<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[..X..] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
March 31, 1996
For the quarterly period ended.......................................
Or
[.....] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ________________ to _________________
Name of
Commission Registrant IRS Employer
File as specified State of Identification
Number in its charter Incorporation Number
- ---------- -------------- -------------- --------------
1-11439 ENOVA CORPORATION California 33-0643023
1-3779 SAN DIEGO GAS &
ELECTRIC COMPANY California 95-1184800
101 ASH STREET, SAN DIEGO, CALIFORNIA 92101
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrants' telephone number, including area code (619) 696-2000
-------------------
No Change
- -----------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since
last report
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Sections 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past
90 days. Yes...X... No......
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock outstanding March 31, 1996:
Enova Corporation 116,563,375
-----------
San Diego Gas & Electric Company Wholly owned by Enova Corporation
<PAGE>
ENOVA CORPORATION
AND
SAN DIEGO GAS & ELECTRIC COMPANY
CONTENTS
Page No.
--------
PART I. FINANCIAL INFORMATION
Statements of Consolidated Income . . . . . . . . . 3
Consolidated Balance Sheets . . . . . . . . . . . . 4
Statements of Consolidated Cash Flows . . . . . . . 5
Notes to Consolidated Financial Statements. . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . .11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . .16
Item 4. Submission of Matters to Vote . . . . . . . .17
Item 6. Exhibits and Reports on Form 8-K. . . . . . .18
Signature . . . . . . . . . . . . . . . . . . . . .19
2
<PAGE>
<TABLE>
STATEMENTS OF INCOME (unaudited)
In thousands except per share amounts
<CAPTION>
Enova Corporation
and Subsidiaries SDG&E
---------------------- ------------------
For the three months ended March 31 1996 1995 1996 1995
--------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues
Electric $367,293 $379,288 $367,293 $379,288
Gas 84,649 84,578 84,649 84,578
Diversified operations 13,955 14,089 -- --
--------------------------------------------
Total operating revenues 465,897 477,955 451,942 463,866
--------------------------------------------
Operating Expenses
Electric fuel 23,824 23,848 23,824 23,848
Purchased power 71,623 86,264 71,623 86,264
Gas purchased for resale 35,498 34,665 35,498 34,665
Maintenance 14,814 19,283 14,814 19,283
Depreciation and decommissioning 71,188 67,818 66,814 64,464
Property and other taxes 11,834 11,488 11,834 11,488
General and administrative 45,638 40,957 45,170 40,454
Other 52,978 51,936 41,832 40,887
Income taxes 45,508 48,041 56,363 55,881
--------------------------------------------
Total operating expenses 372,905 384,300 367,772 377,234
--------------------------------------------
Operating Income 92,992 93,655 84,170 86,632
--------------------------------------------
Other Income and (Deductions)
Allowance for equity funds used
during construction 1,249 1,560 1,249 1,560
Taxes on nonoperating income (455) (221) (455) (221)
Other - net 374 405 602 (247)
--------------------------------------------
Total other income and
(deductions) 1,168 1,744 1,396 1,092
--------------------------------------------
Income Before Interest Charges 94,160 95,399 85,566 87,724
--------------------------------------------
Interest Charges
Long-term debt 22,562 24,291 19,094 21,054
Short-term debt and other 4,467 4,480 4,467 4,837
Allowance for borrowed funds
used during construction (567) (712) (567) (712)
Preferred dividend requirements of
SDG&E 1,646 1,916 -- --
--------------------------------------------
Net interest charges 28,108 29,975 22,994 25,179
--------------------------------------------
Income From Continuing Operations 66,052 65,424 62,572 62,545
Discontinued Operations, Net Of
Income Taxes -- (5,490) -- (695)
--------------------------------------------
Net Income 66,052 59,934 62,572 61,850
Preferred Dividend Requirements -- -- 1,646 1,916
--------------------------------------------
Earnings Applicable to Common Shares $66,052 $59,934 $60,926 $59,934
============================================
Average Common Shares Outstanding 116,570 116,533
=======================
Earnings Per Common Share from
Continuing Operations $0.57 $0.56
=======================
Earnings Per Common Share $0.57 $0.51
=======================
Dividends Declared Per Common Share $0.39 $0.39
=======================
See notes to consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
BALANCE SHEETS
In thousands of dollars
<CAPTION>
Enova Corporation
and Subsidiaries SDG&E
-------------------------- --------------------------
Balance at March 31, December 31, March 31, December 31,
1996 1995 1996 1995
(unaudited) (unaudited)
------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Utility plant - at original cost $5,572,122 $5,533,554 $5,572,122 $5,533,554
Accumulated depreciation
and decommissioning (2,500,499) (2,433,397) (2,500,499) (2,433,397)
----------- ----------- ----------- -----------
Utility plant-net 3,071,623 3,100,157 3,071,623 3,100,157
----------- ----------- ----------- -----------
Investments and other property 579,953 532,289 308,506 448,860
----------- ----------- ----------- -----------
Current assets
Cash and temporary investments 82,472 96,429 9,346 20,755
Accounts receivable 173,238 178,155 169,313 178,091
Due from affiliates -- -- 24,745 --
Notes receivable 34,498 34,498 -- --
Inventories 67,162 67,959 67,162 67,959
Other 74,765 41,012 55,560 29,419
----------- ----------- ----------- -----------
Total current assets 432,135 418,053 326,126 296,224
----------- ----------- ----------- -----------
Deferred taxes recoverable in rates 300,607 298,748 300,607 298,748
----------- ----------- ----------- -----------
Deferred charges and other assets 300,528 321,193 227,235 250,440
----------- ----------- ----------- -----------
Total $4,684,846 $4,670,440 $4,234,097 $4,394,429
=========== =========== =========== ===========
CAPITALIZATION AND LIABILITIES
Capitalization
Common equity $1,540,001 $1,520,070 $1,385,286 $1,520,070
Preferred stock of SDG&E
Not subject to mandatory redemption 78,475 93,475 78,475 93,475
Subject to mandatory redemption 25,000 25,000 25,000 25,000
Long-term debt 1,333,378 1,350,094 1,186,305 1,217,026
----------- ----------- ----------- -----------
Total capitalization 2,976,854 2,988,639 2,675,066 2,855,571
----------- ----------- ----------- -----------
Current liabilities
Short-term borrowings 3,400 -- 3,400 --
Long-term debt redeemable
within one year 115,000 115,000 115,000 115,000
Current portion of long-term debt 68,891 36,316 33,858 8,835
Accounts payable 114,641 145,517 114,312 145,273
Dividends payable 47,105 47,383 47,105 47,383
Interest and taxes accrued 24,875 22,537 29,633 23,621
Regulatory balancing accounts
overcollected-net 180,164 170,761 180,164 170,761
Other 132,442 125,438 72,172 90,119
----------- ----------- ----------- -----------
Total current liabilities 686,518 662,952 595,644 600,992
----------- ----------- ----------- -----------
Customer advances for construction 33,645 34,698 33,645 34,698
Accumulated deferred income taxes-net 578,585 523,335 587,747 536,324
Accumulated deferred investment
tax credits 102,739 104,226 102,739 104,226
Deferred credits and other liabilities 306,505 356,590 239,256 262,618
Contingencies (Note 2) -- -- -- --
----------- ----------- ----------- -----------
Total $4,684,846 $4,670,440 $4,234,097 $4,394,429
=========== =========== ============ ============
See notes to consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
STATEMENTS OF CASH FLOWS (unaudited)
In thousands of dollars
<CAPTION>
Enova Corporation
and Subsidiaries SDG&E
---------------------- ----------------------
For the three months ended March 31 1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities
Income from continuing operations $ 66,052 $ 65,424 $ 62,572 $ 62,545
Adjustments to reconcile income from continuing
operations to net cash provided by operating activities
Depreciation and decommissioning 71,188 67,818 66,814 64,464
Amortization of deferred charges and other assets 1,425 3,221 1,425 3,221
Amortization of deferred credits
and other liabilities (8,768) (8,074) (292) (292)
Allowance for equity funds used during construction (1,249) (1,560) (1,249) (1,560)
Deferred income taxes and investment tax credits (29,087) (2,097) (27,864) (2,720)
Other-net (2,182) (4,414) (4,860) (3,876)
Changes in working capital components
Accounts and notes receivable 4,917 19,125 8,778 23,280
Regulatory balancing accounts 9,403 (3,117) 9,403 (3,117)
Inventories 797 1,526 797 1,526
Other current assets 1,029 1,106 968 (1,876)
Interest and taxes accrued 38,198 52,522 47,975 62,282
Accounts payable and other current liabilities (41,633) (47,708) (48,908) (58,670)
Cash flows used by discontinued operations -- (1,957) (11,544) (1,476)
---------- ---------- ---------- ----------
Net cash provided by operating activities 110,090 141,815 104,015 143,731
---------- ---------- ---------- ----------
Cash Flows from Financing Activities
Dividends paid (45,467) (44,284) (47,383) (46,200)
Short-term borrowings-net 3,400 (52,525) 3,400 (50,325)
Issuance of long-term debt 2,300 50,907 -- 50,000
Repayment of long-term debt (11,758) (11,377) -- --
Redemption of common stock (480) (101) -- (101)
Redemption of preferred stock (15,155) -- (15,155) --
---------- ---------- ---------- ----------
Net cash used by financing activities (67,160) (57,380) (59,138) (46,626)
---------- ---------- ---------- ----------
Cash Flows from Investing Activities
Utility construction expenditures (39,863) (41,827) (39,863) (41,827)
Contributions to decommissioning funds (5,505) (5,505) (5,505) (5,505)
Other-net (11,519) (3,089) (1,203) (1,788)
Discontinued operations -- 1,374 (9,715) (27,664)
---------- ---------- ---------- ----------
Net cash used by investing activities (56,887) (49,047) (56,286) (76,784)
---------- ---------- ---------- ----------
Net increase (decrease) (13,957) 35,388 (11,409) 20,321
Cash and temporary investments, beginning of period 96,429 25,405 20,755 11,605
---------- ---------- ---------- ----------
Cash and temporary investments, end of period $ 82,472 $ 60,793 $ 9,346 $ 31,926
========== ========== ========== ==========
Supplemental disclosure of Cash Flow Information
Income tax payments $ 51,260 $ 9,201 $ 51,260 $ 9,201
========== ========== ========== ==========
Interest payments, net of amounts capitalized $ 24,124 $ 26,298 $ 18,779 $ 22,359
========== ========== ========== ==========
Supplemental Schedule of Noncash Investing
and Financing Activities
Real estate investments $ 31,012 $ 5,000 -- --
Cash paid -- (250) -- --
---------- ---------- ---------- ----------
Liabilities assumed $ 31,012 $ 4,750 -- --
========== ========== ========== ==========
Net assets of affiliates transferred to parent -- -- $150,069 --
========== ========== ========== ==========
See notes to consolidated financial statements.
</TABLE>
5
<PAGE>
ENOVA CORPORATION/SAN DIEGO GAS & ELECTRIC COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. GENERAL
On January 1, 1996 Enova Corporation became the parent of SDG&E and
its unregulated subsidiaries. SDG&E's outstanding common stock was
converted on a share-for-share basis into Enova Corporation common
stock. SDG&E's debt securities, preferred stock and preference stock
were unaffected and remain with SDG&E. On January 31, 1996 SDG&E's
ownership interests in its subsidiaries were transferred to Enova
Corporation at book value, completing the parent company structure.
Additional information concerning the effects of the parent company
structure is provided in Note 3 herein.
This Quarterly Report on Form 10-Q is a combined filing of Enova
Corporation and SDG&E. The financial statements presented herein
represent the consolidated statements of Enova Corporation and its
subsidiaries (including SDG&E), as well as the stand-alone statements
of SDG&E. Unless otherwise indicated, the "Notes to Consolidated
Financial Statements" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" herein pertain to Enova
Corporation as a consolidated entity.
The Registrants believe all adjustments necessary to present a fair
statement of the consolidated financial position and results of
operations for the periods covered by this report, consisting of
recurring accruals, have been made. Certain prior year amounts have
been reclassified for comparability.
The Registrants' significant accounting policies, as well as those of
their subsidiaries, are described in the notes to consolidated
financial statements in its 1995 Annual Report to Shareholders. The
same accounting policies are followed for interim reporting purposes.
This quarterly report should be read in conjunction with the
Registrants' 1995 Annual Report on Form 10-K. The consolidated
financial statements and Management's Discussion & Analysis of
Financial Condition and Results of Operations included in the
Registrants' 1995 Annual Report to Shareholders were incorporated by
reference into the Registrants' 1995 Annual Report on Form 10-K and
filed as an exhibit thereto.
2. MATERIAL CONTINGENCIES
INDUSTRY RESTRUCTURING -- CALIFORNIA PUBLIC UTILITIES COMMISSION
In December 1995, the CPUC issued its policy decision on the
restructuring of California's electric utility industry to stimulate
competition and reduce rates. The decision provides that, beginning in
January 1998, customers will be able to buy their electricity through
a power exchange that will obtain power from the lowest-bidding
suppliers. The exchange is a spot market with published pricing. An
independent system operator (ISO) will schedule power transactions and
access to the transmission system. Consumers also may choose to
continue to purchase from their local utility under regulated tariffs.
As a third option, a cross section of all customer groups
(residential, industrial, commercial and agricultural) will be able to
go directly to any energy supplier and enter into private contracts
with generators, brokers or others (direct access). As the direct-
access mechanism has many technical issues to be resolved, a 5-year
phase-in is planned. All
6
<PAGE>
California electricity consumers will have
the option to purchase generation services directly by 2003. The
utilities will continue to provide transmission and distribution
services to customers who choose to purchase their energy from other
providers.
Utilities will, within certain limits, be allowed to recover their
"stranded" investment costs incurred for CPUC-approved facilities
through the establishment of a non-bypassable competition transition
charge (CTC). In addition to $301 million of deferred taxes
recoverable in rates, SDG&E has approximately $202 million of other
regulatory assets at March 31, 1996 (included in "Deferred Charges and
Other Assets" on the Consolidated Balance Sheets), offset by $133
million of regulatory liabilities (included in "Accumulated Deferred
Investment Tax Credits" and "Deferred Credits and Other Liabilities"
on the Consolidated Balance Sheets). Of these amounts, approximately
$64 million (net) is related to generation operations, of which $24
million (net) is related to nuclear operations. Recovery periods
currently range from one to 30 years. It is estimated that at March
31, 1996, SDG&E had approximately $940 million of net generating plant
(including approximately $740 million of nuclear facilities) currently
being recovered in rates over various periods of time. Under the
CPUC's industry restructuring decision, to the extent these
investments exceed their market values, they must be recouped by 2005
through the CTC mechanism.
In addition, SDG&E has entered into significant long-term purchased-
power commitments with various utilities and other providers totaling
$3.4 billion. Also, under the CPUC's Biennial Resource Plan Update
decision, SDG&E may be required to contract for an additional 500
megawatts of power over 17-year terms. The present value of ratepayer
payments beginning in 1997 over the life of these contracts is
estimated to be $2.3 billion. Prices under these contracts could
significantly exceed the future market price. Both purchased-power and
BRPU commitments are indexed to natural gas prices and are subject to
significant fluctuation. SDG&E has challenged the CPUC's BRPU decision
and the FERC has declared the BRPU auction procedures unlawful under
federal law. The CPUC has issued a ruling encouraging SDG&E and other
utilities to reach settlements with the auction winners. SDG&E has
reached settlement with two auction winners. Settlement discussions
with the others are ongoing. However, under the CPUC's industry
restructuring decision, existing purchased-power obligations
(including qualifying facilities) would be recovered through the CTC
mechanism. For purposes of CTC, rates for customers choosing
traditional utility service (instead of power exchange or direct
access) will be capped at January 1, 1996, levels. Including the CTC,
rates cannot exceed the cap and, therefore, recovery of the CTC is
limited by the cap.
In April 1996 the CPUC issued an order in response to Pacific Gas and
Electric's motion for interim CTC recovery and its concerns over lost
revenues from large customers' choosing other electricity providers
before plans for deregulation are finalized. The CPUC found that
PG&E's request to require customers to pay all of the CTC before
leaving the system was too severe a remedy in a competitive market,
but that these customers have the responsibility to pay their fair
share of transition costs. The CPUC deferred the setting of the
interim CTC to a joint committee process open to all parties. SDG&E
filed a motion on April 12, 1996 requesting that SDG&E be afforded
interim CTC treatment as well and that this effort be consolidated
with PG&E's and addressed by the joint committee.
7
<PAGE>
Performance-based regulation will replace cost-of-service regulation
for distribution services. SDG&E is currently participating in a
performance-based ratemaking process on an experimental basis which
began in 1993 and runs through 1998.
The utilities are required to file plans with the CPUC to implement
direct access and new or revised PBR proposals. Plans to establish the
power exchange and ISO are also required to be filed by the utilities
with both the CPUC and the FERC, as the FERC has jurisdiction over the
exchange, the ISO and interstate transmission.
The CPUC is currently working on building a consensus on the new
market structure with the California Legislature, the governor,
utilities and customers. The California Legislature has passed a
resolution forming an oversight committee to ensure the legislature's
involvement in the policies presented by the CPUC, and that the
policies comply with federal and state laws and achieve the objectives
both of competition and of the various social programs that are
currently funded through utility rates.
As the restructuring of the industry evolves, SDG&E will become more
vulnerable to competition. However, based on recent CPUC decisions,
recovery of stranded costs is provided for, including recovery of
SDG&E's investment in San Onofre Nuclear Generating Station Units 2
and 3. Due to the recent decisions, SDG&E does not anticipate
incurring a material charge against earnings for its generating
facilities, the related regulatory assets and other long-term
commitments. In addition, although California utilities' rates are
significantly higher than the national average, SDG&E has a lower
concentration of industrial customers and is in its eighth year of
being the lowest-cost provider among the investor-owned utilities in
California, which make its customers a less-likely target for outside
competitors.
SDG&E currently accounts for the economic effects of regulation in
accordance with Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation," under
which a regulated entity may record a regulatory asset if it is
probable that, through the rate-making process, the utility will
recover that asset from customers. Regulatory liabilities represent
future reductions in revenues for amounts due to customers. Once the
restructuring transition is final, SDG&E may not continue to meet the
criteria for applying SFAS 71 to all of its operations in the new
regulatory framework. In a non-SFAS 71 environment, additions to
plant, among other things, would need to be recovered through market
prices.
INDUSTRY RESTRUCTURING -- FEDERAL ENERGY REGULATORY COMMISSION
In April 1996 the FERC issued a final rule that will require all
public electric utilities to offer wholesale "open-access"
transmission service on a nondiscriminatory basis and to share
information about available transmission capacity. In addition, public
utilities will be required to functionally price their generation and
transmission services separately from each other. The FERC also stated
its belief that utilities should be allowed to recover the costs of
assets and obligations made uneconomic by the changed regulatory
environment. In October 1995 SDG&E filed for approval of its open-
access tariffs for its service territory with the FERC in conjunction
with its request for a marketing license for Enova Energy, a wholly
owned subsidiary of Enova Corporation which
8
<PAGE>
desires to transact
business at market-based rates in the wholesale energy market. In
December 1995 the FERC issued a draft order approving SDG&E's open-
access tariff, but rejecting Enova Energy's filing. This limits Enova
Energy to cost-based rates. The FERC's final rule and the CPUC's
industry restructuring plan will result in the creation of a bid-based
wholesale electricity spot market with open-access transmission. The
FERC's rule will go into effect during mid 1996.
NUCLEAR INSURANCE
SDG&E and the co-owners of the San Onofre units have purchased primary
insurance of $200 million, the maximum amount available, for public
liability claims. An additional $8.7 billion of coverage is provided
by secondary financial protection required by the Nuclear Regulatory
Commission and provides for loss sharing among utilities owning
nuclear reactors if a costly accident occurs. SDG&E could be assessed
retrospective premium adjustments of up to $32 million in the event of
a nuclear incident involving any of the licensed, commercial reactors
in the United States, if the amount of the loss exceeds $200 million.
In the event the public liability limit stated above is insufficient,
the Price-Anderson Act provides for Congress to enact further revenue-
raising measures to pay claims, which could include an additional
assessment on all licensed reactor operators.
Insurance coverage is provided for up to $2.8 billion of property
damage and decontamination liability. Coverage is also provided for
the cost of replacement power, which includes indemnity payments for
up to 2 years, after a waiting period of 21 weeks. Coverage is
provided primarily through mutual insurance companies owned by
utilities with nuclear facilities. If losses at any of the nuclear
facilities covered by the risk-sharing arrangements were to exceed the
accumulated funds available from these insurance programs, SDG&E could
be assessed retrospective premium adjustments of up to $9 million.
3. DISCONTINUED OPERATIONS
ENOVA CORPORATION:
On June 6, 1995 Enova Corporation sold its investment in Wahlco
Environmental Systems, Inc. for $5 million. The sale of Wahlco has
been accounted for as a disposal of a segment of business. Enova
Corporation's financial statements for prior periods have been
restated to reflect Wahlco as a discontinued operation in accordance
with Accounting Principles Board Opinion No. 30 "Reporting the Effects
of a Disposal of a Segment of Business." Enova Corporation's
discontinued operations are summarized in the table below:
Three Months Ended Year Ended
March 31, December 31,
1995 1995 1994 1993
- ------------------------------------------------------------------------------
In millions of dollars
Revenues $14 $24 $70 $82
Loss from operations before
income taxes - - (70) (14)
Loss on disposal of Wahlco before
income taxes (9) (12) - -
Income tax benefits 4 12 7 5
- ------------------------------------------------------------------------------
9
<PAGE>
The loss on disposal of Wahlco was recorded in 1995 and reflects the
sale of Wahlco and Wahlco's net operating losses after 1994. The loss
from discontinued operations for 1994 was primarily due to the $59
million writedown of Wahlco's goodwill and other intangible assets as
a result of the depressed air pollution-control market and increasing
competition. The 1995 income tax benefit includes the effects of the
1994 writedown to the extent recognizable thus far.
SDG&E:
SDG&E's financial statements for periods prior to 1996 have been
restated to reflect the results of the transferred subsidiaries
(described in Note 1 herein) and the sale of Wahlco as discontinued
operations. SDG&E's discontinued operations are summarized in the
table below.
Three Months Ended Year Ended
March 31, December 31
1995 1995 1994 1993
- -------------------------------------------------------------------------------
In millions of dollars
Revenues $28 $81 $126 $119
Loss from operations before
income taxes (3) (24) (105) (19)
Loss on disposal of Wahlco
before income taxes (9) (12) - -
Income tax benefits 11 50 43 22
- -------------------------------------------------------------------------------
The net assets of the subsidiaries (included in "Investments and Other
Property" on SDG&E's Consolidated Balance Sheets) at December 31, 1995
are summarized as follows:
- ---------------------------------------------------------------
In millions of dollars
Current assets $ 122
Non-current assets 286
Current liabilities ( 62)
Long-term debt and other liabilities (214)
- ---------------------------------------------------------------
Net assets $ 132
- ---------------------------------------------------------------
10
<PAGE>
ITEM 2.
ENOVA CORPORATION/SAN DIEGO GAS & ELECTRIC COMPANY
MANAGEMENTS'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
On January 1, 1996 Enova Corporation became the parent of SDG&E and
its unregulated subsidiaries. SDG&E's outstanding common stock was
converted on a share-for-share basis into Enova Corporation common
stock. SDG&E's debt securities, preferred stock and preference stock
were unaffected and remain with SDG&E. On January 31, 1996 SDG&E's
ownership interests in its subsidiaries were transferred to Enova
Corporation at book value, completing the parent company structure.
Effective January 1, 1996 SDG&E's financial statements for periods
prior to 1996 have been restated to reflect the net results of non-
utility subsidiaries as discontinued operations in accordance with
Accounting Principles Board Opinion No. 30 "Reporting the Effects of a
Disposal of a Segment of Business." For additional information see
Notes 1 and 3 of the notes to consolidated financial statements herein, and
the 1995 Annual Report on Form 10-K.
The following discussions reflect the results for the three months
ended March 31, 1996 compared to the corresponding period in 1995:
OPERATING REVENUES
Electric revenues decreased due primarily to lower purchased power
costs and lower authorized return in 1996. Gas revenues and revenues
from Enova Corporation's diversified operations did not change
significantly.
OPERATING EXPENSES
Purchased power expense decreased due to the availability of lower-
cost nuclear generation in 1996. Electric fuel expense did not change
significantly, reflecting increased nuclear generation offset by lower
natural gas-fired generation. (Energy supply sources were shifted to
purchased power and fossil-fuel generation in 1995 as a result of
nuclear refuelings during 1995).
EARNINGS
Earnings per common share from continuing operations were $0.57 in
1996, compared to $0.56 for the corresponding period in 1995. The
increase in earnings from continuing operations in 1996 is due to
Enova Financial's additional investments in affordable-housing limited
partnerships.
REGULATORY MATTERS:
CALIFORNIA PUBLIC UTILITIES COMMISSION'S INDUSTRY RESTRUCTURING
In December 1995 the CPUC issued its policy decision on the
restructuring of California's electric utility industry to stimulate
competition and reduce rates. See additional discussion of industry
restructuring in Note 2 of the notes to consolidated financial
statements.
11
<PAGE>
SAN ONOFRE NUCLEAR GENERATION STATION UNITS 2 & 3
In April 1996 the CPUC approved the accelerated recovery of existing
capital costs over an eight-year period beginning April 15, 1996.
During this period, SDG&E's overall authorized rate of return on the
investment will be 7.14 percent. The decision includes a performance
incentive plan that encourages continued, efficient operation of the
plant during the eight-year period. During the eight-year period,
customers will pay approximately four cents per kilowatt-hour. This
pricing structure replaces the traditional method of recovering the
units' operating expenses and capital improvements and is intended to
make the units more competitive with other sources.
ELECTRIC RATES
A settlement agreement was filed in February 1996 resolving all issues
in the forecast phase of SDG&E's 1996 ECAC application. The settlement
recommends a $22 million rate decrease which reflects a lower fuel and
purchased-power forecast, previous balancing account overcollections
and the 3.8 cents/kwh incremental cost incentive pricing under the
SONGS 2 & 3 settlement. The settlement incorporates a plan to refund
$35 million of the ECAC balancing account overcollection while
amortizing the remainder over 12 months. A final CPUC decision is
expected in May 1996. If the settlement is adopted, SDG&E's system
average rate will be 9.64 cents/kwh effective June 1, 1996. SDG&E's
authorized system average rate is currently 9.87 cents/kwh.
GAS RATES
In April 1996 SDG&E filed its application under the Biennial Cost
Allocation Proceeding, proposing a $42 million decrease in natural-gas
rates. If approved as filed, the monthly bill of a typical residential
natural-gas customer would decrease about $0.63. This request for a
rate decrease reflects lower natural-gas transportation costs.
Hearings will be scheduled for mid 1996 and a final CPUC decision is
expected by December 1996. The rate change would be effective in
January 1997 if approved.
In March 1996 SDG&E filed an application with the CPUC for
authorization to change its core gas procurement rate on a monthly
basis instead of annually in order to better reflect market price
changes in SDG&E's customer rates. A CPUC decision is expected in mid-
1996.
DEMAND-SIDE MANAGEMENT
SDG&E estimates 1995 shareholder rewards from its DSM programs to be
$40 million, an increase compared to 1994 results of $9 million. This
increase is due to completion of several large government projects.
The rewards will be collected and recorded in earnings over a ten-year
period and are subject to CPUC approval which is expected in late
1996.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES:
Utility operations continue to be a major source of liquidity. In
addition, financing needs are met primarily through the issuance of
short-term and long-term debt, and common and preferred stock. These
capital resources are expected to remain available. SDG&E's cash
requirements include plant construction and other capital
expenditures. Nonutility cash requirements include capital
expenditures related to new products; affordable-housing, leasing and
other investments; and repayments and retirements of long-term debt.
In addition to changes described elsewhere, major changes in cash
flows are described below.
OPERATING ACTIVITIES
Besides the effects of other items discussed in this report, the only
significant changes in cash flows from operations for the three months
ended March 31, 1996 compared to the corresponding 1995 period were
related to the changes in income taxes and interest accrued and
deferred income taxes and investment tax credits. The changes were due
primarily to the differences in timing of income tax payments and
payments in connection with an audit of prior income tax returns.
FINANCING ACTIVITIES
Enova Corporation anticipates that it will require only minimal
amounts of short-term debt in 1996 primarily for utility operations.
Enova does not expect to issue stock or long-term debt in 1996, other
than for SDG&E-related refinancings. Enova Financial repaid $12
million of long-term debt during the first quarter of 1996 during the
ordinary course of business.
At March 31, 1996 SDG&E had short-term bank lines of $30 million and
long-term bank lines of $280 million with short-term loans outstanding
of $3.4 million. Commitment fees are paid on the unused portion of the
lines. There are no requirements for compensating balances.
On January 15, 1996 SDG&E redeemed its $7.20 series preference stock.
The entire $15 million issue was called for mandatory redemption at
$101 per share.
Quarterly cash dividends of $0.39 per share were declared for the
first quarter of 1996 and for each quarter during the year ended
December 31, 1995. The dividend payout ratio for the first quarter of
1996 and years ended December 31, 1995, 1994, 1993, 1992 and 1991 were
68 percent, 80 percent, 130 percent, 82 percent, 81 percent and 79
percent, respectively. The increase in the payout ratio for the year
ended December 31, 1994 was due to the writedowns recorded during
1994. For additional information regarding the writedowns, see Enova
Corporation's 1995 Annual Report on Form 10-K. The payment of future
dividends is within the discretion of the directors and is dependent
upon future business conditions, earnings and other factors. Net cash
flows provided by operating activities currently are sufficient to
maintain the payment of dividends at the present level.
13
<PAGE>
SDG&E maintains its capital structure so as to obtain long-term
financing at the lowest possible rates. The following table shows the
percentages of capital represented by the various components. The
capital structures are net of the construction funds held by a trustee
in 1992 and 1993.
March 31,
1991 1992 1993 1994 1995 1996
-----------------------------------------------------------
Common equity 47% 47% 47% 48% 49% 49%
Preferred stock 5 5 4 4 4 4
Debt and leases 48 48 49 48 47 47
-----------------------------------------------------------
Total 100% 100% 100% 100% 100% 100%
-----------------------------------------------------------
The following table lists key financial ratios for SDG&E.
Twelve Year
months ended ended
March 31, December 31,
1996 1995
----------------- -------------
Pretax interest coverage 4.6 X 4.5 X
Internal cash generation 107 % 115 %
Construction expenditures as
a percent of capitalization 7.7 % 7.7 %
DERIVATIVES: Enova Corporation's policy is to use derivative financial
instruments to reduce its exposure to fluctuations in interest rates
and foreign currency exchange rates. These financial instruments are
with major investment firms and, along with cash and cash equivalents
and accounts receivable, expose Enova Corporation to market and credit
risks. These risks may at times be concentrated with certain
counterparties. Enova Corporation presently contemplates use of
similar instruments to reduce its exposure to fluctuations in natural
gas prices. Enova Corporation does not use derivatives for trading or
speculative purposes.
SDG&E periodically enters into interest-rate swap and cap agreements
to moderate its exposure to interest-rate changes and to lower its
overall cost of borrowing. These swap and cap agreements generally
remain off the balance sheet as they involve the exchange of fixed-
and variable-rate interest payments without the exchange of the
underlying principal amounts. The related gains or losses are
reflected in the income statement as part of interest expense. SDG&E
would be exposed to interest-rate fluctuations on the underlying debt
should other parties to the agreement not perform. Such non-
performance is not anticipated. At March 31, 1996 SDG&E had two such
agreements, including an index cap agreement on $75 million of bonds
maturing in 1996, and a floating-to-fixed-rate swap associated with
$45 million of variable-rate bonds maturing in 2002.
SDG&E's pension fund periodically uses foreign currency forward
contracts to reduce its exposure from exchange-rate fluctuations
associated with certain investments in foreign equity securities.
These contracts generally have maturities ranging from three to six
months. Such contracts may expose the pension fund to credit loss if
the counterparties fail to perform. At March 31, 1996 there were no
forward contracts outstanding.
14
<PAGE>
INVESTING ACTIVITIES
Cash used in investing activities for the three months ended March 31,
1996 included utility construction expenditures and payments to its
nuclear decommissioning trust. Utility construction expenditures,
excluding nuclear fuel and the allowance for equity funds used during
construction, were $221 million in 1995 and are estimated to be $220
million in 1996. The company continuously reviews its construction,
investment and financing programs and revises them in response to
changes in competition, customer growth, inflation, customer rates,
the cost of capital, and environmental and regulatory requirements.
Among other things, the level of expenditures in the next few years
will depend heavily on the impact of the CPUC's industry restructuring
decision, on the timing of expenditures to comply with air emission
reduction and other environmental requirements, on the company's plan
to transport natural gas to Mexico and, on the scope of Enova
Technologies' investment in new technologies. Payments to the nuclear
decommissioning trust are expected to continue until SONGS is
decommissioned, which is not expected to occur before 2013. Although
Unit 1 was permanently shut down in 1992, it is expected to be
decommissioned concurrently with Units 2 and 3.
OTHER SIGNIFICANT BALANCE SHEET CHANGES
Besides the effects of items discussed in the preceding pages,
significant changes to Enova Corporation's and SDG&E's balance sheets
at March 31, 1996, compared to December 31, 1995 were in investments
and other property, other current assets, accounts payable,
accumulated deferred income taxes and deferred credits and other
liabilities. The increase in investments and other property for Enova
Corporation was due to Enova Financial's affordable-housing
investments. The decrease in investments and other property for SDG&E
was due to SDG&E's transfer of the nonutility subsidiaries to Enova
Corporation in January 1996. The increases in other current assets and
accumulated deferred income taxes were due to differences in the
timing of income tax payments. The decrease in accounts payable was
due to lower accruals for demand-side management and lower incentive
compensation and other expense accruals at March 31, 1996. The
decreases in deferred charges and other assets and in deferred credits
and other liabilities were due primarily to a decrease in the
projected pension benefit obligation as a result of a lower assumed
actuarial discount rate.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no significant subsequent developments in the Public
Service Company of New Mexico, Canadian Natural Gas, and Electric and
Magnetic Fields (Covalt and North City West) proceedings. Background
information concerning these and the following proceedings is
contained in Enova Corporation's 1995 Annual Report on Form 10-K.
SONGS Personal Injury Litigation
In Mettler v. Southern California Edison, et al., on March 25, 1996
the judge granted Southern California Edison's motion for summary
judgment based upon the workers' compensation exclusivity rule, thus
dismissing Edison from the case. On April 8, 1996 the judge denied
SDG&E's motion for summary judgment based on the same theory. There
have been no significant subsequent developments in the other SONGS
cases.
SDG&E is unable to predict the ultimate outcome of these proceedings.
16
<PAGE>
ITEM 4. - ENOVA CORPORATION
The shareholders of Enova Corporation elected four Class I Directors
at the annual meeting on April 23, 1996. The name of each nominee and
the number of shares voted for or withheld were as follows:
Nominees Votes For Votes Withheld
- ------------------------------------------------------------------------
Richard C. Atkinson 99,641,466 2,803,388
Stephen L. Baum 99,668,933 2,775,921
Ann Burr 99,569,191 2,875,663
Richard A. Collato 99,691,331 2,753,523
The results of the voting on the following additional items were as follows:
(a) A shareholder proposal regarding criteria for incentive
compensation.
In Favor 16,344,270
Opposed 65,830,522
Abstained 3,493,183
Broker Non-Vote 16,776,879
(b) A shareholder proposal regarding criteria for stock options.
In Favor 14,479,136
Opposed 67,477,641
Abstained 3,710,891
Broker Non-Vote 16,777,186
Additional information concerning the election of the board of
directors and other proposals is contained in Enova Corporation's 1996
Proxy Statement and Notice of Annual Meeting.
ITEM 4. - SAN DIEGO GAS & ELECTRIC COMPANY
The shareholders of San Diego Gas & Electric Company elected 11
directors at the annual meeting on April 23, 1996. The name of each
nominee and the number of preference and preferred shares voted for or
withheld are summarized below. All 116,583,358 common shares, which
are owned by Enova Corporation, were voted for the nominees.
Nominees Votes For Votes Withheld
- ------------------------------------------------------------------------
Richard C. Atkinson 2,301,402 34,530
Stephen L. Baum 2,305,902 30,030
Ann Burr 2,298,502 37,430
Richard A. Collato 2,302,302 33,630
Daniel W. Derbes 2,302,302 33,630
Donald E. Felsinger 2,305,502 30,430
Richard H. Goldsmith 2,300,922 35,010
William D. Jones 2,301,122 34,810
Ralph R. Ocampo 2,301,524 34,408
Thomas A. Page 2,304,742 31,190
Thomas C. Stickel 2,301,602 34,330
Additional information concerning the election of the board of
directors is contained in SDG&E's 1996 Proxy Statement and Notice of
Annual Meeting.
17
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 12 - Computation of ratios
12.1 Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends as required under SDG&E's
August 1993 registration of 5,000,000 shares of Preference
Stock (Cumulative).
Exhibit 27 - Financial Data Schedules
27.1 Financial Data Schedule for the quarter ended March 31,
1996 for Enova Corporation.
27.2 Financial Data Schedule for the quarter ended March 31,
1996 for SDG&E.
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed on February 2, 1996 to
report that on January 31, 1996 SDG&E's ownership interests in
its subsidiaries were transferred to Enova Corporation at book
value, completing the organizational restructuring into the new
parent company framework.
18
<PAGE>
SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934,
the registrant has duly caused this quarterly report to be signed on
its behalf by the undersigned thereunto duly authorized.
ENOVA CORPORATION
SAN DIEGO GAS & ELECTRIC COMPANY
(Registrants)
Date: April 26, 1996 By: /s/ F. H. Ault
---------------------
(Signature)
F. H. AULT
Vice President and Controller
19
<PAGE>
<PAGE>
EXHIBIT 12.1
SAN DIEGO GAS & ELECTRIC COMPANY
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
3 Months
Ended
1991 1992 1993 1994 1995 3/31/96
--------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fixed Charges:
Interest:
Long-Term Debt $ 95,124 $ 97,067 $ 84,830 $ 81,749 $ 82,591 $ 19,094
Short-Term Debt 7,010 5,043 6,676 8,894 17,886 3,261
Amortization of Debt
Discount and Expense,
Less Premium 2,471 2,881 4,162 4,604 4,870 1,206
Interest Portion of
Annual Rentals 18,067 14,558 9,881 9,496 9,631 2,246
---------- ---------- ----------- --------- ----------- ----------
Total Fixed
Charges 122,672 119,549 105,549 104,743 114,978 25,807
---------- ---------- ----------- --------- ----------- ----------
Preferred Dividends
Requirements 10,535 9,600 8,565 7,663 7,663 1,646
Ratio of Income Before
Tax to Net Income 1.64160 1.71389 1.79353 1.83501 1.78991 1.90804
---------- ----------- ----------- ---------- ---------- ----------
Preferred Dividends
for Purpose of Ratio 17,294 16,453 15,362 14,062 13,716 3,141
---------- ----------- ----------- ---------- ---------- ----------
Total Fixed Charges
and Preferred
Dividends for
Purpose of Ratio $139,966 $136,002 $120,911 $118,805 $128,694 $ 28,948
========== =========== ========== ========== ========== ==========
Earnings:
Net Income (before
preferred dividend
requirements) $202,544 $224,177 $215,872 $206,296 $219,049 $ 62,572
Add:
Fixed Charges
(from above) 122,672 119,549 105,549 104,743 114,978 25,807
Less: Fixed Charges
Capitalized 2,322 1,262 1,483 1,424 2,040 330
Taxes on Income 129,953 160,038 171,300 172,259 173,029 56,818
---------- ---------- ---------- ---------- ----------- ---------
Total Earnings for
Purpose of Ratio $452,847 $502,502 $491,238 $481,874 $505,016 $144,867
========== ========== ========== ========== =========== ==========
Ratio of Earnings
to Combined Fixed
Charges and Preferred
Dividends 3.24 3.69 4.06 4.06 3.92 5.00
========== ========== ========== ========== =========== =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,071,623
<OTHER-PROPERTY-AND-INVEST> 579,953
<TOTAL-CURRENT-ASSETS> 432,135
<TOTAL-DEFERRED-CHARGES> 130,828
<OTHER-ASSETS> 470,307
<TOTAL-ASSETS> 4,684,846
<COMMON> 291,408
<CAPITAL-SURPLUS-PAID-IN> 565,434
<RETAINED-EARNINGS> 683,159
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,540,001
25,000
78,475
<LONG-TERM-DEBT-NET> 1,095,248
<SHORT-TERM-NOTES> 3,400
<LONG-TERM-NOTES-PAYABLE> 147,073
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 175,370
0
<CAPITAL-LEASE-OBLIGATIONS> 91,057
<LEASES-CURRENT> 8,521
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,520,701
<TOT-CAPITALIZATION-AND-LIAB> 4,684,846
<GROSS-OPERATING-REVENUE> 465,897
<INCOME-TAX-EXPENSE> 45,508
<OTHER-OPERATING-EXPENSES> 327,397
<TOTAL-OPERATING-EXPENSES> 372,905
<OPERATING-INCOME-LOSS> 92,992
<OTHER-INCOME-NET> 1,168
<INCOME-BEFORE-INTEREST-EXPEN> 94,160
<TOTAL-INTEREST-EXPENSE> 28,108 <F1>
<NET-INCOME> 66,052
0 <F1>
<EARNINGS-AVAILABLE-FOR-COMM> 66,052
<COMMON-STOCK-DIVIDENDS> 45,460
<TOTAL-INTEREST-ON-BONDS> 22,562
<CASH-FLOW-OPERATIONS> 110,090
<EPS-PRIMARY> 0.57
<EPS-DILUTED> 0.57
<FN>
<F1> PREFERRED DIVIDEND OF SUBSIDIARY INCLUDED IN INTEREST EXPENSE
</TABLE>
