ML13331B442
| ML13331B442 | |
| Person / Time | |
|---|---|
| Site: | San Onofre  |
| Issue date: | 12/31/1987 |
| From: | Page T SAN DIEGO GAS & ELECTRIC CO. |
| To: | |
| Shared Package | |
| ML13331B036 | List: |
| References | |
| NUDOCS 8804250248 | |
| Download: ML13331B442 (44) | |
Text
Annual Report San Diego Gas&Electric g
Pacific Diversified Capital h g O
-NOTICE THE ATTACHED FILES ARE OFFICIAL RE CORDS OF THE RECORDS & REPORTS MANAGEMENT BRANCH. THEY HAVE BEEN CHARGED TO YOU FOR A LIMITED TIME PERIOD AND MUST BE RETURNED TO THE RECORDS & ARCHIVES SERVICES SECTION P1-122 WHITE FLINT.
PLEASE DO NOT SEND DOCUMENTS CHARGED OUT THROUGH THE MAIL.
REMOVAL OF ANY PAGE(S) FROM DOCUMENT FOR REPRO DUCTION MUST BE REFERRED TO FILE PERSONNEL.
-NOTICE 8804250248 880413 PDR ADOCK 05000206 I
The Year in Review High Customer Growth Rate A Nice Problem to Have San Diego, America's seventh largest city, keeps growing rapidly. SDG&E's electric customer growth rate has been one of the highest in the nation for the last several years and it was 5.3 percent in 1987. It's a "nice problem" to have, says Chairman Thomas A. Page (page 2).
Nuclear Plant Among the Best In the Nation Unit 2 at San Onofre Nuclear Generating Energy Use Establishes Record Station qualified for a Unusually cold weather in the service area in
$400,000 incentive December 1987 caused record demand for natu award because of its ral gas and electricity On December 16, a new superior performance peak demand for electricity was set at 2,378 during part of 1986 megawatts, up from the former record of 2,376 and 1987. The two megawatts that was reached on August 19, 1986.
other units at the plant In San Diego, it's unusual to establish peak are performing well demand records in the winter. They more often above the national occur in summer. It didn't happen in 1987 average, too. SDG&E because the summer was unseasonably cool.
owns 20 percent of San Onofre (page 6).
Total Retur Declines Slightly Nuclear plant operators at SDG&E was just shy of its goal of being in the San Onofre undergo con tinual training with the top 25 percent of the industry in total return in control room simulator.
1987. Stock price appreciation and dividends are the components of total return, measured over a five-year period (page 38).
Purchased Power Contracts Criticized Two contracts for pur-Lower Prices Helping SDG&E Reach Goal chasing coal-fueled power were the subject Lowering prices, and having them match the of extensive hearings costs of providing service to each group of in 1987. The Division customers, is a primary company goal. Prices of Ratepayer Advo-declined again in 1987, especially for commer cates of the California cial and industrial customers. In recent years, Public Utilities Com-that group has been subsidizing residential mission proposed $285 customers' prices. The company is working to million in disallow-make them equitable. There were more decreases ances. A decision is on January 1, 1988.
expected in 1988 (page 12).
Contents Managing Growth:
That's Our Special Challenge Chairman Thomas A. Page discusses the company's financial strength and factors that will affect the company in the future Page 2 Employees are working together, and individually, to find ways to cut costs Page 5 In an interview, Chief Operating Officer Jack E. Thomas candidly discusses how the utility is managing its growth Page 6 Richard Korpan, president of Pacific Diversified Capital, talks about strategy and performance Page 10 Financial Review Page 12 Financial Statements Page 19 Notes to the Financial Statements Page 26 Responsibility Report for the Financial Statements and Auditors' Opinion Page 32 Mountain forest fires in October knocked Out power Board of Directors Page 33 to 1,000 rural customers. While the fires still burned Dividends Go Up nearby, SDG&E's highly skilled repairmen set ap in 1987 new poles in difficult conditions.
Officers Page 35 Employees' Ideas Saving Money the 11th year in a row, Corporate Profile-Pacific Diversified Capital Page 36 As of the end of 1987, employees' ideas are SDG&E increased its Officers Page 37 helping the company save more than $2 mil-shareholders' dividend, lion annually. An additional incentive program to an annual rate of Shareholder Reference Guide Page 38 to help cut costs began in 1988 (page 5).
$2.50 per share.
Company Descption Subsidiary Acquires San Diego Gas & Electric is an energy manage Another Company ment company It operates a gas and electric util ity that serves more than 2.5 million people in Pacific Diversified Southern California. Through its subsidiary, Capital, SDG&E's Pacific Diversified Capital, it owns four compa nonutility subsidiary, nies in other industries. (More on pages 34-37.)
bought Wahlco, Inc.
of Santa Ana, Califor nia in 1987. Wahlco manufactures flue gas Palm trees. seen through conditioning systems out Southern California.
thataresol arundare impressiN-e. Some grow that are sold aroundheights.
The the world, primarily to company's growth is the electric utilities for focus of this annual report their coal-fueled gener ating plants. A mapgroth Wnalico employees inspect pumps at an showing the diversified air pollution control facility installed by Wahco facilities is on page 36.
at a southwestern electric generating plant.
To Our Shareholders:
2 t's an educational experience to look we have evolved into an aggressively competitive, over what's been written in past annual forward-looking company reports. I recently re-read our 1978 Without question, I believe the discipline of Annual Report, since that was the year setting goals, publishing them and being held I joined San Diego Gas & Electric. The accountable by customers and investors to statistics in it weren't attractive: our annual divi-achieve them in subsequent years, has contrib dend rate was only $1.40 per share; revenues were uted greatly to your company's overall success.
$479 million; the bond rating was a weak BBB; and we were purchasing only 20 percent of our "We have fewer officers and employees now.
energy and burning expensive OPEC-priced oil Looking back almost inevitably gives rise to the and natural gas for most of the rest of our energy question, "What would you do differently if you Beyond these statistics, which I was deter-had the chance?" Well, in answer, we would mined to improve, the report discussed the gen-have done things quicker. We could have short esis of ideas that have helped SDG&E to regain ened the time frame of our recovery plans and its financial strength and resource viability. Some been faster to resolve organizational issues.
of these were:
We have fewer officers and employees now
- Our initial plans for a financial recovery were and clear thinking is required to keep pace with stated. In 1979, the initial plan developed into events. We only have time to spend on things that our five-year goals. These were sent to our really matter.
shareholders and we asked them to monitor our Among the things that matter greatly to us are progress. We've met all those goals and have had the company's continued financial health and its an A+ bond rating from Standard & Poor's attractiveness as an investment. Earnings are one Corporation since 1984 and Aa3 from Moody's part of that picture.
Investors Service since 1985.
In 1987, our earnings declined to $3.28 per
- Our need to diversify fuel resources and our share from $3.42 per share in 1986. There were a general plans to do so were outlined. We later set couple of reasons for that decline but one is the some specific goals and those have been met.
most significant. In 1986, we had a one-time gain Today we're purchasing nearly 40 percent of from the sale of our remaining interest in Energy our energy. And we're only using small amounts Factors, Inc. That added 25 cents per share to 1986 of oil today.
earnings.
- The concept of an energy management com-In 1987, there were two unrelated factors that pany was introduced. Since then, by our plan, affected earnings and about cancelled out each other. In connection with the Tax Reform Act of Finanial ighlghts1986, the company changed its method of Financial Highlights
.C;;__
- recording revenue from when customers are (iThousands_____________ExceptPerShare_________
billed to when the energy is delivered. This Percent accounting change gave us a one-time increase 1987 1986 Change of 32 cents per share in the first quarter.
Operating revenues
$1,904,228
$1,634,211
+16.5 Later in the year, the California Public Util Operating expenses
$1,642,449
$1,351,861
+21.5 ities Commission, in a series of decisions, dis Net income (before preferred allowed $53 million in construction costs for dividend requirements)
$ 196,803
$ 213,196 7.7 units 2 and 3 at San Onofre Nuclear Generating Earnings applicable to common shares
$ 183,058
$ 190,771
- 4.0 Station. This resulted in a reduction of 39 cents Average common shares outstanding per share in earnings. Future earnings will also (thousands) 55,849 55,830 be reduced as a result of this decision, though Common stock shareholders the annual amounts will be much smaller.
(at December 3 1) 72,086 73,771
-2.3 (atDeembr 1)72,86 73771
.3 Looking at the national and California trends Earnings per common share 3.28 $
3.42
-4.1 Earning pe
.omo.hae...8...2 of declining allowed rates of return on equity, it's Dividends declared per common share 2.50 2.345
+ 6.6 going to be increasingly difficult for utilities to Retail energy sales show earnings growth. SDG&E's authorized rate Electric (billions of kilowatt-hours) 11.92 11.36
+ 4.9 of return in 1987 was 13.9 percent and in 1988 Gas (millions of therms) 554 490
+
q13.1 it's 12.75 percent.
"Our earnings were... 90 percent cash."
need to increase our dividend. Our strong cash 3
We also assess our financial condition in terms flow and high quality of earnings strongly sup of the percentage of our earnings that are cash port this change.
and the percentage of our dividends that come from cash earnings. By these measures, our "The success of Pacific Diversified Capital financial health is very, very strong.
is very important to us."
- In 1987, our earnings were more than 90 per-Because it's going to be increasingly difficult to cent cash. By comparison, the recent industry get incremental earnings from utility operations, average has been about 70 percent cash earnings.
two years ago we activated a nonutility subsidi
- For the llth year in a row, we increased the ary, Pacific Diversified Capital, to purchase and dividend, raising the annual rate to $2.50 per develop other companies. We've bought four share. Because of our strong cash flow, we're companies since then. In 1987 we saw the start paying those dividends with our own cash, not up costs of this activity and the company didn't borrowing as we had to do a few years ago.
produce any earnings. I'm not satisfied with that Another thing has been changing, and that's and 1988 will be the year we start to show posi the payout ratio, or the proportion of our earn-tive results.
ings paid out in dividends. In 1987, we paid out about 76 percent of our earnings to you, up from "San Onofre had an excellent record.
69 percent. This percentage will continue to go Maintaining energy diversity, like financial up, because there will be continued competitive health, continues to be one of our company s continuing goals. The three units at San Onofre are key to that program and it's gratifying that as of 1987 our 20 percent share of the three nuclear units was totally in our rate structure. San Onofre had an excellent record in 1987. And those units are using fuel that costs an equivalent of $6 per barrel of oil. In addition, that sends a strong message of independence to OPEC.
Our concept of an energy management com pany embodies a mix of generating and purchas ing energy We have made purchase commit ments to ensure we would never again be held hostage to one fuel source, as we were in the 1970s by OPEC.
We, as a company and as a nation, were suc cessful in forcing a substantial reduction in the price of OPEC oil and, as an offshoot, natural gas. Because of this, some of our longer-term "Without question...
the discipline of setting goals, publishing them and being held accountable by customers and investors to achieve them...
has contributed greatly to your company's overall success."
ehamade. pRaec
4 Electric Fuel and purchased power prefer to hear about the future. Well, we can't commitments for coal-see ahead 10 years, but there are some forces at fueled energy now work now that we can identify that are likely to appear to be com-affect your company within the next decade.
paratively high cost.
Competition. This business is not at all like it They are being ques-used to be. It's become competitive, and this will tioned, in retrospect, be a way of life in the future. We are seeing util by the California ities competing for market share with nonregu the year.
Public Utilities Com-lated companies, for territory with neighboring mission.utilities and for access to transmission lines with 26 I hope the commis-more distant ones.
sion, when it reviews Regulatory process. We sure hope it can be the issues in 1988, will simplified. We would like to see pieces of the o reject its Division of energy supply system operate more like the free Ratepayer Advocates' enterprise system.
1983 1984 1985 1986 1987 penalty recommendat-Diversification. For the industry, as for ions, which are based SDG&E, it's definitely a way of producing on a short-term view of the contracts' value.
needed earnings growth. We are moving slowly Rather, we have asked the commission to That's because we would rather be successful understand that it's the long-term reliability than dramatic in our diversification effort.
and price stability of our system that is impor-Holding company. In 1986, we decided not to tant. That's where we're coming from in our form one because of several unacceptable condi resource planning.
tions that the CPUC attached to its approval.
We're still considering the issue, and it appears "These are, comparatively, nice problems."
that we will have the opportunity to revisit this This annual report is about the challenges of in 1988.
growth. That means several things: our rapid utility customer growth, the need to have "We are ultimately responsible to you.
increased sales growth at lower cost and our Looking ahead is the responsibility of many peo push to find earnings growth through ple at your company SDG&E and PDC both diversification.
have strategic plans and these put us in a frame We are fortunate to be located in a growing, of mind to be able to deal with the future. They vital community and to be dealing with those help us recognize that change is a way of life.
problems compared with being in a depressed Along with the strategic plan, we have articu community or being a utility with a major lated our corporate principles and values. Among nuclear plant problem. I would much rather be them is the recognition that we are ultimately dealing with the kinds of management challenges responsible to you, our shareholders.
we have. These are, comparatively, nice problems.
We've specifically stated that we will work toward maximizing shareholder value and that "This business is not at all like it used to be."
we will keep you informed of current activities While looking back 10 years has been an inter-and future plans. And we intend to continue to esting exercise for me personally, shareholders set, publish and achieve tough goals. fE Thomas A. Page Chairman, President and Chief Executive Officer February 8, 1988
Operations Review San Diego 5
Gas & Electric These are:
- Reduce the operating and maintenance part of "To find ways to cut costs, the company's budget. The reductions will we are drawing uponprovide basic funding for Gain Sharing.
we uon Achieve a strategic goal of an 80 to 85 percent our greatest strength, customer satisfaction level by 1990, as measured the talented people who by the customer service monitoring system. If are employed in each year's customer service goal is exceeded, the corporation."
then the basic Gain Sharing fund will be increased by up to 20 percent. If goals are not a
met, the fund will be decreased by up to 20 percent.
- Meet the capital cost portion of the budget. If the company exceeds the capital budget by more Performance SDG&E has a Performance Improvement Pro-than 3 percent, then the Gain Sharing fund will Improvement gram that's helping the company cut controllable be reduced by 20 percent for that year.
Program costs and, thus, the company is reducing the "We've been identified as a high-cost pro price of its energy products.
ducer of energy," says Chairman Thomas A.
The initial step in the program, called The Page. "That's unacceptable to us. To find ways to 10% Solution, was taken in 1986 when the com-cut costs, we are drawing upon our greatest pany began encouraging individual employees to strength, the talented people who are employed contribute their ideas on ways to cut costs.
in the corporation.
Employees whose ideas are accepted earn 10 "With the Performance Improvement Program percent of the anticipated first year's savings for and other incentive programs for management their ideas. By the end of 1987, suggestions from we're placing much more emphasis on pay for hundreds of employees that will save customers performance.
nearly $2 million annually had been approved "Another way we are controlling our costs is and are being implemented.
by gradually decreasing the number of full-time Another step, called Gain Sharing, was intro-utility employees. We've been doing this for sev duced in 1987. This will reward all employees eral years now, without using any costly pro for working together and achieving certain com-grams that other companies have used to achieve pany goals, beginning in 1988.
employment reductions. As a result of this effort, The plan was designed in part by 200 in the last five years we've reduced the number employees who agreed upon three major goals.
of employees by about 300.' m p
Total Number of Employees Utility Customers Served Per Employee 1983 1984 1985 1986 1987 1983 1984 1985 1986 1987
Operations Review 6 San Diego Gas & Electric an Diego Gas & Electric has one What's the company doing to encourage preferred An interview with of the fastest electric customer types of customers to come to the service area?
Jackgrowth rates in the industry In In 1987, we began providing a spectrum of infor Executive nase 1987, the rate was 5.3 percent mation and services to companies that are con President Vie compared with the industry sidering relocating in San Diego. We're working prsient an ief growth rate of about 2 percent. Is growth desirable very closely with the San Diego Economic to the company?
Development Corporation and many local chai Yes, growth really is advantageous. We're bers of commerce to attract new companies and encouraging growth, primarily in ways that will help those that are in San Diego grow and pros lead to increasing the use of our existing facili-per. This should encourage new job formation ties. If we could attract customers that use and assure job preservation for San Diegans.
energy 24 hours2.777778e-4 days <br />0.00667 hours <br />3.968254e-5 weeks <br />9.132e-6 months <br /> a day, that's the most advan tageous for us.
The growth in retail electric sales in 1987 was Growth is going to continue. I serve on the nearly 5 percent in SDG&E's service area, and City of San Diego's Growth Management Task the national average is about 4 percent, according Force, and the issue is not whether we are "for" to recentfigures. What's theforecastfor 1988for or "against" growth. The issue is how to cope SDG&E?
with the inevitable growth in a satisfactory way.
Our forecast shows that retail electric sales At SDG&E, we're trying to stimulate certain should grow between 5 and 6 percent in 1988.
kinds of industry to come to the area. For exam-So ours is a healthy sales growth rate.
ple, companies that produce a product, like Kyocera or Sanyo, are the targets of our develop-For the last six or seven years, it's been a primary ment efforts.
company goal to diversift energy sources so the Along the USA side of the iternational border with Mexicot farmland is being transrfrmed into business parks and warehousing facilities. A growing trade is attracting manufacturers from several countries. including Japan. They are taking advantage of lower labor costs in Mexico and tax incentives in the United States by putting parts of ther business on each side of the border.
company wouldn't be dependent upon foreign oil.
capacity We have an average system usage of 7
Were any new sources added in 1987 and will any about 57 percent and we intend to improve that.
be added in 1988?
So, we've been developing pricing mechanisms No. Our resource picture is in very good order to stimulate the use of energy at other than peak for the next several years. We expect to cover our demand times. We're also encouraging gas air growing base demand needs over the next five conditioning and thermal energy storage, with years in several ways. We're going to purchase financial incentives to install them for the same additional base capacity when it makes eco-reason.
nomic sense; we could acquire ownership in existing or new coal-fueled generating facilities Ten years ago, SDG&E had 40 diferent conser in Arizona or New Mexico and we may take our vation programs, part of the nationwide effort to Silver Gate power plant out of mothballs.
reduce dependence on expensive foreign oil. In As long as natural gas prices continue to be 1988, SDG&E has almost no programs left. Wy?
relatively low, restarting Silver Gate is a superb Primarily because they are no longer cost effec solution for us. It's fully depreciated and we can tive. California got way ahead of the rest of the use it to meet peak demand requirements at very country in conservation programs in the 1970s low cost. However, we are keeping our minds and early 1980s. There were huge sums of open to other possibilities. An even less costly money spent on them in California. For example, alternative, perhaps, could be purchasing peak capacity during maximum demand times from a "Growth is going to continue....
utility that has excess generating capacity-and We're trying to stimulate there are many that do.
The development of our own power plant site at Blythe, California, maybe with a group of to come to the area.
companies as owners, is some years away. But Jok E. Thomas we really don't anticipate being the project man ager for developing a large generating facility at Blythe or elsewhere.
The company successfully developed the Southwest Powerlink transmission line on its own, which was a major project in the early 1980s. Why not be the project manager of a major power plant con struction project sometime in the future?
The era of adding very large power plant units is gone. A single large generation unit of 400 to 800 megawatts requires an enormous capital investment and, consequently, enormous risk. We think utilities, including SDG&E, will make commitments in smaller capital packages to match their need for capacity as it occurs. Plant modules with between 100 and 400 megawatts of capacity that can be added on over a period of years are easier to finance and less risky to build.
SDG&E's stepped-up marketing programs to com mercial and industrial customers seem to conflict with the company's desire to postpone investment in new generating capacity. Is it a conflict?
I don't think it is. Clearly, we want to increase sales and use of our facilities. We have ample generating capacity today and if we add more sales we don't necessarily have to add new
Electric and Gas Customers we've insulated most of of serving these customers, successfully miti the older homes in San gated that. As a result, we've been able to pre Diego. To continue serve most of our sales and retain most of our programs that are not market share.
cost effective would Nealy cause our prices to How has the pricing change affected the company's customgo up.
negotiations with its largest customer, the Navy, natural gas customergsup were added in 1987.
Also, sales are very which in 1986 announced it was contemplating These set all-time important to us today.
building its own power plants?
records.
Our use per residential Our bill to the Navy a couple of years ago was 4o customer continues to
$110 million. With the general 1987 price reduc be very low because of tions, it declined to about $77 million. In 1988, the climate and the we estimate the Navy's bill will be about $70 200: conservation measures million, as a result of more commercial and of the past. By using industrial price reductions. At that level, it's much
- Gas 1983 1984 1985 1986 1987 our system more effi-less economical for the Navy to build its own ciently we can provide plants and we expect to keep it as a customer.
energy at lower cost and, consequently, it's good for our customers and our shareholders.
Price reductions to all customers have been under way for several years now. What has the company There's been a great deal of talk in the industry done to cut its costs to achieve this?
about "growth in competition." What specifically We've reduced our cost of debt, trimmed our does this mean for SDG&E?
operating and maintenance costs, and reduced SDG&E has become less like a monopoly and our fuel and purchased power costs. That effort more like a competitive company in the last sev-is continuing in 1988, too.
eral years. I think 1987 was kind of a banner
" San Onofre has year in that regard. Many more commercial and Wat was the additional savings to customers from become one of' industrial customers were planning to leave our recalling higher-cost debt and preferred stock in the best ped~lbrm-system to produce their own energy through 1987?
cogeneration. Our aggressive programs to reduce We retired more than $60 million in higher-cost ing nuclear plants commercial and industrial prices in 1987, with preferred stock, which will mean an annual say in the nation.
the objective of having prices based on the costs ings of up to $2.2 million every year to our customers beginning in 1988. By recalling higher-cost debt and preferred stock - and we've been doing that since 1983-we've reduced our financing costs by more than $8 million annually That's only one part of the savings. With our ability to use tax-exempt debt, rather than tax able bonds that most utilities rely on, in the last five years we've saved more than $20 million Plant operators at San annually Those are significant savings.
Onofre Nuclear Generat ing Station are trained One of the company's past cost-cutting efforts was and tested in emergency response methods in a to trim the overall salary and benefit costs. Are any control room1 sinulator, more cuts sought in this area?
which has instruments We're continuing to cut operating and mainte and panels identical to the plant's control roomis.
nance costs in many ways. One of these is reduc ing the number of employees. As a result of this, plus the growth in the number of customers, we continue to have one of the highest customer-to employee ratios in the industry It was 350-to in 1987, and we expect this to increase again in 1988 to 364-to-i. This is one of the best mea-
sures of our growth in productivity that I can SDG&E done about A
think of.
eliminating them?
The cornpany has had In 1986, SDG&E made news around the USA for a very good record on its aggressive spot-market purchases of natural gas PCB removal. We were and fuel oil for its power plants. What was the sit-one of the early cor uation in 1987 and what's the outlook for 1988?
panies to eliminate In 1987, we purchased about half of our natural PCB capacitors on n
gas needs on the spot market. I anticipate that most of our system. I we will continue to do so in 1988. By the way, 1988 we're proceeding we burned very little fuel oil in 1987 for one with programs that will I indutry.
simple reason, natural gas was cheaper.
eliminate additional PCBs from our system.
How many different suppliers of natural gas does In 1987, we estab-IO0 the company have?
lished a separate envi We take bids typically from about 30 suppliers ronmental department 1983 1984 1985 1986 1987 and we end up buying from five or six low bid-because, frankly, we in ders, but the sources are from all over the South-tend to give a lot more attention to environmental Utility Operations west and Canada and they're different from time issues in the years ahead.
Terminology to time. That's quite a change from just two Cogeneration years ago. For about 50 years, until 1986, we Several years ago, the three units at San Onofre The production of thermal had one supplier.
Nuclear Generating Station were able to Operate at and electrical energy from only about 60 percent of their capacity, in part one primary fuel. Some SDG&E closed its Heber geothermal plant in 1987 because of lengthy refueling cycles, modifications firmruse at heatrm and put it up for sale. Was that, in part, a result of required by the Nuclear Regulatory Commission their own operations.
the general cost-cutting efforts?
and some unscheduled maintenance outages.
The Heber plant was a research and development SDG&E, which owns 20 percent of the plant, and ime d ean project. It was successful and provided reliable Southern Calfornia Edison, the majority owner there is the greatest demand energy. However, the costs of production at the and operator, agreed in 1986 to take certain mea-for energy For SDG&E's level the plant was being operated were too high.
sures to improve the plant's performance. Was this electric operations division, Chevron and Unocal, the owners of the geother-achieved in 1987?
theay ncthe surn mal field, weren't willing to make the additional San Onofre performed marvelously in 1987. Unit for the gas operations divi investments to increase the well capacity and 2 went through a refueling at the end of 1987 but sion in the early morning in provide the additional hot water resource needed for about a year and a half operated at an 82 per by the plant on a schedule that met our needs.
cent performance level. That's very important, Refueling outage We have sued them because they did not meet because the California Public Utilities CoMMis-Nuclear generating plants their contractual commitment.
sion gives an economic incentive award for a per-seuled at formance level above 80 percent. We expect to replace the uranium rods Has a buyer for the plant been found?
collect an award of about $400,000. That's that provide the energy For iSan Onofre's three units, We've received six bids for the plant and a deci-almost half a penny a share. The other units are sion will be made in 1988.
performing very well, too.
ing outages, occur every 18 months to two years. Units What does the closing of the plant mean financially How does San Onofre's performance compare are out of service for about to shareholders?
with nuclear plants nationally?
two to three months for SDG&E's customers funded 31 percent of the Very, very well. San Onofre has become one of refueling on a rotating basis.
plant. The majority of the funding came from the best performing nuclear generating plants in Thermal energy storage the U.S. Department of Energy, the Electric the nation. Its overall 1987 capacity factor, which Power Research Institute and several other pri-is a measure of operating performance, was 73 night, using electrical vate and public organizations. The benefits of the percent. That's compared with the industry aver-energy when demand and sale will go to the contributors.
age of about 60 percent. Furthermore, it prices are lower. The ice is achieved the second largest production ofusdtcolhebiin The electric utility industry has had a problem with nuclear-generated electricity among the nation's polychlorinated biphenyls, or PCBs. What has nuclear power stations.
A
Operations Review Pacific Diversified acfic Diversied Capital was aries mature. It would be unrealistic to assume Capital established specifically to increase that we would show large earnings growth in our An interview with the company's earnings. How are first couple of years of existence. But we will RcadKrayou going about this?
need to grow rapidly after that.
Richard Korpan, We're attempting to find com President and Chienx~ti nd e
panies that have earnings growth potential. We Many companies have diversified but their finan Chieflook specifically for companies where we think cial results did not improve. Understandably, inves of Pacific Diversified that ownership by Pacific Diversified Capital tors are concerned about the perceived increased Capital will, over time, give them an opportunity to risk. Today would you invest in a utility if you increase earnings, knew it was going to diversify?
There isn't a simple answer. I think, generally, hat are your specific earnings growth goals?
that diversification is a difficult thing to do for Our stated long-term goal is that we intend to people with a background in a regulated indus produce 10 percent of the income of the total cor-try But I think it can be done successfully. I poration in 1991 and 25 percent in 1996. Another would invest in a company that has the right way to look at it is based on return on equity.
philosophical approach, the right management, a Once we have a solid base of companies we business plan and a sensible strategic plan for would expect to earn at least the same return as diversification.
the utility is authorized to earn.
This is a new operation, however. We need What is PDC's philosophical approach?
time to let PDCs partnership with our subsidi-We said we intended to start small, that we were going to invest primarily in companies we knew something about and could add value to by being Our associated with them. The companies we want must be doing business with or providing a prod euct or a service to the utility industry or its mar ketplace. The other category is real estate development. That's what we set out to do and that's really what we have done.
In this annual report, there is very little detailed financial information about PDC. Wy?
The results are not significant enough compared with the size of the entire corporation to justify separate accounting treatment yet. I would hope that in two or three years we will be large enough to justify more detailed information being shown.
Are you satisfied with your subsidiaries' results for 1987? Were all of them profitable?
To be successful we can never be satisfied with our results. They could always be better. From that standpoint, I would say we are not satisfied with the 1987 results, but when we buy a com pany, we expect that it's going to take a while before the company starts to produce the required level of profits. In fact, when we assess a company, we look at a projected five-year return on equity Two of the subsidiaries were profitable in 1987 and two were not. Looking at each individual company, and the marketplaces
they faced during the year, I think that each one can, and will, do better in 1988.
How did the petroleum products marketing com pany, Mock Resources, Inc., fare in 1987? What's the outlook for its industry in 1988?
Mock Resources made a profit in 1987 but it was operating in a difficult marketplace. Because of the increase in oil prices, brought about by OPEC, oil was less desirable compared with nat ural gas for many of Mock's industrial customers. That's the reason why Mock is developing its natural gas business, but that busi ness' size isn't sufficient enough yet to make up for the setback in the oil business.
The outlook for Mock in 1988 is favorable.
We're looking at several potential expansions of the business that would make its results less impacted by fluctuations in oil prices. Mock is adding some key personnel, moving into new markets and looking at acquisition opportunities.
I expect 1988 to be a very busy year for Mock.
Phase One Development has received a lot of pub licity in San Diego because of its involvement in the redevelopment of the city's historic oceanfront Integrated Inforation Systems, the smalet site, Belmont Park. Has the controversy increased your subsidiaries, is really a start-up operation the risk of success of the project?
because the computerized mapping field is so new.
The controversy made it difficult to develop the Would you acquire another start-up company?
project but I don't feel that it's increased the risk Weintendtohavenomorethanonestart-up of success of Belmont Park. That risk is past us company at a time. Integrated Information Sys now and Belmont Park will open in 1988.
tems is well-positioned in a developing market I think we would always like to be able to with tremendous potential but we have learned avoid controversial projects, but the nature of the that start ups take a considerable amount of man development business in California is that it's agement time. Until 115 is out of the start-up very difficult to avoid public concern. From time phase, we wouldn't be interested in another new to time, projects will be controversial. That's part start-up situation.
of doing business as a developer in this state.
In 1986, PDC bought three companies but in 1987 The Colorado Springs commercial real estate mar-it acquired only one. Wy the slowdown in ket, where Phase One has a branch operation, has acquisition?
generally not been a good market during the last There was no intentional slowdown. We have few years. Will that office remain open?
very stiff criteria for acquisitions and we found We think, long term, that Colorado Springs is an only one that met our criteria in 1987. Also, in attractive market. We have a high concentration 1986, there was a tax law change at year-end and of projects there and we've recently increased our many companies were for sale that year.
marketing effort. At the end of 1987, the leasing was going very well and we're optimistic that the Wat are your acquisition plans generally for area will make a good recovery.
1988?
We will be considering opportunities to We would like to see some expansion, possibly expand into similar types of communities to through acquisitions, of each of the businesses broaden our base so we won't be impacted as we already own. In addition, we would like to adversely by a slowdown in any one area.
make another stand-alone acquisition.
y
Financial Review Earnings are discussed below and in the notes to the con Earnings of $3.28 per share in solidated financial statements. Their effects on 1987 reflect two significant earnings, one negative, the other positive, largely events as well as the continuing offset each other. They left earnings at about the financial strength of the company. One event was same level had neither occurred.
the long-awaited completion of the California 1986 earnings per share and net income were Public Utilities Commission review of the costs higher than 1987 and 1985 amounts because in for constructing the San Onofre nuclear power 1986 the company gained $14 million, or 25 plant. The other event was the recognition of cents per share, from the sale of its investment in unbilled revenues for the first time. Both events Energy Factors, Inc.
Earnings Per Share Net Income 3.00 150 2.00 100 1.00 50 1983 1984 985 986 1987 1983 1984 1985 1986 1987 San Onofre Nuclear Generating Station Unbilled Revenues In 1986, the California Public Utilities Commis-Before January 1, 1987, the company recorded sion voted to disallow $69 million of the com-revenues from the sale of gas and electricity pany's $1.1 billion share of the San Onofre when it read customers' meters and billed construction costs. The company petitioned for a customers for service. In 1987, the company rehearing. In 1987, the commission reheard the began recording revenue based on the date the case and reduced the disallowance to $53 gas and electricity are delivered to customers.
million.
This change increased net income $18 million, or The disallowance reduced 1986 net income by 32 cents per share, in the first quarter of 1987. It
$5 million, or 8 cents per share, and 1987 is discussed in Note 2 of the notes to consoli income by $22 million, or 39 cents per share. In dated financial statements.
addition, the disallowance will require the com pany to write off the disallowed plant costs in Southwest Powerlink 1988 by restating 1986 earnings. The complex An important regulatory contingency is dis accounting effects of the disallowance are cussed in Note 7 of the notes to consolidated explained further in Note 7 of the notes to con-financial statements. The CPUC is almost solidated financial statements.
finished evaluating the cost of power transported
Six-Year Summary 13 For the Years Ended December 31 1987 1986 1985 1984 1983 1982 Operating revenues
$1,904.2
$1,634.2
$1,738.7
$1,620.7
$1,530.2
$1,430.9 Operating income 261.8 282.4 287.9 251.6 174.2 169.9 Income before cumulative effect of change in accounting principle 179.1 213.2 202.7 183.5 187.4 157.3 Net income (before preferred dividend requirements) 196.8 213.2 202.7 183.5 187.4 157.3 Earnings per common share before cumulative effect of change in accounting principle 2.96 3.42 3.25 3.01 3.20 2.90 Earnings per common share 3.28 3.42 3.25 3.01 3.20 2.90 Dividends declared per common share 2.50 2.345 2.205 2.065 1.925 1.785 Funds provided by operations 368.4 434.5 418.1 390.9 276.5 199.2 Additions to utility plant (excluding allowance for funds used during construction) 208.8 254.7 257.5 219.9 312.5 271.7 At December 31 Total assets 3,601.2 3,458.9 3,332.6 3,197.6 3,082.5 2,636.9 Long-term debt and preferred stock subject to mandatory redemption (excludes current portion) 1,388.4 1,333.2 1,354.1 1,391.0 1,338.9 1,115.2 The Six-Year Summary should be read in conjunction with the financial statements, notes to financial statements and statistical data contained elsewhere in this report.
Quarterly Financial Data (Unaudited)
Quarter Ended March 31 June 30 September 30 December 31 1986 Operating revenues
$433,750
$399,238
$392,285
$408,938 Operating expenses 360,285 334,703 320,153 336,720 Operating income 73,465 64,535 72,132 72,218 Other income 20,579 7,294 5,685 9,239 Net interest charges 27,307 26,605 27,656 30,383 Net income (before preferred dividend requirements) 66,737 45,224 50,161 51,074 Preferred dividend requirements 5,922 5,890 5,811 4,802 Earnings applicable to common shares
$ 60,815
$ 39,334
$ 44,350
$ 46,272 Average common shares outstanding 55,823 55,823 55,826 55,848 Earnings per common share*
1.09 0.70 0.79 0.83 1987 Operating revenues
$443,010
$455,569
$475,457
$530,192 Operating expenses 388,418 391,657 403,339 459,035 Operating income 54,592 63,912 72,118 71,157 Other income 6,160 5,413 3,534 4,954 Net interest charges 25,156 25,588 25,814 26,152 Income before cumulative effect of change in accounting principle 35,596 43,737 49,838 49,959 Cumulative effect of change in accounting principle 17,673 Net income (before preferred dividend requirements) 53,269 43,737 49,838 49,959 Preferred dividend requirements 3,936 3,707 3,048 3,054 Earnings applicable to common shares
$ 49,333
$ 40,030
$ 46,790
$ 46,905 Average common shares outstanding 55,848 55,848 55,848 55,854 Earnings per common share before cumulative effect of change in accounting principle 0.56 0.72 0.84 0.84 Earnings per common share 0.88 0.72 0.84 0.84
- Because this is based on average common shares outstanding during the quarter, the sum of quarterly earnings per share does not equal annual earnings per share.
These amounts are unaudited, but in the opinion of the company reflect all adjustments necessary for a fair presentation.
Financial Review over the Southwest Powerlink transmission line.
During 1987 and 1988, a transition arrangement The company expects the commission to issue its limits the change's potential impact on the com decision in the first half of 1988. An unfavorable pany's earnings. The commission also is consid commission decision could materially affect ering elimination of the balancing account for earnings and cash provided by utility operations.
electric sales to the largest commercial and industrial customers.
Revenues In 1988, base prices will replace the balancing The California Public Utilities Commission con-account for original San Onofre construction trols the company's prices, and thereby its reve-costs. Until the commission has reviewed those nues, generally by two mechanisms: base prices costs, the company will continue to use the bal and balancing accounts.
ancing account for additions to San Onofre after Base prices compensate the company for oper-it started operations.
ating and maintenance costs, taxes and deprecia-Gas and electric operating revenues for 1987 tion and provide a return on capital. Base prices were down 5 percent from 1986. About one-third are set in a general rate case every three years.
of the decrease is due to lower fuel costs. The Between rate cases, the commission makes remainder largely is due to the San Onofre write adjustments for inflation, system growth and rate off discussed in Note 7 of the notes to consoli of return. The current three-year cycle started in dated financial statements.
1986.
Revenues also decreased due to a lower autho The company uses balancing accounts for fuel rized margin. The margin is lower because costs, both electric and gas, and for San Onofre authorized return on equity decreased from 15 ownership costs, consisting primarily of percent in 1986 to 13.9 percent in 1987. Also, depreciation and a return on capital. The com-margin is lower because less revenue is required mission sets balancing account rates based on to cover the lower tax expense since the Tax estimated costs. Differences between actual and Reform Act of 1986 lowered tax rates from 46 estimated costs are accumulated in the balancing percent in 1986 to 40 percent in 1987. An accounts. Periodically, the company adjusts rates increase in the authorized equity to debt ratio to amortize the balances. The company also uses partly offset the lower authorized return on balancing accounts to compensate for the dif-equity. The net effect of these changes was a ferences between actual and estimated sales vol-reduction of net income by about $5 million, or umes. However, the account for gas sales to 10 cents per share.
certain large customers was eliminated in 1987.
Gas and electric operating revenues for 1986 were down 6 percent from 1985. The $106 mil Revenueslion decrease was due primarily to the $128 mil Revenues lion decrease in fuel costs.
Electric sales volume increased 6 percent in (iA dIU-of daa-)1987, reflecting customer growth. In 1986, vol ume increased only.5 percent. While customers increased in 1986, average usage declined due to mild weather. Gas sales volume decreased 7 per cent in 1986 due to mild weather but increased ncn17 percent in 1987 due to cold weather.
Revenues from diversified operations arise
- 0 from subsidiaries of Pacific Diversified Capital Company, a company subsidiary Most of these revenues and the gas and oil for resale to other customers arise from Mock Resources, Inc., one of these subsidiaries, which was acquired during 1983 1984 1985 1986 1987 the fourth quarter of 1986. Mock purchases the gas and oil and sells them at a small margin.
Costs The company earns an allowance for funds The total cost of electric fuel and purchased used during construction on the construction power decreased in 1987 and 1986 because lower funds held by a trustee as well as on construction prices more than offset the increase in sales vol-in progress. The total allowance for construction ume. The lower prices primarily resulted from funds, both debt and equity, changed only the general decline in world oil and gas prices slightly in 1987 but increased in 1986 due to the and the company's aggressive program of spot-increase in the amount of construction trust market gas purchases.
funds. The allowance is not a current source of The cost of gas purchased for resale in 1987 cash but will result in increased future cash decreased because of lower prices. The cost of flows as its amortization is included in rates.
gas purchased for resale decreased in 1986 Other income in 1986 includes the $21 million because of lower sales volume, due to milder pretax gain from the sale of the investment in weather, and lower prices.
Energy Factors, Inc.
Other operating costs increased $19 million in Interest charges are net of interest income on 1986 due to the Heber geothermal plant's becom-construction funds temporarily invested by the ing operational, increased insurance costs and trustee. In 1987 and 1986, construction funds the operating costs of the new subsidiaries increased while debt reductions and the use of described below.
low-interest, tax-exempt financings increased.
Taxes on operating income decreased in 1987 This resulted in a decrease in interest charges.
because the Tax Reform Act of 1986 lowered The company's embedded cost of debt decreased corporate tax rates and because operating income from 10.1 percent in 1985, to 9.6 percent in 1986 was lower.
and to 9.4 percent in 1987.
iquidity and Capital Resources Utility operations are a major source of liquidity for the com-Quality of Earnings ipanyn ince 1984, tax-exempt industrial development bonds and equity, c pollution control bonds have been the major external sources of liquidity Funds from opera tions and tax-exempt bonds have been more than 40A adequate to cover construction of utility plant, payment of dividends, and maturing long-term 3
debt. In fact, a large part of the proceeds from bonds issued in 1986 and 1987 is still held by a trustee for use in 1988.r9h A good measure of liquidity provided by oper ations is the percentage of earnings that arises p
from the allowance for funds used during con-c struction. Since this type of earnings does nott provide cash in the short-ten, utilities prefer it 198 i4 1985 1986 1987 to be a small percentage of earnings. The com pany's success in this area is shown in the fol-The percentage of funds for construction that lowing chart.
the company can generate internally is another
Financial Review good measure of liquidity provided by opera tions. The company's goal is to exceed 65 per-Maintain 3.75X Pretax Interest Coverage cent. The following chart shows the company's success in achieving that goal.
kuTc" Maintain Internal Generation of Construction Expenditures (at 65 percent or more) 96 1.8 72 U~e~firmance 48 Goal 1983 1984 1985 1986 1987 eConstruction expenditures, excluding nuclear E~oalfuel, are expected to total $225 million in 1988, 1983198 195 186 987 up 14 percent'from $197 million in 1987. 1988 construction is expected to be funded from the The company's capital structure is one factor use of the construction trust funds arising from that has enabled it to obtain long-term financing issuances of industrial development bonds and at attractive rates. The following table shows the internal generation. And, in spite of the uncer percentages of capital represented by common tainty associated with the Southwest Powerlink, equity, preferred stock and long-term debt.
management believes ample external sources of 1983long-term and short-term financing will continue 1983198 195 196 187 oal to be available if a need or an opportunity arises.
Common equity 37%
40%
43%
44% 45% 45-48%
Nevertheless, regulatory disallowances associated Preferred stock 9
9 8
7 6
5-7 with the Southwest Powerlink may reduce cash Debt and leases 54 51 49 49 49 46-49 flow from operations. The San Onofre dis Total 100% 100% 100% 100% 100%
100%
allowance will reduce cash flow from operations Another measure of the company's ability to by about $13 million in 1988 and by slightly obtain financing is pretax interest coverage. The smaller amounts in future years.
company's goal is to exceed 3.75. The following chart shows the company's results.
he Future Several trends and factors are resulting in lower authorized rates of return.
expected to affect future operat-The Tax Reform Act of 1986 has lowered tax ing results and liquidity rates, eliminated investment tax credits and I San Diego's population is reduced the benefit of depreciation deductions.
growing at a rapid rate, resulting in increasing Competition and partial deregulation have sales. However, the rate of sales growth may be begun.
reduced somewhat by additional cogeneration.
The company is diversifying.
Declines in interest and inflation rates are A short description of each of these follows.
Population Growth are adjusted for the tax changes. However, it has The company's rate of new customer additions reduced cash provided by operations because has been and continues to be well above the investment credits have been eliminated and the national average. For 1986 and 1987, the rate benefits of depreciation deductions have been exceeded 5 percent for electric and 4 percent for reduced. The lower tax rates reduce tax expense gas. The company expects the rate of growth to and revenue by equal amounts, but do not affect remain high. Over the last five years, electric and cash flow.
gas customer growth has averaged approximately 4 percent.
Competition and Partial Deregulation The electric and natural gas utility industry is Customer Growth facing competition and partial deregulation.
Deregulation could result in increased volatility in electricity prices. In the future, customers may be able to purchase power from other sources and transmit it over the company's transmission S
lines. This could result in higher rates to remain ing customers and increased cost recovery risk to CPUthe company As of January 1, 1988, the company's elec tricity prices averaged 9.7 cents per kwh. While 20 still higher than many other utilities, the co a ipany's average electricity prices have decreased erall24 percent since 1985. The company continues uElectfic to pursue goals to lower prices and restructure EGas the way customers pay for electric service to Sreflect the company's costs better. Because of Athis, the company expects its prices to be more competitive with the alternative sources of elec Rate of Return tricity available to its customers.
The decline in inflation and interest rates has led Substantial progress toward the goals of lower to lower authorized rates of return on equity The ing and restructuring electricity prices was made CPUC authorized a rate of return on equity of in 1987. In addition to reducing its costs which 13.9 percent in 1987, which was down from 15 are passed on to customers, the company percent in 1986 and 16 percent in 1985. For obtained approval from the CPUC to revise the 1988, the commission lowered the rate of return price structure for its largest commercial and on equity to 12.75 percent.
industrial customers. More fixed costs are Other than being a factor in determining the recovered now through fixed price components authorized rate of return, inflation does not gen-rather than in variable costs. In addition, standby erally affect income. Increases in operating costs charges were revised to approximate more due to inflation are normally recovered through closely the cost of providing standby service to base prices. Changes in fuel and purchased self-generators.
power prices do not affect income because these The CPUC also approved reallocation of costs costs are recovered in the balancing accounts.
to customer classes to reflect the actual costs of serving each class better. In the past, price Tax Reform Act of 1986 increases were placed disproportionately on large The act has not significantly affected the com-electricity users in an effort to minimize price pany's net income because electric and gas prices increases to residential customers. This resulted
i18 Financial Review in commercial and industrial customers' paying a The California commission also has restructured price higher than the actual cost to serve them.
the price-setting mechanisms for natural gas This differential has been reduced greatly as a sales to certain large customers.
larger portion of price decreases has been passed on to commercial and industrial customers.
Diversification These changes are expected to reduce the One corporate strategy to improve financial per amount of bypass of the company's electric sys-formance is to diversify. During 1986 and 1987, tem. The CPUC's new price structure policies, Pacific Diversified Capital acquired four com however, do not allow residential prices to panies. In addition, SDG&E is reviewing a reap decrease as quickly or as much as those for com-plication to the California commission for the mercial and industrial customers.
formation of a holding company to facilitate Almost one-tenth of the company's electric diversification.
sales is to the federal government, principally to In November 1987, PDC acquired Wahlco, the U.S. Navy. As part of a national program, the Inc., a manufacturer of air pollution control Navy has studied its utility costs and considered equipment. Its customers are primarily electric leaving the company's electrical system. The utility coal-fueled generating plants.
changes described above have reduced the prices In October 1986, PDC acquired Computing charged to the Navy and should significantly Solutions, Inc., a computerized mapping com reduce the likelihood of the Navy's leaving the pany. The new acquisition was merged into Inte company's system.
grated Information Systems, Inc., the subsidiary The company is taking advantage of the formed in 1985 to operate in the same field. In deregulation of the natural gas industry. In 1985, October 1986, PDC acquired Phase One the Federal Energy Regulatory Commission Development, Inc., a real estate development provided for open access to interstate gas trans-firm, whose operations were combined with an mission pipelines. The company is buying a sub-existing real estate subsidiary. In December stantial portion of its natural gas from suppliers 1986, PDC acquired 51 percent of Mock in Texas and Oklahoma at relatively low spot-Resources, Inc., a seller of petroleum-based fuels market prices. Southern California Gas Com-and natural gas to industrial and governmental pany transports that gas for a fee. This arrange-users.
ment has lowered the total cost of natural gas PDC intends to continue this program of diver purchases greatly. Previously, all gas came from sification, acquiring other companies whose Southern California Gas. SDG&E's retail operations relate to fields in which the company customers that meet certain criteria may pur-is active already.
chase gas and pay SDG&E a transmission fee.
A year of Mock 1987 Revenue Dollar ResourcesY revenues for e
arn i i
Source Disposition nifiant hane inthe31
.90 Fuel and Purchased Energy source and di-position of 66.3g UtilitY Electric Sales 17.50 Gas and Oil for Resale to Other Customers the revenue dollar corn-11.5o OtherOperating Expenses pared with earlier years.
15.40 Utility Gas Sales 9.70 Total Taxes Mock is a marketer of 8.00 Depreciation petroleum products and 18.3o Diversified Operations 8.00 Dividends to Shareholders natural gas,1 7.4 Salaries and Benefits 4.63 Cost of Mone net of AFUDC S.40 Reinvested in Business
Statements of Consolidated Income 19 Excerpts from the For the Years Ended December 31 1987 1986 1985 Financial Review Operating Revenues Electric a
$1,261,312
$1,333,479
$1,395,655
- a. Electric operating reve Gas 293,859 299,202 343,047 nues decreased in 1987 pri marily because of a decline Diversified operations b
349,057 1,530 in fuel costs and a con Total operating revenues 1,904,228 1,634,211 1,738,702 struction cost disallowance for San Onofre Nuclear Operating Expenses Generating Station units 2 Electric fuel and purchased power 437,842 456,402 535,968 and 3.
Gas for resale to utility customers 170,303 175,286 223,407 Gas and oil for resale to other customers b
336,632
- b. This relates primarily to Mock Resources, Inc., a Maintenance 66,041 73,502 74,484 nonutility subsidiary Depreciation and amortization 151,655 140,732 132,506 acquired at the end of 1986
--~
by Pacific Diversified Property and other taxes 40,479
-37,714 35,179 Capital.
Other 288,476 282,378 257,573 Sc.
Taxes declined due to the Income taxes (Note 6) c 151,021 185,847 191,718 lower rates in the Tax Total operating expenses 1,642,449 1,351,861 1,450,835 Reform Act of 1986 and Operating Income 261,779 282,350 287,867 lower operating income.
Other Income and (Deductions)
- d. In connection with the Allowance for other funds used during construction 14,816 13,035 5,772 Tax Reform Act of 1986, Taxes on nonoperating income (Note 6) 7,161 (4,534)
(972) the company changed the timing of whe ireords Other-net (1,916) 34,296 23,269 timing hen it reed revenue. This resulted in a Total other income 20,061 42,797 28,069 one-time boost to earnings.
Income Before Interest Charges and Cumulative Effect of Change in Accounting Principle 281,840 325,147 315,936
- e. Earnings in 1987 Interest Charges those in 1986 because 1986 Long-term debt 90,529 95,364 104,449 earnings included 25 cents Short-term debt and other 12,109 17,468 11,065 per share from the sale of an investment in Energy Allowance for borrowed funds used during construction 72 (881)
(2,300)
Factors, Inc. by Pacific Net interest charges 102,710 111,951 113,214 Diversified Capital.
Income Before Cumulative Effect of Change in Accounting Principle 179,130 213,196 202,722 Cumulative effect of change in accounting principle (Note 2) d 17,673 Net Income (before preferred dividend requirements) 196,803 213,196 202,722 Preferred Dividend Requirements 13,745 22,425 23,797 Earnings Applicable to Common Shares
$ 183,058
$ 190,771
$ 178,925 Average Common Shares Outstanding 55,849 55,830 55,125 Earnings Per Common Share Before cumulative effect of change in accounting principle 2.96 3.42 3.25 Cumulative effect of change in accounting principle
.32 Net earnings e
3.28 3.42 3.25 Dividends Declared Per Common Share 2.50 2.345 2.205 See notes to consolidated financial statements.
Consolidated Balance Sheets 20
(
Excerpts from the Balance at December 31 1987 1986 Financial Review Assets Utility plant-at original cost
- a. Although the company In service
$3,907,208
$3,696,637 spent more than $200 mi Construction work in progress 144,316 150,329 lion on capital additions in 1987, there was no large Accumulated depreciation (1,134,617)
(982,605) single project. Rather, the Utility plant-net (Note 3) a 2,916,907 2,864,361 money was spent primarily on adding new customers Investments and other property 81,436 48,425 and improving the distribu Construction funds held by trustee (Note 8) b 130,946 137,152 tion and transmission Current assets Cash and temporary investments 84,178 70,409
- b. Funds raised from the Receivables 189,020 127,101 issuance of tax-exempt Inventoriesbonds in 1986 and 1987 will Invetores 8,86 66046 serve as a source of funds Regulatory balancing accounts undercollected-net
-24,039 in 1988.
Other 14,351 1,5 Othe 14,51 1,153
- c. The increase resulted Total current assets 336,411 299,748 from the acquistion of Goodwill c
38,722 5,542 Wahlco, Inc., by Pacific Deferred charges and other assets 96,818 103,704 Diversified Capital in November 1987.
Total
$3,601,240
$3,458,932 Capitalization and Liabilities
- d. With the increase in Capitalization (see Statements of Capital Stock and Long-Term Debt) cofmot cpitato n
Common equity d
$1,243,343
$1,205,819 in 1987, the company Preferred stock e
156,307 179,743 achieved its capital struc Long-term debt (Note 3) 1,204,587 1,193,922 ture goal.
Total capitalization 2,604,237 2,579,484
- e. The company retired two Current liabilities series of preferred stock as Long-term debt redeemable within one year (Note 3) 115,000 88,000 well as 90 percent of a third series. It also issued a Current portion of long-term debt (Note 3) 35,445
- 54,144 lower-cost series. These Accounts payable 179,961 111,439 events reduced preferred Diviendspayble 7,91 37529 stock to 6 percent of total Dividends payable 37,971italization.
Interest, taxes and other accruals 74,325 112,704 Regulatory balancing accounts overcollected-net 58,883 Other 32,106 46,358 Total current liabilities 533,691 450,174 Customer advances for construction 65,692 55,636 Accumulated deferred income taxes-net (Note 6) 186,935 173,609 Accumulated deferred investment tax credits (Note 6) 159,897 159,245 Deferred credits and other liabilities 50,788 40,784 Contingencies and commitments (Notes 7 and 8)
Total
$3,601,240
$3,458,932 See notes to consolidated financial statements.
Statements of Consolidated Sources of Funds for Construction 21 Excerpts from the For the Years Ended December 31 1987 1986 1985 Financial Review Funds Provided by Operations Income before cumulative effect of change
- a. The Tax Reform Act of in accounting principle
$179,130
$213,196
$202,722 1986 is causing the deferred Non-cash items in net income taxes to decline substan tially This first affected the Depreciation and amortization 178,433 163,146 151,129 company in 1987, reducing Deferred income taxes cash provided by operations.
and investment tax credits-net a
9,236 70,933 69,829 Allowance for funds used during construction b
(14,744)
(13,916)
(8,072) b. For the third year in a row, the allowance for funds Other-net (1,301) 1,145 2,468 used during construction Funds provided before cumulative remained very low. As a effect of change in accounting principle 350,754 434,504 418,076 result, SDG&E has a higher quality of earnings than the Cumulative effect of change in accounting principle 17,673 industry average.
Funds provided by operations 368,427 434,504 418,076 Dividends (153,163)
(153,106)
(145,713) passed its minimum goal of Funds reinvested c
215,264 281,398 272,363 financing more than 65 per Funds Provided (Used) by Long-Term Financing cent of its utility plant addi Sale of preference stock 44,473 tions through operations.
Sale of common stock 124 125 43,070
- d. The embedded cost of Issuance of long-term debt d
68,182 122,392 131,227 debt decreased again in 1987 due to the retirement Retirement of long-term financing (155,030)
(189,164)
(201,810) of two series of higher-cost Addition to capital lease obligations 12,025 12,020 16,295 debt issues, the maturing of half of a third series and Funds used by long-term financing (30,226)
(54,627)
(11,218) the issuance of one series of Other Funds Provided (Used) lower-cost, tax-exempt Acquisition of Wahico, Inc.
industrial development Goodwill (33,229) bonds.
Other (7,688) e (e.
The company uses bal Regulatory balancing accounts-net e
82,922 (29,073) 27,500 ancing accounts for fuel Investments and other property (8,311) 3,933 (5,215) costs, San Onofre owner ship costs, and differences Construction funds held by trustee 6,206 (88,214)
(25,448) between actual and esti Cash and temporary investments (3,586) 81,822 (5,183) mated costs and sales vol Receivables (58,625) 7,733 1,806 umes. In 1988, the San Receivable (58625 7
-Onofre costs are being Inventories 17,184 5,940 12,980 transferred to base prices.
Accounts payable 66,755 (26,706) 26,222 Interest, taxes and other accruals (38,565) 28,403 (11,004)
Other-net 659 44,059 (25,289)
Other funds provided (used) 23,722 27,897 (3,631)
Total additions to utility plant (excluding allowance for funds used during construction)
$208,760
$254,668
$257,514 See notes to consolidated financial statements.
Statements of Consolidated Changes in Capital Stock and Retained Earnings 22 Preferred Stock Not Subject to Subject to Mandatory Mandatory Common Premium on Retained Redemption Redemption Stock Capital Stock Earnings For the Years Ended December 31, 1985, 1986 and 1987 Balance, December 31, 1984
$161,000
$60,500
$270,318
$446,964
$335,623 Net income 202,722 Common stock sold (1,759,170 shares) 8,796 34,274 Current sinking fund requirement (3,000)
Dividends declared Preferred stock (23,785)
Common stock (121,928)
Balance, December 31, 1985 161,000 57,500 279,114 481,238 392,632 Net income 213,196 Common stock sold (25,060 shares) 125 Preferred stock retired (1,300,350 shares)
(32,507)
(7,380)
Current sinking fund requirement (6,250)
Dividends declared Preferred stock (22,172)
Common stock (130,934)
Balance, December 31, 1986 128,493 51,250 279,239 473,858 452,722 Net income 196,803 Common stock sold (24,780 shares) 124 Preferred stock sold (450,000 shares) 45,000 (527)
Preferred stock retired (1,384,360 shares)
(41,000)
(22,436)
(5,713)
Current sinking fund requirement (5,000)
Dividends declared Preferred stock (13,528)
Common stock (139,635)
Balance, December 31, 1987
$ 87,493
$68,814
$279,363
$467,618
$496,362 See notes to consolidated financial statements.
Retained Earnings 1984 18 96 18
Statements of Consolidated Capital Stock 23 Balance at December 31 1987 1986 Common Equity Common stock, without par value, authorized 170,000,000 shares, outstanding: 1987, 55,872,602 shares; 1986, 55,847,822 shares
$ 279,363
$ 279,239 Premium on capital stock 467,618 473,858 Retained earnings 496,362 452,722 Total common equity
$1,243,343
$1,205,819 Voluntary Redemption Preferred Stock Price Not subject to mandatory redemption
$20 par value, authorized 1,375,000 shares 5% Series, 375,000 shares outstanding
$ 24.00
$ 7,500
$ 7,500 4 V2% 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*
$9.84 Series, 1986, 160,000 shares outstanding 16,000
$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
$2.68 Series, 1986, 1,000,000 shares outstanding 25,000
$2.475 Series, 1,000,000 shares outstanding 29.15 25,000 25,000 Total not subject to mandatory redemption
$87,493
$128,493 Subject to mandatory redemption Without par value*
$8.25 Series, 1987, 95,000 shares; 1986, 105,000 shares outstanding
$104.675
$ 9,500
$ 10,500
$9.125 Series, 1987, 160,000 shares; 1986, 200,000 shares outstanding 105.021 16,000 20,000
$15.44 Series, 1987, 25,640 shares; 1986, 250,000 shares outstanding 110.29 2,564 25,000
$7.05 Series, 1987, 450,000 shares outstanding 107.05 45,000 Current sinking fund requirement (4,250)
(4,250)
Total subject to mandatory redemption
$68,814
$ 51,250
- Authorized 10,000,000 shares total (both subject to and not subject to mandatory redemption).
See notes to consolidated financial statements.
Statements of Consolidated Long-Term Debt 24 (In Thousands of Dollars)
Balance at December 31 1987 1986 First mortgage bonds (Note 3) 47/8% Series G, due October 1, 1987 12,000 4%% Series H, due October 1, 1990 30,000 30,000 5 2% 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 83/8% 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 5 2% Series U-2, due September 1, 1994 10,868 11,268 16.70% Series W, due November 3, 1987 and 1988 20,000 40,000 16.65% Series X, due September 1, 1986 and 1987 10,000 16.65% Series Y, due September 1, 1986 and 1987 7,500 127/% Series Z, due July 15, 2013 8,069 8,069 10% Series AA, due June 1, 2018 150,000 150,000 10% Series BB, due September 1, 2018 150,000 150,000 4.90% Series CC, due May 1, 2008 53,000 53,000 8.50% Series DD, due December 1, 2008 27,000 27,000 9 4% Series EE, due September 1, 2020 100,000 100,000 4.70% Series FF, due December 1, 2007 35,000 35,000 75/% Series GG, due July 1, 2021 44,250 44,250 73/8% Series HH, due December 1, 2021 81,350 81,350 8-%
Series II, due March 1, 2023 25,000 Total 1,054,537 1,079,437 Capitalized leases Nuclear fuel 92,811 108,549 Generating facility 101,534 105,098 Other 20,775 18,108 Total 215,120 231,755 Other long-term debt 101,922 41,695 Unamortized discount on long-term debt (16,547)
(16,821 Long-term debt redeemable within one year (Note 3)
(115,000)
(88,000)
Current portion of long-term debt (Note 3)
(35,445)
(54,144)
Total
$1,204,587
$1,193,922 See notes to consolidated financial statements.
Schedules of Consolidated Financial Information by Segments of Business 25 At December 31 or for the Years Then Ended 1987 1986 1985 Operating Revenues*
$1,904,228
$1,634,211
$1,738,702 Operating Income Electric operations
$ 241,777
$ 258,581
$ 261,199 Gas operations 21,734 24,940 26,668 Diversified operations (1,732)
(1,171)
Total
$ 261,779
$ 282,350
$ 287,867 Depreciation and Amortization Electric operations
$ 156,248
$ 145,492
$ 136,571 Gas operations 19,288 17,345 14,558 Diversified operations 2,897 309 Total
$ 178,433
$ 163,146
$ 151,129 Utility Plant Additions**
Electric operations
$ 171,616
$ 202,436
$ 221,764 Gas operations 37,144 52,232 35,750 Total
$ 208,760
$ 254,668
$ 257,514 Identifiable Assets Utility plant-net Electric operations
$2,660,408
$2,616,392
$2,549,596 Gas operations 256,499 247,969 218,618 Total 2,916,907 2,864,361 2,768,214 Inventories Electric operations 46,735 60,988 68,005 Gas operations 2,127 5,058 3,981 Total 48,862 66,046 71,986 Other identifiable assets Electric operations 276,285 252,773 204,098 Gas operations 74,842 96,236 31,809 Diversified operations 143,719 59,666 Total 494,846 408,675 235,907 Other Assets 140,625 119,850 256,426 Total Assets
$3,601,240
$3,458,932
$3,332,533
- The detail to operating revenues is provided on the Statements of Consolidated Income on page 19. The gas operating revenues shown therein include $18 million in 1987, $27 million in 1986 and $38 million in 1985 representing the gross margin on sales to the electric segment. These margins arise from intersegment sales of
$137 million in 1987, $100 million in 1986 and $208 million in 1985 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 accordance with regulatory accounting requirements.
Notes to Consolidated Financial Statements Utility plant and depreciation The CPUC also ordered the use of a balancing Utility plant represents the buildings, equip-account to record the ownership costs, such as depre ment and other facilities used to provide electric ciation and an investment return, for San Onofre and gas service. The cost of utility plant nuclear units 2 and 3 pending resolution of the issue includes labor, material, contract services and other discussed in Note 7. That balancing account currently related items and an allowance for funds used during is being phased out by a transfer to general rates.
construction. The cost of depreciable retired utility plant, plus removal expenses minus salvage value, is Goodwill charged to accumulated depreciation.
Goodwill arose from the acquisition of certain busi Depreciation expense reflects the straight-line nesses by Pacific Diversified Capital Company, an remaining useful life method. The provisions for SDG&E subsidiary. It is being amortized on a depreciation approximated the following percentages straight-line basis over 20 to 40 years.
of average depreciable utility plant: 4.12 percent in 1987 and 1986 and 4.08 percent in 1985.
Other Certain prior year amounts have been reclassified for Inventories comparability Inventories include $36 million of materials and sup-In 1987 and 1986, the financial statements are con plies ($46 million in 1986) and $13 million of fuel oil solidated to include the assets and operations of the
($20 million in 1986). Materials and supplies are val-subsidiaries. In prior years, the equity method was ued at average cost and fuel oil is valued by the last-used.
in first-out, or LIFO, method.
In 1985, company shareholders approved a pro posal that would result in the reorganization of the Allowance for funds used during construction company into a holding company structure. SDG&E The allowance represents the cost of funds used to would become a subsidiary of the holding company finance the construction of utility plant and is added and common stock shareholders of SDG&E would to the cost of utility plant. AFUDC also increases become the shareholders of the holding company income, partly as an offset to financing costs shown During 1986, the commission granted permission for in the Statements of Consolidated Income, although it the restructuring subject to certain conditions, several is not a current source of cash.
of which were unacceptable to SDG&E. The com pany is continuing to reevaluate its alternatives, Revenues and regulatory balancing accounts including reapplication to the commission for condi Revenues from utility customers consist of deliveries tions that are acceptable to the company to customers and the changes in regulatory balancing See Note 5 regarding employee benefit plans, Note accounts. Prior to 1987, these revenues were based on 6 regarding accounting for income taxes and Note 8 meters read on a cycle basis throughout each month.
regarding accounting for leases.
As described in Note 2, this method was changed in The Consolidated Balance Sheet at December 31, 1987. Earnings fluctuations from changes in the costs 1986 has been restated to add $232 million to net util of fuel oil, purchased energy and gas, and consump-ity plant and to long-term debt in order to capitalize tion levels for electricity and the majority of gas are certain leases previously accounted for as operating eliminated by balancing accounts authorized by the leases. The Statements of Consolidated Sources of California Public Utilities Commission. The balances Funds for Construction and of Consolidated Long of these accounts represent amounts that will be Term Debt and the Schedules of Consolidated Finan recovered from, or repaid to, customers by adjust-cial Information by Segments of Business also have ments to future prices. The CPUC reviews the reason-been restated to effect this change.
ableness of the amounts in these accounts.
Change in Accounting Principle Prior to January 1, 1987, the company The Tax Reform Act of 1986 made the unrecorded recorded revenues from the sale of deliveries subject to federal income tax effective Janu electricity and natural gas when it ary 1, 1987. Also as of January 1, 1987, the company billed customers for service after it made a similar change in its accounting policy for the read their meters. This practice was common in the financial statements. The cumulative effect of the utility industry and the Internal Revenue Service change increased first quarter revenue by $32 million accepted it for calculating taxable income.
and net income by $18 million, or $32 per share.
Since meters are read once a month on a cycle Since the $32 million has been building up over basis, at any month end there has been up to one many years, applying the new accounting policy to month's unbilled service for each customer, depending prior years would not significantly affect previously upon the date of the customer's meter reading. On the recorded revenues or net income. Therefore, the pro average, unbilled service approximated one-half of a forma effects on prior years are not presented. Sim month's deliveries at month end. Since this was gener-ilarly, adoption of the new policy will not signifi ally consistent from month to month, the total revenue cantly affect revenues or net income for future recorded in any year approximated the total deliveries periods.
for the year.
Due dates of long-term obligations are stantially all utility plant. Additional first mortgage shown on the Statements of Consoli-bonds may be issued upon compliance with the provi dated Long-Term Debt on page 24.
sions of the bond indenture.
Excluding capital leases, which are Certain first mortgage bonds have variable interest described in Note 8, combined aggregate maturities rate provisions. Bondholders may elect to redeem their and sinking fund requirements of long-term debt are bonds at the interest adjustment dates. The next inter
$29 million for 1988, $26 million for 1989, $41 mil-est rate adjustment dates will be August 1, 1988 for lion for 1990, $13 million for 1991 and $14 million the Series FF bonds and September 1, 1988 for the for 1992.
Series CC and Series DD bonds.
First mortgage bonds are secured by a lien on sub Facilities Under Joint Ownership The Southwest Powerlink transmission Each participant in the projects must provide its line and the San Onofre nuclear power own financing.
plant are jointly owned with other util-The company's share of operating expenses is 4ities.
The company's interests at included in its Statements of Consolidated Income.
December 31, 1987 were:
The company's share of future dismantling and (in Millions of Dollars) decontamination costs for the San Onofre units cur Southwest rently is estimated to be $170 million. These costs are Project Powerlmnk San Onofre expected to be recovered in rates over the estimated Ownership interest (%)
89 20 lives of the plants. In December 1987, the company Utility plant in service
$209
$1,172 began placing in an externally managed trust fund the Accumulated depreciation
$ 24
$ 187 amounts collected in rates.
Construction work in progress
$ 0 21
Notes to Consolidated Employee Benefit Plans Financial The company-funded pension plan The projected benefit obligation assumes an 8 per Statements covers substantially all employees. Ben-cent actuarial discount rate and a 6 percent average efits are related to the employees' com-annual salary increase. The expected long-term rate pensation. Plan assets consist primarily of return on plan assets is 8.5 percent.
of common stocks, annuity contracts, U.S. govern-Eligible employees may make a contribution of 1 to ment securities and bonds.
11 percent of their base pay to the company's Savings At December 31, 1986, the company reported that Plan for investment in mutual funds or in common as of the latest benefit information date, July 1, 1986, stock of the company The company contributes up to the plan had assets of $287 million and accumulated 3 percent of a participant's base compensation for plan benefits of $173 million. The benefit amount was investment in the company's common stock.
based upon an 8 percent discount rate and included The company contributed approximately $14 mil
$149 million that was vested.
lion in 1987, $16 million in 1986 and $15 million in In 1987, the company adopted Statement of Finan-1985 to these plans.
cial Accounting Standards No. 87. This had no effect The company partially provides health and life on the pension expense for 1987. The company con-insurance benefits to retired employees. The benefits tinues to fund the plan based on the aggregate cost paid and expensed amounted to $3 million in 1987 actuarial method.
and $2 million in 1986 and in 1985.
Net pension cost for 1987 consists of the following The company has a long-term incentive stock com (in thousands):
pensation plan, which provides for aggregate awards of up to 1,350,000 shares of common stock over a 10 Cost related to current service
$ 14,413 year period ending in 1996. The company issued Interest on projected benefit obligation 20,878 Return on plan assets (9,854) appr share of stoc to ofiers for Other (14,650)
Total cost
$ 10,787 issued subject to buy-back if certain corporate goals are not met.
The plan's funded status at December 31, 1987 is as follows (in thousands):
Plan assets at fair value
$297,438 Projected benefit obligation (including
$194,978 at current compensation levels of which $178,296 is vested) 285,818 Excess of plan assets over projected benefit obligation 11,620 Unrecognized effect of accounting change (3,209)
Unrecognized actuarial gains and losses (8,411)
Amount recognized as an asset
29 Income Taxes Deferred income taxes arise from are essentially taxes on current year income that will including income or deductions in the be paid in future years. Under prior rules, deferred company's income tax returns in a taxes are computed using current tax rates even if year different from the year they are these taxes are expected to be higher or lower when reported in the financial statements. However, they are paid in future years. The new rule will deferred taxes are not provided for those timing dif-change that. Also, when tax rates change, like they ferences that are reflected in customer rates. At did under the Tax Reform Act of 1986, the new rule December 31, 1987, the cumulative net amounts of requires an adjustment of deferred taxes. Prior rules timing differences for which deferred taxes have not do not permit it.
been provided were approximately $420 million for This new rule, which must be applied by 1989, is federal purposes and $630 million for state purposes.
not expected to affect the company's profits or net In addition, current tax reductions arising from invest-worth significantly because most tax increases or ment tax credits are deferred and recognized over the reductions are bore by customers. However, deferred useful lives of the related property.
taxes on the balance sheet will increase by a substan In December, the Financial Accounting Standards tial, but not yet quantified, amount and a new regula Board issued a new rule that will make a major tory asset will be reported for the estimated amount change in the way tax expense is computed in future collectible from customers.
years. Deferred taxes shown in the income statement Components of Income Tax Expense (In Thousands of Dollars) 1987 1986 1985 Current federal income tax
$145,679
$ 87,231
$112,340 Current state franchise tax 39,300 28,060 36,166 Total current taxes 184,979 115,291 148,506 Deferred -federal and state taxes Regulatory balancing accounts-net (43,767) 15,935 (14,010)
Construction projects (22,106) 2,703 (19,277)
Tax over book depreciation 38,985 41,564 37,553 Nuclear fuel financing (2,009)
(2,693) 3,211 Capitalized nuclear revenue 626 706 9,104 Call premium on refunded debt (821) 5,862 7,785 State franchise tax (876) 828 (3,678)
Unbilled revenue 7,050 r Other-net (5,451) 5,170 6,150 Total deferred taxes (28,369) 70,075 26,838 Deferred investment tax credits-net 2,161 5,015 17,346 Total income tax expense
$158,771
$190,381
$192,690 Total Tax Expense as Reported in the Statements of Consolidated Income (In Thousands of Dollars) 1987 1986 1985 Operating expenses
$151,021
$185,847
$191,718 Taxes on nonoperating income (7,161) 4,534 972 Cumulative effect of change in accounting principle 14,911 Total
$158,771
$190,381
$192,690 Reconciliation of Statutory Federal Income Tax Rate to Effective Rate (In Thousands of Dollars) 1987 1986 1985 Income before federal income taxes
$326,595
$369,803
$365,013 Statutory federal income tax rate 40.0%
46.0%
46.0%
Construction costs capitalized (1.0)
(2.0)
(5.3)
Depreciation 4.4 3.1 2.9 Allowance for funds used during construction (1)
(1.5)
(0.7)
Other-net (2.6)
(3.2) 1.6 Effective federal income tax rate 39.1%
42.4%
44.5%
Notes to Consolidated Contingencies Concerning San Onofre and the Southwest Powerlink Financial San Onofre Nuclear Generating accounting for income taxes would affect the income Statements Station units 2 and 3 tax rate applicable to the disallowance if the company The California Public Utilities Com-adopts the new rule for 1986.
mission finished evaluating the con struction costs for San Onofre units 2 and 3 in 1987, Southwest Powerlink except as explained below. They disallowed $53 mil-The company's 1986 General Rate Case decision by lion of the company's share of the costs. The dis-the. California Public Utilities Commission ordered allowance results in lower revenues and net income SDG&E to establish a five-year balancing account for over the 30-year life of the plant. It reduced net the difference between the cost of energy received income by $5 million in 1986 and $22 million in over the company's Southwest Powerlink transmission 1987. The annual reduction of net income will decline line and avoided cost.
from $7 million in 1988 to zero over the remaining In June 1986, the commission granted the com 26-year life of the units. The 1987 reduction was so pany's request for a rehearing of this portion of the much larger than future annual amounts will be decision. During the hearings, the CPUCs Division of because it included reductions related to 1983 through Ratepayer Advocates proposed disallowances aggre 1986 revenues.
gating $285 million in connection with power pur In 1988, the company will restate its 1986 financial chases over the transmission line. The Division of statements for the disallowance because of a new rule Ratepayer Advocates also recommended a balancing of the Financial Accounting Standards Board. The account, that would not earn interest, for allowed new rule requires reducing the plant value on the bal-costs in excess of avoided costs.
ance sheet by the amount of the disallowance and The commission could decide to retain its original causes a further reduction of 1986 income. Accord-balancing account mechanism, adopt some or all of ingly, financial statements for the first quarter of 1988 the division's recommendations, adopt a different dis will reflect a reduction of $30 million to $50 million allowance mechanism or uphold the company's posi in 1986 net income and in retained earnings at tion that there should be no disallowance or balancing December 31, 1986. The exact amount depends upon account mechanism. A decision is expected in the two matters. The commission has not yet decided how first half of 1988. Because of the uncertainty concern much of the disallowed costs were AFUDC. The ing the outcome of the rehearing and the nature of the amount of AFUDC affects the income tax benefit process of estimating future power purchases and arising from the disallowance. In addition, the Finan-avoided costs, management cannot predict the ulti cial Accounting Standards Board's new rule on mate outcome of this matter.
Other Contingencies and Commitments Nuclear insurance trustee (see the Consolidated Balance Sheets on page Public liability claims that could arise
- 20) represent unspent proceeds from certain first from a nuclear incident are limited by mortgage bonds.
the Price-Anderson Act to a maximum amount of $720 million for each licensed nuclear Leases facility. The company and the co-owners of the San Nuclear fuel, an office building and a generating facil Onofre units have purchased primary insurance of ity are financed by long-term capital leases. Utility
$160 million for this exposure, the maximum amount plant includes $319 million at December 31, 1987 and available in 1987. The remaining $560 million is
$299 million at December 31, 1986 related to these provided by secondary financial protection required leases. Utility plant-net and long-term debt include by the Nuclear Regulatory Commission. This second-corresponding amounts of $215 million and $232 mil ary coverage provides for loss sharing among utilities lion. Prior to 1987, only a minor amount of these owning nuclear reactors if a costly accident occurs.
leases was accounted for as capital leases.
Under the agreement with the NRC, the company The minimum rental commitments payable in could be assessed retrospective premium adjustments future years under all noncancellable leases are:
of up to $3 million in the event of a nuclear incident involving any of the licensed reactors in the United Capitalized Operating States, if the amount of the loss exceeds $160 million.
(In Millions of Dollars)
The Price-Anderson Act expired in 1987 but, until 1988
$ 41
$11 it is replaced, its limits will remain in effect for the 1989 41 11 company and for other owners of existing nuclear 1990 41 11 facilities. The U.S. House of Representatives has 1991 22 10 passed a bill extending the act for 10 years. A Senate 1992 12 8
proposal to extend the act is still pending. The House Thereafter 144 bill would limit liability claims in the event of a Total future rental commitments
$301
$51 nuclear incident such that the company's maximum retrospective adjustment would increase to $38 mil-Rental payments totaled $54 million in 1987, $45 lion. The act limits the retrospective premium adjust-million in 1986 and $44 million in 1985.
ments to two incidents in any year, whereas the revised law may not have any such limit.
Purchased power contracts In addition to public liability insurance, coverage is The company buys electric power under several long provided for property damage and replacement power term contracts. The contracts expire on various dates costs at San Onofre. Primary property damage cover-between 1988 and 2013.
age is provided for losses of up to $500 million. Addi-At December 31, 1987, the future minimum pay tional decontamination liability and excess property ments under the contracts were:
damage insurance coverage of $895 million at December 31, 1987 is provided. Replacement power insurance provides weekly indemnity payments for up 1988
$ 223 to two years, commencing after a waiting period of 1989 146 26 weeks. These three insurance coverages are pro-1990 107 vided primarily through mutual insurance companies 1991 108 owned by utilities with nuclear facilities. If losses at 1992 111 any of the nuclear facilities covered by the risk-shar-Thereafter 1,334 ing arrangements were to exceed the accumulated T
funds available for these insurance programs, the company could be assessed retrospective premium These payments are fixed charges. The company is adjustments of up to $15 million per year.
required to pay additional amounts for actual deliv eries of energy under the contracts.
Construction Total payments, including energy payments, under Approximately $225 million, excluding nuclear fuel the contracts were $229 million in 1987, $231 million and AFUDC, is planned to be spent for utility plant in 1986 and $158 million in 1985.
construction in 1988. Construction funds held by a
3 2 Responsibility The company is responsible for the financial state-Deloitte Haskins & Sells, are engaged to examine the Report for the ments and other data in this annual report. To meet its company's financial statements in accordance with Financial responsibility for the reliability of the financial state-generally accepted auditing standards for the purpose Statements ments, the company has developed a system of inter-of expressing their opinion as to whether the cor nal accounting controls and engages a firm of pany's financial statements are presented fairly in independent public accountants. The board of direc-accordance with generally accepted accounting prin tors of the company carries out its responsibility for ciples applied on a consistent basis.
the financial statements through its audit committee, The audit committee discusses with the company's composed of directors who are not officers or internal auditors and the independent public accoun employees of the company.
tants the overall scope and specific plans for their Management maintains the system of internal respective audits. The committee also discusses the accounting controls, which it believes is adequate to company's consolidated financial statements and the provide reasonable, but not absolute, assurance that its adequacy of the company's internal controls. The assets are safeguarded, transactions are executed in committee met twice during the fiscal year with the accordance with its objectives and the financial rec-internal auditors and the independent public accoun ords and reports are reliable for preparing the finan-tants, without management present, to discuss the cial statements in accordance with generally accepted results of their examinations, their evaluations of the accounting principles.
company's internal controls, and the overall quality of The concept of reasonable assurance recognizes that the company's financial reporting. The internal audi the cost of a system of internal accounting controls tors and the independent public accountants have full should not exceed the benefits derived and that manage-and free access to the committee throughout the year.
ment makes estimates and judgments of these cost/
Company management has prepared the financial benefit factors. The system of internal accounting con-statements and other data in this annual report. In the trols is supported by an extensive program of internal opinion of the company, the financial statements, audits, selection and training of qualified personnel, which include amounts based on estimates and judg and written policies and procedures.
ments of management, have been prepared in confor The company's independent public accountants, mity with generally accepted accounting principles.
Frank H. Ault Controller Auditors' Deloitte Haskins & Sells Certified Public Accountants 701 B Street, San Diego, California Opinion To the Shareholders and Board of Directors of San Diego Gas & Electric Company:
We have examined the consolidated financial statements of San Diego Gas & Electric Company and its subsidi aries (pages 19 to 31) for the years ended December 31, 1987, 1986 and 1985. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.
In our report dated February 9, 1987, our opinion on the consolidated financial statements was qualified as being subject to the effects of such adjustments, if any, as might have been required had the outcome of the San Onofre matter been known. As discussed in Note 7 to the consolidated financial statements, during 1987 the uncertainty concerning the amounts of construction costs to be included in rate base was resolved. Accord ingly, our present opinion on the 1986 and 1985 financial statements, as presented herein, is different from that expressed in our previous report.
As discussed in Note 7 to the consolidated financial statements, the California Public Utilities Commission is considering matters relating to the cost of energy received over the company's Southwest Powerlink. The out come of these matters is uncertain at this time and could result in the reversal of revenues previously recorded.
In our opinion, subject to the effects of such adjustments, if any, as might have been required to the 1987 and 1986 consolidated financial statements had the outcome of the Southwest Powerlink matter been known, such consolidated financial statements present fairly the financial position of the company and its subsidiaries at December 31, 1987 and 1986 and the results of their operations and the sources of funds for construction for each of the three years in the period ended December 31, 1987, in conformity with generally accepted account ing principles consistently applied during the period except for the change, with which we concur, in 1987 in the method of accounting for unbilled revenues as described in Note 2 to the consolidated financial statements.
gfe,&2ik 1 r
January 22, 1988
Board of Directors 33 The 10-person board of directors consists of nine Ralph R. Ocampo Committees outside directors and the chief executive officer of Dr. Ralph Ocampo, 56, a director since 1983, is a of the Board SDG&E, who serves as its chairman. The directors physician and surgeon. He has been active throughout provide a broad perspective because of their diverse his career in many professional associations and in Audit business, professional and civic backgrounds.
community activities. He is a director of the Mercy This committee selects Hospital and Medical Center, of the San Diego an independent auditor chapter of the American Cancer Society and of the and reviews the overall Thomas A. Page*
San Diego Community Foundation. He served as plan of the audit, finan Thomas A. Page, 54, a director since 1979, has been president of the Hispanic American University Foun-cial statements, audit chairman of the board since 1983. He is president and dation in 1986.
results, scope of internal chief executive officer of SDG&E. He also is the audit procedures and the chairman of the board of Pacific Diversified Capital, Charles R. Scott*
auditors' evaluation of an SDG&E subsidiary. Page is a certified public Charles Scott, 59, a director since 1983, has been internal controls.
accountant and a licensed professional engineer with president, chief executive officer and a director of an extensive management background. He is chair-Intermark, Inc. since 1970. He also is a director of Executive man of the Pacific Coast Gas Association and a mem-the operating companies owned or controlled by Inter-This committee is ber of the board and former chairman of the San mark, including Continental Graphic Corp., Mission empowered to act in Diego Economic Development Corporation.
West Properties, Pier 1 Imports, Ridgewood Proper-place of the full board, ties, the Sunbelt Nursery Group, and the Triton except in certain transac Clair W. Burgener Group, Ltd. He is a director of Pacific Diversified tions for various board Clair Burgener, 66, a director since 1983, is president Capital. Scott has served on the board of many civic, responsibilities that are of Burgener Properties, Inc., a real estate and prop-charitable and industrial organizations. In 1984, Scott reserved for the board.
erty development firm. Earlier, he served 24 years in was a national recipient of the Horatio Alger Award, elected public office. Burgener serves on the boards of one of several awards he has received.
Executive several community service organizations and is a Compensation director of San Diego Trust and Savings Bank, of
- 0. Morris Sievert*
This committee reviews TCS Enterprises and of Blue Shield of California.
Morris Sievert, 66, a director since 1976, was a cor-the salaries and other porate executive officer, primarily in the energy forms of compensation Malin Burnham*
industry, for 30 years until he retired in 1987. He is of company officers and Malin Burnham, 60, a director since 1967, is chair-president of 0. Morris Sievert and Associates, general makes compensation man of John Burnham & Co., a mortgage loan, real business consultants. He serves as a member of the recommendations to estate and insurance firm. He is chairman of the board of directors of the Scripps Memorial Hospital the board.
board of First National Bank in San Diego and is a Foundation and of Pacific Diversified Capital.
director of Businessmen's Assurance Co., of Cubic Finace Corporation, of Gen-Probe, Inc., and of Pacific Diver-Fred C. Stalder This committee plans sified Capital. He also is chairman and a director of Fred Stalder, 67, a member of the board since 1969, and counsels with man Burnham American Properties, Inc., and Burnham was chief executive officer of Central Federal Savings agement concerning the Pacific Properties, Inc. He serves as president of Sail and Loan in San Diego from 1948 until his retirement company's capital America, which is organizing the USAs defense of in 1985. He is a private investor. Stalder has been requirements, proposed the America's Cup.
involved with and has provided leadership to many financing programs and San Diego area civic and cultural organizations for capital risk exposure Daniel W Derbes*
40 years.
analyses and reviews the Daniel Derbes, 57, a director since 1983, has been general investment policy president of Allied-Signal International Inc. and Catherine Fitzgerald Wiggs performance for the Pen executive vice president of Allied-Signal Inc. since Catherine Fitzgerald Wiggs, 54, a director since sion Plan and the Savings the company was formed in 1985. From 1983 to 1985, 1979, is a management consultant in the fields of Plan.
he was president of the Signal Advanced Technology human resources and organizational effectiveness. In Group and executive vice president of The Signal the nine years prior to establishing her own consulting Nominating Companies, Inc. Derbes also is a director of WD-40 business in 1986, she was executive vice president of This committee considers and of Pacific Diversified Capital. He also is involved human resources and a member of the executive com-and recommends nomi with many community organizations.
mittee for The Broadway Stores, Inc., a division of nees to the board, crite Wila.M~ryCarter Hawley Hale Stores, Inc.
ria for board and William D. McElroycomtecmpsin William McElroy, 71, a director since 1979, is a pro-andmembeshi n
fessor of biology and former chancellor of the Univer-deors an.
sity of California at San Diego. He is retiring from the board in April 1988.
- Member o the executive committee
Corporate Profile 34 San Diego Gas & Electric an Diego Gas & Electric is an area has been expanding, most recently eastward investor-owned energy manage-along the international border. The gas customer ment company founded in 1881. It growth rate was 4.5 percent in 1987.
has 4,612 full-time employees in Among the company's major assets: a 20 per its utility operations.
cent interest in three nuclear units at the San The electric operations division purchases, Onofre Nuclear Generating Station in north generates and distributes energy to about one western San Diego County; the Encina and million customers in San Diego County and the South Bay power plants, which can burn either southwestern section of Orange County. The ser-fuel oil or natural gas; the Southwest Powerlink vice area covers 4,100 square miles and has a 500,000-volt transmission line, which runs population of about 2.5 million.
between San Diego and Phoenix; and the natural The systemwide electric customer growth rate gas pipeline system in SDG&E's gas service was 5.3 percent in 1987, among the highest in area. Seven service centers are located regionally the country. The company's northern districts in the service territory.
had the highest growth rates, with two districts SDG&E has two subsidiaries: Pacific Diver hooking up customers at a rate of 9.4 percent sified Capital, an independently operated holding in 1987.
company; and Califia Company, a company used SDG&E's gas operations division purchases for general purposes, such as holding some real and distributes natural gas to more than 625,000 estate. (Additional information on PDC begins customers in San Diego County. The gas service on page 36.)
b T
ORANGE COUNTY gwOra unty ct eeiheu annter a Rainbow Compressor Station SDG&E's electric service area covers all of San Diego County and the southwestern section of s pOrange Counts The gas service area, which is gradually expanding, is Not*Ls Northeast Gshown in color. The Mor nCenter eno gas compressor sta sfe Caitl anUNT in tion is located in Riverside SANpanIEGndCOlifYa County, 35 miles north of c othe San Diego County line.
j.J Scec C eService Center S
D&Eseecrcsevc Diego Contiadyh 0
Ssouthwesternpsection of Services
- arte, w---------h--
MEKO--
grdullXepadigOi
35 Officers Thomas A. Page, 54 Stephen L. Baum, 47 Donald E. Felsinger, 40 James C. Holcombe, 42 Frank H. Ault, 43 Chairman, President and Senior Vice President Vice President-Marketing Vice President-Controller Chief Executive Officer and General Counsel Donald Felsinger was Resource Development Frank Ault was elected Thomas Page was elected Stephen Baum was elected a vice president James Holcombe was controller in May 1986 chairman in 1983. He elected senior vice presi-in 1983 and was elected a vice president after serving as direc has been president and dent in 1987 after serving appointed to his current in 1983 and named to his tor-internal auditing.
chief executive officer as a vice president since position in November current position in April Ault joined SDG&E in since 1981. He joined 1985, when he joined 1986. Felsinger joined 1985. He joined the cor-1969.
SDG&E in 1978 as a SDG&E as vice presi-SDG&E in 1972.
pany in 1967.
senior officer.
dent and general counsel.
Margot A. Kyd, 34 He formerly was senior Ronald K. Fuller, 50 Richard L. Manning, 56 Treasurer Jack E. Thomas, 55 vice president and gen-Vice President-Vice President-Margot Kyd was elected Executive Vice President eral counsel for the Governmental and Public Relations and Chief Operating Officer Power Authority of the Regulatory Services Richard Manning has trserin ap 1986 Jack Thomas was elected State of New York.
Ronald Fuller was elected been vice president-of financial services. Kyd executive vice president vice president of regula-public relations since he joined SDG&E in 1980.
in 1985 and chief oper-Gary D. Cotton, 47 tory services in 1983.
joined SDG&E in 1981 ating officer in 1986, Senior Vice President-Governmental services from the Western Oil &
Delroy M. Richardson, 49 after serving as a group Engineering and Operations was added to the division Gas Association, where Secretary vice president since 1980 Gary Cotton was elected in 1984. He joined the he was manager of public Deiroy Richardson was and a vice president senior vice president in company in 1974.
- affairs, elected secretary in since 1972. He joined 1985 after serving as a SDG&E as an engineer vice president since John E. Hamrick, 61 George A. E Weida, 51 in 1957.
1979. He was appointed Vice President-Vice President to his current position in Administrative Services Human Resources retary since 1983. He November 1986. Cotton John Hamrick was George Weida joined joined SDG&E as an joined SDG&E in 1975.
elected a vice president SDG&E in 1983 as a attorney in 1971.
in 1973 and named to his vice president and was Alton T. Davis, 50 current position in named head of the Senior Vice President-November 1986. He human resources division Customer Services joined the company in in 1984. Previously, he Alton Davis was elected 1971.
was head of human senior vice president in resources for other major 1985 after serving as a R. Lee Haney, 48 U.S. corporations.
group vice president Vice President -Finance since 1981 and a vice and Chief Financial Officer president since 1976. He Lee Haney was elected a was appointed to his cur-vice president in 1983 rent position in Novem-and appointed to his cur ber 1986. Davis joined rent position in April SDG&E in 1968.
1986. He joined SDG&E in 1972.
Corporate Profile 36 Pacific Diversified acific Diversified Capital is marily are electric utilities with coal-fueled gen Capital SDG&E's independently operated erating plants.
holding company subsidiary. In Wahico was founded in 1972. Its manufactur 1986, it began acquiring and ing facility is in Puerto Rico. It has regional developing companies as part of the sales offices in four U.S. cities and a worldwide corporation's strategy to diversify into other busi-network of manufacturers' representatives.
nesses to achieve future earnings growth.
Wahico's systems have been installed in more PDC's own strategic plan limits the types of than 200 plants around the world. At the time of businesses it will consider acquiring to:
its acquisition, it had about $18 million in annual
- companies providing services and products to sales, $30 million in assets, and 100 employees.
the utility industry or its marketplace In 1986, PDC acquired three other companies:
- real estate development opportunities in San Computing Solutions, Inc., of Port Chester, Diego and a few other select locations New York, a computerized mapping software Using these guidelines, PDC acquired four company. It was merged into Integrated Informa companies by the end of 1987. Its most recent tion Systems of San Diego, an existing PDC sub acquisition, Wahlco, Inc., of Santa Ana, Califor-sidiary. The combined company provides services nia, was completed in October 1987. Wahlco is to the utility industry and to municipalities in the leading domestic and international manufac-the United States and several foreign countries.
turer of flue gas conditioning systems, which are
- Mock Resources, Inc., of Irvine, California, used in air pollution control. Its customers pri-PDC's largest revenue producer. It markets and Pai fc Diversified Capital has more than three hun V
dred employees working in a dozen locations.
Wahlco. Inc. has its man ing--facility i in Pu Rufacturing facility in San Juan, Puerto Rico. The ntromaferr company makes flue gas conditioners, which are I
Pu sed in many coal-fueled SL
- n n
power plants for air pollu tion control.
- 0okRsucs
- n.
o rie aiona usdiUi olto oto.Iscsoespi-PCslretrvnepoue.I akt n
S Paii0iesfe aia
distributes natural gas and petroleum products in candidates must have certain characteristics, 37 several western states. It has a transportation especially excellent top management that will subsidiary based in Bakersfield, California and stay with the company after it is acquired. Other regional sales offices around the state.
important criteria that candidates must meet are
- Phase One Development, Inc., a San Diego-good sales and financial performance records, based commercial real estate development com-low debt ratios and a leading position in their pany. It also has projects in Colorado Springs.
own industries.
Pacific Diversified and its subsidiaries had 302 PDC intends to acquire 8 to 12 companies by employees at December 31, 1987.
1996 in order to achieve its earnings goal of gen PDC's strategy has been, and continues to be, erating 25 percent of the corporation's total earn to diversify slowly and deliberatelym Acquisition ings by that year.
c especially Paex c to imneenttatwl staywiththeCmpay Caftrinsaqurdyte Capital Company Richard Korpan, 46 President and Chief Executive Officer Henry N. Huta, 40 Vice President and Chief Financial Officer od achieve 1
/,
v ml Ai pitlslierni icng gouaplmfne Integrated Mock Resources, Inc.
Phase One Wahlco, Inc.
Information Systems Development, Inc.
Company Brian Mock, 41 Robert R. Wahler, 61 President and Steven L. Davis, 44 President C. Christopher Fecher, Chief Executive Officer President 41 John H. McDonald, 55 President and Christopher P Kunzi, 37 G. Eric Gossett, 45 Executive Vice President Chief Executive Officer Executive Vice President Executive Vice President-Operations and Secretary Construction and Finance Thomas E. Anderson, 38 L. Keith McNair, 39 Howard E. Sandler, 46 Vice President and Vice President-Gary Hollenbeck, 38 Executive Vice President General Manager Natural Gas and Executive Vice President-Administration, Assistant Business Development Marketing/Asset Management Secretary and General Charles Kogan, 50 Counsel Vice President L. Craig Smith, 33 James M. Justus, 42 Chief Financial Officer Vice President and Manager Michael J. Shaughnessy, Colorado Springs 36 Joyce 0. Duval, 56 Vice President-Marketing Treasurer and Business Development
0 Shareholder Reference Guide 38" We're providing a very competitive hat makes SDG&E an decline in institutional stock ownership to about rat ofretrn ndattractive investment for 23 percent at the end of 1987 from 25 percent at the rate oae time investors, compared with end of 1986. However, the number of institutions atother utilities?
that held our stock remained steady at about 150.
we continue to We're a financially healthy Their interest in utility stocks is very depend provide a... safe company A significant portion of the industry is ent upon the market in general and upon interest investment."
not able to say that. In addition, our board of di-rates in particular. We're considered by some to rectors has a commitment to maintaining dividend be a bond substitute and interest rates are low so An interview with growth, and our stock yield is at an attractive level.
I would expect that more institutions would buy R. Lee Haney, At the end of 1987, our overall return dropped utility stocks in 1988, particularly the higher Vice President and a bit, and we ended up in the top 27 percent.
quality stocks, of which we are one. We are con Chief Financial Officer While it is going to be more difficult for us to be tinuing to update large institutions that don't hold in the top 25 percent in the future, that continues our stock about our company's results. That to be our goal.
includes Japanese businessmen in New York who The most important thing to investors is the purchase stocks on U.S. exchanges.
return that they are getting from an investment balanced by its relative risk. Well, we're provid-In 1987, you met with many institutional investors ing a very competitive rate of return and at the in Japan. Wy has SDG&E been trying to attract same time we continue Japanese investors?
to provide a relatively We began making presentations to the Japanese safe investment, investors several years ago because Japan has become a capital exporting nation. They can no In last year's annual longer plow back all their earnings into their own report, it was stated that economy We were considering listing our stock the company wanted on the Tokyo exchange, but I'm not convinced to increase the number this is the time for us to do that.
of its institutional shareholders. Were we How many meetings with the financial community able to do so in 1987?
did SDG&E hold in 1987?
No, we weren't. The We held 22 group financial analyst meetings and flight from utilities to nearly 50 other meetings with individuals.
the other stocks in the Sh market, particularly Have we set any new financial goals for 1988?
president and director of Nikko Securities during the bull market No. We are continuing to focus our attention on International. at a meeting in New York.
period, resulted in a our current goals.
Total Annual Return to Shareholders Investor Profile j~
to~mai prvdeareaivl top 25 percent of nvesttment industry.
~
~
~
~
I las year's annualo hg o 5 ecet its ~~~
rpot ita was stated th t
issilmrthndue MSDG&Eth copn wantedr ao.2 o
Standard & Poor's 500 f
nInstitutio 983 1984 1985 1986 987 1983 194 1985 1986 1987
Stock Listing and Trading Information Annual Meeting Information Terminology 39 Common stock: Ticker symbol is SDO. Listed on The annual meeting of shareholders is held on the Allowance for funds New York and Pacific stock exchanges. Newspaper fourth Tuesday in April. In 1988, the meeting is at 11 used during construction listing is SDieGs.
a.m., April 26 in the auditorium of the Electric The net cost of funds used Preferred and preference stocks: Ticker symbol Building, 101 Ash Street, San Diego, California.
to finance construction.
This cost is added to con SDO. Listed on the American and Pacific stock Shareholder Profile struction work in progress exchanges (except for the 4.60% preferred series and and credited to interest the $7.05, $8.25, $9.125 and $15.44 preference There were 72,086 common stock shareholders of expense and other income.
series, which are not listed). Newspaper listing is record and 5,735 preferred and preference stock SDgo.shareholders as of December 31, 1987. There are Book value per share S~o.thousands of other individual shareholders whose The total value of common Transfer Agents and Registrars Information accounts are held by securities dealers and nominees, equity divided by the num ber of shares of common The transfer agent has primary responsibility for Common stock shareholders:
stock outstanding.
stock transfers and the cancellation and issuance of Joint accounts 24,318 Cash flow stock certificates. The agent should be contacted W
2 An i o o h directly about these subjects.
cash a company is able to Me 15,394 generate in order to meet its Common stock transfer agents:
Fiduciaries 9,463 debt payments, to invest in California First Bank Securities dealers, nominees, other 1,051 new equipment and other 8155 Mercury Court assets, and to pay dividends.
Post Office Box 2529Loain Psn Die Caornia2921 United States, except California 36,664 Internal generation San Diego, California 92112 of funds (619)230-4487 California,_except SDG&E service area 21,453 The funds produced by the (Also the registrar of common stock in San Diego)
SDG&E service area Firt Itestae ankof alforiaForeign countries 202 company for plant additions.
First Interstate Bank of Californiaexpressed as a c/o First Interstate Trust Company of New York Shares owned:
percentage of total expendi 2 Broadway, 29th Floor 1-99 shares 14,117 tures for new construction.
New York, New York 10004 100-300 39,867 Megawatt (Also registrar of common stock in New York) 301-500 8,874 One million watts or Preferred and preference stock transfer agents 5
1e69 roughy th mut of and registrar:
1001 or more shares 3,037 eeci ta meets th California First Bank (listed above)
San Diego.
First Interstate Bank (listed above)
(Preference series only except the $8.25 and $9.125 series)
Dividends Per Share Common Stock Price Trend Th:
o:ch anuaeetn ofsehodr shedo h
fourt Tuesday in ApitIh 18,teeetn it1 a1 m. A rc upils26 ins the-auioru f h leti d
10 A S10 Shar End 1983 1984 1985 1986 1987 as 1983 1984 1985 1986 1987
Selected Financial Data 40 At December 31 1987 1986 1985 1984 1983 1982 Current assets*
336.4 299.7 366.2 393.8 267.3 303.9 Current liabilities*
533.7 450.2 404.8 352.2 429.7 443.6 Working capital*
(197.3)
(150.5)
(38.6) 41.6 (162.4)
(139.7)
Working capital ratio
.6
.7
.9 1.1
.6
.7 Long-term debt*
1,204.6 1,193.9 1,208.6 1,277.5 1,275.4 1,007.2 Common shares outstanding 55,872,602 55,847,822 55,822,762 54,063,592 51,693,662 48,266,144 Book value per common share 22.25 21.59 20.65 19.48 18.52 16.94 Price/Earnings ratio 9.1 9.9 8.3 7.6 6.1 5.9 For Year Ended December 31 Capital expenditures*/**
208.8 254.7 257.5 219.9 312.5 271.7 Pretax income/revenue 18.7%
24.7%
22.7%
19.8%
18.7%
15.3%
Return on equity 15.0%
16.0%
16.2%
15.8%
18.2%
17.5%
Effective federal tax rate 39.1%
42.4%
44.5%
38.7%
31.2%
24.0%
Earnings per common share 3.28t $
3.42 3.25 3.01 3.20 2.90 Dividend payout ratio (declared) 76.3%
68.6%
68.1%
68.8%
60.7%
62.4%
Price range of common shares
$37%-$284
$422-$26
$28 -$21 2
$23--$17/
$22-$17
$177/-$11
- In millions of dollars.
- Excluding allowance for funds used during construction.
tincluding $0.32 for cumulative effect of change in accounting principle.
Quarterly Common Stock Data 1987 1986 First Second Third Fourth First Second Third Fourth Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Market price High 37%
35V4 35 33 344 36 42V2 37%5/
Low 34 305/8 312 284 26 313/8 343/8 33 Dividends declared 62.50 62.50 62.50 62.50 560 59.50 59.5 59.50 Financial Return on Equity Dividend Payout Ratio Sham rdiided by aerag o p common equity. The com -
12, pany's authorized rate Of return was deceased aai by the California 9
Public Utilities Comnmis sion to 13.9 percent in 1987 and to 12.75 percent 3
1 1
in 1988.
1983 1984 1985 1986 1987 1983 1984 1985 1986 1987
41 Compound Annual Compound Annual Growth Rate Growth Rate 5 Years 10 Years
(%)
1981 1980 1979 1978 1977
(%)
2.1 302.4 308.8 218.9 180.2 171.3 7.0 3.8 453.4 382.3 307.0 216.0 224.5 9.0 (151.0)
(73.5)
(88.1)
(35.8)
(53.2)
.7
.8
.7
.8
.8 3.6 925.0 918.5 813.8 610.5 602.9 7.2 3.0 41,499,034 36,469,483 31,188,237 27,592,809 22,648,992 9.4 5.6 16.20 16.06 17.35 17.41 17.36 2.5 5.3 11.6 7.3 7.3 6.7 (5.1) 216.3 188.6 339.4 206.3 214.8 (0.3) 10.2%
4.5%
10.0%
11.6%
11.0%
14.5%
6.0%
10.4%
11.4%
13.4%
4.7%
(13.1)%
4.3%
3.9%
(2.3)%
2.5 2.34 1.01 1.80 2.02 2.32 3.5 71.1%
156.8%
83.1%
71.5%
55.9%
$14-$Il
$151/-$10
$157/-$123
$163/-$144
$16-$133/
Other Information Available Publications Executive Offices Shareholders who wish to receive more written infor-The Corporate Profile and Statistical Report for San Diego Gas & Electric mation about SDG&E should write to: Office of the 1977-1987 (contains 11 years of financial data and 101 Ash Street Secretary, San Diego Gas & Electric, Post Office Box information on California regulation).
Post Office Box 1831 1831, San Diego, California 92112, or call:
Form 10-K (the annual report to the Securities and San Diego, California (619) 696-2020.
Exchange Commission).
92112 Shareholder Information Handbook (answers many (619)696-2000 Common Stock Investment Plan common questions asked by shareholders).
A prospectus explains how SDG&E common stock shareholders can purchase additional shares, without toard rtr e
p t
a paying brokerage fees, by investing all or a portion of their quarterly dividends on directly held shares. The For Information by Phone:
plan also allows optional cash investments of as little Shareholder inquiries about stock holdings:
as $25 per investment to a maximum of $5,000 per From California (800)826-5942 calendar quarter.
From outside California (800)243-5454 The Share Forum Recorded corporate news and stock update:
Membership information for The Share Forum, an From California (800)443-SDGE organization of SDG&E shareholders, is available.
From outside California (800)521-NEWS Members receive additional news about the company Financial community inquiries:
through meetings with management, tours of utility Jennifer Lewis, Manager facilities and periodic mailings. There are nearly Investor Relations (619)696-4487 10,000 members.
Utility customer inquiries on Annual Report general energy subjects:
(619)239-SDGE Inquiries about this annual report should be directed Utility customer inquiries on specific bill-or service-The 197 nal rot o to: Lynn Taylor, Investor Communications, Post Office related subjects: See the number at the bottom of your shareholders is 80 Box 1831, San Diego, California 92112.
SDG&E bill.
cents per copy
San Diego Gas & Electric Post Office Box 1831 San Diego, California 92112