ML13331B453

1988 Annual Rept for San Diego Gas & Electric

ML13331B453
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Site:	San Onofre
Issue date:	12/31/1988
From:	Page T SAN DIEGO GAS & ELECTRIC CO.
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1988 HIGHLIGHTS 3Ap21.

"Now You're One In A Million!" was the celebration theme as SDG&E added its one millionth electric customer to the system. The company now connects more than 100 new customers each day. In ceremonies held throughout the company's service area, one home in each of SDG&E's seven service districts was chosen as an honorary one millionth customer and commem orative plaques were affixed to their electric meters, marking the occasion.

ESeptember 29.

Ending 2

years of effort on SDG&E's part and many months of nego tiations, the U.S. Navy, the com pany's largest customer, signed an h November 30.

SDG&E entered into an agreement agreement to continue to receive its with SCEcorp and its Southern California Edison sub-electricity from SDG&E for at least 10 sidiary providing for the merger of SDG&E into Edison.

years, abandoning plans to cogenerate its own power. Under Under the terms of the agreement, each share of the agreement, the Navy will save $1.25 million in the first SDG&E common stock will be converted into 1.3 shares year, and all other customers will avoid the higher costs that of te cmmo stok o SCcorp Inaddtion eah sare would have been necessary had the Navy left the system.

(In Cents periKwhrn15 of the common tockrof 2C.c"pNoInYadditionneach sharelLwer!fuelscost of SDG&E'sepreferred andepreferencestockewillsbeocon-irigorouseinterna verted into one share of SCEcorp preferred and prefer-cst eots ctha tn g 10 efusors eahdy7nceeoishl ence stock. The SCEcorp preferred and preference stock and a restructuring will have higher dividend rates than current rates on theh oraiv plaque were afixdtothi stock, while liquidation values and redemption prices essential elements will remain essentially the same.

in the successful Regulatory approvals are now required by the Califor-efforts to match the nia Public Utilities Commission and the Federal Energy annual savings the Regulatory Commission, and approval by the share-Navy estimates it holders of both SDG&E and SCEcorp is also required.

would have real ized by building a cogeneration system.

AVERAGE ELECTRIC PRICES December 19.

In an age when prices almost never go down, a utility company asking for a rate decrease was history in the making. At the request of SDG&E, the Califor nia Public Utilities Commission approved a reduction of $134 million in customer electric rates beginning January 1, 1989.

This decision by the CPUC was remarkable for three reasons:

1) It marked the first time in 25 years a major California util i has asked for a general rate decrease; 2) The reduced rate structure gives San Diego Gas & Electric the lowest electric rates for all classes of customer since 1981; and 3) The rate cut allowed the company to meet an important goal and fulfill a pledge to customers-the average monthly residential 85 8 87 8

89gas and electric bill was brought below $60, from $61.77 to p

l$58.86amonth.

MERGER TIMELINE CONTENTS EXPANDED HORIZONS Chairman Thomas A. Page discusses the proposed merger between Southern California Edison and SDG&E PAGE 2 Residential customers benefit from a 7 percent electric rate decrease PAGE 4 Signed agreement with the U.S.

Navy was a great achievement PAGE 5 SDG&E contributes more than

$1.2 million to community groups PAGE 6 Employees are rewarded for productivity increases PAGE 7 San Onofre Nuclear Generating Station remained one of the highest performing nuclear power plants PAGE 8 Pacific Diversified Capital's strategy continues PAGE 9 Financial Review PAGE 11 Responsibility Report for the Financial Statements PAGE 15 Auditors' Report PAGE 16 Financial Statements PAGE 17 Notes to the Financial Statements PAGE 24 Corporate Profile San Diego Gas & Electric PAGE 30 Officers PAGE 31 Corporate Profile Pacific Diversified Capital PAGE 32 Officers PAGE 32 Board of Directors PAGE 33 Shareholder Reference Guide PAGE 34 Company Description San Diego Gas & Electric is an energy management company. It operates a gas and electric utility that serves more than 2.5 million people in Southern California.

Through its subsidiary, Pacific Diversified Capital, it owns four companies in other industries.

1

CHAIRMAN'S LETTER

Dear Shareholder:

SCEcorp common stock for each of their SDG&E shares.

Sometimes things that seem to be going wrong turn out The offer was contingent on our dropping the Tucson Elec right. Confusing? Then you will have an appreciation for tric merger effort.

what your company has gone through this past year. We In mid-August, SCEcorp increased its exchange ratio to started with our proposal to merge with Tucson Electric 1.2 SCEcorp shares for each SDG&E share. The board Power and ended with an offer from SCEcorp to merge.

rejected this offer. While we believed that the SCEcorp offer The experiences of 1988 make us realize that we don't represented a potential short-term benefit to SDG&E's com always have complete control over our destiny. But, as it mon shareholders, the long-term benefits expected from our turns out, what happened to SDG&E in 1988 was no continuing to pursue our own strategy, including the merger accident.

with Tucson, would outweigh any short-term gain. Two For a number of years we have held the conviction that the weeks later, SCEcorp again increased its offer from 1.2 most successful utility companies in the 1990s will be large, shares to 1.225 shares, but we responded on September 1 by regional firms that have access to long-distance transmission announcing the board's unanimous decision to proceed with lines. They will be able to buy, produce and sell energy from the Tucson merger.

a wide range of sources. They will be companies that can However, on November 3, we agreed to terminate the pro manage growth, and be low-cost producers through posed merger with Tucson because of difficulties we had in improved management of their assets.

agreeing on a joint approach to defeating SCEcorp's efforts This conviction was outlined to you last year in the pub-to block the merger. We also anticipated SCEcorp's efforts lication TOWARD 2000/Our Strategies, when we described would significantly complicate the regulatory processes.

our plan for the future: "We plan to uncover new service and Then, in late November, SCEcorp increased its offer to sales opportunities... and enter new energy markets."

1.3 shares for each SDG&E common share. The board As we entered 1988, it seemed to the company's board of needed to make an extremely difficult decision in an emo directors and senior management that it was time to take tionally charged atmosphere. On November 30, the board action. A merger with Tucson Electric Power Company, we voted 6-2, with one director absent, to approve the SCEcorp believed, would give powerful impetus to our efforts to meet offer. We signed a merger agreement and the two directors the energy management challenges of the 1990s. The merger voting against the merger resigned from the board.

agreement with Tucson, announced in June, represented a Here is how we view the consequences of the proposed logical extension of SDG&E's philosophy-to remain an merger for each group of individuals most directly affected:

aggressive leader in the evolution of the utility industry, for Shareholders. Holders of SDG&E common stock will the benefit of our shareholders and customers alike.

receive 1.3 shares of SCEcorp common stock for each of Then, in late July, we received a letter from SCEcorp, par-their SDG&E shares. Holders of SDG&E preferred and ent company of Southern California Edison, offering to preference stock will receive one share of SCEcorp pre acquire the stock of SDG&E and merge our company into ferred or preference stock for each share they hold. The the Edison system. Under their initial offer, shareholders of SCEcorp preferred and preference stock will have higher SDG&E common stock would have received 1.15 shares of dividend rates than current rates on the stock, while liquida tion values and redemption prices will FINANCIAL HIGHLIGHTS remain substantially the same.

Customers. The combined SDG&E/

S(In Edison entity is estimated to be able to Percent produce a savings of at least $100 million 1988 1987 Change in operating costs and a probable $350 Operating revenues

$2,076,087

$1,904,228

+9.0 million decrease in capital costs. These Operating expenses

$1,803,860

$1,642,449

+9.8 savings will be defined more precisely in Net income (before preferred our regulatory presentations.

dividend requirements)

$ 189,365

$ 196,803

-3.8 San Diego Community. The com Earnings applicable to common shares

$ 177,649

$ 183,058

-3.0 munity has received a pledge from Edi Average common shares outstanding son to maintain SDG&E's charitable (thousands) 55,875 55,849 contributions and community support at Common stock shareholders current levels for at least five years after (at December 31) 69,873 72,086

-3.1 the merger, with specific increases Earnings per common share 3.18 3.28

-3.0 spelled out for the first two years. In Dividends declared per common share 2.60 2.50

+4.0 addition, purchasing relationships will be maintained with local businesses, assum Retail energy sales ectr(ilenryslos okioathus1271.

+67 ing they maintain their availability, com Electric (billions of kilowatt 583

.2 petitive pricing and quality. The name Gas millonsof terms 58 554

+ 5 "San Diego Gas & Electric Company" 2

received by SDG&E shareholders, the board's reasons for approving the merger, our recommendations regarding the merger, and other important information. Shareholders are urged to read the Joint Proxy Statement and Prospectus carefully.

Almost lost in the news about the mergers is the fact that SDG&E had another good year from a financial and operat ing standpoint. Revenues rose 9 percent, from $1.9 billion in 1987 to almost $2.1 billion last year. Earnings were down 3 percent, from $3.28 to $3.18 per share. SDG&E's autho rized rate of return for 1988 was lowered by the California Public Utilities Commission to 12.75 percent, down from 13.9 percent in 1987, making it increasingly difficult for the company to show earnings growth. However, we were able to increase the dividend for the twelfth consecutive year.

Last year, the dividend was raised 4 percent, from $2.50 to

$2.60 per share.

Looking ahead, we believe the merger will take more than a year to complete. From our standpoint, we will use 1989, as we did 1988, to position the company for a swift and effi cient entry into a merged system. The company currently is well-positioned to succeed in this effort:

will continue to be used for at least two years following the

• We have managed record growth in the 1980s while merger. SCEcorp also has agreed to operate an electric and reducing our employee-to-customer ratio and controlling gas division covering at least San Diego County that will be costs. On this score we are a leader, and expect Edison to headquartered in San Diego. The San Diego Division will adopt many of the approaches we have used successfully.

be the merged company's largest division.

• SDG&E has an exceptional work force, well-trained, We will have four directors on the SCEcorp and Edison experienced and motivated.

boards. I will become the vice chairman of SCEcorp and

• Our customer acceptance is very high and we have a num president of the San Diego Division. We will have fair repre-ber of programs in place that will improve service further.

sentation on committees of the boards for at least five years.

• The employees of SDG&E have deep roots in San Diego We will be well represented in SCEcorp and Edison deci-and we are dedicated to seeing that our customers and the sions concerning San Diego.

community are treated fairly and equitably during the mer The merger agreement is a legal road map. Many other ger process and into the future.

conditions and details remain to be concluded that could The proposed merger between San Diego Gas & Electric provide additional benefits to the San Diego community.

and Southern California Edison creates opportunities. For Employees. Employees will have career opportunities investors, customers, our communities, and employees, the within a much larger organization. Edison is well-managed merger will allow us to expand our horizons on the Pacific and has been noted as one of the top 100 companies to work Rim and to shape a new and better future.

for in the United States.

To achieve needed efficiencies, we have estimated a pos sible staff reduction of 1,000 people, which will come from both SDG&E and Edison. The current annual attrition of both companies already exceeds 1,000 people, so we should be able to accomplish this goal with little disruption.

In addition, SCEcorp has agreed that during the two-year period following the merger any reductions in the non-union utility work force of the merged companies will be made on a fair and equitable basis. Decisions will be made on the Thomas A. Page basis of the circumstances, the objectives to be achieved at Chairman, President and the time, and previous work history, job experience and ChiefExecutive Officer qualifications, without regard to whether the person has worked for SCEcorp, Edison or SDG&E.

The Joint Proxy Statement and Prospectus relating to March 3, 1989 SDG&E's April 1989 Annual Meeting describes the terms and conditions of the merger, the SCEcorp stock to be 3

RESIDENTIAL CUSTOMERS E San Diego is the fastest-growing major city in California.

Over the last five years, SDG&E has proven its ability to manage rapid growth, adding new electric customers at a 5.3 percent average annual rate. SDG&E's residential customer growth rate was a healthy 4.3 percent in 1988.

But W el Ieat You Like The company's service territory in southern Orange County and northern San Diego County is growing extremely fast, the O n yO n at annual rates over 9 percent and 7 percent, respectively.

Residential customers benefited from a 7 percent electric rate decrease on January 1, 1989. As the result of the first general rate decrease request by a major California utility company in 25 years, the average customer saw a drop of $2.91 in his or her monthly electric bill. With this reduction, the company has fulfilled its pledge to bring the average monthly residential utility bill below $60.00, as the bill of a typical user of 400 kilowatt-hours of electricity and 40 therms of gas dropped to $58.86. Since 1984, SDG&E's cost-cutting strategies have lowered residential customers' average rates by 19 percent.

SDG&E's one millionth electric customer was the major milestone signifying company growth. Celebra tions were held throughout SDG&E's service territory in April to commemorate the occasion and seven homes, one in 5DG&E is one of the fastest growing As our customer you deserve our best eac ofthecomanys svensericeares, eredesgnaedutilities in the country, last year adding and we work hard for you every day. To each of the company's seven service areas, were designatedpower on when you need it. To recipients of "one millionth customer" plaques and lamps.

connected oar millionth electric custo-hav services available that help you.

met. That's a big milestone and were And to be a company you can count on.

Employees wore "Now you're one in a million" lapel but-proud to have achieved it, As we grow, we remain committed to tons in honor of the event, and ads proclaiming "Now We know as some companies grow, two things. Continuing to lower raes and they seem more concerned about getting always treating you right.

You're One in a Million. But We'll Treat You Like the Only bigger than with treating you right. To One" were placed in local newspapers.

them, you're more imporant as a number SO than as a person.

.V S_

&E An independent national survey showed that SDG&E At SDG&E we don' think that way.

customers' bills are among the lowest in the nation. San Diego ranked in the bottom 11 percent of the cities surveyed, listed number 228 out of 256 metropolitan areas. Mild Advertisements in local newspapers were part of the festivities weather, small homes and aggressive energy management marking the addition of SDG&E's one millionth electric programs initiated by the company have made expenditures customer in April.

on utilities a smaller component of living costs for San Diegans than for people living almost anywhere else.

Two peak demand records were set last year.

ELECTRIC AND GAS CUSTOMERS Customers required an all-time high of 2,777 megawatts of electricity from SDG&E on September 6, at the end of a long, hot Labor Day weekend that witnessed the second-Fort -three thousand 1000 highest temperature ever recorded in San Diego County. Gas electric customers and customers set a record on the crisp winter morning of Janu-21,000 natural gas cusomes au-custotners wtere added in 800 ary 28, when they warmed up with 22.6 million cubic feet 1988. The rate of addi of natural gas within an hour. In both cases, the company tions continues above the 600 experienced no problems in meeting these needs.

national average.

400 200 nE ceoumilotelectric cso W

sGas 84 85 86 87 88 4

COMMERCIAL AND INDUSTRIAL CUSTOMERS E A serious challenge to SDG&E has been a pricing AVERAGE COMMERCIALINDUSTRIAL ELECTRIC RATE environment in which large customers have left or threat ened to leave the electric system to generate their own power. Historically, SDG&E has had rates that subsidized The California Public residential customers at the expense of commercial and Utilities Commission's industrial users.

permission to give a By early 1987, SDG&E had lost nearly 8 percent of its derae o te commercial and industrial electric market share as large customers recognizes customers sought alternative, lower-cost energy sources, pri-that they cost less to marily through cogeneration. Fortunately, lower fuel prices serve than residential occurred at the same time SDG&E was implementing strict customers.

cost controls, and at the end of 1987 the CPUC approved a rate structure based more closely on the costs of serving each class of customer. Last year was, without a doubt, a success in retaining commercial customers.

The rate reductions that took effect on January 1, 84 85 86 87 88 1989, were designed to support the company's continuing will buy and install small, packaged cogeneration units each program to bring greater equity into the rate system and year for the next three years. The packages will be located at reduce the amount by which commercial customers subsi-the facilities of large commercial and industrial customers dize residential customers. This rate restructuring was begun and become a part of the SDG&E system, supplying small in 1987, as rates were reduced for all customers but reduced increments of energy for use by all customers. The customer by a larger proportion for the commercial and the industrial on whose property the unit sits will receive the use of low sectors. While residential customers received a 7 percent cost heat produced by the units for their space heating and reduction in electric rates with the new rate decreases, the manufacturing processes. SDG&E is believed to be the first rates of commercial and industrial customers were cut 10.5 utility in the United States to use this comprehensive and percent.

integrated approach to meeting the thermal energy needs of A signed agreement with the U.S. Navy was a great its biggest customers.

achievement. The Navy agreed to abandon its plan to leave A new "Commercial Load Controller Program" began SDG&E's electric system and build cogeneration plants to in 1986, offering very large customers lower rates in serve its four main bases in San Diego. The 10-year agree-exchange for agreeing to reduce their energy use greatly dur ment, with options that could extend up to 30 years, provides ing periods of intense peak demand on the SDG&E system.

that the Navy will pay the same rates as other customers in Thirteen companies signed up for this program in 1988 and its class for the energy it uses, but will receive a 5 percent initial inquiries were quite impressive. By reducing their savings on costs not related directly to fuel consumption.

electricity use during peak times, these customers are help These are primarily overhead costs associated with the oper-ing to reduce the need to build additional power generating ation of power plants, substations and transmission lines.

facilities.

While the Navy's savings-about $1.25 million in the first year-will be borne by all other customers, the agreement avoids the much larger increases other users would have experienced had the Navy become independent of the com pany. As its largest customer, the Navy accounts for 7 per cent of the power supplied by SDG&E.

The company has worked closely with its large customers to reduce electricity costs through special rates and the installation of more energy-efficient equipment. As a result of these and many other actions, small-and medium-size commercial customers have seen their rates drop by 34 per cent from 1985 to 1989. Large industrial customers have enjoyed an exceptional 45 percent rate decrease in the same period.

SDG&E will begin to offer cogeneration units to qualified customers in 1989, and will offer to purchase and service the units of some customers who left the system in the early 1980s to install their own cogeneration systems.

Under an agreement signed with Tecogen, Inc., the leading In 1989, the company began to purchase and operate manufacturer of packaged cogeneration systems, SDG&E cogeneration units for commercial customers.

5

THE COMMUNITY

• Throughout its history, SDG&E has been one of the Several new corporate community programs were most consistent and generous contributors to the com-begun during 1988. SDG&E cosponsored "Operation munity of San Diego. Last year alone, more than $1.2 mil-Opportunity, " a one-day trade fair designed to help minor lion was given by SDG&E to local organizations.

ity businesses better understand how to solicit and win con The diversity of these organizations reflects the needs of tracts from large corporations. The event was held during the city itself, from the United Way, the Boys and Girls National Minority Business Week.

Clubs, and the La Jolla Cancer Research Institute to the Old Another new program, sponsored in cooperation with the Globe Theatre, major universities and the San Diego Zoo.

San Diego Police Department, helped discourage fifth-and In all, 500 health and human care, cultural, civic and educa-sixth-graders from taking drugs. Underwritten by SDG&E, tional groups received direct monetary assistance from the the week-long program featured the internationally company in 1988.

acclaimed motivational group "Up With People."

Southern California Edison has pledged in the merger In the spring, SDG&E sponsored a free symphony con agreement to maintain support of these activities in San cert in the predominantly minority neighborhood of South Diego. Included in this pledge will be the creation of two east San Diego. For the sixth year in a row, the company full college scholarships for the children of San Diego-area also sponsored the International History Fair, a cross-border customers. Edison's record as a good corporate citizen in the exposition presented in San Diego and its neighboring city 800 communities it serves is equal to SDG&E's. Over the of Tijuana, Mexico. Both programs were part of the com past six years, Edison's overall corporate support for com-pany's continuing effort to expand culture and the arts munity groups has increased an average of 14 percent each beyond their traditional audiences.

year.

Public safety is one of SDG&E's main priorities.

SDG&E's employees participate in the community Throughout the year, the company offered demonstrations to enrichment process through the Contrib Club, a volun-the media on how to avoid power-related accidents and how tary organization that raised $700,000 last year from to operate heating and electrical equipment properly. During employees and donated thousands of hours to community the year, the company held briefings on gas furnace safety, activities. Many other thousands of hours, not related to the dangers of attempting to retrieve kites and metallic bal company sponsorships, are donated by employees to the loons from overhead wires, preparations for possible winter religious, sports, neighborhood and youth organizations to storm damage and power outages, holiday lighting safety which they and their families belong. SDG&E encourages and other subjects.

its employees to be involved in this work.

The company continues to make investments to replace overhead utility lines with underground ones.

SDG&E paid approximately $13 million last year for such conversion projects. A typical $700,000 project undertaken in 1988, for example, buried lines along an ocean-front high way in south Orange County. Not only are underground lines less susceptible to damage by the elements, they help pre serve the natural beauty of the Southern California coast.

1988 CONTRIBUTIONS 54% Health and Human Care 22% Education 14%

Civic and Community 8% Culture 2% Other SDG&E contributed over $50,000 in money and services to the Logan Heights Family Health Center in 1988, helping to provide much-needed health care service to the predominantly Hispanic community.

6

EMPLOYEES

• The hard work, skills and creativity of SDG&E's 4,400 Employee safety is one of the company's most impor employees have built the company into one of the best-run tant responsibilities. In fact, the number of total accidents utilities in America.

declined 20 percent in 1988 and continues to remain below SDG&E has one of the highest customer-to-employee the industry average. Safety is expected to remain one of the ratios in the industry, a tribute to the efficiency, productiv-highest priorities once the merger is completed.

ity and training of its employees. This ratio was 350-to-1 in 1987 and climbed to 379-to-1 in 1988, an 8.3 percent increase that exceeded the company's most optimistic projections.

Since the initiation of the Performance Improvement Program 2V2 years ago, the SDG&E work force has been reduced by 557 employees, or 11.2 percent, as the electric customer base has risen by 12.5 percent. The great majority of these reductions was accomplished through normal attri tion, retirement and reassignment. Through job restructur ing, the cooperation of union management, new technology, and exceptional motivation on the part of employees, the level of service to customers has remained extremely high.

Employees are rewarded for their productivity increases through the Performance Improvement Pro gram. The initial phase of this program, The 10% Solution, was started in 1986. Employees whose ideas for cost savings and efficiency enhancements are accepted by the company receive 10% of the first year's anticipated savings in the form of a bonus. Suggestions that will save customers $4 million have been approved since the program began, and individual employee awards have ranged as high as $25,000.

A second dimension to the Performance Improvement Program is Gain Sharing, which was introduced in 1988.

Nearly all employees received a $1,015 Gain Sharing award for meeting three goals in 1988:

• Reducing the operating and maintenance expenses.

• Exceeding the customer service satisfaction goal.

• Meeting the capital cost budget.

Combined, The 10% Solution and Gain Sharing are achieving phenomenal reductions in costs and increases in A modem Skills Training Center for gas and electric line productivity that lead directly to lower costs for customers.

workers was completed in 1988.

A vivid demonstration of employee dedication was the company's response to a severe wind storm in January 1988. One of the worst in 20 years, the storm caused more than $1 million in damage to SDG&E's distribution system.

CUSTOMERS SERVED PER EMPLOYEE More than 400,000 customers suffered power losses. During the storm and the immediate follow-up period, there were more than 100 crews and 700 employees in the field making SDG&E has successfully repairs and restoring power, many working 24-hour shifts.

reduced its workforce Over a three-day period, the company responded to despite an above-average 48,000 customer calls.

growth in number of A new Skills Training Center for line workers opened in May. The center has centralized and improved the educa tion and training process for these highly-skilled specialists.

Included in the $1.5 million facility is a network of under ground electric lines that can be programmed to simulate an assortment of difficult problems. Electric linemen and gas line workers now have a state-of-the-art facility in which they receive some of the most rigorous and comprehensive training in the nation.

84 85 86 87 88 7

FACILITIES The nuclear industry nationally averages 2.4 automatic reactor shutdowns per unit every year. During 1988, San Onofre did not experience any such shutdowns in any of its three units.

The Encina and South Bay power plants, which can burn either fuel oil or natural gas, operated at 90.3 percent availability in 1988 and together produced 26 percent of Scustomer electrical needs. The forced outage rate at the two plants was only 1.3 percent, one-half of the previous year's rate.

The company achieved a record in selling electricity out side its system. Compared to 576,000 megawatt-hours sold in 1987, sales of electricity to other utilities climbed to 1.

million megawatt-hours last year as record heat and drought in the West dramatically escalated demand. Outside sales provide added revenues and spread SDG&E's costs over a higher level of production.

The Southwest Powerlink is a 500,000-volt transmis sion line extending into Arizona. SDG&E purchased 50 per cent of its energy requirements in 1988, of which three fourths was delivered over the power line. A small amount was delivered over the Pacific Intertie from the Pacific Northwest.

The moder $6 million South Bay Service Center, one of The Heber geothermal plant was a research and SDG&E's fully consolidated district office and operating development project funded by the U.S. Department of centers, was completed in August.

Energy, the Electric Power Research Institute, and other pri yvate and public organizations, including a 31 percent share held by SDG&E. While successfully providing energy to the company's system when it was operating, the plant's costs of One of SDG&E's many strengths is the ability to supply production were too high compared to current alternatives.

customers power from a diverse number of sources-oil, The plant was closed and put up for sale in 1987. The com gas, nuclear power, and purchased power. This diversity pany continues to seek a buyer and will receive 31 percent of protects customers from fluctuations in the cost or the the proceeds from the sale, which customers will receive.

performance of any one energy source, and allows The plant demonstrated that a specific technology could be the company to produce and purchase power from the used in the event of another oil embargo or other serious fuel most economical sources.

supply problem.

The San Onofre Nuclear Generating Station, jointly owned by Edison and SDG&E, remained one of the highest performing nuclear power plants in the U.S. in 1988. The three units at San Onofre are using fuel that costs the equiv alent of oil at $6 per barrel. They operated at very high rates ENERGY SOURCES AVAILABLE FOR SALE of capacity again last year, and were able to meet 22 percent of SDG&E's total electrical requirement.

There are two measures of dependable performance at Changes in relative San Onofre of which the company is particularly proud:

prices and some seasonal 80

• Overall availbilityfwass74eprcentewellrahedtofithe1988taimentsiof natura industry average of 64 percent. The fstar" of the three-unit gas caused changes in the ra elaiveraed oerhe Paii6neri0rmth aii system for the second consecutive year was Unit 2, which orethe pri-198 operated at 95 percent of capacity and was third among all U.S. nuclear units in terms of electrical energy production.

40 Unit 3's third fuel cycle was completed in July; its average

• ~~~~~

~o p n ' systeml whenbiit its was operating thel plant' cost ofutil e t f aua capacity factor was 80.6 percent. This exceeds the 80 per-20 cent upper limit of performance standards set by the Califor-p Purchased Power-net nia Public Utilities Commission. As a consequence of this 3

Fuel Oil excellent result, SDG&E anticipates receiving an award w

Natural Gas U Nuclear Fuel from the CPUC of $130,000.

84 85 86 87 88 8

PACIFIC DIVERSIFIED CAPITAL

• Pacific Diversified Capital's strategy continues to be one quickly for a start-up, and the company approached the of diversification into unregulated, utility-related businesses break-even point at the end of 1988. Mapping contracts with that ultimately can supplement earnings from SDG&E's reg-the City of San Diego and municipalities in other parts of ulated energy management business.

the country and overseas contributed to a $1.5 million back In only its second full year of existence, Pacific Diver-log at year-end that should make the company profitable in sified Capital again was profitable, showing improvement 1989. IIS also has signed software development contracts over last year. While PDC's profit improvement was modest, with IBM Corporation that will allow the company to with gains at Wahlco and Mock Resources offset by losses advance its product line development rapidly.

in real estate, many actions were taken in 1988 to set the Phase One Development, Inc., PDC's real estate stage for increasing profitability in the future.

development subsidiary, continued to suffer from the eco Wahlco, Inc., acquired in 1987, was PDC's earnings nomic weakness of Colorado Springs, one of the company's leader last year. The company manufactures flue gas condi-two major investment markets. The area has been overbuilt tioning systems that are sold to electric utilities for air pollu-in anticipation of potential government contracts that have tion control, primarily for use on coal-fired generating yet to materialize. Leasing activity on PDC's projects picked plants. Several new orders during 1988 brought Wahlco's up during 1988 in spite of the competition's often offering backlog to better than $16 million at the end of the year.

lease terms that are economically unacceptable to Phase Mock Resources, Inc. markets and distributes fuel oil One. The company has been working closely with lenders in and natural gas in several western states. The company Colorado Springs to restructure its portfolio to improve the increased profits again in 1988. Mock increased its par-probability of long-term success and preserve capital for ticipation in the natural gas business during the year to help investment in other areas.

balance the down cycles in the fuel oil side of the business Phase One's successes in 1988 were achieved in San that occur when oil prices rise and customers shift from oil Diego. The award-winning Chesapeake Park office complex to gas. Although Mock was successful in securing both sup-was sold to a trust fund for $13.35 million, and the Belmont plies and customers, the company relies on third-party Park ocean-front mall and recreation area was completed pipelines to transport its gas and securing gas transmission and opened. Phase One currently is negotiating to sell the was a frequent problem during the year. Mock continues to rights to manage the restored historic property. It is also in be run by managers who have exceptional experience in the process of selling other properties.

energy-supplies marketing.

Phase One's results should improve in 1989 as the proper Integrated Information Systems Company, a ties in Colorado Springs are repositioned and leasing and computerized-mapping firm started and built by PDC, has sales continue strong in the dynamic San Diego real estate continued to grow as the market for its new software market.

capabilities has expanded. IIS's revenues have grown PDC's Wahlco, Inc. subsidiary is a world leader in air pollution control technology.

9

SIX-YEAR

SUMMARY

(In Millions of'Dollars Eccep~t Per Share Amounts)

For the Years Ended December 31 1988 1987 1986 1985 1984 1983 Operating revenues

$2,076.1

$1,904.2

$1,634.2

$1,738.7

$1,620.7

$1,530.2 Operating income 272.2 261.8 282.4 287.9 251.6 174.2 Income before cumulative effect of change in accounting principle 189.4 179.1 167.3 202.7 183.5 187.4 Net income (before preferred dividend requirements) 189.4 196.8 167.3 202.7 183.5 187.4 Earnings per common share before cumulative effect of change in accounting principle 3.18 2.96 2.59 3.25 3.01 3.20 Earnings per common share 3.18 3.28 2.59 3.25 3.01 3.20 Dividends declared per common share 2.60 2.50 2.345 2.205 2.065 1.925 Cash provided by operations 265.4 412.4 410.4 417.3 376.9 358.4 Additions to utility plant (excluding allowance for funds used during construction) 196.4 189.4 251.2 246.4 218.8 282.8 At December 31 Total assets 3,532.7 3,551.5 3,409.2 3,332.6 3,197.6 3,082.5 Long-term debt and preferred stock subject to mandatory redemption (excludes current portion) 1,357.0 1,388.4 1,333.2 1,354.1 1,391.0 1,338.9 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)

S(In Thousands Evcept Per Share Amounts)

Quarter Ended March 31 June 30 September 30 December 31 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 1988 Operating revenues

$517,063

$494,409

$538,700

$525,915 Operating expenses 446,026 434,976 473,511 449,347 Operating income 71,037 59,433 65,189 76,568 Other income 6,772 6,941 8,811 (3,324)

Net interest charges 24,942 26,517 24,712 25,891 Net income (before preferred dividend requirements) 52,867 39,857 49,288 47,353 Preferred dividend requirements 3,051 2,985 2,840 2,840 Earnings applicable to common shares

$ 49,816

$ 36,872

$ 46,448

$ 44,513 Average common shares outstanding 55,873 55,873 55,873 55,882 Earnings per common share 0.89 0.66 0.83 0.80

• Includes the loss from the reversal of previously recorded revenues associated with the regulatory disallowance of San Onofre construction costs, as described in Note 7 of the notes to consolidated financial statements.

These amounts are unaudited, but in the opinion of the company reflect all adjustments necessary for a fair presentation.

10

FINANCIAL REVIEW Results of Operations Earnings Earnings of $3.18 per share in 1988 exceeded, income by $22 million, or 39 cents per share. The dis by 22 cents, the 1987 earnings before the effect of the 1987 allowance also required the company to write-off the dis accounting change to record unbilled revenues. The increase allowed plant costs in 1988 by restating 1986 earnings. A is due primarily to the 1987 costs associated with the dis-follow-up decision in December 1988 resolved certain allowance of certain San Onofre Nuclear Generating Station implementation issues and increased the construction cost construction costs by the California Public Utilities writeoff. However, since the majority of the decision Commission.

adopted matters that the parties had stipulated to previously Prior to the restatement described below, 1986 earnings or that the company had otherwise anticipated, the decision per share and net income were higher than 1987 amounts did not have a significant effect on 1988 earnings. The com because in 1986 the company gained $14 million, or 25 plex accounting effects of the disallowance are explained cents per share, from the sale of its investment in Energy further in Note 7 of the notes to consolidated financial Factors, Inc.

statements.

EARNINGS PER SHARE Unbilled Revenues Before January 1, 1987, the company recorded revenues from the sale of gas and electricity when it read customers' meters and billed customers for service.

In 1987, the company began recording revenue based on the 3

date the gas and electricity are delivered to customers. This change increased net income $18 million, or 32 cents per share, in the first quarter of 1987 but has had no significant 2

effect on the seven subsequent quarters. It is discussed in Note 2 of the notes to consolidated financial statements.

I Southwest Powerlink As discussed in Note 7 of the notes to consolidated financial statements, the CPUC has com pleted its evaluation of the cost of power transported over the Southwest Powerlink transmission line. Its decision is 84 8 86 7

88expected in the first quarter of 1989. An unfavorable com 84mission decision will adversely affect earnings and cash NET INCOME provided by utility operations.

(InRevenues The CPUC controls the company's prices, and 20 thereby its revenues, generally by two mechanisms: base 200 pie n aacn cons Base prices compensate the company for operating and 160 maintenance costs, taxes and depreciation, and provide a return on capital. Base prices are set in a General Rate Case 120 every three years. Between rate cases, the commission makes annual adjustments for inflation, system growth and 80 rate of return. The latest three-year cycle started January 1, 1989.

40 The company has used balancing accounts for fuel costs, both electric and gas, and for San Onofre ownership costs.

consisting primarily of depreciation and a return on capital.

84 85 86 87 88 The commission sets balancing account rates based on esti mated costs. Differences between actual and estimated costs San Onofre Nuclear Generating Station In 1986, the are accumulated in the balancing accounts. Periodically, the California Public Utilities Commission voted to disallow company adjusts rates to amortize the balances. The com

$69 million of the company's $1.1 billion share of the San pany also uses balancing accounts to compensate for the dif Onofre construction costs. The company, together with ferences between actual and estimated sales volumes.

Southern California Edison, petitioned for a rehearing. In However, the account for gas sales to certain large customers 1987, the commission reheard the case and reduced the dis-was eliminated, effective May 1988. In the first two years, a allowance to $53 million. The disallowance reduced 1986 transition arrangement limits the change's potential impact net income by $5 million, or eight cents per share, and 1987 on the company's earnings.

11

On January 1, 1989, base prices replaced the balancing percent in 1987, reflecting customer growth. Gas sales vol account for San Onofre construction costs. The remaining ume increased 17 percent in 1987, primarily due to cold balance in the balancing account will be amortized over weather.

three years by a small adjustment to general rates.

Revenues from diversified operations arise from subsidi Electric revenue for 1988 was up three percent, primarily aries of Pacific Diversified Capital Company, a company due to increased volume, partially offset by lower costs. Gas subsidiary. Most of these revenues and the gas and oil for revenue for 1988 was down three percent from 1987. pri-resale to other customers arise from Mock Resources. Inc.,

marily due to lower fuel costs, partially offset by increased one of these subsidiaries, which was acquired during the volume.

fourth quarter of 1986. Mock purchases the gas and oil and Gas and electric operating revenues for 1987 were down sells them at a small margin. Mock's revenues increased in five percent from 1986. About one-third of the decrease is 1988 due to increased sales volumes.

due to lower fuel costs. The remainder largely is due to the San Onofre write-off discussed above and in Note 7 of the Costs The total cost of electric fuel and purchased power notes to consolidated financial statements.

increased in 1988 because of increased volume, due to Revenues also decreased due to a lower authorized mar-customer growth, and higher costs for natural gas. The cost gin. The margin is lower because authorized return on had decreased in 1987 because lower prices more than offset equity decreased from 15 percent in 1986 to 13.9 percent in the increase in sales volume. The lower prices primarily 1987 and to 12.75 percent in 1988. Also, margin is lower resulted from the decline in world oil and gas prices and the because less revenue is required to cover the lower tax company's aggressive program of spot-market gas expense since the Tax Reform Act of 1986 lowered tax rates purchases.

from 46 percent in 1986 to 40 percent in 1987 and to 34 per-The cost of gas purchased for resale decreased in 1988 cent in 1988. Increases in the authorized equity to debt ratio and 1987 because of lower prices, partially offset by the vol partly offset the lower authorized return on equity The net ume increases described above.

effect of these changes was a reduction of net income by Taxes on operating income decreased in 1988 and 1987 about $5 million, or 10 cents per share in 1988 and 1987.

because the Tax Reform Act of 1986 lowered corporate tax Gas and electric sales volumes in 1988 were up six per-rates. Lower operating income in 1987 was an additional cent and seven percent, respectively, over 1987, primarily cause of the lower taxes in 1987 compared to 1986.

due to customer growth. Electric sales volume increased six The company earns an allowance for funds used during construction on the construction funds held by a trustee as OPERATING REVENUES well as on construction in progress. The total allowance for (Inconstruction funds, both debt and equity, changed only slightly in 1987 and 1988. The allowance is not a current source of cash but will result in increased future cash flows 2000 as its amortization is included in rates.

1600 Other income in 1986 includes the $21 million pretax gain from the sale of the company's investment in Energy Factors, Inc.

1200 Interest charges are net of interest income on construction funds temporarily invested by the trustee. In 1987, con 800 struction funds increased while debt reductions and the use of low-interest, tax-exempt financings increased. This 400 resulted in a decrease in interest charges. 1988 interest charges were down slightly from 1987. The company's embedded cost of debt decreased from 9.6 percent in 1986 84 85 86 87 88 to 9.4percentin987 and to 9.2 percentin 98 8.

12

Liquidity and Capital Resources Utility operations are a major source of liquidity for the The company's capital structure is one factor that has company. Since 1984, tax-exempt industrial development enabled it to obtain long-term financing at attractive rates.

bonds and pollution control bonds have been the major The following table shows the percentages of capital repre external sources of liquidity. Funds from operations and tax-sented by common equity, preferred stock and long-term exempt bonds have been more than adequate to cover con-debt.

struction of utility plant, payment of dividends and maturing long-term debt.

A good measure of liquidity provided by operations is the 1984 1985 1986 1987 1988 Goal percentage of earnings that arises from the allowance for Common equity 40%

43%

42%

44%

46% 45-48%

funds used during construction. Since this type of earnings Preferred stock 9

8 7

6 6

5-7 does not provide cash in the short-term, utilities prefer it to Debt and leases 51 49 51 50 48 46-49 be a small percentage of earnings. The company's success in Total 100% 100% 100% 100% 100%

100%

this area is shown in the following chart.

thisare isshow inthefollwin chrt.Another measure of the company's ability to obtain QUALITY OF EARNINGS financing is pretax interest coverage. The company's goal is to exceed 3.75. The chart shows the company's results. The

- goal would have been met in 1988 if the CPUC had not (percnt o earingslowered the company's authorized rate of return.

(percent of earnings attributable to 12 AFUDC)

MAINTAIN 3.75X PRETAX INTEREST COVERAGE Th (Icoman' Capital ehlsttr isoe.ato5ha a

84 85 86 87988 The percentage of funds for construction that the com-7 pany can generate internally is another good measure of liq-o uidity provided by operations. The company's goal is to goalm exceed 65 percent. The following chart shows the company's o

84 85 86 87 88 success in achieving that goal.

Net additions to utility plant, excluding nuclear fuel and MAINTAIN INTERNAL GENERATION OF CONSTRUCTION the allowance for funds used during construction, are EXPENDITURES (AT 65 PERCENT OR MORE) expected to total $225 million in 1989. 1989 construction is expected to be funded from the use of the construction trust funds related to previous issuances of industrial development paonyrbonds, internal generation and short-term debt. And, in uionditrcti spite of the uncertainty associated with the Southwest AFUDC) 80 Powerlink, management believes ample external sources of long-term and short-term financing will continue to be avail eable.

Nevertheless, regulatory disallowances associated with the Southwest Powerlink may reduce cash flow from 40 operations.

( Performance

• Goal 84 85 86 87 88 13

The Future CUSTOMER GROWTH Several trends and factors are expected to affect future oper ating results and liquidity.

• The company may merge with Southern California 40 Edison Company, an adjacent electric utility.

• Fluctuations in interest and inflation rates are affecting the authorized rates of return.

30

• San Diego's population is growing at a rapid rate, result ing in increasing sales.

20

• The Tax Reform Act of 1986 has lowered tax rates, elim inated investment tax credits and reduced the benefit of depreciation deductions.

10

• Competition and partial deregulation are growing.

A short description of each of these follows.

U Electric U Gas 84 85 86 87 88 Possible Merger On November 30, 1988, the company signed a merger agreement with SCEcorp and its utility sub sidiary, Southern California Edison Company, under which Population Growth The company's rate of new customer the company will be merged into Edison, if various condi-additions is slowing slightly, but continues to be well above tions are met. These conditions include favorable votes of the national average. For 1987 and 1988, the rate was four to the common, preferred and preference shareholders of the five percent for electric and about four percent for gas. The companies and approval of regulatory authorities. This pro-company expects the future rate of growth to be about three cess is expected to take more than a year. (This is explained percent over the next five years. Over the last five years, elec in more detail in "Item No. 2-Proposed Merger" in the tric and gas customer growth has averaged approximately March 1989 Proxy Statement.)

four percent. The spread of cogeneration, which had par SDG&E understands that certain governmental units are tially offset the effects of population growth, is slowing, due giving consideration to opposing the proposed merger with largely to reductions in the company's electric rates, Edison and/or condemning utility property and taking over especially those for the largest customers.

SDG&E's operations. No condemnation proceedings have been initiated as of the date hereof. (This is explained in Tax Reform Act of 1986 The act did not significantly more detail in "Item No. 2-Proposed Merger-Regulatory affect the company's net income because electric and gas Filings and Approvals" in the March 1989 Proxy prices are adjusted for the tax changes. However, it has Statement.)

reduced cash provided by operations because investment credits have been eliminated and the benefits of depreciation Rate of Return Fluctuations in inflation and interest rates deductions have been reduced. Otherwise, the lower tax have led to changes in authorized rates of return on equity.

rates reduce tax expense and revenue by equal amounts, but The CPUC lowered the authorized rate of return on equity do not affect cash flow. The effects of the act on cash flow from 16 percent in 1985 to 15 percent in 1986, 13.9 percent will not be significantly greater in 1989 than they were in 1987 and 12.75 percent in 1988. Although the rate was in 1988.

increased to 13 percent for 1989, the equity portion of the capital structure was artificially set at 48 percent, which is Competition and Partial Deregulation The electric and below the actual percentage. This effectively results in an natural gas utility industry is facing competition and partial overall authorized return to common shareholders for 1989 deregulation. Deregulation could result in increased vol that is approximately 0.3 percent below that authorized atility in electricity prices. In the future, customers may be for 1988.

able to purchase power from other sources and transmit it Other than being a factor in determining the authorized over the company's transmission lines. This could result in rate of return, inflation does not generally affect income.

higher rates to remaining customers and increased cost Increases in operating costs due to inflation are normally recovery risk to the company.

recovered through base prices. Changes in fuel and pur chased power prices do not affect income because these costs are recovered in the balancing accounts.

14

As of January 1, 1989, the company's electricity prices Almost one-tenth of the company's electric sales are to the averaged 8.7 cents per kilowatt-hour. While still higher than federal government, principally to the U.S. Navy. As part of many other utilities, the company's average electricity prices a national program, the Navy studied its utility costs and have decreased one-third since 1985 and are now lower than considered leaving the company's electrical system. The those of the other major, investor-owned California utilities.

changes described above have reduced the prices charged to The company continues to pursue goals to lower prices and the Navy. The company and the Navy recently signed a long restructure the way customers pay for electric service to bet-term contract, which is awaiting approval from the CPUC.

ter reflect the company's costs. Because of this, the company The company is continuing to take advantage of the expects its prices to be more competitive with the alternative deregulation of the natural gas industry. In 1985, the Federal sources of electricity available to its customers.

Energy Regulatory Commission provided for open access to In the past, price increases were placed disproportionately interstate gas transmission pipelines. For the last two years on large electricity users in an effort to minimize price the company has bought a substantial portion of its natural increases to residential customers. This resulted in commer-gas from suppliers in Texas and Oklahoma at relatively low cial and industrial customers' paying a price higher than the spot-market prices. Southern California Gas Company actual cost to serve them. This differential has been reduced transports that gas for a fee. This arrangement has lowered greatly as a larger portion of price decreases has been the total cost of natural gas purchases greatly. Previously, all passed on to commercial and industrial customers. These gas came from Southern California Gas. SDG&E retail price structure policies have not allowed residential prices customers that meet certain criteria may purchase gas and to decrease as quickly or as much as those for commercial pay SDG&E a transmission fee. The CPUC also has and industrial customers. These changes are expected to restructured the price-setting mechanisms for natural gas reduce the amount of bypass of the company's electric sales to certain large customers.

system.

Responsibility Report for the Financial Statements The company is responsible for the financial statements and The company's independent auditors, Deloitte Haskins &

other data in this annual report. To meet its responsibility Sells, are engaged to audit the company's financial state for the reliability of the financial statements, the company ments in accordance with generally accepted auditing stan has developed a system of internal accounting controls and dards for the purpose of expressing their opinion as to engages a firm of independent auditors. The board of direc-whether the company's financial statements are presented tors of the company carries out its responsibility for the fairly, in all material respects, in accordance with generally financial statements through its audit committee, composed accepted accounting principles.

of directors who are not officers or employees of the The audit committee discusses with the company's inter company.

nal auditors and the independent auditors the overall scope Management maintains the system of internal accounting and specific plans for their respective audits. The committee controls, which it believes is adequate to provide reasonable, also discusses the company's consolidated financial state but not absolute, assurance that its assets are safeguarded, ments and the adequacy of the company's internal controls.

transactions are executed in accordance with its objectives, The committee met twice during the fiscal year with the and the financial records and reports are reliable for prepar-internal auditors and the independent auditors without man ing the financial statements in accordance with generally agement present, to discuss the results of their examinations, accepted accounting principles.

their evaluations of the company's internal controls, and the The concept of reasonable assurance recognizes that the overall quality of the company's financial reporting. The cost of a system of internal accounting controls should not internal auditors and the independent auditors have full and exceed the benefits derived and that management makes free access to the committee throughout the year.

estimates and judgments of these cost/benefit factors. The Company management has prepared the financial state system of internal accounting controls is supported by an ments and other data in this annual report. In the opinion of extensive program of internal audits, selection and training the company, the financial statements, which include of qualified personnel, and written policies and procedures.

amounts based on estimates and judgments of management, have been prepared in conformity with generally accepted accounting principles.

Frank H. Ault Controller 15

Independent Auditors' Report To the Shareholders and Board of Directors of San Diego Gas & Electric Company:

We have audited the consolidated financial statements of San Diego Gas & Electric Company and its subsidiaries (pages 17 to 29) for the years ended December 31, 1988, 1987 and 1986. These financial statements are the responsibility of the company's manage ment. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the company and its subsidiaries as of December 31, 1988 and 1987, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1988, in conformity with generally accepted accounting principles.

As discussed in Note 7 of the notes to 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 outcome of these matters is uncertain at this time and could result in the reversal of revenues previously recorded.

As discussed in Notes 2 and 7 of the notes to consolidated financial statements, the company changed its method of accounting for unbilled revenues in 1987 and its method of accounting for disallowed plant costs in 1988.

4 A

k

~

DELOITTE HASKINS & SELLS San Diego, California January 23, 1989, except for Note 1, as to which the date is March 6, 1989 1988 REVENUE DOLLAR Increased sales by Mock Source Resources, Inc. again accounted for the signifi-62.60 Utili Electric Sales cant change in the source 13.8o Utili Gas Sales and disposition of the revenue dollar compared 23.60 Diversifed 0perations with the prior year.

Disposition 31.1 Fuel and Purchased Ener v 21.5o Gas and Oil or Resale to Other Customers I1.1 Other 0perating Expenses 7.6 Total Taxes 8.3t De reciation 7.50 Dividends to Shareholders 7.1 Salaries and Bene ts 4.3o Cost o Money-net o AFUDC 1.6c Reinvested in Business 16

STATEMENTS OF CONSOLIDATED INCOME (in Thouisandy Ei-cept Per Share Amounts)

Excerpts from the For the Years Ended December31 1988 1987 1986 Financial Review Operating Revenues Electric

$1,299,995

$1,261,312

$1,333,479

a. This relates primarily Gas 285,430 293,859 299,202 to Mock Resources, Inc.,

Diversified operations a

490,662 349,057 1,530 a nonutility subsidiary D

acquired at the end of Total operating revenues 2,076,087 1,904,228 1,634,211 1986 by Pacific Diversified Operating Expenses Capital.

Electric fuel and purchased power 482,333 437,842 456,402

b. Taxes on operating Gas for resale to utility customers 164,120 170,303 175,286 income decreased in 1988 Gas and oil for resale to other customers a

445,934 336,632 and 1987 because the Tax Maintenance Reform Act of 1986 66,509 66,041 73,502 lowered corporate tax Depreciation and amortization 172,841 151,655 140,732 rates.

Property and other taxes 41,776 40,479 37,714 Other 3190 2846 2278

c. The disallowance of 311,950 288,476 282,378 certain San Onofre Income taxes (Note 6) b 118,397 151,021 185,847 Nuclear Generating Station Total operating expenses 1,803,860 1,642,449 1,351,861 construction costs required Operating Income 272,227 261,779 282,350 the company to write off the disallowed plant costs Other Income and (Deductions) in 1988 by restating 1986 San Onofre cost disallowance (Note 7) c (49,702) earnings.

Allowance for equity funds used during construction 12,398 14,816 13,035

d. Other income in 1986 Taxes on nonoperating income (Note 6) 3,324 7,161 (775) includes the $21 million Other-net d

3,478 (1,916) 34,296 pretax gain from the Total other income 19,200 20,061 (3,146) sale of the company's Income Before Interest Charges and Cumulative investment in Energy Effect of Change in Accounting Principle 291,427 281,840 279,204 Factors, Inc.

Interest Charges

e. The increase in 1988 is Long-term debt 89,166 90,529 95,364 due primarily to the 1987 Short-term debt and other 13,704 12,109 17,468 costs associated with the 13,704 12,109edfususddisallowance of certain Allowance for borrowed funds used San Onofre Nuclear during construction (808) 72 (881)

Generating Station Net interest charges 102,062 102,710 111,951 construction costs.

Income Before Cumulative Effect of Change

f. In connection with the in Accounting Principle e

189,365 179,130 167,253 Tax Reform Act of 1986, Cumulative effect of change in accounting the company changed the principle (Note 2) f 17,673 timing of when it records Net Income (before preferred revenue. This resulted in a dividend requirements) 189,365 196,803 167,253 one-time boost to earnings.

Preferred Dividend Requirements 11,716 13,745 22,425 Earnings Applicable to Common Shares

$ 177,649

$ 183,058

$ 144,828 Average Common Shares Outstanding 55,875 55,849 55,830 Earnings Per Common Share Before cumulative effect of change in accounting principle 3.18 2.96 2.59 Cumulative effect of change in accounting principle

.32 Net earnings 3.18 3.28 2.59 Dividends Declared Per Common Share 2.60 2.50 2.345 See notes to consolidated financial statements.

17

CONSOLIDATED BALANCE SHEETS (In Thousands of D[dlars)

Excerpts from the Balance at December 31 1988 1987 Financial Review Assets Utility plant-at original cost a

$4,159,240

$3,996,169

a. The disallowance of Accumulated depreciation (1,220,993)

(1,128,964) certain San Onofre

_____________________________________________________________________Nuclear____GeNuclartGeeratngaSatio Utility plant-net (Note 3) 2,938,247 2,867,205 construction costs required Investments and other property 102,791 81,436 the company to write off Construction funds held by trustee (Note 8) b 36,267 130,946 the disallowed plant costs Current assets Cash and temporary investments 38,086 84,178

b. 1989 construction is Receivables 186,996 189,020 expected to be funded I

7from the use of the con Inventories 77,206 48,862 struction trust funds Other 17,658 14,351 related to previous Total current assets 319,946 336,411 issuances of industrial Goodwill 38,851 38,722 development bonds, Goodwill_

_38,851_38,722 internal generation of Deferred charges and other assets 96,590 96,818 funds and issuances of Total

$3,532,692

$3,551,538 short-term debt.

Capitalization and Liabilities

c. The company's embed Capitalization (see Statements of Consolidated Capital Stock and ded cost of debt decreased Long-Term Debt) from 9.6 percent in 1986 to Common equity

$1,229,937

$1,197,400 9.4 percent in 1987 to 9.2 Preferred stock 149,993 156,307 percent in 1988.

Long-term debt (Note 3)

C 1,179,483 1,204,587

d. The California Public Total capitalization d

2,559,413 2,558,294 Utilities Commission set Current Liabilities the company's equity C engtem Libiite wportion of its 1989 capital Long-term debt redeemable within one year (Note 3) 115,000 115,00(

structure below the actual Current portion of long-term debt (Note 3) 26,006 39,695 percentage.

Accounts payable 176,077 179,961 Dividends payable 39,160 37,971

e. The company uses Diviend payble39,10 balancing accounts for Taxes accrued 7,979 18,849 fuel costs, San Onofre Interest accrued 25,600 26,628 ownership costs, and the Interst acrueddifference between actual Regulatory balancing accounts overcollected-net e

71,284 58,883 and estimated sales Other 49,004 56,704 volumes.

Total current liabilities 510,110 533,691 Customer advances for construction 73,708 65,692 Accumulated deferred income taxes-net (Note 6) 182,319 183,176 Accumulated deferred investment tax credits (Note 6) 151,497 159,897 Deferred credits and other liabilities 55,645 50,788 Contingencies and commitments (Notes 7 and 8)

Total

$3,532,692

$3,551,538 See notes to consolidated financial statements.

18

STATEMENTS OF CONSOLIDATED CASH FLOWS Excerpts from the For the Years Ended December 31 1988 1987 1986 Financial Review Cash Provided by Operations Cash received from customers a

$2,069,497

$1,973,210

$1,616,105

a. Revenues are increas Cash paid for fuel, gas and power b

(1,154,306)

(886,209)

(636,348) ing due to growth in the number of customers and Cash paid to other suppliers and employees (367,837)

(336,553)

(335,228) increased sales volume by Taxes paid (174,907)

(232,185)

(119,822)

Mock Resources, Inc., a Interest paid c

(107,033)

(105,896)

(114,317) subsidiary that buys and

- sells gas and oil.

Cash provided by operations 265,414 412,367 410,390 Cash Invested

b. Costs are going up due Additions to utility plant d

(196,368)

(189,378)

(251,157) to higher volume and some Payment for purchase of Wahico Inc., net of unit cost increases.

cash acquired (19,387)

c. The reduction in the Payment for purchase of other subsidiaries, net authorized rate of return of cash acquired (7,692) by the California Public Other-net (21,891) 5,658 33,819 Utilities Commission Net cash invested (218,259)

(203,107)

(225,030) prevented the company from attaining its interest Cash Provided (Used) by Financing Activities coverage goal of 3.75 Dividends paid (155,761)

(152,720)

(152,760) times.

Sale of preferred stock 44,481 Saleof cmmonstok 12 124125

d. The company again Sale of common stock 129 124 125 exceeded its goal of 65 per Issuance of long-term debt e

9,071 60,460 140,417 cent internal generation of Retirement of long-term financing (45,963)

(126,064)

(166,750) construction funds by Issuance of short-term debt 4,635 providing 99 percent for the second straight year.

Payment of short-term debt (37)

(27,978)

Net cash used by financing activities (187,926)

(201,697)

(178,968)

e. Since 1984, tax-exempt industrial development Net increase (decrease) in cash, construction bonds and pollution con funds and temporary investments (140,771) 7,563 6,392 trol bonds have been the Balance at beginning of year 215,124 207,561 201,169 major external sources of Balance at end of year 74,353

$ 215,124

$ 207,561 liquidity.

Reconciliation of Net Income to Cash Provided by Operations Net income

$ 189,365

$ 196,803

$ 167,253 San Onofre cost disallowance 45,943 Depreciation and amortization 172,841 151,655 140,732 Change in receivables, payables and balancing accounts 824 130,112 (42,728)

Other-net (97,616)

(66,203) 99,190 Cash provided by operations

$ 265,414

$ 412,367

$ 410,390 Supplemental Schedule of Noncash Investing Activities Acquisition of subsidiaries Working capital other than cash acquired (8,940) 17,963 Long-term assets acquired (46,309)

(51,365)

Long-term liabilities assumed 15,862 20,714 Notes payable issued 20,000 Net assets attributable to minority interests 4,996 Net cash outflow

$ (19,387)

(7,692)

See notes to consolidated financial statements.

19

STATEMENTS OF CONSOLIDATED CHANGES IN CAPITAL STOCK AND RETAINED EARNINGS Preferred Stock Not Subject to Subject to Mandatory Mandatory Common Premium on Retained For the Years Ended December 31, 1986, 1987 and 1988 Redemption Redemption Stock Capital Stock Earnings Balance, December 31, 1985

$161,000

$57,500

$279,114

$481,238

$392,632 Net income 167,253 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 51,250 279,239 473,858 406,779 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 68,814 279,363 467,618 450,419 Net Income 189,365 Common stock sold (25,740 shares) 129 Preferred stock retired (25,640 shares)

(1,314)

(8)

Current sinking fund requirement (5,000)

Dividends declared Preferred stock (11,681)

Common stock (145,268)

Balance, December 31, 1988

$ 87,493

$62,500

$279,492

$467,610

$482,835 See notes to consolidated financial statements.

RETAINED EARNINGS (In Millions of Dollars, ait December 31) 500 Balances at the end of 1986 and 1987 have been 400 restated downward, due to the write-off of dis allowed construction 300 costs at the San Onofre Nuclear Generating Station.

200 100 84 85 86 87 88 20

STATEMENTS OF CONSOLIDATED CAPITAL STOCK (in Thousandv of/ Dollars Except Voluntarly Redemption Price)

Balance at December 31 1988 1987 Common Equity Common stock, without par value, authorized 170,000,000 shares, outstanding: 1988, 55,898,342 shares, 1987, 55,872,602 shares

$ 279,492

$ 279,363 Premium on capital stock 467,610 467,618 Retained earnings 482,835 450,419 Total common equity

$1,229,937

$1,197,400 Preferred Stock Not subject to mandatory redemption Voluntary Not ubjct t

madatoy rdempionRedemption

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

$24.00

$ 7,500

$ 7,500 412% Series, 300,000 shares outstanding 21.20 6,000 6,000 4.40% Series, 325,000 shares outstanding 21.00 6,500 6,500 4.60% Series, 374,650 shares outstanding 20.25 7,493 7,493 Without par value*

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

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

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

$87,493

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

$8.25 Series, 1988, 85,000 shares; 1987, 95,000 shares outstanding 104.4

$ 8,500

$ 9,500

$9.125 Series, 1988, 120,000 shares; 1987, 160,000 shares outstanding 104.565 12,000 16,000

$15.44 Series, 1987, 25,640 shares outstanding 2,564

$7.05 Series, 450,000 shares outstanding 107.05 45,000 45,000 Current sinking fund requirement (3,000)

(4,250)

Total subject to mandatory redemption

$62,500

$68,814

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

See notes to consolidated financial statements.

21

STATEMENTS OF CONSOLIDATED LONG-TERM DEBT (In Thousands of Dollars)

Balance at December 31 1988 1987 First mortgage bonds (Note 3) 45/8% 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 83/4% Series Q, due March 15, 2007 50,000 50,000 9 % Series R, due May 1, 2008 50,000 50,000 52% Series U-2, due September 1, 1994 10,468 10,868 16.70% Series W, due November 3, 1988 20,000 127/8% Series Z, due July 15, 2013 8,069 10% Series AA, due June 1, 2018 150,000 150,000 10% Series BB, due September 1, 2018 150,000 150,000 6.30% Series CC, due May 1, 2008 53,000 53,000 6.30% Series DD, due December 1, 2008 27,000 27,000 94% Series EE, due September 1, 2020 100,000 100,000 57/8% Series FF, due December 1, 2007 35,000 35,000 75/8% Series GG, due July 1, 2021 44,250 44,250 73/8% Series HH, due December 1, 2021 81,350 81,350 83%

Series II, due March 1, 2023 25,000 25,000 Total 1,026,068 1,054,537 Capitalized leases Nuclear fuel 76,618 92,811 Generating facility 97,738 101,534 Other 25,182 20,775 Total 199,538 215,120 Other long-term debt 110,715 106,172 Unamortized discount on long-term debt (15,832)

(16,547)

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

(115,000)

(115,000)

Current portion of long-term debt (Note 3)

(26,006)

(39,695)

Total

$1,179,483

$1,204,587 See notes to consolidated financial statements.

22

SCHEDULES OF CONSOLIDATED FINANCIAL INFORMATION BY SEGMENTS OF BUSINESS At December 31 or for the Years Then Ended 1988 1987 1986 Operating Revenues*

$2,076,087

$1,904,228

$1,634,211 Operating Income Electric operations

$ 242,656

$ 241,777

$ 258,581 Gas operations 25,794 21,734 24,940 Diversified operations 3,777 (1,732)

(1,171)

Total

$ 272,227

$ 261,779

$ 282,350 Depreciation and Amortization Electric operations

$ 147,029

$ 129,470

$ 123,078 Gas operations 21,164 19,288 17,345 Diversified operations 4,648 2,897 309 Total

$ 172,841

$ 151,655

$ 140,732 Utility Plant Additions**

Electric operations

$ 161,206

$ 153,632

$ 197,053 Gas operations 35,162 35,746 54,104 Total

$ 196,368

$ 189,378

$ 251,157 Identifiable Assets Utility plant-net Electric operations

$2,662,318

$2,610,706

$2,566,690 Gas operations 275,929 256,499 247,969 Total 2,938,247 2,867,205 2,814,659 Inventories Electric operations 60,368 46,735 60,988 Gas operations 16,838 2,127 5,058 Total 77,206 48,862 66,046 Other identifiable assets Electric operations 189,060 276,285 252,773 Gas operations 52,863 74,842 96,236 Diversified operations 169,810 143,719 59,666 Total 411,733 494,846 408,675 Other Assets 105,506 140,625 119,850 Total Assets

$3,532,692

$3,551,538

$3,409,230

• The detail to operating revenues is provided in the Statements of Consolidated Income on page 17. The gas operating revenues shown therein include $8 million in 1988, $18 million in 1987 and $27 million in 1986, representing the gross margin on sales to the electric segment. These margins arise from interdepartmental transfers of $129 million in 1988, $137 million in 1987 and $100 million in 1986, based on transfer pricing allowed by the California Public Utilities Commission in tariff rates.

• • Excluding allowance for funds used during construction.

See notes to consolidated financial statements.

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

23

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 Merger Agreement with Southern California Edison Company On November 30, 1988, the company signed a merger agree-are giving consideration to opposing the proposed merger ment with SCEcorp and its utility subsidiary, Southern Cal-with Edison and/or condemning utility property and taking ifornia Edison Company, under which the company will be over SDG&E's operations. No condemnation proceedings merged into Edison, if various conditions are met. These have been initiated as of the date hereof. (This is explained conditions include favorable votes of the common, preferred in more detail in "Item No. 2-Proposed Merger and preference shareholders of the companies and approval of Regulatory Filings and Approvals" in the March 1989 Proxy regulatory authorities. This process is expected to take more Statement.)

than a year. (This is explained in more detail in "Item The March 1989 Proxy Statement contains, among other No. 2-Proposed Merger" in the March 1989 Proxy things, pro forma combined financial information of the two Statement.)

companies as of December 31, 1988, and for the year then SDG&E understands that certain governmental units ended.

2 Summary of Accounting Policies Utility plant and depreciation Utility plant represents the Earnings fluctuations from changes in the costs of fuel oil, buildings, equipment and other facilities used to provide purchased energy and gas, and consumption levels for elec electric and gas service. The cost of utility plant includes tricity and the majority of gas are eliminated by balancing labor, material, contract services and other related items and accounts authorized by the California Public Utilities Com an allowance for funds used during construction. The cost of mission. The balances of these accounts represent amounts depreciable retired utility plant, plus removal expenses minus that will be recovered from, or repaid to, customers by adjust salvage value, is charged to accumulated depreciation.

ments to future prices. The CPUC reviews the reasonableness Depreciation expense reflects the straight-line remaining of the amounts in these accounts.

useful life method. The provisions for depreciation approxi-The CPUC also ordered the use of a balancing account to mated 4.07 percent of average depreciable utility plant in record the ownership costs, such as depreciation and an 1988 and 4.12 percent in 1987 and 1986.

investment return, for San Onofre nuclear units 2 and 3 pending resolution of the issue discussed in Note 7. That Inventories Inventories include $43 million of materials balancing account has now been eliminated and these units and supplies ($36 million in 1987) and $34 million of fuel oil are being treated as part of base rates.

and natural gas ($13 million in 1987). Materials and supplies are valued at average cost and fuel oil and natural gas are Goodwill Goodwill arose from the acquisition of certain valued by the last-in first-out, or LIFO, method.

businesses by Pacific Diversified Capital Company, an SDG&E subsidiary. It is being amortized on a straight-line Allowance for funds used during construction The basis over 20 to 40 years.

allowance represents the cost of funds used to finance the construction of utility plant and is added to the cost of utility Other In 1988, the company adopted Statement No. 95 of plant. AFUDC also increases income, partly as an offset to the Financial Accounting Standards Board, replacing the financing costs shown in the Statements of Consolidated Statements of Consolidated Sources of Funds for Con Income, although it is not a current source of cash.

struction with the Statements of Consolidated Cash Flows.

Certain prior year amounts have been reclassified for Revenues and regulatory balancing accounts Revenues comparability.

from utility customers consist of deliveries to customers and See Note 5 regarding employee benefit plans, Note 6 the changes in regulatory balancing accounts. Prior to 1987, regarding accounting for income taxes and Note 8 regarding these revenues were based on meters read on a cycle basis accounting for leases.

throughout each month. The cumulative effect of this change increased first quarter 1987 revenue by $32 million and net income by $18 million, or $0.32 per share.

24

3 Long-Term Debt Due dates of long-term obligations are shown on the State-issued upon compliance with the provisions of the bond ments of Consolidated Long-Term Debt on page 22. Exclud-indenture.

ing capital leases, which are described in Note 8, combined Certain first mortgage bonds have variable interest rate aggregate maturities and sinking fund requirements of long-provisions. Bondholders may elect to redeem their bonds at term debt are $16 million for 1989, $58 million for 1990, $8 the interest adjustment dates. The 1989 interest rate adjust million for 1991, $8 million for 1992, and $1 million for 1993.

ment dates will be August I for Series FF and September 1 for First mortgage bonds are secured by a lien on substantially Series CC and DD.

all utility plant. Additional first mortgage bonds may be 4

Facilities Under Joint Ownership The Southwest Powerlink transmission line and the San Each participant in the projects must provide its own Onofre nuclear power plant are jointly owned with other financing.

utilities. The company's interests at December 31, 1988, were:

The company's share of operating expenses is included in its Statements of Consolidated Income.

SoutwestThe company's share of future dismantling and decon Southwest Project Powerlink San Onofre tamination costs for the San Onofre units is estimated to be Ownership interest (%)

89 20

$170 million. These costs are considered in setting rates and Utilty pantin srvic $29

$1141are expected to be fully recovered in rates over the estimated Utility plant nervi 20 lives of the plants. In December1987, the company began Accumulated placing in an externally managed trust fund the amounts Construction work in progress

$ 0 12 collected in rates.

25

5 Employee Benefit Plans The company-funded pension plan covers substantially all The projected benefit obligation assumes an eight percent employees. Benefits are related to the employees' compensa-actuarial discount rate and a six percent average annual salary tion. Plan assets consist primarily of common stocks, annuity increase. The expected long-term rate of return on plan assets contracts, U.S. government securities and bonds.

is 8.5 percent.

In 1987, the company adopted Statement of Financial Eligible employees may make a contribution of 1 to 11 Accounting Standards No. 87. This had no effect on pension percent of their base pay to the company's Savings Plan for expense. The company continues to fund the plan based on investment in mutual funds or in common stock of the com the aggregate cost actuarial method, subject to full-funding pany The company contributes up to three percent of a limitations. The cost for 1988 was less than it otherwise participant's base compensation for investment in the com would have been due to new limitations imposed by changes pany's common stock.

in federal tax laws.

The company contributed approximately $8 million in Net pension cost consists of the following:

1988, $14 million in 1987, and $16 million in 1986 to these (In Thousands oDollars)s.

1988 1987 The company partially provides health and life insurance Costbenefits to retired employees. The benefits paid and expensed Cotrelt to rent seeice obiato 21,3,69 201,413 amounted to $2 million in 1988, $3 million in 1987 and $2 Interest on projected benefit obligation 21,231 20,878in 1986.

Return on plan assets (48,936)

(9,854)

The company has a long-term incentive stock compensa Other 19,405 (14,650) tion plan that provides for aggregate awards of up to Total cost

$ 5,395

$ 10,787 1,350,000 shares of common stock over a 10-year period ending in 1996. The company issued approximately 25,000 The plan's status at December 31 is as follows:

shares of stock to officers for $5 per share in each of 1986, (In Thousands of________

1987 and 1988. These shares were issued subject to buy-back 1988 1987 if certain corporate goals are not met.

Accumulated benefit obligation:

Vested

$202,823

$178,296 Nonvested 4,446 16,682 Total

$207,269

$194,978 Plan assets at fair value

$344,159

$297,438 Projected benefit obligation 295,246 285,818 Excess of plan assets over projected benefit obligation 48,913 11,620 Unrecognized effect of accounting change (2,980)

(3,209)

Unrecognized actuarial gains and losses (45,933)

(8,411)

Amount recognized as an asset 26

6 Income Taxes Deferred income taxes arise from including income or deduc-rent year income that will be paid in future years. Under prior tions in the company's income tax returns in a year different rules, deferred taxes are computed using current tax rates from the year they are reported in the financial statements.

even if these taxes are expected to be higher or lower when However, deferred taxes are not provided for those timing they are paid in future years. The new rule will change that.

differences that are reflected in customer rates. At December Also, when tax rates change, as they did under the Tax 31, 1988, the cumulative net amounts of timing differences Reform Act of 1986, the new rule requires an adjustment of for which deferred taxes have not been provided were approx-deferred taxes. Prior rules do not permit it.

imately $390 million for federal purposes and $640 million This new rule is not expected to affect the company's for state purposes. In addition, current tax reductions arising profits or net worth significantly because most tax increases from investment tax credits are deferred and recognized over or reductions are borne by customers. However, deferred the useful lives of the related property.

taxes on the balance sheet will increase by a substantial, but In December 1987, the Financial Accounting Standards not yet quantified, amount and a new regulatory asset will be Board issued a new rule that made a major change in the way reported for the estimated amount collectible from tax expense will be computed in future years. Deferred taxes customers. Implementation of the new rule is required by the shown in the income statement are essentially taxes on cur-first quarter of 1990.

Components of Income Tax Expense (In Thousands of Dollars) 1988 1987 1986 Current federal income tax

$102,797

$145,679

$ 87,231 Current state franchise tax 26,498 39,300 28,060 Total current taxes 129,295 184,979 115,291 Deferred -federal and state taxes Construction projects (31,205)

(22,106) 2,703 Tax over book depreciation 26,703 38,985 41,564 State franchise tax 8,901 (876) 828 Regulatory balancing accounts (7,136)

(43,767) 15,935 Unbilled revenue (6,284) 7,050 Nuclear fuel financing 541 (2,009)

(2,693)

Call premium on refunded debt (519)

(821) 5,862 Other-net 3,177 (4,825) 2,117 Total deferred taxes (5,822)

(28,369) 66,316 Deferred investment tax credits-net (8,400) 2,161 5,015 Total income tax expense

$115,073

$158,771

$186,622 Total Tax Expense as Reported in the Statements of Consolidated Income (In Thousands of Dollars) 1988 1987 1986 Operating expenses

$118,397

$151,021

$185,847 Taxes on nonoperating income (3,324)

(7,161) 775 Cumulative effect of change in accounting principle 14,911 Total

$115,073

$158,771

$186,622 Reconciliation of Statutory Federal Income Tax Rate to Effective Rate (In Thousands of Dollars) 1988 1987 1986 Income before federal income taxes

$279,734

$326,595

$320,101 Statutory federal income tax rate 34.0%

40.0%

46.0%

Depreciation 4.4 4.4 3.1 Construction costs capitalized (1.0)

(1.0)

(2.0)

Allowance for funds used during construction (1.6)

(1.7)

(1.5)

Other-net (3.3)

(2.6) 2.2 Effective federal income tax rate 32.5%

39.1%

47.8%

27

7 Contingencies Concerning San Onofre and the Southwest Powerlink San Onofre Nuclear Generating Station Units 2 and 3 the parties had stipulated to previously or that SDG&E had In 1987, the California Public Utilities Commission com-otherwise anticipated. Accordingly, the decision did not have pleted its evaluation of the construction costs for San Onofre a significant effect on 1988 earnings.

units 2 and 3. They disallowed $53 million of the company's share of the costs. The disallowance results in lower revenues Southwest Powerlink The company's 1986 General Rate and net income over the 30-year life of the plant. It reduced Case decision by the California Public Utilities Commission net income by $5 million in 1986 and $22 million in 1987.

ordered SDG&E to establish a five-year balancing account The annual reduction of net income will decline from $7 for the difference between the cost of energy received over the million in 1988 to zero over the remaining 26-year life of the company's Southwest Powerlink transmission line and units. The 1987 reduction was so much larger than future avoided cost.

annual amounts will be because it included reductions related In June 1986, the commission granted the company's to 1983 through 1986 revenues.

request for a rehearing of this portion of the decision. During As required by Statement No. 90 of the Financial Account-the hearings, the CPUC's Division of Ratepayer Advocates ing Standards Board, SDG&E has made an adjustment to its proposed disallowances aggregating $285 million in connec 1986 income to write down its investment in San Onofre tion with power purchases over the transmission line. The Nuclear Generating Station units 2 and 3 because of the Division of Ratepayer Advocates also recommended a bal disallowance. The after-tax effect of this adjustment was to ancing account, which would not earn interest, for allowed reduce 1986 earnings and retained earnings at December 31, costs in excess of avoided costs.

1986 by $46 million, or $0.82 per share.

In October 1988 an administrative law judge issued a draft On December 9, 1988, the Commission issued its decision decision that recommended a disallowance of $29 million and on implementation of the 1987 decision and on the cost of no balancing account. A CPUC decision is expected in the capital additions subsequent to the day the units went into first quarter of 1989.

operation. The majority of this decision adopted matters that Management cannot predict the outcome of this matter.

28

8 Other Contingencies and Commitments Nuclear insurance Public liability claims that could arise from a nuclear incident are limited by the Price-Anderson Operating Capitalized Amendments Act of 1988 to a maximum amount of $7.6 Leases Leases billion for each licensed nuclear facility. The company and 1989

$14

$ 40 the co-owners of the San Onofre units have purchased pri-1990 11 39 mary insurance of $160 million for this exposure, the max-1991 10 39 imum amount available in 1988. The remaining $7.4 billion 1992 9

16 is provided by secondary financial protection required by the 1993 7

12 Nuclear Regulatory Commission. This secondary coverage Thereafter 12 132 provides for loss sharing among utilities owning nuclear reac-Total future rental commitments

$63 278 tors if a costly accident occurs. The company could be assessed retrospective premium adjustments of up to $40 Ipt itet

(

8r7 million in the event of a nuclear incident involving any of the licensed, commercial reactors in the United States, if the Rental payments totaled $59 million in 1988, $54 million amount of the loss exceeds $160 million.

in 1987, and $45 million in 1986.

In addition to public liability insurance, coverage is provided for property damage and replacement power costs at Purchased power contracts The company buys electric San Onofre. Primary property damage coverage is provided power under several long-term contracts. The contracts expire for losses of up to $500 million. Additional decontamination on various dates between 1989 and 2013. At December 31, liability and excess property damage insurance coverage of 1988, the future minimum payments under the contracts

$1.1 billion at December 31, 1988, is provided. Replacement were:

power insurance provides weekly indemnity payments for up to two years, commencing after a waiting period of 21 weeks.

1989

$ 150 These three insurance coverages are provided primarily 1990 113 through mutual insurance companies owned by utilities with 1991 116 nuclear facilities. If losses at any of the nuclear facilities covered by the risk-sharing arrangements were to exceed the 1992 accumulated funds available for these insurance programs, the company could be assessed retrospective premium adjustments of up to $13 million per year.

Total minimum payments

$1,857 These payments are fixed charges. The company is Construction Approximately $225 million, excluding required to pay additional amounts for actual deliveries of nuclear fuel and AFUDC, is planned to be spent for utility energy under the contracts.

plant construction in 1989. Construction funds held by a Total payments, including energy payments, under the con trustee (see the Consolidated Balance Sheets) represent tracts were $253 million in 1988, $229 million in 1987, and unspent proceeds from certain first mortgage bonds.

$231 million in 1986.

Leases Nuclear fuel, an office building and a generating Termination agreement Under the Termination and Set facility are financed by long-term capital leases. Utility plant tlement Agreement that terminated the pending merger with includes $289 million at December 31,1988, and $319 million Tucson Electric Power Company, the company would be at December 31, 1987, related to these leases, obligated, among other things, to pay Tucson $25 million if The minimum rental commitments payable in future years the SCEcorp merger is consummated.

under all noncancellable leases are:

29

CORPORATE PROFILE San Diego Gas & Electric San Diego Gas & Electric is an investor-owned energy man-gas; a 20 percent interest in three nuclear units at the San agement company founded in 1881. Three-fourths of the Onofre Nuclear Generating Station in northwest San Diego company's revenues are generated from its utility businesses.

County; the Southwest Powerlink, a 500,000-volt trans The electric operations division purchases, generates and mission line which connects San Diego and Phoenix; and a distributes energy to 1,030,000 customers in San Diego natural gas pipeline system within the company's gas ser County and the southwest corner of Orange County. The vice area. Seven service centers are operated regionally electric service area has a population of approximately 2.5 within the service territory.

million.

As of December 31, 1988, there were 4,400 people The gas operations division purchases and distributes employed in the company's utility operations.

natural gas to more than 640,000 customers in San Diego SDG&E owns two subsidiaries-Pacific Diversified County. Gas service is not available in all locations, but Capital, an independently operated holding company that the company's gas service area is being expanded gradually.

owns companies serving utility and real estate markets; and Among SDG&E's major assets are the Encina and South Califia Company, a subsidiary used for general corporate Bay power plants, which can burn either fuel oil or natural purposes such as holding real estate.

San Onofre Gnrating Station Encina Power Planto orta SAN DiEGO COUNTY SDG&E's electric service area covers all of San Diego County and the southwestern section of Orange County.

The gas ser vice area is shown in color. The Moreno gas compressor station is located in Riverside County, 35 miles north of the San Diego County line.

30

Ronald K. Fuller, 51 Margot A. Kyd, 35 Vice President-Governmental Vice President and Regulatory Services Administrative Services Ronald Fuller was elected vice Margot Kyd was elected vice president of regulatory services president-administrative in 1983. Governmental services sevcsiDcmbr18afr was added to the division in serving as treasurer since 1986.

1984. He joined the company in She served as manager 1974.services and assistant John E. Hamrick, 62 tesrrthe previous year. Kyd Officers Vice President-joined the company in 1980.

Thomas A. Page, 55 Gary D. Cotton, 48 Administrative Services Richard L. Manning, 57 Chairman, President and Senior Vice President-John Hamrick was elected a vice Vice President Chief Executive Officer Engineering and Operations president in 1973 and was Public Relations Thomas Page was elected chair-Gary Cotton was elected senior named to his current position in Richard Manning has been vice man in 1983. He has been presi-vice president in 1985 after serv-November 1986. He joined the president-public relations since dent and chief executive officer ing as a vice president since company in 1971. He began his he joined SDG&E in 1981 from since 1981. He joined SDG&E 1979. He was appointed to his retirement December 30, 1988.

the Western Oil & Gas Associa in 1978 as a senior officer.

current position in November R. Lee Haney, 49 tion, where he was manager of Jack E. Thomas, 56 1986. Cotton joined SDG&E in Vice President-Finance, public affairs.

Executive Vice President 1975.

Chief Financial Officer George A. E Weida, 52 and Chief Operating Officer Alton T Davis, 51 and Treasurer Vice President Jack Thomas was elected execu-Senior Vice President-Lee Haney was elected a vice Human Resources tive vice president in 1985 and Customer Services president in 1983 after serving as George Weida joined SDG&E in chief operating officer in 1986, Alton Davis was elected senior treasurer for two years. He was 1983 as a vice president and was after serving as a group vice vice president in 1985 after serv-appointed vice president-named head of the human president since 1980 and a vice ing as a group vice president finance in April 1986 and resources division in 1984. Pre president since 1972. He joined since 1981 and a vice president became chief financial officer in viously, he was head of human SDG&E as an engineer in 1957.

since 1976. He was appointed to July 1988. The position of trea-resources for other major U.S.

StehenL.

aum 48his current position in November surer was added to his respon-corporations.

Stephen L. Baumd 8 1986. Davis joined SDG&E in sibilities in December. He Senior Vice PresidentFrnH.At,4 and General Counsel 1968.

joined SDG&E in 1972.

Controller Stephen Baum was elected sen-Donald E. Felsinger, 41 James C. Holcombe, 43 Frank Ault was elected control ior vice president in 1987 after Vice President-Marketing and Vice President-ler in May 1986 after serving as serving as a vice president since Resource Development Resource Development director-internal auditing. Ault 1985, when he joined SDG&E Donald Felsinger was elected a James Holcombe was elected a joined SDG&E in 1969.

as a vice president and general vice president in 1983 and was vice president in 1983 and was counsel. He formerly was senior appointed vice president of named to his current position in Delroy M. Richardson, 50 vice president and general coun-marketing in November 1986.

April 1985. He joined the com-Corporate Secretary sel for the Power Authority of Resource development was pany in 1967. On March 1, Delroy Richardson was elected the State of New York.

added to the division in Decem-1989, he accepted the position secretary in December 1986 ber 1988. Felsinger joined of executive vice president of after serving as assistant secre SDG&E in 1972.

Nevada Power Co.

tary since 1983. He joined SDG&E as an attorney in 1971.

31

CORPORATE PROFILE Pacific Diversified Capital In 1986, Pacific Diversified Capital was created as an inde pendent SDG&E subsidiary whose mission was to increase return on shareholder equity by diversifying into new, unregulated business areas.

PDC's strategy calls for the company to operate as a hold ing company, investing in companies that serve the utility industry and its marketplace, or companies engaging in real estate development in San Diego and other select locations.

PDC intentionally has proceeded slowly and carefully in its acquisition effort, limiting risk to shareholders while tak ing time to learn to manage the businesses it has acquired.

In 1986 and 1987, PDC acquired four companies:

• Computing Solutions, Inc., of Port Chester, New York, which was merged into Integrated Information Systems of San Diego, an existing PDC subsidiary. Integrated Informa-Pacific Diversified Capital Company tion Systems provides mapping services to the utility indus try and to municipalities in the United States and in several

ridKoan, H

e N. Huta, 41 foreign countries.

Peien Executive eresidentfand

• Phase One Development, Inc., a San Diego-based com mercial real estate development company with projects in Integrated Information Mock Resources, Inc.

San Diego and Colorado Springs.

• Mock Resources, Inc., of Irvine, California, which mar-Bn Mock, 42 kets and distributes fuel oil, natural gas and other petroleum C. Christopher Fecher, 42 President and products in several western states.

President and Chief Executive Officer

• Wahlco, Inc., of Santa Ana, California, the world's lead-Chief Executive Officer Christopher P Kunzi, 38 ing manufacturer of flue gas conditioning systems for air Thomas E. Anderson, 39 Executive Vice President pollution control. Wahlco's primary customers are electric Vice President and utilities with coal-fired generating plants.

General Manager Pacific Diversified Capital and its subsidiaries had 319 Vice President-Natural Gas employees on December 31, 1988.

Charles Kogan, 51 and Business Development Vice President L. Craig Smith, 34 Jeffrey R. Sauter, 33 Chief Financial Officer Vice President-Marketing and Business Development Wahico, Inc.

Phase One W Clay Matthews, 60 Development, Inc.

President and Chief Executive Officer Gary Hollenbeck, 39 John H. McDonald, 56 President and Executive Vice President Chief Executive Officer Operations and Secretary Jerry A. Berdine, Howard E. Sandler, 47 Executive Vice President Opertios ad Adinitraion Administration, Assistant Michael J. Lowell, 30 Secretary and General Counsel Vice President Chief Financial Officer 32

BOARD OF DIRECTORS The seven-person board of Main Burnham*

Ralph R. Ocampo COMMITTEES directors consists of six outside Main Burnham, 61, a director Dr. Ralph Ocampo, 57, a direc-OF THE BOARD directors and the chief executive since 1967, is chairman of John tor since 1983, is a physician officer of SDG&E, who serves Burnham & Co., a mortgage and surgeon. He has been active Audit This committee selects as its chairman. The directors loan, real estate and insurance throughout his career in many an independent auditor and provide a broad perspective firm. He is chairman of the professional associations and in reviews the overall plan of the because of their diverse busi-board of First National Bank in community activities. He is a audit, financial statements, ness, professional and civic San Diego and is a director of director of the Mercy Hospital audit results, scope of internal backgrounds.

Businessmen's Assurance Co.,

and Medical Center, of the San audit procedures and the audi of Cubic Corporation, of Gen-Diego chapter of the American tors' evaluation of internal Thomas A. Page*

Probe, Inc., and of Pacific Cancer Society and of the San controls.

Thomas Page, 55, a director Diversified Capital. He also is Diego Community Foundation.

Executive This committee is since 1979, has been chairman chairman and a director of He served as president of the empowered to act in place of the of the board since 1983. He is Burnham American Properties, Hispanic American University full board, except in certain president and chief executive Inc., and Burnham Pacific Foundation in 1986.

transactions for various board officer of SDG&E. He also is Properties, Inc. He serves as responsibilities that are the chairman of the board of president of Sail America, Fred C. Stalder reserved for the board.

Pacific Diversified Capital, an which organized the USAS 1988 Fred Stalder, 68, a member of Executive Compensation SDG&E subsidiary. Page is a defense of the America's Cup.

the board since 1969, was chief certified public accountant and executive officer of Central Tis cottee r s th sa a licensed professional engineer Daniel W Derbes*

Federal Savings and Loan in aesan o foms offcer with an extensive management Daniel Derbes, 58, a director San Diego from 1948 until his pndatineo compan ofc background. He is past chair-since 1983, was president of retirement in 1985. He is a and mes ation rec man of the Pacific Coast Gas Allied-Signal International vate investor. Stalder has been Association and a member of Inc., and executive vice presi-involved with and has provided Finance This committee the board and former chairman dent of Allied-Signal Inc., from leadership to many San Diego plans and counsels with man of the San Diego Economic 1985, when the company was area civic and cultural organi-agement concerning the com Development Corporation.

formed, until December 31, zations for over 40 years.

pany's capital requirements, 1988. From 1983 to 1985, he proposed financing programs Clair W. Burgener was president of the Signal Catherine Fitzgerald Wiggs and capital risk exposure anal Clair Burgener, 67, a director Advanced Technology Group Catherine Fitzgerald Wiggs, yses and reviews the general since 1983, is president of Bur-and executive vice president of 55, a director since 1979, is a investment policy performance gener Properties, Inc., a real the Signal Companies, Inc.

management consultant in the for the Pension Plan and the estate and property develop-Derbes is a director of WD-40 fields of human resources and Savings Plan.

ment firm. Earlier, he served 24 and of Pacific Diversified organizational effectiveness. In Nominating This committee years in elected public office.

Capital. He also is involved the nine years prior to establish-considers and recommends Burgener serves on the boards with many community ing her own consulting business nominees to the board, criteria of several community service organizations.

in 1986, she was executive vice for board and committee cor organizations and is a director president of human resources position and membership, and of San Diego Trust and Savings and a member of the executive directors' compensation.

Bank, of TCS Enterprises and committee for The Broadway of Blue Shield of California.

Stores, Inc., a division of Carter Hawley Hale Stores, Inc.

• Member of the executive committee 33

SHAREHOLDER REFERENCE GUIDE Stock Listing and Trading Information Transfer Agents and Registrars Common stock:

Listed on the New York and Pacific The company's transfer agents and not the company have stock exchanges under the ticker symbol SDO. Shareholders primary responsibility for stock transfers and the cancella can find the previous day's closing price in the New York tion and issuance of stock certificates. The agents should be Stock Exchange listing table of daily newspapers under the contacted directly about these subjects.

symbol SDieGs.

Transfer agents:

Preferred and preference stocks:

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

California First Bank is the registrar of common stock in Where to buy and sell stock:

The listed common, pre-San Diego.

ferred and preference stocks may be purchased through any California First Bank is also transfer agent and registrar for brokerage firm. There are firms that specialize in making a the preferred and preference stocks.

market in the unlisted series. These firms can be located First Interstate Bank of California through your broker.

do First Interstate Trust Company of New York Common Stock Investment Plan:

Please call or write 2 Broadway, 29th Floor for a prospectus on how SDG&E common stock share-New York, New York 10004 holders can purchase additional shares by investing all or a First Interstate Bank is the registrar of common stock in portion of their quarterly dividends in additional shares. The New York.

plan also allows optional cash investments of as little as $25 First Interstate Bank is also the transfer agent and registrar per investment up to a maximum of $5,000 per calendar for the preference stocks, except the $8.25 and the $9.125 quarter. Shares purchased under this plan are free of any series.

brokerage fees. brokeage ees.How to transfer stock:

A transfer of stock is required Dividend Deposit Service:

If you wish to have your divi-whenever there is a change in the name or names in which dend check mailed directly to your bank for deposit, send signed instructions containing your bank account numberthsocceifaeisrgtrd.Tscnhpenwn and the complete mailing address of the bank to nDGbeI you sell the stock, make a gift of stock, or add or delete and he ompetemaiingaddess f te bnk o SG&E Ifowners of the certificate. The transfer can be made by filling the checks are being deposited to a joint account, all owners of the account and all shareholders should sign the letter.

inathe c

an'signsfentrm ans the ac of theastakertii priate andpsigiityxactlyoc teramser amdte apea-o the front of the certificate. The signatures of the individuals transferring the stock must be guaranteed by either a com mercial bank or a brokerage firm that is a member of a major stock exchange. The certificate can then be sent to the transfer agent for transfer. It is recommended that certifi cates be sent registered or certified mail.

TOTAL ANNUAL RETURN TO SHAREHOLDERS INVESTOR PROFILE The company returned Institutional holdings to the top 25 percent, 30 continued to decline in 80 meeting its goal, as a early 1988, but increased result of the proposed 24 during the fourth quarter.

merger with Southern 60 California Edison Coin panF. Stock price appre-Be ciation and dividends 40 are the components of A

f t

r average total return, measured oversfive years.c s

20 0 SDG&E t

Top 25% of industry T

Individuals c

Standard & Poor's 500 c

institutions 84 85 86 87 88 84 85 86 87 88 34

Annual Meeting Publications Available to Shareholders The annual meeting of shareholders will be held on Tuesday, Annual Report:

Inquiries about this annual report should April 18, at 11 a.m. at the Sheraton Harbor Island East Hotel be directed to Elizabeth Pecsi, Investor Communications, in the Champagne Room. The hotel is located at 1380 Harbor Post Office Box 1831, San Diego, California, 92112.

Island Drive, San Diego, California.

Investors' Report:

Reports of current activities, recent Record date:

The record date for shareholders eligible to results and features of interest to shareholders are issued vote at the annual meeting is March 3, 1989.

periodically during the year.

Corporate Profile and Statistical Report:

Contains the Shareholder Profile last 11 years of financial data on the company (1978-1988)

As of December 31, 1988, there were 69,873 common stock and information on California regulation of the utility shareholders of record and 5,408 preferred and preference industry stock shareholders. There are thousands of other stock Form 10-K:

The annual report to the Securities and holders whose shares are held in street name by securities Exchange Commission.

brokers and nominees.

Shareholder Information Handbook:

Answers many Common Stock Shareholders common questions asked by shareholders.

_____________________________________TOWARD 2000/Our Strategies:

Explains the company's strategies to improve service, control costs, compete By account registration:

aggressively, serve shareholder interests and diversify Joint accounts 23,123 Women 20,914 Where to Callfor Information Men 14,873 Inquiries about stock holdings:

Fiduciaries 9,976 Within California (800) 826-5942 Securities brokers, nominees, others 987 Outside California (800) 243-5454 By gogrphicare:

ITo hear a tape recorded corporate news report and stock By geographic area:

United States, except California 35,555update:

California, except SDG&E service area 20,900 Outsid California (800) 521-NE SDG&E service area, including employees 13,224 Iui e fnia comnt sol b

Ee Foreign countries 194 to:

By shares owned:

Jennifer Lewis, Manager, Investor 1-99 13,994 Relations and Corporate Strategy (619) 696-4487 100-300 38,354 301-500 8,508 Executive Offices 501-1000 5,973 San Diego Gas & Electric 1001 or more 3,044 101 Ash Street Post Office Box 1831 San Diego, California 92112 (619) 696-2000 DIVIDENDS PER SHARE COMMON STOCK PRICE TREND Dividends were increased The 1988 price increases in 1988pfor the twelth 2.5 are due to the proposed 40 consecutive year.

merger with Southern 2.0 a

California Edison Company.

flEE 30 jE 20 1.00

0.

High 1

• Year End ELow 84 85 86 87 88 84 85 86 87 88 35

SELECTED FINANCIAL DATA At December 31 1988 1987 1986 1985 1984 1983 Current assets*

319.9 336.4 299.7 366.2 393.8 267.3 Current liabilities*

510.1 533.7 450.2 404.8 352.2 429.7 Working capital*

(190.2)

(197.3)

(150.5)

(38.6) 41.6 (162.4)

Working capital ratio

.6

.6

.7

.9 1.1

.6 Long-term debt*

1,179.5 1,204.6 1,193.9 1,208.6 1,277.5 1,275.4 Common shareholders' equity*

1,229.9 1,197.4 1,159.9 1,153.0 1,052.9 957.6 Number of customers**

1,032.6 990.4 940.7 893.9 853.6 823.2 Number of utility employees 4,420 4,612 4,815 4,860 4,841 4,917 Common shares outstanding 55,898,342 55,872,602 55,847,822 55,822,762 54,063,592 51,693,662 Book value per common share 22.00 21.43 20.77 20.65 19.48 18.52 Price/Earnings ratio 12.0 9.1 9.9 8.3 7.6 6.1 For Year Ended December 31 Operating Revenues*

Electric 1,300.0 1,261.3 1,333.5 1,395.7 1,292.8 1,207.1 Gas 285.4 293.8 299.2 343.0 327.9 323.1 Diversified operations 490.7 349.1 1.5 Capital expenditures*/t 196.4 189.4 251.2 246.4 218.8 282.8 Pretax income/revenue 14.7%

18.7%

21.6%

22.7%

19.8%

18.7%

Return on equity 14.6%

15.6%

12.3%

16.2%

15.8%

18.2%

Effective federal tax rate 32.5%

39.1%

47.8%

44.5%

38.7%

31.2%

Earnings per common share 3.18 3.28tt $

2.59 3.25 3.01 3.20 Dividends declared per common share 2.60 2.50 2.345 2.205 2.065 1.925 Dividend payout ratio (declared) 81.8%

76.3%

90.4%

68.1%

68.8%

60.7%

Price range of common shares

$ 3912-$30

$377/-$284

$42/2-$26

$28/8-$212

$233-$17/8 22-$17 Certain data have been restated from last year's presentation to reflect the write-off of certain San Onofre Nuclear Generating Station construction costs due to their disallowance by the California Public Utilities Commission or the change from a statement of sources of funds for construction to a statement of cash flows.

FINANCIAL RETURN ON EQUITY DIVIDEND PAYOUT RATIO (By Percent) 18 (BM Pren)=0 (weighted average)

The payout ratio con The California Public tinues to increase. 1986 S0 Utilities Commission's has been restated for the lowering of the author-

/

write-off of disallowed ized rate of return was San Onofre Nuclear Gen-60 izedrateof rturnwaserating Station con the primary cause of the struction costs.

decrease in 1988.

Financial return on equity is measured by earnings applicable to common shares

2) divided by average common equity.

84 85 86 87 88 84 85 86 87 88 36

Compound Annual Compound Annual Growth Rate Growth Rate 5 Years 10 Years

(%)

1982 1981 1980 1979 1978

(%)

3.7 303.9 302.4 308.8 218.9 180.2 5.9 3.5 443.6 453.4 382.3 307.0 216.0 9.0 (139.7)

(151.0)

(73.5)

(88.1)

(35.8)

.7

.7

.8

.7

.8 (1.6) 1,007.2 925.0 918.5 813.8 610.5 6.8 5.1 817.4 672.4 585.8 541.2 480.4 9.9 4.6 804.5 792.4 772.9 750.9 716.9 3.7 (2.1) 5,084 4,909 4,776 4,740 4,384 0.1 1.6 48,266,144 41,499,034 36,469,483 31,188,237 27,592,809 7.3 3.5 16.94 16.20 16.06 17.35 17.41 2.4 5.9 5.3 11.6 7.3 7.3 1.5 1,137.9 948.6 770.9 593.5 469.4 10.7 (2.5) 293.0 211.0 189.5 151.7 144.2 7.1 (7.0) 244.9 206.1 188.4 191.5 203.3 (0.3) 15.3%

10.2%

4.5%

10.0%

11.6%

17.5%

14.5%

6.0%

10.4%

11-4%

24.0%

4.7%

(13.1)%

4.3%

3.9%

(0.1) 2.90 2.34 1.01 1.80 2.02 4.6 6.2 1.785 1.64 1.56 1.48 1.40 6.4 62.4%

71.1%

156.8%

83.1%

71.5%

$ 177/-$11%

14-$11

$ 151-$10

$ 15/-$123

$ 163/-$14-/4

• In millions of dollars.

• • In thousands.

tExcluding allowance for funds used during construction.

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

QUARTERLY COMMON STOCK DATA 1988 1987 First Second Third Fourth First Second Third Fourth Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Market price High 34 33%

36 39/2 377/8 35 35 33 Low 30 305/8 32 34-/8 34 305/8 311V2 281/4 Dividends declared 650 65o 650 65o 62.5o 62.50 62.50 62.50 The estimated cost of the 1988 annual report to shareholders is 90 cents per copy 37

San Diego Gas & Electric Post Office Box 1831 San Diego, California 92112