SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1997
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Exact
Name of
Commission Registrant IRS Employer
File as specified State of Identification
Number in its charter Incorporation Number
- ---------- -------------- -------------- --------------
1-3779 SAN DIEGO GAS &
ELECTRIC COMPANY California 95-1184800
1-11439 ENOVA CORPORATION California 33-0643023
101 ASH STREET, SAN DIEGO, CALIFORNIA 92101
- ----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (619)696-2000
--------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
- ------------------- ---------------------
San Diego Gas & Electric Company
Preference Stock (Cumulative) Without Par Value
(except $1.70 and $1.7625 Series) American
Cumulative Preferred Stock, $20 Par Value (except 4.60% Series) American
Enova Corporation
Common Stock, Without Par Value New York and Pacific
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
San Diego Gas & Electric Company None
Enova Corporation None
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 and (2) has been subject to
such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. [ ]
Exhibit Index on page 90. Glossary on page 98.
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of January 31, 1998:
Enova Corporation Common Stock $2.9 Billion
San Diego Gas & Electric Company Preferred Stock $22 Million
Common Stock outstanding without par value as of January 31, 1998:
Enova Corporation 113,606,162
San Diego Gas & Electric Company Wholly owned by Enova Corporation
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the March 1998 Proxy Statement prepared for the April 1998
annual meeting of shareholders are incorporated by reference into Part
III.
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TABLE OF CONTENTS
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . 15
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . 16
Item 4. Submission of Matters to a Vote of Security Holders. 20
Executive Officers of the Registrant . . . . . . . . 20
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . 22
Item 6. Selected Financial Data . . . . . . . . . . . . . . 23
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . 25
Item 8. Financial Statements and Supplementary Data . . . . 47
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . 83
PART III
Item 10. Directors and Executive Officers of the Registrant . 83
Item 11. Executive Compensation . . . . . . . . . . . . . . . 83
Item 12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . 83
Item 13. Certain Relationships and Related Transactions . . . 83
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . 84
Independent Auditors' Consent . . . . . . . . . . . . . . . . 86
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . 89
GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
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PART I - Enova Corporation/San Diego Gas & Electric
ITEM 1. BUSINESS
Description of Business
A description of Enova Corporation and its subsidiaries, including a
discussion on the proposed business combination with Pacific
Enterprises, is given in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" herein. Additional
information on the business combination is described in Note 1 of the
"Notes to Consolidated Financial Statements" herein.
GOVERNMENT REGULATION
Enova Corporation
Enova Corporation and its subsidiaries are exempt from all provisions,
except Section 9(a)(2), of the Public Utility Holding Company Act of
1935 ("Holding Company Act") on the basis that Enova Corporation and San
Diego Gas & Electric are incorporated in the same state and their
business is predominately intrastate in character and carried on
substantially in the state of incorporation. It is necessary for Enova
Corporation to file an annual exemption statement with the Securities
and Exchange Commission (SEC), and the exemption may be revoked by the
SEC upon a finding that the exemption may be detrimental to the public
interest or the interest of investors or consumers. Enova Corporation
has no intention of becoming a registered holding company under the
Holding Company Act.
Enova Corporation is not a public utility under the laws of the State of
California and is not subject to regulation as such by the California
Public Utilities Commission (CPUC). See "State Regulation" below for a
description of the regulation of SDG&E by the CPUC. However, the CPUC
decision authorizing SDG&E to reorganize into a holding company
structure contains certain conditions, which, among other things,
provide the CPUC access to the portion of books and records of Enova
Corporation and its affiliates that relate to transactions with SDG&E;
require Enova Corporation and its subsidiaries to employ accounting and
other procedures and controls to facilitate full review by the CPUC and
to protect against subsidization by SDG&E's customers of non-utility
activities; require that all transfers of market, technological or
similar data from SDG&E to Enova Corporation or its affiliates are made
at the higher of the fully-loaded cost or market value; preclude SDG&E
from guaranteeing any obligations of Enova Corporation without prior
written consent from the CPUC; provide for royalty payments to be paid
by Enova Corporation or its other subsidiaries in connection with the
transfer of product rights, patents, copyrights or similar legal rights
from SDG&E; and prevent Enova Corporation and its other subsidiaries
from providing certain facilities and equipment to SDG&E except through
competitive bidding. In addition, the decision provides that SDG&E shall
maintain a balanced capital structure in accordance with prior CPUC
decisions, that SDG&E's dividend policy shall continue to be established
by SDG&E's board of directors as though SDG&E were a comparable stand-
alone utility company, and that the capital requirements of SDG&E, as
determined to be necessary to meet SDG&E's service obligations, shall be
given first priority by the boards of directors of Enova Corporation and
SDG&E.
In December 1997 the CPUC issued a decision on the rules governing
transactions between all of California's regulated utilities and their
affiliates that are not regulated by the CPUC. A discussion of these
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rules is included in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" herein.
San Diego Gas & Electric
Local Regulation
San Diego Gas & Electric has separate electric and gas franchises with
the two counties and the 25 cities in its service territory. These
franchises allow SDG&E to locate facilities for the transmission and
distribution of electricity and gas in the streets and other public
places. The franchises do not have fixed terms, except for the electric
and gas franchises with the cities of Chula Vista (expiring in 1998),
Encinitas (2012), San Diego (2021) and Coronado (2028); and the gas
franchises with the city of Escondido (2036) and the county of San Diego
(2030). Negotiations for a new agreement with Chula Vista are currently
in progress.
State Regulation
The CPUC consists of five members appointed by the governor and
confirmed by the senate for six-year terms. The CPUC regulates SDG&E's
rates and conditions of service, sales of securities, rate of return,
rates of depreciation, uniform systems of accounts, examination of
records, and long-term resource procurement. The CPUC also conducts
various reviews of utility performance and conducts investigations into
various matters, such as deregulation, competition and the environment,
to determine its future policies.
The California Energy Commission (CEC) has discretion over electric-
demand forecasts for the state and for specific service territories.
Based upon these forecasts, the CEC determines the need for additional
energy sources and for conservation programs. The CEC sponsors
alternative-energy research and development projects, promotes energy
conservation programs, and maintains a state-wide plan of action in case
of energy shortages. In addition, the CEC certifies power-plant sites
and related facilities within California.
Federal Regulation
The Federal Energy Regulatory Commission (FERC) regulates transmission
access, the uniform systems of accounts, rates of depreciation and
electric rates involving sales for resale. The FERC also regulates the
interstate sale and transportation of natural gas.
The Nuclear Regulatory Commission (NRC) oversees the licensing,
construction and operation of nuclear facilities. NRC regulations
require extensive review of the safety, radiological and environmental
aspects of these facilities. Periodically, the NRC requires that newly
developed data and techniques be used to re-analyze the design of a
nuclear power plant and, as a result, requires plant modifications as a
condition of continued operation in some cases.
Licenses and Permits
SDG&E obtains a number of permits, authorizations and licenses in
connection with the construction and operation of its generating plants.
Discharge permits, San Diego Air Pollution Control District permits and
NRC licenses are the most significant examples. The licenses and permits
may be revoked or modified by the granting agency if facts develop or
events occur that differ significantly from the facts and projections
assumed in granting the approval. Furthermore, discharge permits and
other approvals are granted for a term less than the expected life of
the facility. They require periodic renewal, which results in continuing
regulation by the granting agency.
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Other regulatory matters are described throughout this report.
SOURCES OF REVENUE
(In Millions of Dollars) 1997 1996 1995
- ------------------------------------------------------------------
SDG&E revenue by type of customer:
Electric-
Residential $ 674 $ 642 $ 610
Commercial 670 621 589
Industrial 264 259 250
Other 162 69 55
------ ------ ------
Total Electric 1,770 1,591 1,504
------ ------ ------
Gas-
Residential 241 210 189
Commercial 82 69 60
Industrial 38 32 25
Other 37 37 36
------ ------ ------
Total Gas 398 348 310
------ ------ ------
Total SDG&E 2,168 1,939 1,814
------ ------ ------
Other 49 54 57
------ ------ ------
Total $2,217 $1,993 $1,871
====== ====== ======
Industry segment information is contained in "Statements of Consolidated
Financial Information by Segments of Business" herein.
CONSTRUCTION EXPENDITURES
Construction expenditures are described in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" herein.
ELECTRIC OPERATIONS
Introduction
In September 1996 the state of California enacted a law restructuring
California's electric utility industry (AB 1890). The legislation adopts
the December 1995 CPUC policy decision restructuring the industry to
stimulate competition and reduce rates. This is discussed in
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" and in Note 10 of the "Notes to Consolidated Financial
Statements" herein.
Resource Planning
SDG&E's ability to provide energy at the lowest possible cost has been
based on a combination of production from its own plants and purchases
from other producers. The purchases have been a combination of short-
term and long-term contracts and spot-market purchases. Most resource
acquisitions are obtained through a competitive bidding process. In
December 1994 the CPUC issued its Biennial Resource Plan Update (BRPU)
decision ordering SDG&E, Pacific Gas & Electric (PG&E), and Southern
California Edison (Edison) to allow qualified non-utility power
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producers that cogenerate or use renewable energy technologies to bid
for a portion of the utilities' future capacity needs. As a result of
the decision, SDG&E would be required to enter into contracts (ranging
in term from 17 to 30 years) to purchase an additional 500 megawatts
(mw) of power at an estimated cost of $2.3 billion beginning in 1997.
Prices under these contracts could significantly exceed the future
market price. In February 1995 the FERC issued an order declaring the
BRPU auction procedures unlawful under federal law. In July 1995 the
CPUC issued a ruling encouraging SDG&E, PG&E and Edison to reach
settlements with the auction winners. In October 1997 SDG&E filed an
application with the CPUC seeking approval of the settlements it reached
with three of its five auction winners. Settlement discussions with the
other two are ongoing. To date, no purchases under the BRPU contracts
have been made.
Additional information concerning resource planning is provided in
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" and in Notes 9 and 10 of the "Notes to Consolidated
Financial Statements" herein.
Electric Resources
Based on generating plants in service and purchased-power contracts in
place, the net mw of electric power available to SDG&E at February 28,
1998 are as follows:
Source Net mw
--------------------------------------------------
Gas/oil generating plants 1,641
Combustion turbines 332
Nuclear generating plants 430
Long-term contracts with other utilities 325
Contracts with others (94) 593
-----
Total 3,321
=====
SDG&E's system peak demand reached an all-time record of 3,668 mw on
September 4, 1997, when the net system capability, including power
purchases, was 4,102 mw. The previous record was 3,335 mw which was
reached on August 17, 1992.
Gas/Oil Generating Plants: SDG&E's South Bay (Chula Vista, California)
and Encina (Carlsbad, California) power plants are equipped to burn
either natural gas or fuel oil. The four South Bay units went into
operation between 1960 and 1971 and can generate 690 mw. The five Encina
units began operation between 1954 and 1978 and can generate 951 mw.
SDG&E sold and leased back Encina Unit 5 (330 mw) in 1978. The lease
term is through 2004, with renewal options for up to 15 additional
years.
SDG&E has 19 combustion turbines that were placed in service from 1966
to 1979. They are located at various sites and are used only in times of
peak demand.
San Onofre Nuclear Generating Station (SONGS): SDG&E owns 20 percent of
the three nuclear units at SONGS (south of San Clemente, California).
The cities of Riverside and Anaheim own a total of 5 percent of SONGS 2
and 3. Edison owns the remaining interests and operates the units.
SONGS 1 was removed from service in November 1992 when the CPUC issued a
decision to permanently shut down the unit. At that time SDG&E began the
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recovery of its remaining capital investment, with full recovery
completed in April 1996. SDG&E and Edison filed a decommissioning plan
in November 1994, although final decommissioning is not scheduled to
occur until 2013 when SONGS 2 and 3 are also decommissioned. The unit's
spent nuclear fuel has been removed from the reactor and stored on-site.
In March 1993 the NRC issued a Possession-Only License for SONGS 1, and
the unit was placed in a long-term storage condition in May 1994.
SONGS 2 and 3 began commercial operation in August 1983 and April 1984,
respectively. SDG&E's share of the capacity is 214 mw of SONGS 2 and 216
mw of SONGS 3.
During 1997 SDG&E spent $7 million on capital modifications and
additions and expects to spend $14 million in 1998. SDG&E deposits funds
in an external trust to provide for the future dismantling and
decontamination of the units. The shutdown of SONGS 1 does not affect
contributions to the trust.
Additional Information: Additional information concerning SDG&E's power
plants, the SONGS units, nuclear decommissioning and the CPUC's industry
restructuring proposal (including SDG&E's plan to auction its electric
generation assets) is provided immediately below and in "Environmental
Matters," "Electric Properties," "Legal Proceedings," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and in Notes 5, 9 and 10 of the "Notes to Consolidated
Financial Statements" herein.
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Purchased Power: The following table lists contracts with the various
suppliers:
Megawatt
Supplier Period Commitment Source
- -----------------------------------------------------------------------
Long-Term Contracts with Other Utilities:
Portland General Through December 1998 50 Hydro storage
Electric (PGE) Through December 2013 75 Coal
Public Service
Company of
New Mexico (PNM) Through April 2001 100 System supply
PacifiCorp Through December 2001 100 System Supply
-----
Total 325
=====
Contracts with Others:
LG&E Power Marketing Through December 2001 150 System Supply
Goal Line Limited Through December 2025 50 Cogeneration
Partnership
Illinova Power
Marketing Through December 1999 200 System Supply
Applied Energy Through December 2019 102 Cogeneration
Yuma Cogeneration Through June 2024 50 Cogeneration
Other (89) Various 41 Cogeneration
------
Total 593
======
On the contracts with PGE (sourced from coal) and PNM, SDG&E pays a
capacity charge plus a charge based on the amount of energy received.
SDG&E also has a contract with PGE for available hydro storage service.
Charges under these contracts are based on the selling utility's costs,
including a return on and depreciation of the utility's rate base (or
lease payments in cases where the utility does not own the property),
fuel expenses, operating and maintenance expenses, transmission
expenses, administrative and general expenses, and state and local
taxes. Charges under contracts from PacifiCorp, LG&E and Illinova are
for firm energy only and are based on the amount of energy received. The
prices under these contracts are at market value at the time the
contracts were negotiated. Costs under the remaining contracts (all with
Qualifying Facilities) are based on SDG&E's avoided cost.
Additional information concerning SDG&E's purchased-power contracts is
described immediately below, and in "Legal Proceedings," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and in Notes 9 and 10 of the "Notes to Consolidated
Financial Statements" herein.
Electric Generation Divestiture
In November 1997 SDG&E's board of directors approved a plan to auction
the company's power plants and other electric generating assets,
enabling SDG&E to continue to concentrate its business on the
transmission and distribution of electricity and natural gas as
California opens its electric utility industry to competition in 1998.
The plan includes the divestiture of SDG&E's fossil power plants (Encina
and South Bay) and its combustion turbines, as well as its 20-percent
interest in SONGS and its portfolio of long-term power contracts,
including those with qualifying facilities. Additional information
describing SDG&E's plan to divest of its electric generating assets is
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described in Management's Discussion and Analysis of Financial Condition
and Results of Operations" and in Notes 9 and 10 of the "Notes to
Consolidated Financial Statements" herein.
Power Pools
In 1964 SDG&E, PG&E, and Edison entered into the California Power Pool
Agreement. It provided for the transfer of electrical capacity and
energy by purchase, sale or exchange during emergencies and at other
mutually determined times. Due to electric industry restructuring
(discussed below) the California Power Pool was terminated by the FERC
in May 1997. However, SDG&E, Edison, PG&E and the Los Angeles Department
of Water and Power will continue to abide by the provisions of the
existing California Statewide Emergency Plan for sharing capacity and
energy in the event of a severe resource emergency until the PX and ISO
are fully operational.
SDG&E is a participant in the Western Systems Power Pool (WSPP), which
includes an electric power and transmission rate agreement with
utilities and power agencies located throughout the United States and
Canada. More than 150 investor-owned and municipal utilities, state and
federal power agencies, energy brokers, and power marketers share power
and information in order to increase efficiency and competition in the
bulk power market. Participants are able to target and coordinate
delivery of cost-effective sources of power from outside their service
territories through a centralized exchange of information. Although the
extent has not yet been determined, the status of the WSPP is likely to
change due to industry restructuring and the initiation of the PX and
ISO.
Transmission Arrangements
In addition to interconnections with other California utilities, SDG&E
has firm transmission capabilities for purchased power from the
Northwest, the Southwest and Mexico.
Pacific Intertie: The Pacific Intertie, consisting of AC and DC
transmission lines, enables SDG&E to purchase and receive surplus coal
and hydroelectric power from the Northwest. SDG&E, PG&E, Edison and
others share transmission capacity on the Pacific Intertie under an
agreement that expires in July 2007. SDG&E's share of the intertie was
266 MW. Due to electric industry restructuring (discussed below), the
operating rights of SDG&E, Edison and PG&E on the Pacific Intertie have
been transferred to the ISO.
Southwest Powerlink: SDG&E's 500-kilovolt Southwest Powerlink
transmission line, which is shared with Arizona Public Service Company
and Imperial Irrigation District, extends from Palo Verde, Arizona to
San Diego and enables SDG&E to import power from the Southwest. SDG&E's
share of the line is 931 mw, although it can be less, depending on
specific system conditions.
Mexico Interconnection: Mexico's Baja California Norte system is
connected to SDG&E's system via two 230-kilovolt interconnections with
firm capability of 408 mw. SDG&E uses these interconnections for
transactions with Comision Federal de Electricidad (CFE), Mexico's
government-owned electric utility.
Transmission Access
As a result of the enactment of the National Energy Policy Act of 1992,
the FERC has established rules to implement the Act's transmission-
access provisions. These rules specify FERC-required procedures for
others' requests for transmission service. In October 1997 the FERC
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approved the transfer of control by the California investor-owned
utilities (IOUs) of their transmission facilities to the ISO. Beginning
on March 31, 1998 the ISO will be responsible for the operation and
control of the transmission lines. Additional information regarding the
ISO and transmission access is discussed below and in "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" herein.
Power Exchange and Independent System Operator
Under the CPUC's electric restructuring decision, beginning on March 31,
1998 customers will have the option to buy their electricity through an
independent exchange that will obtain power from qualifying facilities,
nuclear units and, lastly, from the lowest-bidding suppliers. The PX
will serve as a wholesale power pool allowing all energy producers to
participate competitively. The ISO will schedule power transactions and
access to the transmission system. As discussed above, California's IOUs
will transfer the operational control of their transmission facilities
to the ISO, which is under FERC jurisdiction. Additional information
regarding the PX and ISO is discussed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" herein.
Fuel and Purchased-Power Costs
The following table shows the percentage of each electric fuel source
used by SDG&E and compares the costs of the fuels with each other and
with the total cost of purchased power:
Percent of Kwhr Cents per Kwhr
- -----------------------------------------------------------------------
1997 1996 1995 1997 1996 1995
----- ----- ----- ---- ---- ----
Natural gas 19.8% 22.8% 21.7% 3.3 2.8 2.3
Nuclear fuel 11.8 19.6 16.5 0.6 0.5 0.5
Fuel oil 0.1 1.1 0.1 2.4 2.2 2.1
----- ----- -----
Total generation 31.7 43.5 38.3
Purchased
power - net 68.3 56.5 61.7 2.8 3.1 3.3
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
The cost of purchased power includes capacity costs as well as the costs
of fuel. The cost of natural gas includes transportation costs. The
costs of natural gas, nuclear fuel and fuel oil do not include SDG&E's
capacity costs. While fuel costs are significantly less for nuclear
units than for other units, capacity costs are higher.
Electric Fuel Supply
Natural Gas: Information concerning natural gas is provided in "Natural
Gas Operations" herein.
Nuclear Fuel: The nuclear-fuel cycle includes services performed by
others. These services and the dates through which they are under
contract are as follows:
Mining and milling of uranium concentrate 2003
Conversion of uranium concentrate to uranium hexafluoride 2003
Enrichment of uranium hexafluoride(1) 2003
Fabrication of fuel assemblies 2003
Storage and disposal of spent fuel(2) --
(1) SDG&E has a contract with Urenco, a British consortium, for
enrichment services through 2003.
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(2) Spent fuel is being stored at SONGS, where storage capacity will be
adequate at least through 2006. If necessary, modifications in fuel-
storage technology can be implemented to provide on-site storage
capacity for operation through 2013, the expiration date of the NRC
operating license. The plan of the U.S. Department of Energy (DOE) is to
provide a permanent storage site for the spent nuclear fuel by 2010.
Pursuant to the Nuclear Waste Policy Act of 1982, SDG&E entered into a
contract with the DOE for spent-fuel disposal. Under the agreement, the
DOE is responsible for the ultimate disposal of spent fuel. SDG&E is
paying a disposal fee of $0.91 per megawatt-hour of net nuclear
generation. Disposal fees average $3 million per year.
To the extent not currently provided by contract, the availability and
the cost of the various components of the nuclear-fuel cycle for SDG&E's
nuclear facilities cannot be estimated at this time.
Additional information concerning nuclear-fuel costs is discussed in
Note 9 of the "Notes to Consolidated Financial Statements" herein.
Fuel Oil: SDG&E has no long-term commitments to purchase fuel oil. The
use of fuel oil is dependent upon price differences between it and
natural gas, and air-emission limitations associated with the San Diego
Air Pollution Control District's Rule 69. Additional information
concerning air-emission restrictions, including Rule 69, is provided in
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" herein. During 1997 SDG&E burned 49,000 barrels of fuel
oil.
NATURAL-GAS OPERATIONS
SDG&E purchases natural gas for resale to its customers and for fuel in
its generating plants. All natural gas is delivered to SDG&E under a
transportation and storage agreement with Southern California Gas
Company (SoCalGas) through two transmission pipelines with a combined
capacity of 454 million cubic feet per day. On December 12, 1997 SDG&E's
natural-gas usage, which included consumption by both customers and
SDG&E's power plants, reached a new one-day peak of 555 million cubic
feet (mcf). The previous record of 500 mcf had been set on November 28,
1994.
During 1997 SDG&E purchased approximately 98 billion cubic feet of
natural gas. The majority of SDG&E's natural-gas requirements are met
through contracts of less than one year. SDG&E purchases natural gas
primarily from various spot-market suppliers and from suppliers under
short-term contracts. These supplies originate in New Mexico, Oklahoma
and Texas, and are transported to the SoCalGas pipeline at the
California border by El Paso Natural Gas Company and by Transwestern
Pipeline Company. SDG&E also has long-term contracts for natural gas
with four Canadian suppliers. Three of these suppliers have ceased
deliveries due to legal disputes. Natural gas from Canada is transported
to SDG&E's system over Alberta Natural Gas, Pacific Gas Transmission,
and PG&E pipelines. The natural-gas transportation contracts have
varying terms through 2023.
Additional information concerning SDG&E's gas operations is provided
under "Legal Proceedings," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and in Note 9 of the
"Notes to Consolidated Financial Statements" herein.
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RATE REGULATION
Industry Restructuring
In September 1996 the state of California enacted a law restructuring
California's electric utility industry. The legislation adopts the
December 1995 CPUC decision that restructures the industry to stimulate
competition and reduce rates. Electric industry restructuring is
discussed in detail in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and in Note 10 of the
"Notes to Consolidated Financial Statements" herein.
Cost of Capital
A description of SDG&E's cost of capital mechanism, the Market-Indexed
Capital Adjustment Mechanism (MICAM), is provided in "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" herein. MICAM eliminates the need to file an annual cost of
capital application.
Electric Fuel Costs and Sales Volumes
Rates to recover electric-fuel and purchased-power costs had previously
been determined in the Energy Cost Adjustment Clause (ECAC) proceeding.
The Electric Revenue Adjustment Mechanism (ERAM) compensated for
variations in sales volume compared to the estimates used for setting
the non-fuel component of rates. However, both ECAC and ERAM have been
eliminated as part of electric industry restructuring. The elimination
of ECAC and ERAM causes the revenues associated with electric fuel costs
and sales volumes to be market driven. Although no effect occurred for
the full year, quarterly earnings significantly fluctuated in 1997.
Additional information on balancing accounts is discussed below in
"Balancing Accounts" and in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" herein.
Natural-Gas Costs and Sales Volumes
Natural-gas commodity rates are set monthly based on market prices.
Under traditional ratemaking, natural-gas rates were adjusted annually
based on a forecast of natural-gas prices. This resulted in rate
stability, but also contributed to significant accumulations in the
Purchased Gas Account (PGA). Rates to recover the cost of transporting
natural gas to SDG&E are determined in the Biennial Cost Allocation
Proceeding (BCAP). The BCAP proceeding normally occurs every two years
and is updated in the interim year for purposes of amortizing any
accumulation in the balancing accounts. The natural-gas balancing
accounts include the PGA for natural-gas costs and the Gas Fixed Cost
Account (GFCA) for sales volumes. Balancing account coverage includes
both core customers (primarily residential and commercial customers) and
noncore customers (primarily large, industrial customers). However,
SDG&E does not receive balancing account treatment on 25 percent of
noncore GFCA overcollections and undercollections.
Balancing Accounts
Until 1997, the CPUC required electric balancing accounts for fuel and
purchased energy costs and for sales volumes, setting balancing account
rates based on estimated costs and sales volumes. Revenues were adjusted
upward or downward to reflect the differences between authorized and
actual volumes and costs. These differences were accumulated in the
balancing accounts and represented amounts to be either recovered from
customers or returned to them. As of December 31, 1997 net ECAC and ERAM
overcollections of $130 million have been transferred to the interim
transition cost balancing account to be applied to transition cost
recovery. Additional information on balancing accounts is discussed in
"Management's Discussion and Analysis of Financial Condition and Results
12
<PAGE>
of Operations" and in Note 2 of the "Notes to Consolidated Financial
Statements" herein.
Performance-Based Ratemaking
CPUC policies continue to move away from traditional cost-of-service
regulation and toward incentive mechanisms. SDG&E implemented
performance-based ratemaking (PBR) in 1993 for natural-gas procurement
and transportation, and for electric generation and purchased energy.
These mechanisms measure SDG&E's ability to purchase and transport
natural gas, and to generate or purchase energy at the lowest possible
cost, by comparing SDG&E's performance against various market
benchmarks. In 1994 SDG&E implemented its Base Rates PBR, which includes
the measurement of company performance indicators against a set of
predetermined standards. Under all of the PBR mechanisms, SDG&E's
shareholders and customers share in any savings or excess costs within
predetermined ranges. A discussion of the current status of these
programs is contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" herein.
Energy Conservation Programs
Over the past several years, SDG&E has promoted conservation programs to
encourage efficient use of energy. The programs are designed to use
energy-efficiency measures that will reduce customers' energy costs and
ultimately reduce the need to build additional power plants. The costs
of these programs have been recovered from customers. The programs
contained an incentive mechanism that could increase or decrease SDG&E's
earnings, depending upon the performance of the programs in meeting
specified efficiency and expenditure targets. However, consistent with
the industry trend toward increased competition, the CPUC has issued a
decision that the IOUs are to transfer the control of their energy-
efficiency programs to the competitive market beginning in October 1998.
The decision directs the creation of an oversight board that will
develop program policies and procedures and select program
administrators. The utilities no longer will be involved with program
delivery to customers, but will be allowed to bid to become
administrators. Until the transition to a fully competitive market is
complete, customers will continue to provide the funding. A discussion
of the status of these programs is contained in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" herein.
Low-Emission Vehicle Programs
SDG&E has conducted a CPUC-approved natural-gas-vehicle (NGV) program
since 1991. The program includes building refueling stations,
demonstrating new technology, providing incentives and converting
portions of SDG&E's vehicle fleet to natural gas. The cost of this
program is being recovered in natural-gas rates. In November 1995 the
CPUC issued its decision authorizing funding for limited electric-
vehicle (EV) and NGV programs through the year 2000 to allow recovery of
costs for operation and maintenance of SDG&E's EV and NGV fleets and NGV
fueling stations, and to allow recovery of transition costs to meet
existing commitments to customers. The decision requires the sale of
SDG&E's NGV fueling stations located on customer property within six
years. The CPUC approved a six-year program that provides a total of
$5.3 million for SDG&E's electric-vehicle program and $6.7 million for
its natural-gas-vehicle program over the six-year period.
Electric Rates
The average price per kilowatt-hour (kwh) charged to electric customers
was 9.8 cents in 1997 and 9.6 cents in 1996. California's electric
restructuring law (AB 1890) included a rate freeze for all customers.
Beginning on January 1, 1998 SDG&E's average system rate cannot exceed
13
<PAGE>
9.43 cents per kwh. Additional information on electric rates is
discussed in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" herein.
Natural-Gas Rates
The average price per therm of natural gas charged to customers was 65.0
cents in 1997 and 58.4 cents in 1996.
ENVIRONMENTAL MATTERS
Discussions about environmental issues affecting SDG&E, including
electric and magnetic fields, hazardous substances, asbestos, air quality
and water quality, are included in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" herein. The following
should be read in conjunction with those discussions.
Hazardous Substances
In 1994 the CPUC approved the Hazardous Waste Collaborative Memorandum
account, allowing utilities to recover 90 percent of certain costs to
clean up hazardous waste contamination at past and present utility sites
and to obtain recovery of some or all of such costs from responsible
parties, and to recover 70 percent of the related insurance litigation
expenses. SDG&E has asked the CPUC that, beginning on January 1, 1998,
the electric-generation portion of the hazardous waste memorandum account
be eliminated, and that the electric-generation-related cleanup costs be
eligible for transition cost recovery. A CPUC decision is still pending.
A discussion on transition costs and electric industry restructuring is
included in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and in Note 10 of the "Notes to Consolidated
Financial Statements" herein.
Due to the fact that SDG&E disposes of its hazardous wastes at facilities
owned and operated by other entities, applicable environmental laws may
impose an obligation on SDG&E and others to undertake corrective actions
if the owner or operator of such a facility fails to complete any
required corrective actions. This type of obligation has been imposed
upon SDG&E with respect to a site in Pico Rivera, California. SDG&E and
10 other entities have been named potential responsible parties by the
California Department of Toxic Substances Control (DTSC) and are liable
for any required corrective action regarding contamination at the site.
DTSC has taken this action because SDG&E and others sold used electrical
transformers to the site's owner. The DTSC considers SDG&E to be
responsible for 7.4 percent of the transformer-related contamination at
the site. The estimate for the development of the cleanup plan is
$850,000. SDG&E has contributed $73,000 to the effort. The estimate for
the actual cleanup, which commenced in 1997, is in the $2 million to $8
million range.
Underground Storage: California has enacted legislation to protect ground
water from contamination by hazardous substances. Underground storage
containers require permits, inspections and periodic reports, as well as
specific requirements for new tanks, closure of old tanks and monitoring
systems for all tanks. It is expected that cleanup of sites previously
contaminated by underground tanks will occur for an unknown number of
years. SDG&E cannot predict the cost of such cleanup. Pending assessment
and remediation proceedings are described below.
In May 1987 the San Diego Regional Water Quality Control Board issued
SDG&E a cleanup and abatement order for gasoline contamination
originating from an underground storage tank located at SDG&E's Mountain
Empire Operation and Maintenance facility. SDG&E assessed the extent of
14
<PAGE>
the contamination, removed all contaminated soil and completed
remediation of the site. Monitoring of the site confirms its remediation.
SDG&E has applied for and is awaiting a site-closure letter from the
Regional Water Quality Control Board.
Station B: Station B is located in downtown San Diego and was operated as
a steam and electric-generating facility between 1911 and June 1993.
Pursuant to a cleanup and abatement order, SDG&E remediated hydrocarbon
contamination discovered as a result of the removal of three 100,000-
gallon underground diesel-fuel storage tanks from an adjacent substation.
SDG&E has applied for and is awaiting a site-closure letter from the San
Diego County Department of Environmental Health.
OTHER
Research, Development and Demonstration (RD&D)
SDG&E has been conducting RD&D in areas that provided value to SDG&E and
its customers. Annual RD&D costs have averaged $6 million over the past
three years. The CPUC historically has permitted rate recovery of these
expenditures. In association with California's restructuring of the
electric utility industry, the CPUC has established a new structure and
initial funding levels to manage RD&D programs. A discussion of this is
included in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" herein.
Year 2000 Plans
A discussion of Enova's plans to prepare the company's computer systems
and applications for the year 2000 and beyond is included in
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" herein.
Wages
SDG&E and Local 465, International Brotherhood of Electrical Workers
have two labor agreements, a generation contract that runs through
February 28, 1998 and a utility contract (transmission and distribution)
that runs through August 31, 1998. Negotiations for a new generation
contract are ongoing.
Employees of Registrant
As of December 31, 1997 SDG&E had 3,576 employees, compared to 3,688 at
December 31, 1996. Enova and its other consolidated subsidiaries had 89
employees at December 31, 1997 compared to 49 at December 31, 1997.
Foreign Operations
SDG&E's foreign operations in 1997 included power purchases and sales
with CFE in Mexico; purchases of natural gas from suppliers in Canada;
and purchases of uranium from suppliers in Canada, Niger and Russia.
Enova International is part of two consortia that are developing and
operating natural-gas distribution systems in Mexico.
Additional information concerning foreign operations is provided under
"Electric Operations," "Natural Gas Operations," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and in Note 9 of the "Notes to Consolidated Financial
Statements" herein.
ITEM 2. PROPERTIES
Substantially all utility plant is subject to the lien of the July 1,
1940 mortgage and deed of trust and its supplemental indentures between
15
<PAGE>
SDG&E and the First Trust of California N.A. as trustee, securing the
outstanding first-mortgage bonds.
Information concerning SDG&E's properties is provided below. Additional
information is provided under "Electric Operations," "Gas Operations,"
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" and in Notes 2, 5, 9 and 10 of the "Notes to Consolidated
Financial Statements" herein.
Electric Properties
SDG&E's generating capacity is described in "Electric Resources",
herein.
The 1997 system load factor was 55 percent and ranged from 55 percent to
64 percent for the past five years.
SDG&E's electric transmission and distribution facilities include
substations, and overhead and underground lines. Periodically various
areas of the service territory require expansion to handle customer
growth.
SDG&E owns an approved nuclear power-plant site near Blythe, California.
Natural-Gas Properties
SDG&E's natural-gas facilities are located in San Diego and Riverside
counties and consist of the Moreno and Rainbow compressor stations,
various high-pressure transmission pipelines, high-pressure distribution
mains, and service lines. SDG&E's natural-gas system is sufficient to
meet customer demand and short-term growth. SDG&E is currently
undergoing an expansion of its high-pressure transmission lines to
accommodate expected long-term customer growth.
Other SDG&E Properties
The 21-story corporate office building at 101 Ash Street, San Diego is
occupied pursuant to a capital lease through the year 2005. The lease
has four separate five-year renewal options. SDG&E also occupies an
office complex at Century Park Court in San Diego pursuant to an
operating lease ending in the year 2007. The lease can be renewed for
two five-year periods.
In addition, SDG&E occupies eight operating and maintenance centers, two
business centers, six district offices, and five branch offices.
Non-Utility Property
Phase One Development, a subsidiary of Pacific Diversified Capital, held
one property in San Diego County during 1997. In December 1997 this
property was sold for residential development.
ITEM 3. LEGAL PROCEEDINGS
Management believes that the legal proceedings discussed below will not
have a material adverse effect on Enova's results of operations,
financial condition or liquidity.
Public Service Company of New Mexico
On October 27, 1993 SDG&E filed a complaint with the FERC against Public
Service Company of New Mexico, alleging that charges under a 1985 power-
purchase agreement are unjust, unreasonable and discriminatory. SDG&E
requested that the FERC investigate the rates charged under the
agreement and establish December 26, 1993 as the effective refund
16
<PAGE>
date. The relief, if granted, would reduce annual demand charges paid by
SDG&E to PNM by up to $11 million per year through April 2001. If
approved, the proceeds would be refunded principally to SDG&E
customers.On December 8, 1993 PNM answered the complaint and moved that
it be dismissed. PNM denied that the rates are unjust, unreasonable or
discriminatory and asserted that SDG&E's claims were barred by certain
orders issued by the FERC in 1988. On March 18, 1996 SDG&E filed a
second complaint with FERC against PNM, alleging in part that applying
the same methodology as SDG&E had used in the 1993 complaint, but based
on more recent cost information, results in charges under the 1985 power
purchase agreement that are unjust, unreasonable and discriminatory.
SDG&E requested that the FERC investigate the rates charged under the
1985 agreement and establish May 17, 1996 as the effective refund date.
The relief, if granted, would reduce annual demand charges paid by SDG&E
to PNM, in addition to the amount from the first complaint, by up to $12
million per year. On April 26, 1996 PNM answered the second complaint
and moved that it be dismissed for the same reasons in its answer to the
1993 complaint. On August 22, 1997 SDG&E filed a third complaint against
PNM alleging that the demand rate paid by SDG&E under the PNM power-
purchase agreement during 1996 was unjust and unreasonable, resulting in
an overcharge of up to $9.6 million during this period. On September 29,
1997 PNM answered the third complaint and moved that it be dismissed for
the same reasons stated in its answer to the 1993 complaint.
Canadian Natural Gas
During early 1991 SDG&E signed four long-term natural gas supply
contracts with Husky Oil Ltd., Canadian Hunter Ltd. and Noranda Inc.,
Bow Valley Energy Inc., and Summit Resources Ltd. Canadian-sourced
natural gas began flowing to SDG&E under these contracts on November 1,
1993. Disputes have arisen with each of these producers with respect to
events which are alleged by the producers to have occurred justifying a
revision to the pricing terms of each contract, and possibly their
termination. Consequently, during December 1993 SDG&E filed complaints
in the United States Federal District Court, Southern District of
California, seeking a declaration of SDG&E's contract rights.
Specifically, SDG&E states that neither price revision nor contract
termination is warranted.
On March 14, 1994 SDG&E voluntarily dismissed its complaint against Bow
Valley without prejudice. On April 24, 1994 the court denied the other
defendants' motions to dismiss SDG&E's complaints. These motions were
based on jurisdictional grounds. Two of the defendants, Bow Valley and
Husky Oil, filed claims on June 12, 1994 and June 29, 1994,
respectively, against SDG&E with the Queen's Bench in Alberta, Canada,
seeking a declaration that they are entitled to damages or, in the
alternative, that they may terminate their respective contracts with
SDG&E. SDG&E has answered these claims. On March 1, 1995 SDG&E and
Husky Oil reached an agreement dismissing all of their respective claims
with prejudice.
Bow Valley and Summit Resources gave SDG&E notice that their natural-gas
supply contracts with SDG&E were terminated pursuant to provisions in
the contract that purportedly give them the right to do so. SDG&E has
responded that the notices were inappropriate and that it will seek both
contract and tort damages. Bow Valley and Summit have subsequently
ceased deliveries of natural gas to SDG&E.
On May 10, 1996 the U.S. District Court granted Canadian Hunter's and
Summit's motions to dismiss the case, finding that the Alberta Sales of
Goods Act rendered the gas-purchase agreements between SDG&E and the
defendants voidable by either party. On June 1, 1996 Canadian Hunter
17
<PAGE>
ceased deliveries of gas to SDG&E. On September 11, 1996 SDG&E filed in
the Ninth Circuit Federal Court of Appeals an appeal of the U.S.
District Court's judgment granting Canadian Hunter's and Summit's
motions to dismiss the case.
On October 22, 1997 with respect to the Summit appeal and on December
31, 1997 with respect to the Canadian Hunter appeal, the Ninth Circuit
Federal Court of Appeals held that the long-term contracts for SDG&E to
buy Canadian natural gas were invalidated by changes in the Federal
Energy Regulatory Commission's regulation of transportation rates and by
a change in California's regulation of SDG&E gas rates. The Court upheld
the U.S. District Court's order allowing both Summit and Canadian Hunter
to void the 1991 gas-purchase agreements. The question of the value of
the gas delivered remains before the U.S. District Court.
North City West
On June 14, 1993 the Peninsula at Del Mar Highlands Homeowners
Association filed a complaint with the Superior Court of San Diego
County against the City of San Diego and SDG&E to prevent SDG&E from
constructing and operating an electric substation in an area which is
known as North City West. Construction was completed, and the substation
became operational in June 1994. In the complaint, the plaintiffs sought
to have the city either revoke previously issued permits or reopen the
hearing process to address alleged electric and magnetic field concerns.
On July 6, 1993 the court denied the plaintiffs' motion for a temporary
restraining order. On July 30, 1993 the court denied the plaintiffs'
motion for a preliminary injunction. On September 28, 1993 the
plaintiffs withdrew their complaint and the court dismissed it without
prejudice.
On August 18, 1993 the plaintiffs filed a complaint with the California
Public Utilities Commission requesting that the CPUC conduct an
environmental assessment. This complaint still is pending at the CPUC.
SONGS Personal Injury Litigation
As previously discussed, SDG&E holds a 20-percent interest in the San
Onofre Nuclear Generating Station. There have been seven radiation
personal injury cases filed against various parties including Southern
California Edison, SDG&E, Combustion Engineering, and the Institute of
Nuclear Power Operations in Federal District Court, Southern District of
California: James (filed July 12, 1994), McLandrich (February 6, 1995),
Mettler (July 5, 1995), Knapp (August 31, 1995), Kennedy (November 17,
1995), Rock (November 28, 1995), and Keltsch (November 11, 1997). The
plaintiffs allege their various types of leukemia or other forms of
cancers were caused by radiation exposure from "fuel fleas" (radioactive
fuel particles).
On October 12, 1995 the jury in the James case determined that there was
no scientific link between the plaintiff's leukemia and the amount of
radiation he was allegedly exposed to while employed at SONGS as an
employee of a SONGS contractor. On August 15, 1996 the Ninth Circuit
Court of Appeals upheld the decision. The time has lapsed for a petition
for certiorari to the Supreme Court of the United States. Therefore,
this matter is concluded.
McLandrich, Mettler and Knapp are wrongful death cases filed by the
heirs of former SONGS employees seeking unspecified amounts in
compensatory and punitive damages. Edison has been dismissed from
McLandrich and Mettler based upon the District Court's ruling that
Edison is an employer and workers' compensation is the exclusive remedy
for the plaintiffs. The Ninth Circuit Court of Appeals rejected SDG&E's
18
<PAGE>
petition for permission to challenge the lower court's determination
that SDG&E is not an employer and thus may not avail itself of the
workers' compensation exclusivity rule. McLandrich, Mettler and Knapp
are stayed pending the outcome of a plaintiff's appeal in McLandrich,
challenging the District Court's ruling that Southern California Edison
can avail itself of the workers' compensation exclusivity rule.
The Kennedy and Rock cases involve family members of current or former
SONGS employees who allege that the employees carried home fuel fleas
which caused the family members' illnesses. The plaintiffs are alleging
unspecified amounts of compensatory and punitive damages. Jury trial
commenced in the Kennedy case on January 27, 1998 and is expected to
last approximately six weeks. In the Keltsch case, no punitive damages
are alleged. A motion to dismiss the case is scheduled to be heard on
March 10, 1998. SDG&E has not been named in these actions; however,
because of its ownership interest SDG&E may be adversely affected if
plaintiffs are successful.
SONGS Pricing
In May 1997 Ayad Rubaii, an employee of Edison, filed a complaint under
the federal False Claims Act against Edison and SDG&E in United States
District Court for the Southern District of California. The complaint
was unsealed in July 1997 and sent to Edison and SDG&E on September 3,
1997. In the complaint, the plaintiff alleges that Edison and SDG&E have
overcharged customers since early 1996 for energy produced at SONGS
under a pricing mechanism approved by the CPUC and codified by the State
Legislature. The plaintiff alleges that he filed the lawsuit on behalf
of the United States Government. The Department of Justice has elected
not to intervene in the lawsuit, but could elect to do so in the future
if new information becomes available which, in its view, justifies
intervention. The plaintiff is claiming damages of $383 million from
Edison and $102 million from SDG&E. Under the False Claims Act, any
damages are subject to trebling and penalties could be assessed. On
November 7, 1997, SDG&E filed a motion to dismiss this complaint. A
hearing before the U.S. District Court was held on January 20, 1998. The
Court has not yet issued its decision on SDG&E's motion to dismiss.
Employee Benefits
On September 16, 1997 two individual plaintiffs filed a complaint
(Mascari v. SDG&E) in United States District Court for the Southern
District of California on behalf of themselves and a purported class
consisting of a significant number of temporary employees and
independent contractors employed at SDG&E. Plaintiffs allege that they
are and have been common law employees of SDG&E and, as such, under
recent Ninth Circuit decisional law, are and have been entitled to
participate in SDG&E's health and welfare, defined benefit and defined
contribution plans. They seek to recover past and future benefits under
each plan. On October 6, 1997 SDG&E filed its answer to the complaint,
denying that the plaintiffs were or are entitled to any benefits and
denying the appropriateness of a class.
Environmental and Regulatory Issues
Other legal matters related to environmental and regulatory issues are
described under "Environmental Matters," "Rate Regulation" and
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" herein.
19
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<TABLE>
ITEM 4. EXECUTIVE OFFICERS OF THE REGISTRANT (ENOVA)
<CAPTION>
Name Age* Positions (1993 - Current)
- -----------------------------------------------------------------------------------
<S> <C> <C>
Stephen L. Baum 56 Chairman and Chief Executive Officer since January 1998.
President and Chief Executive Officer from January 1996
through December 1997.
Executive Vice President from December 1994 through
December 1995.
Executive Vice President (SDG&E) from January 1993
through December 1995.
Donald E. Felsinger 50 President and Chief Operating Officer since January 1998.
Executive Vice President from December 1994 through
December 1995 and from April 1996 through
December 1997.
President and Chief Executive Officer (SDG&E) from
January 1996 through December 1997.
Executive Vice President (SDG&E) from January 1993
through December 1995.
Edwin A. Guiles 48 Executive Vice President since January 1998.
Senior Vice President from January 1997 through
December 1997.
Senior Vice President - Energy Supply (SDG&E) from
January 1993 through January 1997.
David R. Kuzma 52 Senior Vice President, Chief Financial Officer and
Treasurer since November 1995.
Senior Vice President, Chief Financial Officer and
Treasurer (SDG&E) from June 1995 through
December 1997.
Senior Vice President, Chief Financial Officer and
Treasurer of Florida Progress Corporation from
1991 to 1995.
Frank H. Ault 53 Vice President and Controller since December 1994.
Vice President and Controller (SDG&E) from January
1993 through December 1997.
Jerry W. Deems 52 Vice President and Chief Information Technology
Officer since October 1997.
Manager of NonStop Software Division of Tandem
Computers from 1993 to 1997.
Vice President - Sales and Marketing of Objectivity,
Inc. from 1991 to 1993.
Margot A. Kyd 44 Vice President - Human Resources since January 1996.
Vice President - Human Resources (SDG&E) from January 1993
through December 1996.
William L. Reed 45 Vice President - Regulatory and Governmental Affairs
since August 1997.
Vice President - Regulatory Affairs (SDG&E) from January
1996 through July 1997.
Vice President - Strategic Planning (SDG&E) from August
1995 through December 1995.
Division Manager - Strategic Plans & Projects (SDG&E) from
August 1994 through July 1995.
Director - Energy Management (SDG&E) from April 1993
through July 1994.
Director - Regulatory Affairs (SDG&E) from 1990 through
March 1993.
* As of December 31, 1997.
</TABLE>
20
<PAGE>
<TABLE>
ITEM 4. EXECUTIVE OFFICERS OF THE REGISTRANT (SDG&E)
<CAPTION>
Name Age* Positions (1993 - Current)
- -----------------------------------------------------------------------------------
<S> <C> <C>
Edwin A. Guiles 48 President since January 1998.
Senior Vice President (Enova) from January 1997 through
December 1997.
Senior Vice President - Energy Supply from January 1993
through January 1997.
Gary D. Cotton 57 Senior Vice President - Energy Supply since August 1997.
Senior Vice President - Customer Operations from January
1993 through July 1997.
Frank H. Ault 53 Vice President, Chief Financial Officer, Treasurer and
Controller since January 1998.
Vice President and Controller from January 1993 through
December 1997.
Kathleen A. Flanagan 46 Vice President - Corporate Communications and Public
Affairs since August 1997.
Vice President - Corporate Communications from July 1994
through July 1997.
Manager - Corporate Communications of Southern California
Edison from 1991 to 1994.
Margot A. Kyd 44 Vice President - Human Resources, Marketing and Customer
Service since January 1997.
Acting Vice President - Marketing and Customer Service
from January 1996 through December 1996.
Vice President - Human Resources from January 1993 through
December 1996.
William L. Reed 45 Vice President - Regulatory and Governmental Affairs since
August 1997.
Vice President - Regulatory Affairs from January 1996
through July 1997.
Vice President - Strategic Planning from August 1995
through December 1995.
Division Manager - Strategic Plans & Projects from August
1994 through July 1995.
Director - Energy Management from April 1993 through July
1994.
Director - Regulatory Affairs from 1990 through March
1993.
* As of December 31, 1997.
</TABLE>
21
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Enova Corporation
Common stock of Enova Corporation is traded on the New York and Pacific
stock exchanges. At December 31, 1997 there were 72,639 holders of
common stock. The quarterly common stock information required by Item 5
is included in the Enova Corporation schedule of Quarterly Financial
Data herein.
San Diego Gas & Electric Company
All the common stock of San Diego Gas & Electric Company is owned by
Enova Corporation and is not publicly traded. The following table sets
forth the cash distributions on common stock paid to Enova Corporation
by SDG&E:
1997
First Quarter 45,479,582
Second Quarter 44,310,518
Third Quarter 44,310,518
Fourth Quarter 44,322,572
In addition, in March 1997 SDG&E paid Enova a special dividend of
$70,000,000 to be used for the repurchase of 3 million shares of Enova
Corporation common stock.
Dividend Restrictions
The CPUC regulates SDG&E's capital structure, limiting the dividends it
may pay to Enova. At December 31, 1997 $152 million of common equity was
available for future dividends. In addition, at December 31, 1997
approximately one half of the $658 million of rate-reduction bonds was
also available for future dividends. Of this available amount, $100
million in dividends was paid by SDG&E to Enova on January 2, 1998, in
conjunction with the acquisition of Sempra Energy Trading.
22
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Enova Corporation
<TABLE>
In millions of dollars except per share amounts
<CAPTION>
For the years ended December 31
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Operating revenues $2,217.0 $1,993.5 $1,870.7 $1,912.2 $1,897.5
Operating income $344.2 $335.0 $345.7 $317.2 $303.9
Income from continuing
operations $251.6 $230.9 $225.6 $199.3 $219.0
Earnings applicable to
common shares $251.6 $230.9 $225.8 $135.8 $210.2
Earnings per common
share from continuing
operations $2.20 $1.98 $1.94 $1.71 $1.89
Earnings per common share
(basic and diluted) $2.20 $1.98 $1.94 $1.17 $1.81
Dividends declared per
common share $1.56 $1.56 $1.56 $1.52 $1.48
At December 31
Total assets $5,233.9 $4,649.2 $4,748.6 $4,662.9 $4,694.7
Long-term debt and preferred stock
subject to mandatory redemption
(excludes current
portion)* $2,082.0 $1,504.3 $1,490.1 $1,479.2 $1,523.6
</TABLE>
*Includes long-term debt redeemable within one year.
This summary should be read in conjunction with the Enova Corporation
consolidated financial statements and notes to consolidated financial
statements.
23
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
San Diego Gas & Electric Company
<TABLE>
In millions of dollars except per share amounts
<CAPTION>
For the years ended December 31
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Operating revenues $2,167.5 $1,938.9 $1,814.1 $1,856.5 $1,861.3
Operating income $317.1 $308.8 $315.0 $302.6 $288.2
Income from continuing
operations $238.2 $222.8 $219.0 $206.3 $215.9
Net income (before
preferred dividend
requirement) $238.2 $222.8 $233.5 $143.5 $218.7
Preferred dividends $6.6 $6.6 $7.7 $7.7 $8.5
Earnings applicable to
common shares $231.7 $216.2 $225.8 $135.8 $210.2
At December 31
Total assets $4,654.5 $4,160.5 $4,472.6 $4,353.3 $4,370.0
Long-term debt and preferred stock
subject to mandatory redemption
(excludes current
portion)* $1,812.8 $1,309.8 $1,242.0 $1,239.1 $1,347.5
</TABLE>
*Includes long-term debt redeemable within one year.
This summary should be read in conjunction with the San Diego Gas &
Electric Company consolidated financial statements and notes to
consolidated financial statements.
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Enova Corporation/San Diego Gas & Electric
Company
GENERAL
Enova Corporation (referred to herein as Enova, which includes the
parent and its wholly owned subsidiaries) was formed in January 1996 to
become the parent company of San Diego Gas & Electric (SDG&E). At that
time SDG&E's outstanding common stock was converted on a share-for-share
basis into Enova Corporation common stock. SDG&E's debt securities,
preferred stock and preference stock were unaffected and remained with
SDG&E.
SDG&E is an operating public utility engaged in the electric and
gas businesses. It generates and purchases electric energy and
distributes it to 1.2 million customers in San Diego County and an
adjacent portion of Orange County, California. It also purchases and
distributes natural gas to 721,000 customers in San Diego County and
transports electricity and gas for others. California has enacted an
electric-restructuring law that affects the operations of SDG&E and the
other California investor-owned electric utilities. This information is
discussed below under "Electric Industry Restructuring." Enova has
several other subsidiaries (referred to herein as nonutility
subsidiaries). Enova Financial invests in limited partnerships
representing approximately 1,200 affordable-housing properties located
throughout the United States. Califia leases computer equipment. These
two subsidiaries are expected to provide income tax benefits over the
next several years. Enova International is involved in energy projects
outside the United States. Pacific Diversified Capital is the parent
company of Phase One Development, which has been involved in real estate
development. Enova Energy is an energy management and consulting firm
offering services to utilities and large consumers. In December 1997,
subsidiaries of Enova Energy and Houston Industries formed a joint
venture, El Dorado Energy, to build, own and operate a natural gas-fired
power plant in Boulder City, Nevada. Enova Technologies is in the
business of developing new technologies generally related to utilities
and energy. In January 1997, Enova Energy, Enova Technologies and
certain subsidiaries of Pacific Enterprises (discussed below) formed
Energy Pacific, a joint venture to market integrated energy and energy-
related products and services. Energy Pacific has recently changed its
name to Sempra Energy Solutions. In January 1998, Sempra Energy
Solutions completed the acquisition of CES/Way International, a leading
national energy-service provider. In December 1997, Enova and Pacific
Enterprises completed the joint acquisition of AIG Trading Corporation
(AIG), a leading natural gas and power marketing firm based in
Greenwich, Connecticut. AIG has subsequently changed its name to Sempra
Energy Trading. Additional information regarding Enova's nonutility
subsidiaries is described herein under "Electric Generation" and
"Liquidity and Capital Resources - Investing Activities," and in Notes
1, 2 and 3 of the notes to consolidated financial statements.
BUSINESS COMBINATION
In October 1996, Enova and Pacific Enterprises (PE), parent company of
Southern California Gas Company (SoCalGas), announced that they have
agreed to combine the two companies. Enova and PE have selected Sempra
Energy as the name of the new company formed by the business
combination. 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 will be converted into one
share of common stock of Sempra Energy, (ii) each outstanding share of
common stock of PE will be converted into 1.5038 shares of Sempra
Energy's common stock and (iii) the preferred stock and preference stock
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of SDG&E, PE and SoCalGas will remain outstanding. In March 1997, the
shareholders of Enova and PE approved the combination. Consummation of
the combination is conditional upon the approvals of the California
Public Utilities Commission (CPUC) and various other regulatory bodies
(see below).
In June 1997, the CPUC revised its procedural schedule for the
business combination after delaying until July 1997 its final decision
on the Performance-Based Ratemaking (PBR) proceeding for SoCalGas. (The
CPUC's decision on SoCalGas' PBR proceeding adopted a rate-setting
mechanism for SoCalGas that provides incentives for cost control and
efficiency improvement, including comparisons of productivity and other
factors against benchmarks based on industry performance. SoCalGas had
been operating under traditional "cost of service" regulation. The
decision provides for, among other things, a net rate reduction of $160
million.) In accordance with the CPUC's revised schedule, the
administrative law judge handling the proceeding issued a draft decision
on February 23, 1998. That draft decision proposed approval of the
combination. Among other things, the draft decision proposed 50/50
sharing of the net cost savings resulting from the combination between
shareholders and customers, but only for five years rather than the 10
years sought. The draft decision would reduce the net shareable
savings from $1.1 billion to $340 million. The CPUC decision is
scheduled for the end of March 1998.
In November 1997, the California attorney general issued an
advisory opinion concluding that the business combination would not
adversely affect competition within either the wholesale electricity or
interstate gas markets. The opinion included a recommendation that the
CPUC consider requiring SoCalGas to auction offsetting volumes of
natural gas transportation rights equal to the load with SDG&E that will
be withdrawn if the CPUC concludes that SDG&E would be eliminated as a
potential competitor in the partially regulated intrastate gas
transmission market.
In September 1997, the CPUC staff issued a final Negative
Declaration, concluding that the business combination will not result in
any activities or operational changes that may cause a significant
adverse effect on the environment.
In June 1997, the Federal Energy Regulatory Commission (FERC)
approved the business combination, subject to the conditions that the
combined company will not unfairly use any potential market power
regarding natural gas transportation to gas-fired electric-generation
plants. The FERC acknowledged that this issue is clearly within the
jurisdiction of the CPUC and the conditions will be considered during
the CPUC review process. Therefore, the FERC's final decision is not
expected to be issued before the CPUC's approval.
In August 1997, the Nuclear Regulatory Commission approved the
business combination, ruling that the creation of the new company will
not affect SDG&E's qualifications to hold the license for its
20-percent interest in the San Onofre Nuclear Generating Station
(SONGS).
Remaining regulatory reviews, which are not expected to be
concluded prior to the CPUC decision, include clearance by the U.S.
Department of Justice, under the Hart-Scott-Rodino Antitrust Act, and
approval by the Securities and Exchange Commission. Both agencies will
review the business combination for its impacts on competition.
The commencement of combined operations is expected in the summer
of 1998. Earnings of the combined company could be negatively impacted
in 1998, and to a lesser extent in subsequent years, by delays in
achieving cost savings from the combination caused by the later-than-
expected effective combination date, CPUC limitations on transactions
between SDG&E and SoCalGas, which may be modified by the CPUC
combination proceedings (discussed below), the possibility that the CPUC
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might not permit recovery of certain costs of the combination and might
reduce the period or percentage for shareholder participation in the
related cost savings, and slower-than-anticipated growth in revenues
from Sempra Energy Solutions. Additional information regarding the
proposed business combination is described in Note 1 of the notes to
consolidated financial statements.
RESULTS OF OPERATIONS
Operating Results Electric revenues increased 11 percent in 1997,
primarily due to an increase in sales for resale to other utilities and
increased retail sales volume due to weather. Electric revenues
increased 6 percent in 1996, primarily due to the accelerated recovery
of SONGS Units 2 and 3 which commenced in April 1996. Gas revenues
increased 14 percent in 1997, primarily due to weather-related higher
sales volume and higher purchased-gas prices, offset by an increase in
customer purchases of gas directly from other suppliers (for whom SDG&E
provides transportation). Gas revenues increased 12 percent in 1996,
reflecting higher purchased-gas prices.
Operating Expenses Electric fuel expense increased 22 percent in 1997,
primarily due to increased natural gas prices and increased natural gas-
fired generation resulting from SONGS Units 2 and 3 refuelings. Electric
fuel expense increased 34 percent in 1996, primarily due to increased
generation and increases in natural gas prices.
Purchased-power expenses increased 42 percent in 1997, primarily due
to increased volume, which resulted from lower nuclear-generation
availability from the SONGS refuelings and increased use of purchased
power due to decreased purchased-power prices. Purchased-power expenses
decreased 9 percent in 1996, reflecting the availability of lower-cost
nuclear generation and decreases in purchased-power capacity charges.
Gas purchased for resale increased 20 percent in 1997 and 34 percent
in 1996, primarily due to increases in sales volume and in natural gas
prices.
The changes in maintenance expenses reflect the nuclear refuelings
in 1997 and 1995.
General and administrative expenses decreased 15 percent in 1997,
primarily due to higher 1996 costs for customer service, partially
offset by the expenses relating to the proposed business combination
with Pacific Enterprises.
Earnings 1997 earnings per common share were $2.20 compared to $1.98
in 1996 and $1.94 in 1995. The increase in earnings in 1997 is primarily
due to incentive rewards for Performance-Based Ratemaking (PBR) and
Demand-Side Management (DSM) programs, retirements of debt and common
shares, and improved earnings of Enova Financial, partially offset by
expenses relating to the proposed business combination with Pacific
Enterprises. Other events that improved 1997 earnings included income
tax benefits from the 1995 sale of Wahlco Environmental Systems and
capital gains from the sale of property held by Pacific Diversified
Capital. The increase in earnings in 1996 is primarily due to DSM
rewards, partially offset by SDG&E's lower authorized return on equity.
Earnings per share for the quarter ended December 31, 1997, were
$0.72, compared to $0.47 for the same period in 1996. The increase in
earnings for the quarter was due to numerous offsetting factors,
including PBR and DSM rewards, retirement of common shares, higher off-
system electric sales, previously announced seasonal variability related
to the elimination of electric balancing accounts, and expenses relating
to the proposed business combination with Pacific Enterprises. Although
the elimination of the balancing accounts did not have any effect on
1997 full-year earnings, quarterly earnings now fluctuate significantly,
depending on monthly or seasonal changes in electric sales and fuel
27
<PAGE>
prices. In general, earnings are expected to be higher in high sales-
volume months and lower in others. In 1998 and future years, full-year
earnings also will be affected by sales volumes.
Some of the PBR rewards recorded in 1997 had been pending with the
CPUC for several years. During 1998, SDG&E will not have a multiple-year
backlog of these PBR rewards to record. In addition, because of the
elimination of the Generation and Dispatch PBR mechanism and the San
Onofre Nuclear Generating Station Target Capacity Factor mechanism, the
impact of performance rewards on future earnings will be reduced.
Califia and Enova Financial's contributions to earnings for the year
were $0.21 in 1997, $0.19 in 1996 and $0.17 in 1995. Contributions to
earnings by Enova Energy and Enova Technologies were negatively impacted
in 1997 by the slower-than-anticipated growth in revenues from Sempra
Energy Solutions.
LIQUIDITY AND CAPITAL RESOURCES
SDG&E's operations continue to be a major source of liquidity. In
addition, financing needs are met primarily through issuances of short-
term and long-term debt. These capital resources are expected to remain
available. Cash requirements include utility capital expenditures,
nonutility subsidiaries' investments, and repayments and retirements of
long-term debt. Nonutility cash requirements include capital
expenditures associated with subsidiary activities related to the plans
to distribute natural gas in Mexico and the eastern United States; new
products; investments in Sempra Energy Trading, CES/Way International
and El Dorado Energy; and affordable-housing, leasing and other
investments. Additional information on these activities is discussed
under "Cash Flows from Investing Activities" below. In addition to
changes described elsewhere, major changes in cash flows are described
below.
Cash Flows from Operating Activities The major changes in cash flows
from operations among the three years result from changes in income
taxes, accounts receivable, other current assets, accounts payable, and
regulatory balancing accounts. The changes in cash flows related to
income taxes were primarily due to the timing of certain deductions in
1997 and higher 1996 income tax payments in connection with settlements
with the Internal Revenue Service. The changes in cash flows related to
accounts and notes receivable were primarily due to increases in sales
in December 1997. The changes in cash flows related to other current
assets were primarily due to advances made to unconsolidated
subsidiaries during late 1997. The changes in cash flows related to
accounts payable were primarily due to fluctuations in natural gas
purchases and prices from year to year. The changes in cash flows
related to regulatory balancing accounts were primarily due to
overcollections in the Electric Revenue Adjustment Mechanism (ERAM)
account as a result of higher-than-authorized sales volumes in 1997 and
changes in prices for natural gas in 1996.
Quarterly cash dividends of $0.39 per share were declared for the
year ended December 31, 1997. The dividend payout ratios for the years
ended December 31, 1997, 1996, 1995, 1994 and 1993 were 71 percent, 79
percent, 80 percent, 130 percent, and 82 percent, respectively. The
increase in the payout ratio for the year ended December 31, 1994, was
due to writedowns recorded during 1994. For additional information
regarding the writedowns, see Enova Corporation's 1996 Annual Report.
The payment of future dividends is within the discretion of the Enova
Board of Directors and is dependent upon future business conditions,
earnings and other factors. Net cash flows provided by operating
activities currently are sufficient to maintain the payment of dividends
at the present level.
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Enova has initiated an enterprise-wide program to prepare the
company's computer systems and applications for the year 2000 and
beyond. A comprehensive review has been conducted to identify the
systems that could be affected by the year 2000 issue and an
implementation plan has been developed. The year 2000 issue results from
time-sensitive software applications that recognize a date using only
two digits. For example, "00" may be recognized as the year 1900 rather
than the year 2000. This could result in a system failure or
miscalculations. This year 2000 problem creates risk for the company
from unforeseen problems in its own computer systems and from third
parties with whom the company deals on financial transactions.
Management has not yet assessed whether the company's date-conversion
project will be completed on a timely basis nor the impact of third-
party computer system failures. The company expects to incur internal
staff costs as well as consulting and other expenses related to
infrastructure and facilities enhancements necessary to prepare the
systems for the year 2000. Expenditures for the testing and conversion
of system applications were $4 million in 1997 and are expected to be
between $20 million and $25 million over the next two years. These costs
are expensed as incurred.
Cash Flows from Financing Activities Enova did not issue additional
stock or long-term debt in 1997, except for SDG&E-related refinancings
and electric industry restructuring-related rate-reduction bonds.
Additional information concerning the rate-reduction bonds is discussed
below and under "Electric Industry Restructuring." Enova and SDG&E do
not plan any issuances in 1998.
In October 1997, SDG&E issued $25 million of tax-exempt Industrial
Development Bonds (IDBs) through the City of Chula Vista. The variable-
rate bonds were issued at an initial rate of 3.5 percent. The proceeds
from the bonds, which will mature in 2023, were used to redeem $25
million of 8.75 percent IDBs with the City of San Diego. Also during
1997, SDG&E purchased and retired $62 million of 9.625 percent and 8.5
percent first mortgage bonds.
In December 1997, $658 million of rate-reduction bonds were issued
on SDG&E's behalf at an average interest rate of 6.26 percent. A portion
of the bond proceeds was used to retire $14.9 million of variable-rate,
taxable IDBs in December 1997 and $15.7 million of variable-rate,
taxable IDBs in January 1998. Additional retirements are planned.
Additional information concerning the rate-reduction bonds is provided
below under "Electric Industry Restructuring."
SDG&E currently has approximately $83 million of temporary
investments that will be maintained into the future. The purpose of
maintaining such a level of investments is to offset a like amount of
long-term debt. The specific debt series being offset consists of
variable-rate IDBs. The CPUC has approved specific ratemaking treatment
which allows SDG&E to offset IDBs as long as there is at least a like
amount of temporary investments. If and when SDG&E requires all or a
portion of the $83 million of IDBs to meet future needs for long-term
debt, such as to finance new construction, the amount of investments
which is being maintained will be reduced below $83 million and the
level of IDBs being offset will be reduced by the same amount.
During 1997, Enova Corporation repurchased three million shares of
its outstanding common stock. During 1998, the $1.82-series preferred
stock becomes callable at $26 per share.
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. In 1993
the capital structure is net of the construction funds held by a
trustee.
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1993 1994 1995 1996 1997 Goal
-----------
(A) (B) (A)
- ------------------------------------------------------------------------
Common equity 47 % 48 % 49 % 50 % 51 % 41 % 46-49 %
Preferred stock 4 4 4 4 4 3 3-5
Debt and leases 49 48 47 46 45 56 46-49
- ------------------------------------------------------------------------
Total 100 % 100 % 100 % 100 % 100 % 100 % 100 %
- ------------------------------------------------------------------------
(A) Excludes rate reduction bonds ($658 million at December 31, 1997).
(B) Includes rate reduction bonds ($658 million at December 31, 1997).
The CPUC regulates SDG&E's capital structure, limiting the dividends
it may pay Enova. At December 31, 1997, $152 million of common equity
was available for future dividends. In addition, at December 31, 1997,
approximately one half of the $658 million of rate-reduction bonds was
also available for future dividends. Of this available amount, $100
million in dividends were paid by SDG&E to Enova on January 2, 1998, in
conjunction with the acquisition of Sempra Energy Trading. This
restriction is not expected to affect Enova's ability to meet its cash
obligations.
In December 1997, Moody's Investors Service upgraded SDG&E's long-
term-bond rating from an A1/stable outlook to an A1/positive outlook,
reflecting SDG&E's business mix, which is heavily weighted toward
distribution and transmission. The outlook upgrade also reflects the
probability of recovery of stranded costs and the expected proceeds from
the sale of generating assets (see discussion under "Electric
Generation"). Standard & Poor's Ratings Group affirmed SDG&E's long-
term-bond rating of A+/positive outlook.
Cash Flows from Investing Activities Cash used in investing activities
in 1997 included SDG&E's construction expenditures and payments to its
nuclear decommissioning trusts. SDG&E's capital expenditures were $197
million in 1997 and are estimated to be $242 million in 1998. Actual
capital expenditures in 1997 were lower than anticipated due to changes
in the scope and timing of several major capital projects. Estimated
1998 capital expenditures are closer to normal levels, with increases to
meet industry restructuring needs and improvements to the electric
distribution system. 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 expenditures in the next few years will
depend heavily on the impacts of industry restructuring and the sale of
SDG&E's Encina and South Bay power plants and other electric-generating
assets, as well as the timing and extent of expenditures to comply with
air-emission reduction and other environmental requirements. Additional
information concerning the proposed sale of SDG&E's electric-generating
assets is provided below under "Electric Generation."
Payments to the nuclear-decommissioning trusts 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
scheduled to be decommissioned concurrently with Units 2 and 3. However,
this will depend on the outcome of the proposed sale of SDG&E's
electric-generating assets, including its interest in SONGS.
Enova's level of nonutility expenditures in the next few years will
depend primarily on the activities of its subsidiaries other than SDG&E,
including Sempra Energy Solutions and the natural gas distribution
projects in Mexico and the eastern United States. Nonutility
expenditures were $158 million in 1997 and are estimated to be $100
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million in 1998, not including special projects. The decrease in
expected expenditures in 1998 is primarily attributable to a decrease in
expected investments by Enova Financial.
As discussed previously, in January 1997, certain subsidiaries of
Enova and Pacific Enterprises formed Sempra Energy Solutions, a joint
venture to market integrated energy and energy-related products and
services. During 1997, Enova invested $21 million in Sempra Energy
Solutions. In addition, in January 1998, Sempra Energy Solutions
completed the acquisition of CES/Way International, a leading national
energy-service provider.
In September 1997, Sempra Energy Solutions formed a joint venture
with Bangor Hydro to build, own and operate a $40 million natural gas
distribution system in Bangor, Maine. In addition, in December 1997
Sempra Energy Solutions signed a partnership agreement with Frontier
Utilities to build and operate a $55 million natural gas distribution
system in North Carolina.
In December 1997, Enova and Pacific Enterprises completed the joint
acquisition of AIG Trading Corporation, a leading natural gas and power
marketing firm. Enova contributed $110.6 million to that acquisition,
which was subsequently renamed Sempra Energy Trading.
In July 1997, Enova International and its partners, Pacific
Enterprises International and Proxima S.A. de C.V., delivered their
first supply of natural gas to Baja California. 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 30-year
license period to supply natural gas to the region. The partnership is
expected to serve 25,000 customers over the next four years. In March
1997, the Mexican Energy Regulatory Commission awarded the partners
their second natural gas privatization license in Mexico, allowing
Distribuidora de Gas Natural de Chihuahua to build and operate a natural
gas distribution system in Chihuahua. That partnership plans to invest
approximately $50 million in the project and is expected to serve 50,000
customers over the next five years. In January 1998, Enova International
and its partner, Union Fenosa ACEX of Spain, submitted a bid to build,
own and operate a natural gas distribution system in Monterrey, Mexico.
The project will consist of an initial investment of $190 million for a
system that will serve 320,000 customers, with an additional $60 million
invested over five years to serve a total of 400,000 customers. Two
other international consortia have submitted bids on the project. The
Mexican Energy Regulatory Commission is expected to announce the winning
bidder in March 1998.
In December 1997, Enova Power Corporation, a subsidiary of Enova
Energy, and Houston Industries Power Generation formed El Dorado Energy,
a joint venture to build, own and operate a natural gas power plant in
Boulder City, Nevada. Enova invested $2.3 million in El Dorado Energy in
1997 and expects to invest an additional $37 million in 1998 and $17
million in 1999.
Additional information about these acquisitions and joint ventures
is discussed in Note 3 of the notes to consolidated financial
statements.
Derivative Financial Instruments The policy of Enova 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 expose
Enova to market and credit risks. At times, these risks may be
concentrated with certain counterparties, although counterparty
nonperformance is not anticipated.
SDG&E periodically enters into interest-rate swap and cap agreements
to moderate its exposure to interest-rate changes and to lower its
overall cost of borrowing. These swap and cap agreements generally
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remain off the balance sheet as they involve the exchange of fixed- and
variable-rate interest payments without the exchange of the underlying
principal amounts. The related gains or losses are reflected in the
income statement as part of interest expense. SDG&E would be exposed to
interest-rate fluctuations on the underlying debt should other parties
to the agreement not perform. Such nonperformance is not anticipated. At
December 31, 1997, SDG&E had an agreement for a floating-to-fixed-rate
swap associated with $45 million of variable-rate bonds maturing in
2002.
SDG&E's pension fund periodically uses foreign-currency forward
contracts to reduce its exposure to exchange-rate fluctuations
associated with certain investments in foreign equity securities. These
contracts generally have maturities ranging from three to six months. At
December 31, 1997, and 1996, there were no foreign-currency forward
contracts outstanding.
In November 1996, SDG&E commenced price risk management activities,
on a limited basis, in the area of hedging price volatility of natural
gas requirements. SDG&E uses energy derivatives for both hedging and
trading purposes within certain limitations imposed by company policies.
These derivative financial instruments include forward contracts, swaps,
options and other contracts which have maturities ranging from 30 days
to nine months. Additional information on derivative financial
instruments of SDG&E is provided in Note 8 of the notes to consolidated
financial statements and under "Market Risk" below.
Sempra Energy Trading Corp. derives a substantial portion of its
revenue from trading activities in natural gas, petroleum and
electricity. Trading profits are earned as Sempra Energy Trading acts as
a dealer in structuring and executing transactions that permit its
counterparties to manage their risk profiles. In addition, Sempra Energy
Trading takes positions in energy markets based on the expectations of
future market conditions. These positions may be offset with similar
positions or may be offset in the exchange traded markets. These
positions include options, forwards, futures and swaps. Additional
information on derivative financial instruments of Sempra Energy Trading
is provided in Note 3 of the notes to consolidated financial statements
and under "Market Risk" below.
Market Risk Market risk arises from the potential change in the value
of financial instruments and physical commodities based on fluctuations
in natural gas, petroleum and electricity commodity exchange prices and
basis. Market risk is also affected by changes in volatility and
liquidity in markets in which these instruments are traded. SDG&E
utilizes a variety of financial structures, products and terms which
require the company to manage, on a portfolio basis, the resulting
market risks inherent in these transactions, subject to parameters
established by company policies. Market risks are monitored separately
from the groups that create or actively manage these risk exposures to
ensure compliance with the company's stated risk management policies at
both the Enova and subsidiary levels.
SDG&E measures the risk in its portfolio on a daily basis in
accordance with value-at-risk methodologies, which simulate forward
price curves in the energy markets to estimate the size and probability
of future potential losses. The quantification of market risk using
value-at-risk provides a consistent measure of risk across diverse
energy markets and products. The use of this methodology requires a
number of key assumptions, including the selection of a confidence level
for losses and the holding period chosen for the value-at-risk
calculation.
SDG&E expresses value-at-risk as the amount of SDG&E's earnings at
risk based on a 95 percent confidence level using a time horizon of the
average life of the portfolio. As of December 31, 1997, SDG&E's value-
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at-risk for its price-risk management activities was $2.8 million (net
of income taxes) of SDG&E's net earnings. Since this is not an absolute
measure of risk under all conditions for all products, SDG&E performs
alternative scenario analyses to estimate the economic impact of a
sudden market movement on the value of the portfolio. This and the
professional judgment of experienced business and risk managers is used
to supplement the value-at-risk methodology.
Based upon the ongoing policies and controls discussed above, SDG&E
does not anticipate a material adverse effect on its financial position
or results of operations as a result of market fluctuations.
A Risk Management Committee, composed of Enova and Pacific
Enterprises officers, is responsible for monitoring operating
performance and compliance with established risk management policies for
Sempra Energy Solutions and its subsidiaries. Sempra Energy Trading has
established position and stop-loss limits for each line of business to
monitor its market risk and traders are required to maintain positions
within these market-risk limits. The position limits are monitored
during the day by Sempra Energy Trading's senior management, which
determines whether to adjust its market-risk profile.
All of Sempra Energy Trading's market-risk sensitive instruments are
entered into for trading purposes. The following table provides the
potential changes in net principal transaction revenues resulting from
hypothetical 10-percent increases and 10-percent decreases in the
applicable commodity prices for significant commodity market-price
sensitive instruments held on December 31, 1997. This quantitative
information about market risk is limited because it does not take into
account potential hedging transactions or changes to the market-risk
profile of the portfolio by management in reaction to such changes in
market conditions. Additionally, it does not take into account
anticipated management reaction to breaches of counterparty credit
limitations caused by the shocks within a given risk category. Further,
inherent limitations arise from assuming that hypothetical 10-percent
increases and 10-percent decreases in commodity prices move in the same
direction, and this information does not recognize co-movements in
prices.
The following table presents the impact on Sempra Energy Trading's
net principal transaction revenues resulting from a 10-percent increase
and a 10-percent decrease in the respective December 31, 1997 commodity
prices:
In thousands of dollars
- -----------------------------------------------------------------------
Commodity 10% Increase 10% Decrease
- -----------------------------------------------------------------------
Crude oil and derivatives $ 3,288 $ (3,288)
Natural gas (2,441) 2,441
Emission credits (81) 81
Electricity (540) 540
- -----------------------------------------------------------------------
SDG&E's payments to the externally managed nuclear decommissioning
trust funds expose SDG&E to market risk. Market risk can result from
fluctuations in the volatility and liquidity in markets in which these
instruments are traded. These fluctuations can also correspondingly
affect the level of funding of the decommissioning trust.
Credit Risk Credit risk relates to the risk of loss that would be
incurred as a result of nonperformance by counterparties pursuant to the
terms of their contractual obligations. SDG&E and Sempra Energy Trading
avoid concentration of counterparties and maintain credit policies with
regard to counterparties that management believes significantly minimize
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overall credit risk. These policies include an evaluation of potential
counterparties' financial condition (including credit rating),
collateral requirements under certain circumstances, and the use of
standardized agreements which allow for the netting of positive and
negative exposures associated with a single counterparty.
The companies monitor credit risk exposure through an approval
process and the assignment of credit limits. These credit limits are
established based on risk and return considerations under terms
customarily available in the industry.
ELECTRIC INDUSTRY RESTRUCTURING
Background In September 1996, the state of California enacted a law
restructuring California's electric utility industry (AB 1890). The
legislation adopts the December 1995 CPUC policy decision that
restructures the industry to stimulate competition and reduce rates.
In May 1997, the CPUC issued a decision providing for direct access
to be available to all California electric customers on January 1, 1998.
The CPUC concluded that there were no technical or operational barriers
to justify limiting direct access availability once electric
restructuring commenced. The decision allowed customers to begin
choosing electricity providers in November 1997. In December 1997, the
CPUC agreed to delay the initiation of electric restructuring until
March 31, 1998, to allow California's Power Exchange (PX) and
Independent System Operator (ISO) to resolve computer software problems
and conduct additional user training. Beginning on March 31, 1998,
customers will be given the choice to continue to purchase electricity
from their local utility under regulated tariffs, to enter into
contracts with other energy service providers (i.e., private generators,
brokers, etc.) or buy their power from the independent PX that serves as
a wholesale power pool allowing all energy producers to participate
competitively. The PX obtains power from qualifying facilities, nuclear
units and, lastly, from the lowest-bidding suppliers. The ISO will
schedule the power transactions and access to the transmission system.
To facilitate this, the utilities will transfer the operational control
of their transmission facilities to the ISO. The local utility will
continue to provide distribution services, regardless of which source
the consumer chooses. These customer choices will, in effect, open up
the service territories of all California utilities. This will allow
Enova, through Sempra Energy Solutions, to pursue customers outside of
SDG&E's traditional service territory to provide electricity and other
energy-related services. This also allows other energy-service providers
to enter SDG&E's service territory to compete for generation customers.
Transition Costs Both the CPUC decision and the California legislation
allow utilities, within certain limits, the opportunity 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). The CPUC's direction
is that traditional cost-of-service regulation will move toward
performance-based regulation.
Utilities are allowed a reasonable opportunity to recover their
stranded costs through December 31, 2001. Stranded costs such as
reasonable employee-related costs directly caused by restructuring and
purchased-power contracts (including those with qualifying facilities)
may be recovered beyond 2001, subject to a reasonableness review.
SDG&E's transition-cost application, filed in October 1996,
identified $2 billion of estimated stranded costs, including generation,
purchased-power and qualifying facilities' contracts, and regulatory
assets. The amount includes sunk costs, as well as ongoing costs the
CPUC finds necessary to maintain generation facilities through December
31, 2001. These identified transition costs were determined to be
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reasonable by independent auditors selected by the CPUC, with $73
million identified as requiring further action before being deemed
recoverable transition costs. Through December 31, 1997, SDG&E has
recovered transition costs of $0.2 billion for nuclear generation and
$0.1 billion for nonnuclear generation. Additionally, overcollections of
$0.1 billion recorded in the Energy Cost Adjustment Clause (ECAC) and
the Electric Revenue Adjustment Mechanism (ERAM) balancing accounts as
of December 31, 1997, have been applied to transition cost recovery,
leaving approximately $1.6 billion for future CTC recovery. Included
therein is $0.4 billion for post-2001 purchased-power-contract payments
that may be recovered after 2001, subject to an annual reasonableness
review. Outside of the exceptions discussed above, transition 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. During the 1998-2001
period, the recovery of transition costs is limited by the rate freeze
(discussed below). Management believes that the rates within the rate
freeze and the proceeds from the sale of electric-generating assets
(discussed below) will be sufficient to recover all of SDG&E's approved
transition costs by December 31, 2001.
In November 1997, the CPUC issued a decision allowing SDG&E the
opportunity to recover all of its sunk nonnuclear generation costs, with
the exception of $39 million in fixed costs relating to gas
transportation to power plants, which SDG&E believes will be recovered
through contracts with the ISO. The decision does not include generation
plant additions made after December 20, 1995. Instead, SDG&E must file
an application seeking a CPUC reasonableness review thereof. In October
1997, SDG&E filed an application with the CPUC seeking recovery of $14.5
million in 1996 capital additions for the Encina and South Bay power
plants. A final CPUC decision is expected in 1998.
Rate-Reduction Bonds AB 1890 required a 10-percent rate reduction for
residential and small-commercial customers beginning in January 1998. AB
1890 also provided for the issuance of rate-reduction bonds by an agency
of the state of California to enable California's investor-owned
electric utilities (IOUs) to use the proceeds to finance this rate
reduction. In December 1997, $658 million of rate-reduction bonds were
issued on behalf of SDG&E at an average interest rate of 6.26 percent.
These bonds are being repaid over 10 years by SDG&E's residential and
small-commercial customers via a nonbypassable charge on their
electricity bills. In September 1997, SDG&E and the other California
IOUs received a favorable ruling by the Internal Revenue Service on the
tax treatment of the bond transaction. The ruling states, among other
things, that the receipt of the bond proceeds does not result in gross
income to SDG&E at the time of issuance, but rather the proceeds are
taxable over the life of the bonds. The Securities and Exchange
Commission determined that these bonds should be reflected on the
utilities' balance sheets as debt, even though the bonds are not secured
by, or payable from, utility assets, but rather by the revenue streams
collected from customers. SDG&E formed a subsidiary, SDG&E Funding LLC,
to facilitate the issuance of the rate-reduction bonds. In exchange for
the bond proceeds, SDG&E sold to SDG&E Funding all of its rights to the
revenue streams. Consequently, the revenue streams are not the property
of SDG&E nor are they available to satisfy any claims of SDG&E's
creditors. There was no gain or loss recorded from the issuance of the
bonds or the receipt of the proceeds. SDG&E has begun to use a portion
of the proceeds to redeem its higher cost debt, described herein under
"Liquidity and Capital Resources - Financing Activities." In December
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1997, the California Supreme Court dismissed a petition submitted by a
coalition of consumer groups to overturn the CPUC's Rate-Reduction Bond
financing orders. A related coalition of consumer groups has also put
together a California ballot initiative that, among other things, would
possibly result in an additional 10-percent rate reduction, require that
this rate reduction be achieved through the elimination or reduction of
CTC payments and prohibit the collection of the charge on customer bills
that would finance the rate reduction. SDG&E cannot predict the final
outcome of the initiative. If the initiative were to be voted into law
and upheld by the courts, the financial impact on SDG&E could be
substantial.
Electric Rates AB 1890 included a rate freeze for all customers. Until
the earlier of March 31, 2002, or when transition cost recovery is
complete, SDG&E's average system rate will be frozen at 9.64 cents per
kilowatt-hour, except for the impacts of natural gas price changes and
the mandatory 10-percent rate reduction. As a result of significant
increases in natural gas prices during the first quarter of 1997, SDG&E
received CPUC authority to increase rates, but rates could not be
increased above 9.985 cents per kwh. With the 10-percent rate reduction
beginning on January 1, 1998, the maximum system-average rate became
9.43 cents per kwh. SDG&E's ability to recover its transition costs is
dependent on its total revenues under the rate freeze exceeding normal
cost-of-service revenues during the transition period by at least the
amount of the CTC less any proceeds from the sale of electric-generating
assets (discussed below). During the transition period, SDG&E will not
earn awards from special programs, such as DSM, unless total revenues
are also adequate to cover the awards. Fuel-price volatility is the most
significant variable in the ability of SDG&E to recover its transition
costs and program awards.
Balancing Accounts In October 1997, the CPUC issued a decision
eliminating the ECAC and the ERAM balancing accounts, effective December
31, 1997. As of December 31, 1997, net overcollections for these
accounts of $130 million have been transferred to the interim
transition-cost-balancing account to be applied to CTC recovery, subject
to a reasonableness review. The decision eliminates further ECAC
proceedings for generation costs incurred beginning in January 1998.
Additionally, the decision eliminates all other electric balancing
accounts, except for those associated with the administration of DSM,
low-income assistance, and research and development (R&D) programs,
which will be used to assist in the administration of public-purpose
funds (discussed below). In addition, SDG&E has requested the retention
of the Electric Vehicle balancing account through December 31, 1998. The
elimination of ERAM and ECAC resulted in earnings volatility that began
in the first quarter of 1997. Although no effect in 1997 was seen for
the full year, quarterly earnings fluctuated significantly, as was the
case for the other California IOUs. The largest impacts were reduced
first-quarter earnings and increased third-quarter earnings. This
quarterly volatility pattern is expected to continue in the future.
Beginning in 1998, annual earnings also will be affected by sales
volumes.
Regulatory Accounting Standards SDG&E had been accounting for the
economic effects of regulation on all of its utility operations in
accordance with Statement of Financial Accounting Standards (SFAS) No.
71, "Accounting for the Effects of Certain Types of Regulation." Under
SFAS No. 71, a regulated entity records a regulatory asset if it is
probable that, through the ratemaking process, the utility will recover
that asset from customers. Regulatory liabilities represent future
reductions in revenues for amounts due to customers.
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The SEC indicated a concern that the California IOUs may not meet
the criteria of SFAS No. 71 with respect to their electric-generation
net regulatory assets. SDG&E has ceased the application of SFAS No. 71
to its generation business, in accordance with the conclusion by the
Emerging Issues Task Force of the Financial Accounting Standards Board
that the application of SFAS No. 71 should be discontinued when
deregulatory legislation is issued that determines that a portion of an
entity's business will no longer be regulated. SDG&E's discontinuance of
SFAS No. 71 applied to its generation business will not result in a
write-off of its net regulatory assets, since the CPUC has approved the
recovery of these assets by the distribution portion of its business,
subject to the rate freeze.
Consumer Education In August 1997, the CPUC authorized $89 million in
rate recovery to fund California's Customer Education Program (CEP).
SDG&E's share of this amount is approximately $9 million. The CEP's
objective is to provide information to California electric customers to
help them compare and choose among electric products and services in a
competitive environment. The CEP began in September 1997 and is expected
to end by May 31, 1998.
Public-Purpose Programs The CPUC has established a new administrative
structure and initial funding levels to manage DSM, renewable-energy,
low-income assistance and R&D programs beginning in January 1998. The
CPUC has formed independent boards to oversee a competitive bidding
process to administer DSM and low-income programs. On an interim basis,
the CPUC has required that the California IOUs transfer their
administration of DSM and low-income programs to these boards by October
1998, and January 1999, respectively. Until the transition to a fully
competitive energy-service market is complete, customers will be
required to provide the funding. For 1998, SDG&E will be funded $32
million and $12 million for DSM and renewables programs, respectively.
Low-income assistance funding will remain at 1996 authorized levels. The
California Energy Commission will be allocated most of the $63 million
authorized to administer the R&D programs, of which SDG&E will be funded
$4 million. SDG&E's earnings potential from DSM programs will be reduced
when the transition to the competitive market is complete.
Federal Restructuring Activities In October 1997, the FERC approved
key elements of the California IOUs' restructuring proposal effective
January 1, 1998. This includes the transfer by the IOUs of the
operational control of their transmission facilities to the ISO, which
is under FERC jurisdiction. The FERC also approved, on an interim basis,
the establishment of the California PX to operate as an independent
wholesale power pool. The California IOUs will pay to the PX a
restructuring charge (in four annual installments) and an
administrative-usage charge for each megawatt-hour of volume transacted.
SDG&E's share of the restructuring charge is approximately $10 million,
which is eligible for transition-cost recovery. The IOUs have jointly
guaranteed $300 million of commercial loans to the PX and ISO for their
development and initial start-up. SDG&E's share of the guarantee is $30
million.
ELECTRIC GENERATION
In November 1997, SDG&E's Board of Directors approved a plan to auction
the company's power plants and other electric-generating assets,
enabling SDG&E to continue to concentrate its business on the
transmission and distribution of electricity and natural gas as
California opens its electric utility industry to competition in 1998.
The plan includes the divestiture of SDG&E's fossil power plants - the
Encina (Carlsbad, California) and South Bay (Chula Vista, California)
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plants - and its combustion turbines, as well as its 20-percent interest
in the San Onofre Nuclear Generating Station (SONGS) and its portfolio
of long-term purchased-power contracts, including those with qualifying
facilities. The power plants, including the interest in SONGS, have a
net book value as of December 31, 1997, of $800 million ($200 million
for fossil and $600 million for SONGS) and a combined generating
capacity of 2,400 megawatts. The proceeds from the auction will be
applied directly to SDG&E's transition costs. In December 1997, SDG&E
filed with the CPUC for its approval of the auction plan. The sale of
the nonnuclear generating assets is expected to be completed by the end
of the first quarter of 1999.
Although the other California IOUs are required by the CPUC to
divest themselves of at least 50 percent of their fossil power plants as
a part of industry restructuring, SDG&E is not under the same mandate.
Other companies in the free market, not bound by the rules that apply to
the state's regulated utilities, are expected to have a greater
opportunity to provide competitive generation services with SDG&E's
plants. The FERC has ruled that it has jurisdiction over all electricity
sales into the California PX, meaning that the buyers of divested
California power plants would qualify as wholesale power generators. The
FERC's ruling has increased the interest in the nonnuclear plants owned
by the other California IOUs, and is expected to have the same impact on
SDG&E's fossil plants.
As previously discussed, subsidiaries of Enova Energy and Houston
Industries have formed a joint venture to build, own and operate a 480-
megawatt natural gas-fired power plant in Boulder City, Nevada, 40 miles
southeast of Las Vegas. The joint venture, called El Dorado Energy,
plans to sell the plant's electricity into the wholesale market to
utilities throughout the western United States. The new plant will
employ an advanced combined-cycle gas-turbine technology, enabling it to
become one of the more efficient and environmentally friendly power
plants in the nation. Its proximity to existing natural gas pipelines
and electric transmission lines will allow El Dorado to actively compete
in the deregulated electric-generation market. Construction on the $280
million project, which will be funded 50 percent each by Enova and
Houston Industries, began in the first quarter of 1998, with an expected
operational date set for the fourth quarter of 1999.
AFFILIATE TRANSACTION GUIDELINES
In December 1997, the CPUC issued a decision on the rules governing
transactions between a regulated utility and its affiliates that are not
regulated by the CPUC. The decision adopts guidelines that are more
favorable to consumers and less restrictive to utilities and their
affiliates than the conditions that were recommended in October 1997 by
a CPUC administrative law judge's proposed decision and an alternate
decision by two CPUC commissioners. Key elements of the decision
include: allowing the unregulated affiliates to operate within the
utility's service territory without limitation; permitting utilities to
share logos with their parent company and unregulated affiliates as long
as proper disclaimers to California customers clearly communicate the
utility-affiliate relationship; and allowing officers or board of
directors of the parent company to also hold positions with the utility
or unregulated affiliate, but not both. The rules adopted require
separating functions between the utility and the affiliates with the
exception of sharing certain corporate support services. These
guidelines include transactions between affiliated utilities. However,
these transactions have been addressed by the CPUC in the Enova/Pacific
Enterprises business combination proceedings and the draft decision
arising from that proceeding would exclude transactions between SDG&E
and SoCalGas from the guidelines.
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PERFORMANCE-BASED RATEMAKING (PBR)
Background The CPUC has affirmed its belief that the new competitive
environment should be based on policies that encourage efficient
operation and improved productivity rather than on reasonableness
reviews and disallowances. SDG&E has been participating in a PBR process
for base rates, gas procurement, and electric generation and dispatch.
SDG&E has applied to extend the Gas Procurement mechanism. The
Generation and Dispatch mechanism has been terminated. SDG&E has filed a
proposal for a new Distribution PBR mechanism to replace the current
experimental Base-Rate PBR when it terminates at the end of 1998.
Base Rates In December 1997, the CPUC approved $6.5 million in
performance rewards for SDG&E's 1996 PBR. The CPUC has eliminated the
price-performance benchmark indicator, which compares SDG&E's average
electric-system rate to a national average, from SDG&E's Base-Rate PBR
effective in 1997 due to the electric-rate freeze. For the 1998 PBR, all
customer sharing amounts will be credited to the transition-cost
balancing account rather than refunded to customers.
In December 1997, the CPUC eliminated SDG&E's 1999 General Rate Case
filing requirement, and replaced it with a 1999 Cost of Service study in
its new Distribution PBR application for electric distribution and gas
operations (filed in January 1998 to begin in 1999). The Distribution
PBR, which includes six categories of performance indicators, will
measure SDG&E's ability to provide efficient, safe and reliable utility
transmission (gas only) and distribution services. The application
requests a $60 million increase in SDG&E's revenue requirements ($35
million for electric distribution and $25 million for gas). The electric
distribution increase does not affect rates and, therefore, reduces the
amount available to recover transition costs. Under the new mechanism,
all customer-sharing amounts will be reflected as reductions to future
rates rather than refunded directly to customers. SDG&E's ability to
control its costs within the limits of the revenues authorized by the
study will impact future earnings.
1998 Revenues In December 1997, the CPUC approved a $67 million
increase in SDG&E's authorized electric distribution revenue
requirements and a $7 million increase in gas base rates, effective on
January 1, 1998. The electric distribution increase, which reflects 1998
PBR escalations, does not affect rates and, therefore, reduces the
amount available to recover transition costs.
Natural Gas In September 1997, SDG&E filed with the CPUC its
application for a permanent Gas Procurement PBR mechanism. The filing
proposes a mechanism structured around a commodity price cap plus an
incremental adjustment, designed to recover transportation costs to the
California border. SDG&E is holding settlement discussions with the
CPUC's Office of Ratepayer Advocates over the proposed
new mechanism.
NATURAL GAS OPERATIONS
The ongoing restructuring of the natural gas utility industry has
allowed customers to bypass utilities as suppliers and, to a lesser
extent, as transporters of natural gas. Currently, nonutility
electricity producers and other large customers may use a natural gas
utility's facilities to transport gas purchased from other suppliers.
Also, smaller customers may form groups to buy natural gas from another
supplier.
In January 1998, the CPUC opened a rulemaking proceeding designed to
open the natural gas industry to all customers, expanding the
opportunities of residential and small commercial customers to have
access to competing natural gas suppliers. The rulemaking will allow
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smaller customers to receive the price and service benefits already
realized by larger customers. A potential benefit from future natural
gas reform, benefiting both customers and industry participants, would
be the opportunity for energy providers to offer integrated retail
electric and natural gas service to develop synergies between the two
energy markets. In developing a natural gas retail restructuring
proposal, the CPUC has provided several guiding principles: replace
traditional regulation with competition in those markets where
competition or the potential for competition exists, thereby allowing
market forces to dictate prices; reform regulation for those utility
functions that are not fully competitive; maintain a standard of
consumer protection in both competitive and noncompetitive markets; and
maintain supply reliability and ensure the safety of consumers' natural
gas service. Hearings on the proposed restructuring are scheduled to
begin in April 1998, with a final CPUC decision expected to be issued
before the end of 1998.
Enova's nonutility subsidiaries are involved in several projects to
develop natural gas systems in the United States and in Mexico.
Discussion on these activities is included herein under "Liquidity and
Capital Resources - Investing Activities."
COST OF CAPITAL
In October 1997, SDG&E filed with the CPUC its 1998 Market Indexed
Capital Adjustment Mechanism (MICAM). MICAM, approved by the CPUC in
1996, adjusts SDG&E's authorized cost of capital based on changes in
interest rates. For the current MICAM review, interest-rate movements
over the corresponding 12 months did not trigger the mechanism to
change, resulting in SDG&E's 1998 cost of capital remaining at 1997
authorized levels of 11.60 percent for the rate of return on equity and
9.35 percent for the rate of return on rate base. Beginning in 1998,
MICAM only applies to electric distribution and gas rate base, and
excludes the rates of return on nuclear and nonnuclear generating assets
(recovered as transition costs), which are authorized at rates of 7.14
percent and 6.75 percent, respectively. During 1998, the CPUC will
conduct proceedings to establish separate rates for the electric and gas
components. SDG&E's authorized capital structure, which excludes the
rate-reduction bonds, remains 49.75 percent common equity, 44.5 percent
long-term debt and 5.75 percent preferred stock.
Electric transmission rates are regulated by the FERC. SDG&E's 1998
rate of return for transmission is 9.54 percent.
RESOURCE PLANNING
Sources of Fuel and Energy SDG&E's primary sources of fuel and
purchased power include natural gas from Canada and the Southwest,
surplus power from other utilities in the Southwest and the Northwest,
and uranium from Canada. Although short-term natural gas supplies are
volatile due to weather and other conditions, these sources should
provide SDG&E with an adequate supply of competitively priced natural
gas. SDG&E has been involved in litigation concerning its long-term
contracts for natural gas with four Canadian suppliers. SDG&E has
settled with one supplier, with gas being delivered under the terms of
the settlement agreement. The remaining suppliers have ceased deliveries
pending legal resolution. A U.S. Court of Appeals has upheld a U.S.
District Court's decision to invalidate the contracts with two of the
suppliers, although the value of the gas delivered has not yet been
determined by the court. SDG&E has long-term pipeline capacity
commitments related to these contracts for natural gas supplies. If the
supply of Canadian natural gas to SDG&E is not resumed, SDG&E intends to
use the capacity in other ways, including the release of a portion of
this capacity to third parties. SDG&E cannot predict the final outcome
of the litigation, but does not expect that an unfavorable outcome would
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have a material effect on its financial condition, results of operations
or liquidity. Additional information on Canadian gas litigation is
discussed in Note 9 of the notes to consolidated financial statements.
San Onofre Nuclear Generating Station In January 1996, the CPUC
approved the accelerated recovery of the existing capital costs of Units
2 and 3. The decision allowed SDG&E to recover its remaining investment
in the units at a lower rate of return (7.14 percent) over an eight-year
period beginning in 1996, rather than over the life of the units'
license, which extends to 2013. The accelerated recovery began in April
1996. At December 31, 1997, approximately $600 million was not yet
recovered. California electric-industry-restructuring legislation
requires that all generation-related stranded assets, which includes the
uneconomic sunk costs of Units 2 and 3, be recovered by 2001. The 1996
decision also includes a performance incentive plan that encourages
continued, efficient operation of the plant. Under this plan, customers
will pay about $0.04 per kilowatt-hour through December 31, 2003. This
pricing structure replaces the traditional method of recovering the
units' operating expenses and capital improvements. This is intended to
make the units more competitive with other sources.
The California Coastal Commission (CCC) approved the SONGS owners'
preliminary plan to provide 150 acres of wetlands restoration, 150 acres
of kelp reef and other mitigation that was ordered by the CCC in April
1997. SDG&E's share of the cost is estimated to be $23 million.
Additional information is included under "Water Quality" below.
While conducting routine inspections of Unit 3 during its scheduled
refueling in the second quarter of 1997, it was noted that, in several
areas, the thickness of the heat transfer tubes' structural supports was
significantly reduced, apparently due to erosion. In June 1997, the
Nuclear Regulatory Commission approved the removal of the affected tubes
from service as a corrective action and the unit's return to service.
Unit 2, which also had this inspection during its scheduled refueling in
the first quarter of 1997, showed no signs of this type of erosion. As a
precautionary measure, Unit 2 was shut down in January 1998 for a 30-day
mid-cycle outage for an inspection of its steam generators. The SONGS
owners have scheduled a 30-day outage for Unit 3 in March 1998, for this
inspection. The discovery of such problems in the future could increase
the possibility that the units would be removed from service prior to
2013.
ENVIRONMENTAL MATTERS
SDG&E's operations are conducted in accordance with federal, state and
local environmental laws and regulations governing hazardous wastes, air
and water quality, land use and solid-waste disposal. SDG&E incurs
significant costs to operate its facilities in compliance with these
laws and regulations, and to clean up the environment as a result of
prior operations of SDG&E or of others.
The costs of compliance with environmental laws and regulations are
normally recovered in customer rates. However, restructuring of the
California electric-utility industry (see "Electric Industry
Restructuring" above) will change the way utility rates are set and
costs are recovered. SDG&E has proposed a change in the hazardous waste
memorandum account to exclude cleanup costs related to electric-
generation activities, as described below. Capital costs related to
environmental regulatory compliance for electric generation are intended
to be included in transition costs for recovery through 2001. However,
depending on the final outcome of industry restructuring and the impact
of competition, the costs of compliance with future environmental
regulations may not be fully recoverable.
Capital expenditures to comply with environmental laws and
regulations were $4 million in 1997, $6 million in 1996 and $4 million
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in 1995, and are expected to be $38 million in the aggregate over the
next five years. These expenditures primarily include the estimated cost
of retrofitting SDG&E's power plants to reduce air emissions. However,
in November 1997 SDG&E announced a plan to auction its power plants and
other electric-generating resources. Additional information on SDG&E's
plan to divest its electric-generating assets is discussed in Note 10 of
the notes to consolidated financial statements.
Hazardous Wastes In 1994, the CPUC approved the Hazardous Waste
Collaborative, which allows utilities to recover cleanup costs of
hazardous waste contamination at sites where the utility may have
responsibility or liability under the law to conduct or participate in
any required cleanup. In general, utilities are allowed to recover 90
percent of their cleanup costs and any related costs of litigation with
responsible parties. SDG&E has asked the CPUC that beginning on January
1, 1998, the hazardous waste memorandum account be modified to exclude
cleanup costs related to electric-generation activities. Electric-
generation-related cleanup costs are intended to be eligible for
transition cost recovery. A CPUC decision is still pending.
SDG&E lawfully disposed of hazardous wastes at facilities owned and
operated by other entities. Operations at these facilities may result in
actual or threatened risks to the environment or public health. Where
the owner or operator of such a facility fails to complete any
corrective action required by regulatory agencies to abate such risks,
applicable environmental laws may impose an obligation to undertake
corrective actions on SDG&E and others who disposed of hazardous wastes
at the facility.
During the early 1900s, SDG&E and its predecessors manufactured gas
from coal and oil at its Station A facility and at two small facilities
in Escondido and Oceanside. Certain amounts of residual by-products from
the gas manufacturing process and subsurface hydrocarbon contamination
were discovered on portions of the Station A site during an
environmental assessment which was completed in 1996. A risk assessment
has been completed for Station A and demolition was performed during
1997 at a cost of $1 million. Cleanup will commence in 1998, to be
completed in 1999, and is estimated to cost $5 million for subsurface
remediation. SDG&E also may be required to assess certain off-site
contamination which, in part, may have originated from the gas
manufacturing process or other operations at Station A. Not included in
this estimate are potential costs related to a previously removed
shallow underground tank-like structure found under a public street
immediately west of Station A. Any potential costs related to this tank
would be immaterial. SDG&E is completing negotiations for an appropriate
site-remediation work plan for Station A with the County of San Diego
Department of Environmental Health.
The Escondido facility was remediated during 1990 through 1993 at a
cost of $3 million and a site-closure letter from the Department of
Environmental Health has been received. However, contaminants similar to
those on the Escondido site have been observed on adjacent property. In
1997, SDG&E assessed the nature and extent of these off-site
contaminants at a cost of $75,000. Hazardous contaminants were found on
property to the east of the site and are believed to have originated
from SDG&E operations. Remediation of these contaminants was initiated
in 1997 and completed in 1998 at a total cost of $250,000. A site-
closure letter has been requested from the Department of Environmental
Health. Nonhazardous contaminants were determined to be present on
property to the north, but may not require further action subject to
future land-use decisions. Finally, potential contaminants resulting
from the gas manufacturing process by-products were assessed at the
Oceanside facility, as well as on adjacent property. The cost to
remediate the hazardous contaminants discovered in the assessment at the
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property adjacent to the Oceanside facility and at the facility itself
is estimated to be $150,000.
Asbestos was used in the construction of SDG&E's Station B power
plant, which closed in 1993. Activities to dismantle and decommission
the facility require the removal of the asbestos in a manner complying
with all applicable environmental, health and safety laws. This work
also includes the removal or cleanup of paints containing heavy metals
and small amounts of PCBs, fuel oil and other substances. These
activities commenced in 1997 at a cost of $3 million. This work effort
is expected to be completed in 1998 at an estimated additional cost of
$3 million.
Electric and Magnetic Fields (EMFs) In property-damage litigation in
1996, the California Supreme Court agreed with SDG&E and unanimously
affirmed the 1995 California Court of Appeal decision that the CPUC has
exclusive jurisdiction over EMF health and safety issues. The California
Supreme Court also stated that scientific evidence is insufficient to
conclude that EMFs pose a health hazard. In addition, in a December 1997
case involving Pacific Gas & Electric, the California Court of Appeal
held that the CPUC has exclusive jurisdiction over EMF personal injury,
as well as EMF property-damage cases. Plaintiffs have sought review of
this case at the California Supreme Court, which request is still
pending.
Although scientists continue to research the possibility that
exposure to EMFs causes adverse health effects, to date, science has
demonstrated no cause-and-effect relationship between adverse health
effects and exposure to the type of EMFs emitted by utilities, power
lines and other electrical facilities. Some laboratory studies suggest
that such exposure creates biological effects, but those effects have
not been shown to be harmful. The studies that have most concerned the
public are certain epidemiological studies, some of which have reported
a weak correlation between childhood leukemia and the proximity of homes
to certain power lines and equipment. Other epidemiological studies
found no correlation between estimated exposure and any disease.
Scientists cannot explain why some studies using estimates of past
exposure report correlations between estimated EMF levels and disease,
while others do not.
To respond to public concerns, the CPUC has directed California
utilities to adopt a low-cost EMF-reduction policy that requires
reasonable design changes to achieve noticeable reduction of EMF levels
that are anticipated from new projects. However, consistent with the
major scientific reviews of the available research literature, the CPUC
has indicated that no health risk has been identified.
Air Quality The San Diego Air Pollution Control District (APCD)
regulates air quality in San Diego County in conformance with the
California and Federal Clean Air Acts. California's standards are more
restrictive than federal standards.
During 1996 and 1997, SDG&E installed equipment on South Bay Unit 1
in order to comply with the nitrogen oxide emission limits that the APCD
imposed on electric-generating boilers through its Rule 69. Under this
rule, SDG&E must maintain the total nitrogen oxide emissions from its
entire system below a prescribed emissions cap, which decreases
periodically through 2005. The estimated capital costs for compliance
with the rule through 2005 are $60 million. The California Air Resources
Board has expressed concern that Rule 69 does not meet the requirements
of the California Clean Air Act and may advocate or propose more
restrictive emissions limitations which will likely cause SDG&E's Rule
69 compliance costs to increase.
Under a South Coast Air Quality Management District program called
RECLAIM, SDG&E is required to reduce its nitrogen oxide emission levels
43
<PAGE>
of the natural gas compressor engines at its Moreno gas-compression
facility by 10 percent a year through 2003. This will be accomplished
through the installation of new emission-monitoring equipment,
operational changes to take advantage of low-emission engines and engine
retrofits. The cost of complying with RECLAIM may be as much as $3
million.
Water Quality Wastewater discharge permits issued by the Regional
Water Quality Control Board (RWQCB) for SDG&E's Encina and South Bay
power plants are required to enable SDG&E to discharge its cooling water
and certain other wastewaters into the Pacific Ocean and into San Diego
Bay. Wastewater discharge permits are prerequisite to the continued
cooling-water and other wastewater discharges and, therefore, the
continued operation of the power plants as they are currently
configured. Increasingly stringent cooling-water and wastewater
discharge limitations may be imposed in the future and SDG&E may be
required to build additional facilities or modify existing facilities to
comply with these requirements. Such facilities could include wastewater
treatment facilities, cooling towers or offshore-discharge pipelines.
Any required construction could involve substantial expenditures, and
certain plants or units may be unavailable for electric generation
during construction.
In 1981, SDG&E submitted a demonstration study in support of its
request for two exceptions to certain thermal discharge requirements
imposed by the California Thermal Plan for Encina power plant Unit 5. In
November 1994, the RWQCB issued a new discharge permit, subject to the
results of certain additional thermal discharge and cooling water
related studies, to be used in considering SDG&E's earlier thermal
discharge exception requests. The results of these additional studies
were submitted to the RWQCB and the United States Environmental
Protection Agency in 1997. If SDG&E's exception requests are denied,
SDG&E could be required to construct off-shore discharge facilities at a
cost of $75 million to $100 million or to perform mitigation, the costs
of which may be significant.
In November 1996, the RWQCB issued a new discharge permit to SDG&E
for the South Bay power plant. SDG&E filed an appeal to the State Water
Resources Control Board (SWRCB) of various provisions which SDG&E
considers unduly stringent. The SWRCB has not yet formally acted on the
appeal. However, the SWRCB sponsored workshops with the RWQCB and the
Environmental Health Coalition in November and December 1997, as a
result of which several important issues may be resolved in 1998. As
with the Encina power plant, increasingly stringent cooling-water and
wastewater discharge limitations may require SDG&E to build additional
facilities to comply with these requirements. To comply with its current
permit, in 1997 SDG&E diverted its in-plant wastewater discharges from
San Diego Bay to the sanitary sewer at a cost of $2 million.
During 1997, in conjunction with its permit requirements to treat
wastewater at its Encina and South Bay power plants, SDG&E evaluated
whether any remediation activities may be required at the power plants
based on currently available records and other information. In addition,
SDG&E evaluated whether remediation is required at its Silvergate plant,
which was shut down in 1984. As a result of these evaluations, only
minor and localized remediation efforts were required. However, these
evaluations did not include an extensive sampling and analysis of the
property at such sites. Extensive sampling and analysis may identify
additional contamination or other environmental conditions requiring
remediation.
As previously discussed, in December 1997, SDG&E filed an
application with the CPUC to divest its electric-generating assets,
including its Encina and South Bay power plants, gas combustion turbines
and its interest in the San Onofre Nuclear Generating Station. As a part
44
<PAGE>
of the sale of any such facilities, SDG&E will complete an environmental
baseline analysis of such sites, which may identify significant
contamination or other environmental conditions requiring abatement or
remediation.
The California Coastal Commission (CCC) required a study of the
offshore impact on the marine environment from the cooling-water
discharge by SONGS Units 2 and 3 as a condition of granting a
construction permit. The study concluded that some environmental damage
is caused by the discharge. To mitigate the damage, the CCC ordered
Southern California Edison, SDG&E and the cities of Anaheim and
Riverside to improve the plant's fish-protection system, build a 300-
acre artificial reef to help restore kelp beds and restore 150 acres of
coastal wetlands. SDG&E and Edison asked the CCC to reconsider and
modify this mitigation plan to reduce the size of the artificial reef
and shorten the monitoring period based on new studies that show that
the environmental damage is much less than anticipated. During 1997 the
CCC ordered that the plant owners proceed with a mitigation program that
includes the enhanced fish-protection system, a 150-acre artificial reef
and restoration of 150 acres of coastal wetlands. In addition, plant
owners must deposit $3.6 million with the state for the enhancement of
marine fish hatchery programs and pay for state monitoring and oversight
of the mitigation projects. SDG&E's share of the cost is estimated to be
$23 million. The pricing structure contained in the CPUC's decision
regarding accelerated recovery of SONGS Units 2 and 3 (see "San Onofre
Nuclear Generating Station" above) likely will accommodate most of these
added mitigation costs.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income." This statement, which is effective for 1998
financial statements, requires reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a
full set of general-purpose financial statements. The term
"comprehensive income" describes all changes in equity of a business
enterprise during a period from transactions and other events including,
as applicable, foreign-currency items, minimum pension liability
adjustments and unrealized gains and losses on certain investments in
debt and equity securities. Upon adoption, financial statements for
earlier periods provided for comparative purposes must be restated. The
impact on Enova and SDG&E of the adoption of this new accounting
standard is considered immaterial to the companies' financial
statements.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement,
which is effective for 1998 financial statements, requires that public
companies report certain information about operating segments in
complete sets of financial statements of the enterprise and in condensed
financial statements of interim periods. It also requires certain
information about the company's products and services, geographic areas
in which they operate, and their major customers. Under SFAS No. 131,
operating segments are to be determined consistent with the way that
management organizes and evaluates financial information internally for
making operating decisions and assessing performance. Upon adoption,
statements for earlier periods provided for comparative purposes must
reflect this information. The impact of the adoption of this new
accounting standard is the potential redefinition of the company's
segments. The company estimates that the primary segments upon adoption
of SFAS No. 131 will be electric operations, gas operations, energy
services and other.
45
<PAGE>
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report to Shareholders 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 this
"Management's Discussion and Analysis of Financial Condition and Results
of Operations," the words "estimates," "expects," "anticipates," "plans"
and "intends," variations of such words, and similar expressions are
intended to identify forward-looking statements that involve risks and
uncertainties.
Although Enova and SDG&E 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 and substance of electric-industry
deregulation in California and in the United States, 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 proposed business combination of Enova and Pacific
Enterprises, the timing and level of proceeds of sales of SDG&E's
electric-generating assets, the level of sales of electricity, the rate
of growth of nonutility subsidiary revenues, international political
developments, environmental regulations, and the timing and extent of
changes in interest rates and prices for natural gas and electricity.
46
<PAGE>
Item 8. Financial Statements and Supplementary Data - Enova Corporation
<TABLE>
ENOVA CORPORATION
STATEMENTS OF CONSOLIDATED INCOME
In thousands except per share amounts
<CAPTION>
For the years ended December 31 1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Operating Revenues
Electric $1,769,421 $1,590,882 $1,503,926
Gas 398,127 348,035 310,142
Other 49,459 54,557 56,608
------------ ------------ ------------
Total operating revenues 2,217,007 1,993,474 1,870,676
------------ ------------ ------------
Operating Expenses
Electric fuel 163,765 134,350 100,256
Purchased power 441,490 310,731 341,727
Gas purchased for resale 183,208 152,408 113,355
Maintenance 87,597 57,652 91,740
Depreciation and decommissioning 347,438 332,490 278,239
Property and other taxes 43,419 44,764 45,566
General and administrative 223,032 262,058 210,207
Other 222,727 212,245 209,358
Income taxes 160,161 151,813 134,578
------------ ------------ ------------
Total operating expenses 1,872,837 1,658,511 1,525,026
------------ ------------ ------------
Operating Income 344,170 334,963 345,650
------------ ------------ ------------
Other Income and (Deductions)
Allowance for equity funds used
during construction 5,192 5,898 6,435
Taxes on nonoperating income 9,959 3,339 (27)
Other - net 1,653 (3,265) (5,876)
------------ ------------ ------------
Total other income 16,804 5,972 532
------------ ------------ ------------
Income Before Interest Charges and
Preferred Dividends 360,974 340,935 346,182
------------ ------------ ------------
Interest Charges and Preferred Dividends
Long-term debt 85,617 89,198 95,523
Short-term debt and other 19,474 17,516 20,215
Allowance for borrowed funds
used during construction (2,306) (3,288) (2,865)
Preferred dividend requirements of SDG&E 6,582 6,582 7,663
------------ ------------ ------------
Net interest charges and preferred dividends 109,367 110,008 120,536
------------ ------------ ------------
Income From Continuing Operations 251,607 230,927 225,646
Discontinued Operations, Net of Income Taxes -- -- 148
------------ ------------ ------------
Earnings Applicable to Common Shares $ 251,607 $ 230,927 $ 225,794
============ ============ ============
Average Common Shares Outstanding 114,322 116,572 116,535
============ ============ ============
Earnings Per Common Share (basic and diluted) $ 2.20 $ 1.98 $ 1.94
============ ============ ============
Dividends Declared Per Common Share $ 1.56 $ 1.56 $ 1.56
============ ============ ============
See notes to consolidated financial statements.
</TABLE>
47
<PAGE>
<TABLE>
ENOVA CORPORATION
CONSOLIDATED BALANCE SHEETS
In thousands of dollars
<CAPTION>
Balance at December 31 1997 1996
-------------- --------------
<S> <C> <C>
ASSETS
Utility plant - at original cost $5,888,539 $5,704,464
Accumulated depreciation and decommissioning (2,952,455) (2,630,093)
-------------- --------------
Utility plant - net 2,936,084 3,074,371
-------------- --------------
Investments in partnerships and unconsolidated
subsidiaries 516,113 271,035
-------------- --------------
Nuclear decommissioning trust 399,143 328,042
-------------- --------------
Current assets
Cash and temporary investments 624,375 173,079
Accounts receivable 231,678 186,529
Notes receivable 27,083 33,564
Inventories 67,074 63,437
Other 89,826 47,094
-------------- --------------
Total current assets 1,040,036 503,703
-------------- --------------
Deferred taxes recoverable in rates 184,837 189,193
-------------- --------------
Deferred charges and other assets 157,711 282,893
-------------- --------------
Total $5,233,924 $4,649,237
============== ==============
CAPITALIZATION AND LIABILITIES
Capitalization (see Statements of Consolidated
Capital Stock and of Long-Term Debt)
Common equity $1,570,383 $1,569,670
Preferred stock not subject to mandatory redemption 78,475 78,475
Preferred stock subject to mandatory redemption 25,000 25,000
Long-term debt 2,057,033 1,479,338
-------------- --------------
Total capitalization 3,730,891 3,152,483
-------------- --------------
Current liabilities
Current portion of long-term debt 121,700 69,902
Accounts payable 163,395 175,815
Dividends payable 46,050 47,213
Interest accrued 23,160 21,259
Regulatory balancing accounts overcollected - net 58,063 35,338
Other 146,267 158,317
-------------- --------------
Total current liabilities 558,635 507,844
-------------- --------------
Customer advances for construction 37,661 34,666
Accumulated deferred income taxes - net 501,030 497,400
Accumulated deferred investment tax credits 62,332 64,410
Deferred credits and other liabilities 343,375 392,434
Contingencies and commitments (Notes 9 and 10) -- --
-------------- --------------
Total $5,233,924 $4,649,237
============== ==============
See notes to consolidated financial statements.
</TABLE>
48
<PAGE>
<TABLE>
ENOVA CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS
<CAPTION>
In thousands of dollars
For the years ended December 31 1997 1996 1995
--------- --------- ----------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Income from continuing operations $ 251,607 $ 230,927 $ 225,646
Adjustments to reconcile income from continuing
operations to net cash provided by operating activities
Depreciation and decommissioning 347,438 332,490 278,239
Amortization of deferred charges and other assets 6,246 6,556 12,068
Amortization of deferred credits and other
liabilities (37,802) (38,399) (32,975)
Allowance for equity funds used during construction (5,192) (5,898) (6,435)
Deferred income taxes and investment tax credits 18,749 (6,875) (42,237)
Other - net 55,817 73,850 57,475
Changes in working capital components
Accounts and notes receivable (38,668) (7,440) 7,141
Inventories (3,637) 4,522 7,648
Other current assets (23,322) (14,242) (5,609)
Interest and taxes accrued (30,350) (28,199) 23,131
Accounts payable and other current liabilities (24,470) 49,427 26,983
Regulatory balancing accounts 22,725 (37,313) 59,030
Cash flows provided by discontinued operations -- -- 6,148
----------- --------- ---------
Net cash provided by operating activities 539,141 559,406 616,253
----------- --------- ---------
Cash Flows from Financing Activities
Dividends paid (179,586) (181,849) (180,625)
Issuances of long-term debt 677,850 228,946 124,641
Repayment of long-term debt (171,133) (286,668) (165,871)
Short-term borrowings - net -- -- (89,325)
Redemption of common stock (74,122) (480) (241)
Redemption of preferred stock -- (15,155) (18)
---------- ----------- ----------
Net cash provided (used) by financing activities 253,009 (255,206) (311,439)
---------- ----------- ----------
Cash Flows from Investing Activities
Utility construction expenditures (197,184) (208,850) (220,748)
Contributions to decommissioning funds (22,038) (22,038) (22,038)
Other - net (121,632) 3,338 3,874
Discontinued operations -- -- 5,122
---------- ----------- ----------
Net cash used by investing activities (340,854) (227,550) (233,790)
---------- ----------- ----------
Net increase 451,296 76,650 71,024
Cash and temporary investments, beginning of year 173,079 96,429 25,405
---------- ----------- ----------
Cash and temporary investments, end of year $ 624,375 $ 173,079 $ 96,429
========== =========== ==========
Supplemental Schedule of Noncash Investing
and Financing Activities
Real estate investments $ 125,726 $ 96,832 $ 50,496
Cash paid (309) -- (2,550)
----------- ----------- ---------
Liabilities assumed $ 125,417 $ 96,832 $ 47,946
=========== =========== =========
See notes to consolidated financial statements.
49
</TABLE>
<PAGE>
<TABLE>
ENOVA CORPORATION
STATEMENTS OF CONSOLIDATED CHANGES IN
CAPITAL STOCK AND RETAINED EARNINGS
In thousands of dollars
For the years ended December 31, 1995, 1996, 1997
<CAPTION>
Preferred Stock
-----------------------------
Not Subject Subject to Premium on
to Mandatory Mandatory Common Capital Retained
Redemption Redemption Stock Stock Earnings
--------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $ 93,493 $ 25,000 $ 291,341 $ 564,508 $ 618,581
Earnings applicable to
common shares 225,794
Long-term incentive plan
activity-net 117 1,530
Preferred stock retired
(880 shares) (18) 8
Common stock dividends declared (181,809)
- ----------------------------- --------- --------- --------- --------- ---------
Balance, December 31, 1995 93,475 25,000 291,458 566,046 662,566
Earnings applicable to common shares 230,927
Long-term incentive plan activity-net 113 582
Preferred stock retired
(150,000 shares) (15,000) (155)
Common stock dividends declared (181,867)
- ----------------------------- --------- --------- --------- --------- ---------
Balance, December 31, 1996 78,475 25,000 291,571 566,473 711,626
Earnings applicable to common shares 251,607
Long-term incentive plan activity-net 172 1,158
Common stock retired (3,062,490 shares) (7,656) (66,145)
Common stock dividends declared (178,423)
- ----------------------------- --------- --------- --------- --------- ---------
Balance, December 31, 1997 $ 78,475 $ 25,000 $ 284,087 $ 501,486 $ 784,810
============================= ========= ========= ========= ========= =========
See notes to consolidated financial statements.
</TABLE>
50
<PAGE>
<TABLE>
ENOVA CORPORATION
STATEMENTS OF CONSOLIDATED CAPITAL STOCK
In thousands of dollars except call price
<CAPTION>
Balance at December 31 1997 1996
----------- ----------
<S> <C> <C> <C> <C>
COMMON EQUITY
Common stock, without par value, authorized
300,000,000 shares, outstanding: 1997,
113,634,744 shares; 1996, 116,628,735 shares $ 284,087 $ 291,571
Premium on capital stock 501,486 566,473
Retained earnings 784,810 711,626
----------- ----------
Total common equity $1,570,383 $1,569,670
=========== ==========
PREFERRED STOCK (A) Trading Call
Not subject to mandatory redemption Symbol(B) Price
$20 par value, authorized
1,375,000 shares --------- --------
5% Series, 375,000 shares outstanding SDOPrA $24.00 $ 7,500 $ 7,500
4.50% Series, 300,000 shares outstanding SDOPrB $21.20 6,000 6,000
4.40% Series, 325,000 shares outstanding SDOPrC $21.00 6,500 6,500
4.60% Series, 373,770 shares outstanding -- $20.25 7,475 7,475
Without par value (C)
$1.70 Series, 1,400,000 shares outstanding -- $25.85(D) 35,000 35,000
$1.82 Series, 640,000 shares outstanding SDOPrH $26.00(D) 16,000 16,000
----------- ----------
Total not subject to mandatory redemption $ 78,475 $ 78,475
=========== ==========
Subject to mandatory redemption
Without par value (C)
$1.7625 Series, 1,000,000 shares
outstanding(E) -- $25.00(D) $ 25,000 $ 25,000
=========== ===========
(A) All series of preferred stock have cumulative preferences as to dividends.
The $20 par value preferred stock has two votes per share, whereas the no
par value preferred stock is nonvoting. The $20 par value preferred stock
has a liquidation value at par. The no par value preferred stock has a
liquidation value of $25 per share.
(B) All listed shares are traded on the American Stock Exchange.
(C) SDG&E is authorized to issue 10,000,000 shares total (both subject to and not
subject to mandatory redemption). Enova is authorized to issue 30,000,000 shares
total, of which no shares were issued and outstanding at December 31, 1997.
(D) The $1.70 and $1.7625 series are not callable until 2003; the $1.82 series
is not callable until November 1998. All other series are currently callable.
(E) The $1.7625 series has a sinking fund requirement to redeem 50,000 shares
per year from 2003 to 2007. The remaining 750,000 shares must be redeemed
in 2008.
See notes to consolidated financial statements.
</TABLE>
51
<PAGE>
<TABLE>
ENOVA CORPORATION
STATEMENTS OF CONSOLIDATED LONG-TERM DEBT
In thousands of dollars
<CAPTION>
First Call
Balance at December 31 Date 1997 1996
----------------- ---------- ----------
<S> <C> <C> <C>
SDG&E
First mortgage bonds
5.5% Series I, due March 1, 1997 4/15/67 $ -- $ 25,000
8.75% Series II, due March 1, 2023(A) 9/1/97 -- 25,000
9.625% Series JJ, due April 15, 2020 4/15/00 54,260 100,000
6.8% Series KK, due June 1, 2015(B) Non-callable 14,400 14,400
8.5% Series LL, due April 1, 2022 4/1/02 43,725 60,000
7.625% Series MM, due June 15, 2002 Non-callable 80,000 80,000
6.1% and 6.4% Series NN, due September 1, 2018
and 2019(A) 9/1/02 118,615 118,615
Various % Series OO, due December 1, 2027(C) (D) 250,000 250,000
5.9% Series PP, due June 1, 2018(A) 6/1/03 70,795 70,795
Variable % Series QQ, due June 1, 2018(A) (E) -- 14,915
5.85% Series RR, due June 1, 2021(B) 6/1/03 60,000 60,000
5.9% Series SS, due September 1, 2018(A) 9/1/03 92,945 92,945
Variable % Series TT, due September 1, 2020(A) (E) 57,650 57,650
Variable % Series UU, due September 1, 2020(A) (E) 16,700 16,700
-------------- ---------- ----------
Total 859,090 986,020
---------- ----------
Unsecured bonds
5.90% Series CPCFA96A, due June 1, 2014(B) Non-callable 129,820 129,820
Variable % Series CV96A, due July 1, 2021(C) (E) 38,900 38,900
Variable % Series CV96B, due December 1, 2021(C) (E) 60,000 60,000
Variable % Series CV97A, due March 1, 2023(C) (E) 25,000 --
-------------- ---------- ----------
Total 253,720 228,720
---------- ----------
Rate reduction bonds (F) 658,000 --
Capitalized leases 95,301 105,315
Other long-term debt 465 528
Unamortized discount on long-term debt (6,178) (2,128)
Current portion of long-term debt (72,575) (33,639)
---------- ----------
Total SDG&E 1,787,823 1,284,816
---------- ----------
Other Subsidiaries
Debt incurred to acquire limited partnerships,
various rates, payable annually through 2008 312,862 219,051
Other long-term debt 5,473 11,734
Current portion of long-term debt (49,125) (36,263)
--------- ---------
Total Other Subsidiaries 269,210 194,522
--------- ---------
Total Enova $2,057,033 $1,479,338
=========== ==========
(A) Issued to secure SDG&E's obligation under a series of loan agreements with the City
of San Diego under which the city loaned the proceeds from the sale of industrial-
development revenue bonds to the company to finance certain qualified facilities.
All series are tax-exempt except QQ and UU.
(B) Issued to secure SDG&E's obligation under a series of loan agreements with the
California Pollution Control Financing Authority under which the Authority loaned
proceeds from the sale of tax-exempt pollution-control revenue bonds to the company
to finance certain qualified facilities.
(C) Issued to secure SDG&E's obligation under a series of loan agreements with the City
of Chula Vista under which the city loaned the proceeds from the sale of tax-exempt
industrial-development revenue bonds to the company to finance certain qualified
facilities.
(D) The first call date for $75 million is December 1, 2002. The remaining $175 million
of the bonds is currently variable rate and is callable at various dates within
one year. Of this, $45 million is subject to a floating-to-fixed rate swap, which
expires December 15, 2002 (Note 8).
(E) Callable at various dates within one year.
52
<PAGE>
(F) Issued to facilitate 10-percent rate reduction mandated by California's electric
restruturing law. Issued in December 1997 at an average interest rate of 6.26
percent. Bonds are secured by the revenue streams collected from customers over 10
years and are not secured by utility assets.
See notes to consolidated financial statements.
</TABLE>
53
<PAGE>
<TABLE>
ENOVA CORPORATION
STATEMENTS OF CONSOLIDATED FINANCIAL
INFORMATION BY SEGMENTS OF BUSINESS
<CAPTION>
In thousands of dollars
At December 31 or for the
years then ended 1997 1996 1995
- ---------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Operating Revenues (A) $ 2,217,007 $ 1,993,474 $ 1,870,676
=========== =========== ===========
Operating Income
Electric operations $ 257,706 $ 269,038 $ 263,346
Gas operations 59,382 39,724 51,654
Other 27,082 26,201 30,650
----------- ----------- -----------
Total $ 344,170 $ 334,963 $ 345,650
=========== =========== ===========
Depreciation and Decommissioning
Electric operations $ 286,804 $ 279,251 $ 227,616
Gas operations 37,078 35,027 33,225
Other 23,556 18,212 17,398
----------- ----------- -----------
Total $ 347,438 $ 332,490 $ 278,239
=========== =========== ===========
Utility Plant Additions (B)
Electric operations $ 160,689 $ 167,166 $ 171,151
Gas operations 36,495 41,684 49,597
----------- ----------- -----------
Total $ 197,184 $ 208,850 $ 220,748
=========== =========== ===========
Identifiable Assets
Utility plant - net
Electric operations $ 2,487,472 $ 2,625,620 $ 2,737,201
Gas operations 448,612 448,751 441,140
----------- ----------- -----------
Total 2,936,084 3,074,371 3,178,341
----------- ----------- -----------
Inventories
Electric operations 50,354 47,445 53,828
Gas operations 15,036 15,633 14,131
Other 1,684 359 --
----------- ----------- -----------
Total 67,074 63,437 67,959
----------- ----------- -----------
Other identifiable assets
Electric operations 770,885 697,145 802,172
Gas operations 128,525 161,252 148,714
Other (C) 699,191 488,102 434,940
----------- ----------- -----------
Total 1,598,601 1,346,499 1,385,826
----------- ----------- -----------
Other Utility Assets 632,165 164,930 116,498
----------- ----------- -----------
Total Assets $ 5,233,924 $ 4,649,237 $ 4,748,624
=========== =========== ===========
(A) The detail to operating revenues is provided in the Statements of
Consolidated Income. The gas operating revenues shown therein include
$14 million in 1997, $9 million in 1996 and $9 million in 1995, representing
the gross margin on sales to the electric segment. These margins arose from
interdepartmental transfers of $144 million in 1997, $111 million in 1996
and $85 million in 1995, based on transfer pricing approved by the
California Public Utilities Commission in tariff rates.
(B) Excluding allowance for equity funds used during construction.
(C) Includes $378 million in real estate investments.
Utility income taxes and corporate expenses are allocated between electric and gas
operations in accordance with regulatory accounting requirements.
See notes to consolidated financial statements.
</TABLE>
54
<PAGE>
<TABLE>
ENOVA CORPORATION
QUARTERLY FINANCIAL DATA (UNAUDITED)
In thousands except per share amounts
<CAPTION>
Quarter ended March 31 June 30 September 30 December 31
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
Operating revenues $ 507,930 $ 501,481 $ 581,058 $ 626,538
Operating expenses 438,535 416,241 485,699 532,362
----------- ---------- ---------- -----------
Operating income 69,395 85,240 95,359 94,176
Other income and (deductions) 6,086 (124) (3,425) 14,267
Net interest charges and
preferred dividends 26,615 28,738 26,868 27,146
----------- ---------- ---------- -----------
Earnings applicable to
common shares $ 48,866 $ 56,378 $ 65,066 $ 81,297
Average common shares outstanding 116,452 113,616 113,616 113,643
Earnings per common share
(basic and diluted)* $ 0.42 $ 0.50 $ 0.57 $ 0.72
1996
Operating revenues $ 465,897 $ 470,967 $ 507,593 $ 549,017
Operating expenses 372,905 396,442 420,307 468,857
----------- ---------- ---------- -----------
Operating income 92,992 74,525 87,286 80,160
Other income 1,168 11 4,373 420
Net interest charges and
preferred dividends 28,108 27,186 28,914 25,800
----------- ---------- ---------- -----------
Earnings applicable to
common shares $ 66,052 $ 47,350 $ 62,745 $ 54,780
Average common shares outstanding 116,570 116,565 116,566 116,587
Earnings per common share
(basic and diluted)* $ 0.57 $ 0.41 $ 0.54 $ 0.47
These amounts are unaudited, but in the opinion of Enova reflect all adjustments necessary
for a fair presentation.
* The sum of quarterly earnings per share does not equal the annual total due to rounding.
</TABLE>
<TABLE>
Quarterly Common Stock Data (Unaudited)
<CAPTION>
1997 1996
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Market price
High 23 24 3/8 25 1/4 27 1/8 24 3/4 23 1/8 23 23
Low 21 5/8 21 3/8 23 3/8 23 15/16 21 5/8 20 3/8 20 1/2 21 5/8
Dividends
declared $0.39 $0.39 $0.39 $0.39 $0.39 $0.39 $0.39 $0.39
</TABLE>
55
<PAGE>
<TABLE>
ENOVA CORPORATION
Ratings at December 31, 1997 (Unaudited)
<CAPTION>
Issue Standard & Poor's Moody's
<S> <C> <C>
Bonds A+ A1
Commercial paper A-1 P-1
Preferred stock A a2
The presentation of these ratings is not a recommendation to buy, sell or hold these
securities.
</TABLE>
56
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of Enova Corporation:
We have audited the accompanying consolidated balance sheets and the
statements of consolidated capital stock and of consolidated long-
term debt of Enova Corporation and subsidiaries as of December 31,
1997 and 1996, and the related statements of consolidated income,
consolidated changes in capital stock and retained earnings,
consolidated cash flows, and consolidated financial information by
segments of business for each of the three years in the period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of Enova
Corporation and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/S/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
San Diego, California
February 23, 1998
57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ENOVA CORPORATION
NOTE 1: BUSINESS COMBINATION
In October 1996 Enova Corporation and Pacific Enterprises (PE), parent
company of Southern California Gas Company (SoCalGas), announced an
agreement to combine the two companies. As a result of the combination,
(i) each outstanding share of common stock of Enova will be converted
into one share of common stock of the new company, (ii) each outstanding
share of common stock of PE will be converted into 1.5038 shares of
common stock of the new company and (iii) the preferred stock and
preference stock of SDG&E, PE and SoCalGas will remain outstanding.
The combination was unanimously approved by the boards of directors
of both companies and subsequently was approved by the shareholders of
both companies. The combination will be a tax-free transaction and is
expected to be accounted for as a pooling of interests. Enova and PE
have selected Sempra Energy as the name of the new combined company,
with the corporate headquarters to be located in San Diego, California.
Headquarters for SDG&E and SoCalGas, whose names will be retained, will
remain in San Diego and Los Angeles, California, respectively.
Consummation of the combination is conditional upon the approvals of the
California Public Utilities Commission and various other regulatory
bodies, with completion expected in the summer of 1998. On February 23,
1998, the CPUC's administrative law judge handling the proceeding issued
a draft decision that proposed approval of the combination. Among other
things, the draft decision proposed 50/50 sharing of the net cost
savings resulting from the combination between shareholders and
customers, but only for five years rather than the 10 years sought. The
draft decision would reduce the net shareable savings from $1.1
billion to $340 million. The CPUC decision is scheduled for the end of
March 1998. Additional information concerning Enova/PE joint activities
is discussed in Note 3.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations On January 1, 1996, Enova Corporation (referred to
herein as Enova, which includes the parent and its wholly owned
subsidiaries) became the parent of SDG&E and its unregulated
subsidiaries (referred to herein as nonutility subsidiaries). SDG&E's
outstanding common stock was converted on a share-for-share basis into
Enova common stock. SDG&E's debt securities, preferred and preference
stock were unaffected and remain with SDG&E.
The consolidated financial statements include Enova and its wholly
owned subsidiaries. The subsidiaries include SDG&E, Califia, Enova
Financial, Enova Energy, Enova Technologies, Enova International and
Pacific Diversified Capital. In 1997, nonutility subsidiaries
contributed 8 percent to operating income (8 percent in 1996 and 9
percent in 1995).
Utility Plant and Depreciation Utility plant represents the buildings,
equipment and other facilities used by SDG&E to provide electric and gas
service. The cost of utility plant includes labor, materials, contract
services and related items, and an allowance for funds used during
construction. The cost of retired depreciable utility plant, plus
removal costs minus salvage value is charged to accumulated
depreciation. Information regarding industry restructuring and its
effect on utility plant is included in Note 10. Utility plant in service
by major functional categories at December 31, 1997, are: electric
generation $1.8 billion, electric distribution $2.3 billion, electric
transmission $0.7 billion, other electric $0.3 billion and gas
operations $0.8 billion. The corresponding amounts at December 31, 1996,
were essentially the same as 1997. Accumulated depreciation and
decommissioning of electric and gas utility plant in service at December
31, 1997, are $2.6 billion and $0.4 billion, respectively, and at
December 31, 1996, were $2.2 billion and $0.4 billion, respectively.
58
<PAGE>
Depreciation expense is based on the straight-line method over the
useful lives of the assets or a shorter period prescribed by the
California Public Utilities Commission (CPUC) (for SONGS, see below).
The provisions for depreciation as a percentage of average depreciable
utility plant (by major functional categories) in 1997 and (in 1996,
1995, respectively) are: electric generation 8.83 (7.57, 4.04), electric
distribution 4.39 (4.38, 4.36), electric transmission 3.28 (3.25, 3.21),
other electric 6.02 (5.95, 5.89) and gas operations 4.03 (4.07, 4.06).
The increases for electric generation in 1997 and 1996 reflect the
accelerated recovery of San Onofre Nuclear Generating Station (SONGS)
Units 2 and 3 approved by the CPUC in April 1996.
Inventories Included in inventories at December 31, 1997, are SDG&E's
$43 million of materials and supplies ($40 million in 1996), and $22
million of fuel oil and natural gas ($23 million in 1996). Materials and
supplies are valued at average cost; fuel oil and natural gas are valued
by the last-in first-out (LIFO) method.
Other Current Assets Included in other current assets at December 31,
1997, is $44 million for Enova's current and deferred income taxes ($47
million in 1996). Included therein is SDG&E's portion of $26 million
($33 million in 1996).
Short-term Borrowings There were no short-term borrowings at December
31, 1997, and 1996. At December 31, 1997, SDG&E had $50 million of bank
lines available to support commercial paper. Commitment fees are paid on
the unused portion of the lines and there are no requirements for
compensating balances.
Other Current Liabilities Included in other current liabilities at
December 31, 1997, is Califia's $21 million current portion of deferred
lease revenue ($33 million in 1996) and $35 million for SDG&E's accrued
vacation and sick leave ($33 million in 1996). In 1996 the $21 million
noncurrent portion of Califia's deferred lease revenue is included in
"Deferred Credits and Other Liabilities." The deferred revenue is
amortized over the lease terms that end in 1998.
Allowance for Funds Used During Construction (AFUDC) The allowance
represents the cost of funds used to finance the construction of utility
plant and is added to the cost of utility plant. AFUDC also increases
income, as an offset to interest charges shown in the Statements of
Consolidated Income, although it is not a current source of cash. The
average rate used to compute AFUDC was 9.35 percent in 1997, 9.36
percent in 1996 and 9.74 percent in 1995.
Effects of Regulation SDG&E's accounting policies conform with
generally accepted accounting principles for regulated enterprises and
reflect the policies of the CPUC and the Federal Energy Regulatory
Commission. SDG&E has been preparing its financial statements in
accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of
Regulation," under which a regulated utility may record a regulatory
asset if it is probable that, through the ratemaking process, the
utility will recover that asset from customers. Regulatory liabilities
represent future reductions in revenues for amounts due to customers. To
the extent that a portion of SDG&E's operations is no longer subject to
SFAS No. 71, or recovery is no longer probable as a result of changes in
regulation or SDG&E's competitive position, the related regulatory
assets and liabilities would be written off. In addition, SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets to Be Disposed Of,"
affects utility plant and regulatory assets such that a loss must be
recognized whenever a regulator excludes all or part of an asset's cost
from rate base. As discussed in Note 10, California enacted a law
restructuring the electric utility industry. The law adopts the December
1995 CPUC policy decision, and allows California utilities the
opportunity to recover existing utility plant and regulatory assets over
a transition period that ends in 2001. SDG&E has ceased the application
of SFAS No. 71 with respect to its electric-generation business. SDG&E
continues to evaluate the applicability of SFAS No. 121 as industry
restructuring progresses. Additional information
59
<PAGE>
concerning regulatory assets and liabilities is described below in
"Revenues and Regulatory Balancing Accounts" and in Note 10.
Revenues and Regulatory Balancing Accounts Revenues from utility
customers have consisted of deliveries to customers and the changes in
regulatory balancing accounts. Earnings fluctuations from changes in the
costs of fuel oil, purchased energy and natural gas, and consumption
levels for electricity and the majority of natural gas previously were
eliminated by balancing accounts authorized by the CPUC. This is still
the case for natural gas sales. However, as a result of California's
electric-restructuring law, beginning in 1997 overcollections recorded
in the Energy Cost Adjustment Clause (ECAC) and Electric Revenue
Adjustment Mechanism (ERAM) balancing accounts were transferred to the
interim transition cost-balancing account, which is being applied to
transition cost recovery (see Note 10). At December 31, 1997,
overcollections of $130 million were included in this account. Of this
amount, $98 million of overcollections were recorded at December 31,
1996. The elimination of ECAC and ERAM resulted in quarter-to-quarter
earnings volatility in 1997. This earnings volatility will continue in
future years. Additional information on industry restructuring is
included in Note 10.
Deferred Charges and Other Assets Deferred charges include SDG&E's
unrecovered premium on early retirement of debt and other regulatory-
related expenditures that SDG&E expects to recover in future rates,
excluding generation operations (discussed above). These items are
amortized as recovered in rates. The net regulatory assets associated
with SDG&E's generation operations at December 31, 1997, were credited
to the interim transition cost balancing account.
Deferred Credits and Other Liabilities Other liabilities at December
31, 1997, include $117 million of accumulated decommissioning costs
associated with SONGS Unit 1 ($96 million in 1996), which was
permanently shut down in 1992. Additional information on SONGS Unit 1
decommissioning costs is included in Note 5.
Discontinued Operations
Enova's financial statements for periods prior to 1996 reflect 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."
Discontinued operations are summarized in the table below:
In millions of dollars 1995
- ---------------------------------------------------------------------
Revenues $ 24
Loss from operations before income taxes --
Loss on disposal before income taxes (12)
Income tax benefits 12
The loss on disposal of Wahlco reflects the sale of Wahlco and Wahlco's
1995 net operating losses prior to the sale.
Use of Estimates in the Preparation of Financial Statements The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Statements of Consolidated Cash Flows Temporary investments are highly
liquid investments with original maturities of three months or less, or
investments that are readily convertible to cash.
Basis of Presentation Certain prior-year amounts have been reclassified
to conform to the current year's format.
60
<PAGE>
NOTE 3: SIGNIFICANT ACQUISITIONS AND JOINT VENTURES
Sempra Energy Trading On December 31, 1997, Enova and Pacific
Enterprises completed their acquisition (50% interest each) of Sempra
Energy Trading (formerly AIG Trading Corporation), a leading natural gas
and power marketing firm headquartered in Greenwich, Connecticut, for a
total cost of $225 million.
Sempra Energy Trading's primary business focus is wholesale trading
and marketing of natural gas, power and oil to customers primarily in
North America. Sempra Energy Trading had net assets of $30 million at
December 31, 1997.
An allocation of the purchase price has not yet been completed. The
difference between the cost and underlying equity in the net assets will
be amortized over a period of not more than 15 years.
As of December 31, 1997, Sempra Energy Trading's trading assets and
trading liabilities approximate the following:
In millions of dollars
- ---------------------------------------------------------------------
Trading Assets
Unrealized gains on swaps and forwards $ 497
Due from commodity clearing organization and clearing brokers 41
OTC commodity options purchased 33
Due from trading counterparties 16
- ---------------------------------------------------------------------
Total $ 587
=====================================================================
Trading Liabilities
Unrealized losses on swaps and forwards $ 487
Due to trading counterparties 41
OTC commodity options written 29
- ---------------------------------------------------------------------
Total $ 557
=====================================================================
The notional amounts of Sempra Energy Trading's financial
instruments are provided below and include a maturity profile as of
December 31, 1997, based upon the expected timing of the future cash
flows. The notional amounts do not necessarily represent the amounts
exchanged by parties to the financial instruments and do not measure
Sempra Energy Trading's exposure to credit or market risks. The notional
or contractual amounts are used to summarize the volume of financial
instruments, but do not reflect the extent to which positions may offset
one another. Accordingly, Sempra Energy Trading is exposed to much
smaller amounts potentially subject to risk.
<TABLE>
<CAPTION>
Within One to Five Five to Ten After
In millions of dollars One Year Years Years Ten Years Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Forwards and
commodity swaps $3,175 $458 $90 $74 $3,797
Futures 856 189 -- -- 1,045
Options purchased 704 52 -- -- 756
Options written 592 62 -- -- 654
- --------------------------------------------------------------------------------
Total $5,327 $761 $90 $74 $6,252
================================================================================
</TABLE>
Enova and Pacific Enterprises have jointly and severally guaranteed
certain trading obligations of Sempra Energy Trading with credit worthy
counterparties in connection with authorized transactions and in
connection with funding. The total obligations guaranteed by the
companies as of December 31, 1997, are $190 million.
Sempra Energy Solutions In January 1998 Sempra Energy Solutions
completed the acquisition of CES/Way International, a leading national
energy-service
61
<PAGE>
provider. In September 1997 Sempra Energy Solutions formed a joint
venture with Bangor Hydro to build, own and operate a $40 million
natural gas distribution system in Bangor, Maine. In December 1997,
Sempra Energy Solutions signed a partnership agreement with Frontier
Utilities to build and operate a $55 million natural gas distribution
system in North Carolina.
Enova International Gas Distribution Projects Enova International,
Pacific Enterprises International and Proxima S.A. de C.V., partners in
the Mexican companies Distribuidora de Gas Natural de Mexicali and
Distribuidora de Gas Natural de Chihuahua, are the licensees to build
and operate natural gas distribution systems in Mexicali and Chihuahua.
DGN - Mexicali will invest up to $25 million during the first five years
of the 30-year license period. DGN - Chihuahua plans to invest $50
million in the gas distribution project in Chihuahua over the next five
years.
El Dorado Power Project In December 1997 Enova Power Corporation, a
subsidiary of Enova Energy, and Houston Industries Power Generation
(HIPG) formed a joint venture, El Dorado Energy, to build, own and
operate a 480-megawatt natural gas-fired plant in Boulder City, Nevada.
Total cost of construction is expected to be $280 million, with each
company providing 50 percent of the funding. Enova Power and HIPG each
will be responsible for 50 percent of the plant's fuel procurement and
output marketing. Construction on the plant is expected to begin in the
first quarter of 1998 and be completed in the fourth quarter of 1999.
NOTE 4: LONG-TERM DEBT
Amounts and due dates of long-term debt are shown on the Statements of
Consolidated Long-Term Debt. Excluding capital leases, which are
described in Note 9, maturities of long-term debt for SDG&E are $66
million due in 1998, $65 million due in 1999, 2000 and 2001, and $145
million due in 2002. Total maturities of long-term debt for nonutility
subsidiaries are $49 million for 1998, $53 million for 1999, $44 million
for 2000, $35 million for 2001 and $34 million for 2002. SDG&E has CPUC
authorization to issue an additional $185 million in long-term debt.
First Mortgage Bonds First mortgage bonds are secured by a lien on
substantially all of SDG&E's utility plant. Additional first mortgage
bonds may be issued upon compliance with the provisions of the bond
indenture, which provides for, among other things, the issuance of an
additional $1.3 billion of first mortgage bonds at December 31, 1997.
Certain first mortgage bonds may be called at SDG&E's option.
First mortgage bonds totaling $249 million have variable-interest-
rate provisions. During 1997, SDG&E retired $127 million of first
mortgage bonds, of which $102 million were retired prior to scheduled
maturity.
Unsecured Bonds During 1997, SDG&E issued $25 million of unsecured
bonds. Unsecured bonds totaling $124 million have variable-interest-rate
provisions.
Rate-Reduction Bonds In December 1997, $658 million of rate-reduction
bonds were issued on behalf of SDG&E at an average interest rate of 6.26
percent. These bonds were issued to facilitate the 10-percent rate
reduction mandated by California's electric-restructuring law. These
bonds are being repaid over 10 years by SDG&E's residential and small-
commercial customers via a charge on their electricity bills. These
bonds are secured by the revenue streams collected from customers and
are not secured by, or payable from, utility assets. Additional
information on rate-reduction bonds and electric industry restructuring
is discussed in Note 10.
Other At December 31, 1997, SDG&E had $340 million of bank lines,
providing a committed source of long-term borrowings, with no debt
outstanding. Bank lines, unless renewed by SDG&E, expire in 1998 ($60
million) and in 2000 ($280 million). Commitment fees are paid on the
unused portion of the lines and there are no requirements for
compensating balances.
62
<PAGE>
Nonutility loans (Enova Financial and Califia) of $318 million and
$231 million at December 31, 1997, and 1996, respectively, are secured
by real estate and equipment.
SDG&E's interest payments, including those applicable to short-term
borrowings, amounted to $89 million in 1997, $93 million in 1996 and
$100 million in 1995. Nonutility interest payments amounted to $12
million in 1997, $12 million in 1996 and $14 million in 1995.
SDG&E periodically enters into interest-rate swap and cap agreements
to moderate its exposure to interest-rate changes and to lower its
overall cost of borrowings. At December 31, 1997, SDG&E had such an
agreement, maturing in 2002, with underlying debt of $45 million. See
additional information in Note 8.
Although holders of variable-rate bonds may elect to redeem them
prior to scheduled maturity, for purposes of determining the maturities
listed above, it is assumed the bonds will be held to maturity.
NOTE 5: FACILITIES UNDER JOINT OWNERSHIP
SONGS and the Southwest Powerlink transmission line are owned jointly
with other utilities. SDG&E's interests at December 31, 1997, are:
In millions of dollars
- ----------------------------------------------------------------------
Southwest
Project SONGS Powerlink
- ----------------------------------------------------------------------
Percentage ownership 20 89
Utility plant in service $1,143 $ 217
Accumulated depreciation $ 593 $ 96
Construction work in progress $ 9 $ --
SDG&E's share of operating expenses is included in the Statements
of Consolidated Income. Each participant in the projects must provide
its own financing. The amounts specified above for SONGS include nuclear
production, transmission and other facilities.
SONGS Decommissioning Objectives, work scope and procedures for the
future dismantling and decontamination of the SONGS units must meet the
requirements of the Nuclear Regulatory Commission, the Environmental
Protection Agency, the California Public Utilities Code and other
regulatory bodies.
SDG&E's share of decommissioning costs for the SONGS units is
estimated to be $401 million in current dollars and is based on studies
performed and updated periodically by outside consultants. The most
recent study was performed in 1993. A new study is planned for 1998. A
new escalation methodology was utilized to estimate the liability in
1997. This methodology was authorized by the CPUC in its 1996
Performance-Based Ratemaking decision for Southern California Edison
(principal owner of SONGS), and incorporates an internal rate of return
calculation that results in higher escalation amounts. Although electric
industry restructuring legislation requires that stranded costs, which
include SONGS plant costs, be amortized in rates by 2001, the recovery
of decommissioning costs is allowed until the time as the costs are
fully recovered.
The amount accrued each year is based on the amount allowed by
regulators and is currently being collected in rates. This amount is
considered sufficient to cover SDG&E's share of future decommissioning
costs. The depreciation and decommissioning expense reflected on the
Statements of Consolidated Income includes $22 million of
decommissioning expense for each of the years 1997, 1996 and 1995.
The amounts collected in rates are invested in externally managed
trust funds. In accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," the securities held by the
trust are considered available for sale and are adjusted to market value
($399 million at December 31, 1997, and $328 million at December 31,
1996) and shown on the Consolidated Balance Sheets. The fair values
reflect unrealized gains of $89 million and $50 million at December 31,
1997, and 1996, respectively. The corresponding accumulated accrual is
included on the Consolidated Balance Sheets in
63
<PAGE>
"Accumulated Depreciation and Decommissioning" for SONGS Units 2 and 3
and in "Deferred Credits and Other Liabilities" for Unit 1. SONGS Unit 1
was permanently shut down in 1992.
The Financial Accounting Standards Board is reviewing the
accounting for liabilities related to closure and removal of long-lived
assets, such as nuclear power plants, including the recognition,
measurement and classification of such costs. The Board could require,
among other things, that SDG&E's future balance sheets include a
liability for the estimated decommissioning costs, and a related
increase in the cost of utility plant.
Additional information regarding SONGS is included in Notes 9 and
10.
NOTE 6: EMPLOYEE BENEFIT PLANS
Pension Plan SDG&E has a defined-benefit pension plan, which covers
substantially all of its employees. Benefits are related to the
employees' compensation. Plan assets consist primarily of common stocks
and bonds. SDG&E funds the plan based on the projected unit credit
actuarial cost method. Net pension cost consisted of the following for
the years ended December 31:
In thousands of dollars 1997 1996 1995
- ----------------------------------------------------------------------
Cost related to current service $16,756 $18,547 $14,598
Interest on projected benefit obligation 39,089 37,253 30,760
Return on plan assets (119,554) (72,829) (132,674)
Net amortization and deferral 63,500 25,315 93,708
- ----------------------------------------------------------------------
Cost pursuant to general
accounting standards (209) 8,286 6,392
Regulatory adjustment -- (15,286) 608
- ----------------------------------------------------------------------
Net cost (benefit) $ (209) $(7,000) $7,000
======================================================================
The plan's status was as follows at December 31:
In thousands of dollars 1997 1996
- ----------------------------------------------------------------------
Accumulated benefit obligation
Vested $495,278 $435,029
Non-vested 11,637 12,321
- ----------------------------------------------------------------------
Total $506,915 $447,350
======================================================================
Plan assets at fair value $699,000 $598,610
Projected benefit obligation 589,911 539,391
- ----------------------------------------------------------------------
Plan assets less projected
benefit obligation 109,089 59,219
Unrecognized effect of accounting change (761) (950)
Unrecognized prior service cost 28,444 31,315
Unrecognized actuarial gains (204,061) (157,082)
- ----------------------------------------------------------------------
Net liability $(67,289) $(67,498)
======================================================================
The projected benefit obligation assumes a 7.25 percent actuarial
discount rate in 1997 (7.50 percent in 1996) and a 5.0 percent average
annual compensation increase. The expected long-term rate of return on
plan assets is 8.5 percent. The increase in the total accumulated
benefit obligation and projected benefit obligation at December 31,
1997, is due primarily to a decrease in the actuarial discount rate.
SDG&E's annual cost for a supplemental retirement plan for a limited
number of key employees was approximately $3 million in 1997, 1996 and
1995.
64
<PAGE>
Post-Retirement Health Benefits SDG&E provides certain health and life
insurance benefits to retired employees. These benefits are accrued
during the employee's years of service, up to the year of benefit
eligibility. SDG&E is recovering the cost of these benefits based upon
actuarial calculations and funding limitations. The costs for the
benefits were $4 million in 1997, $5 million in 1996 and $5 million in
1995. These costs include $2 million of amortization per year for the
unamortized transition obligation (arising from the initial
implementation of this accounting policy) of approximately $31 million,
which is being amortized through 2012.
Savings Plan Essentially all employees are eligible to participate in
SDG&E's savings plan. Eligible employees may make a contribution of 1
percent to 15 percent of their base pay to the savings plan for
investment in mutual funds or in Enova common stock. SDG&E contributes
amounts equal to up to 3 percent of participants' compensation for
investment in Enova common stock. SDG&E's annual compensation expense
for this plan was $3 million in 1997, $2 million in 1996 and $2 million
in 1995.
Stock-Based Compensation Enova has a long-term incentive stock
compensation plan that provides for aggregate awards of up to 2,700,000
shares of Enova common stock. The plan terminates in April 2005. In each
of the last 10 years, 49,000 shares to 75,000 shares of stock were
issued to officers and key employees, subject to forfeiture over four
years if certain corporate goals are not met. The long-term incentive
stock compensation plan also provides for the granting of stock options.
In October 1997, Enova rescinded all options granted in October 1996.
There were no stock options outstanding at December 31, 1997. As
permitted by SFAS No. 123, "Accounting for Stock-Based Compensation,"
SDG&E has adopted the disclosure-only requirements of SFAS No. 123 and
continues to account for stock-based compensation by applying the
provisions of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." The differences between compensation
cost included in net income and the related cost measured by the fair-
value-based method defined in SFAS No. 123 are immaterial. SDG&E's
compensation expense for this plan was approximately $1 million in 1997,
$1 million in 1996 and $2 million in 1995.
65
<PAGE>
NOTE 7: INCOME TAXES
Income tax payments totaled $162 million in 1997, $176 million in 1996
and $148 million in 1995.
The components of accumulated deferred income taxes at December 31
are as follows:
In thousands of dollars 1997 1996
- ----------------------------------------------------------------------
Deferred tax liabilities
Differences in financial and tax
bases of utility plant $567,804 $628,617
Loss on reacquired debt 30,535 26,399
Other 91,708 80,033
- ----------------------------------------------------------------------
Total deferred tax liabilities 690,047 735,049
- ----------------------------------------------------------------------
Deferred tax assets
Unamortized investment tax credits 62,144 66,729
Equipment leasing activities 8,494 22,333
Regulatory balancing accounts 27,903 37,010
Unbilled revenue 22,365 21,923
Other 89,856 123,158
- ---------------------------------------------------------------------
Total deferred tax assets 210,762 271,153
- ---------------------------------------------------------------------
Net deferred income tax liability 479,285 463,896
Current portion (net asset) 21,745 33,504
- ---------------------------------------------------------------------
Non-current portion (net liability) $501,030 $497,400
=====================================================================
The components of income tax expense are as follows:
In thousands of dollars 1997 1996 1995
- ---------------------------------------------------------------------
Current
Federal $93,040 $115,410 $134,212
State 38,413 39,939 42,630
- ---------------------------------------------------------------------
Total current taxes 131,453 155,349 176,842
- ---------------------------------------------------------------------
Deferred
Federal 23,222 434 (23,914)
State 1,600 (1,518) (13,464)
- ---------------------------------------------------------------------
Total deferred taxes 24,822 (1,084) (37,378)
- ---------------------------------------------------------------------
Deferred investment
tax credits - net (6,073) (5,791) (4,859)
- ---------------------------------------------------------------------
Total income tax expense $150,202 $148,474 $134,605
=====================================================================
Federal and state income taxes are allocated between operating
income and other income.
66
<PAGE>
The reconciliation of the statutory federal income tax rate to the
effective income tax rate is as follows:
1997 1996 1995
- ---------------------------------------------------------------------
Statutory federal income tax rate 35.0 % 35.0 % 35.0 %
Depreciation 8.1 6.3 5.5
State income taxes - net of
federal income tax benefit 7.0 6.9 5.5
Tax credits (10.8) (9.5) (7.6)
Equipment leasing activities (2.3) (2.8) (2.8)
Repair allowance (1.9) (1.2) (3.0)
Other - net 2.3 4.4 4.8
- ---------------------------------------------------------------------
Effective income tax rate 37.4 % 39.1 % 37.4 %
=====================================================================
NOTE 8: FINANCIAL INSTRUMENTS
Fair Value The fair values of financial instruments (cash, temporary
investments, funds held in trust, notes receivable, investments in
limited partnerships, dividends payable, short- and long-term debt,
deposits from customers, and preferred stock subject to mandatory
redemption) are not materially different from the carrying amounts,
except for long-term debt. The carrying amounts and fair value of long-
term debt are $2.1 billion and $2.2 billion, respectively, at December
31, 1997, and $1.5 billion and $1.5 billion, respectively, at December
31, 1996. The fair values of SDG&E's first mortgage bonds are estimated
based on quoted market prices for them or for similar issues. The fair
values of long-term notes payable are based on the present values of the
future cash flows, discounted at rates available for similar notes with
comparable maturities. The fair values of the rate-reduction bonds
issued in December 1997 are estimated to approximate carrying value due
to the relatively short period of time between the issuance date and the
valuation date, and the relative market stability during those periods.
Off-Balance-Sheet Financial Instruments Enova's policy is to use
derivative financial instruments to reduce its exposure to fluctuations
in interest rates, foreign-currency exchange rates and natural gas
prices. These financial instruments expose Enova to market and credit
risks which may at times be concentrated with certain counterparties,
although counterparty nonperformance is not anticipated.
Interest-Rate-Swap Agreements SDG&E periodically enters into interest-
rate-swap agreements to moderate its exposure to interest-rate changes
and to lower its overall cost of borrowing. These swap agreements
generally remain off the balance sheet as they involve the exchange of
fixed- and variable-rate interest payments without the exchange of the
underlying principal amounts. The related gains or losses are reflected
in the income statement as part of interest expense. At December 31,
1997, 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. SDG&E expects to hold this derivative financial instrument to its
maturity. This swap agreement has effectively fixed the interest rate on
the underlying variable-rate debt at 5.4 percent. SDG&E would be exposed
to interest-rate fluctuations on the underlying debt should the
counterparty to the agreement not perform. Such nonperformance is not
anticipated. This agreement, if terminated, would result in an
obligation of $2 million at December 31, 1997, and at December 31, 1996.
Foreign-Currency Forward Exchange Contracts SDG&E's pension fund
periodically uses foreign-currency forward contracts to reduce its
exposure to exchange-rate fluctuations associated with certain
investments in foreign equity securities. These contracts generally have
maturities ranging from three to six months. At December 31, 1997, there
were no foreign-currency forward contracts outstanding.
67
<PAGE>
Energy Derivatives SDG&E uses energy derivatives for both hedging and
trading purposes within certain limitations imposed by company policies.
These derivative financial instruments include forward contracts, swaps,
options and other contracts which have maturities ranging from 30 days
to nine months. SDG&E's accounting policy is to adjust the book value of
these derivatives to market each month with gains and losses recognized
in earnings. These instruments are included in other current assets on
the Consolidated Balance Sheet. Certain instruments such as swaps are
entered into and closed out within the same month and, therefore, do not
have any balance-sheet impact. Gains and losses are included in electric
or gas revenue or expense, whichever is appropriate, on the Consolidated
Income Statement.
As of December 31, 1997, the net fair value of open positions was
$5.9 million. The net unrealized profit of these open positions was $0.3
million. These positions hedge approximately 6 percent of SDG&E's annual
total purchased-gas volumes. The average fair value of derivative
financial instruments during 1997 was an obligation of $0.2 million. The
net gains arising from these activities during 1997 were $2.5 million.
Information on derivative financial instruments of Sempra Energy Trading
is provided in Note 3.
Market and Credit Risk SDG&E and Sempra Energy Trading utilize a
variety of financial structures, products and terms which require the
company to manage, on a portfolio basis, the resulting market risks
inherent in these transactions, subject to parameters established by
company policies. Market risks are monitored separately from the groups
that create or actively manage these risk exposures to ensure compliance
with the company's stated risk management policies.
Credit risk relates to the risk of loss that would incur as a result
of nonperformance by counterparties pursuant to the terms of their
contractual obligations. SDG&E and Sempra Energy Trading avoid
concentration of counterparties and maintain credit policies with regard
to counterparties that management believes significantly minimize
overall credit risk.
A Risk Management Committee, composed of Enova and Pacific
Enterprises officers, is responsible for monitoring operating
performance and compliance with established risk management policies for
Sempra Energy Solutions and its subsidiaries.
NOTE 9: CONTINGENCIES AND COMMITMENTS
Purchased-Power Contracts SDG&E buys electric power under several
short-term and long-term contracts. Purchases are for up to 7 percent of
plant capacity under contracts with other utilities and up to 100
percent of plant capacity under contracts with nonutility suppliers. No
one supplier provides more than 3 percent of SDG&E's total system
requirements. The contracts expire on various dates between 1998 and
2025.
At December 31, 1997, the estimated future minimum payments under
the contracts were:
In millions of dollars
- ---------------------------------------------------------------------
1998 $234
1999 232
2000 200
2001 183
2002 134
Thereafter 2,462
- ---------------------------------------------------------------------
Total minimum payments $3,445
=====================================================================
These payments represent capacity charges and minimum energy
purchases. SDG&E is required to pay additional amounts for actual
purchases of energy that exceed the minimum energy commitments. Total
payments, including energy payments, under the contracts were $421
million in 1997, $296 million in 1996
68
<PAGE>
and $329 million in 1995. Payments under purchased-power contracts
increased in 1997 due to increased sales volume and lower nuclear
generation availability.
In November 1997, SDG&E announced a plan to auction its power plants
and other electric-generating resources, which include its long-term
purchased-power contracts. Additional information on SDG&E's plan to
divest its electric-generating assets is discussed in Note 10.
Natural Gas Contracts SDG&E has a contract with Southern California Gas
Company (SoCalGas) that provides SDG&E with intrastate transportation
capacity on SoCalGas' pipelines. This contract is currently being
renegotiated and continues on a month-to-month basis under the original
terms until a new agreement is reached. The commitment presumes a
contract renewal for one year. SDG&E's long-term contracts with
interstate pipelines for transportation capacity expire on various dates
between 2007 and 2023. SDG&E's contract with SoCalGas for 8 billion
cubic feet of natural gas storage capacity expires in March 1998. A new
agreement has been reached for 6 billion cubic feet of natural gas
storage capacity from April 1998 through March 1999. SDG&E has long-term
natural gas supply contracts (included in the table below) with four
Canadian suppliers that expire between 2001 and 2004. SDG&E has been
involved in negotiations and litigation with the suppliers concerning
the contracts' terms and prices. SDG&E has settled with one supplier,
with gas being delivered under the terms of the settlement agreement.
The remaining suppliers have ceased deliveries pending legal resolution.
A U.S. Court of Appeals has upheld a U.S. District Court's invalidation
of the contracts with two of these suppliers, although the value of the
gas delivered has not yet been determined by the court.
At December 31, 1997, the future minimum payments under natural gas
contracts were:
Transportation Natural
In millions of dollars and Storage Gas
- ----------------------------------------------------------------------
1998 $65 $19
1999 15 17
2000 14 19
2001 14 21
2002 14 24
Thereafter 234 25
- ----------------------------------------------------------------------
Total minimum payments $356 $125
======================================================================
Total payments under the contracts were $125 million in 1997, $100
million in 1996 and $95 million in 1995.
69
<PAGE>
Leases SDG&E has nuclear fuel, office buildings, a generating facility
and other properties that are financed by long-term capital leases.
Utility plant includes $198 million at December 31, 1997, and $200
million at December 31, 1996, related to these leases. The associated
accumulated amortization is $102 million and $95 million, respectively.
SDG&E and nonutility subsidiaries also lease office facilities, computer
equipment and vehicles under operating leases. Certain leases on office
facilities contain escalation clauses requiring annual increases in rent
ranging from 2 percent to 7 percent.
The minimum rental commitments payable in future years under all
noncancellable leases are:
Operating Capitalized
Leases Leases
In millions of dollars Enova SDG&E SDG&E
- ---------------------------------------------------------------------
1998 $35 $13 $26
1999 12 12 26
2000 12 12 20
2001 8 8 12
2002 8 8 12
Thereafter 36 36 20
- ---------------------------------------------------------------------
Total future rental commitment $111 $89 116
- ---------------------------------------------------------------------
Imputed interest (6% to 9%) (21)
- ---------------------------------------------------------------------
Net commitment $95
=====================================================================
Enova's rental payments totaled $81 million in 1997, $88 million in
1996 and $85 million in 1995. Included in these amounts are SDG&E
payments of $43 million, $46 million and $44 million, respectively.
Environmental Issues SDG&E's operations are conducted in accordance
with federal, state and local environmental laws and regulations
governing hazardous wastes, air and water quality, land use, and solid-
waste disposal. SDG&E incurs significant costs to operate its facilities
in compliance with these laws and regulations. The costs of compliance
with environmental laws and regulations have been recovered in customer
rates. Capital expenditures to comply with environmental laws and
regulations were $4 million in 1997, $6 million in 1996 and $4 million
in 1995, and are expected to be $38 million over the next five years.
These expenditures primarily include the estimated cost of retrofitting
SDG&E's power plants to reduce air emissions.
SDG&E has been associated with various sites which may require
remediation under federal, state or local environmental laws. SDG&E is
unable to determine the extent of its responsibility for remediation of
these sites until assessments are completed. Furthermore, the number of
others that also may be responsible, and their ability to share in the
cost of the cleanup, is not known. Environmental liabilities that may
arise from these assessments are recorded when remedial efforts are
probable, and the costs can be estimated. In 1994 the CPUC approved the
Hazardous Waste Collaborative Memorandum account allowing utilities to
recover their hazardous waste costs, including those related to
Superfund sites or similar sites requiring cleanup. The decision allows
recovery of 90 percent of cleanup costs and related third-party
litigation costs and 70 percent of the related insurance-litigation
expenses. As discussed in Note 10, restructuring of the California
electric-utility industry will change the way utility rates are set and
costs are recovered. Both the CPUC and state legislation have indicated
that the California utilities will be allowed an opportunity to recover
existing utility plant and regulatory assets over a transition period
that ends in 2001. SDG&E has asked the CPUC that beginning on January 1,
1998, the collaborative account be modified, and that electric-
generation-related cleanup costs be eligible for transition cost
recovery. A CPUC decision is still pending. Depending on the final
outcome of industry restructuring and the impact of competition, the
70
<PAGE>
costs of compliance with environmental regulations may not be fully
recoverable.
Nuclear Insurance SDG&E and the co-owners of SONGS have purchased
primary insurance of $200 million, the maximum amount available, for
public-liability claims. An additional $8.7 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 $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, 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 $2.8 billion of property
damage and decontamination liability. Coverage is also provided for the
cost of replacement power, which includes indemnity payments for up to
three years, after a waiting period of 17 weeks. Coverage is provided
primarily through mutual insurance companies owned by utilities with
nuclear facilities. If losses at any of the nuclear facilities covered
by the risk-sharing arrangements were to exceed the accumulated funds
available from these insurance programs, SDG&E could be assessed
retrospective premium adjustments of up to $6 million.
Department of Energy Decommissioning The Energy Policy Act of 1992
established a fund for the decontamination and decommissioning of the
Department of Energy nuclear-fuel-enrichment facilities. Utilities using
the DOE services are contributing a total of $2.3 billion, subject to
adjustment for inflation, over a 15-year period ending in 2006. Each
utility's share is based on its share of enrichment services purchased
from the DOE. SDG&E's annual contribution is $1 million, and will be
recovered as part of decommissioning costs (see Note 10).
Litigation Enova and its subsidiaries, including SDG&E, are involved in
various legal matters, including those arising out of the ordinary
course of business. Management believes that these matters will not have
a material adverse effect on Enova's results of operations, financial
condition or liquidity.
Distribution System Conversion Under a CPUC-mandated program and
through franchise agreements with various cities, SDG&E is committed, in
varying amounts, to convert overhead distribution facilities to
underground. As of December 31, 1997, the aggregate unexpended amount of
this commitment was approximately $100 million. Capital expenditures for
underground conversions were $17 million in 1997, $15 million in 1996
and $12 million in 1995.
Concentration of Credit Risk SDG&E grants credit to its utility
customers, substantially all of whom are located in its service
territory, which covers all of San Diego County and an adjacent portion
of Orange County.
NOTE 10: INDUSTRY RESTRUCTURING
In September 1996, the state of California enacted a law restructuring
California's electric-utility industry (AB 1890). The legislation adopts
the December 1995 CPUC policy decision restructuring the industry to
stimulate competition and reduce rates. The new law supersedes the CPUC
policy decision when in conflict.
Beginning on March 31, 1998, customers will be able to buy their
electricity through a power exchange that will obtain power from
qualifying facilities, nuclear units and, lastly, 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 will schedule power transactions and access
to the transmission system. Consumers also may choose either to continue
to purchase from their local utility under
71
<PAGE>
regulated tariffs or to enter into private contracts with generators,
brokers or others. The local utility will continue to provide
distribution service regardless of which source the consumer chooses.
Utilities are allowed a reasonable opportunity to recover their
stranded costs through December 31, 2001. Stranded costs, such as those
related to reasonable employee-related costs directly caused by
restructuring and purchased-power contracts (including those with
qualifying facilities), may be recovered beyond December 31, 2001.
Outside of those exceptions, stranded costs not recovered through 2001
will not be collected from customers. Such costs, if any, would be
written off as a charge against earnings.
SDG&E's transition cost application filed in October 1996 identifies
costs totaling $2 billion (net present value in 1998 dollars). These
identified transition costs were determined to be reasonable by
independent auditors selected by the CPUC, with $73 million requiring
further action before being deemed recoverable transition costs. Of this
amount, the CPUC has excluded from transition cost recovery $39 million
in fixed costs relating to gas transportation to power plants, which
SDG&E believes will be recovered through contracts with the ISO. Total
transition costs include sunk costs, as well as ongoing costs the CPUC
finds reasonable and necessary to maintain generation facilities through
December 31, 2001. Both the CPUC policy decision and AB 1890 provide
that above-market costs for existing purchased-power contracts may be
recovered over the terms of the contracts or sooner. Qualifying
facilities purchases include approximately 100 existing contracts, which
extend as far as 2025. Other power purchases consist of two long-term
contracts expiring in 2001 and 2013. Transition costs also include 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 transition costs.
Through December 31, 1997, SDG&E has recovered transition costs of
$0.2 billion for nuclear generation and $0.1 billion for nonnuclear
generation. Additionally, overcollections of $0.1 billion recorded in
the ECAC and ERAM balancing accounts as of December 31, 1997, have been
applied to transition cost recovery, leaving approximately $1.6 billion
for future recovery. Included therein is $0.4 billion for post-2001
purchased-power-contract payments that may be recovered after 2001,
subject to an annual reasonableness review. SDG&E has announced a plan
to auction its power plants and other electric-generating assets. This
plan includes the divestiture of SDG&E's fossil power plants and
combustion turbines, its 20-percent interest in SONGS and its portfolio
of long-term purchased-power contracts. The power plants, including the
interest in SONGS, have a net book value as of December 31, 1997, of
$800 million ($200 million for fossil and $600 million for SONGS). The
proceeds from the auction will be applied directly to SDG&E's transition
costs. In December 1997, SDG&E filed with the CPUC for its approval of
the auction plan. The sale of the nonnuclear-generating assets is
expected to be completed by the end of the first quarter of 1999. During
the 1998-2001 period, recovery of transition costs is limited by the
rate freeze (discussed below). Management believes that the rates within
the rate cap and the proceeds from the sale of electric-generating
assets will be sufficient to recover all of SDG&E's approved transition
costs by December 31, 2001.
The California legislation provides for a 10-percent reduction of
residential and small commercial customers' rates, which began in
January 1998, as a result of the utilities' receiving the proceeds of
rate-reduction bonds issued by an agency of the state of California. In
December 1997, $658 million of rate-reduction bonds were issued on
behalf of SDG&E at an average interest rate of 6.26 percent. These bonds
are being repaid over 10 years by SDG&E's residential and small-
commercial customers via a nonbypassable charge on their electric bills.
In addition, the California legislation includes a rate freeze for
all customers. Until the earlier of March 31, 2002, or when transition
cost recovery is complete, SDG&E's system-average rate will be frozen at
June 1996 levels (9.64 cents per kwh), except for the impact of fuel
cost changes and the 10-percent rate reduction described above.
Beginning in 1998 system-average rates cannot be increased above 9.43
cents per kwh, which includes the mandatory rate reduction and any
impact of fuel cost changes.
72
<PAGE>
As discussed in Note 2, SDG&E has been accounting for the economic
effects of regulation in accordance with SFAS No. 71. The SEC indicated
a concern that the California investor-owned utilities may not meet the
criteria of SFAS No. 71 with respect to their electric-generation net
regulatory assets. SDG&E has ceased the application of SFAS No. 71 to
its generation business, in accordance with the conclusion by the
Emerging Issues Task Force of the Financial Accounting Standards Board
that the application of SFAS 71 should be discontinued when deregulatory
legislation is issued that determines that a portion of an entity's
business will no longer be regulated. The discontinuance of SFAS No. 71
applied to the utilities' generation business did not result in a write-
off of their net regulatory assets, since the CPUC has approved the
recovery of these assets by the distribution portion of their business,
subject to the rate cap.
73
<PAGE>
Item 8. Financial Statements and Supplementary Data - San Diego Gas & Electric
Company
<TABLE>
SAN DIEGO GAS & ELECTRIC COMPANY
STATEMENTS OF CONSOLIDATED INCOME
In thousands except per share amounts
<CAPTION>
For the years ended December 31 1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Operating Revenues
Electric $1,769,421 $1,590,882 $1,503,926
Gas 398,127 348,035 310,142
------------ ------------ ------------
Total operating revenues 2,167,548 1,938,917 1,814,068
------------ ------------ ------------
Operating Expenses
Electric fuel 163,765 134,350 100,256
Purchased power 441,400 310,731 341,727
Gas purchased for resale 183,078 152,151 113,355
Maintenance 87,597 57,652 91,740
Depreciation and decommissioning 323,882 314,278 260,841
Property and other taxes 43,261 44,764 45,566
General and administrative 212,634 247,653 207,078
Other 177,760 166,391 166,303
Income taxes 217,083 202,185 172,202
------------ ------------ ------------
Total operating expenses 1,850,460 1,630,155 1,499,068
------------ ------------ ------------
Operating Income 317,088 308,762 315,000
------------ ------------ ------------
Other Income and (Deductions)
Allowance for equity funds used
during construction 5,192 5,898 6,435
Taxes on nonoperating income (2,073) 4,227 (827)
Other - net 4,243 (5,431) 923
------------ ------------ ------------
Total other income and (deductions) 7,362 4,694 6,531
------------ ------------ ------------
Income Before Interest Charges 324,450 313,456 321,531
------------ ------------ ------------
Interest Charges
Long-term debt 69,545 76,463 82,591
Short-term debt and other 13,825 12,635 17,886
Amortization of debt discount and
expense, less premium 5,154 4,881 4,870
Allowance for borrowed funds
used during construction (2,306) (3,288) (2,865)
------------ ------------ ------------
Net interest charges 86,218 90,691 102,482
------------ ------------ ------------
Income From Continuing Operations 238,232 222,765 219,049
Discontinued Operations, Net of
Income Taxes -- -- 14,408
------------ ------------ ------------
Net Income (before preferred
dividend requirements) 238,232 222,765 233,457
Preferred Dividend Requirements 6,582 6,582 7,663
------------ ------------ ------------
Earnings Applicable to Common Shares $ 231,650 $ 216,183 $ 225,794
============ ============ ============
See notes to consolidated financial statements.
</TABLE>
74
<PAGE>
<TABLE>
SAN DIEGO GAS & ELECTRIC COMPANY
CONSOLIDATED BALANCE SHEETS
In thousands of dollars
<CAPTION>
Balance at December 31 1997 1996
-------------- --------------
<S> <C> <C>
ASSETS
Utility plant - at original cost $5,888,539 $5,704,464
Accumulated depreciation and decommissioning (2,952,455) (2,630,093)
-------------- -------------
Utility plant - net 2,936,084 3,074,371
-------------- -------------
Nuclear decommissioning trust 399,143 328,042
-------------- -------------
Current assets
Cash and temporary investments 536,050 81,409
Accounts receivable 229,148 187,986
Due from affiliates 125,417 --
Inventories 65,390 63,078
Other 51,840 33,227
-------------- -------------
Total current assets 1,007,845 365,700
-------------- -------------
Deferred taxes recoverable in rates 184,837 189,193
-------------- -------------
Deferred charges and other assets 126,584 203,210
-------------- -------------
Total $4,654,493 $4,160,516
============== =============
CAPITALIZATION AND LIABILITIES
Capitalization
Common equity $1,387,363 $1,404,136
Preferred stock not subject to mandatory redemption 78,475 78,475
Preferred stock subject to mandatory redemption 25,000 25,000
Long-term debt 1,787,823 1,284,816
-------------- -------------
Total capitalization 3,278,661 2,792,427
-------------- -------------
Current liabilities
Current portion of long-term debt 72,575 33,639
Accounts payable 161,039 174,884
Due to affiliates -- 7,214
Dividends payable 45,968 47,131
Interest accrued 10,468 12,824
Regulatory balancing accounts overcollected-net 58,063 35,338
Other 114,388 110,743
-------------- -------------
Total current liabilities 462,501 421,773
-------------- -------------
Customer advances for construction 37,661 34,666
Accumulated deferred income taxes - net 471,890 487,119
Accumulated deferred investment tax credits 62,332 64,410
Deferred credits and other liabilities 341,448 360,121
Contingencies and commitments (Notes 9 and 10) -- --
-------------- -------------
Total $4,654,493 $4,160,516
============== =============
See notes to consolidated financial statements.
75
</TABLE>
<PAGE>
<TABLE>
SAN DIEGO GAS & ELECTRIC COMPANY
STATEMENTS OF CONSOLIDATED CASH FLOWS
<CAPTION>
In thousands of dollars
For the years ended December 31 1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Income from continuing operations $ 238,232 $ 222,765 $ 219,049
Adjustments to reconcile income from continuing
operations to net cash provided by operating activities
Depreciation and decommissioning 323,882 314,278 260,841
Amortization of deferred charges and other assets 6,247 5,926 12,068
Amortization of deferred credits and other
liabilities (4,238) (3,901) (1,169)
Allowance for equity funds used during construction (5,192) (5,898) (6,435)
Deferred income taxes and investment tax credits 10,713 (16,369) (42,046)
Other - net 19,416 25,570 21,108
Changes in working capital components
Accounts and notes receivable (41,162) 19,573 9,159
Inventories (2,312) 4,881 7,648
Other current assets (4,464) (14,119) (5,550)
Interest and taxes accrued (40,169) (24,897) 15,737
Accounts payable and other current liabilities (142,831) 50,235 25,288
Regulatory balancing accounts 22,725 (37,313) 59,030
Cash flows provided(used) by discontinued operations -- (11,544) 49,188
----------- ------------- ------------
Net cash provided by operating activities 380,847 529,187 623,916
----------- ------------- ------------
Cash Flows from Financing Activities
Dividends paid (256,168) (188,700) (188,288)
Issuances of long-term debt 677,850 226,646 123,734
Repayment of long-term debt (133,267) (257,772) (126,164)
Short-term borrowings-net -- -- (58,325)
Repurchase of common stock -- -- (241)
Redemption of preferred stock -- (15,155) (18)
------------ ------------ ------------
Net cash provided (used) by financing activities 288,415 (234,981) (249,302)
------------ ------------ ------------
Cash Flows from Investing Activities
Utility construction expenditures (197,184) (208,850) (220,748)
Contributions to decommissioning funds (22,038) (22,038) (22,038)
Other - net 4,601 (2,664) (2,456)
Discontinued operations -- -- (120,222)
------------ ------------ ------------
Net cash used by investing activities (214,621) (233,552) (365,464)
------------ ------------ ------------
Net increase 454,641 60,654 9,150
Cash and temporary investments, beginning of year 81,409 20,755 11,605
------------ ------------ ------------
Cash and temporary investments, end of year $ 536,050 $ 81,409 $ 20,755
============ ============ ============
Supplemental Disclosure of Cash Flow Information
Interest payments, net of amounts capitalized $ 88,574 $ 93,652 $ 104,373
============ ============ ============
Net assets of affiliates transferred to parent $ -- $ 150,095 $ --
============ ============ ============
See notes to consolidated financial statements.
</TABLE>
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<PAGE>
<TABLE>
SAN DIEGO GAS & ELECTRIC COMPANY
STATEMENTS OF CONSOLIDATED CHANGES IN
CAPITAL STOCK AND RETAINED EARNINGS
<CAPTION>
In thousands of dollars
For the years ended December 31, 1995, 1996, 1997
Preferred Stock
-----------------------------
Not Subject Subject to Premium on
to Mandatory Mandatory Common Capital Retained
Redemption Redemption Stock Stock Earnings
--------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $ 93,493 $ 25,000 $ 291,341 $ 564,508 $ 618,581
Earnings applicable to common shares 225,794
Long-term incentive plan activity-net 117 1,530
Preferred stock retired (880 shares) (18) 8
Common stock dividends declared (181,809)
- ---------------------------- --------- --------- --------- --------- ---------
Balance, December 31, 1995 93,475 25,000 291,458 566,046 662,566
Earnings applicable to common shares 216,183
Transfer to Enova Corporation 342 (150,437)
Preferred stock retired
(150,000 shares) (15,000) (155)
Common stock dividends declared (181,867)
- ---------------------------- --------- --------- --------- --------- ---------
Balance, December 31, 1996 78,475 25,000 291,458 566,233 546,445
Earnings applicable to common shares 231,650
Special dividend to Enova Corporation ( 70,000)
Common stock dividends declared (178,423)
- ---------------------------- --------- --------- --------- --------- ---------
Balance, December 31, 1997 $ 78,475 $ 25,000 $ 291,458 $ 566,233 $ 529,672
============================ ========= ========= ========= ========= =========
See notes to consolidated financial statements.
77
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of San Diego Gas &
Electric Company:
We have audited the accompanying consolidated balance sheets of San
Diego Gas & Electric Company and subsidiary as of December 31, 1997
and 1996, and the related statements of consolidated income,
consolidated changes in capital stock and retained earnings, and
consolidated cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of San Diego
Gas & Electric Company and subsidiary of December 31, 1997 and 1996,
and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
/S/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
San Diego, California
February 23, 1998
78
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SAN DIEGO GAS & ELECTRIC COMPANY
Except as modified below, the Notes to Consolidated Financial Statements
of Enova Corporation are incorporated herein by reference insofar as
they relate to San Diego Gas & Electric Company:
Note 1 -- Business Combination
Note 2 -- Significant Accounting Policies
Note 4 -- Long-Term Debt
Note 5 -- Facilities Under Joint Ownership
Note 6 -- Employee Benefit Plans
Note 8 -- Financial Instruments
Note 9 -- Contingencies and Commitments
Note 10 -- Industry Restructuring
Note 3: Significant Affiliate Transactions
In January 1996 Enova Corporation (Enova) became the parent of San Diego
Gas & Electric (SDG&E) and its subsidiaries. At that time SDG&E's
ownership interests in its subsidiaries were transferred to Enova at
book value. SDG&E's financial statements for periods prior to 1996
reflect the results of these subsidiaries as discontinued operations in
accordance with Accounting Principles Board Opinion No. 30 "Reporting
the Effects of a Disposal of a Segment of Business." Discontinued
operations are summarized in the table below:
Year Ended
December 31,
1995
- ------------------------------------------------------
(millions of dollars)
Revenues $81
Loss from operations before
income taxes (24)
Loss on disposal before income
taxes (12)
Income tax benefits 32
- ------------------------------------------------------
In December 1997 SDG&E and Enova signed a promissory note agreement for
an amount not to exceed $400 million to be loaned by SDG&E to Enova due
within one year. Interest on the outstanding balance under the note is
accrued monthly at the current three-month commercial paper rate. As of
December 31, 1997 $130 million had been issued and was outstanding under
the promissory note agreement.
In March 1997 SDG&E paid to Enova a special dividend of $70 million to
be used for the repurchase of three million shares of Enova common
stock.
Note 4: Long-Term Debt
The information contained in Enova Corporation's Statements of
Consolidated Long-Term Debt is incorporated herein by reference.
79
<PAGE>
Note 7: Income Taxes
SDG&E's income tax payments totaled $217 million in 1997, $245 million
in
1996 and $200 million in 1995.
The components of accumulated deferred income taxes at December 31 are
as follows:
in thousands of dollars 1997 1996
- ------------------------------------------------------------------
Deferred tax liabilities
Differences in financial and
tax bases of utility plant $567,804 $628,617
Loss on reacquired debt 30,535 26,399
Other 65,675 63,081
- ------------------------------------------------------------------
Total deferred tax liabilities 664,014 718,097
- ------------------------------------------------------------------
Deferred tax assets
Unamortized investment tax credits 64,873 68,239
Regulatory balancing accounts 27,903 37,010
Unbilled revenue 22,365 21,923
Other 90,232 123,534
- ------------------------------------------------------------------
Total deferred tax assets 205,373 250,706
- ------------------------------------------------------------------
Net deferred income tax liability 458,641 467,391
Current portion (net asset) 13,249 19,728
- ------------------------------------------------------------------
Non-current portion (net liability) $471,890 $487,119
==================================================================
The components of income tax expense are as follows:
in thousands of dollars 1997 1996 1995
- ---------------------------------------------------------------
Current
Federal $164,642 $169,309 $170,212
State 43,801 45,018 44,863
- --------------------------------------------------------------
Total current taxes 208,443 214,327 215,075
- --------------------------------------------------------------
Deferred
Federal 12,922 (8,666) (23,647)
State 1,600 (1,518) (13,464)
- --------------------------------------------------------------
Total deferred taxes 14,522 (10,184) (37,111)
- --------------------------------------------------------------
Deferred investment
tax credits - net (3,809) (6,185) (4,935)
- --------------------------------------------------------------
Total income tax
expense $219,156 $197,958 $173,029
==============================================================
Federal and state income taxes are allocated between operating income
and other income.
80
<PAGE>
The reconciliation of the statutory federal income tax rate to effective
income tax rate is as follows:
1997 1996 1995
- -------------------------------------------------------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
Depreciation 7.1 5.7 5.0
State income taxes - net of
federal income tax benefit 5.7 6.1 4.8
Tax credits (1.3) (2.1) (1.8)
Repair allowance (1.6) (1.1) (2.8)
Other - net 3.0 3.4 3.9
- -------------------------------------------------------------
Effective income tax rate 47.9% 47.0% 44.1%
=============================================================
Note 11: Capital Stock
The information contained in SDG&E's Statements of Changes in Capital
Stock and Retained Earnings is incorporated herein by reference. The
information contained in Enova Corporation's Statements of Consolidated
Capital Stock as it relates to preferred and preference stock is
incorporated herein by reference.
Note 12: Segments of Business
The information contained in Enova Corporation's Statements of
Consolidated Financial Information by Segments of Business is
incorporated herein by reference.
81
<PAGE>
Note 13: Quarterly Financial Data (Unaudited)
SAN DIEGO GAS & ELECTRIC
<TABLE>
In thousands
<CAPTION>
Quarter ended March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
1997
Operating revenues $ 494,636 $ 491,892 $ 566,297 $ 614,723
Operating expenses 431,706 413,670 480,303 524,781
--------- --------- --------- ---------
Operating income 62,930 78,222 85,994 89,942
Other income and (deductions) 164 (444) (17) 7,659
Net interest charges 21,165 22,875 21,058 21,120
--------- --------- --------- ---------
Net income (before preferred
dividend requirements) 41,929 54,903 64,919 76,481
Preferred dividend requirements 1,646 1,645 1,646 1,645
--------- --------- --------- ---------
Earnings applicable to common shares $ 40,283 $ 53,258 $ 63,273 $ 74,836
========= ========= ========= =========
1996
Operating revenues $ 451,942 $ 458,221 $ 493,485 $ 535,269
Operating expenses 367,772 388,379 411,657 462,347
--------- --------- --------- ---------
Operating income 84,170 69,842 81,828 72,922
Other income and (deductions) 1,396 (884) 4,372 (190)
Net interest charges 22,994 22,786 24,073 20,838
--------- --------- --------- ---------
Net income (before preferred
dividend requirements) 62,572 46,172 62,127 51,894
Preferred dividend requirements 1,646 1,645 1,646 1,645
--------- --------- --------- ---------
Earnings applicable to common shares $ 60,926 $ 44,527 $ 60,481 $ 50,249
========= ========= ========= =========
These amounts are unaudited, but in the opinion of SDG&E reflect all adjustments necessary
for a fair presentation.
</TABLE>
82
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure - Enova Corporation/San Diego Gas & Electric
Company
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Enova Corporation
The information required on Identification of Directors is incorporated
by reference from "Election of Directors" in the March 1998 Enova
Corporation Proxy Statement. The information required on executive
officers is incorporated by reference from Item 4 herein.
San Diego Gas & Electric Company
The information required on Identification of Directors is incorporated
by reference from "Election of Directors" in the March 1998 SDG&E Proxy
Statement. The information required on executive officers is
incorporated by reference from Item 4 herein.
Item 11. Executive Compensation
Enova Corporation
The information required by Item 11 is incorporated by reference from
"Executive Compensation and Transactions with Management and Others" in
the March 1998 Enova Corporation Proxy Statement.
San Diego Gas & Electric Company
The information required by Item 11 is incorporated by reference from
"Executive Compensation and Transactions with Management and Others"
in the March 1998 SDG&E Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Enova Corporation
The information required by Item 12 is incorporated by reference from
"Security Ownership of Management and Certain Beneficial Holders" in
the March 1998 Enova Corporation Proxy Statement.
San Diego Gas & Electric Company
The information required by Item 12 is incorporated by reference from
"Security Ownership of Management and Certain Beneficial Holders" in
the March 1998 SDG&E Proxy Statement.
Item 13. Certain Relationships and Related Transactions
None.
83
<PAGE>
PART IV - Enova Corporation/San Diego Gas & Electric Company:
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. Financial statements
Enova Corporation SDG&E
Independent Auditors' Report . . . . . . . . . . . . . 57 78
Statements of Income for the years ended
December 31, 1997, 1996 and 1995. . . . . . . . . . . 47 74
Balance Sheets at December 31, 1997 and 1996 . . . . . 48 75
Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995. . . . . . . . 49 76
Statements of Changes in Capital Stock and
Retained Earnings for the years ended
December 31, 1997, 1996 and 1995. . . . . . . . . . . 50 77
Statements of Capital Stock at
December 31, 1997 and 1996. . . . . . . . . . . . . . 51 --
Statements of Long-Term Debt at
December 31, 1997 and 1996. . . . . . . . . . . . . . 52 --
Statements of Financial Information by
Segments of Business for the years ended
December 31, 1997, 1996 and 1995. . . . . . . . . . . 54 --
Notes to Financial Statements. . . . . . . . . . . . . 58 79
Quarterly Financial Data (Unaudited) . . . . . . . . . 55 82
84
<PAGE>
2. Financial statement schedules
The following documents may be found in this report at the indicated
page numbers.
Report of Independent Auditors on Supplemental
Schedule and Consent. . . . . . . . . . . . . . . . . . . . 86
Schedule I--Condensed Financial Information of Parent. . . . . 87
Schedules I through V, inclusive, except those referred to above, are
omitted as not required or not applicable.
3. Exhibits
See Exhibit Index on page 90 of this report.
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed on July 17, 1997 to announce the
California Public Utilities Commission's decision on Southern California
Gas Company's Performance-Based Ratemaking proceeding.
A Current Report on Form 8-K was filed on August 12, 1997 to announce
the agreement for the joint acquisition of AIG Trading Corporation (now
Sempra Energy Trading) by Enova Corporation and Pacific Enterprises, and
the extension of the Enova Corporation and Pacific Enterprises merger
agreement.
A Current Report on Form 8-K was filed on November 26, 1997 to announce
the plans of San Diego Gas & Electric to auction its electric generation
assets.
A Current Report on Form 8-K was filed on December 23, 1997 to announce
the changes in the boards of directors and executive officers at Enova
Corporation and San Diego Gas & Electric.
85
<PAGE>
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
To the Shareholders and Boards of Directors of Enova Corporation and San
Diego Gas & Electric Company:
We consent to the incorporation by reference in Post-Effective Amendment
No. 2 to Registration Statement No. 33-59681 on Form S-3 and Post-
Effective Amendment No. 1 to Registration Statement Nos. 33-59683 and
33-7108 on Form S-8 of Enova Corporation; in Registration Statement Nos.
33-45599, 33-52834 and 33-49837 on Form S-3 of San Diego Gas & Electric
Company; in Registration Statement No. 333-30761 on Form S-3 of SDG&E
Funding LLC; and in Registration Statement No. 333-21229 on Form S-4 of
Mineral Energy Company of our reports dated February 23, 1998 on Enova
Corporation and San Diego Gas & Electric Company, appearing in this
Annual Report on Form 10-K of Enova Corporation and San Diego Gas &
Electric Company for the year ended December 31, 1997.
Our audits of the financial statements referred to in our aforementioned
reports also included the financial statement schedule of Enova
Corporation, listed in Item 14. This financial statement schedule is the
responsibility of the management of Enova Corporation. Our
responsibility is to express an opinion based on our audits. In our
opinion, such financial statement schedule, when considered in relation
to the basic Enova Corporation financial statements taken as a whole,
presents fairly in all material respects the information set forth
therein.
/S/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
San Diego, California
February 23, 1998
86
<PAGE>
Schedule I -- CONDENSED FINANCIAL INFORMATION OF PARENT
<TABLE>
ENOVA CORPORATION
Schedule 1
Condensed Financial Information of Parent
<CAPTION>
Condensed Statements of Income
(In thousands, except per share amounts)
For the years ended December 31 1997 1996
---------- ----------
<S> <C> <C>
Operating revenues and other income $ 1,156 $ 2,528
Operating expenses, interest and income taxes 3,834 2,594
---------- ----------
Loss before subsidiary earnings 2,678 66
Subsidiary earnings 254,285 230,993
---------- ----------
Earnings applicable to common shares $ 251,607 $ 230,927
========== ==========
Average common shares outstanding 114,322 116,572
---------- ----------
Earnings per common share (basic and diluted) $ 2.20 $ 1.98
========== ==========
</TABLE>
<TABLE>
Condensed Balance Sheets
(In thousands of dollars)
<CAPTION>
Balance at December 31 1997 1996
---------- ----------
<S> <C> <C>
Assets:
Cash and temporary investments $ 6,037 $ 11,927
Dividends receivable 44,323 45,485
Other current assets 25,490 16,612
---------- ----------
Total current assets 75,850 74,024
Investments in subsidiaries 1,716,548 1,564,256
Deferred charges and other assets 7,805 2,695
---------- ----------
Total Assets $1,800,203 $1,640,975
========== ==========
Liabilities and Shareholders' Equity:
Dividends payable $ 44,323 $ 45,485
Due to affiliates 180,274 24,711
Other current liabilities 5,223 295
---------- ----------
Total current liabilities 229,820 70,491
Common equity 1,570,383 1,570,484
---------- ----------
Total Liabilities and Shareholders' Equity $1,800,203 $1,640,975
========== ==========
</TABLE>
87
<PAGE>
<TABLE>
ENOVA CORPORATION
Schedule 1 (continued)
Condensed Financial Information of Parent
<CAPTION>
Condensed Statements of Cash Flows
(In thousands of dollars)
For the years ended December 31 1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities $ 158,929 $ 1,536
--------- ---------
Cash flows from financing activities (253,708) (163,389)
--------- ---------
Cash flows from investing activities 88,889 173,780
--------- ---------
Net cash flow (5,890) 11,927
Cash and temporary investments,
beginning of year 11,927 --
--------- ---------
Cash and temporary investments, end of year 6,037 $ 11,927
========= =========
Dividends received from
San Diego Gas & Electric $ 249,585 $ 181,849
========= =========
Net assets of affiliates transferred to
Enova Corporation $ -- $ 150,095
========= =========
88
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrants have duly caused this report to be
signed on its behalf by the undersigned, hereunto duly authorized. The
signatures of the undersigned companies relate only to matters having
reference to such companies and their respective subsidiaries.
ENOVA CORPORATION SAN DIEGO GAS & ELECTRIC COMPANY
By: /s/ Stephen L. Baum By: /s/ Edwin A. Guiles
_____________________ ________________________
Stephen L. Baum Edwin A. Guiles
Chairman and Chief Executive Officer President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report is signed below by the following persons on behalf of the
Registrants in the capacities and on the dates indicated. The signatures
of the undersigned companies relate only to matters having reference to
such companies and their respective subsidiaries.
Signature Title Date
Principal Executive Officers:
/s/ Stephen L. Baum
________________________________________________________________________
Stephen L. Baum Chairman and Chief Executive February 23, 1998
Officer (Enova)
/s/ Edwin A. Guiles
________________________________________________________________________
Edwin A. Guiles President (SDG&E) February 23, 1998
Principal Financial Officers:
/s/ David R. Kuzma
________________________________________________________________________
David R. Kuzma Senior Vice President,
Chief Financial February 23, 1998
Officer and Treasurer (Enova)
/s/ Frank H. Ault
________________________________________________________________________
Frank H. Ault Vice President, Chief Financial
Officer, Treasurer February 23, 1998
and Controller (SDG&E)
Principal Accounting Officer:
/s/ Frank H. Ault
________________________________________________________________________
Frank H. Ault Vice President and Controller February 23, 1998
(Enova and SDG&E)
Directors:
/s/ Stephen L. Baum
________________________________________________________________________
Stephen L. Baum Chairman (Enova) February 23, 1998
/s/ Daniel W. Derbes
________________________________________________________________________
Daniel W. Derbes Chairman (SDG&E) and
Director (Enova) February 23, 1998
/s/ Richard C. Atkinson
_______________________________________________________________________
Richard C. Atkinson Director (Enova and SDG&E) February 23, 1998
/s/ Ann Burr
_______________________________________________________________________
Ann Burr Director (Enova and SDG&E) February 23, 1998
/s/ Richard A. Collato
_______________________________________________________________________
Richard A. Collato Director (Enova and SDG&E) February 23, 1998
/s/ Robert H. Goldsmith
_______________________________________________________________________
Robert H. Goldsmith Director (Enova and SDG&E) February 23, 1998
/s/ Edwin A. Guiles
_______________________________________________________________________
Edwin A. Guiles Director (SDG&E) February 23, 1998
/s/ Ralph R. Ocampo
_______________________________________________________________________
Ralph R. Ocampo Director (Enova and SDG&E) February 23, 1998
/s/ Thomas A. Page
________________________________________________________________________
Thomas A. Page Director (Enova and SDG&E) February 23, 1998
/s/ Thomas C. Stickel
_______________________________________________________________________
Thomas C. Stickel Director (Enova and SDG&E) February 23, 1998
89
<PAGE>
EXHIBIT INDEX
The Forms 8, 8-B/A, 8-K, S-4, 10-K and 10-Q referred to herein were
filed under Commission File Number 1-3779 (SDG&E), Commission File
Number 1-11439 (Enova Corporation) and/or Commission File Number 333-
30761 (SDG&E Funding LLC).
Exhibit 1 -- Underwriting Agreements
1.1 Underwriting Agreement dated December 4, 1997 (Incorporated by
reference from Form 8-K filed by SDG&E Funding LLC on December
23, 1997 (Exhibit 1.1)).
Exhibit 3 -- Bylaws and Articles of Incorporation
Bylaws
3.1 Restated Bylaws of Enova Corporation as of January 27, 1997
(Incorporated by reference from 10-Q filed May 2, 1997 (Exhibit
3.1)).
3.2 Restated Bylaws of San Diego Gas & Electric as of January 27,
1997 (Incorporated by reference from 10-Q filed May 2, 1997
(Exhibit 3.2)).
Articles of Incorporation
3.3 Restated Articles of Incorporation of Enova Corporation
(Incorporated by reference from the Registration
Statement on Form 8-B/A of Enova Corporation (Exhibit 3.1)).
Exhibit 4 -- Instruments Defining the Rights of Security Holders,
Including Indentures
4.1 Mortgage and Deed of Trust dated July 1, 1940. (Incorporated
by reference from SDG&E Registration No. 2-49810, Exhibit 2A.)
4.2 Second Supplemental Indenture dated as of March 1, 1948.
(Incorporated by reference from SDG&E Registration No. 2-49810,
Exhibit 2C.)
4.3 Ninth Supplemental Indenture dated as of August 1, 1968.
(Incorporated by reference from SDG&E Registration No. 2-68420,
Exhibit 2D.)
4.4 Tenth Supplemental Indenture dated as of December 1, 1968.
(Incorporated by reference from SDG&E Registration No. 2-36042,
Exhibit 2K.)
4.5 Sixteenth Supplemental Indenture dated August 28, 1975.
(Incorporated by reference from SDG&E Registration No. 2-68420,
Exhibit 2E.)
4.6 Thirtieth Supplemental Indenture dated September 28, 1983.
(Incorporated by reference from SDG&E Registration No. 33-34017,
Exhibit 4.3.)
90
<PAGE>
Exhibit 10 -- Material Contracts (Previously filed exhibits are
incorporated by reference from Forms 8-K, S-4, 10-K or
10-Q as referenced below).
10.1 Transition Property Purchase and Sale Agreement dated December
16, 1997 (Incorporated by reference from Form 8-K filed by SDG&E
Funding LLC on December 23, 1997 (Exhibit 10.1)).
10.2 Transition Property Servicing Agreement dated December 16, 1997
(Incorporated by reference from Form 8-K filed by SDG&E Funding
LLC on December 23, 1997 (Exhibit 10.2)).
10.3 Agreement and Plan of Merger and Reorganization, dated as of
October 12, 1996, among Enova Corporation, Pacific
Enterprises, Mineral Energy Company, G Mineral Energy Sub
and B Mineral Energy Sub (8-K filed October 15, 1996, Exhibit
10.1).
10.4 Employment contract, dated as of October 12, 1996 between
Mineral Energy Company and Stephen L. Baum (8-K filed October 15,
1996, Exhibit 10.2).
10.5 Employment contract, dated as of October 12, 1996 between
Mineral Energy Company and Richard D. Farman (8-K filed
October 15, 1996, Exhibit 10.3).
10.6 Employment contract, dated as of October 12, 1996 between
Mineral Energy Company and Donald E. Felsinger (8-K filed
October 15, 1996, Exhibit 10.4).
10.7 Employment contract, dated as of October 12, 1996 between
Mineral Energy Company and Warren I. Mitchell (8-K filed
October 15, 1996, Exhibit 10.5).
Compensation
10.8 Form of Amendment to San Diego Gas & Electric Company
Deferred Compensation Agreements for Officers #1 and #3 (1996
Form 10-K Exhibit 10.6).
10.9 Form of Enova Corporation 1998 Deferred Compensation Agreement
for Officers #1 (1998 compensation, 1998 bonus).
10.10 Form of Enova Corporation 1997 Deferred Compensation Agreement
for Officers #1 (1997 compensation, 1998 bonus) (1996 Form 10-K
Exhibit 10.7).
10.11 Form of San Diego Gas & Electric Company Deferred
Compensation Agreement for Officers #1 (1996 compensation,
1997 bonus)(1995 SDG&E Form 10-K Exhibit 10.1).
10.12 Form of Enova Corporation 1998 Deferred Compensation
Agreement for Officers #3.
10.13 Form of Enova Corporation 1997 Deferred Compensation
Agreement for Officers #3 (1997 compensation, 1998 bonus)(1996
Form 10-K Exhibit 10.10).
10.14 Form of San Diego Gas & Electric Company Deferred
Compensation Agreement for Officers #3 (1996 compensation,
1997 bonus)(1995 SDG&E Form 10-K Exhibit 10.3).
91
<PAGE>
10.15 Form of Enova Corporation 1998 Deferred Compensation
Agreement for Nonemployee Directors.
10.16 Form of Enova Corporation 1997 Deferred Compensation
Agreement for Nonemployee Directors (1996 Form 10-K Exhibit
10.13).
10.17 Form of San Diego Gas & Electric Company Deferred
Compensation Agreement for Nonemployee Directors (1996
compensation)(1995 SDG&E Form 10-K Exhibit 10.5).
10.18 Form of Enova Corporation 1986 Long-Term Incentive Plan
1997 restricted stock award agreement.
10.19 Form of Enova Corporation 1986 Long-Term Incentive Plan
1996 restricted stock award agreement (1996 Form 10-K
Exhibit 10.16).
10.20 Form of San Diego Gas & Electric Company 1986 Long-Term
Incentive Plan 1995 restricted stock award agreement
(1995 SDG&E Form 10-K Exhibit 10.7).
10.21 Form of San Diego Gas & Electric Company 1986 Long-Term
Incentive Plan Special 1995 restricted stock award
agreement (1995 SDG&E Form 10-K Exhibit 10.8).
10.22 Form of San Diego Gas & Electric Company 1986 Long-Term
Incentive Plan 1994 restricted stock award agreement two-
year vesting (1995 SDG&E Form 10-K Exhibit 10.9).
10.23 Form of San Diego Gas & Electric Company 1986 Long-Term
Incentive Plan 1994 restricted stock award agreement
(1994 SDG&E Form 10-K Exhibit 10.4).
10.24 Form of San Diego Gas & Electric Company 1986 Long-Term
Incentive Plan 1993 restricted stock award agreement
(1993 SDG&E Form 10-K Exhibit 10.4).
10.25 Amended 1986 Long-Term Incentive Plan, amended and restated
effective April 25, 1995 (SDG&E's Amendment No. 2 to
Form S-4 filed February 28, 1995).
10.26 Amended 1986 Long-Term Incentive Plan, Restatement as of
October 25, 1993 (1993 SDG&E Form 10-K Exhibit 10.6).
10.27 San Diego Gas & Electric Company Severance Plan effective
October 22, 1996 (1996 Form 10-K Exhibit 10.24).
10.28 San Diego Gas & Electric Company Severance Plan effective
on the date of the Enova Corporation -- Pacific Enterprises
business combination (1996 Form 10-K Exhibit 10.25).
10.29 San Diego Gas & Electric Company Retirement Plan for
Directors, restated as of October 24, 1994 (1994 SDG&E
Form 10-K Exhibit 10.5).
10.30 Executive Incentive Plan dated April 23, 1985 (1991 SDG&E
Form 10-K Exhibit 10.39).
92
<PAGE>
10.31 Employment agreement between San Diego Gas & Electric
Company and Thomas A. Page, dated June 15, 1988 (1988 SDG&E
Form 10-K Exhibit 10E).
10.32 Supplemental Pension Agreement with Thomas A. Page, dated as
of April 3, 1978 (1988 SDG&E Form 10-K Exhibit 10V).
10.33 Supplemental Executive Retirement Plan restated as of
July 1, 1994 (1994 SDG&E Form 10-K Exhibit 10.14).
Financing
10.34 Loan agreement with the City of Chula Vista in connection
with the issuance of $25 million of Industrial Development
Bonds, dated as of October 1, 1997.
10.35 Loan agreement with the City of Chula Vista in connection
with the issuance of $38.9 million of Industrial Development
Bonds, dated as of August 1, 1996 (1996 Form 10-K Exhibit
10.31).
10.36 Loan agreement with the City of Chula Vista in connection
with the issuance of $60 million of Industrial Development
Bonds, dated as of November 1, 1996 (1996 Form 10-K
Exhibit 10.32).
10.37 Loan agreement with City of San Diego in connection with
the issuance of $16.7 million of Industrial Development
Bonds, dated as of June 1, 1995 (June 30, 1995 SDG&E
Form 10-Q Exhibit 10.2).
10.38 Loan agreement with City of San Diego in connection with
the issuance of $57.7 million of Industrial Development
Bonds, dated as of June 1, 1995 (June 30, 1995 SDG&E
Form 10-Q Exhibit 10.3).
10.39 Loan agreement with the City of San Diego in connection with
the issuance of $92.9 million of Industrial Development
Bonds 1993 Series C dated as of July 1, 1993 (June 30, 1993
SDG&E Form 10-Q Exhibit 10.2).
10.40 Loan agreement with the City of San Diego in connection with
the issuance of $70.8 million of Industrial Development Bonds
1993 Series A dated as of April 1, 1993 (March 31, 1993 SDG&E
Form 10-Q Exhibit 10.3).
10.41 Loan agreement with the City of San Diego in connection with
the issuance of $118.6 million of Industrial Development
Bonds dated as of September 1, 1992 (Sept. 30, 1992 SDG&E
Form 10-Q Exhibit 10.1).
10.42 Loan agreement with the City of Chula Vista in connection
with the issuance of $250 million of Industrial Development
Bonds, dated as of December 1, 1992 (1992 SDG&E Form 10-K
Exhibit 10.5).
10.43 Loan agreement with the City of San Diego in connection with
the issuance of $25 million of Industrial Development
Bonds, dated as of September 1, 1987 (1992 SDG&E Form 10-K
Exhibit 10.6).
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10.44 Loan agreement with the California Pollution Control Financing
Authority in connection with the issuance of $129.82 million
of Pollution Control Bonds, dated as of June 1, 1996
(1996 Form 10-K Exhibit 10.41).
10.45 Loan agreement with the California Pollution Control
Financing Authority in connection with the issuance of $60
million of Pollution Control Bonds dated as of June 1, 1993
(June 30, 1993 SDG&E Form 10-Q Exhibit 10.1).
10.46 Loan agreement with the California Pollution Control Financing
Authority, dated as of December 1, 1991, in connection with
the issuance of $14.4 million of Pollution Control Bonds
(1991 SDG&E Form 10-K Exhibit 10.11).
Natural Gas Commodity, Transportation and Storage
10.47 Long-Term Natural Gas Storage Service Agreement dated
January 12, 1994 between Southern California Gas Company and
SDG&E (1994 SDG&E Form 10-K Exhibit 10.42).
10.48 Amendment to San Diego Gas & Electric Company and Southern
California Gas Company Restated Long-Term Wholesale Natural
Gas Service Contract dated March 26, 1993 (1993 SDG&E
Form 10-K Exhibit 10.53).
10.49 San Diego Gas & Electric Company and Southern California Gas
Company Restated Long-Term Wholesale Natural Gas Service
Contract, dated September 1, 1990 (1990 SDG&E Form 10-K
Exhibit 10.9).
10.50 Third Amending Agreement, dated November 1, 1997 between
Husky Oil Operations Limited and San Diego Gas & Electric
Company.
10.51 Second Amending Agreement, dated January 1, 1997 between
Husky Oil Operations Limited and San Diego Gas & Electric
Company.
10.52 Amending Agreement dated November 1, 1994 between Husky
Oil Operations Limited and San Diego Gas & Electric Company.
10.53 Gas Purchase Agreement, dated March 12, 1991 between Husky
Oil Operations Limited and San Diego Gas & Electric Company
(1991 SDG&E Form 10-K Exhibit 10.1).
10.54 Gas Purchase Agreement, dated March 12, 1991 between
Canadian Hunter Marketing Limited and San Diego Gas &
Electric Company (1991 SDG&E Form 10-K Exhibit 10.2).
10.55 Gas Purchase Agreement, dated March 12, 1991 between Bow
Valley Industries Limited and San Diego Gas & Electric
Company (1991 SDG&E Form 10-K Exhibit 10.3).
10.56 Gas Purchase Agreement, dated March 12, 1991 between Summit
Resources Limited and San Diego Gas & Electric Company (1991
SDG&E Form 10-K Exhibit 10.4).
10.57 Service Agreement Applicable to Firm Transportation Service
under Rate Schedule FS-1, dated May 31, 1991 between Alberta
Natural Gas Company Ltd. and San Diego Gas & Electric
94
<PAGE>
Company (1991 SDG&E Form 10-K Exhibit 10.5).
10.58 Amendment to Firm Transportation Service Agreement, dated
December 2, 1996, between Pacific Gas and Electric Company
and San Diego Gas & Electric Company.
10.59 Firm Transportation Service Agreement, dated December 31,
1991 between Pacific Gas and Electric Company and San Diego
Gas & Electric Company (1991 SDG&E Form 10-K Exhibit 10.7).
10.60 Firm Transportation Service Agreement, dated October 13, 1994
between Pacific Gas Transmission Company and San Diego Gas
& Electric Company.
Nuclear
10.61 Uranium enrichment services contract between the U.S.
Department of Energy (DOE assigned its rights to the U.S.
Enrichment Corporation, a U.S. government-owned corporation,
on July 1, 1993) and Southern California Edison Company, as
agent for SDG&E and others; Contract DE-SC05-84UEO7541,
dated November 5, 1984, effective June 1, 1984, as amended
(1991 SDG&E Form 10-K Exhibit 10.9).
10.62 Fuel Lease dated as of September 8, 1983 between SONGS Fuel
Company, as Lessor and San Diego Gas & Electric Company, as
Lessee, and Amendment No. 1 to Fuel Lease, dated September
14, 1984 and Amendment No. 2 to Fuel Lease, dated March 2,
1987 (1992 SDG&E Form 10-K Exhibit 10.11).
10.63 Nuclear Facilities Qualified CPUC Decommissioning Master
Trust Agreement for San Onofre Nuclear Generating Station,
approved November 25, 1987 (1992 SDG&E Form 10-K Exhibit 10.7).
10.64 Amendment No. 1 to the Qualified CPUC Decommissioning Master
Trust Agreement dated September 22, 1994 (see Exhibit 10.63
herein)(1994 SDG&E Form 10-K Exhibit 10.56).
10.65 Second Amendment to the San Diego Gas & Electric Company
Nuclear Facilities Qualified CPUC Decommissioning Master
Trust Agreement for San Onofre Nuclear Generating Station
(see Exhibit 10.63 herein)(1994 SDG&E Form 10-K Exhibit 10.57).
10.66 Third Amendment to the San Diego Gas & Electric Company
Nuclear Facilities Qualified CPUC Decommissioning Master
Trust Agreement for San Onofre Nuclear Generating Station
(see Exhibit 10.63 herein)(1996 Form 10-K Exhibit 10.59).
10.67 Fourth Amendment to the San Diego Gas & Electric Company
Nuclear Facilities Qualified CPUC Decommissioning Master
Trust Agreement for San Onofre Nuclear Generating Station
(see Exhibit 10.63 herein)(1996 Form 10-K Exhibit 10.60).
10.68 Nuclear Facilities Non-Qualified CPUC Decommissioning Master
Trust Agreement for San Onofre Nuclear Generating Station,
approved November 25, 1987 (1992 SDG&E Form 10-K Exhibit 10.8).
10.69 First Amendment to the San Diego Gas & Electric Company
Nuclear Facilities Non-Qualified CPUC Decommissioning Master
Trust Agreement for San Onofre Nuclear Generating Station
(see Exhibit 10.68 herein)(1996 Form 10-K Exhibit 10.62).
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<PAGE>
10.70 Second Amendment to the San Diego Gas & Electric Company
Nuclear Facilities Non-Qualified CPUC Decommissioning Master
Trust Agreement for San Onofre Nuclear Generating Station
(see Exhibit 10.68 herein)(1996 Form 10-K Exhibit 10.63).
10.71 Second Amended San Onofre Agreement among Southern
California Edison Company, SDG&E, the City of Anaheim and
the City of Riverside, dated February 26, 1987 (1990 SDG&E
Form 10-K Exhibit 10.6).
10.72 U. S. Department of Energy contract for disposal of spent
nuclear fuel and/or high-level radioactive waste, entered
into between the DOE and Southern California Edison Company,
as agent for SDG&E and others; Contract DE-CR01-83NE44418,
dated June 10, 1983 (1988 SDG&E Form 10-K Exhibit 10N).
Purchased Power
10.73 Public Service Company of New Mexico and San Diego Gas &
Electric Company 1988-2001 100 mw System Power Agreement
dated November 4, 1985 and Letter of Agreement dated April
28, 1986, June 4, 1986 and June 18, 1986 (1988 SDG&E
Form 10-K Exhibit 10H).
10.74 San Diego Gas & Electric Company and Portland General
Electric Company Long-Term Power Sale and Transmission
Service agreements dated November 5, 1985 (1988 SDG&E Form
10-K Exhibit 10I).
Other
10.75 U. S. Navy contract for electric service, Contract
N62474-70-C-1200-P00414, dated September 29, 1988 (1988 SDG&E
Form 10-K Exhibit 10C).
10.76 City of San Diego Electric Franchise (Ordinance No. 10466)
(1988 SDG&E Form 10-K Exhibit 10Q).
10.77 City of San Diego Gas Franchise (Ordinance No. 10465) (1988
SDG&E Form 10-K Exhibit 10R).
10.78 County of San Diego Electric Franchise (Ordinance No. 3207)
(1988 SDG&E Form 10-K Exhibit 10S).
10.79 County of San Diego Gas Franchise (Ordinance No. 5669) (1988
SDG&E Form 10-K Exhibit 10T).
10.80 Lease agreement dated as of March 25, 1992 with American
National Insurance Company as lessor of an office complex at
Century Park (1994 SDG&E Form 10-K Exhibit 10.70).
10.81 Lease agreement dated as of June 15, 1978 with Lloyds Bank
California, as owner-trustee and lessor - Exhibit B to
financing agreement of SDG&E's Encina Unit 5 equipment trust
(1988 SDG&E Form 10-K Exhibit 10W).
10.82 Amendment to Lease agreement dated as of July 1, 1993 with
Sanwa Bank California, as owner-trustee and lessor - Exhibit
B to secured loan agreement of SDG&E's Encina Unit 5
equipment trust (See Exhibit 10.81 herein)(1994 SDG&E Form
96
<PAGE>
10-K Exhibit 10.72).
10.83 Lease agreement dated as of July 14, 1975 with New England
Mutual Life Insurance Company, as lessor (1991 SDG&E Form 10-K
Exhibit 10.42).
10.84 Assignment of Lease agreement dated as of November 19, 1993
to Shapery Developers as lessor by New England Mutual
Life Insurance Company (See Exhibit 10.83 herein)(1994 SDG&E
Form
10-K Exhibit 10.74).
Exhibit 12 -- Statement re: computation of ratios
12.1 Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends for the years ended December
31, 1997, 1996, 1995, 1994 and 1993.
Exhibit 22 - Subsidiaries - See "Part I, Item 1. Description of
Business."
Exhibit 23 - Independent Auditors' Consent, page 86.
Exhibit 27 - Financial Data Schedules
27.1 Financial Data Schedules for the year ended December 31,
1997.
97
<PAGE>
GLOSSARY
AB 1890 Assembly Bill 1890 - California's electric
restructuring law
AFUDC Allowance for Funds Used During Construction
AIG AIG Trading Corporation
APCD Air Pollution Control District
BCAP Biennial Cost Allocation Proceeding
BRPU Biennial Resource Plan Update
CCC California Coastal Commission
CEC California Energy Commission
CEP Customer Education Program
CFE Comision Federal de Electricidad
CPUC California Public Utilities Commission
CTC Competition transition charge
DOE Department of Energy
DGN Distribuidora de Gas Natural
DSM Demand-Side Management
DTSC Department of Toxic Substances Control
ECAC Energy Cost Adjustment Clause
Edison Southern California Edison Company
EMF Electric and magnetic fields
Enova Enova Corporation and its wholly owned
subsidiaries
ERAM Electric Revenue Adjustment Mechanism
EV Electric vehicle
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
GFCA Gas Fixed Cost Account
HIPG Houston Industries Power Generation
IDBs Industrial Development Bonds
IOUs Investor-owned utilities
ISO Independent System Operator
kv Kilovolt
kwhr Kilowatt hour
LG&E Louisville Gas & Electric Power Marketing
98
<PAGE>
LIFO Last-in-first-out inventory measurement
MICAM Market Indexed Capital Adjustment Mechanism
mw Megawatt
NGV Natural-Gas Vehicle
NRC Nuclear Regulatory Commission
PBR Performance-Based Ratemaking
PCB Polychlorinated Biphenyl
PE Pacific Enterprises
PGA Purchased Gas Account
PG&E Pacific Gas and Electric Company
PGE Portland General Electric Company
PNM Public Service Company of New Mexico
PX Power Exchange
RD&D Research, Development and Demonstration
RECLAIM Regional Clean Air Incentive Market
RWQCB Regional Water Quality Control Board
SDG&E San Diego Gas & Electric Company
SEC Securities and Exchange Commission
SFAS Statement of Financial Accounting Standards
SoCalGas Southern California Gas Company
SONGS/San Onofre San Onofre Nuclear Generating Station
Southwest Powerlink A transmission line connecting San Diego to
Phoenix and intermediate points
WSPP Western Systems Power Pool
99
</TABLE>
ENOVA CORPORATION
1998 DEFERRED COMPENSATION AGREEMENT #1
(1998 BASE COMPENSATION)
(1998 BONUS)
THIS AGREEMENT is made and entered into this ______ day of
December, 1997, by and between Enova Corporation or any of its
subsidiaries, (hereinafter "Company") and ________________________
(hereinafter "Participant"), an employee of Company.
WITNESSETH:
WHEREAS, in addition to 1998 base compensation, incentive
compensation payable in the form of a cash bonus may be paid to
Participant in 1998 or 1999 for outstanding performance in 1998
("Bonus");
WHEREAS, Participant and Company desire that the payment of
said 1998 base compensation and/or Bonus to Participant be
deferred, pursuant to the terms and provisions of this Agreement;
and
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. This Agreement shall be effective on the first date after
its execution upon which Participant's Bonus would otherwise be
payable to Participant for outstanding performance in 1998 and
shall continue in effect until this Agreement is terminated as
provided herein.
2. Company shall credit to an account on Company's books, in
Participant's name, that portion of such Participant's Bonus
otherwise payable to Participant as may be specified by
Participant on an Election Form submitted to Company
simultaneously with the execution of this Agreement. If a
Participant has elected to defer 100% of such Participant's Bonus
(pursuant to Deferred Compensation Agreements for Participants #1
and #3) and the Participant is also participating in the Savings
Plan of San Diego Gas & Electric, which has been adopted by the
Company, to the maximum extent permissible, such Participant may
also elect to defer, and Company shall credit to the Participant's
account, a portion of such Participant's base compensation (in
equal bi-weekly installments of whole dollar amounts).
3. There shall be credited to Participant's account an
additional amount equal to eight and sixty-eight one-hundreths
percent (8.68%) per annum computed on the balance in Participant's
account as of the end of each month; provided, however, that
Company reserves the right to increase or decrease from time to
time such amounts to be credited to the account after the date of
such increase or decrease, provided that upon a "change-in-
control" (as defined in the Enova Corporation 1986 Long-Term
Incentive Plan) the percentage used shall not decrease to
- 1 -
<PAGE>
less than the last published percentage shown in Moody's Average
of Yields on Public Utility Bonds for a utility having a rating
equivalent to SDG&E.
4. All amounts credited to Participant's account pursuant to
paragraphs 2 and 3 hereof shall be paid to Participant on the
date(s) specified by Participant on this Agreement's Election
Form. In the event of Participant's death after installment
payments to Participant have commenced hereunder, installment
payments shall continue to be paid to the person(s) specified by
Participant on the Election Form for the remainder of the period
selected by Participant on this Agreement's Election Form. In the
event of Participant's death before any payment has been made
under this Agreement, Participant's account shall be distributed
or commence to be distributed, as soon as administratively
practicable after Participant's death, to the person(s) specified
by Participant on this Agreement's Election Form in the form and
over the period selected on such Election Form. The Company's
Board of Directors or Executive Compensation Committee may, in its
sole discretion, provide instead for payment of the amount in
Participant's account to Participant's beneficiary in a form and
over a period determined by the Board or Committee except that the
Board or Committee's authority and discretion to change the form
or period of distribution shall terminate upon such a "change-in-
control." If Participant's spouse is the beneficiary, the annual
amount of any installment payments under this paragraph 4 shall at
least equal the entire annual income earned by the account and if
the spouse dies prior to distribution of all amounts in
Participant's account, all undistributed income on such account
shall be distributed to the spouse's estate. Upon the death of
Participant's beneficiary, the balance in Participant's account
(after the application of the previous sentence, if the spouse is
the beneficiary) shall be distributed to the person(s) designated
by the beneficiary on a form provided by Company or, if no
designation is made, to the beneficiary's estate.
Notwithstanding the foregoing, a Participant (or former
Participant whose services have terminated, hereinafter referred
to in this paragraph as "Participant") may, at any time, elect to
withdraw all or a portion of the balance in the Participant's
account prior to the time such amount is otherwise due and
payable, subject to a withdrawal penalty (the amount to be
withdrawn prior to the application of the withdrawal penalty shall
be referred to as the "Gross Withdrawal Amount", which may not
exceed the balance of the account immediately prior to the
withdrawal). The Participant shall make this election by filing a
written notice with the Committee on a form provided by the
Committee. Within thirty days following the Committee's receipt
of such notice, an amount equal to 90% of the Gross Withdrawal
Amount (less applicable withholding tax) shall be paid to the
Participant in a cash lump sum. Upon payment of such withdrawal,
(a) a withdrawal penalty equal to 10% of the Gross Withdrawal
Amount shall be permanently forfeited, and the Company shall have
no obligation to the Participant or the Participant's spouse or
beneficiary with respect to such forfeited amount and (b) the
Participant shall be ineligible to have any additional bonus or
base compensation amounts credited to the Participant's account
pursuant to this Agreement (or any subsequent Deferred
Compensation Agreement) for the balance of the calendar year of
withdrawal and the subsequent calendar year.
5. All amounts credited to Participant's account pursuant to
paragraphs 2 and 3 hereof may be used to purchase common stock of
Enova Corporation or other equity securities, subject to the
following conditions:
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<PAGE>
a. All such purchases must be made through a stock
equivalent tracking device, a "rabbi trust" or other similar
instrument that causes the deferred amount not to become taxable;
b. Equity securities of other entities may be purchased
only if the Participant has met or is expected to meet, under the
normal course of events, the Company's Enova Corporation stock
ownership requirement;
c. If the Participant becomes subject to a higher Enova
Corporation stock ownership requirement, the Participant may
retain any then current investment in equity securities of other
entities, but shall not make additional purchases of other equity
securities until the higher Enova Corporation stock ownership
requirement has been met or is expected to be met under the normal
course of events; and
d. All such purchases must be made in accordance with
applicable Company procedures, as they may be amended from time to
time.
6. No amounts credited to Participant's account may be
assigned, transferred, encumbered, or made subject to any legal
process for the payment of any claim against Participant,
Participant's spouse or beneficiary. In no event shall
Participant, Participant's spouse or beneficiary have the right to
recover any amounts credited to Participant's account other than
in accordance with this Agreement.
7. Nothing contained in this Agreement and no action taken
pursuant to the provisions of this Agreement shall create or be
construed to create a trust of any kind, or a fiduciary
relationship between Company and the Participant or any other
person. To the extent that any person acquires a right to
receive payments from Company under this Agreement, such right
shall be no greater than the right of any unsecured general
creditor of Company. Except as provided in paragraph 5 of this
Agreement, title to and beneficial ownership of any assets,
whether cash or investments which Company may earmark to pay the
deferred compensation hereunder, shall at all times remain assets
of Company and neither the Participant nor any other person shall,
under this Agreement, have any property interest whatsoever in any
specific assets of Company.
8. The existence of this Agreement shall not confer upon any
Participant any right to continue to serve as an officer or
employee for any period of time.
9. This Agreement may be terminated by Company upon 30 days
written notice to the Participant. Such termination shall be
applicable only with respect to bonuses and/or base compensation
payable to Participant on and after the first day of the calendar
year following the date of termination. Funds previously deferred
and credited (and income earned on such funds) will continue to be
governed by the applicable year's Participant's Deferred
Compensation Agreement Election Form and paragraph 3 of this
Agreement.
- 3 -
<PAGE>
10. Participant acknowledges that Participant has been
advised that Participant may confer with and seek advice from a
tax or financial advisor of Participant's choice concerning this
deferral. Participant further acknowledges that Participant has
not received tax advice from Company nor has Participant relied
upon information provided by Company in electing to make this
deferral.
IN WITNESS WHEREOF, this Agreement has been executed on the
day and year written above.
PARTICIPANT COMPANY
______________________________ By ______________________________
Signature of Participant Company _________________________
Title _________________________
- 4 -
ENOVA CORPORATION
1998 DEFERRED COMPENSATION AGREEMENT #3
THIS AGREEMENT is made and entered into this _____ day of
December, 1997, by and between Enova Corporation or any of its
subsidiaries (hereinafter "Company") and _________________________
(hereinafter "Participant"), an employee of Company.
WITNESSETH:
WHEREAS, Company desires to provide Participant with the
opportunity to defer base compensation and any Bonus that is
payable for services to be rendered in 1998 and after the date of
this Agreement and which, as a result of amendments to the
Internal Revenue Code ("Code") made by the Tax Reform Act of 1986
("1986 Tax Act"), cannot be contributed on Participant's behalf as
Pretax Contributions to the San Diego Gas & Electric Company
Savings Plan, which has been adopted by Company ("Savings Plan");
and
WHEREAS, Company desires to match, as an additional Company
contribution, a percentage of the Participant's base compensation
and bonus deferred pursuant to this Agreement; and
WHEREAS, Participant and Company desire that the payment of a
portion of Participant's base compensation and bonus and the
additional matching contribution be deferred pursuant to the terms
and provisions of this Agreement.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. This Agreement shall be effective upon its execution by
Company and Participant with respect to base compensation and
bonus which would otherwise be payable to Participant for services
rendered after such execution and shall continue in effect until
this Agreement is terminated as provided herein. Participant
shall be eligible to enter into this Agreement only if Participant
has elected the maximum Basic Contribution under the Savings Plan
for which Participant is eligible.
2. Company shall credit to an account on Company's books, in
Participant's name, that percentage of Participant's 1998 base
compensation (in equal biweekly installments of whole dollar
amounts) and bonus otherwise payable to Participant as may be
specified by Participant in this Agreement's Election Form. The
amount credited under this paragraph 2 may not exceed the
percentage of Participant's 1998 base compensation and Bonus that
may be contributed as Pretax Contributions or After-tax
Contributions under the terms of the Savings Plan (determined
prior to any reduction of such percentage required under
applicable law), reduced by any amount contributed by Participant
as After-tax Contributions or on Participant's behalf as Pretax
Contributions to the Savings Plan. Further, the amount credited
under this paragraph 2 shall be
- 1 -
<PAGE>
limited to an amount which, when added to Company's matching
contribution under paragraph 3 of this Agreement and all
allocations to his or her accounts under the Savings Plan, does
not exceed the maximum amount that could have been allocated to
Participant's Savings Plan accounts pursuant to Section 415 of the
Code, as in effect prior to the enactment of the 1986 Tax Act.
For purposes of this paragraph 2, "base compensation and bonus"
shall include Participant's Pretax Contributions to the Savings
Plan. Company shall have the sole and complete authority to
determine the maximum amount that may be credited under this
paragraph 2.
3. In addition, as amounts are credited to Participant's
account under paragraph 2, Company shall also credit to
Participant's account, as a matching contribution, an amount equal
to the Company Matching Contributions that would have been
contributed on Participant's behalf to the Savings Plan, if any,
(reduced by Matching Contributions actually made to the Savings
Plan for Participant) under the provisions of the Code prior to
enactment of the 1986 Tax Act, if the amount deferred under
paragraph 2 had been contributed to the Savings Plan as Pretax
Contributions or After-tax Contributions.
4. There shall be credited to Participant's account an
additional amount equal to eight and sixty-eight one-hundredths
percent (8.68%) per annum computed on the balance in Participant's
account as of the end of each month. Company reserves the right
to increase or decrease from time to time such percentage credited
with respect to amounts to be credited under paragraphs 2 and 3 to
the account after the date of such increase or decrease, provided
that upon a "change-in-control" (as defined in the Enova
Corporation 1986 Long-Term Incentive Plan) no decrease will result
in a percentage credited under the previous sentence of less than
the last published interest rate shown in Moody's Average of
Yields on Public Utility Bonds for a utility having a rating
equivalent to SDG&E.
5. All amounts credited to Participant's account pursuant to
paragraphs 2, 3, and 4 hereof shall be paid to Participant upon
his or her termination of services as an Participant in the form
and over the period specified by Participant on this Agreement's
Election Form; provided, however, the Company's Board of Directors
or Executive Compensation Committee may, in its sole discretion,
provide instead for payment of the amount in Participant's account
in a form and over a period determined by such Board or Committee
except that the Board or Committee's authority and discretion to
change the form or period of distribution shall terminate upon
such a "change-in-control."
6. In the event of Participant's death after installment
payments to Participant have commenced hereunder, installment
payments shall continue to be paid to the person(s) specified by
Participant on the Election Form for the remainder of the period
selected by Participant on the Election Form. In the event of
Participant's death before any payment has been made under this
Agreement, Participant's account shall be distributed or commence
to be distributed, as soon as administratively practicable after
Participant's death, to the person(s) specified by Participant on
this Agreement's Election Form in the form and over the period
selected on such Election Form. The Board or Committee may, in
its sole discretion, provide instead for payment of the amount in
Participant's account to Participant's beneficiary in a form and
over a period determined by the
- 2 -
<PAGE>
Board or Committee except that the Board or Committee's authority
and discretion to change the form or period of distribution shall
terminate upon such a "change-in-control."
If Participant's spouse is the beneficiary, the annual amount
of any installment payments under this paragraph 6 shall at least
equal the entire annual income earned by the account and if the
spouse dies prior to distribution of all amounts in Participant's
account, all undistributed income on such account shall be
distributed to the spouse's estate. Upon the death of
Participant's beneficiary, the balance in Participant's account
(after the application of the previous sentence, if the spouse is
the beneficiary) shall be distributed to the person(s) designated
by the beneficiary on a form provided by Company or, if no
designation is made, to the beneficiary's estate.
Notwithstanding the foregoing, a Participant (or former
Participant whose services have terminated, hereinafter referred
to in this paragraph as Participant) may, at any time, elect to
withdraw all or a portion of the balance in the Participant's
account prior to the time such amount is otherwise due and
payable, subject to a withdrawal penalty (the amount to be
withdrawn prior to the application of the withdrawal penalty shall
be referred to as the Gross Withdrawal Amount, which may not
exceed the balance of the account immediately prior to the
withdrawal). The Participant shall make this election by filing a
written notice with the Committee on a form provided by the
Committee. Within thirty days following the Committee's receipt
of such notice, an amount equal to 90% of the Gross Withdrawal
Amount (less applicable withholding tax) shall be paid to the
Participant in a cash lump sum. Upon payment of such withdrawal,
(a) a withdrawal penalty equal to 10% of the Gross Withdrawal
Amount shall be permanently forfeited, and the Company shall have
no obligation to the Participant or the Participant's spouse or
beneficiary with respect to such forfeited amount and (b) the
Participant shall be ineligible to have any additional bonus or
base compensation amounts credited to the Participant's account
pursuant to this Agreement (or any subsequent Deferred
Compensation Agreement) for the balance of the calendar year of
withdrawal and the subsequent calendar year.
7. All amounts credited to Participant's account pursuant to
paragraphs 2, 3 and 4 hereof may be used to purchase common stock
of Enova Corporation or other equity securities, subject to the
following conditions:
a. All such purchases must be made through a stock
equivalent tracking device, a rabbi trust or other similar
instrument that causes the deferred amount not to become taxable;
b. Equity securities of other entities may be purchased
only if the Participant has met or is expected to meet, under the
normal course of events, the Company's Enova Corporation stock
ownership requirement;
c. If the Participant becomes subject to a higher Enova
Corporation stock ownership requirement, the Participant may
retain any then current investment in equity securities of other
entities, but shall not make additional purchases of other equity
securities until
- 3 -
<PAGE>
the higher Enova Corporation stock ownership requirement has been
met or is expected to be met under the normal course of events;
and
d. All such purchases must be made in accordance with
applicable Company procedures, as they may be amended from time to
time.
8. No amounts credited to Participant's account may be
assigned, transferred, encumbered, or made subject to any legal
process for the payment of any claim against Participant,
Participant's spouse or other beneficiary. In no event shall
Participant, Participant's spouse, or other beneficiary have the
right to recover any amount credited to Participant's account
other than in accordance with this Agreement.
9. Nothing contained in this Agreement and no action taken
pursuant to the provisions of this Agreement shall create or be
construed to create a trust of any kind, or a fiduciary
relationship between Company and Participant or any other person.
To the extent that any person acquires a right to receive payments
from Company under this Agreement, such right shall be no greater
than the right of any unsecured general creditor of Company.
Except as provided in paragraph 7 of this Agreement, title to and
beneficial ownership of any assets, whether cash or investments,
which Company may earmark to pay the deferred compensation
hereunder, shall at all times remain assets of Company and neither
Participant nor any other person shall, under this Agreement, have
any property interest whatsoever in any specific assets of
Company.
10. The existence of this Agreement shall not confer upon
Participant the right to continue to serve as an officer or
employee for any period of time.
11. This Agreement shall be deemed to modify any provisions
in an employment agreement between Participant and Company
pertaining to the timing of payment of base compensation and bonus
and, in the event of any conflict between this Agreement and such
provisions of the employment agreement, this Agreement shall
control.
12. This Agreement may be terminated by Company upon thirty
days' written notice to Participant. This Agreement will also
terminate upon Participant's filing of an election of a Basic
Contribution percentage which is less than the maximum for which
he or she is eligible under the Savings Plan. Termination of the
Agreement shall be applicable only with respect to base
compensation and bonus payable to Participant on and after the
first day of the calendar year following the date of termination.
Funds previously deferred and credited (and income earned on such
funds) will continue to be governed by the applicable year's
Participant's Deferred Compensation Agreement Election Form and
Section 4 of this Agreement.
13. Participant acknowledges that Participant has been
advised that Participant may confer with and seek advice from a
tax or financial advisor of Participant's choice concerning this
deferral. Participant further acknowledges that Participant has
not received tax advice from Company nor has Participant relied
upon information provided by Company in electing to make this
deferral.
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed on the
day and year written above.
PARTICIPANT COMPANY
_______________________________ By ______________________________
Signature of Participant Company _________________________
Title ___________________________
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ENOVA CORPORATION
1998 DEFERRED COMPENSATION AGREEMENT
FOR NONEMPLOYEE DIRECTORS
THIS AGREEMENT, made and entered into this _____ day of
December, 1997, by and between Enova Corporation or any of its
subsidiaries, (hereinafter "Company") and __________________
(hereinafter "Director"), a member of the Board of Directors of
Company (hereinafter the "Board"),
WITNESSETH:
WHEREAS, fees are paid to Directors as a retainer; and
WHEREAS, Director and Company desire that the payment of said
fees to Director be deferred, pursuant to the terms and provisions
of this Agreement;
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. This Agreement shall be effective on the first date
subsequent to its execution upon which Director's fees would
otherwise be payable to Director for service as a member of the
Board and shall continue in effect until this Agreement is
terminated as provided herein.
2. Company shall credit to an account on Company's books, in
Director's name, that portion of such Director's fees otherwise
payable to Director as may be specified by Director on an election
form submitted to Company simultaneously with the execution of
this Agreement.
3. There shall be credited to Director's account an
additional amount equal to eight and sixty-eight one-hundreths
(8.68%) per annum computed on the balance in Director's account as
of the end of each month; provided, however, that Company reserves
the right to increase or decrease from time to time such amount
with respect to amounts to be credited to the account subsequent
to the date of such increase or decrease, provided that upon a
"change-in-control" (as defined in the Enova Corporation 1986
Long-Term Incentive Plan) the percentage used shall not decrease
to less than the last published rate shown in Moody's Average of
Yields on Public Utility Bonds for a utility having a rating
equivalent to Company.
4. All amounts credited to Director's account pursuant to
paragraphs 2 and 3 hereof shall be paid to Director in a lump sum
on the date specified by Director on the Director's election form.
In the event of Director's death before any payment due under this
paragraph 4 has been paid, such payment due shall be paid in a
lump sum to the person specified by the Director on the election
form as soon as administratively practicable.
Notwithstanding the foregoing, a Director (or former Director
whose services have terminated, hereinafter referred to in this
paragraph as "Director") may, at any time, elect to withdraw all
or a portion of the balance in the Director's account prior to the
time such amount is otherwise due and payable, subject to a
withdrawal penalty (the amount to be withdrawn prior to the
application of the withdrawal penalty shall be referred to as the
"Gross Withdrawal Amount",
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which may not exceed the balance of the account immediately prior
to the withdrawal). The Director shall make this election by
filing a written notice with the Committee on a form provided by
the Committee. Within thirty days following the Committee's
receipt of such notice, an amount equal to 90% of the Gross
Withdrawal Amount (less applicable withholding tax) shall be paid
to the Director in a cash lump sum. Upon payment of such
withdrawal, (a) a withdrawal penalty equal to 10% of the Gross
Withdrawal Amount shall be permanently forfeited, and the Company
shall have no obligation to the Director or the Director's spouse
or beneficiary with respect to such forfeited amount and (b) the
Director shall be ineligible to have any additional bonus or base
compensation amounts credited to the Director's account pursuant
to this Agreement (or any subsequent Deferred Compensation
Agreement) for the balance of the calendar year of withdrawal and
the subsequent calendar year.
5. No amounts credited to Director's account may be
assigned, transferred, encumbered, or made subject to any legal
process for the payment of any claim against Director, Director's
spouse or beneficiary. In no event shall Director, Director's
spouse or beneficiary have the right to recover any fees credited
to Director's account other than in accordance with this
Agreement.
6. Nothing contained in this Agreement and no action taken
pursuant to the provisions of this Agreement shall create or be
construed to create a trust of any kind, or a fiduciary
relationship between Company and the Director or any other person.
To the extent that any person acquires a right to receive payments
from Company under this Agreement, such right shall be no greater
than the right of any unsecured general creditor of Company.
Title to and beneficial ownership of any assets, whether cash or
investments which Company may earmark to pay the deferred
compensation hereunder, shall at all times remain assets of
Company and neither the Director nor any other person shall, under
this Agreement, have any property interest whatsoever in any
specific assets of Company.
7. The existence of this Agreement shall not confer upon any
Director any right to continue to serve as a Director for any
period of time.
8. This Agreement may be terminated by Company upon 30 days
written notice to the Director. Such termination shall be
applicable only with respect to fees payable to Director on and
after the first day of the calendar year following the date of
termination. Funds previously deferred and credited (and income
earned on such funds) will continue to be governed by the
applicable year's director election form and Section 3 of this
Agreement.
9. Director acknowledges that Director has been advised that
Director may confer with and seek advice from a tax or financial
advisor of Director's choice concerning this deferral. Director
further acknowledges that Director has not received tax advice
from Company nor has Director relied upon information provided by
Company in electing to make this deferral.
IN WITNESS WHEREOF, this Agreement has been executed on the
day and year written above.
NONEMPLOYEE DIRECTOR COMPANY
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_________________________________ By ____________________________
Signature of Nonemployee Director Company _______________________
Title _________________________
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ENOVA CORPORATION
1986 LONG-TERM INCENTIVE PLAN
1997 RESTRICTED STOCK AWARD AGREEMENT
_______________________________________________
THIS RESTRICTED STOCK AWARD AGREEMENT (the "Agreement") is
entered into this _____ day of _________________, 1997, by and
between ENOVA CORPORATION, a California corporation ("Enova") and
_____________ ("Participant").
WHEREAS, the Boards of Directors of Enova and San Diego Gas &
Electric Company ("SDG&E") ("the Boards") have adopted the Enova
Corporation 1986 Long-Term Incentive Plan (the "Plan"), which
provides for the granting to selected employees of Enova and its
subsidiaries of awards of Common Stock of Enova Corporation
("Restricted Stock Awards");
WHEREAS, the grant of Restricted Stock Awards is intended as an
incentive which will attract and retain highly competent persons as
officers and key employees of Enova and its subsidiaries;
WHEREAS, Participant is a selected employee of Enova and/or one
of its subsidiaries; and
WHEREAS, the Executive Compensation Committees of the Boards of
Enova and SDG&E (the "Committees") have authorized, and the Boards
have approved, the grant of a Restricted Stock Award to Participant
pursuant to the terms of the Plan.
NOW, THEREFORE, in consideration of the foregoing and of the
mutual covenants hereinafter set forth and other good and valuable
consideration, the receipt of which is hereby acknowledged, the
parties hereto agree as follows:
1. GRANT OF RESTRICTED STOCK AWARD
Enova hereby grants to Participant, on the terms, conditions
and restrictions hereinafter set forth, and in accordance with
the Plan which is incorporated herein, as a matter of separate
inducement to achieve a certain goal set by the Boards and not
in lieu of any salary or other compensation for Participant's
services, a Restricted Stock Award consisting of _____________
shares of the authorized but unissued shares of Enova
Corporation Common Stock, (the "Shares").
2. RECEIPT AND TRANSFER OF SHARES
Participant hereby acquires the Shares, and Enova hereby
transfers the Shares to Participant. Concurrently with the execution
hereof, Enova has delivered to Participant, and Participant
acknowledges receipt into escrow of, a certificate or certificates
evidencing the Shares, duly issued to Participant by Enova
Corporation. Concurrently with the execution hereof, Participant
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<PAGE>
acknowledges that the Secretary or Assistant Secretary of Enova,
holds on behalf of Participant all certificates evidencing the
Shares. Participant also acknowledges prior receipt of a prospectus
for the Plan, a copy of the Plan, and the most recent Annual Report
of Enova Corporation. Participant shall execute all such stock
powers and other instruments of transfer in favor of Enova as are
necessary at any time in the future to perform this contract.
3. SHAREHOLDER OF RECORD
Enova agrees that Participant shall be deemed a shareholder of
record with respect to the Shares on the date first written above.
4. RESTRICTED TERM
The Restricted Term with respect to the Shares shall commence
on the date first above written. The restrictions will be removed
and the restricted term will expire on one quarter of such
restricted shares after the end of each of the years 1998, 1999,
2000 and 2001:
a. If, at the end of each of such year San Diego Gas &
Electric Company has earned the CPUC authorized rate of return on
rate base.
b. If, beginning in 1999 at the end of any quarter, San Diego
Gas & Electric Company meets or exceeds it authorized rate of return
for the twelve months then ending.
c. At the end of 2001, the remaining restricted shares not
released previously may be released in the discretion of the Board
dependent upon the impact on 1998 through 2001 earnings of industry
and corporate restructuring during such period.
d. The Board of each Corporation, in response to industry or
corporate restructuring, may elect to change the Plan design and
performance goals to align the Plan with a new long term direction.
5. VOTING AND OTHER RIGHTS
During the Restricted Term, Participant shall, except as
otherwise provided herein, have all of the rights of a stockholder
with respect to all of the Shares subject to the Restricted Term,
including without limitation the right to vote such Shares and the
right to receive all dividends or other distributions with respect
to such Shares. In connection with the payment of such dividends or
other distributions, there shall be deducted any taxes or other
amounts required by any governmental authority to be withheld and
paid over to such authority for the account of Participant.
6. RESTRICTIONS ON INTER VIVOS TRANSFER
During the Restricted Term, the Shares subject to the
Restricted Term shall not be sold, assigned, transferred,
hypothecated or otherwise alienated, disposed of or encumbered
except as
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<PAGE>
provided in the Plan. The certificate for such Shares shall bear
the following legend, or any other similar legend as may be required
by Enova:
"THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE MAY NOT BE
SOLD, ASSIGNED, TRANSFERRED, PLEDGED, HYPOTHECATED OR
OTHERWISE ENCUMBERED OR DISPOSED OF EXCEPT AS PERMITTED BY
ENOVA CORPORATION'S 1986 LONG-TERM INCENTIVE PLAN OR THE
COMMITTEE WHICH ADMINISTERS THAT PLAN."
7. TERMINATION OF PARTICIPANT'S EMPLOYMENT
In the event Participant ceases to be employed by Enova and/or
one of its subsidiaries at any time before the end of the Restricted
Term for any reason, Participant shall deliver to Enova all
certificates evidencing the Shares subject to the Restricted Term,
accompanied by stock powers and other instruments of transfer duly
executed by Participant to transfer such shares to Enova.
8. ELECTION TO RECOGNIZE INCOME
Check one:
a. ___ Participant elects, pursuant to the Internal Revenue
Code as amended, and the comparable provisions of state tax law, to
include in gross income in connection with the grant of this
Restricted Stock Award, all amounts now recognizable.
b. ___ Participant shall not elect, pursuant to the Internal
Revenue Code as amended, or comparable provisions of any state tax
law, to include any amount in gross income in connection with the
grant of this Restricted Stock Award.
9. WITHHOLDING AND REGISTRATION
a. Upon recognition of income as elected in paragraph 8 above,
Participant shall, with respect to such Shares, make payment, in the
form of cash or a cashier's check or in the manner stated in
paragraph 9(b) below, to Enova in an amount sufficient to satisfy
any taxes or other amounts Enova determines is required by any
governmental authority to be withheld and paid over by Enova or any
of its subsidiaries to such authority for the account of Participant
(collectively, "Withholding Taxes"), or shall otherwise make
arrangements satisfactory to Enova for the payment of such amounts
through withholding or otherwise. For purposes of paragraph 8(a),
such payment or arrangements shall be made by December 5, 1997. For
purposes of paragraph 8(b), the date shall be 30 days after the
restrictions are removed. Participant shall, if requested by Enova,
make appropriate representations in a form satisfactory to Enova
that such Shares will not be sold other than pursuant to an
effective registration statement under the Securities Act of 1933,
as amended, or an applicable exemption from the registration
requirements of such Act.
b. Subject to the restrictions set forth in paragraph 9(c) and
such rules as the Committee may from time to time adopt and upon
approval by the Committee in its sole discretion,
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<PAGE>
Participant may elect to satisfy all or any portion of such
Participant's tax withholding obligations set forth in paragraph
9(a) by electing (i) to have Enova withhold from delivery of any
Shares otherwise deliverable to Participant in the manner set forth
in paragraph 10 hereof, a portion of such Shares to satisfy
Withholding Taxes or (ii) to deliver to Enova shares of Common
Stock, no par value, of Enova, other than those delivered to
Participant in the manner set forth in paragraph 10 hereof, to
satisfy all or any portion of such Participant's Withholding Taxes.
The number of Shares withheld from delivery or such other shares
delivered shall equal the number of shares the Committee, in its
sole discretion, determines to have a fair market value equal to the
amount of such Participant's Withholding Taxes required to be
withheld or paid over by Enova or any of its subsidiaries and which
Participant elected to be satisfied by withholding or delivery of
shares.
c. Participant's election to satisfy all or any portion of
Participants Withholding Taxes under paragraph 9(b) is subject to
the following restrictions:
(i) such election must be made in writing on or before the
date when the amount of Withholding Taxes is required to be
determined (the "Tax Date");
(ii) such election shall be irrevocable;
(iii) such election shall be subject to the approval or
disapproval of the Committee, in its sole discretion;
(iv) the fair market value of the Shares to be withheld or
other shares of Common Stock to be delivered to Enova for the
purposes of satisfying all or any portion of such Participant's
Withholding Taxes shall be deemed to be the average of the
highest and lowest selling prices of such stock as reported on
the New York Stock Exchange Composite Transactions Tape on the
Tax Date, or if such stock is not traded that day, then on the
next preceding day on which such stock was traded; and
(v) if Participant is or becomes subject to Section 16(b)
of the Securities Exchange Act of 1934, as amended (the "1934
Act"), such election must be made in compliance with Rule 16b-
3(e) promulgated under said Section 16(b) or any successor
regulation promulgated thereunder.
10. DELIVERY OF SHARES
Upon expiration of the Restricted Term applicable to any
shares as provided in the manner stated in paragraph 4 above and
payment by the Participant as required in paragraph 9 above, the
Secretary or Assistant Secretary of Enova shall deliver to
Participant all certificates evidencing the Shares free of legend
and no longer subject to the Restricted Term and all restrictions
set forth herein with respect to such Shares shall terminate.
If at the end of 2001 the restrictions have not been removed
from and the Restricted Term has not expired on any of the shares
received by Participant under this Agreement, Participant shall
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<PAGE>
deliver to Enova all certificates evidencing such shares accompanied
by stock powers and other instruments of transfer duly executed by
Participant to transfer such shares to Enova.
11. EFFECTS ON PARTICIPANT'S CONTINUED EMPLOYMENT
Participant's right, if any, to continue to serve Enova and/or
its subsidiaries as an officer or employee shall not be enlarged or
otherwise affected by the grant to him or her of this Restricted
Stock Award, nor shall such grant in any way restrict the right of
Enova and/or any of its subsidiaries to terminate Participant's
employment at any time.
12. FURTHER ACTION
Each party hereto agrees to perform any further acts and to
execute and deliver any documents which may be reasonably necessary
to carry out the provisions hereof.
13. PARTIES IN INTEREST AND GOVERNING LAW
This Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective assigns and successors-
in-interest, and shall be governed by and interpreted in accordance
with the laws of the State of California.
14. ENTIRE AGREEMENT
This Agreement contains the entire agreement and understanding
between the parties as to the subject matter hereof.
15. INVALID PROVISIONS
The invalidity or unenforceability of any particular provision
hereto shall not affect the other provisions hereof, and this
Agreement shall be construed in all respects as if such invalid or
unenforceable provisions were omitted.
16. AMENDMENT
No amendment or modification hereof shall be valid unless it
shall be in writing and signed by both parties hereto.
17. COUNTERPARTS
This Agreement may be executed in counterparts, each of which
shall be deemed to be an original, and taken together shall
constitute one and the same document.
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<PAGE>
18. NOTICES
All notices or other communications required or permitted
hereunder shall be in writing, and shall be sufficient in all
respects only if delivered in person or sent via certified mail,
postage prepaid, addressed as follows:
If to Enova: Enova Corporation
P. O. Box 129400
San Diego, CA 92112-9400
Attention: Corporate Secretary
If to Participant: ________________________________________
________________________________________
________________________________________
or such other address as shall be furnished in writing by any such
party. Any such notice or communication shall be deemed to have
been delivered when delivered in person or 48 hours after the date
it has been mailed in the manner described above.
IN WITNESS WHEREOF, the parties hereto have executed this
Restricted Stock Award Agreement on the day and year first above
written.
PARTICIPANT ENOVA CORPORATION
________________________________ By: ___________________________
Signature of Participant
Title: ________________________
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EXECUTION COPY
LOAN AGREEMENT
Between
CITY OF CHULA VISTA
And
SAN DIEGO GAS & ELECTRIC COMPANY
Dated as of October 1, 1997
Relating to
$25,000,000
City of Chula Vista
Industrial Development Revenue Bonds
(San Diego Gas & Electric Company)
1997 Series A
- cover page -
<PAGE>
LOAN AGREEMENT
TABLE OF CONTENTS
Page
PARTIES 1
PREAMBLES 1
ARTICLE I
DEFINITIONS
SECTION 1.1 DEFINITION OF TERMS 2
SECTION 1.2 NUMBER AND GENDER 2
SECTION 1.3 ARTICLES, SECTIONS, ETC. 2
ARTICLE II
REPRESENTATIONS
SECTION 2.1 REPRESENTATIONS OF THE CITY 2
SECTION 2.2 REPRESENTATIONS OF THE BORROWER 3
ARTICLE III
ISSUANCE OF THE BONDS; APPLICATION OF PROCEEDS
SECTION 3.1 AGREEMENT TO ISSUE BONDS; APPLICATION OF BOND
PROCEEDS 4
SECTION 3.2 INVESTMENT OF MONEYS IN FUNDS 4
SECTION 3.3 AMENDMENT OF DESCRIPTION OF THE PROJECT 4
ARTICLE IV
LOAN TO BORROWER; REPAYMENT PROVISIONS
SECTION 4.1 LOAN TO BORROWER 5
SECTION 4.2 REPAYMENT AND PAYMENT OF OTHER AMOUNTS PAYABLE 5
SECTION 4.3 UNCONDITIONAL OBLIGATION 6
SECTION 4.4 ASSIGNMENT OF CITY'S RIGHTS 7
SECTION 4.5 AMOUNTS REMAINING IN FUNDS 7
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<PAGE>
SECTION 4.6 CREDIT FACILITY 7
ARTICLE V
SPECIAL COVENANTS AND AGREEMENTS
SECTION 5.1 RIGHT OF ACCESS TO THE PROJECT 8
SECTION 5.2 THE BORROWER'S MAINTENANCE OF ITS EXISTENCE;
ASSIGNMENTS 8
SECTION 5.3 RECORDS AND FINANCIAL STATEMENTS OF BORROWER 9
SECTION 5.4 MAINTENANCE AND REPAIR 9
SECTION 5.5 QUALIFICATION IN CALIFORNIA 9
SECTION 5.6 TAX EXEMPT STATUS OF BONDS 9
SECTION 5.7 NOTICE OF RATE PERIODS 10
SECTION 5.8 REMARKETING OF THE BONDS 11
SECTION 5.9 NOTICES TO TRUSTEE AND CITY 12
SECTION 5.10 CONTINUING DISCLOSURE 12
ARTICLE VI
EVENTS OF DEFAULT AND REMEDIES
SECTION 6.1 EVENTS OF DEFAULT 12
SECTION 6.2 REMEDIES ON DEFAULT 13
SECTION 6.3 AGREEMENT TO PAY ATTORNEYS' FEES AND EXPENSES 15
SECTION 6.4 NO REMEDY EXCLUSIVE 15
SECTION 6.5 NO ADDITIONAL WAIVER IMPLIED BY ONE WAIVER 15
ARTICLE VII
PREPAYMENT
SECTION 7.1 REDEMPTION OF BONDS WITH PREPAYMENT MONEYS 15
SECTION 7.2 OPTIONS TO PREPAY INSTALLMENTS 16
SECTION 7.3 MANDATORY PREPAYMENT 16
SECTION 7.4 AMOUNT OF PREPAYMENT 16
SECTION 7.5 NOTICE OF PREPAYMENT 16
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<PAGE>
ARTICLE VIII
NON-LIABILITY OF CITY; EXPENSES; INDEMNIFICATION
SECTION 8.1 NON-LIABILITY OF CITY 17
SECTION 8.2 EXPENSES 17
SECTION 8.3 INDEMNIFICATION 18
ARTICLE IX
MISCELLANEOUS
SECTION 9.1 NOTICES 18
SECTION 9.2 SEVERABILITY 18
SECTION 9.3 EXECUTION OF COUNTERPARTS 19
SECTION 9.4 AMENDMENTS, CHANGES AND MODIFICATIONS 19
SECTION 9.5 GOVERNING LAW 19
SECTION 9.6 AUTHORIZED BORROWER REPRESENTATIVE 19
SECTION 9.7 TERM OF THE AGREEMENT 19
SECTION 9.8 BINDING EFFECT 19
TESTIMONIUM 20
SIGNATURES AND SEALS 20
EXHIBIT A Description of the Project A-1
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<PAGE>
LOAN AGREEMENT
THIS LOAN AGREEMENT, dated as of October 1, 1997, by and
between the CITY OF CHULA VISTA, a municipal corporation and charter
city duly organized and existing under the laws and Constitution of
the State of California (the "City"), and SAN DIEGO GAS & ELECTRIC
COMPANY, a corporation organized and existing under the laws of the
State of California (the "Borrower"),
W I T N E S S E T H :
WHEREAS, the City is a municipal corporation and charter
city, duly organized and existing under a freeholders' charter
pursuant to which the City has the right and power to make and
enforce all laws and regulations in accordance with and as more
particularly provided in Sections 3, 5 and 7 of Article XI of the
Constitution of the State of California and Section 200 of the
Charter of the City (the "Charter"); and
WHEREAS, the City Council of the City, acting under and
pursuant to the powers reserved to the City under Sections 3, 5 and
7 of Article XI of the Constitution and Section 200 of the Charter,
has enacted Chapter 3.48 of the Chula Vista Municipal Code, pursuant
to Ordinance No. 1970 adopted on February 9, 1982, as amended from
time to time (the "Law"), establishing a program to provide
financial assistance for the acquisition, construction and
installation of facilities for industrial, commercial or public
utility purposes; and
WHEREAS, the Borrower has duly applied to the City for
financial assistance to refinance the costs of acquisition,
construction and installation of certain facilities for the
distribution of electric energy, as more fully described in Exhibit
A hereto (the "Project"), by prepaying a loan (the "Prior Loan")
made to the Borrower with the proceeds of The City of San Diego
Industrial Development Revenue Bonds (San Diego Gas & Electric
Company) 1987 Series A (the "Prior Bonds"), resulting in the
refunding of the Prior Bonds; and
WHEREAS, the City after due investigation and deliberation
has determined that the Project and the refinancing thereof, and the
resulting refunding of the Prior Bonds, will directly benefit the
citizens of the City by substantially promoting the public interests
recited in the Law and has adopted its resolutions authorizing the
provision or lending of financial assistance to the Borrower to
refinance the costs of acquisition, construction and installation of
the Project and to prepay the Prior Loan, and the issuance and sale
of its bonds, including its Industrial Development Revenue Bonds
(San Diego Gas & Electric Company) 1997 Series A (the "Bonds"), for
such purposes; and
WHEREAS, the City proposes to assist in such refinancing
upon the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and the
respective representations and covenants herein contained, the
parties hereto agree as follows:
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<PAGE>
ARTICLE I
DEFINITIONS
SECTION 1.1 DEFINITION OF TERMS Unless the context
otherwise requires, the terms used in this Agreement shall have the
meanings specified in Section 1.01 of the Indenture of Trust, of
even date herewith relating to the Bonds (the "Indenture"), by and
between the City and First Trust of California, National
Association, as trustee (the "Trustee"), as originally executed or
as it may from time to time be supplemented or amended as provided
therein.
SECTION 1.2 NUMBER AND GENDER The singular form of
any word used herein, including the terms defined in Section 1.01 of
the Indenture, shall include the plural, and vice versa. The use
herein of a word of any gender shall include all genders.
SECTION 1.3 ARTICLES, SECTIONS, ETC. Unless otherwise
specified, references to Articles, Sections and other subdivisions
of this Agreement are to the designated Articles, Sections and other
subdivisions of this Agreement as originally executed. The words
"hereof," "herein," "hereunder" and words of similar import refer to
this Agreement as a whole. The headings or titles of the several
articles and sections, and the table of contents appended to copies
hereof, shall be solely for convenience of reference and shall not
affect the meaning, construction or effect of the provisions hereof.
ARTICLE II
REPRESENTATIONS
SECTION 2.1 REPRESENTATIONS OF THE CITY. The City
makes the following representations as the basis for its
undertakings herein contained:
(a) The City is a municipal corporation and charter city
in the State of California. Under the provisions of the Law, the
City has the power to enter into the transactions contemplated by
this Agreement and to carry out its obligations hereunder. The
Project constitutes a "project" as that term is defined in the Law.
By proper action, the City has been duly authorized to execute,
deliver and duly perform this Agreement and the Indenture.
(b) To refinance the cost of the Project, the City will
issue the Bonds which will mature, bear interest and be subject to
redemption as set forth in the Indenture.
(c) The Bonds will be issued under and secured by the
Indenture, pursuant to which the City's interest in this Agreement
(except certain rights of the City to give approvals and consents
and to receive payment for expenses and indemnification and certain
other payments) will be pledged to the Trustee as security for
payment of the principal of, premium, if any, and interest on the
Bonds.
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<PAGE>
(d) The City has not pledged and will not pledge its
interest in this Agreement for any purpose other than to secure the
Bonds under the Indenture.
(e) The City is not in default under any of the
provisions of the laws of the State of California or the City's
Charter which default would affect its existence or its powers
referred to in subsection (a) of this Section 2.1.
(f) The City has found and determined and hereby finds
and determines that all requirements of the Law with respect to the
issuance of the Bonds and the execution of this Agreement and the
Indenture have been complied with and that refinancing the Project
by issuing the Bonds, refunding or replacing the Prior Bonds and
entering into this Agreement and the Indenture will be in
furtherance of the purposes of the Law.
(g) On May 21, 1996, the City Council of the City adopted
Resolution No. 18302 authorizing the issuance and sale of the Bonds.
(h) On July 23, 1996, the City Council adopted Resolution
No. 18384 authorizing the execution and delivery of a bond purchase
agreement and official statement in connection with the sale of the
Bonds.
SECTION 2.2 REPRESENTATIONS OF THE BORROWER. The
Borrower makes the following representations as the basis for its
undertakings herein contained:
(a) The Borrower is a corporation duly formed under the
laws of the State of California, is in good standing in the State of
California and has the power to enter into and has duly authorized,
by proper corporate action, the execution and delivery of this
Agreement and all other documents contemplated hereby to be executed
by the Borrower.
(b) Neither the execution and delivery of this Agreement,
the consummation of the transactions contemplated hereby, nor the
fulfillment of or compliance with the terms and conditions hereof
and thereof, conflicts with or results in a breach of any of the
terms, conditions or provisions of the Borrower's Articles of
Incorporation or By-laws or of any corporate actions or of any
agreement or instrument to which the Borrower is now a party or by
which it is bound, or constitutes a default (with due notice or the
passage of time or both) under any of the foregoing, or results in
the creation or imposition of any prohibited lien, charge or
encumbrance whatsoever upon any of the property or assets of the
Borrower under the terms of any instrument or agreement to which the
Borrower is now a party or by which it is bound.
(c) The Project consists and will consist of those
facilities described in Exhibit A hereto, and the Borrower shall
make no changes to such portion of the Project or to the operation
thereof which would affect the qualification of the Project as a
"project" under the Law or impair the exemption from gross income of
the interest on the Bonds for federal income tax purposes. In
particular, the Borrower shall comply with all requirements of the
San Diego Gas & Electric Company Engineering Certificate, dated the
Issue Date (the "Engineering Certificate"), which is hereby
incorporated by reference herein. The Project consists of
facilities for the local furnishing of electric energy and gas as
described in the Engineering Certificate.
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The Borrower intends to utilize such portion of the Project as
facilities for the local furnishing of electric energy and gas
throughout the foreseeable future.
(d) The Borrower has and will have title to the Project
sufficient to carry out the purposes of this Agreement.
(e) The economic useful life of the Project is as set
forth in the Engineering Certificate.
(f) All certificates, approvals, permits and
authorizations with respect to the construction of the Project of
agencies of applicable local governmental agencies, the State of
California and the federal government have been obtained; and
pursuant to such certificates, approvals, permits and authorizations
the Project has been constructed and is in operation.
ARTICLE III
ISSUANCE OF THE BONDS; APPLICATION OF PROCEEDS
SECTION 3.1 AGREEMENT TO ISSUE BONDS; APPLICATION OF
BOND PROCEEDS. To provide funds to enable the Borrower to refinance
a portion of the cost of the Project by prepaying the Prior Loan,
the City agrees that it will issue under the Indenture, sell and
cause to be delivered to the purchasers thereof, the Bonds, bearing
interest as provided and maturing on the date set forth in the
Indenture. The City will thereupon apply the proceeds received from
the sale of the Bonds as provided in Section 3.02 of the Indenture.
SECTION 3.2 INVESTMENT OF MONEYS IN FUNDS. Any moneys
in any fund held by the Trustee shall, at the written request of an
Authorized Borrower Representative, be invested or reinvested by the
Trustee as provided in the Indenture. Such investments shall be
held by the Trustee and shall be deemed at all times a part of the
fund from which such investments were made, and the interest
accruing thereon and any profit or loss realized therefrom shall,
except as otherwise provided in the Indenture, be credited or
charged to such fund.
SECTION 3.3 AMENDMENT OF DESCRIPTION OF THE PROJECT.
In the event that the Borrower desires to amend or supplement the
Project, as described in Exhibit A hereto, and the City approves of
such amendment or supplement, the City will enter into, and will
instruct the Trustee to consent to, such amendment or supplement
upon receipt of:
(i) a certificate of an Authorized Borrower
Representative describing in detail the proposed changes and
stating that they will not have the effect of disqualifying any
component of the Project as a facility that may be financed
pursuant to the Law;
(ii) a copy of the proposed form of amended or
supplemented Exhibit A hereto; and
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(iii) an Opinion of Bond Counsel that such proposed
changes will not affect the exclusion from gross income of
interest on the Bonds for federal income tax purposes.
ARTICLE IV
LOAN TO BORROWER; REPAYMENT PROVISIONS
SECTION 4.1 LOAN TO BORROWER. The City and the
Borrower agree that the application of the proceeds of sale of the
Bonds to refund and retire a portion of the Prior Bonds and the
first mortgage bonds of the Borrower relating thereto will be deemed
to be and treated for all purposes as a loan to the Borrower of an
amount equal to the principal amount of the Bonds.
SECTION 4.2 REPAYMENT AND PAYMENT OF OTHER AMOUNTS
PAYABLE.
(a) The Borrower covenants and agrees to pay to the
Trustee as a Repayment Installment on the loan to the Borrower
pursuant to Section 4.1 hereof, on each date provided in or pursuant
to the Indenture for the payment of principal (whether at maturity
or upon redemption or acceleration) of, premium, if any, and/or
interest on the Bonds, until the principal of, premium, if any, and
interest on the Bonds shall have been fully paid or provision for
the payment thereof shall have been made in accordance with the
Indenture, in immediately available funds, for deposit in the Bond
Fund, a sum equal to the amount then payable as principal (whether
at maturity or upon redemption or acceleration), premium, if any,
and interest upon the Bonds as provided in the Indenture.
Each payment required to be made pursuant to this Section 4.2(a)
shall at all times be sufficient to pay the total amount of interest
and principal (whether at maturity or upon redemption or
acceleration) and premium, if any, then payable on the Bonds;
provided that any amount held by the Trustee in the Bond Fund on any
due date for a Repayment Installment hereunder shall be credited
against the installment due on such date to the extent available for
such purpose; and provided further that, subject to the provisions
of this paragraph, if at any time the amounts held by the Trustee in
the Bond Fund are sufficient to pay all of the principal of and
interest and premium, if any, on the Bonds as such payments become
due, the Borrower shall be relieved of any obligation to make any
further payments under the provisions of this Section.
Notwithstanding the foregoing, if on any date the amount held by the
Trustee in the Bond Fund is insufficient to make any required
payments of principal of (whether at maturity or upon redemption or
acceleration) and interest and premium, if any, on the Bonds as such
payments become due, the Borrower shall forthwith pay such
deficiency as a Repayment Installment hereunder.
The obligation of the Borrower to make any payment under this
Section 4.2(a) with respect to the Bonds shall be deemed to have
been satisfied to the extent of any corresponding payment by the
Credit Provider under the Credit Facility, if any, for such Bonds.
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(b) The Borrower also agrees to pay to the Trustee until
the principal of, premium, if any, and interest on the Bonds shall
have been fully paid or provision for the payment thereof shall have
been made as required by the Indenture, (i) the annual fee of the
Trustee for its ordinary services rendered as trustee, and its
ordinary expenses incurred under the Indenture, as and when the same
become due, (ii) the reasonable fees, charges and expenses of the
Trustee, the Registrar and the reasonable fees of any paying agent
on the Bonds as provided in the Indenture, as and when the same
become due, (iii) the reasonable fees, charges and expenses of the
Trustee for the necessary extraordinary services rendered by it and
extraordinary expenses incurred by it under the Indenture, as and
when the same become due. The Borrower shall also pay the cost of
printing any Bonds required to be furnished by the City.
(c) The Borrower also agrees to pay, within 60 days after
receipt of request for payment thereof, all expenses required to be
paid by the Borrower under the terms of the bond purchase agreement
executed by it in connection with the sale of the Bonds, and all
reasonable expenses of the City related to the financing of the
Project which are not otherwise required to be paid by the Borrower
under the terms of this Agreement; provided that the City shall have
obtained the prior written approval of the Authorized Borrower
Representative for any expenditures other than those provided for
herein or in said bond purchase agreement.
The Borrower also agrees to pay to the City within five
days following the Issue Date an issuance fee in the amount of
$62,500.
(d) The Borrower hereby agrees to provide or cause to be
provided in immediately available funds, for deposit into the Bond
Purchase Fund maintained by the Tender Agent, all amounts necessary
to purchase Bonds tendered for purchase in accordance with Sections
2.01(d) and 2.01(e) of the Indenture.
(e) In the event the Borrower should fail to make any of
the payments required by subsections (a) through (d) of this
Section, such payments shall continue as obligations of the Borrower
until such amounts shall have been fully paid. The Borrower agrees
to pay such amounts, together with interest thereon until paid, to
the extent permitted by law, at the rate of one percent (1%) per
annum over the rate borne by any Bonds in respect of which such
payments are required to be made pursuant to said subsection (a),
and one percent (1%) per annum over the average rate then borne by
the Bonds as to all other payments. Interest on overdue payments
required under subsection (a) or (d) above shall be paid to
Bondholders as provided in the Indenture.
(f) Upon written request of the Trustee, the Borrower
shall pay any Repayment Installment directly to the Paying Agent.
(g) Any unpaid obligation of the Borrower under
subsections (b) through (e) of this Section 4.2 shall survive the
payment and discharge of the Bonds and the termination of this
Agreement.
SECTION 4.3 UNCONDITIONAL OBLIGATION. The obligations
of the Borrower to make the payments required by Section 4.2 hereof
and to perform and observe the
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other agreements on its part contained herein shall be absolute and
unconditional, irrespective of any defense or any rights of set-off,
recoupment or counterclaim it might otherwise have against the City,
and during the term of this Agreement, the Borrower shall pay
absolutely net the payments to be made on account of the loan as
prescribed in Section 4.2 and all other payments required hereunder,
free of any deductions and without abatement, diminution or set-off.
Until such time as the principal of, premium, if any, and interest
on the Bonds shall have been fully paid, or provision for the
payment thereof shall have been made as required by the Indenture,
the Borrower (i) will not suspend or discontinue any payments
provided for in Section 4.2 hereof; (ii) will perform and observe
all of its other covenants contained in this Agreement; and (iii)
will not terminate this Agreement for any cause, including, without
limitation, the occurrence of any act or circumstances that may
constitute failure of consideration, destruction of or damage to the
Project, commercial frustration of purpose, any change in the tax or
other laws of the United States of America or of the State of
California or any political subdivision of either of these, or any
failure of the City or the Trustee to perform and observe any
covenant, whether express or implied, or any duty, liability or
obligation arising out of or connected with this Agreement or the
Indenture, except to the extent permitted by this Agreement.
SECTION 4.4 ASSIGNMENT OF CITY'S RIGHTS. As security
for the payment of the Bonds, the City will assign to the Trustee
the City's rights, but not its obligations, under this Agreement,
including the right to receive payments hereunder (except (i) the
rights of the City to receive notices under this Agreement, (ii) the
right of the City to receive certain payments, if any, with respect
to fees, expenses and indemnification and certain other purposes
under Sections 4.2(c), 4.2(e), 6.3, 8.2 and 8.3 hereof, and (iii)
the right of the City to give approvals or consents pursuant to this
Agreement) and the City hereby directs the Borrower to make the
payments required hereunder (except such payments for fees, expenses
and indemnification) directly to the Trustee. The Borrower hereby
assents to such assignment and agrees to pay the Repayment
Installments directly to the Trustee (subject to the provisions of
Section 4.2(f)) without defense or set-off by reason of any dispute
between the Borrower and the City or the Trustee.
SECTION 4.5 AMOUNTS REMAINING IN FUNDS. It is agreed
by the parties hereto that after payment in full of (i) the Bonds,
or after provision for such payment shall have been made as provided
in the Indenture, (ii) the fees and expenses of the City in
accordance with this Agreement, (iii) the fees, charges and expenses
of the Trustee, the Registrar and Paying Agents in accordance with
the Indenture and this Agreement and (iv) all other amounts required
to be paid under this Agreement and the Indenture, any amounts
remaining in any fund held by the Trustee under the Indenture shall
belong, subject to the requirements of Section 6.06 of the
Indenture, to the Borrower and be paid to the Borrower by the
Trustee.
SECTION 4.6 CREDIT FACILITY. No initial Credit
Facility shall be provided with respect to the Bonds. The Borrower
may provide and subsequently terminate or remove a Credit Facility
with respect to the Bonds pursuant to the provisions of Section 5.07
of the Indenture; provided, however, that, except in connection with
the redemption of Bonds, the Borrower shall not intentionally cause
the termination or substitution of any Credit Facility with
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respect to Bonds during a Term Rate Period or a Variable Term
Segment with respect to such Bonds. Not less than twenty-five days
prior to the termination, removal, substitution or delivery of any
Credit Facility with respect to the Bonds, the Borrower shall mail
written notice of such termination, removal, substitution or
delivery to the Trustee. Not less than fifteen days prior to the
delivery of any substitute or new Credit Facility for the Bonds, the
Borrower shall mail written notice of such substitution or delivery
to each Rating Agency.
ARTICLE V
SPECIAL COVENANTS AND AGREEMENTS
SECTION 5.1 RIGHT OF ACCESS TO THE PROJECT. The
Borrower agrees that during the term of this Agreement the City, the
Trustee and the duly authorized agents of either of them shall have
the right at all reasonable times during normal business hours to
enter upon the site of the Project described in Exhibit A hereto to
examine and inspect such Project; provided, however, that this right
is subject to federal and State of California laws and regulations
applicable to such site. The rights of access hereby reserved to
the City and the Trustee may be exercised only after such agent
shall have executed release of liability (which release shall not
limit any of the Borrower's obligations hereunder) and secrecy
agreements if requested by the Borrower in the form then currently
used by the Borrower, and nothing contained in this Section or in
any other provision of this Agreement shall be construed to entitle
the City or the Trustee to any information or inspection involving
the confidential know-how of the Borrower.
SECTION 5.2 THE BORROWER'S MAINTENANCE OF ITS
EXISTENCE; ASSIGNMENTS. (a) The Borrower agrees that during the
term of this Agreement it will maintain its corporate existence in
good standing and will not dissolve or otherwise dispose of all or
substantially all of its assets and will not consolidate with or
merge into another corporation or permit one or more other
corporations to consolidate or merge into it; provided, that the
Borrower may, without violating the covenants contained in this
Section, consolidate with or merge into another corporation, or
permit one or more other corporations to consolidate with or merge
into it, or sell or otherwise transfer to another corporation all or
substantially all of its assets and thereafter dissolve, provided
that (1) either (A) the Borrower is the surviving corporation or (B)
the surviving, resulting or transferee corporation, as the case may
be, (I) assumes and agrees in writing to pay and perform all of the
obligations of the Borrower hereunder and (ii) qualifies to do
business in the State of California; and (2)the Borrower shall
deliver to the Trustee an Opinion of Bond Counsel to the effect that
such consolidation, merger or transfer and dissolution does not in
and of itself adversely affect the exclusion from gross income for
federal income tax purposes of interest on the Bonds.
(b) With the prior written consent of the City (which
consent shall not be unreasonably withheld), the rights and
obligations of the Borrower under this Agreement may be assigned by
the Borrower, in whole or in part, subject, however, to each of the
following conditions:
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(i) No assignment (other than pursuant to a merger,
consolidation or combination described in Section 5.2(a)) shall
relieve the Borrower from primary liability for any of its
obligations hereunder, and in the event of any assignment not
pursuant to Section 5.2(a), the Borrower shall continue to remain
primarily liable for the payments specified in Section 4.2 hereof
and for performance and observance of the other agreements on its
part herein provided to be performed and observed by it.
(ii) Any assignment from the Borrower shall retain
for the Borrower such rights and interests as will permit it to
perform its obligations under this Agreement, and any assignee from
the Borrower shall assume the obligations of the Borrower hereunder
to the extent of the interest assigned.
(iii) The Borrower shall, within thirty days after
delivery of such assignment, furnish or cause to be furnished to the
City and the Trustee a true and complete copy of each such
assignment together with an instrument of assumption.
(iv) The Borrower shall cause to be delivered to the
City and the Trustee an Opinion of Bond Counsel that such assignment
will not, in and of itself, result in the interest on the Bonds
being determined to be includable in the gross income for federal
income tax purposes of the owners thereof (other than a "substantial
user" of the Project or a "related person" within the meaning of
Section 147(a) of the Code).
SECTION 5.3 RECORDS AND FINANCIAL STATEMENTS OF
BORROWER. The Borrower agrees (a) to keep and maintain full and
accurate accounts and records of its operations in accordance with
generally accepted accounting principles, (b) to permit the Trustee
for itself or on behalf of the holders of the Bonds and its
designated officers, employees, agents and representatives to have
access to such accounts and records and to make examinations thereof
at all reasonable times and (c) upon request of the Trustee, to
provide the Trustee with the Borrower's most recent audited
financial statements.
SECTION 5.4 MAINTENANCE AND REPAIR. The Borrower
agrees that as long as it owns the Project it will (i) maintain, or
cause to be maintained, the Project in as reasonably safe condition
as its operations shall permit and (ii) maintain, or cause to be
maintained, the Project in good repair and in good operating
condition, ordinary wear and tear excepted, making from time to time
all necessary repairs thereto and renewals and replacements thereof.
SECTION 5.5 QUALIFICATION IN CALIFORNIA. The Borrower
agrees that throughout the term of this Agreement it, or any
successor or assignee as permitted by Section 5.2, will be qualified
to do business in the State of California.
SECTION 5.6 TAX EXEMPT STATUS OF BONDS. (a) It is the
intention of the parties hereto that interest on the Bonds shall be
and remain excluded from gross income for federal income tax
purposes. To that end, the covenants and agreements of the City and
the Borrower in this Section and in the Tax Certificate are for the
benefit of the Trustee and each and every person who at any time
will be a holder of the Bonds. Without limiting the generality
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of the foregoing, the Borrower and the City agree that there shall
be paid from time to time all amounts required to be rebated to the
United States pursuant to Section 148(f) of the Code and any
temporary, proposed or final Treasury Regulations as may be
applicable to the Bonds from time to time. This covenant shall
survive payment in full or defeasance of the Bonds. The Borrower
specifically covenants to pay or cause to be paid for and on behalf
of the City to the United States at the times and in the amounts
determined under Section 6.06 of the Indenture the Rebate
Requirement as described in the Tax Certificate. The City shall not
be liable to make any such payment except from funds provided by the
Borrower for such purpose.
(b) The City covenants and agrees that it has not taken
and will not take any action which results in interest to be paid on
the Bonds being included in gross income of the holders of the Bonds
for federal income tax purposes, and the Borrower covenants and
agrees that it has not taken or permitted to be taken and will not
take or permit to be taken any action which will cause the interest
on the Bonds to become includable in gross income for federal income
tax purposes; provided that neither the Borrower nor the City shall
have violated these covenants if interest on any of the Bonds
becomes taxable to a person solely because such person is a
"substantial user" of the Project or a "related person" within the
meaning of Section 147(a) of the Code; and provided further that
none of the covenants and agreements herein contained shall require
either the Borrower or the City to enter an appearance or intervene
in any administrative, legislative or judicial proceeding in
connection with any changes in applicable laws, rules or regulations
or in connection with any decisions of any court or administrative
agency or other governmental body affecting the taxation of interest
on the Bonds. The Borrower acknowledges having read Section 6.06 of
the Indenture and agrees to perform all duties imposed on it by such
Section, by this Section and by the Tax Certificate. Insofar as
Section 6.06 of the Indenture and the Tax Certificate impose duties
and responsibilities on the City or the Borrower, they are
specifically incorporated herein by reference.
(c) Notwithstanding any provision of this Section 5.6 or
Section 6.06 of the Indenture, if the Borrower shall provide to the
City and the Trustee an Opinion of Bond Counsel to the effect that
any specified action required under this Section 5.6 and Section
6.06 of the Indenture is no longer required or that some further or
different action is required to maintain the exclusion from federal
income tax of interest on the Bonds, the Borrower, the Trustee and
the City may conclusively rely on such opinion in complying with the
requirements of this Section, and the covenants set forth in this
Section 5.6 shall be deemed to be modified to that extent.
SECTION 5.7 NOTICE OF RATE PERIODS. The Borrower
shall designate and give timely written notice to the Trustee as
required by the Indenture prior to any change in Rate Periods for
the Bonds. In addition, if the Borrower shall elect to change Rate
Periods in accordance with the Indenture and the Bonds under
circumstances requiring the delivery of an Opinion of Bond Counsel,
the Borrower shall deliver such opinion to the Trustee concurrently
with the giving of notice with respect thereto, and no such change
shall be effective without an Opinion of Bond Counsel to the effect
that such change is authorized or permitted by the Indenture and the
Law and will not adversely affect the Tax-Exempt status of the
interest on the Bonds.
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SECTION 5.8 REMARKETING OF THE BONDS.
(a) The Borrower agrees to perform all obligations and
duties required of it by the Indenture with respect to the
remarketing of the Bonds, and, to appoint as set forth below a
Remarketing Agent and a Tender Agent meeting the qualifications and
otherwise meeting the requirements set forth in this Section 5.8.
(b) Tender Agent.
(i) Appointment and Duties: In order to carry out the
duties and obligations of the Tender Agent contained in the
Indenture, the Borrower shall appoint a Tender Agent or Tender
Agents in order to carry out such duties and obligations, subject to
the conditions set forth below. Each Tender Agent shall designate
to the Trustee its principal office and signify its acceptance of
the duties and obligations imposed upon it under the Indenture by
entering into a Tender Agreement with the Borrower and such other
parties as shall be appropriate, which may be combined with a
Remarketing Agreement into a single document, delivered to the City,
the Trustee, the Borrower and the Remarketing Agent, under which the
Tender Agent shall agree, particularly (but without limitation):
(A) to perform the duties and comply with the requirements imposed
upon it by the Tender Agreement, the Indenture and this Agreement;
and (B) to keep such books and records with respect to its
activities as Tender Agent as shall be consistent with prudent
industry practice and to make such books and records available for
inspection by the City, the Trustee and the Borrower at all
reasonable times.
(ii) Qualifications: The Tender Agent shall be a
financial institution organized and doing business under the laws of
the United States or of a state thereof, authorized under such laws
to exercise corporate trust powers, having a combined capital and
surplus of at least Fifty Million Dollars ($50,000,000), and subject
to supervision or examination by federal or state authority. If
such financial institution publishes a report of condition at least
annually, pursuant to law or to the requirements of any supervising
or examining authority above referred to, then for the purposes of
this Section the combined capital and surplus of such financial
institution shall be deemed to be its combined capital and surplus
as set forth in its most recent report of condition so published.
(c) Remarketing Agent. In order to carry out the duties
and obligations contained in the Indenture, the Borrower, by an
instrument in writing (which may be the Remarketing Agreement)
signed by an Authorized Borrower Representative, shall select the
Remarketing Agent for the Bonds subject to the conditions set forth
below. The Remarketing Agent shall designate to the Trustee its
principal office and signify its acceptance of the duties and
obligations imposed upon it under the Indenture by a written
instrument of acceptance (which may be the execution of a
Remarketing Agreement) delivered to the City, the Trustee and the
Borrower under which the Remarketing Agent shall agree, particularly
(but without limitation): (i) to perform the duties and comply with
the requirements imposed upon it by the Remarketing Agreement, the
Indenture and this Agreement; and (ii) to keep such books and
records with respect to its activities as Remarketing Agent as shall
be consistent with prudent industry practice and to make such books
and records available for inspection by the City, the Trustee and
the Borrower at all reasonable times.
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(d) Remarketing Agreement. In order to provide for the
remarketing of the Bonds, the Borrower shall enter into a
Remarketing Agreement with the Remarketing Agent and such other
parties as shall be appropriate, which may be combined with a Tender
Agreement into a single document. The Remarketing Agreement shall
include the following: (i) a requirement that the Remarketing
Agreement shall not be terminated by the Borrower without cause for
a period of at least six months after the effective date thereof;
and (ii) a statement to the effect that the Remarketing Agent is not
acting in an agency capacity with respect to the Borrower in
establishing interest rates and Rate Periods as described in Section
2.01 of the Indenture, but is acting as agent of the City pursuant
to the Law with respect to such functions.
SECTION 5.9 NOTICES TO TRUSTEE AND CITY. The Borrower
hereby agrees to provide the Trustee and the City with notice of any
event of which it has knowledge which, with the passage of time or
the giving of notice, would be an Event of Default, such notice to
include a description of the nature of such event and what steps are
being taken to remedy such Event of Default.
SECTION 5.10 CONTINUING DISCLOSURE. The Borrower hereby
covenants and agrees, upon the adjustment of the Rate Period for the
Bonds to a Term Rate Period pursuant to Section 2.01(c)(iv) of the
Indenture and the remarketing of such Bonds in accordance with the
Indenture, to comply with the continuing disclosure requirements for
the Bonds as promulgated under Rule 15c2-12, as it may from time to
time hereafter be amended or supplemented. Notwithstanding any
other provision of this Agreement, failure of the Borrower to comply
with the requirements of Rule 15c2-12 applicable to the Bonds, as it
may from time to time hereafter be amended or supplemented, shall
not be considered an Event of Default hereunder or under the
Indenture; however, any Bondholder or beneficial owner of any Bonds
may take such actions as may be necessary and appropriate, including
seeking mandate or specific performance by court order, to cause the
Borrower to comply with its obligations pursuant to this Section
5.10.
ARTICLE VI
EVENTS OF DEFAULT AND REMEDIES
SECTION 6.1 EVENTS OF DEFAULT. Any one of the
following which occurs and continues shall constitute an Event of
Default pursuant to this Agreement:
(a) failure by the Borrower to pay any amounts required
to be paid under Section 4.2(a) or 4.2(d) hereof at the times
required to avoid causing an Event of Default pursuant to the
Indenture; or
(b) failure of the Borrower to observe and perform any
covenant, condition or agreement on its part required to be observed
or performed by this Agreement, other than making the payments
referred to in (a) above, which continues for a period of 60 days
after written notice, which notice shall specify such failure and
request that it be remedied, given to the Borrower by the City or
the Trustee, unless the
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City and the Trustee shall agree in writing to an extension of
such time; provided, however, that if the failure stated in the
notice cannot be corrected within such period, the City and the
Trustee will not unreasonably withhold their consent to an
extension of such time if corrective action is instituted
within such period and diligently pursued until the default is
corrected; or
(c) an Act of Bankruptcy of the Borrower; or
(d) a default under any Credit Facility if the Credit
Provider notifies the Trustee in writing that such default
shall be treated as an Event of Default hereunder.
The provisions of subsection (b) of this Section are subject to the
limitation that the Borrower shall not be deemed in default if and
so long as the Borrower is unable to carry out its agreements
hereunder by reason of strikes, lockouts or other industrial
disturbances; acts of public enemies; orders of any kind of the
government of the United States or of the State of California or any
of their departments, agencies, or officials, or any civil or
military authority; insurrections, riots, epidemics, landslides;
lightning; earthquake; fire; hurricanes; storms; floods; washouts;
droughts; arrests; restraint of government and people; civil
disturbances; explosions; breakage or accident to machinery,
transmission pipes or canals; partial or entire failure of
utilities; or any other cause or event not reasonably within the
control of the Borrower; it being agreed that the settlement of
strikes, lockouts and other industrial disturbances shall be
entirely within the discretion of the Borrower, and the Borrower
shall not be required to make settlement of strikes, lockouts and
other industrial disturbances by acceding to the demands of the
opposing party or parties when such course is, in the judgment of
the Borrower, unfavorable to the Borrower. This limitation shall
not apply to any default under subsections (a), (c) or (d) of this
Section.
SECTION 6.2 REMEDIES ON DEFAULT. Whenever any Event
of Default shall have occurred and shall continue, the following
remedies may be pursued:
(a) The Trustee may, and upon the written request of any
Credit Provider or the holders of not less than 25% in
aggregate principal amount of Bonds then outstanding, shall, by
notice in writing delivered to the Borrower with copies of such
notice being sent to the City and each Credit Provider, declare
the unpaid balance of the loan payable under Section 4.2(a) of
this Agreement and the interest accrued thereon to be
immediately due and payable and such principal and interest
shall thereupon become and be immediately due and payable.
Upon any such acceleration, the Bonds shall be subject to
mandatory redemption as provided in Section 4.01(b)(3) of the
Indenture. After any such declaration of acceleration, the
Trustee shall immediately take such actions as necessary to
realize moneys under any Credit Facility.
(b) The Trustee shall have access to and the right to
inspect, examine and make copies of the books and records and
any and all accounts, data and federal income tax and other tax
returns of the Borrower.
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(c) The City or the Trustee may take whatever action at
law or in equity as may be necessary or desirable to collect
the payments and other amounts then due and thereafter to
become due or to enforce performance and observance of any
obligation, agreement or covenant of the Borrower under this
Agreement.
The provisions of clause (a) of the preceding paragraph,
however, are subject to the condition that if, at any time after the
loan shall have been so declared due and payable, and before any
judgment or decree for the payment of the moneys due shall have been
obtained or entered as hereinafter provided, there shall have been
deposited with the Trustee a sum sufficient (together with any
amounts held in the Bond Fund) to pay all the principal of the Bonds
matured prior to such declaration and all matured installments of
interest (if any) upon all the Bonds, with interest on such overdue
installments of principal as provided herein, and the reasonable
expenses of the Trustee, and any and all other defaults known to the
Trustee (other than in the payment of principal of and interest on
the Bonds due and payable solely by reason of such declaration)
shall have been made good or cured to the satisfaction of the
Trustee or provision deemed by the Trustee to be adequate shall have
been made therefor, then, and in every such case, the holders of at
least a majority in aggregate principal amount of the Bonds then
outstanding, by written notice to the City and to the Trustee, may,
on behalf of the holders of all the Bonds, rescind and annul such
declaration and its consequences and waive such default; provided
that no such rescission and annulment shall extend to or shall
affect any subsequent default, or shall impair or exhaust any right
or power consequent thereon; and provided further that there shall
not be rescinded or annulled any such declaration which follows an
event described in Section 6.1(d) without the written consent of the
Credit Provider.
In case the Trustee or the City shall have proceeded to
enforce its rights under this Agreement and such proceedings shall
have been discontinued or abandoned for any reason or shall have
been determined adversely to the Trustee or the City, then, and in
every such case, the Borrower, the Trustee and the City shall be
restored respectively to their several positions and rights
hereunder, and all rights, remedies and powers of the Borrower, the
Trustee and the City shall continue as though no such action had
been taken (provided, however, that any settlement of such
proceedings duly entered into by the City, the Trustee or the
Borrower shall not be disturbed by reason of this provision).
In case the Borrower shall fail forthwith to pay amounts
due by reason of this Section 6.2 upon demand of the Trustee, the
Trustee shall be entitled and empowered to institute any action or
proceeding at law or in equity for the collection of the sums so due
and unpaid, and may prosecute any such action or proceeding to
judgment or final decree, and may enforce any such judgment or final
decree against the Borrower and collect in the manner provided by
law the moneys adjudged or decreed to be payable.
In case proceedings shall be pending for the bankruptcy or for the
reorganization of the Borrower under the federal bankruptcy laws or
any other applicable law, or in case a receiver or trustee shall
have been appointed for the property of the Borrower or in the case
of any other similar judicial proceedings relative to the Borrower,
or the creditors or property of the Borrower, then the Trustee shall
be entitled and empowered, by intervention in such proceedings or
otherwise, to file and prove a claim or claims for the whole amount
owing and
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unpaid pursuant to this Agreement and, in case of any judicial
proceedings, to file such proofs of claim and other papers or
documents as may be necessary or advisable in order to have the
claims of the Trustee allowed in such judicial proceedings relative
to the Borrower, its creditors or its property, and to collect and
receive any moneys or other property payable or deliverable on any
such claims, and to distribute such amounts as provided in the
Indenture after the deduction of its charges and expenses. Any
receiver, assignee or trustee in bankruptcy or reorganization is
hereby authorized to make such payments to the Trustee, and to pay
to the Trustee any amount due it for compensation and expenses,
including expenses and fees of counsel incurred by it up to the date
of such distribution.
SECTION 6.3 AGREEMENT TO PAY ATTORNEYS' FEES AND
EXPENSES. In the event the Borrower should default under any of the
provisions of this Agreement and the City or the Trustee should
employ attorneys or incur other expenses for the collection of the
payments due under this Agreement or the enforcement of performance
or observance of any obligation or agreement on the part of the
Borrower herein contained, the Borrower agrees to pay to the City or
the Trustee the reasonable fees of such attorneys and such other
expenses so incurred by the City or the Trustee.
SECTION 6.4 NO REMEDY EXCLUSIVE. No remedy herein
conferred upon or reserved to the City or the Trustee is intended to
be exclusive of any other available remedy or remedies, but each and
every such remedy shall be cumulative and shall be in addition to
every other remedy given under this Agreement or now or hereafter
existing at law or in equity or by statute. No delay or omission to
exercise any right or power accruing upon any default shall impair
any such right or power or shall be construed to be a waiver
thereof, but any such right and power may be exercised from time to
time and as often as may be deemed expedient. In order to entitle
the City or the Trustee to exercise any remedy reserved to it in
this Article, it shall not be necessary to give any notice, other
than such notice as may be herein expressly required. Such rights
and remedies as are given the City hereunder shall also extend to
the Trustee, and the Trustee and the holders of the Bonds shall be
deemed third party beneficiaries of all covenants and agreements
herein contained.
SECTION 6.5 NO ADDITIONAL WAIVER IMPLIED BY ONE
WAIVER. In the event any agreement or covenant contained in this
Agreement should be breached by the Borrower and thereafter waived
by the City or the Trustee, such waiver shall be limited to the
particular breach so waived and shall not be deemed to waive any
other breach hereunder.
ARTICLE VII
PREPAYMENT
SECTION 7.1 REDEMPTION OF BONDS WITH PREPAYMENT
MONEYS. By virtue of the assignment of certain of the rights of the
City under this Agreement to the Trustee as is provided in Section
4.4 hereof, the Borrower agrees to and shall pay directly to the
Trustee any amount permitted or required to be paid by it under this
Article VII. The Trustee shall use the moneys so paid to it by the
Borrower to effect redemption of the Bonds in
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accordance with Article IV of the Indenture on the date specified
for such redemption pursuant to Section 7.5 hereof.
SECTION 7.2 OPTIONS TO PREPAY INSTALLMENTS. The
Borrower shall have the option to prepay the amounts payable under
Section 4.2 hereof, in whole or in part, by paying to the Trustee,
for deposit in the Bond Fund, the amount set forth in Section 7.4
hereof, under the circumstances set forth in Section 4.01(a) of the
Indenture; provided, however, that if any event specified in Section
4.01(a)(1)(A) through (D) of the Indenture gives rise to the
Borrower's exercise of its option to prepay such amounts payable
hereunder, the amount of such loan payment prepaid shall not exceed
the original cost of the portion of the Project affected by such
event.
SECTION 7.3 MANDATORY PREPAYMENT. (a) The Borrower
shall have and hereby accepts the obligation to prepay Repayment
Installments to the extent mandatory redemption of the Bonds is
required pursuant to Section 4.01(b) of the Indenture. The Borrower
shall satisfy its obligation hereunder by prepaying such Repayment
Installments within one hundred eighty (180) days after the
occurrence of any event set forth in paragraphs (1) through (3) of
said Section 4.01(b) giving rise to such required prepayment, and
immediately upon the occurrence of any event set forth in paragraph
(3) thereof giving rise to such required prepayment. The amount
payable by the Borrower in the event of a prepayment required by
this Section shall be determined as set forth in Section 7.4 and
shall be deposited in the Bond Fund.
SECTION 7.4 AMOUNT OF PREPAYMENT. In the case of a
prepayment of the entire amount due hereunder pursuant to Section
7.2 or 7.3 hereof, the amount to be paid shall be a sum sufficient,
together with other funds and the yield on any securities deposited
with the Trustee and available for such purpose, to pay (1) the
principal of all Bonds outstanding on the redemption date specified
in the notice of redemption, plus interest accrued and to accrue to
the payment or redemption date of the Bonds, plus premium, if any,
pursuant to the Indenture, (2) all reasonable and necessary fees and
expenses of the City, the Trustee, the Registrar, the Tender Agent
and any Paying Agent accrued and to accrue through final payment of
the Bonds, and (3) all other liabilities of the Borrower accrued and
to accrue under this Agreement.
In the case of partial prepayment of the Repayment Installments, the
amount payable shall be a sum sufficient, together with other funds
deposited with the Trustee and available for such purpose, to pay
the principal amount of and premium, if any, and accrued interest on
the Bonds to be redeemed, as provided in the Indenture, and to pay
expenses of redemption of such Bonds.
SECTION 7.5 NOTICE OF PREPAYMENT. The Borrower shall
give forty-five days' prior written notice to the City and the
Trustee specifying the date upon which any prepayment pursuant to
this Article VII will be made. If, in the case of a mandatory
prepayment pursuant to Section 7.3 hereof, the Borrower fails to
give such notice of a prepayment required by this Section 7.5, such
notice may be given by the City or by any holder or holders of ten
percent (10%) or more in aggregate principal amount of the Bonds
Outstanding, and shall be given by the Trustee, but solely at the
times and under the
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circumstances provided in Section 4.01(b) of the Indenture. The
City and the Trustee, at the request of the Borrower or any such
Bondholder or Bondholders, shall forthwith take all steps necessary
under the applicable provisions of the Indenture (except that the
City shall not be required to make payment of any money required for
such redemption) to effect redemption of all or part of the then
outstanding Bonds, as the case may be, on the earliest practicable
date thereafter on which such redemption may be made under
applicable provisions of the Indenture.
Notwithstanding anything to the contrary in this
Agreement, each notice contemplated in this Section 7.5 that is
given with respect to an optional prepayment pursuant to Section 7.2
hereof may state that it is subject to and conditional upon receipt
by the Trustee on or prior to the proposed prepayment date of
amounts sufficient to effect such prepayment and, if a notice so
states, such notice shall be of no force and effect and the
prepayment need not be made and the Repayment Installments will not
become due and payable on the proposed prepayment date unless such
amounts are so received on or prior to the proposed prepayment date.
ARTICLE VIII
NON-LIABILITY OF CITY; EXPENSES; INDEMNIFICATION
SECTION 8.1 NON-LIABILITY OF CITY. The City shall not
be obligated to pay the principal of, or premium, if any, or
interest on the Bonds, or to discharge any other financial liability
(including but not limited to financial liability under Section 5.6
hereof) in connection herewith, except from Revenues. The Borrower
hereby acknowledges that the City's sole source of moneys to repay
the Bonds will be provided by the payments made by the Borrower
pursuant to this Agreement (excluding payments to the City or the
Trustee pursuant to Section 4.2(b), 4.2(c), 4.2(e), 5.6, 6.3, 8.2
and 8.3 of this Agreement), together with other Revenues, including
investment income on certain funds and accounts held by the Trustee
under the Indenture, and hereby agrees that if the payments to be
made hereunder shall ever prove insufficient to pay all principal
of, and premium, if any, and interest on the Bonds as the same shall
become due (whether by maturity, redemption, acceleration or
otherwise), then upon notice from the Trustee, the Borrower shall
pay such amounts as are required from time to time to prevent any
deficiency or default in the payment of such principal, premium or
interest, including, but not limited to, any deficiency caused by
acts, omissions, nonfeasance or malfeasance on the part of the
Trustee, the Borrower, the City or any third party.
SECTION 8.2 EXPENSES. The Borrower covenants and
agrees to pay within fifteen (15) days after billing therefor and to
indemnify the City and the Trustee against all costs and charges,
including fees and disbursements of attorneys, accountants,
consultants, including financial consultants, engineers and other
experts incurred, in the absence of willful misconduct, in
connection with this Agreement, the Bonds or the Indenture. The
City shall notify the Borrower in writing prior to engaging any
professional or expert for which the City plans to bill the
Borrower.
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<PAGE>
SECTION 8.3 INDEMNIFICATION. The Borrower releases
the City and the Trustee from, and covenants and agrees that neither
the City nor the Trustee shall be liable for, and covenants and
agrees, to the extent permitted by law, to indemnify, defend and
hold harmless the City and the Trustee and their officers, employees
and agents from and against, any and all losses, claims, damages,
liabilities or expenses, of every conceivable kind, character and
nature whatsoever arising out of, resulting from or in any way
connected with (1) the Project, or the conditions, occupancy, use,
possession, conduct or management of, or work done in or about, or
from the planning, design, acquisition, installation or construction
of the Project or any part thereof; (2) the issuance of any Bonds or
any certifications, covenants or representations made in connection
therewith and the carrying out of any of the transactions
contemplated by the Bonds, the Indenture and this Agreement; (3)
the Trustee's acceptance or administration of the trusts under the
Indenture, or the exercise or performance of any of its powers or
duties under the Indenture or this Agreement; or (4) any untrue
statement or alleged untrue statement of any material fact or
omission or alleged omission to state a material fact necessary to
make the statements made, in light of the circumstances under which
they were made, not misleading, in any official statement or other
offering circular utilized by the City or any underwriter or
placement agent in connection with the sale of any Bonds; provided
that such indemnity shall not be required for damages that result
from negligence or willful misconduct on the part of the party
seeking such indemnity. The indemnity of the Trustee required by
this Section shall be only to the extent that any loss sustained by
the Trustee exceeds the net proceeds the Trustee receives from any
insurance carried with respect to the loss sustained. The Borrower
further covenants and agrees, to the extent permitted by law, to pay
or to reimburse the City and the Trustee and their officers,
employees and agents for any and all reasonable costs, including but
not limited to attorneys fees, liabilities or expenses incurred in
connection with investigating, defending against or otherwise in
connection with any such losses, claims, damages, liabilities,
expenses or actions, except to the extent that the same arise out of
the negligence or willful misconduct of the party claiming such
payment or reimbursement. The provisions of this Section shall
survive the retirement of the Bonds or resignation or removal of the
Trustee.
ARTICLE IX
MISCELLANEOUS
SECTION 9.1 NOTICES. All notices, certificates or
other communications shall be deemed sufficiently given on the
second day following the day on which the same have been mailed by
first class mail, postage prepaid, addressed to the City, the
Borrower or the Trustee, as the case may be, as set forth in the
Indenture. A duplicate copy of each notice, certificate or other
communication given hereunder by either the City or the Borrower to
the other shall also be given to the Trustee. The City, the
Borrower and the Trustee may, by notice given hereunder, designate
any different addresses to which subsequent notices, certificates or
other communications shall be sent.
SECTION 9.2 SEVERABILITY. If any provision of this
Agreement shall be held or deemed to be, or shall in fact be,
illegal, inoperative or unenforceable, the same shall
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not affect any other provision or provisions herein contained or
render the same invalid, inoperative, or unenforceable to any extent
whatever.
SECTION 9.3 EXECUTION OF COUNTERPARTS. This Agreement
may be simultaneously executed in several counterparts, each of
which shall be an original and all of which shall constitute but one
and the same instrument; provided, however, that for purposes of
perfecting a security interest in this Agreement under Article 9 of
the California Uniform Commercial Code, only the counterpart
delivered, pledged, and assigned to the Trustee shall be deemed the
original.
SECTION 9.4 AMENDMENTS, CHANGES AND MODIFICATIONS.
Except as otherwise provided in this Agreement or the Indenture,
subsequent to the initial issuance of Bonds and prior to their
payment in full, or provision for such payment having been made as
provided in the Indenture, this Agreement may not be effectively
amended, changed, modified, altered or terminated without the
written consent of the Trustee.
SECTION 9.5 GOVERNING LAW. This Agreement shall be
governed exclusively by and construed in accordance with the
applicable laws of the State of California.
SECTION 9.6 AUTHORIZED BORROWER REPRESENTATIVE.
Whenever under the provisions of this Agreement the approval of the
Borrower is required or the City or the Trustee is required to take
some action at the request of the Borrower, such approval or such
request shall be given on behalf of the Borrower by an Authorized
Borrower Representative, and the City and the Trustee shall be
authorized to act on any such approval or request and neither party
hereto shall have any complaint against the other or against the
Trustee as a result of any such action taken.
SECTION 9.7 TERM OF THE AGREEMENT. This Agreement
shall be in full force and effect from the date hereof and shall
continue in effect as long as any of the Bonds are outstanding or
the Trustee holds any moneys under the Indenture, whichever is
later; provided, however, that the rights of the Trustee and the
City under Section 8.2 and 8.3 hereof shall survive the termination
of this Agreement, the retirement of the Bonds and the removal or
resignation of the Trustee. All representations and certifications
by the Borrower as to all matters affecting the Tax-Exempt status of
the Bonds shall survive the termination of this Agreement.
SECTION 9.8 BINDING EFFECT. This Agreement shall
inure to the benefit of and shall be binding upon the City, the
Borrower, the Trustee and their respective successors and assigns;
subject, however, to the limitations contained in Section 5.2
hereof.
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<PAGE>
IN WITNESS WHEREOF, the City of Chula Vista has caused
this Agreement to be executed in its name and its seal to be
hereunto affixed and attested by its duly authorized officers, and
San Diego Gas & Electric Company has caused this Agreement to be
executed in its name and its seal to be hereunto affixed by its duly
authorized officers, all as of the date first above written.
CITY OF CHULA VISTA
By _____________________________
Mayor
[SEAL]
Attest:
____________________________
City Clerk
APPROVED AS TO FORM:
JOHN M. KAHENY
CITY ATTORNEY
By _____________________________
Deputy City Attorney
SAN DIEGO GAS & ELECTRIC COMPANY
By _______________________________
Vice President and Controller
[SEAL]
Attest:
_________________________________
Assistant Secretary
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<PAGE>
EXHIBIT A
Description of the Project
Local Electric Facilities
Acquisition and construction of additions and
improvements to the Borrower's electric distribution facilities
(12 KV and under) and related substations, and customer service
connections located within the Borrower's electric retail service
area, required by the Borrower to provide for the transfer and
distribution of electric energy to its customers located therein,
including all necessary poles, foundations, cable, conduit,
transformers, switches, controls, meters, substations, land and
land rights and other like facilities and equipment, as well as
necessary other equipment required for the proper installation,
protection, maintenance, control and operation of the foregoing
local electric distribution facilities. These facilities will be
required to meet the needs of new customers, maintain and improve
system capabilities, and make overhead to underground conversions.
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An extra section break has been inserted above this paragraph. Do
not delete this section break if you plan to add text after the
Table of Contents/Authorities. Deleting this break will cause
Table of Contents/Authorities headers and footers to appear on any
pages following the Table of Contents/Authorities.
THIRD AMENDING AGREEMENT
NOVEMBER 1, 1997
Between
SAN DIEGO GAS & ELECTRIC COMPANY, a
California corporation with its
principal office of business in San
Diego, California ("SDG&E")
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HUSKY OIL OPERATIONS LTD., an Alberta
corporation with its principal place of
business in Calgary, Alberta ("HOOL")
and HUSKY GAS MARKETING INC., a Delaware
corporation with its principal place of
business in Calgary, Alberta ("HGMI")
(collectively, "Seller")
Whereas:
1. SDG&E and HOOL are parties to a Natural Gas Purchase
Agreement made as of March 12, 1991 as amended by an Amending
Agreement made effective as of November 1, 1994 and a Second
Amending Agreement made effective as of January 1, 1997
("Agreement"); and
2. the parties wish to amend the Agreement in the manner
hereinafter set forth and to include HGMI as a party to the
Agreement.
Now therefore in consideration of the premises and the mutual
covenants herein contained, the parties agree as follows:
1. The terms and expressions which are defined in the Agreement
shall have the same meanings where used in this Third
Amending Agreement.
2. Section 1.1 is amended to add the following as clauses to
Section 1.1:
(a-1) "Assigned ANG Transportation" means, initially, the
firm transportation service described in clause
1.1(ii)(1), subject to any reduction which occurs
from time to time when Seller assigns all or
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any portion of such service to SDG&E pursuant to any
term of this Agreement;
(a-2) "Assigned PGT Transportation" means, initially, the
firm transportation service described in clause
1.1(ii)(2), subject to any reduction which occurs
from time to time when Seller assigns all or any
portion of service to SDG&E pursuant to any term of
this Agreement;
(a-3) "Assigned PG&E Transportation" means, initially, the
transportation service described in clause
1.1(ii)(3), subject to any reduction which occurs
from time to time when Seller assigns all or any
portion of such service to SDG&E pursuant to any term
of this Agreement;
(a-4) "Assignment Transporters" means, collectively, ANG,
PGT and PG&E and "Assignment Transporter" means any
one of them, as the context requires;
(k-1) "Demand Charges" means amounts payable from time to
time by a shipper to a pipeline entity pursuant to
contract or as may be mandated to be paid by any
regulatory body or agency or by legislation or
regulations, to reserve and maintain the right to
transport quantities or volumes of gas on a firm
basis for an agreed-to period of time on a pipeline
and which are payable irrespective of actual
quantities or volumes shipped including, without
limitation, any amounts chargeable to a shipper's
account as costs, charges, surcharges, or levies for
that firm service entitlement;
(y-1) "Netback Price" means the Contract Price less Seller's
Unit Transportation Costs;
(ee-1) "Reassignment Date" means the earlier of (i) the date
that the temporary assignments referred to in the
definition of Seller's Transportation have terminated
and Seller's Transportation has reverted to SDG&E,
and (ii) the date that all of Seller's Transportation
has been reassigned by Seller to SDG&E pursuant to
this Agreement.
3. Section 1.1 is further amended as follows:
(a) Subsection 1.1(j) is amended to (1) delete the
references to "Mountain Standard Time" and "Mountain
Daylight Time" and to replace those references with
"Pacific Standard Time" and "Pacific
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<PAGE>
Daylight Time", respectively, (2) delete the reference
to "NOVA" and to replace reference with "PG&E", and (3)
delete each reference to "8:00 o'clock a.m." and to
replace those references with "12:00 midnight".
(b) Subsection 1.1(k) is deleted and replaced with the
following:
"Delivery Point" shall mean the interconnection of the
facilities of PG&E and SoCal on the upstream side of
Wheeler Ridge or such other point as is mutually agreed
to by the parties pursuant to Section 8.3;
(c) Subsection 1.1(v) is deleted and replaced with the
following:
"Maximum Daily Quantity" or "MDQ" shall mean (prior to
the Authorization Date) the lesser of:
(1) ABC Heat Value Equivalent
__________________________________________________
(1 + ANG Fuel%) x (1 + PGT Fuel%) x (1 + PG&E Fuel%)
and
(2) the firm delivery capacity available under the
Assigned PG&E Transportation on that Day reduced by
PG&E's line loss percentage in effect for that Day
pursuant to PG&E's tariff and increased or reduced
to reflect any reduction or increase respectively in
PG&E's fuel gas ratio for that day (pursuant to
PG&E's tariff) below or above 1.11%.
and
"Maximum Daily Quantity" or "MDQ" shall mean
(following the Authorization Date) the lesser of:
(1) ABC Heat Value Equivalent
_____________________________________
(1 + ANG Fuel%) x (1 + PGT Fuel%) x (1)
and
(2) the firm delivery capacity available under the
Assigned PG&E Transportation on that Day.
Where:
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"ABC Heat Value Equivalent" means, for each Day, the
Heating Value of 619.8 103m3 of gas determined at
the interconnection of the NOVA and ANG systems at
the Alberta-British Columbia border calculated
using NOVA's weighted average heating value for all
gas delivered to that point on that Day (expressed
in MMBtus using the conversions in Section 21.3).
"ANG Fuel %" means, for each Day, the fuel gas ratio
in effect for that Day pursuant to ANG's tariff
expressed as a decimal number (i.e., an ANG fuel
ratio of 1.6% is converted to ".016" before being
used in the denominator of the formula in paragraph
1.1(v)(1)).
"PGT Fuel %" means, for each Day, the fuel gas ratio
in effect for that Day pursuant to PGT's tariff
expressed as a decimal number (i.e., a PGT fuel
ratio of 3% is converted to ".03" before being used
in the denominator of the formula in paragraph
1.1(v)(1)).
"PG&E Fuel %" means, for each Day, the fuel gas
ratio in effect for that Day pursuant to PG&E's
tariff expressed as a decimal number (i.e., a PG&E
fuel ratio of 1.11% is converted to ".0111" before
being used in the denominator of the formula in
paragraph 1.1(v)(1)).
"Authorization Date" means the date that the
amendment dated December 10, 1996 between PG&E and
SDG&E (which amends SDG&E's Firm Transportation
Service Agreement dated December 31, 1991, as
amended March 18, 1994) becomes effective following
the receipt of all required approvals from the CPUC
(such amendment being more particularly described in
PG&E's Advice 2003-G dated January 31, 1997 to the
CPUC).
(d) Subsection 1.1(aa) is amended to delete the words "the
MDQ into the NOVA system and deliver the MDQ to the
Delivery Point" and to replace those words with the
following:
into the NOVA system the volume of gas required for NOVA
to deliver 619.8 103m3 of gas each Day to the inter-
connection of the NOVA and ANG systems at the Alberta-
British Columbia border, such volume to be proportion-
ately reduced by each decrease in the MDQ pursuant to
this Agreement;
(e) Subsection 1.1(gg) is amended to delete the reference to
"SDG&E's Transporters" from the fourth line and to
replace that term with "ANG, PGT and PG&E".
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<PAGE>
(f) Subsection 1.1(ii) is deleted and replaced with the
following:
"Seller's Transportation" means, collectively:
(1) ANG FS-1 transportation service for firm delivery
capacity at Kingsgate, British Columbia of 610
103m3 per day;
(2) PGT T-3 transportation service for firm delivery
capacity at Malin, Oregon of 21,323 MMBtus per day;
and
(3) PG&E Line 401 transportation service for firm
delivery capacity at Kern River Station of 21,089
MMBtus per day,
which has been temporarily assigned by SDG&E to Seller
for the period from November 1, 1997 to August 1, 2003,
subject to earlier reassignment (in whole or in part) by
Seller to SDG&E from time to time pursuant to the terms
of this Agreement;
(g) Subsection 1.1(jj) is deleted and replaced with the
following:
"Seller" means, collectively, HOOL and HGMI except when
the context requires that "Seller" refer to only one of
HOOL and HGMI;
(h) Subsection 1.1(kk) is deleted and replaced with the
following:
"Seller's Unit Transportation Costs" has the meaning
ascribed to this term in Section 6.1;
(i) Subsection 1.1(11) is deleted and replaced with the
following:
"Seller's Regulatory Authorities" means each federal,
provincial, state and local government agency or other
authority in Canada and in the United States, which has
jurisdiction over the sale and removal from Alberta, the
export from Canada, the import into the United States,
and transportation on Seller's Transportation, of gas
to be sold and purchased hereunder including, without
limitation, the Alberta Energy and Utilities Board, the
National Energy Board of Canada, the Alberta and federal
Governors-in-Council, the Office of Fossil Energy of the
United States Department of Energy, the Federal Energy
Regulatory Commission and the California Public
Utilities Commission.
- 5 -
<PAGE>
4. Section 1.3 is amended to delete the reference to "Mountain
Standard Time ("MST")" and to replace that reference with
"Pacific Standard Time ("PST")".
5. Article II is amended to delete Sections 2.1-2.7 inclusive,
to replace those sections with the following Sections 2.1-
2.5, and to re-title the Article "Seller's Transportation":
2.1 TRANSPORTATION MAINTENANCE OBLIGATIONS
Seller covenants, represents and warrants to SDG&E that:
(a) Seller shall use Seller's Transportation to deliver gas
to SDG&E in accordance with Seller's obligations under
this Agreement;
(b) until the Reassignment Date and subject to SDG&E's
performance of its obligations under Section 2.2, Seller
shall maintain the Seller's Transportation in good
standing including, without limitation, Seller shall be
responsible for and timely pay to the Assignment
Transporters all amounts which are due or become due
under the Seller's Transportation from time to time and
perform all of the other obligations of the shipper
relating to that transportation service;
(c) Seller shall promptly reassign Seller's Transportation
to SDG&E when required pursuant to this Agreement;
(d) Seller shall not amend, encumber, assign, broker,
terminate, allow to terminate or expire, surrender,
release, waive non-performance under, or in any other
way modify or alienate its interest in any of Seller's
Transportation except as first approved in writing by
SDG&E;
(e) Seller shall promptly provide SDG&E with copies of all
notices and other communications of any kind whatsoever
given to any Assignment Transporter by Seller or
received by Seller from any Assignment Transporter
including, without limitation, invoices, non-payment
notices, and other reports or other information provided
by any of the Assigned Transporters and required or
reasonably requested by SDG&E from time to time but
excluding other day-to-day nomination notices and
nomination confirmations and the PG&E 120 daily Report
(Scheduled Transactions) (and any replacements or
substitutions for that Report) except when specifically
requested by SDG&E from time to time;
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<PAGE>
(f) Seller shall keep SDG&E timely informed of all material
matters relating to each of Seller's Transportation
agreements; and
(g) SDG&E shall have the right, from time to time, to review
Seller's records which pertain to the administration and
operation of Seller's Transportation.
For the purposes of certainty, it is understood that Seller's
Transportation contains the specific firm capacity rights
described in paragraphs 1.1(ii)(l)-(3) (in the definition of
Seller's Transportation) and Seller's firm capacity rights on
each of the Assignment Transporters pursuant to the Seller's
Transportation shall not be increased or reduced in the event
SDG&E either takes additional capacity on any Assignment
Transporter or releases or otherwise disposes of any of its
other existing firm service capacity on any of the Assignment
Transporters.
2.2 PIPELINE FINANCIAL ASSURANCES
SDG&E shall maintain in effect, with the Assignment
Transporters, all financial assurances and arrangements
("SDG&E Assurances") which SDG&E currently has in place with
each of the Assignment Transporters (to the extent each
Assignment Transporter continues to require the continuation
of the SDG&E assurances). Seller shall be responsible for
timely providing and maintaining, at its sole expense, any
financial assurances and arrangements (including letters of
credit) which are required by any of the Assignment
Transporters in addition to the SDG&E assurances but only if
those additional assurances would not be required to be
provided by SDG&E if SDG&E had remained as the sole shipper
of record under the applicable Seller's Transportation. If
additional financial assurances are requested of Seller by
any Assignment Transporter, SDG&E shall provide those
additional financial assurances if SDG&E would have been
required to provide those additional assurances had it
remained the sole shipper of record under Seller's
Transportation.
2.3 TRANSPORTATION INDEMNITY
(a) Seller agrees to and shall at all times indemnify and
save harmless SDG&E, and SDG&E's directors, officers,
employees and agents (collectively the "SDG&E
Indemnitees") from and against any and all:
(i) claims, demands, liabilities, actions and
prosecutions of any nature or kind whatsoever which
may be asserted, made or brought against the SDG&E
Indemnitees, or any of them; and
(ii) losses, damages, and expenses of any nature or kind
whatsoever which may be incurred, suffered or
sustained by the SDG&E Indemnitees, or any of them,
to the extent directly or indirectly resulting from,
contributed by or attributable to any breach by Seller
of any of its obligations under this Article.
(b) For purposes of certainty, it is agreed that the parties
comprising Seller shall be jointly and severally liable
for the performance of all obligations in respect of
each of Seller's Transportation agreements and the
indemnification in subsection 2.3(a) notwithstanding
that only one party comprising Seller is a party to each
of Seller's Transportation agreements.
(c) SDG&E agrees to and shall at all times indemnify and
save harmless Seller, and Seller's directors, officers,
employees and agents (collectively, the "Seller's
Indemnitees") from and against any and all:
(i) claims, demands, liabilities, actions and
prosecutions of any nature or kind whatsoever which
may be asserted, made or brought against the
Seller's Indemnitees, or any of them; and
(ii) costs, losses, damages, and expenses of any nature
or kind whatsoever which may be incurred, suffered
or sustained by the Seller's Indemnitees, or any of
them,
to the extent directly or indirectly resulting from,
contributed by or attributable to any breach by SDG&E of
any of its obligations under this Article.
2.4 TRANSPORTATION DEFAULT
(a) In the event Seller defaults in any of its obligations
under this Article, SDG&E shall have the right (but not
the obligation) to require that Seller reassign Seller's
Transportation to SDG&E and take all other steps as are
reasonably required to terminate the temporary
assignments (described in the definition of Seller's
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<PAGE>
Transportation) in order for SDG&E to be recognized by
the Assignment Transporters as the sole shipper of
record in respect of Seller's Transportation. Upon
receipt of a notice from SDG&E identifying Seller's
default and requiring the return of all of Seller's
Transportation, Seller shall promptly take all steps
required to cause the return of Seller's Transportation
to SDG&E. For purposes of certainty, SDG&E shall be
entitled to require the return of all of Seller's
Transportation even though Seller's default may pertain
to less than all of the Assignment Transporters.
(b) Effective upon the return of Seller's Transportation to
SDG&E, Seller and SDG&E shall, from and after that date,
continue to sell and purchase gas for the remainder of
the term in Section 3.1 (subject to any other rights or
remedies available to SDG&E arising from Seller's non-
performance of any of its obligations under this
Article) upon the terms of the original Natural Gas
Purchase Agreement made as of March 12, 1991 as amended
by the Amending Agreement made effective as of November
1, 1994 and the Second Amending Agreement made effective
as of January 1, 1997 ("original arrangements"). To the
extent any dispute arises in respect of any matter when
returning to the original arrangements, either party
shall be entitled to refer the matter to a single
arbitrator and the decision of the arbitrator shall be
binding upon the parties. The arbitration shall be
conducted pursuant to the provisions of Section 11(d) of
Appendix A to the original arrangements which shall
apply, mutatis mutandis, to any arbitration conducted
pursuant to this provision. The parties shall use all
reasonable efforts to continue performing their
respective obligations under this Agreement during any
such arbitration proceedings and to make all required
adjustments following the receipt of the arbitrator's
decision retroactive to the date that Seller's
Transportation was returned to SDG&E.
(c) In the event of a default by Seller in any payment
obligation pertaining to any of Seller's Transportation,
SDG&E shall be entitled (but not obligated) to make any
overdue payment to maintain Seller's Transportation in
good standing (without limiting its rights under this
Article) and to set off any such payment against any
amount then or thereafter payable by SDG&E to Seller
under this Agreement.
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<PAGE>
2.5 EARLY TRANSPORTATION REVERSION
(a) In the event that this Agreement terminates prior to
August 1, 2003, Seller shall promptly reassign Seller's
Transportation to SDG&E and take all other steps as are
reasonably required to terminate the temporary
assignments (referred to in the definition of Seller's
Transportation) in order that SDG&E is recognized by the
Assignment Transporters as the sole shipper of record.
6. Subsection 3.1(b) is amended to delete "and (d)" from the
first line of that subsection. In addition, subsections
3.1(c) and (d) are deleted and replaced with the following:
(c) If Seller is unable to obtain the long term import
authorization (referred to in subsection 12.1(c)) by
September 1, 1998, then and promptly following that
date, Seller shall take all necessary steps to re-assign
the Seller's Transportation to SDG&E effective as of
November 1, 1998 and to otherwise ensure that, as of
November 1, 1998, SDG&E is recognized by the Assignment
Transporters as the sole shipper of record in respect of
Seller's Transportation. Without limiting the
generality of the foregoing, Seller shall take all steps
as are reasonably required to terminate the temporary
assignments (described in the definition of Seller's
Transportation). All such action shall be taken in a
timely manner, taking into account the advance notice
requirements of each of the Assignment Transporters, to
ensure that SDG&E will be able to place nominations with
the Assignment Transporters for November 1, 1998.
Effective upon the return of Seller's Transportation to
SDG&E, Seller and SDG&E shall, from and after that date,
continue to sell and purchase gas for the remainder of
the term set out in Section 3.1 (subject to any other
rights or remedies available to SDG&E arising from
Seller's non-performance of any of its obligations) upon
the terms of the original arrangements (as that term is
defined in subsection 2.4(b)). For the purposes of
effecting such purchases and sales from and after
November 1, 1998:
(i) Seller shall continue to use its long term removal
permit originally obtained by Seller for the
purposes of this Agreement (prior to the
Commencement of Firm Deliveries) to remove gas from
Alberta for delivery to SDG&E; and
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<PAGE>
(ii) SDG&E shall continue to use the long term export
licence originally obtained by the parties (on a
joint basis) and the long term import authorization
originally obtained by SDG&E, in each case for the
purposes of this Agreement (prior to the
Commencement of Firm Deliveries).
7. Article III is amended to add the following as Sections 3.4,
3.5 and 3.6:
3.4 The parties entered into the Third Amending Agreement
(dated as November 1, 1997) to this Agreement ("Third
Amendment") with the understanding that the assignment
of the Seller's Transportation to Seller and the
management and use of that transportation service by
Seller will enable Seller to share increased revenues
and other benefits (over and above those that Seller
would have obtained had the Seller's Transportation
remained with SDG&E and the parties performed their
obligations and obtained the benefits provided for under
the original arrangements, as defined in subsection
2.4(b)). If at any time SDG&E determines, acting
reasonably, that Seller is failing to perform in
accordance with its obligations hereunder including,
without limitation, its obligation to mitigate demand
charges payable to the Assignment Transporters, or any
of them, for unutilized transportation capacity, then
SDG&E shall be entitled to forward a notice ("Election")
to Seller electing to terminate the Third Amendment.
Upon receipt of the Election, Seller shall take all
necessary steps to re-assign the Seller's Transportation
to SDG&E and otherwise ensure that, as of the first day
of the third month following the month that Seller
receives the Election, SDG&E is recognized by the
Assignment Transporters as the sole shipper of record in
respect of the Seller's Transportation. Without
limiting the generality of the foregoing, Seller shall
take all steps as are reasonably required to terminate
the temporary assignments (described in the definition
of Seller's Transportation). All such actions shall be
taken in a timely manner, taking into account the
advance notice requirements of each of the Assignment
Transporters to ensure that SDG&E will be able to place
nominations with the Assignment Transporters on the
first day of the aforementioned third month (following
the month that Seller receives the Election). Effective
upon the return of the Seller's Transportation to SDG&E,
Seller and SDG&E shall, from and after that date,
continue to sell and purchase gas for the remainder of
the term set out in Section 3.1 upon the terms of the
original arrangements (and the Third Amendment shall
thereafter cease to have any force or effect).
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<PAGE>
3.5 If at any time Seller determines, acting reasonably,
either that:
(a) it has not been able to generate sufficient
increased revenues and other benefits as a result
of managing and using Seller's Transportation (in
accordance with the understanding as expressed in
the first sentence of Section 3.4); or
(b) SDG&E has repeatedly failed to act in a reasonable
manner when considering whether to accept
Opportunities presented by Seller to SDG&E under
Section 4.4 (excluding from that determination any
Opportunities rejected by SDG&E for any of the four
reasons cited in subsection 4.4(c)),
then Seller shall be entitled to forward a notice
("Assignment Notice") to SDG&E electing to terminate the
Third Amendment effective as of the first day of the
third month following the month that SDG&E receives the
Assignment Notice. Upon SDG&E's receipt of the
Assignment Notice, Seller shall take all necessary steps
to reassign the Seller's Transportation to SDG&E and
otherwise ensure that, as of the first day of the third
month following the month that SDG&E receives the
Assignment Notice, SDG&E is recognized by the Assignment
Transporters as the sole shipper of record in respect of
the Seller's Transportation. The last three sentences
of Section 3.4 shall apply, mutatis mutandis, to this
provision.
3.6 To the extent any dispute arises in respect of any
matter when returning to the original arrangements
(pursuant to subsection 3.1(c), Section 3.4 or Section
3.5), either party shall be entitled to refer the matter
to a single arbitrator and the decision of the
arbitrator shall be binding upon the parties. The
arbitration shall be conducted pursuant to the
provisions of Section 11(d) of Appendix A to the
original arrangements which shall apply, mutatis
mutandis, to any arbitration conducted pursuant to this
provision. The parties shall use all commercially
reasonable efforts to continue performing their
respective obligations under this Agreement during any
such arbitration proceedings and to make all required
adjustments following the receipt of the arbitrator's
decision retroactive to the date that Seller's
Transportation was returned to SDG&E.
8. Section 4.2(a) is amended to delete the words "less an amount
equal to any `elected capacity' pursuant to subsection 4.4(b)
for such Months.".
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<PAGE>
9. Clause 4.2(b)(1) is deleted and replaced with the following:
(i) the Netback Price less
10. The last sentence of subsection 4.2(b) is amended to delete
"the weighted average heat content of all gas received in
such Month by SDG&E at the Delivery Point" and to replace
those words with the following:
NOVA's weighted average heating value for the Month for all
gas delivered by NOVA for the Month at the interconnection of
the NOVA and ANG systems at the Alberta-British Columbia
border
11. Subsection 4.2(d) is amended to delete the reference to
"paragraphs 4.2(a)(i) and (ii)" and to replace that reference
with "subsections 4.2(a) and (b)".
12. Subsection 4.2(e) is amended to add the following additional
sentences:
If Seller elects to reduce the MDQ pursuant to this
subsection, Seller shall have the one time option of
reassigning to SDG&E a proportionate share of Seller's
Transportation, such proportionate share to be equal to the
proportionate reduction in the MDQ elected by Seller.
Seller's election to assign such share of Seller's
Transportation must be specified in the aforesaid notice to
SDG&E (in which Seller elects to reduce the MDQ). For
purposes of certainty, any election to reassign
transportation service to SDG&E must include a proportionate
share of Seller's capacity on all three of the Assignment
Transporters. If Seller does not elect to reassign such share
of Seller's Transportation to SDG&E (when Seller has elected
to reduce the MDQ), then SDG&E shall have the option to
require that Seller assign such proportionate share of
Seller's Transportation to SDG&E. SDG&E's option must be
exercised within 60 days of receipt of Seller's notice
electing to reduce the MDQ. In the event SDG&E elects to
obtain that transportation service, Seller shall promptly
take all steps required to cause the return of that
proportionate share of Seller's Transportation to SDG&E. If
Seller does not elect to reassign, and SDG&E does not elect
to acquire, such proportionate share of Seller's
Transportation, Seller shall assume all Demand Charge
obligations and other liabilities in respect of that
transportation service for the remainder of the term of this
Agreement and SDG&E's obligation under Section 4.3 shall be
reduced accordingly.
13. Subsection 4.2(f) is deleted.
14. Section 4.3 is deleted and replaced with the following:
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<PAGE>
4.3 TRANSPORTATION ADJUSTMENT PAYMENT
Each month, SDG&E shall pay to Seller the amount of the
Transportation Adjustment Payment ("TAP") for the prior
Month calculated as follows:
TAP = Unutilized ANG Service + Unutilized PGT Service +
Unutilized PG&E Service
Where:
"Unutilized ANG Service" for a Month means the monthly
Demand Charge payable in respect of the Assigned ANG
Transportation for that Month (converted to United
States dollars pursuant to Section 21.2) ("ANG Toll")
less the portion of the ANG Toll which is attributable
to:
(a) the sum of
(i) the aggregate quantity of gas (expressed in
MMBtus) transported for or sold to a third
party by Seller using all or a portion of the
Assigned ANG Transportation during that Month,
plus
(ii) the aggregate quantity of fuel gas which is
transported using the Assigned ANG
Transportation and which is attributable to
such third party volumes and sales,
such portion of the ANG Toll to be determined
on a 100% load factor basis;
(b) the sum of:
(i) the aggregate quantity of gas (expressed in
MMBtus) diverted for that Month under Section
4.4, plus the aggregate quantity of gas
(expressed in MMBtus) not delivered by Seller
(when nominated by SDG&E) other than due to
force majeure,
plus
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<PAGE>
(ii) the aggregate quantity of fuel gas which would
have been transported using the Assigned ANG
Transportation if such aggregate withheld and
undelivered quantities had been delivered to
SDG&E during the Month,
such portion of the ANG Toll to be determined
on a 100% load factor basis; and
(c) the sum of:
(i) the aggregate quantity of gas (expressed in
MMBtus) which is delivered by Seller to SDG&E
for the Month,
plus
(ii) the aggregate quantity of fuel gas which is
transported using the Assigned ANG
Transportation and which is attributable to
gas delivered to SDG&E.
"Unutilized PGT Service" for a Month means the monthly
Demand Charge payable in respect of the Assigned PGT
Transportation for that Month ("PGT Toll") less the
portion of the PGT Toll which is attributable to:
(a) the sum of:
(i) the aggregate quantity of gas (expressed in
MMBtus) transported for or sold by Seller to a
third party by Seller using all or a portion of
the Assigned PGT Transportation during that
Month,
plus
(ii) the aggregate quantity of fuel gas which is
transported using the Assigned PGT
Transportation and which is attributable to
such third party volumes and sales,
such portion of the PGT Toll to be determined
on a 100% load factor basis;
(b) the sum of:
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<PAGE>
(i) the aggregate quantity of gas (expressed in
MMBtus) diverted for that Month under Section
4.4, plus the aggregate quantity of gas
(expressed in MMBtus) not delivered by Seller
(when nominated by SDG&E) other than due to
force majeure,
plus
(ii) the aggregate quantity of fuel gas which would
have been transported using the Assigned PGT
Transportation if such aggregate withheld and
undelivered quantities had been delivered to
SDG&E during the Month,
such portion of the PGT Toll to be determined
on a 100% load factor basis; and
(c) the sum of:
(i) the aggregate quantity of gas (expressed in
MMBtus) which is delivered by Seller to SDG&E
for the Month,
plus
(ii) the aggregate quantity of fuel gas which is
transported using the Assigned PGT
Transportation and which is attributable to
gas delivered to SDG&E.
"Unutilized PG&E Service" for a Month means the monthly
Demand Charge payable in respect of the Assigned PG&E
Transportation for that Month ("PG&E Toll") less the
portion of the PG&E Toll which is attributable to:
(a) the sum of:
(i) the aggregate quantity of gas (expressed in
MMBtus) transported for or sold by Seller to a
third party by Seller using all or a portion
of the Assigned PG&E Transportation during
that Month,
plus
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<PAGE>
(ii) the aggregate quantity of fuel gas which is
transported using the Assigned PG&E
Transportation and which is attributable to
such third party volumes and sales,
such portion of the PG&E Toll to be determined
on a 100% load factor basis;
(b) the sum of:
(i) the aggregate quantity of gas (expressed in
MMBtus) diverted for that Month under Section
4.4, plus the aggregate quantity of gas
(expressed in MMBtus) not delivered by Seller
(when nominated by SDG&E) other than due to
force majeure,
plus
(ii) the aggregate quantity of fuel gas which would
have been transported using the Assigned PG&E
Transportation if such aggregate withheld and
undelivered quantities had been delivered to
SDG&E during the Month,
such portion of the PG&E Toll to be determined on a
100% load factor basis; and
(c) the sum of:
(i) the aggregate quantity of gas (expressed in
MMBtus) which is delivered by Seller to SDG&E
for the Month,
plus
(ii) the aggregate quantity of fuel gas which is
transported using the Assigned PG&E
Transportation and which is attributable to
gas delivered to SDG&E.
For purposes of certainty, if the parties agree at any
time and from time to time to deliver and receive gas
at an alternate delivery point pursuant to Section 8.3,
all such gas deliveries (including associated fuel gas
volumes) shall be included within paragraph (c) in each
of the definitions of "Unutilized ANG Service",
"Unutilized PGT Service" and "Unutilized PG&E Service"
notwithstanding that some portion of Seller's
Transportation may not have been required to
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<PAGE>
deliver those gas quantities to SDG&E. In addition,
SDG&E's obligation to Seller under this Section is
subject to further reduction pursuant to subsection
4.2(e) and Section 4.4.
15. Section 4.4 is deleted and replaced with the following:
4.4 SALES/TRANSPORTATION OPTIMIZATION
(a) If, from time to time:
(i) either party becomes aware of a potential or actual
opportunity (including opportunities developed by
that party or anticipated to be developable by that
party or the parties) which could be served or
otherwise taken advantage of using the assets which
are subject to this Agreement (including, without
limitation, Seller's firm gas supply, Seller's
Transportation, SDG&E's SoCal transportation
service and Seller's NOVA firm service)
("Opportunity"); and
(ii) the Opportunity could reasonably be expected to
increase revenues or create other benefits for the
parties (after taking into account the sharing
arrangements in subsection 4.4(d)) in excess of the
revenues and benefits which would otherwise accrue
to each of the parties if the parties simply
continued to perform their respective commitments
under this Agreement,
then that party shall timely notify the other party of
the Opportunity, which notice shall contain reasonably
detailed particulars of the Opportunity including,
without limitation, the term of the arrangement, the
adverse effect on the rights and other benefits of each
party under this Agreement, any additional obligations
associated with the Opportunity, and the anticipated
benefits which would be expected to accrue from the
Opportunity. Opportunities could include, but are not
limited to, the delivery of gas to alternate delivery
points whether to SDG&E or a third party, third party
gas purchase and sale arrangements (including, without
limitation, peaking sales), exchanges, swaps, the
brokering of pipeline capacity (including, without
limitation, temporary assignments), buy/sell
arrangements, combinations of any of the foregoing or
other opportunities.
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<PAGE>
(b) If:
(i) each party identifies an Opportunity, all or any
portion of which would be in effect during the same
period of time; and
(ii) both such Opportunities cannot be accommodated at
the same time using the assets which are subject to
this Agreement,
then the parties will only consider implementing
the Opportunity which is anticipated to provide the
greater level of benefits (after taking into
account subsection 4.4(d)).
(c) The parties must jointly agree to accept any Opportunity
which would alter any of a party's rights, benefits and
obligations under this Agreement. A party's approval to
any Opportunity may be arbitrarily withheld if (1) that
party has reasonable cause for believing that the
Opportunity will not provide sufficient benefits when
compared to the efforts and costs required to implement
the Opportunity, (2) that party reasonably believes
that, during the particular time period that the
Opportunity will be in effect, it will be important for
that party to either retain all of its rights and
benefits under this Agreement or not increase its level
of obligations (as may be required to effectuate the
Opportunity), (3) in respect of quantities of gas which
are proposed to be diverted from SDG&E (for the purposes
of an Opportunity) for a period of one Month or longer,
SDG&E does not receive notice of the Opportunity
together with all required particulars at least 72 hours
prior to the first Day that gas is to be diverted from
SDG&E hereunder (if the Opportunity is agreed to by the
parties), or (4) in respect of quantities of gas which
are proposed to be diverted from SDG&E (for the purposes
of an Opportunity) for a period of less than one Month,
SDG&E does not receive notice of the Opportunity
together with all required particulars by not later than
0930 hours Pacific time on the second day preceding the
first Day that gas is to be diverted from SDG&E
hereunder (if the Opportunity is agreed to by the
parties).
(d) All net incremental benefits derived from implementing
an Opportunity shall be shared as follows:
Seller - 70%
SDG&E - 30%
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<PAGE>
Net incremental benefit shall be the residual revenue or
other benefit remaining from the implementation of an
Opportunity after each party is reimbursed for its
reasonable, third party out-of-pocket costs incurred to
implement the Opportunity. Under no circumstances
whatsoever shall any Non-Delivery Adjustment Payments
(payable by Seller pursuant to subsection 4.4(e)) reduce
the amount of the net incremental benefits which are to
be determined for each Opportunity and shared as
provided herein. All Non-Delivery Adjustment Payments
are to be borne solely by Seller without reducing
SDG&E's benefits under this Section.
(e) If an accepted Opportunity results in SDG&E's right to
nominate for the MDQ being reduced, then and for the
term of the Opportunity, the MDQ under this Agreement
shall be deemed to be reduced accordingly. In addition,
during each Month of any accepted Opportunity that the
Replacement Price exceeds the Reference Price, Seller
shall pay to SDG&E, in respect of each MMBtu of gas
purchased by SDG&E to replace some or all of the
quantities of gas diverted to an Opportunity
("Replacement Gas Quantity") an amount ("Non-Delivery
Adjustment Payment") calculated as follows:
Replacement x (Replacement Price - Reference Price)
Gas Quantity
(total for the Month)
Where:
"Replacement Price" equals the weighted average price per
MMBtu paid by SDG&E for the Replacement Gas Quantity for
that Month at the California border into SoCal's System.
SDG&E shall not unreasonably refuse any request from
Seller to terminate any Opportunity if such termination
can occur without penalty or other cost to SDG&E.
(f) If any accepted Opportunity involves deliveries at an
alternate delivery point such that all or any portion of
the Assigned ANG Transportation, Assigned PGT
Transportation or Assigned PG&E Transportation is not
expected to be utilized during the term of the
Opportunity for the purposes of implementing or
fulfilling the Opportunity, SDG&E shall have no
obligation under Section 4.3 in respect of the entire
transportation service of the applicable Assignment
Transporter (to the extent of the Opportunity volume)
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<PAGE>
and Seller shall be responsible for all Demand Charges
attributable to that stranded transportation service (to
the extent of the Opportunity volume).
(g) During those periods when SDG&E is not nominating for
the MDQ, SDG&E shall have the right (without relieving
Seller of its obligations under the last paragraph of
Section 4.3) to temporarily assign or broker the
capacity under Seller's Transportation which is
attributable to the quantities not then being nominated
by SDG&E, for the purpose of mitigating SDG&E's
obligations under Section 4.3. Seller shall use all
commercially reasonable efforts to assist SDG&E in
locating opportunities to mitigate unutilized
transportation capacity under Seller's Transportation.
Seller shall timely implement any such mitigation
arrangements made by SDG&E. If, during any Contract
Year, SDG&E receives aggregate revenues from such
mitigation arrangements which exceed its aggregate
payments to Seller under Section 4.3 for that Contract
Year, the difference shall be shared by the parties in
accordance with subsection 4.4(d).
(h) If Seller receives any payment from a third party which
is attributable to any arrangements made by SDG&E
pursuant to subsection 4.4(g), Seller shall immediately
pay those amounts to SDG&E (subject to Seller's right,
if any, to receive a portion of aggregate mitigation
revenues pursuant to the last sentence of subsection
4.4(g)).
16. Article IV is amended to add the following as Section 4.5:
4.5 Pipeline Utilization
(a) The parties acknowledge that:
(i) either or both of the Sellers or any of their
Affiliates may now hold and may hereafter acquire
firm, interruptible or other transportation service
rights on all or any of the systems of the
Assignment Transporters (whether held directly by
or indirectly for the benefit of either of the
Sellers or their Affiliates and regardless of when
those rights were acquired) ("Other
Transportation"); and
- 21 -
<PAGE>
(ii) SDG&E has obligations under this Agreement to make
Transportation Adjustment Payments under certain
circumstances when Seller's Transportation is not
being used.
Seller agrees to use all commercially reasonable efforts
to ensure that the Seller's Transportation is fully
utilized at all times in order that SDG&E is able to
avoid making Transportation Adjustment Payments in
respect of unutilized Seller's Transportation. In the
event of a curtailment of firm pipeline service by any
of the Assignment Transporters, then Seller shall
allocate its remaining capacity on the Assignment
Transporters between the Seller's Transportation and
the Other Transportation on the basis of the respective
maximum daily capacities of firm service normally
available to Seller under those transportation service
arrangements. For the purposes of this Section,
"Affiliate" means, in respect of a person, any other
person that, directly or indirectly, controls, is
controlled by or under common control with the first
mentioned person, and for the purposes of this
definition "control" means the possession, directly or
indirectly, by a person or a group of persons acting in
concert of the power to direct or cause the direction of
the management and policies of the person, whether
through the ownership of voting securities or otherwise.
(b) During those periods when Seller is unable (or expects
to be unable) to deliver all or any portion of the
quantity of gas nominated by SDG&E due to a force
majeure event affecting Seller's performance under this
Agreement, then Seller shall promptly inform SDG&E of
the delivery shortfall (or expected delivery shortfall)
and use all commercially reasonable efforts to locate
and to obtain substitute gas supplies (to avoid a
delivery shortfall) at the lowest possible prices
reasonably obtainable under the circumstances. Once
Seller has located such substitute gas supplies, Seller
shall promptly contact SDG&E (with all relevant
particulars pertaining to the substitute supplies) to
determine whether those supplies should be acquired for
delivery to SDG&E. Without detracting from Seller's
obligations (under the preceding sentence), SDG&E shall
have the right (but not the obligation) to arrange for
substitute gas supplies (to avoid any delivery
shortfall). Seller shall use the Seller's
Transportation to transport to SDG&E all such substitute
gas supplies.
17. Article V is amended to delete Section 5.1.
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<PAGE>
18. (a) The formula for the calculation of "Contract Price" in
the fourth line of Section 6.1 is deleted and replaced
with the following:
Contract Price = Reference Price
(b) The definition "SDG&E's Unit Transportation Cost" is
deleted from Section 6.1 and replaced with the
following:
Seller's Unit Transportation Cost = in respect of any
Month, Seller's unit cost (expressed in $U.S./MMBtu),
being the sum of all Seller's Transportation fixed and
variable charges and surcharges, net of any credits,
that apply to the firm transportation of gas hereunder
in such Month from the interconnection of the NOVA and
ANG systems at the Alberta-British Columbia border to
the Delivery Point, including any non-tariff costs such
as shipper provided fuel and line loss. This unit cost
will be the 100% load factor rate calculated based upon
an assumed full utilization of transportation capacity,
held on Seller's Transportation equal to the MDQ
regardless of whether Seller delivered and SDG&E
received less than the MDQ.
(c) The last paragraph of Section 6.1 is amended to delete
the term "SDG&E's" and to replace that term with the
word "Seller's".
19. Section 6.3 is amended to (1) replace the "; or" at the end
of subsection 6.3(a) with a period, and (2) delete subsection
6.3(b).
20. Section 7.1 is deleted and replaced with the following:
Commencing with the Month immediately following the Month in
which the Commencement of Firm Deliveries occurs, SDG&E
shall, on or before the 10th day of each Month, notify Seller
of the Reference Price and the Base Price for the proceeding
Month and Seller shall, on or before the 15th Business Day of
such Month, render to SDG&E a statement in U.S. dollars
showing on a line basis:
(a) Seller's best reasonable estimate of the quantity of gas
delivered to SDG&E at the Delivery Point during the
preceding Month under this Agreement, the Heating Value
thereof, and the gross amount payable in respect
thereof;
(b) the amount of any Transportation Adjustment Payment in
respect of the preceding Month (including a detailed
breakdown of the
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<PAGE>
Unutilized ANG Service, Unutilized PGT Service and
Unutilized PG&E Service calculations for the Month);
(c) the amount of any Deficiency Volume, GIC Payment and
NOVA Adjustment (under Section 4.2) in respect of the
preceding Month;
(d) the amounts of any Non-Delivery Adjustment Payment
(under Section 4.4) in respect of the preceding Month;
(e) the amount of any credits or other adjustments
determined in accordance with the terms of this
Agreement; and
(f) the net amount payable hereunder.
Included with each statement, Seller shall separately provide
details of the appropriate conversions, calculations applied
to prepare the statement, and any other information
reasonably requested by SDG&E. SDG&E shall make payment of
the net amount on or before the 25th day of the calendar
month in which the invoice is received. In the event the 25th
day of the month is a Saturday or another day which is not a
Business Day (other than a Sunday or Monday), SDG&E shall
make payment to Seller on or before the last Business Day
immediately before the 25th day of the billing month. When
the 25th day of the month is a Sunday or a Monday (which is
not a Business Day) SDG&E shall make payment on or before the
first Business Day immediately following the 25th day of the
billing month. If presentation of the invoice to SDG&E is
delayed after the 15th day of the billing month, then the
time for payment shall be extended accordingly unless SDG&E
is responsible for the delay. Such payment shall be made by
wire transfer as set out below under "Bank Instructions". Any
adjustments necessary to reflect actual deliveries shall be
made in the Month's invoice following the receipt of
information which reflects actual deliveries. Unpaid amounts
shall accrue interest at a rate and in the manner described
in Section 7.4.
Banking Instructions:
Route through Fedwire to: Bank of America NT & SA
One World Trade Center
10th Floor
New York, New York 10048-1191
ABA 026009593
- 24 -
<PAGE>
To: Canadian Imperial Bank of Commerce
Toronto, Ontario
Account #655026157
Swift Address: BOFAUS3N
Chips Member ID: 015035
Further Credit to: Canadian Imperial Bank of Commerce
309 - 8th Avenue S.W.
Calgary, Alberta
Transit #0010-0009
Account Of: Husky Gas Marketing Inc.
#03-46217
21. Section 7.2 is amended to delete the phrase "any SDG&E
Transportation Adjustment and".
22. Section 8.3 is deleted and replaced with the following:
At any time and from time to time at the request of either
party, the parties shall meet or otherwise discuss the
possibility of establishing one or more alternate delivery
points for gas deliveries and receipts under this Agreement.
Such proposed alternate delivery points must be locations at
which SDG&E has the ability to receive gas and Seller has the
ability to deliver gas using Seller's Transportation (in each
case taking into account the quantities proposed to be
delivered and received at those alternate points), provided
that neither party shall have any obligation to agree to an
alternate delivery point or points at any time, such decision
to be in its sole discretion.
23. Section 11.1 is amended to delete the reference to "GJ's" and
to replace that reference with "MMBtus".
24. Section 11.2 is amended to delete the reference to
"transporters" in the second line and to replace that
reference with "receiving transporter".
25. Subsection 12.1(c) is deleted and replaced with the
following:
"Seller has obtained all approvals which may be required by
Seller's Regulatory Authorities, provided that Seller has
only obtained a 2 year import authorization from the United
States Department of Energy (expiring on April 30, 1999).
Seller shall use all commercially reasonable
- 25 -
<PAGE>
efforts to promptly obtain a long-term import authorization
for the MDQ expiring August 1, 2003."
26. Section 12.2 is amended to delete the words "other than
SDG&E's Regulatory Authorities as contemplated in Section
2.2".
27. Section 14.2 is amended to add the following as a final
paragraph to the Section:
In the event SDG&E elects, at any time, to reduce the MDQ
pursuant to subsection 14.2(a), Seller shall reassign to
SDG&E a proportionate share of Seller's Transportation, such
proportionate share to be equal to the proportionate
reduction in the MDQ elected by SDG&E. If SDG&E makes that
election, Seller shall reassign such proportionate share of
the Seller's Transportation to SDG&E and take all other steps
as are reasonably required in order for SDG&E to be
recognized by the Assignment Transporters as the sole shipper
in respect of the assigned portion of the Seller's
Transportation, effective on the date that the MDQ reduction
takes effect.
28. Section 14.3 is amended to delete subsection 14.3(b).
29. Section 15.1 is amended as follows:
(a) to replace the colon following the phrase "mechanical
breakdowns" in the 12th line with a comma.
(b) to delete the phrase "NOVA's facilities" from the 14th
line and to replace that phrase with "any of NOVA's,
ANG's, PGT's and PG&E's facilities".
(c) to delete the reference to "Transporters'" from the 16th
line and to replace that word with "or SoCal's".
30. Article XIX is amended to add the following in Section 19.2:
19.2 COMMUNICATIONS AND DEALINGS
Notwithstanding that HOOL and HGMI are parties to this
Agreement or that HGMI is the sole shipper of record for the
Assigned PGT Transportation and the Assigned PG&E
Transportation, SDG&E shall be entitled at all times to deal
solely with HOOL in respect of any and all matters which in
any way pertain to this Agreement including, without
limitation, the Assigned PGT Transportation and the Assigned
PG&E
- 26 -
<PAGE>
Transportation as if HOOL was the only party to this
Agreement as "Seller" and was the shipper of record for the
Assigned PGT Transportation and the Assigned PG&E
Transportation. HGMI waives any and all right to deal with
SDG&E in respect of any matter and agrees that any and all
notices, conversations, negotiations and other communications
of any kind whatsoever between SDG&E and HOOL shall be
binding upon and enforceable against HGMI as if HGMI had been
involved together with HOOL in those communications. Without
limiting the generality of the foregoing:
(a) any amendment to this Agreement executed by HOOL or any
waiver provided by HOOL shall bind HGMI whether or not
executed by, known of or consented to by HGMI;
(b) any notice of any kind whatsoever served on HOOL under
this Agreement (including, without limitation, a default
notice) shall be binding upon HGMI; and
(c) SDG&E shall be entitled to disregard any notices or
other communications received from HGMI.
If, at any time, SDG&E deals with HGMI, SDG&E shall not be
under any obligation to continue dealing with HGMI, whether
in respect of the same or any other matter. Any course of
conduct by SDG&E in this regard shall not in any way modify
SDG&E's right to deal solely with HOOL, it being understood
that HOOL requested HGMI's inclusion as a party to this
Agreement for purposes relevant only to HOOL and HGMI, and
SDG&E is prepared to accept HGMI as a party to accommodate
that request so long as SDG&E is only obligated to deal with
HOOL in respect of any matter pertaining to this Agreement.
31. Section 20.1 is amended to delete the phrase "SDG&E's
Transporters" in the 9th line and to replace that phrase with
"SoCal".
32. Section 20.3 is amended to add "(including charges under
Seller's Transportation)" after the reference to "fixed
transportation charges" in the second line.
33. Article XXII is amended to include the following as an
additional Section:
22.10. Joint and Several Liability. HOOL and HGMI are
jointly and severally liable for the performance of
Seller's obligations under this Agreement (including,
without limitation, all liabilities and
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<PAGE>
responsibilities relating to each of the Assigned
Transportation agreements notwithstanding that both
of them are not parties to each of those agreements).
SDG&E shall be entitled, at its option, to pursue any
of its rights and remedies under this Agreement
against either or both of HOOL and HGMI and neither
HOOL nor HGMI shall be entitled to defend against any
SDG&E claim on the basis that the other is
responsible for the breach, failure or nonperformance
upon which SDG&E's claim is based.
34. This Third Amending Agreement is effective as of November 1,
1997.
35. By its execution of this Agreement, HGMI agrees to become a
party to the Agreement as "Seller" jointly with HOOL and each
of SDG&E and HOOL accept HGMI as a party to the Agreement in
that capacity effective November 1, 1997.
36. As between the parties hereto, Seller shall be responsible
for complying with all filing and other reporting
requirements of Seller's Regulatory Authorities in respect of
this Third Amending Agreement.
37. This Third Amending Agreement was prepared with each of the
parties having access to its own counsel and the parties
waive any claim they may have now or in the future based on
this Third Amending Agreement not having been prepared
jointly by the parties or by any party to the exclusion of
one or more of the other parties.
38. This Third Amending Agreement may be executed in any number
of counterparts, each of which when so executed shall be
deemed to be an originally executed copy, and it shall not be
necessary to make proof of the Third Amending Agreement to
produce all of such counterparts.
39. Each party represents and warrants that the officer or
officers signing this Third Amending Agreement on its behalf
is authorized to do so.
40. SDG&E and HOOL each restate as being true and correct as of
the date of this Third Amending Agreement each of the
representations and warranties made by them and set forth in
Article XII of the Agreement.
41. This Third Amending Agreement shall be governed by and
construed in accordance with the laws of the Province of
Alberta excluding however any conflict of laws rule that
would apply the laws of another jurisdiction. The parties
hereby attorn to the jurisdiction of the Courts of Alberta at
Calgary which shall have exclusive jurisdiction in respect of
all disputes and other
- 28 -
<PAGE>
matters relating to this Third Amending Agreement with the
exception of those disputes and other matters referable to
arbitration under this Third Amending Agreement.
In Witness Whereof this Third Amending Agreement is executed in
multiple originals effective as of the date first above written.
SAN DIEGO GAS & ELECTRIC
COMPANY
By:________________________
Name:______________________
Title:_____________________
HUSKY OIL OPERATIONS LTD.
By:________________________
Name:______________________
Title:_____________________
HUSKY GAS MARKETING INC.
By:________________________
Name:______________________
Title:_____________________
- 29 -
SECOND AMENDING AGREEMENT
THIS AMENDING AGREEMENT made effective as of January 1, 1997.
BETWEEN:
SAN DIEGO GAS & ELECTRIC COMPANY, an Enova Company, a
California corporation with its principal place of
business in San Diego, California ("SDG&E")
- and -
HUSKY OIL OPERATIONS LTD., an Alberta corporation, with
its principal place of business in Calgary, Alberta
("Seller")
WHEREAS SDG&E and Seller are parties to a Natural Gas Purchase
Agreement made as of March 12, 1991, and amended as of November 1,
1994 (the "Gas Purchase Agreement"); and
WHEREAS the parties wish to amend the Gas Purchase Agreement in
the manner hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the parties agree as follows:
1. Section 22.6 of the Gas Purchase Agreement is deleted and
replaced with the following:
"Section 22.6 Governing Law
This Agreement shall be governed by and
construed according to the laws of the Province of
Alberta excluding however any conflict of laws rule
that would apply the law of another jurisdiction. The
parties hereby attorn to the jurisdiction of the
Courts of Alberta at Calgary which shall have
exclusive jurisdiction in respect of all disputes and
other matters relating to this Agreement with the
exception of those disputes and other matters
referable to arbitration under this Agreement."
- 1 -
<PAGE>
2. Sections 11.0(a), (c) and (f) of Appendix A to the Gas
Purchase Agreement are deleted and replaced with:
(a) Subject to any other provisions of this Appendix:
(i) if in the reasonable opinion of either party any
published index or price, or any rate or tariff or
other provision of the Gas Purchase Agreement,
including this Appendix, which is required to
determine the Base Price:
(A) ceases to be available or ascertainable; or
(B) assumes a measure or value that is wholly
inconsistent with the measure or value
represented by the component in December, 1994;
or
(ii) if in the reasonable opinion of either party the
Base Price no longer represents a price which is
competitive with SDG&E's alternative southwest gas
supplies
(any of the circumstances described in (i) or (ii) shall,
subject to section 11.0 (b), be referred to as a "Pricing
Event"),
then that party shall have the right by notice in writing
("Pricing Event Notice"), which can be given to the other
party ("Recipient") at any time following the occurrence
of the Pricing Event, to require the other party to meet,
within thirty (30) days of the Recipient's receipt of the
Pricing Event Notice, to attempt in good faith to
negotiate a replacement index, price, rate, tariff or
mechanism in order that the Base Price will be:
(iii) competitive with the cost of SDG&E's alternative
southwest gas supplies; and
(iv) insofar as possible, consistent with the pricing
structure as set out in this Appendix;
((iii) and (iv) herein shall be referred to as the
"Standard").
If the Recipient disputes the occurrence of a Pricing
Event, the parties shall nevertheless meet within thirty
(30) days of the Recipient's receipt of the Pricing Event
Notice. For the then remaining portion of the ninety
(90) day period following the Recipient's receipt of the
Pricing Event Notice ("Determination Period"), the
parties shall meet regularly to review and discuss the
relevant issues and events in a good faith effort to
agree upon whether or not a Pricing Event has occurred.
During the Determination Period, neither party shall
commence any legal
- 2 -
<PAGE>
proceedings of any kind whatsoever which pertain in any
way to the Pricing Event Notice or the alleged occurrence
of a Pricing Event. If during the Determination Period
the parties determine that a Pricing Event has not
occurred, the Pricing Event Notice shall be deemed not to
have been issued. If during the Determination Period the
parties determine that a Pricing Event has occurred
("Consensus"), then the parties shall meet, within ten
(10) days of the Consensus, in a good faith attempt to
negotiate a replacement index, price, rate, tariff or
mechanism consistent with this section 11.
(c) If the parties are unable to negotiate a replacement
index, price, rate, tariff or mechanism within ninety
(90) days following the Recipient's receipt of the
Pricing Event Notice, the parties shall proceed to
arbitration pursuant to the following provisions of this
section. However, if a Consensus has occurred, the
parties shall not proceed to arbitration until thirty
(30) days following the date of the Consensus (during
which period the parties shall meet regularly in a good
faith attempt to negotiate a replacement index, price,
rate, tariff or mechanism as stipulated in section
11(a)).
(f) Upon a replacement index, price, rate, tariff, mechanism
or Base Price being determined by negotiation or
arbitration, the Base Price, the Reference Price and
Contract Price shall be adjusted to reflect the
difference, if any, for:
(i) each Day, during the Month in which the Recipient
received the Pricing Event Notice ("Receipt
Month"), that the Pricing Event occurred or was in
effect,
(ii) each Day, during the 3 Month period immediately
preceding the Receipt Month, that the Pricing Event
occurred or was in effect, and
(iii) each Month following the Receipt Month, and any
payment adjustment will be recovered in the first
payment period immediately following that
determination and shall include interest accrued as
if the adjustment was a Disputed Amount (determined
to be owing) under Article 7 of the Gas Purchase
Agreement.
3. None of the amendments made to the Gas Purchase Agreement in
this Amending Agreement are intended to either support or detract
from any argument or position respecting the authority or proper
jurisdiction of either an arbitrator or a court to determine the
issue (if the parties are unable to agree) of whether or not a
Pricing Event has occurred.
4. This Amending Agreement was prepared with each of the parties
having access to its own counsel and the parties waive any claim
they may have now or in the future
- 3 -
<PAGE>
based on this Amending Agreement not having been prepared jointly
by the parties or by either to the exclusion of the other.
5. This Amending Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be
an originally executed copy, and it shall not be necessary in
making proof of the Amending Agreement to produce all of such
counterparts.
6. Each party represents and warrants that the officer or
officers signing this Amending Agreement on its behalf is
authorized to do so.
7. This Amending Agreement shall be governed by and construed
according to the laws of the Province of Alberta excluding however
any conflict of laws rule that would apply to the law of another
jurisdiction. The parties hereby attorn to the jurisdiction of
the Courts of Alberta at Calgary which shall have exclusive
jurisdiction in respect of all disputes and other matters relating
to this Amending Agreement with the exception of those disputes
and other matters referable to arbitration under the Gas Purchase
Agreement.
IN WITNESS WHEREOF this Amending Agreement is executed in multiple
originals effective as of the date and year first above written.
SAN DIEGO GAS &
ELECTRIC COMPANY HUSKY OIL OPERATIONS LTD.
By: ______________________ By: ______________________
Name:______________________ Name:______________________
Title: ____________________ Title:_____________________
By: ______________________
Name:______________________
Title:______________________
- 4 -
EXHIBIT "C" ATTACHED TO AND FORMING PART OF A SETTLEMENT AGREEMENT
MADE EFFECTIVE AS OF NOVEMBER 1, 1994 BETWEEN SAN DIEGO GAS &
ELECTRIC COMPANY AND HUSKY OIL OPERATIONS LTD.
AMENDING AGREEMENT
THIS AMENDING AGREEMENT made effective as of November 1, 1994.
BETWEEN:
SAN DIEGO GAS & ELECTRIC COMPANY, a California
corporation with its principal place of business in San
Diego, California ("SDG&E")
OF THE FIRST PART
- and -
HUSKY OIL OPERATIONS LTD., an Alberta corporation, with
its principal place of business in Calgary, Alberta ("Seller")
OF THE SECOND PART
WHEREAS SDG&E and Seller are parties to a Natural Gas
Purchase Agreement made as of March 12, 1991 (the "Gas Purchase
Agreement"); and
WHEREAS the parties wish to amend the Gas Purchase
Agreement in the manner hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the
mutual covenants herein contained, the parties agree as follows:
1. The terms and expressions which are defined in the Gas
Purchase Agreement shall have the same meanings where used in this
Amending Agreement except where the context otherwise requires.
2. Subsection 1.1 is amended as follows:
(a) Subsection 1.1(z) is deleted and replaced with the
following:
"(z) "NOVA" means NOVA Gas Transmission Ltd."
(b) Subsection 1.1(ii) is deleted and replaced with the
following:
"(ii) "SDG&E's Transporters" means those transporters
operating pipeline facilities which are used to transport
gas from the Delivery Point to the interconnection of the
facilities of PG&E with SoCal's
- 1 -
<PAGE>
System; being the 1993 expansion facilities of ANG, PGT
and PG&E;"
(c) The following subsection 1.1(mm.1) is added after
subsection 1.1(mm):
"(mm.1) "SoCal's System" means the facilities owned and
operated by SoCal for the transmission of natural gas and
for the purposes of Article VI shall be deemed to
interconnect with the facilities of PG&E at Kern River
Station, California and deemed to interconnect with the
facilities of El Paso and Transwestern at the
California border near Blythe, California and Needles,
California;"
(d) Subsection 1.1(qq) is deleted.
3. Section 6.1 is amended as follows:
(a) The definition of Contract Price is deleted and replaced
with the following:
"Contract Price = Reference Price - SDG&E's Unit
Transportation Cost"
(b) The definition of Reference Price is amended by deleting
"as set forth in Schedule "A" and indexed in the manner
set forth in Schedule "A"" and inserting "as calculated
pursuant to Appendix "A"."
(c) Schedule "A" to the Gas Purchase Agreement is deleted and
replaced with Appendix "A" attached hereto. Appendix A"
is incorporated into and is a part of the Gas Purchase
Agreement by this reference as though contained in the
body of such Agreement.
(d) The definition of SoCal Unit Transportation Cost is
deleted.
(e) The definition of SDG&E's Unit Transportation Cost is
deleted and replaced with the following:
"SDG&E's Unit Transportation Cost = in respect of any
Month, SDG&E's unit cost (in $U.S./MMBtu), being the sum
of all SDG&E's Transporters' fixed and variable charges
or surcharges, net of any credits, that apply to the
firm transportation of gas hereunder in such Month from
the Delivery Point to SoCal's System, including any non-
tariff costs such as shipper provided fuel and line
loss. This unit cost will be the 100% load factor rate
calculated based on an assumed full utilization of
transportation capacity held on SDG&E's Transporters
equal to the MDQ
- 2 -
<PAGE>
regardless of whether Seller delivered and SDG&E
received less than the MDQ."
(f) The last paragraph of Section 6.1 is amended by deleting
"the SoCal Unit Transportation Cost or".
4. Section 6.3 is deleted and replaced with the following:
"6.3 Rolled-in Rates.
If FERC authorizes rolled-in rates on the PGT
pipeline, the resulting transportation charges,
including any surcharges associated with the
restructuring of PG&E's Alberta and Southern Gas Co.
Ltd. obligation:
(a) shall be the responsibility of Seller if and to the
extent it assumes SDG&E's present capacity rights
on the PGT pipeline; or
(b) shall continue to be otherwise included within the
definition of "SDG&E's Unit Transportation Cost"."
5. Section 7.1 is amended by:
(a) deleting "SoCal Unit Transportation Cost," and
(b) by replacing "WACOG" with "Base Price".
6. SDG&E and Seller each restate as being true and correct
as of the date of this Amending Agreement each of the
representations and warranties made by them and set
forth in Article XII of the Gas Purchase Agreement.
7. Section 15.1 is amended by:
(a) in the fifth line by replacing "been unable" with
"failed or will fail";
(b) in the fourteenth line adding after "SDG&E's System" the
words ", SoCal's System"; and
(c) in the last line by replacing "is unable" with "has
failed or will fail".
8. Section 15.2(c)(iv) is amended by replacing in the
seventh line "is unable" with
"has failed or will fail".
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<PAGE>
9. Section 17.1 is amended by replacing "assigns" with
"permitted assigns".
10. Subsections 17.2(b), (c) and (d) are deleted and replaced
by the following new subsections 17.2(b), (c), and (d), and an
additional subsection 17.2(e) is added::
(b) SDG&E shall not require Seller's consent under
subsection (a) to assign all of its rights, obligations
and interests in this Agreement to an affiliate of SDG&E
that provides gas service to markets that includes core
customers in San Diego County (the "Affiliate"). In
such circumstances the Affiliate shall be bound by all
of the terms and conditions of this Agreement and,
notwithstanding such assignment, SDG&E shall continue to
remain liable for all of the obligations of the
Affiliate, whether such obligations arose prior to the
effective date of the assignment, or arise from or after
the effective date of the assignment unless and until
the Affiliate can demonstrate to Seller's reasonable
satisfaction the Affiliate's ability to meet all
existing and continuing obligations under this
Agreement.
For the purposes of this subsection 17.2(b), the term
"Affiliate" shall mean, with respect to any person, any
other person (other than an individual) that, directly
or indirectly, through one or more intermediaries,
controls, or is controlled by, or is under common
control with, such person. For the purposes of the
foregoing definition, "control" means the direct or
indirect ownership of more than 50% of the outstanding
capital stock or other equity interests having ordinary
voting power.
(c) In the event that SDG&E reasonably believes that
Seller's ability to meet its material obligations under
this Agreement is materially impaired, SDG&E may, by
written notice to Seller, require Seller to provide
further assurances within ninety (90) days, which in
SDG&E's reasonable judgment are adequate to provide
comfort that Seller can continue to perform its
material obligations hereunder. If Seller is unable to
provide such assurances, SDG&E may upon thirty (30)
days written notice terminate this Agreement.
(d) In the event that Seller reasonably believes that
SDG&E's ability to meet its material obligations under
this Agreement is materially impaired, Seller may, by
written notice to SDG&E, require SDG&E to provide
further assurances within ninety (90) days, which in
Seller's reasonable judgment are adequate to provide
comfort that SDG&E can continue to perform its material
obligations hereunder. If SDG&E is unable to provide
such assurances, Seller may upon thirty (30) days
written notice terminate this Agreement. This
subsection (d) shall not apply to the assignment
described in subsection 17.2(b).
(e) For purposes of subsections 17(2)(c) and 17(2)(d),
Seller shall mean both Seller and its permitted assigns
and SDG&E shall mean both SDG&E and its permitted
assigns."
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<PAGE>
11. The Seller's address for notices in Section 19.1 is
deleted and replaced with the following:
"To Seller: Husky Oil Operations Ltd.
707 - 8th Avenue S.W.
P.O. Box 6525, Station "D"
Calgary, Alberta T2P 2G7
Attention: Manager, Natural Gas Supply
and Marketing
Telecopy: (403) 298-6093"
12. Section 22.2 is amended by replacing "assigns" with
"permitted assigns".
13. The following sections are added to Article XXII:
"22.7 Time of Essence. Time shall be of the essence of
this Agreement.
22.8 Severability. If one or more provisions
contained in this Agreement are invalid, illegal or
unenforceable in any respect under any applicable law
the validity, legality and enforceability of the
remaining provisions of this Agreement shall not be
affected or impaired thereby.
22.9 Preparation. This Agreement was prepared with
each of the parties having access to its own counsel
and the parties waive any claim they may have now or in
the future based on this Agreement not having been
prepared jointly by the parties or by either to the
exclusion of the other.
14. This Amending Agreement was prepared with each of the
parties having access to its own counsel and the parties waive any
claim they may have now or in the future based on this Amending
Agreement not having been prepared jointly by the parties or by
either to the exclusion of the other.
15. This Amending Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be
an originally executed copy, and it shall not be necessary in
making proof of the Amending Agreement to produce all of such
counterparts.
16. Each party represents and warrants that the officer or
officers signing this Amending Agreement on its behalf is
authorized to do so.
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<PAGE>
17. This Amending Agreement shall be governed by and
construed according to the laws of the Province of Alberta.
IN WITNESS WHEREOF this Agreement is executed in
multiple originals effective as of the date and year first above
written.
SAN DIEGO GAS & ELECTRIC COMPANY HUSKY OIL OPERATIONS LTD.
By: ___________________________ By: ____________________________
Name: _________________________ Name: ___________________________
Title: _________________________ Title:___________________________
By: ____________________________
Name: ___________________________
Title:___________________________
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<PAGE>
APPENDIX "A" ATTACHED TO AND FORMING PART OF A GAS PURCHASE
AGREEMENT BETWEEN SAN DIEGO GAS & ELECTRIC COMPANY AND HUSKY OIL
OPERATIONS LTD. DATED MARCH 12, 1991 AS AMENDED BY AMENDING
AGREEMENT MADE EFFECTIVE AS OF NOVEMBER 1, 1994.
1.0 "Reference Price" for the Month = Base Price for the Month
x 0.97
2.0 "Base Price" for the Month = Southwest Basin Index for the
Month plus Southwest Transportation Cost for the Month.
3.0 The Reference Price and Base Price shall be rounded to
four decimal places.
4.0 The terms and expressions which are defined in the Gas
Purchase Agreement shall have the same meanings when used
in this Appendix unless the context otherwise requires.
CALCULATION OF SOUTHWEST BASIN INDEX
5.0 "Southwest Basin Index" for the Month (expressed in
$/MMBTU) = (0.70 x San Juan Index Price) plus (0.30 x
Permian Index Price) as described in sections 6.0 and
6.1.
6.0 "San Juan Index Price" for the Month:
(a) shall equal the index price of gas supply for
deliveries from the San Juan basin into the El Paso
system as published in the first issue of the
current month by Inside FERC's Gas Market Report, in
the table Prices of Spot Gas Delivered to Pipelines,
El Paso Natural Gas Co. San Juan Basin (expressed in
$/MMBTU);or
(b) if the index described in section 6.0(a) is not
published in the first issue of the current month,
shall equal the first posted Contract Index as
published by Natural Gas Intelligence, for
deliveries from the San Juan basin into the El Paso
system for the current month in the table
Spot Gas delivered to Pipelines 30 Day Supply
Transactions, Rocky Mountains, El Paso San
Juan (expressed in $/MMBTU).
6.1 "Permian Index Price" for the Month:
(a) shall equal the index price of gas supply for
deliveries from the Permian basin into the
Transwestern system as published in the first issue
of the current month by Inside FERC's Gas Market
Report, in the table "Prices of Spot Gas Delivered
to Pipelines", Transwestern Pipeline Co. Permian
Basin (expressed in $/MMBTU); or
(b) If the index described in section 6.1(a) is not
published in the first issue of the current month,
shall equal the first posted Contract Index as
published by Natural Gas Intelligence, for
deliveries from the Permian basin into the
Transwestern system for the current month in the
table Spot Gas Prices Delivered to Pipelines, 30 Day
Supply Transactions, West Texas/Permian Basin
Transwestern (expressed in $/MMBTU).
CALCULATION OF SOUTHWEST TRANSPORTATION COST
7.0 "Southwest Transportation Cost" for the Month (expressed
in $/MMBTU) = Transportation Fuel Cost plus
Transportation Variable Cost plus Transportation Fixed
Cost.
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TRANSPORTATION FUEL COST
8.0 "Transportation Fuel Cost" for the Month (expressed in
$/MMBTU) = (0.70 x El Paso Fuel Cost) plus (0.30 x
Transwestern Fuel Cost) as described in sections 8.1 and
8.2.
8.1 "El Paso Fuel Cost" for the Month, (expressed in
$/MMBTU) = [San Juan Index Price divided by (1 - EP % of
Fuel Use)] minus San Juan Index Price
where "EP % of Fuel Use" means the applicable figure
published in the Firm Transportation Tariff, T-3, for
the El Paso system, or any equivalent replacement or
successor rate or rate schedule. Currently the EP % of
Fuel Use is documented on Original Sheet No. 116 of Rate
Schedule T-3 issued on May 23, 1994, paragraph 7a.
8.2 "Transwestern Fuel Cost" for the Month (expressed in
$/MMBTU) = [Permian Index Price divided by (1 - TW % of
Fuel Use)] minus Permian Index Price
where "TW % of Fuel Use" means the applicable figure
published in the Firm Transportation Tariff, FTS-1, for
the Transwestern system, or any equivalent replacement
or successor rate or rate schedule. Currently the TW %
of Fuel Use is documented on 109th Revised Sheet No. 5
issued on August 31, 1994 in the column titled Maximum
Fuel % for the East of Thoreau Receipt Point Area.
TRANSPORTATION VARIABLE COST
9.0 "Transportation Variable Cost" for the Month (expressed
in $/MMBTU) = (0.70 x El Paso Variable Cost) plus (0.30
x Transwestern Variable Cost) as described in sections
9.1 and 9.2, but excluding Transportation Fuel Cost.
9.1 "El Paso Variable Cost" means all the transportation
variable cost components of the Firm Transportation
Tariff, T-3, including any present or future commodity
or usage surcharges or any equivalent replacement or
successor rate or rate schedule, from the San Juan basin
to the interconnection with SoCal's System (expressed in
$/MMBTU). Currently El Paso variable costs are
documented on second revised sheet No. 23 issued on
November 30, 1994 in the column titled Maximum Rate. The
components are Mainline transportation from San Juan to
California on line 1F, GRI surcharge on line 6, ACA
surcharge on line 7 and Take-or Pay Surcharge on line 8.
9.2 "Transwestern Variable Cost" means all the ransportation
variable cost components of the Firm Transportation
Tariff, FTS-1, including any present or future commodity
surcharges for the Transwestern system, or any
equivalent replacement or successor rate or rate
schedule, from the Permian basin to the interconnection
with SoCal's System (expressed in $/MMBTU). Currently
Transwestern variable costs are documented on 109th
Revised Sheet No. 5 under the heading FTS-1 Commodity
for the East of Thoreau Receipt point area.
TRANSPORTATION FIXED COST
10.0 "Transportation Fixed Cost" for the Month (expressed in
$/MMBTU) shall equal the greater of the Floor Cost as
described in section 10.1 or Average Transportation
Fixed Cost as described in section 10.2.
10.1 (a) The "Floor Cost" for the Month (expressed in
$/MMBTU) shall equal the lesser of:
(i) $0.15; or
(ii) the Full As-Billed SW Firm Service Cost as
described in section 10.1(b).
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(b) The "Full As-Billed SW Firm Service Cost" for the
Month (expressed in $/MMBTU) shall equal the sum
of, all for the Month:
(0.70 x El Paso Reservation Charge) plus (0.30 x
Transwestern Reservation Charge).
(c) "El Paso Reservation Charge" shall be as determined
in section 10.3.
(d) "Transwestern Reservation Charge" for the Month
(expressed in $/MMBTU) means the reservation charge
cost component of the Firm Transportation Tariff,
FTS-1, including any present or future reservation
surcharges for the Transwestern system, or any
equivalent replacement or successor rate or rate
schedule, from the Permian basin to the
interconnection with SoCal's System. This charge is
currently documented on 109th Revised Sheet No. 5
in the column headed MAXIMUM FTS-1 RESERVATION
CHARGE for the East of Thoreau Receipt Point Area
at the line labeled TOTAL RATE.
10.2 "Average Transportation Fixed Cost" for the Month
(expressed in $/MMBTU) shall equal the quotient obtained
by dividing the sum of the following products:
(a) El Paso Reservation Charge multiplied by El Paso
Volume (both for the Month) as described in
sections 10.3 and 10.4;
(b) New SW Contracted Fixed Rate multiplied by New SW
Contracted Volume (both for the Month) as described
in sections 10.5 and 10.6; and
(c) Other SW Deemed Fixed Rate multiplied by Other SW
Volume (both for the Month) as described in
sections 10.7 and 10.8;
by Total SW Volume (for the Month) as described in
section 10.9.
10.3 "El Paso Reservation Charge" for the Month (expressed in
$/MMBTU) shall for the term of the Gas Purchase
Agreement equal the reservation charge published in the
Firm Transportation Tariff, T-3, including any present
or future reservation surcharges for the El Paso system
or any equivalent replacement or successor rate or rate
schedule, from the San Juan basin to the interconnection
with SoCal's System. The reservation charge currently
includes the sum of Transportation Reservation Charge
documented on First Revised Sheet No. 22, line 1G -
California in the column titled Maximum Rate, plus the
GRI Surcharge - High Load Factor documented on line 3A
of the same page, plus the Washington Ranch Surcharge,
as documented on Second Revised Sheet No. 29, in the
line labeled California Reservation Surcharge, all
divided by the number of days in the current month.
10.4 "El Paso Volume" for the Month (expressed in MMBTU's)
shall equal the product of 10,300 MMBTU per day
multiplied by the number of days in that Month.
10.5 (a) The "New SW Contracted Fixed Rate" for the Month
(expressed in $/MMBTU) shall equal the quotient
obtained by dividing the sum of:
(i) The reservation charge, including any present
or future reservation surcharges, (expressed
in $/MMBTU) as stated in each acquired
capacity agreement or transportation contract
of one year or longer for firm transportation
service held by SDG&E to deliver gas from the
San Juan or Permian basin on the El Paso or
Transwestern systems to SoCal's System
multiplied by the volume of gas actually
transported under each such contract,
by New SW Contracted Volume as described in
section 10.6.
The charges and volumes referenced in section
10.2(a) and all charges and volumes referenced in
section 10. 5(b) shall be excluded from this
calculation.
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<PAGE>
(b) "Excluded Contracts" means:
(i) Any firm service transportation capacity
acquired by or for the account of SDG&E as the
result of the Southern California Edison ITCS
Proposal (OIR R.88-08-018, joint petition
No.92-07-025) or similar proposals as approved
or directed by the CPUC relating to the
assignment or release to SDG&E of El Paso or
Transwestern firm transportation service held
by SoCal; and
(ii) SDG&E's 90 Mmcf/d firm service transportation
contract with SoCal which is comprised of
transportation contracts Nos. EP98L8, EP98L2
and TW22513;
(c) If SDG&E secures any acquired capacity agreement or
transportation contract as described in section
10.5(a) that has (1) variable costs higher than (2)
the applicable tariff variable costs in sections
9.1 or 9.2, then the positive difference of (1)
minus (2) will be added to and deemed part of the
reservation charge of that contract in section
10.5(a). The resulting reservation charge cannot
exceed the Full As-Billed SW Firm Service Cost as
defined in section 10.1(b.)
10.6 "New SW Contracted Volume" for the Month (expressed in
MMBTU's) shall equal the aggregate of the volumes of gas
actually transported by SDG&E in the Month under the
firm transportation service contracts described in
section 10.5(a) and excluding only the El Paso Volume
referred to in section 10.4 and Excluded Contracts'
volumes as described in section 10.5(b).
10.7 "Other SW Deemed Fixed Rate" for the Month (expressed in
$/MMBTU) shall equal the California Index minus
(Transportation Fuel Cost plus Transportation Variable
Cost plus Southwest Basin Index).
The "California Index" for the Month (expressed in
$/MMBTU) shall equal the current month Index under the
line titled Southern CA Border on the table titled U.S.
SPOT MARKET SUMMARY in the publication titled BTU's
Daily Gas Wire in the first issue of the current
month or if that index is not published for the current
month then the replacement index will be: The
California Border Contract Index Price on the table
titled Spot Gas Prices Delivered to Pipelines 30 Day
Supply Transactions from the publication Natural Gas
Intelligence.
10.8 "Other SW Volume" for the Month (expressed in MMBTU's)
shall equal the positive difference, if any, obtained by
subtracting from Total SW Volume, as described in
section 10.9, the sum of El Paso Volume plus New SW
Contracted Volume.
10.9 "Total SW Volume" means the total quantity of gas
(expressed in MMBTU's) received by SDG&E in the Month:
(a) at the interconnection of the El Paso system and
SoCal's System;
(b) at the interconnection of the Transwestern system
and SoCal's System.
10.10 If requested by Seller, SDG&E shall provide Seller with
current copies of all firm acquired capacity agreements
and transportation contracts, as amended from time to
time, as described in section 10.5 and as applicable to
the pricing terms of this Agreement.
ARBITRATION
11.0 (a) Subject to any other provisions of this Appendix:
(i) if any published index or price, or any rate or
tariff or other provision of the Gas Purchase
Agreement, including this Appendix, which is
required to determine the Base Price:
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<PAGE>
(A) ceases to be available or ascertainable;
or
(B) assumes a measure or value that is wholly
inconsistent with the measure or value
represented by the component in December,
1994; or
(ii) if in the reasonable opinion of either party
the Base Price no longer represents a price
which is competitive with SDG&E's alternative
southwest gas supplies
(any of the circumstances described in (i) or (ii)
shall, subject to section 11.0(b), be referred to as
a "Pricing Event"),
then either party may by notice in writing, within ninety
(90) days of the Pricing Event, require the other party to
meet and attempt in good faith to negotiate a replacement
index, price, rate, tariff or mechanism in order that the
Base Price will be:
(iii) competitive with the cost of SDG&E's
alternative southwest gas supplies; and
(iv) insofar as possible, consistent with the
pricing structure as set out in this Appendix;
((iii) and (iv) herein shall be referred to as the
"Standard").
(b) Notwithstanding the provisions of subsection 11.0(a), in
no event shall:
(i) the concept of the Floor Cost as described in
section 10.1(a) (which may be zero or any other
amount up to and including $0.15);
(ii) the amount set forth in section 10.1(a)(i); or
(iii) the 70%/30% allocations contained in the
calculation of the Base Price, so long as gas
continues to be supplied to California from
both the San Juan and Permian basins on the
El Paso and Transwestern systems respectively;
be cause for a Pricing Event or subject to
redetermination as part of any arbitration.
(c) If the parties are unable to negotiate a replacement
index, price, rate, tariff or mechanism within three (3)
months following the provision of the notice referred to
in section 11.0(a), the parties shall proceed to
arbitration pursuant to the following provisions of this
section.
(d) The matter shall be referred to and finally resolved by
arbitration under the rules of the British Columbia
International Commercial Arbitration Centre. The
appointing authority shall be the British Columbia
International Commercial Arbitration Centre. The case
shall be administered by the British Columbia
International Commercial Arbitration Centre in
accordance with its "procedures for cases under the
BCICAC Rules". The place for arbitration shall be
Vancouver, British Columbia, Canada.
(e) Any such arbitration shall be limited to determining a
replacement index, price, rate, tariff or mechanism
which will result in a Base Price formula which will
meet the Standard. If the arbitrator determines that no
appropriate replacement index, price, rate, tariff or
mechanism exists then the arbitrator shall determine a
Base Price to apply to the Gas Purchase Agreement which
will meet the Standard.
(f) Upon a replacement index, price, rate, tariff, mechanism
or Base Price being determined by negotiation or
arbitration, the Base Price and Contract Price shall be
adjusted to reflect the difference, if any, for the
applicable month or months following the month of the
Pricing Event and any payment adjustment will be
recovered in the first payment period immediately
following
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<PAGE>
that determination and shall include interest accrued as
if the adjustment was a Disputed Amount under Article 7
of the Gas Purchase Agreement.
6 of 6
AMENDMENT TO THE FIRM TRANSPORTATION SERVICE AGREEMENT BETWEEN
SAN DIEGO GAS & ELECTRIC COMPANY AND PACIFIC GAS AND ELECTRIC COMPANY
Pacific Gas and Electric Company (PG&E) and San Diego Gas &
Electric Company (SDG&E) hereby agree to amend the Firm
Transportation Service Agreement (FTSA) between them, dated
December 31, 1991, as follows:
1. For the "Negotiated Period" as defined in Section 11,
SDG&E's rate for gas transportation service under the FTSA
shall be a "Negotiated Rate".
1.1. NEGOTIATED RATE:
The "Negotiated Rate" shall be $ 0.28 per decatherm.
SDG&E shall pay PG&E each month an amount calculated
as follows. SDG&E shall pay a reservation charge
equal to the Negotiated Rate times the number of
calendar days in the month times the Maximum Daily
Quantity. There shall be no usage charge.
1.2. The payment provisions of PG&E's tariffs shall apply.
1.3. During the Negotiated Period, SDG&E shall have a one-
time option to elect to pay the standard tariff rates
applicable to Expansion deliveries to the Southern
Terminus for delivery off system. If SDG&E elects to
pay standard tariff rates, SDG&E shall not be able to
revert to the Negotiated Rate.
2. Following the Negotiated Period, SDG&E shall pay rates and
charges as specified in the CPUC-approved tariff applicable
to firm Expansion service, with the exception that such
rates and charges shall be no higher than a rate calculated
using the methodology in effect at the time the rates and
charges are calculated, with a Line 401 capital cost of $736
million, and a utility capital structure. SDG&E shall pay
rates on an SFV basis.
3. Upon a CPUC decision on the PEBA balance, the owing party
shall pay all amounts due in a manner consistent with the
CPUC decision. Payment of the balance shall be independent
of the monthly payments calculated in Section 1.1.
4. SDG&E agrees that PG&E may transfer all or part of its
ownership interest in Line 401 without SDG&E's consent and,
if PG&E's successor in interest assumes all of PG&E's
obligations under the FTSA, PG&E shall have no further or
continuing obligations to SDG&E, its successor, or its
assignees.
5. SDG&E agrees that, if PG&E or its successor in interest at
any time seeks, in accordance with California Public
Utilities Commission (CPUC) Resolution L-244, to transfer
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<PAGE>
Line 401 to the jurisdiction of the Federal Energy
Regulatory Commission, SDG&E will neither oppose such a
transfer nor claim that such a transfer violates any
provision of the FTSA.
6. As consideration for PG&E's agreement to the Negotiated Rate
set forth in paragraph 1, effective immediately, and for the
remainder of the 30-year term of the FTSA, SDG&E irrevocably
waives rights it has under the "Uniform Terms of Service"
set forth in the March, 1994 Amendment to the FTSA, and
relinquishes all claims it may have either arising under or
relating in any way to rights under that provision.
7. For the period beginning on the first day of the Negotiated
Period and ending on the last day of the Negotiated Period,
SDG&E agrees to deliver all gas transported under this
amendment off PG&E's system, using the delivery point
specified in Exhibit A attached to the original FTSA.
Following the Negotiated Period, SDG&E shall have a right to
whatever delivery point options are available in effective
CPUC-approved tariffs applicable to long-term firm Expansion
service.
8. Within five calendar days of execution of this amendment by
both SDG&E and PG&E, SDG&E agrees to withdraw with prejudice
all opposition to PG&E's positions in all phases of the
consolidated PEPR/ITCS cases; including the so-called
`statewide ITCS' issue.
9. SDG&E agrees to: (a) actively support approval by the CPUC
of this amendment, without modification or condition; and
(b) actively support PG&E's Gas Accord before the CPUC.
10. Within 60 days of execution of this amendment, PG&E shall
file the amendment with the CPUC by advice letter.
11. The Negotiated Period shall begin on the date the CPUC
approves this amendment and shall continue until the later
of (a) five years from the date or (b) the end of the Gas
Accord period, as approved by the CPUC.
12. As consideration for SDG&E's agreement to execute this
amendment by December 2, 1996 without the limited protection
of a favored-nations provision granting SDG&E the right to
take possible subsequent arrangements PG&E might agree to
with other firm Expansion shippers under the August 12, 1996
letter, PG&E shall pay to SDG&E the sum of $150,000 within
thirty (30) calendar days from the date this amendment is
approved by the CPUC.
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<PAGE>
13. Prior to any future expansion of PG&E's Line 400/401 system,
PG&E agrees to offer SDG&E the option to reduce its firm
transportation commitment by the lesser of SDG&E's contract
demand, the proposed amount of the new expansion, or, if
applicable, a pro rata share (with other firm Expansion
Shippers) of the amount of the new expansion.
14. Each provision of this amendment is agreed to by the parties
as quid pro quo consideration for each of the other
provisions, so that no provision of this amendment is
separable from the others for any purpose. If any provision
of this amend is deleted, this amendment shall be null and
void and of no binding effect on any party.
For SDG&E: For PG&E:
By: __________________________By: ___________________________
Title:__________________________Title:___________________________
Date: __________________________Date: ___________________________
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FIRM TRANSPORTATION SERVICE AGREEMENT
THIS AGREEMENT is made and entered into this 13th day of October,
1994 by and between
PACIFIC GAS TRANSMISSION COMPANY, a California corporation
(hereinafter referred to as "PGT")
and
SAN DIEGO GAS & ELECTRIC COMPANY, a California corporation existing
under the laws of the State of California, (hereinafter referred to
as "Shipper").
WHEREAS, PGT owns and operates a natural gas pipeline transmission
system which extends from a point of interconnection with the
pipeline facilities of Alberta Natural Gas Company Ltd. (ANG) at
the International Boundary near Kingsgate, British Columbia, through
the states of Idaho, Washington and Oregon to a point of
interconnection with Pacific Gas and Electric Company at the Oregon-
California border near Malin, Oregon; and
WHEREAS, Shipper desires PGT, on a firm basis, to transport certain
quantities of natural gas as specified on Exhibit A of this
Agreement; and
WHEREAS, PGT is willing to transport certain quantities of natural
gas for Shipper, on a firm basis,
NOW, THEREFORE, the parties agree as follows:
I. GOVERNMENTAL AUTHORITY
1.1 This Firm Transportation Agreement ("Agreement") is made
pursuant to the regulations of the Federal Energy Regulatory
Commission (FERC) contained in 18 CFR Part 284, as amended from time
to time.
1.2 This Agreement is subject to all valid legislation with
respect to the subject matters hereof, either state or federal, and
to all valid present and future decisions, orders, rules, regulations
and ordinances of all duly constituted governmental authorities having
jurisdiction.
<PAGE>
I. GOVERNMENTAL AUTHORITY
(continued)
1.3 Shipper shall reimburse PGT for any and all FERC filing fees
incurred by PGT in seeking governmental authorization for the
initiation, extension, or termination of service under this Agreement
and Rate Schedule FTS-1. Shipper shall reimburse PGT for such fees at
PGT's designated office within ten (10) days of receipt of notice from
PGT that such fees are due and payable. Additionally, Shipper shall
reimburse PGT for any and all penalty fees or fines assessed PGT by
either the government of the United States or Canada caused strictly by
the negligence of Shipper or Shipper's Agent in not obtaining all proper
Canadian and U.S. domestic import/export licenses, surety bonds or any
other documents and approvals related to the Canadian exportation and
subsequent domestic importation of natural gas transported by PGT
hereunder.
II. QUANTITY OF GAS AND PRIORITY OF SERVICE
2.1 Subject to the terms and provisions of this Agreement and
PGT's Transportation General Terms and Conditions contained in PGT's
FERC Gas Tariff, First Revised Volume No. 1-A or superseding tariff(s)
(Transportation General Terms and Conditions) applicable to Rate
Schedule FTS-1 or superseding rate schedule(s) (Effective Rate Schedule)
daily receipts of gas by PGT from Shipper at the point(s) of receipt
shall be equal to daily deliveries of gas by PGT to Shipper at the
point(s) of delivery; provided, however, Shipper shall deliver to PGT an
additional quantity of natural gas at the point(s) of receipt as
compressor station fuel, line loss and unaccounted for gas as specified
in the Statement of Effective Rates and Charges of PGT's FERC Gas
Tariff, First Revised Volume No. 1-A or superseding tariff(s) (Statement
of Effective Rates and Charges). Any limitations of the quantities to
be received from each point of receipt and/or delivered to each point of
delivery shall be as specified on the Exhibit A attached hereto.
2.2 The maximum quantities of gas to be delivered by PGT for
Shipper's account at the point(s) of delivery are set forth in Exhibit
A.
2.3 In providing service to its existing or new customers, PGT
will use the priorities of service specified in Paragraph 18 of PGT's
Transportation General Terms and Conditions on file with the FERC.
2.4 Prior to initiation of service, Shipper shall provide PGT with
any information required by the FERC, as well as all information
identified in PGT's Transportation General Terms and Conditions
applicable to the Effective Rate Schedule.
<PAGE>
III. TERM OF AGREEMENT
3.1 This Agreement shall become effective _________________, and
shall continue in full force and effect until October 31, 2023 (Initial
Term). Thereafter, this Agreement shall continue in full force and
effect from year to year (Subsequent Term) unless either party gives
twelve (12) months prior written notice of its desire to terminate this
Agreement.
3.2 Neither party may terminate this Agreement during the Initial
Term except as provided by Paragraph 6.9 of this Agreement.
IV. POINTS OF RECEIPT AND DELIVERY
4.1 The point(s) of receipt of gas deliveries to PGT is/are as
designated in Exhibit A, attached hereto.
4.2 The point(s) of delivery of gas to Shipper is/are as
designated in Exhibit A, attached hereto.
4.3 Shipper shall deliver or cause to be delivered to PGT the gas
to be transported hereunder at pressures sufficient to deliver such gas
into PGT's system at the point(s) of receipt. PGT shall deliver the gas
to be transported hereunder to or for the account of Shipper at the
pressures existing in PGT's system at the point(s) of delivery.
4.4 Pursuant to PGT's Transportation General Terms and Conditions,
Shipper may designate other receipt and/or delivery points as secondary
receipt and/or delivery points.
V. OPERATING PROCEDURES
5.1 Both PGT's and Shipper's performance hereunder shall be
subject to and must conform with all applicable operating procedures
contained in PGT's Transportation General Terms and Conditions.
5.2 PGT shall have the right to interrupt or curtail the transport
of gas for the account of Shipper pursuant to PGT's Transportation
General Terms and Conditions.
<PAGE>
VI. RATE(S), RATE SCHEDULES, AND
GENERAL TERMS AND CONDITIONS OF SERVICE
6.1 Shipper shall pay PGT each month for services rendered
pursuant to this Agreement in accordance with the, Effective Rate
Schedule, on file with and subject to the jurisdiction of the FERC.
6.2 Shipper shall provide PGT each month with gas for compressor
station fuel, line loss and other unaccounted for gas associated with
this transportation service provided herein in accordance with PGT's
Statement of Effective Rates and Charges on file with. and subject to
the jurisdiction of the FERC.
6.3 This Agreement in all respects shall be and remains subject to
the applicable provisions of the Effective Rate Schedule and of the
applicable Transportation General Terms and Conditions , all of which
are by this reference made a part hereof.
6.4 PGT shall have the right from time to time to propose and file
with the FERC such changes in the rates and charges applicable to
transportation services pursuant to this Agreement, the rate schedule(s)
under which this service is hereunder provided, or any provisions of
PGT's Transportation General Terms and Conditions applicable to such
services. Shipper shall have the right to protest any such changes
proposed by PGT and to exercise any other rights that Shipper may have
with respect thereto.
6.5 If PGT fails to deliver to Malin, Oregon ninety-five percent
(95%) or more of the aggregate Confirmed Daily Nominations (as
hereinafter defined) of all Converting Shippers with a Malin primary
delivery point receiving service under the Effective Rate Schedule
(hereinafter referred to as the "Non-Deficiency Amount") for more than
twenty-five (25) days in any given Contract Year, then for each day
during that Contract Year in excess of twenty-five (25) days that PGT so
fails to deliver the Non-Deficiency Amount (a "Credit Day"), Converting
Shipper shall be entitled to a Reservation Charge Credit calculated in
the manner hereinafter set forth.
For the purpose of this Paragraph 6.5, Confirmed Daily
Nomination shall mean for any day, the lesser of (i) Converting
Shipper's Maximum Daily Quantity or (ii) the actual quantity of gas that
the connecting pipeline upstream of PGT is capable of delivering for
Converting Shipper's account to PGT at Converting Shipper's primary
point(s) of receipt on PGT less Converting Shipper's requirement to
provide compressor fuel and line losses under PGT's Statement of
Effective Rates and Charges or (iii) the quantity of gas that Pacific
Gas and Electric Company (PG&E) is capable of accepting at Malin for
Converting Shipper's account, or (iv) Converting Shipper's nomination to
PGT.
<PAGE>
VI. RATE(S), RATE SCHEDULES, AND
GENERAL TERMS AND CONDITIONS OF SERVICE
(continued)
The Reservation Charge Credit for each Credit Day for a particular
Converting Shipper shall be computed as follows:
Reservation Charge
Credit for Each = A x B - C
------- ------
Credit Day 30.4 B
where A = Converting Shipper's Monthly Reservation Charge
B = Converting Shipper's confirmed daily nomination for the
Credit Day
C = Actual quantity of gas delivered by PGT to PG&E at Malin for
Converting Shipper's account for the Credit Day
Except as provided for in Paragraphs 6.6 and 6.9 of this
Agreement, these circumstances are the only circumstances are the only
circumstances under which a Reservation Charge Credit will be provided
and except to this limited extent, the provisions of Paragraph 10.3 of
PGT's General Terms and Conditions continue to apply.
6.6 If PGT fails to deliver to a primary delivery point on its
system other than Malin, Oregon ninety-five percent (95%) or more of the
aggregate Confirmed Daily Nominations (as hereinafter defined) of all
Converting Shippers at such primary delivery point other than Malin
receiving service under this rate schedule (hereinafter referred to as
the "Non-Deficiency Amount") for more than twenty-five (25) days that
PGT so fails to deliver the Non-Deficiency Amount (a "Credit Day"),
Converting Shipper shall be entitled to a Reservation Charge Credit
calculated in the manner hereinafter set forth.
For the purpose of this Paragraph 6.6, Confirmed Daily
Nomination shall mean for any day, the lesser of (I) Converting
Shipper's Maximum Daily Quantity or (ii) the quantity of gas that the
connecting downstream pipeline(s), local distribution company
pipeline(s), or end-user(s) is/are capable of accepting for Converting
Shipper's account at Converting Shipper's primary point(s) of delivery
on PGT or (iii) the quantity of gas that the connecting pipeline
upstream of PGT is capable of delivering for the Converting Shipper's
primary point(s) of receipt on PGT less Converting Shipper's requirement
to provide compressor fuel and line losses under PGT's Statement of
Effective Rates and Charges, or (iv) Converting Shipper's nomination to
PGT.
<PAGE>
VI. RATE(S), RATE SCHEDULES, AND
GENERAL TERMS AND CONDITIONS OF SERVICE
(continued)
The Reservation Charge Credit for each Credit Day for a
particular Converting Shipper shall be computed as follows:
Reservation Charge
Credit for Each = A x B - C
----- -----
Credit Day 30.4 B
where A = Converting Shipper's Monthly Reservation Charge
B = Converting Shipper's confirmed daily nomination for the
Credit Day
C = Actual quantity of gas delivered by PGT to a Converting
Shipper's primary delivery point(s) (other than Malin)
for Converting Shipper's account for the Credit Day
Except as provided for in Paragraphs 6.5 and 6.9 of this
Agreement, these circumstances are the only circumstances under which a
Reservation Charge Credit will be provided and except to this limited
extent, the provisions of Paragraph 10.3 of PGT's General Terms and
Conditions continue to apply.
6.7 For the purposes of Paragraphs 6.5, 6.6, 6.9, and 7.9 of this
Agreement, (i) the term "Converting Shipper" shall mean any Shipper
receiving service under PGT's Effective Rate Schedule which has
converted its firm transportation service from Rate Schedule T-3 in
accordance with the FERC's July 2, 1993 order at Docket No. RS92-46, and
(ii) the term "Contract Year" shall be the period of twelve (I 2)
consecutive months commencing the first month that this Agreement
becomes effective and each such consecutive twelve (I 2) month period
thereafter during the term of this Agreement.
6.8 The Reservation Charge Credit contemplated in Paragraphs 6.5,
6.6 and 6.9 of this Agreement shall only apply to the reservation
charges associated with the firm capacity that Shipper has not
permanently released in accordance with PGT's Transportation General
Terms and Conditions.
VI. RATE(S), RATE SCHEDULES, AND
GENERAL TERMS AND CONDITIONS OF SERVICE
(continued)
6.9 Shipper shall be relieved from its Reservation Charge payment
obligation for any period ("Relief Period") when an unforeseeable
action, after service commences on the PGT Expansion Project, by the
federal or provincial governments of Canada or the United States having
jurisdiction ("Event") occurs which: (1) prohibits directly all gas
exports or imports through the PGT Expansion Project, or (2) prohibits
through economic means intended to have prohibitory effect, all gas
exports or imports from Canada to the U.S.. This provision shall only
apply, however, if the Event: is equally applicable to all Converting
Shippers subject to such governmental jurisdiction; is not peculiar to
the circumstances of a particular Converting Shipper; and is not
attributable to the actions or non-actions of any particular Converting
Shipper. In order for Shipper to invoke this provision, Shipper must
notify PGT of such Event within four weeks after Shipper becomes aware
of such Event. The Relief Period shall commence twelve months after
service is curtailed as a result of such Event'("Commencement Date")
provided Shipper has resisted such Event by all reasonable means
(including appeals) within the twelve month period whether or not all
such appeals have been resolved as of the Commencement Date.
If this provision is invoked by a Shipper to relieve its
Reservation Charge payment obligations, PGT shall have the unilateral
right during the first two years of the Relief Period to terminate the
Firm Transportation Service Agreement with that Shipper, however, such
right to terminate may be exercised by PGT only if the PG&E and ANG Firm
Transportation Service Agreements are coincidentally terminated.
6.10 The Reservation Charge Relief contemplated in Paragraph 6.9
of this Agreement shall terminate and have no force or effect if the
FERC should require PGT to offer such relief to any Part 284 firm
shipper on PGT which is not a "Converting Shipper" as that term is
defined in Paragraph 6.7 of this Agreement.
VII. MISCELLANEOUS
7.1 This Agreement shall be interpreted according to the laws of
the State of California.
7.2 Unless otherwise stated in this Agreement, in the case of
inconsistencies between this Agreement, the applicable Transportation
General Terms and Conditions, and PGT's Effective Rate Schedule , the
applicable Transportation General Terms and Conditions and PGT's
Effective Rate Schedule shall control. In the case of inconsistencies
between PGT's Effective Rate Schedule and the applicable Transportation
General Terms and Conditions, PGT's Effective Rate Schedule shall
control.
<PAGE>
VII. MISCELLANEOUS
(continued)
7.3 Shipper agrees to indemnify and hold PGT harmless for refusal
to transport gas hereunder in the event any upstream or downstream
transporter fails to receive or deliver gas as contemplated by this
Agreement, except to the extent such failure to receive or deliver gas
by the upstream or downstream transporter is a direct result of PGT's
failure to perform according to the terms and conditions of this
Agreement.
7.4 Unless herein provided to the contrary, any notice called for
in this Agreement shall be in writing and shall be considered as having
been given if delivered by facsimile or registered mail with all postage
or charges prepaid, to either PGT or Shipper at the place designated
below. Routine communications, including monthly statements , shall be
considered duly delivered when received by ordinary mail or facsimile.
Payments shall be considered duly delivered when received by ordinary
mail, registered mail, or electronic wire transfer. Shipper's daily
nomination shall be considered as duly delivered when received by
electronic data interchange when such system(s) is/are available. If
such system(s) is/are not available, Shipper's daily nominations shall
be considered duly delivered when received by facsimile. Unless
changed, the addresses of the parties are as
follows:
"PGT" PACIFIC GAS TRANSMISSION COMPANY
160 Spear Street
Room 1900
San Francisco, California 94105-1570
Attention: President & CEO
"Shipper" SAN DIEGO GAS & ELECTRIC COMPANY
101 Ash Street
San Diego, California 92101
Attention: Manager, Fuels Department
7.5 A waiver by either party of any one or more defaults by the
other hereunder shall not operate as waiver of any future default or
defaults, whether of a like or of a different character.
7.6 This Agreement may only be amended by an instrument in writing
executed by both parties hereto.
7.7 Nothing in this Agreement shall be deemed to create any rights
or obligations between the parties hereto after the expiration of the
Initial or Subsequent Terms set forth herein, except that termination of
this Agreement shall not relieve either party of the obligation to
correct any quantity imbalances or Shipper of the obligation -.to pay
any amounts due hereunder to PGT.
<PAGE>
VII. MISCELLANEOUS
(continued)
7.8 Exhibits A and C attached hereto are incorporated herein by
reference and made a part hereof for all purposes.
7.9 If PGT modified or changes any term or condition specified in
an effective Firm Transportation Service Agreement with any Converting
Shipper receiving service under PGT's Effective Rate Schedule, within
sixty (60) days thereafter, PGT shall offer to make the same term(s) and
condition(s) applicable to any other Converting Shipper then receiving
service under the Effective Rate Schedule.
IN WITNESS WHEREOF the parties hereto have caused this Agreement to
be executed as of the day and year first above written.
PACIFIC GAS TRANSMISSION COMPANY
By: __________________________________
Name: Stephen P. Reynolds
Title: President & CEO
SAN DIEGO GAS & ELECTRIC COMPANY
By: __________________________________
Name: Edwin A. Guiles
Title: Senior Vice President - Energy Supply
Date: October 11, 1994
<PAGE>
EXHIBIT A
To the
FIRM TRANSPORTATION SERVICE AGREEMENT
Dated Between
PACIFIC GAS TRANSMISSION COMPANY
And
SAN DIEGO GAS & ELECTRIC COMPANY
Primary Primary Maximum Daily Quantity (MDQ)
Receipt Delivery (Delivered) MMBtu/d(1)
Point(4) Point(4)
Summer(2) Winter(3)
Kingsgate, Malin, Oregon 52,508 52,508
British Columbia
(1) Shipper's Maximum Daily Quantity or MDQ for service under this
Agreement, the Effective Rate Schedule, and the Transportation
General Terms and Conditions shall be based on the quantity of gas
delivered at Shipper's point(s) of delivery as stated in this
Exhibit A.
(2) Summer = April through September
(3) Winter = October through March
(4) Shipper may designate secondary points of receipt and/or delivery
in accordance with Paragraph 29 of the Transportation General Terms
and Conditions.
<PAGE>
TO BE COMPLETED WHEN SHIPPER RELEASES CAPACITY
EXHIBIT C
To the
FIRM TRANSPORTATION SERVICE AGREEMENT
Dated Between
PACIFIC GAS TRANSMISSION COMPANY
And
SAN DIEGO GAS & ELECTRIC COMPANY
Type of Replacement Service:
Replacement Shipper:
Receipt Point:
Delivery Point:
Maximum Daily Quantity:
Commencement of Credit:
Termination of Credit:
Level of Credit: __________percent of the maximum rate defined as
__________________________________________
__________________________________________
applicable for service under Rate Schedule FTS-1
Other Terms and Conditions:
1)_______________________________________________________________
2)_______________________________________________________________
3)_______________________________________________________________
<TABLE> <S> <C>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,936,084
<OTHER-PROPERTY-AND-INVEST> 406,259
<TOTAL-CURRENT-ASSETS> 1,007,845
<TOTAL-DEFERRED-CHARGES> 119,468
<OTHER-ASSETS> 184,837
<TOTAL-ASSETS> 4,654,493
<COMMON> 291,458
<CAPITAL-SURPLUS-PAID-IN> 566,233
<RETAINED-EARNINGS> 529,672
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,387,363
25,000
78,475
<LONG-TERM-DEBT-NET> 1,699,245
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 66,302
0
<CAPITAL-LEASE-OBLIGATIONS> 88,578
<LEASES-CURRENT> 6,723
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,303,257
<TOT-CAPITALIZATION-AND-LIAB> 4,654,493
<GROSS-OPERATING-REVENUE> 2,167,548
<INCOME-TAX-EXPENSE> 217,083
<OTHER-OPERATING-EXPENSES> 1,633,377
<TOTAL-OPERATING-EXPENSES> 1,850,460
<OPERATING-INCOME-LOSS> 317,088
<OTHER-INCOME-NET> 7,362
<INCOME-BEFORE-INTEREST-EXPEN> 324,450
<TOTAL-INTEREST-EXPENSE> 86,218
<NET-INCOME> 238,232
6,582
<EARNINGS-AVAILABLE-FOR-COMM> 231,650
<COMMON-STOCK-DIVIDENDS> 178,423
<TOTAL-INTEREST-ON-BONDS> 69,545
<CASH-FLOW-OPERATIONS> 380,847
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE>
EXHIBIT 12.1
SAN DIEGO GAS & ELECTRIC COMPANY
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
<CAPTION>
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Fixed Charges:
Interest:
Long-Term Debt $ 84,830 $ 81,749 $ 82,591 $ 76,463 $ 69,546
Short-Term Debt 6,676 8,894 17,886 12,635 13,825
Amortization of Debt
Discount and Expense,
Less Premium 4,162 4,604 4,870 4,881 5,154
Interest Portion of
Annual Rentals 9,881 9,496 9,631 8,446 9,496
-------- --------- --------- --------- --------
Total Fixed
Charges 105,549 104,743 114,978 102,425 98,021
-------- --------- --------- --------- --------
Preferred Dividends
Requirements 8,565 7,663 7,663 6,582 6,582
Ratio of Income Before
Tax to Net Income 1.79353 1.83501 1.78991 1.88864 1.91993
--------- ---------- --------- --------- ---------
Preferred Dividends
for Purpose of Ratio 15,362 14,062 13,716 12,431 12,637
--------- --------- --------- --------- ---------
Total Fixed Charges
and Preferred
Dividends for
Purpose of Ratio $120,911 $118,805 $128,694 $114,856 $110,658
========= ========= ========= ========= =========
Earnings:
Net Income (before
preferred dividend
requirements) $215,872 $206,296 $219,049 $222,765 $238,232
Add:
Fixed Charges
(from above) 105,549 104,743 114,978 102,425 98,021
Less: Fixed Charges
Capitalized 1,483 1,424 2,040 1,495 2,052
Taxes on Income 171,300 172,259 173,029 197,958 219,156
---------- ---------- ---------- ----------- ---------
Total Earnings for
Purpose of Ratio $491,238 $481,874 $505,016 $521,653 $553,357
========== ========== ========== =========== ==========
Ratio of Earnings
to Combined Fixed
Charges and Preferred
Dividends 4.06 4.06 3.92 4.54 5.00
========== ========== ========== =========== =========
</TABLE>
