UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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Commission file number 1-3779
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SAN DIEGO GAS & ELECTRIC COMPANY
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(Exact name of registrant as specified in its charter)
California 95-1184800
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8326 Century Park Court, San Diego, California 92123
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(Address of principal executive offices)
(Zip Code)
(619) 696-2000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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Common stock outstanding: Wholly owned by Enova Corporation
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
SAN DIEGO GAS & ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions
<CAPTION>
Three Months Ended
June 30,
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2000 1999
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<S> <C> <C>
Operating Revenues
Electric $473 $646
Natural gas 101 94
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Total operating revenues 574 740
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Expenses
Electric fuel and net purchased power 264 109
Cost of natural gas distributed 55 43
Operation and maintenance 79 119
Depreciation and decommissioning 52 391
Other taxes and franchise payments 19 20
Income taxes 36 (9)
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Total 505 673
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Operating Income 69 67
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Other Income and (Deductions)
Interest income 14 12
Regulatory interest (2) (2)
Allowance for equity funds used
during construction 2 2
Taxes on non-operating income (2) (4)
Other - net (5) (7)
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Total 7 1
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Income Before Interest Charges 76 68
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Interest Charges
Long-term debt 23 20
Allowance for borrowed funds used
during construction (1) (1)
Other 13 2
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Total 35 21
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Net Income 41 47
Preferred Dividend Requirements 1 1
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Earnings Applicable to Common Shares $ 40 $ 46
==================
See notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
SAN DIEGO GAS & ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions
<CAPTION>
Six Months Ended
June 30,
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2000 1999
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<S> <C> <C>
Operating Revenues
Electric $ 822 $1,006
Natural gas 223 195
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Total operating revenues 1,045 1,201
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Expenses
Electric fuel and net purchased power 397 211
Cost of natural gas distributed 102 90
Operation and maintenance 172 226
Depreciation and decommissioning 104 458
Other taxes and franchise payments 36 40
Income taxes 83 38
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Total 894 1,063
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Operating Income 151 138
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Other Income and (Deductions)
Interest income 28 17
Regulatory interest (4) (2)
Allowance for equity funds used
during construction 3 2
Taxes on non-operating income (8) (11)
Other - net (6) 6
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Total 13 12
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Income Before Interest Charges 164 150
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Interest Charges
Long-term debt 44 43
Allowance for borrowed funds used
during construction (1) (1)
Other 26 6
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Total 69 48
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Net Income 95 102
Preferred Dividend Requirements 3 3
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Earnings Applicable to Common Shares $ 92 $ 99
==================
See notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
SAN DIEGO GAS & ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
Dollars in millions
<CAPTION>
Balance at
-------------------------
June 30, December 31,
2000 1999
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<S> <C> <C>
ASSETS
Utility plant - at original cost $4,620 $4,483
Accumulated depreciation and decommissioning (2,430) (2,326)
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Utility plant - net 2,190 2,157
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Nuclear decommissioning trusts 551 551
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Current assets
Cash and cash equivalents 308 337
Accounts receivable 213 192
Due from affiliates 158 152
Income taxes receivable -- 87
Inventories 46 61
Other 7 5
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Total current assets 732 834
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Other Assets
Loan to parent 406 422
Deferred taxes recoverable in rates 96 114
Regulatory assets 598 233
Deferred charges and other assets 55 55
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Total other assets 1,155 824
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Total $4,628 $4,366
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See notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
SAN DIEGO GAS & ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
Dollars in millions
<CAPTION>
Balance at
-------------------------
June 30, December 31,
2000 1999
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<S> <C> <C>
CAPITALIZATION AND LIABILITIES
Capitalization
Common stock $ 857 $ 857
Retained earnings 351 460
Accumulated other comprehensive income (1) (3)
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Total common equity 1,207 1,314
Preferred stock not subject to mandatory redemption 79 79
Preferred stock subject to mandatory redemption 25 25
Long-term debt 1,373 1,418
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Total capitalization 2,684 2,836
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Current liabilities
Current portion of long-term debt 66 66
Accounts payable 233 155
Deferred income taxes 112 106
Regulatory balancing accounts - net 176 192
Customer refunds payable 388 --
Other 147 161
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Total current liabilities 1,122 680
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Deferred Credits and other liabilities
Customer advances for construction 44 44
Deferred income taxes - net 316 327
Deferred investment tax credits 49 51
Deferred credits and other liabilities 413 428
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Total deferred credits and other liabilities 822 850
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Commitments and contingent liabilities (Note 2)
Total $4,628 $4,366
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See notes to Consolidated Financial Statements.
</table
</TABLE>
<TABLE>
SAN DIEGO GAS & ELECTRIC COMPANY AND SUBSIDIARY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
Dollars in millions
<CAPTION>
Six Months Ended
June 30,
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2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 95 $ 102
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and decommissioning 104 458
Application of plant sale proceeds to stranded costs -- (295)
Application of balancing accounts to stranded costs -- (62)
Deferred income taxes and investment tax credits 9 (92)
Non-cash rate reduction bond revenue 11 (62)
Other - net (16) 26
Net change in other working capital components 132 (186)
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Net cash (used) provided by operating activities 335 (111)
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CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (130) (90)
Collections on loan to parent 16 --
Proceeds from sale of generating plants - net -- 466
Contributions to decommissioning funds (2) (11)
Other - net -- (12)
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Net cash provided (used) by investing activities (116) 353
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CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (203) (103)
Issuance of long-term debt 4 12
Payment on long-term debt (49) (80)
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Net cash used by financing activities (248) (171)
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Increase (decrease) in cash and temporary investments (29) 71
Cash and cash equivalents, January 1 337 284
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Cash and cash equivalents, June 30 $ 308 $ 355
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest payments, net of amounts capitalized $ 69 $ 47
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Income tax payments (refunds) - net $ (8) $ 194
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See notes to Consolidated Financial Statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
This Quarterly Report on Form 10-Q is that of San Diego Gas &
Electric Company (SDG&E or the Company), the common stock of which
indirectly is wholly owned by Sempra Energy, a California-based
Fortune 500 energy services company. The financial statements herein
are the Consolidated Financial Statements of SDG&E and its sole
subsidiary, SDG&E Funding LLC.
The accompanying Consolidated Financial Statements have been prepared
in accordance with the interim-period-reporting requirements of Form
10-Q. Results of operations for interim periods are not necessarily
indicative of results for the entire year. In the opinion of
management, the accompanying statements reflect all adjustments
necessary for a fair presentation. These adjustments are only of a
normal recurring nature. Certain changes in classification have been
made to prior presentations to conform to the current financial
statement presentation.
The Company's significant accounting policies are described in the
notes to Consolidated Financial Statements in the Company's 1999
Annual Report. The same accounting policies are followed for interim
reporting purposes.
Information in this Quarterly Report is unaudited and should be read
in conjunction with the Company's 1999 Annual Report.
As described in the notes to Consolidated Financial Statements in the
Company's 1999 Annual Report, SDG&E accounts for the economic effects
of regulation on utility operations (excluding generation operations)
in accordance with Statement of Financial Accounting Standards No.
71, "Accounting for the Effects of Certain Types of Regulation" (SFAS
No. 71).
2. MATERIAL CONTINGENCIES
ELECTRIC INDUSTRY RESTRUCTURING -- CALIFORNIA PUBLIC UTILITIES
COMMISSION
In September 1996, the State of California enacted a law
restructuring California's electric utility industry (AB 1890). The
legislation adopted the December 1995 policy decision of the
California Public Utility Commission (CPUC) that was intended to
restructure 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 (direct access) or to 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, from nuclear units
and, lastly, from the lowest-bidding suppliers. California's
investor-owned utilities (IOUs) are obligated to sell their power
supply, including owned generation and purchased-power contracts, to
the PX. The IOUs are also obligated to purchase from the PX the power
that they distribute. An Independent System Operator (ISO) schedules
power transactions and access to the transmission system. The local
utility continues to provide distribution service regardless of the
source from which the customer chooses to purchase electricity.
Purchases by SDG&E from the PX/ISO are included in purchased-power
expenses and revenues from sales to the PX/ISO have been netted
therein on the Statements of Consolidated Income. Revenues from the
PX/ISO reflect sales to the PX/ISO at market prices of energy from
SDG&E's power plants and from its long-term purchased-power
contracts.
As discussed in the notes to Consolidated Financial Statements
contained in the Company's 1999 Annual Report, AB 1890 allowed the
IOUs a reasonable opportunity to recover their stranded costs via a
competition transition charge (CTC) to customers through December 31,
2001. In June 1999, SDG&E completed the recovery of its stranded
costs, other than the future above-market portion of qualifying
facilities and other purchased-power contracts that were in effect at
December 31, 1995, and San Onofre Nuclear Generating Station (SONGS)
costs as described below, which will both continue to be collected in
rates. Recovery of the other stranded costs was effected by, among
other things, the sale of SDG&E's South Bay and Encina fossil power
plants and combustion turbines during the quarter ended June 30,
1999. SDG&E will operate and maintain both plants for the new owners
until April 2001 and May 2001, respectively.
Stranded costs included the cost of SONGS as of December 31, 1995.
SDG&E retains ownership of its 20-percent interest in SONGS.
Subsequent SONGS costs are recoverable only from the sales to the PX
of power produced from SONGS, at rates previously fixed by the CPUC
through December 31, 2003 and at market rates thereafter. If approved
by the CPUC, SDG&E is planning to auction its interest in SONGS. A
major issue being addressed is the management of the decommissioning
trust to ensure that adequate funding is available at the time the
plant is decommissioned.
AB 1890 also required a 10-percent reduction of residential and small
commercial customers' rates, beginning in January 1998, and 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 the
revenue streams collected from such customers related to the non-
bypassable charge. 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.
The sizes of the rate-reduction bond issuances were set so as to make
the IOUs neutral as to the 10-percent rate reduction, and were based
on a four-year period to recover stranded costs. Because SDG&E
recovered its stranded costs in only 18 months (due to the greater-
than-anticipated plant-sale proceeds), the bond sale proceeds were
greater than needed. Accordingly, SDG&E will return to its customers
$388 million of surplus bond proceeds. Pursuant to a June 8, 2000
CPUC decision, this refund, included in current liabilities at June
30, 2000, will take place during the third quarter of 2000.
AB 1890 also includes a rate freeze for all IOU customers. The rate
freeze was to have stayed in place until January 1, 2002. However, in
connection with completion of its stranded cost recovery, SDG&E filed
with the CPUC and received approval to reduce base rates (the non-
commodity portion of rates) to all electric customers, effective July
1, 1999. The portion of the electric rate representing the commodity
cost is passed through to customers with no markup and fluctuates
with the price of electricity from the PX. As a result, although base
rates are now below those implicit in the rate freeze, total rates
charged by SDG&E may be above or below those set by the rate freeze
depending on the cost of electricity.
A number of factors, including recent supply/demand conditions, have
resulted in abnormally high commodity prices, which are expected to
continue through the heavy air-conditioning season in the
southwestern United States. This has caused SDG&E's monthly customer
bills to be substantially higher than normal. SDG&E and others have
proposed various methods of responding to these high rates.
On June 28, 2000 the ISO Board of Governors approved the reduction of
the wholesale price cap for electricity in California from $750 per
megawatt hour (MWh) to $500 per MWh. Subsequently, on August 1, 2000,
they approved an additional reduction of the price cap from $500 per
MWh to $250 per MWh. In a filing the following day, SDG&E requested
that the Federal Energy Regulatory Commission (FERC) place an
emergency order capping the price electricity generators offer to the
PX/ISO wholesale markets at $250 per MWh. However, three large power-
generating companies have requested a FERC ruling that any attempt to
limit wholesale electricity prices be judged unjust and unreasonable
and that the ISO be ordered to compensate them for actual damages and
lost opportunity costs.
On August 3, 2000 the CPUC approved a proposal by SDG&E to accelerate
the refund to its electric customers of $100 million of certain
balancing account overcollections to partially offset the high
monthly bills. This is in addition to the $388 million return to
residential and small commercial customers of surplus bond proceeds
referred to above.
In addition, the CPUC denied a proposal by others to place a ceiling
on electric rates for residential and small commercial customers. It
also ordered SDG&E not to disconnect the service of any customers who
do not pay their high bills through November 2000, and directed SDG&E
to expand its level pay plan to all customers who request it. This
would allow a customer to level out payments over a year. The CPUC
agreed to study the issues and hold hearings and did not rule out a
rate freeze in the future. In addition, the CPUC granted SDG&E
expanded authority to participate in the PX's Block Forward Market
which allows SDG&E to utilize futures contracts to hedge electricity
prices and purchase electricity for extended periods at fixed prices.
On August 9, 2000 the California governor issued a press release
calling on the CPUC to establish a one- or two-year rate reduction
and stabilization plan to cut electricity rates by about one-half for
SDG&E residential and business customers, but still allow SDG&E to
eventually recover the prices paid for wholesale power.
In response, a CPUC commissioner has issued a proposed decision
which, if adopted by the CPUC, would impose an interim rate freeze on
SDG&E's electric rates for residential, small commercial and lighting
customers. Under the proposed decision these rates would be frozen
through December 2003 at 110 percent of June 30, 1998 levels. A
balancing account would be established to record related
undercollections resulting from the frozen rates with undercollected
amounts to be recovered in a manner (not specified in the proposed
decision) intended to make SDG&E whole.
A second CPUC commissioner has proposed an alternate decision which
would impose a similar rate freeze only on monthly volumes of
electricity used by the lowest-volume 70 percent of customers (500
kwh for residential customers and 1,500 kwh for commercial
customers). This is intended to encourage conservation. The alternate
proposal would also automatically switch all SDG&E customers to a
level-pay plan, except for those customers who specifically indicate
that they do not want to participate in this billing arrangement.
This alternate proposal would provide for the deferred billings to be
accumulated in an existing balancing account, to be recovered in a
manner intended to make SDG&E whole.
The proposed decisions will be reviewed by the CPUC, which may accept
either one (with or without modification) or reject them both, in
rendering a final decision on the matter. The CPUC has scheduled a
special meeting on August 21, 2000 to address this matter.
The California State Senate has approved emergency legislation to
roll back and freeze rates at July 1999 levels in the San Diego area
(effective June 1, 2000) and sent it to the State Assembly for its
action. The bill requires the CPUC to initiate a proceeding to assess
alternatives for recovering undercollections resulting from the rate
freeze.
The FERC is investigating the electric bulk power markets and
California's attorney general is investigating whether there has been
market manipulation. Various proposals have included application of
any refunds from power suppliers, arising from such investigations,
to help defray any billings deferred as a result of adoption of
certain of the proposals.
The proposed legislation, the proposed CPUC decisions and other
proposals to respond to the high electricity rates would, if adopted,
adversely affect the timing of revenue collections by SDG&E and
related cash flows. They could also adversely affect the ultimate
collectibility of these revenues, which are intended to recover the
costs of electricity purchased by SDG&E to serve its customers. The
Company is unable to predict whether any of these proposals will be
adopted or their ultimate impact on SDG&E. However, SDG&E will
vigorously oppose, through regulatory proceedings and otherwise, any
proposal that does not assure the ultimate collectibility of its full
costs of providing electricity service.
The CPUC is currently deliberating on the legal, ratemaking and
policy issues of ending the rate freeze for all the IOUs, including
post-rate freeze ratemaking. The CPUC has now permitted SDG&E to
purchase energy through the PX or a mixture of the PX and any other
qualified exchange, if a qualified exchange is authorized by future
advice letter filings. A "qualified exchange" is defined as one that
provides continuous trading in either a bid/ask or second price
auction type market, equal nondiscriminatory access and a mechanism
for timely, anonymous price transparency. The CPUC also made numerous
changes in cost allocations among customer classes, adjusted various
ratemaking mechanisms, granted SDG&E's request to close certain
balancing accounts, and ordered hourly pricing to be implemented for
customers with hourly meters. The CPUC rejected as premature an SDG&E
proposal for an incentive mechanism for commodity prices.
Thus far, electric-industry restructuring has been confined to
generation. Transmission and distribution have remained subject to
traditional cost-of-service regulation. However, the CPUC is
exploring the possibility of opening up electric distribution to
competition. During 2000, the CPUC will consider whether any changes
should be made in electric distribution regulation. A CPUC staff
report on this issue was submitted to the CPUC in July 2000, with
dissenting opinions recommending against changing electric
distribution regulation at this time due to the current state of
electric-industry restructuring.
The recent electricity supply/demand conditions have combined with
other factors to affect natural gas supplies and prices. The lack of
surplus natural gas production and the current need to store gas for
the coming winter competes directly with the need to use gas supplies
to generate electricity to meet demand. On August 1, 2000 SDG&E
requested that the CPUC allow San Diego County's two major fossil-
fuel power plants to use alternative fuels such as oil to generate
electricity when demand for natural gas exceeds supply. The new
operators of the power plants, which SDG&E sold in 1999, apparently
intend to protest the proposal, citing potential supply interruptions
and increased pollution.
ELECTRIC INDUSTRY RESTRUCTURING -- FEDERAL ENERGY REGULATORY
COMMISSION
On December 20, 1999, the Federal Energy Regulatory Commission (FERC)
issued "Order 2000". As described in the Company's 1999 Annual
Report, the rule discusses the formation of Regional Transmission
Organizations, grid management, transmission pricing reform and
related matters. The impact of Order 2000 on SDG&E depends on the
results of this process and other implementation issues.
Transmission Access Charge
On March 31, 2000, the ISO filed with the FERC a transmission access
charge (TAC) which separates the transmission systems in California
into two groups (high and low voltage) as the basis for allocating
the costs of maintaining the transmission systems among the various
transmission owners. SDG&E voted against the TAC and filed a protest
with the FERC in April 2000. In June 2000, the FERC approved the TAC
subject to refund and settlement agreement. Settlement efforts among
all parties are ongoing. Resolution is not expected before 2001. Once
the TAC is in effect, Internal Revenue Service (IRS) regulations may
require SDG&E to refinance the industrial development bonds that
support its transmission facilities, the face value of which totals
$168 million. If this occurs, SDG&E's estimated annual pretax cost of
replacing the bonds with debt, the interest on which is taxable to
the holders, would be $4 million, most of which would be recovered in
rates. SDG&E recently submitted a request for a private letter ruling
from the IRS. In addition, pending federal legislation could resolve
this issue.
NATURAL GAS INDUSTRY RESTRUCTURING
The natural gas industry experienced an initial phase of
restructuring during the 1980s by deregulating natural gas sales to
noncore customers. On January 21, 1998, the CPUC released a staff
report initiating a project to assess the current market and
regulatory framework for California's natural gas industry. The
general goals of the plan are to consider reforms to the current
regulatory framework emphasizing market-oriented policies benefiting
California's natural gas consumers.
In July 1999, after hearings, the CPUC issued a decision stating
which gas regulatory changes it found most promising, encouraging
parties to submit settlements addressing those changes, and providing
for further hearings if necessary.
In October 1999, the State of California enacted a law (AB 1421)
which requires that natural gas utilities provide "bundled basic gas
service" (including transmission, storage, distribution, purchasing,
revenue-cycle services and after-meter services) to all core
customers, unless the customer chooses to purchase natural gas from a
non-utility provider. The law prohibits the CPUC from unbundling most
distribution-related natural gas services (including meter reading)
and after-meter services (including leak investigation, inspecting
customer piping and appliances, pilot relighting and carbon monoxide
investigation) for core customers. The objective is to preserve both
customer safety and customer choice.
Between late 1999 and April 2000, several conflicting settlements
were filed by various groups of parties that address the changes the
CPUC found promising in July 1999. Hearings were held in May and June
of 2000, and a CPUC decision is expected by year-end 2000. The
principal issues in dispute include the recovery of the utilities'
costs to implement whatever regulatory changes are adopted.
Additional proposals include improving the access of energy service
providers to sell gas supply to core customers of SoCalGas and SDG&E.
Consistent with Sempra Energy's corporate policies favoring the
unbundling of commodity and nonessential services, SDG&E and its
affiliate, Southern California Gas Company, are supporting changes
that they believe will provide greater customer choice in utility
services and greater access to gas supply service from energy service
providers in the core market.
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 $9.3 billion of coverage is provided by
secondary financial protection required by the Nuclear Regulatory
Commission and provides for loss sharing among utilities owning
nuclear reactors if a costly accident occurs. SDG&E could be assessed
retrospective premium adjustments of up to $36 million in the event
of a nuclear incident involving any of the licensed, commercial
reactors in the United States, if the amount of the loss exceeds $200
million. In the event these coverages are insufficient, the Price-
Anderson Act provides for Congress to enact further revenue-raising
measures to pay claims, which could include an additional assessment
on all licensed reactor operators.
Insurance coverage is provided for up to $2.75 billion of property
damage and decontamination liability. Coverage is also provided for
the cost of replacement power, which includes indemnity payments for
up to three years and six weeks, after a waiting period of 12 weeks.
Coverage is provided primarily through a mutual insurance company
owned by utilities with nuclear facilities. If losses at any of the
nuclear facilities covered by the risk-sharing arrangements were to
exceed the accumulated funds available from these insurance programs,
SDG&E could be assessed retrospective premium adjustments of up to $5
million.
3. COMPREHENSIVE INCOME
Comprehensive income for the three-month periods ended June 30, 2000
and 1999 was $41 million and $47 million, respectively. Comprehensive
income for the six-month periods ended June 30, 2000 and 1999 was $97
million and $102 million, respectively. For the 2000 periods, the
following is a reconciliation of net income to comprehensive income.
Three months Six months
ended ended
(Dollars in millions) June 30, 2000 June 30, 2000
--------------------------------------------------------------------
Net income $ 41 $ 95
Minimum pension liability adjustments -- 2
--------------------------------
Comprehensive income $ 41 $ 97
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For the 1999 periods, comprehensive income was equal to earnings
applicable to common shares.
4. SEGMENT INFORMATION
The Company previously had three separately managed reportable
segments: electric transmission and distribution, electric
generation, and natural gas service. Effective with the sale of its
fossil fuel generation facilities and other organizational changes,
the Company no longer operates in multiple business segments.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
financial statements contained in this Form 10-Q and Management's
Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's 1999 Annual Report.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains statements that are not
historical fact and constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. The
words "estimates," "believes," "expects," "anticipates," "plans,"
"intends," "may" and "should" or similar expressions, or discussions
of strategy or of plans are intended to identify forward-looking
statements that involve risks, uncertainties and assumptions. Future
results may differ materially from those expressed in the forward-
looking statements.
These statements are necessarily based upon various assumptions
involving judgments with respect to the future and other risks,
including, among others, local, regional, national and international
economic, competitive, political and regulatory conditions and
developments; technological developments; capital market conditions;
inflation rates; interest rates; energy markets, including the timing
and extent of changes in commodity prices; weather conditions;
business, regulatory or legal decisions; the pace of deregulation of
retail natural gas and electricity delivery; the timing and success
of business development efforts; and other uncertainties -- all of
which are difficult to predict and many of which are beyond the
control of the Company. Readers are cautioned not to rely unduly on
any forward-looking statements and are urged to review and consider
carefully the risks, uncertainties and other factors which affect the
Company's business described in this quarterly report and other
reports filed by the Company from time to time with the Securities
and Exchange Commission.
See also "Factors Influencing Future Performance" below.
CAPITAL RESOURCES AND LIQUIDITY
The Company's California utility operations continue to be the major
source of liquidity. In addition, working capital requirements are
met through the issuance of short-term and long-term debt. Cash and
cash equivalents at June 30, 2000 are available for investment in
utility plant, the retirement of debt and other corporate purposes.
Major changes in cash flows not described elsewhere are described
below.
CASH FLOWS FROM OPERATING ACTIVITIES
For the six-month period ended June 30, 2000, the increase in cash
flows from operations is primarily due to income tax refunds and
increases in accounts payable.
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures for property, plant and equipment are estimated
to be $300 million for the full year 2000 and will be financed
primarily by internally generated funds. Construction, investment and
financing programs are continuously reviewed and revised in response
to changes in competition, customer growth, inflation, customer
rates, the cost of capital, and environmental and regulatory
requirements. For the six-month period ended June 30, 2000, the
decrease in cash flows from investing activities is primarily due to
the 1999 sale of SDG&E's generating plants.
CASH FLOWS FROM FINANCING ACTIVITIES
For the six-month period ended June 30, 2000, the decrease in cash
flows from financing activities is primarily due to an increase in
dividends paid to Sempra Energy. In May 2000, SDG&E called its 9-5/8
percent First Mortgage Bonds due in 2020 at a cost of $104.04 per
bond, or $10 million including accrued interest.
RESULTS OF OPERATIONS
Net income decreased 13 percent and 7 percent for the three-month and
six-month periods ended June 30, 2000, respectively, compared to the
same periods in 1999, primarily due to decreased rate base and
authorized rate of return on equity, and increased interest expense
on rate reduction bond refunds (all of which began in mid 1999 and
which are related to industry restructuring) offset by the
elimination of the Gas Fixed Cost Adjustment balancing account at the
end of 1999. With the elimination of the balancing account, SDG&E's
net income now fluctuates with changes in natural gas demand, due to
seasonal and other factors. During the six-month period ended June
30, 2000, this resulted in a $10 million increase in net income. This
was based on a timing difference that likely will reverse later in
the year.
The tables below summarize electric and natural gas volumes and
revenues by customer class for the six-month periods ended June 30,
2000 and 1999.
<TABLE>
San Diego Gas & Electric
Electric Distribution and Transmission
For the six-month periods ended June 30
(Volumes in millions of Kwhrs, dollars in millions)
<CAPTION>
2000 1999
------------------------------------------
Volumes Revenue Volumes Revenue
------------------------------------------
<S> <C> <C> <C> <C>
Residential 3,130 $ 332 3,134 $ 315
Commercial 2,913 274 2,994 271
Industrial 1,139 84 968 69
Direct access 1,744 59 1,403 48
Street and highway lighting 33 3 38 3
Off-system sales 253 11 52 1
------------------------------------------
9,212 763 8,589 707
Balancing and other 59 299
------------------------------------------
Total 9,212 $ 822 8,589 $1,006
------------------------------------------
</TABLE>
<TABLE>
San Diego Gas & Electric
Gas Sales, Transportation and Exchange
For the six-month periods ended June 30
(Volumes in billion cubic feet, dollars in millions)
<CAPTION>
Gas Sales Transportation & Exchange Total
--------------------------------------------------------------------
Volumes Revenue Volumes Revenue Volumes Revenue
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2000:
Residential 20 $ 148 -- $ -- 20 $ 148
Commercial and industrial 12 63 9 8 21 71
Utility electric generation -- -- 19 5 19 5
--------------------------------------------------------------
32 $ 211 28 $ 13 60 224
Balancing accounts and other ( 1)
--------
Total $ 223
-------------------------------------------------------------------------------------------
1999:
Residential 25 $ 172 -- $ -- 25 $ 172
Commercial and industrial 14 60 9 9 23 69
Utility electric generation* 18 7 -- -- 18 7
-------------------------------------------------------------
57 $ 239 9 $ 9 66 248
Balancing accounts and other (53)
---------
Total $ 195
-------------------------------------------------------------------------------------------
</TABLE>
* margin only for the months prior to the sale of the fossil-fuel plants.
Electric revenues decreased 18 percent for the six-month period ended
June 30, 2000 compared to the same period in 1999. The decrease is
primarily due to the decrease in base electric rates (the non-
commodity portion) from the completion of stranded cost recovery
(described in Note 2 of the notes to Consolidated Financial
Statements), offset by the effect of higher prices, as discussed
below.
Natural gas revenues increased 14 percent for the six-month
period ended June 30, 2000, compared to the corresponding period
in 1999, primarily due to increased natural gas prices.
Electric fuel and net purchased power expense increased 88
percent for the six-month period ended June 30, 2000 compared to
the corresponding period in 1999. The increase was primarily due
to the higher price of electricity from the PX reflecting the
recent supply/demand conditions described in Note 2 of the notes
to Consolidated Financial Statements. Under the current
regulatory framework, changes in on-system prices do not affect
net income, as explained in the 1999 Annual Report.
Natural gas purchased for resale for the six-month period ended
June 30, 2000 increased 13 percent from the corresponding period
in 1999. Decreases in volumes were more than offset by higher
prices of natural gas. Under the current regulatory framework,
changes in core-market natural gas prices do not affect net
income since, as explained more fully in the 1999 Annual Report,
current or future customer rates normally recover the actual
cost of natural gas.
Depreciation and decommissioning expense decreased 77 percent
for the six-month period ended June 30, 2000, compared to the
corresponding period in 1999, due to the sale of the power
plants and combustion turbines.
Operating income increased 9 percent for the six-month period
ended June 30, 2000 compared to the corresponding period in
1999. The increase is primarily due to the elimination of the
Gas Fixed Cost Adjustment balancing account at the end of 1999
as discussed below.
FACTORS INFLUENCING FUTURE PERFORMANCE
As noted in Note 2 of the notes to Consolidated Financial Statements,
a number of factors, including recent supply/demand conditions, have
resulted in abnormally high commodity prices, which are expected to
continue through the heavy air-conditioning season in the
southwestern United States. This has caused SDG&E's monthly customer
bills to be substantially higher than normal. SDG&E and others have
proposed various methods of responding to these high rates.
On June 28, 2000 the ISO Board of Governors approved the reduction of
the wholesale price cap for electricity in California from $750 per
megawatt hour (MWh) to $500 per MWh. Subsequently, on August 1, 2000,
they approved an additional reduction of the price cap from $500 per
MWh to $250 per MWh. In a filing the following day, SDG&E requested
that the Federal Energy Regulatory Commission (FERC) place an
emergency order capping the price electricity generators offer to the
PX/ISO wholesale markets at $250 per MWh. However, three large power-
generating companies have requested a FERC ruling that any attempt to
limit wholesale electricity prices be judged unjust and unreasonable
and that the ISO be ordered to compensate them for actual damages and
lost opportunity costs.
On August 3, 2000 the CPUC approved a proposal by SDG&E to accelerate
the refund to its electric customers of $100 million of certain
balancing account overcollections to partially offset the high
monthly bills. This is in addition to the $388 million return to
residential and small commercial customers of surplus bond proceeds
referred to above.
In addition, the CPUC denied a proposal by others to place a ceiling
on electric rates for residential and small commercial customers. It
also ordered SDG&E not to disconnect the service of any customers who
do not pay their high bills through November 2000, and directed SDG&E
to expand its level pay plan to all customers who request it. This
would allow a customer to level out payments over a year. The CPUC
agreed to study the issues and hold hearings and did not rule out a
rate freeze in the future. In addition, the CPUC granted SDG&E
expanded authority to participate in the PX's Block Forward Market
which allows SDG&E to utilize futures contracts to hedge electricity
prices and purchase electricity for extended periods at fixed prices.
On August 9, 2000 the California governor issued a press release
calling on the CPUC to establish a one- or two-year rate reduction
and stabilization plan to cut electricity rates by about one-half for
SDG&E residential and business customers, but still allow SDG&E to
eventually recover the prices paid for wholesale power.
In response, a CPUC commissioner has issued a proposed decision
which, if adopted by the CPUC, would impose an interim rate freeze on
SDG&E's electric rates for residential, small commercial and lighting
customers. Under the proposed decision these rates would be frozen
through December 2003 at 110 percent of June 30, 1998 levels. A
balancing account would be established to record related
undercollections resulting from the frozen rates with undercollected
amounts to be recovered in a manner (not specified in the proposed
decision) intended to make SDG&E whole.
A second CPUC commissioner has proposed an alternate decision which
would impose a similar rate freeze only on monthly volumes of
electricity used by the lowest-volume 70 percent of customers (500
kwh for residential customers and 1,500 kwh for commercial
customers). This is intended to encourage conservation. The alternate
proposal would also automatically switch all SDG&E customers to a
level-pay plan, except for those customers who specifically indicate
that they do not want to participate in this billing arrangement.
This alternate proposal would provide for the deferred billings to be
accumulated in an existing balancing account, to be recovered in a
manner intended to make SDG&E whole.
The proposed decisions will be reviewed by the CPUC, which may accept
either one (with or without modification) or reject them both, in
rendering a final decision on the matter. The CPUC has scheduled a
special meeting on August 21, 2000 to address this matter.
The California State Senate has approved emergency legislation to
roll back and freeze rates at July 1999 levels in the San Diego area
(effective June 1, 2000) and sent it to the State Assembly for its
action. The bill requires the CPUC to initiate a proceeding to assess
alternatives for recovering undercollections resulting from the rate
freeze.
The FERC is investigating the electric bulk power markets and
California's attorney general is investigating whether there has been
market manipulation. Various proposals have included application of
any refunds from power suppliers, arising from such investigations,
to help defray any billings deferred as a result of adoption of
certain of the proposals.
The proposed legislation, the proposed CPUC decisions and other
proposals to respond to the high electricity rates would, if adopted,
adversely affect the timing of revenue collections by SDG&E and
related cash flows. They could also adversely affect the ultimate
collectibility of these revenues, which are intended to recover the
costs of electricity purchased by SDG&E to serve its customers. The
Company is unable to predict whether any of these proposals will be
adopted or their ultimate impact on SDG&E. However, SDG&E will
vigorously oppose, through regulatory proceedings and otherwise, any
proposal that does not assure the ultimate collectibility of its full
costs of providing electricity service.
See Note 2 of the notes to Consolidated Financial Statements for
further discussion.
Performance of the Company in the near future will depend primarily
on the ratemaking and regulatory process, electric and natural gas
industry restructuring, and the changing energy marketplace. These
factors are discussed in this section.
Industry Restructuring
See discussion of industry restructuring in Note 2 of the notes to
Consolidated Financial Statements.
Electric-Generation Assets and Electric Rates
Note 2 of the notes to Consolidated Financial Statements describes
regulatory and legislative actions that affect SDG&E's electric
rates.
Performance-Based Regulation (PBR)
To promote efficient operations and improved productivity and to move
away from reasonableness reviews and disallowances, the CPUC has been
directing utilities to use PBR. PBR has replaced the general rate
case and certain other regulatory proceedings for the California
utilities. Under PBR, regulators require future income potential to
be tied to achieving or exceeding specific performance and
productivity goals, as well as cost reductions, rather than relying
solely on expanding utility plant in a market where a utility already
has a highly developed infrastructure. The utility's PBR mechanism is
scheduled to be updated at December 31, 2002, to reflect, among other
things, changes in costs and volumes.
Key elements of the mechanisms include an initial reduction in base
rates, an indexing mechanism that limits future rate increases to the
inflation rate less a productivity factor, a sharing mechanism with
customers if earnings exceed the authorized rate of return on rate
base, and rate refunds to customers if service quality deteriorates
or awards if service quality exceeds set standards. Specifically, the
key elements of the mechanisms include the following:
-- Earnings up to 25 basis points in excess of the authorized rate of
return on rate base are retained 100 percent by shareholders.
Earnings that exceed the authorized rate of return on rate base by
greater than 25 basis points are shared between customers and
shareholders on a sliding scale that begins with 75 percent of the
additional earnings being given back to customers and declining to 0
percent as earned returns approach 300 basis points above authorized
amounts. There is no sharing if actual earnings fall below the
authorized rate of return. In 1999, SDG&E was authorized to earn 9.05
percent on rate base. For 2000, the authorized return is 8.75
percent.
-- Base rates are indexed based on inflation less an estimated
productivity factor.
-- SDG&E would be authorized to earn or be penalized up to a maximum
of $14.5 million annually as a result of its performance related to
employee safety, electric reliability, customer satisfaction, and
call-center responsiveness.
-- Annual cost of capital proceedings are replaced by an automatic
adjustment mechanism. If changes in certain indices exceed
established tolerances, there would be an automatic adjustment of
rates for the change in the cost of capital according to a formula
which applies a percentage of the change to various capital
components.
Cost of Capital
Electric-industry restructuring has changed the method of calculating
the utility's annual cost of capital. In June 1999, the CPUC adopted
a 10.6 percent return on common equity and an 8.75 percent return on
rate base for SDG&E's electric-distribution and natural gas
businesses. The electric-transmission cost of capital is determined
under a separate FERC proceeding.
Biennial Cost Allocation Proceeding (BCAP)
The BCAP determines how a utility's natural gas transportation costs
are allocated among various customer classes (residential,
commercial, industrial, etc.). In October 1998, the California
utilities filed 1999 BCAP applications requesting that new rates
become effective August 1, 1999, and remain in effect through
December 31, 2002. On April 20, 2000, the CPUC issued a decision
adopting overall decreases in natural gas revenues of $37 million for
SDG&E for transportation rates effective June 1, 2000. Since the
decrease reflects anticipated changes in corresponding costs, it has
no effect on net income.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 133
"Accounting for Derivative Instruments and Hedging Activities." As
amended, SFAS 133, which is effective for the company on January
1, 2001, requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial
position, measure those instruments at fair value and recognize
changes in the fair value of derivatives in earnings in the period
of change unless the derivative qualifies as an effective hedge
that offsets certain exposures. The effect of this standard on the
company's Consolidated Financial Statements has not yet been
determined.
In December 1999, the Securities Exchange Commission (SEC) staff
issued Staff Accounting Bulletin (SAB) 101 " Revenue Recognition."
SABs are not rules issued by the SEC. Rather, they represent
interpretations and practices followed by the SEC's staff in
administering the disclosure requirements of the federal
securities laws. SAB 101 provides guidance on the recognition,
presentation and disclosure of revenue in financial statements; it
does not change the existing rules on revenue recognition. SAB 101
sets forth the basic criteria that must be met before revenue
should be recorded. Implementation of SAB 101 is required by the
fourth quarter of 2000 and will have no effect on the company's
Consolidated Financial Statements.
ITEM 3. MARKET RISK
There have been no significant changes in the risk issues affecting
the Company subsequent to those discussed in the Annual Report on
Form 10-K for 1999.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor its subsidiary are party to, nor is their
property the subject of, any material pending legal proceedings other
than routine litigation incidental to their businesses.
ITEM 5. OTHER INFORMATION
In August 2000 the Company announced the succession of E.A. Guiles to
the position of group president of Sempra Energy's Regulated Business
Units which was left vacant by the retirement of Warren Mitchell.
Guiles has also been named chairman of SDG&E and of SoCalGas and
continues as president of SoCalGas' Energy Distribution Services.
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.
Exhibit 27 - Financial Data Schedules
27.1 Financial Data Schedule for the six-month period ended
June 30, 2000.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed after March 31, 2000.
SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934,
SDG&E has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SAN DIEGO GAS & ELECTRIC COMPANY
(Registrant)
Date: August 11, 2000 By: /s/ D.L. Reed
-----------------------------
D.L. Reed
President
