SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[..X..] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
June 30, 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 June 30, 1997:
Enova Corporation 113,616,714
-----------
San Diego Gas & Electric Company Wholly owned by Enova Corporation
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 . . . . . . . . . . . . . .18
Item 6. Exhibits and Reports on Form 8-K. . . . . . .18
Signature . . . . . . . . . . . . . . . . . . . . . .19
<TABLE>
STATEMENTS OF INCOME (unaudited)
In thousands except per share amounts
<CAPTION>
Enova Corporation
and Subsidiaries SDG&E
---------------------- ------------------
For the three months ended June 30, 1997 1996 1997 1996
--------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues
Electric $417,040 $376,971 $417,040 $376,971
Gas 74,852 81,250 74,852 81,250
Other 9,589 12,746 -- --
--------------------------------------------
Total operating revenues 501,481 470,967 491,892 458,221
--------------------------------------------
Operating Expenses
Electric fuel 38,741 25,580 38,741 25,580
Purchased power 89,018 76,525 89,018 76,525
Gas purchased for resale 22,752 33,689 22,752 33,388
Maintenance 21,389 16,839 21,389 16,839
Depreciation and decommissioning 86,174 92,741 80,506 87,990
Property and other taxes 11,046 11,377 11,046 11,377
General and administrative 51,245 52,294 50,181 49,190
Other 53,359 50,423 40,896 38,601
Income taxes 42,517 36,974 59,141 48,889
--------------------------------------------
Total operating expenses 416,241 396,442 413,670 388,379
--------------------------------------------
Operating Income 85,240 74,525 78,222 69,842
--------------------------------------------
Other Income and (Deductions)
Allowance for equity funds used
during construction 1,446 1,467 1,446 1,467
Taxes on nonoperating income 631 1,540 856 740
Other - net (2,201) (2,996) (2,746) (3,091)
--------------------------------------------
Net other income and
(deductions) (124) 11 (444) (884)
--------------------------------------------
Income Before Interest Charges 85,116 74,536 77,778 68,958
--------------------------------------------
Interest Charges
Long-term debt 22,130 21,871 18,008 19,116
Short-term debt and other 5,628 4,897 5,532 4,897
Allowance for borrowed funds
used during construction (665) (1,227) (665) (1,227)
Preferred dividend requirements of
SDG&E 1,645 1,645 -- --
--------------------------------------------
Net interest charges 28,738 27,186 22,875 22,786
--------------------------------------------
Net Income 56,378 47,350 54,903 46,172
Preferred Dividend Requirements -- -- 1,645 1,645
--------------------------------------------
Earnings Applicable to Common Shares $56,378 $47,350 $53,258 $44,527
============================================
Average Common Shares Outstanding 113,616 116,565
=======================
Earnings Per Common Share $0.50 $0.41
=======================
Dividends Declared Per Common Share $0.39 $0.39
=======================
See notes to financial statements.
</TABLE>
<TABLE>
STATEMENTS OF INCOME (unaudited)
In thousands except per share amounts
<CAPTION>
Enova Corporation
and Subsidiaries SDG&E
---------------------- ------------------
For the six months ended June 30, 1997 1996 1997 1996
--------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues
Electric $790,710 $744,264 $790,710 $744,264
Gas 195,818 165,899 195,818 165,899
Other 22,883 26,701 -- --
--------------------------------------------
Total operating revenues 1,009,411 936,864 986,528 910,163
--------------------------------------------
Operating Expenses
Electric fuel 78,422 49,404 78,422 49,404
Purchased power 176,768 148,148 176,679 148,148
Gas purchased for resale 90,633 69,187 90,513 68,886
Maintenance 43,355 31,653 43,355 31,653
Depreciation and decommissioning 171,881 163,929 161,128 154,804
Property and other taxes 22,758 23,211 22,672 23,211
General and administrative 95,846 97,932 89,251 94,360
Other 108,223 103,401 83,461 80,433
Income taxes 66,890 82,482 99,895 105,252
--------------------------------------------
Total operating expenses 854,776 769,347 845,376 756,151
--------------------------------------------
Operating Income 154,635 167,517 141,152 154,012
--------------------------------------------
Other Income and (Deductions)
Allowance for equity funds used
during construction 2,869 2,716 2,869 2,716
Taxes on nonoperating income 5,699 1,085 1,288 285
Other - net (2,606) (2,622) (4,437) (2,489)
--------------------------------------------
Net other income and
(deductions) 5,962 1,179 (280) 512
--------------------------------------------
Income Before Interest Charges 160,597 168,696 140,872 154,524
--------------------------------------------
Interest Charges
Long-term debt 43,859 44,433 35,933 38,210
Short-term debt and other 9,500 9,364 9,404 9,364
Allowance for borrowed funds
used during construction (1,297) (1,794) (1,297) (1,794)
Preferred dividend requirements of
SDG&E 3,291 3,291 -- --
--------------------------------------------
Net interest charges 55,353 55,294 44,040 45,780
--------------------------------------------
Net Income 105,244 113,402 96,832 108,744
Preferred Dividend Requirements -- -- 3,291 3,291
--------------------------------------------
Earnings Applicable to Common Shares $105,244 $113,402 $93,541 $105,453
============================================
Average Common Shares Outstanding 115,026 116,568
=======================
Earnings Per Common Share $0.91 $0.97
=======================
Dividends Declared Per Common Share $0.78 $0.78
=======================
See notes to financial statements.
</TABLE>
<TABLE>
BALANCE SHEETS
In thousands of dollars
<CAPTION>
Enova Corporation
and Subsidiaries SDG&E
-------------------------- --------------------------
Balance at June 30, December 31, June 30, December 31,
1997 1996 1997 1996
(unaudited) (unaudited)
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Utility plant - at original cost $5,770,023 $5,704,464 $5,770,023 $5,704,464
Accumulated depreciation
and decommissioning (2,782,591) (2,630,093) (2,782,591) (2,630,093)
----------- ----------- ----------- -----------
Utility plant-net 2,987,432 3,074,371 2,987,432 3,074,371
----------- ----------- ----------- -----------
Investments and other property 780,016 650,188 366,799 337,520
----------- ----------- ----------- -----------
Current assets
Cash and temporary investments 112,847 173,079 49,312 81,409
Accounts receivable 227,225 186,529 225,429 187,986
Notes receivable 28,961 33,564 -- --
Inventories 58,670 63,437 57,523 63,078
Other 24,658 47,094 24,451 33,227
----------- ----------- ----------- -----------
Total current assets 452,361 503,703 356,715 365,700
----------- ----------- ----------- -----------
Deferred taxes recoverable in rates 182,009 189,193 182,009 189,193
----------- ----------- ----------- -----------
Deferred charges and other assets 203,165 231,782 191,291 193,732
----------- ----------- ----------- -----------
Total $4,604,983 $4,649,237 $4,084,246 $4,160,516
=========== =========== =========== ===========
CAPITALIZATION AND LIABILITIES
Capitalization
Common equity $1,518,864 $1,569,670 $1,337,887 $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 1,510,538 1,479,338 1,272,226 1,284,816
----------- ----------- ----------- -----------
Total capitalization 3,132,877 3,152,483 2,713,588 2,792,427
----------- ----------- ----------- -----------
Current liabilities
Short-term borrowings 1,000 -- 1,000 --
Current portion of long-term debt 54,858 69,902 6,722 33,639
Accounts payable 120,183 175,815 119,507 174,884
Due to affiliates -- -- 16,074 7,214
Dividends payable 45,956 47,213 45,956 47,131
Interest and taxes accrued 25,606 21,259 46,338 12,824
Regulatory balancing accounts
overcollected-net 68,532 35,338 68,532 35,338
Other 167,669 158,317 111,148 110,743
----------- ----------- ----------- -----------
Total current liabilities 483,804 507,844 415,277 421,773
----------- ----------- ----------- -----------
Customer advances for construction 33,530 34,666 33,530 34,666
Accumulated deferred income taxes-net 503,984 497,400 485,686 487,119
Accumulated deferred investment
tax credits 63,143 64,410 63,143 64,410
Deferred credits and other liabilities 387,645 392,434 373,022 360,121
----------- ----------- ----------- -----------
Total $4,604,983 $4,649,237 $4,084,246 $4,160,516
=========== =========== ============ ============
See notes to financial statements.
</TABLE>
<TABLE>
STATEMENTS OF CASH FLOWS (unaudited)
In thousands of dollars
<CAPTION>
Enova Corporation
and Subsidiaries SDG&E
---------------------- ----------------------
For the six months ended June 30, 1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities
Net income $105,244 $113,402 $ 96,832 $108,744
Adjustments to reconcile income from continuing
operations to net cash provided by operating activities
Depreciation and decommissioning 171,881 163,929 161,128 154,804
Amortization of deferred charges and other assets 3,231 2,873 3,231 2,873
Amortization of deferred credits
and other liabilities (19,673) (17,537) (2,129) (585)
Allowance for equity funds used during construction (2,869) (2,716) (2,869) (2,716)
Deferred income taxes and investment tax credits 2,458 (23,146) 115 (23,573)
Other-net 17,680 20,508 (3,971) (697)
Changes in working capital components
Accounts and notes receivable (36,093) (3,358) (37,443) (2,230)
Inventories 4,767 (2,385) 5,555 (2,077)
Other current assets 13,003 (108) 1,140 23
Accounts payable and other current liabilities (43,869) (9,662) (47,551) (10,708)
Interest and taxes accrued 37,542 36,783 59,238 51,152
Regulatory balancing accounts 33,194 (8,118) 33,194 (8,118)
Cash used by discontinued operations -- -- -- (11,544)
---------- ---------- ---------- ----------
Net cash provided by operating activities 286,496 270,465 266,470 255,348
---------- ---------- ---------- ----------
Cash Flows from Financing Activities
Regular dividends paid (91,047) (90,927) (94,256) (94,488)
Special dividend paid -- -- (66,150) --
Short-term borrowings-net 1,000 -- 1,000 --
Issuances of long-term debt -- 2,300 -- --
Repayment of long-term debt (70,189) (23,588) (37,500) (293)
Repurchase of common stock (66,314) (480) -- --
Redemption of preferred stock -- (15,155) -- (15,155)
---------- ---------- ---------- ----------
Net cash used by financing activities (226,550) (127,850) (196,906) (109,936)
---------- ---------- ---------- ----------
Cash Flows from Investing Activities
Utility construction expenditures (84,979) (85,743) (84,979) (85,743)
Contributions to decommissioning funds (11,016) (11,016) (11,016) (11,016)
Other-net (24,183) (10,879) (5,666) (10,705)
---------- ---------- ---------- ----------
Net cash used by investing activities (120,178) (107,638) (101,661) (107,464)
---------- ---------- ---------- ----------
Net increase (decrease) (60,232) 34,977 (32,097) 37,948
Cash and temporary investments, beginning of period 173,079 96,429 81,409 20,755
---------- ---------- ---------- ----------
Cash and temporary investments, end of period $112,847 $131,406 $ 49,312 $ 58,703
========== ========== ========== ==========
Supplemental disclosure of Cash Flow Information
Income tax payments (net of refunds) $ 15,436 $ 69,386 $ 40,650 $ 80,334
========== ========== ========== ==========
Interest payments, net of amounts capitalized $ 58,708 $ 51,452 $ 44,614 $ 42,340
========== ========== ========== ==========
Supplemental Schedule of Noncash Activities:
Investing and Financing
Real estate investments $ 88,632 $ 47,367 -- --
Cash paid (279) -- -- --
---------- ---------- ---------- ----------
Liabilities assumed $ 88,353 $ 47,367 -- --
========== ========== ========== ==========
Net assets of affiliates transferred to parent -- -- -- $150,069
========== ========== ========== ==========
See notes to financial statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS (Unaudited)
1. GENERAL
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 financial Statements"
and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" herein pertain both to SDG&E and 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.
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 its Quarterly Report on Form
10-Q for the three months ended March 31, 1997. The "Management's
Discussion & 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 March 1997 the shareholders of both Enova Corporation and Pacific
Enterprises (PE) approved the proposed combination of Enova and PE.
Consummation of the combination is conditional upon the approvals of the
California Public Utilities Commission and various other regulatory
bodies.
In June 1997 the CPUC revised its procedural schedule for the proposed
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 will issue a proposed
decision on the combination in late January 1998, with a CPUC decision
scheduled for March 1998.
On July 16, 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. Enova is
analyzing the decision to determine the effect on Pacific Enterprises
and on the new company formed by the proposed business combination.
Enova and PE submitted a joint Proponents' Environmental Assessment to
the CPUC, stating that the plan of merger will not result in any
activities or operational changes that may cause a significant adverse
effect on the environment. In April 1997 the CPUC issued a draft
Negative Declaration concluding that the plan of merger will not result
in significant adverse effects on the environment and, therefore, no
Environmental Impact Report or mitigation is necessary. Under the
current schedule, the period during which the public may comment on the
draft Negative Declaration ended in May 1997 and the final version of
the proposed Negative Declaration is expected to be published in the
third quarter of 1997. The Negative Declaration will become final when
certified by the Commission.
On June 25, 1997 the Federal Energy Regulatory Commission approved the
proposed business combination subject to conditions that the combined
company will not unfairly use its market power with the potential
control over 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.
Effective April 1997 substantially all of the activities and certain
assets of Enova subsidiaries, Enova Energy and Enova Technologies, were
transferred to Energy Pacific, the joint venture between certain
unregulated subsidiaries of Enova and PE to provide integrated energy
and energy-related products and services.
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 instead of
phased in over five years as originally envisioned. The CPUC concluded
that there are no technical or operational barriers to justify limited
direct access availability once electric restructuring commences. The
decision gives power companies permission to begin direct marketing on
July 1, 1997 and sets 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
will be allowed a reasonable opportunity to recover their stranded costs
through December 31, 2001. SDG&E's competition transition charge (CTC)
application filed in October 1996 estimates transition costs totaling $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. In June 1997 the CPUC issued a
decision that provides for the recovery of uneconomic generation-related
costs and associated regulatory assets. The decision establishes a CTC
rate component that will be determined on a residual basis. The CTC
revenues will be first applied to "current costs," which includes, among
other things, purchased-power expenses, and will next be applied to the
transition assets that are being depreciated and/or amortized over a 48-
month period. Should there be any CTC revenues remaining, the revenues
may be used to accelerate the recovery of transition assets with a high
rate of return. 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. SDG&E expects to
file such an application during the third quarter of 1997 to address
1996 capital additions, and another in early 1998 to address 1997
additions.
In May 1997 SDG&E and the other California investor-owned electric
utilities (IOUs) filed applications with the CPUC for authority to issue
rate-reduction bonds. California's 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 IOUs to achieve this rate reduction. SDG&E's application requests
authority to issue up to $800 million in bonds. SDG&E estimates that it
will 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. A final
CPUC decision is expected in September 1997. The IOUs are awaiting a
ruling from the Internal Revenue Service on the tax consequences of the
bond issuance. If an adverse ruling is made by the IRS, the issuance of
the rate-reduction bonds could be at risk. SDG&E maintains that it would
not be required to provide for the 10-percent rate reduction in the
event that the bonds are not issued. The Securities and Exchange
Commission 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.
In addition, the California legislation 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 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. The rate cap will be reduced in
conjunction with the 10-percent rate reduction for residential and small
commercial customers. During the first quarter of 1997, soaring 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.
Natural-gas prices have since decreased, but the mechanism, which is
based on a 12-month rolling average, continues to push SDG&E's system
average rate against the 9.985 cents-per-kwh rate cap.
SDG&E currently accounts for the economic effects of regulation 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
has 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. The Emerging Issues Task Force of the
Financial Accounting Standards Board has concluded that the
discontinuance of SFAS No. 71 applied to the utilties' 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.
INDUSTRY RESTRUCTURING -- FEDERAL ENERGY REGULATORY COMMISSION
In March 1997 the utilities 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. In
November 1996 the FERC conditionally approved joint recommendations from
the utilities on the creation of an ISO and power exchange, but required
further information from the utilities as to how they would be
structured and operate.
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 21 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.
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 existence of or
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 Corporation 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 June 30, 1997 were $0.50
compared to $0.41 for the corresponding period in 1996. Earnings per
common share for the six months ended June 30, 1997 were $0.91 compared
to $0.97 for 1996. The 1997 changes in earnings for the quarter and the
six months are primarily due to previously announced changes related to
the elimination of electric balancing accounts. Although no significant
effect is expected 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.
OPERATING REVENUES
For the quarter ended June 30, 1997 electric revenues increased from the
corresponding period in 1996 primarily due to increased sales volume due
to weather. Electric revenues increased for the six months ended June
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 six months
primarily due to the increases in both natural-gas prices and sales
volume in the first quarter of 1997.
OPERATING EXPENSES
For the quarter and the six months ended June 30, 1997 electric fuel
expense increased from the corresponding period in 1996 primarily due to
increased natural-gas-fired generation and increases in natural-gas
prices, offset by a decrease in nuclear generation as a result of SONGS
Units 2 and 3 refuelings. This decrease in nuclear generation
availability also resulted in an increase in purchased-power expense for
both periods. Gas purchased for resale increased for the six months due
to the increases in both natural-gas prices and sales volume in the
first quarter of 1997.
In addition, for the quarter and the six months ended June 30, 1997
maintenance expense increased due to the additional costs incurred
during SONGS Units 2 and 3 refuelings (see additional discussion under
"San Onofre Nuclear Generating Station Units 2 & 3," below).
Depreciation and decommissioning expense increased for the six months
due to the accelerated recovery of SONGS Units 2 and 3. Income-tax
expense decreased for the six 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
Other income increased for the six months ended June 30, 1997 due to the
first quarter 1997 tax benefits on nonoperating income relating to the
1995 sale of Wahlco Environmental Systems, Inc. Additional information
concerning the sale of Wahlco is provided in Note 3 in the notes to
consolidated financial statements of the 1996 Annual Report to
Shareholders.
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.
CONSUMER EDUCATION
The CPUC has approved a plan for the Consumer Education Program (CEP)
jointly submitted by California's investor-owned utilities (IOUs). The
plan establishes a 19-member Electric Restructuring Education Group
(EREG) that includes one member from each of the IOUs. The EREG will
design and implement the CEP. The CPUC has approved an initial CEP
funding of $20 million to be provided by the IOUs in proportion to their
1995 kwh sales. The final number, expected to be decided by the CPUC in
August 1997, could be as high as $87 million. These funds will be
recoverable through rates. The details of how these costs will be
recovered under the rate cap are still being finalized. The CEP's
objective will be to provide electric customers information to help them
compare and choose among electric products and services when competition
begins on January 1, 1998. The CEP's work is anticipated to begin by
September 1, 1997 and end by May 31, 1998. In addition, in May 1997
SDG&E filed a request with the CPUC for funding of a $1.4 million SDG&E-
specific CEP to be an enhancement to the statewide program. In its
request, SDG&E asked that the supplemental program's costs be eligible
for recovery.
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. Until the transition to a fully
competitive energy-services market is complete, customers will be
required to provide the funding. SDG&E will be funded $32 million
annually for demand-side management programs from January 1998 to
December 2001. SDG&E will contribute $12 million in renewables funding.
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
contribute $4 million. SDG&E's contributions to the renewables and R&D
programs will be eligible for rate recovery.
In May 1997 SDG&E filed a application for 1996 shareholder rewards
totaling $41 million ($39 million in 1995) for its DSM programs. The
rewards will be collected and recorded in earnings over ten years and
are subject to CPUC approval. The revenue requirement increase is
effective on January 1, 1998, but due to the rate cap, there will be no
rate increase. If, during the industry-restructuring transition period,
SDG&E is able to recover its transition costs and has revenue available
under the rate cap, SDG&E will be able to recover these DSM earnings. A
final CPUC decision is expected in the first quarter of 1998. SDG&E
cannot predict the impact on future earnings of DSM programs when the
transition to a competitive market is complete.
NATURAL-GAS RATES
In late 1996 natural-gas prices significantly increased primarily due to
weather-related factors and low storage levels. As the price of natural
gas increased beyond what SDG&E was authorized to charge for it, a $26
million shortfall resulted. In July 1997 SDG&E received CPUC approval to
raise gas rates by 6 cents per therm for 12 months beginning in August
1997. The decision lifted a two-year cap on natural-gas rates that
limited the amount that could be charged to 25 cents per therm.
PERFORMANCE-BASED RATEMAKING
Base-Rates PBR: In May 1997 SDG&E filed an application with the CPUC
that reflects a $1.9 million penalty for 1996. While SDG&E obtained the
maximum rewards for employee safety and customer satisfaction, it did
not meet its performance targets for system reliability and customer
rates. Although SDG&E's electric rates declined in 1996, the average
national rate declined proportionately more. A final CPUC decision is
expected in the third quarter of 1997. The five-year PBR mechanism,
which began in 1994, is currently under its mid-course review by the
CPUC. A final decision is expected in the fourth quarter of 1997.
SAN ONOFRE NUCLEAR GENERATION STATION UNITS 2 & 3
In May 1997 the SONGS owners agreed to provide 150 acres of wetlands
restoration, 150 acres of kelp reef and other mitigation that was
ordered by the California Coastal Commission in April 1997. SDG&E's
share of the cost is estimated to be $23 million. The SONGS owners have
decided to pay for the actual costs of the mitigation work themselves
rather than depositing the estimated costs in a trust.
Unit 3 was shut down in April 1997 for its scheduled refueling. While
conducting routine inspections, it was noted that, in several areas, the
thickness of the heat transfer tubes' structural supports was
significantly reduced, apparently due to erosion. In June 1997 the
Nuclear Regulatory Commission approved the removing of the affected
tubes from service as a corrective action and the unit's return to
service. The NRC will make a further review in the next few months to
determine the need for a mid-cycle outage, but the SONGS owners plan to
schedule one in the second quarter of 1998 even without a NRC mandate.
Unit 2, which recently went through inspection of its steam generators,
showed no signs of this type of erosion.
The Unit 3 refueling outage was extended by four weeks to repair a
control rod that became separated from its extension shaft and a failed
charging-system check valve. The unit returned to service on July 21,
1997. When an identical check valve was tested in Unit 2, the same
problem was discovered, causing the unit to be shut down on June 29,
1997. The unit was restarted on July 16, 1997.
ELECTRIC AND MAGNETIC FIELDS (EMF)
The National Academy of Sciences (NAS) recently published its evaluation
of potential EMF health risks. After examining more than 500 studies
spanning 17 years of research, the NAS found that "the current body of
evidence does not show that exposure to EMFs presents a human-health
hazard." A recently completed study (the nation's largest, most
extensive EMF research conducted to date) by the National Cancer
Institute concluded that there is no evidence that children who live
near high-current power lines have any higher incidence of leukemia than
children who do not live near these lines.
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 associated
with subsidiary activities related to the plan to distribute natural gas
in Mexico; 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 six
months ended June 30, 1997 compared to the corresponding 1996 period.
Cash flows from accounts and notes receivable decreased due to an
increase in accounts receivable at June 30, 1997 resulting from an
increase in SDG&E's sales in June of 1997. Regulatory balancing accounts
increased due to overcollections in the gas fixed cost account as a
result of higher than authorized sales volumes. Accounts payable and
other current liabilities decreased due to an increase in payments for
purchased gas.
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.
Enova Financial repaid $30 million and issued $88 million of long-term
debt during the first six months of 1997 in the ordinary course of
business. During that same period SDG&E repaid $38 million of long-term
debt.
SDG&E had short-term bank lines of $50 million and long-term bank lines
of $330 million with $1 million of short-term loans outstanding at June
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
and second quarters of 1997 and for each quarter during the year ended
December 31, 1996. The dividend payout ratio for the twelve months ended
June 30, 1997 and years ended December 31, 1996, 1995, 1994, 1993 and
1992 were 81 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. Enova's
directors have set a goal to reach a dividend payout of 60 percent to 70
percent of earnings through earnings growth and new investment. 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.
June 30,
1992 1993 1994 1995 1996 1997
-----------------------------------------------------------
Common equity 47% 47% 48% 49% 50% 49%
Preferred stock 5 4 4 4 4 4
Debt and leases 48 49 48 47 46 47
-----------------------------------------------------------
Total 100% 100% 100% 100% 100% 100%
-----------------------------------------------------------
The following table lists key financial ratios for SDG&E.
Twelve Year
months ended ended
June 30, December 31,
1997 1996
----------------- -------------
Pretax interest coverage 5.1 X 5.2 X
Internal cash generation 151 % 127 %
Construction expenditures as
a percent of capitalization 7.7 % 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.
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 June 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. Such contracts may expose the pension fund to credit loss
if the counterparties fail to perform.
At June 30, 1997 Enova had various open natural-gas futures positions
used 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 June
30, 1997.
INVESTING ACTIVITIES
Cash used in investing activities for the six months ended June 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 $230
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, 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.
In April 1997 Enova invested $21 million in Energy Pacific, the joint
venture with Pacific Enterprises discussed in Note 2.
Enova's level of non-utility expenditures in the next few years will
depend primarily on the activities of its other subsidiaries, including
Enova International's plan to develop natural-gas distribution systems
in Mexico. In March 1997 the Mexican Energy Regulatory Commission
awarded Enova International and its partners, Pacific Enterprises
International and Proxima S.A. de C.V., its second natural-gas
privatization license in Mexico, allowing the partnership to build and
operate a natural-gas distribution system in Chihuahua, Mexico. 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.
OTHER SIGNIFICANT BALANCE SHEET CHANGES
Besides the effects of items discussed in the preceding pages, the only
other significant change to the Registrants' balance sheets at June 30,
1997, compared to December 31, 1996 was a decrease in other current
assets resulting from a shift in Enova's net deferred tax position from
current assets to current liabilities.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no significant subsequent developments in litigation
proceedings that were outstanding at December 31, 1996 and there have
been no significant new litigation proceedings since that date.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 12 - Computation of ratios
12.1 Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends as required under SDG&E's
August 1993 registration of 5,000,000 shares of Preference
Stock (Cumulative).
Exhibit 27 - Financial Data Schedules
27.1 Financial Data Schedule for the six months ended June 30,
1997 for Enova Corporation.
27.2 Financial Data Schedule for the six months ended June 30,
1997 for SDG&E.
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed on July 17, 1997
announcing the California Public Utilities Commission's decision
on Southern California Gas Company's Performance-Based Ratemaking
proceeding.
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: July 29, 1997 By: /s/ F.H. Ault
-----------------------------------
(Signature)
F. H. AULT
Vice President and Controller
<TABLE>
EXHIBIT 12.1
SAN DIEGO GAS & ELECTRIC COMPANY
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
<CAPTION>
6 Months
Ended
1992 1993 1994 1995 1996 6/30/97
--------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fixed Charges:
Interest:
Long-Term Debt $ 97,067 $ 84,830 $ 81,749 $ 82,591 $ 76,463 $ 35,933
Short-Term Debt 5,043 6,676 8,894 17,886 12,635 6,878
Amortization of Debt
Discount and Expense,
Less Premium 2,881 4,162 4,604 4,870 4,881 2,526
Interest Portion of
Annual Rentals 14,558 9,881 9,496 9,631 8,446 4,980
---------- ---------- ----------- --------- ----------- ----------
Total Fixed
Charges 119,549 105,549 104,743 114,978 102,425 50,317
---------- ---------- ----------- --------- ----------- ----------
Preferred Dividends
Requirements 9,600 8,565 7,663 7,663 6,582 3,291
Ratio of Income Before
Tax to Net Income 1.71389 1.79353 1.83501 1.78991 1.88864 2.01833
---------- ----------- ----------- ---------- ---------- ----------
Preferred Dividends
for Purpose of Ratio 16,453 15,362 14,062 13,716 12,431 6,642
---------- ----------- ----------- ---------- ---------- ----------
Total Fixed Charges
and Preferred
Dividends for
Purpose of Ratio $136,002 $120,911 $118,805 $128,694 $114,856 $ 56,959
========== =========== ========== ========== ========== ==========
Earnings:
Net Income (before
preferred dividend
requirements) $224,177 $215,872 $206,296 $219,049 $222,765 $ 96,832
Add:
Fixed Charges
(from above) 119,549 105,549 104,743 114,978 102,425 50,317
Less: Fixed Charges
Capitalized 1,262 1,483 1,424 2,040 1,495 1,510
Taxes on Income 160,038 171,300 172,259 173,029 197,958 98,607
---------- ---------- ---------- ---------- ----------- ---------
Total Earnings for
Purpose of Ratio $502,502 $491,238 $481,874 $505,016 $521,653 $244,246
========== ========== ========== ========== =========== =========
Ratio of Earnings
to Combined Fixed
Charges and Preferred
Dividends 3.69 4.06 4.06 3.92 4.54 4.29
========== ========== ========== ========== =========== =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,987,432
<OTHER-PROPERTY-AND-INVEST> 780,016
<TOTAL-CURRENT-ASSETS> 452,361
<TOTAL-DEFERRED-CHARGES> 96,847
<OTHER-ASSETS> 288,327
<TOTAL-ASSETS> 4,604,983
<COMMON> 284,042
<CAPITAL-SURPLUS-PAID-IN> 507,741
<RETAINED-EARNINGS> 727,081
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,518,864
25,000
78,475
<LONG-TERM-DEBT-NET> 1,175,734
<SHORT-TERM-NOTES> 1,000
<LONG-TERM-NOTES-PAYABLE> 238,312
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 48,188
0
<CAPITAL-LEASE-OBLIGATIONS> 96,492
<LEASES-CURRENT> 6,670
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,416,248
<TOT-CAPITALIZATION-AND-LIAB> 4,604,983
<GROSS-OPERATING-REVENUE> 1,009,411
<INCOME-TAX-EXPENSE> 66,890
<OTHER-OPERATING-EXPENSES> 787,886
<TOTAL-OPERATING-EXPENSES> 854,776
<OPERATING-INCOME-LOSS> 154,635
<OTHER-INCOME-NET> 5,962
<INCOME-BEFORE-INTEREST-EXPEN> 160,597
<TOTAL-INTEREST-EXPENSE> 55,353
<NET-INCOME> 105,244
0
<EARNINGS-AVAILABLE-FOR-COMM> 105,244
<COMMON-STOCK-DIVIDENDS> 91,047
<TOTAL-INTEREST-ON-BONDS> 35,933
<CASH-FLOW-OPERATIONS> 286,496
<EPS-PRIMARY> .91
<EPS-DILUTED> .91
</TABLE>
