ML13331B479

Annual Rept for San Diego Gas & Electric Co for CY89

ML13331B479
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Site:	San Onofre
Issue date:	12/31/1989
From:	Page T SAN DIEGO GAS & ELECTRIC CO.
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ML13331A448	List: ML13331A447 ML13331B478 ML13331B479 ML13331B480
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NUDOCS 9006200540
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9006200540 90061'5 PDR ADOCK 05000206 1

PDC

88 Percent of Customers "Very Satisfied" Eighty-eight percent of customers said they were "very satisfied" with the company's customer service efforts, according to customer surveys completed during 1989.

It is the highest annual rating to date for customer satisfaction, and a significant improvement over the 79 percent "very satisfied" rating customers gave SDG&E just two years ago.

Also, the company completed a restruc turing of the Customer Services Division to enable employees to identify and respond better to customer needs in future years.

(See page 12.)

Natural Gs Compressor Gae Licensing Begins for New Power Plant Geneaor To meet the future energy needs of a growing customer Exhaust population, the company began the licensing process for a Electicity two-unit, 460-megawatt combined-cycle power plant.

Air Superheated Combined-cycle systems are less expensive and more fuel Exhaustt e

efficient than conventional generating facilities. They com Turbine bine two separate types of power generation: a natural gas tur bine generator and a heat recovery unit that produces steam to Genererat Stock Reaches Highest Level Ever SDG&E common stock climbed to a high of $45.63 during 1989, the highest level ever. This is nearly double the then-record high five years ago of $23.75 per share.ga For last year, the company also increased annual shareholder dividends to a record

$2.70 and retained strong bondratings of A + and Aa3. (See pages 2 and 3.)

eIto.

Cnene 19o 1931 1982 1983 1984 1935 1986 1987 1988 199 151/

14 177/s 22 23/4 28/s 42 /

377/8 39 2 45/8

Subsidiary Buys Environment-Related Company the coer His ot erprset Pacific Diversified Capital, SDG&E's independent subsidi-will designfuture cities and ary, strengthened its environment-related operations with the 5

communities. SDG&E must purchase of the assets of Helmick Heater Element Services, yo of ta bem e

Inc., a manufacturer of heater baskets. The purchase is part tomorrow's customers, they of an effort to focus more intensely on environmental business will have reliable supplies of services, an area of significant growth opportunity.

PDC, activated three years ago, also produced its first sig nificant operating profit, contributing about 7 cents to 1989 per-share earnings for SDG&E common stock shareholders.

(See page 13.)

Merger Process Continues The state and federal reviews of SDG&E's proposed merger with SCEcorp and its utility subsidiary, Southern California Edison Co., began in 1989 and will continue during 1990.

The chart below shows the merger review schedule for 1990.

4 California Public Federal Energy Utilities Commission Regulatory Commission Division of Ratepayer Responses to applicants'th Advocates' testimony filed hdavvery requests due Applicants fale rebuttal gs testimony interer P esmony fled

[s11 2

Ediso b

b iering 990n California Attorney Generals Advisory Opinion on anti-trust issues MM000 Hearings end 2

Hearings beginreply brefs All parties file rebuttal 34 testimonynstrate Law Judges I

decision 3

Hearings end Brief on exceptions 3

Opening brief I

Reply brief Administrative Law Judge s decision Comments on Administrative Initial commission decision Law Judge's decision Reply comments on Administrative Law Judge s Rehearing motions due decision Final dcisionFdeal deiinergy

We sometimes learn important lessons from unconventional specific, measurable goals, and we regularly reported-to share sources. In the children's classic On Beyond Zebra, by Dr.

holders and to our customers-on our progress in achieving Seuss, the main character emphasizes "the old alphabet isn't them. This goal-oriented approach worked.

enough." While "most people stop with the 'Z'," he says, "my SDG&E employees successfully met all three major chal alphabet starts where your alphabet ends!"

lenges. They provided energy for a rapidly growing customer For more than a decade, the people of SDG&E have been base, they dramatically reversed a trend of rising customer rates, breaking through traditional barriers in our industry. As a result, and they significantly improved the financial condition of your in a relatively short time frame, your company evolved from a company.

conventional utility beset with problems to an energy manage-I now have more than 4,200 reasons to be confident about the ment company positioned to capture future opportunities.

future of our company: the individual employees of SDG&E.

SDG&E is stronger, more dynamic, and more flexible than ever Meeting future growth in our service territory is more difficult before. And we need to be. In the years ahead, the challenge in now than it was in 1979. The reason is a classic example of sup our business will intensify and the pace of change will increase.

ply and demand. In the years since 1979, we negotiated purchases We will emerge successful in the future's energy marketplace, of surplus power from other utilities in the Southwest to help in and we will continue to anticipate and profit from change.

meeting the energy needs of our customers. However, customer energy demands are increasing in the regions those utilities Our Challenge serve. Supplies of surplus power will diminish in the years Asahead.

By the mid-1990s, very little, if any, surplus power will Asr weoro' b

ginaneain decade r 00, we fcamjochlengme: platn be available to our company. Any available power will be signifi for tomorrow's generation. By the year 2000, we estimate thatour customers.

customer demands for electricity will increase 30 percent, or by We must move in new directions now to assure adequate and 1,000 megawatts, enough power to serve one million reliable energy for tomorrow's generation. It is our responsibility households.

houseolds.to make certain that when our customers flip on light switches or At SDG&E, we are accustomed to overcoming challenges.

turn on gas furnaces in the year 2000, the energy they need will In 1979, we confronted three serious problems:

be readily available, and at a reasonable cost.

• We had to meet the energy demands accompanying rapid customer growth; Our solution?

• We had to gain control over soaring customer rates, which climbed by about 50 percent in 1979 alone; and We are moving simultaneously along two paths, each of which

• We had to find remedies for poor financial performance, will assure our customers of energy for the future.

including both low shareholder earnings and a weak bond rating.

First, we have the opportunity to gain access to additional SDG&E management took an unusual approach to solving energy resources through a merger with SCEcorp and its utility those tough problems. We established and publicly announced subsidiary, Southern California Edison, our neighboring utility to the north.

(IN THOUSANDS OF DOLLARS EXCEPTPecn Operating revenues

$2,082,485

$2,076,087

+0.3%

Operating expenses

$1,802,466

$1,803,860

-0.1%

Net income (before preferred dividend requirements)

$ 187,126

$ 189,365

-1.2%

Earnings applicable to common shares

$ 175,924

$ 177,649

-1.0%

Average common shares outstanding (thousands) 55,895 55,875 e Common stock shareholders (at December3 d1) 65,941 69,873

-5.6%

Earnings per common share 3.15 3.18

-0.9%

Dividends declared per comnmon share 2.70 2.60

+3.8%

Retail energy sales Electric (billions of kilowatt-hours) 13.4 12.7

+ 5.5%

Gas (millions of therms) 584 583

+0.2%

2 1989 ANNUAL REPORT

Now that we have improved our financial health and have gained control over customer rates, our employees are focusing on improving the already superior service we provide our customers. As our challenges increase in the energy mar ketplace, so does the importance of providing excellent customer service. We have given more responsibility to our front-line employees, those who deal directly with customers, so they have the freedom to respond quickly to customer needs.

Our innovative approaches to our business continue to pro duce solid financial results. If you were an SDG&E shareholder back in 1979, when we began our concentrated effort to resolve some very difficult problems, you have been rewarded for keep ing faith in SDG&E and in its employees. On December 27, 1989, our common stock hit the highest level ever at $45.63 per share. In 1979, the stock sold for as low as $12.75 per share.

Shareholder earnings for common stock nearly doubled from

$1.80 per share in 1979 to $3.15 last year.

The company's bond ratings, also key indicators of financial health, likewise have improved significantly since 1979. At that time our company held weak bond ratings: BBB from Standard

& Poor's and Baa from Moody's. For several years now, SDG&E Like many approaches we have taken in the past, the proposed has retained strong ratings of A+ from Standard & Poor's and merger has raised a few eyebrows in the utility industry. Mergers Aa3 from Moody's.

are not common in our industry, but this one makes good, com-During 1989, we maintained a solid financial performance mon sense.

despite a $25 million Southwest Powerlink disallowance and a Edison has a power surplus; we have a need.

lower return on common equity as authorized by the Public The merger also will produce significant savings for Utilities Commission. These factors were largely offset by other customers, about $1.7 billion over the next decade, and provide favorable events that reduced the net decline to only 3 cents per benefits for employees and for the San Diego community. Share-share of common stock. Annual earnings for 1989 were down by holders also will benefit. Holders of SDG&E common stock will about 1 percent to $3.15 per share of common stock compared to receive 1.3 shares of SCEcorp common stock for each of their

$3.18 per share in 1988. We also increased dividends by about 4 SDG&E shares. Holders of SDG&E preferred and preference percent, from $2.60 per share in 1988 to $2.70 in 1989.

stock will receive one share of SCEcorp preferred and preference SDG&E ended the decade of the 1980s with very positive stock for each share they hold.

results. We did not limit ourselves to conventional approaches in As you know, the merger is subject to approvals by state and the energy business. Instead, we used imagination -and hard federal government agencies. Together with Edison, during 1989 work-to overcome problems and to discover innovative ways to we began working methodically through the regulatory process.

forge ahead.

All the necessary approvals and final decisions likely will occur Our company is in many ways similar to the protagonist of the by late this year or early 1991.

Dr. Seuss book, On Beyond Zebra:

However, as we pursue the merger, it is prudent for us to plan "Now the letters he uses are something to see!

for the unexpected, the possibility that the merger may not be Most people still stop at the Z.

. but not he!"

completed. So we are concurrently planning another strategy for meeting the future energy needs of our customers.

Our parallel approach to providing energy for the future involves the addition of generating capacity. In December 1989, we filed an application with the California Energy Commission to begin the licensing process for a two-unit, 460-megawatt combined-cycle power plant. If the merger does not occur, the first unit of this plant is expected to begin supplying power to our customers in June 1995 and the second unit a year later. We also Thomas A. Page are planning to expand the generating capacity of our South Bay Chairman, President and power plant through our South Bay Clean Air Project, and we are Chief Executive Officer using technological advances to obtain maximum use of other existing generating facilities.

March 2, 1990 While meeting future energy needs is our greatest challenge, it certainly is not the only one we face.

SAN DIEGO GAS & ELECTRIC 3

Future Challenges: An Overview utilities now selling power face growing customer energy demands in their own service terr itories.

To children and even to adults, energy seems like magic. Flip a Meanwhile, energy needs in the company's service territory switch or press a button, and an invisible force automatically continue to grow. By the year 2000, SDG&E's customers will activates lights, video games, the heater or the air conditioner.

As with many things of value, however, it takes careful plan-more natural gas, than they use today.

ning and hard work to provide reliable, economically priced SDG&E and other utilities must provide energy service to energy services. That is especially true in SDG&E's service territory, which has no natural energy resources. San Diego tinue doing business with the company. As competition in the County and southern Orange County have no rich coal deposits, energy business intensifies, utility customers, particularly large no flowing rivers, no oil or natural gas reserves.

commercial and industrial customers, will have an increasing Long-term planning that began in 1979 successfully enabled the company to meet customer energy needs and to improve the ompny t met cstomr eergynees ad toimpoveTo retain customers and to remain successful in the future's value for shareholders during 1989.

highly competitive energy marketplace, SDG&E is taking action SDG&E must plan now for tomorrow's generation. There is no time for resting on laurels, because the challenges of meeting sive to customer needs.

customer energy needs and of providing a fair return to share holders will be even more difficult in the years ahead.

Customer Growth Increases Energy Needs Meeting these important challenges will be tougher due to diminishing power supplies and the increasing pace of change in Last year, the customer population in SDG&E's service territory the energy business.

continued to grow faster than the national average. More than During the 1980s, SDG&E increasingly relied on purchases of 37,000 new customers were connected to SDG&E's electric surplus electricity from other Southwestern utilities to meet system in 1989, about a 3.6 percent growth rate. The nation's customer power needs. By the mid-1990s, however, that surplus average growth rate for electric utilities in 1989 was less than of reasonably priced power is expected to end as Southwestern 2 percent.

During the year, San Diego was designated the nation's sixth largest city, moving up from number seven in total population.

ELECTRIC AND GAS CUSTOMERS 1200 According to population projections, San Diego will continue to (IN THOUSANDS, AT DECEMBER 31) be one of the fastest-growing major cities in California and in the For several years now, 1000 nation through the year 2000.

the customer popula-Rapid customer growth is expected to continue also in south tion has grown at a 800 em Orange County over the next decade. During 1989, that area rapid pace.

had a nearly 10 percent growth rate, the highest in SDG&E's service territory.

600 The Proposed Merger: An Opportunity 400 for Power and Savings "The company continued in 1989 to seek approval for a merger r

Gas200 Gas with SCEcorp and its utility subsidiary, Southern California Edison, which would give SDG&E customers access to 85 86 87 88 89 Edison's extensive network of generating facilities. Edison has

_________________________a surplus of generating capacity that fits well with SDG&E's ELECTRIC CUSTOMER GROWTH 15 need for electricity.

(PROJECTED. IN MILLIONS)

(PROECTE, INMILLONS)The merger with Edison offers other substantial benefits for Though the rate of 1.2 customers and shareholders of SDG&E:

growth Is slowing,

• Access to a more diverse mix of energy resources. Edison total customer popu-obtains power from hydro, oil, natural gas, coal, nuclear, geo lation Is projected to 0.9 thermal, wind, solar and biomass energy. This diversity helps Increase at signifi-protect customers from extreme price fluctuations.

cant levels through the y Additional transmission links to electric utilities in other 0.6 ruions of the country, increasing opportunities for power pur chases and enhancing overall system reliability.

0M3 0 Operational savings of $1.7 billion through the year 2000.

Those savings would lead to rate reductions for SDG&E customers and improve the prospects for long-term financial 89 90 91c92 93 94 95 96 97 98 992000 growth and for increased shareholder value.

4 1989 ANNUAL REPORT

While shareholders of both utilities have approved the merger, approvals are still needed from both state and federal govern mental agencies.

On April 17, 1989, SDG&E and Edison jointly filed merger testimony with the California Public Utilities Commission, and on May 26, 1989, the two utilities filed similar testimony with the Federal Energy Regulatory Commission. The state and the federal governmental agencies plan to make their final rulings on the merger by late this year or early in 1991.

SAN DIEGO GAS & ELECTRIC 5

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Increasing Generating Resources Power Plant Construction The three largest projects to Meet Future Needs planned to increase overall generating capacity are:

Durig 189 ndepndet pannng ws crrid ou toassre Return the 230-megawatt Silver Gate power plant to service During 1989 independent planning was carried out to assure i

92 customers of adequate generating resources for the next decade.

i E1t po Existing Resources Currently the company meets about half plant Unit 3. The addition of a combustion turbine and a heat of its customer energy needs by generating power at company-recovery system to that power plant unit would enable it to owned power plants that use oil, natural gas and nuclear fuels, become the most fuel-efficient generating unit on SDG&E's and half by purchasing power from other electric utilities. The entire system. This South Bay Clean Air Project is planned for high level of power purchases results from a strategic decision, completion in June 1993; made more than a decade ago, to take advantage of a temporary a Build a two-unit, 460-megawatt combined-cycle power surplus of economically-priced power available from other plant. Combined-cycle systems use both a gas turbine generator utilities.

and a heat recovery steam generator, a process that is more fuel SDG&E owns and operates two major generating facilities, efficient than conventional fossil-fueled power plants.

the Encina and South Bay power plants, and has a 20 percent While combined-cycle offers a lower-cost alternative than ownership of the San Onofre Nuclear Generating Station.

most other types of generating facilities, capital expenditures Altogether, the company owns 2,128 megawatts of power plant would range between $387 million and $577 million, depending capacity. (One megawatt provides enough energy to meet the on the site selected.

needs of 1,000 average households.)

In December 1989, SDG&E filed a Notice of Intention with The Encina and South Bay power plants, which can burn the California Energy Commission as the first step in the licens either fuel oil or natural gas, operated at 90.1 percent availability ing process for the combined-cycle power plant. If the necessary in 1989. Together, they met 31 percent of customer power needs.

approvals are granted in a timely manner, construction would An additional 2 percent was provided by gas turbines located begin in May 1993, with operation of the units scheduled for throughout the service territory.

June 1995 and June 1996.

The San Onofre Nuclear Generating Station continues to be Although the company seeks the lowest-cost alternatives for one of the nuclear industry's safest and best-run plants. San increasing generation on its system, power plant additions place Onofre received the Institute of Nuclear Power Operations' high-pressure on the company's capital budget and likely will lead to est grade on its April plant evaluation, rating San Onofre as one customer rate increases.

of the top eight plants of the 71 in the country.

Power Purchases Power purchases from other utilities and Despite two extensive refueling overhauls, the plant's overall from private energy developers offer another potential future capacity factor for the year of 67 percent again exceeded the industry's average of 61 percent. San Onofre provided 20 percent power supply contracts, it is uncertain how much reasonably of SDG&E's customer energy needs during 1989.

Unit 3 had an outstanding year. Its overall capacity factor for pri ele will eavaiable fr prchase.

the year was 93 percent, well above the industry average. Unit 2 continue at the same level as in recent years. The amount of sur completed its fourth fuel cycle in December with an average plus power available from Southwest utilities will diminish and capacity factor of 72 percent, which met the performance stand-the cost of available power will increase.

ards set by the California Public Utilities Commission.

Some power supplies should be available from energy Power purchases enabled the company to meet 47 percent of developers, private companies that build generating facilities.

customer electricity needs during 1989. More than half of this Following the process established by the state's Public Utilities purchased power was delivered through SDG&E's 500,000-volt Commission, before SDG&E builds its own generating capacity, Southwest Powerlink, which extends into Arizona.

the company solicits bids from independent power producers and Planning Future Resources If for any reason the merger other utilities. The company will continue to follow this pro does not occur, SDG&E is positioned to meet future energy needs through a combination of building new generating facili ties, improving the efficiency of existing facilities, purchasing power from energy developers and from other utilities, and pro-ENERGY SOURCES moting customer conservation and load management programs.

The company expects some of these efforts to lead to customer Power purchase 100 rates higher than could be achieved by a merged company.

met nearly half of If the proposed merger gains approval, Edison's power surplus customer energy 80 will enable SDG&E's planned expansion of generating capacity needs during 1989.

to be deferred by several years, reducing capital expenditures approximately $375 million in the decade of the 1990s.

40 r Purchased Power-Net SFuel Oil Natural Gas 20 Nuclear Fuel 85 86 87 88 89 SAN DIEGO GAS & ELECTRIC 7

cedure, and will purchase power when it is available at a price mid-1990s and beyond. However, both contracts are subject to lower than the company's own projected costs for developing and further review and to regulatory approvals.

producing power.

In March 1989, the company signed a contract with Southern During 1989, as the result of a bidding process, SDG&E California Gas Co., Los Angeles, that would guarantee agreed to long-term, 30-year power purchases from two private SDG&E's access to the transportation of up to 300 million cubic energy producers:

feet of natural gas over interstate pipelines linked to gas supply

• An 80-megawatt contract with Luz International, Ltd. for markets in the states of Texas, Oklahoma and New Mexico. That power to be produced beginning in late 1993 at a solar-thermal amount of gas would meet SDG&E's existing customer facility in the Mojave Desert, about 140 miles northeast of Los requirements.

Angeles. The electricity will be transported over Southern Cal-The SoCal Gas contract also would increase by 50 percent the ifornia Edison's power lines to SDG&E's power grid. Luz has amount of natural gas SDG&E could store in underground facili been operating solar-thermal power plants since 1984, and pro-ties owned by SoCal Gas.

duces more power from solar energy than any other company in In December 1989, the Public Utilities Commission rejected the world.

the SoCal Gas contract. However, SDG&E and SoCal Gas

• A 50-megawatt arrangement with Bonneville Pacific Corp.,

intend to promptly address the commission's concerns by a firm that builds cogeneration facilities throughout the nation, renegotiating the contract, which will be submitted for commis for power from a plant to be completed in Yuma, Arizona in sion approval.

1993. Electricity will be transported from Arizona over SDG&E and 19 other companies signed a joint agreement in SDG&E's Southwest Powerlink.

November 1989 for a planned $1.2 billion expansion of gas Future Natural Gas Supplies SDG&E signed two major transmission links between Canada and Southern California.

gas agreements in 1989 that, if implemented, will enhance sig-Numerous regulatory approvals are required before construction nificantly the company's ability to supply competitively priced can begin. The project could be completed by the end of 1993, natual as o cstoersin te 190sandbeynd.and would allow SDG&E and its customers access to 100 million natural gas to customers in the 1990s and beyond.

The contracts together would provide the company with cubic feet per day of dependable, long-term supplies of natural greater access to up to 400 million cubic feet per day of natural gas from Canada.

gas from sources in the Western United States and in Canada, These two agreements would enable the company to benefit enough to satisfy anticipated customer needs during the more fully from the deregulation of the natural gas industry, and to compete more effectively for economically priced supplies of natural gas for SDG&E's customers. The contracts also would help ensure adequate future gas supplies for customers.

Providing Personalized Service to Large Customers SDG&E representatives improve the company's outlook for long term success by helping large business, industrial and govern mental customers become more productive or more profitable.

This higher level of service increases the company's value to major customers, and should assist SDG&E in retaining those customers in future years as competition increases in the energy business.

Two years ago, SDG&E's Marketing Division began looking more intently at the world from the V,

customer's viewpoint. Each major customer now works with a single SDG&E representative who thor oughly understands the customer's operations and can recommend energy conservation projects that benefit the customer. The customer realizes lower monthly energy bills, and SDG&E benefits by reducing the need for additional generating capacity.

However, the services SDG&E representatives provide to large customers often extend beyond energy matters. For example, a representative may provide information about new manufacturing technologies that can increase a customers productivity, or provide technical assistance in areas where that representative has specific expertise. Some company representatives have even helped large non-profit institutions with fund-raising and marketing.

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02 SDO&E lacentives helped Nyalftects San, Diego, Inc.

a manufacturer of precios plastic eeldlage, to per chase automated equipament wIcts sigelflsant improve&senoe off~ciency. SDOME inalide emergy 10 1989 ANNUAL REPORT

In keeping with the company's objective of helping major customers become more successful, the Market ing Division also has developed a team of employees with special expertise in customer operations for par ticular market segments:

• hospitals and health care facilities

• aerospace manufacturing

• electronics manufacturing

• supermarkets

• restaurants

• hotels

• government Customers in these market segments represent about 18 percent of the company's total electric revenues.

Many of SDG&E's specialized representatives were formerly employed in these market segments. Their past experience and ongoing efforts to stay informed about changes in the marketplace enable them to provide extensive customer service.

Energy Conservation Benefits Customers and SDG&E During 1989, SDG&E representatives and large customers worked together on energy conserva tion projects that will result in annual savings of approximately 35 million kilowatt-hours of electricity, enough to meet the needs of 6,700 households for a year. Conservation projects started in 1989 also will save 500,000 therms of natural gas, enough to supply 1,100 homes for a year. In addition, major customers made commitments to reduce peak electric load by 22 megawatts.

The company provides several major conservation and load management programs for its large customers, including energy audits, a design review program for new buildings, a commercial and industrial incentive program that offers rebates for certain conservation and load management projects, and incentives for alternative cooling technologies.

New Convention Center Saves Energy With Gas Air Conditioning Under the design review program, for example, Nymitech: An Example of Service to Major Customers company energy specialists work with architects and engineers SDG&E incentives helped Nymitech San Diego, Inc., a high on design plans for new buildings. SDG&E specialists suggest tech plastics manufacturer, to establish and later to expand its changes to improve the building's energy efficiency. Company manufacturing plant in San Diego County. Nymitech uses auto representatives also recommend ways to shift energy demand mated equipment and robotics to produce a variety of plastic away from the summer afternoon hours, when overall energy use peaks due to high air conditioning demands.

However, Nymitech produces mainly precision injection For instance, the new San Diego Convention Center, com-moldings for U.S.-based medical products companies that oper pleted in late 1989, benefited from the design review process and ate maquiladoras, or "twin plants," in both the U.S. and Mex the alternative cooling technologies program. Company repre-ico. Maquiladoras enable U.S. companies to send products to sentatives worked with the convention center's architects and Mexico for partial assembly, to benefit from that country's low engineers to design a gas air conditioning system that will save labor costs.

the city an estimated $250,000 per year in energy costs. If a typ-In mid-1987, when Nymitech officials were considering ical electric air conditioning system had been installed, it would various locations on the U.S. side of the international border, have added 2.6 megawatts of demand on SDG&E's system.

SDG&E provided information on rates and the company's incen Encouraging large customers to use gas instead of electric air tives for purchasing energy-efficient manufacturing equipment.

conditioning systems reduces operating expenses for the SDG&E's energy conservation incentives and proactive customer, and reduces the need for SDG&E to construct new customer assistance helped convince the firm to locate in generating facilities.

San Diego County.

The company also offers rebates and financial incentives to Altogether SDG&E provided $40,000 in energy conservation business and industrial customers to encourage the installation of incentives to Nymitech, and helped the firm to improve substan energy-efficient equipment in their buildings.

SAN DIEGO GAS & ELECTRIC 11

tially its overall energy efficiency. Nymitech saves about contractor was required to deal with many different areas of the

$200,000 on its annual energy bill as a result of energy conser-company as a project progressed from planning through con vation measures suggested by SDG&E representatives.

struction to final completion. Now, under a more streamlined Meeting Conservation Goals Benefits Shareholders structure, the contractor works with an SDG&E project manage SDG&E employees serving large customers, including the team meGt is onucingrearchnto idntiyth of specialized representatives, contributed to the company's of varis oupsiof res identi nd sess ct es overall success in encouraging customers to conserve energy Resarch rus wl esedtol and exaned during 1989, which in turn is expected to provide a significant cuser res.

benefit to shareholders.

As part of the January 1989 General Rate Case agreement with y

the Public Utilities Commission, shareholders can receive an incentive reward or a financial penalty based on whether the7 days per company achieves specific conservation goals. The company substantially exceeded the 1989 goals, primarily as a result of with a new state law that requires utilities to offer home service energy conservation programs involving large commercial and visits within a four-hour time frame.

industrial customers. Accordingly, 1989 earnings include an estimate of the incentive award. During the early part of 1990, the more individualized service they will require.

the PUC will determine the exact amount of the incentive award Employees Improve Productivity, Cut Costs payment to shareholders.

This year, the commission will consider expanding SDG&E's SDG&E's more than 4,200 employees continued to improve pro conservation incentive programs for customers.

ductivity and cut costs in 1989, building on efforts begun several years ago.

Company Streamlines Service for Residential, Productivity increased by 57 percent between 1982 and 1989, Small Business and Construction Customers based on the numbers of employees and customers. During 1982, about 5,100 employees provided service to approximately 1989 was a banner year for achieving customer satisfaction.

800,000 electric customers and 520,000 gas customers. By the The company's Customer Services Monitoring System surveys end of 1989, the company's work force had decreased by 900 indicated that 88 percent of customers were "very satisfied" employees, mainly through attrition, while the customer popula with the company's service during the year. Just two years ago, tion had increased significantly to about 1.1 million electric the same surveys showed that only 79 percent of customers customers and more than 660,000 gas customers.

were "very satisfied" with the company's service.

Individual employees use creativity and experience to discover Quarterly CSMS surveys involve phone calls to a random ways to improve efficiency. Employee suggestions adopted last selection of customers about the services they have just received.

year under The 10% Solution program will save SDG&E $1.9 SDG&E and its employees are not resting on previous million in the first full year of implementation. Under this pro customer service achievements. The company realizes that meet-gram, an employee whose cost-saving idea is accepted receives ing customer needs will be an even greater challenge in future 10 percent of the first year's anticipated savings as an award.

years. All types of companies, from banks to supermarkets, are From September 1986, when this program started, through increasing customer responsiveness. As a result, customers will December 1989, adopted suggestions have saved or will save expect an even higher level of service during the 1990s and

$5.2 million in the first year of implementation.

beyond.

Employees also work together as a team to minimize company During 1989, the company completed a restructuring of the expenses. The Gain Sharing Program, started in January 1988, Customer Services Division, which is now organized around provides each employee with an annual incentive award if spe the differences in customer needs. For instance, one part of the cific goals are reached in providing good customer service while restructured Customer Services Division focuses on providing reducing operating, maintenance and capital costs. For 1989, service to existing customers, and another focuses on service nearly all employees received a $695 Gain Sharing award for to new customers. The new structure also provides customer achieving these goals.

contact employees with more authority and more freedom to This year a new employee flexible benefits program began.

meet the needs of customers.

Named "flexCHOICE," it enables employees to choose health The restructuring involved about an 8 percent reduction in the care and other benefits that fit their individual needs. In the past, number of customer service employees, and a reassignment of all employees received basically the same fixed benefits. The 40 percent of the division's middle-management supervisors.

fiexCHOICE program gives employees more choice in the bene The ratio of supervisors to employees was reduced significantly, fits they receive, and enables the company to gain better control from 1:6 to 1:11.

over future costs.

The company is training front-line employees to take more SDG&E employees, both individually and collectively, con initiative in meeting customer needs, and is giving employees tinue to support the company's efforts to control expenses while the authority to make on-the-spot decisions when dealing with providing good service to customers.

customers. The anticipated results are more responsive employees and more satisfied customers.

The restructuring also benefits residential and commercial building contractors in SDG&E's service territory. In the past, a 12 1989 ANNUAL REPORT

Subsidiary Focuses on Environmental Services ucts manufactured by these newly acquired units, enabling Pacific Diversified Capital, SDG&E's nonregulated subsidiary, Wahco is reructurin it the lu tion into.

shifted its emphasis in mid-1989 more toward environment-wahoi cpan cle Whco Environ Sytms related products and services. This strategy was complemented nc.

by a decision to limit investments in other operations.

PeDv For 1989, PDC's combined businesses achieved a consoli-ment sbiar rdeb relettedprop dated net income of approximately $4 million, which contrib-tie si din 1989.uInuaditi Phase o sold 30,000 uted about 7 cents in per-share earnings for SDG&E common stoc shrehlder.

Drin th preiou tw yeas, DC ro-square feet of commercial properties in Colorado and San Diego.

stock shareholders. DuringIn Colorado, the outlook for the remaining properties has Wahlco,dest pro ii improved substantially since the debt restructuring, and the tems sold to electric utilities throughout the world, was PDC's are geerating cs O l

reahe en dur earnings leader again last year. Flue gas conditioning systems the yea ting strOngulang aves.

assist utilities in controlling and reducing air pollution.

the faci otok fean Diee In 1989, consistent with PDC's revised strategy, Wahlco began ire andil futher benefi o highertccuacy lvs considering acquisitions of companies in environment-related imporantl the ent roje financleito industries. In October, Wahlco acquired the assets of Helmick oe portisl facilitat ar n pro peries to Heater Element Services, Inc. which manufactures heater intmet ommun it baskets, devices used to preheat air in conjunction with elec-mcou

n.

tric power generation.

naua gasrrily to Shortly after year end, Wahlco signed a letter of intent to industrial, utility and governmental acquire Bachmann, Inc., which manufactures gas-and fluid-customers in the Western United States. In addition, the com pany buys and sells gasoline, diesel fuel and lubricants in the Wahwoontrorovidcas.Woadcoineslfspolluti.international market.

The company's key management and trading groups provide an exceptionally strong base of experience in this industry, and the company is positioned for growth as natural gas continues to be deregulated.

For 1989, Mock Resources provided a profit which was essen tially unchanged from its contribution the previous year.

In keeping with the shift in emphasis toward environment related operations, PDC sold the assets of Integrated Informa tion Systems Co. to Geographic Systems Inc., a company partially owned by IBM, in October 1989. PDC had formed Integrated Information Systems in 1985. The company offered automated mapping systems to utilities and municipalities. Under the sale agreement, employees of Integrated Informa tion Systems joined Geographic Systems, which maintains an office in San Diego.

SAN DIEGO GAS & ELECTRIC 13

Six-Year Summary (IN MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS)

FORTHEYEARSENDEDDECEMBER31 1989 1988 1987 1986 1985 1984 Operating revenues

$2,082.5

$2,076.1

$1,904.2

$1,634.2

$1,738.7

$1,620.7 Operating income 280.0 272.2 261.8 282.4 287.9 251.6 Net income (before preferred dividend requirements) 187.1 189.4 196.8*

167.3 202.7 183.5 Earnings per common share before cumulative effect of change in accounting principle 3.15 3.18 2.96 2.59 3.25 3.01 Earnings per common share 3.15 3.18 3.28 2.59 3.25 3.01 Dividends declared per common share 2.70 2.60 2.50 2.345 2.205 2.065 AT DECEMBER 31 Total assets 3,546.5 3,532.7 3,551.5 3,409.2 3,332.6 3,197.6 Long-term debt and preferred stock subject to mandatory redemption (excludes current portion) 1,287.2 1,357.0 1,388.4 1,333.2 1,354.1 1,391.0

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

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

Quarterly Financial Data (Unaudited)

(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)

QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER31 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 (expense) 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 1989 Operating revenues

$499,441

$504,280

$500,920

$577,844 Operating expenses 436,025 437,253 424,205 504,983 Operating income 63,416 67,027 76,715 72,861 Other income (expense) 103 1,417 (317) 7,357 Net interest charges 27,600 25,210 22,964 25,679 Net income (before preferred dividend requirements) 35,919 43,234 53,434 54,539 Preferred dividend requirements 2,840 2,815 2,774 2,773 Earnings applicable to common shares

$ 33,079

$ 40,419

$ 50,660

$ 51,766 Average common shares outstanding 55,894 55,893 55,893 55,900 Earnings per common share 0.59 0.72 0.91 0.93 These amounts are unaudited, but in the opinion of the company reflect all adjustments necessary for a fair presentation.

14 1989 ANNUAL REPORT

Results of Operations Purchased Power As discussed in Note 8 of the notes to con Earnings Earnings of $3.15 per share in 1989 were three cents that i

ctanmcots o e

transpred o the less than the $3.18 in 1988, due to numerous factors. The pri-tht owerin transprincipal t

mary factors were the effects of the 1989 regulatory dis-ingtefet oe diallowa n w e r he irst qute allowance of certain purchased power costs associated with the ofg1989,creducing pretaxoince by roxiate $25 million Southwest Powerlink (described below), offset by increased sales not subject to regulatory balancing accounts, improved or 28 cents per share.

earnings of subsidiaries (described below), and a conservation During the third quarter of 1989, the CPUC Division of award from the California Public Utilities Commission.

Ratepayer Advocates issued a report on the reasonableness of the 1988company's entering into its purchased power contract with Port ings of $2.96 before the effect of the 1987 accounting change toneral Electric Co. Power deliveries under that contract record unbilled revenues. The increase was due primarily to the rebal tesiny contestin t

e PU staff alg that 1987 costs associated with the disallowance of certain San signing the contract was unreasonable. The DRA has recoi Onofre Nuclear Generating Station construction costs by the mended that future Energy Cost Adjustment Clause proceedings California Public Utilities Commission.

Caliorna PulicUtiltie Comisson.compare the costs under the contract with the costs of alternative EARNINGS PER SHARE 40 sources of power. The potential disallowances have a net present EARNINGS PER SHARE 4.00 value of $28 million. CPUC hearings have been completed and a (IN DOLLARS) 3.00 ifornia Public Utilities Commission voted to disallow $69 mil lion of the company's $1.1 billion share of the San Onofre construction costs. The company, together with Southern Cal 2.00 ifornia Edison, petitioned for a rehearing. In 1987, the commis sion reheard the case and reduced the disallowance to $53 million.

The disallowance reduced 1987 income by $22 million, or 39 1.00 cents per share. The disallowance also required the company to write-off the disallowed plant costs in 1988 by restating 1986 earnings. A follow-up decision in December 1988 resolved cer 85 86 87 88 89 tai implementation issues and increased the construction cost write off. That decision did not have a significant effect on 1988 NET INCOME 240 earnings.

(IN MILLIONS OF DOLLARS)

Subsidiary Operations 1989 was the first year that earnings 200 of the company's nonutility operations were more than nominal.

During 1989, one of the subsidiaries, which had not been contri 160 buting to earnings, was sold. A new subsidiary in the pollution control business was acquired near the end of the year and a let 120 ter of intent for a related acquisition was signed shortly after year-end. These changes reflect the company's decision to focus 80 its nonutility operations on the pollution control industry.

Unbiiied Revenues Before January 1, 1987, the company 40 recorded revenues from the sale of gas and electricity when it read customers' meters and billed customers for service. In 85 86 87 88 89 1987, the company began recording revenue based on the 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 effect on subse quent periods. It is discussed in Note 2 of the notes to consoli dated financial statements.

SAN DIEGO GAS & ELECTRIC 15

Revenues The CPUC controls the company's prices, and In 1988, revenues decreased due to a lower authorized margin.

thereby its revenues, generally by two mechanisms: base prices The margin was lower because authorized return on equity and balancing accounts.

decreased from 13.9 percent in 1987 to 12.75 percent in 1988.

Base prices provide a return on capital and compensate the Margin also decreased because less revenue was required to company for operating and maintenance costs, taxes and cover the lower tax expense since the Tax Reform Act of 1986 depreciation. Base prices, except for the cost of capital, are set lowered tax rates from 40 percent in 1987 to 34 percent in 1988.

in a general rate case every three years. Annually, the commis-Increases in the authorized equity to debt ratio partly offset the sion sets the authorized cost of capital and makes adjustments for lower authorized return on equity.

inflation, system growth and rate of return. The current three-1989 revenues were adversely affected by a change in author year cycle started January 1, 1989. Because of the pending mer-ized return. Although the rate of return was increased from ger with Southern California Edison, which is described in a fol-12.75 percent to 13 percent, this was more than offset by a lowing section of the financial review, the next general rate case change in the authorized rate-making capital structure. While will be replaced with a modified proceeding that is similar to the the company had requested a 51 percent common equity compo annual proceedings.

nent to fully recognize its use of capitalized leases, the CPUC The company uses balancing accounts for fuel costs, both authorized only 48 percent.

electric and gas. The commission sets balancing account rates Most of the revenues from diversified operations and the gas based on estimated costs. Differences between actual costs and and oil for resale to other customers arise from Mock Resources, authorized estimates are accumulated in the balancing accounts.

Inc., one of the nonutility subsidiaries. Mock purchases the gas Periodically, the company adjusts rates to blend the balances into and oil and resells them at a small margin. Mock's revenues future rates. The company also uses balancing accounts to com-increased in 1988 and decreased in 1989 primarily due to fluc pensate for the differences between actual and estimated sales tuations in sales volumes.

volumes. However, the account for gas sales to certain large Costs The total cost of electric fuel and purchased power customers was eliminated, effective May 1988. In the first two increased again in 1989. The primary causes continue to be years, a transition arrangement limits the change's potential increased volume and higher costs for natural gas used in electric impact on the company's earnings.

generation.

Electric revenue was up 2 percent in 1989 and 3 percent in The cost of natural gas for resale to utility customers con 1988, due to increased volume, partially offset by a decrease in tinued to decline due to reduced unit costs for this natural gas, total authorized costs. Gas revenue was up 5 percent in 1989, due to increases in total authorized costs and in volumes. Gas Ialofetby the ffects of th.

revenue for 1988 was down 3 percent from 1987, primarily due to lower fuel costs, partially offset by increased volume. In both oraing Income tax djutesed to aus regula years, the volume increases were primarily due to growth in the reduced tax rates in 1988 due to the Tax Reform Act of 1986.

number of customers in the company's service territory. This The company earns an allowance for funds used during con growth slowed in 1988 and 1989 but is still far in excess of the struction on the construction funds held by trustees as well as on national average.

construction in progress. The total allowance for construction funds, both debt and equity, decreased in 1989 due to the total OPERATING REVENUES 2500:

OPERTINGREVEUES 500 drawdown of the funds held by trustees. The allowance is not a (IN MILLIONS OF DOLLARS)

(IN ILLINS O DOLARS)current source of cash but will result in increased future cash 2000 flows as its amortization is included in rates.

Interest charges are net of interest income on construction funds temporarily invested by trustees. Interest charges have 1500 been stable for the last three years. The company's embedded cost of debt decreased from 9.4 percent in 1987 to 9.2 percent in lwere1988 and in 1989.

1000 500 85 86 87 88 89 16 1989 ANNUAL REPORT

Liquidity and Capital Resources The utility's capital structure is one factor that has enabled it Utility operations are a major source of liquidity for the com-financing at attractive rates. The following pany. Since 1984, tax-exempt industrial development bonds and compoents.

pollution control bonds have been the major external sources of liquidity. Until 1989, funds from operations and tax-exempt Common equity 43%

42%

44%

46%

45%

45-48%

bonds were more than adequate to cover construction of utility plant, payment of dividends and maturing long-term debt.

Preferred stock 8

7 6

6 6

5-7 However, by late 1989 the situation had changed. In 1989 the Debt and leases 49 51 50 48 49 46-49 company issued short-term debt to fund that portion of con struction expenditures not covered by cash flow from operations.

Another measure of the company's ability to obtain financing This was done as an interim measure pending issuance of long-is pretax interest coverage. The company's goal is to exceed 3.75.

term debt in 1990.

The company recently received authorization from the CPUC The chart shows the company's results.

to issue $200 million in debt. Such issuances will be made over a two-year period and will be in various types, depending upon MAINTAIN 3.75X PRETAX INTEREST COVERAGE 4.50 two-year(INCLUDING CAPITAL market conditions. The first issue ($100 million of first mortgage LEASE INTEREST bonds) is currently in process. Proceeds from that issue will also be used to repay $30 million of first mortgage bonds that mature on October 1, 1990.

The major changes in operational cash flows in 1989 com pared to 1988, and in 1988 compared to 1987 have been changes in regulatory balancing accounts, partly offset in 1989 by changes in income taxes. In 1988 the balancing accounts were a source of cash, as the amounts collected in prices temporarily exceeded the related costs, primarily because sales volumes r Performance were significantly higher than anticipated. However, the over-Goal collection was much smaller than in 1987. In 1989 the balancing accounts were a major cash use as the previous overcollections 85 86 87 88 89 were returned to customers by means of prices that were set wereretrne to ustmer bymean ofpries tat eresetNet additions to utility plant, excluding nuclear fuel and the lower than the related costs. The major cause of the 1989 change allowance for funds used during construction, are expected to in the cash flow effect of income taxes was related to the timing total $234 million in 1990. This includes preliminary costs of tax deductions arising from balancing account activity. A similar effect in 1988 was largely offset by various, minor reted t ne gee Test are planed tonbeacom factors.

The percentage of funds for construction that the company can facilities since 1984. 1990 construction is expected to be funded geneateintrnaly s a oodmeaureof iquiityproide by from the new debt issues discussed earlier in this section, and generate internally is a good measure of liquidity provided by fo nenlgnrto n

hr-emdb.Mngmn operations. The company's goal is to exceed 65 percent. The following chart shows the company's success in achieving that believes ample external sources of long-term and short-term goal.

financing will continue to be available.

MAINTAIN INTERNAL GENERATION OF CONSTRUCTION 125 EXPENDITURES (at t5 preant or nore)

(BY PERCENT)

(CONSTRUCTION 100 EXPENDITURES EXCLUDE AFUDC) r Performance 2

1bGoal 85 86 87 88 89 SAN DIEGO GAS & ELECTRIC 17

The Future The company continues to pursue goals to lower prices.

Several trends and factors are expected to affect future operating

dmie, the copay expcs that it ilbeo e

results and liquidity.

inesgl y u pcha l t energyefom o

• The company may merge with Southern California Edi-ilites. Thrfore, despite cost e

fo prier son Company, an adjacent electric utility.

• Competition and partial deregulation are increasing.

expected to increase.

• The company's nonutility operations are changing focus.

The company is continuing to take advantage of the deregula

• San Diego's customer growth continues at a rapid rate, re-tion of the natural gas industry. In 1985, the Federal Energy Reg sultng i inceasig saes.ulatory Commission provided for open access to interstate gas suiting in increasing sales.

• Fluctuations in interest and inflation rates are affecting the transmission pipelines. For the last three years the company has authrize raes o retrn.bought a substantial portion of its natural gas from suppliers in authorized rates of return.

ANew Mexico, Texas and Oklahoma at relatively low spot-market A shrt escipton f eah o thse ollwsprices.

Southern California Gas Company transports that gas for Possible Merger On November 30, 1988, the company a fee. This arrangement has lowered the total cost of natural gas signed a merger agreement with SCEcorp and its utility subsidi-purchases greatly. Previously, all gas came from Southern Cal ary, Southern California Edison Company, under which the com-ifornia Gas. SDG&E retail customers that meet certain criteria pany will be merged into Edison, subject to various conditions.

may purchase gas and pay SDG&E a transmission fee. The Favorable votes of the common, preferred and preference share-CPUC also has restructured the price-setting mechanisms for holders of the companies were received at the annual meetings natural gas sales to certain large customers.

held in April 1989. The merger still is dependent upon regula-Nonutlity Operations When the company expanded into tory approvals, which are expected to be received around the end nonregulated businesses a few years ago, it included real estate of 1990.

of 190.and computer software for utilities and governmental entities.

The CPUC's Division of Ratepayer Advocates, the California This was a logical beginning, since the utility was already very Attorney General, the City of San Diego and various other gov-involved in these areas. Recently, however, the focus has shifted.

ernmental units have taken or may take actions that are adverse The software operation and much of the real estate have been to the merger. The outcome of such actions is not known.

sold. The direction is now shifting toward pollution control.

Competition and Partial Deregulation In recent years, Wahlco, Inc., purchased in 1987, has successfully increased the electric and natural gas utility industry has begun to experi-its sales volume in its flue gas conditioning business. It recently ence competition and partial deregulation. Deregulation could acquired another company in a complementary pollution control result in increased volatility in electricity and gas prices. In the field and has signed a letter of intent for another.

future, customers may be able to purchase power from other sources and transmit it over the company's transmission lines.

tome grothe com n ate of new cuto ad This could result in higher rates to remaining customers and tion isow the reor eel of 198 t o tes increased cost recovery risk to the company.

abovertent aor 1988 and 1

t r

as As of January 1, 1990, the company's electricity prices aver-Outr4tpercet for electric and cttoer for gas aged 8.6 cents per kilowatt-hour and will increase on May 1. The Overate astrfi arelercnd gas com e

thh amount of the increase is dependent on regulatory proceedings average apxme 4 pec ny ex the to be completed shortly. While still higher than many other util-futre Te of o

togaveraaout 3 p

rthe net fie ities, the company's average electricity prices have decreased one-third since 1985 and for two years have been lower than those of the other major, investor-owned California utilities.

(IN THOUSANDS OF NEW CUSTOMERS)

In recent years, the company restructured the way customers pay for electric service to reflect the company's real costs. In the 50 past, price increases were placed disproportionately on large electricity users. This resulted in commercial and industrial 40 customers' paying a price higher than the actual cost to serve them. This differential has been reduced greatly as a larger por-30 tion of price decreases has been passed on to commercial and industrial customers. This change and the company's successful efforts to reduce costs have made prices more competitive with the alternative sources of electricity available to its customers r Electric and reduced the amount of bypass of the company's electric t

Gas e

system.

to increas e 85 86 87 88 89 18 1989 ANNUAL REPORT

effects of customer growth, continues to decline, due largely to For 1990, the CPUC reduced the authorized rate to 12.9 per reductions in the company's electric rates, especially those for cent but increased the equity portion of the capital structure to the largest customers.

49.5 percent, resulting in a net 0.2 percent improvement in Rates of Return Fluctuations in inflation and interest rates advocates reuestedwthat the CPUC Difysthe decisionato have contributed to changes in authorized rates of return on loe ha rte or the equ poif the cpit equity. The CPUC lowered the authorized rate of return on equity from 16 percent in 1985 to 15 percent in 1986, 13.9 per-tr thced cent in 1987 and 12.75 percent in 1988. Although the rate was increased to 13 percent for 1989, the equity portion of the rate-return, inflation does not generally affect income. Increases in making capital structure was artificially set at 48 percent, which operating costs due to inflation are normally recovered through was below the actual percentage. This resulted in an overall base prices. The effects of inflation on fuel and purchased power authrizd rtur to ommn sareoldrs fr 189 hatwasprices generally do not affect income because these costs are authorized return to common shareholders for 1989 that was rcvrdi h aacn cons lower than that authorized for 1988 by approximately 0.3 percent of equity.

Responsibility Report for the consolidated financial statements are presented fairly, in all Consolidated Financial Statements material respects, in accordance with generally accepted The company is responsible for the consolidated financial state-accounting principles.

auThe audit committee discusses with the company's internal sienlit ad thereldabiita in th annalieprt.

e t cite auditors and the independent auditors the overall scope and spe siifrthe rompanyhasdvelibltyofd a

sthe oliternaal onw cific plans for their respective audits. The committee also dis thels coany hngaes dvlp afystm of independen trl a

o g con cusses the company's consolidated financial statements and the ditoro s nd eag panycarries aut firm ofrinde de itos T

ord o adequacy of the company's internal controls. The committee met dirosofte coany ctarem s ou h

its spon iity fortee twice during the fiscal year with the internal auditors and the cosoiatdfianil tteetsthoghis udtcomtte independent auditors without management present, to discuss composed of directors who are not officers or employees of the the results of their examinations, their evaluations of the com company.

pany's internal controls, and the overall quality of the company's Management maintains the system of internal accounting con-financial reporting. The internal auditors and the independent trols, which it believes is adequate to provide reasonable, but not auditors have full and free access to the committee throughout absolute, assurance that its assets are safeguarded, transactions thyer are executed in accordance with its objectives, and the financial te year.

Tecosan reos r

rsponible for pepaingidted consolidlate-opn aaeethspeardtecnoiaeiaca rstatements and other data in this annual report. In the opinion of financial statements in accordance with generally accepted the company, the consolidated financial statements, which accounting principles, include amounts based on estimates and judgments of manage The concept of reasonable assurance recognizes that the cost mnhv enpeae ncnomt ihgnrlyacpe of a system of internal accounting controls should not exceed t ment n prpedh benefits derived and that management makes estimates and judg ments of these cost/benefit factors. The system of internal accounting controls is supported by an extensive program of internal audits, selection and training of qualified personnel, and written policies and procedures.9 The company's independent auditors, Deloitte & Touche, are engaged to audit the company's consolidated financial statements Frank H. Ault in accordance with generally accepted auditing standards for the purpose of expressing their opinion as to whether the company's Controller SAN DIEGO GAS & ELECTRIC 19

To the Shareholders and the Board of Directors of San In our opinion, the consolidated financial statements referred Diego Gas & Electric Company: We have audited the to above present fairly, in all material respects, the financial consolidated financial statements of San Diego Gas & Electric position of the company and its subsidiaries as of December 31, Company and its subsidiaries (pages 21 to 33) for the years 1989 and 1988 and the results of their operations and their cash ended December 31, 1989, 1988 and 1987. These financial state-flows for each of the three years in the period ended December ments are the responsibility of the company's management. Our 31, 1989 in conformity with generally accepted accounting responsibility is to express an opinion on these financial state-principles.

ments based on our audits.

As discussed in Note 2 to the consolidated financial state We conducted our audits in accordance with generally ments, the company changed its method of accounting for accepted auditing standards. Those standards require that we unbilled revenues in 1987.

plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstate ment. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial state ments. An audit also includes assessing the accounting princi ples 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 San Diego, California opinion.

February 23, 1990 1989 REVENUE DOLLAR to6(

abovet presentc farySnallaeraeepettesiaca 14.4p Utility Gas Sales 22.18a Diversified Operations Diversified Operations consist primarily of sales by Mock Resources, Inc.

Disposition

31. 9c Fuel and Purchased Energy 19.4s Gas and Oilfor Resale to Other Customersc 11t.2s Other Operating Expenses 8.5o Total Taxes u8.5n Depreciation 7.8o Dividends to Shareholders 7.OS Salaries and Benefits 4.5 Cost of Money-net of AFUDC I1.2ot Reinvested in Business 20 1989 ANNUAL REPORT

Statements of Consolidated Income (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

Evcerpts from the FOR THE YEARS ENDED DECEMBER 31 1989 1988 1987 Financial Review Operating Revenues Electric

$1,324,891

$1,299,995

$1,261,312

a. This relates primarily Gas 300,397 285,430 293,859 to Mock Resources, Inc., a nonutility Diversified operations a

457,197 490,662 349,057 subsidiary.

Total operating revenues 2,082,485 2,076,087 1,904,228 Operating Expenses

b. Taxes on operating Electric fuel and purchased power 509,720 482,333 437,842 income decreased in 1988 because the Tax Gas for resale to utility customers 155,400 164,120 170,303 Reform Act of 1986 Gas and oil for resale to other customers a

404,342 445,934 336,632 lowered corporate tax Maintenance 67,645 66,509 66,041 rates. Taxes increased in 1989 due to higher oper Depreciation and decommissioning 177,096 172,841 151,655 ating income and regula Property and other taxes 40,440 41,776 40,479 tory issues.

Other 306,016 311,950 288,476 Income taxes (Note 7) b 141,807 118,397 151,021

c. The total allowance for construction funds Total operating expenses 1,802,466 1,803,860 1,642,449 decreased in 1989 due to Operating Income 280,019 272,227 261,779 the total drawdown of Other Income and (Deductions) the funds held by Allowance for equity funds used during construction c 7,386 12,398 14,816 Taxes on nonoperating income (Note 7) 6,441 3,324 7,161

d. The CPUC dis Other-net (5,267) 3,478 (1,916) allowance of $53 million Total other income 8,560 19,200 20,061 of San Onofre con struction costs reduced Income Before Interest Charges and Cumulative 1987 income by $22 Effect of Change in Accounting Principle 288,579 291,427 281,840 million.

Interest Charges Long-term debt 87,962 89,166 90,529

e. In connection with the Short-term debt and other 16,404 13,704 12,109 lax Reform Act of 1986, the company changed Allowance for borrowed funds used the timing of when it during construction c

(2,913)

(808) 72 records revenue. This Net interest charges 101,453 102,062 102,710 resulted in a one-time Income Before Cumulative Effect of Change boost to earnings in in Accounting Principle d

187,126 189,365 179,130 1987.

Cumulative effect of change in accounting principle (Note 2) e 17,673 Net Income (before preferred dividend requirements) 187,126 189,365 196,803 Preferred Dividend Requirements 11,202 11,716 13,745 Earnings Applicable to Common Shares

$ 175,924

$ 177,649

$ 183,058 Average Common Shares Outstanding 55,895 55,875 55,849 Earnings Per Common Share Before cumulative effect of change in accounting principle 3.15 3.18 2.96 Cumulative effect of change in accounting principle

.32 Net earnings 3.15 3.18 3.28 Dividends Declared Per Common Share 2.70 2.60 2.50 See notes to consolidated financial statements.

SAN DIEGO GAS & ELECTRIC 21

Consolidated Balance Sheets (IN THOUSANDS OF DOLLARS)

Excerpts from the BALANCE AT DECEMBER 31 1989 1988 Financial Review Assets Utility plant-at original cost

$4,383,771

$4,159,240

a. The company's Accumulated depreciation (1,433,791)

(1,257,152) embedded cost of debt Utility plant-net (Note 3)per Utiit plntne (Nte3)2,949,980 2,902,088 cent in 1987 to 9.2 per Investments and other property 157,852 138,950 cent in 1988 and in 1989.

Construction funds held by trustees (Note 9) 36,267 Current.

he California Public Cash and temporary investments 20,033 38,086 te Comysiuit Receivables 175,616 186,996 portion of its 1989 capi Inventories 76,533 77,206 tal structure below the Other 26,971 17,658 Total current assets 299,153 319,946

c. in 1989 the cornan Goodwill 41,028 38,851 issued short-term debt Deferred charges and other assetstepory financin of a portion of its con Total

$3,546,496

$ 3,532,692 struction expenditures.

Capitalization and Liabilities Capitalization (see Statements of Consolidated

d. Previous overcollec Capital Stock and Long-Term Debt) tions were refunded in Common equity

$ 1,256,113

$1,229,937 1989 by reducing prices Preferred stock 146,993 149,993 Long-term debt (Note 3) a 1,112,743 1,179,483 Total capitalization b

2,515,849 2,559,413 Current Liabilities Short-term borrowings (Note 4) c 72,474 Long-term debt redeemable within one year (Note 3) 115,000 115,000 Current portion of long-term debt (Note 3) 50,372 26,006 Accounts payable 159,382 176,077 Dividends payable 40,519 39,160 Taxes accrued 28,962 7,979 Interest accrued 27,504 25,600 Regulatory balancing accounts overcollected-net d

8,393 71,284 Other 52,595 49,004 Total current liabilities 555,201 510,110 Customer advances for construction 71,993 73,708 Accumulated deferred income taxes-net (Note 7) 206,101 182,319 Accumulated deferred investment tax credits (Note 7) 134,588 151,497 Deferred credits and other liabilities 62,764 55,645 Contingencies and commitments (Notes 8 and 9)

Total

$ 3,546,496

$ 3,532,692 See notes to consolidated financial statements.

22 1989 ANNUAL REPORT

Statements of Consolidated Cash Flows (IN THOUSANDS OF DOLLARS)

Excerpts from the FOR THE YEARS ENDED DECEMBER 31 1989 1988 1987 Financial Review Cash Flows from Operating Activities Net income

$ 187,126

$ 189,365

$ 196,803

a. The 1989 change in Adjustments for noncash items the cash flow effect of Depreciation and decommissioning 177,096 172,841 151,655 income taxes was pri mar ily due to the timing Amortization of deferred charges and other assets 1,251 1,267 1,464 of tax deductions related Allowance for funds used during construction (10,299)

(13,206)

(14,744) to balancing accounts.

Deferred income taxes and investment tax credits a

24,471 (14,222)

(26,208)

Other-net 3,785 (1,898) 4,716 wereasourceofcashin Changes in working capital components 1988 and 1987 as collec Receivables 11,380 2,024 (61,919) tions exceeded costs but Regulatory balancing accounts b

(62,891) 12,401 82,922 were a cash use in 1989 a previous overcollec Inventories 673 (28,344) 17,184 tions were refunded to Prepayments and other current assets (1,603)

(3,307)

(2,198) customers.

Accrued interest and taxes a

5,289 (6,933)

(2,430)

Accounts payable and other current liabilities (13,104)

(9,530) 75,425 wIh Sotgen alrn Net cash provided by operating activities 323,174 300,458 422,670 Edison restricts divi Cash Flows from Financing Activities dends and debt issues, Dividends paid c

(160,777)

(155,761)

(152,720) without Edison's Sale of preferred stock 44,481 Sale of common stock 116 129 124

d. In 1989 the company Issuances of long-term debt c

1,615 9,071 60,460 issued short-term debt to Repayment of long-term debt (10,337)

(38,399)

(51,906) expenditures, pending a Redemption of preferred stock (3,000)

(7,564)

(74,158) 1990 issue of first mort Short-term financings-net d

72,474 4,598 (27,978) gage bonds.

Net cash used by financing activities (99,909)

(187,926)

(201,697)

Cash Flows from Investing Activities Construction expenditures (236,738)

(201,629)

(193,918)

Contributions to decommissioning funds (25,640)

(30,268)

(5,891)

Payment for purchase of Wahlco, Inc.,

net of cash acquired (19,387)

Purchase of assets (20,054)

(33,592)

(17,536)

Proceeds from sale of assets 2,269 13,811 2,598 Other-net 2,578 (1,625) 20,724 Net cash used by investing activities (277,585)

(253,303)

(213,410)

Net increase (decrease)

(54,320)

(140,771) 7,563 Cash, construction funds and temporary investments, beginning of period 74,353 215,124 207,561 Cash, construction funds and temporary investments, end of period

$ 20,033

$ 74,353

$215,124 Supplemental Schedule of Noncash Investing and Financing Activities Acquisition of Wahlco, Inc.

Assets acquired

$ 61,811 Net cash paid for stock (19,387)

Liabilities assumed or incurred

$ 42,424 Disposals of real estate Real estate disposed

$ 24,624 Debt discharged (21,300)

Noncash proceeds 3,324

$ 1 See notes to consolidated financial statements.

SAN DIEGO GAS & ELECTRIC 23

Statements of Consolidated Changes In Capital Stock and Retained Earnings Preferred Stock (IN THOUSANDS OF DOLLARS)

Not Subject to Subject to Mandatory Mandatory Common Premium on Retained FOR THE YEARS ENDED DECEMBER 31, 1987, 1988, 1989 Redemption Redemption Stock Capital Stock Earnings 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 Net Income 187,126 Common stock sold (23,163 shares) 116 Vesting of previously restricted shares 1,071 Current sinking fund requirement (3,000)

Dividends declared Preferred stock (11,192)

Common stock (150,945)

Balance, December 31, 1989

$ 87,493

$ 59,500

$279,608

$468,681

$ 507,824 See notes to consolidated financial statements.

RETAINED EARNINGS 600 (IN MILLIONS OF DOLLARS, AT DECEMBER 31) 500 400 300 200 100 85 86 87 88 89 24 1989 ANNUAL REPORT

Statements of Consolidated Capital Stock (IN THOUSANDS OF DOLLARS EXCEPT VOLUNTARY REDEMPTION PRICE)

BALANCE AT DECEMBER 31 1989 1988 Common Equity Common stock, without par value, authorized 170,000,000 shares, outstanding: 1989, 55,921,505 shares, 1988, 55,898,342 shares

$ 279,608

$ 279,492 Premium on capital stock 468,681 467,610 Retained earnings 507,824 482,835 Total common equity

$1,256,113

$1,229,937 Preferred Stock Voluntary Not subject to mandatory redemption Redemption

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

$24.00

$ 7,500

$ 7,500 4 2% Series, 300,000 shares outstanding 21.20 6,000 6,000 4.40% Series, 325,000 shares outstanding 21.20 6,500 6,500 4.60% Series, 374,650 shares outstanding 20.25 7,493 7,493 Without par value*

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

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

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

$87,493

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

$8.25 Series, outstanding: 1989, 75,000 shares; 1988, 85,000 shares 104.125

$ 7,500

$ 8,500

$9.125 Series, outstanding: 1989, 100,000 shares; 1988, 120,000 shares 104.109 10,000 12,000

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

(3,000)

Total subject to mandatory redemption

$59,500

$62,500

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

See notes to consolidated financial statements.

SAN DIEGO GAS & ELECTRIC 25

Statements of Consolidated Long-Term Debt (IN THOUSANDS OF DOLLARS)

BALANCE AT DECEMBER 31 1989 1988 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 8 % Series Q, due March 15, 2007 50,000 50,000 9 % Series R, due May 1, 2008 50,000 50,000 512% Series U-2, due September 1, 1994 10,068 10,468 10% Series AA, due June 1, 2018 150,000 150,000 10% Series BB, due September 1, 2018 150,000 150,000 6.20% Series CC, due May 1, 2008 53,000 53,000 6.20% Series DD, due December 1, 2008 27,000 27,000 94% Series EE, due September 1, 2020 100,000 100,000 5.95% Series FF, due December 1, 2007 35,000 35,000 7/8% Series GG, due July 1, 2021 44,250 44,250 71/8% Series HH, due December 1, 2021 81,350 81,350 8

% Series II, due March 1, 2023 25,000 25,000 Total 1,025,668 1,026,068 Capitalized leases Nuclear fuel 71,767 76,618 Generating facility 93,695 97,738 Other 21,776 25,182 Total 187,238 199,538 Other long-term debt 87,013 110,715 Unamortized discount on long-term debt (15,242)

(15,832)

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

(115,000)

(115,000)

Current portion of long-term debt (Note 3)

(56,934)

(26,006)

Total

$1,112,743

$1,179,483 See notes to consolidated financial statements.

26 1989 ANNUAL REPORT

Schedules of Consolidated Financial Information by Segments of Business (IN THOUSANDS OF DOLLARS)

AT DECEMBER 31 OR FOR THE YEARS THEN ENDED 1989 1988 1987 Operating Revenues*

$2,082,485

$2,076,087

$1,904,228 Operating Income Electric operations

$ 237,174

$ 242,656

$ 241,777 Gas operations 35,364 25,794 21,734 Diversified operations 7,481 3,777 (1,732)

Total

$ 280,019

$ 272,227

$ 261,779 Depreciation and Decommissioning Electric operations

$ 149,400

$ 147,029

$ 129,470 Gas operations 23,188 21,164 19,288 Diversified operations 4,508 4,648 2,897 Total

$ 177,096

$ 172,841

$ 151,655 Utility Plant Additions**

Electric operations

$ 194,637

$ 165,517

$ 157,306 Gas operations 42,101 36,112 36,612 Total

$ 236,738

$ 201,629

$ 193,918 Identifiable Assets Utility plant-net Electric operations

$2,652,349

$2,626,159

$2,610,706 Gas operations 297,631 275,929 256,499 Total 2,949,980 2,902,088 2,867,205 Inventories Electric operations 58,554 60,368 46,735 Gas operations 17,979 16,838 2,127 Total 76,533 77,206 48,862 Other identifiable assets Electric operations 209,037 225,219 276,285 Gas operations 36,641 52,863 74,842 Diversified operations 161,621 169,810 143,719 Total 407,299 447,892 494,846 Other Assets 112,684 105,506 140,625 Total Assets

$3,546,496

$3,532,692

$3,551,538

• The detail to operating revenues is provided in the Statements of Consolidated Income. The gas operating revenues shown therein include $5 million in 1989, $8 million in 1988 and $18 million in 1987, representing the gross margin on sales to the electric segment. These margins arise from interdepartmental transfers of

$150 million in 1989, $129 million in 1988 and $137 million in 1987, based on transfer pricing allowed by the California Public Utilities Commission in tariff rates.

• • Excluding allowance for funds used during construction.

See notes to consolidated financial statements.

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

SAN DIEGO GAS & ELECTRIC 27

Merger Agreement with Southern SDG&E and Edison would be carried forward at their recorded California Edison Company amounts as of the effective time of the merger. Income of the On November 30, 1988, SDG&E, SCEcorp and combined corporation would include income of the constituent Southern California Edison Company, a subsidiary of corporations for the entire fiscal year in which the combination SCEcorp, executed an agreement to merge SDG&E into Edison.

occurs and reported income of the separate corporations for the Under the terms of the merger agreement, SCEcorp will prior periods would be combined and restated as income of the exchange 1.3 shares of its newly issued common stock for each combined corporation.

SDG&E common share. SDG&E preferred and preference stock Pro forma combined financial information of the two com will be exchanged for SCEcorp preferred and preference stock panies as of December 31, 1989, and for the year then ended will with similar provisions, except that dividends on each series will be included in the company's annual report to the Securities and be increased between 10 percent and 20 percent. During April Exchange Commission on Form 10-K which will be filed in 1989, the shareholders of SDG&E, SCEcorp and Edison March 1990.

approved the merger agreement. The merger remains subject to The City of San Diego has stated that the company's fran approval by regulatory agencies, including the California Public chises with the city may not be transferred to Edison without the Utilities Commission and the Federal Energy Regulatory Com-consent of the city and that the merger would result in such trans mission. The merger agreement limits various company actions, fers. These franchises allow the company to locate facilities for including dividend increases and debt issues, without Edison's the transmission and distribution of electricity, gas and steam in consent.

the city's streets and public places. On February 13, 1990, the During the second quarter of 1989, SDG&E and Edison filed city attorney filed suit against SDG&E, SCEcorp and Edison in joint testimony with the FERC and the CPUC requesting Superior Court, asking for a determination of the rights of the approval of the proposed merger. Hearing schedules have been city under the franchises.

issued by both commissions, but are subject to change. FERC On February 7, 1990, the California Attorney General idi hearings began in February 1990 and CPUC hearings are sched-cated that he will challenge the merger before the regulatory uled to begin in April 1990. The schedules should lead to a deci-authorities and, possibly, in the courts. On February 8, 1990, the sion on the merger in late 1990 or early 1991.

CPUC's Division of Ratepayer Advocates recommended that the The proposed merger will be treated as a "pooling of inter-CPUC not approve the merger unless various, stringent condi ests" for accounting and financial reporting purposes. Under tions are imposed.

this method of accounting, the assets and liabilities of both 28 1989 ANNUAL REPORT

Summary of Accounting Policies Allowance for funds used during construction The Consolidation The consolidated financial state-allowance represents the cost of funds used to finance the con ments include the accounts of San Diego Gas & Elec-struction of utility plant and is added to the cost of utility plant.

tric and its subsidiary, Pacific Diversified Capital AFUDC also increases income, partly as an offset to financing Company, the holding company for the nonutility subsidiaries.

costs shown in the Statements of Consolidated Income, although The nonutility subsidiaries consist of Wahlco Environmental it is not a current source of cash.

Systems, Inc.; Mock Resources, Inc.; and Phase One Develop-Revenues and regulatory balancing accounts Revenues ment, Inc. Mock is 51 percent owned by Pacific Diversified Cap-from utility customers consist of deliveries to customers and the ital and the others are wholly owned. Wahlco Environmental Systems was formed recently to be the parent company for cnes inregator balancin accntsi to t

Wahlco, Inc., previously a direct subsidiary of Pacific Diver-enue were bae onmete ead o a cle icthroughout sified Capital; Helmick Heater Element Services, Inc., a recent e

nth.bThe3cmlive effet incr 1987 acquisition; and Bachmann, Inc., with which a letter of intent re was signed recently for its acquisition.

prsae was igne reentl fo itsacqisiton.Earnings fluctuations from changes in the costs of fuel oil, Utility plant and depreciation Utility plant represents the purchased energy and gas, and consumption levels for electricity buildings, equipment and other facilities used to provide electric and the majority of gas are minimized by balancing accounts and gas service. The cost of utility plant includes labor, mate-authorized by the California Public Utilities Commission. The rial, contract services and other related items and an allowance balances of these accounts represent amounts that will be for funds used during construction. The cost of depreciable recovered from, or repaid to, customers by adjustments to future retired utility plant, plus removal expenses minus salvage value, prices. The CPUC reviews the reasonableness of the amounts in is charged to accumulated depreciation.

these accounts.

Depreciation expense reflects the straight-line remaining use ful life method. The provisions for depreciation approximated Godilodwlarsfomtecqstonfcranbu ful ifemetod.Theproisins fr dpreiaton pprximted nesses by Pacific Diversified Capital. It is being amortized on a 3.96 percent of average depreciable utility plant in 1989, 4.07 straight-line basis over 20 to 40 years.

percent in 1988, and 4.12 percent in 1987.

Inventories At December 31, 1989 and 1988, inventories Other Certain prior year amounts have been reclassified for include $43 million of materials and supplies and $34 million of comparability.

fuel oil and natural gas. Materials and supplies are valued at average cost, and fuel oil and natural gas are valued at cost by the last-in first-out, or LIFO, method.

LongATerm Debt Certain first mortgage bonds have variable interest rate provi Due dates of long-term obligations are shown on the sions. Bondholders may elect to redeem their bonds at the inter Statements of Consolidated Long-Term Debt. Exclud-est adjustment dates. The 1990 interest rate adjustment dates will ing capital leases, which are described in Note 9, be August 1 for Series FF and September 1 for Series CC and DD.

combined aggregate maturities and sinking fund requirements of The company has received CPUC authorization to issue $200 long-term debt are $41 million for 1990, $20 million for 1991, million in debt over the next two years and is in the process of

$12 million for 1992, $16 million for 1993, and $11 million for issuing $100 million of first mortgage bonds.

1994.

Interest payments, including those applicable to short-term First mortgage bonds are secured by a lien on substantially all borrowings, amounted to $102 million in 1989 and $104 million in utility plant. Additional first mortgage bonds may be issued 1988 and in 1987.

upon compliance with the provisions of the bond indenture.

SAN DIEGO GAS & ELECTRIC 29

Short-Term Borrowings At December 31, 1989, short-term borrowings consisted of As of December 31, 1989, SDG&E had various bank

$57.8 million of commercial paper at 8.7 percent and the sub lines aggregating $79.5 million, all of which were sidiary bank credit line of $14.7 million at 10.5 percent. At available to support commercial paper. SDG&E's December 31, 1988, there were no short-term borrowings subsidiaries have a bank credit line that provides for borrowing outstanding.

up to $16.5 million at the prime rate. A commitment fee is paid on the unused portion of the lines. There are no requirements for compensating balances.

Facilities Under Joint Ownership Each participant in the projects must provide its own financing.

5 The Southwest Powerlink transmission line and the The company's share of operating expenses is included in its San Onofre nuclear power plant are owned jointly Statements of Consolidated Income.

with other utilities. The company's interests at The company's share of future dismantling and decontamina December 31, 1989 were:

tion costs for the San Onofre units is estimated to be $175 mil lion. These costs are considered in setting rates and are expected (IN MILLIONS OF DOLLARS) to be recovered fully in rates over the estimated lives of the SOUTHWEST PROJECT POWERLINK SAN ONOFRE plants. In December 1987, the company began placing in an Ownership interest (%)

89 20 externally managed trust fund the amounts collected in rates. At Utility plant in service

$209

$1,152 December 31, 1989, the trust fund had a balance of $60 million, Accumulated depreciation

$ 37

$ 248 which is included in Investments and Other Property on the bal Construction work in progress

$ 0 11 ance sheet.

EEmployee Benefit Plans The projected benefit obligation assrnes an 8 percent actu The company-funded pension plan covers substan-anal discount rate and a 6 percent average annual salary tially all employees. Benefits are related to the increase. The expected long-term rate of return on plan assets is employees' compensation. Plan assets consist pri-8.5 percent.

martly of common stocks, annuity contracts, U.S. government Eligible employees may make a contribution of 1 percent to 11 securities and bonds.

percent of their base pay to the company's Savings Plan for In 1987, the company adopted Statement of Financial investment in mutual funds or in common stock of the company.

Accounting Standards No. 87. This had no effect on pension The company contributes up to 3 percent of a participant's base expense. The company continues to fund the plan based on the compensation for investment in the company's common stock.

aggregate cost actuarial method, subject to full-funding The company contributed approximately $4 million in 1989, limitations.

$8 million in 1988 and $14 million in 1987 to these plans.

Net pension cost consists of the following (in thousands):

The company partially provides health and life insurance s

benefits to retired employees. The benefits paid and expensed 1989 6988 amounted to $3 million in 1989, $2 million in 1988 and $3 mil Cost related to current service

$ 13,370

$ 13,695 lion in 1987.

Interest on projected benefit obligation 18,670 21,231 The company has a long-term incentive stock compensation Return on plan assets (50,703)

(48,936) plan that provides for aggregate awards of up to 1,350,000 shares Other 20,008 19,405 of common stock over a 10-year period ending in 1996. The com Total Cost

$ 1,345

$ 5,395 pany issued approximately 25,000 shares of stock to officers for

$5 per share in each of the last four years. These shares were The plan's status at December 31 is as follows (in thousands):

issued subject to buy-back if certain corporate goals are not met.

1989 1988 Accumulated benefit obligation:

Vested

$163,929

$202,823 Nonvested 6,055 4,446 Total

$169,984

$207,269 Plan assets at fair value

$338,224

$344,159 Projected benefit obligation 263,317 295,246 Excess of plan assets over projected benefit obligation 74,907 48,913 Unrecognized effect of accounting change (2,751)

(2,980)

Unrecognized actuarial gains (72,156)

(45,933)

Amount recognized as an asset 30 1989 ANNUAL REPORT

Income Taxes Deferred taxes shown in the income statement essentially are Deferred income taxes arise from including income or taxes on current year income that will be paid in future years.

deductions in the company's income tax returns in a Under existing rules, deferred taxes are computed using current year different from the year they are reported in the tax rates even if these tax rates are expected to change in future financial statements. However, deferred taxes are not provided years. The new rule will require an adjustment of deferred taxes for those timing differences that are reflected in customer rates.

when tax rates change.

At December 31, 1989, the cumulative net amounts of timing This new rule is not expected to affect the company's profits or differences for which deferred taxes have not been provided were net worth significantly because most tax increases or reductions approximately $340 million for federal purposes and $650 mil-are borne by customers. However, deferred taxes on the balance lion for state purposes. In addition, current tax reductions aris-sheet will increase by a substantial, but not yet quantified, ing from investment tax credits are deferred and recognized over amount and a new regulatory asset will be reported for the esti the useful lives of the related property.

mated amount collectible from customers.

In December 1987, the Financial Accounting Standards Board Income tax payments totaled $107 million in 1989, $129 issued a rule that would require a major change in the way tax million in 1988 and $190 million in 1987.

expense will be computed in future years. Implementation of the new rule is required by the first quarter of 1992.

Components of Income Tax Expense (IN THOUSANDS OF DOLLARS) 1989 1988 1987 Current federal income tax

$ 86,461

$102,797

$145,679 Current state franchise tax 24,434 26,498 39,300 Total current taxes 110,895 129,295 184,979 Deferred -federal and state taxes Construction projects (7,397)

(31,205)

(22,106)

Tax over book depreciation 30,119 26d703 38.985 State franchise tax b

8,901 (876)

Regulatory balancing accounts 27,334 (7,136)

(43,767)

Unbilled revenue (10,267)

(6.284) 7050 Other-net (2,558) 3,199 (7,655)

Total deferred taxes 37,231 (5,822)

(28,369)

Deferred investment tax credits -net (12,760)

(8,400) 2,161 Total income tax expense

$135,366

$115,073

$158,771 Total Tax Expense as Reported In the Statements of Consolidated Income (IN THOUSANDS OF DOLLARS) 1989 1988 1987 Operating expenses

$141,807

$118,397

$151,021 Taxes on nonoperating income (6,441)

(3,324)

(7161)

Cumulative effect of change in accounting principle 14,911 Total

$135,366

$115,073

$158,771 Reconciliation of Statutory Federal Income Tax Rate to Effective Rate (IN THOUSANDS OF DOLLARS) 1989 1988 1987 Income before federal income taxes

$295,394

$279,734

$326,595 Statutory federal income tax rate 34.0%

34.0 40.0%

Depreciation 5.0 4.4 4.4 Construction costs capitalized (0.9)

(1.0)

(1.0)

Allowance for funds used during construction (0.8)

(1.6)

(1.7)

Deferred investment tax credits - net (4.3)

(3.0) 0.7 Other-net 3.5 (0.3)

(3.3)

Effective federal income tax rate 36.5%

32.5%

39.1%

SAN DIEGO GAS& ELECTRIC 31

Contingencies Concerning Purchased of its application in U.S. District Court in San Francisco.

Power Contracts SDG&E requested an injunction from the court reversing the Southwest Powerlink On February 24, 1989, the CPUC's action.

California Public Utilities Commission issued a deci-Portland General Electric On July 17,1989, the CPUC sion ordering a disallowance of approximately $25 million of Division of Ratepayer Advocates issued a report on the reason costs associated with long-term purchased power contracts using ableness of the company's entering into its purchased power con the Southwest Powerlink. This decision had the effect of reduc ing pretax income for the first quarter by $25 million, or $0.28 ta c

wt tln ral Ee ri cont t the oer per share after tax. The decision also provided for a possible term. Power deliveries under that contract began on January 1, reduction of the disallowance through an energy credit based on 1989. The DRA has recommended that the annual costs of the cost savings from energy purchased under these contracts. In contract be compared with the cost of alternative sources of September 1989, SDG&E filed for this credit, increasing pretax power, with the excess costs being subject to disallowance in income for the third quarter by $5 million, or $0.05 per share those years in which the contract costs are higher than the cost of after tax.

aftertax.the alternative sources. The potential disallowances identified by On March 31, 1989, seeking to reduce the disallowance, the DRA have a net present value of $28 million, based on the SDG&E filed an application for rehearing with the CPUC. The DRA's assertions as to what constitutes the cost of alternative application challenged the CPUC's authority to disallow expenses resulting from paying Federal Energy Regulatory source of power A Ci t

re Commission-approved rates. The application also challenged inath e

at r

of 1990 various premises supporting the CPUC's decision. On Septem-manema ber 7, 1989, the CPUC denied the application for rehearing. On September 29, 1989, SDG&E challenged the CPUC's rejection 32 1989 ANNUAL REPORT

Other Contingencies and Commitments The minimum rental commitments payable in future years Nuclear Insurance Public liability claims that under all noncancellable leases are:

could arise from a nuclear incident are limited by the OPERATINGCAPITALIZED Price-Anderson Amendments Act of 1988 to a max-(IN MILLIONS OF DOLLARS)

LEASES LEASES imum amount of $7.8 billion for each licensed nuclear facility.

1990

$14

$ 37 The company and the co-owners of the San Onofre units have 1991 10 36 purchased primary insurance of $200 million for this exposure, 1992 9

37 the maximum amount available in 1989. The remaining $7.6 bil-1993 8

15 lion is provided by secondary financial protection required by 1994 6

12 the Nuclear Regulatory Commission. This secondary coverage Thereafter 9

119 provides for loss sharing among utilities owning nuclear reactors Total future rental commitments

$56 256 if a costly accident occurs. The company could be assessed Imputed interest (6 percent to 9 percent)

(69) retroactive premium adjustments of up to $40 million in the Net commitment

$187 event of a nuclear incident involving any of the licensed, com mercial reactors in the United States, if the amount of the loss Rental payments totaled $61 million in 1989, $59 million in exceeds $200 million.

1988, and $54 million in 1987.

In addition to public liability insurance, coverage is provided Purchased power contracts The company buys electric for property damage and replacement power costs at San Onofre.

power under several long-term contracts. The contracts expire on Primary property damage coverage is provided for losses of up to various dates between 1992 and 2013.

$500 million. Additional decontamination liability and excess At December31, 1989, the future minimum payments under property damage insurance coverage of $1.375 billion at Decem-the contracts were:

ber 31, 1989 is provided. Replacement power insurance provides weekly indemnity payments for up to two years, commencing (IN MILLIONS OF DOLLARS) after a waiting period of 21 weeks. These three insurance 1990 112 coverages are provided primarily through mutual insurance com-1991 115 panies owned by utilities with nuclear facilities. If losses at any 1992 119 of the nuclear facilities covered by the risk-sharing arrangements 1993 122 were to exceed the accumulated funds available for these insur-1994 122 ance programs, SDG&E could be assessed retroactive premium T

adjustments of up to $13 million per year.

Total 1,685 Termination Agreement If the SCEcorp merger is consum mated, the merged company would be obligated, among other pay mnts fie chage.vThe ompany s er to things, to pay Thcson Electric Power Co. $25 million under the Termination and Settlement Agreement that terminated the pen-contracts.

ding merger with Tucson.

Total payments, including energy payments, under the con tracts were $247 million in 1989, $253 million in 1988, and Construction Approximately $234 million, excluding nuclear

$229 million in 1987.

fuel and AFUDC, is planned to be spent for utility plant con struction in 1990. Construction funds held by trustees (see the Litigto the ompany is ovedineariousalemat Consolidated Balance Sheets) represented proceeds from certain aris thof the o ary cours e buie.

ageet first mortgage bonds that had not yet been spent.

b e th es matril oth m

l e

Leases Nuclear fuel, an office building and a generating facility are financed by long-term capital leases. Utility plant includes $298 million at December 31, 1989 and $289 million at December 31, 1988 related to these leases.

SAN DIEGO GAS& ELECTRIC 33

San Diego Gas & Electric is an investor-owned energy man-Generating Station in northwest San Diego County; the South agement company founded in 1881. About 80 percent of the com-west Powerlink, a 500,000-volt transmission line which con pany's revenues are generated from its utility businesses.

nects San Diego and Phoenix; and a natural gas pipeline system The electric operations division purchases, generates and dis-within the company's gas service area. Within its service tern tributes energy to about 1.1 million customers in San Diego tory, the company has six operating and maintenance centers, County and the southwest corner of Orange County. The electric two new construction centers, seven district offices and six service area has a population of approximately 2.5 million.

branch offices.

The gas operations division purchases and distributes natural As of December31, 1989, there were about 4,200 people gas to about 660,000 customers in San Diego County. Gas serv-employed in the company's utility operations.

ice is not available in all locations, but the company's gas service SDG&E owns two subsidiaries: Pacific Diversified Capital, area is being expanded.

an independently operated holding company that owns com Among SDG&E's major assets are the Encina and South Bay panies serving utility, environmental and real estate markets; and power plants, which can burn either fuel oil or natural gas; a 20 Califia Company, a subsidiary used for general corporate purposes percent interest in three nuclear units at the San Onofre Nuclear such as holding real estate.

n n

a O

SDrc D ishn h cman' gssevcOaf.fice tssrvc tri teneior heom h

o Dw e

osrcincnes ee istrict ffices n

i SAN DIEGO COUNT branchtoffices Ass oftibto Decmbe 31ut 199Bhrawrybu 420pol Pwemtion sla 34 1989 ANNUAL REPORT

Officers Alton T. Davis, 52 Edwin A. Galls, 40 ThmsA ae 6Senior Vice President-Vice President-Corporate Planning Thomas A. Page, 56 Customer Services Edwin Guiles was elected vice Chairman, President and Chief Executive Officer Alton Davis was elected senior president-corporate planning Thomas Page was elected vice president in 1985 after in January 1990 after serving as chairman in 1983. He has been serving as a group vice presi-director-merger transition president and chief executive dent since 1981 and a vice since January 1989 and as offcersine 981 Hejoied president since 1976. He was director-business planning officer since 198 1. He joined SDG&E in 1978 as a senior appointed to his current posi-since 1987. He joined SDG&E officer.

tion in November 1986. Davis as an engineer in 1972.

Jack E. Thomas, 57joined SDG&E in 1968.

MargotA. Kyd, 36 Executive Vice President R. Lee Haney, 50 Vice President and Chief Operating Qfficer Senior Vice President-Finance Administrative Services and Chief Financial Officer Margot Kyd was elected vice Jack Thomas was elected executive vice president in 1985 Lee Haney was elected senior president-administrative serv and chief operating officer in vice president-finance in ices in December 1988 after 1986, after serving as a group January 1990. He was elected a serving as treasurer since 1986.

vice president since 1980 and a vice president in 1983 after She served as manager vice president since 1972. He serving as treasurer for two financial services and assistant joined SDG&E as an engineer years. He was elected vice treasurer the previous year.

in 1957.

president-finance in April Kyd joined the company in 1986 and became chief finan-1980.

Stephen L. Baum, 49 cial officer in July 1988. He Senior Vice President and General Counsel Vice President-Treasurer Stephen Baum was elected sen-Donald E. Feinger, 42 Public Relations Malyn Malquist was elected iorvie resdet n 187afer Vice President -Marketing and Richard Manning has been vice treasurer in January 1990 after iorResource Development president-public relations serving as director-finance serving as a vice president since 1985,vwhe hejin Donald Felsinger was elected a since he joined SDG&E in 1981 and assistant treasurer since SDG&E as a vice preside and vice president in 1983 and was from the Western Oil & Gas 1988. He was named director general sel.ve frerly appointed vice president of Association, where he was information services during wagenor csle relan marketing in November 1986.

manager of public affairs.

1987 following service as was senior vice president andwasGeorgedA.el.pmentaa53manager-financial services.

general counsel for the Power addt h

iiini er-Gog

.F ed,5 Authority of the State of Vice President-He joined the company in 1978.

New York.

ary 1989. Felsinger joined Human Resources Deiroy M. Richardson, 51 Gary D. Cotton, 49 SDG&E in 1972.

George Weida joined SDG&E Corporate SecretarY Senior Vice President-Ronaid K. Fuller, 52 in 1983 as a vice president and Engineering and Operations was named head of the human secretary in December 1986 Gary Cotton was elected senior and Regulatory Services resources division in 1984. Pre-after serving as assistant secre vice president in 1985 after Ronald Fuller was elected vice viously, he was head of human tary since 1983. He joined serving as a vice president president of regulatory services resources for other major U.S.

SDG&E as an attorney in 1971.

since 1979. He was appointed in 1983. Governmental services corporations.

to his current position in was added to the division in Frank H. Ault, 45 November 1986. Cotton joined 1984. He joined the company in Controller SDG&E in 1975.

1974.

Frank Ault was elected control ler in May 1986 after serving as director-internal auditing since 1981. Aultjoined SDG&E in 1969.

SAN DIEGO GAS & ELECTRIC 35

Pacific Diversified Capital, an independent SDG&E sub-Officers sidiary, seeks to increase return on shareholder equity by diver sifying into new, unregulated business areas.

Pacific Diversified Since 1986, PDC has operated as a holding company that has Capital Company acquired companies serving the utility industry or companies Thomas A. Page, 56 engaged in real estate development in San Diego and in other Chairman of the Board select locations. PDC has proceeded cautiously in its acquisi tions to limit shareholder risk while learning to manage the busi-Henry N. Huta, 42 nesses it acquired.

President and During 1989, PDC focused increasingly on environment-Chief Executive Officer related products and services, primarily pollution control equipment.

Wahico Environmental As of December 31, 1989, PDC owns three companies:

Systems, Inc.

• Wahlco, Inc., of Santa Ana, California, manufactures and installs air pollution control equipment sold to electric utilities throughout the world. Wahlco employs 235 people.

PDC acquired Wahlco in October 1987. In October 1989, Henry N. Huta, 42 Wahlco acquired the assets of Helmick Heater Element Services, President and Inc. of Fairmount, West Virginia.

Chief Executive Officer Early in 1990, Wahlco signed a letter of intent to acquire Bachmann, Inc. of Lewiston, Maine, which manufactures gas-E u

Vice Pesi an and fluid-flow control products.

Wahlco is restructuring its three business operations into a new holding company called Wahlco Environmental Systems, A. Noel DeWinter, 50 Inc.

Vice President,

• Phase One Development, Inc., San Diego, owns commer-Chief Financial Officer cial real estate development projects in San Diego and in Color-and Secretary ado Springs, Colorado. Phase One was acquired in October 1986 and has three employees.

Wahico, Inc.

• Mock Resources, Inc., of Irvine, California, distributes and markets fuel oil, natural gas and lubricants, primarily to indus-President and trial firms in the western states. Mock Resources employs Chief Executive Officer Phase One approximately 130 people.

Development, Inc.

In December 1986, PDC acquired 51 percent of Mock Howard E. Sandier, 48 Resources.

Executive Vice President-HrsenN Ha 4

Administration, General Counsel PreidfEetiv d

ce and Assistant Secretary R. J. Mudd, 44 Michael J. Lowell, 31 Vice President-Operations Vice President and Secretary of Corporation Chief Financial Officer Fred C. Johnson, 38 Mock Resources, Inc.

Vice President-Finance Brian Mock, 43 President and ChiefhExecutive Officer Christopher P. Kunz, 39 Executive Vice President L. Keith MMtair, 41 Vice President-Natural Gas and Business Development 36 1989 ANNUAL REPORT

The seven-person board of Main Burnham*

Fred C. Staider Committees directors consists of six outside Main Burnham, 62, a director Fred Stalder, 69, a member of of the Board directors and the chief execu-since 1967, is chairman of John the board since 1969, was chief tive officer of SDG&E, who Burnham & Co., a mortgage executive officer of Central Audit This committee selects serves as its chairman. The loan, real estate and insurance Federal Savings and Loan in an independent auditor and directors provide a broad per-firm. He is chairman of First San Diego from 1948 until his reviews the overall plan of the spective because of their National Corp. in San Diego retirement in 1985. He is a pri-audit, financial statements, diverse business, professional and is a director of Cubic vate investor. Stalder has been audit results, scope of internal and civic backgrounds.

Corp., BMA Corp. and of involved with and has provided audit procedures and the audi Pacific Diversified Capital. He leadership to many San Diego-tors' evaluation of internal Thomas A. Page*

also is chairman and a director area civic and cultural organi-controls.

Thomas Page, 56, a director of Burnham Pacific Properties, zations for over 40 years.

Executive This committee is since 1979, has been chairman Inc.

empowered to act in place of of the board since 1983. He is Catherine Fitzgerald Wigs the full board, except in certain president and chief executive Daniel W. Derbes*

Catherine Fitzgerald Wiggs, transactions for various board officer of SDG&E. He also is Daniel Derbes, 59, a director 56, a director since 1979, is a responsibilities that are the chairman of the board since 1983, was president of management consultant in the reserved for the board.

of Pacific Diversified Capital.

Allied-Signal International fields of human resources and Page is a certified public Inc., and executive vice presi-organizational effectiveness.

Executive Compensation accountant and a licensed pro-dent of Allied-Signal, Inc.,

In the nine years prior to estab-This committee reviews the fessional engineer with an from 1985, when the company lishing her own consulting salaries and other forms of extensive management back-was formed, until December business in 1986, she was compensation of company ground. He is a past chairman 31, 1988. From 1983 to 1985, executive vice president of officers and makes compensa of both the Pacific Coast Gas he was president of the Signal human resources for The tion recommendations to the Association and the San Diego Advanced Technology Group Broadway Stores, Inc., a divi-board.

Economic Development Corp.

and executive vice president of sion of Carter Hawley Hale Finance This committee He is a member of the Califor-the Signal Companies, Inc.

Stores, Inc.

counsels management and nia Business Roundtable.

Derbes is president of Signal helps plan the company's capi Clair W. Burgener Ventures and is a director of tal requirements, proposed Clair Burgener, 68, a director financing programs and capital since 1983, is president of risk exposure analyses and Burgener Properties, Inc., a real Capital. He also is involved reviews the general investment estate and property develop-policy performance for the Pen ment firm. Earlier, he served organizations.

sion Plan and the Savings Plan.

24 years in elected public Ralph R. Ocampe Nominating This committee office. Burgener serves on the Dr. Ralph Ocampo, 58, a considers and recommends boards of several community director since 1983, is a physi-nominees to the board, criteria service organizations and is a cian and surgeon. He has been for board and committee com director of San Diego Trust and active throughout his career in position and membership, and Savings Bank, of TCS Enter-many professional associations directors' compensation.

prises and of Blue Shield of and in community activities.

California.

He is a director of Mercy Hos pital and Medical Center, of the San Diego chapter of the Amer ican Cancer Society and of the San Diego Community Foun dation. He served as president of the Hispanic American Uni versity Foundation in 1986.

• Member of the executive committee SAN DIEGO GAS & ELECTRIC 37

Selected Financial Data AT DECEMBER 31 1989 1988 1987 1986 1985 1984 Current assets*

299.2 319.9 336.4 299.7 366.2 393.8 Current liabilities*

555.2 510.1 533.7 450.2 404.8 352.2 Working capital*

(256.0)

(190.2)

(197.3)

(150.5)

(38.6) 41.6 Working capital ratio

.5

.6

.6

.7

.9 1.1 Long-term debt*

1,112.7 1,179.5 1,204.6 1,193.9 1,208.6 1,277.5 Common shareholders' equity*

1,256.1 1,229.9 1,197.4 1,159.9 1,153.0 1,052.9 Number ofcustomerst 1,069.6 1,032.6 990.4 940.7 893.9 853.6 Number of utility employees 4,209 4,420 4,612 4,815 4,860 4,841 Common shares outstanding 55,921,505 55,898,342 55,872,602 55,847,822 55,822,762 54,063,592 Book value per common share 22.46 22.00 21.43 20.77 20.65 19.48 Price/Earnings ratio 14.33 12.0 9.1 9.9 8.3 7.6 FOR YEAR ENDED DECEMBER 31 Operating Revenues*

Electric 1,324.9 1,300.0 1,261.3 1,333.5 1,395.7 1,292.8 Gas 300.4 285.4 293.8 299.2 343.0 327.9 Diversified operations 457.2 490.7 349.1 1.5 Pretax income/revenue 15.5%

14.7%

18.7%

21.6%

22.7%

19.8%

Return on equity 14.2%

14.6%

15.6%

12.3%

16.2%

15.8%

Effective federal tax rate 36.5%

32.5%

39.1%

47.8%

44.5%

38.7%

Earnings per common share 3.15 3.18 3.28tt $

2.59 3.25 3.01 Dividends declared per common share 2.70 2.60 2.50 2.345 2.205 2.065 Dividend payout ratio (declared) 85.7%

81.8%

76.3%

90.4%

68.1%

68.8%

Price range of common shares

$ 455/8-$363

$ 39 2-$30

$ 37/8-$28 4

$42 2-$26%

$ 283/8-$21 V2

$ 23 i-$175/8

• In millions of dollars.

tIn thousands.

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

FINANCIAL RETURN ON EQUITY 20 (WEIGHTED AVERAGE)

(BY PERCENT)

Financial return on equity Is measured by earnings applicable to common shares 12 divided by average common equity.

____8 4

85 86 87 88 89 38 1989 ANNUAL REPORT

Compound Annual Compound Annual Growth Rate Growth Rate 5 Years 1983 1982 1981 1980 1979 10 Years (5.1)%

267.3 303.9 302.4 308.8 218.9 3.3%

9.5%

429.7 443.6 453.4 382.3 307.0 6.1%

(162.4)

(139.7)

(151.0)

(73.5)

(88.1)

.6

.7

.7

.8

.7 (2.7)%

1,275.4 1,007.2 925.0 918.5 813.8 3.2%

3.6%

957.6 817.4 672.4 585.8 541.2 8.8%

4.6%

823.2 804.5 792.4 772.9 750.9 3.6%

(2.8)%

4,917 5,084 4,909 4,776 4,740 (1.2)%

0.7%

51,693,662 48,266,144 41,499,034 36,469,483 31,188,237 6.0%

2.9%

18.52 16.94 16.20 16.06 17.35 2.6%

6.1 5.9 5.3 11.6 7.3 0.5%

1,207.1 1,137.9 948.6 770.9 593.5 8.4%

(1.7)%

323.1 293.0 211.0 189.5 151.7 7.1%

18.7%

15.3%

10.2%

4.5%

10.0%

18.2%

17.5%

14.5%

6.0%

10.4%

31.2%

24.0%

4.7%

(13.1)%

4.3%

0.9%

3.20 2.90 2.34 1.01 1.80 5.8%

5.5%

1.925 1.785 1.64 1.56 1.48 6.2%

60.7%

62.4%

71.1%

156.8%

83.1%

22-$17

$1T/-$11%

14-$1l

$ 154-$10

$15/8-$123/

Quarterly Common Stock Data 1989 1988 First Second Third Fourth First Second Third Fourth Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Market price High 394 412 42/8 455/8 34 33%

36 392 Low 36 37/8 40 392 30 305/8 32 34-/8 Dividends declared 67.50 67.50 67.50 67.50 65o 650 650 650 SAN DIEGO GAS & ELECTRIC 39

Stock Listing and Trading Information Transfer Agents and Registrars Common stock: Listed on the New York and Pacific stock The company's transfer agents and not the company have pri exchanges under the ticker symbol SDO. Shareholders can find mary responsibility for stock transfers and the cancellation and the previous day's closing price in the New York Stock Exchange issuance of stock certificates. You should contact the agents listing table of daily newspapers under the symbol SDieGs.

directly.

Preferred and preference stocks: Listed on the American Transfer agents:

and Pacific stock exchanges under the ticker symbol SDO. Pre vious day closing prices are listed in the American Stock 8155 Mecr ort Exchange listing table under the symbol SDGO. The 4.60% pre-Post Offce Bo29 ferred series and the $7.05, $8.25 and $9.125 preference series s Die Cornia29 are not listed.230-4487 Where to buy and sell stock: You can purchase the listed Union Bank is the registrar for common stock in San Diego.

common, preferred and preference stocks through any brokerage Union Bank is also transfer agent and registrar for the preferred firm. Some firms specialize in selling the unlisted series, and and preference stocks.

they can be located through your broker.

Common Stock Investment Plan: Please call or write for a First Interstate Trust Con e

prospectus on how SDG&E common stock shareholders can pur-2 Brd 29t Flo chase additional shares by investing all or a portion of their quar-y, terly dividends in additional shares. The plan also allows New York, New York 10004 optional cash investments of as little as $25 per investment up to First Interstate Bank is the registrar for common stock in a maximum of $5,000 per calendar quarter. Shares purchased New York.

under this plan are free of any brokerage fees.

First Interstate Bank is also the transfer agent and registrar for DIvidend Deposit Service: If you wish to have your dividend the preference stocks, except the $8.25 and the $9.125 series.

check mailed directly to your bank for deposit, send signed How to transfer stock: A transfer of stock is required when instructions containing your bank account number and the com-ever there is a change in the name or names in which the stock plete mailing address of the bank to the Office of the Secretary, certificate is registered. This can happen when you sell the SDG&E. If the checks are being deposited to a joint account, all stock, make a gift of stock, or add or delete owners of the certifi owners of the account and all shareholders should sign the letter.

cate. The transfer can be made by filling in the stock assignment form on the back of the stock certificate and signing it exactly as the name or names appear on the front of the certificate. The sig natures of the individuals transferring the stock must be guaran teed by either a commercial 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 cer tificates be sent registered or certified mail.

TOTAL ANNUAL RETURN TO SHAREHOLDERS 40 INVESTOR PROFILE (BY PERCENT)

(BY PERCENT AT DECEMBER 31)

The company Court remained In the top 25 percent, meeting Its 80 goal. Stock price 91 appreciation and divi dends are the compo-60 nents of average total return, measured overso fiEve years.

40 Fi r Individuals 20 oTop 25% of Industry Institutions 29Standard

& Poor's 500 85 86 87 88 89 85 86 87 88 89 40 1989 ANNUAL REPORT

Annual Meeting Publications Available to Shareholders The annual meeting of shareholders will be held on Tuesday, Annual Report: Inquiries about this annual report should be April 24 at 11 a.m. at the U.S. Grant Hotel, Grand Ballroom, directed to Elizabeth Pecsi, Public Communications, Post Office 326 Broadway, San Diego, California 92101-4812.

Box 1831, San Diego, California 92112.

Record date: The record date for shareholders eligible to vote Investors Report: Reports of current activities, recent results at the annual meeting is March 2, 1990.

and features of interest to shareholders are issued periodically during the year.

Shareholder Profile Form 10-K: The annual report to the Securities and Exchange As of December 31, 1989, there were 65,941 common stock Commission.

shareholders of record and 5,084 preferred and preference stock Shareholder Information Handbook: Answers many ques shareholders. There are thousands of other stock holders whose tions commonly asked by shareholders.

shares are held in street name by securities brokers and nominees.

Where to Call for Information Common Stock Shareholders Inquiries about stock holdings:

By account registration:

Within California (800) 826-5942 Jitacut2120 Outside California (800) 243-5454 Joint accounts 21,270 Women 19,499 To hear a tape recorded corporate news report and stock update:

Men 14,003 Within California (800) 443-SDGE Fiduciaries 10,299 Outside California (800) 521-NEWS Securities brokers, nominees, others 870 Inquiries from the financial community should be directed to:

Bgegahcae:Roberta Detata (619) 696-4488 By geographic area:

United States, except California 33,575 California, except SDG&E service area 20,140 Saecie Off ic SDG&E service area, including employees 12,045 101 Ash Street Foreign countries 181 Post Office Box 1831 By shares owned:

San Diego, California 92112 1-99 3,653 (619) 696-2000 1-99 13,653 100-300 35,787 301-500 7,974 501-1000 5,619 1001 or more 2,908 DIVIDENDS PER SHARE 3.00 COMMON STOCK PRICE TREND iO (DECLARED, IN DOLLARS)

(IN DOLLARS)

Dividends were 2R50 The 19o9 price 40 Increased In 19f9 Increases are due to s

i foduin the year.eth For0theanhrertothSe2.00 the prcpsed mergera n

consecutive year.

with Southern calfer--

j3 Cm Edisson and lewer Wh.

Interest rates.

______20 1.00 High

/

TYear e

re

.0 LowEn 85 86 87 88 89 85 86 87 88 89 SAN DIEGO GAS& ELECTRIC 41