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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
September 30, 1995
For the quarterly period ended...........................................
Or
[.....] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________________ to _______________________
Name of
Commission Registrant IRS Employer
File as specified State of Identification
Number in its charter Incorporation Number
- ---------- -------------- -------------- --------------
1-3779 SAN DIEGO GAS &
ELECTRIC COMPANY California 95-1184800
1-11439 SDO PARENT CO.,INC. California 33-0643023
101 ASH STREET, SAN DIEGO, CALIFORNIA 92101
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrants' telephone number, including area code. (619) 696-2000
---------------------------
No Change
- -------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes...X... No......
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock outstanding September 30, 1995
San Diego Gas & Electric Company 116,539,315
----------
SDO Parent Co., Inc. None
----------
SAN DIEGO GAS & ELECTRIC COMPANY
AND
SDO PARENT CO., INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1995
CONTENTS
Page No.
BACKGROUND INFORMATION - SDO PARENT CO., INC. . . . . . . . . . . . . . 3
PART I. FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . 3
SDO PARENT CO., INC. . . . . . . . . . . . . . . . . . . . . . . . . . 3
SAN DIEGO GAS & ELECTRIC COMPANY
Consolidated Statements of Income . . . . . . . . . . . . . 4
Consolidated Balance Sheets . . . . . . . . . . . . . . . . 6
Consolidated Statements of Cash Flows. . . . . . . . . . . . 7
Notes To Consolidated Financial Statements . . . . . . . . . 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 17
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . 17
Signature - San Diego Gas & Electric Company . . . . . . . . . . . . . 18
Signature - SDO Parent Co., Inc.. . . . . . . . . . . . . . . . . . . 19
2
BACKGROUND - SDO Parent Co., Inc.
SDO Parent Co., Inc., a California corporation, was formed by San
Diego Gas & Electric Company, a California corporation, for the
purpose of becoming the parent holding company for SDG&E and for
SDG&E's present direct subsidiaries. At the annual meeting of
SDG&E's shareholders on April 25, 1995, the merger transaction to
effect the holding company structure was approved. However,
completion of the merger is subject to SDG&E's receipt of certain
authorizations from the California Public Utilities Commission.
An application was filed with the CPUC on November 7, 1994.
At present, SDO Parent has no assets, no operations, and no
issued and outstanding stock. Although SDG&E will be the initial
holder of SDO Parent's securities prior to the merger, this step
in the holding company formation process is being held in
abeyance pending receipt of the authorizations.
The CPUC's Division of Ratepayer Advocates has recommended
against approval of the holding company or, in the alternative,
that approval include several conditions, some of which are
onerous. To date, the holding company proposal has been approved
by the Federal Energy Regulatory Commission, the Nuclear
Regulatory Commission and SDG&E shareholders. SDG&E anticipates
forming the holding company shortly after receiving final
approval from the CPUC, whose decision is expected before the end
of December 1995. For additional information see Note 2 of the
notes to consolidated financial statements. Upon receipt of the
authorizations, the merger will be effected and then-present
holders of SDG&E common stock will become the holders of SDO
Parent's common stock.
The financial position and results of operations of SDO Parent
had the merger occurred on or prior to September 30, 1995 would
be the same as reported for SDG&E in Parts 1 and 2 of this
Quarterly Report on Form 10-Q.
PART I - FINANCIAL INFORMATION - SDO Parent Co., Inc.
Part I - Financial Information - San Diego Gas & Electric Company
beginning on page 4 of this Quarterly Report on Form 10-Q is
incorporated herein by reference.
3
PART I - FINANCIAL INFORMATION
SAN DIEGO GAS & ELECTRIC COMPANY
STATEMENTS OF CONSOLIDATED INCOME
(In thousands except per share amounts)
Three Months Ended
September 30,
1995 1994
----------- -----------
(Unaudited)
Operating Revenues
Electric . . . . . . . . . . . . . . $ 396,526 $ 387,144
Gas . . . . . . . . . . . . . . . . . 68,574 75,261
Diversified operations . . . . . . . 13,589 14,270
----------- -----------
Total operating revenues . . . . . 478,689 476,675
----------- -----------
Operating Expenses
Electric fuel . . . . . . . . . . . . 31,151 42,311
Purchased power . . . . . . . . . . . 91,501 93,409
Gas purchased for resale . . . . . . 19,468 24,567
Maintenance . . . . . . . . . . . . . 18,486 15,400
Depreciation and decommissioning . . 68,645 65,631
Property and other taxes . . . . . . 11,514 11,221
General and administrative . . . . . 54,934 44,217
Other . . . . . . . . . . . . . . . . 51,528 52,834
Income taxes . . . . . . . . . . . . 41,160 42,771
----------- -----------
Total operating expenses . . . . . 388,387 392,361
----------- -----------
Operating Income . . . . . . . . . . . 90,302 84,314
----------- -----------
Other Income and (Deductions)
Allowance for equity funds used
during construction . . . . . . . . 1,434 1,196
Taxes on nonoperating income . . . . (2,127) (2,649)
Other - net . . . . . . . . . . . . . (409) 4,388
----------- -----------
Total other income and (deductions) (1,102) 2,935
----------- -----------
Income Before Interest Charges. . . . . 89,200 87,249
----------- -----------
Interest Charges
Long-term debt . . . . . . . . . . . 22,476 23,495
Short-term debt and other . . . . . . 5,534 3,922
Allowance for borrowed funds used
during construction . . . . . . . . (630) (342)
----------- -----------
Net interest charges . . . . . . . 27,380 27,075
----------- -----------
Income from Continuing Operations . . . 61,820 60,174
Discontinued Operations, Net
of Income Taxes . . . . . . . . . . . -- (385)
----------- -----------
Net Income (before preferred
dividend requirements) . . . . . . . . 61,820 59,789
Preferred Dividend Requirements . . . . 1,916 1,916
----------- -----------
Earnings Applicable
to Common Shares . . . . . . . . . . . $ 59,904 $ 57,873
=========== ===========
Average Common Shares Outstanding . . . 116,538 116,475
=========== ===========
Earnings Per Common Share - Continuing
Operations. . . . . . . . . . . . . . $ 0.51 $ 0.50
=========== ===========
Earnings Per Common Share . . . . . . . $ 0.51 $ 0.50
=========== ===========
Dividends Declared Per Common Share . . $ 0.39 $ 0.38
=========== ===========
See notes to consolidated financial statements.
4
SAN DIEGO GAS & ELECTRIC COMPANY
STATEMENTS OF CONSOLIDATED INCOME
(In thousands except per share amounts)
Nine Months Ended
September 30,
1995 1994
----------- -----------
(Unaudited)
Operating Revenues
Electric . . . . . . . . . . . . . . $1,130,530 $1,115,061
Gas . . . . . . . . . . . . . . . . . 229,897 252,371
Diversified operations . . . . . . . 41,456 41,272
----------- -----------
Total operating revenues . . . . . 1,401,883 1,408,704
----------- -----------
Operating Expenses
Electric fuel . . . . . . . . . . . . 75,480 110,677
Purchased power . . . . . . . . . . . 262,702 256,376
Gas purchased for resale . . . . . . 82,610 105,312
Maintenance . . . . . . . . . . . . . 55,194 47,970
Depreciation and decommissioning . . 208,354 194,698
Property and other taxes . . . . . . 34,193 33,717
General and administrative . . . . . 140,521 151,240
Other . . . . . . . . . . . . . . . . 156,011 155,560
Income taxes . . . . . . . . . . . . 123,373 120,949
----------- -----------
Total operating expenses . . . . . 1,138,438 1,176,499
----------- -----------
Operating Income . . . . . . . . . . . 263,445 232,205
----------- -----------
Other Income and (Deductions)
Writedown of real estate. . . . . . . - (25,000)
Allowance for equity funds used
during construction . . . . . . . . 4,447 6,036
Taxes on nonoperating income . . . . (950) 6,853
Other - net . . . . . . . . . . . . . (3,354) 4,047
----------- -----------
Total other income and (deductions) 143 (8,064)
----------- -----------
Income Before Interest Charges. . . . . 263,588 224,141
----------- -----------
Interest Charges
Long-term debt . . . . . . . . . . . 72,122 68,785
Short-term debt and other . . . . . . 14,425 10,174
Allowance for borrowed funds used
during construction . . . . . . . . (2,013) (2,580)
----------- -----------
Net interest charges . . . . . . . 84,534 76,379
----------- -----------
Income from Continuing Operations . . . 179,054 147,762
Discontinued Operations, Net
of Income Taxes . . . . . . . . . . . (6,168) (61,396)
----------- -----------
Net Income (before preferred
dividend requirements) . . . . . . . . 172,886 86,366
Preferred Dividend Requirements . . . . 5,747 5,747
----------- -----------
Earnings Applicable
to Common Shares . . . . . . . . . . . $ 167,139 $ 80,619
=========== ===========
Average Common Shares Outstanding . . . 116,535 116,480
=========== ===========
Earnings Per Common Share - Continuing
Operations. . . . . . . . . . . . . . $ 1.48 $ 1.22
=========== ===========
Earnings Per Common Share . . . . . . . $ 1.43 $ 0.69
=========== ===========
Dividends Declared Per Common Share . . $ 1.17 $ 1.14
=========== ===========
See notes to consolidated financial statements.
5
SAN DIEGO GAS & ELECTRIC COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
September 30, December 31,
1995 1994
------------ ------------
(Unaudited)
ASSETS
Utility plant - at original cost . . . . . . . . $5,468,196 $5,329,179
Accumulated depreciation and decommissioning . . (2,364,825) (2,180,087)
------------ ------------
Utility plant-net . . . . . . . . . . . . . . 3,103,371 3,149,092
------------ ------------
Investments and other property . . . . . . . . . 514,993 465,918
------------ ------------
Current assets
Cash and temporary investments . . . . . . . . 140,093 25,405
Accounts receivable . . . . . . . . . . . . . 190,542 187,988
Notes receivable . . . . . . . . . . . . . . . 33,194 31,806
Inventories . . . . . . . . . . . . . . . . . 73,001 75,607
Other . . . . . . . . . . . . . . . . . . . . 33,192 34,022
------------ ------------
Total current assets . . . . . . . . . . . 470,022 354,828
------------ ------------
Deferred taxes recoverable in rates . . . . . . 283,968 305,717
------------ ------------
Deferred charges and other assets . . . . . . . 333,441 322,881
------------ ------------
Total . . . . . . . . . . . . . . . . . . $4,705,795 $4,598,436
============ ============
CAPITALIZATION AND LIABILITIES
Capitalization
Common equity . . . . . . . . . . . . . . . . $1,505,881 $1,474,430
Preferred stock:
Not subject to mandatory redemption . . . . 93,475 93,493
Subject to mandatory redemption . . . . . . 25,000 25,000
Long-term debt . . . . . . . . . . . . . . . . 1,395,759 1,339,201
------------ ------------
Total capitalization . . . . . . . . . . . 3,020,115 2,932,124
------------ ------------
Current liabilities
Short-term borrowings . . . . . . . . . . . . - 89,325
Long-term debt redeemable within one year . . 115,000 115,000
Current portion of long-term debt . . . . . . 45,550 35,031
Accounts payable . . . . . . . . . . . . . . . 99,509 130,157
Dividends payable . . . . . . . . . . . . . . 47,365 46,200
Taxes accrued . . . . . . . . . . . . . . . . 48,721 5,519
Interest accrued . . . . . . . . . . . . . . . 25,770 23,372
Regulatory balancing accounts
overcollected-net. . . . . . . . . . . . . . 188,279 111,731
Other . . . . . . . . . . . . . . . . . . . . 121,089 113,815
------------ ------------
Total current liabilities . . . . . . . . 691,283 670,150
------------ ------------
Customer advances for construction . . . . . . . 35,250 36,250
------------ ------------
Accumulated deferred income taxes-net . . . . . 497,322 513,592
------------ ------------
Accumulated deferred investment tax credits . . 105,286 109,161
------------ ------------
Deferred credits and other liabilities . . . . . 356,539 337,159
------------ ------------
Total . . . . . . . . . . . . . . . . . . $4,705,795 $4,598,436
============ ============
See notes to consolidated financial statements.
6
SAN DIEGO GAS & ELECTRIC COMPANY
STATEMENTS OF CONSOLIDATED CASH FLOWS
( In thousands of dollars)
Nine Months Ended
September 30,
1995 1994
-------- -------
(Unaudited)
Cash Flows from Operating Activities
Income from Continuing Operations. . . . . . . . . . . . $179,054 $147,762
Adjustments to reconcile income from continuing
operations to net cash provided by operating activities
Writedown of real estate and other assets . . . . . . -- 37,000
Depreciation and decommissioning. . . . . . . . . . . 208,354 194,698
Amortization of deferred charges and other assets . . 10,350 9,647
Amortization of deferred credits
and other liabilities . . . . . . . . . . . . . . . (24,561) (22,622)
Allowance for equity funds used during construction . (4,447) (6,036)
Deferred income taxes and investment tax credits . . (6,598) (18,043)
Other-net . . . . . . . . . . . . . . . . . . . . . . 14,653 21,784
Changes in working capital components
Accounts and notes receivable . . . . . . . . . . . . (3,942) (12,648)
Regulatory balancing accounts . . . . . . . . . . . . 76,548 85,129
Inventories . . . . . . . . . . . . . . . . . . . . . 2,606 (11,189)
Other current assets. . . . . . . . . . . . . . . . . 830 1,267
Accrued interest and taxes . . . . . . . . . . . . . 44,081 51,059
Accounts payable and other current liabilities. . . . (23,374) (38,290)
Cash flows provided (used) by discontinued operations. . (168) 2,335
--------- ---------
Net cash provided by operating activities . . . . . 473,386 441,853
--------- ---------
Cash Flows from Financing Activities
Dividends paid. . . . . . . . . . . . . . . . . . . . (140,927) (137,315)
Short-term borrowings-net . . . . . . . . . . . . . . (89,325) (77,397)
Issuance of long-term debt. . . . . . . . . . . . . . 124,641 --
Repayment of long-term debt . . . . . . . . . . . . . (102,074) (24,507)
Redemption of common stock . . . . . . . . . . . . . (29) (929)
Redemption of preferred stock . . . . . . . . . . . . (18) --
--------- ---------
Net cash used by financing activities . . . . . . . (207,732) (240,148)
--------- ---------
Cash Flows from Investing Activities
Utility construction expenditures . . . . . . . . . . (146,569) (197,715)
Withdrawals from construction trust funds . . . . . . -- 58,042
Contributions to decommissioning funds . . . . . . . (16,527) (16,527)
Other-net . . . . . . . . . . . . . . . . . . . . . . 7,008 (2,662)
Discontinued operations . . . . . . . . . . . . . . . 5,122 (14,508)
--------- ---------
Net cash used by investing activities . . . . . . . (150,966) (173,370)
--------- ---------
Net increase . . . . . . . . . . . . . . . . . . . . . . . 114,688 28,335
Cash and temporary investments, beginning of period . . . 25,405 12,711
--------- ---------
Cash and temporary investments, end of period . . . . . . $140,093 $ 41,046
========= =========
Supplemental Disclosure of Cash Flow Information
Income tax payments . . . . . . . . . . . . . . . . . $ 97,960 $ 81,219
========= =========
Interest payments, net of amounts capitalized . . . . $ 82,136 $ 71,555
========= =========
Supplemental Schedule of Noncash Investing
and Financing Activities
Real estate investments . . . . . . . . . . . . . . . $ 32,553 $ 10,641
Cash paid . . . . . . . . . . . . . . . . . . . . . . (250) (52)
--------- ---------
Liabilities assumed . . . . . . . . . . . . . . . . . $ 32,303 $ 10,589
========= =========
See notes to consolidated financial statements.
7
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 1994 Annual
Report to Shareholders. SDG&E follows the same accounting
policies for interim reporting purposes.
This report should be read in conjunction with SDG&E's 1994
Annual Report on Form 10-K and its Quarterly Reports on Form 10-Q
for the three months ended March 31, 1995 and June 30, 1995. The
consolidated financial statements and Management's Discussion &
Analysis of Financial Condition and Results of Operations
included in SDG&E's 1994 Annual Report to Shareholders were
incorporated by reference into SDG&E's 1994 Annual Report on Form
10-K and filed as an exhibit thereto.
2. MATERIAL CONTINGENCIES
INDUSTRY RESTRUCTURING - CALIFORNIA PUBLIC UTILITIES COMMISSION
On May 24, 1995 the CPUC voted 3-1 approving a proposed plan for
restructuring California's electric industry with a wholesale
power pool to begin by January 1997. The plan would allow the
state's investor-owned utilities to remain in the business of
owning and operating power plants for utility-owned generation.
The pool, operated by an independent party, would provide for
economic dispatch of competing generation facilities based on
spot-market clearing prices similar to a commodities market.
After two years, if jurisdictional and market power issues are
resolved and transition cost recovery mechanisms are in place,
retail consumers would be able to buy electricity directly from
specific generators. The dissenting commissioner presented an
alternative plan calling for direct power sales to all customers,
including residential customers, by 1997.
The proposed majority plan supports the continued development of
performance-based ratemaking. In addition, the CPUC stated that
it is committed to industry restructuring in a manner that
"...does not compromise the financial integrity of the utilities
and continues to provide them with a reasonable opportunity to
earn a fair profit." On July 24, 1995 SDG&E filed comments in
support of the CPUC's majority plan. On September 11, 1995
Southern California Edison and a coalition of independent power
producers and large customers including the California
Manufacturers Association jointly filed a Memorandum of
Understanding as an alternative to the CPUC's majority proposal
for industry restructuring. The MOU calls for, among other
things, simultaneous operation of the power pool and direct
access no later than January 1, 1998; phase-in of direct access
over five years (including residential and small commercial
customers); honoring cogeneration contracts; developing a
competitive transition charge to cover stranded assets; and
separation of the independent system operator (where the state's
electricity will be scheduled and dispatched) from the functions
of the independent power pool (where the market transactions
occur). The MOU was the subject of CPUC full-panel hearings on
September 13 and 14, 1995. On October 2, 1995 SDG&E filed
comments with the CPUC supporting the main components of the MOU,
but questioning the feasibility of separating the power pool from
the system operator. SDG&E also commented that the proposal does
not ensure that the benefits of the pool will be distributed
equitably to all customers and may result in cost shifting and
inefficiencies.
On October 12, 1995 CPUC President Daniel Fessler requested the
California utilities to: 1) comment on a new CPUC proposal to
reduce commercial and residential electric rates by 10 percent
beginning on the date that the industry restructuring decision
becomes effective and subsequently freezing rates for the next
five years (due to recent voluntary rate reductions, SDG&E would
not be subject to the immediate 10 percent rate cut, but would be
subject to the 5-year rate freeze for rates that were in effect
on January 1
8
1995); 2) comment on a new CPUC proposal that the
utilities separate their generation, transmission and
distribution assets, and divide the generation assets into two or
three separate entities of which one or more would be spun off to
shareholders; and 3) provide additional justification for the
adoption of the MOU's proposal to separate the functions of the
power pool from the system operator. Commissioner Fessler
indicated that he does not currently favor this separation.
Fessler also indicated that the new proposals are intended to
alleviate concerns that only large industrial customers would
receive the benefits of industry restructuring or that a single
entity would control a significant portion of California's
generation resources. Comments are due by October 25, 1995. A
final CPUC policy decision is expected in December 1995.
SDG&E believes that there are no state or federal laws that need
to be changed in order for the CPUC's majority proposal to go
forward, although the California legislature does not agree. The
California legislature is considering the CPUC's proposal and may
hold additional hearings and/or issue its own restructuring
policy in early 1996.
On September 30, 1995 SDG&E had approximately $960 million of net
utility plant (including approximately $750 million of nuclear
facilities) and $60 million of deferred taxes and regulatory
assets (included in "Deferred Charges and Other Assets" on the
Consolidated Balance Sheets) relating to generating facilities
currently being recovered in rates over various periods of time.
In addition, SDG&E has long-term purchased-power commitments
totaling $3.8 billion with various utilities and other providers.
Further, the CPUC's December 1994 Biennial Resource Plan Update
decision could require SDG&E to contract for an additional 500
megawatts of power over 17 to 30-year terms at an estimated cost
of $4.8 billion beginning in 1997. Prices under the 1994 BRPU
contracts are estimated to exceed future market prices by $500
million. SDG&E challenged the decision and in February 1995 the
FERC issued a decision declaring the BRPU unlawful under federal
law. Subsequently the CPUC delayed the schedule for completion of
the BRPU auction and directed SDG&E and the successful bidders to
attempt to negotiate a settlement. SDG&E presented a
comprehensive settlement offer that provides for a $10 million
pool to be shared by the successful bidders and would terminate
SDG&E's BRPU obligations. SDG&E also offered to negotiate market-
based contracts. SDG&E regards all bidders as having no rights to
a contract under the BRPU process. No settlement has been
reached.
Once the CPUC has completed its restructuring of the electric
utility industry, if the prices of competing suppliers are as
anticipated, and if the regulatory process does not provide for
complete recovery of those costs that are in excess of what will
otherwise be recoverable via market-based pricing structures,
SDG&E would incur a charge against earnings for a significant
portion of its generating facilities, the related regulatory
assets and the long-term commitments. However, the CPUC has
indicated that any otherwise unrecovered amounts will be provided
for in the new environment. SDG&E cannot at this time predict the
impact of the CPUC's tentative decision and the transition to a
more competitive environment on SDG&E's financial condition and
results of operations.
SDG&E believes that changes in the California utility industry
and the movement toward a more competitive marketplace will
require SDG&E to change its corporate structure. SDG&E is
presently considering various strategies for the separation of
its power generation and transmission assets from its other
utility assets. These strategies are dependent on the outcome of
the CPUC industry restructuring proceedings and the FERC
wholesale open access rule-making proceedings (see "Industry
Restructuring - Federal Energy Regulatory Commission" below). In
connection with the proposed industry restructuring, SDG&E has
applied to the CPUC for permission to form a holding company. A
holding company structure would, among other things, provide a
platform for the separation of SDG&E's generation and
transmission assets. The CPUC's Division of Ratepayer Advocates
has recommended against approval of the holding company or, in
the alternative, that approval include several conditions, some
of which are onerous. To date, the holding company proposal has
been approved by the FERC, the Nuclear Regulatory Commission and
SDG&E shareholders. SDG&E anticipates forming the holding company
shortly after
9
receiving final approval from the CPUC, whose
decision is expected before the end of December 1995.
INDUSTRY RESTRUCTURING - FEDERAL ENERGY REGULATORY COMMISSION
On March 29, 1995 the FERC issued a proposed rule that, if
adopted, would require all public utilities to offer wholesale
"open-access" transmission service on a nondiscriminatory basis.
In addition, public utilities would be required to functionally
price their generation and transmission services separately from
each other. The FERC also stated its belief that utilities should
be allowed to recover the costs of assets and obligations made
uneconomic by the changed regulatory environment. Although
SDG&E's cost recovery mechanisms are not currently under the
jurisdiction of the FERC, the recognition by the FERC of the
propriety of such cost recovery supports the CPUC's similar
position, as stated in its tentative policy decision.
On October 6, 1995 SDG&E filed for approval of its open-access
tariffs for its service territory with the FERC in conjunction
with its request for a marketing license for Enova Energy
Management, SDG&E's wholly owned subsidiary, which intends to
transact business at market-based rates in the wholesale energy
market. Open-access tariffs provide for nondiscriminatory access
to SDG&E's transmission system. The filing is required of any
company seeking to market energy at market-based rates. SDG&E
requested three exceptions to the FERC's proposed transmission
pricing rules: 1) SDG&E's rates should reflect any additional
costs incurred to the extent that providing transmission service
to others would conflict with Internal Revenue Service
restrictions on SDG&E's Industrial Development Bonds and result
in the loss of their tax-exempt status. SDG&E has issued $800
million of tax-exempt bonds to finance its generating,
distribution and transmission facilities. Such an impairment
could result in SDG&E's incurring approximately $300 million of
additional interest costs over the life of the bonds if its IDBs
are replaced with taxable bonds. If an impairment occurred, it is
not certain if all of the bonds would lose their tax-exempt
status, or only the portion attributable to SDG&E's transmission
facilities; 2) SDG&E should be compensated for lost opportunities
that result from providing transmission service to others; and 3)
transmission rates should be higher during peak periods to
prevent "cherry picking" of transmission capacity. The FERC is
expected to act on SDG&E's request within 60 days.
Final approval of the FERC's rule and the CPUC's industry
restructuring plan would result in the creation of a bid-based
wholesale electricity spot market with open-access transmission.
Participating utilities would transfer complete operating control
over the flow of energy to an independent system operator that
would be responsible for directing the operation of the
transmission system. At least at the outset, retail customers
would not participate directly as buyers in the wholesale market.
SDG&E has also proposed that a single entity would ultimately own
and/or lease the transmission facilities within a broad
geographic area. The creation of such an entity could involve the
sale, lease or other disposition of SDG&E's transmission
facilities. The FERC is expected to issue a final rule in early
1996.
SAN ONOFRE NUCLEAR GENERATING STATION UNITS 2 & 3
In November 1994 SDG&E, Southern California Edison and the CPUC's
Division of Ratepayer Advocates signed a settlement agreement on
the accelerated recovery of SONGS Units 2 and 3 capital costs. It
is anticipated that the rates in the agreement would be
sufficient for SDG&E to recover approximately $750 million over
an eight-year period beginning in February 1996, rather than over
the anticipated operational life of the units, which may extend
to 2013. During the eight-year period, the authorized rate of
return would be reduced from the authorized weighted average cost
of capital (currently 9.76 percent) to 7.52 percent (SDG&E's 1995
authorized cost of debt). The agreement also includes a
performance-incentive plan that would encourage continued,
efficient operation of the plant. However, continued operation of
SONGS beyond the eight-year period would be at the owners'
discretion. Under the plan, customers would pay about four cents
per kilowatt-hour for energy delivered from SONGS during the
eight-year period. This pricing plan would replace the
traditional method of recovering the units' operating expenses
and capital improvements. This is intended to make the plants
more competitive with other sources. SDG&E is
10
unable at this time
to predict the impact of this proposal, if approved, on the
results of its operations. Hearings were concluded in May 1995.
On September 14, 1995 a CPUC Administrative Law Judge issued a
proposed decision recommending that the settlement be addressed
in the Industry Restructuring proceeding. The CPUC could issue a
decision as early as November. However, Commissioner Fessler
indicated that he is considering writing an alternate decision,
which could delay the CPUC's final decision until December 1995.
NUCLEAR INSURANCE
Public liability claims that could arise from a nuclear incident
are limited by law to $9 billion for each licensed nuclear
facility. For this exposure, SDG&E and the co-owners of SONGS
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 $32 million
in the event of a nuclear incident involving any of the licensed,
commercial reactors in the United States, if the amount of the
loss exceeds $200 million.
Insurance coverage is also provided for up to $2.8 billion of
property damage and decontamination liability, and 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 $9 million.
3. WRITEDOWNS
In June 1994 SDG&E recorded writedowns related to the utility and
its subsidiaries. SDG&E recorded a $25 million writedown of
various commercial properties, including $19 million of
subsidiary properties in Colorado Springs and in San Diego, to
reflect continuing declines in commercial real estate values. As
a result of the CPUC'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 the South Bay
Repower project. Additional information on the CPUC's proposed
industry restructuring and its potential impacts on SDG&E is
provided in Note 2. Additional writedowns associated with
discontinued operations are described in Note 4.
11
4. DISCONTINUED OPERATIONS -- WAHLCO ENVIRONMENTAL SYSTEMS, INC.
On June 6, 1995 SDG&E sold its investment in Wahlco Environmental
Systems, Inc. for $5 million. The sale of Wahlco is being
accounted for as a disposal of a segment of business and SDG&E's
prior periods' financial statements have been restated to reflect
Wahlco as a discontinued operation. Discontinued operations
consist of the following:
Nine Months Ended Year Ended
September 30, December 31,
1995 1994 1994 1993 1992
_______________________________________________
(millions of dollars)
Revenues $24 $50 $70 $82 $82
Loss from operations before
income taxes -- (64) (70) (14) (13)
Loss on disposal before income
taxes (10) -- -- -- --
Income tax benefits 4 3 7 5 3
_______________________________________________
The loss on disposal of Wahlco was recorded in 1995 and reflects
the sale of Wahlco and Wahlco's net operating losses after 1994.
The loss from discontinued operations for the nine months ended
September 30, 1994 was primarily due to the $59 million writedown
of Wahlco's goodwill and other intangible assets as a result of
the depressed air pollution-control market and increasing
competition.
Wahlco's net assets (included in "Investments and Other Property"
on the Consolidated Balance Sheets) at December 31, 1994 are
summarized as follows:
Current assets $ 40.2
Non-current assets 18.9
Current liabilities (27.1)
Long-term debt and other liabilities (24.2)
______
$ 7.8
======
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
EARNINGS
Earnings per share from continuing operations for the three
months ended September 30, 1995 were $0.51, up $0.01 per share
from the same period in 1994. Earnings per share from continuing
operations for the nine months ended September 30, 1995 were
$1.48, up from $1.22 per share for the same period in 1994. The
change in nine-month earnings results primarily from a $0.20 per
share June 1994 writedown associated with utility and real estate
assets and a higher authorized return on equity in 1995.
Additional information concerning the writedowns is provided in
Note 3 of the notes to consolidated financial statements.
OPERATING REVENUES AND EXPENSES
Gas revenues, gas purchased for resale, and electric fuel expense
decreased for the three months and nine months ended September
30, 1995 from the corresponding periods in 1994 primarily due to
lower natural gas prices. Purchased power expense for the nine
months ended September 30, 1995 was up over the corresponding
1994 period, primarily due to increased purchases of short-term
energy to replace nuclear generation as a result of the refueling
of San Onofre Nuclear Generating Station Units 2 and 3.
General and administrative expenses decreased for the nine months
ended September 30, 1995 compared with 1994 primarily due to the
June 1994 writedowns of various non-earning utility assets
described in Note 3 of the notes to consolidated financial
statements.
REGULATORY MATTERS:
CALIFORNIA PUBLIC UTILITIES COMMISSION'S PROPOSED INDUSTRY
RESTRUCTURING
On May 24, 1995 the CPUC voted 3-1 approving a tentative plan for
restructuring California's electric industry with a wholesale
power pool to begin by January 1997. See additional discussion of
industry restructuring in Note 2 of the notes to consolidated
financial statements. SDG&E cannot at this time 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.
HOLDING COMPANY
In November 1994 SDG&E filed an application with the CPUC to form
a holding company. Under the proposed structure, SDG&E would
become a subsidiary of the parent company, as would SDG&E's
existing subsidiaries. Additional discussion of industry
restructuring and the proposed holding company plan is provided
in Note 2 of the notes to consolidated financial statements.
ELECTRIC RATES
On October 16, 1995 SDG&E filed rate requests with the CPUC to
reflect lower expected prices for fuel and purchased power, lower
cost of capital, balancing account activity, and inflation and
customer growth based on SDG&E's PBR base-rates mechanism
formula. If approved, SDG&E's system average electric rate would
decrease from 9.9 cents to 9.7 cents. The adjustment for fuel
and energy costs would be effective June 1, 1996. The cost of
capital and other base rate adjustments would be effective
January 1, 1996.
COST OF CAPITAL
On October 6, 1995 a CPUC Administrative Law Judge issued a
proposed decision (subsequently modified on October 12) on the
1996 Cost of Capital proceeding recommending an 11.60 percent
authorized return on common equity and a 0.25 percent increase in
SDG&E's common equity ratio for an overall rate of return
13
of 9.38
percent. SDG&E's 1995 authorized return on equity and overall
rate of return are 12.05 percent and 9.76 percent, respectively.
A final decision is on the CPUC's agenda for its November 8, 1995
meeting.
In late October 1995 SDG&E expects to file a proposal with the
CPUC to implement a 3-year cost of capital mechanism beginning in
January 1997. Each October SDG&E's authorized rate of return
would be adjusted if interest rates change by one percent or more
from the prior year's benchmark. A one percent change in interest
rates would result in a one-half percent change in SDG&E's return
on equity. In addition, SDG&E's embedded costs of debt and
preferred stock would be adjusted to reflect SDG&E's outstanding
long-term debt and preferred stock at each September 30. The
adjustments would be effective on January 1 of the following
year.
BIENNIAL RESOURCE PLAN UPDATE PROCEEDING
In December 1994 the CPUC issued a decision ordering SDG&E,
Pacific Gas & Electric and Southern California Edison to proceed
with the BRPU auction. SDG&E was ordered to begin negotiating
contracts (ranging from 17 to 30 years) to purchase 500 mw of
power from qualifying facilities at an estimated cost of $4.8
billion beginning in 1997. The FERC's February 1995 order
declared the BRPU auction procedures unlawful under federal law.
The CPUC encouraged SDG&E, PG&E and Edison to reach settlements
with the auction winners. To date no settlements have been
reached. Additional information is provided in Note 2 of the
notes to consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES:
Sources of cash for 1995 through 1999 are expected to consist of
income from operations and issuances of stock and debt. Cash
requirements for 1995 through 1999 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.
FINANCING ACTIVITIES
SDG&E anticipates that it will have no outstanding short-term or
intermediate-term borrowings on December 31, 1995 and does not
expect to issue any short- or intermediate-term debt in 1996. At
December 31, 1994 SDG&E had various short-term bank lines
aggregating $170 million and two $50 million long-term bank
lines, related to which $58 million in short-term bank loans was
outstanding. At September 30, 1995 SDG&E had short-term bank
lines of $30 million (none outstanding) and long-term bank lines
of $280 million ($50 million outstanding). Commitment fees are
paid on the unused portion of the lines. There are no
requirements for compensating balances.
SDG&E does not expect any issuances of long-term debt or
preferred stock in 1995 other than refinancings. On June 6, 1995
SDG&E issued $74 million of Industrial Development Bonds through
the City of San Diego to refinance the 9-1/4 percent bonds issued
in 1985. The new bonds were issued at par, with variable interest
rates, and are due September 1, 2020. The proceeds were placed in
an escrow fund and were used to call the 1985 bonds on September
1, 1995.
$80 million of SDG&E's Pollution Control Bonds were remarketed in
August 1995 at a rate of 4 percent, which compares to last year's
rate of 4.25 percent. The new rate is effective September 1, 1995
through August 31, 1996.
14
SDG&E is in the process of delisting its preferred and preference
stock from the Pacific Stock Exchange. Once this is accomplished,
SDG&E's preferred and preference stock will be listed on the
American Stock Exchange only.
SDG&E periodically enters into interest rate swap and cap
agreements to moderate its exposure to interest rate changes and
to lower its overall cost of borrowing. These swap and cap
agreements generally remain off the balance sheet as they involve
the exchange of fixed- and variable-rate interest payments
without the exchange of the underlying principal amounts. The
related gains or losses are reflected in the income statement as
part of interest expense. Beginning in late 1995, SDG&E intends
to use derivative financial instruments, such as futures, and
option and swap contracts, to reduce price volatility of natural
gas purchases in the regular course of business. SDG&E intends to
use these contracts in its hedging activities on a continuing
basis for periods consistent with its committed exposures.
SDG&E's current policy is to use derivatives only as a hedge.
CAPITAL STRUCTURE
SDG&E maintains its utility capital structure so as to obtain
long-term financing at the lowest possible rates. The following
table lists key financial ratios for SDG&E's utility operations.
September 30, December 31,
1995 1994
or the twelve or the year
months then ended then ended
Pretax interest coverage 4.7 X 4.7 X
Internal cash generation 118 % 85 %
Construction expenditures as
a percent of capitalization 7.3 % 9.1 %
Capital structure:
Common equity 48 % 48 %
Preferred stock 4 % 4 %
Debt and leases 48 % 48 %
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 for
these plans.
CAPITAL REQUIREMENTS
Quarterly cash dividends of $0.39 per share have been declared
through September 30, 1995. The dividend pay-out ratio for the 12
months ended September 30, 1995 and December 31, 1994, 1993, 1992
and 1991 were 81%, 130%, 82%, 81% and 79%, respectively. The
increase in the pay-out ratio for the year ended December 31,
1994 was due to the writedowns recorded during 1994. Additional
information regarding the writedowns is provided in Notes 3 and 4
of the notes to consolidated financial statements. The payment of
future dividends is within the discretion of the SDG&E Board of
Directors and dependent upon future business conditions, earnings
and other factors. Net cash flows provided by operating
activities currently are sufficient to maintain the payment of
dividends at the present level.
15
Construction expenditures were $264 million in 1994 and are
expected to be approximately $230 million in 1995. The level of
expenditures in the next few years will depend 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 1994 Annual Report.)
OTHER
Besides the effects of items discussed in the preceding pages,
significant changes to the balance sheet at September 30, 1995
compared to December 31, 1994 were in cash and temporary
investments, accounts payable, taxes accrued and regulatory
balancing accounts. The increase in cash and temporary
investments was due to lower construction expenditures, and lower
than expected prices for purchased-power and natural gas.
Accounts payable decreased due to lower expense accruals at
September 30, 1995. The increase in taxes accrued was due to
regulatory balancing account overcollections. The increase in
balancing accounts reflects overcollections as a result of lower
than expected prices for purchased power and natural gas.
NEW ACCOUNTING STANDARD
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed of." This statement, which is
effective for 1996 financial statements, requires that long-lived
assets be reviewed for impairment whenever events or changes in
circumstances indicate that the asset's book value exceeds its
expected future cash flows such that the carrying amount of an
asset may not be fully recoverable. The statement also affects
utility plant and regulatory assets such that a loss must be
recognized whenever a regulator excludes all or part of an
asset's cost from a company's rate base. Based on the existing
regulatory environment and preliminary indications from the CPUC
and the FERC on recovery of transition costs arising from
industry restructuring, SFAS 121 is not currently expected to
have an adverse impact on SDG&E's financial condition or results
of operations. However, this may change in the future as
deregulation, competitive factors, and restructuring take effect
in the electric utility industry.
16
PART II - OTHER INFORMATION - SDO Parent Co., Inc.
Part II - Other Information - San Diego Gas & Electric Company on
page 17 of this Quarterly Report on Form 10-Q is incorporated herein by
reference.
PART II - OTHER INFORMATION - San Diego Gas & Electric Company
ITEM 1. LEGAL PROCEEDINGS
There have been no significant subsequent developments in the
American Trails, Public Service Company of New Mexico, Canadian
Natural Gas, Covalt, North City West and Wood Poles Preservatives
proceedings. Background information concerning these and the
following proceedings is contained in SDG&E's 1994 Annual Report
on Form 10-K and in its March 31, 1995 and June 30, 1995
Quarterly Reports on Form 10-Q.
Century Power
On October 23, 1995 SDG&E filed an Offer of Settlement with the
Federal Energy Regulatory Commission which would result in the
dismissal of all claims between SDG&E and Tucson Electric Power
and Century with prejudice. SDG&E is unable to predict the
ultimate outcome of these proceedings.
SONGS Personal Injury Litigation
On October 12, 1995 a jury ruled in favor of Southern California
Edison, SDG&E and Combustion Engineering in the case filed by
Glen James in the United States District Court for the Southern
District. The plaintiffs have 30 days to appeal the verdict.
The allegations in this case were substantially identical to
those contained in the complaints of R. C. Tang, Linda McLandrich
and Jason Mettler, described in SDG&E's 1993 and 1994 Annual
Report on Form 10-K and subsequent quarterly reports. The
complaint alleged that the plaintiff's cancer was caused by the
emission of radiation while he was serving as a nuclear equipment
operator at SONGS between 1982 and 1990. The Tang, James,
McLandrich and Mettler complaints were all filed by the same
attorneys. SDG&E is unable to predict the ultimate outcome of
these proceedings.
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).
Exhibit 27 - Financial Data Schedule
27.1 SDG&E Financial Data Schedule for the nine months ended
September 30, 1995.
(b) Reports on Form 8-K
None
17
SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this quarterly report to be signed on its behalf
by the undersigned thereunto duly authorized.
SAN DIEGO GAS & ELECTRIC COMPANY
(Registrant)
Date: October 23, 1995 By: /s/ F.H. Ault
-------------------------------
(Signature)
F. H. Ault
Vice President and Controller
18
SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this quarterly report to be signed on its behalf by
the undersigned thereunto duly authorized.
SDO PARENT CO., INC.
(Registrant)
Date: October 23, 1995 By: /s/ F.H. Ault
----------------------
(Signature)
F. H. Ault
Vice President and Controller
19
EXHIBIT 12.1 SAN DIEGO GAS & ELECTRIC COMPANY COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
9 Months Ended 1990 1991 1992 1993 1994 9/30/95 --------- ---------- ---------- ---------- ---------- ---------- Fixed Charges: Interest: Long-Term Debt $ 97,894 $ 98,802 $100,776 $ 93,402 $ 93,076 $ 72,122 Short-Term Debt 12,301 8,234 6,242 7,980 10,322 10,750 Amortization of Debt Discount and Expense, Less Premium 2,465 2,471 2,881 4,162 4,604 3,675 Interest Portion of Annual Rentals 20,898 18,067 14,677 19,206 21,998 15,571 ---------- ---------- ----------- --------- ----------- ---------- Total Fixed Charges 133,558 127,574 124,576 124,750 130,000 102,118 ---------- ---------- ----------- --------- ----------- ---------- Preferred Dividends Requirements 10,863 10,535 9,600 8,565 7,663 5,747 Ratio of Income Before Tax to Net Income 1.75499 1.63017 1.72369 1.67794 1.90447 1.71910 ---------- ----------- ----------- ---------- ---------- ---------- Preferred Dividends for Purpose of Ratio 19,064 17,174 16,547 14,372 14,594 9,880 ---------- ----------- ----------- ---------- ---------- ---------- Total Fixed Charges and Preferred Dividends for Purpose of Ratio $152,622 $144,748 $141,123 $139,122 $144,594 $111,998 ========== =========== ========== ========== ========== ========== Earnings: Net Income (before preferred dividend requirements) $207,841 $208,060 $210,657 $218,715 $143,477 $172,886 Add: Fixed Charges (from above) 133,558 127,574 124,576 124,750 130,000 102,118 Less: Fixed Charges Capitalized 3,306 2,907 2,242 5,789 6,792 4,866 Taxes on Income 156,917 131,114 152,451 148,275 129,771 124,323 ---------- ---------- ---------- ---------- ----------- --------- Total Earnings for Purpose of Ratio $495,010 $463,841 $485,442 $485,951 $396,456 $394,461 ========== ========== ========== ========== =========== ========== Ratio of Earnings to Combined Fixed Charges and Preferred Dividends 3.24 3.20 3.44 3.49 2.74 3.52 ========== ========== ========== ========== =========== =========