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 June 30, 2001
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Commission file number 1-3779
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SAN DIEGO GAS & ELECTRIC COMPANY
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(Exact name of registrant as specified in its charter)
California 95-1184800
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8326 Century Park Court, San Diego, California 92123
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(Address of principal executive offices)
(Zip Code)
(619) 696-2000
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(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
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Common stock outstanding: Wholly owned by Enova Corporation
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SAN DIEGO GAS & ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions
Three Months Ended
June 30,
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2001 2000
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Operating Revenues
Electric $ 432 $ 473
Natural gas 192 101
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Total operating revenues 624 574
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Operating Expenses
Electric fuel and net purchased power 203 264
Cost of natural gas distributed 143 55
Operation and maintenance 116 79
Depreciation and amortization 48 52
Other taxes and franchise payments 24 19
Income taxes 33 36
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Total operating expenses 567 505
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Operating Income 57 69
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Other Income and (Deductions)
Interest income 6 14
Allowance for equity funds used
during construction -- 2
Regulatory interest - net 1 (2)
Taxes on non-operating income (4) (2)
Other - net 1 (5)
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Total 4 7
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Income Before Interest Charges 61 76
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Interest Charges
Long-term debt 22 23
Other 3 13
Allowance for borrowed funds used
during construction (2) (1)
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Total 23 35
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Net Income 38 41
Preferred Dividend Requirements 1 1
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Earnings Applicable to Common Shares $ 37 $ 40
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See notes to Consolidated Financial Statements.
SAN DIEGO GAS & ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions
Six Months Ended
June 30,
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2001 2000
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Operating Revenues
Electric $1,236 $ 822
Natural gas 530 223
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Total operating revenues 1,766 1,045
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Operating Expenses
Electric fuel and net purchased power 788 397
Cost of natural gas distributed 388 102
Operation and maintenance 232 172
Depreciation and amortization 102 104
Other taxes and franchise payments 46 36
Income taxes 80 83
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Total operating expenses 1,636 894
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Operating Income 130 151
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Other Income and (Deductions)
Interest income 12 28
Allowance for equity funds used
during construction 1 3
Regulatory interest - net 6 (4)
Taxes on non-operating income (8) (8)
Other - net (1) (6)
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Total 10 13
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Income Before Interest Charges 140 164
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Interest Charges
Long-term debt 43 44
Other 8 26
Allowance for borrowed funds used
during construction (3) (1)
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Total 48 69
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Net Income 92 95
Preferred Dividend Requirements 3 3
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Earnings Applicable to Common Shares $ 89 $ 92
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See notes to Consolidated Financial Statements.
SAN DIEGO GAS & ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
Dollars in millions
Balance at
--------------------------
June 30, December 31,
2001 2000
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ASSETS
Utility plant - at original cost $4,859 $4,778
Accumulated depreciation and decommissioning (2,553) (2,502)
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Utility plant - net 2,306 2,276
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Nuclear decommissioning trust 538 543
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Current assets
Cash and cash equivalents 375 256
Accounts receivable - trade 258 233
Accounts receivable - other 12 20
Income taxes receivable -- 236
Regulatory assets arising from fixed price contracts
and other derivatives 21 --
Fixed price contracts and other derivatives 12 --
Inventories 66 50
Other 5 8
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Total current assets 749 803
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Other assets
Deferred taxes recoverable in rates 127 140
Regulatory assets 932 925
Fixed price contracts and other derivatives 89 --
Deferred charges and other 52 47
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Total other assets 1,200 1,112
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Total assets $4,793 $4,734
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See notes to Consolidated Financial Statements.
SAN DIEGO GAS & ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
Dollars in millions
Balance at
--------------------------
June 30, December 31,
2001 2000
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CAPITALIZATION AND LIABILITIES
Capitalization
Common stock $ 857 $ 857
Retained earnings 294 205
Accumulated other comprehensive income (loss) (3) (3)
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Total common equity 1,148 1,059
Preferred stock not subject to mandatory redemption 79 79
Preferred stock subject to mandatory redemption 25 25
Long-term debt 1,263 1,281
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Total capitalization 2,515 2,444
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Current liabilities
Accounts payable 174 407
Income taxes payable 20 --
Deferred income taxes 199 252
Regulatory balancing accounts - net 256 367
Customer refunds payable 162 --
Regulatory liabilities arising from fixed price
contracts and other derivatives 12 --
Fixed price contracts and other derivatives 22 --
Current portion of long-term debt 93 66
Other 187 196
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Total current liabilities 1,125 1,288
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Deferred credits and other liabilities
Customer advances for construction 43 40
Deferred income taxes 569 502
Deferred investment tax credits 47 48
Regulatory liabilities arising from fixed price
contracts and other derivatives 89 --
Deferred credits and other liabilities 405 412
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Total deferred credits and other liabilities 1,153 1,002
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Contingencies and commitments (Note 2)
Total liabilities and shareholders' equity $4,793 $4,734
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See notes to Consolidated Financial Statements.
SAN DIEGO GAS & ELECTRIC COMPANY AND SUBSIDIARY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
Dollars in millions
Six Months Ended
June 30,
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2001 2000
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Cash Flows from Operating Activities
Net income $ 92 $ 95
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 102 104
Deferred income taxes and investment tax credits 26 9
Non-cash rate reduction bond expense 34 11
Other - net (144) (16)
Net changes in other working capital components 129 132
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Net cash provided by operating activities 239 335
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Cash Flows from Investing Activities
Capital expenditures (138) (130)
Loan repaid by affiliate 19 16
Contributions to decommissioning funds (2) (2)
Other - net (5) --
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Net cash used in investing activities (126) (116)
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Cash Flows from Financing Activities
Dividends paid (3) (203)
Issuance of long-term debt 93 4
Repayment of long-term debt (84) (49)
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Net cash provided by (used in) financing
activities 6 (248)
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Increase (decrease) in cash and cash equivalents 119 (29)
Cash and cash equivalents, January 1 256 337
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Cash and cash equivalents, June 30 $ 375 $ 308
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Income tax payments (refunds) - net $ (191) $ 8
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Interest payments, net of amounts capitalized $ 44 $ 69
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See notes to Consolidated Financial Statements.
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 Quarterly Report 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 No.
71, "Accounting for the Effects of Certain Types of Regulation" (SFAS
No. 71).
2. MATERIAL CONTINGENCIES
ELECTRIC INDUSTRY RESTRUCTURING
The restructuring of California's electric utility industry
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 the 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, as amended,
under which 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, future 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. These increases are not expected to significantly affect SDG&E's
or Sempra Energy's liquidity. 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.
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 summarized 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 approximately $750
million (the last reported balance at the time of the MOU discussion)
of 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 SDG&E's and SoCalGas' revised base rates
would be delayed to 2004 from 2003.
- -- 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, plus the discharge or assumption of related
long-term debt (purchase price of approximately $1.2 billion).
Implementation of this element of the MOU would require enabling
legislation as well as approval by the Federal Energy Regulatory
Commission (FERC). 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.
Governor Davis recently stated that, if a contemplated purchase of
Southern California Edison's transmission system by the State of
California is not approved by the state legislature, the purchase of
SDG&E's transmission assets contemplated by the MOU may not be
pursued.
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 January 1,
2003 or a date determined by the DWR upon 180 days prior written
notice, but not before at least one of the other two major
California-based investor-owned electric utilities has resumed
procurement of its residual net short and certain CPUC approvals,
including adoption of a satisfactory procurement cost recovery
mechanism, have occurred. These conditions are intended to assure
SDG&E's timely recovery of costs incurred in resuming power
procurement for its customers.
On August 2, 2001, the CPUC approved a reduction of the rate ceiling
balancing account by the application thereto of overcollections in
certain other balancing accounts. The amount of the reduction depends
on balances in those other accounts, but is expected to be
approximately $70 million. On that date the CPUC also targeted all
other components for resolution at its meetings on or before October
25, 2001.
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. A pending case before the CPUC would, if
approved, establish rate increases for SDG&E's electric customers in
an average amount of approximately 3 cents/kWh in order to provide
sufficient revenues for the collection of the DWR revenue
requirement. Residential customers whose electric power consumption
does not exceed 130 percent of baseline quantities, as well as
certain low income and medical customers, would be exempt from the
increases. A CPUC decision is expected during the third quarter of
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. This law is not expected to add to
the undercollection since the purchases for these customers are
covered by the agreement between SDG&E and the DWR.
On June 18, 2001, the 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 new order expands 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. Various observers have responded that this
proposal will be ineffective since, among other things, it does not
cover power brokers and marketers, and the resultant price will still
be relatively high.
NATURAL GAS INDUSTRY RESTRUCTURING
The Company's 2000 annual report discusses various proposals and
actions related to this topic. As discussed therein, no significant
impacts on the Company are expected when the various issues are
finalized. This case is currently being held by the CPUC
indefinitely.
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, which could include
an additional assessment on all licensed reactor operators.
Insurance coverage is provided for up to $2.75 billion of property
damage and decontamination liability. Coverage is also provided for
the cost of replacement power, which includes indemnity payments for
up to three years 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 $3.4
million.
LITIGATION
A 2000 lawsuit, which seeks class-action certification, alleges 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.
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 Six-month
periods ended periods ended
June 30, June 30,
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(Dollars in millions) 2001 2000 2001 2000
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Net income $ 38 $ 41 $ 92 $ 95
Minimum pension liability
adjustments -- -- -- 2
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Comprehensive income $ 38 $ 41 $ 92 $ 97
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4. FINANCIAL INSTRUMENTS
Adoption of SFAS 133
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133 "Accounting for Derivative
Instruments and Hedging Activities" as amended by SFAS No. 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.
On January 1, 2001, $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 the Company's
hedging activities.
Market Risk
The Company's policy is to use derivative financial instruments to
manage its 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 delivered to their
customers.
Due to the regulatory environment in which SDG&E operates, regulatory
assets and liabilities are established to the extent that derivative
gains and losses are recoverable or payable through future rates. As
such, SDG&E does not apply hedge accounting to energy derivatives.
However, such contracts continue to be effective in achieving the
risk management objectives for which they were intended.
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 June 30, 2001, SDG&E had one
interest-rate swap agreement: a floating-to-fixed-rate swap
associated with $45 million of variable-rate bonds maturing in 2002.
Although this financial instrument did 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 June 30, 2001, $12 million in current assets, $89 million in
noncurrent assets and $22 million in current 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, $21 million in
current regulatory assets, $12 million in current regulatory
liabilities and $89 million in noncurrent regulatory liabilities were
recorded in the Consolidated Balance Sheet as of June 30, 2001. For
the six-month period ended June 30, 2001, $2 million in other
operating losses was recorded in the Consolidated Statement of
Income.
Fair Value
The fair value of the Company's derivative financial instruments
(fixed-priced contracts and other derivatives) is not materially
different from their carryings amounts. The fair values of fixed-
priced 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
including statements regarding SDG&E's ability to finance
undercollected costs on reasonable terms and retain its financial
strength, estimates of future accumulated undercollected costs, and
plans to obtain future financing. 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 (including those with
respect to the Memorandum of Understanding among Sempra Energy, SDG&E
and the DWR); 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.
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 have 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 earlier terminated 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. Continued DWR purchases of SDG&E's full net short position
or timely rate recovery of electricity procurement costs remain
necessary to continue obtaining financing and provide adequate
liquidity.
Cash and cash equivalents at June 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 six-month period ended June 30, 2001, the decrease in cash
flows from operations compared to the corresponding period in 2000
was primarily due to SDG&E's continuing undercollection of purchased-
power costs, as described in Note 2 of the notes to Consolidated
Financial Statements and the decrease in trade accounts payable due
to less purchased electricity, because of the DWR purchases partially
offset by an income tax refund received during the first quarter of
2001 (none received during the same period in 2000).
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures for property, plant and equipment are estimated
to be $400 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.
CASH FLOWS FROM FINANCING ACTIVITIES
For the six-month period ended June 30, 2001, cash flows from
financing activities increased from the corresponding period in 2000
due primarily to a decrease in common dividends paid during 2001.
Between January 24 and February 5, 2001, the Company drew down
substantially all ($250 million) of its available credit facilities
in order to enhance its liquidity in view of the current California
electric industry situation. In May 2001 SDG&E repaid its entire
balance.
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-interest-rate debt,
respectively. All other terms remain the same and the interest rate
may resume floating in the future at the Company's option.
RESULTS OF OPERATIONS
The Company's net income decreased for the three-month and six-month
periods ended June 30, 2001, compared to the same periods in 2000,
primarily due to increased operation and maintenance expense
resulting from greater customer service activities during the
California energy crisis. This was partially offset by 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.
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 six-month periods ended June 30,
2001 and 2000.
Electric Distribution and Transmission
(Volumes in millions of Kwhrs, dollars in millions)
2001 2000
------------------------------------------
Volumes Revenue Volumes Revenue
------------------------------------------
Residential 2,993 $ 405 3,130 $ 332
Commercial 2,961 462 2,913 274
Industrial 1,532 272 1,139 84
Direct access 1,032 36 1,744 59
Street and highway lighting 44 5 33 3
Off-system sales 952 214 253 11
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9,514 1,394 9,212 763
Balancing and other (158) 59
------------------------------------------
Total 9,514 $1,236 9,212 $ 822
------------------------------------------
Gas Sales, Transportation and Exchange
(Volumes in billion cubic feet, dollars in millions)
Gas Sales Transportation & Exchange Total
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Volumes Revenue Volumes Revenue Volumes Revenue
--------------------------------------------------------------------
2001:
Residential 21 $ 352 -- $ -- 21 $ 352
Commercial and industrial 11 173 10 10 21 183
Electric generation plants -- -- 39 11 39 11
--------------------------------------------------------------
32 $ 525 49 $ 21 81 546
Balancing accounts and other (16)
--------
Total $ 530
- -------------------------------------------------------------------------------------------
2000:
Residential 20 $ 148 -- $ -- 20 $ 148
Commercial and industrial 12 63 9 8 21 71
Utility electric generation -- -- 19 5 19 5
--------------------------------------------------------------
32 $ 211 28 $ 13 60 224
Balancing accounts and other ( 1)
--------
Total $ 223
- -------------------------------------------------------------------------------------------
The increase in electric revenues was primarily due to the increase
in electric commodity costs, which are passed on to customers without
markup, and increased off-system sales.
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.
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. 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 mechanism 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 are both due to be filed on December 21,
2001. However, under the MOU described in Note 2, both SoCalGas' and
SDG&E's PBR/COS cases would be delayed such that the resulting rates
would be effective in 2004 instead of 2003, if this portion of the
MOU is approved by the CPUC.
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 remain in effect for 2000 and 2001. SDG&E is
working on a petition to modify SDG&E's last cost of capital
proceeding which requires the 2002 application, to seek a delay in
the required filing due date due to the current uncertainty in
California's electricity market. SDG&E was granted an extension of
time to file its 2002 cost of capital application to 60 days after
the CPUC issues a decision on the petition to modify described above.
The electric-transmission cost of capital is determined under a
separate FERC proceeding.
RELATIONSHIP WITH NON-UTILITY SUBSIDIARIES
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.
NEW ACCOUNTING STANDARDS
Effective January 1, 2001, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 133 "Accounting for
Derivative Instruments and Hedging Activities" as amended by SFAS
No. 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 the Company's earnings.
For further information regarding the Company's implementation of
SFAS 133, see Note 4 above.
In July 2001 the Financial Accounting Standards Board 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 each period, 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. The effect of these standards on the
Company's Consolidated Financial Statements has not yet been
determined.
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 recent 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 quarter
of 2001, the gas hedging activity at SDG&E was sharply reduced and,
as of June 30, 2001, the VaR of the hedges was $0.75 million. 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 above-mentioned VaR amounts due to the offsetting regulatory
asset or liability also recorded by the Company.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except as otherwise described in this report, 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 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 March 31, 2001:
Current Report on Form 8-K filed June 19, 2001 announced the
Memorandum of Understanding with the State of California.
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: August 9, 2001 By: /s/ D.L. Reed
-----------------------------
D.L. Reed
President
3
1
21
EXHIBIT 12.1
SAN DIEGO GAS & ELECTRIC COMPANY
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
(Dollars in millions)
For the six
months ended
June 30,
1996 1997 1998 1999 2000 2001
-------- -------- -------- -------- -------- --------
Fixed Charges and Preferred
Stock Dividends:
Interest:
Long-Term Debt $ 76 $ 69 $ 55 $ 49 $50 $29
Rate Reduction Bonds -- -- 41 35 33 14
Short-Term Debt & Other 13 14 14 40 31 5
Amortization of Debt
Discount and Expense,
Less Premium 5 5 8 7 5 3
Interest Portion of
Annual Rentals 8 10 7 5 3 2
-------- -------- -------- -------- -------- --------
Total Fixed
Charges 102 98 125 136 122 53
-------- -------- -------- -------- -------- --------
Preferred Dividends
for Purpose of Ratio (1) 13 13 11 10 13 6
-------- -------- -------- -------- -------- --------
Total Fixed Charges
and Preferred Stock
Dividends For
Purpose of Ratio $115 $111 $136 $146 $135 $59
======== ======== ======== ======== ======== ========
Earnings:
Pretax income from
continuing operations $420 $457 $332 $325 $295 $180
Add:
Fixed charges
(from above) 102 98 125 136 122 53
Less: Fixed charges
capitalized 1 2 1 1 3 -
-------- -------- -------- -------- -------- --------
Total Earnings for
Purpose of Ratio $521 $553 $456 $460 $414 $233
======== ======== ======== ======== ======== ========
Ratio of Earnings
to Combined Fixed
Charges and Preferred
Stock Dividends 4.54 5.00 3.36 3.15 3.07 3.95
======== ======== ======== ======== ======== ========
(1) In computing this ratio, "Preferred dividends" represents the before-tax earnings necessary
to pay such dividends, computed at the effective tax rates for the applicable periods.
