<PAGE>PAGE 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[..X..] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
June 30, 1998
For the quarterly period ended.......................................
Or
[.....] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ________________ to _________________
SAN DIEGO GAS & ELECTRIC COMPANY
- ---------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 1-3779 95-1184800
- ---------------------------------------------------------------------
(State of incorporation (Commission (I.R.S. Employer
or organization) File Number) Identification No.
101 ASH STREET, SAN DIEGO, CALIFORNIA 92101
- ---------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant' telephone number, including area code (619) 696-2000
-----------------
No Change
- ---------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since
last report
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Sections 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes...X... No......
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date.
Common stock outstanding: Wholly owned by Enova Corporation
<PAGE>PAGE 2
<TABLE>
San Diego Gas and Electric Company and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
In thousands except per share amounts
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
------------------ -----------------
1998 1997 1998 1997
------------------ -----------------
<S> <C> <C> <C> <C>
Operating Revenues
Electric $476,328 $417,040 $973,527 $790,710
Gas 93,017 74,852 201,671 195,818
PX/ISO power 113,636 -- 113,636 --
------------------ ------------------
Total operating revenues 682,981 491,892 1,288,834 986,528
------------------ ------------------
Operating Expenses
PX/ISO power 112,532 -- 112,532 --
Purchased power 64,265 89,018 160,322 176,679
Electric fuel 36,486 38,741 67,100 78,422
Gas purchased for resale 38,044 22,752 90,377 90,513
Maintenance 27,189 21,389 47,633 43,355
Depreciation and decommissioning 178,184 80,506 376,897 161,128
Property and other taxes 10,888 11,046 22,178 22,672
General and administrative 107,220 50,181 152,248 89,251
Other 41,534 40,896 86,483 83,461
Income taxes 21,531 59,141 50,966 99,895
------------------ -------------------
Total operating expenses 637,873 413,670 1,166,736 845,376
------------------ -------------------
Operating Income 45,108 78,222 122,098 141,152
------------------ -------------------
Other Income and (Deductions)
Allowance for equity funds used
during construction 1,042 1,446 1,918 2,869
Taxes on nonoperating income (6,406) 856 (8,934) 1,288
Other - net 15,503 (2,746) 21,516 (4,437)
------------------ -------------------
Net other income and
(deductions) 10,139 (444) 14,500 (280)
------------------ -------------------
Income Before Interest Charges
and Preferred Dividends 55,247 77,778 136,598 140,872
------------------ -------------------
Interest Charges
Long-term debt 23,739 18,008 51,053 35,933
Other interest 4,754 5,532 8,910 9,404
Allowance for borrowed funds
used during construction (386) (665) (728) (1,297)
------------------ -------------------
Net interest charges 28,107 22,875 59,235 44,040
------------------ -------------------
Net Income 27,140 54,903 77,363 96,832
Dividends on preferred stock 1,645 1,645 3,291 3,291
------------------ -------------------
Earnings Applicable to Common Shares $ 25,495 $ 53,258 $ 74,072 $ 93,541
================== ===================
See notes to consolidated financial statements.
</TABLE>
<PAGE>PAGE 3
<TABLE>
San Diego Gas and Electric Company and Subsidiary
CONSOLIDATED BALANCE SHEETS
In thousands of dollars
<CAPTION>
Balance at June 30, December 31,
1998 1997
(Unaudited)
----------- -----------
<S> <C> <C>
ASSETS
Utility plant - at original cost $4,834,177 $4,750,607
Accumulated depreciation
and decommissioning (2,535,746) (2,391,541)
----------- -----------
Utility plant - net 2,298,431 2,359,066
----------- -----------
Nuclear decommissioning trusts 448,456 399,143
----------- -----------
Current assets
Cash and cash equivalents 273,723 536,050
Accounts receivable - trade 111,844 144,837
Accounts receivable - other 72,692 84,311
Due from affiliates 158,203 125,417
Inventories 64,291 65,390
Regulatory balancing accounts - net 11,035 --
Other 13,864 51,840
----------- -----------
Total current assets 705,652 1,007,845
----------- -----------
Deferred taxes recoverable in rates 196,547 184,837
Regulatory assets 464,092 608,353
Deferred charges and other assets 142,792 95,249
----------- -----------
Total $4,255,970 $4,654,493
=========== ===========
CAPITALIZATION AND LIABILITIES
Capitalization
Common equity $1,272,853 $1,387,363
Preferred stock
Not subject to mandatory redemption 78,475 78,475
Subject to mandatory redemption 25,000 25,000
Long-term debt 1,612,621 1,787,823
----------- -----------
Total capitalization 2,988,949 3,278,661
----------- -----------
Current liabilities
Short-term debt 8,400 --
Long-term debt due within one year 72,640 72,575
Accounts payable 86,183 161,039
Accrued interest and dividends 10,665 56,436
Accrued taxes 63,518 --
Regulatory balancing accounts - net -- 58,063
Other 149,248 114,388
----------- -----------
Total current liabilities 390,654 462,501
----------- -----------
Customer advances for construction 36,674 37,661
Post-retirement benefits other than pensions 31,371 31,488
Deferred income taxes 393,819 471,890
Deferred investment tax credits 92,071 62,332
Deferred credits and other liabilities 322,432 309,960
---------- -----------
Total deferred credits and
other liabilities 876,367 913,331
---------- -----------
Commitments and contingent liabilities (Note 4)
Total $4,255,970 $4,654,493
=========== ===========
See notes to consolidated financial statements.
</TABLE>
<PAGE>PAGE 4
<TABLE>
San Diego Gas and Electric Company and Subsidiary
STATEMENTS OF CONSOLIDATED CASH FLOWS (Unaudited)
In thousands of dollars
<CAPTION>
For the six months ended June 30 1998 1997
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 77,363 $ 96,832
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and decommissioning 376,897 161,128
Amortization of deferred charges and other assets 4,559 3,231
Amortization of deferred credits
and other liabilities (2,361) (2,129)
Allowance for equity funds used during construction (1,918) (2,869)
Deferred income taxes and investment tax credits (53,702) 115
Application of balancing accounts to stranded costs (86,000) --
Other - net (34,713) (3,971)
Net changes in working capital components
Accounts and notes receivable (88,174) (37,443)
Inventories 1,099 5,555
Other current assets 12,472 1,140
Interest accrued (1,449) (574)
Taxes accrued 65,133 59,812
Accounts payable and other current liabilities (39,996) (47,551)
Regulatory balancing accounts (69,098) 33,194
---------- ----------
Net cash provided by operating activities 160,112 266,470
---------- ----------
Cash Flows from Financing Activities
Dividends paid (136,195) (94,256)
Special dividend paid -- (66,150)
Payment on long-term debt (181,994) (37,500)
Increase in short-term debt 8,400 1,000
---------- ----------
Net cash used by financing activities (309,789) (196,906)
---------- ----------
Cash Flows from Investing Activities
Expenditures for utility plant (100,647) (84,979)
Contributions to decommissioning funds (11,016) (11,016)
Other - net (987) (5,666)
---------- ----------
Net cash used in investing activities (112,650) (101,661)
---------- ----------
Net decrease in cash and cash equivalents (262,327) (32,097)
Cash and cash equivalents, beginning of period 536,050 81,409
---------- ----------
Cash and cash equivalents, end of period $273,723 $ 49,312
========== ==========
Supplemental Disclosure of Cash Flow Information
Income tax payments, net of refunds $ 48,619 $ 40,650
========== ==========
Interest payments, net of amounts capitalized $ 60,684 $ 44,614
========== ==========
Supplemental Schedule of Noncash Activities
Dividend to Parent of Intercompany Receivable $100,000 $ --
========== ==========
See notes to consolidated financial statements.
</TABLE>
<PAGE>PAGE 5
SAN DIEGO GAS & ELECTRIC COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. GENERAL
This Quarterly Report on Form 10-Q is a filing of San Diego Gas &
Electric Company (SDG&E), a wholly owned subsidiary of Enova
Corporation (Enova). The financial statements presented herein
represent the consolidated statements of SDG&E and its subsidiary,
SDG&E Funding LLC.
The accompanying consolidated financial statements have been
prepared in accordance with the interim-reporting requirements of
Form 10-Q. This quarterly report should be read in conjunction
with SDG&E's 1997 Annual Report on Form 10-K which includes the
financial statements and notes thereto, its Quarterly Report on
Form 10-Q for the three months ended March 31, 1998, and the
Current Report on Form 8-K filed by Sempra Energy (Commission no.
1-14201) with the Securities and Exchange Commission on June 30,
1998 in connection with the completion of the business combination
of Pacific Enterprises and Enova Corporation.
Results of operations for interim periods are not necessarily
indicative of results for the entire year. In the opinion of
management, the accompanying statements reflect all adjustments
necessary for a fair presentation. These adjustments are of a
normal recurring nature. Certain changes in account classification
have been made to prior presentations to conform to the current
financial statement presentation.
SDG&E has been accounting for the economic effects of regulation on
all of its utility operations in accordance with SFAS No. 71,
"Accounting for the Effects of Certain Types of Regulation," as
described in the notes to consolidated financial statements in
SDG&E's Annual Report to Shareholders. SDG&E has ceased the
application of SFAS No. 71 to its generation business, in
accordance with the conclusion of the Financial Accounting
Standards Board that the application of SFAS No. 71 should be
discontinued when legislation is issued that determines that a
portion of an entity's business will no longer be regulated. The
discontinuance of SFAS No. 71 has not resulted in a write-off of
SDG&E's generation assets, since the California Public Utilities
Commission (CPUC) has approved the recovery of the stranded costs
related to these assets by the distribution portion of its
business, via the competition transition charge described in Note
4, subject to the rate cap. (See further discussion in Note 4.)
The new revenue and expense captions on the Consolidated Statements
of Income (both entitled "PX/ISO Power") relate to the new
regulatory requirements concerning the way power is purchased by
and sold by the distribution and generation, respectively,
operations of SDG&E. This is discussed in Note 4.
2. BUSINESS COMBINATION
On June 26, 1998(pursuant to an October 1996 agreement), Enova and
Pacific Enterprises(PE) combined the two companies into a new
company named Sempra Energy. As a result of the combination, (i)
each outstanding share of common stock of Enova was converted into
one share of common stock of Sempra Energy, (ii) each outstanding
share of common stock of PE was converted into 1.5038 shares of
common stock of Sempra Energy and (iii) the preferred stock and/or
preference stock of SDG&E; PE; and PE's principal subsidiary,
Southern California Gas Company (SoCalGas) remain outstanding.
Additional information on the business combination is discussed in
the Current Report on Form 8-K filed by Sempra Energy (Commission
no. 1-14201) on June 30, 1998 and incorporated herein by reference.
Expenses incurred in connection with the business combination are
$29 million and $4 million, after-tax, for the six-month period
<PAGE>PAGE 6
ended June 30, 1998 and 1997, respectively. These costs consist
primarily of employee-related costs, and investment banking, legal,
regulatory and consulting fees.
3. COMPREHENSIVE INCOME
In conformity with generally accepted accounting principles, SDG&E
has adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income." Comprehensive income for the
three-month and the six-month periods ended June 30, 1998 and 1997
was equal to net income.
4. MATERIAL CONTINGENCIES
ELECTRIC INDUSTRY RESTRUCTURING -- CALIFORNIA PUBLIC UTILITIES
COMMISSION
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.
Beginning on March 31, 1998, customers were given the opportunity
to choose to continue to purchase their electricity from the local
utility under regulated tariffs, to enter into contracts with other
energy service providers or buy their power from the independent
Power Exchange (PX) that serves as a wholesale power pool allowing
all energy producers to participate competitively. The PX obtains
its power from qualifying facilities, nuclear units and, lastly,
from the lowest-bidding suppliers. The California investor-owned
utilities (IOUs) are obligated to bid their power supply, including
owned generation and purchased-power contracts, into the PX. An
Independent System Operator (ISO) schedules power transactions and
access to the transmission system. The local utility continues to
provide distribution service regardless of which source the
customer chooses.
The IOUs have been given a reasonable opportunity to recover their
stranded costs via a competition transition charge (CTC) to
customers through December 31, 2001. Excluding the costs of
purchased power and other costs whose recovery is not limited to
the pre-2002 period, the balance of stranded assets at June 30,
1998 is $800 million, consisting of $600 million for the power
plants (see the following paragraph) and $200 million of related
deferred taxes and undercollections. During the 1998-2001 period,
recovery of transition costs is limited by the rate cap (discussed
below). Generation plant additions made after December 20, 1995 are
not eligible for transition cost recovery. Instead, each utility
must file a separate application seeking a reasonableness review
thereof. The CPUC has approved an agreement between SDG&E and the
CPUC's Office of Ratepayer Advocates for the recovery of $13.6
million of SDG&E's $14.5 million in 1996 capital additions for the
Encina and South Bay power plants. In addition, in August 1998
SDG&E submitted an application to the CPUC seeking recovery of
$21.7 million in capital additions for 1997 and the first three
months of 1998.
In November 1997 SDG&E announced a plan to auction its power plants
and other generation assets. This plan includes the divestiture of
SDG&E's fossil power plants and combustion turbines, its 20-percent
interest in San Onofre Nuclear Generating Station (SONGS) and its
portfolio of long-term purchased-power contracts. The power plants
have a net book value as of June 30, 1998 of $600 million ($200
million for fossil and $400 million for SONGS). The proceeds from
the auction will be applied directly to SDG&E's transition costs.
SDG&E has proposed to the CPUC that the sale of its fossil plants
be completed by the end of 1998. 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, not including the
<PAGE>PAGE 7
post-2001 purchased-power contract payments that may be recovered
after 2001 (see discussion above). However, if the proceeds from
the sale of the power plants are less than expected or if
generation costs, principally fuel costs, are greater than
anticipated, SDG&E may be unable to recover all of its approved
transition costs. This would result in a charge against earnings at
the time it becomes probable that SDG&E will be unable to recover
all of the transition costs.
AB 1890 requires a 10-percent reduction of residential and small
commercial customers' rates beginning in January 1998. AB 1890
provided for the issuance of rate-reduction bonds by an agency of
the State of California to enable the IOUs to achieve this rate
reduction. 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. These bonds are being repaid over 10 years by SDG&E's
residential and small commercial customers via a non-bypassable
charge on their electric bills. In 1997 SDG&E formed a subsidiary,
SDG&E Funding LLC, to facilitate the issuance of the bonds. In
exchange for the bond proceeds, SDG&E sold to SDG&E Funding LLC all
of its rights to revenue streams collected from such customers.
Consequently, the transaction is structured to cause such revenue
streams not to be the property of SDG&E nor to be available to
satisfy any claims of SDG&E's creditors.
In June 1998 a coalition of consumer groups received verification
that its electric restructuring ballot initiative received the
needed signatures to qualify for the November 1998 California
ballot. The initiative seeks to amend or repeal AB 1890 in various
respects, including requiring utilities to provide a 10-percent
reduction in electricity rates charged to residential and small
commercial customers in addition to the 10-percent rate reduction
that became effective on January 1, 1998. Among other things, the
initiative would 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. In May 1998 a statewide coalition of
California's investor-owned electric utilities and business groups
known as "Californians for Affordable and Reliable Electric
Services" (CARES) filed a lawsuit with the Third District Court of
Appeal to block the initiative. In July 1998 the Third District
Court of Appeal issued a one-sentence order refusing to grant
review of the lawsuit prior to the November balloting, the CARES
coalition filed a petition in the California Supreme Court seeking
to overturn the Third District Court of Appeal's denial, and that
court rejected the CARES petition. Such ruling did not represent a
ruling on the merits of the arguments presented; rather, the ruling
was a decision by the court not to consider the merits of the
petition prior to the November balloting. SDG&E cannot predict the
outcome on the vote of the initiative; and the effect of the
initiative on SDG&E's business, if passed by the voters, could be
uncertain for some time. If the initiative were to be upheld by
the courts in whole or in part, it could have a material adverse
effect on SDG&E's results of operations and financial position.
Upon voter approval of the initiative, a write-down of a portion of
SDG&E's generation-related assets might be required under
applicable accounting principles, depending on SDG&E's assessment
of both the probability that the initiative would be determined to
be invalid, in whole or in substantial part, through litigation and
the manner in which the initiative or such part as remains in
effect as of a final judgment would be interpreted and applied to
SDG&E. If the most onerous interpretations of the initiative's
provisions are applied, and it is assumed that SDG&E's nuclear-
generation facilities have zero market value and that SDG&E's
fossil-generation assets have a market value equal to their
carrying amounts, the potential write-down of SDG&E's generation-
related assets could amount to as much as approximately $400
million after taxes. In addition, the annual after-tax earnings
reductions could be as large as approximately $50 million in 1999,
followed by declining amounts for some years thereafter.
<PAGE>PAGE 8
AB 1890 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 the June 10, 1996
levels of 9.64 cents per kilowatt-hour (kwh), except for the impact
of certain fuel cost changes and the 10-percent rate reduction
described above. Beginning in 1998 rates were fixed at 9.43 cents
per kwh, which includes the maximum-permitted increase related to
fuel cost increases and the mandatory rate reduction.
INDUSTRY RESTRUCTURING -- FEDERAL ENERGY REGULATORY COMMISSION
In October 1997 the FERC approved key elements of the California
IOUs' restructuring proposal. This included 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
the establishment of the California PX to operate as an independent
wholesale power pool. The IOUs pay to the PX an up-front
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 being recovered as a transition
cost. The IOUs have jointly guaranteed $300 million of commercial
loans to the ISO and PX for their development and initial start-up.
SDG&E's share of the guarantee is $30 million.
In July 1998, based on a settlement with the FERC and CPUC staffs,
SDG&E filed its transmission revenue requirements of $104 million
with the FERC. A FERC decision is expected in the fourth quarter of
1998.
SDG&E is in discussions with the staffs of the FERC, CPUC and ISO
to determine SDG&E's revenue-requirements for its "must run"
generating plants. Excluding the cost of fuel, generation revenue
requirements will be frozen for four years (even after SDG&E
divests its fossil generation). Major capital additions to the
plants during this period will be allowed by the ISO through
separate filings with the FERC.
NUCLEAR INSURANCE
SDG&E and the co-owners of the San Onofre units 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 $2.75 billion of property
damage and decontamination liability. Coverage is also provided for
the cost of replacement power, which includes indemnity payments
for up to three years, after a waiting period of 17 weeks. Coverage
is provided through mutual insurance companies owned by utilities
with nuclear facilities. If losses at any of the nuclear facilities
covered by the risk-sharing arrangements were to exceed the
accumulated funds available from these insurance programs, SDG&E
could be assessed retrospective premium adjustments of up to $6
million.
CANADIAN GAS
SDG&E has long-term pipeline capacity commitments related to its
contracts for Canadian natural-gas supplies. Certain of these
supply contracts are in litigation, while others have been settled.
<PAGE>PAGE 9
If the supply of Canadian natural gas to SDG&E is not resumed to a
level approximating the related committed long-term pipeline
capacity, SDG&E intends to continue using the capacity in other
ways, including the release of a portion of this capacity to third
parties and the transport of replacement gas.
ITEM 2.
SAN DIEGO GAS & ELECTRIC COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
financial statements contained in this Form 10-Q and Management's
Discussion and Analysis of Financial Condition and Results of
Operations contained in SDG&E's 1997 Form 10-K.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
The following discussion 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. The words
"estimates", "believes", "expects", "anticipates", "plans" and
"intends," variations of such words, and similar expressions are
intended to identify forward-looking statements that involve risks
and uncertainties. These statements are necessarily based upon
various assumptions involving judgments with respect to the future
including, among others, national, regional and local economic,
competitive and regulatory conditions, technological developments,
inflation rates, interest rates, energy markets, weather
conditions, business and regulatory or legal decisions, and other
uncertainties, all of which are difficult to predict and many of
which are beyond the control of the Company. Accordingly, while the
Company believes that the assumptions are reasonable, there can be
no assurance that they will approximate actual experience, or that
the expectations will be realized.
RESULTS OF OPERATIONS
The following discussions reflect the results for the three-month
and six-month periods ended June 30, 1998 compared to the
corresponding periods in 1997:
NET INCOME
The decreases in earnings in 1998 are primarily due to business
combination costs, partially offset by the favorable resolution of
income-tax matters and rewards reflecting SDG&E's performance under
the Gas Procurement Performance-Based Ratemaking (PBR) mechanism.
<PAGE>PAGE 10
<TABLE>
UTILITY OPERATIONS
Electric Sales
<CAPTION>
1998 1997
------------------ ----------------
Volumes Revenue Volumes Revenue
(Volumes in millions of Kwhrs, revenues in millions of dollars)
------- ------- ------- -------
<S> <C> <C> <C> <C>
Six Months Ended June 30
Residential 3,011 $ 305 2,939 $ 325
Commercial 3,249 288 3,242 303
Industrial 1,683 112 1,775 120
Direct access 93 6 - -
Street lighting 43 4 41 4
Off-System sales 639 13 1,359 25
------------------ ----------------
Total in rates 8,718 728 9,356 777
Balancing accounts and other 246* 14
----- -----
Total operating revenues $ 974 $ 791
===== =====
* See "Operating Revenues" below
</TABLE>
<TABLE>
Gas Sales, Transportation and Exchanges
<CAPTION>
Transportation
Gas Sales and Exchanges Total
------------------- ------------------ -------------------
Throughput Revenue Throughput Revenue Throughput Revenue
(Volumes in billion cubic feet, revenues in millions of dollars)
------------------- ------------------ -------------------
<S> <C> <C> <C> <C> <C> <C>
Six Months Ended
June 30, 1998
Residential 21 $ 163 21 $ 163
Commercial/industrial 11 59 10 $ 9 21 68
Utility electric generation 21 5* 21 5*
Wholesale
------------------- ------------------ -------------------
Total in rates 53 $ 227 10 $ 9 63 236
Balancing accounts and other (34)
------
Total operating revenues $ 202
======
Six Months Ended
June 30, 1997
Residential 18 $ 139 18 $ 139
Commercial/industrial 11 65 9 $ 11 20 76
Utility electric generation 23 10 23 10
------------------- ------------------ -------------------
Total in rates 52 $ 214 9 $ 11 61 225
Balancing accounts and other (29)
------
Total operating revenues $ 196
======
* Represents margin only
</TABLE>
<PAGE>PAGE 11
OPERATING REVENUES
The increases in electric operating revenues are primarily due to
stranded costs that are being recovered via the competition
transition charge(CTC), and to alternate costs incurred (including
fuel and short-term purchased-power) due to the delay from January
1 to March 31, 1998 in the startup of operations of the California
Power Exchange and Independent System Operator. The alternate costs
incurred as a result of the delay have been deferred and did not
impact 1998 earnings. Stranded costs included the January 1998
application for stranded cost recovery of the $130-million balance
in the Interim Transition Cost Balancing Account at December 31,
1997.
Revenues from the ISO/PX were $114 million for the three-month and
six-month periods ended June 30, 1998. These reflect sales at
market prices of energy from SDG&E's power plants and from long-
term purchased-power contracts to the California Power Exchange and
Independent System Operator commencing April 1,1998.
OPERATING EXPENSES
Purchased power from long-term contracts decreased $25 million and
$16 million for the three-month and six-month periods ended June 30
1998, respectively, compared to the corresponding periods in 1997,
as a result of purchases from the ISO/PX replacing short-term
energy sources.
Electric fuel expenses decreased $2 million and $11 million for the
three-month and six-month periods ended June 30 1998, respectively,
compared to the corresponding periods in 1997, due to purchases
from the California Power Exchange and the replacement of natural-
gas-fired generation with lower-cost nuclear generation. The
decrease is also due to lower natural-gas prices in the three-month
period ended March 31, 1998 compared to the corresponding period of
1997.
Gas purchased for resale increased for the three months ended June
30, 1998 due to increases in natural-gas prices.
Depreciation and decommissioning expense increased $98 million and
$216 million for the three-month and six-month periods ended June
30 1998, respectively, compared to the corresponding periods in
1997 due to the recovery of stranded costs via the CTC. The
increases in depreciation and amortization are offset by CTC
revenue (see above).
Operating expenses increased $64 million and $70 million for the
three-month and six-month periods ended June 30 1998, respectively,
compared to the corresponding periods in 1997 primarily due to
nonrecurring charges for business combination costs and costs of
providing "must run" energy from SDG&E's power plants to the ISO to
help maintain utility-system reliability.
Income tax expense decreased $38 million and $49 million for the
three-month and six-month periods ended June 30 1998, respectively,
compared to the corresponding periods in 1997 due to changes in the
treatment and timing of the recognition of certain items due to
electric-industry restructuring. This results in income taxes
associated with certain regulatory items being deferred rather than
recorded as current tax expense.
OTHER
Nonoperating income increased $11 million and $15 million for the
three-month and six-month periods ended June 30 1998, respectively,
compared to the corresponding periods in 1997 due to higher
interest income from short-term investments.
<PAGE>PAGE 12
Interest expense related to long-term debt increased $6 million and
$15 million for the three-month and six-month periods ended June 30
1998, respectively, compared to the corresponding periods in 1997,
due to the rate reduction bonds that were issued in December 1997,
partly offset by the affects of repayments.
LIQUIDITY AND CAPITAL RESOURCES
Utility operations continue to be a major source of liquidity.
Liquidity has been favorably impacted by the issuance of Rate
Reduction Bonds (see above). 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, and repayments
and retirements of long-term debt. Major changes in cash flows not
described elsewhere are described below. Cash and cash equivalents
at June 30, 1998 are available for capital projects, the retirement
of debt and other corporate purposes.
OPERATING ACTIVITIES
The decrease in cash flows from operations is due to
undercollections for fuel, short-term purchased power and various
operating costs incurred as a result of the delay of the ISO/PX
startup, and undercollections of CTC charges, partially offset by
overcollections in the gas balancing accounts attributable to
decreasing natural-gas prices. In addition, cash flows from
operations decreased due the 10-percent rate reduction reflected in
customers' bills in 1998.
FINANCING ACTIVITIES
The increase in long-term debt repayments in 1998 is due to the
tender of $147 million of first mortgage bonds and repayment of $22
million of rate-reduction-bonds. This, coupled with the $32 million
of variable-rate, taxable IDBs retired previously and the $83
million of debt offset (for regulatory purposes) by temporary
assets, completes the anticipated debt-related use of rate-
reduction bond proceeds. SDG&E does not anticipate the need for
additional long- or short-term debt during the remainder of 1998.
SDG&E has two short-term bank lines, including $30 million expiring
in April 1999 and $60 million expiring in December 1998. These are
expected to be extended. SDG&E also has long-term bank lines of
$280 million. Commitment fees are paid on the unused portion of the
lines and there are no requirements for compensating balances.
Quarterly dividends are paid to Sempra Energy. The increase in
dividends in the six-month period ended June 30, 1998, is due to
the payment of three quarterly dividends. The payment of future
dividends is within the discretion of the board of directors and is
dependent upon future business conditions, earnings and other
factors. The CPUC regulates SDG&E's capital structure, limiting the
dividends it may pay Sempra Energy. Net cash flows provided by
operating activities currently are sufficient to maintain the
payment of dividends at the current level.
<PAGE>PAGE 13
SDG&E maintains its capital structure so as to obtain long-term
financing at the lowest possible rates. The following table shows
the percentages of capital represented by the various components.
The capital structures are net of the construction funds held by a
trustee in 1993.
June 30,
1997 1998
1993 1994 1995 1996 (A) (B) (A) (B)
- ----------------------------------------------------------------------
Common equity 47% 48% 49% 50% 51% 41% 52% 42%
Preferred stock 4 4 4 4 4 3 4 3
Debt and leases 49 48 47 46 45 56 44 55
- - --------------------------------------------------------------------
Total 100% 100% 100% 100% 100% 100% 100% 100%
- ----------------------------------------------------------------------
(A) Excludes the rate reduction bonds ($658 million at December 31,
1997 and $636 million at June 30, 1998).
(B) Includes the rate reduction bonds.
INVESTING ACTIVITIES
Capital expenditures are estimated to be $233 million for the full
year 1998. Construction, investment and financing programs are
continuously reviewed and revised in response to changes in
competition, customer growth, inflation, customer rates, the cost
of capital, and environmental and regulatory requirements. Among
other things, the level of utility 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-generation assets, as well as the timing and extent of
expenditures to comply with air-quality emission reduction and
other environmental requirements.
BUSINESS COMBINATION
See Note 2 of the notes to consolidated financial statements.
REGULATORY MATTERS:
CALIFORNIA PUBLIC UTILITIES COMMISSION'S INDUSTRY RESTRUCTURING
See discussion of industry restructuring in Note 4 of the notes to
consolidated financial statements.
AUCTION OF ELECTRIC GENERATION ASSETS
In November 1997 SDG&E announced a plan to auction its power plants
and other electric-generation assets, enabling it to continue to
concentrate its business on the transmission and distribution of
electricity and natural gas in a competitive marketplace. In
addition, the March 1998 CPUC decision approving the Enova/PE
business combination requires, among other things, the divestiture
by SDG&E of its gas-fired generation units. Further, in March
1998, Enova and PE reached an agreement with the U.S. Department of
Justice (DOJ) to gain clearance for the business combination under
the Hart-Scott-Rodino Antitrust Act. Under such agreement, Enova
committed to follow through on its plan to divest SDG&E's fossil-
fuel power plants, and Sempra is required to obtain DOJ's prior
approval prior to acquiring or controlling any existing California
generation facilities in excess of 500 megawatts. The auction plan
includes the divestiture of SDG&E's fossil plants - the Encina
(Carlsbad, California) and South Bay (Chula Vista, California)
plants. The power plants, including the interest in SONGS, have a
combined generating capacity of 2,400 megawatts. The proceeds from
the auction will be applied directly to SDG&E's transition costs.
SDG&E has proposed to the CPUC that the sale of its fossil plants
<PAGE>PAGE 14
be completed by the end of 1998. An interim CPUC decision is
expected by September 1998, with a final decision expected by year
end. Procedures for the auction of the fossil plants commenced in
August 1998 with the distribution of the Offering Memorandum.
PUBLIC POLICY PROGRAMS
The CPUC established a new administrative structure and initial
funding levels to manage demand-side management, renewable-energy,
low-income assistance, and research and development (R&D) programs
beginning in January 1998. The CPUC formed independent boards to
oversee a competitive bidding process to administer demand-side
management and low-income-assistance programs. In an interim
decision, the CPUC has required that the California IOUs transfer
their administration of demand-side management and low-income
programs to these independent boards by December 1998 and December
1999, respectively. Until the transition to a fully competitive
energy-services market is complete, customers will be required to
provide the funding. For 1998 SDG&E is being funded $32 million and
$12 million for demand-side management and renewables programs,
respectively. Low-income-assistance funding remains at 1997
authorized levels ($12 million). The California Energy Commission
is being allocated most of the $63 million authorized to administer
the R&D programs, from which SDG&E is funded $4 million. SDG&E's
earnings potential from DSM programs will be reduced when the
transition to the competitive markets is complete.
In May 1998 SDG&E filed an application for 1997 shareholder rewards
totaling $4 million ($12 million for 1996) for its DSM programs.
The rewards will be collected and recorded in earnings over ten
years and are subject to CPUC approval. The revenue requirement
increase is effective on January 1, 1999, but, due to the rate cap,
there will be no rate increase. If, during the industry-
restructuring transition period, SDG&E is able to recover its
transition costs and has revenue available under the rate cap,
SDG&E will be able to recover these DSM earnings.
PERFORMANCE-BASED RATEMAKING
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 application requests an increase in SDG&E's revenue
requirements for electric distribution and natural-gas operations.
The electric distribution increase does not affect rates and,
therefore, if approved, reduces the amount available for transition
cost recovery. Hearings are scheduled for August and September 1998
and a CPUC decision is expected by March 1999.
DISTRIBUTION COST OF CAPITAL
Electric industry restructuring has changed the method of
calculating SDG&E's annual cost of capital. SDG&E's 1998 cost of
capital, as regulated by the CPUC, remains at 1997 authorized
levels of 11.6 percent for the rate of return on equity (ROE) and
9.35 percent for the rate of return on rate base (ROR). These rates
apply only to electric distribution and natural-gas rate base,
excluding electric transmission (regulated by the FERC) and
electric generation (recovered through contracts with the PX and
the ISO or as transition costs). In May 1998 SDG&E filed with the
CPUC its unbundled Cost of Capital application for 1999 rates.
Historically, SDG&E's cost of capital has been determined on an
incremental basis, with annual adjustment made to reflect market
conditions. However, the current application seeks approval to
establish new, separate rates for SDG&E's electric distribution and
natural-gas businesses. The application proposes a 12.00% ROE,
which would produce an overall ROR of 9.33%. A CPUC decision is
expected by early 1999.
<PAGE>PAGE 15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than as discussed below and in SDG&E's Quarterly Report on
Form 10Q for the three-month period ended March 31, 1998, there
have been no significant subsequent developments in litigation
proceedings that were outstanding at December 31, 1997 and there
have been no significant new litigation proceedings since that
date.
SONGS PERSONAL INJURY LITIGATION
As described in the "Legal Proceedings -- SONGS Personal Injury
Litigation" section in SDG&E's Annual Report on Form 10-K, seven
personal-injury radiation cases have been filed against various
parties in which plaintiffs allege that their various types of
leukemia or other forms of cancers were caused by radiation
exposure to "fuel fleas" (radioactive fuel particles). On May 28,
1998 the Ninth Circuit Court of Appeals affirmed the District
Court's decision in the McLandrich and Mettler cases granting
Southern California Edison's (Edison) motion of summary judgment.
The District Court had ruled that Edison is an employer and that
workers' compensation is plaintiff's exclusive remedy against
Edison. As a result of the Ninth Circuit's decision, the previous
stays in the McLandrich, Mettler and Knapp cases will be lifted and
these cases will proceed against SDG&E.
SONGS PRICING
As described in the "Legal Proceedings -- SONGS Pricing" section in
SDG&E's Annual Report on Form 10-K, on January 20, 1998 a hearing
was held before the U.S. District Court regarding SDG&E's motion to
dismiss the SONGS pricing litigation. On July 6, 1998 the U.S.
District Court dismissed the federal claims contained in
plaintiff's complaint with prejudice and dismissed the pendant
state-law claims without prejudice.
CANADIAN NATURAL GAS
SDG&E and Bow Valley settled their dispute, and on April 23, 1998
the parties filed a notice of discontinuance of action with the
Queen's Bench of Alberta.
<PAGE>PAGE 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 12 - Computation of ratios
12.1 Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends as required under
SDG&E's August 1993 registration of 5,000,000 shares of
Preference Stock (Cumulative).
Exhibit 27 - Financial Data Schedules
27.1 Financial Data Schedule for the six months ended
June 30, 1998 for SDG&E.
(b) Reports on Form 8-K
A Current Report on Form 8-K filed on July 1, 1998 announced
the completion of the business combination between Enova
Corporation and Pacific Enterprises, and the related changes
in control.
A Current Report on Form 8-K filed on July 15, 1998 discussed
the Voter Initiative which qualified for the November 1998
ballot (seeking to amend or repeal California electric
industry restructuring legislation in various respects) and
disclosed the potential impact on SDG&E.
A Current Report on Form 8-K filed on July 27, 1998 discussed
the California Supreme Court denial of the petition which
seeks to overturn the Third District Court of Appeal's denial
to remove the Voter Initiative from the November 1998 ballot.
<PAGE>PAGE 17
SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934,
SDG&E has duly caused this quarterly report to be signed on its
behalf by the undersigned thereunto duly authorized.
SAN DIEGO GAS & ELECTRIC COMPANY
(Registrant)
Date: August 14, 1998 By: /s/ E.A. Guiles
-----------------------------
E.A. Guiles
President
<TABLE> <S> <C>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,298,431
<OTHER-PROPERTY-AND-INVEST> 451,780
<TOTAL-CURRENT-ASSETS> 705,652
<TOTAL-DEFERRED-CHARGES> 792,267
<OTHER-ASSETS> 7,840
<TOTAL-ASSETS> 4,255,970
<COMMON> 291,458
<CAPITAL-SURPLUS-PAID-IN> 566,233
<RETAINED-EARNINGS> 415,162
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,272,853
25,000
78,475
<LONG-TERM-DEBT-NET> 1,534,857
<SHORT-TERM-NOTES> 8,400
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 65,861
0
<CAPITAL-LEASE-OBLIGATIONS> 77,764
<LEASES-CURRENT> 6,779
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,185,981
<TOT-CAPITALIZATION-AND-LIAB> 4,255,970
<GROSS-OPERATING-REVENUE> 1,288,834
<INCOME-TAX-EXPENSE> 50,966
<OTHER-OPERATING-EXPENSES> 1,115,770
<TOTAL-OPERATING-EXPENSES> 1,166,736
<OPERATING-INCOME-LOSS> 122,098
<OTHER-INCOME-NET> 14,500
<INCOME-BEFORE-INTEREST-EXPEN> 136,598
<TOTAL-INTEREST-EXPENSE> 59,235
<NET-INCOME> 77,363
3,291
<EARNINGS-AVAILABLE-FOR-COMM> 74,072
<COMMON-STOCK-DIVIDENDS> 136,195
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 160,112
<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>
6 Months 6 Months
Ended Ended
1993 1994 1995 1996 1997 6/30/98* 6/30/98**
-------- -------- -------- -------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Charges:
Interest:
Long-Term Debt $ 84,830 $ 81,749 $ 82,591 $ 76,463 $ 69,546 $ 29,393 $ 29,393
Short-Term Debt 6,676 8,894 17,886 12,635 13,825 4,981 4,981
Rate Reduction Bonds -- -- -- -- -- -- 21,655
Amortization of Debt
Discount and Expense,
Less Premium 4,162 4,604 4,870 4,881 5,154 3,615 3,615
Interest Portion of
Annual Rentals 9,881 9,496 9,631 8,446 9,496 4,317 4,317
-------- -------- -------- -------- -------- --------- ----------
Total Fixed
Charges 105,549 104,743 114,978 102,425 98,021 42,306 63,961
-------- -------- -------- -------- -------- --------- ----------
Preferred Dividends
Requirements 8,565 7,663 7,663 6,582 6,582 3,291 3,291
Ratio of Income Before
Tax to Net Income 1.79353 1.83501 1.78991 1.88864 1.91993 1.77427 1.77427
-------- -------- -------- -------- -------- --------- ----------
Preferred Dividends
for Purpose of Ratio 15,362 14,062 13,716 12,431 12,637 5,839 5,839
-------- -------- -------- -------- -------- --------- ----------
Total Fixed Charges
and Preferred
Dividends for
Purpose of Ratio $120,911 $118,805 $128,694 $114,856 $110,658 $ 48,145 $ 69,800
======== ======== ======== ======== ======== ========= ==========
Earnings:
Net Income (before
preferred dividend
requirements) $215,872 $206,296 $219,049 $222,765 $238,232 $ 77,363 $ 77,363
Add:
Fixed Charges
(from above) 105,549 104,743 114,978 102,425 98,021 42,306 63,961
Less: Fixed Charges
Capitalized 1,483 1,424 2,040 1,495 2,052 613 613
Taxes on Income 171,300 172,259 173,029 197,958 219,156 59,900 59,900
-------- -------- -------- -------- -------- --------- ----------
Total Earnings for
Purpose of Ratio $491,238 $481,874 $505,016 $521,653 $553,357 $178,956 $200,611
======== ======== ======== ======== ======== ========= ==========
Ratio of Earnings
to Combined Fixed
Charges and Preferred
Dividends 4.06 4.06 3.92 4.54 5.00 3.72 2.87
======== ======== ======== ======== ======== ========= ==========
</TABLE>
* Not including interest for rate reduction bonds.
** Including interest for rate reduction bonds.
