ML13329A161

Annual Rept San Diego Gas & Electric 1990

ML13329A161
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Site:	San Onofre
Issue date:	12/31/1990
From:	Page T SAN DIEGO GAS & ELECTRIC CO.
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1990 ANNUAL REPORT 1990 Highlights CUSTOMERS LIKE OUR RECORD ANNUM EARNINGS SDG&E SUBSIDJARYS SERVICE, 89 PERCENT REPORTED FOR 1990 ENRON AL BUSINESS "VERY SATISFIED"L We've taken steps to provide better and 987

$3.52 On April 25,1990, SDG&E's wholly faster customer service, and customers

$3118 3.15 owned subsidiary, Pacific Diversified are recognizing our efforts. During

-198 Capital, made a public stock offering of 1990, our surveys showed that 89 per-20 percent of the ownership of Wahico cent of customers were "very satisfied" SDG&E common stock earnings reached Environmental Systems. That environ with the company's service. It's the a record annual high of $3.52 per share ment-related company is now listed on for 1990. Total earnings applicable to thNeYokSckEhagunr highest-ever annual rating of customer satsfctin.common shares were $197 million for the ticker symbol WAL.

satisfaction.

See page 4 for more information the year, up from $176 million in 1989.

PDC continues to own 80 percent of on our customer surveys, and pages The common stock price also reached WES; so in effect, SDG&E shareholders 4 through 7 for details on some of an all-time high of $46.25 per share on retain 80 percent ownership of WES.

the special programs and services November 13, 1990.

WES sells pollution control equipment we now provide our customers.

See page 2.

that's used primarily at coal-fired power 18 19318 9518 9718 9919 plants throughout the United States I

and in foreign countries.

Percent of "Very WES also expanded its products and L=

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services in 1990, and is better prepared a 0 a 0to benefit from the worldwide emphasi 990 SDN constoc MEig reachedn irquliy No ME cO M shrsor

$19 mo for epae 6 n 7

theN y ar, upfrm 16MiliniE99 The csN a

omo soc pric so reahe ME N ON Novme 13, 1990.N M

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CONTENTS 2 Chairman Thomas A. Page discusses the roller coaster ride of change 4 The Customer Environment B The Business Environment 1l2i The Regulatory Environment 14 The Employee Environment 16 Subsidiary Operations DB A Pictorial History of SDG&E C

r A.

Lindberghngs.

w t

-y-his SpioStLu vereelmen diainake inin 1It (pehee paka galle coatedi prmien) Hisd planenmnt was buil incti Sanit Diego andrhis fligh acrossons theondng Atlnti brought attentio to7 thei city'si hisory linked srnlwihthe growth of San Diegosm areuhenCliona depictedivdua in phto andancaptionsTh in hi anuleprt S

FnacaSRve tiB ResponsibiliymReportofo theeod Dvesfe aitl ton Fai Statements Abe otte Cover:y Companylvieo tewnod "enio San Di Gas meunt's to to B,

Eletri isis reth physic ont energyon mange Charles A. Lindbergh was test flying his

'Spirit of St. Louisc o

verBelmonet Park in 1927 (the parks roller coaster is a ga a rohinent) His plane was built in San Diego, and his se s f light across the Atlantic brought attention to the city'set growing aerospace industry. Highlights of SDG&E's historyt linked strongly with the growth of San Diego, are depicted in photos and captions in this annual report.

s d r C e eting "envirgeomntcges fr eycindly eFinancial R eviewc o ris a

an u l

e of afrResponsibility Report for the Financial Statements in:Financial Statements bnNotes to the Financial Statements eM Auditors' Report r

s h

edBoard of Directors b

oaZe Corporate Profile as Off icerso e

Selected Financial Data e

n r

Sharehoider Reoerence Guide pirit of St. Louis composite photograph San Diego Historical society Rstorarion 2

copyrighmt Take Two

2 1990 ANNUAL REPORT CHADWAN'S LETFER an Diego's grand old roller coaster at opportunities. Now we're more flexible, more respon Belmont Park, on the shores of the sive, more capable of dealing with the roller coaster Pacific Ocean, shares some similarities ride of change in a business which is dramatically with your company.

different from what it was a decade ago.

The roller coaster started operation In the not-so-distant past, it was common for utili July 4, 1925, and went through a num-ties to begin planning 10 years ahead for a large-scale ber of ownership changes. Over the power plant. Today forward-looking energy providers years, the roller coaster was partially rely on a combination of smaller power-producing burned by fire three times, and charred efforts which require shorter lead times to meet their by financial problems even more often.

future energy needs.

The weathered and worn coaster stood idle from It also was easier to estimate the future availability 1976 until 1990. With much planning and hard and costs of various energy resources, such as oil. In work, it was rebuilt and reopened.

prior times, utilities tended to depend on a single Now, with the benefit of modern technology and energy resource to meet energy needs, such as oil or a fresh coat of paint, it's stronger, safer and more coal. Now there's an emphasis on fuel diversification, striking than the original. The roller coaster once developing a mix of different energy sources.

stood on wooden pilings buried in the sand. Today, In today's and in tomorrow's energy marketplace, it's anchored securely in concrete. It's fun to ride -

the Most Successful companies will be those that I've been on it.

implement short-term strategies to achieve long-term Just as the Belmont Park roller coaster was tested goals. They will always be ready to respond quickly by fire, so, in a way, was San Diego Gas & Electric.

to new challenges and opportunities.

Two separate oil embargoes during the 1970s led to Like a roller coaster ride, facing the prospect of serious problems. By the early 1980s, customer rates more rapid changes can be scary, or fun -

or a mix were soaring upward, while our employee morale ture of both. Much depends on skills, preparation and our financial performance were plunging down-and attitude. For SDG&E, however, facing change is ward. Customers were angry, employees discouraged like looking forward to a roller coaster ride that's and shareholders disappointed.

challenging, to be sure, but one that also promises Just as the roller coaster was rebuilt, so was your rewards.

company. We began that effort with a plan of action Take 1990, for instance.

and faith in the abilities of SDG&E's employees. We set strategic goals and steadily worked toward their Record Earnings, High Rating from Customers achievement. We implemented strategies that en-We achieved significant progress during the past year abled us to transform a troubled utility into an en-in financial results and in customer satisfaction.

ergy management business ready to capture future Record annual earnings for 1990 were $3.52 per share of common stock, up from $3.15 in 1989.

In addition, for the second consecutive year, our FINANCIAL HIGHLIG lS common stock hit a new record high. On November 13, 1990 our common stock reached an all-time high of $46.25 per share. The high for 1989 was set on December 27 of that year, $45.63 per share.

Continued emphasis on improving customer ser Percent vice and customer satisfaction was rewarded in 1990 In thousands of dollars except per share amounts 1990 1989 Ch ang,

Operating revenues

$1,771,868

$1,669,471

+ 6.1%

a st of custome r fene. The Operating expenses

$1,470,719

$1,384,707

+ 6.2%

ageret of cter sursfor th year sed Net income (before preferred 8cen ere ratisfie with dGrins se dividend requirements)

$ 207,841

$ 187,126

+11.1%

O Earnings applicable to common shares

$ 196,978

$ 175,924

+12.0%

urtI quarter of 1990: 92 percent of customers sur Earnings per common share 3.52 3.15

+11.7%

vyed were "very satisfied."

Dividends declared per common share 2.70 2.70 Your company's key achievements for 1990 Retal enrgy alesrecord earnings and high customer satisfaction Retail energy sales Electric (billions of kilowatt-hours) 14.3 13.4

+ 6.7%

were made possible by the leadership of a quality Gas (millions of therms) 613 584

+ 5.0%

management team and by the individual efforts of each and every SDG&E employee.

Customer Rates, Subsidiary Operations I do have some unpleasant news concern ing our rates for customers. Despite our efforts to cut expenses and to search dili gently for low-cost power supplies for our customers, electric rates increased by about 5 percent in January 1991. This increase was due mainly to inflation and to the ending of a customer refund.

Even with this increase, our rates con tinue to be the lowest among California's investor-owned utilities. Of special note, SDG&E's electric rates are now about 25 percent below our 1985 levels.

I also want to address the 1990 results of our subsidiary, Pacific Diversified Capi tal. PDC's net income was about $12 mil lion for 1990, up significantly from $4 million in 1989. Although results from operations were up, the $12 million in cludes the gain from a public stock offer ing by PDC's subsidiary, Wahlco Environ mental Systems, Inc. This gain was partially offset by losses on the sale of Mock Resources, Inc. and frorm the real estate investment activities of another PDC subsidiary.

We had expected higher revenues from the sales of pollution control equipment than were achieved. Unfortunately, delays by Con-On Track and Moving Forward gress in approving amendments to the Clean Air Act Similar to the Belmont Park roller coaster, SDG&E led to postponements in orders. Now that the new is anchored securely in today's energy business, and air quality law has been passed, we are confident that our performance in 1990 was more striking than Wahlco is well positioned to increase sales in the ever.

U.S. and world markets.

Your company is on track, whether SDG&E's fu ture is as part of a merged company or as a stand The Merger alone business. But we're not satisified with just We continue to seek federal and state regulatory remaining on track. As the cowboy-philosopher approvals of our proposed merger with Southern Will Rogers noted, "Even if you're on the right track, California Edison Company. The merger will pro-you'll get run over if you just sit there."

duce savings for customers, and benefits for share-We're moving forward by continuously striving for holders and for San Diego County and southern improvement in all areas of our business. At the same Orange County communities.

time, we're keeping abreast of change so that we can Although recommendations against approval of better maneuver the twists and turns ahead.

the merger were issued by federal and state adninis trative law judges, we hope to persuade the regula tory commissions to reject the judges' recommenda tions and approve the merger.

We are working with Edison on plans that will enable the two companies to move quickly to cap-Thomas A. Page ture merger benefits when, and if, the required regu-Chairman, President and Chief Executive Officer latory approvals are granted.

March 1, 1991

4 1990 ANNUAL REPORT ThE CUSTOMER ENVmOMENT tive effort with consumer groups, environmental Customers Enjoy ognztos tt euaosadohruiiis Custo m rs J Ypromise to provide significant benefits.

Better and M ore Although customers will pay for these new pro grams through slightly higher rates (about $1 per Specia ed month for the typical home), they benefit from re S *aize Ser iceduced energy use. Every dollar spent on conservation proram isexpected to yield about $2 in energy might well be called savings.

"The Year of the Cus-More efficient use of existing energy resources tomer" at SDG&E.

hlst ee h

edfradtoa oe ln During the year:

capacity, which minimizes customer rates in the

• We completed a major restructuring of our Cus-long term and also benefits the environment.

tomer Services Division, which reduced layers of We're already helping customers save energy with management and gave front-line employees more these new programs which, like some of our continu authority to respond to customer needs. We also ing programs for our larger customers, offer the po increased the number of service personnel. The re-tential for shareholder incentive rewards if we sult? Better and faster customer service.

achieve certain energy conservation goals.

• Customers told us they like the results of our on-We received Public Utilities Commission approval going efforts to improve service. During 1990, they for a $5.6 million shareholder incentive for the sig gave us the highest-ever ratings in our ongoing quar-nificant energy conservation results we helped our terly surveys of customer satisfaction. The average larger business and industrial customers to achieve results of the four surveys taken during the year show during 1989. The approval was anticipated and the that 89 percent of those interviewed were "very satis-money was included in 1989 shareholder earnings.

fied" with SDG&E service. For the last quarter of the This shared savings approach offers benefits to both year, the rating was even higher: 92 percent were customers and the company for cooperating on ways "very satisfied." Just three years ago, in 1987, only to make better use of existing energy resources.

78 percent of customers rated our service that high.

• We expanded our 24-hour phone service, making Another measure of satisfaction is that the number it more convenient for customers to do business with of informal complaints filed by customers with the us. We've always offered 24-hour emergency re California Public Utilities Commission in 1990 de-sponse. But now customers can call us any time creased by about one-third from the previous year, about other energy service matters, from billing and by more than two-thirds from 1987. There were questions to requests for energy conservation tips.

no informal complaints filed with the commission The company's customer service operations are during September 1990, the first month that has divided into two main areas: residential and small occurred in 15 years.

business customers, who are served by the Customer

• We gained approval for and began implementing a Services Division; and our larger business, industrial

$25 million package of energy efficiency and energy and governmental customers, served by our Market conservation programs for low-income, other resi-ing Department.

dential, and business customers. These new pro grams, developed as a result of a statewide collabora-Service to Residential and Small Business Customers While the rate of cus tomer growth slowed Electricand Gas Customers Senior Vice President Al Davis, who heads the Cus in 1990, there was a tomer Services Division, believes that "providing significant increase:

reliable, quality customer service is our number one 25,000 new electric at December31 responsibility." While SDG&E has always empha customers and 11,000 89 new gas customers.

L9 sized good service, he says, "today's customers expect 8 E t a higher level of service. They want us to provide the ssame or better service than they can get from super at87 markets and retail stores."

For example, our customers want shop tverping."

When customers call an SDG&E service repre 300 600 900 1200 sentative, they want to handle all their service needs

SAN DIEGO GAS & ELECTRIC 5

with one call. Our front-line employees now have the training and the management support to provide that one-stop shopping service for our customers.

Customer Services Division employees developed a strong mission: "We will exceed customers' expecta tions in the delivery of the highest quality service, and will be the recognized service management leader in the industry." And with their conscientious efforts, employees are meeting that challenge. In fact, several utilities from other parts of the U.S. and from foreign countries have sent representatives to SDG&E to learn how our employees provide such a high level of quality service.

"We have steadily improved the service we pro vide our customers," notes Davis. "But it requires ongoing efforts, so we're constantly looking for new ways to be even more responsive to individual cus tomer needs."

One example is the company's increased effort to provide customer service to a population with a rich mix of different cultures. The company has long Customer telephone provided telephone service in Spanish, the language service was expanded of our service area's largest non-English speaking "In terms of the services we provide our larger to 24 hours2.777778e-4 days <br />0.00667 hours <br />3.968254e-5 weeks <br />9.132e-6 months <br /> a day population. By the end of 1990, we were able to customers, we're a totally different company than we during 1990, making communicate with customers in 20 different lan-were just a few years ago," says Don Felsinger, vice it more convenient for guages, thanks to employees who serve as president of marketing and resource planning.

nes t us ADais interpreters.

"We've become a very customer-driven organiza-senior vice president "We've also expanded the number of hours we tion," Felsinger continues. "We put ourselves in our of customer services, have repair crews on duty, so that we can more customers' shoes to look for effective energy solu-visits with Kim Fremo quickly respond to customer needs during outages tions that provide mutual benefits for our customers phone call telea that occur in the late night and early morning and our company."

Manning is seated in hours," says Davis.

One example is our commercial/industrial Cus-the foreground.

"The best way for us to assure customer satisfac-tomer Advisory Panel. Started in 1989, this panel's tion is to provide personal attention in combination more than a dozen members each represent a par with high quality technical service," Davis continues.

ticular type of business, industry or public organiza "And we're doing just that."

tion. Large hospitals, hotels, electronics manufactur Davis says the company continues to look for new ers and school districts all are examples of ways to meet customer needs, sometimes in collabo-participating customers.

ration with others. For example, SDG&E is working "The panel serves as a source of practical ideas on with consumer groups, other California utilities, state how we can improve existing customer service, and regulators, building industry groups, realtors and better deal with important energy use issues facing lenders to develop an energy efficiency rating, simi-our large customers," says Felsinger. "It also serves as lar to the miles-per-gallon rating for new cars, that a sounding board for new energy efficiency programs can help new home buyers estimate a home's we are considering."

monthly energy consumption. Like many of our In 1990, the Customer Advisory Panel was instru customer programs, this offers potential for educat-mental in helping SDG&E to simplify commercial!

ing customers on efficient ways to use energy, while industrial rate structures that had become increas also improving our relationship with customers.

ingly complex during the 1980s. The new, simplified rate structures were recently approved by the Califor Specialized Service for Business Customers nia Public Utilities Commission. "Now, it's much There's an intense effort to provide specialized cus-easier for many of our business and industrial cus tomer services to our large business, industrial and tomers to understand how they are charged for the governmental customers.

energy they use," says Felsinger.

In 1935, an innovative poncho allowed m

eter reading in the rain.

6 1990 ANNUAL REPORT "I'm impressed The Marketing Department provides specialized Building Design Review Program: SDG&E's with SDG&E's service to Customers because different energy needs energy specialists work with our customers' archi commitment require different solutions. SDG&E has developed a tects and engineers on design plans for new build to eneigy team of account executives, each with training in ings, so that suggestions for improved energy effi efficiency."

specific types of customer operations, such as hospi-ciency can be considered and implemented in the Tom Novak, chief tals, hotels or aerospace manufacturing. This special-planning stage. For a customer, designing energy engineer for San Diego's ization enables our representatives to work more efficiency into the planning phase of a new building Executive One office effectively with both individual customers and is less expensive and results in greater energy savings groups of customers to help them find better and than waiting until a building is completed.

more efficient ways to use energy. Customers gain Commercial/Industrial Incentive Program:

better control over their operating costs, and SDG&E Energy efficiency improvements often are costly.

further strengthens its energy partnerships with SDG&E's Commercial/Industrial Incentive Program these customers.

is a highly customized program that assists custom The company's representative for the hotel indus-ers financially with some of the up-front costs associ try, for example, encouraged hotel engineers in the ated with energy-efficient equipment and conserva San Diego area to form a Hotel Engineers Associa-tion measures. The incentives often make the tion, which now represents u of the area's largest difference in the customer's decision about whether hotel and conference facilities. The association meets to implement recommended equipment changes.

regularly and discusses a wide range of mutual top-At Southwestern College, for instance, John Wil ics, including energy issues. During 1991, a SDG&E son, director of business/operations, liked the light will offer training seminars to association members ing retrofit recommendations suggested by SDG&E's to suggest energy-efficient equipment and conserva-account executive. "SDG&E offered us a $75,000 tion measures for heating and air conditioning incentive that represented 10 percent of the entire systems.

project's cost," recalls Wilson. "That incentive Customers appreciate the increased level of tech-helped convince our Board of Trustees that SDG&E nical assistance they now receive from us. "I'm im-was serious about helping us to reduce energy costs pressed with SDG&E's commitment to energy through becoming more energy efficient."

efficiency," says Tom Novak, chief engineer for Cogeneration Program: Some business customers downtown San Diego's Executive One office com-find cogeneration (on-site energy plants) an attrac plex. In 1990, the chillers for the cooling system tive energy option. But often, they don't want the were due for replacement, and SDG&E's account risks associated with operating and maintaining a executive helped Novak to select high-efficiency cogeneration system. SDG&E offers an answer by cooling equipment that resulted in energy savings, installing, owning and operating a cogeneration "I can't imagine that we would make any future system located on a customer's property. We offer equipment changes without consulting SDG&E,"

the customer energy savings and freedom from in says Novak.

stallation and maintenance responsibilities, while Following are just a few examples of innovative giving SDG&E an easily manageable way of increas SDG&E programs aimed at satisfying the energy ing generating capacity to meet growing customer needs of large business, industrial and governmental needs.

customer organizations:

In 1990, SDG&E installed its first company-owned cogeneration system at the Ramada Inn in San Diego's Old Town.

o"Electrical Happiness"

• Retrofit Lighting Program: Sometimes business displays in 1927 customers want to conserve energy, but just don't swwdmoe oeredefrrpaeet n

D&'con applides ec have the time and experience needed to select high

gquality, energy-efficient equipment, or to bid the work through competent contractors and/or oversee equipment installation. Our lighting retrofit program is unique in the utility industry, for it offers a "turn key" approach that removes these barriers and allows cut oe customers to devote their time to running their o "ElectriclsHappiness

SAN DIEGO GAS & ELECTRIC 7

SDG&E works with customers during the design phase of buildings to help them save energy and reduce energy costs.

Don Felsinger, vice president of marketing and resource development (right), talks with Dave Himchak, an SDG&E ac count executive, about an off-peak cooling system for the Great American Plaza Project in downtown San Diego. The cooling system will freeze water during the night and on weekends, when energy costs are lower. The ice can then be stored to provide daytime cooling for the 34-story office building and a planned 14-story hotel.

We provide the customer with a lighting survey, D&prvdsifmaonlatileias recommendations for improving energy efficiency, addrc utmrassac ohl uiescs and a cost analysis. If the customer decides to imple-toesudranntolywtcuesp eri ment our recommendations, we oversee the project tracs u

o oaayeadt ov hm from start to finish. In the process, we obtain com-Thspocieadnivulzdcstmrprah petitive bids from highly qualified lighting contrac-hlsu oipoecsoe eain n

vr tors, which can significantly reduce the customer's cm h

icneto htalpwrpolm r

cost for lighting system changes.

drcl soitdwt h

tlt ytm

• Energy Education Programs: Through seminars, DensRtrfdaitntm agromit newsletters, informative brochures and free services, nacfoSnDig-seJt 1rdtisnefth we're telling customers about energy saving measures cutmrwhbefidfomhsefr."nte and a variety of energy topics.beinnwetogtSGEsp eruplwa Take, for example, SDGRE's Power Quality Pro-thprbesasRhrfd,"uinhendw gramn. Some customers, particularly those with sensi-fudw eeOronwrteey hnst tive electronic equipment, can have serious power SGEspwrqaiysrie n

eias ev disturbances, causing excessive downtime, employee albteiiae u

oe itracs n

er frustratand di otpodcin rectl cso m

Ger assistance.t"epbsiescs toesudrtnIo nywa asspwrds tubnebu o oaalz n oIov hm Thspoatv adidiiulie usoe apoc DG&wors wih cutomes duingt es pheof bunefited fromhl thesvet.

rgI anthec negcss DonFelingrvic prsientof arein ndn reou devlop e (right) suppy wit aeslmhk a D

c coun exeutiv, abutaoffpea cooing blsem,"o says rethAerican bu Plaz Poth n dwntwa Deoh coolng ystm wll feezwaer un e gh ren our wknds wst enerycotrlwe.

Theanksan to b

We rovde he ustmerwit a ighingsurey, SDG&E povies ainfosrvaional adterias, einar men ou reommndtios, eoerseherojct uallcut eliinte hour towaye dtobance Andhe're f

ruraio Eatot prgsThrugh semnartennis RuhrfSG rE' assistantce."

rofmine

8 1990 ANNUAL REPORT TE BuSINESS ENVIRONMENT 0

Our main challenge is all the more difficult be Meeting the Energy DeoCut ri otenOag ony h

eeti g th ffi r~vcause there are no natural energy resources in San N eeds of a company's service area often is described as an en ergy desert.

Cust m er tionSince 1988, SIDG&E and Southern California Customer Population Edison Company have been working toward a merger that would link our company's need for en DG&E met its key business challenges in 1990, ergy with Edison's power surplus and its more di providing competitively priced energy supplies verse mix of energy resources. The merger also would and a high level of service to customers, and produce substantial savings to help minimize cus record earnings to shareholders.

tomer rates better than either company could During the year the company also continued to achieve on a stand-alone basis.

build on its strengths as an innovative energy man-The merger requires approval by both the Califor agement company, taking actions to assure future nia Public Utilities Commission and the Federal energy supplies for customers, success for the com-Energy Regulatory Commission. Final decisions by pany and benefits to shareholders.

those regulatory agencies probably could be issued The company's primary challenge for the future is during the first half of 1991.

to provide a growing customer population with reli-

"We continue to expect the merger to occur," says able energy supplies.

Jack Thomas, SDG&E's executive vice president and Customer energy needs are expected to increase chief operating officer. "We've been working with by about 100 megawatts per year, so we'll need about Edison on transition planning, so that the merged 1,000 megawatts of additional capacity by the year company can be operating effectively soon after we 2000. That's enough power to meet the average receive regulatory approvals.

needs of about one million households and it repre-

"At the same time," adds Thomas, "it's also pru sents a 33 percent increase over our peak electricity dent for us to continue to take steps to assure our use in 1990. Most of the additional power will be success as a stand-alone company, just in case the required by business and industry, not by residential merger is not approved."

customers.

The task of simultaneously pursuing these two paths isn't as difficult as it sounds, adds Lee Haney, Despite a slight in-chief financial officer and senior vice president for crease in 1990, Average Residential Electric Rate finance. "Many of the steps we take to cut costs, to customer electricity improve efficiency and to plan for the future benefit rates are well below rates are wells belo go[~F us whether we merge with Edison or continue as a 1986 lvels.*

in cents per 90 19861evels.

kilowatt-hour stand-alone company," Haney emphasizes.

89 For example, maintaining customer rates that are 88

-competitive with other companies in the energy business is important under either of the two future 97 scenarios.

86~ 86 7

ZL I Customer Rates 4

8 10 12 SDG&E's customer rates were among the highest in the nation from 1980 to 1985. As a result of continu Average Commercial/Industrial Electric Rate ous efforts to improve efficiency and reduce costs, SDG&E's rates now are competitive with those of in cents per 90 other utilities.

kilowatt-hour 1

Due mainly to inflation and the ending of a cus c

etomer refund, SDG&E's customer rates for electricity 88 increased by about 5 percent in January 1991. Even 8m with that increase, however, our rates remain com petitive with those of other utilities, many of which are facing substantially higher increases during 1991.

4 8

10 12

SAN DIEGO GAS & ELECTRIC 9

SDG&E's 1991 overall customer rates also are now Company officers about 25 percent below our 1985 levels.

financial analysts to keep them aware of 1990 Achievements company issues and During 1990:

projects. Pictured (left The company placed an increased emphasis on to right) are Malyn energy efficiency and conservation programs to meet a

tease, the growing power needs of our customers. Such senior vice president programs help to obtain maximum use of energy of finance and chief resources and to defer the need to build additional financial officer.

generating capacity.

• We continued to operate and maintain our power plants at performance levels that are among the highest in our industry. Each year since 1985, SDG&E has achieved at least an 89 percent level of power plant availability, compared to the industry's average of 78 percent for 1985 through 1989 (1990 national ratings are not yet available).

Our successful power plant operating and mainte nance efforts improve efficiency, reduce costs, extend the service life of those facilities and give the com pany leverage to buy surplus power from other utili ties at economical prices. All of this, in turn, helps to minimize customer rates.

• SDG&E realized a record $39 million in savings by effectively managing electric power supplies. The bulk of these savings relate to our short-term pur chases of electricity, ranging from one hour to one year. These savings are measured against the costs of Simultaneously, SDG&E continued to cooperate producing power at our own generating plants and with 19 other companies on the expansion of a gas purchasing power under long-term contracts of a transmission pipeline that could deliver these de year or more.

pendable, long-term supplies of Canadian gas to our

• We achieved $29 million in savings by purchasing service territory. The actual volume contracted by gas supplies on the spot market. These are savings SDG&E on the pipeline is expected to be determined achieved in comparison to the cost of purchases sometime in 1991.

from a single wholesale supplier. The savings we The planned $1.2 billion expansion of the existing achieve through economical purchases of electricity Pacific Gas Transmission pipeline gained needed and natural gas help to minimize customer rates.

approvals from the California Public Utilities Coi

• SDG&E implemented a new gas service agreement mission and from the Federal Energy Regulatory with Southern California Gas Company which in-Commission. However, additional U.S. and Canadian cludes additional gas storage capacity, equivalent to regulatory approvals are required before the project about 10 percent of our annual needs. This improves can be built.

our ability to purchase gas supplies during the sum mer, when prices are lower, and then store the gas for the winter, when customer demand is high.

• We signed letters of intent with Canadian gas o

n 1882, s s

suppliers to purchase up to 100 million cubic feet of the company's oil gas natural gas per day for the next 30 years, beginning manufacturing plant at in November 1993. This is enough gas to meet the the Staion A complex.

total summer load of our residential customers. The company is now working toward final contract agreements with those Canadian suppliers.

companyissue

10 1990 ANNUAL REPORT During 1990 We worked on projects to expand electric and SDG&E coordinated an effort by a coalition of we continued to natural gas facilities to meet our customers' energy California and Texas utilities to encourage the manu operate and needs. Our two largest expansion projects involve facture of compressed natural gas vehicles. Partially maintain our the Pefiasquitos electric substation, a $19 million as a result of this effort, General Motors will produce power plants at project, and the Moreno natural gas compressor 1,000 natural gas-powered pickup trucks in 1991.

performance station, a $14 million effort.

In 1990, our company signed an agreement with levels that are The existing Pefiasquitos electric substation will be Unocal Corporation for a joint demonstration among the doubled in size when its expansion is completed in project to make natural gas fuel available at two local V highest in our 1991. This project is necessary to ensure reliable service stations.

industry, electric service and to meet projected growth needs SDG&E also worked with school districts and local for businesses and homes in the coastal area north of transit authorities on various proects to demonstrate the city of San Diego.

and to use natural gas-powered buses in our service The Moreno natural gas compressor station expan-territory.

sion, estimated to be completed in November 1991, We conducted research to discover new ways to will maintain our ability to deliver gas supplies to cut expenses and to help customers use energy more residential and commercial customers during peak efficiently. These efforts range from more effective winter weather. This project also allows us to deliver and less expensive ways of reducing power plant more natural gas as fuel for our power plants and for emissions to developing battery storage systems.

industrial customers during off-peak conditions.

Battery storage systems would allow energy to be f The company completed a number of actions to captured during the night, when energy demands encourage the development of natural gas vehicles, and rates are lower, and stored for daytime use.

Natural gas is a lower-cost, lower-emission fuel than

• SDG&E focused subsidiary operations more in gasoline for cars, trucks and buses.

tensely on business opportunities linked to the Vehicles powered by compressed natural gas worldwide emphasis on more effective environmen (CNG) could help improve air quality in California tal controls for power plants. A public stock offering and in the nation's major cities. In comparison with by a subsidiary operation, Wahlco Environmental gasoline-powered vehicles, CNG vehicles would Systems, raised $38 million in capital that can be reduce carbon monoxide by 90 percent, hydrocar-used in part to expand into additional business op bons by 50 percent and nitrogen oxides by portunities pertaining to environment-related prod 33 percent.

ucts and services.

Power Plant Operations Besides pursuing a merger, SDG&E and Southern California Edison The company's Encina and South Bay power plants, Company worked on a transition plan to integrate the two companies. vehicles Below (left to right) are Ed Guiles, vice president of corporate natural gas ning, and Jack Thomas, executive vice president and chief operating ated at 89 percent availability in 1990. Together they officer. During 1990, these officers made several trips to Edison's head-met 24 percent of customer power needs.

quarters in Rosemead, about 110 miles northeast of San Diego.

SDG&E also has a 20 percent ownership of the San Onofre Nuclear Generating Station, which continues to be one of the nation's safest and best-run nuclear plants. Power from San Onofre met 20 percent of the needs of our customers in 1990.

Power purchases enabled the company to meet 56 percent of customer electricity needs during 1990.

The company's transmission links include its own 500,000-volt Southwest Powerlink, which extends into Arizona, as well as tramsmission access to the Pacific Intertie, which extends from California north to the Canadian border.

Managing Energy Supplies For several years now, the company has been reach ing far beyond its service boundaries to seek out economical, short-term purchases of electricity and natural gas in the energy marketplace.

SAN DIEGO GAS & ELECTRIC 11 jvr 7l--

-I7 The Pefiasquitos substation will be Transmission links beyond our service area enable achieved for our customers through economical doubled in size us to shop the energy marketplace aggressively, on power purchases. During the past year, we also ex-inring cutomer an hourly basis, 24 hours2.777778e-4 days <br />0.00667 hours <br />3.968254e-5 weeks <br />9.132e-6 months <br /> each day, to seek out low-tended our ability to purchase power further east-energy demands in cost energy. This keeps our prices down, and allows ward by completing a low-cost, short-term power the coastal area us to minimize customer rates.

purchase in Arkansas. Prior to that, our company had north of San Diego.

SDG&E purchases electricity from Mexico, from never made a power purchase beyond Texas.

Mar d

ve Canada and from throughout the Western U.S., and On the gas side of the business, we've progressively president of adminis natural gas from Canada and from the West. We also increased our transmission access, enabling us to trative services, and are able to make short-term power sales throughout increase competition among suppliers when we so-Gary Cotton, senior the western region and to Mexico.

licit bids for supplies. During 1990, SDG&E pur-gineein oper In recent years, we've progressively become more chased 95 percent of customer gas needs on the spot tions. The $19 million skilled in our power purchases, both in terms of the market. Prior to 1986, the company purchased all substation expansion prices we pay and the expansion of our transmission our customer gas needs from one supplier. Soliciting project is the com access.

spot market bids enables us to obtain gas supplies at consrtion et In comparison with the average of the previous lower prices.

three years, during 1990 we doubled the savings we These skills in managing energy supplies will help the company to continue to search out the most qq=W"F11economical supplies of electricity and natural gas to NATIONAL HOUSINGACTLOANSINCLUDE: help meet future customer energy needs.

• GAS HEATING WAUTOMATIC WATER HEATERS pw prae Duin the pastIn tee anid-1930s, puthe coin ns tcade n

rwide us a

of billboard advertising.

On tn

12 1990 ANNUAL RE PORT THE REGULATORY ENVRONMENT

• The commission also approved plans for the Cali Collaboration Helps ln rjcwihwl aeaalbet C ollbora ion elpsfornia portion of the Pacific Gas Transmission Pipe Achieve Regulatory and its customers long-term access to Canadian natu Success ral gas supplies beginning in 1993.

Power Contracts The $25-million settlement with Century Power DG&E's dealings with regulatory issues proved reflects the company's continued efforts to seek successful during 1990, marked by a stronger power purchase contracts, and take legal action emphasis on collaboration with consumer and when necessary, to ensure economically priced en LS~/ environmental groups. The company also ergy for customers, according to the company's top continued to search for effective but economical legal officer.

methods of protecting the environment while still "Over the past several years we brought actions to meeting customer energy needs.

recover overcharges from Century for our custom Looking ahead, California Governor Pete Wilson ers," says Stephen Baum, senior vice president and is expected to streamline some of the state's regula-general counsel. "When the conditions of this settle tory processes concerning utilities, while maintain-ment have been met, including approval by the ing California's leadership role in addressing energy Federal Energy Regulatory Commission, and it has issues.

been reviewed by the California Public Utilities Coi Specific highlights for 1990 include:

mission, we'll pass on to customers their share of the

• SDG&E began a $25-million package of new en-settlement money through lower rates."

ergy efficiency programs following a year-long, col-The settlement also gives SDG&E rights to pur laborative effort that involved consumer groups, chase up to 217 megawatts of economically priced environmental organizations and state agencies.

energy from Century during 1991, with other op

• We negotiated a $25-million settlement that will tions to purchase power in the years 1992 through benefit SDG&E and its customers, pending regula-1994.

tory approvals. The settlement is a positive end to a During the latter part of 1990, the company long dispute concerning our company's 1978 agree-signed power purchase contracts with Southern Call ment to purchase power from Century Power fornia Edison Company that enabled us to suspend Corporation.

plans and equipment orders for two major expansion

• State and federal regulatory hearings on the pro-projects, a 460-megawatt combined cycle power posed merger between our company and Southern plant and a 140-megawatt addition to an existing California Edison were completed. Final regulatory power plant unit.

decisions on the merger could occur during the first These power contracts take effect only if the half of 1991.

merger does not occur, and if SDG&E chooses to

• The California Public Utilities Commission made implement them. The contracts are intended to no disallowances during 1990 concerning our cover any project delays caused by the suspensions.

company's operations. Disallowances for utilities The contracts with Edison help us to achieve maxi are common in California for expenditures, such as mum savings for the merged company. At the same those concerning capital construction projects, time, the contracts ensure that, if for some reason power contracts and fuel expenses.

the merger does not occur, we can still meet custom ers' future energy needs.

Environmental Research and Innovation The company has a solid record of complying with local, state and federal environmental regulations. In addition, the company searches for innovative ways to respond to environmental issues and problems.

o These linemen Some examples:

used an electric Ss p

When an underground storage tank has a gasoline or oil leak, a common way of complying with envi ronmental regulations is to haul the contaminated

SAN DIEGO GAS & ELECTRIC 13 soil to an approved hazardous waste site. That's often an expensive solution.

During 1990, SDG&E's environmental research efforts achieved successful results in removing soil contaminants with an innovative approach involv-t ing microbes that occur naturally in soil. By injecting nutrients into the soil, our researchers stimulate the microbes' appetites for hydrocarbons. The microbes then consume the hydrocarbons, eliminating the hazardous waste. The cost? It's less than half that of the common landfill disposal method. This ap proach, called bioremediation, also eliminates the long-term liability the company would face in asso ciation with the disposal of contaminated soil at a hazardous waste site.

California is facing its fifth year of drought. As a good corporate citizen, SDG&E has placed a stronger emphasis on water conservation projects in recent years. By using water chemistry monitoring and control techniques and the latest technologies for water reclamation, the company conserves several to right) Ronald Fuller million gallons of water per year.

the development and testing of fuel cells. SDG&E vice president of gov Power plant boilers require pure water, and sensi-is taking a lead role in this cooperative effort with ernmental and regula tive instruments continuously test water quality. In other utilities and manufacturers. Fuel cells convert tory services and the past, the water was tested in instruments and any natural gas fuel directly into electricity through a Stephen Baum, senior water that did not meet certain quality standards was chemical reaction, a process that produces very few gee sel. The discharged. Now, instead of being discharged, the emissions. Fuel cells also would enable generating often travel to San water passes through purification equipment so it capacity to be added in small increments.

Francisco, the location can be recycled and returned to the boiler. This saves Utltie Commissionls approximately five million gallons of water per year.

Regulatory Changes Ahead headquarters, to the The company also is researching other ways to con-

"California's new governor wants to restructure the state capital in Sacra serve water and to reclaim waste water at its Encina state agencies that regulate our business," observes mento and to Wash and South Bay power plants.

Ronald Fuller, vice president for governmental and ington, D.C. to protect the interests of SDG&E, Careful control of the chemical content of water at regulatory services. "The emphasis will be on looking its customers and its power plants has an important benefit besides water for ways to streamline the regulatory process while shareholders.

conservation: it leads to more economical power still assuring adequate energy resources at a reason plant operation. Improving the quality of boiler able cost," says Fuller. "We plan to participate in any feedwater reduces boiler tube failures, a common such review process, to speak out for the interests of cause of unplanned power plant outages.

our company, our customers and our shareholders."

During 1990, the company established a joint In an October 1990 statement on energy matters, energy and water conservation program with the San Pete Wilson said that as governor he will encourage Diego County Water Authority. We worked together energy conservation and "the widespread use of to provide and install low-flow showerheads in cleaner fuels for cars, trucks and buses."

homes to conserve both water and the energy used SDG&E already places a strong emphasis on en to heat water.

ergy conservation, energy efficiency and the develop

• The company also carries out research projects ment of natural gas-powered vehicles.

which may yield environmental benefits, such as:

"California leads the nation in imaginative energy

- research of a cost-effective chemical injection programs," says Fuller, "and we expect that to con process for controlling nitrogen oxide emissions tinue under the new governor's administration."

from power plants. In 1990, this research progressed to the stage where it is ready to be tested commer cially. Once commercial tests of this process are com pleted, it can be used as a standard technique in power plants.

14 1990 ANNUAL REPORT THE EMPLOYEE ENVIRONMENT Employees helped the company to further cut Em pl yeescosts and improve revenues by their collective and Improve Productivity I~ipoveftod ch~ 7,approved during 1990 will lead to $5 million in annual benefits to our company, a record one-year C IA Ex ensesamount for our employee suggestion program.

C ut They enabled the company to provide services to a growing customer population with fewer employees.

D y every measure, our employees are more iv yeragtecm nyhd9000lcrc productive, more efficient and more capable customers and 590,000 natural gas customers. At than ever before. During 1990:

that time, the number of employees was 4,815.The

• They helped the company to complete a company now serves 1.1 million electric customers major reorganization of its largest division, which and 670,000 gas customers and has 4,175 employees.

employs about half of our total work force. The That translates into a 33 percent increase in em changes in our Customer Services Division reduced ployee efficiency.

the levels of management and gave many employees Management recognizes that employees comprise additional responsibilities. The results are improved our greatest resource. To encourage and to reward efficiency for the company as a whole and better superior employee performance:

customer service.

a The company provided extensive new training to

• Employees improved service to our 1.1 million employees during 1990, which will continue in electric and 670,000 natural gas customers. Through 1991. This training provides employees with the surveys, our customers confirmed that employees are skills they need to become more service-oriented, to improving service. To accomplish this improved improve customer satisfaction, to meet the needs of level of service, many of our front-line employees both internal and external customers, and to manage assumed more decision-making responsibilities.

change.

• They also improved internal service between the e The company continued to give employees an company's various departments.

incentive for helping the company to achieve its "Since our corporate goal is to provide quality goals. The Gain Sharing program, instituted in Janu service to customers," explains Margot Kyd, vice ary 1988, provides employees with an annual incen president of administrative services, "employees tive award if specific goals are reached in providing throughout our company must provide excellent good service while cutting costs and improving service in support of those employees who deal di-safety. For 1990, nearly all employees received a $755 rectly with customers."

Gain Sharing award.

SDG&E's management places a high priority on commun Sicating openly about company issues with employees, the comunity and the news media. Below (at left) is Frank

uta, controller, with George Weida, vice president of Extamount fornin ourram empoye suggestion prgrm

• mrv Theyic enale theomrs company toprvdeseveot, growingt customer pouato withton fewersi empoyes Fivet yearsse ago, theoee coman had940000eletri hum anestoers.

a 0

n l

c e

thattime thenumbr ofemplyeeswas

,815iTh Extensiveatrainingeprogramsshehptemmloyeesstoomprise improvereatestceesource.omersncouragedandetoreward corporate drectoriof oerations anlysismande:

auditoyeessduring 1990,ewhichewillhcontinueyin servic managmenthehic..

SAN DIEGO GAS & ELECTRIC 15

• We continued the flexCHOICE plan, begun in DTF-1W SDG&E and its em 1989, which delivers a full benefit package to em-ployees support a va ployees while still controlling costs.

riety of community

• Individual employees were rewarded for their Manning, vice presi suggestions on effective ways to reduce expenses and dent of public rela improve revenues. Under the company's "10% Solu-tions, is a board mem tion" program, an employee receives 10 percent of Co Yn en' the first year's savings for cost-cutting ideas, up to a Christian Association.

maximum of $25,000.

He's shown here help We maintained open and effective communica-

'77 ing youngsters as tion with employees to keep them informed of com human body at San pany-related issues, including ones concerning the De a

pending merger with Edison. These communications Robinson YMCA.

included group meetings and question and answer sessions with officers, news bulletins, fact sheets, an employee telephone news line, a daily news sum-Community Involvement mary distributed by electronic mail, an employee SDG&E and its employees together support a variety newspaper and special-edition video reports.

of community organizations throughout the

• SDG&E participated with Southern California company's service territory.

Edison Company in a culture study so employees can In 1990, as in previous years, our contributions to understand better the similarities and the differences United Way ranked among the highest of firms lo between the two companies. This provided employ-cated in San Diego and Orange counties. United Way ees of both companies information that will give in turn supports hundreds of community groups, them greater opportunities for success in a merged from those that provide medical services to the company. (During the year, Edison also pledged a job needy to those that offer sports activities for youth.

offer for every SDG&E employee.)

In addition, SDG&E and it employees contribute

• The company maintained good relations with its directly to individual arts, community service, educa union, which resulted in improved productivity.

tional and youth activity organizations. During 1990, "Our employees deserve the credit for our this support became especially important because company's success," says George Weida, vice presi-many community groups, particularly those in the dent of human resources. "They've responded quite arts, experienced cuts in government funding.

well to changes in our company and in our business.

At all levels of the company, employees generously During the past four years, almost every department contribute their time as community volunteers, from in our company has been reorganized, requiring a lot serving as tutors for school children to heading fund of effort on the part of our employees."

raising campaigns for medical clinics.

Employees, in turn, show more confidence in the "There's a strong partnership between our com company's management than in previous years.

pany and the communities we serve," notes Dick Results of an employee survey show that in 1990 the Manning, vice president of public relations. "As a majority of employees believed that the company's major corporation, we have a responsibility to be management values individual employee input. Five involved in the social concerns of the communities years ago, a similar survey showed that only 13 per-where we do business. Our efforts have gained cent of employees felt they were valued. Similarly, SDG&E a solid reputation as a good corporate citizen.

the survey showed that in 1990 the majority of em-The youth programs we support help individuals ployees believed that there was free and informal who will be our customers, and possibly our employ communication at all levels of the company. Only ees, in future years."

1d6 percent of employees believed that in 1985.

on 1926p27, this boiler crew set installation records.

H e 's s hwte r e p

16 1990 ANNUAL REPORT SUBSIDIARY OPERATIONS Some of the money raised by the WES public stock Subsidiary Markets caiaadsmwsseaiefo Subsdiar M ar etsoffering was used to repay existing debt and to re Fnvironmental "We're building on Wahico Environmental Sys Pr~ u ts orld~ detems' two main strengths: its excellent worldwide Productssales network and its highly skilled engineering staff," says Henry Huta, president and chief executive k acific Diversified Capital, SDG&E's wholly officer of both PDC and WES. "We are expanding owned subsidiary, has been an indepen-and diversifying Wahlco's line of air pollution con dently operated holding company since trol technologies and services."

1986. PDC's objective is to increase our WES primarily sells flue gas conditioning systems return on shareholders' equity through diversifica-to coal-fired power plants operated by utilities. These tion into unregulated businesses. In 1990, PDC took systems help reduce air emissions, using an approach actions to concentrate its investments in environ-that also improves the operating efficiency and the ment-related products and services. As a result, the useful life of precipitators, expensive equipment that company is better prepared to benefit from the captures emission particles.

worldwide emphasis on improving air quality.

PDC continues to own 80 percent of WES; so, in PDC's consolidated net income for 1990 was ap-effect, SDG&E shareholders retain 80 percent owner proximately $12 million, contributing 22 cents in ship of WES. The total after-tax gain to SDG&E from per-share earnings for SDG&E common stock share-the WES offering was $13.5 million, or 24 cents per holders. By comparison, 1989 net income was about share of SDG&E common stock.

$4 million, or seven cents a share.

e PDC sold its fuel oil and natural gas distribution The increased net income for 1990 was due to a subsidiary, Mock Resources, Inc., in June 1990 at a public stock offering involving a PDC subsidiary, loss of about $2.7 million, or five cents per share of Wahlco Environmental Systems. The WES gain was SDG&E common stock. The sale enabled PDC to partially offset by losses from the sale of Mock Re-focus more intently on environment-related busi sources, Inc., a fuel distribution company, and from nesses. PDC also remains on a long-range program of the real estate investment activities of Phase One reducing its investment in commercial real estate.

Development.

Following is a summary of PDC's most significant Wahico Environmental Systems, Inc. (WES) activities during 1990:

Wahlco Environmental Systems, Inc. expanded its

• On April 25, a public stock offering of 20 percent products and services during 1990.

of the ownership of WES raised an approximate net WES has designed, engineered and built about 90

$38 million in capital. The company is now listed on percent of the flue gas conditioning systems installed the New York Stock Exchange under the ticker in North America and 75 percent of those installed symbol WAL.

in other parts of the world.

Officers Pacific Diversified Capital Wahico Environmental Wahlco, Inc.

Bachmann Companies, Inc.

Company Systems, Inc.

W. Clay Matthews, 61 Lothar Bachmann, 49 Thomas A. Page, 57 Thomas A. Page, 57 President and Chief Executive President and Chief Executive Chairman of the Board Chairman of the Board Officer Officer Henry N. Huta, 43 Henry N. Huta, 43 R. J. Mudd, 44 Rick W. MacMillan, 46 President and Chief Executive President and Chief Executive Vice President-Operations and Vice President and Chief Officer Officer Secretary of Corporation Financial Officer A. Noel DeWinter, 51 A. Noel DeWinter, 51 Gary A. Skarphol, 41 John T. Guffre, 42 Vice President and Chief Vice President, Finance and Controller Vice President and General Manager Financial Officer Secretary Ekkehard Bachmann, 45 Fred C. Johnson, 39 President-Bachmann Industries Vice President and Treasurer Canada, Inc.

Alberto. Salvato, 50 President-Bachmann Industries Australia Ptd., Ltd.

The federal Clean Air Act Amendments of 1990, and possible expansion of government regulations about air quality in Eastern and Western Europe and in Asia, are expected to increase significantly the sales of a variety of types of pollution control equip ment in the coming years.

Highlights for WES in 1990 were:

WES acquired all of the capital stock of Bachmann Companies on March 30, for $9.6 million in cash.

Bachmann designs, manufactures and sells dampers and other products used by electric utilities, chemical plants, refineries, cement plants, paper and steel mills, and other industrial firms.

Bachmann has manufacturing facilities in the U.S.,

Canada, Australia and India. Since the acquisition by WES, Bachmann's sales backlog has increased from

$11 million in March 1990 to approximately $20 SDG&E's subsidiary, million in December 1990. The company is ex-Install complex "scrubbers" that capture emission Papi conerted panding manufacturing capacity to meet increased particles, an option that costs about $80 million to its efforts more in product demand.

$120 million per boiler There are 111 power plants tently on environmen Since Bachmann products are components of in the U.S. that have been targeted by the Environ-tal products and ser systems used to help control air emissions, sales may mental Protection Agency. A large power plant can vics Wuricg Enirn increase as a result of the approval of new federal have as many as four boilers, mental Systems sells clean air standards.

- Switch to lower-sulfur coal and enlarge exist-air pollution control

• On November 15, President George Bush signed ing precipitators. This alternative can cost from $20 equipment to power the Clean Air Act Amendments of 1990. This com-million to $50 million for each precipitator.

wld. hryuhuth prehensive revision of existing federal air quality Convert to lower-sulfur coal in conjunction shown here in front regulations is intended to reduce toxic air pollutants with a flue gas conditioning system. These sys-of a utility power and deal with the issue of acid rain.

tems cost between $1.5 million and $3.5 million plant, serves as presi The new regulations will require utilities to reduce per boiler to install, creating a potential market deve offief both levels of a number of types of air emissions, includ-of approximately $400 million in the U.S. alone.

PDC and Wahlco Envi ing sulfur dioxide. WES is the world leader in the e Wahico Power Products, a division of WES, ronmental Systems.

manufacture and sale of flue gas conditioning sys-opened a new 65,000-square-foot manufacturing tems, a comparatively low-cost option to help utili-facility in Fairmont, West Virginia. The facility pro ties comply with the federal air quality rules.

duces heater baskets, used mainly by utilities to help Utilities that burn high-sulfur coal basically have power plants conserve and transfer heat as they gen three options for meeting the new sulfur dioxide erate electricity.

emission rules:

WES plans to continue leading the flue gas condi tioning market, says Huta, and to market these sys tems to utilities and to industrial firms as a method Wahico Power Products, Inc.

o In 1887, the for reducing air emissions. "At the same time, we William H. Pollock, 42 Station A complex want to expand the company's line of pollution President and Chief Executive housed a power control products and services," he emphasizes.

Officer plant and a gas "Our own research scientists and engineers are manufacturing Rick W. MacMillan, 46 facility.

developing new products, and we're pursuing both Vice President and Chief VicePresdentand hiefacquisitions and joint ventures," says Huta.

Financial Officer Finacia OffcerWES already does business in the U.S., Canada, the Phase One Development, Inc.

United Kingdom, France, Germany, Italy, Hungary, Henry N. Huta, 43 Poland, Australia, Korea, Taiwan, and Hong Kong.

President and Chief Executive The company hopes to expand soon to other coun Officer tries in Eastern Europe and to the Soviet Union.

Michael J. Lowell, 32 Vice President-Chief Financial Officer

18 1990 ANNUAL REPORT 1887 1890 189921900ic9a5 S

1881"SanDiego 1887 San Dieg a&I 1905 San 'Dieg Consolidlatei C o y

C I

i GasComan Electric Light Company

&IIElec-i 0-1~~~a 11, i

F F,9 1887 Coronado Gas 1892 Electric Rapid

& Electric Company Transit Street Car Company MORE THAN A CENTURY OF SERVICE Since April 18, 1881, our company has provided vifYiVnerf Ty rvices toustoiers TIg'lrief glimpse of highlights during SDG&E's more than a century of service is dedicated to company empio1yeers--./rThTetrp-tortirnof the*imeline-aboVe-w AAA A 1displays the company's name changes over the years.

The bottom portion of the timeline lists some of the companies and facilities our company acquired over the years. Photos illustrate our progress as we ex Iip 1,

nded Spanded from a gas company with 89 customers to a company with 1.1 million electric service customers and 670,000 gas service customers.

9A 1886

• This two-room 1886

• Electric arc 1887* Employees 1906

• The Hotel del 1906

• The first turbine-1908

• Electric linemen building was the street light tower at stand in front of new Coronado, opened generator was installed pose in front of Station company's first office.

Fifth Avenue and F plant that manufac-in 1888, was the at Station A power plant. A power plant.

Street, downtown tured gas.

world's first electrically San Diego.

lighted hotel.

SAN DIEGO GAS & ELECTRIC 19 1910 19 K7 1~ 190

~

1925 1930 195 1916 Oceanside 1917 Escondido 1918 Del Mar 1921 S. D. Electric 1923 Electric 1928 San Juan 1930 South Electric & Gas Utilities W. L. & P.

Railway Company Building Capistrano Coast Gas Company Company Company (Station B)

Substation Company 1~-F.

0-1

-olI 7

[L LEE iiI~UlWl o Stanley Steamers serviced residen tial gas customers It' in 1923.OP 1916

• Raising a power 1921

• Station B 1923

• This building 1928

• Station B power 1929

• Members of 1937

• This kitchen pole required muscle power plant was was purchased. It re-plant was expanded.

Women's Committee display promoted gas power.

acquired.

mained our headquar-forned a first aid and electric appliances.

ters until 1968.

team.

20 1990 ANNUAL REPORT 19 195 715195 9016 140 Sa n Dieg Gas &

I1 1948 Rincon 1954 Escondido Substation Mutual Water Company

(

o Reddy Kilowatt, an electric power industry symbol, was featured on '50s traffic warning flags for poles.

1941

• Guards 1943

• Women meter 1950

• Silver Gate 1960

• The first unit of 1967

• San Onofre 1968 * "Electric protected company readers joined SDG&E power plant was ex-South Bay power plant Nuclear Generating Building" headquar facilities during for the first time.

panded during the post-began operation.

Station Unit I went ters opened.

wartime war population boom.

on line.

SAN DIEGO GAS & ELECTRIC 21 1970 19519810 19190F 1970 Mountain 1988 Merger Agree Empire Electric ment with Southern Co-op California Edison TI-S

]I

-1 7

1.W1 EN

• ii I

Nm, MEI n.ui 1 Ei 1968

• This iiatural 1970s

• Construction 1970s and '80s 1978

• Unit 5 at 1983

• Southwest 1988

• SDG&E gas-powered vehicle continued on Unit 2 at

• Construction and the Encina power plant Powerlink was dedi-Chairman Tom Page went on a national San Onofre Nuclear influx of new residents began operation.

cated. The 280-mile and Edison Chainan tour.

Generating Station.

increased the demands line was built to bring Howard Allen signed for energy services, power from Arizona.

merger agreement.

22 1990 ANNUAL REPORT Six-Year Summary In millions of dollars except per share amounts For the years ended December 31 1990 1989 1988 1987 1986 1985 Operating revenues

$1,771.9

$1,669.5

$1,620.5

$1,562.2

$1,634.2

$1,738.7 Operating income 301.1 284.8 274.6 261.1 282.4 287.9 Net income (before preferred dividend requirements) 207.8 187.1 189.4 196.8*

167.3 202.7 Earnings per common share before cumulative effect of change in accounting principle 3.52 3.15 3.18 2.96 2.59 3.25 Earnings per common share 3.52 3.15 3.18 3.28 2.59 3.25 Dividends declared per common share 2.70 2.70 2.60 2.50 2.345 2.205 At December 31 Total assets 3,656.6 3,546.5 3,532.7 3,551.5 3,409.2 3,332.6 Long-term debt and preferred stock subject to mandatory redemption (excludes current portion) 1,337.1 1,287.2 1,357.0 1,388.4 1,333.2 1,354.1

• Includes $17.7 million from the cumulative effect of change in accounting principle.

The Six-Year Summary should be read in conjunction with the consolidated financial statements, notes to consolidated financial statements and statistical data contained elsewhere in this report.

Quarterly Financial Data (Unaudited)

In thousands of dollars except per share amounts Quarter ended March 31 June 30 September 30 December 31 1989 Operating revenues

$420,204

$390,593

$423,892

$434,782 Operating expenses 358,348 323,702 346,317 356,340 Operating income 61,856 66,891 77,575 78,442 Other income (expense) 1,663 1,553 (1,177) 1,776 Net interest charges 27,600 25,210 22,964 25,679 Net income (before preferred dividend requirements) 35,919 43,234 53,434 54,539 Preferred dividend requirements 2,840 2,815 2,774 2,773 Earnings applicable to common shares

$ 33,079

$ 40,419

$ 50,660

$ 51,766 Average common shares outstanding 55,894 55,893 55,893 55,900 Earnings per common share 0.59 0.72 0.91 0.93 1990 Operating revenues

_$445,749

$403,285

$452,127

$470,707 Operating expenses 366,643 337,477 373,407 393,192 Operating income 79,106 65,808 78,720 77,515 Other income (expense) 2,345 11,122 3,382 (1,415)

Net interest charges 25,310 27,942 27,429 28,061 Net income (before preferred dividend requirements) 56,141 48,988 54,673 48,039 Preferred dividend requirements 2,774 2,743 2,673 2,673 Earnings applicable to common shares

$ 53,367

$ 46,245

$ 52,000

$ 45,366 Average common shares outstanding 55,919 55,918 55,918 55,929 Earnings per common share 0.95 0.83 0.93 0.81 These amounts are unaudited, but in the opinion of the company reflect all adjustments necessary for a fair presentation.

SAN DIEGO GAS & ELECTRIC 23 FINANCIAL REVIEW Results of Operations cation plans for the 1990s include additional acquisitions and Earnings Earnings for 1990 increased 37 cents over 1989 to product development. This could include joint ventures, licens

$3.52 per share. The increase was primarily due to the gain from ing agreements and strategic alliances in foreign countries. The the public offering of 20 percent of Wahlco Environmental company plans to continue its focus of diversification in envi Systems, Inc., previously a wholly owned subsidiary, and the ronment-related businesses.

California Public Utilities Commission's 1989 Southwest Powerlink regulatory disallowance, partly offset by expenses Purchased Power As discussed in Note 8 of the notes to con related to the pending merger with Southern California Edison solidated financial statements, the CPUC issued a 1989 decision Company. The total after-tax gain to the company from the that disallowed certain costs of power transported over the WES offering was $13.5 million. As described below, the South-Southwest Powerlink transmission line. The principal account west Powerlink regulatory disallowance reduced 1989 pretax ing effects of the disallowance were recorded in the first quarter income by approximately $20 million. Absent these unusual of 1989, reducing pretax income by approximately $25 million, items, earnings were up slightly, due primarily to the increase in or 28 cents per share after tax. This was partially offset in the the company's authorized return and to increased conservation third quarter of 1989 when the company filed for a credit of $5 awards from the CPUC.

million.

1989 earnings of $3.15 per share were three cents less than During the third quarter of 1989, the CPUC Division of the $3.18 in 1988, due to numerous factors. The primary factors Ratepayer Advocates issued a report on the reasonableness of the were the 1989 Southwest Powerlink regulatory disallowance, company's entering into its 75-megawatt long-term purchased offset by increased sales not subject to regulatory balancing power contract with Portland General Electric. Power deliveries accounts, improved earnings of subsidiaries and a conservation at issue under that contract began on January 1, 1989. The DRA award from the CPUC.

has recommended comparing the annual costs of the contract with the cost of alternative sources of power, with the excess Earnings Per Share costs being subject to disallowance in those years in which the contract costs are higher than the cost of the alternative sources.

• dla 90 The potential disallowances identified by the DRA have a in_

dolr

-1 present value of $28 million, based on the DRA's assertions 89 regarding the value of the benefits of the contract to SDG&E's 8i customers during the contract's first 10 years.

o 2The company has participated with PGE in negotiating new 87(

contracts with the coal company and the railroad supplying coal In99to PGE's Boardman power plant. This plant is associated with 86 Sthe company's power contract with PGE. The new contracts will 1

2 3

4 enable PGE to resume normal operations of the plant, which had operated only briefly during the last seven years.

Subsidiary Operations and Activities In 1990, the company's Because of the new contracts, energy costs from PGE will be nonutility subsidiaries contributed approximately $12 million, reduced. The company hopes that the new contracts will reduce or 22 cents per SDG&E common share, to consolidated earnings, or eliminate the DRA's concerns about the cost effectiveness of In 1989, the subsidiaries achieved a consolidated net income of the PGE contract. The CPUC has reopened the record to con approximately $4 million, or seven cents per SDG&E common sider the reduced annual costs. The additional hearings are share. The increase in earnings is primarily due to the Wahco scheduled for April 1991.

Environmental Systems public offering, offset by losses on the sale of Mock Resources, Inc. and by the real estate investment Power Plant Construction The company's philosophy of pro activities of Phase One Development, Inc. The WES offering and viding adequate energy at the lowest possible cost has been the sale of Mock are described in Note 2 of the notes to consoli-based on a combination of production from its own plants and dated financial statements. There are no plans for further offer-purchases from other producers. The company has been in the ings of WES stock.

early stages of developing new generating facilities. Southern In March 1990 WES purchased Bachmann Companies, Inc.

California Edison, with which the company is proposing to for $9.6 million in cash. Bachmann is a manufacturer of gas-merge, has a surplus of power. Therefore, work has been sus and fluid-flow control products. WES's expansion and diversifi-pended on two power plant projects and the construction of the

24 1990 ANNUAL REPORT projects may be postponed if the proposed merger is consum mated. SDG&E has signed two firm power contracts with Edison that enable the company economically to defer capital expendi tures for the projects. The Edison contracts insure the availabil-f dc) ity of future additional power that may be necessary due to delaying the start of the projects.

One project was to expand by 140 megawatts the output of the South Bay power plant. The second project was the construc tion of a two-unit, 460-megawatt combined-cycle power plant at 7

an undetermined site. Combined-cycle plants use both a gas turbine generator and a heat recovery steam generator, a process

.5 10 15 2,0 that is more fuel-efficient than conventional fossil-fueled power Revenues in 1990 also increased due to an increase in the plants.

company's authorized return. The increase was due to the Energy under the Edison contract related to the South Bay CPUC's increase of the company's common equity component project would be available from June 1993 to the earlier of the from 48 percent to 49.5 percent. The change in the equity ratio completion of the South Bay project or May 1995. Energy under competin o th Soth ay rojet o Ma 195. nery uder was partially offset by the authorized return on equity decreas the Edison contract related to the combined-cycle project would ing from 13 percent in 1989 to 12.9 percent in 1990. The net be available from June 1995 to either May 1996 or May 1997 at effect of the changes in the rate of return and in the equity com SDG&E's option. The company also has the option to terminate the Edison contracts within 180 days of the termination of the holders for 1990 exceeded that for 1989 by 0.2 percent of equity.

merger. Therefore, if energy can be acquired from other utilities 1989 revenues were adversely affected by a change in autho or independent producers at a lower cost, the company can rized return. Although the rate of return was increased from obtain the lower market prices.

12.75 percent to 13 percent, this was more than offset by a Revenues The CPUC controls the company's prices, and change in the CPUC-authorized equity to debt ratio. The CPUC thereby its revenues, generally by two mechanisms: base rates etcommon eqity cmoe which a blothe and balancing accounts.

Base rates provide a return on capital and compensate the company's actual percentage. The net effect of the two factors was an authorized return to common shareholders for 1989 company for operating and maintenance costs, taxes and depre-lower than that authorized for 1988 by 0.3 percent of equity.

ciation. Base rates are set in a general rate case every three years.

Most of the revenues from diversified operations arise from Between rate cases, the commission makes annual adjustments Wahlco Environmental Systems, Inc., a nonutility subsidiary.

for inflation, system growth and rate of return. The current WES's revenues increased in 1990 due to the sales of Wahlco three-year cycle started January 1, 1989.

Power Products, Inc., formed in September 1989, and of The company uses balancing accounts for fuel costs, both Bachmann, acquired in March 1990.

electric and gas. The commission sets balancing account rates based on estimated costs. Differences between actual and esti-Costs The total cost of electric fuel and purchased power de mated costs are accumulated in the balancing accounts and, creased in 1990 due primarily to lower costs for natural gas and periodically, blended into future rates. The company also uses purchased power, partially offset by increases in volume. In balancing accounts to compensate for the differences between 1989, the cost of electric fuel and purchased power increased actual and estimated sales volumes except for gas sales to certain because of increased volume and higher costs for natural gas.

large customers.

Income taxes increased in 1990 and in 1989 because of the Electric revenue increased 2 percent in 1990 and in 1989. The increase in operating income and tax adjustments related to 1990 increase was due to increased volume, the 1989 Southwest various regulatory issues.

Powerlink regulatory disallowance and slightly higher autho-The company earns an allowance for funds used during con rized costs, partially offset by decreases in rates for electric fuel struction on the construction funds held by the trustee as well as and purchased power. The 1989 increase was due to increased volume, partially offset by the Southwest Powerlink regulatory tion funds, both debt and equity, decreased in 1989 due to the disallowance and a decrease in total authorized costs. Gas rev-total drawdown of the funds held by the trustee and remained enue was up 18 percent in 1990 and 5 percent in 1989. The 1990 increase was due to increases in total authorized costs and ree costn t in 9.T e

ane is not a

t in sales to cogenerators. The 1989 increase was due to higher amortization is included in rates.

authorized costs.

SAN DIEGO GAS & ELECTRIC 25 Liquidity and Capital Resources Another measure of the company's ability to obtain financing Utility operations are a major source of liquidity for the com-is pretax interest coverage. The company's goal is to exceed 3.75.

pany. Since 1984, tax-exempt industrial development bonds and The chart shows the company's results.

pollution control bonds have been the major external sources of liquidity. Until 1989, funds from operations and tax-exempt Maintain Internal Generation of Construction bonds were more than adequate to cover construction of utility xpenditures (at 65 percent or more) plant, payment of dividends and maturing long-term debt.

90 However, by late 1989 the situation had changed. In 1989, the expendcture company issued short-term debt to fund that portion of con-excude AFHDC struction expenditures not covered by cash flow from opera tions. In 1990, the company issued $100 million of taxable 30 year first mortgage bonds to pay off short-term borrowings.

8 It is anticipated that only short-term borrowings will be used Poance to fulfill external capital requirements in 1991. For the years 1992-1995, external sources are expected to consist of stock and 25 50 75 100 debt issuances. debt ssuaces.The major changes in operational cash flows in 1990 com The company conducts a continuing review of its construc-pared to 1989 have been related to inventories and liabilities.

tion and financing programs in response to changes in system The change in cash flow related to inventories was due primarily growth, inflation, rate relief, environmental and regulatory to increased purchases and reduced usage of fuel oil and the requirements, and availability and cost of capital.

increased natural gas storage capability. The 1990 increase in The utility's capital structure is one factor that has enabled it accounts payable and other current liabilities was due primarily to obtain long-term financing at attractive rates. The following to the December receipt of a $25 million supplier refund, the table shows the percentages of capital represented by the various majority of which will be refunded to the company's customers.

components.

In financing activities, the cash flow related to issuances of 1986 1987 1988 1989 1990 Goal long-term debt was higher in 1990 due to the issuance of $100 Common equity 42%

44%

46%

45%

45%

45-48%

million of 30-year first mortgage bonds. The repayment of long Preferred stock 7

6 6

6 6

5-7 term debt increased in 1990 due primarily to the retirement of Debt and leases 51 50 48 49 49 46-49

$30 million of 30-year first mortgage bonds. The high level of Total 100%

100%

1000/

1000/,

100 100%

short-term borrowings in 1989 was due primarily to the issuance of short-term debt to fund capital expenditures, pending the The percentage of funds for construction that the company sioo million bond issue.

generates internally is another good measure of liquidity pro-The major changes in operational cash flows in 1989 com vided by operations. The company's goal is to exceed 65 per-pared to 1988 were changes in regulatory balancing accounts, cent. The following chart shows the company's success in partly offset by changes in income taxes. In 1988, the balancing achieving that goal.

accounts were a source of cash, as the amounts collected in prices temporarily exceeded the related costs, primarily because Maintain 3.75x Pretax Interest Coverage sales volumes were significantly higher than anticipated. In 1989, the balancing accounts were a larger cash use than in

~Ipcud~g 90~

-1988, because in 1989 the previous overcollections were re

• ,nclding 90 r

r ca1pital turned to customers by means of prices lower than the related n erest costs. The major cause of the 1989 change in the cash flow effect 88 1-of income taxes was the timing of tax deductions arising from balancing account activity.

ExAdditions to utility plant, excluding nuclear fuel and the

.Peirfoimaice l86 Thallowance for funds used during construction, were $235 million in 1990 and are expected to total approximately $260 million in 1.25 2.50 3t75 5.00 1991. Management believes ample external sources of long-term and short-term financing will continue to be available.

26 1990 ANNUAL REPORT The Future and FERC decisions are subject to possible appeal for rehearing Several pending events, trends and factors are expected to affect by the applicable commission and then to possible judicial re future operating results and liquidity.

view by the appropriate state and federal courts.

• The company plans to merge with Southern California Edison SDG&E continues to seek approval of the merger, believing it Company.

is in the best interests of shareholders and customers.

• Public and regulatory concern regarding environmental issues is increasing.

Environmental Concerns There is increasing public concern

• New federal clean air regulations and recent political events in over a variety of environmental issues related to the company's Europe may help expand the company's nonutility operations operations. These issues include hazardous wastes, air quality, in the environment-related industry.

water quality, and the possibility that electric and magnetic

• San Diego's population growth is slowing, but sales and peak fields cause adverse health effects.

demand levels continue to grow.

The company has taken pride in being a leader in the utility

• New energy efficiency and conservation programs will affect industry in its efforts to protect the environment. Compliance rates, system requirements and future earnings.

programs necessary to meet future environmental laws and

• Partial deregulation and competition are continuing.

regulations will increase the cost of electric and gas service by

• Oil costs may increase due to the war in the Middle East.

requiring changes to the company's operations or facilities.

• Significant capital expenditures are necessary to upgrade San The company owns three sites upon which manufactured gas Onofre Nuclear Generating Station Unit 1.

had been produced. The company is cleaning up one site and is A short description of each of these follows.

studying the other two sites. The cleanup that is underway will cost $1-$3 million. Cleanup costs for the other sites, if required, Planned Merger In November 1988, the company signed a are not known.

merger agreement with SCEcorp and its utility subsidiary, South-Although research conducted to date has found no conclusive ern California Edison Company, under which the company will evidence that electric and magnetic fields cause health effects, a be merged into Edison. Favorable votes of the companies' share-few studies have suggested a possible connection with cancer.

holders were received at annual meetings held in April 1989.

The company and the utility industry are funding additional Hearings before the Federal Energy Regulatory Commission studies. The ultimate impact of this issue on the company and ended in May 1990. In November 1990, the administrative law the utility industry is impossible to predict.

judge presiding at the FERC proceedings issued a proposed deci sion that the merger not be approved. SDG&E believes that the Clean Air Regulations In November 1990, President Bush FERC, consistent with its decision in the Utah Power-PacifiCorp signed the Clean Air Act Amendments of 1990. This revision of merger, should reject the proposed decision. However, there can existing federal air quality regulations will require utilities to be no assurance in this regard.

reduce further the level of several types of air emissions. Since The CPUC's evidentiary hearings ended in August 1990. In the new law is less stringent than California law, it should not February 1991, the administrative law judges presiding at the result in any major capital expenditures for the company.

CPUC hearings issued a proposed decision that the merger not The company's subsidiary, Wahico Environmental Systems, be approved. The proposed decision was based on a finding that Inc., is the world leader in the manufacture and sale of flue gas the merger does not meet the legal requirement of not adversely conditioning systems, which is a comparatively low-cost option affecting competition. The ALJs believe the merger has anti-for utilities to help comply with the new federal regulations.

competitive effects that cannot be mitigated. That finding is in WES is already doing business in many foreign countries and is contradiction to the U.S. Department of Justice's finding that, actively pursuing sales in Eastern Europe and the Soviet Union.

with certain mitigation measures already accepted by Edison, Also, the European Economic Community is designing environ the merger poses no competitive problems. In addition, the mental requirements similar to those of the U.S.

judges agreed that the merger would provide more than $1 bil lion in customer savings and that all significant environmental Sales and Customer Growth The company's rate of new cus concerns related to the merger can be mitigated. In their tomer additions continues to decline due to the current eco response to the proposed decision, SDG&E and Edison have nomic recession. In 1989, the customer growth rate was 4 per recommended that the CPUC set aside the proposed decision cent for electric and 3 percent for gas. For 1990, the rate of and approve the merger. The response also stated that the growth was 2 percent for both electric and gas customers. Yet, proposed decision contained conditions that, if not modified in 1990 electric and gas sales volumes increased at 7 and 5 percent, the final CPUC decision, may cause Edison to not consummate respectively. In 1989, electric sales volumes increased 6 percent the merger, even if it is approved by the CPUC.

and gas sales volumes were unchanged.

The merger remains dependent upon regulatory approvals, In 1990, electric sales volumes increased more than customer which could be received in the first half of 1991. Both the CPUC additions due to higher consumption per customer. The higher

SAN DIEGO GAS & ELECTRIC 27 consumption is primarily attributable to mild weather in 1989 The company continues to pursue methods to lower rates.

and customer response to electric price reductions in 1988 and However, the company recently has been required to increase its 1989. The company's system peak demand increased by 7 per-rates. The increases are due to inflation, higher taxes and the cent over the company's previous record system peak, which fact that previous overcollections have now been completely occurred in 1988. The 1990 gas sales volumes increase was pri-refunded. Price competition in the western market is expected to marily due to increased gas usage by cogenerators.

remain intense due to the availability of surplus energy from other utilities. Due to the current economic recession and lower Customercustomer growth rates in the Southwest, the availability of sur Custoer Gowthplus energy will probably continue into at least the mid-1990s.

Still, the company believes that, due to increasing energy re in thousands of 90 quirements, the supply of surplus energy in the Southwest will new customers 89 1.

L I

f diminish, resulting in upward pressure on long-term wholesale 2power prices. Therefore, despite cost-reduction efforts, prices are 88 expected to increase.

87

~

The company has signed letters of intent with seven Cana 87 Electic ~L~

__~~

dan natural gas suppliers to purchase a total of 100 million Gas 86 cubic feet of gas per day. This amount represents more than a 10 20 30 40 50 quarter of the company's anticipated natural gas needs for a Energy Efficiency and Conservation The company recently typical day in the mid-1990s. The letters of intent are contingent received approval from the CPUC for a $25 million energy effi-upon a final gas commodity agreement to be worked out with ciency and conservation package for 1991. The demand-side each supplier, U.S. and Canadian regulatory approvals, and management programs are much larger than the 1989 and 1990 completion of planned pipeline expansion projects.

programs and were developed as a result of a year-long collabo rative process that involved California utilities, consumer Oil Prices and the Middle East War The long-term effects of groups, environmental organizations and state regulatory the war in the Middle East are very difficult to predict. The com agencies.

pany does not anticipate any major change in resource availabil Customers who participate in the programs can reduce their ity or customer rates due to the current situation. This is due to bills and gain long-term energy savings. All customers benefit the company's efforts to significantly reduce its dependence on because conservation enables the company to control rates by oil since the 1970s. In 1977, for example, about 73 percent of reducing its need to build new power plants. The company has the company's total electrical output depended on fuel oil. In the potential to earn up to a 13.5 percent share of the savings 1990, that percentage was reduced to about 4 percent.

from certain programs, if specific goals are met. However, the Due to the significant gas competition, natural gas prices have company faces a financial penalty if program goals are not met.

remained relatively low despite the recent hikes in oil prices.

And, there are abundant supplies of natural gas available, both Partial Deregulation and Competition The electric and natural domestically and in Canada. However, due to pipeline capacity gas utility industries are experiencing partial deregulation and restrictions in bringing the gas to California, some additional oil competition. Deregulation could result in increased volatility in may have to be burned. It is expected that planned pipeline electric rates. In the future, customers may be able to purchase expansion projects will reduce future gas curtailments caused by power from other sources and transmit it over the company's pipeline restrictions.

transmission lines. This could result in higher rates to remaining In August 1990, the CPUC issued an order suspending the customers and increased cost recovery risk to the company.

incentive mechanism that otherwise rewards or penalizes the Since January 1, 1991, the company's electric rates have aver-utilities to the extent of 8 percent of the actual cost of their aged 9.4 cents per kilowatt-hour and may be increased slightly electric fuel compared to the forecasted cost. The suspension was in May 1991. While still higher than many other utilities, the ordered in anticipation of higher prices due to the Middle East company's average electric rate has decreased from a peak of situation. The incentive mechanism was adopted by the CPUC 12.7 cents in 1985 and for the latest three years has been lower in 1980 to encourage the utilities to manage effectively their than those of the other major, investor-owned California utili-electric fuel and purchased power expenses. The suspension is ties. The lower prices have made the company more competitive not expected to have any significant effect on the company's with the alternative sources of electricity available to its custom-1991 earnings. The CPUC plans to investigate the effectiveness ers and reduced the amount of bypass of the company's electric of this incentive mechanism and will consider alternative incen system.

tive systems.

28 1990 ANNUAL REPORT San Onofre Nuclear Generating Station Unit 1 Unit 1 at San of the three San Onofre units, indicated that an additional $375 Onofre, in which the company has a 20 percent interest, has million will have to be spent during the unit's remaining life to been out of service since June 30, 1990. The unit is expected to comply with other NRC requirements. The company's share of return to service in March 1991. The outage was originally in-these expenditures would be $75 million and would be ex tended to repair damage to the thermal shield and to perform a pended over the years 1992 to 2004. The CPUC decision may be normal refueling. However, it was decided to extend the outage issued in late 1991. If the CPUC finds that the additional expen further in order to perform some additional procedures previ-ditures are not cost effective, it could order the utilities to re ously scheduled for a subsequent mid-cycle outage, in order to move Unit 1 from rate base. In such event, the company's abil comply with mandates of the Nuclear Regulatory Commission.

ity to earn a normal return on its undepreciated investment in The mid-cycle outage has now been cancelled.

the unit would be uncertain.

Also, in revenue requests filed with the CPUC, the company and Southern California Edison Company, the majority owner RESPONSImoJiTY REPORT FOR TeE CONSOLsdATED FINANCuLu STATEMNiTS The company is responsible for the consolidated financial state-company's consolidated financial statements are presented ments and other data in this annual report. To meet its responsi-fairly, in all material respects, in accordance with generally ac bility for the reliability of the consolidated financial statements, cepted accounting principles.

the company has developed a system of internal accounting The audit committee discusses with the company's internal controls and engages a firm of independent auditors. The board auditors and the independent auditors the overall scope and of directors of the company carries out its responsibility for the specific plans for their respective audits. The committee also consolidated financial statements through its audit committee, discusses the company's consolidated financial statements and composed of directors who are not officers or employees of the the adequacy of the company's internal controls. The commit company.

tee met twice during the fiscal year with the internal auditors Management maintains the system of internal accounting and the independent auditors without management present, to controls, which it believes is adequate to provide reasonable, but discuss the results of their examinations, their evaluations of the not absolute, assurance that its assets are safeguarded, transac-company's internal controls, and the overall quality of the tions are executed in accordance with its objectives, and the company's financial reporting. The internal auditors and the financial records and reports are reliable for preparing the con-independent auditors have full and free access to the committee solidated financial statements in accordance with generally throughout the year.

accepted accounting principles.

Company management has prepared the consolidated finan The concept of reasonable assurance recognizes that the cost cial statements and other data in this annual report. In the opin of a system of internal accounting controls should not exceed ion of the company, the consolidated financial statements, the benefits derived and that management makes estimates and which include amounts based on estimates and judgments of judgments of these cost/benefit factors. The system of internal management, have been prepared in conformity with generally accounting controls is supported by an extensive program of accepted accounting principles.

internal audits, selection and training of qualified personnel, and written policies and procedures.

The company's independent auditors, Deloitte & Touche, are engaged to audit the company's consolidated financial state ments in accordance with generally accepted auditing standards for the purpose of expressing their opinion as to whether the Frank H. Ault, Controller

SAN DIEGO GAS & ELECTRIC 29 Statements of Consolidated Income In thousands except per share amounts For the years ended December 31 1990 1989 1988 Operating Revenues Electric a

$1,356,448

$1,324,891

$1,299,995 Excerpts from the Gas b

355,069 300,397 285,430 Financialneview Diversified operations c

60,351 44,183 35,076

a. 1989 revenues and earnings were Total operating revenues 1,771,868 1,669,471 1,620,501 reduced by the Operating Expenses Southwest Powerlink Electric fuel and purchased power 483,019 509,720 482,333 regulatory disallow ance.

Gas purchased for resale 199,040 155,400 164,120 Maintenance 62,868 67,645 66,509

b. Part of the 1990 increase in gas Depreciation and decommissioning 185,901 175,867 171,809 revenues was due to Property and other taxes 42,827 40,440 41,776 increased sales to Other d

350,635 299,891 305,400 cogenerators.

Income taxes (Note 7) 146,429 135,744 113,987

c. Wahico Total operating expenses 1,470,719 1,384,707 1,345,934 Environmental Systems, hic.

Operating Income 301,149 284,764 274,567 increased its Other Income and (Deductions) revenues in 1990 by tihe formation of Allowance for equity funds used during construction 5,098 7,386 12,398 Wahico Power Gain on subsidiary sale of stock e

22,559 Products, Inc. and Taxes on nonoperating income (Note 7)

(10,488) 822 314 its acqisition of Bachmann Other-net (1,735)

(4,393) 4,148 Companies, Inc.

Total other income 15,434 3,815 16,860

d. Merger expenses Income Before Interest Charges f

316,583 288,579 291,427 reduced 1990 Interest Charges earnings.

Long-term debt 97,894 87,962 89,166

e. 1990 earnings Short-term debt and other 14,766 16,404 13,704 included the gain Allowance for borrowed funds used fron a public during construction (3,918)

(2,913)

(808) offering of 20 Net interest charges 108,742 101,453 102,062 Environmental Net Income (before preferred Systems, Inc.

dividend requirements) g 207,841 187,126 189,365

f. The company's Preferred Dividend Requirements 10,863 11,202 11,716 authorized return was increasect for Earnings Applicable to Common Shares

$ 196,978

$ 175,924

$ 177,649 1990.

Average Common Shares Outstanding 55,921 55,895 55,875 Earnings Per Common Share 3.52 3.15 3.18

g. The sale of Mock Resources, Inc.

Dividends Declared Per Common Share 2.70 2.70 2.60 reduced subsidiary earnings. Consoli See notes to consolidated financial statements.

dated mntcosne Statements hlave been restated to exclude Mock's operations.

1990 Revenue Dollar Source Disposition 76.61 o Electric Sales 38.50 o Fuel and Purchased Energy 20.09 o Gas Sales 13.9w o Other Operating Expenses 3.49 o Diversified Operations 11.30 o Total Taxes 10.59oa Depreciation 9.9oDividends to Shareholders Diversified operations consist primarily of sales by Wahico Environmental Systems, Inc.

30 1990 ANNUAL REPORT Consolidated Balance Sheets In thousands of dollars Balance at December 31 1990 1989 Assets Utility plant -

at original cost

$ 4,594,253

$4,383,771 Exerpts from the Accumulated depreciation (1,606,438)

(1,433,791)

Finwwial Review Utility plant -

net (Notes 3 and 5) 2,987,815 2,949,980

a. Inventories grew Investments and other property (Note 5) 188,284 157,852 due to increased fuel Currnt asetsoil and natural gas Currentstorage capabilities.

Cash and tem porary investm ents 11,529_20,11,529 Diffe20,033 Receivables 166,067 175616 beences Inventories a

101,164 76,533 estimated sales Regulatory balancing accounts undercollected -

net b

40,765 volumes and fuel costs are accumu Other 15,969 26,971 lated in balancing Total current assets 335,494 299,153 accounts.

Goodwill 47,979 41,028

c. The company Deferred charges and other assets 97,065 98,483 issued $100 million Totalof30-year first Tota

$3,56,67

$354646 mortgage bonds in Capitalization and Liabilities 1990.

Capitalization (see Statements of Consolidated

d. $30 million of Capital Stock and Long-Term Debt) 30-year first Common equity

$1,303,307

$ 1,256,113 mortgage bonds Preferred stock 142,493

146, e

rtedi Long-term debt (Note 3) c 1,167,089 1,112,743 Total capitalization 2,612,889 2,515,849 Current liabilities Short-term borrowings (Note 4) 63,729 72,474 Long-term debt redeemable within one year (Note 3) 115,000 115,000 Current portion of long-term debt (Note 3) d 18,064 50,372 Accounts payable 131,594 159,382 Dividends payable 40,439 40,519 Taxes accrued 56,993 28,962 Interest accrued 26,650 27,504 Regulatory balancing accounts overcollected -

net b

8,393 Other 83,067 52,595 Total current liabilities 535,536 555,201 Customer advances for construction 67,088 71,993 Accumulated deferred income taxes -

net (Note 7) 226,676 206,101 Accumulated deferred investment tax credits (Note 7) 129,367 134,588 Deferred credits and other liabilities 85,081 62,764 Contingencies and commitments (Notes 8 and 9)

Total

$ 3,656,637

$ 3,546,496 See notes to consolidated 1inancial statements.

SAN DIEGO GAS & ELECTRIC 31 Statements of Consolidated Cash Flows in thousands of dollars For the years ended December 31 1990 1989 1988 Cash Flows from Operating Activities Net income

$207,841

$187,126

$189,365 Excerpts frn the

-Financial Review Adjustments to reconcile net income to net cash provided by operating activities

a. The allowance Depreciation and decommissioning 185,901 175,867 171,809 for funds used during construction Amortization of deferred charges and other assets 1,554 1,251 1,267 i

Allowance for funds used during construction a

(9,016)_

(10,299)

(13,206) source of cash but Deferred income taxes and investment tax credits 26,773 24,471 (14,222) resuls Deferred merger costs 11,083 (3,709)

(7,374)

Gain on subsidiary sale of stock b

(22,559) included the gain Other -

net 11,842 8,723 6,508 from a public Changes in working capital components offering of 20 net of effects from sale of subsidiary percent of Wahico Environmental Receivables (8,259)

-11,380 2,024 Systems, Inc.

Regulatory balancing accounts (49,158)

(62,891) 12,401

c. Additions to Inventories (24,631) 673 (28,344) utility plant are Prepayments and other current assets 6,903 (1,603)

(3,307) expected to total Accrued interest and taxes 15,758 5,289 (6,933) approximately $260 miloni 1991.

Accounts payable and other current liabilities 21,334 (13,104)

(9,530)

Net cash provided by operating activities 375,366 323,174 300,458

d. In March 1990 Bach mann Com Cash Flows from Financing Activities panies, Inc. was Dividends paid

_(161,874)

(160,777)

(155,761) acquired for $9.6 Sale of common stock 137 116 129 million in cash.

Issuances of long-term debt 107,185 1,615 9,071 Repayment of long-term debt (66,064)

(10,337)

(38,399)

Redemption of preferred stock (4,500)

(3,000)

(7,564)

Short-term borrowings -

net (8,745) 72,474 4,598 Proceeds from subsidiary sale of stock b

38,120 Net cash used by financing activities (95,741)

(99,909)

(187,926)

Cash Flows from Investing Activities Construction expenditures c

(235,356)

(236,738)

(201,629)

Contributions to decommissioning funds (22,038)

(25,640)

(30,268)

Purchases of assets and subsidiaries d

(18,644)

(20,054)

(33,592)

Sales of assets and subsidiaries (2,151) 2,269 13,811 Other -

net (9,940) 2,578 (1,625)

Net cash used by investing activities (288,129)

(277,585)

(253,303)

Net decrease (8,504)

(54,320)

(140,771)

Cash and temporary investments, beginning of period 20,033 74,353 215,124 Cash and temporary investments, end of period

$ 11,529

$ 20,033

$ 74,353 Supplemental Information Noncash investing and financing activities Real estate disposed

$24,624 Debt discharged (21,300)

Noncash proceeds E$

3,324 See notes to consolidated tinancial statements.

32 1990 ANNUAL REPORT Statements of Consolidated Changes in Capital Stock and Retained Earnings Preferred Stock In thousands of dollars Not Subject to Subject to Mandatory Mandatory Common Premium on Retained For the years ended December 31, 1988, 1989, 1990 Redemption Redemption Stock Capital Stock Earnings Balance, December 31, 1987

$87,493

$68,814

$279,363

$467,618

$450,419 Net Income 189,365 Common stock sold (25,740 shares) 129 Preferred stock retired (25,640 shares)

(1,314)

(8)

Current sinking fund requirement (5,000)

Dividends declared Preferred stock (11,681)

Common stock (145,268)

Balance, December 31, 1988 87,493 62,500 279,492 467,610 482,835 Net Income 187,126 Common stock sold (23,163 shares) 116 Vesting of previously restricted shares 1,071 Current sinking fund requirement (3,000)

Dividends declared Preferred stock (11,192)

Common stock (150,945)

Balance, December 31, 1989 87,493 59,500 279,608 468,681 507,824 Net Income 207,841 Common stock sold (27,417 shares) 137 Vesting of previously restricted shares 1,062 Preferred stock retired (15,000 shares)

(1,500)

Current sinking fund requirement (3,000)

Dividends declared Preferred stock (10,847)

Common stock (150,999)

Balance, December 31, 1990

$87,493

$55,000

$279,745

$469,743

$553,819 See notes to consolidated financial statements.

Retained Earnings

• in milin 90TI~IJZII of dollars, at December 31 89

)

88 80(

150 300 450 600

SAN DrEGO GAS & ELECTRIC 33 Statements of Consolidated Capital Stock In thousands of dollars except voluntary redemption price Balance at December 31 1990 1989 Common Equity Common stock, without par value, authorized 170,000,000 shares, outstanding: 1990, 55,948,922 shares; 1989, 55,921,505 shares

$ 279,745

$ 279,608 Premium on capital stock 469,743 468,681 Retained earnings 553,819 507,824 Total common equity

$1,303,307

$1,256,113 Preferred Stock Not subject to mandatory redemption Voluntary Redemption

$20 par value, authorized 1,375,000 shares Price 5% Series, 375,000 shares outstanding

$ 24.00

$ 7,500

$ 7,500 42% Series, 300,000 shares outstanding 21.20 6,000 6,000 4.40% Series, 325,000 shares outstanding 21.00 6,500 6,500 4.60% Series, 374,650 shares outstanding 20.25 7,493 7,493 Without par value*

$7.80 Series, 200,000 shares outstanding 101.00 20,000 20,000

$7.20 Series, 150,000 shares outstanding 101.00 15,000 15,000

$2.475 Series, 1,000,000 shares outstanding 28.35 25,000 25,000 Total not subject to mandatory redemption

$87,493

$87,493 Subject to mandatory redemption Without par value*

$8.25 Series, outstanding: 1990, 65,000 shares; 1989, 75,000 shares

$103.85

$ 6,500

$ 7,500

$9.125 Series, outstanding: 1990, 65,000 shares; 1989, 100,000 shares 103.65 6,500 10,000

$7.05 Series, 450,000 shares outstanding 107.05 45,000 45,000 Current sinking fund requirement**

(3,000)

(3,000)

Total subject to mandatory redemption

$55,000

$59,500

• Authorized 10,000,000 shares total (both subject to and not subject to mandatory redemption).

• • Future sinking fund requirements include $3 million in 1992, $4.8 million in 1993, $3.3 million in 1994 and $2.8 million in 1995.

See notes to consolidated financial statements.

34 1990 ANNUAL REPORT Statements of Consolidated Long-Term Debt In thousands of dollars Balance at December 31 1990 1989 First mortgage bonds (Note 3) 45/% Series H, due October 1, 1990 30,000 52% Series I, due March 1, 1997 25,000 25,000 7% Series J, due December 1, 1998 35,000 35,000 8 % Series K, due February 1, 2000 40,000 40,000 8% Series L, due September 1, 2001 45,000 45,000 8/8% Series M, due January 15, 2004 75,000 75,000 8 % Series Q due March 15, 2007 50,000 50,000 9 % Series R, due May 1, 2008 50,000 50,000 52% Series U-2, due September 1, 1994 9,668 10,068 10% Series AA, due June 1, 2018 150,000 150,000 10% Series BB, due September 1, 2018 150,000 150,000 6% Series CC, due May 1, 2008 53,000 53,000 6.2% Series DD, due December 1, 2008 27,000 27,000 94% Series EE, due September 1, 2020 100,000 100,000 5.9% Series FF, due December 1, 2007 35,000 35,000 7/8% Series GG, due July 1, 2021 44,250 44,250 73/% Series HH, due December 1, 2021 81,350 81,350 8 % Series II, due March 1, 2023 25,000 25,000 95/8% Series JJ, due April 15, 2020 100,000 Total 1,095,268 1,025,668 Capitalized leases (Note 9)

Nuclear fuel 56,085 71,767 Generating facility 89,390 93,695 Other 21,168 21,776 Total 166,643 187,238 Other long-term debt (Note 3) 54,410 80,451 Unamortized discount on long-term debt (16,168)

(15,242)

Long-term debt redeemable within one year (Note 3)

(115,000)

(115,000)

Current portion of long-term debt (Note 3)

(18,064)

(50,372)

Total

$1,167,089

$1,112,743 See notes to consolidated financial statements.

SAN DIEGO GAS & ELECTRIC 35 Schedules of Consolidated Financial Information by Segments of Business In thousands of dollars At December 31 or for the years then ended 1990 1989 1988 Operating revenues*

$1,771,868

$1,669,471

$1,620,501 Operating Income Electric operations

$ 255,636

$ 242,064

$ 245,377 Gas operations 37,371 36,093 26,083 Diversified operations 8,142 6,607 3,107 Total

$ 301,149

$ 284,764

$ 274,567 Depreciation and Decommissioning Electric operations 156,606 149,400 147,029 Gas operations 25,183 23,188 21,164 Diversified operations 4,112 3,279 3,616 Total

$ 185,901

$ 175,867

$ 171,809 Utility Plant Additions**

Electric operations 190,794

$ 194,637 165,517 Gas operations 44,562 42,101 36,112 Total

$ 235,356

$ 236,738

$ 201,629 Identifiable Assets Utility plant -

net Electric operations

$2,667,923

$2,652,349

$2,626,159 Gas operations 319,892 297,631 275,929 Total 2,987,815 2,949,980 2,902,088 Inventories Electric operations 68,416 58,554 60,368 Gas operations 22,229 17,979 16,838 Diversified operations 10,519 Total 101,164 76,533 77,206 Other identifiable assets Electric operations 282,333 209,037 225,219 Gas operations 52,802 36,641 52,863 Diversified operations 146,873 161,621 169,810 Total 482,008 407,299 447,892 Other Assets 85,650 112,684 105,506 Total Assets

$3,656,637

$3,546,496

$3,532,692

• The detail to operating revenues is provided in the Statements of Consolidated Income. The gas operating revenues shown therein include $6 million in 1990, $5 million in 1989 and $8 million in 1988, representing the gross margin on sales to the electric segment. These margins arose from interdepartmental transfers of $112 million in 1990, $150 million in 1989 and $129 million in 1988, based on transfer pricing allowed by the California Public Utilities Commission in tariff rates.

• • Excluding allowance for funds used during construction.

See notes to consolidated financial statements.

The company is an operating public utility engaged principally in the generation, purchase, distribution and sale of electrical energy and the purchase, distribution and sale of natural gas. Income taxes and corporate expenses are allocated to departments in accor dance with regulatory accounting requirements.

36 1990 ANNUAL REPORT NOTES 7 C ONSOLIDA TED FINANCIAL STATEMENTS 1 Merger Agreement with Southern California that the CPUC set aside the proposed decision and approve the Edison Company merger. The response also stated that the proposed decision In November 1988, SDG&E, SCEcorp and Southern California contained conditions that, if not modified in the final CPUC Edison Company, a subsidiary of SCEcorp, executed an agree-decision, may cause Edison to not consummate the merger, ment to merge SDG&E into Edison. Under the terms of the even if it is approved by the CPUC.

agreement, SCEcorp will exchange 1.3 shares of its newly issued In October 1990, the CPUC issued its Final Environmental common stock for each SDG&E common share. SDG&E Impact Report. The report concludes that, if the merger is ap preferred and preference stock will be exchanged for SCEcorp proved, all significant environmental impacts can be mitigated.

preferred and preference stock with similar provisions, except Hearings before the FERC commenced in February 1990 and that dividends on each series will be increased between 10 per-ended in May 1990. After the hearings, the FERC staff stated that cent and 20 percent. During April 1989, the shareholders of most of the objections to the merger are without merit and SDG&E, SCEcorp and Edison approved the agreement. Com-concluded that the merger is consistent with the public interest pletion of the merger remains subject to approval by regulatory and should be approved. In November 1990, the administrative agencies, including the California Public Utilities Commission law judge presiding at the FERC proceedings issued a proposed and the Federal Energy Regulatory Commission. The agreement decision not to approve the merger.

describes various company actions, including dividend increases An Environmental Assessment will be issued in early 1991.

and debt issues, that cannot be done without SCEcorp's consent.

The FERC will review the results of this Environmental Assess The proposed merger will be treated as a "pooling of interests" ment before making its merger decision.

for accounting and financial reporting purposes. Under this Regulatory decisions on the merger could be received in the method of accounting, the assets and liabilities of SDG&E and first half of 1991. Both the CPUC and FERC decisions are subject Edison would be carried forward at their recorded amounts as of to possible appeal for rehearing by the applicable commission the effective time of the merger. Income of the combined corpo-and then to possible judicial review by the appropriate state and ration would include income of the constituent corporations for federal courts.

the entire year in which the combination occurs and reported In June 1990, SDG&E and Edison reached settlement with the income of the separate corporations for the prior periods would U.S. Department of justice on conditions that resolve the DOJ's be combined and restated as income of the combined previous concerns about the merger's impact on competition.

corporation.

Under the commitments made to the DOJ, SDG&E and Edison Combined pro forma financial information of the two compa-agreed to extend the period of transmission commitments they nies as of December 31, 1990, and for each of the three years in had made previously in the merger case, and agreed to propose the period ended December 31, 1990, will be included in to FERC a system that will allow third parties to bid for transmis SDG&E's annual report to the Securities and Exchange Commis-sion capacity the merger will make available. In addition, the sion on Form 10-K to be filed in March 1991.

merged utility agreed to obtain prior approval of the CPUC be In February 1990, the California Attorney General indicated fore entering any contracts to purchase power from an affiliate.

that he would challenge the merger before the regulatory au-In April 1990, the City Attorney for the City of San Diego thorities and, possibly, in the courts. In May 1990, he issued a amended its February 1990 complaint filed in the San Diego formal advisory opinion to the CPUC recommending that the County Superior Court against SDG&E, SCEcorp and Edison, merger not be approved. Under California law the CPUC cannot asking for a determination of the rights of the City under its approve a utility merger without first obtaining the attorney franchises with SDG&E. In June 1990, the San Diego County general's advisory opinion on its effect on competition.

Superior Court granted Edison's motion to transfer the case to a Also in February 1990, the CPUC's Division of Ratepayer Ad-neutral county. The court ordered the case transferred to vocates recommended that the CPUC not approve the merger Monterey County. In September 1990, SDG&E and Edison filed unless various, stringent conditions are imposed. The CPUC's answers and cross-complaints opposing the lawsuit filed by the evidentiary hearings began in May 1990 and ended in August City. The City's response stated that SDG&E/SCE cross-coi 1990. In February 1991, the administrative law judges presiding plaints didn't state facts sufficient to constitute a cause of action at the CPUC hearings issued a proposed decision that the merger and that the City had properly exercised its powers related to not be approved. The proposed decision was based on a finding SDG&E's franchise agreement. Pretrial discovery has not yet that the merger does not meet the legal requirement of not commenced in the case and the case is not set for trial.

adversely affecting competition. The ALJs believe the merger has In September 1990, Tucson Electric Power Company filed a anti-competitive effects that cannot be mitigated. That finding is lawsuit in San Diego County Superior Court against SCEcorp in contradiction to the U.S. Department of Justice's finding that, and Edison. The lawsuit alleges intentional and negligent inter with certain mitigation measures already accepted by Edison, ference by SCEcorp and Edison with the proposed merger of the merger poses no competitive problems. In their response to Tucson and SDG&E in 1988. The lawsuit seeks actual damages in the proposed decision, SDG&E and Edison have recommended an amount to be determined at trial and punitive damages and

SAN DIEGO GAS & ELECTRIC 37 exemplary damages of $6.7 billion. The lawsuit was subse-Revenues and Regulatory Balancing Accounts Revenues from quently amended, naming as an additional plaintiff a share-utility customers consist of deliveries to customers and the holder who requests the case be certified as a class action.

changes in regulatory balancing accounts. Earnings fluctuations SCEcorp and Edison believe their merger with SDG&E was made from changes in the costs of fuel oil, purchased energy and gas, within the terms of the SDG&E/Tucson merger agreement and and consumption levels for electricity and the majority of gas deny Tucson's allegations.

are eliminated by balancing accounts authorized by the Califor nia Public Utilities Commission. The balances of these accounts 2 Summary of Accounting Policies represent amounts that will be recovered from, or repaid to, Consolidation The consolidated financial statements include customers by adjustments to future prices. The CPUC reviews the accounts of San Diego Gas & Electric and its subsidiary, the reasonableness of the amounts in these accounts.

Pacific Diversified Capital Company, the holding company for the nonutility subsidiaries. The nonutility subsidiaries are Goodwill Goodwill arose from the acquisition of certain busi Wahlco Environmental Systems, Inc. and Phase One Develop-nesses by Pacific Diversified Capital. It is being amortized on a ment, Inc. WES was formed in February 1990 and provides prod-straight-line basis over 40 years.

ucts and services in the pollution control and utility services industries. In the second quarter of 1990, PDC sold 20 percent of Other Certain prior year amounts have been reclassified for WES in an initial common stock offering, resulting in an after-comparability.

tax gain of $13.5 million ($0.24 per SDG&E common share).

In June 1990 PDC sold its 51 percent interest in Mock Re-3 Long-Term Debt sources, Inc. The Mock sale resulted in an after-tax loss of $2.7 Due dates of long-term debt are shown on the Statements of million ($0.05 per SDG&E common share). The loss is reflected Consolidated Long-Term Debt. Excluding capital leases, which in the Statements of Consolidated Income under the caption are described in Note 9, combined aggregate maturities and "Other Income and (Deductions), Other -

Net." The results of sinking fund requirements of long-term debt are $8 million for the operations of Mock through June 29, 1990 are included in 1991, $8 million for 1992, $3 million for 1993, $11 million for the Statements of Consolidated Income under the same caption.

1994, and $0.4 million for 1995.

Revenues related to the Mock operations were $197 million in First mortgage bonds are secured by a lien on substantially all 1990, $413 million in 1989, and $456 million in 1988. Prior utility plant. Additional first mortgage bonds may be issued year operating results have been restated to reclassify the net upon compliance with the provisions of the bond indenture.

operating results of Mock into "Other -

net."

Certain first mortgage bonds have variable interest rate provi sions. Bondholders may elect to redeem their bonds at the inter Utility Plant and Depreciation Utility plant represents the est adjustment dates. The interest rate adjustment dates are buildings, equipment and other facilities used to provide electric August 1 for Series FF and September 1 for Series CC and DD. In and gas service. The cost of utility plant includes labor, material, February 1990, the company received CPUC authorization to contract services and other related items and an allowance for issue $200 million in debt over a two-year period. In April 1990, funds used during construction. The cost of depreciable retired the company issued $100 million of first mortgage bonds.

utility plant, plus removal expenses minus salvage value is Interest payments, including those applicable to short-term charged to accumulated depreciation.

borrowings, amounted to $114 million in 1990, $102 million in Depreciation expense reflects the straight-line remaining 1989, and $104 million in 1988.

useful life method. The provisions for depreciation approxi mated 3.97 percent of average depreciable utility plant in 1990, 4 Short-Term Borrowings 3.96 percent in 1989, and 4.07 percent in 1988.

At December 31, 1990 and 1989, short-term borrowings and weighted average interest rates for the balances outstanding Inventories At December 31,1990, inventories include $54 mil-were:

lion of materials and supplies ($43 million in 1989), and $47 in millions of dollars 1990 1989 million of fuel oil and natural gas ($34 million in 1989). Materi-Balance Interest Rate Balance Interest Rate als and supplies are valued at average cost, and fuel oil and natu-Commercial paper

$53.0 8.1%

$57.8 8.7%

ral gas are valued by the last-in first-out, or LIFO, method.

Subsidiaries' bank credit line 10.7

10. 0%y 14.7 10.5%

Total$63.7

$72.5 Allowance for Funds Used During Construction The allow-T ance represents the cost of funds used to finance the construc-As of December 31, 1990, SDG&E had various bank lines tion of utility plant and is added to the cost of utility plant.

aggregating $100 million, all of which were available to support AFUDC also increases income, partly as an offset to financing commercial paper. SDG&E's subsidiaries had a bank credit line costs shown in the Statements of Consolidated Income, al though it is not a current source of cash.

38 1990 ANNUAL REPORT that provided for borrowings up to $21.5 million at the prime The plan's status at December 31 is as follows:

rate. A commitment fee was paid on the unused portion of the In thousands of dollars 1990 1989 lines. There were no requirements for compensating balances.

Accumulated benefit obligation:

Vested

$203,422

$163,929 5 Facilities Under Joint Ownership Nonvested 5,441 6,055 The Southwest Powerlink transmission line and the San Onofre Total

$208,863

$169,984 nuclear power plant are owned jointly with other utilities. The Plan assets at fair value

$319,865

$338,224 company's interests at December 31, 1990 were:

Inmlin fdlasProjected benefit obligation 315,580 263,317 In millions of dollars Excess of plan assets over projected Project Southwest Powerlink San Onofre benefit obligation 4,285 74,907 Ownership interest (%)

89 20 Unrecognized effect of accounting change (2,522)

(2,751)

Utility plant in service

$209

$1,179 Unrecognized actuarial gains and losses (1,763)

(72,156)

Accumulated depreciation

$ 45

$ 287 Amount recognized as an asset Construction work in progress 20 The projected benefit obligation assumes an 8 percent actuarial Each participant in the projects must provide its own financing.

discount rate and a 6 percent average annual salary increase. The The company's share of operating expenses is included in its expected long-term rate of return on plan assets is 8.5 percent.

Statements of Consolidated Income.

Eligible employees may make a contribution of 1 to 11 percent The company's share of future dismantling and decontamina-of their base pay to the company's Savings Plan for investment in tion costs for the San Onofre units is estimated to be $187 mil-mutual funds or in common stock of the company. The com lion. These costs are considered in setting rates and are expected pany contributes up to three percent of a participant's base com to be fully recovered in rates over the estimated lives of the pensation for investment in the company's common stock. The plants. In December 1987, the company began placing in exter-company contributed approximately $6 million in 1990, $4 nally managed trust funds the amounts collected in rates. At million in 1989 and $8 million in 1988 to these plans.

December 31, 1990, the trust funds had a balance of $86 mil-The company has a long-term incentive stock compensation lion, which is included in "Investments and Other Property" on plan that provides for aggregate awards of up to 1,350,000 shares the Consolidated Balance Sheets.

of common stock over a 10-year period ending in 1996. In each of the last five years the company issued approximately 25,000 to 6 Employee Benefit Plans 31,000 shares of stock to officers for $5 per share. These shares The company-funded pension plan covers substantially all em-were issued subject to buy-back if certain corporate goals are not ployees. Benefits are related to the employees' compensation.

met.

Plan assets consist primarily of common stocks and bonds.

The company partially provides health and life insurance ben The company funds the plan based on the aggregate cost efits to retired employees. The benefits paid and expensed actuarial method, subject to full-funding limitations. Net pen-amounted to $3 million in 1990, $3 million in 1989 and $2 mil sion cost consists of the following:

lion in 1988. In December 1990, the Financial Accounting Stan In thousands of dollars 1990 1989 1988 dards Board issued a rule that would require a major change in Cost related to current service

$14,221

$13,370

$13,695 the way retiree benefits other than pensions will be accounted Interest on projected benefit obligation 21,589 18,670 21,231 for beginning in 1993.

(Return)/loss on plan assets 12,342 (50,703)

(48,936)

The company's current expense for retiree health and life in Other (45,362) 20,008 19,405 surance premiums represents premiums paid during the year for Total Cost

$ 2,790

$ 1,345

$ 5,395 existing retirees. The new rule will require an accrual of all cur rent and future health and life insurance premiums for the life of each employee. This projected benefit will be expensed over each employee's years of service, up to the first year of benefit eligibil ity. The present value of these projected premiums is expected to be about $45 million. This accounting change is not expected to affect company profit or net worth significantly because most employee benefits are recovered in rates.

SAN DIEGO GAS & ELECTRIC 39 7 Income Taxes new rule is expected to be required by the first quarter of 1993.

Deferred income taxes arise from including income or deduc-Deferred taxes included in the income statement essentially tions in the company's income tax returns in a year different are taxes on current year income that will be paid in future from the year they are reported in the financial statements.

years. Under existing rules, deferred taxes are computed using However, deferred taxes are not provided for those timing differ-tax rates in effect at the time the deferred taxes arise, despite ences that are reflected in customer rates. At December 31, 1990, actual or anticipated changes in tax rates. The new rule will the cumulative net amounts of timing differences for which require an adjustment of deferred taxes for changes in tax rates.

deferred taxes have not been provided were approximately $300 This new rule is not expected to affect the company's profits million for federal purposes and $700 million for state purposes.

or net worth significantly because most tax increases or reduc In addition, tax reductions that arose from investment tax cred-tions are reflected in rates. However, deferred taxes on the bal its had been deferred and are recognized over the useful lives of ance sheet will increase by a substantial, but not yet quantified, the related property.

amount and a new regulatory asset will be reported for the esti In December 1987, the Financial Accounting Standards Board mated amount collectible from customers.

issued a rule that would require a major change in the way tax Income tax payments totaled $104 million in 1990, $108 expense will be computed in future years. Implementation of the million in 1989 and $129 million in 1988.

Components of Income Tax Expense in thousands of dollars 1990 1989 1988 Current federal income tax

$102,683

$ 86,017

$101,397 Current state franchise tax 27,461 24,434 26,498 Total current taxes 130,144 110,451 127,895 Deferred -

federal and state taxes Construction projects (15,765)

(8,929)

(31,205)

Tax over book depreciation 24,189 32,247 27,355 State franchise tax 5,247 8,901 Regulatory balancing accounts 15,992 27,334 (7,136)

Unbilled revenue (7,487)

(10,267)

(6,284)

Gain on subsidiary sale of stock 9,024 c

m Other -

net 794 (3,154) 2,547 Total deferred taxes 31,994 37,231 (5,822)

Deferred investment tax credits -

net (5,221)

(12,760)

(8,400)

Total income tax expense

$156,917

$134,922

$113,673 Federal and state income taxes are allocated between operating income and other income.

Reconciliation of Statutory Federal Income Tax Rate to Effective Rate In thousands of dollars 1990 1989 1988 Income before federal taxes

$331,739

$295,394

$279,734 Statutory federal income tax rate 34.0%

34.0%

34.0%

Depreciation 1.9 4.6 3.6 Deferred investment tax credts -

net (1.8)

(4.3)

(3.0)

Other - net 3.2 2.2 (2.1)

Effective federal income tax rate 37.3%

36.5%

32.5%

40 1990 ANNUAL REPORT 8 Regulatory Proceedings and Litigation Springerville Litigation On December 28, 1990, Philip Morris Southwest Powerlink In February 1989, the California Public Capital Corporation filed a lawsuit against SDG&E, Century Utilities Commission issued a decision ordering a disallowance of Power Corporation and two other defendants alleging liability approximately $25 million of costs associated with long-term for unspecified compensatory damages, including the loss of tax purchased power contracts using the Southwest Powerlink. This benefits and losses sustained from the adverse tax consequences decision had the effect of reducing pretax income for the first of defendants' alleged acts, and punitive damages for various quarter of 1989 by $25 million, or $0.28 per share after tax. The improprieties relating to the sale and leaseback of Springerville decision also provided for a possible reduction of the disallow-Unit 1. SDG&E faces the exposure of joint and several liability ance through an energy credit based on cost savings from energy with the other defendants.

purchased under these contracts. In September 1989, SDG&E A portion of the electricity generated by Unit 1 was purchased filed for this credit, increasing pretax income for the third quar-by SDG&E. The sale and leaseback transaction was entered into ter by $5 million, or $0.05 per share after tax. In 1990, the CPUC between Century and six investors, including Philip Morris.

approved the credit.

Philip Morris asserts that SDG&E unlawfully agreed to delay In March 1989, seeking to reduce the disallowance, SDG&E its claim that it was entitled to rate relief as a result of the sale filed an application for rehearing with the CPUC. The applica-and leaseback transaction until after the transaction was com tion challenged the CPUC's authority to disallow expenses result-pleted in December 1986. According to the lawsuit, SDG&E ing from paying rates approved by the Federal Energy Regulatory allegedly participated in a plan with the other defendants to Commission. The application also challenged various premises conceal the expected rate relief.

supporting the CPUC's decision. In September 1989, the CPUC According to the lawsuit, Philip Morris' investment in the denied the application for rehearing. Also in September 1989, Springerville unit is $90 million. Philip Morris does not specify SDG&E challenged the CPUC's rejection of its application in U.S.

that the $90 million represents a loss or damage. Since the Fed District Court in San Francisco. SDG&E requested an injunction eral Energy Regulatory Commission has not ruled that SDG&E is from the court reversing the CPUC's action.

entitled to the expected rate relief, it is SDG&E's position that Management cannot predict the ultimate outcome of this the Plaintiff has not been damaged by SDG&E's alleged actions.

matter or when a decision will be reached.

On February 19, 1991, SDG&E moved to dismiss the com plaint against it on various grounds. SDG&E believes it has meni Portland General Electric In July 1989, the CPUC Division of torious defenses against the claims and intends to defend the Ratepayer Advocates issued a report on the reasonableness of the lawsuit vigorously. Management cannot predict the ultimate company's entering into its purchased power contract with Port-outcome.

land General Electric, contending that the power was uneco nomic to the ratepayers during part of the contract term. Power Subsidiary Shareholder Litigation In June 1990, an action was deliveries under that contract began on January 1, 1989. The instituted against Wahico Environmental Systems, Inc., certain DRA has recommended that the annual costs of the contract be directors and officers as well as the underwriters for WES's initial compared with the cost of alternative sources of power, with the public offering. In November 1990, a substantially similar action excess costs being subject to disallowance in those years in which was filed, naming SDG&E as an additional defendant. The com the contract costs are higher than the cost of the alternative plaints, which seek unspecified compensatory and punitive sources. The potential disallowances identified by the DRA have damages, allege various violations of federal and state securities a present value of $28 million, based on the DRA's assertions as laws and various state law claims based upon alleged misrepre to what constitutes the cost of alternative sources of power.

sentations and material omissions made in connection with In 1989 and 1990, SDG&E participated with PGE in negotiat-WES's initial public offering, first quarter 10-Q filing, press re ing new contracts with the coal company and the railroad sup-leases and other documents and statements.

plying coal to PGE's Boardman power plant. This plant is associ-SDG&E and WES believe they have meritorious defenses to ated with SDG&E's 75-megawatt long-term power contract with the claims and intend to defend the suits vigorously. Manage PGE. As a result of these new contracts, energy costs from PGE ment cannot predict the ultimate outcome of the litigation.

will be reduced.

The company hopes that the new contracts will reduce or Other Litigation The company is involved in various legal mat eliminate the DRA's concern about the cost effectiveness of the ters arising out of the ordinary course of business. Management PGE contract. The CPUC granted SDG&E's request to reopen the believes that these matters will not have a material adverse effect record in this proceeding to consider the reduced annual costs.

on the company's financial position.

The additional hearings are scheduled for April 1991.

Management cannot predict the ultimate outcome of this matter or when a decision will be reached.

SAN DIEGO GAS & ELECTRIC 41 9 Other Contingencies and Commitments The minimum rental commitments payable in future years Nuclear Insurance Public liability claims that could arise from a under all noncancellable leases are:

nuclear incident are limited by the Price-Anderson Amendments In millions of dollars Operating Leases Capitalized Leases Act of 1988 to a maximum amount of $7.8 billion for each li-1991

$12

$38 censed nuclear facility. The company and the co-owners of the 1992 11 38 San Onofre units have purchased primary insurance of $200 1993 9

20 million for this exposure, the maximum amount available in 1994 6

12 1990. The remaining $7.6 billion is provided by secondary fi-1995 5

12 nancial protection required by the Nuclear Regulatory Commis-Thereafter 11 106 sion. This secondary coverage provides for loss sharing among Total future rental commitments

$54 226 utilities owning nuclear reactors if a costly accident occurs. The Imputed interest (6 percent to 9 percent)

(59) company could be assessed retroactive premium adjustments of Net commitment

$167 up to $40 million in the event of a nuclear incident involving any of the licensed, commercial reactors in the United States, if Rental payments totaled $57 million in 1990, $61 million in the amount of the loss exceeds $200 million.

1989 and $59 million in 1988.

In addition to public liability insurance, coverage is provided for property damage and replacement power costs at San Onofre. Primary property damage coverage is provided for losses under several long-term contracts. The contracts expire on van of up to $500 million. Additional decontamination liability and ous dates between 1992 and 2013.

excess property damage insurance coverage of $1.7 billion at December 31, 1990 is provided. Replacement power insurance the contracts were:

provides weekly indemnity payments for up to two years, com mencing after a waiting period of 21 weeks. These three insur-1991

$ 117 ance coverages are provided primarily through mutual insurance 1992 117 companies owned by utilities with nuclear facilities. If losses at 1993 119 any of the nuclear facilities covered by the risk-sharing arrange-1994 122 ments were to exceed the accumulated funds available for these 1995 123 insurance programs, SDG&E could be assessed retroactive pre-Thereafter 1,039 mium adjustments of up to $7.4 million per year.

Total minimum payments

$1,637 Termination Agreement If the SCEcorp merger is consum-These payments are fixed charges. The company is required to mated, the merged company would be obligated, among other pay additional amounts for actual deliveries of energy under the things, to pay Tucson Electric Power Co. $25 million under the contracts.

Termination and Settlement Agreement that terminated the Total payments, including energy payments, under the con pending merger with Tucson.

tracts were $236 million in 1990, $247 million in 1989 and $253 million in 1988.

Construction Approximately $260 million, excluding nuclear The company has exercisable options to extend two long fuel and AFUDC, is planned to be spent for utility plant con-term contracts. The company also has two contracts for future struction in 1991.

years that it can terminate. Because the payments under these contracts are not firm commitments, they are not included in Environmental Issues The company's operations are guided by the above table.

federal, state and local environmental laws and regulations gov erning hazardous wastes, air quality, water quality, land use and Concentration of Credit Risk In March 1990, the Financial solid waste disposal. Compliance programs necessary to meet Accounting Standards Board issued a rule that requires compa existing and future environmental laws and regulations will nies to disclose all significant concentrations of credit risk. The increase the cost of electric and gas service by requiring changes company grants credit to its customers, substantially all of to the company's operations or facilities. The costs of compli-whom are located in its service territory, which covers all of San ance with environmental laws and regulations are normally Diego County and the southern portion of Orange County.

included in rates.

Leases Nuclear fuel, an office building and a generating facility are financed by long-term capital leases. Utility plant includes

$285 million at December 31, 1990 and $298 million at Decem ber 31, 1989 related to these leases

42 1990 ANNUAL REPORT INDEPENDENT A UDTORS 'REPORT To the Shareholders and Board of Directors of San Diego Gas & Electric Company:

We have audited the accompanying consolidated balance sheets and the consolidated statements of capital stock and long-term debt of San Diego Gas & Electric Company and its subsidiaries as of December 31, 1990 and 1989, and the related consolidated statements of income, changes in capital stock and retained earnings, and cash flows for each of the three years in the period ended December 31, 1990. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presenta tion. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of San Diego Gas and Electric Company and its subsidiaries as of December 31, 1990 and 1989, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1990 in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE San Diego, California February 22, 1991

SAN DIEGO GAS & ELECTRIC 43 BOARD OF DIRECTORS The seven-person board of direc tors consists of six outside directors and the chief executive officer of SDG&E, who serves as its chair man. The directors provide a broad perspective because of their diverse business, professional and civic backgrounds.

Thomas A. Page*

Mr. Page has been chairman, presi dent and chief executive officer of the company since February 1983.

Mr. Page is the chairman and a director of both Pacific Diversified Capital Company and Wahlco Envirnetal Sopaystems Inhc ei Board members include (left to right): Fred C. Stalder, Main Burnham, Ralph R. Ocampo, Environmental Systems, Inc.

i Thomas A. Page, Daniel W. Derbes, Catherine Fitzgerald Wiggs and Clair W. Burgener.

57 years old and has been a direc tor of SDG&E since 1979. Commit tee memberships: chairman of the subsidiaries of the company. He is Fred C. Stalder Committees of the Board Executive Committee and a mem-63 years old and has been a direc-Mr. Stalder is a private investor.

ber of the Nominating Committee.

tor of SDG&E since 1967. Commit-He formerly was president, chair-Audit This committee selects an tee memberships: chairman of the man of the board and chief execu-independent auditor and reviews Clair W. Burgener Audit Committee and a member of tive officer of Central Savings and the overall plan of the audit, finan Mr. Burgener has been president the Executive Committee.

Loan Association. He is 70 years cial statements, audit results, scope of Burgener Properties, Inc., a real old and has been a director of of hiternal auditprocedures and tie estate and property development Daniel W. Ierbes*

SDG&E since 1969. Committee auditors'evaluation of internal firm, since January 1958. He is a Mr. Derbes is president of Signal memberships: Audit, Executive conrols.

former member of Congress, U.S.

Ventures. He is chairman of the Compensation and Nominating House of Representatives, 43rd Executive Committee and a direc-committees.

Executive This comnittee is em District (California), 1973-1983.

tor of Oak Industries, Inc. From powered to act in place of the full Mr. Burgener is a director of San November 1985 until December Catherine Fitzgerald Wiggs board, except i certain transactions Diego Trust and Savings Bank, 31, 1988, he was president of Mrs. Wiggs is vice president, hu-for various board responsibilities that TCS Enterprises, and Blue Shield Allied-Signal International, Inc.

man resources development and a are reserved for the board.

of California. He serves on the and executive vice president of member of the Management Ex California State Personnel Board, Allied-Signal, Inc., a multi-national ecutive Committee of The Security Executive Compensation This the Board of Management Analysis advanced technologies company.

Life of Denver, a wholly owned committee reviews tie salaries and Co. and the Board of Regents of He was president of Signal Ad-subsidiary of Nationale-Neder-other fonns of compensation of the University of California. He vanced Technology Group and landen N. V. She has been a man-company officers and makes cont is 69 years old and has been a executive vice president of The agement consultant in the fields of pensation recommendations to the director of SDG&E since 1983.

Signal Companies, Inc. from Febru-human resources and organiza-board.

Committee memberships: chair-ary 1983 until November 1985.

tional effectiveness. She formerly man of the Nominating Commit-He is a director of WD-40 Co. and was executive vice president, hu-Finance Tis committee counsels tee and a member of the Finance of both Pacific Diversified Capital man resources, and a member of mcaagement hlps plan the and the Executive Compensation Company and Wahlco Environ-the management executive com-companys capital requirements, committees.

mental Systems, Inc. He is 60 years mittee of '[he Broadway Stores, proposed financing programs and old and has been a director of

[ic., Division of Carter Hawley capital risk exposure analyses, anid Malin Burnham*

SDG&E since 1983. Committee Hale Stores, Inc., a retail depart-reviews the general investment policy Mr. Burnham is chairman of John memberships: Executive and ment store chain. She is 57 years performance for tie Pension Plan Burnham & Co., a mortgage loan, Finance committees.

old and has been a director of and tie Savings Plan.

real estate and insurance firm. He SDG&E since 1979. Committee is chairman and a director of Ralph R. Ocanpo memberships: chairwoman of the Nominating This committee con Burnham Pacific Properties, Inc. He Dr. Ocampo is a San Diego physi-Executive Compensation Commit-siders and recommends nonlilees to is chairman of the board and a cian and surgeon. He is 59 years tee and a member of the Audit tie board, criteria for board and director of First National Corp. of old and has been a director of Committee.

comnittee composition and member San Diego and a director of BMA SDG&E since 1983. Committee Corp. and of both Pacific Diversi-memberships: chairman of the

• Member of the Executive Committee fied Capital Company and Wahlco Finance Committee and a member Environmental Systems, Inc.,

of the Audit Committee.

44 1990 ANNUAL REPORT CORPORATE PROFILE-SAN DIEGO GAS & ELECTRIC San Diego Gas & Electric is an investor-owned energy at the San Onofre Nuclear Generating Station in management company founded in 1881. Nearly all northwest San Diego County; the Southwest of the company's revenues are generated from its Powerlink, a 500,000-volt transmission line which utility businesses.

connects San Diego and Phoenix; and a natural gas SDG&E purchases, generates and distributes en-pipeline system within the company's gas service ergy to about 1.1 million customers in San Diego area. Within its service territory, the company has County and the southern portion of Orange County.

seven operating and maintenance centers, two busi The electric service area has a population of approxi-ness centers, seven district offices and five branch mately 2.7 million.

offices.

The company also purchases and distributes natu-As of December 31, 1990, there were about 4,175 ral gas to about 670,000 customers in San Diego people employed in SDG&E's utility operations.

County. Gas service is not available in all locations, SDG&E owns two subsidiaries: Pacific Diversified but the company's gas service area is being ex-Capital, an independently operated holding com panded.

pany that owns companies serving utility, environ Among SDG&E's major assets are the Encina and mental and real estate markets; and Califia Coi South Bay power plants, which can burn either fuel pany, a subsidiary used for general corporate oil or natural gas; a 20 percent interest in three units purposes such as holding real estate.

SDG&E's electric service area covers all of San Diego County and the southern ORANGE portion of Orange COUNTY County. The natural aoresor gas service area is c m a ysg s eri shown in color. TheseviceOerrieorIVtheIcopanyNTa Moreno gas compres-m ainbowe Compressor sor station is located uitoein in Riverside County,i p

e ord i

m 35 miles north of the San Diego county line.

SAN DIEGO COUNTY J

z 0

U cz portion ofOrng gas*service areaecs shtoiwn infolr.Th MEXICO

SAN DIEGO GAS & ELECTRIC 45 Officers R. Lee Haney, 51 Richard L. Manning, 59 San Diego Senior Vice President-Finance Vice President-Public Relations Gas & Electric Thomas A. Page, 57 and Chief Financial Officer Richard Manning has been vice Company Chairman, President and Chief Lee Haney was elected senior vice president-public relations since Pacific Diversified Executive Officer president-finance in January he joined SDG&E in 1981.

Capital Company Thomas Page was elected chairman 1990. He was elected a vice presi in 1983. He has been president and dent in 1983 after serving as trea-George A. F. Weida, 54 chief executive officer since 1981.

surer for two years. He was elected Vice President-Human He joined SDG&E in 1978 as a Vice president-finance in April Resources senior officer.

1986 and became chief financial George Weida joined SDG&E in officer in July 1988. He joined 1983 as a vice president and was Jack E. Thomas, 58 SDG&E in 1972.

named head of the human re Executive Vice President and Chief sources division in 1984. Previ Operating Officer Donald E. Felsinger, 43 ously, he was head of human Jack Thomas was elected executive Vice President-Marketing and resources for other major U.S.

vice president in 1985 and chief Resource Development corporations.

Copnis operating officer in 1986, after Donald Felsinger was elected a serving as a group vice president vice president in 1983 and was Frank H. Ault, 46 since 1980 and as a vice president appointed vice president of mar-Controller since 1972. He joined SDG&E as keting in November 1986. Re-Frank Ault was elected controller an engineer in 1957.

source development was added to in May 1986 after serving as direc the division in February 1989.

tor-internal auditing since 1981.

Stephen L. Baum, 50 Felsinger joined SDG&E in 1972.

Ault joined SDG&E in 1969.

Pa O

Senior Vice President and General Counsel Ronald K. Fuller, 53 Malyn K. Malquist, 38 Stephen Baum was elected senior Vice President-Governmental Treasurer viepeietin 1987 after servingCaiaCopn vice president i197atrsvng and Regulatory Services Malyn Maiquist was elected trea-E-C, lfi omp y

as a vice president since 1985, Ronald Fuller was elected vice surer in January 1990 after serving when he joined SDG&E as a vice president of regulatory services in as director-finance and assistant president and general counsel. He 1983. Governmental services was treasurer since 1988. He was formerly was senior vice president added to the division in 1984. He named director-information and general counsel for the Power joined the company in 1974. Prior services during 1987 following Authority of the State of New York.

to that he served in the executive service as manager-financial office of the president of the services. He joined the company Gary D. Cotton, 50 United States.

in 1978.

Senior Vice President Engineering and Operations Edwin A. Guiles, 41 Deiroy M. Richardson, 52 Gary Cotton was elected senior Vice President-Corporate Corporate Secretary vice president in 1985 after serving Planning Deiroy Richardson was elected as a vice president since 1979. He Edwin Guiles was elected vice secretary in December 1986 after was appointed to his current posi-president-corporate planning serving as assistant secretary since tion in November 1986. Cotton in January 1990 after serving as 1983. He joined SDG&E as an joined SDG&E in 1975.

director-merger transition since attorney in 1971 January 1989 and as director Alton T. Davis, 53 business planning since 1987. He Senior Vice President-joined SDG&E as an engineer Customer Services in 1972.

Alton Davis was elected senior vice president in 1985 after serving as a Margot A. Kyd, 37 group vice president since 1981 Vice President-Administrative and as a vice president since 1976.

Services He was appointed to his current Margot Kyd was elected vice presi position in November 1986. Davis dent-administrative services in joined SDG&E in 1968.

December 1988 after serving as treasurer since 1986. She served as manager-financial services and assistant treasurer the previous year. Kyd joined the company in 1980.

46 1990 ANNUAL REPORT Selected Financial Data At December 31 1990 1989 1988 1987 1986 1985 Current assets*

335.5 299.2 319.9 336.4 299.7 366.2 Current liabilities*

535.5 555.2 510.1 533.7 450.2 404.8 Working capital*

(200.0)

(256.0)

(190.2)

(197.3)

(150.5)

(38.6 Working capital ratio

.6

.5

.6

.6

.7

.9 Long-term debt*

1,167.1 1,112.7 1,179.5 1,204.6 1,193.9 1,208.6 Common shareholders' equity*

1,303.3 1,256.1 1,229.9 1,197.4 1,159.9 1,153.0 Number of utility customerst 1,095.2 1,069.6 1,032.6 990.4 940.7 893.9 Number of utility employees 4,175 4,209 4,420 4,612 4,815 4,860 Common shares outstanding 55,948,922 55,921,505 55,898,342 55,872,602 55,847,822 55,822,762 Book value per common share 23.29 22.46 22.00 21.43 20.77 20.65 Price/Earnings ratio 12.7 14.3 12.0 9.1 9.9 8.3 For year ended December 31 Operating Revenues*

Electric 1,356.4 1,324.9 1,300.0 1,261.3 1,333.5 1,395.7 Gas 355.1 300.4 285.4 293.8 299.2 343.0 Diversified operations 60.4 44.2 35.1 7.1 1.5 Pretax income/revenue 20.6%

19.3%

18.7%

21.7%

21.6%

22.7 Return on equity 15.4%

14.2%

14.6%

15.6%

12.3%

16.2 Effective federal tax rate 37.3%

36.5%

32.5%

39.1%

47.8%

44.5 Earnings per common share 3.52 3.15 3.18 3.28tt 2.59 3.25 Dividends declared per common share 2.70 2.70 2.60 2.50 2.345 2.205 Dividend payout ratio (declared) 76.7%

85.7%

81.8%

76.3%

90.4%

68.11 Price range of common shares

$ 464-$39

$45/8-$36s

$ 39V2-$30

$377/-$28%

$422-$26%

$28-$21V2

• ln millions of dollars.

fln thousands.

ttlncluding $0.32 for cumulative effect of change in accounting principle.

Financial Return on equity is measured Financial Return on Equity by earnings appli cable to common 1Z m

]

cabe t cmmo

-weighted average 90 shares divided by by percent average common 89 equity.

88 86 4

8 12 16

SAN DIEGO GAS & ELECTRIC 47 Compound Annual Compound Annual Growth Rate Growth Rate 5 Years 1984 1983 1982 1981 1980 10 Years (1.7)%

393.8 267.3 303.9 302.4 308.8 0.8%

5.8%

352.2 429.7 443.6 453.4 382.3 3.4%

41.6 (162.4)

(139.7)

(151.0)

(73.5) 1.1

.6

.7

.7

.8 (0.7)%

1,277.5 1,275.4 1,007.2 925.0 918.5 2.4%

2.5%

1,052.9 957.6 817.4 672.4 585.8 8.3%

4.1%

853.6 823.2 804.5 792.4 772.9 3.5%

(3.0)%

4,841 4,917 5,084 4,909 4,776 (1.3)%

54,063,592 51,693,662 48,266,144 41,499,034 36,469,483 4.4%

2.4%

19.48 18.52 16.94 16.20 16.06 3.8%

7.6 6.1 5.9 5.3 11.6 (0.6)%

1,292.8 1,207.1 1,137.9 948.6 770.9 5.8%

0.7%

327.9 323.1 293.0 211.0 189.5 6.5%

19.8%

18.7%

15.3%

10.2%

4.5%

15.8%

18.2%

17.5%

14.5%

6.0%

38.7%

31.2%

24.0%

4.7%

(13.1)%

1.6%

3.01 -

3.20 2.90 2.34 1.01 13.3%

4.1%

2.065 1.925 1.785 1.64 1.56 5.6%

68.8%

60.7%

62.4%

71.1%

156.8%

$23%-$17/8 22-$17

$177/s-$11%

14-$11

$ 15/-$10 uarterly Common Stock Data 1990 1989 First Second Third Fourth First Second Third Fourth Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Market price High 453/

43 44%

46 39%

412 427/8 45/

Low 40 392 39 39 36/8 37Vs 40 392 Dividends declared 67.5c 67.5c 67.5c 67.5e 67.5c 67.5(

67.5i 67.5c

48 1990 ANNUAL REPORT SHAREHOLDER REFERENCE GUIDE Stock Listing and Trading Information Transfer Agents and Registrars Common stock: Listed on the New York and Pacific The company's transfer agents and not the company stock exchanges under the ticker symbol SDO. Share-have primary responsibility for stock transfers and holders can find the previous day's closing price in the cancellation and issuance of stock certificates.

the New York Stock Exchange listing table of daily You should contact the agents directly.

newspapers under the symbol SDieGs.

Transfer agents:

Preferred and preference stocks: Listed on the Union Bank (formerly California First Bank)

American and Pacific stock exchanges under the 8155 Mercury Court ticker symbol SDO. Previous day closing prices are Post Office Box 2529 listed in the American Stock Exchange listing table San Diego, California 92112 (619) 230-4487 under the symbol SDGO. The 4.60% preferred series and the $7.05, $8.25 and $9.125 preference series nio are not listed.

Del ichadso, co-ar no lised.Union Bank is also transfer agent and registrar for Del Richardson, cor porate secretary, has Where to buy and sell stock: You can purchase the preferred and preference stocks.

responsibility for the the listed common, preferred and preference stocks company's board of First Interstate Bank of California directors' meetings, through any brokerage firm. Some firms specialize in shareholder relations selling the unlisted series, and they can be located do Frst ntr Bank and records manage-through your broker.

ment.

New York, New York 10271 Common Stock Investment First Interstate Bank is the registrar for common Plan: Please call or write for a prospectus on how SDG&E First Interstate Bank is also the transfer agent and commn socksharholers registrar for the preference stocks, except the $8.25 common stock shareholders can purchase additional shares by investing all or a porton f thir uartrlyHow to transfer stock: A transfer of stock is required portion of their quarterly dividends in additional whenever there is a change in the name or names in shares. The plan also allows which the stock certificate is registered. This can optional cash investments of happen when you sell the stock, make a gift of stock, as little as $25 per investment or add or delete owners of the certificate. The trans up to a maximum of $5,000 fer can be made by filling in the stock assignment per calendar quarter. Shares form on the back of the stock certificate and signing purchased under this plan are it exactly as the name or names appear on the front free of any brokerage fees.

of the certificate. The signatures of the individuals transferring the stock must be guaranteed by either a Dividend Deposit Service:

commercial bank or a brokerage firm that is a mem If you wish to have your dividend check mailed her of a major stock exchange. The certificate can directly to your bank for deposit, send signed in-then be sent to the transfer agent for transfer. It is structions containing your bank account number recommended that certificates be sent registered or and the complete mailing address of the bank to the certified mail.

Office of the Secretary, SDG&E. If the checks are being deposited to a joint account, all owners of the Annual Meeting account and all shareholders should sign the letter.

The annual meeting of shareholders will be held on Tuesday, April 23 at 11 a.m. at the U.S. Grant Hotel, Grand Ballroom, 326 Broadway, San Diego, Califor nia 92101-48 12.

The record date for shareholders eligible to vote at the annual meeting is February 25, 199c1.

SAN DIEGO GAS & ELECTRIC 49 hareholder Profile Executive Offices s of December 31,1990, there were 62,431 common San Diego Gas & Electric stock shareholders of record and 4,808 preferred and 101 Ash Street reference stock shareholders. There are thousands of Post Office Box 1831 ther stock holders whose shares are held in street San Diego, California 92112 ame by securities brokers and nominees.

(619) 696-2000 Common Stock Shareholders The company y account registration:

Total Annual Return to Shareholders remained in the top foint accounts 19,452 25 percent, meeting omen 18,283 by percent 90 its goal. Stock price

_________________________________________appreciation and Men 13,181 89 dividends are the iduciaries 10,673 components o ecurities brokers, nominees, others 842 88 average total return, measured over five y geographic area:

87yas nited States, except California 31,838 op 25%

yars alifornia, except SDG&E service area 19,047 Standard&

8 DG&E service area, including employees 11,433 10 2

3 4

oreign countries 113 y shares owned:

1-99 13,394 100-300 29,616 30150 by percent, 90 301-500 8,484 atoecember3L 501-1000 6,70589tI 1001 or more 4,232 ublications Available to Shareholders 87 nnual Report: Inquiries about this annual report Individual hould be directed to Tom Murnane, Corporate ommunications, Post Office Box 1831, San Diego, 25 50 75 100 alifornia 92112.

nvestors Report: Reports of current activities, recent Dividends Per Share esults and features of interest to shareholders are ssued periodically during the year.

declared, 90 orm 10-K: The annual report to the Securities and in dollars xchange Commission.

hareholder Information Handbook: Answers any questions commonly asked by shareholders.

87 here to Call for Information hareholders may call every business day, between

.6 1.2 1.8 2.4 3.0

00 a.m. and 4:45 p.m. (Pacific time), to inquire bout stock holdings:

The 1989 and 1990 Within California (800) 826-5942 Common Stock Price Trend price increases are due Outside California (800) 243-5454 me in dollars.

90 j

mrger with Southern o hear a tape recorded corporate news report and California Edison and tock update:

89 ower interest rates.

Within California (800) 443-SDGE Outside California (800) 521-NEWS nquiries from the financial community should 87 e directed to:

YearEnd 86 Roberta DeTata (619) 696-4488 1i.I 10 20 30 40 50

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