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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 March 31, 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
- ------------------------------- -------------------
(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
----- -----
Common stock outstanding: Wholly owned by Enova Corporation
ITEM 1. FINANCIAL STATEMENTS.
SAN DIEGO GAS & ELECTRIC COMPANY AND SUBSIDIARY
STATEMENTS OF CONSOLIDATED INCOME
Dollars in millions
Three months ended
March 31,
-----------------
2001 2000
-------- ------
Operating Revenues
Electric $ 804 $ 349
Natural gas 338 122
------ ------
Total operating revenues 1,142 471
------ ------
Operating Expenses
Electric fuel and net purchased power 585 133
Cost of natural gas distributed 245 47
Operation and maintenance 116 93
Depreciation and amortization 54 52
Other taxes and franchise payments 22 17
Income taxes 47 47
------ ------
Total operating expenses 1,069 389
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Operating Income 73 82
------ ------
Other Income and (Deductions)
Allowance for equity funds used
during construction 1 1
Interest income 6 14
Regulatory interest - net 5 (2)
Taxes on non-operating income (4) (6)
Other - net (2) (1)
------ ------
Total 6 6
------ ------
Income Before Interest Charges 79 88
------ ------
Interest Charges
Long-term debt 21 21
Other 5 13
Allowance for borrowed funds
used during construction (1) -
------ ------
Total 25 34
------ ------
Net Income 54 54
Preferred Dividend Requirements 2 2
------ ------
Earnings Applicable to Common Shares $ 52 $ 52
====== ======
See notes to Consolidated Financial Statements.
SAN DIEGO GAS & ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
Dollars in millions
Balance at
--------------------------
March 31, December 31,
2001 2000
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ASSETS
Utility plant - at original cost $4,809 $4,778
Accumulated depreciation and decommissioning (2,516) (2,502)
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Utility plant - net 2,293 2,276
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Nuclear decommissioning trust 540 543
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Current assets
Cash and cash equivalents 555 256
Accounts receivable - trade 319 233
Accounts receivable - other 18 20
Income taxes receivable -- 236
Fixed price contracts and other derivatives 66 --
Inventories 41 50
Other 7 8
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Total current assets 1,006 803
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Other assets
Deferred taxes recoverable in rates 134 140
Regulatory assets 1,162 925
Fixed price contracts and other derivatives 7 --
Deferred charges and other 48 47
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Total other assets 1,351 1,112
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Total assets $5,190 $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
--------------------------
March 31, December 31,
2001 2000
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CAPITALIZATION AND LIABILITIES
Capitalization
Common stock $ 857 $ 857
Retained earnings 257 205
Accumulated other comprehensive income (loss) (3) (3)
------ ------
Total common equity 1,111 1,059
Preferred stock not subject to mandatory redemption 79 79
Preferred stock subject to mandatory redemption 25 25
Long-term debt 1,330 1,281
------ ------
Total capitalization 2,545 2,444
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Current liabilities
Short-term debt 250 --
Accounts payable 283 407
Deferred income taxes 202 252
Regulatory balancing accounts - net 489 367
Regulatory liabilities arising from fixed price
contracts and other derivatives 66 --
Current portion of long-term debt 66 66
Other 211 196
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Total current liabilities 1,567 1,288
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Deferred credits and other liabilities
Customer advances for construction 39 40
Deferred income taxes 575 502
Deferred investment tax credits 47 48
Regulatory liabilities arising from fixed price
contracts and other derivatives 7 --
Deferred credits and other liabilities 410 412
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Total deferred credits and other liabilities 1,078 1,002
------ ------
Contingencies and commitments (Note 2)
Total liabilities and shareholders' equity $5,190 $4,734
====== ======
See notes to Consolidated Financial Statements.
SAN DIEGO GAS & ELECTRIC COMPANY AND SUBSIDIARY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
Dollars in millions
Three Months Ended
March 31,
------------------
2001 2000
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Cash Flows from Operating Activities
Net income $ 54 $ 54
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 54 52
Deferred income taxes and investment tax credits 28 9
Non-cash rate reduction bond expense 18 6
Other - net (256) (10)
Net change in other working capital components 156 70
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Net cash provided by operating activities 54 181
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Cash Flows from Investing Activities
Capital expenditures (68) (65)
Loan repaid by affiliate 19 119
Contributions to decommissioning funds (1) (1)
Other - net (2) 3
------ ------
Net cash provided by (used in) investing
activities (52) 56
------ ------
Cash Flows from Financing Activities
Dividends paid (2) (202)
Issuance of long-term debt 93 4
Repayment of long-term debt (44) (20)
Increase in short-term debt 250 --
------ ------
Net cash provided by (used in) financing
activities 297 (218)
------ ------
Increase in cash and cash equivalents 299 19
Cash and cash equivalents, January 1 256 337
------ ------
Cash and cash equivalents, March 31 $ 555 $ 356
====== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Income tax refunds - net $ (218) $ --
====== ======
Interest payments, net of amounts capitalized $ 19 $ 31
====== ======
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.
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. 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 recently entered into an agreement under
which the DWR will continue to purchase power for SDG&E's customers
until December 31, 2002, subject to either party's right to terminate
the agreement on six-months' notice.
The DWR is now purchasing all 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 March 31, 2001,
balance of $747 million will result from these contracts and
interest, offset by nuclear generation, the cost of which is below
the rate cap. These increases are not expected to significantly
affect SDG&E's or Sempra Energy's liquidity. During the three-month
period ended March 31, 2001, the increase was significantly greater
than expected in the future because nuclear generation was reduced
due to a fire, and, more significantly, the DWR agreement was not in
effect for the entire period.
On April 25, 2001, FERC adopted a proposal that, during Stage 1, 2
and 3 shortage situations, limits prices to all generators to the
cost of the least-efficient plant whose generation is required at
that time, and compels sales to California. 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.
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 that cap) retroactive
to February 7, 2001. This law is not expected to add to the
undercollection since the purchases for these customers will be
covered by the agreement between SDG&E and the DWR.
The CPUC has not yet acted on SDG&E's request for a temporary 2.3
cents/kWh electric-rate surcharge beginning March 1, 2001. No action
is anticipated until the CPUC completes its examination of the
prudence and reasonableness of SDG&E's procurement of wholesale
energy on behalf of its customers for the period July 1999 through
August 2000, in accordance with AB 265. A decision is expected before
the fourth quarter of 2001.
The State of California is considering the purchase of the IOUs'
transmission assets and the sale of revenue bonds to fund that
purchase, its past purchases of power for the IOUs' customers and/or
future purchases of power for the IOUs' customers. In April 2001,
Southern California Edison (Edison) and the State of California
announced a Memorandum of Understanding for the state to purchase
Edison's transmission facilities, reportedly in an attempt to avert a
bankruptcy similar to that filed by Pacific Gas & Electric earlier
that month.
Although SDG&E has no compelling financial need to sell its
transmission assets, it is currently in discussions with the State
concerning an agreement similar to Edison's, as a positive step
toward restructuring California's energy market.
California regulatory uncertainties have led Moody's Investors
Service (Moody's) to change its rating outlook on SDG&E's securities
from "positive" to "negative." Moody's also changed the rating
outlook on Sempra Energy's securities from "stable" to "negative."
Fitch IBCA, another major credit rating agency, also lowered its
outlook on SDG&E's securities from "stable" to "negative" due to the
uncertainty over the recovery of high wholesale energy prices not
included in customer bills. Another major credit rating agency,
Standard & Poor's (S&P), did not change the Company's rating outlook.
Although some of the rating outlooks have changed, the Company's
actual credit ratings have not. As of April 30, 2001, the credit
ratings of Sempra Energy and SDG&E are as follows:
S&P Moody's Fitch IBCA
-------------------------------------
Sempra Energy
Unsecured debt A A2 A
Commercial paper A-1 -- --
Trust preferred securities BBB+ a3 A-
SDG&E
Secured debt AA- Aa3 AA
Unsecured debt A+ A1 AA-
Preferred stock A a1 A+
Commercial paper A1+ P1 F1+
The ratings and outlook can affect the Company's ability to obtain
financing and can increase its incremental costs of borrowing.
However, these ratings are significantly better than the state's
other IOUs, and both SDG&E and Sempra Energy are current on all of
their obligations.
Thus far, the California Public Utilities Commission's (CPUC)
electric-industry restructuring has been confined to generation.
Transmission and distribution have remained subject to traditional
cost-of-service regulation. However, the CPUC is exploring the
possibility of opening up electric distribution to competition. A
CPUC staff report on this issue was submitted to the CPUC in July
2000, with dissenting opinions recommending against changing electric
distribution regulation at this time due to the current state of
electric-industry restructuring.
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, which is not expected to occur before late 2001.
NUCLEAR INSURANCE
SDG&E and the co-owners of the San Onofre Nuclear Generating Station
(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
periods ended
March 31,
--------------
(Dollars in millions) 2001 2000
- ----------------------------------------------
Net income $ 54 $ 54
Minimum pension liability
adjustments -- 2
--------------
Comprehensive income $ 54 $ 56
- ----------------------------------------------
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.
The adoption of this new standard on January 1, 2001, did not have a
material impact on the Company's earnings. However, $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. As such, $93
million in current regulatory liabilities, $5 million in noncurrent
regulatory liabilities, $2 million in current regulatory assets, and
$238 million in noncurrent regulatory assets were recorded as of
January 1, 2001, in the Consolidated Balance Sheet. 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 basis swaps, forwards, and long-term delivery contracts.
These contracts allow SDG&E to predict with greater certainty the
effective prices to be received and delivered to its 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 March 31, 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 March 31, 2001, $66 million in current assets and $7 million in
noncurrent assets were recorded 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. As such, $66
million in current regulatory liabilities and $7 million in
noncurrent regulatory liabilities were recorded in the Consolidated
Balance Sheet as of March 31, 2001. In addition, at March 31, 2001,
$2 million in current liabilities were recorded in the Consolidated
Balance Sheet as other current liabilities and $2 million in other
operating losses was recorded in the Consolidated Statement of Income
as other income and deductions.
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; actions by the CPUC, the California
Legislature, the DWR, and the FERC; the financial condition of other
investor-owned utilities; inflation rates and interest rates; energy
markets, including the timing and extent of changes in commodity
prices; weather conditions; 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
The effects of electric industry restructuring, as described in Note
2 of the notes to Consolidated Financial Statements, will continue to
reduce SDG&E's liquidity in 2001 and, possibly, thereafter. Working
capital requirements currently are expected to be met through the
issuance of short-term and long-term debt.
Continued purchases by the DWR for resale to SDG&E's customers of
substantially all of the electricity that would otherwise be
purchased by SDG&E or dramatic decreases in wholesale electricity
prices, favorable action by the CPUC on SDG&E's electric-rate-
surcharge application discussed above and SDG&E's access to the
capital markets are required to manage and finance SDG&E's cost
undercollections and provide adequate liquidity.
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.
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.
Cash and cash equivalents at March 31, 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 three-month period ended March 31, 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, the increase in trade accounts receivable due
to higher natural gas commodity prices and colder weather, 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 $300 million for the full year 2001 and are being financed
primarily by internally generated funds. Construction, investment and
financing programs are continuously reviewed and revised in response
to changes in competition, customer growth, inflation, customer
rates, the cost of capital, and environmental and regulatory
requirements.
CASH FLOWS FROM FINANCING ACTIVITIES
For the three-month period ended March 31, 2001, cash flows from
financing activities increased from the corresponding period in 2000
due primarily to the drawdown of lines of credit in January and
February of 2001.
RESULTS OF OPERATIONS
The Company's net income remained unchanged for the three-month
period ended March 31, 2001, compared to the same period in 2000.
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
were offset by decreased operating income which reflected increased
operation and maintenance expense.
Seasonality
SDG&E's electric sales volume generally is higher in the summer due to
air-conditioning demands. Both California utilities' 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 three-month periods ended March 31, 2001
and 2000.
Electric Distribution and Transmission
(Volumes in millions of Kwhrs, dollars in millions)
2001 2000
------------------------------------------
Volumes Revenue Volumes Revenue
------------------------------------------
Residential 1,654 $ 225 1,680 $ 169
Commercial 1,506 255 1,427 120
Industrial 765 170 564 37
Direct access 587 19 879 28
Street and highway lighting 22 3 19 2
Off-system sales 470 102 104 3
------------------------------------------
5,004 774 4,673 359
Balancing and other 30 (10)
------------------------------------------
Total 5,004 $ 804 4,673 $ 349
------------------------------------------
Gas Sales, Transportation and Exchange
(Volumes in billion cubic feet, dollars in millions)
Gas Sales Transportation & Exchange Total
--------------------------------------------------------------------
Volumes Revenue Volumes Revenue Volumes Revenue
--------------------------------------------------------------------
2001:
Residential 14 $ 232 -- $ -- 14 $ 232
Commercial and industrial 6 95 5 7 11 102
Electric generation plants -- -- 18 5 18 5
--------------------------------------------------------------
20 $ 327 23 $ 12 43 339
Balancing accounts and other (1)
--------
Total $ 338
- -------------------------------------------------------------------------------------------
2000:
Residential 13 $ 95 -- $ -- 13 $ 95
Commercial and industrial 6 34 10 5 16 39
Electric generation plants -- -- 5 2 5 2
--------------------------------------------------------------
19 $ 129 15 $ 7 34 136
Balancing accounts and other (14)
--------
Total $ 122
- -------------------------------------------------------------------------------------------
The increase in electric revenues was primarily due to the increase
in the cost of electric commodity costs, which are passed on to
customers without markup.
The increase in natural gas revenues was primarily due to higher
natural gas prices and increased transportation for electric
generation plants.
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. 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.
The increase in depreciation and decommissioning expense was due to
normal additions to utility plant.
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.
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
required to file a 2002 cost of capital application by May 8, 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. The electric-transmission cost of
capital is determined under a separate FERC proceeding.
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.
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 VaR of the
hedges was $7.5 million. This amount 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 December 31, 2000:
Current Report on Form 8-K filed January 24, 2001 announced SDG&E's
application to the CPUC for authority to implement an electric rate
surcharge, which would increase the rates it may charge its electric
customers.
Current Report on Form 8-K filed February 16, 2001 reported a
discussion of recent developments affecting SDG&E contained in
supplemental information distributed in connection with the
remarketing from short term to long term of certain unsecured,
variable-rate bonds.
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: May 3, 2001 By: /s/ D.L. Reed
-----------------------------
D.L. Reed
President
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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 three
months ended
March 31,
1996 1997 1998 1999 2000 2001
-------- -------- -------- -------- -------- --------
Fixed Charges and Preferred
Stock Dividends:
Interest:
Long-Term Debt $ 76 $ 69 $ 55 $ 49 $50 $14
Rate Reduction Bonds -- -- 41 35 33 7
Short-Term Debt & Other 13 14 14 40 31 3
Amortization of Debt
Discount and Expense,
Less Premium 5 5 8 7 5 2
Interest Portion of
Annual Rentals 8 10 7 5 3 1
-------- -------- -------- -------- -------- --------
Total Fixed
Charges 102 98 125 136 122 27
-------- -------- -------- -------- -------- --------
Preferred Dividends
for Purpose of Ratio (1) 13 13 11 10 13 3
-------- -------- -------- -------- -------- --------
Total Fixed Charges
and Preferred Stock
Dividends For
Purpose of Ratio $115 $111 $136 $146 $135 $30
======== ======== ======== ======== ======== ========
Earnings:
Pretax income from
continuing operations $420 $457 $332 $325 $295 $105
Add:
Fixed charges
(from above) 102 98 125 136 122 27
Less: Fixed charges
capitalized 1 2 1 1 3 -
-------- -------- -------- -------- -------- --------
Total Earnings for
Purpose of Ratio $521 $553 $456 $460 $414 $132
======== ======== ======== ======== ======== ========
Ratio of Earnings
to Combined Fixed
Charges and Preferred
Stock Dividends 4.54 5.00 3.36 3.15 3.07 4.40
======== ======== ======== ======== ======== ========
(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.