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
September 30, 1997
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 September 30, 1997:
Enova Corporation 113,616,714
-----------
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 Income. . . . . . . . . . . . . . . . 3
Balance Sheets. . . . . . . . . . . . . . . . . . . 5
Statements of Cash Flows. . . . . . . . . . . . . . 6
Notes to Financial Statements . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . .11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . .21
Item 6. Exhibits and Reports on Form 8-K. . . . . . .23
Signature . . . . . . . . . . . . . . . . . . . . . .24
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 September 30, 1997 1996 1997 1996
--------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues
Electric $484,218 $419,809 $484,218 $419,809
Gas 82,079 73,676 82,079 73,676
Other 14,761 14,108 -- --
--------------------------------------------
Total operating revenues 581,058 507,593 566,297 493,485
--------------------------------------------
Operating Expenses
Electric fuel 45,661 42,794 45,661 42,794
Purchased power 134,712 85,777 134,712 85,777
Gas purchased for resale 32,254 24,137 32,254 24,283
Maintenance 19,440 16,201 19,440 16,201
Depreciation and decommissioning 86,887 84,607 81,116 79,522
Property and other taxes 10,882 10,719 10,870 10,719
General and administrative 52,287 59,024 50,002 54,270
Other 56,618 50,786 45,041 38,937
Income taxes 46,958 46,262 61,207 59,154
--------------------------------------------
Total operating expenses 485,699 420,307 480,303 411,657
--------------------------------------------
Operating Income 95,359 87,286 85,994 81,828
--------------------------------------------
Other Income and (Deductions)
Allowance for equity funds used
during construction 1,402 1,443 1,402 1,443
Taxes on nonoperating income 2,880 (2,086) 536 (2,514)
Other - net (7,707) 5,016 (1,955) 5,443
--------------------------------------------
Net other income and
(deductions) (3,425) 4,373 (17) 4,372
--------------------------------------------
Income Before Interest Charges 91,934 91,659 85,977 86,200
--------------------------------------------
Interest Charges
Long-term debt 21,361 22,423 17,293 19,228
Short-term debt and other 4,487 5,527 4,391 5,527
Allowance for borrowed funds
used during construction (626) (682) (626) (682)
Preferred dividend requirements of
SDG&E 1,646 1,646 -- --
--------------------------------------------
Net interest charges 26,868 28,914 21,058 24,073
--------------------------------------------
Net Income 65,066 62,745 64,919 62,127
Preferred Dividend Requirements -- -- 1,646 1,646
--------------------------------------------
Earnings Applicable to Common Shares $65,066 $62,745 $63,273 $60,481
============================================
Average Common Shares Outstanding 113,616 116,566
=======================
Earnings Per Common Share $0.57 $0.54
=======================
Dividends Declared Per Common Share $0.39 $0.39
=======================
See notes to financial statements.
</TABLE>
3
<PAGE>
<TABLE>
STATEMENTS OF INCOME (unaudited)
In thousands except per share amounts
<CAPTION>
Enova Corporation
and Subsidiaries SDG&E
----------------------- --------------------
For the nine months ended September 30, 1997 1996 1997 1996
---------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues
Electric $1,274,928 $1,164,073 $1,274,928 $1,164,073
Gas 277,897 239,575 277,897 239,575
Other 37,644 40,809 -- --
---------------------------------------------
Total operating revenues 1,590,469 1,444,457 1,552,825 1,403,648
---------------------------------------------
Operating Expenses
Electric fuel 124,083 92,198 124,083 92,198
Purchased power 311,480 233,925 311,391 233,925
Gas purchased for resale 122,887 93,324 122,767 93,169
Maintenance 62,795 47,854 62,795 47,854
Depreciation and decommissioning 258,768 248,536 242,244 234,326
Property and other taxes 33,640 33,930 33,542 33,930
General and administrative 148,133 156,956 139,253 148,630
Other 164,841 154,187 128,502 119,370
Income taxes 113,848 128,744 161,102 164,406
---------------------------------------------
Total operating expenses 1,340,475 1,189,654 1,325,679 1,167,808
---------------------------------------------
Operating Income 249,994 254,803 227,146 235,840
---------------------------------------------
Other Income and (Deductions)
Allowance for equity funds used
during construction 4,271 4,159 4,271 4,159
Taxes on nonoperating income 8,579 (1,001) 1,824 (2,229)
Other - net (10,313) 2,394 (6,392) 2,954
---------------------------------------------
Net other income and
(deductions) 2,537 5,552 (297) 4,884
---------------------------------------------
Income Before Interest Charges 252,531 260,355 226,849 240,724
---------------------------------------------
Interest Charges
Long-term debt 65,220 66,856 53,226 57,438
Short-term debt and other 13,987 14,891 13,795 14,891
Allowance for borrowed funds
used during construction (1,923) (2,476) (1,923) (2,476)
Preferred dividend requirements of
SDG&E 4,937 4,937 -- --
---------------------------------------------
Net interest charges 82,221 84,208 65,098 69,853
---------------------------------------------
Net Income 170,310 176,147 161,751 170,871
Preferred Dividend Requirements -- -- 4,937 4,937
---------------------------------------------
Earnings Applicable to Common Shares $170,310 $176,147 $156,814 $165,934
=============================================
Average Common Shares Outstanding 114,551 116,567
=======================
Earnings Per Common Share $1.49 $1.51
=======================
Dividends Declared Per Common Share $1.17 $1.17
=======================
See notes to financial statements.
</TABLE>
4
<PAGE>
<TABLE>
BALANCE SHEETS
In thousands of dollars
<CAPTION>
Enova Corporation
and Subsidiaries SDG&E
-------------------------- --------------------------
Balance at September 30, December 31, September 30, December 31,
1997 1996 1997 1996
(unaudited) (unaudited)
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Utility plant - at original cost $5,821,280 $5,704,464 $5,821,280 $5,704,464
Accumulated depreciation
and decommissioning (2,871,008) (2,630,093) (2,871,008) (2,630,093)
----------- ----------- ----------- -----------
Utility plant-net 2,950,272 3,074,371 2,950,272 3,074,371
----------- ----------- ----------- -----------
Investments and other property 802,063 650,188 388,158 337,520
----------- ----------- ----------- -----------
Current assets
Cash and temporary investments 143,058 173,079 48,891 81,409
Accounts receivable 255,001 186,529 251,422 187,986
Notes receivable 28,961 33,564 -- --
Inventories 67,001 63,437 65,710 63,078
Other 38,160 47,094 25,582 33,227
----------- ----------- ----------- -----------
Total current assets 532,181 503,703 391,605 365,700
----------- ----------- ----------- -----------
Deferred taxes recoverable in rates 175,367 189,193 175,367 189,193
----------- ----------- ----------- -----------
Deferred charges and other assets 205,635 231,782 193,567 193,732
----------- ----------- ----------- -----------
Total $4,665,518 $4,649,237 $4,098,969 $4,160,516
=========== =========== =========== ===========
CAPITALIZATION AND LIABILITIES
Capitalization
Common equity $1,539,618 $1,569,670 $1,356,849 $1,404,136
Preferred stock of SDG&E
Not subject to mandatory redemption 78,475 78,475 78,475 78,475
Subject to mandatory redemption 25,000 25,000 25,000 25,000
Long-term debt 1,465,483 1,479,338 1,218,151 1,284,816
----------- ----------- ----------- -----------
Total capitalization 3,108,576 3,152,483 2,678,475 2,792,427
----------- ----------- ----------- -----------
Current liabilities
Current portion of long-term debt 57,622 69,902 6,748 33,639
Accounts payable 145,937 175,815 143,699 174,884
Due to affiliates -- -- 5,467 7,214
Dividends payable 45,956 47,213 45,956 47,131
Interest and taxes accrued 25,537 21,259 23,041 12,824
Regulatory balancing accounts
overcollected-net 113,550 35,338 113,550 35,338
Other 178,413 158,317 122,583 110,743
----------- ----------- ----------- -----------
Total current liabilities 567,015 507,844 461,044 421,773
----------- ----------- ----------- -----------
Customer advances for construction 35,910 34,666 35,910 34,666
Accumulated deferred income taxes-net 498,233 497,400 477,148 487,119
Accumulated deferred investment
tax credits 62,179 64,410 62,179 64,410
Deferred credits and other liabilities 393,605 392,434 384,213 360,121
----------- ----------- ----------- -----------
Total $4,665,518 $4,649,237 $4,098,969 $4,160,516
=========== =========== ============ ============
See notes to financial statements.
</TABLE>
5
<PAGE>
<TABLE>
STATEMENTS OF CASH FLOWS (unaudited)
In thousands of dollars
<CAPTION>
Enova Corporation
and Subsidiaries SDG&E
---------------------- ----------------------
For the nine months ended September 30, 1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities
Net income $170,310 $176,147 $161,751 $170,871
Adjustments to reconcile net income from continuing
operations to net cash provided by operating activities
Depreciation and decommissioning 258,768 248,536 242,244 234,326
Amortization of deferred charges and other assets 4,714 4,267 4,714 3,536
Amortization of deferred credits
and other liabilities (28,737) (28,608) (3,183) (2,883)
Allowance for equity funds used during construction (4,271) (4,159) (4,271) (4,159)
Deferred income taxes and investment tax credits 3,289 (29,308) (14) (28,603)
Other-net 31,267 23,199 5,611 5,080
Changes in working capital components
Accounts and notes receivable (63,869) (27,009) (63,436) (16,467)
Inventories (3,564) 4,045 (2,632) 4,924
Other current assets (2,826) (8,986) (702) (10,424)
Interest and taxes accrued 40,885 62,054 35,910 64,440
Accounts payable and other current liabilities (6,171) (13,960) (21,331) (24,196)
Regulatory balancing accounts 78,212 30,061 78,212 30,061
Cash used by discontinued operations -- -- -- (11,544)
---------- ---------- ---------- ----------
Net cash provided by operating activities 478,007 436,279 432,873 414,962
---------- ---------- ---------- ----------
Cash Flows from Financing Activities
Regular dividends paid (135,357) (136,388) (140,212) (141,594)
Special dividend paid -- -- (66,150) --
Issuances of long-term debt -- 169,452 -- 167,152
Repayment of long-term debt (126,672) (199,816) (92,796) (174,743)
Repurchase of common stock (66,314) (480) -- --
Redemption of preferred stock -- (15,155) -- (15,155)
---------- ---------- ---------- ----------
Net cash used by financing activities (328,343) (182,387) (299,158) (164,340)
---------- ---------- ---------- ----------
Cash Flows from Investing Activities
Utility construction expenditures (141,544) (144,192) (141,544) (144,192)
Contributions to decommissioning funds (16,527) (16,527) (16,527) (16,527)
Other-net (21,614) 2,879 (8,162) 7,217
---------- ---------- ---------- ----------
Net cash used by investing activities (179,685) (157,840) (166,233) (153,502)
---------- ---------- ---------- ----------
Net increase (decrease) (30,021) 96,052 (32,518) 97,120
Cash and temporary investments, beginning of period 173,079 96,429 81,409 20,755
---------- ---------- ---------- ----------
Cash and temporary investments, end of period $143,058 $192,481 $ 48,891 $117,875
========== ========== ========== ==========
Supplemental Disclosure of Cash Flow Information
Income tax payments (net of refunds) $ 84,761 $112,528 $135,745 $146,934
========== ========== ========== ==========
Interest payments, net of amounts capitalized $ 77,943 $ 74,754 $ 61,544 $ 64,570
========== ========== ========== ==========
Supplemental Schedule of Noncash Activities:
Investing and Financing
Real estate investments $101,576 $ 52,367 -- --
Cash paid (279) -- -- --
---------- ---------- ---------- ----------
Liabilities assumed $101,297 $ 52,367 -- --
========== ========== ========== ==========
Net assets of affiliates transferred to parent -- -- -- $150,069
========== ========== ========== ==========
See notes to financial statements.
</TABLE>
6
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Unaudited)
1. GENERAL
This Quarterly Report on Form 10-Q is a combined filing of Enova
Corporation (Enova) and San Diego Gas & Electric (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 Financial Statements" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" herein pertain both to
SDG&E and to Enova 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.
The Registrants' significant accounting policies, as well as those of
their subsidiaries, are described in the notes to consolidated financial
statements in Enova Corporation's 1996 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' 1996 Annual Report on Form 10-K, which included the
financial statements and notes thereto, and their Quarterly Reports on
Form 10-Q for the three months ended March 31, 1997 and the six months
ended June 30, 1997. The "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in the
Registrants' 1996 Annual Report to Shareholders was incorporated by
reference into the Registrants' 1996 Annual Report on Form 10-K and
filed as an exhibit thereto.
2. BUSINESS COMBINATION
In October 1996 Enova and Pacific Enterprises Inc., parent company of
Southern California Gas Company, announced an agreement to combine the
two companies. Additional information on the proposed business
combination is discussed on page 13 in "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
3. MATERIAL CONTINGENCIES
INDUSTRY RESTRUCTURING -- CALIFORNIA PUBLIC UTILITIES COMMISSION
In May 1997 the CPUC issued a decision stating that direct access will
be available to all electric customers on January 1, 1998. The CPUC
concluded that there are no technical or operational barriers to justify
limiting direct access availability once electric restructuring
commences. The decision gave power companies permission to begin direct
marketing on July 1, 1997 and set November 1, 1997 as the date customers
can begin choosing electricity providers.
As discussed in Note 10 in the notes to consolidated financial
statements of the 1996 Annual Report to Shareholders, electric utilities
7
<PAGE>
will be allowed a reasonable opportunity to recover their stranded costs
through December 31, 2001. SDG&E estimated its transition costs totaled
$2 billion (net present value in 1998 dollars). These identified
transition costs have been audited by independent auditors selected by
the CPUC. The auditors found SDG&E's recorded and forecasted cost
estimates reasonable and have identified $73 million as requiring
further action before being deemed a recoverable CTC. Through September
30, 1997 SDG&E has recovered transition costs of $0.2 billion for
nuclear generation and $0.1 billion for non-nuclear generation.
Additionally, overcollections of $0.1 billion recorded in the Energy
Cost Adjustment Clause and Electric Revenue Adjustment Mechanism
balancing accounts as of December 31, 1996, have been applied to
transition cost recovery, leaving approximately $1.6 billion for future
CTC recovery. Included therein is $0.4 billion for post-2001 purchased-
power-contract payments that may be recovered after 2001, subject to an
annual reasonableness review. During the 1997-2001 period recovery of
transition costs is limited by the rate cap (discussed below).
In October 1997 a CPUC Administrative Law Judge issued a proposed
decision allowing SDG&E the opportunity to recover of all of its sunk
non-nuclear generation costs, with the exception of $39 million in fixed
costs relating to gas transportation to power plants. An additional $34
million is still pending final determination. In any event, SDG&E is
confident that the costs excluded from CTC recovery can be recovered
through other CPUC proceedings. The decision does not include generation
plant additions made after December 20, 1995. Instead, each utility must
file a separate application seeking a reasonableness review thereof. In
October 1997 SDG&E filed an application with the CPUC seeking the
recovery of $13 million in 1996 capital additions for the Encina and
South Bay power plants. A final CPUC decision is expected in the first
half of 1998.
California's electric restructuring law (AB 1890) requires a 10-percent
reduction of residential and small commercial customers' rates beginning
in January 1998. AB 1890 provides for the issuance of rate-reduction
bonds by an agency of the State of California to enable the investor-
owned utilities (IOUs) to achieve this rate reduction. In September 1997
the CPUC approved SDG&E's application for the issuance of up to $800
million in rate-reduction bonds. SDG&E estimated that it would need $710
million of bond proceeds to enable it to effect a sufficient decrease in
rate base to finance the desired rate reduction. These bonds will be
repaid over 10 years by SDG&E's residential and small commercial
customers via a charge on their electric bills. In September 1997 SDG&E
and the other California IOUs received a favorable Internal Revenue
Service ruling on the tax treatment of the rate-reduction bonds. The
ruling states that the bond proceeds are taxable over the life of bonds
rather than at the time of issuance. The Securities and Exchange
Commission (SEC) has ruled that these bonds should be reflected on the
utilities' balance sheets as debt, even though the bonds would not be
secured by utility assets, but rather by the revenue streams collected
from the charge to residential and small commercial customers. SDG&E has
formed a subsidiary, SDG&E Funding LLC., to facilitate the issuance of
the rate-reduction bonds. In exchange for the proceeds from the bond
8
<PAGE>
issue, SDG&E will sell to SDG&E Funding its rights to the revenue
streams.
AB 1890 includes a rate freeze for all customers. Until the earlier of
March 31, 2002, or when transition cost recovery is complete, SDG&E's
system average rate will be frozen at June 10, 1996 levels (9.64 cents
per kilowatt-hour (kwh)), except for the impact of fuel cost changes and
the 10-percent rate reduction. In any event, rates cannot be increased
above 9.985 cents per kwh. During the first quarter of 1997, rising
natural-gas prices resulted in electric rate increases that raised
SDG&E's system average rate from 9.64 cents per kwh to 9.985 cents per
kwh. SDG&E's ability to recover its stranded costs is dependent on its
total revenues under the rate cap exceeding normal cost-of-service
revenues during the transition period by at least the amount of the
stranded costs. During the transition period SDG&E will not earn awards
from special programs, such as demand-side management, unless total
revenues are also adequate to cover the awards. Fuel-price volatility is
the most significant variable in the ability of SDG&E to recover its
stranded costs and program awards.
SDG&E had been accounting for the economic effects of regulation on all
of its utility operations in accordance with SFAS No. 71, "Accounting
for the Effects of Certain Types of Regulation," as described in the
notes to consolidated financial statements in the 1996 Annual Report to
Shareholders. The SEC had indicated a concern that the California
investor-owned utilities may not meet the criteria of SFAS No. 71 with
respect to their electric generation net regulatory assets. SDG&E has
ceased the application of SFAS No. 71, in accordance with the conclusion
of the Emerging Issues Task Force of the Financial Accounting Standards
Board that the discontinuance of SFAS No. 71 applied to the utilities'
generation business would not result in a write-off of their net
regulatory assets, since the CPUC has approved the recovery of these
assets by the distribution portion of their business, subject to the
rate cap.
INDUSTRY RESTRUCTURING -- FEDERAL ENERGY REGULATORY COMMISSION
The IOUs have jointly filed plans with the FERC, detailing the structure
of California's independent system operator (ISO) that will manage the
state's transmission grid and outlining the development of a power
exchange to act as a spot market for trading electricity. The FERC has
conditionally approved joint recommendations from the IOUs on the
creation of an ISO and power exchange, but has required further
information from the utilities as to their structure and operation. In
October 1997 the power exchange and the ISO filed their proposed rate
structures with the FERC. The ISO filing proposes that the California
IOUs pay an up-front restructuring charge and an administrative usage
charge for each megawatt-hour of volume transacted. SDG&E's share of the
restructuring charge would be $8.5 million. The IOUs have jointly
guaranteed $250 million of commercial loans to the ISO and power
exchange for their development and initial start-up. SDG&E's share of
the guarantee is $25 million. The IOUs have filed with the CPUC to
increase this amount to $300 million, increasing SDG&E's share to $30
million.
9
<PAGE>
NUCLEAR INSURANCE
SDG&E and the co-owners of the San Onofre units have purchased primary
insurance of $200 million, the maximum amount available, for public
liability claims. An additional $8.7 billion of coverage is provided by
secondary financial protection required by the Nuclear Regulatory
Commission and provides for loss sharing among utilities owning nuclear
reactors if a costly accident occurs. SDG&E could be assessed
retrospective premium adjustments of up to $32 million in the event of a
nuclear incident involving any of the licensed, commercial reactors in
the United States, if the amount of the loss exceeds $200 million. In
the event the public liability limit stated above is insufficient, the
Price-Anderson Act provides for Congress to enact further revenue-
raising measures to pay claims, which could include an additional
assessment on all licensed reactor operators.
Insurance coverage is provided for up to $2.75 billion of property
damage and decontamination liability. Coverage is also provided for the
cost of replacement power, which includes indemnity payments for up to
three years, after a waiting period of 17 weeks. Coverage is provided
through mutual insurance companies owned by utilities with nuclear
facilities. If losses at any of the nuclear facilities covered by the
risk-sharing arrangements were to exceed the accumulated funds available
from these insurance programs, SDG&E could be assessed retrospective
premium adjustments of up to $5.1 million.
CANADIAN GAS
SDG&E has long-term pipeline capacity commitments related to its
contracts for Canadian natural-gas supplies. These contracts are
currently in litigation, as described in "Legal Proceedings" in the 1996
Annual Report on Form 10-K beginning on page 19. If the supply of
Canadian natural-gas to SDG&E is not resumed to a level approximating
the related committed long-term pipeline capacity, SDG&E intends to
continue using the capacity in other ways, including the release of a
portion of this capacity to third parties.
10
<PAGE>
ITEM 2.
ENOVA CORPORATION/SAN DIEGO GAS & ELECTRIC COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements
within the definition of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. When used in
"Management's Discussion and Analysis of Financial Condition and Results
of Operations," the words "estimates", "expects", "anticipates", "plans"
and similar expressions are intended to identify forward-looking
statements that involve risks and uncertainties.
Although the Registrants believe that their expectations are based on
reasonable assumptions, they can give no assurance that those
expectations will be realized. Important factors that could cause actual
results to differ materially from those in the forward-looking
statements herein include political developments affecting state and
federal regulatory agencies, the pace and substance of electric industry
deregulation in California and in the United States, the ability to
create a market for rate-reduction bonds, the ability to effect a
coordinated and orderly implementation of both state legislation and the
CPUC's restructuring regulations, the consummation and timing of the
proposed business combination of Enova and Pacific Enterprises, the
level of sales of electricity, international political developments, and
the timing and extent of changes in interest rates and prices for
natural gas and electricity.
RESULTS OF OPERATIONS:
EARNINGS
Earnings per common share for the quarter ended September 30, 1997 were
$0.57 compared to $0.54 for the corresponding period in 1996. Earnings
per common share for the nine months ended September 30, 1997 were $1.49
compared to $1.51 for 1996. The 1997 increase in earnings for the
quarter is primarily due to previously announced changes related to the
elimination of electric balancing accounts, partially offset by expenses
relating to the proposed business combination with Pacific Enterprises.
Although the elimination of the balancing accounts is not expected to
have a significant effect for any full year, quarterly earnings will
fluctuate significantly, depending on monthly or seasonal changes in
electric sales and fuel prices. In general, earnings are expected to be
higher in high sales-volume months and lower in others. The 1997
decrease in earnings for the nine months is primarily due to the
balancing accounts' elimination, partially offset by improved earnings
at Enova's non-regulated subsidiaries.
OPERATING REVENUES
For the quarter ended September 30, 1997 electric revenues increased
from the corresponding period in 1996 primarily due to increased sales
volume due to weather. During the quarter SDG&E reached new all-time
electric system peaks on three occasions, resulting in a new peak demand
11
<PAGE>
of 3,668 megawatts reached on September 4, 1997. Prior to 1997 the
record for electricity demand was 3,355 megawatts on August 17, 1992.
Electric revenues increased for the nine months ended September 30, 1997
due to the increased sales volume and the accelerated recovery of San
Onofre Nuclear Generating Station Units 2 and 3 which commenced in April
1996. Additional information concerning the recovery of SONGS Units 2
and 3 is provided in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the 1996 Annual Report to
Shareholders on page 27. Gas revenues increased for the quarter
primarily due to an increase in natural-gas sales volume. Gas revenues
increased for the nine months primarily due to an increase in sales
volume and higher natural-gas prices during the first quarter of 1997.
OPERATING EXPENSES
For the nine months ended September 30, 1997 electric fuel expense
increased from the corresponding period in 1996 primarily due to
increases in natural-gas-fired generation and natural-gas prices, offset
by a decrease in nuclear generation as a result of SONGS Units 2 and 3
refuelings during the first half of 1997. The increase in purchased-
power expense for the quarter and the nine months is primarily due to
the higher sales volume. The lower nuclear generation availability
resulting from the SONGS refuelings also contributed to the increase in
purchased-power expense for the nine months. Gas purchased for resale
increased for the quarter due to the increase in sales volume. Gas
purchased for resale increased for the nine months due to the increases
in sales volume and in natural-gas prices in the first quarter of 1997.
In addition, for the nine months ended September 30, 1997 maintenance
expense increased due to the additional costs incurred during the SONGS
Units 2 and 3 refuelings. Depreciation and decommissioning expense
increased for the nine months due to the accelerated recovery of SONGS
Units 2 and 3. The decrease in general and administrative expense for
the quarter and the nine months is primarily due to higher 1996 costs
for customer service, partially offset by the expenses relating to the
business combination with Pacific Enterprises. The increase in other
expense for the quarter and the nine months reflects an increase in
electric transmission expense associated with the higher sales volume.
Income-tax expense decreased for the nine months due to the decrease in
operating income and the increase in income-tax benefits related to
Enova Financial's increased investments in affordable-housing projects.
OTHER INCOME
Other income decreased for the quarter and the nine months ended
September 30, 1997 due to losses associated with the start-up of Energy
Pacific, the joint venture of Enova and Pacific Enterprises to market
integrated energy and energy-related products and services. For the nine
months, these losses were partially offset by the first quarter 1997 tax
benefits on nonoperating income relating to the 1995 sale of Wahlco
Environmental Systems, Inc. Additional information concerning the sale
12
<PAGE>
of Wahlco is provided in Note 3 in the notes to consolidated financial
statements of the 1996 Annual Report to Shareholders.
BUSINESS COMBINATION
Consummation of the proposed business combination of Enova and Pacific
Enterprises (PE) is conditional upon the approvals of the California
Public Utilities Commission (CPUC) and various other regulatory bodies.
In June 1997 the CPUC revised its procedural schedule for the business
combination after delaying until July 1997 its final decision on the
Performance-Based Ratemaking (PBR) proceeding for Southern California
Gas Company (SoCalGas), PE's principal subsidiary. Under the new
timeline, a CPUC Administrative Law Judge is expected to issue a
proposed decision on the combination in late January 1998, with a CPUC
decision scheduled for March 1998. The CPUC evidentiary hearings on the
business combination concluded in October 1997.
In July 1997 the CPUC issued its decision on SoCalGas's PBR proceeding.
The decision adopts a rate-setting mechanism for SoCalGas that provides
incentives for cost control and efficiency improvement, including
comparisons of productivity and other factors against benchmarks based
on industry performance. SoCalGas had been operating under traditional
"cost of service" regulation. The decision provides for, among other
things, a net rate reduction of $160 million.
In August 1997 Enova and PE, after having reviewed the totality of
circumstances surrounding the business combination, announced that both
companies remain committed to its successful completion. Enova and PE
further agreed to extend the deadline by which they must complete the
combination from April 30, 1998 to September 1, 1998.
In September 1997 the CPUC staff issued a final Negative Declaration,
concluding that the business combination will not result in any
activities or operational changes that may cause a significant adverse
effect on the environment.
In June 1997 the Federal Energy Regulatory Commission (FERC) approved
the proposed business combination subject to conditions that the
combined company will not unfairly use any potential market power
regarding natural-gas transportation to gas-fired electric-generation
plants. In its decision, the FERC acknowledged that this issue is
clearly within the jurisdiction of the CPUC and the conditions will be
considered during the CPUC review process. Various parties have since
filed a joint petition with the FERC asking it for a rehearing.
In August 1997 the Nuclear Regulatory Commission (NRC) approved the
business combination, ruling that the creation of the new company will
not affect SDG&E's qualifications to hold the license for its 20-percent
interest in the San Onofre Nuclear Generating Station (SONGS). The NRC's
approval was required since the business combination would result in an
indirect transfer of control of the SONGS' license to the new company.
13
<PAGE>
In August 1997 Enova and PE announced an agreement to jointly acquire
AIG Trading Corporation, a leading natural-gas and power-marketing firm
based in Greenwich, Connecticut, for $190 million. Enova and PE will
also commit up to $35 million for certain long-term incentive
compensation and retention arrangements. AIG will become a subsidiary of
the new company formed by the business combination. The acquisition,
subject to various federal regulatory approvals, is expected to be
completed by the end of 1997.
Remaining regulatory approvals and the commencement of combined
operations are expected by the summer of 1998. Earnings of the combined
company could be negatively impacted in 1998, and to a lesser extent in
subsequent years by delays in achieving cost savings from the
combination caused by the later-than-expected effective combination
date, potential CPUC limitations on affiliate transactions by all
California energy utilities (see below), the possibility that the CPUC
might not permit recovery of certain costs of the combination and might
reduce the period or percentage for shareholder participation in the
related cost savings, and slower-than-anticipated growth in revenues
from Energy Pacific.
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. In addition, in September 1996 California
Governor Wilson signed into law a bill restructuring the industry. See
additional discussion of industry restructuring in Note 3 of the notes
to financial statements.
AFFILIATE TRANSACTION GUIDELINES
On October 31, 1997 the CPUC issued the ALJ's draft decision on
guidelines for transactions between a utility that it regulates and the
utility's affiliates that it does not regulate. If the final decision of
the CPUC is substantially the same as the draft decision, it would limit
the ability of Enova/SDG&E and the other California energy utilities
(and the unregulated affiliates in each case) to operate as totally
cohesive units by, among other things, restricting the sharing of
information, facilities, etc., which would reduce opportunities for
efficiencies and impact marketing opportunities for the affiliates. In
addition, an alternate draft decision sponsored by two of the CPUC's
five commissioners would add additional restrictions, such as
prohibiting the energy utilities' affiliates from marketing in the
respective utility's service territory for two years and banning the
joint use of names and logos.
14
<PAGE>
As expected, guidelines on transactions between SDG&E and SoCal Gas (see
"Business Combinations" above) were not addressed; they were considered
in the business combination proceedings and will be addressed in the
decision that results therefrom.
CONSUMER EDUCATION
In August 1997 the CPUC authorized $89 million in rate recovery to fund
California's Consumer Education Plan (CEP). SDG&E's share of this amount
is approximately $9 million. The CEP's objective will be to provide
California electric customers information to help them compare and
choose among electric products and services in a competitive
environment. The CEP's program began in September 1997 and is expected
to end by May 31, 1998. In a draft decision, the CPUC rejected SDG&E's
request for rate recovery of a $1.4 million SDG&E-specific CEP, which
was to be an enhancement to the statewide program. The CPUC decision
does allow SDG&E to recover certain customer-service costs associated
with its additional customer inquiries concerning industry
restructuring.
PUBLIC POLICY PROGRAMS
The CPUC has established a new administrative structure and initial
funding levels to manage demand-side management, renewable-energy, low-
income assistance, and research and development (R&D) programs beginning
in January 1998. The CPUC has formed independent boards to oversee a
competitive bidding process to administer demand-side management and
low-income assistance programs. In an interim decision, the CPUC has
required that the California IOUs transfer their administration of
demand-side management and low-income programs to these independent
boards by October 1998 and January 1999, respectively. Until the
transition to a fully competitive energy-services market is complete,
customers will be required to provide the funding. For 1998 SDG&E will
be funded $32 million and $12 million for demand-side management and
renewables programs, respectively. Low-income assistance funding will
remain at 1996 authorized levels. The California Energy Commission will
be allocated most of the $63 million authorized to administer the R&D
programs, of which SDG&E will be funded $4 million. SDG&E cannot predict
the impact on future earnings of these programs when the transition to
the competitive markets is complete.
ELECTRIC BALANCING ACCOUNTS
In October 1997 the CPUC issued a decision eliminating the Electric Cost
Adjustment Clause (ECAC) and the Electric Revenue Adjustment Mechanism
(ERAM) balancing accounts effective December 31, 1997. The balances in
these accounts will be transferred to the interim transition cost
balancing account, subject to a reasonableness review. The decision
eliminates further ECAC proceedings for generation costs incurred
beginning in January 1998. Additionally, the decision eliminates all
other electric balancing accounts except for those associated with the
15
<PAGE>
administration of public purpose funds (described above). For the nine
months ended September 30, 1997 SDG&E had charged against earnings its
undercollection in the ECAC balancing account under the expectation that
this balance would continue to exist for the remainder of 1997 and could
not be netted with its ERAM overcollection. Because the CPUC decision
allows for the transfer of both accounts to the transition cost
balancing account, SDG&E will record a favorable adjustment of $9
million, after income taxes, in its fourth-quarter 1997 earnings.
PERFORMANCE-BASED RATEMAKING (PBR)
Base Rates: In August 1997 SDG&E filed an advice letter with the CPUC
to revise its 1996 Performance-Based Ratemaking Base-Rate Annual Report
to reflect new data received from the Edison Electric Institute (EEI)
relating to the national-rate comparison. The EEI revised its 1996
national average electric rate from 6.95 to 7.12 cents per kwh, causing
SDG&E's calculation of the PBR price-performance benchmark to change
from a $4 million penalty to a $3 million reward. This change also
allows SDG&E to eliminate the $1.4 million two-way conditionality
penalty that was originally filed for exceeding the national-rate
benchmark. The effect of the change would result in a total PBR reward
of $6.5 million as compared to a $1.9 million penalty that was
previously reported. A CPUC decision is expected in December 1997. The
CPUC has eliminated the price-performance indicator from SDG&E's Base-
Rate PBR effective in 1997 since the electric-rate freeze renders this
indicator meaningless. The five-year PBR mechanism, which began in 1994,
is in its mid-course review by the CPUC.
A CPUC Administrative Law Judge has ruled that SDG&E's requirement to
file a 1999 General Rate Case should be eliminated and replaced by a
1999 Cost of Service study in its new PBR application due in December
1997. SDG&E's ability to control its costs within the limits of the
revenues authorized by the study will impact future earnings.
1998 Revenues: In October 1997 SDG&E filed an advice letter with the
CPUC to request an update to its electric distribution and gas base-rate
revenue requirements to reflect the PBR base-rate revenue escalation for
1998. The escalation would increase SDG&E's authorized electric
distribution revenues by $33 million and its gas base-rate amount by $7
million. The increase would not affect rates and, therefore, would
reduce the amount available to recover stranded costs (see Note 3 of the
notes to financial statements). A CPUC decision is expected in the
fourth quarter of 1997.
Natural Gas: In September 1997 SDG&E filed with the CPUC its
application for a permanent Gas Procurement PBR mechanism. The filing
proposes a mechanism structured around a commodity price cap plus an
incremental adjustment, designed to recover transportation costs to the
California border.
16
<PAGE>
COST OF CAPITAL
In October 1997 SDG&E filed with the CPUC its 1998 Market Indexed
Capital Adjustment Mechanism (MICAM). MICAM, approved by the CPUC in
1996, adjusts SDG&E's authorized cost of capital based on changes in
interest rates. For the current MICAM review, interest-rate movements
over the past 12 months have not triggered the mechanism to change,
resulting in SDG&E's 1998 cost of capital remaining at the 1997
authorized levels of 11.60 percent for the rate of return on equity and
9.35 percent for the rate of return on rate base. Excluded from this are
the rates of return on nuclear and non-nuclear generating assets
(recovered as transition costs), which are authorized at rates of 7.14
percent and 6.75 percent, respectively.
ELECTRIC GENERATION
GENERAL
SDG&E is considering the divestiture of its non-nuclear generating
assets, which would allow it to concentrate on providing electric
distribution and other energy services in a deregulated market. Although
the other California IOUs are required by the CPUC to divest themselves
of at least 50 percent of their fossil-fueled power plants as part of
industry restructuring, SDG&E is not under the same mandate. However,
SDG&E's principal fossil plants (Encina and South Bay) may not be as
competitive as newer facilities in a deregulated market. The FERC has
ruled that it has jurisdiction over all electricity sales into the
California Power Exchange, meaning that the buyers of divested
California power plants would qualify as wholesale power generators. The
FERC's ruling is expected to increase the interest in the California
utilities' generating plants.
SAN ONOFRE NUCLEAR GENERATING STATION UNITS 2 & 3
In October 1997 the California Coastal Commission (CCC) staff approved
the SONGS owners plan to provide 150 acres of wetlands restoration, 150
acres of kelp reef and other mitigation that was ordered by the CCC in
April 1997. A final CCC decision is expected in the fourth quarter of
1997. SDG&E's share of the cost is estimated to be $23 million.
SONGS Units 2 and 3 are scheduled for 30-day mid-cycle outages for
inspections of their steam generators in January 1998 and March 1998,
respectively. These inspections were prompted when it was discovered in
a routine inspection during last quarter's refueling of Unit 3 that the
thickness of the heat transfer tubes' structural supports was
significantly reduced, apparently due to erosion.
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
17
<PAGE>
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 associated
with subsidiary activities related to the plans to distribute natural
gas in Mexico and the northeast United States; 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, there were
other significant changes in cash flows from operations for the nine
months ended September 30, 1997 compared to the corresponding 1996
period. Cash flows from accounts and notes receivable decreased due to
an increase in accounts receivable at September 30, 1997 resulting from
an increase in SDG&E's sales in September 1997. Regulatory balancing
accounts increased due to overcollections in the ERAM and gas fixed cost
accounts as a result of higher-than-authorized sales volumes. As
discussed above, the December 31, 1996 ERAM balancing account has been
applied to the recovery of transition costs and the new overcollected
balance at December 31, 1997 will be similarly applied.
FINANCING ACTIVITIES
Enova Corporation anticipates that it will require only minimal amounts
of short-term debt in 1997, primarily for utility operations. Enova does
not expect to issue stock or long-term debt in 1997, other than for
SDG&E-related refinancings. In conjunction with electric industry
restructuring, rate-reduction bonds are expected to be issued by an
agency of the State of California. Additional information concerning
these bonds is provided in Note 3 of the notes to financial statements,
above.
During the first nine months of 1997 SDG&E and Califia repaid long-term
debt of $87 million and $3 million, respectively. During that same
period Enova Financial repaid $31 million and issued $101 million of
long-term debt.
SDG&E had short-term bank lines of $50 million and long-term bank lines
of $380 million at September 30, 1997. Commitment fees are paid on the
unused portion of the lines. There are no requirements for compensating
balances.
In March 1997 Enova Corporation repurchased three million shares of its
outstanding common stock.
Quarterly cash dividends of $0.39 per share were declared for the first
three quarters of 1997 and for each quarter during the year ended
December 31, 1996. The dividend payout ratio for the twelve months ended
18
<PAGE>
September 30, 1997 and years ended December 31, 1996, 1995, 1994, 1993
and 1992 were 80 percent, 79 percent, 80 percent, 130 percent, 82
percent and 81 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 1996 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 anticipated level.
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.
Sept. 30,
1992 1993 1994 1995 1996 1997
-----------------------------------------------------------
Common equity 47% 47% 48% 49% 50% 50%
Preferred stock 5 4 4 4 4 4
Debt and leases 48 49 48 47 46 46
-----------------------------------------------------------
Total 100% 100% 100% 100% 100% 100%
-----------------------------------------------------------
The following table lists key financial ratios for SDG&E.
Twelve Year
months ended ended
September 30, December 31,
1997 1996
----------------- -------------
Pretax interest coverage 5.3 X 5.2 X
Internal cash generation 153 % 127 %
Construction expenditures as
a percent of capitalization 7.9 % 7.4 %
DERIVATIVES: Registrants use derivative financial instruments to reduce
exposure to fluctuations in interest rates, foreign currency exchange
rates and natural-gas prices. These financial instruments are with major
investment firms and expose Registrants to market and credit risks if
the counterparties fail to perform. These risks may at times be
concentrated with certain counterparties, although counterparty non-
performance is not anticipated. Registrants do not use derivatives for
trading or speculative purposes.
At September 30, 1997 SDG&E had one interest-rate swap agreement: a
floating-to-fixed-rate swap maturing in 2002 associated with $45 million
of variable-rate bonds. 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.
19
<PAGE>
At September 30, 1997 Enova had various open natural-gas futures
positions to hedge against the volatility of natural-gas prices. The
total amount of these open positions was immaterial. There were no other
derivative financial instruments outstanding at September 30, 1997.
INVESTING ACTIVITIES
Cash used in investing activities for the nine months ended September
30, 1997 included utility construction expenditures and payments to the
SONGS decommissioning trust. Utility construction expenditures,
excluding nuclear fuel and the allowance for equity funds used during
construction, were $209 million in 1996 and are estimated to be $218
million in 1997. Enova 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, SDG&E's level of expenditures in the next few years will depend
heavily on the impacts of industry restructuring, and on the timing of
expenditures to comply with air-emission reduction and other
environmental requirements. Payments to the nuclear decommissioning
trust are expected to continue until SONGS is decommissioned.
In April 1997 Enova invested $21 million in Energy Pacific. Enova's
level of non-utility expenditures in the next few years will depend
primarily on the activities of its subsidiaries other than SDG&E,
including Enova International's plan to develop natural-gas distribution
systems in Mexico. In July 1997 Enova International and its partners,
Pacific Enterprises International and Proxima S.A. de C.V., delivered
its first supply of natural gas to Baja California. The Mexican company
formed by the three partners, Distribuidora de Gas Natural de Mexicali,
will invest up to $25 million during the first five years of the 30-year
license period to supply natural gas to the region. In March 1997 the
Mexican Energy Regulatory Commission awarded the partners its second
natural-gas privatization license in Mexico, allowing the partnership to
build and operate a natural-gas distribution system in Chihuahua. The
partnership plans to invest approximately $50 million in the project and
serve at least 50,000 customers in the first five years of operation. In
September 1997 Energy Pacific formed a joint venture with Bangor Hydro
to build, own and operate a $40 million natural-gas distribution system
in Bangor, Maine. The joint venture plans to file with the Maine Public
Utilities Commission to provide natural-gas service for the first time
to residential, commercial and industrial customers in the Bangor area.
Finally, as discussed in Note 2 of the notes to financial statements,
Enova has agreed to provide 50 percent of the total funding ($190
million plus additional incentive commitments) to acquire AIG Trading
Corporation.
20
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than as discussed below, there have been no significant subsequent
developments in litigation proceedings that were outstanding at December
31, 1996, nor have there been any significant new litigation proceedings
since that date.
SONGS Pricing
Southern California Edison (Edison) and SDG&E are co-owners of the San
Onofre Nuclear Generating Station. SDG&E owns a 20-percent interest. In
May 1997 Ayad Rubaii, an employee of Edison, filed a complaint under the
federal False Claims Act against Edison and SDG&E in United States
District Court for the Southern District of California. The complaint
was unsealed in July 1997 and served upon Edison and SDG&E in September
1997. In the complaint, the plaintiff alleges that Edison and SDG&E have
overcharged customers since early 1996 for energy produced at SONGS
under a pricing mechanism approved by the CPUC and codified by the State
Legislature in AB 1890. The plaintiff alleges that he filed the lawsuit
on behalf of the United States Government. The Department of Justice has
elected not to intervene in the lawsuit, but could elect to do so in the
future if new information becomes available. The plaintiff is claiming
damages of $383 million from Edison and $102 million from SDG&E. Under
the False Claims Act, any damages would be trebled and penalties could
be assessed. SDG&E intends to vigorously defend this action. SDG&E
cannot predict the ultimate outcome.
Employee Benefits
In September 1997 two individual plaintiffs filed a complaint (Mascari
v. SDG&E) in United States District Court for the Southern District of
California on behalf of themselves and a purported class consisting of
temporary employees and independent contractors employed at SDG&E.
Plaintiffs allege that they are and have been common law employees of
SDG&E and, as such, under recent Ninth Circuit decisional law, are and
have been entitled to participate in SDG&E's health and welfare, defined
benefit and defined contribution plans. They seek to recover past and
future benefits under each plan. In October 1997 SDG&E filed its answer
to the complaint, denying that the plaintiffs were or are entitled to
any benefits and denying the appropriateness of a class. SDG&E intends
to vigorously defend this action. SDG&E cannot predict the ultimate
outcome.
Public Service Company of New Mexico
As described in the "Legal Proceedings -- Public Service of New Mexico"
section on page 19 of the Registrants' 1996 Annual Report on Form 10-K,
SDG&E has filed two previous complaints with the FERC against Public
Service of New Mexico (PNM). In August 1997 SDG&E filed a third
complaint against PNM alleging that the demand rate paid by SDG&E under
the PNM power-purchase agreement during 1996 was unjust and
unreasonable, resulting in an overcharge of up to $9.6 million during
this period.
21
<PAGE>
SONGS Personal Injury Litigation
As described in the "Legal Proceedings -- SONGS Personal Injury
Litigation" section on page 21 of the Registrants' 1996 Annual Report on
Form 10-K, the McLandrich wrongful death case is currently on appeal.
The Ninth Circuit Court of Appeals rejected SDG&E's petition for
permission to challenge the lower court's determination that SDG&E is
not an employer and thus may not avail itself of the workers'
compensation exclusivity rule. McLandrich, Metler and Knapp are stayed
pending the outcome of a plaintiff appeal in McLandrich, challenging the
District Court's ruling that Southern California Edison can avail itself
to the workers' compensation exclusivity rule.
22
<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 nine months ended September
30, 1997 for Enova Corporation.
27.2 Financial Data Schedule for the nine months ended September
30, 1997 for SDG&E.
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed on August 12, 1997
announcing the joint acquisition of AIG Trading Corp. by Enova
Corporation and Pacific Enterprises (PE), and the amendment to
the Enova and PE merger agreement extending the completion
deadline from April 30, 1998 to September 1, 1998.
23
<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: November 4, 1997 By: /s/ F. H. Ault
----------------------------------
(Signature)
F. H. AULT
Vice President and Controller
24
<TABLE>
EXHIBIT 12.1
SAN DIEGO GAS & ELECTRIC COMPANY
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
<CAPTION>
9 Months
Ended
1992 1993 1994 1995 1996 9/30/97
--------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fixed Charges:
Interest:
Long-Term Debt $ 97,067 $ 84,830 $ 81,749 $ 82,591 $ 76,463 $ 53,226
Short-Term Debt 5,043 6,676 8,894 17,886 12,635 9,980
Amortization of Debt
Discount and Expense,
Less Premium 2,881 4,162 4,604 4,870 4,881 3,815
Interest Portion of
Annual Rentals 14,558 9,881 9,496 9,631 8,446 7,230
---------- ---------- ----------- --------- ----------- ----------
Total Fixed
Charges 119,549 105,549 104,743 114,978 102,425 74,250
---------- ---------- ----------- --------- ----------- ----------
Preferred Dividends
Requirements 9,600 8,565 7,663 7,663 6,582 4,937
Ratio of Income Before
Tax to Net Income 1.71389 1.79353 1.83501 1.78991 1.88864 1.98471
---------- ----------- ----------- ---------- ---------- ----------
Preferred Dividends
for Purpose of Ratio 16,453 15,362 14,062 13,716 12,431 9,799
---------- ----------- ----------- ---------- ---------- ----------
Total Fixed Charges
and Preferred
Dividends for
Purpose of Ratio $136,002 $120,911 $118,805 $128,694 $114,856 $ 84,049
========== =========== ========== ========== ========== ==========
Earnings:
Net Income (before
preferred dividend
requirements) $224,177 $215,872 $206,296 $219,049 $222,765 $161,751
Add:
Fixed Charges
(from above) 119,549 105,549 104,743 114,978 102,425 74,250
Less: Fixed Charges
Capitalized 1,262 1,483 1,424 2,040 1,495 1,903
Taxes on Income 160,038 171,300 172,259 173,029 197,958 159,278
---------- ---------- ---------- ---------- ----------- ---------
Total Earnings for
Purpose of Ratio $502,502 $491,238 $481,874 $505,016 $521,653 $393,376
========== ========== ========== ========== =========== =========
Ratio of Earnings
to Combined Fixed
Charges and Preferred
Dividends 3.69 4.06 4.06 3.92 4.54 4.68
========== ========== ========== ========== =========== =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,950,272
<OTHER-PROPERTY-AND-INVEST> 802,063
<TOTAL-CURRENT-ASSETS> 532,181
<TOTAL-DEFERRED-CHARGES> 97,804
<OTHER-ASSETS> 283,198
<TOTAL-ASSETS> 4,665,518
<COMMON> 284,042
<CAPITAL-SURPLUS-PAID-IN> 507,741
<RETAINED-EARNINGS> 747,835
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,539,618
25,000
78,475
<LONG-TERM-DEBT-NET> 1,126,553
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 247,332
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 50,926
0
<CAPITAL-LEASE-OBLIGATIONS> 91,598
<LEASES-CURRENT> 6,696
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,499,320
<TOT-CAPITALIZATION-AND-LIAB> 4,665,518
<GROSS-OPERATING-REVENUE> 1,590,469
<INCOME-TAX-EXPENSE> 113,848
<OTHER-OPERATING-EXPENSES> 1,226,627
<TOTAL-OPERATING-EXPENSES> 1,340,475
<OPERATING-INCOME-LOSS> 249,994
<OTHER-INCOME-NET> 2,537
<INCOME-BEFORE-INTEREST-EXPEN> 252,531
<TOTAL-INTEREST-EXPENSE> 82,221
<NET-INCOME> 170,310
0
<EARNINGS-AVAILABLE-FOR-COMM> 170,310
<COMMON-STOCK-DIVIDENDS> 135,357
<TOTAL-INTEREST-ON-BONDS> 53,226
<CASH-FLOW-OPERATIONS> 478,007
<EPS-PRIMARY> 1.49
<EPS-DILUTED> 1.49
</TABLE>
