ML13331B440

San Diego Gas & Electric,Annual Rept for 1986

ML13331B440
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Site:	05000000, San Onofre
Issue date:	12/31/1986
From:	Page T SAN DIEGO GAS & ELECTRIC CO.
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8 Annual Repor San Diego Gas & Electric KING FOR YOU AROUND THE CLOCK m~

SAN DIEGO GAS

& ELcnIC 19 8 6S Dig Gcs&Eev6nmieetad employees coninuewd toset toug goals, pubwice tenfor die invetn pubfic to monitor; and work to achieve diemGowh Among the major corporate goaltated and achieved inSW.-

Aan

• Maintain the conmpany's total overal uern to Time company also obtained repteagy appravalsto IWi err co monoashahlesintetop 25 perc n

uchasenaturagW sonsout-ar-seenupin Msote9000touie ofele arcar...

anutilities Reselts: te cut operatingcoss anucesraesand us-wasaOdo G&!

conspany was amnnog the top 19 percent with an somer bills. Resubts: tA mee~ly lbili for dietpical ss~mB e'ed e

average annual retuom over five years at nearly resid*.ent customer using both electricity and gas WIol cti as~

34percent declined, for the thirl year in a rove from a peake lf adst e

407Zo Gainacem tDadidtim sef-cpstareourcs.

$72.75 toS$62-07.

i Imtesh SDG&E will have the rgh topadditinal

• Focus nuaring activitie. Resulbs: a uniod 191.TiSc"q electric trmwsmisinn capability between Califrnia approach to gas and electric arketing with sonme g~&Eef55 and Arizona for the 1990 when a new Tame is built.

tough goals set for the future.cn oo teh m

2> In January, Pacific Diversified Capital, ea SDORE subsidiary, sokl its 20 percent intest in Baeagy be Factors, Inc. for $24.6 amillion, contibuting 25 cents per shae to earnings. Later PDC bouight:

• the assets of Phase One Devieloposent, Inc., a San Diego-based commercial real estat developend1 company

• all the stock of Computing Solutions, Inc., of 9 0 7 Port Chester, New York, a computerized mapping software company94

• a majority interest in Mock Resources, Inc., an e

Irvine, California-based marketer and distributor 9 of natural gas, and petrolem product (pagewm 36).

T

-o Dham.(Oft TDeloninnt's knildings wre desioned fa WEni In Fen b e copany began or con siteth wec for the year, a $1.

in addi tion to: th as tramii sytm. Twvo Sunrise in San Dieg With new 300 hreower SDGE'sladmak lec egine n com<es trc oadig.Fo M sors insue as par of the thewada da bn

Dect n aryduled tie anny hour endlier-at pm midight. Thi Anua capacit ofth-Mrno Reportis dedicated o compresrsidn SDG&Es mplyees, who JoGacseir 0

awe working for yo am Jn the clockto achiee heerisecsistla coRany' goals.

tion w.k ona e natural gas comro.

more thankio tw ilonpol n otenCaiona wMeIb.e~r Throug itsete susdayaaii iesfe aiai alkw on four c pi i

h deances pag 237 Woln f Youear Generating Staiion

CiApril, aheoAsuan

Peeatg, oiscman what thccompa Anhasadone tooicreaseesholeholerlvaluebanddth outlookeforioarningsoand dividends.cPagen2 Gaininggaccessdtoelower-costcepergyesourcesiies

~~~~Company marcig or n196SD Ewa San Diego Gas & Electric is an energy management company. It operates a gas and electric utility that scrves Smoere than two million people in Southern California.

Through its subsidiary, Pacific Diversified Capital, it fMrktigCeiffottia Pubfr 176ar Cfuomeission owns ri companies in other industries (pages 31 0

Contents:

Notes to 7

the Financia Staemnt Pagee 24ea Reonibrkingfor Rou to Achieve Our Goals Chairman Thomas Page discusses what the company has done to increase shareholder value and the outlook for earnings and dividends.

Page 2 Gaining access to lower-cost energy sources is a

$1 80 30

• 0 company marching order. In 1986, SDG&E was definitely in command.

Page 4 To cut rates and operating costs in 1986, SDG&E SI 20 employees used their creativity.

Page 6 Charts of utility operations Page 8 Can we do our work more efficiently and cut costs?

$060S100Employees began offering their solutions to this challenging question in 1986.

Page 9 Marketing efforts for 1987 are focused on ireasing the company's profits in the future.

Page 10 Financial Review Page l2 Financial Statements Page 17 Notes to the Financial Statements Page 24 Responsibility Report for the Financial Statements and Auditors' Opinion Page 30 Corporate Profile - San Diego Gas & Electric Page 31 Officers Page 32 Board of Directors Page 33 Corporate Profile -Pacific Diversified Capital Page 36

)r Shareholder Reference Guide Page 38

To Our Shareholders:

D

~~awn is a

very special part of the EnryFcosIc.fr$46mliwhh day. Seeing the sun come up from added 25 cents per share to corporate earnings.

behind the hills and high-rises of

- The California Public Utilities Commission dis San Diego is one of the pleasures allowed some of the construction costs of San of living in the area, whose life Onofre Nuclear Generating Stations units 2 and 3.

style, climate and varied business SDG&Es 20 percent share of the disallowance was opportunities are attracting record numbers of

$69 million and we took part of it in the fourth new residents. Serving the region's population, quarter of 1986. This reduced total earnings by 8 which is among the fastest-growing in the nation, cents per share.

is a continuing challenge for SDG&E.

Along with co-owner Southern California Edi 1986 was an excellent year for the company.

son, we have requested a rehearing of the Record earnings were produced and rates to remainder of the cost disallowance. However, if no customers were reduced. It was the best of both change is made by the commission, 1986 and 1987 worlds!

earnings will be reduced, in total, by approxi mately $1.30 per share.

Meeting the Competition Nevertheless, our dividends to shareholders Although the company's residential customer base should not be affected. The company's financial has been growing rapidly, we have been losing position is excellent. Our board recognizes the some of our larger commercial and industrial importance of maintaining and increasing the divi customers as more companies have begun generat-dend, as we have for the past 10 years.

ing their own electricity. To curb this loss of larger customers, we must become more competitive.

Earnings in the Future As you will read elsewhere in this report, we In the utility industry generally, it's going to be already have begun cutting costs aggressively, and increasingly difficult to produce incremental earn we are providing commercial and industrial cus-ings from operations, primarily because the tomers with attractive rate options.

authorized rates of return are decreasing.

We must do these things to minimize future rate SDG&Es authorized rate of return on equity in increases to our residential customers, the inevita-1987, for example, is 13.9 percent, down from ble result of the loss of larger customers. This is, in 15 percent in 1986. Nevertheless, SDG&E should fact, the dawn of a new era of competitiveness for continue to compare favorably with other compa SDG&E.

nes in financial performance.

Management is determined to work hard to Earnings in 1986 achieve every dime of our authorized return.

Earnings were $3.42 per share in 1986, a new Furthermore, the CPUC has approved, on our record. This was the result of the company's own request, an increased common equity ratio. This strict expense controls and two specific events.

will partially offset the drop in authorized return

• SDG&E's independently operated subsidiary, by allocating a greater percentage of our return to Pacific Diversified Capital, sold its interest in common stock earnings.

Financial Highlights Total Annual Return to Shareholders (In Thousands of Dollars Except Per Share A.ounts) 1986 1985 Change and dividends are the corn ponents of total annual operating revenues

$1,634,211

$1,738,702

-6.0 return, measured over a Operating expenses

$1,351,861

$1,450,835

-6.8 five year period. SDG&E continues to be an industry dividend requirements)

$ 213,196

$ 202,722

+5.2 ifan ns applicable to common shares

$ 190,771

$ 178,925

+6.6 Averare common shares outstanding (thousands) 55,830 55,125

+1.3 Common stock shareholders (at December 3 1) 73,771 81,471

-9.5 Earningspermcommonshare 3.42 3.25

+5.2 Dividends declared per common share 2.345 2.205

+6.3 Total energy sales Electric (billions of kilowatt-hours) 11.72 11.66

+0.5 Gas (millions of therns) 490 529 the psy percent) 1978-1979-1980- 1981-1982 1982 1983 1984 1985 1988

These factors will help SDG&E reach its goal to Reducing the Risk produce maximum operating earnings per share In the past we've made some very important for the regulated segment of our company. We decisions that have helped the company to change expect the nonregulated, diversified operations to from being a high investment risk to a relatively produce the incremental earnings in the years lower investment risk.

ahead. Pacific Diversified Capital made three Lower interest rates, a higher dividend rate, acquisitions in 1986 for a good beginning.

plus the marketplaces perception of reduced risk To help Pacific Diversified Capital achieve its led to a higher market price and reduced yield. In goals, we still believe that we should have a 1982, SDG&Es year-end yield was 10.55 percent, holding company structure. It would provide the with a market price that ranged from $11.75 to best financing flexibility for PDC and the greatest

$17.875. In 1986, the company's year-end yield separation of functions between the regulated and was 7.03 percent and the market price ranged from nonregulated operations.

$26.75 to $42.50.

As you may recall, SDG&E's shareholders in The higher market price helped us to achieve late 1985 overwhelmingly approved our proposal our goal to be in the top 25 percent of the utility to form a holding company. Then the California industry in overall return to shareholders. For the commission in early 1986 approved the proposal.

five-year period of 1982 to 1986, the average annual However, in doing so, the commission attached return was nearly 34 percent.

several conditions we believe are inappropriate or To serve our customers well, to reduce invest impractical and thus we chose not to proceed to ment risk, to provide good earnings and, we hope, form a holding company at that time.

to increase further the market price of SDG&E We are reviewing this matter and making some stock, we will continue working hard and crea preliminary preparations to reapply. We will do so, tively toward achieving our corporate goals. We however, only if we think the commission would already have demonstrated we can achieve tough reconsider and eliminate those unacceptable goals and we have the motivation and energy to do conditions.

so in the years ahead.

Thomas A. Page Chairman, President and Chief Executive Officer February 10, 1987

At 12:01 a.m. on January 1, 1986, thefirst failures, and SDG&s preparedness to take economy energy purchase of the year was made advantage of both.

tem energydemand wit by SDG&E: 190 megawatts of coal-rgy from the Salt River Project in Phoenix. It was Purchased Power one of thousands of transactions made during Throughout the day and night, every day of the the year by the Energy Control Center staff, who year, SDG&E has the operations flexibility to work unusual 12-hour shifts, around the clock, move back and forth between spot market or seven days a week, monitoring the system and contract purchased power, electric energy bought lookingfor purchase and sale opportunities.

from other sources, and its own power generation Jeannie Scranton is one of sources, according to price and demand.

six resource coordinators he largest part of every dollar spent Whether it's nighttime or daytime, weekends or who match the varying sys-by SDG&E on behalf of its customers weekdays, energy control schedulers at SDG&E monthe loesidstenergy deman nrdeae th tenwscs energyadwt is for fuel and purchased power.

take advantage of cheap energy available on the sources available. The SDG&E has been working effec-spot market.

energy demand projection tively to lower those costs. In 1982, Firm power contracts, however, provide greater and the actual usage for 58 cents of every dollar spent was for reliability than spot market purchases. A very Atl2:0ari.ro Januayslo186,ethcfirs pteprmior.

I sow therom fuel or purchased power. Five years later, that had important low-cost contract for geothermal-fueled commercial and industrial dropped to 39 cents.

energy began in 1986 between SDG&E and Comi demand increase in the An ongoing goal at SDG&E is to have diversi-si6n Federal de Electricidad, the national electric morning, the residential fled energy resources. The ongoing benefits are to utility of Mexico. For the next 10 years, this demand increase that keep costs down and assure customers of a reliable purchase will provide about five percent of the occurs in the early eveningnerg tro eer st w

o and the tapering off of all see y

tr e

st customer demand during reduction opportunities that resulted partially from Two higher-cost energy contracts with utilities the night.

some deregulation in the energy industry, OPECs in New Mexico and Arizona will end in 1988 and 1989. To assure future reliable sources of pur chased energy, SDG&E already has signed two new, coalcfueled energy contracts. Especially important is that the new contracts have flexible prices that will be adjusted to the actual costs of producing the power.

Transmission Access to sources of energy continues to be the key to the company's operating plans. SDG&Eus own Southwest Powerlink, a 500-kilovolt line to Arizona, plus two shorter interconnecting lines to tngMexico, are the company's primary routes to energy beyond Californias eastern and southern borders.

In 1986, the capacity of the Southwest Powerlink was upgraded from 700 to 1,000 megawatts. Also during the year, SDG&E negotiated an improved contract with Southern California Edison that for now provides a back-up transmission route to Weekly management coun cil breakfasts begin at 7:30 a.m. John Hamrick, vice president-administrative services, right, is one of 17 members. Among them they have an average of 13 years of experience with SDG&E and an average age of 46. Periodic rotation of assignments keeps executives personally chal lenged and provides the company with new ideas.

eastern energy sources. For the future, it will secure additional transmission capability and pro vide improved operating flexibility for SDG&E when SCE completes construction of a proposed line between California and Arizona.

SDG&E's primary transmission link to the north is the Pacific Intertie, a transmission system between the California-Oregon border and Los Angeles. Access to northern sources of energy is expected to be increased substantially by the early 1990s, when the present system's capacity is increased and a proposed new line is added.

Studies for a new Inland Intertie transmission line between Idaho and Arizona are under way as well.

Also in 1986, SDG&E signed an agreement with 12 other utilities and power agencies that will allow open access to transmission lines throughout the western United States during 1987 and 1988. The two-year experiment will demonstrate how mar ket-based, rather than regulated, transmission rates affect the industry and its customers' costs.

Power Plant Operations In the early 1980s, SDG&E's management stopped thinking of the company as a "traditional" utility and began calling itself an "energy management company." At the time, not too many people, inside or outside of SDG&E, understood what it really meant to be an energy management company.

In 1986, the concept became an operating reality and work-a-day examples, particularly in the area of the company's fuel purchase activities, provide the evidence.

When oil and natural gas prices plummeted in 1986, SDG&E was well prepared to take advan tage of the competitive pricing marketplace. Fuel contract personnel, skilled in negotiating for power plant fuels, including oil and uranium, moved quickly to apply those skills in the newly emerged natural gas spot market.

During early 1986, the company's last single fuel unit at the Encina power plant was converted to use either oil or natural gas, allowing the company to purchase the lowest-cost fuel.

Significant cost savings were achieved during The results: Since the beginning of 1986, power The sun's just up and Kelly 1986 with 16 spot market deliveries of fuel oil from plant natural gas fuel costs dropped 35 percent and Ward and Dan Lancaster suppliers in Singapore, Australia, Alaska and Cali-the average cost of fuel oil in inventory dropped by are loading polyethylene fornia. The low-cost oil was burned until SDG&E percent. So successful and unique was the on tir trcka gained access to lower-cost spot market natural SDG&Es fuel switching capability and generating Center. About 1,400 gas. This was made possible when SDG&E per-fuel purchase expertise, that the company's work employees begin work at or suaded the California Public Utilities Commission was described in numerous national news and fuel before 7:00 a.m. to meet to require SDG&E's sole supplier to transport for a industry trade publications.

the needs of customers.

fee natural gas SDG&E purchased from other What worked well in 1986 may not work as well suppliers.

in 1987 or beyond in the changing energy market SDG&E quickly instituted an innovative spot place. Keeping one step ahead by gaining better market bidding program that attracted suppliers access to more energy sources remains a funda from around the countryo mental challenge for SDG&E.

At 8:00 a.m. on July 1, the San Francisco office of SDG&E's governmental and regulatory ser vices division was opened. It's located just a short walk away from the offices of the Califor nia Public Utilities Commission. This office opening is indicative of the company's deter mination to play a pivotal role in helping redesign the energy marketplace to meet the future needs of shareholders and customers.

ates have been very high since 1981 when the company was burdened with heavy construction costs on top of higher fuel costs. Since the com pletion of the major construction projects, operating budgets and rates have been trimmed. The initial focus of the company's rate-cutting efforts, beginning in 1983, was on residential customers. Since then, residen tial bills have declined 15 percent.

Commercial and industrial customers' rates also have been lowered. However, these customers have been subsidizing residential customers' energy use because they pay more than it costs the company to serve them. Therefore, changing rate design to make commercial and industrial rates reflect the actual cost of service or benefit to them is a company goal. Residential rates are expected to fluctuate moderately from year to year during the next few years.

Beginning in mid-1985, the company increased its focus on reducing rates to commercial and industrial customers. As a first step, on January 1, 1986, some specific time of day rates were reduced by 54 percent. A second step was taken in early 1987, when the California Public Utilities Com mission approved another $85.5 million reduction, much of this designed to benefit commercial and industrial customers.

Cogeneration SDG&E's efforts to have equitable rates among its customers have meant that the rates paid to cogenerators are being scrutinized by the com pany. Cogeneration systems use waste heat from The California Capitol in operations, or another fuel source, to produce Sacramento is familiar ter-thermal and electrical energy for their own use, ritory to Ronald Fuller, and sometimes for sale to SDG&E.

vice president-govern-In San Diego, 165 companies have or are mental and regulatory services, and Sacramento planning cogeneration systems. SDG&E does office staff member count on some cogenerated energy to be available Jeanette Bunch. When in the future. However, in 1986 alone, more than important legislative bills 40 companies left SDG&'s system to generate are being considered, a their own electricity. SDG&E has provided stand working day may last far by service to customers with cogeneration systems into the night. The division also has offices in Washing-at the California commissions direction and this ton, D.C. and San Francisco.

increases costs to other customers. The rate

charged for this stand-by service doesn't come including $125.6 million during 1986. As of close to covering the company's costs. As an initial December, total annual savings to customers from step toward covering those costs, beginning in IDBs and tax-exempt pollution control bond 1986, the company sought a rate design change. It issues was approximately $20 million.

was approved by the California commission.

By the end of the year, the company had more than 60 percent of its debt in tax-exempt issues, The Largest Customer one of the highest percentages of any investor Midway through 1986, the U.S. Navy, which repre-owned utility in the country sents nearly 10 percent of SDG&E's electric sales, announced that it intended to have a third party Recall of High Cost Debt and Preferred Stock build fossil fuel cogeneration plants for its use.

In the past two years, with major construction SDG&E launched its reply by reminding the activities completed, the company has had cash Navy of recently effective rate reductions that they available to retire early $241.3 million in high had not considered in their analysis. For the interest rate first mortgage bonds and preferred second component of its response, the company stock. Of this, $127.9 million was retired in 1986.

informed the media, other customers, congress-Total savings to customers from the recall of men and state legislators of the total impact of the higher cost debt and preferred stock by the end of Navy's plan: all other customers' bills would 1986 was $5.5 million annually In early 1987, increase if the Navy takes its business away.

another $41 million in higher cost preferred stock Next, SDG&E negotiators offered the Navy a was retired for an additional $1.1 million in annual competitive rate proposal designed to equal the savings to customers.

benefits the Navy sought from the cogeneration Shareholders are benefiting from SDG&'s systems while minimizing the impact on other financial management expertise, too, as the com customers. By year's end, the Navy and the pany seeks higher paying investments for its cash company had begun constructive negotiations. A balances.

final decision is expected in 1987.

While part of the company's cash was used for To make sure that the con Management wants to keep all the customers it the retirement of higher coupon debt and preferred struction work on a major economically can and the company's employees issues in 1986, the balance was invested in tax-project is completed on are working creatively to achieve this objective.

advantaged short-term investments that improved ge a

oite the company's after-tax rate of return.

construction managers.

It was close to 3:00p.m. on November10, 1986 There were signs of the financial community's Jeff Attig had that respon when the San Diego City Council approved its growing approval of SDG&'s progress toward sibiity for the expansion of fifth issue of tax-exempt industrial development achieving its goals when SDG&Es stock rose to an the Moreno gas compressor bondsfor SDG&E. The interest rate later was all-time high of $42.50 per share and when the station, the company's only bond formajor construction project set at 7.375 percent, a pelican's plunge from the rating agency of Duff& Phelps increased the in 1986. He's checking an 17.375 percent interest rate that SDG&E paid company's bond rating equivalent to an A plus.

oil storage vessel.

for some first mortgage bonds back in 1981 when interest rates were at an all-time high.

In the early 1980s, with a large construction program under way, SDG&E was forced to raise large amounts of capital at very high interest rates. Financial improvement has been slow, steady and well-planned. Today, the company is financially strong. Further more, its staff is using sound financial management to achieve SDG&E's goals. This expertise is help ing to cut customer costs and increase shareholder value.

Issues of Tax-Exempt Debt Management is working long and hard to continue to qualify the company for low-cost, tax-exempt industrial development bonds and pollution control bonds. SDG&E was one of the few to qualify in the past. By the end of 1986, the city of San Diego had issued $525.6 million in IDBs for SDG&E,

Electric System Energy M ix Electric Customers 0

Gas Customers (in thousands, at December 31)

(in thousands, at December 31) 1986 San Diego's climate and The number of natural gas life style continued to customers grew by four 230/a Gas attract people. Another percent in 1986. >

customer growth record 12%

Oil was set in 986. To meet the demand, employees often 22%

Nuclear worked longer hours. >

43%

Purchased Power 1996 32%

Oil and Gas 19%

Nuclear 1982 1983 1984 1985 1986 15%

Coal and Hydro (off peak)

Electric Sales Gas Sales 110% Cogeneration (in billions of kilowatt-hours)

(excludes interdepartmental 9%

Coal transfers) 9% Geothermal Electricity sales increased (in millions of therms) record increase in residen-Gas sales declined because tial customers. P of a warmer winter in 1986. P SDG&E took advantage of sharply declining fuel oil prices in 1986, more than doubling its use of fuel oil from 1985. In the 1996 chart, the purchased power component shows the vari ous sources of power to which the company expects to have access.

1982 1983 1984 1985 1986 Peak Demand Profile Electric Fuel and Average Cost of

" Electric system peak demand (in megawatts)

Purchased Power Costs Purchased Gas

" Gas system peak day sendout (in millions of standard cubic feet)

(in millions of dollars)

(in cents per therm)

MSCF MW SDG&E aggressively Competition between natu 2

• s2500 bought lower-cost fuel oil ral gas and fuel oil for and natural gas, chopping power plants led to a 25 000 millions from customer percent decline in the fuel costs in 1986. >w average cost of purchased gas in 1986. >

100 1000 50 500 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 1986 SDG&E is working to change this profile to level out the peaks and valleys by using its system more efficiently.

1982 1983 1984 1985 1986

When the digital watches began to beep at about 2:00 p.m. on July 11, the hubbub from the crowd in the Electric Building's auditorium subsided.

The audience, SDG&E's managers and division directors, anticipated hearing from senior manage ment the details of rumored changes ahead. This meeting was the introduction of the company's Performance Improve 1982 1983 1984 1985 1986 ment Program.

Jack Thomas, SDG&E's he company updated its business plan chief operating officer, in 1986 and a new goal was stated in talks with workers at the it: develop an organization that can Encina power plant about

~Tt~togti~etheareixi&~s ostperformance improvement adapt to change and challenge.

and the incentive award SDG&E has 4,815 employees.

program for employees.

TAltogether they are SDG&E's most important resource. The Performance Improve ment Program that was introduced in July 1986 is meant to reach into every corner of the company's operations. Since individual employees look into those corners as part of their jobs, stimulating ideas from them for cutting costs is an important element of the entire program.

Jack Thomas, executive vice president and chief operating officer, spoke at 39 employee meetings to explain why the Performance Improvement Program is so vital to SDG&E. He said repeatedly,

'As we look to the future, we see an ever 1982 1983 1984 1985 1986 increasing need to be competitive. To be successful 5

in today's energy marketplace, SDG&E will have to deliver services to the larger commercial and industrial customers at competitive prices.

"We must find new ways to reduce our costs, without harmful effects to our customers or our shareholders. This is our next challenge. Success depends on your efforts."

30 To encourage employees to contribute their ideas, the company began offering 10 percent of the first year's savings for cost-cutting ideas. Called "The 10% Solution", the program awards a maxi 20 mum of $25,000.

The ideas poured in. During the first four months of the program, more than 1,000 sug gestions were submitted and 44 employees won awards based on anticipated savings of $260,000 to customers. It was a good beginning.

1982 1983 1984 1985 1986

Around 10:00 p.m. on July 24, the thermal Goal One: Maintain Market Share.

energy storage unit at the corporate office of The Reason: Cogeneration has been capturing more Henley Group, Inc. was turned on for the first commercial and industrial customers each year as time. Since then, the company has been able to the technology of cogeneration has advanced from take advantage of SDG&E's cheaper nighttime custom-designed systems for the largest energy electric rates to keep the building cool during users to off-the-shelf models designed for small or the day, a year-round necessity for San Diego's mid-size companies.

commercial buildings. The Henley Group is one To maintain its market share, SDG&E is plan of 25 companies in the San Diego area that have ing to redesign its rates during the next few years either already taken advantage of an SDG&E to lower variable rates and increase fixed fee financial incentive program or have contracted charges. Of course, the marketing division and the to do so in the near future.

governmental and regulatory services division must work cooperatively to achieve this.

ighttime. It's of special importance The cooperative spirit was tested in 1986 when to SDG&E. Persuading customers the U.S. Navy announced it would become an to use more energy efficiently, par-independent energy producer. As leaders in the ticularly at night, is the responsi-companywide effort to keep it as a customer, bility of the new marketing divi-marketing developed a competitive rate proposal sion. In December 1986, new goals and regulatory affairs briefed the CPUC on the were drafted, with an eye not only toward keeping concepts and negotiation progress to ensure final operating costs down but toward improving the approval of a Navy contract in 1987, if SDG&E "earnings applicable to common shares" line of and the Navy reach an agreement.

SDG&E's income statements in the years ahead.

Maintaining market share also will require Establishing - and then publishing - goals is one attracting new commercial and industrial custom of few "traditions" at SDG&E. The new marketing ers. SDG&E has one of the highest customer goals and the reasons behind them follow.

growth rates in the country. In 1986, customers increased by a record 46,884 to 940,752, a 5.25 percent growth rate. Most are residential custom ers attracted by the climate and life style San Diego offers. To draw more industry, SDG&E will begin a new economic development program in 1987 in cooperation with the San Diego Economic Devel opment Corporation.

The current cost of energy may be a deterrent to attracting businesses. Therefore, there will be continuing efforts to lower the average commercial mand industrial rates, to develop market research on how to add value to commercial and industrial operations, and to provide new pricing options for commercial and industrial customers.

Goal Two: Increase Earnings.

Reason: Earnings growth in the industry in recent years has been based mostly on the growth of capital investment. Like others in the industry, SDG&E's rate of growth in capital investment will be declining. Like other industry leaders, SDG&E Continuing education is Donald Felsinger, vice will use its marketing expertise to increase sales as important in the changing president-marketing, the company continues to seek ways to cut costs.

energy marketplace. Each took the intensive Execu-Deregulation is not a far-off concept. Its already year, hundreds of SDG&E tive Management Program happening, as nonregulated competitors slowly employees take courses in at Stanford University in take away market share from regulated companies the company's Manage-1986. He's one of several like SDG&E.

ment Development Center.

officers who have taken I 96 n gi nery18,SGEto There are other oppor-advanced management anain i ear

, SDG&E tunities to learn, too.

courses recently.

some steps to be more competitive by sharply reducing rates to commercial and industrial cus tomers. The company's marketing employees will

Information processing goes on around the clock.

Proserfina Quiambao, computer operator, works the 3:30 p.m. to midnight shift in the computer room, where all of the cor porate data is handled. By morning, stacks of printed reports will be ready for employees throughout the company.

continue to work hard explaining the new alt r-management company "In the early 1970s," recalls natives to customers.

Jack Thomas, then a newly elected vice president Goal Three: Improve Generating System se.

sof the company and now its chief operating officer, GoalThre:

Iprov Geeratng Sste U5

'V"te company estimated its budget and hoped for Reason: To postpone the need for building new the best. Of course, that was before the two energy generating plants, which increase customer costs, crises of the 1970s.

SDG&E must improve the usage of its existing "In the early 1980s, we made sure rates matched plants.

our budgets. Because we had huge construction Marketing can make a vital contribution to programs, the rates and the budgets soared.

improving the systemds use by minimizing the "By 1986 we had accepted deregulation as a growth in energy demand. To do so, the company reality in the industry and realized that to compete must persuade customers to shift some of their we had to change," says Thomas. "Therefore, in

-nergy demand to the dusk-to-dawn hours, known 1987 we are focusing our efforts on marketing and is off-peak time.

cutting costs and rates to be competitive, to Thermal energy storage, which encourages increase sales and to provide earnings growth."

ommercial and industrial customers to run air

onditioning equipment at night, is a specific Sharon Mayer begins work

>rogram being promoted successfully Another is at 9:30 p.m. She's a night he gas air conditioning program, which encour-most of the night driving ges commercial and industrial customers to shift hundreds of miles to pick onventional air conditioning from the electric up and deliver mail ystem's peak time to the gas system's low-use between offices. Commu me. Financial incentives are being offered by nications, even in this day DG&E to spur customers to shift their energy use of computers, still means way from the daytime peak period.

handles up to 15,000 items SDG&E has been evolving from the "tradi-every day-and night.

onal" utility it was into a competitive energy

(In Thousands of Dollars Except Per Share Amounts) 19 9318 For the Years Ended December 31 1986 1985 1984 1983 198 Operating revenues

$1,634,211

$1,738,702

$1,620,701

$1,530,207

$1,430,948 Operating income 282,350 287,867 251,550 174,155 169,861 Net income (before preferred dividend requirements) 213,196 202,722 183,467 187,370 157,303 Earnings 3.42 3.25 3.01 3.20 2.90 Dividends declared per common share 2.345 2.205 2.065 1.925 1.785 Funds provided by operations 412,090 399,453 370,855 267,429 196,084 Funds provided (used) by long-term financing (4,233)

(8,890) 69,419 284,265 141,173 Additions to utility plant (excluding allowance for funds used during construction) 242,648 241,219 197,775 291,999 252,790 At December 31 Total assets 3,227,177 3,085,962 2,950,695 2,840,195 2,411,676 Long-term debt and preferred stock subjectto mandatory redemption 1,105,378 1,112,567 1,148,290 1,099,903 893,043 The Financial Review should be read in conjunction with the financial statements, notes to financial statements and statistical data contained elsewhere in this report.

Net Income Earnings Per Share (in millions of dollars)

(in dollars)

Sale of an investment in The 1986 earnings Energy Factors, Inc.

per share established a resulted in higher earnings. >

new record. P.

182 1 1

85 1986 1982 1983 1984 19 5 198E Revenues Total Assets

• 00 Rnuels o(in millions of dollars)

(in millions of dollars)

Revenues declined, Many smaller construction due to much lower fuel projects contributed to the costs in 1986. P-growth in assets. W 1982 1983 1984 1985 1986 1982 1983 1984 1985 1

Results of Operations Earnings eliminated in 1987. For two years, a transition arrange The increase in net income and earnings per share in ment will limit the changes potential impact on the 1986 reflects the sale of the investment in Energy company's earnings. The commission is also consider Factors, Inc. The gain on the sale net of taxes was $14 ing elimination of the balancing account for electric million, or 25 cents per share. The gain was offset partly sales. The company expects base rates to replace the by a reserve of $5 million net of taxes, or 8 cents per balancing account for San Onofre ownership costs share, for the California Public Utilities Commission's in 1988.

partial disallowance of construction costs for San Gas and electric operating revenues for 1986 were Onofre Nuclear Generating Station units 2 and 3.

down 6 percent from 1985. The $106 million decrease Financial return on equity declined slightly from 16.2 was due primarily to the $128 million decrease in fuel percent in 1985 to 16.0 percent in 1986. This occurred costs. However, because of the balancing account pro because average common equity grew at a slightly cess described above, the decrease had no impact on higher rate than the increase in net income.

operating income.

'IWo important regulatory contingencies are dis-Electric sales volume increased 5 percent in 1985 cussed in Note 6 to the financial statements. In reflecting customer growth. In 1986, volume increased December 1986, the company petitioned the commis-only.5 percent. While customers increased in 1986, sion to rehear its recent decision to disallow part of the average usage declined. Gas sales volume increased costs to construct San Onofre. In addition, the commis-17 percent in 1985, due to cold weather, but decreased sion is evaluating the cost of power purchased from 7 percent in 1986 due to milder weather.

other sources and transported over the Southwest Powerlink. Unfavorable commission decisions in these cases could materially affect the company's earnings and Mis Of Dollars) the cash provided by utility operations.

For the Years Ended December31 1986 1985 The company's independent auditors qualified their Authorized margin

$(10) $ 67 opinion relating to the company's audited financial Fuel cost (73) 13 statements for the year ended December 31, 1986 Other because of these uncertainties. The same qualification Net increase (decrease)

$(62)

$103 relating to San Onofre appeared in the auditors' opinion covering the company's financial statements for the years Changes in gas revenues are due to the following:

ended December 31, 1985 and 1984.

(Millions of Dollars)

For the Years Ended December 31 1986 1985 Revenues Authorized margin

$ (2)

$ 6 The California Public Utilities Commission controls the Fuel cost (48) 10 company's rates, and thereby its revenues, generally by Other 6

(1) two mechanisms-base rates and balancing accounts.

Net increase (decrease)

$(44)

$15 Base rates compensate the company for operating and maintenance costs, taxes and depreciation and provide a Costs return on capital. Base rates are set in a general rate case The total cost of electric fuel and purchased power every three years. Between rate cases, the commission decreased in 1986 because lower prices more than offset makes adjustments for inflation, system growth and rate the increase in sales volume. The lower prices primarily of return. The current three-year cycle started in 1986.

resulted from the general decline in world oil and gas The company uses balancing accounts for fuel costs, prices and the company's aggresive program of spot both electric and gas, and for San Onofre ownership market purchases. However, the total cost increased in costs, consisting primarily of depreciation and a return 1985 because increases in sales volume more than offset on capital. The commission sets balancing account rates the decreases in fuel prices.

based on estimated costs. Differences between actual The cost of gas purchased for resale decreased in and estimated costs are accumulated in the balancing 1986 because of lower sales volume, due to milder accounts. Periodically, the company adjusts rates to weather, and lower prices. In 1985, volume increased amortize the balances. The company also uses balancing and prices decreased.

accounts to compensate for the differences between Other operating costs increased $19 million in 1986 actual and estimated sales volumes. However, the due to the Heber geothermal plant becoming opera account for gas sales to certain large customers will be tional, increased insurance costs and the operating costs

of the new subsidiaries described below. In 1985, other in increased future cash flows as its amortization is operating costs decreased $7 million primarily because included in rates.

of the non-recurrence of 1984 start-up costs for the Other income in 1986 includes the $21 million pretax Southwest Powerlink and San Onofre units 2 and 3 and gain from the sale of the investment in Energy Factors, development costs for the Heber plant.

Inc. The 1985 total was up significantly from 1984 due to Taxes on operating income basically were unchanged an increase in temporary investments.

in 1986 after increasing substantially in 1985 due pri-Interest charges are net of interest income on con marily to increased operating income.

struction funds temporarily invested by the trustee.

The company earns an allowance for funds used These interest charges increased in 1985 because con during construction on the construction funds held by a struction trust funds declined. However, in 1986 trustee as well as on construction in progress. The total construction funds increased while debt reductions and allowance for construction funds, both debt and equity, the use of low-interest, tax-exempt financings increased.

increased in 1986 due to the increase in the amount of This resulted in a decrease in interest charges. The construction trust funds. The total allowance had company's embedded cost of debt decreased from 10.5 decreased in 1985 due to completion in 1984 of the percent in 1984 to 10.1 percent in 1985 and to 9.6 perceni Southwest Powerlink and San Onofre units 2 and 3. The in 1986.

allowance is not a current source of cash but will result Liquidity and Capital Resourcdi Utility operations are a major source of liquidity for the The company's capital structure is one factor that has companyI Since 1984, tax-exempt industrial develop-enabled it to obtain long-term financing at attractive ment bonds and pollution control bonds have been the rates. The following table shows the percentages of major external sources of liquidity. Funds from opera-capital represented by common equity, preferred stock tions and tax-exempt bonds have been more than and long-term debt. It also shows the targets toward adequate to cover construction of utility plant, payment which the company intends to progress.

of dividends, and maturing long-term debt. In fact, a o

large part of the proceeds from bonds issued in 1986 is 1986 stil el bya ruteeawitng tsus in197.Common equity 36%

37%

40%

43%

44% 45-48%

onstPreferred stock 12 9

9 8

7 5

The percentage of funds for construction that the Debt and leases 52 54 51 49 49 46-49 company can generate internally is a good measure of TOtW 100% 100% 100% 100% 100%

100%

liquidity provided by operations. The company's goal is to exceed 65 percent. The following chart shows the Another measure of the company's ability to obtain company's success in achieving that goal.

financing is pretax interest coverage. The company's goal is to exceed 3.75. The chart shows the company's results.

Maintain Internal c

Maintain 3.75X Pretax 15 a

Generation of Interest Coverage Construction (including capital lease interest)

Expenditures (at 65 mj suc Performance percent or more)

Goal e

(construction expenditures exclude AFUDC)

(by percent) o rn e

Performance to oa 0 Goal 1982 1983 1984 1985 1986 1982 1983 1984 1985 198

Controlling the level of construction expenditures is Funds generated internally plus the drawdown of the one method the company uses to meet its financial goals.

construction trust funds discussed above are expected to Power plant construction has been minimized by be more than adequate to fund 1987 construction. And, increasing the percentage of power purchased from in spite of the uncertainties associated with the South others. As the chart shows, the company has been west Powerlink and San Onofre contingencies, recently successful in keeping construction expenditures management believes ample external sources of long below 10 percent of capitalization.

tern financing will continue to be available if a need or an opportunity arises. Nevertheless, regulatory dis Limit Construction allowances associated with the Southwest Powerlink or Expenditures San Onofre may reduce liquidity from operations.

to 10 Percent of Construction expenditures are expected to total $196 Capitalization million in 1987, down 19 percent from $243 million in (construction expenditures 1986. Planned 1987 expenditures are less than 1986 exclude AFUDC) expenditures due to non-recurring activity in 1986, (capitalization includes capital primarily at San Onofre and the newly expanded leases and short-term debt)

Moreno natural gas compressor facility 0 Performance The sale of Pacific Diversified Capital's investment in l1 percent iiFt Energy Factors, Inc. provided $22 million in cash net of taxes in 1986. Pacific Diversified uses that cash, plus cash accumulated in prior years, to invest in the existing subsidiaries and to acquire new subsidiaries.

1982 1983 1984 1985 1986 The Future Several trends and factors are expected to affect future percent and for 1986 it exceeded five percent. The operating results and liquidity company expects the rate of growth to remain high.

• San Diegos population is growing at a rapid rate, Cogeneration: Cogeneration is the simultaneous gener resulting in increasing sales. However, the rate of ation of steam and electricity from one fuel, usually oil sales growth will be reduced somewhat by additional or natural gas. Cogenerators may use both the steam cogeneration.

and the electricity, use one and sell the other, or sell S

Declines in interest and inflation rates are resulting in both. Largely because of the way the commission has lower authorized rates of return.

allocated costs among the company's classes of custom

• The Tax Reform Act of 1986 has lowered tax rates, ers and structured rates, cogeneration can sometimes eliminated investment tax credits and reduced the produce electricity and steam at a cost lower than the benefit of depreciation deductions.

comparable cost of purchasing energy from the com

" Partial deregulation has begun.

pany Increases in customer electric rates could result if T

The company is diversifying, major customers elect to install and operate cogenera tion facilities in the company's service area. Since a A short description of each of these follows. In addition, large share of the company's costs are fixed, the the outcome of the commission's evaluations of San company would have to allocate a greater proportion of Onofre construction costs and power received over the the costs to those users who remain customers.

Southwest Powerlink may affect results of operations The U.S. Navy is the company's largest customer, and liquidity. These contingencies were discussed above, accounting for almost one-tenth of total sales. The Navy is considering using cogeneration to meet a large Population Growth: The company's rate of new cus-percentage of its electric requirements. The company's tomer additions has been and continues to be well above efforts to retain the Navy's business have included the national average. For 1985, the rate was almost five discussions of recent reductions in the company's rates

after the Navy study began and changes in rate structure changes in rate structure to relate the various rate to allocate a lower share of costs to customers like the classes more closely with the cost of providing service Navy.

to tem. The company will continue to seek additional Since the company sells both gas and electricity, the changes. Such changes will enhance the company's effects of cogeneration on its operations are greater if competitive position and reduce imbalances in rates.

the cogenerator burns oil, purchased from another The company is taking advantage of the deregulation supplier, rather than gas, purchased from SDG&E.

of the natural gas industry In 1985, the Federal Energy Since many of the cogenerators in the company's service Regulatory Commission provided for open access to territory are equipped to burn either fuel, the choice will interstate gas transmission pipelines. The company is depend primarily on the fuels' relative prices. Reg-buying a substantial portion of its natural gas from ulatory changes described below are expected to keep suppliers in Texas and Oklahoma at relatively low spot gas competitive with oil.

market prices. Southern California Gas Company trans ports that gas for a fee. This arrangement has greatly Rates of Return: The decline in inflation and interest lowered the total cost of natural gas purchases. Pre rates has led to lower authorized rates of return on rate viously, all gas came from Southern California Gas.

base and equity. The commission authorized a rate of SDG&Es retail customers that meet certain criteria may return on equity of 15 percent in 1986, which is down also purchase gas and pay SDG&E a transmission fee.

from 16 percent in 1985 and 1984. For 1987, the The California commission has also restructured the commission lowered the rate to 13.9 percent. However, rate-setting mechanisms for natural gas sales to certain on behalf of the U.S. Navy, the Federal Executive large customers, as described above.

Agencies has challenged that rate. The company cannot predict whether the 13.9 percent rate will be changed.

Diversfication: One corporate strategy to improve Other than being a factor in determining the autho-financial performance is to diversify During 1986, rized rate of return, inflation does not generally affect Pacific Diversified Capital acquired three companies. In income. Increases in operating costs due to inflation are addition, SDG&E is reviewing a reapplication to the normally recovered through base rates. Changes in fuel California commission for the formation of a holding and purchased power prices do not affect income company to facilitate diversification.

because these costs are recovered in the balancing In October1986, Pacific Diversified acquired Com accounts.

puting Solutions, Inc., a computerized mapping company The new acquisition was merged into Inte Tax Reform Act of 1986: The new tax law is not grated Information Systems, Inc., the subsidiary formed expected to have a significant effect on the company's in 1985 to operate in the same field. In October1986, net income because electric and gas rates will be Pacific Diversified acquired Phase One Development, adjusted for the tax changes. However, it will reduce Inc., a real estate development firm, whose operations cash provided by operations because investment credits were combined with an existig real estate subsidiary have been eliminated and the benefits of depreciation The real estate subsidiary then changed its name to deductions have been reduced.

Phase One Development, Inc. In December1986, Pacific Diversified acquired 51 percent of Mock Partial Deregulation: The company is preparing for Resources, Inc., a seller of petroleum-based fuels and potential deregulation in both its electric and natural gas recent entrant into the newly deregulated business of business segments. Deregulation could result in selling natural gas to industrial users.

increased volatility in electricity prices. In the future, Pacific Diversified intends to continue this program customers may be able to purchase power from other of diversification, acquiring other companies whose sources and transmit it over the company's transmission operations relate to fields in which the company is active lines. This could result in higher rates to remaining already customers and increased risk of cost recovery to the Because of the diversification in 1986 and its expected company.

continuation, the company's financial statements for Rates that subsidize residential and other low-volume 1986 are consolidated to include all subsidiaries, since customers to the detriment of large-volume customers acquisition, where applicable. This change has little encourage cogeneration and other forms of competition.

effect, particularly because the acquisitions were late in As noted above, this can lead ultimately to higher rates the year. The company has not restated prior financial for customers who do not have access to cogeneration statements because the diversified activity was not or other alternative sources. Therefore, the company significant to the financial statements in the past.

recently has asked for, and received, from regulators

Stemens of Corso lated Income (In Thousands Except Per Share Amounts)

Excerpts from the For the Years Ended December 31 1986 1985 1984 Financial Review Operating Revenues Electric

$1,333,479

$1,395,655

$1,292,839

a. Operating revenues for Gas 299,202 343,047 327,862 1986 were down 6 percent, Other 1,530 primarily due to the decrease in fuel costs. However, Total operating revenues a

1,634,211 1,738,702 1,620,701 because of balancing Operating Expenses accounts, the decrease had no Electric fuel and purchased power b

456,402 535,968 521,621 impact on operating income.

Gas purchased for resale c

175,286 223,407 213,813

b. The total cost of electric Transmission, distribution and storage 49,935 40,263 43,725 fuel and purchased power Franchise payments 30,952 34,443 30,961 decreased in 1986 because Other operating d

201,491 182,867 190,359 lower prices more than offset the increase in sales volume.

Maintenance 73,502 74,484 73,164 Depreciation and amortization 140,732 132,506 115,200

c. The cost of gas pur Property and other taxes 37,714 35,179 32,088 chased for resale decreased in 1986 because of lower Income taxes (Note 5) 185,847 191,718 148,220 sales volume, due to milder Total operating expenses 1,351,861 1,450,835 1,369,151 weather, and lower prices.

Operating Income 282,350 287,867 251,550

d. The $19 million increase Other Income and (Deductions) was due to the Heber geo Allowance for other funds used during construction 13,035 5,772 19,241 thermal plant's becoming Taxes on nonoperating income (Note 5)

(4,534)

(972) 10,656 operational, increased insur Other-net e

34,296 23,269 9,296 ance costs and the operating costs of new subsidiaries.

Total other income 42,797 28,069 39,193 Income Before Interest Charges 325,147 315,936 290,743

e. In 1986, this includes the Interest Charges

$21 million pretax gain from Pacific Diversified Capital's Long-term debt 95,364 104,449 100,391 sale of its investment in Short-term debt and other 17,468 11,065 10,987 Energy Factors, Inc.

Allowance for borrowed funds used during construction (881)

(2,300)

(4,102)

Net interest charges 111,951 113,214 107,276 Net Income (before preferred dividend requirements) 213,196 202,722 183,467 Preferred Dividend Requirements 22,425 23,797 24,172 Earnings Applicable to Common Shares

$ 190,771

$ 178,925

$ 159,295 Average Common Shares Outstanding 55,830 55,125 52,868 Earnings Per Common Share 3.42 3.25 3.01 Dividends Declared Per Common Share 2.345 2.205 2.065 See notes to consolidated financial statements.

1986 Revenue Dollar Source Disposition 81.60 Electric Sales in 1986, the fuel and pur 18.39 Gas Sales chased power component 38.6 Fuel and Purchased Poweragain, to 38.6 0.10 11.7c 11ncents of every revenue dol 14.00 Total Taxes I

lar compared with 43.7 9.40 Dividends to Shareholdersin 1985.

8.60 Depreciation 8.00 Salaries and Benefits 6.00 Cost of Money-net of AFUDC 3.d i

Reinvested in Business

Collsolidated Balance Seets (In Thousands of Dollars)

Excerpts from the Balance at December 31 1986 1985 Financial Review Assets Utility plant-at original cost

a. Construction expendi In service tures in 1986 remained below Electric

$3,003,555

$2,790,158 10 percent of capitalization.

Gas 384,884 347,317 The expenditures were used Common 65,838 46,743 Generating Station, the Total plant in service 3,454,277 3,184,218 Moreno natural gas cor Plant held for future use 767 1,009 pressor facility and general upgrading and extension of Construction work in progress 93,348 117,336 other facilities to meet record Total utility plant a

3,548,392 3,302,563 customer growth.

Accumulated depreciation (915,786)

(780,920)

Utility plant-net (Note 2) 2,632,606 2,521,643 of spot market purchases of Investments and other property 53,967 57,953 fuel oil from suppliers in Sin Construction funds held by trustee (Note 7) 137,152 48,938 gapore, Australia, Alaska and California led to a sharp Current assets decline in the average cost of Cash and temporary investments 70,409 152,231 fuel oil in inventory.

Receivables (less allowance for doubtful accounts:

1986, $1,298; 1985, $1,311)

c. Ba of tiersimpa Customer 110,026 122,661 tinn196thcopys Custmer 10,06 12, 1

financial statements are con Other 17,075 12,173 solidated. The assets and Materials and supplies-at average cost 45,591 41,336 liabilities include those of all Fuel inventory -at average cost b

20,455 30,650 the subsidiaries of SDG&E Regulatory balancing accounts undercollected-net 24,039 Cail Other 12,153 7,180 Total current assets 299,748 366,231

d. Voluntary and sinking fund retirements of preferred Deferred charges and other assets 103,704 91,197 stock helped to improve the Total c

$3,227,177

$3,085,962 capital structure in 1986. The Capitalization and Liabilities company's new, tougher goal is to limit preferred stock to Capitalization (see Statements of Capital Stock and Long-Term Debt) 5 percent to 7 percent of its Common equity

$1,205,819

$1,152,984 Preferred stock Not subject to mandatory redemption d 128,493 161,000 Subject to mandatory redemption d

51,250 57,500 Long-term debt (Note 2) 966,128 967,067 Total capitalization 2,351,690 2,338,551 Current Liabilities Long-term debt redeemable within one year (Note 2) 88,000 88,000 Current portion of long-term debt (Note 2) 50,183 17,980 Accounts payable 111,439 138,145 Dividends payable 37,529 37,183 Interest, taxes and other accruals 112,704 84,301 Regulatory balancing accounts overcollected-net 5,034 Other 46,358 29,051 Total current liabilities 446,213 399,694 Customer advances for construction 55,636 52,006 Accumulated deferred income taxes-net (Note 5) 173,609 107,941 Accumulated deferred investment tax credits (Note 5) 159,245 153,980 Deferred credits and other liabilities 40,784 33,790 Contingencies and commitments (Notes 6 and 7)

Total c

$3,227,177

$3,085,962 See notes to consolidated financial statements.

taterents of Consoldated ources o unds for onstruction (In Thousands of Dollars)

Excerpts from the For the Years Ended December31 1986 1985 1984 Financial Review Funds Provided by Operations Net income

$213,196

$202,722

$183,467

a. The company again Non-cash items in net income surpassed its goal of financ Depreciation and amortization 140,732 132,506 115,200 ing more than 65 percent of Deferred income taxes and investment through operations.

tax credits-net 70,933 69,829 90,922 Allowance for funds used during

b. Debt reductions and the construction (13,916)

(8,072)

(23,343) increased use of low-interest, Other-net 1,145 2,468 4,609 tax-exempt financings were largely responsible for the Funds provided by operations 412,090 399,453 370,855 embedded cost of debt Dividends (153,106)

(145,713)

(133,556) decreasing from 10.5 percent in 1984 to 10.1 percent in 1985 Funds reinvested a

258,984 253,740 237,299 and to 9.6 percent in 1986.

Funds Provided (Used) by Long-Term Financing Sale of common stock 125 43,070 45,387

c. The company uses bal Sale of first mortgage bonds b

122,392 131,227 77,757 ancing accounts for fuel costs, San Onofre ownership Retirement of long-term financing b

(166,750)

(183,187)

(53,725) costs and differences between Funds provided (used) by long-term financing (44,233)

(8,890) 69,419 actual and estimated costs Other Funds Provided (Used) and sales volumes. Peri Regulatory balancing accounts-net c

(29,073) 27,500 (1,144) odically, the company adjusts rates to amortize the Investments and other property 3,933 (5,215)

(7,635) balances.

Construction funds held by trustee (88,214)

(25,448) 131,290 Cash and temporary investments 81,822 (5,183)

(142,171)

Receivables 7,733 1,806 (3,293)

Fuel inventory 10,195 10,991 34,447 Short-term borrowings (85,000)

Accounts payable (26,706) 26,222 (47,708)

Interest, taxes and other accruals 28,403 (11,004) 2,203 Other-net 39,804 (23,300) 10,068 Other funds provided (used) 27,897 (3,631)

(108,943)

Total additions to utility plant (excluding allowance for funds used during construction)

$242,648

$241,219

$197,775 See notes to consolidated financial statements.

aement o

onsoliated anges in Capi Soc and Re ined arnings (In Thousands of Dollars)

Preferred Stock Not Subject to Subject to Premium For the Years Ended Mandatory Mandatory Common on Capital Retained December 31, 1984, 1985 and 1986 Redemption Redemption Stock Stock Earnings Balance, December 31, 1983

$161,000

$63,500

$258,468

$413,427

$285,712 Net income 183,467 Common stock sold (2,369,930 shares) 11,850 33,537 Current sinking fund requirement (3,000)

Dividends declared Preferred stock (24,030)

Common stock (109,526)

Balance, December 31, 1984 161,000 60,500 270,318 446,964 335,623 Net income 202,722 Common stock sold (1,759,170 shares) 8,796 34,274 Current sinking fund requirement (3,000)

Dividends declared Preferred stock (23,785)

Common stock (121,928)

Balance, December 31, 1985 161,000 57,500 279,114 481,238 392,632 Net income 213,196 Common stock sold (25,060 shares) 125 Preferred stock retired (1,300,350 shares)

(32,507)

(7,380)

Current sinking fund requirement (6,250)

Dividends declared Preferred stock (22,172)

Common stock (130,934)

Balance, December 31, 1986

$128,493

$51,250

$279,239

$473,858

$452,722 See notes to consolidated financial statements.

tatements of onsolidated apital Stock (In Thousands of Dollars Except Voluntary Redemption Price)

Balance at December 31 1986 1985 Common Equity Common stock, $5 par value, authorized 80,000,000 shares, outstanding: 1986, 55,847,822 shares; 1985, 55,822,762 shares

$ 279,239

$ 279,114 Premium on capital stock 473,858 481,238 Retained earnings 452,722 392,632 Total common equity

$1,205,819

$1,152,984 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

$ 7,500 412 % Series, 300,000 shares outstanding 21.20 6,000 6,000 4.40% Series, 325,000 shares outstanding 21.00 6,500 6,500 4.60% Series, 1986, 374,650 shares; 1985, 375,000 shares outstanding 20.25 7,493 7,500 Without par value*

$9.84 Series, 160,000 shares outstanding (redeemed January 1987) 101.00 16,000 16,000

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

$7.20 Series, 150,000 shares outstanding 102.50 15,000 15,000

$2.68 Series, 1,000,000 shares outstanding (redeemed January 1987) 28.50 25,000 25,000

$2.475 Series, 1,000,000 shares outstanding 29.15 25,000 25,000

$4.65 Series, 1985, 1,300,000 shares outstanding 32,500 Total not subject to mandatory redemption

$128,493

$161,000 Subject to mandatory redemption Without par value*

$8.25 Series, 1986, 105,000 shares; 1985, 115,000 shares outstanding 104.95

$ 10,500

$ 11,500

$9.125 Series, 1986, 200,000 shares; 1985, 240,000 shares outstanding 113.50 20,000 24,000

$15.44 Series, 250,000 shares outstanding 115.44 25,000 25,000 Current sinking fund requirement (4,250)

(3,000)

Total subject to mandatory redemption

$ 51,250

$ 57,500

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

See notes to consolidated financial statements.

taterents of Consoldated Long-Tern Ds (In Thousands of Dollars)

Balance at December 31 1986 1985 First mortgage bonds (Note 2) 4Y % Series G, due October 1, 1987 12,000 12,000 45/ % 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 8 /8 % Series M, due January 15, 2004 75,000 75,000 10% Series P, due July 15, 2006 45,000 8% % Series Q, due March 15, 2007 50,000 50,000 934 % Series R, due May 1, 2008 50,000 50,000 5 V2% Series U-2, due September 1, 1994 11,268 11,668 17/s % Series V, due July 15, 2011 16,714 16.70% Series W, due November 3, 1987 and 1988 40,000 40,000 16.65% Series X, due September 1, 1986 and 1987 10,000 20,000 16.65% Series Y, due September 1, 1986 and 1987 7,500 15,000 12Y8 % Series Z, due July 15, 2013 8,069 39,769 10% Series AA, due June 1, 2018 150,000 150,000 10% Series BB, due September 1, 2018 150,000 150,000 5.25% Series CC, due May 1, 2008 53,000 53,000 8.50% Series DD, due December 1, 2008 27,000 27,000 94% Series EE, due September 1, 2020 100,000 100,000 4.75% Series FF, due December 1, 2007 35,000 35,000 7/s% Series GG, due July 1, 2021 44,250 7/% Series HH, due December 1, 2021 81,350 Total 1,079,437 1,065,151 Other long-term debt Pollution control bonds, 68 % 1977 Series A, due April 1, 2007 9,575 9,575 Pollution control bonds, 7.20% 1979 Series A, due April 1, 2009 5,700 5,700 Sinking fund debentures, 4'/2 %, due September 1, 1994 1,384 1,412 Other 25,036 7,256 Total 41,695 23,943 Unamortized discount on long-term debt (16,821)

(16,047)

Long-term debt redeemable within one year (Note 2)

(88,000)

(88,000)

Current portion of long-term debt (Note 2)

(50,183)

(17,980)

Total

$ 966,128

$ 967,067 See notes to consolidated financial statements.

chedules of Consoidated Financial Information by Segments of Business (In Thousands of Dollars)

At December 31 or for the Years Then Ended 1986 1985 1984 Operating Revenues*

$1,634,211

$1,738,702

$1,620,701 Operating Income Electric operations

$ 258,581

$ 261,199

$ 224,156 Gas operations 24,940 26,668 27,394 Other (1,171)

Total

$ 282,350

$ 287,867

$ 251,550 Depreciation and Amortization Electric operations

$ 123,078

$ 117,948

$ 101,805 Gas operations 17,345 14,558 13,395 Other 309 Total

$ 140,732

$ 132,506

$ 115,200 Utility Plant Additions**

Electric operations

$ 190,416

$ 205,469

$ 174,753 Gas operations 52,232 35,750 23,022 Total

$ 242,648

$ 241,219

$ 197,775 Identifiable Assets Utility plant-net Electric operations

$2,384,637

$2,303,025

$2,197,292 Gas operations 247,969 218,618 195,736 Total 2,632,606 2,521,643 2,393,028 Materials and supplies Electric operations 40,688 37,614 39,580 Gas operations 4,903 3,722 3,745 Total 45,591 41,336 43,325 Fuel inventory Electric operations 20,300 30,391 40,606 Gas operations 155 259 1,035 Total 20,455 30,650 41,641 Other identifiable assets Electric operations 252,773 204,098 218,683 Gas operations 96,236 31,809 25,349 Other 59,666 Total 408,675 235,907 244,032 Other Assets 119,850 256,426 228,669 Total Assets

$3,227,177

$3,085,962

$2,950,695

• The detail to operating revenues is provided on the Statements of Consolidated Income on page 19. The gas operating revenues shown thereon include $27 million in 1986,

$38 million in 1985 and $47 million in 1984 representing the gross margin on sales to the electric segment. Those margins arise from intersegment sales of $100 million in 1986,

$208 million in 1985 and $252 million in 1984 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.

o tS o

IIO 1a Stl aements Summary of Accounting Policies Utility plant and depreciation authorized by the California Public Utilities Commis Utility plant represents the buildings, equipment and sion. The balances of these accounts represent amounts other facilities used to provide electric and gas service.

that will be recovered from, or repaid to, customers by The cost of utility plant includes labor, material, con-adjustments to future rates. The CPUC reviews the tract services and other related items and an allowance reasonableness of the amounts in these accounts.

for funds used during construction. The cost of The CPUC also has ordered the use of a balancing depreciable retired utility plant, plus removal expenses account to record the ownership costs, such as deprecia minus salvage value, is charged to accumulated tion and a return on capital, for San Onofre units 2 depreciation.

and 3 until the issue discussed in Note 6 is resolved.

Depreciation expense reflects the straight-line remaining useful life method. The provisions for Other depreciation approximated the following percentages of Certain prior year amounts have been reclassified for average depreciable plant: 4.12 percent in 1986, 4.08 comparability.

percent in 1985 and 4.09 percent in 1984.

In 1986, the financial statements are consolidated to include the assets and operations of the subsidiaries. In Allowance for funds used during construction prior years, the equity method was used.

The allowance represents the cost of funds used to In 1985, company shareholders approved a proposal finance the construction of utility plant and is added to that would result in the reorganization of the company the cost of utility plant. AFUDC also increases income, into a holding company structure. The company would partly as an offset to financing costs shown in the become a subsidiary of the holding company and Statements of Consolidated Income, although it is not a common stock shareholders of the company would current source of cash.

become the shareholders of the holding company. Dur ing 1986, the commission granted permission for the Revenues and regulatory balancing accounts restructuring subject to certain conditions, several of Revenues consist of billings to customers and the which were unacceptable to the company The company changes in regulatory balancing accounts. Billings to is reevaluating its alternatives, including reapplication customers are based on meters read on a cycle basis to the commission for conditions that are acceptable to throughout each month. Earnings fluctuations from the company changes in the costs of fuel oil, purchased energy and See Note 4 regarding employee benefit plans, Note 5 gas, and consumption levels for electricity and the regarding accounting for income taxes and Note 7 majority of gas are eliminated by balancing accounts regarding accounting for leases.

Due dates of long-term obligations are shown on the bonds may be issued upon compliance with the provi Statements of Consolidated Long-Term Debt on page sions of the bond indenture.

22. Combined aggregate maturities and sinking fund Certain first mortgage bonds have variable interest requirements of long-term debt are $50 million for 1987, rate provisions. Bondholders may elect to redeem their

$24 million for 1988, $4 million for 1989, $33 million bonds at the interest adjustment dates. The next interest for 1990 and $2 million for 1991.

rate adjustment dates will be August 1, 1987 for the First mortgage bonds are secured by a lien on Series FF bonds, September 1, 1987 for the Series CC substantially all utility plant. Additional first mortgage bonds and September 1, 1988 for the Series DD bonds.

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

utilities. The company's interests at December 31, 1986 The company's share of operating expenses is were:

included in its Statements of Consolidated Income.

The company's share of future dismantling and (Sn Millions of Dollars) decontamination costs for the San Onofre units is Southwest Project Powerlink San Onofre currently estimated to be $170 million. These costs are Ownership interest (%)

89 20 expected to be recovered in rates over the estimated Utility plant in service

$209

$1,142 lives of the plants. Procedures for rate recovery are to Accumulated depreciation

$ 16

$ 142 be established by the California Public Utilities Com Construction work in progress

$ 0 23 mission. These procedures will include placing the amounts collected in a trust fund as they are received.

Employee Benefit Plans A non-contributory, funded pension plan is provided for pant's base compensation. Company contributions are substantially all employees. Pension costs are based on invested in the company's common stock. Employee actuarial determinations and the pension plan is funded contributions are invested, as the employees elect, in on the same basis. A non-contributory, unfunded pen-mutual funds or common stock of the company sion plan for certain officers also is maintained. The The company contributed approximately $16 million accumulated plan benefits and net assets as of the latest in 1986 and $15 million in 1985 and 1984 to these plans.

benefit information date are presented below:

Employees may participate also in the Employee (In Millions of Dollars)

Stock Ownership Plan. The company's contribution to As ofJuly 1 1986 1985 that plan is funded by tax credits.

Actuarial present value The company provides health and life insurance of accumulated plan benefits benefits to all retired employees. The benefits paid and Vested

$149

$135 expensed amounted to $2 million in each of the years Non-vested 24 21 1986,1985 and 1984.

Total

$173

$156 A long-term incentive stock compensation plan was Net assets available for benefits

$287

$226 approved by company shareholders in April 1986 and provides for aggregate awards of up to 1,350,000 shares An 8 percent rate of return was used to determine the of common stock over the 10-year period ending in actuarial present value of accumulated plan benefits.

1996. In 1986, the company issued 25,060 shares of Eligible employees may make a contribution of I to 11 stock to officers for $5 per share. If certain corporate percent of their base pay to the company's Savings Plan.

goals are not met over the next four years, the company The company contributes up to 3 percent of a partici-will buy back the stock at $5 per share.

in 96ad$5mlini 95ad18 oteepas

Income Taxes Deferred income taxes arise from including income or purposes. In addition, current tax reductions arising deductions in the company's income tax returns in a year from investment tax credits are deferred and recognized different from the year they are reported in the financial over the useful lives of the related property.

statements. However, deferred taxes are not provided The Tax Reform Act of 1986 is not expected to have a for those timing differences that are reflected in cus-significant effect on the net income of the company tomer rates. At December 31, 1986, the cumulative net However, the repeal of the investment tax credit and the amounts of timing differences for which deferred taxes changes in the depreciation rules will reduce cash have not been provided were approximately $445 mil-provided by operations.

lion for federal purposes and $612 million for state Components of Income Tax Expense (in Thousands of Dollars) 1986 1985 1984 Current federal income tax

$ 87,231

$112,340

$ 13,162 Current state franchise tax 28,060 36,166 25,894 Totalccurrenthtaxes 115,291 148,506 39,056 Deferred -federal and state taxes Regulatory balancing accounts -net 15,935 (14,010) 609 Construction projects 2,703 (19,277) 8,502 Tax over book depreciation 41,564 37,553 34,490 Nuclear fuel financing (2,693) 3,211 (3,234)

Capitalized nuclear revenue 706 9,104 (3,303)

Call premium on refunded debt 5,862 7,785 (298)

State franchise tax 828 (3,678)

(4,514)

Other-net 5,170 6,150(497 Total deferred taxes 70,075 26,838 27,755 Deferred investment tax credits -net 5,015 17,346 70f,753 Total income tax expense

$190,381

$192,690

$137,564 Federal and state income taxes are allocated between operating income and other income.

Reconciliation of Statutory Federal Income Tax Rate to Effective Rate (In Thousands of Dollars) 1986 1985 1984 Income before federal income taxes

$369,803

$365,013

$299,428 Statutory federal income tax rate 46.0%

46.0%

46.0%

Construction costs capitalized (2.0)

(5.3)

(3.6)

Depreciation 3.1 2.9 2.3 Allowance for funds used during construction (1.5)

(0.7)

(3.6)

Other-net (3.2) 1.6 (2.4)

Effective federal income tax rate 42.4%

44.5%

38.7%

Contingencies Concerning San Onofre and the Southwest Powerlink San Onofre Nuclear Generating Station company has not challenged actively is disallowed, such Units 2and 3 reduction in net income would be $8 million after tax, On November 10, 1986, the California Public Utilities or $15 per share.

Commission released its written decision on the pru-The above amounts would be one-time charges dency of construction costs for San Onofre nuclear units against earnings. Continuing effects due to the $69 2 and 3, owned by the company and Southern California million exclusion from rate base initially would be Edison Company. Under the commission's decision, approximately $7 million after tax per year, and would approximately $69 million of the costs incurred by the decline to zero over the remaining 27-year depreciable company in connection with the units' construction life of the units. If the amount of costs disallowed is would be permanently excluded from rate base. Along limited to the $12 million which the company has not with SCE, the company has filed an application for a challenged actively, the continuing effect initially would rehearing of the commission's decision. Although the be approximately $1 million per year and would decline company is seeking a rehearing with respect to the to zero over 27 years.

entire amount of costs disallowed by the commission, Management cannot predict the outcome of this the company did not actively challenge the disallowance matter.

of $12 million of such costs.

Because the company has been accruing revenue Southwest Powerlink based on full recovery of construction costs, the revenue The company's 1986 General Rate Case decision by the attributable to the disallowed costs recorded since the California Public Utilities Commission ordered the plants started operation would have to be reversed.

company to establish a five-year balancing account for Based on a disallowance of $69 million, such reversal the difference between the cost of energy received over would reduce the company's net income by $26 million the company's Southwest Powerlink and avoided cost as after tax, or $.47 per share. Due to the $12 million of established by the procedures set forth in the commis disallowed costs which the company did not actively sion's decision. In June 1986, the commission granted challenge, the company recorded a charge against the company's request for a rehearing of this portion of earnings of $5 million after tax, or $.08 per share, in the the decision. The company now expects a final decision fourth quarter of 1986. Future write-offs, if any, related in this matter in late 1987. In the meantime, in response to the remaining $57 million of disallowed costs will be to a commission request, the company has estimated the recorded if and when the company has determined that projected excess of the company's cost of energy the ultimate disallowance of such costs is probable and received over the Southwest Powerlink over avoided the amount of such disallowance can be reasonably costs from January 1986 through December 1988, when estimated.

certain purchased power contracts expire, will be In December 1986, the Financial Accounting Stan-approximately $380 million, excluding interest.

dards Board issued a rule requiring that the company In the rehearing, the commission could retain the write off the undepreciated balance of the construction balancing account mechanism, eliminate it or propose a costs disallowed. Implementation of the rule is not different mechanism. Because of the uncertainty con required until 1988. If the commission's decision is not cerning the outcome of the rehearing and the nature of modified, the write-off of the $69 million of disallowed the process of estimating future power purchases and costs would reduce the company's net income by an avoided costs, management cannot predict the ultimate additional $50 million after tax, or $.90 per share. If outcome of this matter.

only the $12 million portion of such costs which the

Other Contingencies and Commitments Nuclear insurance Leases Public liability claims that could arise from a nuclear Nuclear fuel, an office building and a generating facility incident currently are limited by the Price-Anderson are financed by long-term capital leases. If they were Act to a maximum amount of $690 million for each included on the Consolidated Balance Sheets, both licensed nuclear facility. The company and the co-assets and liabilities would increase by $234 milion at owners of the San Onofre units have purchased primary December 31,1986 and $242 million at December 31, insurance of $160 million for this exposure, the maxi-1985. Generally accepted accounting principles require mum amount available in 1986. The remaining $530 capitalization of these leases in 1987. Capitalizing these million is provided by secondary financial protection leases would not affect total expenses.

required by the Nuclear Regulatory Commission. This The minimum rental commitments payable in future secondary coverage provides for loss sharing among years under all noncancellable leases are:

utilities owning nuclear reactors if a costly accident occurs. Under the agreement with the NRC, the com-(9n M n

o pany could be assessed retrospective premium 1987 46 adjustments of up to $6 million a year in the event of 1

nuclear incidents involving any of the licensed reactors 1989 45 in the United States, if the amount of the loss exceeds 1990 43

$160 million.

Teat 16 The Price-Anderson Act is scheduled to expire in Totafter c

e8 1987 and Congress is considering several proposals to amend it. The proposals include substantial increases in Rent expense totaled $24 million in 1986, 1985 and the maximum claim. The company is unable to predict 1984. In addition, nuclear fuel expense associated with the effect on its potential liability.

the rental commitments amounted to $21 million in In addition to public liability insurance, coverage is 1986, $20 million in 1985 and $23 million in 1984.

provided for property damage and replacement power costs at San Onofre. Primary property damage coverage Purchased power contracts is provided for losses of up to $500 million. Additional The company buys electric power under several long decontamination liability and excess property damage term contracts. The contracts expire on various dates insurance coverage of $660 million at December 31, between 1988 and 2013.

1986 is provided. Replacement power insurance pro-At December 31, 1986, the future minimum pay vides weekly indemnity payments for up to two years, commencing after a waiting period of 26 weeks. These three insurance coverages are provided primarily (In Millions of Dollars) through mutual insurance companies owned by utilities 1987

$ 203 with nuclear facilities. If losses at any of the nuclear 1988 199 facilities covered by the risk-sharing arrangements were 1989 156 to exceed the accumulated funds available for these 1990 110 insurance programs, the company could be assessed 1991 111 retrospective premium adjustments of up to $15 million Thereafter 1,506 per year.

Total minimum payments

$2,285 Construction These payments are fixed charges. The company is Approximately $196 million, excluding AFUDC, is required to pay additional amounts for actual deliveries planned to be spent for utility plant construction in 1987.

of energy under the contracts.

Construction funds held by a trustee (see Consolidated Total payments, including energy payments, under Balance Sheets, p.18) represent unspent proceeds from the contracts were $231 million in 1986, $158 million in certain first mortgage bonds.

1985 and $87 million in 1984.

Quarterly Financial Data (Unaudited)

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

(In Thousands Except Per Share Amounts)

Quarter Ended March 31 June 30 September 30 December 31 1985 Operating revenues

$447,300

$403,503

$433,102

$454,797 Operating expenses 371,667 337,579 362,918 378,671 Operating income 75,633 65,924 70,184 76,126 Other income 5,090 6,548 6,194 10,237 Net interest charges 29,840 28,720 27,359 27,295 Net income (before preferred dividend requirements) 50,883 43,752 49,019 59,068 Preferred dividend requirements 5,989 5,963 5,923 5,922 Earnings applicable to common shares

$ 44,894

$ 37,789

$ 43,096

$ 53,146 Average common shares outstanding 54,428 54,952 55,383 55,721 Earnings per common share*

0.82 0.69 0.78 0.95 1986 Operating revenues

$433,750

$399,238

$392,285

$408,938 Operating expenses 360,285 334,703 320,153 336,720 Operating income 73,465 64,535 72,132 72,218 Other income 20,579 7,294 5,685 9,239 Net interest charges 27,307 26,605 27,656 30,383 Net income (before preferred dividend requirements) 66,737 45,224 50,161 51,074 Preferred dividend requirements 5,922 5,890 5,811 4,802 Earnings applicable to common shares

$ 60,815

$ 39,334

$ 44,350

$ 46,272 Average common shares outstanding 55,823 55,823 55,826 55,848 Earnings per common share*

1.09 0.70 0.79 0.83

• Because these earnings are based on average common shares outstanding during the quarter, the sum of quarterly earnings per share does not equal annual earnings per share.

he company is responsible for the financial internal audits, selection and training of qualified per statements and other data in this annual report.

sonnel, and written policies and procedures.

To meet its responsibility for the reliability of The company's independent public accountants, the financial statements, the company has developed a Deloitte Haskins & Sells, are engaged to examine the system of internal accounting controls and engages a company's financial statements in accordance with gen firm of independent public accountants. The board of erally accepted auditing standards for the purpose of directors of the company carries out its responsibility expressing their opinion as to whether the company's for the financial statements through its audit committee, financial statements are presented fairly in accordance composed of directors who are not officers or employ-with generally accepted accounting principles applied ees of the company.

on a consistent basis.

Management maintains the system of internal The audit committee of the board of directors meets accounting controls, which it believes is adequate to periodically with management, the independent public provide reasonable, but not absolute, assurance that its accountants and the internal auditors to ensure that each assets are safeguarded, transactions are executed in is carrying out its responsibilities, and to discuss accordance with its objectives and the financial records auditing, financial reporting and internal control mat and reports are reliable for preparing the financial ters. The independent public accountants and the statements in accordance with generally accepted company's internal auditors have full and free access to accounting principles.

the audit committee throughout the year The concept of reasonable assurance recognizes that Company management has prepared the financial the cost of a system of internal accounting controls statements and other data in this annual report. In the should not exceed the benefits derived and that manage-opinion of the company, the financial statements, which ment makes estimates and judgments of these cost/

include amounts based on estimates and judgments of benefit factors. The system of internal accounting management, have been prepared in conformity with controls is supported by an extensive program of generally accepted accounting principles.

Frank H. Ault Controller Deitte Haskis & Sells t

o m

ODOM erlyacced uitinta expess in their opi ninas to whetr te comany' V&

bWICCX~JWWdr cuseidae inanialme finsania s tatemefSnt ae presntedlfairyin Corance T he audit co mmiee of the brd of dietr meets 9mmnudeiffaccodmoewth "r~y amptedm erioadially with aae ent, thlued indepenet public wcaawang mcoulacoutans and thobrak poeue s ecmee esrinthe auitrustnesr.htec As wused n NW 6IG e cmohate fiancal t

eis, eCa iontis rePosblilites n ofm diss camkrig mttmretfmgto an nafe Ncler fauting, finaunial reoin and iter cotro l mat-g ter The indepee pic antans a nt company'sh*Imv ir audito savefulln d freoccs Insub eote o suct hean audi tc ommit ee n rugh out t h year.

and U cosoliaW fmicil stnnens ba theMoo ompanyO maeen as w pe ared the nacia com xbtd inaca ane ofsuh a stien satements wan fdw othe t th risnua reor.nh twwp, ~ ~ ~ ~ ~ ~ ~ ~ ~~opno ofc the comany, th financial steetan d heprstfilyheinc itaofte mn yhc wdjt~bs at~m

bf31, 86 nd M an thincslude aonts based ond tmae s and judns fof cogimicionfbr achof ire yeas i th perodmanagDe emet,hvebenppae in conformity withgeral acntldi supotedyanextesied pogram cofsstn geealyacetdscoutnspicils FtbFrank H. Ault

San Diego Gas & Electric is an investor-trsmsinlewchusbtenSaDeg owned energy management company and Phoenix; the Moreno and Rainbow gas com founded in 1881. It has 4,815 full-time pressor stations; and the natural gas pipeline employees.

system in SDG&Es gas service area. Seven ser The electric operations division pur-vice centers are located regionally in the service chases, generates and distributes energy territory to 940,000 customers in San Diego County and the SDG&E has two subsidiaries: Pacific Diversi southwestern section of Orange County. The ser-fled Capital, an independently operated holding vice area covers 4,100 square miles and has a company; and Califia Company, an inactive financ population of more than two million.

ing company (Additional information on Pacific The systemwide electric customer growth rate Diversified begins on page 36.)

was 5.25 percent in 1986, among the highest in the country. The Orange County service area, which is the smallest in total number of customers, had a 9.7 percent growth rate, the highest in the com pany's system.

SDG&E's gas operations division purchases and distributes natural gas to 595,000 customers in San Diego County. The gas service area has been expanding, most recently eastward along the inter national border. The gas customer growth rate was 4.2 percent in 1986.

Among the company's major assets: a 20 per cent interest in three nuclear units at the San Onofre Nuclear Generating Station in north western San Diego County; the Encina and South Bay power plants, which can burn either fuel oil or natural gas; the Southwest Powerlink 500,000-volt SDG&E's electric service area covers all of San Diego County and the southwestern section ofORA NGE Orange County. The gas COUNTY service area, which is grad ually expanding, is shown in color. The newly expanded Moreno gas com-0 range County pressor station is located in Compressor Riverside County, 35 miles north of the San Diego county iine.

'4 pressor sttions; andthenaturlgsppln enter Service Center SAN DIEGO COUNTY Heber Geothermal Plant Diversified---

SnpoWerink San---

Diego~i----

Officers Thomas A. Page, 53 Operations Officers Financial Officers Staff Officers Chairman, President and Chief Executive Officer Gary D. Cotton, 46 John E. Hamrick, 60 R. Lee Haney, 47 Stephen L. Baum, 46 Thomas Page was elected Senior Vice President-Vice President -

Vice President-Finance Vice President and chairman in 1983. He has Engineering and Operations Administrative Services and Chief Financial Officer General Counsel been president and chief Gary Cotton was elected John Hamrick was elected Lee Haney was elected a Stephen Baum joined executive officer since senior vice president in a vice president in 1973 vice president in 1983 and SDG&E as vice president 1981. He joined SDG&E 1985 after serving as a and named to his current appointed to his current and general counsel in in 1978 as a senior officer.

vice president since 1979.

position in November position in April 1986. He 1985 from the Power He was appointed to his 1986. He joined the com-joined SDG&E in 1972.

Authority of the State of Jack E. Thomas, 54 current position in pany in 1971.

New York, where he was Executive Vice President and November 1986. Cotton Frank H. Ault, 42 senior vice president and Chief Operating Officer joined SDG&E in 1975.

James C. Holcombe, 41 Controller general counsel.

Jack Thomas was elected Vice President-Fuel Frank Ault was elected executive vice president in Alton T. Davis, 49 and Power Contracts controller in May 1986 Delroy M. Richardson, 48 1985 and chief operating Senior Vice President-James Holcombe was after serving as director -

Secretary officer in 1986, after serv-Customer Services elected a vice president in internal auditing. Ault Delroy Richardson was ing as a group vice Alton Davis was elected 1983 and named to his joined SDG&E in 1969.

elected secretary in president since 1980 and a senior vice president in current position in April December 1986 after vice president since 1972.

1985 after serving as a 1985. He joined the com-Margot A. Kyd, 33 serving as assistant secre He joined SDG&E as an group vice president since pany in 1967.

Treasurer tary since 1983. He joined engineer in 1957.

1981 and a vice president Margot Kyd was elected SDG&E as an attorney in since 1976. He was Richard L. Manning, 55 treasurer in April 1986 1971.

appointed to his current Vice President-after serving as manager position in November Public Relations of financial services. Kyd George A. F Weida, 50 1986. Davis joined Richard Manning has joined SDG&E in 1980.

Vice President SDG&E in 1968.

been vice president-Human Resources public relations since he George Weida joined Donald E. Felsinger, 39 joined SDG&E in 1981 SDG&E in 1983 as a vice Vice President-from the Western Oil &

president and was named Marketing Gas Association, where head of the human Donald Felsinger was he was manager of public resources division in 1984.

elected a vice president in affairs.

Previously, he was head of 1983 and was appointed to human resources for other his current position in Ronald W. Watkins, 45 major US. corporations.

November 1986. Felsinger Vice President joined SDG&E in 1972.

Information Services Ronald Watkins, a vice Ronald K. Fuller, 49 president since 1979, was Vice President-Governmental appointed to his current and Regulatory Services position in November Ronald Fuller was elected 1986. He joined the com vice president of reg-pany in 1967.

ulatory services in 1983.

Governmental services was added to the division in 1984. He joined the company in 1974.

Board of Directors The 10-person board of Thomas A. Page*

directors consists of nine Thomas Page, 53, a direc outside directors and the tor since 1979, has been chief executive officer of chairman of the board SDG&E, who serves as since 1983. He is president its chairman. The direc-and chief executive officer tors provide a broad of SDG&E. Page is a cer perspective because of tified public accountant their diverse business, and licensed professional professional and civic engineer with an extensive backgrounds.

management background.

He currently is chairman of the San Diego Eco nomic Development Corporation.

4 In the corporate headquarters of SDG&E.

Clair W. Burgener Clair Burgener, 65, a director since 1983, is president of Burgener Properties, Inc., a real estate and property devel opment firm. Earlier, he served 24 years in elected public office. Burgener serves on the boards of several community ser vice organizations. In 1972, a public school for the trainable mentally retarded in Oceanside, Malin Burnham*

A In his office in the new California was named for Malin Burnham, 59, a corporate headquarters of him, one of many honors director since 1967, is John Burnham & Co. in he has received for his chairman of John Bum-downtown San Diego.

public service work.

ham & Co., an insurance, Cubic Corporation. A With new playground No, real estate and real estate life-long sailor, Burnham equipment at the Burgener finance firm. He is chair-is president of Sail School, which was paid for man of First National America, San Diego's employees.

Bank located in San Diego successful 1987 America's and serves as a director of Cup challenger.

• Member of the executive committee continued on next page

Daniel W. Derbes*

Daniel Derbes, 56, a director since 1983, has been president of Allied Signal International Inc.

and executive vice presi dent of Allied-Signal Inc.

since the company was formed in 1985. From 1983 to 1985 he was presi dent of the Advanced Technology Group of The Signal Companies, Inc.

Derbes is a director of The Garrett Corporation, Ampex Corporation and WD-40 Company. He also is involved with many community organizations.

4 In the headquarters of Allied-Signal International.

Ralph R. Ocampo Dr. Ralph Ocampo, 55, a director since 1983, is a physician and surgeon.

William D. McElroy A In front of the library He has been active William McElroy, 70, a on the campus of the dieco sinc 1979 istia University of California throughout his career in director since 1979, is a at San Diego.

many professional asso-professor of biology and ciations and in community former chancellor of the many honorary degrees activities. He currently is University of California at and awards. He is the a director of the Mercy San Diego. As a dis-author and editor of Hospital and Medical tinguished member of the numerous scientific text Center, the San Diego country's scientific com-books and articles.

chapter of the American munity, he has received Cancer Society and the San Diego Community Foundation. He served as president of the Hispanic American University Foundation in 1986.

A In Mercy Hospital, San Diego.

Charles R. Scott*

Properties and the Sunbelt Charles Scott, 58, a direc-Nursery Group. Scott has tor since 1983, has been served on the boards of president and chief execu-many civic, charitable and tive officer of Intermark, industrial organizations.

Inc. since 1970. Intermark In 1984, Scott was a owns and/or controls a national recipient of the diversified group of oper-Horatio Alger Award, one ating companies including of several awards he has Pier 1 Imports, Mission received.

West Properties, The Tri-In front of Intermark's >

ton Group, Ridgewood headquarters in La Jolla.

0. Morris Sievert*

1957 until his retirement Committees Morris Sievert, 65, a in early 1987. Sievert of the Board director since 1976, was a currently is a private corporate executive investor. He serves as a Audit officer, primarily in the member of the board of This committee selects an energy industry from directors of the Scripps independent auditor and 4 Near te Memorial Hospital Foun-reviews the overall plan of merchant vessel Star of dation and of San Diegos the audit, financial state India, a short walk from annual Holiday Bowl.

ments, audit results, scope SDG&E's corporate offices.

of internal audit pro cedures and the auditors' Fred C. Stalder investor. Stalder has been evaluation of internal Fred Stalder, 66, a mem-involved with and has pro-controls.

ber of the board since vided leadership to many 1969, was chief executive San Diego area civic and Executive officer of Central Federal cultural organizations for This committee is Savings and Loan in San 40 years.

empowered to act in place Diego from 1948 until his In front of the Timken of the full board, except in retirement in 1985. He Art Gallery, located in San certain transactions for currently is a private Diego's Balboa Park. v various board respon sibilities that are reserved for the board.

Executive Compensation This committee reviews A

othe salaries and other Olt

'forms of compensation of company officers and makes compensation rec ommendations to the board.

Finance This committee plans and counsels with manage ment concerning the company's capital require ments, proposed financing programs and capital risk exposure analyses and reviews the general investment policy and investment performance for the Pension Plan and the Savings Plan.

Catherine range planning of human Nominating Fitzgerald Wiggs resources. In the nine This committee considers Catherine Fitzgerald years prior to establishing and recommends nomi Wiggs, 53, a director her own consulting busi-fo board c

itee since 1979, is a manage-ness in 1986, she was ment advisor on executive vice president of composition and mem organization structure and human resources and a bership and directors' effectiveness and long member of the executive compensation.

~ Ner Th Brodway commnittee for The Broad A,

-4 Near The Broadway store in downtown San Diego's Horton Plaza.

• Memexr of the executive committee

ARonichard Kpia's InDaemer DCacuienataortyiners stated goals is to have its earings in Mock Resources, Inc., an Irvine, California reach 10 percent of the total corpo-based marketer and distributor of natural gas and rate earnings of SDG&E by 1991 petroleum products. It has 130 employees.

and 25 percent by 1996 through Richard Korpan, president and chief executive mergers, acquisitions and invest-officer of PDC, says, "Companies often have more ments in other companies.

than one potential buyer and the process is some PDC began working toward this goal in 1986. It thing like a courtship. Many things must be sought candidates and many were reviewed during considered. Were finding corporate executives are the year. While few fit the established profile, three very responsive to being acquired by Pacific companies did.

Diversified Capital because of our philosophy of In October, PDC acquired the assets of Phase keeping intact the management team of acquired One Development, Inc., a San Diego-based com-companies.

mercial real estate development company "We still have a substantial amount of cash Also in October, PDC acquired all the stock of available for our 1987 acquisition program, but if Computing Solutions Inc., of Port Chester, New we need to, we will do some debt financing. The York, a computerized mapping software company acquisition rate in 1987, by design, will be slower.

It was merged into Integrated Information Sys-

"In 1986, we did exactly what we said we were tems, a marketer of a computerized mapping going to do. We said we would acquire two or service to the utility industry.

three companies and we did. We said the acquired tunitieiesdwpuldmbnti Richard Korpan (center),

president and chief execu-three specified indus tive officer of Pacific tries and they were.

Diversified Capital, for-And we said we wanted merly was SDG&sts chief management to remain financial officer. Henry with the acquired com Huta (right) joined PDC in 1991 1986 as vice president and 25e andrh be ahre chief financial officer. He "eaewl wr formerly held several that diversification is a senior management posi-difficult thing to do tions at Ducommun, Inc.,

properly Therefore, we where he helped formulate will continue to follow the company's strategicd plan. Paul RasmussenDeurpmnnnin aanDigopsencm (left) is director of mergers manner.

and acquisitions. He for merly was manager of SDG&mas growth oppor tunities department.

PDC's corporate staff totals six employees.

ofiero DC ay,"omaie fenhvemr DieriievCptaebcus oiurphlsohyo keeping inattemngmnttaIfaqie Ccompames "WItl aeasbtnilaon fcs avial o

u 97aqusto rgabti

Officers Pacific Diversified Capital Company Richard Korpan, 45 President and Chief Executive Officer Henry N. Huta, 39 Vice President and Chief Financial Officer Subsidiaries:

Integrated Information Systems Company Chris Harlow, 42 President and Chief Executive Officer Thomas E. Anderson, 37 Vice President and General Manager Charles Kogan, 49 (Founder of Computing Solutions, Inc.)

Vice President Michael J. Shaughnessy, 35 Vice President-Marketing and Business Development Mock Resources, Inc.

Brian Mock, 40 President Christopher P Kunzi, 36 Executive Vice President Phase One Retaining key manage-De e ment is an important Development, Inc.

element in PDC's acquisi-Steven L. Davis, 42 tion strategy. Steven Davis, President president and founder of Phase One Development, G. Eric Gossett, 44 Inc., continues as the cor-Executive Vice President pany's president. He's on a Construction and Finance balcony of a Phase One commercial building in James M. Justice, 42 San Diego's Sorrento Vice President and Valley Science Park.

Manager-Colorado Springs MOCK Areas targeted for invest ment in PDC's strategic plan: real estate and prod Air" ucts or services to utilities m____

or their customers. Mock Resources, Inc. fit the lat ter profile and met other specific PDC acquisition standards. A majority in terest in the company was acquired in December 1986.

Second, SDG&E increased its financial media relations program. This helped the company to reach even more potential investors, including individuals, and to reinforce the contacts made at the meetings with institutional investors.

By year's end, 44 meetings with financial ana lysts and institutional investors had been held in 12 different cities. The company's financial executives were interviewed, in person or by phone, more than 200 times. In 1986, articles appeared in many major publications including Forbes, Business Week, Wall Street Journal, Los Angeles Times, San Diego Union and USA Today The important result of this concerted, well planned effort was that the number of institutional investors had risen to about 150 by December 31.

This represented an estimated 31 percent of the com'on stock ownership of the company "While thers a lot of competition for invest e Te mremment money, we have a very good story to tell Z.

sia says Lee Haney, vice president-finance. "Our over Lee Haney, vice president-elling how SDG&E sets goals and then all return to shareholders, in the top 19 percent of Tworks thoughtfully and carefully to achieve the utility industry, is appealing as is our focus on Nw York City with Dan plane is the subject of this Annual Report.

the need to improve the price of our stock.

Tan of Electric Utility Here's one final example.

Financial professionals also have told us they like Week. Interviews such as this one help introduce the In last year's Annual Report it was stated that the strong goal orientation of our management company to potential the number of institutional shareholders had team. They tell us this is not so in many other investors and update pres-increased to 127 and that the company would like companies.

ent investors on SDG&E's to have even more institutional interest in its stock, "In our meetings with fund managers and ana activities. Haney partici-eThe mpny'sfnanc eci pated in 50 such interviews,te veed er p

ne or conducted in New York, billion-dollar investment funds.

investing in companies with which they are famil Los Angeles and San To achieve this, a two-pronged approach was iar. In 1986, we concentrated on meeting people Francisco as well as planned. First, more meetings were scheduled we had not met before. This year we will follow up San Diego.

with financial analysts and with current and poten-with them and visit new cities to talk with other tial institutional investors, potential institutional investors."

Investor Profile h

rn Dividends Per Share 150 (by percent)

(declared, in dollars)

• Initionas Dividends were increased c

stin 1986 for the tenth con-t SDG&E's continuing effort secutive year. For the fifth to interest financial institu-year in a row, the rate of tions in its stock has been increase exceeded the rate successful.

of inflation. g o

o r

g

.0 1.0 20 05 1982 1983 1984 1985 1986 1982 1983 1984 1985 1986

Finance and Operations S

o dnM eeting infor:esation T A e ldronthe g

o S ip e and r nce s o ks : Listed on New The Annual M eeting of Shareholdere old of frlI ~7 the semsdcedhteiona col nei tintees exdperans aremn lstedk* Newspaer obl D' t s

f othe indi delr an nominhee.ri n Ntr as Infoat r ai ahem, April2 in the auditOlm ostinYgork and Pacific stock Mchanges Nur ldig i A pril t I n D987, e ein Allow a nice for funds used SD ieG s.

s i k rs m o r fl Cashn fcowrutof hoauh C

nuno stcprnfer agts:-Saeolesarhleso The net cost of funds used to prefe 9)ed and s

ckeir sy o

aLso the r

and i sherefler common stof inaternc tion PTisreferred and preference Ltste ote co st is ad d ed tO co n s u c tio n xch a n g e s ( x c p t fo r th e 4.6 0 % P re fe rre d se rie 'swan dT re o w9 6.Tere 7 3 7 1 c m n s o k s oholders as of Decemb the a1fhere ar or in ror pers and c tied are not listed). N ew spaper listing is SD go of other individ a shareholder Bompae Pr ha Transfer Agents and Registrars Information held by the secu Bovauta ofr otalxed-(tdaoe) onyeptnilthe $8.25 andc

$9.125lers t value of comn son T he tr efer agent has ries riie ae r adnm es ao n A c c w tt s

2 2, 5 2 6 itvided by the n ber t

rs a Cnd the cancellation and issuance of sccounts mqit ei SatDeo.

n dolraee be 1) atdiecl of shares of comm ion stock certificates. The agent should bem co tctddrety__

_8__

_998___

T ean i me, o e about these subjects.

h cash ere Compa is ale et et c uo er n T Frst k se Ftiduchiaries An id eman dof how much o

ro n g n riies dealers, no inees, other SDG's ele to pe yet ais ark e

37,54 eis a on seeeancfr y m Coaurti ofca156n inite 22,58 generate in order to metin d v i in percurynt debt Payments to invest post Office Box 2529 h equpment and other Sa iego, California 92112 aliforma, except SDG&E service area9 (Als th reisra of comn tc i a Deo)

SG2 vceae assets and to pay dividends.

(619) 2304487 owerEservice area a e l e c t r ic e n e r g y ur F

o eias e dt r e s2 fro othe sources Inoc 19Sa ieo thiso incude coalt geother-un~ne Theprdutind yrpwr C o g e ner a t i o n gs t a t e B a n k o f C a l i f o r n i a TePoute O syte'stoal energy Ite

-1, CCompany Shares owne one pi ayfuel. Co ie-one State Street 1

(

waste-1-99 shares Tre cial and industri l fir is use (A s Ne1or0015Y rk0-300 w sheat from their ow nl New York, New Y o stc0015e 3 1-0 operations.

(Aloregistrar of coneorh stock p cn 101 or more shares Internal generation prefere d an d Prefeen c stC tr1e ag nt ande s0h-res of funds registrar:

r yst ands invsten The funds Produced by the rCalifeornia normal operations of the (listed above) company for plant additiocotnu It is usually expresse as a First Interstate Bank prcesnd. (listed above) tnenew o (Preferene series only except the $8.25 and $9.125 series)

Megawatt 5

One million watts or roughY Cmo tc the amount of elecricity dt met h ed fi~

common Stock Data 4

rc rn p et h edso eeople31 ice Tolrend pepein San Diego.

(in dollars. at Deeme 31)h a Market Price (in Edoll4 Peak demand MBook Value Thee he re ats customer The pric of a share of Y30En there tim e orseasn whensok lse h

A record high stock Price demand for energy. For Commo stc clne th30o SD&E~ letrcoperations year at $33.875, giving the of $42.5 was reached i dvi sio cti cur duig o pany a market P ce -

September 1986.Fa o bl td ayisin the summer and for to-book value ratio of16reports byse rafi nc l the ay n e. sio in ercnt.analysts and investment the gs opratios di newsletters reflected the 2

the early morning in the finanscal ivnn.

winter.fiacaimrvens purchased powercoans niig Electric energy purchasedTo1 from other sources. in 1986, this included coal, geother mral and hydropower, amounting to43 percent of

--981 the systens total energy needs.192131419598

Selected Financia Data At December 31 Current assets*

1986 1985 C urrent liabilities*

62 3 9 7 1

W orking c tal*

446.2 3

.2 393.8

$ 267.3 39 Working capital ratio (146.5) 3(3.5) 348.0 302.4 Wokn capal*

$ ( 4.)

$ ( 33.5)

$-5.-$

( 59)--13.6--(

481 Long-term debt*

.7 9

45.8 440.5 Common shares Outstandin 966.1 967.j 6

(136.6)

(148.1)

Book value per common 55,847,822 55,822,762

,034.8 51,036.4

.7

.7 share 541,034.2

$1,366.4 785.1 727.2 Prea r

21.59 21.2 M~~~4,6,4 4srto99 206 9811,499,034 Fo Year Ended Deceber3 1 Capital expenditure*/**24.

24 197.8 292.0 Pre-tax inc ome/1 revenue 2.6 %2 7

98 87 53 2

Effective federal te 1

16.2%

19.8

./7%

252.8 209.7 E

t urn n s p e r c0ha r e 4 4.5 %

1 5.8 %

1 8.2 %

1 5 %

1 0.2 %

Dividend payout ratio 3

5 31.2 14.5%

(declared) 3.01 7 3.20 24.0%

4.7%

Price range of common 68.6%

68.1%

2 2.34 shares 68.8%

67

• In millions of dollars.

$28 N$2112

$3/$62.4%

71,1%

• Excluding alowance for funds used during construction.

1773 -$1I 14-$11

,uarterly Comon Stock Data r Ended December31 First Second rket Price Quarter Quarter Third Fourth First Seo 5

fQuarter Quarter uarter

,OW 4!/436 4 Qurte Quater Fourth ow 26431%

2 2%

2 idends declared 263 31,18 4

3 24 Quarter 59.5c 59.5c 3l 4V 8/

F inancial R eturn F

c R

on Equity (w eighted average)

F n ei al ae r (by percent)

Financial return on equity I

percent) is measured by earnings Financial retur applicable to common shares divided by average divided by average rate common equity. The com pany's authorized rate of a u e d a o fe r return was decreased by o ri ed to t en the California Public Util ities Commission in 1986.

9 1984 195 1986

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

(%)

1980 1979 1978 1977 1976

(%)

(0.2) 308.8 218.9 180.2 171.3 128.5 8.8 (0.2) 379.6 304.5 215.8 224.3 178.3 9.6 (70.8)

(85.6)

(35.6)

(53.0)

(49.8)

.8

.7

.8

.8

.7 5.8 732.3 640.1 573.1 572.6 489.6 7.0 6.1 36,469,483 31,188,237 27,592,809 22,648,992 19,281,308 11.2 5.9 16.06 17.35 17.41 17.36 16.72 2.6 11.6 7.3 7.3 6.7 6.8 3.0 178.1 200.1 200.3 205.5 175.8 3.3 4.5%

10.0%

11.6%

11.0%

12.3%

6.0%

10.4%

11.4%

13.4%

12.7%

(13.1)%

4.3%

3.9%

(2.3)%

5.6%

7.9 1.01 1.80 2.02 2.32 2.14 4.8 156.8%

83.1%

71.5%

55.9%

56.5%

$15%-$10

$15Ys-$12 3/

$163/s-$14%/

$ 16-$13 3A

$ 15-$11s Other Information Available Publications Executive Offices Shareholders who wish to receive more written infor-The Corporate Profile and Statistical Report for San Diego Gas & Electric mation about SDG&E should write to: Office of the 1976-1986 (contains 11 years of financial data and 101 Ash Street Secretary, San Diego Gas & Electric, Post Office Box information on California regulation).

Post Office Box 1831 1831, San Diego, California 92112, or call:

Form 10-K (the Annual Report to the Securities and San Diego, California (619) 696-2020.

Exchange Commission).

92112 Common Stock Investment Plan Shareholder Information Handbook (answers many (619) 6962000 A prospectus explains how SDG&E common stock common questions asked by shareholders).

shareholders can purchase additional shares, without Toward 2000: New Strategies (outlines the company's paying brokerage fees, by investing all or a portion of strategic plan).

their quarterly dividends on directly held shares. The For Information b Phone:

plan also allows optional cash investments of as little as

$25 per investment to a maximum of $5,000 per Shareholder inquires about stock holdings:

calendar quarter.

From California (800) 826-5942 The Sare orumFrom outside California (800) 243-5454 The Share Forum Membrshi inormaion or he Sare Recorded corporate news and stock update:

Membrshp iforatin fr Te SareFrom California (800) 443-SDGE Forum, an organization of SDG&E share-From outside California (800)521-NEWS holders, is available. Members receive SMembership nfomto o

h hr additional news about the company through Financial community inquiries:

meetings with management, tours of utility Jennifer Lewis, Manager facilities and periodic mailings. There are Investor Relations (619) 696-4487 nearly 10,000 members.

Utility customer inquiries on general energy subjects:

(619) 239-SDGE theit crpoere irenpcThe estimated cost of this Forml10-K custmer inquir o

R ec1986 Annual Report to related subjects: See the number listed at the bottom of Shareholders is 85 cents your SDG&E bill.

per copy

Post Ofice Box 1831