SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT 1
(Mark One)
[..X..] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
September 30, 1996
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
- ---------- -------------- -------------- --------------
1-11439 ENOVA CORPORATION California 33-0643023
1-3779 SAN DIEGO GAS &
ELECTRIC COMPANY California 95-1184800
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, 1996:
Enova Corporation 116,565,775
-----------
San Diego Gas & Electric Company Wholly owned by Enova Corporation
<PAGE>
ENOVA CORPORATION
AND
SAN DIEGO GAS & ELECTRIC COMPANY
CONTENTS
Page No.
--------
PART I. FINANCIAL INFORMATION
Statements of Income. . . . . . . . . . . . . . . . . . . . .3
Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . .5
Statements of Cash Flows. . . . . . . . . . . . . . . . . . .6
Notes to Financial Statements . . . . . . . . . . . . . . . .7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . 21
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . 22
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . 23
<PAGE>
<TABLE>
STATEMENTS OF INCOME (unaudited)
In thousands except per share amounts
<CAPTION>
Enova Corporation
and Subsidiaries SDG&E
----------------------------- -------------------------------
For the three months ended September 30 1996 1995 1996 1995
----------------------------- -------------------------------
<S> <C> <C> <C> <C>
Operating Revenues
Electric $419,809 $396,526 $419,809 $396,526
Gas 73,676 68,574 73,676 68,574
Diversified operations 14,108 13,589 -- --
------------ ------------ ------------ ------------
Total operating revenues 507,593 478,689 493,485 465,100
------------ ------------ ------------ ------------
Operating Expenses
Electric fuel 42,794 31,151 42,794 31,151
Purchased power 85,777 91,501 85,777 91,501
Gas purchased for resale 24,137 19,468 24,283 19,468
Maintenance 16,201 18,486 16,201 18,486
Depreciation and decommissioning 84,607 68,645 79,522 65,485
Property and other taxes 10,719 11,514 10,719 11,514
General and administrative 59,024 54,934 54,270 54,611
Other 50,786 51,528 38,937 40,715
Income taxes 46,262 41,160 59,154 50,956
------------ ------------ ------------ ------------
Total operating expenses 420,307 388,387 411,657 383,887
------------ ------------ ------------ ------------
Operating Income 87,286 90,302 81,828 81,213
------------ ------------ ------------ ------------
Other Income and (Deductions)
Allowance for equity funds used
during construction 1,443 1,434 1,443 1,434
Taxes on nonoperating income (2,086) (2,127) (2,514) (1,727)
Other - net 5,016 (409) 5,443 3,428
------------ ------------ ------------ ------------
Total other income and
(deductions) 4,373 (1,102) 4,372 3,135
------------ ------------ ------------ ------------
Income Before Interest Charges 91,659 89,200 86,200 84,348
------------ ------------ ------------ ------------
Interest Charges
Long-term debt 22,423 22,476 19,228 20,470
Short-term debt and other 5,527 5,534 5,527 6,142
Allowance for borrowed funds
used during construction (682) (630) (682) (630)
Preferred dividend requirements of
SDG&E 1,646 1,916 -- --
------------ ------------ ------------ ------------
Net interest charges 28,914 29,296 24,073 25,982
------------ ------------ ------------ ------------
Income From Continuing Operations 62,745 59,904 62,127 58,366
Discontinued Operations, Net Of
Income Taxes -- -- -- 3,454
------------ ------------ ------------ ------------
Net Income 62,745 59,904 62,127 61,820
Preferred Dividend Requirements -- -- 1,646 1,916
------------ ------------ ------------ ------------
Earnings Applicable to Common Shares $62,745 $59,904 $60,481 $59,904
============ ============ ============ ============
Average Common Shares Outstanding 116,566 116,538
============ ============
Earnings Per Common Share from
Continuing Operations $0.54 $0.51
============ ============
Earnings Per Common Share $0.54 $0.51
============ ============
Dividends Declared Per Common Share $0.39 $0.39
============ ============
See notes to consolidated financial statements.
</TABLE>
<TABLE>
STATEMENTS OF INCOME (unaudited)
In thousands except per share amounts
<CAPTION>
Enova Corporation
and Subsidiaries SDG&E
------------------------------- ----------------------------
For the nine months ended September 30 1996 1995 1996 1995
------------------------------- ----------------------------
<S> <C> <C> <C> <C>
Operating Revenues
Electric $1,164,073 $1,130,530 $1,164,073 $1,130,530
Gas 239,575 229,897 239,575 229,897
Diversified operations 40,809 41,456 -- --
------------ ------------ ------------ ------------
Total operating revenues 1,444,457 1,401,883 1,403,648 1,360,427
------------ ------------ ------------ ------------
Operating Expenses
Electric fuel 92,198 75,480 92,198 75,480
Purchased power 233,925 262,702 233,925 262,702
Gas purchased for resale 93,324 82,610 93,169 82,610
Maintenance 47,854 55,194 47,854 55,194
Depreciation and decommissioning 248,536 208,354 234,326 194,857
Property and other taxes 33,930 34,193 33,930 34,193
General and administrative 156,956 140,521 148,630 138,988
Other 154,187 156,011 119,370 123,353
Income taxes 128,744 123,373 164,406 150,816
------------ ------------ ------------ ------------
Total operating expenses 1,189,654 1,138,438 1,167,808 1,118,193
------------ ------------ ------------ ------------
Operating Income 254,803 263,445 235,840 242,234
------------ ------------ ------------ ------------
Other Income and (Deductions)
Allowance for equity funds used
during construction 4,159 4,447 4,159 4,447
Taxes on nonoperating income (1,001) (950) (2,229) (1,750)
Other - net 2,394 (3,354) 2,954 2,093
------------ ------------ ------------ -----------
Total other income and
(deductions) 5,552 143 4,884 4,790
------------ ------------ ------------ -----------
Income Before Interest Charges 260,355 263,588 240,724 247,024
------------ ------------ ------------ -----------
Interest Charges
Long-term debt 66,856 72,122 57,438 62,592
Short-term debt and other 14,891 14,425 14,891 15,783
Allowance for borrowed funds
used during construction (2,476) (2,013) (2,476) (2,013)
Preferred dividend requirements of
SDG&E 4,937 5,747 -- --
------------ ------------ ------------ ------------
Net interest charges 84,208 90,281 69,853 76,362
------------ ------------ ------------ ------------
Income From Continuing Operations 176,147 173,307 170,871 170,662
Discontinued Operations, Net Of
Income Taxes -- (6,168) -- 2,224
------------ ------------ ------------ ------------
Net Income 176,147 167,139 170,871 172,886
Preferred Dividend Requirements -- -- 4,937 5,747
------------ ------------ ------------ ------------
Earnings Applicable to Common Shares $176,147 $167,139 $165,934 $167,139
============ ============ ============ ============
Average Common Shares Outstanding 116,567 116,535
============ ============
Earnings Per Common Share from
Continuing Operations $1.51 $1.48
============ ============
Earnings Per Common Share $1.51 $1.43
============ ============
Dividends Declared Per Common Share $1.17 $1.17
============ ============
See notes to consolidated financial statements.
</TABLE>
<TABLE>
BALANCE SHEETS
In thousands of dollars
<CAPTION>
Enova Corporation
and Subsidiaries SDG&E
----------------------------- -----------------------------
Balance at September 30, December 31, September 30, December 31,
1996 1995 1996 1995
(unaudited) (unaudited)
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
ASSETS
Utility plant - at original cost $5,646,801 $5,533,554 $5,646,801 $5,533,554
Accumulated depreciation
and decommissioning (2,546,613) (2,355,213) (2,546,613) (2,355,213)
----------- ----------- ----------- -----------
Utility plant-net 3,100,188 3,178,341 3,100,188 3,178,341
----------- ----------- ----------- -----------
Investments and other property 577,286 532,289 305,418 448,860
----------- ----------- ----------- -----------
Current assets
Cash and temporary investments 192,481 96,429 117,875 20,755
Accounts receivable 204,572 178,155 194,558 178,091
Due from affiliates -- -- 12,380 --
Notes receivable 35,090 34,498 -- --
Inventories 63,914 67,959 63,035 67,959
Other 31,109 41,012 21,497 29,419
----------- ----------- ----------- -----------
Total current assets 527,166 418,053 409,345 296,224
----------- ----------- ----------- -----------
Deferred taxes recoverable in rates 276,035 298,748 276,035 298,748
----------- ----------- ----------- -----------
Deferred charges and other assets 279,386 321,193 222,747 250,440
----------- ----------- ----------- -----------
Total $4,760,061 $4,748,624 $4,313,733 $4,472,613
=========== =========== =========== ===========
CAPITALIZATION AND LIABILITIES
Capitalization
Common equity $1,559,227 $1,520,070 $1,399,373 $1,520,070
Preferred stock of SDG&E
Not subject to mandatory redemption 78,475 93,475 78,475 93,475
Subject to mandatory redemption 25,000 25,000 25,000 25,000
Long-term debt 1,443,344 1,350,094 1,289,507 1,217,026
----------- ----------- ----------- -----------
Total capitalization 3,106,046 2,988,639 2,792,355 2,855,571
----------- ----------- ----------- -----------
Current liabilities
Long-term debt redeemable
within one year -- 115,000 -- 115,000
Current portion of long-term debt 69,921 36,316 33,615 8,835
Accounts payable 120,723 145,517 120,044 145,273
Dividends payable 47,106 47,383 47,106 47,383
Interest and taxes accrued 27,054 22,537 30,819 23,621
Regulatory balancing accounts
overcollected-net 200,822 170,761 200,822 170,761
Other 150,335 125,438 91,152 90,119
----------- ----------- ----------- -----------
Total current liabilities 615,961 662,952 523,558 600,992
----------- ----------- ----------- -----------
Customer advances for construction 34,677 34,698 34,677 34,698
Accumulated deferred income taxes-net 542,835 523,335 546,040 536,324
Accumulated deferred investment
tax credits 100,156 104,226 100,156 104,226
Deferred credits and other liabilities 360,386 434,774 316,947 340,802
Contingencies (Note 2) -- -- -- --
----------- ----------- ----------- -----------
Total $4,760,061 $4,748,624 $4,313,733 $4,472,613
=========== =========== =========== ===========
See notes to consolidated financial statements.
</TABLE>
<TABLE>
STATEMENTS OF CASH FLOWS (unaudited)
In thousands of dollars
<CAPTION>
Enova Corporation
and Subsidiaries SDG&E
---------------------- ----------------------
For the nine months ended September 30 1996 1995 1996 1995
---------------------- ----------------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities
Income from continuing operations $ 176,147 $ 173,307 $ 170,871 $ 170,662
Adjustments to reconcile income from continuing
operations to net cash provided by operating activities
Depreciation and decommissioning 248,536 208,354 234,326 194,857
Amortization of deferred charges and other assets 4,267 10,350 3,536 10,350
Amortization of deferred credits
and other liabilities (28,608) (24,561) (2,883) (877)
Allowance for equity funds used during construction (4,159) (4,447) (4,159) (4,447)
Deferred income taxes and investment tax credits (29,308) (6,598) (28,603) (6,802)
Other-net 23,199 14,653 5,080 (2,835)
Changes in working capital components
Accounts and notes receivable (27,009) (3,942) (16,467) 1,323
Regulatory balancing accounts 30,061 76,548 30,061 76,548
Inventories 4,045 2,606 4,924 2,606
Other current assets (8,986) 830 (10,424) 944
Interest and taxes accrued 62,054 44,081 64,440 44,299
Accounts payable and other current liabilities (13,960) (23,374) (24,196) (35,202)
Cash flows provided (used) by discontinued operations -- (168) (11,544) 21,960
---------- ---------- ---------- ----------
Net cash provided by operating activities 436,279 467,639 414,962 473,386
---------- ---------- ---------- ----------
Cash Flows from Financing Activities
Dividends paid (136,388) (135,180) (141,594) (140,927)
Short-term borrowings-net -- (89,325) -- (58,325)
Issuance of long-term debt 169,452 124,641 167,152 123,734
Repayment of long-term debt (199,816) (102,074) (174,743) (76,117)
Redemption of common stock (480) (29) -- (29)
Redemption of preferred stock (15,155) (18) (15,155) (18)
---------- ---------- ---------- ----------
Net cash used by financing activities (182,387) (201,985) (164,340) (151,682)
---------- ---------- ---------- ----------
Cash Flows from Investing Activities
Utility construction expenditures (144,192) (146,569) (144,192) (146,569)
Contributions to decommissioning funds (16,527) (16,527) (16,527) (16,527)
Other-net 2,879 7,008 16,932 (1,116)
Discontinued operations -- 5,122 (9,715) (44,486)
---------- ---------- ---------- ----------
Net cash used by investing activities (157,840) (150,966) (153,502) (208,698)
---------- ---------- ---------- ----------
Net increase 96,052 114,688 97,120 113,006
Cash and temporary investments, beginning of period 96,429 25,405 20,755 11,605
---------- ---------- ---------- ----------
Cash and temporary investments, end of period $ 192,481 $ 140,093 $ 117,875 $ 124,611
========== ========== ========== ==========
Supplemental Disclosure of Cash Flow Information
Income tax payments $ 112,528 $ 97,960 $ 146,934 $ 97,960
========== ========== ========== ==========
Interest payments, net of amounts capitalized $ 74,754 $ 82,136 $ 64,570 $ 73,746
========== ========== ========== ==========
Supplemental Schedule of Noncash Investing
and Financing Activities
Real estate investments $ 52,367 $ 32,553 $ -- $ --
Cash paid -- (250) -- --
---------- ---------- ---------- ----------
Liabilities assumed $ 52,367 $ 32,303 $ -- $ --
========== ========== ========== ==========
Net assets of affiliates transferred to parent $ -- $ -- $ 150,069 $ --
========== ========== ========== ==========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
ENOVA CORPORATION/SAN DIEGO GAS & ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited)
1. GENERAL
In January 1996 Enova Corporation became the parent company of SDG&E and
its subsidiaries. At that time SDG&E's ownership interests in its
subsidiaries were transferred to Enova Corporation at book value.
Additional information concerning the effects of the parent company
structure is provided in Note 3 herein.
On October 14, 1996 Enova Corporation and Pacific Enterprises (parent
company of Southern California Gas Company) announced that they have
agreed to combine the two companies. As a result of the combination,
which was unanimously approved by the Boards of Directors of both
companies, (i) each outstanding share of common stock of Enova
Corporation will be converted into one share of common stock of the new
company, (ii) each outstanding share of common stock of Pacific
Enterprises will be converted into 1.5038 shares of the new company's
common stock and (iii) the preferred stock and preference stock of
Pacific Enterprises, SDG&E and Southern California Gas Company will
remain outstanding.
Consummation of the combination is conditional upon, among other things,
the approvals of each company's shareholders, the California Public
Utilities Commission and various other regulatory bodies. Completion of
the combination is expected by the end of 1997. In the interim, Enova
Corporation and Pacific Enterprises are separately proceeding with plans
to form a joint venture to provide integrated energy and energy-related
products and services.
This Quarterly Report on Form 10-Q is a combined filing of Enova
Corporation and SDG&E. The financial statements presented herein
represent the consolidated statements of Enova Corporation and its
subsidiaries (including SDG&E), as well as the stand-alone statements of
SDG&E. Unless otherwise indicated, the "Notes to Financial Statements"
and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" herein pertain to Enova Corporation as a
consolidated entity.
The Registrants believe all adjustments necessary to present a fair
statement of the 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. The Registrants' significant accounting policies are
described in the notes to consolidated financial statements in the 1995
Annual Report to Shareholders. The same accounting policies are followed
for interim reporting purposes.
This quarterly report should be read in conjunction with the
Registrants' 1995 Annual Report on Form 10-K and its Quarterly Reports
on Form 10-Q for the three months ended March 31, 1996 and the six
months ended June 30, 1996. The consolidated financial statements and
Management's Discussion & Analysis of Financial Condition and Results of
Operations included in the 1995 Annual Report to Shareholders were
7
<PAGE>
incorporated by reference into the 1995 Annual Report on Form 10-K and
filed as an exhibit thereto.
2. MATERIAL CONTINGENCIES
ELECTRIC INDUSTRY RESTRUCTURING -- CALIFORNIA
In December 1995, the CPUC issued its policy decision on the
restructuring of California's electric utility industry to stimulate
competition and reduce rates. On September 23, 1996 California Governor
Wilson signed into law a bill restructuring the industry (AB 1890). The
legislation was unanimously passed by the California Legislature in
August 1996 and supersedes the CPUC policy decision when in conflict.
The CPUC's decision provides that, beginning in January 1998, customers
will be able to buy their electricity through a power exchange that will
obtain power from the lowest-bidding suppliers. The power exchange will
serve as a wholesale power pool allowing all energy producers to
participate competitively. An independent system operator (ISO) will
schedule power transactions and access to the transmission system.
Consumers may also choose to continue to purchase from their local
utility under regulated tariffs or to enter into private contracts with
generators, brokers or others (direct access). The local utility will
continue to provide distribution services no matter which method the
consumer chooses (power exchange, direct access or local utility). In
addition, within certain limits, utilities will be allowed to recover
their "stranded" costs incurred for certain above-market CPUC-approved
facilities, contracts and obligations through the establishment of a
nonbypassable competition transition charge (CTC). Performance-based
regulation will replace cost-of-service regulation.
The California legislation adopts the CPUC's market structure and allows
for recovery of stranded investment. However, the bill contains a few
key differences. Recovery of stranded costs will be accelerated to
December 31, 2001 (instead of 2005), with certain exceptions. At the
start of the new competitive market (scheduled for January 1, 1998),
SDG&E will receive approximately $500 million from the proceeds of rate-
reduction bonds issued by an agency of the State of California. SDG&E
and the two other major investor-owned utilities in California are in
discussions with the Securities and Exchange Commission concerning the
accounting for the receipt. There will be no gain or loss from the issuance of
the bonds or the receipt of the proceeds. SDG&E has not yet determined how the
proceeds will be used and, therefore, is unable to project the impact on
liquidity or on results of operations from utilization of the proceeds.
These bonds will be repaid over approximately ten years by SDG&E's
residential and small commercial customers via a separate charge on
their electric bills and will be non-recourse to SDG&E. Receipt of the
$500 million will enable SDG&E to effect a decrease in rate base, which
will result in a ten percent reduction of residential and small
commercial customers' rates beginning in January 1998. These rates,
including the bond-repayment charge, will remain at that level until
8
<PAGE>
approximately March 31, 2002. Until the earlier of that date or
transition cost recovery is complete, SDG&E's system average rate will
be frozen at June 10, 1996 levels, except for the impact of fuel cost
changes. If fuel costs change significantly, SDG&E may seek CPUC
authority to increase or decrease rates to compensate therefor, but
rates cannot be increased so as to raise SDG&E's system average rate
above 9.985 cents per kwh. For purposes of transition cost recovery,
overcollections recorded in the Energy Cost Adjustment Clause and
Electric Revenue Adjustment Mechanism balancing accounts as of December
31, 1996 will be credited to the recovery of transition costs on January
1, 1997. With certain exceptions, stranded costs not recovered by
December 31, 2001 will not be collected from customers. Such costs, if
any, would be written off as a charge against earnings. AB 1890
clarifies that all existing and future consumers must pay CTC except for
a segment of self-generators and irrigation districts. SDG&E has very
few, if any, of these types of customers and does not anticipate a
material impact from the exemption.
The CPUC is currently attempting to meld its restructuring plan with
that of the California legislature. California's three major investor-
owned utilities filed cost-recovery plans with the CPUC in October 1996
in response to AB 1890. Related to this cost-recovery filing are SDG&E's
October 1996 transition cost application and a rate and product
unbundling application to be filed in November 1996. The scope of the
transition costs related to the CTC includes generation-related assets
and obligations that were being collected in rates on December 20, 1995
and that may become uneconomic as a result of a competitive generation
market. In its transition cost application SDG&E identifies the
following transition costs totaling $2 billion:
Nuclear generation (SONGS) $805 million
Non-nuclear generation 490
Qualifying facilities purchases 383
Other power purchases 315
Other regulatory commitments 25
These identified transition costs are subject to a CPUC audit, which is
expected to commence in early November 1996. The amounts include sunk
costs, as well as on-going costs the CPUC finds reasonable and necessary
to maintain generation facilities through December 31, 2001. Qualifying
facilities purchases include approximately 100 existing contracts, some
of which extend to the year 2025, to the extent the costs are above
market price. Other power purchases consist of two long-term contracts
to the extent they exceed market. Both the CPUC policy decision and AB
1890 provide that above-market costs for existing power purchase and QF
contracts may be recovered over the term of the contracts or sooner.
Regulatory commitments are the generation-related portion of sunk costs
arising from regulatory assets or liabilities related to various
deferred costs, timing differences, outstanding balancing account
balances and other items SDG&E has accrued under cost-of-service
regulation. Nuclear decommissioning costs are nonbypassable until fully
recovered, but are not included as part of CTC. However, recovery of
these costs may be accelerated to the extent possible.
9
<PAGE>
In April 1996, based on Pacific Gas & Electric's motion for interim CTC
recovery and concerns over lost revenues from large customers' choosing
other suppliers before plans for deregulation are finalized, SDG&E filed
a motion requesting that it also be afforded interim CTC treatment. The
CPUC has not acted on that motion as yet, but, based on the
clarification contained in AB 1890, SDG&E is evaluating the need to
pursue the issue.
The rate and product unbundling application which SDG&E expects to file
in November 1996 will be the primary proceeding for establishing the
specific rates and charges to be in place on January 1, 1998. SDG&E will
identify and separate individual rate components such as charges for
energy, transmission, distribution, public-benefit programs, nuclear
decommissioning, recovery of uneconomic costs and the rate-reduction
bonds repayment.
In the new competitive environment performance-based regulation will
replace cost-of-service regulation for generation in order to encourage
efficient utility operation and lead to a truly competitive environment
over the passage of time. Rates for distribution services will remain
cost-of-service based, utilizing PBR to encourage efficient operation,
replacing the former General Rate Case-based cost-of-service regulation.
On an experimental basis SDG&E is participating in a PBR process for gas
procurement, electric generation and dispatch, and base rates, beginning
in 1993 and running through 1997. SDG&E has filed plans with the CPUC to
extend these PBR mechanisms and a proposal for a new generation PBR. The
new generation PBR would allow SDG&E to recover its costs of production
and the cost of having its generating units available, as well as
mitigate any market-power issues.
As restructuring evolves, SDG&E will become more vulnerable to
competition. However, based on recent CPUC decisions and new
legislation, recovery of stranded costs is provided for. Based on this,
SDG&E does not anticipate incurring a material charge against earnings
for its generating facilities, the related regulatory assets and other
long-term commitments. This is based on SDG&E's estimates of
distribution sales volumes and the total of all costs other than
recovery of stranded costs, since recovery of stranded costs will come
primarily from the excess of electric revenue over other costs. The
compilation of these estimates indicates that such excess will probably
be sufficient to recover the stranded costs (excluding nuclear
decommissioning and power purchase contracts except to the extent they
occur during the transition period).
SDG&E accounts for the economic effects of regulation in accordance with
Statement of Financial Accounting Standards No. 71, "Accounting for the
Effects of Certain Types of Regulation," under which a regulated entity
may record a regulatory asset if it is probable that, through the rate-
making process, the utility will recover that asset from customers.
Regulatory liabilities represent future reductions in revenues for
amounts due to customers.
10
<PAGE>
Once the restructuring transition is final, SDG&E may not continue to
meet the criteria for applying SFAS 71 to all of its operations in the
new regulatory framework. In a non-SFAS 71 environment, among other
things, additions to plant would need to be recovered through market
prices.
ELECTRIC INDUSTRY RESTRUCTURING -- FEDERAL
In April 1996 the FERC issued a final rule that will require all
utilities to offer wholesale "open-access" transmission service on a
nondiscriminatory basis and to share information about available
transmission capacity. In addition, utilities will 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. In July 1996 SDG&E
filed open-access transmission tariffs that comply with the FERC's April
1996 rule described above. These tariffs immediately became effective.
In April 1996 California's three major investor-owned utilities filed
plans to establish the power exchange and ISO with the FERC, which has
jurisdiction over the exchange, the ISO and interstate transmission. The
FERC is currently holding technical conferences and reviewing the
issues.
Several bills on electric industry restructuring have been filed
recently at the Federal level. One bill would make states establish
rules to let all residences, businesses and industries choose their own
power suppliers by December 15, 2000, or force states to give way to the
FERC to open the local market to competition after 2000. Another bill
calls for full customer choice by January 1, 1998. This measure provides
that if retail choice is not a reality by that date, the FERC will set
rates until competition takes effect. A third bill, introduced on the
last day of the 1996 Congressional session and, therefore, too late for
hearings or debate, would, if reintroduced and enacted as written,
supercede state regulations and legislations, and prevent utility
customers from being charged for stranded investments of the utilities.
The other bills left the recovery of stranded costs to the discretion of
each state.
NUCLEAR INSURANCE
SDG&E and the co-owners of San Onofre Nuclear Generating Station have
purchased primary insurance of $200 million, the maximum amount
available, for public liability claims. An additional $8.7 billion of
coverage is provided by secondary financial protection required by the
Nuclear Regulatory Commission and provides for loss sharing among the
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. In the event the public liability limit stated
above is insufficient, federal law provides for Congress to enact
11
<PAGE>
further revenue-raising measures to pay claims. These measures could
include an additional assessment on all licensed reactor operators.
Insurance coverage is provided for up to $2.8 billion of property damage
and decontamination liability. Coverage is also provided for the cost of
replacement power, which includes payments for up to 3 years, after a
waiting period of 21 weeks. Coverage is provided 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 from these
insurance programs, SDG&E could be assessed retrospective premium
adjustments of up to $5.3 million.
CANADIAN GAS
SDG&E has long-term pipeline capacity commitments related to its
contracts for Canadian natural gas supplies. These contracts are
currently in litigation, as described in Part II, Item 1, "Legal
Proceedings," herein. If the supply of Canadian natural gas to SDG&E is
not resumed to a level approximating the related committed long-term
pipeline capacity, SDG&E intends to use the excess capacity in other
ways.
3. DISCONTINUED OPERATIONS
As discussed in Note 1 herein, in January 1996 Enova Corporation became
the parent of SDG&E and its unregulated subsidiaries. At that time
SDG&E's ownership interests in its subsidiaries were transferred to
Enova Corporation at book value. SDG&E's financial statements for
periods prior to 1996 have been restated to reflect the results of that
transfer and the June 1995 sale of Wahlco Environmental Systems, Inc. as
discontinued operations in accordance with Accounting Principles Board
Opinion No. 30 "Reporting the Effects of a Disposal of a Segment of
Business." SDG&E's discontinued operations are summarized in the table
below.
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31
1995 1995 1994 1993
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
In millions of dollars
Revenues $65 $81 $126 $119
Loss from operations before
income taxes (20) (24) (105) (19)
Loss on disposal of Wahlco
before income taxes (10) (12) - -
Income tax benefits 32 50 43 22
- -------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
The net assets of the subsidiaries (included in "Investments and Other
Property" on SDG&E's Balance Sheets) at December 31, 1995 are summarized
as follows:
- ---------------------------------------------------------------
In millions of dollars
Current assets $ 122
Non-current assets 286
Current liabilities ( 62)
Long-term debt and other liabilities (214)
- ---------------------------------------------------------------
Net assets $ 132
- ---------------------------------------------------------------
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ENOVA CORPORATION/SAN DIEGO GAS & ELECTRIC COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
OVERVIEW:
In January 1996 Enova Corporation became the parent of SDG&E, and
SDG&E's ownership interests in its subsidiaries were transferred to the
parent company. Effective January 1, 1996 SDG&E's financial statements
for periods prior to 1996 have been restated to reflect the net results
of subsidiaries as discontinued operations.
On October 14, 1996 Enova Corporation and Pacific Enterprises announced
that they have entered into an agreement, unanimously approved by the
Boards of Directors of both companies, to combine the two companies.
Consummation of the combination is conditional upon, among other things,
the approvals of each company's shareholders, the California Public
Utilities Commission and various other regulatory bodies. Completion of
the combination is expected by the end of 1997.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements
within the definition of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. When used in
"Management's Discussion and Analysis of Financial Condition and Results
of Operations," the words "estimates", "expects", "anticipates", "plans"
and similar expressions are intended to identify forward-looking
statements that involve risks and uncertainties.
Although the Registrants believe that their expectations are based on
reasonable assumptions, they can give no assurance that those
expectations will be realized. Important factors that could cause actual
results to differ materially from those in the forward-looking
statements herein include political developments affecting state and
federal regulatory agencies, the pace of electric industry deregulation
in California and in the United States, the existence of or ability to
create a market for rate-reduction bonds, the ability to effect a
coordinated and orderly implementation of both state legislation and the
CPUC's restructuring regulations, the consummation and timing of the
combination of Enova Corporation and Pacific Enterprises, international
political developments, and the timing and extent of changes in interest
rates and prices for natural gas and electricity.
RESULTS OF OPERATIONS:
The following discussions reflect the results for the nine months and
three months ended September 30, 1996 compared to the corresponding
periods in 1995:
EARNINGS
Earnings per common share from continuing operations for the three
months ended September 30, 1996 were $0.54, up $0.03 per share from the
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<PAGE>
same period in 1995. Earnings per share from continuing operations for
the nine months ended September 30, 1996 were $1.51, up from $1.48 per
share for the same period in 1995. The change in the three-month
earnings results primarily from the CPUC's approval of SDG&E's 1995 base
rates performance-based ratemaking reward and lower operating and
maintenance expenses. The increase in earnings for the nine months is
due to various offsetting factors, including changes in incentive
rewards for PBR and demand-side management programs, a higher authorized
rate base and Enova Financial's additional investments in affordable-
housing limited partnerships.
OPERATING REVENUES
Electric revenues increased for the nine months and three months ended
September 30, 1996 from the corresponding periods in 1995 primarily due
to the accelerated recovery of SONGS Units 2 and 3 as further discussed
in "Operating Activities" below.
OPERATING EXPENSES
For the nine months and three months ended September 30, 1996, electric
fuel expense increased from the corresponding periods in 1995 primarily
due to increased nuclear and natural-gas-fired generation, as well as
increases in natural gas prices. During those same periods, purchased-
power expense decreased due to the availability of lower-cost nuclear
generation in 1996 and decreases in purchased-power capacity charges.
Gas purchased for resale increased primarily due to increases in natural
gas prices.
Depreciation and decommissioning expenses increased due to the shortened
recovery period for SONGS Units 2 and 3 as described in the 1995 Form
10-K. General and administrative expenses increased due to increased
demand-side-management expenditures, which are recoverable via a
balancing account.
REGULATORY MATTERS:
CALIFORNIA PUBLIC UTILITIES COMMISSION'S INDUSTRY RESTRUCTURING
In December 1995 the CPUC issued its policy decision on the
restructuring of California's electric utility industry to stimulate
competition and reduce rates. In addition, in September 1996 California
Governor Wilson signed into law a bill restructuring the industry. See
additional discussion of industry restructuring in Note 2 of the notes
to financial statements.
ELECTRIC RATES
In October 1996 SDG&E filed its 1997 Energy Cost Adjustment Clause
application for the forecast period May 1997 through April 1998.
Reflecting the mandated rate freeze contained in AB 1890, the forecast
phase requested no rate changes and no revenue requirement impact. The
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<PAGE>
reasonableness phase of the filing requests that the CPUC review for
reasonableness the second- and third-year PBR generation and dispatch
rewards of $0.8 million and $9.8 million, respectively, and a SONGS
target capacity factor reward of $3.5 million. A CPUC decision is
expected in mid 1997 on the forecast phase and in late 1997 on the
reasonableness phase.
PERFORMANCE-BASED RATEMAKING
SDG&E's advice letter, filed with the CPUC for a $5.5 million Base Rates
PBR reward for 1995, was approved by resolution in September 1996.
In July 1996 SDG&E filed with the CPUC an application requesting a
generation and dispatch PBR reward of $9.8 million. SDG&E has requested
that the CPUC review the reward for reasonableness, as discussed in
"Electric Rates" above. The filing was for the nine-month period August
1995 through April 1996 in order to align the PBR year with the ECAC
year.
GAS RATES
In September 1996 SDG&E filed a gas-refund plan with the CPUC. If
approved, the $12 million refund would occur in December 1996 as a one-
time credit of $6.70 on a typical residential customer's bill. The
refund is primarily due to the overcollected balance in the Core
Purchased Gas Account as of June 1996 and a refund received from El Paso
Natural Gas Company. A CPUC decision is expected in November 1996.
COST OF CAPITAL
SDG&E and the CPUC's Office of Ratepayer Advocates (ORA) have reached an
agreement on SDG&E's 1997 Cost of Capital application, recommending no
change to SDG&E's present authorized return on common equity of 11.60
percent and a decrease in SDG&E's overall rate of return from 9.37
percent to 9.35 percent. The small decrease in rate of return is due to
a lower expected cost of long-term debt. A final CPUC decision is
expected in late 1996. The 11.60 percent return establishes SDG&E's
benchmark to be used in its new cost of capital mechanism effective
January 1, 1998 (referred to as the Market Indexed Capital Adjustment
Mechanism). As a result, SDG&E will discontinue participation in the
annual cost of capital proceeding. The new mechanism automatically
resets SDG&E's return based on the prior year's interest rates.
DEMAND-SIDE MANAGEMENT
An agreement has been reached with the ORA on all earnings issues for
1994 and 1995 demand-side management programs. SDG&E has agreed to
reduce 1994 DSM rewards from $9 million to $6 million, deferring $2
million of the $3 million reduction to the 1997 proceeding when updated
information will be available. In addition, SDG&E has agreed to reduce
1995 DSM rewards from $39 million to $36 million based on current data.
A final CPUC decision is expected by late 1996. The ORA had previously
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<PAGE>
issued its report proposing to reduce the 1994 reward by $3 million
(without deferral) and to reduce the 1995 reward by $26 million.
LIQUIDITY AND CAPITAL RESOURCES:
Utility operations continue to be a major source of liquidity. In
addition, financing needs are met primarily through the issuance of
short-term and long-term debt, and common and preferred stock. These
capital resources are expected to remain available. SDG&E's cash
requirements include plant construction and other capital expenditures.
Nonutility cash requirements include capital expenditures related to new
products; affordable-housing and other investments; and repayments and
retirements of long-term debt. In addition to changes described
elsewhere, major changes in cash flows are described below.
OPERATING ACTIVITIES
Depreciation and decommissioning expense increased during the nine
months and three months ended September 30, 1996 compared to the
corresponding 1995 periods due to the accelerated recovery of SONGS
Units 2 and 3 approved by the CPUC in April 1996.
FINANCING ACTIVITIES
Enova Corporation and its subsidiaries anticipate that they will require
only minimal amounts of short-term debt and do not expect to issue stock
or long-term debt in 1996, other than for SDG&E refinancings. Enova
Financial, Enova Corporation's affordable-housing subsidiary, repaid $22
million of long-term debt in the ordinary course of business.
In May 1996 the CPUC approved SDG&E's request to issue up to $300
million of long-term debt to refinance previously issued long-term debt.
The decision also grants a two-year extension of a prior CPUC
authorization to issue $138 million of additional long-term debt and
$100 million of additional preferred stock.
In July 1996 SDG&E issued $130 million of Pollution Control Bonds at an
interest rate of 5.9 percent, due June 1, 2014. In August and September
1996 the funds obtained from this issue were used to retire the
following Pollution Control Bonds: Series CC, DD and FF (all variable
rate), Series 1979A (7.2 percent) and Series 1977A (6.375 percent).
In August 1996 SDG&E issued $39 million of variable-rate Industrial
Development Bonds, due July 1, 2021. In September 1996 the funds
obtained from this issue were used to retire Series GG (7.625 percent).
At September 30, 1996 SDG&E had short-term bank lines of $50 million and
long-term bank lines of $280 million. Commitment fees are paid on the
unused portion of the lines. There are no requirements for compensating
balances.
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<PAGE>
Quarterly cash dividends of $0.39 per share were declared for each
quarter of 1996 and for each quarter during the year ended December 31,
1995. The dividend payout ratio for the twelve months ended September
30, 1996 and years ended December 31, 1995, 1994, 1993, 1992 and 1991
were 78 percent, 80 percent, 130 percent, 82 percent, 81 percent and 79
percent, respectively. The high payout ratio for the year ended December
31, 1994 was due to the writedowns recorded during 1994. For additional
information regarding the writedowns, refer to the 1995 Annual Report on
Form 10-K. The payment of future dividends is at the discretion of
Enova's directors and is dependent upon future business conditions,
earnings and other factors. Enova's directors have set a goal to reach a
dividend payout of 60 percent to 70 percent of earnings through earnings
growth and new investment. Net cash flows provided by operating
activities currently are sufficient to maintain the payment of dividends
at the anticipated level.
SDG&E maintains its capital structure so as to obtain long-term
financing at the lowest possible rates. The following table shows the
percentages of capital represented by the various components. The
capital structures are net of the construction funds held by a trustee
in 1992 and 1993.
September 30,
1991 1992 1993 1994 1995 1996
-----------------------------------------------------------
Common equity 47% 47% 47% 48% 49% 49%
Preferred stock 5 5 4 4 4 4
Debt and leases 48 48 49 48 47 47
-----------------------------------------------------------
Total 100% 100% 100% 100% 100% 100%
-----------------------------------------------------------
The following table lists key financial ratios for SDG&E.
Twelve Year
months ended ended
September 30, December 31,
1996 1995
----------------- -------------
Pretax interest coverage 4.8 X 4.5 X
Internal cash generation 124 % 115 %
Construction expenditures as
a percent of capitalization 7.5 % 7.7 %
DERIVATIVES: Registrants' policy is to use derivative financial
instruments to reduce exposure to fluctuations in interest rates,
foreign currency exchange rates and natural gas prices. These financial
instruments are with major investment firms and, along with cash
equivalents and accounts receivable, expose Registrants to market and
credit risks. These risks may at times be concentrated with certain
counterparties, although counterparty non-performance is not
anticipated. Registrants do not use derivatives for speculative
purposes.
18
<PAGE>
At September 30, 1996 SDG&E had one interest-rate swap agreement: a
floating-to-fixed-rate swap maturing in 2002 associated with $45 million
of variable-rate bonds. SDG&E's pension fund periodically uses foreign
currency forward contracts to reduce its exposure from exchange-rate
fluctuations associated with certain investments in foreign equity
securities. At September 30, 1996 there were no forward contracts
outstanding.
In October 1996 the Enova Corporation and SDG&E Boards of Directors
approved the companies' use of energy derivatives in price-risk-
management activities for both hedging and trading purposes within
certain limitations imposed by company policies. Price-risk-management
activities will commence, at the earliest, in late 1996, initially in
the area of hedging price volatility of natural-gas purchases.
INVESTING ACTIVITIES
For the nine months ended September 30, 1996 cash used in SDG&E's
investing activities included utility construction expenditures and
payments to its nuclear decommissioning trust. Utility construction
expenditures, excluding nuclear fuel and the allowance for equity funds
used during construction, were $221 million in 1995 and are estimated to
be $220 million in 1996. SDG&E continuously reviews its construction,
investment and financing programs and revises them in response to
changes in competition, customer growth, inflation, customer rates, the
cost of capital, and environmental and regulatory requirements. Among
other things, the level of SDG&E's expenditures in the next few years
will depend heavily on the impact of industry restructuring and on the
timing of expenditures to comply with air emission reduction and other
environmental requirements. Payments to the nuclear decommissioning
trust are expected to continue until SONGS is decommissioned, which is
not expected to occur before 2013. Although Unit 1 was permanently shut
down in 1992, it is expected to be decommissioned concurrently with
Units 2 and 3.
Enova Corporation's level of non-utility expenditures in the next few
years will depend primarily on the activities of its subsidiaries, some
of which are discussed below, and the proposed combination of Enova
Corporation and Pacific Enterprises and formation of the energy-
marketing joint venture, which are discussed in Note 1 of the notes to
financial statements.
The Mexican Energy Regulatory Commission has awarded Enova International
and its partners, Pacific Enterprises International and Proxima S.A. de
C.V., the first natural gas privatization license in Mexico, allowing
the partnership to build and operate a natural gas distribution system
in Mexicali, Baja, California. The partnership will be granted a 30-year
license with exclusive rights to supply natural gas to the region for
the first 12 years. The Mexican company formed by the three partners,
Distribuidora de Gas Natural de Mexicali, will invest up to $25 million
during the first five years of the license period, providing service to
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<PAGE>
major commercial and industrial users and more than 25,000 residents
beginning in July 1997.
OTHER SIGNIFICANT BALANCE SHEET CHANGES
Besides the effects of items discussed in the preceding pages, there
were significant changes to Enova Corporation's and SDG&E's balance
sheets at September 30, 1996, compared to December 31, 1995. The
increase in investments and other property for Enova Corporation was due
to Enova Financial's affordable-housing investments. The decrease in
investments and other property for SDG&E was due to SDG&E's transfer of
its subsidiaries to Enova Corporation in January 1996. The increases in
other current assets and accumulated deferred income taxes were due to
differences in the timing of income tax payments. The decreases in
deferred charges and other assets and in deferred credits and other
liabilities were due primarily to a decrease in the projected pension
benefit obligation as a result of a lower assumed actuarial discount
rate.
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<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no significant subsequent developments in the Public
Service of New Mexico, North City West and, except for McLandrich
discussed below, SONGS personal injury litigation proceedings.
Background information concerning these and the following proceedings is
contained in Enova Corporation's 1995 Annual Report on Form 10-K and in
its March 31, 1996 and June 30, 1996 Quarterly Reports on Form 10-Q.
Canadian Natural Gas
On September 11, 1996 SDG&E filed in the Ninth Circuit Federal Court of
Appeals an appeal of the May 1996 U.S. District Court judgment granting
Canadian Hunter's and Summit's motion to dismiss the case.
SDG&E is unable to predict the ultimate outcome of these proceedings.
Electric and Magnetic Fields
On August 22, 1996 the California Supreme Court unanimously affirmed the
California Court of Appeal decision to dismiss the Covalt case, ruling
that the California Public Utilities Commission, not the courts, has
exclusive jurisdiction over the power-line health and safety issues the
plaintiffs raised in this matter.
SONGS Personal Injury Litigation
In September 1996 the United States Circuit Court of Appeals in the
McLandrich case denied SDG&E's petition for review of the Federal
District Court's pretrial ruling that plaintiffs' suit against SDG&E is
not barred by the workers' compensation exclusivity rule. SDG&E may not
further appeal this ruling until after a final disposition of the case
in the trial court. At issue is whether SDG&E was an employer of the
former SONGS worker. If so, workers' compensation would be the exclusive
remedy for McLandrich's alleged work-related injuries and the lawsuit
against SDG&E would have to be dismissed. Southern California Edison,
the majority owner and operator of SONGS, was dismissed from the case
pursuant to the workers' compensation exclusivity rule. Edison's
dismissal is being appealed. The case will be returned to the Federal
District Court pending disposition of the appeal of Edison's dismissal
in late 1997 or early 1998.
SDG&E is unable to predict the ultimate outcome of this proceeding.
21
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10 - Material Contracts (Compensation)
10.1 Employment agreement between Enova Corporation and Stephen
L. Baum, dated September 18, 1996.
10.2 Employment agreement between San Diego Gas & Electric
Company and Donald E. Felsinger, dated September 18, 1996.
10.3 Amended 1986 Long-Term Incentive Plan, amended and restated
effective April 25, 1995 and as amended through July 22,
1996.
10.4 Supplemental Executive Retirement Plan restated as of August
26, 1996.
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 Schedules
27.1 Financial Data Schedule for the nine months ended September
30, 1996 for Enova Corporation.
27.2 Financial Data Schedule for the nine months ended September
30, 1996 for SDG&E.
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed on September 24, 1996
announcing a bill on restructuring the electric utility industry
signed into law by California Governor Wilson.
A Current Report on Form 8-K was filed on October 15, 1996
announcing an agreement entered into by Enova Corporation and
Pacific Enterprises to combine the two companies.
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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.
ENOVA CORPORATION
SAN DIEGO GAS & ELECTRIC COMPANY
(Registrants)
Date: February 5, 1997 By: F.H. Ault
----------------------------------
(Signature)
F. H. AULT
Vice President and Controller
