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 September 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
STATEMENTS OF CONSOLIDATED INCOME
Dollars in millions
<CAPTION>
Three Months Ended
September 30,
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2000 1999
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<S> <C> <C>
Operating Revenues
Electric $ 645 $ 438
Natural gas 86 82
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Total operating revenues 731 520
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Expenses
Electric fuel and net purchased power 444 181
Cost of natural gas distributed 52 29
Operation and maintenance 105 111
Depreciation and decommissioning 53 52
Other taxes and franchise payments 26 20
Income taxes 18 45
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Total 698 438
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Operating Income 33 82
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Other Income and (Deductions)
Interest income 16 9
Regulatory interest (4) (1)
Allowance for equity funds used
during construction 2 1
Taxes on non-operating income (5) (11)
Other - net 2 17
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Total 11 15
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Income Before Interest Charges 44 97
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Interest Charges
Long-term debt 21 21
Other 6 15
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Total 27 36
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Net Income 17 61
Preferred Dividend Requirements 2 2
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Earnings Applicable to Common Shares $ 15 $ 59
========= =========
See notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
SAN DIEGO GAS & ELECTRIC COMPANY AND SUBSIDIARY
STATEMENTS OF CONSOLIDATED INCOME
Dollars in millions
<CAPTION>
Nine Months Ended
September 30,
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2000 1999
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<S> <C> <C>
Operating Revenues
Electric $1,467 $1,443
Natural gas 309 277
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Total operating revenues 1,776 1,720
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Expenses
Electric fuel and net purchased power 841 391
Cost of natural gas distributed 154 119
Operation and maintenance 277 337
Depreciation and decommissioning 157 510
Other taxes and franchise payments 62 60
Income taxes 101 83
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Total 1,592 1,500
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Operating Income 184 220
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Other Income and (Deductions)
Interest income 44 26
Regulatory interest (8) (3)
Allowance for equity funds used
during construction 5 3
Taxes on non-operating income (13) (22)
Other - net (4) 23
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Total 24 27
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Income Before Interest Charges 208 247
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Interest Charges
Long-term debt 61 63
Allowance for borrowed funds used
during construction (1) (1)
Other 36 21
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Total 96 83
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Net Income 112 164
Preferred Dividend Requirements 5 5
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Earnings Applicable to Common Shares $ 107 $ 159
======== =========
See notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
SAN DIEGO GAS & ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
Dollars in millions
<CAPTION>
Balance at
-------------------------
September 30, December 31,
2000 1999
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<S> <C> <C>
ASSETS
Utility plant - at original cost $4,679 $4,483
Accumulated depreciation and decommissioning (2,492) (2,326)
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Utility plant - net 2,187 2,157
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Nuclear decommissioning trusts 578 551
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Current assets
Cash and cash equivalents 210 337
Accounts receivable 309 192
Due from affiliates 279 152
Income taxes receivable 3 87
Inventories 62 61
Other 9 5
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Total current assets 872 834
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Other Assets
Loan to parent -- 422
Deferred taxes recoverable in rates 90 114
Regulatory assets 696 233
Deferred charges and other assets 54 55
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Total other assets 840 824
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Total $4,477 $4,366
======= =======
See notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
SAN DIEGO GAS & ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
Dollars in millions
<CAPTION>
Balance at
-------------------------
September 30, December 31,
2000 1999
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<S> <C> <C>
CAPITALIZATION AND LIABILITIES
Capitalization
Common stock $ 857 $ 857
Retained earnings 167 460
Accumulated other comprehensive income (1) (3)
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Total common equity 1,023 1,314
Preferred stock not subject to mandatory redemption 79 79
Preferred stock subject to mandatory redemption 25 25
Long-term debt 1,361 1,418
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Total capitalization 2,488 2,836
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Current liabilities
Current portion of long-term debt 66 66
Accounts payable 256 155
Deferred income taxes 95 106
Regulatory balancing accounts - net 281 192
Customer refunds payable 254 --
Other 174 161
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Total current liabilities 1,126 680
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Deferred Credits and other liabilities
Customer advances for construction 43 44
Deferred income taxes 353 327
Deferred investment tax credits 48 51
Deferred credits and other liabilities 419 428
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Total deferred credits and other liabilities 863 850
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Commitments and contingent liabilities (Note 2)
Total $4,477 $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>
Nine Months Ended
September 30,
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2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 112 $ 164
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and decommissioning 157 510
Customer refunds paid (378) --
Application of plant sale proceeds to stranded costs -- (295)
Application of balancing accounts to stranded costs -- (66)
Deferred income taxes and investment tax credits 35 (201)
Non-cash rate reduction bond expense (revenue) 16 (50)
Other - net 4 57
Net change in other working capital components 272 232
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Net cash provided by operating activities 218 351
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CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (207) (165)
Loans repaid by (paid to) parent 304 (393)
Proceeds from sale of generating plants - net -- 466
Contributions to decommissioning funds (4) (13)
Other - net 24 (12)
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Net cash (used) provided by investing activities 117 (117)
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CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (405) (105)
Issuance of long-term debt 12 16
Payment on long-term debt (69) (130)
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Net cash used by financing activities (462) (219)
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Increase (decrease) in cash and temporary investments (127) 15
Cash and cash equivalents, January 1 337 284
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Cash and cash equivalents, September 30 $ 210 $ 299
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest payments, net of amounts capitalized $ 94 $ 85
====== ======
Income tax payments (refunds) - net $ (8) $ 266
====== ======
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
Background
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 may purchase from the PX or any other
"qualified exchange" the power that they distribute or may utilize
any of the available tools (i.e., block forward market and bilateral
contracts as described below) to make these purchases. 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. 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
electric fuel and net 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, both of which will 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.
SDG&E's stranded costs included the cost of SONGS as of December 31,
1995. SDG&E retains its 20-percent ownership interest in SONGS. SONGS
costs subsequent to December 31, 1995, 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. Subsequent to December 31, 2003, any benefits associated
with the operation of SONGS would be shared equally with customers.
These benefits may be defined as one of the following: profits from
continued operations (shareholders would bear any losses), any gain
on plant sale, a third party appraisal or some other valuation
approach. SDG&E must notify the CPUC no later than July 1, 2002 as to
its preferred valuation approach. SDG&E's request for CPUC approval
to auction its interest in SONGS has been withdrawn, with the CPUC
reserving the right to approve any future ratemaking or divestiture
request.
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, during the third quarter of 2000
SDG&E returned to its customers, via a combination of cash refunds
and billing credits, $388 million of surplus bond proceeds in
accordance with a June 8, 2000 CPUC decision.
AB 1890 also included 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 was to be passed through to customers with no markup and would
fluctuate with the price of electricity from the ISO/PX.
Recent Developments Concerning Commodity Prices
Recently, a number of factors, including recent supply/demand
conditions, resulted in abnormally high commodity prices, which
caused SDG&E's monthly customer bills to be substantially higher than
normal. Responses to these high rates have resulted in a temporary
ceiling on the commodity portion of electric rates, as described
below.
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,
it approved an additional reduction of the price cap from $500 per
MWh to $250 per MWh. On November 1, 2000 the FERC reported its
findings from its formal investigation of the electric rates and
structure of the ISO/PX, as well as of market-based sellers in the
California market. The investigation found no specific abuse of
market power by individual generators and determined that constraints
within the market structure, such as hedging restrictions imposed by
the CPUC, and a long-term shortage of power in the state resulted in
the high electric commodity prices. Federal regulators proposed
several remedies to fix California's flawed market, but stated that
past profits from generators and traders could not be ordered
refunded to customers. The FERC did state that the high short-term
energy rates during the summer of 2000 were "unjust and unreasonable"
and left the door open to future customer refunds should specific
instances of market abuses be uncovered. The report proposes a
temporary modification (for the next two years) of how prices are set
in the PX, so that bids higher than $150 per MWh cannot set the
market clearing price paid to all participants. Companies can receive
prices higher than the $150 per MWh "soft cap," but only if they can
demonstrate they are justified and fulfill extensive reporting
requirements. In addition, the FERC proposes to allow the California
IOUs to buy and sell power outside the PX to afford the IOUs better
deals, to replace the ISO/PX stakeholder governing boards with
independent boards, and to require market buyers to schedule 95
percent of their transactions in the day-ahead markets to reduce the
over-reliance on the real-time market to meet supply. The FERC
ordered that the $250 per MWh ISO/PX price cap, as described above,
will remain in place until the new FERC pricing mechanism is
finalized. The FERC proposal will be open to industry and public
comment before implementation. A final order is expected by the end
of 2000.
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 refund is in addition to the $388 million of
surplus bond proceeds (see above) returned to residential and small
commercial customers.
Also on August 3, 2000 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. In addition, it
ordered SDG&E not to disconnect the service of any customers who do
not pay their high bills through October 31, 2000. SDG&E recently
requested the CPUC to extend this policy through December 31, 2000
for customer classes covered by AB 265 (see below). The CPUC also
directed SDG&E to expand its level pay plan to all customers who
request it. This allows a customer to level out payments over a year.
Subsequently, in September 2000 the California governor signed two
bills (AB 265 and AB 970) passed by the California Legislature with
respect to electricity pricing and power plant construction. AB 265
contains a commodity rate ceiling and stabilization plan that imposes
a ceiling on the commodity rate for electricity that SDG&E can pass on
to residential and small business customers on a current basis. The
ceiling is retroactive to June 1, 2000, extends through December 31,
2002, and may be extended through December 31, 2003 if the CPUC
determines that it is in the public interest. AB 265 also requires the
CPUC to initiate a proceeding to assess alternatives for recovering
undercollections (the cost of electricity purchased by SDG&E that
cannot be passed on to customers on a current basis) resulting from
the commodity rate ceiling. The legislation provides for the recovery
of such undercollections (in excess of net revenues associated with
sales of energy from utility-owned or managed generation assets)
resulting from the reasonable and prudent costs of procuring the
commodity. It also directs the CPUC to examine the prudence and
reasonableness of SDG&E's procurement of wholesale energy on behalf of
its customers. In October 2000, the CPUC commenced a thorough review
of SDG&E's energy procurement practices for the period July 1999
through August 2000. A decision is expected in the third quarter of
2001. AB 970 speeds up the licensing and review of new power plants to
increase supply and meet growing demand. The bill also encourages
energy conservation, establishing new programs to reduce demand.
To implement AB 265, on September 7, 2000, the CPUC unanimously
approved a cap on electric rates. The ceiling on the electricity
commodity portion of customers' bills is set at 6.5 cents/kWh. This
is a "floating cap" that can float downward as prices decrease, but
cannot exceed actual commodity costs without the permission of the
CPUC. An interest-bearing balancing account would be established to
record related undercollections resulting from the commodity rate
ceiling with undercollected amounts to be recovered in a manner (not
specified in the decision) intended to make SDG&E whole for the
reasonable and prudent costs of procuring the electric commodity.
This balancing account is classified as a regulatory asset on the
Consolidated Balance Sheets due to its long-term nature. The
undercollection is $254 million at September 30, 2000, is estimated
to amount to $375 million by December 31, 2000, and grow to $550
million and $750 million at December 31, 2001 and 2002, respectively,
based on NYMEX Palo Verde futures prices. If the CPUC later adopts
the option granted it by the legislation to extend the ceiling for an
additional year, the balance at December 31, 2003 is estimated to be
$950 million. These amounts are higher than those recently discussed
by the Company due to balancing-account treatment of contracts with
Qualified Facilities and changes in NYMEX Palo Verde futures prices.
These amounts could increase or decrease significantly due to
variations between the forward prices used in the estimation process
and the actual costs incurred, and could decrease to the extent that
regulators permit overcollections in other balancing accounts to be
applied against this undercollection and/or take actions to correct
the California market, such as by adopting the $150 per MWh "soft
cap" recently proposed by the FERC. In October 2000 SDG&E requested
that the CPUC freeze the commodity rate at 6.5 cents/kWh instead of
capping the rate at that amount. Under a rate freeze, in those months
when the electric commodity cost is less than 6.5 cents/kWh, SDG&E
would be able to collect more revenue than its current cost of
electricity to offset the undercollection incurred when wholesale
power prices are above that rate.
Customers covered under the commodity rate ceiling plan include
residential, small-commercial and lighting customers, as well as
general acute-care hospitals, K-12 public and private schools and
other small usage customers. Based on 6.5 cents/kWh, the average
customer's electric bill is expected to be $53 a month for
residential customers and $220 a month for small-commercial
customers. Because the legislation is retroactive to June 1, 2000,
customers will receive credits on their bills for the amounts paid in
excess of the 6.5-cents cap from June through August of 2000. During
the summer of 2000, the average electric commodity cost was 13.95
cents/kWh (compared to 4.34 cents/kWh the prior summer). The
legislation also charges the CPUC with setting up a voluntary program
for large-commercial, agricultural and industrial customers that
would allow such customers the option of the 6.5-cents cap during the
year with a true-up at year end. The CPUC is in the initial stages of
designing a program to implement this part of the legislation.
On September 21, 2000, the CPUC granted SDG&E authority to purchase
up to 1,900 megawatts of power through bilateral contracts. These
contracts are transactions between SDG&E and a third-party power
supplier (other than the PX) that require the third party to provide
a specific amount of power at a specific future time and price.
Subsequent to September 30, 2000, SDG&E began signing multi-year
contracts for fixed-price power. The current intention is not to
contract for a large portion of its requirements.
A third bill (AB 1165) addressed utility revenue shortfalls from the
commodity rate ceiling by allocating $150 million of state funds to
provide most customers with rate relief from the high cost of
wholesale energy incurred during the commodity rate ceiling period.
The bill was vetoed by the California governor on September 29, 2000.
The FERC continues to investigate the electric bulk power markets and
California's attorney general is investigating whether there has been
market manipulation. Ongoing investigations are also in process by
the CPUC and the U.S. Attorney General's office. 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 the commodity price ceiling. The
California Joint Legislative Audit Committee recently approved an
audit of the PX/ISO.
AB 265 and related CPUC decisions to respond to the high electricity
rates will adversely affect the timing of revenue collections by
SDG&E and related cash flows. However, the legislation and related
decisions affirm SDG&E's right to recover all of its prudently
incurred costs of purchasing electricity for its customers. As noted
above, a decision is expected in the third quarter of 2001 on the
CPUC's review of SDG&E's recent energy procurement practices. During
the third quarter of 2000, SDG&E recorded an aftertax charge of $30
million related to the recent legislative and regulatory actions
associated with power acquisition costs. 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 electric service.
California regulatory uncertainties have led Moody's Investors
Service to change its rating outlook on SDG&E's securities from
positive to negative. Moody's also changed the rating outlook on
Sempra Energy's securities from stable to negative. Fitch IBCA,
another major credit rating agency, also lowered its outlook on
SDG&E's securities from stable to negative due to the uncertainty
over the recovery of high wholesale energy prices not included in
customer bills. Another major credit rating agency, Standard &
Poor's, did not change the Company's rating outlook and believes the
Company's long-term prognosis to be stable. Although some of the
rating outlooks have changed, the Company's actual credit ratings
have not. As of November 7, 2000, the Company's credit ratings are as
follows:
S&P Moody's Fitch IBCA
-------------------------------------
Sempra Energy
Unsecured debt A A2 A
Commercial paper A-1 P-1 D-1
SDG&E
Secured debt AA- Aa3 AA
Unsecured debt A+ A1 AA-
Preferred stock A+ a1 A+
Commercial paper A1+ P1 D1+
The ratings and outlook can affect the Company's ability to finance
other projects and can increase its incremental costs of borrowing.
Other
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 (RTO), grid management, transmission pricing reform and
related matters. The identification of RTO regions and formation of
the RTOs are subject to a collaborative process. The impact of Order
2000 on SDG&E depends on the results of this process and other
implementation issues.
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 opposed 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. The
TAC will go into effect in January 2001. The estimated impact on
SDG&E is to increase transmission costs by $1 million annually. In
addition, 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 principal amount
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 related to municipalities seeking to preserve tax-exempt
status could resolve this issue.
Thus far, the CPUC's 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.
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 natural 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 settlement
proposals were filed by various groups of parties that addressed the
changes the CPUC found promising in July 1999. Hearings were held in
May and June of 2000, and a CPUC decision is expected in 2001. 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 natural 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 (SoCalGas), 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 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 September 30,
2000 and 1999 was $17 million and $61 million, respectively.
Comprehensive income for the nine-month periods ended September 30,
2000 and 1999 was $114 million and $164 million, respectively. For
the 2000 periods, the following is a reconciliation of net income to
comprehensive income.
Three-month Nine-month
period ended period ended
(Dollars in millions) September 30, 2000 September 30, 2000
--------------------------------------------------------------------
Net income $ 17 $ 112
Minimum pension liability adjustments -- 2
--------------------------------
Comprehensive income $ 17 $ 114
--------------------------------------------------------------------
For the 1999 periods, comprehensive income was equal to net income.
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;
legislative activities; business, regulatory and legal decisions; the
pace of deregulation of retail natural gas and electricity delivery;
the timing and success of business development efforts; and other
uncertainties -- all of which are difficult to predict and many of
which are beyond the control of the Company. Readers are cautioned
not to rely unduly on any forward-looking statements and are urged to
review and consider carefully the risks, uncertainties and other
factors which affect the Company's business described in this
quarterly report and other reports filed by the Company from time to
time with the Securities and Exchange Commission.
See also "Factors Influencing Future Performance" below.
CAPITAL RESOURCES AND LIQUIDITY
Recent events in electric industry restructuring, in particular the
commodity rate ceiling and resulting undercollections, will reduce
SDG&E's liquidity in 2000 and in the next two or three years. Working
capital requirements can be met through the issuance of short-term
and long-term debt. Cash and cash equivalents at September 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 nine-month period ended September 30, 2000, the decrease in
cash flows from operations compared to the corresponding period in
1999 is primarily due to SDG&E's refund to customers of surplus rate
reduction bond proceeds (see Note 2 of the notes to Consolidated
Financial Statements) and a decrease in overcollections on regulatory
balancing accounts. These factors are partially offset by increased
accounts payable due to an increase in volumes and prices for
electricity and lower income tax payments as a result of income tax
refunds.
The $100 million accelerated refund to customers of certain balancing
account overcollections, as discussed in Note 2 of the notes to
consolidated financial statements, has been returned to customers as
a credit on their bills.
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures for property, plant and equipment are estimated
to be $300 million for the full year 2000 and are being financed
primarily by internally generated funds. Construction, investment and
financing programs are continuously reviewed and revised in response
to changes in competition, customer growth, inflation, customer
rates, the cost of capital, and environmental and regulatory
requirements.
CASH FLOWS FROM FINANCING ACTIVITIES
For the nine-month period ended September 30, 2000, the increase in
cash flows used in financing activities compared to the corresponding
period in 1999 is primarily due to an increase in dividends paid to
Sempra Energy. In May 2000, SDG&E redeemed 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. In addition, during the nine
months ended September 30, 2000, payments on rate reduction bonds and
nuclear fuel capital leases were $48 million and $11 million,
respectively.
RESULTS OF OPERATIONS
Earnings applicable to common shares decreased 75 percent and 33
percent for the three-month and nine-month periods ended September
30, 2000, respectively, compared to the same periods in 1999,
primarily due to a $30 million aftertax charge for a potential
regulatory disallowance related to the acquisition to date of
wholesale power in the deregulated California market (see Note 2 of the
notes to Consolidated Financial Statements). Also contributing to the
decrease in net income were decreased rate base and authorized rate of
return on equity and (for the nine-month periods) increased interest
expense on customer refunds. In addition, with the elimination of the Gas
Fixed Cost Adjustment balancing account at the end of 1999, SDG&E's net
income now fluctuates with changes in natural gas demand, due to seasonal
and other factors. During the three-month period ended September 30, 2000,
this resulted in a $10 million decrease in net income. The effect on the
nine-month period ended September 30, 2000, was negligible because earlier
timing differences reversed during the three-month period ended September
30, 2000.
The tables below summarize electric and natural gas volumes and
revenues by customer class for the nine-month periods ended September
30, 2000 and 1999.
</TABLE>
<TABLE>
San Diego Gas & Electric
Electric Distribution and Transmission
For the nine-month periods ended September 30
(Volumes in millions of Kwhrs, dollars in millions)
<CAPTION>
2000 1999
------------------------------------------
Volumes Revenue Volumes Revenue
------------------------------------------
<S> <C> <C> <C> <C>
Residential 4,778 $ 654 4,753 $ 491
Commercial 4,740 643 4,733 446
Industrial 1,822 206 1,523 116
Direct access 2,579 82 2,304 88
Street and highway lighting 51 5 57 5
Off-system sales 561 20 290 7
------------------------------------------
14,531 1,610 13,660 1,153
Balancing and other (143) 290
------------------------------------------
Total 14,531 $1,467 13,660 $1,443
------------------------------------------
</TABLE>
<TABLE>
San Diego Gas & Electric
Gas Sales, Transportation and Exchange
For the nine-month periods ended September 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 25 $ 191 -- $ -- 25 $ 191
Commercial and industrial 16 94 16 9 32 106
Utility electric generation -- -- 42 14 42 14
--------------------------------------------------------------
41 $ 285 58 $ 23 99 311
Balancing accounts and other (2)
--------
Total $ 309
-------------------------------------------------------------------------------------------
1999:
Residential 30 $ 210 -- $ -- 30 $ 210
Commercial and industrial 19 82 13 11 32 93
Utility electric generation 18 7* 15 4 33 11
-------------------------------------------------------------
67 $ 299 28 $ 15 95 314
Balancing accounts and other (37)
---------
Total $ 277
-------------------------------------------------------------------------------------------
</TABLE>
* margin only for the months prior to the sale of the fossil-fuel plants.
Electric revenues increased two percent for the nine-month period
ended September 30, 2000 compared to the same period in 1999. The
fluctuation is primarily due to the charge for a potential regulatory
disallowance related to the acquisition to date of wholesale power in
the deregulated California market and 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), partially offset by the effect of higher pass-
through electric commodity costs.
Natural gas revenues increased 12 percent for the nine-month period
ended September 30, 2000, compared to the corresponding period in
1999, primarily due to increased natural gas prices.
Electric fuel and net purchased power expense increased 115 percent
for the nine-month period ended September 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 normally do not affect net
income, as explained in the 1999 Annual Report. However, the recent
supply/demand conditions referred to above resulted in a $50 million
pretax charge to income in September 2000.
Natural gas purchased for resale for the nine-month period ended
September 30, 2000 increased 29 percent from the corresponding period
in 1999. The increase was primarily due to higher natural gas prices.
Under the current regulatory framework, changes in core-market
natural gas prices do not affect net income since, as explained more
fully in the 1999 Annual Report, current or future customer rates
normally recover the actual cost of natural gas.
Depreciation and decommissioning expense decreased 69 percent for the
nine-month period ended September 30, 2000, compared to the
corresponding period in 1999, due to the 1999 sale of the power
plants and combustion turbines.
Operating income decreased 16 percent for the nine-month period ended
September 30, 2000 compared to the corresponding period in 1999. The
decrease is primarily due to the charge for a potential regulatory
disallowance related to the acquisition to date of wholesale power in
the deregulated California market.
FACTORS INFLUENCING FUTURE PERFORMANCE
As discussed in more detail in Note 2 of the notes to Consolidated
Financial Statements, a number of factors, including recent
supply/demand conditions, have resulted in abnormally high electric
commodity prices. This has caused SDG&E's monthly customer bills to
be substantially higher than normal. Responses to these high rates
have resulted in a temporary ceiling on electric rates, as described
briefly below and in more detail in the Note.
In September 2000 the California governor signed two bills (AB 265 and
AB 970) passed by the California Legislature with respect to
electricity pricing and power plant construction. AB 265 contains a
commodity rate ceiling and stabilization plan that imposes a ceiling
on the commodity rate for electricity that SDG&E can pass on to
residential and small business customers on a current basis. The
ceiling is retroactive to June 1, 2000, extends through December 31,
2002, and may be extended through December 31, 2003 if the CPUC
determines that it is in the public interest. AB 265 also requires the
CPUC to initiate a proceeding to assess alternatives for recovering
undercollections (the cost of electricity purchased by SDG&E that
cannot be passed on to customers on a current basis) resulting from
the commodity rate ceiling. The legislation provides for the recovery
of such undercollections (in excess of net revenues associated with
sales of energy from utility-owned or managed generation assets)
resulting from the reasonable and prudent costs of procuring the
commodity. It also directs the CPUC to examine the prudence and
reasonableness of SDG&E's procurement of wholesale energy on behalf of
its customers. In October 2000, the CPUC commenced a thorough review
of SDG&E's energy procurement practices for the period July 1999
through August 2000. A decision is expected in the third quarter of
2001. AB 970 speeds up the licensing and review of new power plants to
increase supply and meet growing demand. The bill also encourages
energy conservation, establishing new programs to reduce demand.
To implement AB 265, on September 7, 2000, the CPUC unanimously
approved a cap on electric rates. The ceiling on the electricity
commodity portion of customers' bills is set at 6.5 cents/kWh. This
is a "floating cap" that can float downward as prices decrease, but
cannot exceed actual commodity costs without the permission of the
CPUC. An interest-bearing balancing account would be established to
record related undercollections resulting from the commodity rate
ceiling with undercollected amounts to be recovered in a manner (not
specified in the decision) intended to make SDG&E whole for the
reasonable and prudent costs of procuring the electric commodity.
This balancing account is classified as a regulatory asset on the
Consolidated Balance Sheets due to its long-term nature. The
undercollection is $254 million at September 30, 2000, is estimated
to amount to $375 million by December 31, 2000, and grow to $550
million and $750 million at December 31, 2001 and 2002, respectively,
based on NYMEX Palo Verde futures prices. If the CPUC later adopts
the option granted it by the legislation to extend the ceiling for an
additional year, the balance at December 31, 2003 is estimated to be
$950 million. These amounts are higher than those recently discussed
by the Company due to balancing-account treatment of contracts with
Qualified Facilities and changes in NYMEX Palo Verde futures prices.
These amounts could increase or decrease significantly due to
variations between the forward prices used in the estimation process
and the actual costs incurred, and could decrease to the extent that
regulators permit overcollections in other balancing accounts to be
applied against this undercollection and/or take actions to correct
the California market, such as by adopting the $150 per MWh "soft
cap" recently proposed by the FERC. In October 2000 SDG&E requested
that the CPUC freeze the commodity rate at 6.5 cents/kWh instead of
capping the rate at that amount. Under a rate freeze, in those months
when the electric commodity cost is less than 6.5 cents/kWh, SDG&E
would be able to collect more revenue than its current cost of
electricity to offset the undercollection incurred when wholesale
power prices are above that rate.
California regulatory uncertainties have led Moody's Investors
Service to change its rating outlook on SDG&E's securities from
positive to negative. Moody's also changed the rating outlook on
Sempra Energy's securities from stable to negative. Fitch IBCA,
another major credit rating agency, also lowered its outlook on
SDG&E's securities from stable to negative due to the uncertainty
over the recovery of high wholesale energy prices not included in
customer bills. Another major credit rating agency, Standard &
Poor's, did not change the Company's rating outlook and believes the
Company's long-term prognosis to be stable. Although some of the
rating outlooks have changed, the Company's actual credit ratings
have not. The Company's actual credit ratings are detailed in Note 2
of the notes to Consolidated Financial Statements.
Performance of the Company in the near future will depend primarily
on the ratemaking and regulatory process, electric and natural gas
industry restructuring, and the changing energy marketplace. These
factors are discussed in this section and in the notes to
Consolidated Financial Statements.
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 (SoCalGas and SDG&E). 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
Except as otherwise described in this report, 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 that E.A. Guiles was appointed
to the position of group president of the regulated business units of
Sempra Energy, 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 and its Energy
Distribution Services business unit.
In September 2000 Sempra Energy announced the appointment of Stephen
L. Baum as chairman. He succeeds former chairman Richard D. Farman,
who has retired. Baum continues as president and chief executive
officer of Sempra Energy.
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 nine-month period ended
September 30, 2000.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed after June 30, 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: November 13, 2000 By: /s/ D.L. Reed
-----------------------------
D.L. Reed
President
