UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
--------------------------------------
Commission file number 1-40
----------------------------------------------
PACIFIC ENTERPRISES
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 94-0743670
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
555 West Fifth Street, Los Angeles, California 90013-1011
- --------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(213) 244-1200
----------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
----- -----
Common stock outstanding: Wholly owned by Sempra Energy
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PACIFIC ENTERPRISES AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME (Unaudited)
(Dollars in millions)
Three Months Ended
June 30,
------------------
1999 1998
------ ------
Revenues and Other Income:
Operating revenues $621 $581
Other (3) 4
---- ----
Total 618 585
---- ----
Expenses:
Cost of natural gas distributed 241 168
Operating expenses 194 283
Depreciation and amortization 65 64
Franchise payments and other taxes 20 26
Preferred dividends of subsidiaries 1 --
---- ----
Total 521 541
---- ----
Income Before Interest and Income Taxes 97 44
Interest 22 16
---- ----
Income Before Income Taxes 75 28
Income Taxes 35 16
---- ----
Net Income 40 12
Preferred Dividend Requirements 1 1
---- ----
Earnings Applicable to
Common Shares $ 39 $ 11
==== ====
See notes to Consolidated Financial Statements.
PACIFIC ENTERPRISES AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME (Unaudited)
(Dollars in millions)
Six Months Ended
June 30,
------------------
1999 1998
------ ------
Revenues and Other Income:
Operating revenues $1,235 $1,250
Other 2 13
---- -----
Total 1,237 1,263
---- -----
Expenses:
Cost of natural gas distributed 497 458
Operating expenses 356 480
Depreciation and amortization 130 128
Franchise payments and other taxes 45 55
Preferred dividends of subsidiaries 1 1
---- -----
Total 1,029 1,122
---- -----
Income Before Interest and Income Taxes 208 141
Interest 45 35
---- -----
Income Before Income Taxes 163 106
Income Taxes 75 54
---- -----
Net Income 88 52
Preferred Dividend Requirements 2 2
---- -----
Earnings Applicable to
Common Shares $ 86 $ 50
==== =====
See notes to Consolidated Financial Statements.
PACIFIC ENTERPRISES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
Balance at
------------------------
June 30, December 31,
1999 1998
(Unaudited)
---------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 199 $ 27
Accounts and notes receivable 254 462
Due from affiliates 50 119
Income taxes receivable 19 22
Deferred income taxes 165 130
Natural gas in storage 3 49
Materials and supplies 13 16
Prepaid expenses 23 19
------ ------
Total current assets 726 844
------ ------
Investments and other assets:
Regulatory assets 343 351
Other receivables 128 130
Investments 2 209
Other assets 62 61
------ ------
Total investments and
other assets 535 751
------ ------
Property, plant and equipment 6,141 6,152
Less accumulated depreciation and
amortization (3,241) (3,149)
------ ------
Total property, plant and
equipment - net 2,900 3,003
------ ------
Total $4,161 $4,598
====== ======
See notes to Consolidated Financial Statements.
PACIFIC ENTERPRISES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
Balance at
-------------------------
June 30, December 31,
1999 1998
(Unaudited)
---------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt $ -- $ 43
Long-term debt due within one year 205 206
Accounts payable - trade 127 163
Accounts payable - other 257 245
Regulatory balancing accounts
overcollected - net 360 129
Interest accrued 49 47
Other taxes payable 17 32
Other 71 149
------ ------
Total current liabilities 1,086 1,014
------ ------
Long-term Debt 968 985
------ ------
Deferred credits and other liabilities:
Post-retirement benefits other than pensions 200 210
Deferred income taxes - net 229 220
Deferred investment tax credits 57 58
Other deferred credits and
other liabilities 480 544
------ ------
Total deferred credits and
other liabilities 966 1,032
------ ------
Preferred stock of subsidiary 20 20
------ ------
Commitments and contingent liabilities (Note 3)
Shareholders' equity:
Capital stock:
Preferred 80 80
Common 1,117 1,117
------ ------
Total capital stock 1,197 1,197
Retained earnings (31) 395
Deferred compensation relating to
Employee Stock Ownership Plan (45) (45)
------ ------
Total shareholders' equity 1,121 1,547
------ ------
Total $4,161 $4,598
====== ======
See notes to Consolidated Financial Statements.
PACIFIC ENTERPRISES AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (Unaudited)
(Dollars in millions)
Six Months Ended
June 30,
------------------
1999 1998
----- -----
Cash Flows from Operating Activities:
Net Income $ 88 $ 52
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 130 128
Deferred income taxes 44 6
Other - net (5) (1)
Net change in other working capital components 151 368
----- -----
Net cash provided by operating
activities 408 553
----- -----
Cash Flows from Investing Activities:
Expenditures for property, plant and equipment (75) (72)
(Increase) decrease in other investments -- (70)
(Increase) decrease in other receivables,
regulatory assets and other assets (15) 20
----- -----
Net cash used in investing activities (90) (122)
----- -----
Cash Flows from Financing Activities:
Issuance of long-term debt -- 75
Payment on long-term debt (2) (151)
Decrease in short-term debt (43) (305)
Sale of Common Stock -- 27
Repurchase of preferred stock of a subsidiary -- (75)
Common dividends paid (100) (97)
Preferred dividends paid (1) (2)
----- -----
Net cash used in financing activities (146) (528)
----- -----
Increase (Decrease) in Cash and Cash Equivalents 172 (97)
Cash and Cash Equivalents, January 1 27 153
----- -----
Cash and Cash Equivalents, June 30 $ 199 $ 56
===== =====
Supplemental Disclosure of Cash Flow Information:
Interest payments (net of amount capitalized) $ 21 $ 38
===== =====
Income tax payments (net of refunds) $ 119 $ 153
===== =====
Supplemental Schedule of Noncash Activities:
Dividend of property to Sempra Energy $ -- $ 23
===== =====
Dividend of affiliates to Sempra Energy $ 413 $ --
===== =====
See notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. GENERAL
This Quarterly Report on Form 10-Q is that of Pacific Enterprises (PE
or the Company), the parent company of Southern California Gas
Company (SoCalGas). The Company is a subsidiary of Sempra Energy, a
California-based Fortune 500 energy services company. The financial
statements herein are the Consolidated Financial Statements of PE and
its subsidiaries.
The accompanying Consolidated Financial Statements have been prepared
in accordance with the interim-period-reporting requirements of Form
10-Q. Results of operations for interim periods are not necessarily
indicative of results for the entire year. In the opinion of
management, the accompanying statements reflect all adjustments
necessary for a fair presentation. These adjustments are only of a
normal recurring nature. Certain changes in classification have been
made to prior presentations to conform to the current financial
statement presentation.
The Company's significant accounting policies, as well as those of
its subsidiaries, are described in the notes to Consolidated
Financial Statements in the Company's 1998 Annual Report. The same
accounting policies are followed for interim reporting purposes.
This Quarterly Report should be read in conjunction with the
Company's 1998 Annual Report and its Quarterly Report on Form 10-Q
for the three months ended March 31, 1999. The Company's 1998 Annual
Report includes the Consolidated Financial Statements and notes
thereto, and "Management's Discussion & Analysis of Financial
Condition and Results of Operations."
In conformity with generally accepted accounting principles,
SoCalGas' accounting policies reflect the financial effects of rate
regulation authorized by the California Public Utilities Commission
(CPUC). SoCalGas applies the provisions of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" (SFAS No. 71). This statement requires cost-
based rate-regulated entities that meet certain criteria to reflect
the authorized recovery of costs due to regulatory decisions in their
financial statements. SoCalGas continues to meet the criteria of SFAS
No. 71 in accounting for its regulated operations.
2. BUSINESS COMBINATIONS
PE/Enova
On June 26, 1998 (pursuant to an October 1996 agreement) Enova
Corporation (Enova), the parent corporation of San Diego Gas &
Electric (SDG&E), and PE completed a business combination in which
the two companies became subsidiaries of a new company named Sempra
Energy. As a result of the combination, (i) each outstanding share of
common stock of Enova was converted into one share of common stock of
Sempra Energy, (ii) each outstanding share of common stock of PE was
converted into 1.5038 shares of common stock of Sempra Energy and
(iii) the preferred stock and/or preference stock of SDG&E, PE and
SoCalGas remain outstanding. Additional information on the business
combination is discussed in the Company's 1998 Annual Report.
Expenses incurred in connection with the above were $0.5 million,
after tax, and $32 million, after tax, for the six-month periods
ended June 30, 1999 and 1998, respectively, of which $0.2 million,
after tax, and $31 million, after tax, respectively, occurred during
the three months ended June 30, 1999 and 1998.
As a result of the business combination, PE dividended certain
nonutility subsidiaries to Sempra Energy during 1998 and early 1999.
SoCalGas is now the sole direct subsidiary of PE.
KN Energy
On February 22, 1999, Sempra Energy and KN Energy, Inc. (KN Energy)
announced that their respective boards of directors had approved
Sempra Energy's acquisition of KN Energy, subject to approval by the
shareholders of both companies and by various federal and state
regulatory agencies. On June 21, 1999, Sempra Energy and KN Energy
announced that they had agreed to terminate the proposed acquisition.
3. MATERIAL CONTINGENCIES
NATURAL GAS INDUSTRY RESTRUCTURING
The natural gas industry experienced an initial phase of
restructuring during the 1980s by deregulating natural gas sales to
noncore customers. On January 21, 1998, the CPUC released a staff
report initiating a project to assess the current market and
regulatory framework for California's natural gas industry. The
general goals of the plan are to consider reforms to the current
regulatory framework emphasizing market-oriented policies benefiting
California's natural gas consumers.
In August 1998, California enacted a law prohibiting the CPUC from
enacting any natural gas industry restructuring decision for core
customers prior to January 1, 2000; the CPUC continues to study the
issue. During the implementation moratorium, the CPUC will hold
hearings throughout the state and intends to give the legislature a
draft ruling before adopting a final market-structure policy. SDG&E
and SoCalGas will actively participate in this effort.
QUASI-REORGANIZATION
During 1993, PE completed a strategic plan to refocus on its natural
gas utility and related businesses. The strategy included the
divestiture of the Company's merchandising operations and all of its
oil and gas exploration and production business. In connection with
the divestitures, PE effected a quasi-reorganization for financial-
reporting purposes, effective December 31, 1992. Certain of the
liabilities established in connection with discontinued operations
and the quasi-reorganization will be resolved in future years.
Management believes the provisions previously established for these
matters are adequate.
4. COMPREHENSIVE INCOME
In conformity with generally accepted accounting principles, the
Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income." Comprehensive income for the
six-month periods ended June 30, 1999 and 1998 was equal to net
income.
5. SEGMENT INFORMATION
The Company had two separately managed reportable segments: SoCalGas
and Sempra Energy Trading (SET). However, PE dividended its SET
holdings to Sempra Energy during the second quarter of 1999. SoCalGas
is a natural gas distribution utility, serving customers throughout
most of southern California and part of central California. SET is
based in Stamford, Connecticut, and is engaged in the nationwide
wholesale trading and marketing of natural gas, power and petroleum.
The Company had a 50-percent ownership interest in SET and accounted
for this investment on the equity method of accounting. However, for
segment reporting, items of income and assets for SET are reported at
100 percent. A corresponding adjustment is made to reconcile the
amounts to those that were reported by the Company under the equity
method. The accounting policies of the segments are the same as those
described in the notes to Consolidated Financial Statements in the
Company's 1998 Annual Report, and segment performance is evaluated by
management based on reported net income. Intersegment transactions
are generally recorded the same as sales or transactions with third
parties. Utility transactions are primarily based on rates set by the
CPUC. There were no other significant changes in segment assets
during the six months ended June 30, 1999. Segment information of
SoCalGas is provided in the company's Quarterly Report on Form 10-Q
for the six-month period ended June 30, 1999.
- ---------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
----------------------------------------
(Dollars in millions) 1999 1998 1999 1998
- ---------------------------------------------------------------------
Revenues and Other Income:
Southern California Gas $ 624 $ 578 $1,231 $1,242
Sempra Energy Trading** 109 24 182 33
Sempra Energy Trading
adjustment (109) (24) (182) (33)
All other (6) 7 6 21
----------------------------------------
Total $ 618 $ 585 $1,237 $1,263
----------------------------------------
Net Income:
Southern California Gas* $ 46 $ 19 $ 93 $ 65
Sempra Energy Trading** 3 2 4 (6)
Sempra Energy Trading
adjustment (2) (1) (3) 3
All other (8) (9) (8) (12)
----------------------------------------
Total $ 39 $ 11 $ 86 $ 50
----------------------------------------
* after preferred dividends
** transferred to Sempra Energy in April, 1999
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
financial statements contained in this Form 10-Q and Management's
Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's 1998 Annual Report.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking
statements within the meaning of the Private Securities Litigation
Reform Act of 1995. The words "estimates," "believes," "expects,"
"anticipates," "plans" and "intends," variations of such words, and
similar expressions are intended to identify forward-looking
statements that involve risks and uncertainties which could cause
actual results to differ materially from those anticipated.
These statements are necessarily based upon various assumptions
involving judgments with respect to the future including, among
others, local, regional, national and international economic,
competitive, political and regulatory conditions and developments;
technological developments; capital market conditions; inflation
rates; interest rates; energy markets; weather conditions; business,
regulatory or legal decisions; the pace of deregulation of retail
natural gas and electricity industries; the timing and success of
business development efforts; and other uncertainties, all of which
are difficult to predict and many of which are beyond the control of
the Company. Accordingly, while the Company believes that the
assumptions are reasonable, there can be no assurance that they will
approximate actual experience, or that the expectations will be
realized. Readers are urged to review and consider carefully the
risks, uncertainties and other factors which affect the Company's
business described in this quarterly report and other reports filed
by the Company from time to time with the Securities and Exchange
Commission. Readers are cautioned not to put undue reliance on any
forward-looking statements. For those statements, the Company claims
the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995.
BUSINESS COMBINATIONS
See Note 2 of the notes to Consolidated Financial Statements
regarding the PE/Enova business combination and the agreement to
terminate the KN Energy acquisition.
CAPITAL RESOURCES AND LIQUIDITY
The Company's utility operations continue to be a major source of
liquidity. In addition, working capital requirements are met through
the issuance of short-term and long-term debt. These capital
resources are expected to remain available. Major changes in cash
flows not described elsewhere are described below. Cash and cash
equivalents at June 30, 1999 are available for investment in utility
plant, the retirement of debt, and other corporate purposes.
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flows from operations decreased primarily due to payments on
behalf of affiliated companies, and less overcollections on
regulatory balancing accounts compared to 1998.
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures for property, plant and equipment are estimated
to be $150 million for the full year 1999 and will be financed
primarily by internally generated funds and will largely represent
investment in utility operations. Construction, investment and
financing programs are continuously reviewed and revised in response
to changes in competition, customer growth, inflation, customer
rates, the cost of capital, and environmental and regulatory
requirements.
In January 1998, PE and Enova jointly acquired CES/Way International,
Inc. for a total of $79 million. CES/Way provides energy-efficiency
services, including energy audits, engineering design, project
management, construction, financing and contract maintenance.
Effective January 1999, PE transferred its ownership interest in
CES/Way to Sempra Energy.
In March 1998, PE increased its existing investment in two Argentine
natural gas utility holding companies from 12.5 percent to 21.5
percent by purchasing an additional interest for $40 million. In
March 1999, Pacific Enterprises International (PEI) was dividended to
Sempra Energy.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash used in financing activities decreased primarily due to
greater long-term and short-term debt repayments and the redemption
of SoCalGas' preferred stock in 1998. On February 2, 1998, SoCalGas
redeemed all outstanding shares of its 7-3/4% Series Preferred Stock
for a total cost of $75 million, including unpaid dividends.
RESULTS OF OPERATIONS
Consolidated earnings consist primarily of the results from SoCalGas.
SoCalGas' net income for the three-month and six-month periods ended
June 30, 1999 increased primarily due to lower business combination
costs in 1999.
UTILITY OPERATIONS
Utility natural gas revenues increased 7 percent for the three-
month period ended June 30, 1999, compared to the same period in
1998. Natural gas revenues decreased one percent for the six-
month period ended June 30, 1999 compared to the same period of
1998. The increase for the second quarter was primarily due to
higher sales to residential customers due to colder weather and
customer growth, and higher sales to commercial and industrial
customers. The decrease for the six-month period was primarily
due to a decrease in the average cost of natural gas.
Cost of natural gas distributed increased 30 percent and 2
percent for the three-month and six-month periods ended June 30,
1999 compared to the same period in 1998. The increases were due
to the higher sales, affected by higher prices during the three
months and lower prices during the six months. Under the current
regulatory framework, changes in revenue resulting from core
market changes in volumes and the cost of natural gas do not
affect net income.
Utility operating expenses decreased 22 percent and 16 percent
for the three-month and six-month periods ended June 30, 1999
compared to the same period in 1998 primarily due to lower
business-combination costs and a continuing emphasis on reducing
operating costs to remain competitive in the marketplace.
The table below summarizes the components of natural gas volumes
and revenues by customer class for the six months ended June 30,
1999 and 1998.
Gas Sales, Transportation & Exchange
(Dollars in millions, volumes in billion cubic feet)
Gas Sales Transportation & Exchange Total
--------------------------------------------------------------
Throughput Revenue Throughput Revenue Throughput Revenue
--------------------------------------------------------------
1999:
Residential 162 $1,017 1 $ 4 162 $1,021
Commercial and industrial 46 241 152 122 198 363
Utility electric generation -- -- 49 20 49 20
Wholesale -- -- 80 28 80 28
--------------------------------------------------------------
208 $1,258 282 $174 489 $1,432
Balancing accounts and other (201)
--------
Total $1,231
- -----------------------------------------------------------------------------------------
1998:
Residential 154 $1,153 2 $ 7 156 $1,160
Commercial and industrial 43 259 157 136 200 395
Utility electric generation -- -- 40 20 40 20
Wholesale -- -- 77 30 77 30
--------------------------------------------------------------
197 $1,412 276 $193 473 1,605
Balancing accounts and other (363)
--------
Total $1,242
- -----------------------------------------------------------------------------------------
YEAR 2000 ISSUES
Most companies are affected by the inability of many automated
systems and applications to process the year 2000 and beyond. The
Year 2000 issues are the result of computer programs and other
automated processes using two digits to identify a year, rather than
four digits. Any of the Company's computer programs that include
date-sensitive software may recognize a date using "00" as
representing the year 1900, instead of the year 2000, or "01" as
1901, etc., which could lead to system malfunctions. The Year 2000
issue impacts both Information Technology ("IT") systems and also
non-IT systems, including systems incorporating embedded processors.
To address this problem, in 1996, both Pacific Enterprises and Enova
Corporation established company-wide Year 2000 programs. These
programs have now been consolidated into Sempra Energy's overall Year
2000 readiness effort. Sempra Energy has established a central Year
2000 Program Office, which reports to the Company's Chief Information
Technology Officer and reports periodically to the audit committee of
the Board of Directors.
The Company's State of Readiness
Sempra Energy has identified all significant IT and non-IT systems
(including embedded systems) that might not be Year 2000 ready and
categorizing them in the following areas: IT applications, computer
hardware and software infrastructure, telecommunications, embedded
systems, and third parties. The Company evaluated its exposure in all
of these areas. These systems and applications are being tracked and
measured through four key phases: inventory, assessment,
remediation/testing, and Year 2000 readiness. The Company has
prioritized so that, when possible, critical systems are being
assessed and modified/replaced first. Critical systems are those
applications and systems, including embedded processor technology,
which, if not appropriately remediated, may have a significant impact
on energy delivery, revenue collection or the safety of personnel,
customers or facilities. The Company's Year 2000 testing effort
includes functional testing of Year 2000 dates and validating that
changes have not altered existing functionality. The Company uses an
independent, internal review process to verify that the appropriate
testing has occurred.
The Company's Year 2000 project is currently on schedule, with
critical energy delivery systems for both SoCalGas and SDG&E Year
2000 Ready as of June 30, 1999. The Company defines "Year 2000 Ready"
as suitable for continued use into the year 2000 with no significant
operational problems.
Sempra Energy's current schedule for Year 2000 testing and readiness
for non-critical systems is to be completed by the fourth quarter of
1999. In certain cases, this schedule is dependent upon the efforts
of third parties, such as suppliers (including energy producers) and
customers. Accordingly, delays by third parties may cause the
Company's schedule to change. In addition, a continued readiness
management process has been implemented to monitor and review the
progress of Year 2000 readiness of the Company's systems.
The Costs to Address the Company's Year 2000 Issues
Sempra Energy's budget for the Year 2000 program is $48 million, of
which $43 million has been spent. As the Company continues to assess
its systems and as the remediation and testing efforts progress, cost
estimates may change. The Company's Year 2000 readiness effort is
being funded entirely by operating cash flows.
The Risks of the Company's Year 2000 Issues
Based upon its current assessment and testing of the Year 2000 issue,
the Company believes the reasonably likely worst case Year 2000
scenarios to have the following impacts upon Sempra Energy and its
operations. With respect to the Company's ability to provide energy
to its domestic utility customers, the Company believes that the
reasonably likely worst case scenario is for small, localized
interruptions of utility service which are restored in a time frame
that is within normal service levels. With respect to services that
are essential to Sempra Energy's operations, such as customer
service, business operations, supplies and emergency response
capabilities, the scenario is for minor disruptions of essential
services with rapid recovery and all essential information and
processes ultimately recovered.
To assist in preparing for and mitigating these possible scenarios,
Sempra Energy is a member of several industry-wide efforts
established to deal with Year 2000 problems affecting embedded
systems and equipment used by the nation's natural gas and electric
power companies. Under these efforts, participating utilities are
working together to assess specific vendors' system problems and to
test plans. These assessments will be shared by the industry as a
whole to facilitate Year 2000 problem solving.
A portion of this risk is due to the various Year 2000 Ready
schedules of critical third party suppliers and customers. The
Company continues to contact its critical suppliers and customers to
survey their Year 2000 remediation programs. While risks related to
the lack of Year 2000 readiness by third parties could materially and
adversely affect the Company's business, results of operations and
financial condition, the Company expects its Year 2000 readiness
efforts to reduce significantly the Company's level of uncertainty
about the impact of third party Year 2000 issues on both its IT
systems and its non-IT systems.
The Company's Contingency Plans
The Company's contingency plans for Year-2000-related interruptions
have been completed and were submitted to the CPUC on July 1, 1999.
These plans will continue to be revised and improved during the
remainder of 1999. The contingency plans include emergency backup and
recovery procedures, replacing electronic applications with manual
processes, and identification of alternate suppliers along with
increasing inventory levels. In addition, the following key
contingency actions will be taken.
- -- Only critical system changes will be implemented during
December 1999 and January 2000.
- -- An hour-by-hour plan will be developed to cover key
contingency actions.
- -- On-site staffing will be in place at key operational and
administrative locations.
- -- Designated standby staff will be on-call with thirty-minute
availability.
- -- Emergency Operations Centers will be activated on December
31, 1999.
- -- Walk-through drills will be held during the fourth quarter
of 1999.
Due to the speculative and uncertain nature of contingency planning,
there can be no assurances that such plans actually will be
sufficient to reduce the risk of material impacts on the Company's
operations due to Year 2000 issues.
FACTORS INFLUENCING FUTURE PERFORMANCE
The Company's performance in the near future will primarily depend on
the results of SoCalGas. Because of the ratemaking and regulatory
process, electric and natural gas industry restructuring, and the
changing energy marketplace, there are several factors that will
influence the Company's future financial performance. These factors
are discussed in this section below.
Industry Restructuring
See discussion of industry restructuring in Note 3 of the notes to
Consolidated Financial Statements.
Performance-Based Regulation (PBR)
To promote efficient operations and improved productivity and to move
away from reasonableness reviews and disallowances, the CPUC has been
directing utilities to use PBR. PBR has replaced the general rate
case and certain other regulatory proceedings for both SoCalGas and
SDG&E. Under PBR, regulators require future income potential to be
tied to achieving or exceeding specific performance and productivity
goals, as well as cost reductions, rather than relying solely on
expanding utility rate base in a market where a utility already has a
highly developed infrastructure.
SoCalGas' PBR is in effect through December 31, 2002; however, the
CPUC decision allows for the possibility that changes to the PBR
mechanism could be adopted in a decision to be issued in SoCalGas'
1999 Biennial Cost Allocation Proceeding (BCAP) application which is
anticipated to become effective at year-end 1999
Cost of Capital
Under PBR, annual Cost of Capital proceedings were replaced by an
automatic adjustment mechanism if changes in certain indices exceed
established tolerances. For 1999, SoCalGas is authorized to earn a
rate of return on common equity (ROE) of 11.6 percent and a 9.49
percent return on rate base (ROR), unchanged from 1998.
Annual Earnings Assessment Proceeding
An application was filed in May 1999 to recover shareholder rewards
for the Demand Side Management (DSM) programs and incentives earned
for its energy-efficiency and low-income programs totaling $5
million. The revenue requirement increase is proposed to become
effective on January 1, 2000. The DSM rewards and low-income program
incentives will be collected and recorded in earnings over ten years.
The energy-efficiency program incentives are recovered in one year.
Rewards and incentives for these programs are subject to CPUC
approval.
The CPUC has extended interim utility administration of energy-
efficiency and low-income programs through December 31, 2001.
Biennial Cost Allocation Proceeding (BCAP)
The BCAP determines how a utility's costs are allocated among various
customer classes (residential, commercial, industrial, etc.).
SoCalGas filed the 1999 BCAP application in October 1998, with
hearings held during the first half of 1999. At the conclusion of
hearings, a joint BCAP recommendation was reached proposing, among
other things, an overall natural gas rate reduction of $229 million
for SoCalGas. A CPUC decision is expected in early 2000.
OTHER OPERATIONS
Sempra Energy Solutions (Solutions), formed in 1997 as a joint
venture of PE and Enova, incorporates several existing unregulated
businesses from each of PE and Enova. Effective January 1999, PE
transferred its ownership interest in Solutions to Sempra Energy.
Sempra Energy Trading Corp. (SET), a leading natural-gas power
marketing firm headquartered in Stamford, Connecticut, was jointly
acquired by PE and Enova on December 31, 1997. For the three and six-
month periods ended June 30, 1999, SET recorded after-tax income of
$3 million and $4 million, compared to net income of $2 million and a
net loss of $6 million for the same periods in 1998. The increase in
income was primarily due to greater penetration of all customer
segments resulting in higher volumes traded in 1999. In addition, new
European crude oil and natural gas trading contributed to 1999
earnings. Effective April 1999, PE transferred its ownership interest
in SET to Sempra Energy.
INTERNATIONAL OPERATIONS
In conjunction with the PE/Enova business combination, in March 1999,
Enova's and PE's ownership interests in international subsidiaries
were transferred to Sempra Energy at book value.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except for the matters referred to in the Company's 1998 Annual
Report or referred to elsewhere in this Quarterly Report on Form 10-Q
for the six months ended June 30, 1999, neither the Company nor any
of its affiliates is a party to, nor is its property the subject of,
any material pending legal proceedings other than routine litigation
incidental to its businesses.
ITEM 4. SUBMISSION OF MATTERS TO VOTE
At the annual meeting on May 11, 1999, the Company's shareholders
elected 16 directors to hold office until the next annual meeting and
until their successors have been elected and qualified. The name of
each nominee and the number of shares voted for or withheld were as
follows:
Nominees Votes For Votes Withheld
- -------------------------------------------------------------------
Stephen L. Baum 83,917,664 --
Hyla H. Bertea 83,917,664 --
Ann L. Burr 83,917,664 --
Herbert L. Carter 83,917,664 --
Richard A. Collato 83,917,664 --
Daniel W. Derbes 83,917,664 --
Richard D. Farman 83,917,664 --
Wilford D. Godbold, Jr. 83,917,664 --
Robert H. Goldsmith 83,917,664 --
William D. Jones 83,917,664 --
Ignacio E. Lozano, Jr. 83,917,664 --
Ralph R. Ocampo 83,917,664 --
William G. Ouchi 83,917,664 --
Richard J. Stegemeier 83,917,664 --
Thomas C. Stickel 83,917,664 --
Diana L. Walker 83,917,664 --
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedules
27.1 Financial Data Schedule for the six months ended
June 30, 1999.
(b) Reports on Form 8-K
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly cause this report to be signed on its behalf
by the undersigned thereunto duly authorized.
PACIFIC ENTERPRISES
-------------------
(Registrant)
Date: August 12, 1999 By: /s/ F. H. Ault
----------------------------
F. H. Ault
Vice President and Controller
UT
