that could arise from a nuclear incident are
limited by law to $9.1 billion for each licensed nuclear facility.
For this exposure, SDG&E and the co-owners of the San Onofre units
have purchased primary insurance of $200 million, the maximum amount
available. The remaining coverage is provided by secondary financial
protection required by the Nuclear Regulatory Commission and provides
for loss sharing among utilities owning nuclear reactors if a costly
accident occurs. SDG&E could be assessed retrospective premium
adjustments of up to $50 million in the event of a nuclear incident
involving any of the licensed, commercial reactors in the United
States, if the amount of the loss exceeds $200 million.
Insurance coverage is provided for up to $2.8 billion of property
damage and decontamination liability. Coverage is also provided for
the cost of replacement power, which includes indemnity payments for
up to two years, after a waiting period of 21 weeks. Coverage is
provided primarily through mutual insurance companies owned by
utilities with nuclear facilities. If losses at any of the nuclear
facilities covered by the risk-sharing arrangements were to exceed
the accumulated funds available for these insurance programs, SDG&E
could be assessed retrospective premium adjustments of up to $8
million.
3. WRITEDOWNS
For the quarter ended June 30, 1994 SDG&E recorded writedowns related
to the utility and its subsidiaries. The total amount of the
writedowns was $96 million before income taxes. $59 million
represents the writedown of goodwill and other intangible assets at
Wahlco Environmental Systems as a result of the depressed air
pollution-control market and increasing competition as described in
Note 2. SDG&E also recorded a $25 million writedown of various
commercial properties in Colorado Springs and in San Diego to reflect
continuing declines in commercial real estate values. As a result of
the California Public Utilities Commission's proposal to restructure
the electric utility industry and the uncertainty concerning the
impact of competition, SDG&E also recorded a $12 million writedown
of various non-earning utility assets, including costs associated
with its South Bay Repower project. (Additional information on the
CPUC's proposed industry restructuring, its potential impacts on
SDG&E and the South Bay Repower project is provided below under
"Regulatory Matters" in Management's Discussion & Analysis of
Financial Condition and Results of Operations.)
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
EARNINGS
Earnings per share for the three months ended June 30, 1994 were down
$0.66 from the same period in 1993. Earnings per share for the six
months ended June 30, 1994 were down $0.65 from the same period in
1993. The decreases in earnings result from the writedowns described
in Notes 2 and 3 of the notes to consolidated financial statements.
OPERATING REVENUE AND EXPENSE
Electric fuel expense and gas purchased for resale decreased for the
three months and six months ended June 30, 1994 from the
corresponding periods in 1993 primarily due to lower sales volumes.
Revenues from diversified operations for the three months ended June
30, 1994 decreased due to lower sales at Wahlco Environmental
Systems, resulting from the continuing poor market for air pollution
control products. Revenues from diversified operations for the six
months ended June 30, 1994 were up over the corresponding 1993
period, primarily due to Califia's increased leasing activities,
partially offset by lower sales at Wahlco Environmental Systems.
Additional information concerning Wahlco is described in Note 2 of
the notes to consolidated financial statements.
Other operating expenses increased for the three months and six
months ended June 30, 1994 primarily due to Califia's increased
leasing activities.
REGULATORY MATTERS:
CALIFORNIA PUBLIC UTILITIES COMMISSION'S PROPOSED INDUSTRY
RESTRUCTURING
On April 20, 1994 the CPUC announced its proposal to restructure
California's regulated electric utility industry to stimulate
competition and to lower rates. The proposed regulatory framework
would be phased in over a six-year period. Beginning in 1996, the
California utilities' largest customers (i.e. customers receiving
service at transmission voltages) would be allowed to purchase their
energy from either utility or nonutility suppliers. Other industrial
and commercial customers would have this choice by between 1997 and
1999 depending on their energy requirements. Residential customers
would have this choice by 2002. The utilities would continue to
provide transmission and distribution services to customers that
switch to other suppliers. The CPUC also proposed that the cost of
providing these services and the cost of serving remaining utility
customers would be recovered through a performance-based ratemaking
process, replacing traditional cost-of-service ratemaking.
(Additional information on performance-based ratemaking is described
below under "Performance-Based Ratemaking Base Rate Proposal.")
On June 14 and 15, 1994 the CPUC held a full-panel hearing to address
comments on its proposal from the six California investor-owned
utilities and several others. SDG&E proposed a multi-step process for
the transition to a competitive market for all customers, including:
the establishment of a 10-year schedule for the transition to
competition that would allow recovery of the above-market cost of
existing generating plants, including SONGS, without a significant
adverse impact on shareholders or customers; the separation of the
fossil-fuel generation business from other utility operations,
including the transmission and distribution business, under a utility
holding company structure; the renegotiation of long-term purchased
power contracts, including contracts with cogenerators, to lower the
cost of contracts to market price, but also allow the recovery of any
excess contract costs that have not been recovered after the 10-year
transition period by allocating these costs to all customers as a
fixed component of distribution charges; the development of a fully
competitive, pool-based wholesale market with open access to the
transmission system for all power generators; the replacement of the
Biennial Resource Plan Update process (which requires utilities to
make long-term commitments for future capacity at above-market costs)
with short-term resource procurement, to lower the cost of electric
service to California energy customers; and, if beneficial to
customers after the above steps are implemented, the establishment
of direct access to other suppliers for all customers at the same
time, beginning in 2005, rather than the phase-in proposed by the
CPUC.
8
Some of the comments from others cautioned that the CPUC's proposed
transition to competition would be too rapid and result in large
transition costs (e.g. the writedown of utilities' assets to market
value). Both the Federal Energy Regulatory Commission and the
California legislature have raised the issue of whether the CPUC has
the authority to unilaterally change the way rates are determined and
power is sold, since several California statutes would need to be
changed to accommodate the proposal, and since the FERC would have
jurisdiction over interstate power sales involving California's
transmission network.
On July 1, 1994 the CPUC held a second full-panel hearing to discuss
the impact of industry restructuring on public policy objectives,
including economic development, demand-side management, low-emission
vehicles, renewable resources and other utility-subsidized social
programs. SDG&E commented that utilities can promote economic
development and business retention in California by lowering rates,
and that SDG&E's Performance-Based Ratemaking plans and SDG&E's
proposal for a fully competitive wholesale generation market would
help achieve this goal. SDG&E also commented that social programs
should continue; however, the programs' costs should be shared by all
electric consumers, including those purchasing their energy from
others; the benefits should justify the costs; and the programs
should not interfere with the functioning of the competitive market
or the utilities' participation in that market. On demand-side
management issues, SDG&E indicated that utilities should provide
leadership in DSM programs or else the DSM market will not progress;
utilities should continue to recover the cost of these programs from
customers and shareholder incentives should also continue; and that
the CPUC should evaluate DSM's cost effectiveness to determine
appropriate levels of spending for DSM. SDG&E also commented that
renewable resources are not cost-effective and that the CPUC should
identify their impact on electricity prices before requiring
consumers to pay for them.
A third full-panel hearing was held on August 4, 1994 to address the
role and structure of a competitive wholesale electric market in a
restructured industry. This hearing was a result of comments from
various groups on whether such a market should be developed before
allowing retail customers to have direct access to suppliers other
than the local utility.
SDG&E commented that it supports the implementation of a efficient
wholesale electricity market based on a non-discriminatory
competitive power pool. SDG&E proposed that the competitive market
should be developed by requiring all sellers of electricity to sell
to a wholesale pool operated by an independent company that would set
spot-market prices and dispatch electricity. All wholesale customers
would be given equal and simultaneous access to the pool. In
addition, the costs of social programs would be included in
customers' bills for transmission and distribution services. Utility
generating assets (power plants and cogeneration contracts) would be
separated from transmission and distribution assets (to avoid self-
dealing concerns), and utility customers would be served by the
distribution company. SDG&E believes that this plan would result in
the most efficient and non-discriminatory use of existing
transmission facilities and in lower electricity prices for all
electric customers in California.
SDG&E further commented that customers' direct access to suppliers
would not be necessary if an efficient wholesale market is
implemented. SDG&E believes that the CPUC's initial proposal for
direct access through "retail wheeling" would result in a few large
customers and suppliers reaping all of the benefits of reduced rates
while increasing the remaining customers' rates and compromising
environmental and public policy programs.
9
The CPUC has scheduled a fourth full-panel hearing for September 16,
1994 on the subject of customer choice through direct access, to
discuss whether direct access and retail competition is necessary for
the CPUC to achieve its industry restructuring objectives and how
such a market would be structured. The CPUC is expected to schedule
additional full-panel hearings to be held later in 1994 to discuss
various issues, including those concerning jurisdiction and
uneconomic assets. In addition, the CPUC has scheduled several
hearings throughout the state, inviting public participation on the
industry restructuring proposal.
Utility plant - net shown on the accompanying balance sheets includes
approximately $800 million related to generating facilities. In
addition, approximately $100 million of the various regulatory assets
included on the balance sheet apply to the generating portion of
SDG&E's operations. Recovery of these amounts is currently being
collected in electric rates over various periods of time and the CPUC
has stated that the recovery of remaining amounts will be provided
for in the new environment. However, if the CPUC proceeds with the
move to a competitive environment, the prices of competing suppliers
are as anticipated, and the regulatory process does not provide for
recovery (before or after the inception of the competitive
environment) of those costs that are in excess of what will otherwise
be recoverable via market-based pricing structures, SDG&E would have
to write off a significant portion of the generating facilities and
the related regulatory assets.
A CPUC decision setting forth policy conclusions is not expected
before late 1994. SDG&E cannot predict the impact of the CPUC's final
decision and the transition to a more competitive environment on
SDG&E's financial condition and results of operations.
PERFORMANCE-BASED RATEMAKING BASE RATE PROPOSAL
On August 3, 1994 the CPUC approved an Administrative Law Judge's
preliminary decision that recommended, with one minor modification,
an agreement among SDG&E, the CPUC's Division of Ratepayer Advocates
and the Federal Executive Agencies on the Base Rate component of
SDG&E's Performance-Based Ratemaking proposal. The ALJ's modification
adjusted the customer growth and productivity component of the
formula that determines the non-fuel portion of SDG&E's annual
electric revenue requirement. The final decision adopts SDG&E's
proposal as follows: SDG&E will forego its next General Rate Case,
which is scheduled for 1996, and implement the base rate mechanism
beginning in 1994 and ending in 1998. The base rate mechanism has
three components. The first is a formula similar to the current
attrition mechanism used to determine SDG&E's annual revenue
requirement for operating, maintenance and capital expenditures. This
replaces the annual operational attrition filing. The second
component is a set of indicators which set performance standards for
customer rates, employee safety, electric system reliability and
customer satisfaction. Each indicator specifies a range of possible
annual benefits and risks to shareholders. Annually, SDG&E could be
penalized up to $21 million should it fall below, or earn up to $19
million if it exceeds, all of the performance targets. The third
component is a revenue-sharing mechanism, which would set limits on
SDG&E's annual rate of return. The cost of capital proceeding will
remain in effect as the means of determining SDG&E's annual
authorized rate of return.
BIENNIAL RESOURCE PLAN UPDATE PROCEEDING
On April 20, 1994 the CPUC temporarily postponed further action on
the BRPU auctions to consider the initial comments on the CPUC's
proposed industry restructuring (discussed above). On June 22, 1994
the CPUC issued a decision ordering the utilities to proceed with the
auctions and awarding of contracts. The CPUC abandoned its earlier
proposal (issued March 16, 1994) to reduce the utilities' required
solicitation of BRPU capacity by 25 percent. As a result, SDG&E is
required to solicit bids for 491 mw of capacity. The decision caps
the BRPU contract payments at the lowest losing bid price, thereby
eliminating certain loopholes in the auction rules which would
otherwise result in significantly higher energy costs. The CPUC also
indicated that the parties should modify the contracts' terms if they
become uneconomic in the future.
10
On July 25, 1994 SDG&E filed an Application for Rehearing of the
CPUC's June 22 decision requesting inclusion of a specific provision
in the BRPU contracts that would allow for future renegotiation if
the contracts' underlying economic assumptions change as a result of
the CPUC's implementation of industry restructuring or other
circumstances. SDG&E also claimed that the CPUC's bidding rules will
result in payments that exceed the cost of other resources available
to SDG&E and, therefore, violate the Public Utility Regulatory Policy
Act and the Federal Energy Regulatory Commission's rules that require
prices to be based on all sources of energy available to the utility.
Southern California Edison also filed an Application for Rehearing
requesting that the CPUC cancel the solicitation process and issue
an immediate stay of the remaining BRPU schedule. Edison indicated
that the CPUC's mandated BRPU solicitation was unwise and unlawful
since Edison does not have a current need for additional capacity and
because of the uncertainty surrounding industry restructuring. Edison
also indicated that it would need to increase customer rates by
approximately one-third of a cent per kilowatt hour to recover the
cost of the BRPU power. Edison also requested that, if the BRPU is
not cancelled, the CPUC should affirm its practice of allowing
utilities to recover the cost of power purchased from cogenerators,
including the cost of BRPU power, regardless of industry
restructuring.
Pacific Gas & Electric filed a Petition for Modification of the
CPUC's BRPU decision requesting that the CPUC confirm that the
payments for the BRPU power be fully recoverable from customers, and
that any relief provided to Edison and SDG&E should also apply to
PG&E.
Unless the CPUC grants Edison's request for an immediate stay while
it considers these petitions, SDG&E must proceed in accordance with
the CPUC's decision for completion of the auction. Edison must first
complete its analysis of the transmission costs for BRPU energy that
would be directed through Edison's system to SDG&E. Edison's
analysis is expected in September 1994. The decision requires SDG&E
to announce the preliminary rankings within 30 days after receiving
Edison's studies and to publish the final winning bids 30 days later.
The CPUC's decision also stated that the parties have 180 days after
the announcement of the final auction winners in which to execute
contracts and submit them for CPUC approval.
Purchases of BRPU energy would begin in 1997 and 1998; however, the
CPUC's decision permits winners to delay their in-service dates by
one year. Based on the prices in the preliminary ranking, SDG&E
estimates that the cost of BRPU energy will exceed lower-cost
resources by at least $58 million annually, and to recover these
costs, SDG&E would require an increase in customer rates of
approximately one-half of a cent per kilowatt hour. SDG&E cannot
predict the impact of the CPUC's final decision and the transition
to a more competitive environment on SDG&E's financial condition and
results of operations.
SOUTH BAY REPOWER PROJECT
On May 4, 1994 the CPUC approved SDG&E's request to withdraw its
application for a Certificate of Public Convenience and Necessity for
the proposed 500-mw South Bay Repower project. If SDG&E refiles the
application later, the CPUC will require SDG&E to comply with certain
conditions which would allow sufficient time for the CPUC and other
parties to evaluate the application and provide other potential
suppliers the opportunity to submit competing proposals.
On June 9, 1994 the California Energy Commission also approved
SDG&E's request to withdraw its application for certification of the
South Bay Repower, terminating further regulatory review of the
project. SDG&E indicated that the long-term commitment needed for
this project would create significant risk, given the uncertainty of
the impact of competition resulting from the CPUC's proposed utility
industry restructuring. Additional information concerning the South
Bay Repower project is discussed in Note 3 of the notes to
consolidated financial statements.
11
1995 COST OF CAPITAL APPLICATION
On May 9, 1994 SDG&E filed its 1995 Cost of Capital application,
requesting a $44 million increase in electric and gas rates. SDG&E
is requesting a return on equity of 12.45 percent for an overall rate
of return of 9.95 percent and a $44 million increase in electric and
gas rates. SDG&E's 1994 authorized return on equity and rate of
return are 10.85 percent and 9.03 percent, respectively. The
requested increase reflects the higher cost of debt and the higher
risk associated with the CPUC's proposed industry restructuring.
(Additional information on industry restructuring is described under
"California Public Utilities Commission's Proposed Industry
Restructuring.") On August 8, 1994 the CPUC's Division of Ratepayer
Advocates issued its report recommending a return on equity of 11.15
percent for an overall rate of return 9.31 percent and a $12 million
increase in electric and gas rates. The DRA indicated that while
industry restructuring would not immediately impact the utility
industry, SDG&E was better positioned than the other utilities for
the transition to competition, and therefore, a higher return was not
warranted. A CPUC decision is expected by year end. The rates would
be effective January 1, 1995.
ENERGY COST ADJUSTMENT CLAUSE PROCEEDING
On May 27, 1994 the Division of Ratepayer Advocates issued its report
on SDG&E's 1993 Energy Cost Adjustment Clause reasonableness review
for the year ended July 31, 1993. The DRA generally found SDG&E's
expenses and operations reasonable. A CPUC decision is expected in
the fourth quarter.
HAZARDOUS WASTE COLLABORATIVE
On May 4, 1994 the CPUC issued its decision on the Hazardous Waste
Collaborative, approving a mechanism for utilities to recover their
hazardous waste costs, including those related to Superfund sites or
similar sites requiring cleanup. Basically, the decision allows
utilities to recover 90 percent of their cleanup costs and related
third party litigation costs and 70 percent of the related insurance
litigation expenses.
OTHER OPERATING HIGHLIGHTS:
COGENERATION
On July 20, 1994 SDG&E entered into an agreement to terminate its
long-term power-purchase agreement with Bayside Cogeneration, Limited
Partnership, owners of a 50-mw cogeneration project proposed for
development in San Diego. SDG&E estimates that the termination of the
agreement will result in significant savings to SDG&E's customers
over the life of the contract. SDG&E will file for CPUC approval of
the contract termination agreement and payment. If the CPUC does not
approve the termination agreement and payment, then SDG&E will be
liable for Bayside's incremental cost of obtaining new financing to
replace the financing that Bayside had previously arranged for the
project.
12
LIQUIDITY AND CAPITAL RESOURCES:
Sources of cash for 1994 through 1998 are expected to consist of
income from operations and issuances of stock and debt. Cash
requirements for 1994 through 1998 include the construction program
and retirements of long-term debt. SDG&E conducts a continuing
review of its construction, investment and financing programs. They
are revised in response to changes in competition, customer growth,
inflation, customer rates, the cost of capital, and environmental and
regulatory requirements.
SDG&E anticipates that it will continue to have short-term borrowings
in 1994 due to construction expenditures' continuing to exceed the
amount of available funds generated internally. SDG&E also plans to
issue up to $65 million of preferred securities in 1994.
SDG&E's employee savings and common stock investment plans permit
SDG&E to issue common stock or to purchase it on the open market.
Currently, SDG&E is purchasing the stock on the open market.
SDG&E maintains its utility capital structure to obtain long-term
financing at the lowest possible rates. The following table lists
key financial ratios for SDG&E's utility operations. The capital
structure at December 31, 1993 is shown net of construction funds
held by trustee:
June 30, December 31,
1994 1993
or the twelve or the year
months then ended then ended
Pretax interest coverage 4.9X 4.7X
Internal cash generation 73% 78%
Construction
expenditures as a percent of
capitalization 12.4% 12.0%
Capital structure:
Common equity 46% 47%
Preferred stock 4% 4%
Debt and leases 50% 49%
Besides the effects of items discussed in the preceding pages, the
only significant change in cash flows for the six months ended June
30, 1994 compared to the corresponding 1993 period was related to the
change in accounts payable and other current liabilities due to lower
accruals for construction activity and for employee compensation at
June 30, 1994.
Construction expenditures were $354 million in 1993 and are expected
to be approximately $260 million in 1994. The level of expenditures
in the next few years will depend heavily on the CPUC's proposed
industry restructuring (as described in "Regulatory Matters" above),
the timing of expenditures to comply with air emission reduction and
other environmental requirements, and SDG&E's proposal to transport
natural gas to Mexico. (Additional information concerning SDG&E's
proposal to transport gas to Mexico is provided in SDG&E's 1993
Annual on Form 10-K.)
13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no significant subsequent developments in the Century
Power, American Trails, Public Service Company of New Mexico, North
City West and MTDB proceedings. Background information concerning
these and the following proceedings is contained in SDG&E's 1993
Annual Report on Form 10-K and in its March 31, 1994 Quarterly Report
on Form 10-Q.
Subsidiary Shareholder Litigation:
On May 10, 1994 the court approved the settlement and the complaint
was dismissed with prejudice. No plaintiff class members objected
or opted out of the settlement.
Canadian Natural Gas Litigation:
On April 25, 1994 the court denied the motions to dismiss SDG&E's
complaint by three of the defendants (Husky Oil, Canadian Hunter and
Summit Resources). These motions were based on jurisdictional
grounds. All of the defendants have filed answers to SDG&E's
complaint. Two of the defendants, Bow Valley and Husky Oil, filed
claims on June 12, 1994 and June 29, 1994 respectively, against SDG&E
with the Queen's Bench in Alberta, Canada, seeking a declaration that
the defendant is entitled to damages, or in the alternative, that it
may terminate its respective natural gas supply contract with SDG&E.
SDG&E cannot predict the ultimate outcome of these proceedings.
McCartin Litigation:
On May 13, 1994 the jury returned a verdict in favor of SDG&E on all
of the plaintiffs' claims. The jury found that SDG&E's power lines
did not diminish the value of the plaintiffs properties. On May 16,
1994 the judge ratified the jury's verdict and on June 17, 1994 the
judge signed the final judgments in SDG&E's favor. The time has
expired for the plaintiffs to request a new trial, but the plaintiffs
may appeal the trial court's decision. SDG&E cannot predict the
ultimate outcome of this proceeding.
Covalt Litigation:
On July 15, 1994 SDG&E petitioned the California Court of Appeal to
review the ruling of an Orange County Superior Court judge who
recently denied SDG&E's demurrer to the Covalt complaint. The Covalt
lawsuit involves the same lawyers, allegations and neighborhood as
the McCartin lawsuit; however, a different judge will be presiding.
On July 21, 1994 the Court of Appeal issued an order that SDG&E's
petition "appears to have merit" and directed the plaintiffs to file
an opposition by August 8, 1994. Soon thereafter, the Court will
decide whether to address the merits of SDG&E's petition. SDG&E
cannot predict the ultimate outcome of this proceeding.
Blackburn v. Watt Litigation:
On May 20, 1994 the court granted SDG&E's motion for summary judgment
on one of the cross-complaints filed against it. On May 25, 1994
SDG&E was dismissed as a party to the remaining cross-complaint.
14
Graybill Litigation:
A comprehensive and confidential settlement between all of the
parties, including SDG&E, was reached on June 14, 1994. The
settlement amount paid by SDG&E did not have a material adverse
effect on its net income. Pursuant to the settlement agreement, the
complaint and all related cross-actions against SDG&E were dismissed
with prejudice.
Transphase Systems Litigation:
On May 12, 1994 the Ninth Circuit Court of Appeal denied the appeal
by Transphase Systems of the District Court's dismissal of its
complaint against SDG&E. SDG&E cannot predict the ultimate outcome
of this proceeding.
James Litigation:
On July 12, 1994 Glen James filed a complaint in the United States
District Court for the Southern District of California against
Southern California Edison Company, SDG&E and Combustion Engineering.
The allegations in the complaint are substantially identical to those
contained in the complaint of R.C. Tang filed against the above-named
defendants in 1993. The complaint alleges that the plaintiff was
damaged by the emission of radiation while serving as an electrical
designer and engineer for outside contractors performing services at
the San Onofre Nuclear Generating Station intermittently between 1982
and 1988. The plaintiff has asked for general compensatory damages
and punitive damages. The defendants believe that the allegations in
this complaint are without merit and intend to defend this lawsuit
vigorously. SDG&E is unable to predict the ultimate outcome of this
proceeding.
Yuma Cogeneration Litigation:
On June 6, 1994 SDG&E filed a complaint in the Federal District Court
for the Southern District of California against Yuma Cogeneration
Associates (YCA) and its affiliated owners (California Energy
Company, Inc., California Energy Development Corporation and
California Energy Yuma Corporation) for breach of contract,
rescission, fraud, misrepresentation, and breach of the covenant of
good faith and fair dealing. SDG&E and YCA are parties to a power-
purchase agreement under which SDG&E agreed to purchase 50 mw of firm
capacity from a facility identified in the contract as a 53-mw
qualifying cogeneration facility. YCA constructed a 70-mw facility
rather than the 53-mw facility provided for under the contract.
SDG&E alleged that by building the larger plant, YCA breached the
terms of the power-purchase contract. SDG&E is seeking unspecified
compensatory damages and punitive damages arising out of YCA's fraud
and breach of the contract. YCA filed a motion to dismiss on August
1, 1994. SDG&E's response is due September 15, 1994 and a hearing on
SDG&E's response is scheduled for September 28, 1994. SDG&E is unable
to predict the ultimate outcome of this proceeding.
15
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 as required under SDG&E's August 1993
registration of 5,000,000 shares of Preference Stock (Cumulative).
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed on July 5, 1994 announcing a
series of writedowns related to the utility and its subsidiaries for
the second quarter of 1994, and announcing the California Public
Utilities Commission Administrative Law Judge's preliminary decision
approving the Base Rates component of SDG&E's Performance-Based
Ratemaking Plans.
16
SIGNATURE
Pursuant to the requirements 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.
SAN DIEGO GAS & ELECTRIC COMPANY
(Registrant)
August 10, 1994 By /s/ F. H. Ault
---------------- --------------------------------
Date (Signature)
F. H. Ault
Vice President and Controller
17
EXHIBIT 12.1
SAN DIEGO GAS & ELECTRIC COMPANY
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGE
AND PREFERRED STOCK DIVIDEND
Six Month
Ended
1989 1990 1991 1992 1993 06/30/94
---------- ---------- ---------- ---------- ---------- -----------
(Unaudited
Fixed Charges:
Interest:
Long-Term Debt $ 87,962 $ 97,894 $ 98,802 $100,776 $ 93,402 $ 45,504
Short-Term Debt 13,984 12,301 8,234 6,242 7,980 4,204
Amortization of Debt
Discount and Expense,
Less Premium 2,420 2,465 2,471 2,881 4,162 2,263
Interest Portion of
Annual Rentals 23,664 20,898 18,067 14,677 19,206 8,173
---------- ---------- ---------- ----------- ---------- ----------
Total Fixed
Charges 128,030 133,558 127,574 124,576 124,750 60,144
---------- ---------- ---------- ----------- ---------- ----------
Preferred Dividends
Requirements 11,202 10,863 10,535 9,600 8,565 3,831
Ratio of Income Before
Tax to Net Income 1.79480 1.75499 1.63017 1.72369 1.67794 3.3863
---------- ---------- ---------- ----------- ---------- ---------
Preferred Dividend
for Purpose of Ratio 20,105 19,064 17,174 16,547 14,372 12,97
---------- ---------- ---------- ---------- ---------- ---------
Total Fixed Charges
and Preferred
Dividends for
Purpose of Ratio $148,135 $152,622 $144,748 $141,123 $139,122 $ 73,11
========== ========== ========== ========== ========== =========
Earnings
Net Income (befor
preferred dividend
requirements) $179,434 $207,841 $208,060 $210,657 $218,715 $ 26,57
Add
Fixed Charge
(from above) 128,030 133,558 127,574 124,576 124,750 60,14
Less: Fixed Charge
Capitalized 3,481 3,306 2,907 2,242 5,789 2,48
Taxes on Income 142,614 156,917 131,114 152,451 148,275 63,41
---------- ---------- ---------- ---------- ---------- ----------
Total Earnings for
Purpose of Ratio $446,597 $495,010 $463,841 $485,442 $485,951 $147,65
========== ========== ========== ========== ========== ==========
Ratio of Earning
to Combined Fixed
Charges and Preferred
Dividends 3.01 3.24 3.20 3.44 3.49 2.0
========== ========== ========== ========== ========== =========