FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission file number 1-40
PACIFIC ENTERPRISES
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(Exact name of Registrant as specified in its charter)
California 94-0743670
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(State of incorporation) (IRS Employer Identification No.)
555 West Fifth Street, Suite 2900, Los Angeles, California 90013-1011
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(Address of principal executive offices) (Zip Code)
(213) 895-5000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock and Associated New York Stock Exchange
Common Stock Purchase Rights Pacific Stock Exchange
Preferred Stock
$4.75 dividend
$4.50 dividend American Stock Exchange
$4.40 dividend Pacific Stock Exchange
$4.36 dividend
Securities registered pursuant to Section 12(g) of the Act: None
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 and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of Registrant's voting stock (Common Stock and
Preferred Stock) held by non-affiliates at March 17, 1997, was approximately
$2.6 billion. This amount excludes the market value of 1,213,314 shares of
Common Stock held by Registrant's directors and executive officers.
Registrant's Common Stock outstanding at March 17, 1997, numbered 84,167,510
shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information in this Annual Report is incorporated by reference to
information contained or to be contained in other documents filed or to be filed
by Registrant with the Securities and Exchange Commission. The following table
identifies the information so incorporated in each Part of this Annual Report on
Form 10-K and the document in which it is or will be contained.
Information Incorporated
by Reference and Document
Annual Report in Which Information is or
On Form 10-K will be Contained
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Part II - Information contained under the
captions "Financial Review --
Management's Discussion and
Analysis," "Quarterly Financial
Data," "Range of Market Prices of
Capital Stock" and "Selected
Financial Data and Comparative
Statistics 1986-1996," in
Registrant's 1996 Annual Report to
Shareholders.
Part III - Information contained under the
captions "Election of Directors,"
"Share Ownership of Directors and
Executive Officers" and "Executive
Compensation" in Registrant's Proxy
Statement for its Annual Meeting of
Shareholders scheduled to be held
on May 8, 1997.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Annual Report on Form 10-K to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this Form 10-K.
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TABLE OF CONTENTS
Page
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Pacific Enterprises. . . . . . . . . . . . . . . . . . . . . . . . 5
Southern California Gas Company. . . . . . . . . . . . . . . . . . 6
Operating Statistics . . . . . . . . . . . . . . . . . . . . 7
Service Area . . . . . . . . . . . . . . . . . . . . . . . . 8
Utility Services . . . . . . . . . . . . . . . . . . . . . . 9
Demand for Gas . . . . . . . . . . . . . . . . . . . . . . . 9
Competition. . . . . . . . . . . . . . . . . . . . . . . . . 10
Supplies of Gas. . . . . . . . . . . . . . . . . . . . . . . 11
Rates and Regulation . . . . . . . . . . . . . . . . . . . . 13
Current Ratemaking Procedures . . . . . . . . . . . . . . 13
Performance Based Regulation. . . . . . . . . . . . . . . 13
Properties . . . . . . . . . . . . . . . . . . . . . . . . . 14
Energy Management Services . . . . . . . . . . . . . . . . . . . . 14
Pacific Enterprises International. . . . . . . . . . . . . . . . . 15
Environmental Matters. . . . . . . . . . . . . . . . . . . . . . . 15
Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . 18
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters. . . . . . . . . . . . . . . . . . . . . . . . 19
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . 19
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . . 19
Item 8. Financial Statements and Supplementary Data. . . . . . . . . . . . 19
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Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . 19
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . 20
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . 20
Item 12. Security Ownership of Certain Beneficial Owners and Management . . 20
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . 20
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . 21
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THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITH RESPECT TO MATTERS
INHERENTLY INVOLVING NUMEROUS RISKS AND UNCERTAINTIES. THESE STATEMENTS ARE
IDENTIFIED BY THE WORDS "ESTIMATES," "EXPECTS," "ANTICIPATES," "PLANS,"
"BELIEVES," AND SIMILAR EXPRESSIONS.
THE ANALYSES EMPLOYED TO DEVELOP THESE STATEMENTS ARE NECESSARILY
BASED UPON VARIOUS ASSUMPTIONS INVOLVING JUDGMENTS WITH RESPECT TO THE FUTURE
INCLUDING, AMONG OTHER FACTORS, NATIONAL, REGIONAL, AND LOCAL ECONOMIC,
COMPETITIVE AND REGULATORY CONDITIONS, LEGISLATIVE DEVELOPMENTS,
TECHNOLOGICAL DEVELOPMENTS, INFLATION RATES, WEATHER CONDITIONS, FINANCIAL
MARKET CONDITIONS, FUTURE BUSINESS DECISIONS, AND OTHER UNCERTAINTIES, ALL OF
WHICH ARE DIFFICULT TO PREDICT, AND MANY OF WHICH ARE BEYOND THE CONTROL OF
THE PACIFIC ENTERPRISES. ACCORDINGLY, WHILE PACIFIC ENTERPRISES BELIEVES THAT
THE ASSUMPTIONS UPON WHICH THE FORWARD-LOOKING STATEMENTS ARE BASED, ARE
REASONABLE FOR PURPOSES OF MAKING THESE STATEMENTS, THERE CAN BE NO ASSURANCE
THAT THESE ASSUMPTIONS WILL APPROXIMATE ACTUAL EXPERIENCE, OR THAT THE
EXPECTATIONS SET FORTH IN THE FORWARD-LOOKING STATEMENTS DERIVED FROM THESE
ASSUMPTIONS WILL BE REALIZED.
PART I
ITEM 1. BUSINESS
PACIFIC ENTERPRISES
Pacific Enterprises is a Los Angeles-based utility holding company
engaged in supplying natural gas throughout most of southern and part of
central California. These operations are conducted through Southern
California Gas Company, the nation's largest natural gas distribution
utility. Through other subsidiaries, Pacific Enterprises is also engaged in
interstate and offshore natural gas transmission to serve its utility
operations, natural gas marketing, alternate energy development, centralized
heating and cooling for large building complexes, energy management services
and investments in international energy utility operations.
Pacific Enterprises was incorporated in California in 1907 as the
successor to a corporation organized in 1886. Its principal executive
offices are located at 555 West Fifth Street, Los Angeles, California
90013-1011 and its telephone number is (213) 895-5000.
On October 14, 1996, Pacific Enterprises announced an agreement to
combine its operations with Enova Corporation ("Enova"), the parent company
of San Diego Gas & Electric Company ("SDG&E"). This strategic merger of
equals will be a tax-free transaction accounted for as a pooling of
interests. The combination was approved by the shareholders of both
companies on March 11, 1997. Upon completion of the combination, Pacific
Enterprises and Enova will become separate subsidiaries of a new holding
company and their common shareholders will become shareholders of the new
holding company. Pacific Enterprises' common shareholders will receive
1.5038 shares of new holding company stock for each of their shares of
Pacific Enterprises common stock and Enova common shareholders will receive
one share of the new holding company common stock for each of their shares of
Enova common stock. Preferred stock of Pacific Enterprises, Southern
California Gas Company and SDG&E will remain outstanding and unaffected by
the business combination. The new company will be incorporated in California
and will be exempt from the Public Utility Holding Company Act as an
intrastate holding company.
The approval of the California Public Utilities Commission, the
approval or disclaimer of jurisdiction of the Federal Energy Regulatory
Commission, the expiration or termination of the applicable waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act, the approval of the
Securities and Exchange Commission and the approval of the Nuclear Regulatory
Commission are also required to complete the combination. These approvals are
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expected to be completed in late 1997. In the interim, Pacific Enterprises
and Enova have formed a joint venture to provide energy and energy related
products and services. See "Energy Management Services."
SOUTHERN CALIFORNIA GAS COMPANY
Pacific Enterprises' principal subsidiary is Southern California Gas
Company ("SoCalGas"), a public utility owning and operating a natural gas
distribution, transmission and storage system that supplies natural gas in
535 cities and communities throughout most of southern California and part of
central California. SoCalGas is the nation's largest natural gas
distribution utility, providing gas service to residential, commercial,
industrial, utility electric generation and wholesale customers through
approximately 4.8 million meters in a 23,000-square mile service area with a
population of approximately 17.4 million.
SoCalGas is subject to regulation by the California Public Utilities
Commission ("CPUC") which, among other things, establishes the rates SoCalGas
may charge for gas service, including an authorized rate of return on
investment. Under current ratemaking policies, SoCalGas' future earnings and
cash flow will be determined primarily by the authorized rate of return on
rate base, changes to authorized rate base, noncore market pricing and the
variance in gas volumes delivered to noncore customers versus CPUC-adopted
forecast deliveries and the ability of management to control expenses and
investment in line with the amounts authorized by the CPUC to be collected in
rates. The impact of any future regulatory restructuring (including the
performance based regulation proposal (See "Rates and Regulation")),
increased competitiveness in the energy industry, price and availability of
electric power generated outside SoCalGas' service area and electric industry
restructuring may also affect SoCalGas' future performance.
For 1997, the CPUC has authorized SoCalGas to earn a rate of return
of 9.49% on rate base and 11.6% on common equity compared to 9.42% and
11.6% , respectively, in 1996. In 1997, rate base is expected to remain at
approximately the same level as 1996. SoCalGas has achieved or exceeded its
authorized return on rate base for the last fourteen consecutive years.
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OPERATING STATISTICS
The following table sets forth certain operating statistics of
SoCalGas from 1992 through 1996.
Year Ended
December 31
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1996 1995 1994 1993 1992
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Gas Sales, Transportation & Exchange
Revenues (thousands of dollars):
Residential $1,612,739 $1,553,491 $1,712,899 $1,652,562 $1,483,654
Commercial/Industrial 708,220 751,409 798,180 853,579 836,672
Utility Electric Generation 70,588 104,486 118,353 147,208 194,639
Wholesale 70,291 62,256 98,354 116,737 128,881
Exchange 530 777 690 3,745 5,863
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Total in rates 2,462,368(1) 2,472,419(1) 2,728,476(1) 2,773,831 2,649,709
Regulatory balancing accounts
and other (40,387) (193,111) (141,952) 37,243 190,216
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Operating Revenue $2,421,981 $2,279,308 $2,586,524 $2,811,074 $2,839,925
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Volumes (millions of cubic feet):
Residential 235,186 239,417 256,400 247,507 243,920
Commercial/Industrial 374,540 351,649 347,419 339,706 363,124
Utility Electric Generation 139,098 204,582 260,290 212,720 220,642
Wholesale 129,905 128,730 146,279 147,978 149,232
Exchange 5,224 12,735 10,002 16,969 23,888
------------ ------------ ----------- --------- ---------
Total 883,953 937,113 1,020,390 964,880 1,000,806
------------ ------------ ----------- --------- ---------
------------ ------------ ----------- --------- ---------
Core 313,925 324,758 341,469 338,795 334,630
Noncore 570,028 612,355 678,921 626,085 666,176
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Total 883,953 937,113 1,020,390 964,880 1,000,806
------------ ------------ ----------- --------- ---------
------------ ------------ ----------- --------- ---------
Sales 315,313 337,952 362,624 352,052 355,177
Transportation 563,416 586,426 647,764 595,859 621,741
Exchange 5,224 12,735 10,002 16,969 23,888
------------ ------------ ----------- --------- ---------
Total 883,953 937,113 1,020,390 964,880 1,000,806
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Revenues (per thousand cubic feet):
Residential $6.86 $6.49 $6.68 $6.68 $6.08
Commercial/Industrial $1.89 $2.14 $2.30 $2.51 $2.30
Utility Electric Generation $0.50 $0.51 $0.45 $0.69 $0.88
Wholesale $0.54 $0.48 $0.67 $0.79 $0.86
Exchange $0.10 $0.06 $0.07 $0.22 $0.25
Customers
Active Meters (at end of period):
Residential 4,582,553 4,526,150 4,483,324 4,459,250 4,445,500
Commercial 184,425 184,470 187,518 187,602 189,364
Industrial 22,952 22,976 23,505 23,924 24,419
Utility Electric Generation 9 8 8 8 8
Wholesale 3 3 3 3 2
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Total 4,789,942 4,733,607 4,694,358 4,670,787 4,659,293
------------ ------------ ----------- --------- ---------
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Residential Meter Usage (annual average):
Revenues (dollars) $341 $345 $383 $371 $334
Volumes (thousands of cubic feet) 50.5 53.2 57.4 55.6 55.0
System Usage (millions of cubic feet):
Average Daily Sendout 2,452 2,579 2,795 2,611 2,717
Peak Day Sendout 4,000 4,120 4,350 4,578 4,547
Sendout Capability (at end of period) 7,917 8,059 7,570 7,351 7,419
Degree Days (2):
Number 1,178(3) 1,241 1,459 1,203 1,258
Average (20 Year) 1,369 1,381 1,418 1,430 1,458
Percent of Average 86.0% 89.9% 102.9% 84.1% 86.3%
Population of Service Area
(estimated at year end) 17,423,970 17,260,000 17,070,000 15,600,000 15,600,000
(1) Beginning January 1, 1994, rates included the ratepayer's portion
of the Comprehensive Settlement (the amount included in rates for
1996, 1995 and 1994 was $90 million, $84 million and $119 million,
respectively).
(2) The number of degree days for any period of time indicates whether
the temperature is relatively hot or cold. A degree day is
recorded for each degree the average temperature for any day falls
below 65 degrees Fahrenheit.
(3) Estimated calendar degree days.
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SERVICE AREA
SoCalGas distributes natural gas throughout a 23,000-square mile
service territory with a population of approximately 17.4 million people. As
indicated by the following map, its service territory includes most of
southern California and part of central California.
[MAP OF SOCAL GAS SERVICE TERRITORY]
Natural gas service is also provided on a wholesale basis to the distribution
systems of the City of Long Beach, San Diego Gas & Electric Company and
Southwest Gas Corporation.
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UTILITY SERVICES
SoCalGas' customers are separated, for regulatory purposes, into
core and noncore customers. Core customers are primarily residential and
small commercial and industrial customers, without alternative fuel
capability. Noncore customers consist primarily of utility electric
generation ("UEG"), wholesale and large commercial and industrial customers.
Gas volumes delivered to UEG customers are greatly affected by the price and
availability of electric power generated outside of SoCalGas' service area.
UEG and other noncore customers are also sensitive to the price relationship
between natural gas and alternate fuels, and many are capable of readily
switching from one fuel to another, subject to air quality regulations.
SoCalGas offers two basic utility services, sale of gas and
transportation of gas through two business units, one focusing on core
distribution customers and the other on large volume gas transportation
customers. Most residential customers and most other core customers purchase
gas directly from SoCalGas. Noncore customers have the option of purchasing
gas either from SoCalGas or from other sources (such as brokers or producers)
for delivery through SoCalGas' transmission and distribution system. Core
customers are permitted to aggregate their gas requirements and also to
purchase gas directly from brokers or producers, up to a limit of 10% of
SoCalGas' core market. Although the revenues from transportation throughout
are less than for gas sales, SoCalGas generally earns the same margin whether
SoCalGas buys the gas and sells it to the customer or transports gas already
owned by the customer. (See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - SoCalGas Operations -
1994-1996 Financial Results.")
SoCalGas continues to be obligated to purchase reliable supplies of
natural gas to serve the requirements of its core customers. However, the
only gas supplies that SoCalGas may offer for sale to noncore customers are
the same supplies that it purchases to serve its core customers.
SoCalGas also provides gas storage services for noncore and
off-system customers on a bid and negotiated contract basis. The storage
service program provides opportunities for customers to store gas on an "as
available" basis during the summer to reduce winter purchases when gas costs
are generally higher. As of December 31, 1996, SoCalGas stored approximately
11 billion cubic feet of customer-owned gas.
DEMAND FOR GAS
Natural gas is a principal energy source in SoCalGas' service area
for residential, commercial and industrial uses as well as UEG requirements.
Gas competes with electricity for residential and commercial cooking, water
heating, space heating and clothes drying uses, and with other fuels for
large industrial, commercial and UEG uses. Growth in SoCalGas' markets is
largely dependent upon the health and expansion of the California economy.
SoCalGas added approximately 44,000 new meters in 1996. This represents a
growth rate of approximately 1%, which is expected to continue for 1997.
During 1996, approximately 97% of residential energy customers in
SoCalGas' service area used natural gas for water heating and 94% for space
heating. Approximately 78% of those customers used natural gas for cooking
and 72% for clothes drying.
Demand for natural gas by noncore customers such as large volume
commercial, industrial and UEG customers is very sensitive to the price of
alternative competitive fuels. These customers number only approximately
1,600; however, during 1996, accounted for approximately 16% of total gas
revenues and 64% of total gas volumes delivered.
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External factors such as weather, electric restructuring, the increased use
of hydroelectric power, competing pipeline bypass and general economic
conditions can result in significant shifts in this market. Demand for gas
for UEG use is also greatly affected by the price and availability of
electric power generated in other areas and purchased by SoCalGas' UEG
customers. (See "Competition" below.) In 1996, demand for gas for UEG use
decreased as a result of an abundance of less-expensive hydroelectric power
from high levels of precipitation last winter.
A comprehensive restructuring of the California electric industry
intended to increase competition is scheduled to become effective on January
1, 1998. Under the restructuring plan, California electric utilities
generally will purchase electricity from a common power pool. In addition,
electric customers will be able to purchase electricity directly from other
suppliers. Consequently, future volumes of natural gas SoCalGas transports
for electric utilities (currently, approximately 16% of SoCalGas' annual
throughput) may be adversely affected by increased use of electricity
generated by producers outside SoCalGas' service area. The electric industry
restructuring may also result in a reduction of electric rates to core
customers, but it is unlikely to overcome the entire cost advantage of
natural gas for existing uses.
COMPETITION
Since interstate pipelines began operations in SoCalGas' service
area, SoCalGas' throughput to customers in the Kern County area who use
natural gas to produce steam for enhanced oil recovery projects has decreased
significantly because of the bypass of SoCalGas' system. The decrease in
revenues from enhanced oil recovery customers is subject to full balancing
account treatment, except for a 5% incentive to SoCalGas, and therefore, does
not have a material impact on earnings. Bypass of other SoCalGas markets may
also occur and SoCalGas is fully at risk for reduction in such noncore
volumes due to bypass. However, significant additional bypass would require
construction of additional facilities by competing pipelines. SoCalGas is
continuing to reduce its costs to maintain competitive rates to
transportation customers.
To respond to bypass, SoCalGas has received authorization from the
CPUC for expedited review of long-term gas transportation contracts with some
noncore customers at lower than tariff rates. The CPUC has also approved
changes in the methodology for allocating SoCalGas' costs that eliminate
subsidization of core customer rates by noncore customers. This allocation
flexibility, together with negotiating authority, has enabled SoCalGas to
better compete with new interstate pipelines for noncore customers. In
addition, under a capacity brokering program, for a fee, SoCalGas provides to
noncore customers, or others, a portion of its control of interstate pipeline
capacity to allow more direct access to producers. Also, a comprehensive
settlement of certain regulatory issues (See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations - Factors
Influencing Future Financial Performance") has improved SoCalGas'
competitiveness by reducing the cost of transportation service to noncore
customers.
SoCalGas' operations and those of its customers are affected by a
growing number of environmental laws and regulations. These laws and
regulations affect current operations as well as future expansion.
Increasingly complex administrative and reporting requirements of
environmental agencies applicable to commercial and industrial customers
utilizing gas are not generally applicable to those using electricity.
However, anticipated advancement in natural gas technologies should enable
gas equipment to remain competitive with alternate energy sources.
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SUPPLIES OF GAS
In 1996, SoCalGas delivered approximately 884 billion cubic feet of
natural gas through its system. Approximately 64% of these deliveries
were customer-owned gas for which SoCalGas provided transportation services.
The balance of gas deliveries was gas purchased by SoCalGas and resold to
customers.
Most of the natural gas delivered by SoCalGas is produced outside of
California. These supplies are delivered to the SoCalGas' intrastate
transmission system by interstate pipeline companies (primarily El Paso
Natural Gas Company and Transwestern Pipeline Company) that provide
transportation services for supplies purchased from other sources by SoCalGas
or its transportation customers. The rates that interstate pipeline
companies may charge for gas and transportation services and other terms of
service are regulated by the Federal Energy Regulatory Commission ("FERC").
SoCalGas has exercised its step-down option on both the El Paso and
Transwestern interstate pipeline systems by 300 million cubic feet per day
and 450 million cubic feet per day, respectively, thereby reducing its firm
interstate capacity obligations to 1.45 Bcf per day. SoCalGas' requirements
to meet the demand of the core market is approximately 1.05 Bcf per day or
400 MMcf per day below its capacity obligation.
SoCalGas has entered into a FERC approved settlement with
Transwestern, and an El Paso settlement is currently pending before the FERC.
Both settlements define the amount of the unsubscribed capacity costs that is
to be recovered from SoCalGas and the other remaining firm service customers,
thus reducing SoCalGas' exposure to higher annual reservation charges. Under
existing regulation in California, unsubscribed capacity costs are included
in customer rates.
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The following table sets forth the sources of gas deliveries by
SoCalGas from 1992 through 1996.
SOURCES OF GAS
Year Ended December 31
----------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------
Gas Purchases (Millions of Cubic Feet):
Market Gas:
30-Day 153,107 133,298 98,071 84,696 20,695
Other 72,604 72,792 148,371 159,197 198,049
------ ------ ------- ------- -------
Total Market Gas 225,711 206,090 246,442 243,893 218,744
Affiliates 96,025 98,460 101,276 96,559 99,226
California Producers &
Federal Offshore 11,757 29,181 36,158 28,107 42,262
------ ------- ------ ------ ------
Total Gas Purchases 333,493 333,731 383,876 368,559 360,232
Customer-Owned Gas and
Exchange Receipts 518,562 619,721 658,293 622,307 641,080
Storage Withdrawal
(Injection) - Net 42,037 (12,278) (9,299) (9,498) 14,379
Company Use and
Unaccounted For (10,139) (4,061) (12,480) (16,488) (14,885)
-------- ------- -------- -------- --------
Net Gas Deliveries 883,953 937,113 1,020,390 964,880 1,000,806
------- ------- --------- ------- ---------
------- ------- --------- ------- ---------
Gas Purchases: (Thousands of dollars)
Commodity Costs $627,107 $477,595 $643,865 $815,145 $805,550
Fixed Charges* 275,888 264,269 368,516 397,714 397,579
-------- -------- -------- -------- --------
Total Gas Purchases $902,995 $741,864 $1,012,381 $1,212,859 $1,203,129
-------- -------- ---------- ---------- ----------
-------- -------- ---------- ---------- ----------
Average Cost of Gas Purchased
(Dollars per Thousand Cubic Feet)** $1.88 $1.42 $1.68 $2.21 $2.24
----- ----- ----- ----- -----
----- ----- ----- ----- -----
* Fixed charges primarily include pipeline demand charges, take or pay settlement costs and other direct billed
amounts allocated over the quantities delivered by the interstate pipelines serving SoCalGas.
** The average commodity cost of gas purchased excludes fixed charges.
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Market sensitive gas supplies (supplies purchased on the spot
market as well as under longer-term contracts and ranging from one month to
ten years based on spot prices) accounted for approximately 68% of total gas
volumes purchased by SoCalGas during 1996, as compared with 62% and 64%,
respectively, during 1995 and 1994. These supplies were generally purchased
at prices significantly below those for other long-term sources of supply.
SoCalGas estimates that sufficient natural gas supplies will be
available to meet the requirements of its customers into the next century.
RATES AND REGULATION
SoCalGas is regulated by the CPUC. The CPUC consists of five
commissioners appointed by the Governor of California for staggered six-year
terms. It is the responsibility of the CPUC to determine that utilities
operate in the best interest of the customer with the opportunity to earn a
reasonable return on investment. The regulatory structure is complex and has
a very substantial impact on the profitability of SoCalGas.
CURRENT RATEMAKING PROCEDURES
Under current ratemaking procedures, the return that SoCalGas is
authorized to earn is the product of the authorized rate of return on rate base
and the amount of rate base. Rate base consists primarily of net investment in
utility plant. Thus, SoCalGas' earnings are affected by changes in the
authorized rate of return on rate base, changes to authorized rate base, noncore
market pricing, the variance in gas volumes delivered to noncore customers from
CPUC-adopted forecast deliveries and SoCalGas' ability to control expenses and
investment in line with the amounts authorized by the CPUC to be collected in
rates. (See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - SoCalGas Operations - Ratemaking Procedures.")
SoCalGas' operating and fixed costs, including return on rate
base, are allocated between core and noncore customers under a methodology
that is based upon the costs incurred in serving these customer classes. For
1997, approximately 89% of the CPUC-authorized gas margin has been allocated
to core customers and 11% to noncore customers, including wholesale
customers. Under the current regulatory framework, costs may be reallocated
between the core and the noncore markets once every other year in a biennial
cost allocation proceeding ("BCAP"). The BCAP substantially eliminates the
effect on core income of variances in core market demand and gas costs
subject to the limitations of the "Gas Cost Incentive Mechanism" ("GCIM").
GCIM is a pilot program, which compares SoCalGas' cost of gas with
the average market price of 30-day firm spot supplies delivered to the SoCalGas
service area and permits full recovery of all costs within a tolerance band
above that average. The cost of purchases above the tolerance band or savings
from purchases below the average market price are shared equally between
customers and shareholders. A filing has been made with the CPUC requesting a
reward to shareholders under the procurement portion of the GCIM for the April
1995-March 1996 program year. The reward amount will be recognized in income
when a final CPUC decision is issued.
The GCIM pilot program is scheduled to expire at the end of March
1997. SoCalGas is currently in discussions with the CPUC to extend the GCIM
program.
PERFORMANCE BASED REGULATION
SoCalGas has filed a "performance based regulation" ("PBR")
application with the CPUC to replace the general rate case and certain other
traditional regulatory proceedings. PBR, if approved, would allow SoCalGas to
be more responsive to consumer interests and compete more
-13
effectively in contestable markets. Key elements of this proposal include a
permanent reduction in base rates of $62 million. As a result of discussions
in late 1996, SoCalGas has agreed with the staff of the CPUC to a rate
reduction of $110 million. Other elements of PBR include an indexing
mechanism that would limit future rate increases to the inflation rate less a
productivity factor and rate refunds to customers if service quality were to
deteriorate. This new approach would maintain cost based rates, but would
link financial performance with changes in productivity. Although PBR in the
near term could result in increased earnings volatility, SoCalGas would have
the opportunity to improve financial performance over the long-term to the
extent it is able to reduce expenses, increase gas deliveries and generate
profits from new products and services.
Under the PBR proposal, SoCalGas would be at risk for certain
changes in interest rates and cost of capital, variances in core volumes not
caused by weather and achievement of productivity improvements.
It is expected that PBR will be implemented during the last half of
1997.
PROPERTIES
At December 31, 1996, SoCalGas owned approximately
2,835 miles of transmission and storage pipeline, 43,435 miles of distribution
pipeline and 43,130 miles of service piping. It also owned 10 transmission
compressor stations and 5 underground storage reservoirs (with a combined
working storage capacity of approximately 116 billion cubic feet) and general
office buildings, shops, service facilities, and certain other equipment
necessary in the conduct of its business.
Southern California Gas Tower, a wholly owned subsidiary of
SoCalGas, has a 15% limited partnership interest in a 52-story office
building in downtown Los Angeles. SoCalGas leases, and currently occupies,
about half of the building. (See also "Item 2. Properties.")
ENERGY MANAGEMENT SERVICES
The Energy Management Services (EMS) business unit of Pacific
Enterprises consists of Pacific Interstate Company, Pacific Energy, Pacific
Enterprises Energy Management Services, Ensource and other related
subsidiaries.
Through its subsidiaries, Pacific Interstate Company purchases
natural gas from producers in Canada and from federal waters offshore
California and transports it for resale to SoCalGas and others. Two
subsidiaries own and operate pipelines and related facilities for deliveries
to SoCalGas of gas produced from offshore fields near Santa Barbara,
California. Another subsidiary has an interest in pipeline facilities for
deliveries to SoCalGas of gas from western Canada. During 1996, deliveries
from these subsidiaries accounted for approximately 30% of the total volume
of gas purchased by SoCalGas and approximately 11% of SoCalGas' total
throughput. The gas is purchased under long-term contracts. (See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Energy Management Services.")
Ensource, which was also established in 1996, buys, sells and
arranges transportation, delivery and storage of natural gas. SoCalGas is a
customer of Ensource. Ensource sold approximately 19 MMcfs of natural gas
during 1996.
Pacific Enterprises Energy Services (PEES), which also was
established in 1996, provides energy related products and services to both
commercial and residential customers. The New Product Development (NPD)
business unit, established in 1995, was consolidated into EMS in 1996 to support
design and launch of new products. Five new residential consumer products were
launched during 1996 as well as four commercial customer services.
-14-
Pacific Energy develops and operates alternate energy facilities
including geothermal, hydro-power, biogas, and woodburning plants. It also
operates centralized heating and cooling plants for large building complexes.
Pacific Energy owns interests in several small electric generation facilities
which are "qualifying facilities" under the Public Utility Regulatory Policies
Act. Qualifying facilities are entitled to a mandatory purchase obligation and
exemption from regulation in connection with their sale of electricity.
Qualifying facility status is not available to any facilities that are more than
50% owned by an electric utility or an electric utility holding company.
Upon the completion of the proposed business combination of Pacific
Enterprises and Enova, the new holding company by reason of its indirect
ownership of SDG&E will become an electric utility holding company.
Consequently, in order to avoid the loss of qualifying facility status, Pacific
Enterprises must cause its ownership in these facilities to be not more than 50%
prior to the completion of the business combination. Several alternatives to
accomplish this result, including the sale of all or part of these facilities,
are being considered. Pacific Enterprises does not expect that the sale of
these facilities will have a material adverse effect on its consolidated results
of operations or financial position.
In order to pursue opportunities in unregulated energy markets
pending completion of the business combination with Enova, Pacific Enterprises
and Enova formed a joint venture in early 1997 to market energy products.
PACIFIC ENTERPRISES INTERNATIONAL
Pacific Enterprises International ("PEI") was
established in late 1994 to participate in the international gas infrastructure
market and began operations in March 1995.
In April 1996, PEI acquired a 12.5% interest in each of two
natural gas utility holding companies in Argentina for $48.5 million. These
utilities serve approximately 1.1 million customers in central and southern
Argentina with about 625 million cubic feet of gas per day. PEI has a role
in actively managing the utility operations by providing expertise in areas
such as underground storage, marketing gas usage and technology applications.
In August 1996, a holding company formed by PEI, together with Enova
International and Proxima Gas, was awarded the franchise by the Mexican
government to build and operate a natural gas distribution system in Mexicali,
Baja California. This distribution network will have the capacity to deliver
80 million cubic feet of gas per day. Licensing will take approximately six
months and actual buildout of the pipeline and facilities will be completed over
a number of years. It is expected that the first customer will be served in
July 1997. The main backbone of the system will be completed in September 1997.
Commercial, industrial and residential growth will occur continuously.
Other international projects are currently under evaluation.
ENVIRONMENTAL MATTERS
SoCalGas has identified and reported to California
environmental authorities 42 former gas manufacturing sites for which it
(together with other utilities as to 21 of the sites) may have remedial
obligations under environmental laws. As of December 31, 1996, ten of the sites
have been remediated, of which six have received certification from the
California Environmental Protection Agency. One site remedy is in process.
Preliminary investigations, at a minimum, have been completed on 39 of the gas
plant sites, including those sites at which the remediations described above
have been
-15-
completed. In addition, the Company and its subsidiaries are one of a
large number of major corporations that have been identified as potentially
responsible parties for environmental remediation of three industrial waste
disposal sites and two landfill sites.
The CPUC has approved a collaborative settlement which provides for
rate recovery of 90% of environmental investigation and remediation costs
without reasonableness review. In addition, SoCalGas has the opportunity to
retain a portion of any insurance recovery to offset the 10% of costs not
recovered in rates.
At December 31, 1996, SoCalGas' estimated remaining liability for
investigation and remediation was approximately $77 million, of which 90%
is authorized to be recovered through the rate recovery mechanism described
above. The estimated liability is subject to future adjustment pending further
investigation. (See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation -- Factors Influencing Future Performance -
Environmental Matters.") Because of current and expected insurance and rate
recovery, Pacific Enterprises believes that compliance with environmental laws
and regulations will not have a material adverse effect on its consolidated
results of operations or financial position.
EMPLOYEES
Pacific Enterprises and its subsidiaries employ
approximately 7,643 persons. Of these, approximately 6,917 are employed by
SoCalGas.
Most field, clerical and technical employees of SoCalGas are
represented by the Utility Workers' Union of America or the International
Chemical Workers' Union. A contract on wages and working conditions is
effective through March 31, 1999.
-16-
MANAGEMENT
The executive officers of Pacific Enterprises are as follows:
NAME Age Position
- ---- --- --------
Willis B. Wood, Jr. 62 Chairman of the Board and Chief
Executive Officer
Richard D. Farman 61 President and Chief Operating Officer
Warren I. Mitchell 59 President, Southern California Gas
Company
Larry J. Dagley 48 Senior Vice President and Chief
Financial Officer
Frederick E. John 51 Senior Vice President
Eric B. Nelson 47 Senior Vice President
Debra L. Reed 40 Senior Vice President, Southern
California Gas Company
Lee M. Stewart 51 Senior Vice President, Southern
California Gas Company
Dennis V. Arriola 37 Vice President and Treasurer
Leslie E. LoBaugh, Jr. 51 Vice President and General Counsel
Ralph Todaro 46 Vice President and Controller
Executive officers are elected annually and serve at
the pleasure of the Board of Directors.
All of Pacific Enterprises' executive officers have been employed by
Pacific Enterprises or its subsidiaries in management positions for more than
five years, except for Mr. Dagley and Mr. Arriola. From 1985, until joining
Pacific Enterprises in August, 1995, Mr. Dagley was Senior Vice President and
Controller (1985-1993) and Senior Vice President and Chief Financial Officer
(1993-1995) of Transco Energy Company. From 1987 until joining Pacific
Enterprises in August 1994, Mr. Arriola was a Vice President of Bank of America
NT&SA (1992-1994) and a Vice President of Security Pacific National Bank 1987-
1992).
There are no family relationships between any of Pacific
Enterprises' executive officers.
-17-
ITEM 2. PROPERTIES
Information with respect to the properties of Pacific
Enterprises subsidiaries is set forth in Item 1 of this Annual Report.
ITEM 3. LEGAL PROCEEDINGS
Except for the matters referred to in the financial
statements filed with or incorporated by reference in Item 8 or referred to
elsewhere in this Annual Report, neither Pacific Enterprises nor any of its
subsidiaries is a party to, nor is their property the subject of, any material
pending legal proceedings other than routine litigation incidental to its
businesses.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1996 to a
vote of Pacific Enterprises' security holders.
-18-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Pacific Enterprises' Common Stock is traded on the
New York and Pacific Stock Exchanges. Information as to the high and low sales
prices for such stock as reported on the composite tape for stocks listed on the
New York Stock Exchange and dividends paid for each quarterly period during the
two years ended December 31, 1996 is set forth under the captions "Financial
Review--Range of Market Prices of Capital Stock" and "Quarterly Financial Data"
in Pacific Enterprises' 1996 Annual Report to Shareholders filed as
Exhibit 13.01 to this Annual Report. Such information is incorporated herein by
reference.
At December 31, 1996, there were 37,902 holders of record of Pacific
Enterprises' Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is set forth
under the caption "Financial Review - Selected Financial Data and Comparative
Statistics 1986-1996" in Pacific Enterprises' 1996 Annual Report to Shareholders
filed as Exhibit 13.01 to this Annual Report. Such information is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information required by this Item is set forth
under the caption "Financial Review - Management's Discussion and Analysis" in
Pacific Enterprises' 1996 Annual Report to Shareholders filed as Exhibit 13.01
to this Annual Report. Such information is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pacific Enterprises' consolidated financial statements and
schedules required by this Item are listed in Item 14(a)1 in Part IV of this
Annual Report. The consolidated financial statements listed in Item 14(a)1
are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
-19-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item with respect to the
Company's directors is set forth under the caption "Election of Directors" in
the Company's Proxy Statement for its Annual Meeting of Shareholders scheduled
to be held on May 8, 1997. Such information is incorporated herein by
reference.
Information required by this Item with respect to the Company's
executive officers is set forth in Item 1 of this Annual Report.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is set forth under
the caption "Election of Directors" and "Executive Compensation" in the
Company's Proxy Statement for its Annual Meeting of Shareholders scheduled to be
held on May 8, 1997. Such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item is set forth under the caption
"Election of Directors" in the Company's Proxy Statement for its
Annual Meeting of Shareholders scheduled to be held on May 8, 1997. Such
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
None.
-20-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT:
1. CONSOLIDATED FINANCIAL STATEMENTS:
1.01 Report of Deloitte & Touche LLP,
Independent Certified Public Accountants
(Contained in Exhibit 13.01).
1.02 Statement of Consolidated
Income for the years ended
December 31, 1996, 1995 and 1994
(Contained in Exhibit 13.01).
1.03 Consolidated Balance Sheet at
December 31, 1996 and 1995
(Contained in Exhibit 13.01).
1.04 Statement of Consolidated Cash Flows
for the years ended December 31, 1996,
1995 and 1994 (Contained in Exhibit 13.01).
1.05 Statement of Consolidated Shareholders'
Equity for the years ended
December 31, 1996, 1995 and 1994
(Contained in Exhibit 13.01).
1.06 Notes to Consolidated Financial
Statements (Contained in Exhibit 13.01).
3. ARTICLES OF INCORPORATION AND BY-LAWS:
3.01 Articles of Incorporation of
Pacific Enterprises
3.02 Bylaws of Pacific Enterprises.
(Note 23; Exhibit 3.02)
-21-
4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS:
(Note: As permitted by Item 601(b)(4)(iii) of Regulation S-K, certain
instruments defining the rights of holders of long-term debt for which
the total amount of securities authorized thereunder does not exceed
ten percent of the total assets of Southern California Gas Company and
its subsidiaries on a consolidated basis are not filed as exhibits to
this Annual Report. The Company agrees to furnish a copy of each such
instrument to the Commission upon request.)
4.01 Specimen Common Stock Certificate of
Pacific Enterprises (Note 16; Exhibit 4.01).
4.02 Specimen Preferred Stock Certificates of Pacific
Enterprises (Note 8; Exhibit 4.02).
4.03 First Mortgage Indenture of Southern California
Gas Company to American Trust Company dated
October 1, 1940 (Note 1; Exhibit B-4).
4.04 Supplemental Indenture of Southern California Gas
Company to American Trust Company dated as of
July 1, 1947 (Note 2; Exhibit B-5).
4.05 Supplemental Indenture of Southern California
Gas Company to American Trust Company dated as
of August 1, 1955 (Note 3; Exhibit 4.07).
4.06 Supplemental Indenture of Southern California
Gas Company to American Trust Company dated as
of June 1, 1956 (Note 4; Exhibit 2.08).
4.07 Supplemental Indenture of Southern California
Gas Company to Wells Fargo Bank, National
Association dated as of August 1, 1972 (Note 6;
Exhibit 2.19).
4.08 Supplemental Indenture of Southern California
Gas Company to Wells Fargo Bank, National
Association dated as of May 1, 1976 (Note 5;
Exhibit 2.20).
4.9 Supplemental Indenture of Southern California
Gas Company to Wells Fargo Bank, National
Association dated as of September 15, 1981
(Note 9; Exhibit 4.25).
4.10 Supplemental Indenture of Southern California
Gas Company to Manufacturers Hanover Trust
Company of California, successor to Wells
Fargo Bank, National Association, and Crocker
National Bank as Successor Trustee dated as
of May 18, 1984 (Note 11; Exhibit 4.29).
-22-
4.11 Supplemental Indenture of Southern California
Gas Company to Bankers Trust Company of
California, N.A., successor to Wells Fargo Bank,
National Association dated as of January 15,
1988 (Note 13; Exhibit 4.11).
4.12 Supplemental Indenture of Southern California Gas
Company to First Trust of California, National
Association, successor to Bankers Trust Company
of California, N.A. (Note 18; Exhibit 4.37).
4.13 Rights Agreement dated as of March 7, 1990
between Pacific Enterprises and Security
Pacific National Bank, as Rights
Agent (Note 19; Exhibit 4).
10. MATERIAL CONTRACTS
10.01 Form of Indemnification Agreement
between Pacific Enterprises and each of
its directors and officers
(Note 21; Exhibit 10.07).
10.2 Agreement and Plan of Merger
and Reorganization dated as of October 12,
1996, by and among Pacific Enterprises,
Enova, the New Holding Company,
Pacific Sub and Enova Sub
(Note 24; Exhibit 10.1).
10.3 Operating Agreement of Mineral JV, LLC,
dated as of January 13, 1997 (Note 25;
Exhibit 10.5).
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
10.4 Restatement and Amendment of Pacific
Enterprises 1979 Stock Option Plan
(Note 7; Exhibit 1.1).
10.5 Pacific Enterprises Supplemental Medical
Reimbursement Plan for Senior Officers
(Note 8; Exhibit 10.24).
10.6 Pacific Enterprises Financial Services
Program for Senior Officers (Note 8;
Exhibit 10.25).
10.7 Pacific Enterprises Supplemental
Retirement and Survivor Plan (Note 11;
Exhibit 10.36).
-23-
10.8 Pacific Enterprises Stock Payment
Plan (Note 11; Exhibit 10.37).
10.9 Pacific Enterprises Pension Restoration
Plan (Note 8; Exhibit 10.28).
10.10 Southern California Gas Company Pension
Restoration Plan For Certain Management
Employees (Note 8; Exhibit 10.29).
10.11 Pacific Enterprises Executive Incentive
Plan (Note 13; Exhibit 10.13).
10.12 Pacific Enterprises Deferred Compensation
Plan for Key Management Employees (Note 12;
Exhibit 10.41).
10.13 Pacific Enterprises Employee Stock
Ownership Plan and Trust Agreement
as amended in toto effective October 1, 1992.
(Note 21; Exhibit 10.18).
10.14 Pacific Enterprises Stock Incentive Plan
(Note 15; Exhibit 4.01).
10.15 Pacific Enterprises Retirement Plan for
Directors (Note 21; Exhibit 10.20).
10.16 Pacific Enterprises Director's Deferred
Compensation Plan (Note 21; Exhibit 10.21).
10.17 Amended and Restated Pacific Enterprises Employee
Stock Option Plan (as of March 4, 1997).
10.18 Form of Severance Agreement.
10.19 Form of Incentive Bonus Agreement.
11. STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
11.01 Pacific Enterprises Computation of
Earnings per Share (see Statement of
Consolidated Income contained in Exhibit 13.01).
-24-
13. ANNUAL REPORT TO SECURITY HOLDERS
13.01 Pacific Enterprises 1996 Annual
Report to Shareholders. (Such
report, except for the portions
thereof which are expressly
incorporated by reference in this
Annual Report, is furnished for the
information of the Securities and
Exchange Commission and is not to
be deemed "filed" as part of this
Annual Report).
21. SUBSIDIARIES OF THE REGISTRANT
21.01 List of subsidiaries of Pacific Enterprises.
23. CONSENTS OF EXPERTS AND COUNSEL
23.01 Consent of Deloitte & Touche LLP,
Independent Certified Public Accountants.
24. POWER OF ATTORNEY
24.01 Power of Attorney of Certain Officers
and Directors of Pacific Enterprises
(contained on signature pages).
27. FINANCIAL DATA SCHEDULE
27.01 Financial Data Schedule.
(b) REPORTS ON FORM 8-K:
The following reports on Form 8-K were filed during the last quarter of
1996:
Report Date Item Reported
----------- -------------
October 15, 1996. Item 5
_________________________
NOTE: Exhibits referenced to the following notes were filed with
the documents cited below under the exhibit or annex number
following such reference. Such exhibits are incorporated
herein by reference.
-25-
Note
Reference Document
- --------- --------
1 Registration Statement No. 2-4504 filed by Southern California Gas
Company on September 16, 1940.
2 Registration Statement No. 2-7072 filed by Southern California Gas
Company on March 15, 1947.
3 Registration Statement No. 2-11997 filed by Pacific Lighting
Corporation on October 26, 1955.
4 Registration Statement No. 2-12456 filed by Southern California Gas
Company on April 23, 1956.
5 Registration Statement No. 2-56034 filed by Southern California Gas
Company on April 14, 1976.
6 Registration Statement No. 2-59832 filed by Southern California Gas
Company on September 6, 1977.
7 Registration Statement No. 2-66833 filed by Pacific Lighting
Corporation on March 5, 1980.
8 Annual Report on Form 10-K for the year ended December 31, 1980,
filed by Pacific Lighting Corporation.
9 Annual Report on Form 10-K for the year ended December 31, 1981,
filed by Pacific Lighting Corporation.
10 [Intentionally Left Blank.]
11 Annual Report on Form 10-K for the year ended December 31, 1984,
filed by Pacific Lighting Corporation.
12 Annual Report on Form 10-K for the year ended December 31, 1985,
filed by Pacific Lighting Corporation.
13 Annual Report on Form 10-K for the year ended December 31, 1987,
filed by Pacific Enterprises.
14 [Intentionally Left Blank.]
15 Registration Statement No. 33-21908 filed by Pacific Enterprises on
May 17, 1988.
16 Annual Report on Form 10-K for the year ended December 31, 1988,
filed by Pacific Enterprises.
17 [Intentionally Left Blank.]
18 Registration Statement No. 33-50826 filed by Southern California Gas
Company on August 13, 1992.
19 Current Report on Form 8-K dated September 25, 1992, filed by
Pacific Enterprises.
20 [Intentionally Left Blank.]
21 Annual Report on Form 10-K for the year ended December 31, 1992,
filed by Pacific Enterprises.
22 [Intentionally Left Blank.]
23. Annual Report on Form 10-K for the year ended December 31, 1995,
filed by Pacific Enterprises.
-26-
24. Current Report on Form 8-K dated October 15, 1996, filed by Pacific
Enterprises.
25. Registration Statement No. 333-21229 filed by Mineral Energy Company
on February 5, 1997.
-27-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
PACIFIC ENTERPRISES
By: WILLIS B. WOOD, JR. /s/
-----------------------
Name: Willis B. Wood, Jr.
Title: Chairman of the Board and
Chief Executive Officer
Dated: March 26, 1997
-28-
Each person whose signature appears below hereby authorizes
Willis B. Wood, Jr., Richard D. Farman, and Larry J. Dagley, and each of
them, severally, as attorney-in-fact, to sign on his or her behalf,
individually and in each capacity stated below, and file all amendments to
this Annual Report.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- -----
WILLIS B. WOOD, JR. /s/ Chairman of the Board, March 26, 1997
- ---------------------- Chief Executive Officer and
(Willis B. Wood, Jr.) Director (Principal Executive
Officer)
LARRY J. DAGLEY /s/ Senior Vice President and Chief March 26, 1997
- --------------------- Financial Officer
(Larry J. Dagley) (Principal Financial Officer)
RALPH TODARO /s/ Vice President and Controller March 26, 1997
- -------------------- (Principal Accounting Officer)
(Ralph Todaro)
HYLA H. BERTEA /s/ Director March 26, 1997
- --------------------
(Hyla H. Bertea)
HERBERT L. CARTER /s/ Director March 26, 1997
- --------------------
(Herbert L. Carter)
RICHARD D. FARMAN /s/ Director March 26, 1997
- ---------------------
(Richard D. Farman)
WILFORD D. GODBOLD, JR./s/ Director March 26, 1997
- --------------------------
(Wilford D. Godbold, Jr.)
IGNACIO E. LOZANO, JR. /s/ Director March 26, 1997
- -------------------------
(Ignacio E. Lozano, Jr.)
PAUL A. MILLER /s/ Director March 26, 1996
- ------------------
(Paul A. Miller)
RICHARD J. STEGEMEIER /s/ Director March 26, 1997
- ---------------------
(Richard J. Stegemeier)
DIANA L. WALKER /s/ Director March 26, 1997
- ------------------
(Diana L. Walker)
-29-
EXHIBIT 3.01
RESTATED
ARTICLES OF INCORPORATION
OF
PACIFIC ENTERPRISES
First: The name of the corporation is Pacific Enterprises.
Second: The purpose of the corporation is to engage in any lawful act
or activity for which a corporation may be organized under the California
General Corporation Law other than the banking business, the trust company
business or the practice of a profession permitted to be incorporated by the
California Corporations Code.
Third: The said corporation shall have perpetual existence.
Fourth: 1. AUTHORIZED NUMBER, CLASSES AND SERIES OF SHARES. The total
number of shares which this corporation is authorized to issue is six hundred
fifteen million (615,000,000), which are to be classified into three classes,
of which ten million (10,000,000) shall be shares of Preferred Stock issuable
in one or more series, five million (5,000,000) shall be shares of Class A
Preferred Stock issuable in one or more series and six hundred million
(600,000,000) shall be shares of Common Stock.
Of said ten million (10,000,000) shares of Preferred Stock, three
hundred thousand (300,000) shall be shares of a series of $4.50 Dividend
Preferred Stock, one hundred thousand (100,000) shall be shares of a series
of $4.40 Dividend Preferred Stock, two hundred thousand (200,000) shall be
shares of a series of $4.75 Dividend Preferred Stock, two hundred thousand
(200,000) shall be shares of a series of $4.36 Dividend Preferred Stock and
two hundred fifty-three (253) shall be shares of a series of $4.75 Dividend
Preferred Stock (convertible on or before October 31, 1966), and all of said
series shall have the respective rights, preferences and privileges
hereinafter set forth and no others.
The remainder of said shares of Preferred Stock, to wit, nine million,
one hundred ninety nine thousand, seven hundred forty seven (9,199,747), and
said five million (5,000,000) shares of Class A Preferred Stock, may be issued
from time to time in one or more additional series as determined by the Board
of Directors of this corporation which is hereby authorized, within the
limitations and restrictions stated herein, to fix or alter, from time to
time, the dividend rate (including fixed, variable or adjustable rates), the
number of votes per share, the conversion rights, if any, the rights and
terms of redemption (including sinking fund provisions), the redemption price
or prices, if any, the liquidation preferences, the number of shares, and the
distinctive designations of each such additional series while wholly
unissued; and to increase or decrease the number of shares of any such series
subsequent to the issue of shares of the series, but not below the number of
such shares then outstanding. In case the number of such series shall so be
so decreased, the shares constituting such decrease shall resume the status
which they had prior to the adoption of the resolution originally fixing the
number of shares of such series. The designation of each such additional
series shall include the words "Preferred Stock" in the case of Preferred
Stock and "Class A Preferred Stock" in the case of Class A Preferred Stock.
2. DIVIDEND RIGHTS. The holders of the shares of the $4.50 Dividend
Preferred Stock, the $4.40 Dividend Preferred Stock, the $4.75 Dividend
Preferred Stock, the $4.36 Dividend Preferred Stock and the $4.75 Dividend
Preferred Stock (convertible on or before October 31, 1966), are entitled to
receive, when and as declared by said Board of Directors out of any funds
legally available therefor, dividends payable quarterly in each year after
the issuance thereof on such dates as may be fixed by said Board of Directors
at the following rates, and no more:
$4.50 Dividend Preferred Stock - $4.50 per share per annum;
$4.40 Dividend Preferred Stock - $4.40 per share per annum;
$4.75 Dividend Preferred Stock - $4.75 per share per annum;
$4.36 Dividend Preferred Stock - $4.36 per share per annum;
$4.75 Dividend Preferred Stock (convertible on or before October 31,
1966) - $4.75 per share per annum;
The holders of the shares of each additional series of Preferred Stock and
each series of Class A Preferred Stock shall be entitled to receive, when and as
declared by said Board of Directors out of any funds legally available therefor,
dividends at the respective rate fixed for such
-2-
series by the Board of Directors in the resolution providing for the issuance
of such series, and no more, payable on such dates as may be fixed by said
Board of Directors. There shall be no priority of any series of Preferred
Stock over any other series of Preferred Stock in the payment of dividends
and there shall be no priority of any series of Class A Preferred Stock over
any other series of Class A Preferred Stock in the payment of dividends. The
dividends on every series of shares of Preferred Stock and of Class A
Preferred Stock shall be cumulative from the date of issuance thereof, or
from and after the first day of the dividend period in which the shares of
the respective series shall be issued, or from such other date, as may be
fixed by said Board of Directors prior to the issuance thereof, and all
accrued and current dividends on the Preferred Stock of all series shall be
paid or declared and set apart before any dividends are paid or set apart on
the Class A Preferred Stock or the Common Stock, and before any assets shall
be paid or set apart for the purchase of or for distribution with respect to
the Class A Preferred Stock or the Common Stock or any other stock of this
corporation not ranking prior to the Preferred Stock.
All accrued and current dividends on the Class A Preferred Stock of all
series shall be paid or declared and set apart before any dividends are paid
or set apart on the Common Stock, and before any assets shall be paid or set
apart for the purchase or redemption of or for distribution with respect to
the Common Stock or any other stock of this corporation other than the
Preferred Stock. The holders of the shares of Common Stock are entitled to
receive all other dividends which may be declared by said Board of Directors.
No dividend on the Class A Preferred Stock or the Common Stock shall be
payable until all accrued and accumulated dividends on the shares of
Preferred Stock of all series, at the respective rates fixed therefor, from
the respective dates of the original issue thereof or such other date as may
be fixed by said Board of Directors as aforesaid, up to the date of the
declaration of such dividend on Class A Preferred Stock or Common Stock,
shall have been paid or declared and set apart. No dividend on the Common
Stock shall be payable until all accrued and accumulated dividends on the
shares of Class A Preferred Stock of all series, at the respective rates
fixed therefor, from the respective dates of the original issue thereof or
such other date as may be fixed by said Board of Directors as aforesaid, up
to the date of the declaration of such dividend on Common Stock, shall have
been paid or declared and set apart.
Section 503 of the California General Corporations Law shall not apply
to distribution on shares of Class A Preferred Stock or Common Stock or on
any other shares
-3-
junior to Preferred Stock or Class A Preferred Stock of this corporation.
3. VOTING RIGHTS. Each share of Common Stock, $4.50 Dividend
Preferred Stock, $4.40 Dividend Preferred Stock, $4.75 Dividend Preferred
Stock, $4.36 Dividend Preferred Stock and $4.75 Dividend Preferred Stock
(convertible on or before October 31, 1966) shall be entitled to one vote on
each matter submitted to a vote of shareholders.
Each share of each additional series of Preferred Stock and each share
of each series of Class A Preferred Stock shall be entitled to such number of
votes (if any), not to exceed one vote, as the Board of Directors may specify
in the resolution providing for the issuance of such series; provided,
however, that each share of Preferred Stock shall be entitled to one vote on
each matter as to which, under these Articles of Incorporation, action cannot
be taken without the consent of the holders of at least two-thirds of the
outstanding shares of the Preferred Stock, as a class.
Except as to shares of Preferred Stock to be issued to redeem, or to be
issued in exchange for, an equal number of outstanding shares of Preferred
Stock, this corporation shall not without the consent of the holders of at
least two-thirds of the outstanding shares of the Preferred Stock, as a
class, issue any Preferred Stock, or stock on a parity with the Preferred
Stock, in excess of three hundred thousand (300,000) shares (including any
Preferred Stock or stock on a parity with Preferred Stock issuable on
conversion of other securities), or any stock, or securities convertible into
any stock, ranking prior to the Preferred Stock, unless after giving effect
to each such transaction, (i) the sum of the aggregate involuntary
liquidation preference of all outstanding shares of Preferred Stock of all
series and all other stock of this corporation on a parity with or ranking
prior to the Preferred Stock (or any Preferred Stock or stock on a parity
with or prior to the Preferred Stock issuable on conversion of other
securities) is not in excess of the consolidated surplus (including earned,
capital and other surplus) of this corporation and its subsidiaries,
determined from the consolidated balance sheet in accordance with sound
accounting practice, plus the aggregate stated value of all classes of stock
of this corporation ranking junior to the Preferred Stock, and (ii) the
aggregate of the consolidated net earnings of the corporation and its
subsidiaries (determined in accordance with sound accounting practice), for a
period of any twelve (12) consecutive months within the eighteen (18) months
next preceding the date of such transaction, plus an amount equal to the
annual interest charges on the consolidated funded debt of this corporation
and its subsidiaries, shall be at least one and one-half times a sum equal to
the aggregate of the annual interest charges on the consolidated funded debt
-4-
of this corporation and its subsidiaries, and the annual dividend
requirements on all outstanding Preferred Stock, and stock on a parity with
or ranking prior to the Preferred Stock, and on all preferred stock of
subsidiaries outstanding in the hands of the public. In the foregoing
computations annual interest charges and annual dividend requirements shall
be calculated in respect of any funded debt or stock not having a fixed
interest or dividend rate on the basis of the interest or dividend rate
prevailing thereon or that would have prevailed thereon at the earliest of
the public offering of the stock to be issued, the execution of an agreement
to issue the stock to be issued or the issuance of the stock to be issued;
the stock to be issued and dividends thereon shall be included; and if any
property operated by others has been acquired by this corporation or any
subsidiary within such eighteen (18) months period or is to be acquired with
all or part of the proceeds of such stock to be issued, such property shall
be treated as having been owned by this corporation or such subsidiary for
the twelve (12) consecutive months in calculating net earnings.
This corporation, without the consent of the holders of at least
two-thirds of the outstanding Preferred Stock, as a class, shall not (i)
authorize any stock ranking prior to the outstanding Preferred Stock or (ii)
change any provision of the outstanding Preferred Stock which would authorize
this corporation to levy assessments thereon, reduce the dividend rate
thereof, make the dividends thereon non-cumulative in whole or in part,
reduce the redemption price thereof, reduce any amount payable thereon upon
voluntary or involuntary liquidation, eliminate, diminish or alter adversely
any conversion rights, if any, pertaining thereto, diminish or eliminate
voting rights pertaining thereto, diminish or alter adversely any options or
rights theretofore granted to the holders thereof to purchase other shares of
this corporation, diminish or alter adversely any sinking fund provision
relating thereto, or rearrange the priority of outstanding shares of
Preferred Stock so as to make them subject to the preferences of other than
outstanding shares as to distributions by way of dividends or otherwise.
4. REDEMPTION. Any or all of the series of the $4.50 Dividend
Preferred Stock, the $4.40 Dividend Preferred Stock, the $4.75 Dividend
Preferred Stock, the $4.36 Dividend Preferred Stock and the $4.75 Dividend
Preferred Stock (convertible on or before October 31, 1966) are subject to
redemption upon payment to the holders whose stock may be called for
redemption in each case of the amounts provided for in the following schedule:
$4.50 Dividend Preferred Stock - one hundred dollars ($100) per share;
together with accrued and
-5-
accumulated dividends to the date of redemption on any shares of such
stock to be redeemed;
$4.40 Dividend Preferred Stock - one hundred one dollars and fifty
cents ($101.50) per share; together with accrued and accumulated dividends
to the date of redemption on any shares of such stock to be redeemed;
$4.75 Dividend Preferred Stock - one hundred dollars ($100) per share;
together with accrued and accumulated dividends to the date of redemption
on any shares of such stock to be redeemed;
$4.36 Dividend Preferred Stock - one hundred one dollars and fifty
cents ($101.50) per share if redeemed on or before October 15, 1975 and one
hundred one dollars $101) per share if redeemed thereafter; together in
each case with accrued and accumulated dividends to the date of redemption
on any shares of such stock to be redeemed;
$4.75 Dividend Preferred Stock (convertible on or before October 31,
1966) - one hundred one dollars $101) per share; together with accrued and
accumulated dividends to the date of redemption on any shares of such stock
to be redeemed; together in each case with accrued and accumulated
dividends to the date of redemption on any shares of such stock to be
redeemed.
Notice of the redemption of any or all of the shares of said series of
Preferred Stock shall be given by mail at the respective addresses, as shown
on the books of this corporation, to the holders of the Preferred Stock of
record on the books of this corporation whose stock is to be redeemed, not
less than thirty (30) days prior to the date fixed for such redemption, and
such notice of redemption shall also be given by publication in a newspaper
of general circulation published in the State of California, once a week for
at least thirty (30) days prior to the date fixed for such redemption. If
the whole of any one said series or of more than one said series of shares of
Preferred Stock is to be redeemed at one time such notice of redemption shall
so state; and if shares of Preferred Stock of any one said series or of more
than one said series are to be redeemed in part, such notice shall also
specify which of said shares of Preferred Stock are to be redeemed by giving
the numbers of the stock certificates evidencing the shares to be redeemed.
Such notice shall in any case specify the time and place of redemption and
the price to be paid for the shares redeemed. Such redemption shall be at
such time and place as shall be specified in the notice. From and after the
date fixed in any such notice as the date of redemption, unless default shall
be made by this corporation in providing moneys at the time and place as
aforesaid for the payment of the
-6-
redemption price of such Preferred Stock, all dividends on such Preferred
Stock so called for redemption shall cease to accrue and all the rights of
the holders thereof, as shareholders of this corporation, except the right to
receive such redemption price and accrued and accumulated dividends to the
date of redemption, shall cease and determine. All certificates of the
Preferred Stock so redeemed shall be appropriately cancelled on the books of
this corporation and the shares so redeemed represented by such certificates
shall be restored to the status of authorized but unissued shares; the number
of shares of the series redeemed shall be reduced by the number of shares so
redeemed; and the shares so redeemed shall have the status of shares as to
which the Board of Directors is authorized, within the limitations and
restrictions stated herein, to fix or alter the dividend rate (including
fixed, variable or adjustable rates), the number of votes per share, the
conversion rights, if any, the rights and terms of redemption (including
sinking fund provisions), the redemption price or prices, if any, the
liquidation preferences, the number of shares, and the distinctive
designations of each additional series. If this corporation shall deposit on
or prior to the date fixed for redemption of any such shares of Preferred
Stock with one or more banks or trust companies, each having capital and
surplus of at least five million dollars ($5,000,000) and doing business in
the State of California, as a trust fund for the benefits of the respective
holders of such shares to be redeemed, a sum sufficient to redeem, on the
date fixed for redemption thereof, such shares called for redemption, with
irrevocable instructions and authority to any one of such depositary banks or
trust companies to publish, in the name of this corporation, the notice of
redemption thereof (or to complete such publication if theretofore commenced)
and to pay, on and after the date fixed for such redemption or prior thereto,
to the respective holders of such shares, the redemption price thereof upon
the surrender of the certificates representing the shares so called for
redemption, then from and after the date of such deposit (although prior to
the date fixed for redemption) such shares so called for redemption shall be
deemed to be redeemed and dividends thereon shall cease to accrue after such
date fixed for redemption, and such deposit shall be deemed to constitute
full payment of such shares to the respective holders thereof, and from and
after the date of such deposit such shares shall be deemed to be no longer
outstanding, and the holders thereof shall cease to be shareholders with
respect to such shares and shall have no rights with respect thereto except
only the right to receive from such bank or banks or trust company or
companies payment of the redemption price of such shares without interest,
upon surrender of their certificates therefor, and the right to exercise any
existing conversion rights in accordance with the express terms of the shares
so called
-7-
for redemption. Any funds so deposited which are not required for the
redemption of shares because of the conversion thereof shall forthwith be
returned to this corporation. Moneys so deposited and unclaimed at the end
of six (6) years shall be repaid to this corporation and thereafter the
holders of such shares called for redemption shall look only to this
corporation for payment.
Shares of each other series of Preferred Stock and shares of each series
of Class A Preferred Stock shall be redeemable, if at all, upon such terms as
specified by the Board of Directors in the resolution providing for the
issuance of such series.
5. LIQUIDATION. In the event of a voluntary or involuntary
dissolution or liquidation of this corporation, the holders of the shares of
each series of Preferred Stock shall be entitled pro rata to receive, without
priority between series, out of the surplus profits arising from the business
of this corporation and then remaining intact, or, in case such profits shall
be insufficient, then from the general assets of this corporation, payment of
all accumulated and unpaid dividends thereon at the respective rate fixed for
such series together with, in the case of the holders of the shares of the
$4.50 Dividend Preferred Stock, the $4.40 Dividend Preferred Stock, the $4.75
Dividend Preferred Stock and the $4.36 Dividend Preferred Stock, the $4.75
Dividend Preferred Stock (convertible on or before October 31, 1966) the sum
of one hundred dollars ($100) per share for each share held by such holders,
respectively, and in the case of the holders of the shares of each additional
series of Preferred Stock, the sum of money per share fixed by the Board of
Directors for such series for each share held by such holders, respectively,
and such payment shall be made before the holders of the Class A Preferred
Stock or the Common Stock shall receive any payment thereon. The holders of
the shares of the Preferred Stock of any series shall not be entitled to any
further share in the assets of this corporation.
In the event of a voluntary or involuntary dissolution or liquidation of
this corporation and after there shall have been paid to, or set aside for
payment to, holders of shares of Preferred Stock of all sums which they are
entitled to receive in such event, the holders of the shares of each series
of Class A Preferred Stock shall be entitled pro rata to receive, without
priority between series, out of the surplus profits arising from the business
of this corporation and then remaining intact, or, in case such profits shall
be insufficient, then from the general assets of this corporation, payment of
all accumulated and unpaid dividends thereon at the respective rates fixed
for such series together with the sum of money per share determined by the
Board of Directors for such series for each share
-8-
held by such holders, respectively, and such payment shall be made before the
holders of the Common Stock shall receive any payment thereon. The holders
of the shares of Class A Preferred Stock of any series shall not be entitled
to any further share in the assets of this corporation.
After there shall have been paid to, or set aside for payment to, the
holders of shares of Preferred Stock of Class A Preferred Stock of all sums
which they are entitled to receive in the event of a voluntary or involuntary
dissolution or liquidation of this corporation, the remaining assets of this
corporation shall be divided and payable equally to the holders of the Common
Stock in proportion to the number of shares held by each.
6. GENERAL. No holder of any class of stock of this corporation
shall, as such shareholder, have any right of subscription to shares of any
class of this corporation now or hereafter authorized and which may be
offered for subscription or sale by this corporation, except that whenever
the Board of Directors of this corporation in its discretion may from time to
time determine, the holders of the shares of Common Stock of this corporation
may be given the right of subscription to all or any part of new shares of
Common Stock of this corporation now or hereafter authorized and which may be
offered for subscription or sale by this corporation at such price as the
Board of Directors may from time to time fix. All stock issued by this
corporation shall be fully paid up and non-assessable.
Fifth: Said corporation elects to be governed by all the provisions of
the General Corporation Law of California as amended by act of the California
Legislature 1975-76 Regular Session, effective January 1, 1977, not otherwise
applicable to it under Chapter 23 of that law.
Sixth: 1. LIABILITY OF DIRECTORS. The liability of the directors of
the corporation for monetary damages shall be eliminated to the fullest
extent permissible under California law.
2. INDEMNIFICATION OF AGENTS. The corporation is authorized by bylaw,
agreement or otherwise to provide for indemnification of agents (as defined
in Section 317 of the California General Corporations Law) of the corporation
to the fullest extent permissible under California law and in excess of that
expressly permitted under Section 317 of the California General Corporation
Law, subject to the limits on such excess indemnification set forth in
Section 204 of the California General Corporation Law.
3. INSURANCE FOR AGENTS. The corporation is authorized to purchase
and maintain insurance on behalf of any agent (as defined in Section 317 of
the California
-9-
General Corporation Law) of the corporation against any liability asserted
against or incurred by the agent in such capacity or arising out of the
agent's status as such to the fullest extent permitted by California law and
whether or not the corporation would have the power to indemnify the agent
under the provisions of Section 317 of the California General Corporation Law
or these articles of incorporation. The fact that the corporation owns all
or a portion of the shares of the company issuing a policy of insurance shall
not render this provision inapplicable, if such policy meets the requirements
of Section 317 of the California General Corporation Law.
4. REPEAL OR MODIFICATION. No repeal or modification of any provision
of this Article Sixth shall adversely affect any protection, right or
insurance afforded to any director or other agent (as defined in Section 317
of the California General Corporation Law) of the corporation existing at the
time of such repeal or modification with respect to acts or omissions
occurring prior to such repeal or modification.
Seventh: ELIMINATION OF CUMULATIVE VOTING. No holder of any class of
stock of this corporation shall be entitled to cumulate votes at any election
of directors of this corporation.
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Exhibit 10.17
PACIFIC ENTERPRISES
-----------------
EMPLOYEE STOCK OPTION PLAN*
-----------------
I
PURPOSE
The purpose of this Plan is to further the growth and development of
Pacific Enterprises (the "Company") by strengthening the ability of the
Company to attract and retain outstanding employees upon whose judgment,
initiative and efforts the continued success of the Company is dependent, by
providing employees with additional incentives for high levels of performance
and by increasing the commonality of interests of employees and the Company's
shareholders. This Plan seeks to accomplish these purposes by providing
employees with a proprietary interest in the Company through the grant of
stock options to purchase shares of the Company's Common Stock.
II
ADMINISTRATION
This Plan shall be administered by the Compensation Committee of the
Company's Board of Directors.
The Compensation Committee shall, subject to the express provisions of
this Plan, have full and final authority in its sole discretion:
(a) To grant stock options to persons eligible for selection to
participate in this Plan provided that no employee may be granted in any
calendar year stock options to purchase more than an aggregate of 75,000
shares of the Company's Common Stock;
(b) To determine the terms and conditions (which need not be
identical) of each stock option;
(c) To modify or amend any stock option granted under this Plan
(except to reduce the option price thereof or increase the number of shares
subject thereto, other than as required or permitted pursuant to Article IV
of this Plan) or waive any restrictions or conditions applicable thereto or
to the exercise thereof, provided that an optionee's rights may not be
adversely affected in any material respect without the consent of the
optionee.
(d) To construe and interpret this Plan and any related stock option
and define the terms employed herein and therein;
(e) To prescribe, amend and rescind rules, regulations and policies
for the administration of this Plan; and
(f) To make all other determinations necessary or advisable with
respect to this Plan and any stock option granted hereunder.
The Compensation Committee, in its sole discretion and upon such terms
and conditions as it may prescribe, may designate one or more officers or a
committee of officers of the Company or its subsidiaries to exercise any or
all of the foregoing authority of the Compensation Committee except authority
with respect to the grant of stock options to, or stock options held by, any
person who, at the time such authority is exercised, is subject to Section 16
of the Securities Act of 1934 in respect of equity securities of the Company.
*Amended and restated as of March 4, 1997
No member of the Board of Directors or the Compensation Committee or
agent or designee thereof will be liable for any action or inaction in respect
of this Plan or any stock option granted under this Plan.
III
PARTICIPATION
Officers and other employees of the Company or any of its subsidiaries
(any corporation of which 50% or more of the issued and outstanding stock
having ordinary voting rights is owned directly or indirectly by the Company
or any other business entity or association of which 50% or more of the
outstanding equity interest is so owned) shall be eligible for selection to
participate in this Plan. Directors who are not also employees of the Company
or its subsidiaries shall not be eligible for selection to participate in
this Plan.
IV
SHARES SUBJECT TO STOCK OPTIONS
Stock options granted under this Plan shall be for the purchase of shares
of Common Stock of the Company. The maximum number of shares as to which
stock options may be granted under this Plan during 1994 shall be 830,000
shares. During each subsequent year the maximum number of shares as to which
stock options may be granted under this Plan shall be a number of shares
equal to 1% of the number of shares of the Company's Common Stock outstanding
at the beginning of such year. If any stock option granted under this Plan
shall for any reason expire or terminate during the year in which it is
granted without having been exercised in full, then any unexercised shares
which were subject to such option shall again be available for the grant of
stock options under this Plan during such year.
If the outstanding shares of the Company's Common Stock are increased or
decreased as a result of split-up or consolidation thereof, stock dividend
thereon or a similar transaction, or are changed into or exchanged for a
different number or kind of securities as a result of a reclassification or
recapitalization or of a reorganization, merger or consolidation then, in
each such case, an appropriate and proportionate adjustment shall be made in
the number and the kind of securities as to which stock options may be
granted under this Plan and to any employee. A corresponding adjustment shall
likewise be made in the number and kind of securities to which stock options
then outstanding shall relate. Any such adjustment, however, in an
outstanding stock option shall be made without change in the total purchase
price applicable to the securities to which such stock option relates but
with a corresponding adjustment in the option price for each such security.
V
TERMS OF STOCK OPTIONS
Each stock option granted under this Plan shall be subject to the
following terms and conditions:
(a) OPTION PRICE. The option price of each share purchasable upon
exercise of a stock option shall be determined by the Compensation Committee
but shall be not less than 100% of the fair market value of the shares
subject to the stock option on the date the stock option is granted. Unless a
higher option price is specified by the Compensation Committee, the option
price of each share purchasable upon exercise of a stock option shall be 100%
of the fair market value on the date the stock option is granted.
(b) OPTION TERM. The term of each stock option shall be determined by
the Compensation Committee. Unless a different term is specified by the
Compensation Committee, the term of a stock option shall be for ten years
from the date the stock option is granted.
(c) EXERCISABILITY. Each stock option shall be exercisable either
immediately or at such time or times as may be determined by the Compensation
Committee. Unless a different determination is specified by the Compensation
Committee, a stock option shall become and remain exercisable in cumulative
installments of 20% of the shares originally subject thereto on each of the
first five anniversaries of the date the stock option is granted.
2
(d) DIVIDEND EQUIVALENTS. Each stock option may provide for the payment
upon the exercise of the stock option of dividend equivalents (the amount of
dividends that would have been paid on the shares as to which a stock option
is exercised had the shares been outstanding from the date the stock option
was granted) as may be determined by the Compensation Committee. Unless a
different determination is specified by the Compensation Committee, full
dividend equivalents shall be paid by the Company in cash to the employee
upon the exercise of a stock option.
(e) TERMINATION OF EMPLOYMENT. Each option shall expire at such times
following the optionee's termination of employment with the Company and its
subsidiaries as may be determined by the Compensation Committee. Unless a
different determination is specified by the Compensation Committee:
(1) Upon the termination of employment by reason of the retirement
by the optionee after having attained age 60, a stock option shall expire
on the earlier of (a) three years from the date of retirement or (b) the
date on which it would otherwise have expired, and during that period
shall be exercisable only as to the shares as to which it was exercisable
on the last day of employment.
(2) Upon the termination of employment by reason of the death of the
optionee, a stock option shall expire on the earlier of (a) three years
from the date of the employee's death or (b) the date on which it would
otherwise have expired, and during that period shall be exercisable only
as to the shares as to which it was exercisable on the last day of
employment.
(3) Upon the termination of employment for any other reason, a stock
option shall expire on the earlier of (a) three months from the date of
termination of employment or (b) the date on which it would otherwise
have expired, and during that period shall be exercisable only as to the
shares as to which it was exercisable on the last day of employment.
(f) NON-TRANSFERABILITY. Each stock option shall be non-transferable by
the optionee other than by will or the laws of descent and distribution or
pursuant to a qualified domestic relations order as defined by the Internal
Revenue Code of 1986, as amended, or Title I of the Employee Retirement
Income Security Act, or the rules thereunder.
(g) ADDITIONAL TERMS AND CONDITIONS. Each stock option shall be subject
to such additional terms and conditions, not inconsistent with the terms of
this Plan, as may be determined by the Compensation Committee including,
without limitation, provisions for increases in the option price or changes
in the term of the stock option, individual or corporate performance
conditions to the exercisability of the stock option or the payment of
dividend equivalents and limitations on amounts payable as dividend
equivalents.
VI
CHANGE IN CONTROL
Upon the occurrence of a change in control of the Company, any time
periods relating to the exercise of any stock option granted under this Plan
and held by any optionee who is an employee of the Company or its subsidiaries
at the time of the change of control shall be accelerated and any conditions
to exercise thereof shall immediately terminate so that immediately upon the
change in control the stock option thereafter may be exercised at any time or
from time to time in whole or in part as to all shares remaining subject to
the stock option until the expiration date thereof.
The Compensation Committee may make such further provisions with respect
to a change in control of the Company as it shall deem equitable and in the
best interests of the Company. Such provision may be made in any stock option
granted under this Plan or any agreement relating thereto, by amendment or
supplement to any such stock option or agreement, or by resolution of the
Compensation Committee.
The phrase "change in control of the Company" shall have such meaning as
from time to time ascribed thereto by the Compensation Committee and set
forth in any stock option granted under this Plan or any agreement relating
thereto or by any amendment or supplement to any such stock option or
3
agreement, or by resolution of the Compensation Committee; provided, however,
that notwithstanding the foregoing, a "change in control of the Company" shall
be deemed to have occurred if:
(i) Any person is or becomes the beneficial owner, directly or
indirectly, of securities of the Company (not including in the
securities beneficially owned by such person any securities acquired
directly from the Company or its affiliates other than in connection
with the acquisition by the Company or its affiliates of a business)
representing 20% or more of the combined voting power of the Company's
then outstanding securities; or
(ii) During any period of three consecutive years, the following
individuals cease for any reason to constitute a majority of the number
of directors then serving: individuals who at the beginning of such
three-year period constitute the Board of Directors of the Company and
any new director (other than a director whose initial assumption of
office is in connection with an actual or threatened election contest,
including but not limited to a consent solicitation, relating to the
election of directors of the Company) whose appointment or election by
the Board of Directors of the Company or nomination for election by the
Company's shareholders was approved or recommended by a vote of at least
two-thirds of the directors then still in office who either were directors
at the beginning of such three-year period or whose appointment, election
or nomination for election was previously so approved or recommended; or
(iii) There is consummated a merger or consolidation of the Company
or any direct or indirect subsidiary of the Company with any other
corporation, other than (a) a merger or consolidation which would result
in the voting securities of the Company outstanding immediately prior
to such merger or consolidation continuing to represent (either by
remaining outstanding or by being converted into voting securities of
the surviving entity or any parent thereof), in combination with the
ownership of any trustee or other fiduciary holding securities under an
employee benefit plan of the Company or its subsidiaries, at least 60%
of the combined voting power of the securities of the Company or such
surviving entity or any parent thereof outstanding immediately after
such merger or consolidation, or (b) a merger or consolidation effected
to implement a recapitalization of the Company (or similar transaction)
in which no person is or becomes the beneficial owner, directly or
indirectly, of securities of the Company (not including in the
securities benefically owned by such person any securities acquired
directly from the Company or it affiliates other than in
connection with the acquisition by the Company or its affiliates of a
business) representing 20% or more of the combined voting power of the
Company's then outstanding securities; or
(iv) The shareholders of the Company approve a plan of complete
liquidation or dissolution of the Company or there is consummated an
agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets, other than a sale or
disposition by the Company of all or substantially all of the Company's
assets to an entity, at least 60% of the combined voting power of the
voting securities of which are owned by shareholders of the Company in
substantially the same proportions as their ownership of the Company
immediately prior to such sale.
Notwithstanding the foregoing, no event or transaction which would otherwise
constitute a change of control under clauses (i) through (iv) shall
constitute a change of control for purposes of any stock option if effected
in connection with either (a) the currently pending business combination of
the Company and Enova Corporation or (b) any other substantially similar
business combination of the Company and Enova Corporation that is effected on
or prior to December 31, 1999. In addition, any event or transaction which
would otherwise constitute a change in control under clauses (i) through (iv)
shall not constitute a change of control for purposes of any stock option
granted to an individual who in connection with the event or transaction
participates as an equity investor in the acquiring entity or any of its
affiliates. For purposes of the preceding sentence, an individual shall not
be deemed to have participated as an equity investor in the acquiring entity
or any of its affiliates by virtue of (a) obtaining beneficial ownership of
any equity interest in the acquiring entity or any of its affiliates as a
result of the grant to the individual of an incentive compensation award
under one or more incentive plans of the acquiring entity or any of its
affiliates (including, but not limited to, the conversion in connection with
such event or transaction of incentive compensation awards of the Company or
its subsidiaries into incentive compensation awards of the
4
acquiring entity or any of its affiliates), on terms and conditions
substantially equivalent to those applicable to other executives of the
Company or its subsidiaries immediately prior to such event or transaction,
after taking into account normal differences attributable to job
responsibilities, title and the like, (b) obtaining beneficial ownership of
any equity interest in the acquiring entity or any of its affiliates on terms
and conditions substantially equivalent to those obtained in such transaction
by all other shareholders of the Company, or (c) having previously obtained
beneficial ownership of any equity interest in the acquiring entity or any of
its affiliates in a manner unrelated to such event or transaction.
For purposes of this Article VI, the following definitions shall be
applicable:
(i) "affiliate" shall have the meaning set forth in Rule 12b-2
promulgated under Section 12 of the Exchange Act.
(ii) "beneficial owner" shall have the meaning set forth in
Rule 13d-3 under the Exchange Act.
(iii) "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended from time to time.
(iv) "person" shall have the meaning set forth in Section 3(a)(9) of
the Exchange Act, as modified and used in Sections 13(d) and 14(d)
thereof, except that such term shall not include (a) the Company or any
of its subsidiaries, (b) a trustee or other fiduciary holding securities
under an employee benefit plan of the Company or any of its affiliates,
(c) an underwriter temporarily holding securities pursuant to an
offering of such securities, (d) a corporation owned, directly or
indirectly, by the shareholders of the Company in substantially the same
proportions as their ownership of stock of the Company, or (e) a person
or group as used in Rule 13d-2(b) under the Exchange Act.
VII
TERMINATION OF 1988 INCENTIVE PLAN
Upon the approval of this Plan by shareholders of the Company, the
Company's Stock Incentive Plan approved by the Company's Board of
Directors and shareholders in 1988 shall terminate as to the grant of
additional incentive awards.
VIII
GENERAL PROVISIONS
(a) Nothing in this Plan or in related agreement will confer upon
any employee any right to continue in the employ of the Company or any
of its subsidiaries or affect the right of the Company to terminate the
employment of any employee at any time with or without cause.
(b) No employee (individually or as a member of a group) and no
beneficiary or other person claiming under or through such employee will
have any right, title, or interest in or to any shares allocated or
reserved under this Plan or subject to any stock option except as to such
shares, if any, that have been issued to such employee.
(c) The Company may make such provisions as it deems appropriate to
withhold any taxes which it determines it is required to withhold in
connection with the exercise of any stock option.
(d) No stock option and no right under this Plan, contingent or
otherwise, will be assignable or subject to any encumbrance, pledge or charge
of any nature except that, under such rules and regulations as the Company
may establish pursuant to the terms of the Plan, a beneficiary may be
designated with respect to a stock option in the event of death of the
employee granted the stock option.
(e) No shares will be issued under this Plan or any stock option granted
under this Plan unless and until all then applicable requirements imposed by
federal and state securities and other laws, rules and regulations and by any
regulatory agencies having jurisdiction, and by any stock exchanges upon
which the shares may be listed, have been fully met.
5
(f) In the event that any member of the Compensation Committee shall
fail to be a "disinterested person" within the meaning of Rule 16b-3 under
the Securities Exchange Act of 1934 or an "outside director" within the
meaning of Section 162(m) of the Internal Revenue Code of 1986, the Board of
Directors of the Company may appoint a committee of two or more directors,
each of whom shall be a disinterested director and an outside director, to
administer this Plan and, upon such appointment, such committee shall become
the administrator of this Plan and shall succeed to all of the authority
vested in the Compensation Committee by this Plan.
IX
AMENDMENT AND TERMINATION
The Board of Directors of the Company may at any time, suspend, amend,
modify or terminate this Plan, provided that no amendment or modification
shall become effective which, within the meaning of Rule 16b-3 under the
Securities Exchange Act of 1934, would:
(i) materially increase the benefits accruing to participants in
this Plan,
(ii) materially increase the number of shares which may be issued under
this Plan, or
(iii) materially modify the requirements as to eligibility for
participation in this Plan.
unless approved by the affirmative vote of the holders of a majority of the
Company's shares present, or represented, and entitled to vote at a meeting
duly held in accordance with applicable law. No such suspension, amendment,
modification or termination of this Plan shall alter or impair any rights or
obligations under any stock option theretofore granted under this Plan.
X
EFFECTIVE DATE
This Plan shall be effective upon the adoption thereof by the Board of
Directors of the Company subject to approval by the affirmative vote of the
holders of a majority of the Company's shares present, or represented, and
entitled to vote at a meeting of shareholders duly held in accordance with
the laws of the State of California within twelve months following the date
of the adoption of this Plan by the Board of Directors of the Company. Any
stock option granted under this Plan prior to such approval shall be granted
subject to such approval being so obtained.
6
Exhibit 10.18
SEVERANCE AGREEMENT
THIS AGREEMENT, dated _____________________ (the "Effective Date"),
is made by and between Pacific Enterprises, a California corporation ("PE"),
and ______________________ the "Executive").
WHEREAS, severance benefits have historically been provided to
senior executives, officers and other key employees of PE and its
subsidiaries and affiliates (PE and its subsidiaries and affiliates at any
given time being referred to herein collectively as the "PE Group"); and
WHEREAS, the Executive is currently employed by PE and may from time
to time during the term of this Agreement be employed by one or more other
members of the PE Group (Executive's then PE Group employer hereinafter
referred to as the "Employer"); and
WHEREAS, the Board of Directors of PE has determined that it is in
the best interests of PE to institute formalized severance arrangements for
certain of its executives, officers and key employees, including the
Executive.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, PE and the Executive hereby agree as follows:
1. TERM OF AGREEMENT. Subject to the provisions of Section 12
hereof, the Term of this Agreement shall commence on the Effective Date and
shall continue in effect through the third anniversary of the Effective Date;
PROVIDED, HOWEVER, that on each anniversary of the Effective Date during the
Term of this Agreement, the Term shall automatically be extended for one
additional year unless, not later than 90 days prior to any such anniversary,
the Executive or the Employer shall have given notice in accordance with
Section 8 not to extend the Term.
2. COMPENSATION OTHER THAN SEVERANCE PAYMENTS
2.1 ACCRUED SALARY. If, during the Term, the Executive's
employment with the Employer shall terminate for any reason, the Employer
shall pay the Executive's full salary to the Executive through the Date of
Termination (as defined in Section 4.2) at the rate in effect immediately
prior to the Date of Termination or, if higher, the rate in effect
immediately prior to the first occurrence of an event or circumstance
constituting Good Reason, together with all compensation and benefits payable
to the Executive through the Date of Termination under the terms of the
Employer's compensation and benefit plans, programs or arrangements as in
effect immediately prior to the Date of Termination or, if more favorable to
the Executive, as in effect immediately prior to the first occurrence of an
event or circumstance constituting Good Reason. For purposes of this
Agreement, the transfer of Executive's employment from the Employer to
another member of the PE Group shall not alone be deemed to constitute a
termination of Executive's employment.
2.2 POST-TERMINATION BENEFITS. If, during the Term, the
Executive's employment with the Employer shall terminate for any reason, the
Employer shall pay to the Executive the Executive's normal post-termination
compensation and benefits as such payments become due. Such post-termination
compensation and benefits shall be determined under, and paid in accordance
with, the Employer's retirement, insurance and other compensation or benefit
plans, programs and arrangements as in effect immediately prior to the Date
of Termination or, if more favorable to the Executive, as in effect
immediately prior to the occurrence of the first event or circumstance
constituting Good Reason.
3. ENTITLEMENT TO SEVERANCE BENEFITS.
3.1 BENEFITS. Subject to Sections 3.2 and 3.5 hereof,
if, during the Term, the Executive's employment with the Employer is
terminated (x) by the Employer other than (i) for Cause (as defined in
Section 17(A)) or (ii) by reason of Executive's death or disability (as
defined in the Employer's long term disability policy in effect from time to
time) or (y) by the Executive for Good Reason (as defined in Section 17(B)),
the Employer shall pay the Executive the amounts, and provide the Executive
the benefits, described in this Section 3.1 ("Severance Payments") in
addition to any payments and benefits to which the Executive is entitled
under Section 2 hereof.
2
(A) LUMP SUM PAYMENT. In lieu of any further
salary payments to the Executive for periods
subsequent to the Date of Termination and in lieu
of any cash severance payment otherwise payable to
the Executive under any other severance plan,
policy or arrangement maintained by the Employer,
the Employer shall pay to the Executive a lump
sum severance payment, in cash, equal to 1.5 times
the Executive's annual base salary as in effect
immediately prior to the Date of Termination or, if
higher, in effect immediately prior to the first
occurrence of an event or circumstance constituting
Good Reason.
(B) CONTINUATION OF WELFARE BENEFITS. For the
eighteen (18) month period immediately following the
Date of Termination, the Employer shall arrange to
provide the Executive and his or her dependents
with life, accident and health insurance benefits
substantially similar to those provided to the
Executive and his or her dependents immediately prior
to the Date of Termination or, if more favorable to
the Executive, those provided to the Executive and
his or her dependents immediately prior to the first
occurrence of an event or circumstance constituting
Good Reason, at no greater cost to the Executive than
the cost of such benefits to the Executive immediately
prior to such date or occurrence. Benefits otherwise
receivable by the Executive pursuant to this
Section 3.1(B) shall be reduced to the extent benefits
of the same type are received by the Executive from
another employer during the eighteen (18) month
period following the Executive's termination of
employment (and any such benefits received by the
Executive shall be reported to the Employer by the
Executive).
(C) ACCELERATED VESTING OF STOCK OPTIONS. All
stock options held by Executive under any stock option
or incentive plan maintained by any member of the
PE Group shall immediately vest and become exercisable
as of the Date of Termination, to be exercised in
accordance with the terms of the applicable plan.
(D) ACCELERATED VESTING OF DIVIDEND EQUIVALENT
RIGHTS ("DERs"). All DERs granted in connection with
any stock option held by Executive under any stock
option or incentive plan maintained by any member of
the PE Group shall immediately vest and shall become
payable at target upon exercise of the related stock
option in accordance with the terms of the applicable
plan.
3
(E) DEFERRED COMPENSATION PAYOUT. Payments to
Executive under the Pacific Enterprises Deferred
Compensation Plan for Key Management Employees (the
"Deferred Compensation Plan") or any similar or
successor plan maintained by any member of the PE
Group shall be made without reduction in the interest
rate applicable to Executive's account thereunder
pursuant to Section VIII.B of the Deferred
Compensation Plan or any similar or successor provision
of the Deferred Compensation Plan or any similar or
successor plan.
(F) FINANCIAL PLANNING. The Employer shall
provide Executive with financial planning services
and/or benefits for a period of one (1) year
following the Date of Termination at a level
consistent with the benefits provided under PE's
financial planning program for executives and
officers in effect as of the Effective Date.
(G) ACCRUED VACATION. The Employer shall provide
Executive with a cash payment in an amount equal to
Executive's accrued vacation benefits through the Date
of Termination, such amount calculated on the basis of
the salary used for purposes of the calculation in
Section 3.1(A).
(H) OUTPLACEMENT SERVICES. The Employer shall
provide the Executive with outplacement services
suitable to the Executive's position for a period of
eighteen (18) months or, if earlier, until the first
acceptance by the Executive of an offer of employment
with a subsequent employer, in an aggregate amount
not to exceed $30,000.
3.2 SECTION 280G LIMITATION ON BENEFITS.
(A) Notwithstanding any other provisions of this
Agreement, in the event that any payment or benefit
received or to be received by the Executive (whether
pursuant to the terms of this Agreement or any other
plan, arrangement or agreement with (i) any member of
the PE Group, (ii) any Person (as defined in
Section 17(C)) whose actions result in a change in the
ownership or effective control of any member of the PE
Group or a substantial portion of its assets
(a "Section 280G Event") or (iii) any Person affiliated
with such Person) (all such payments and benefits,
including the Severance Payments, being hereinafter
called "Total Payments") would not be deductible (in
whole or part), by any member of the PE Group or a
Person making such payment or providing
4
such benefit as a result of section 280G of the
Internal Revenue Code of 1986, as amended (the
"Code"), then, to the extent necessary to make such
portion of the Total Payments deductible (and after
taking into account any reduction in the Total
Payments provided by reason of section 280G of the
Code in such other plan, arrangement or agreement),
the cash Severance Payments shall first be reduced
(if necessary, to zero), and all other Severance
Payments shall thereafter be reduced (if necessary,
to zero): PROVIDED, HOWEVER, that the Executive may
elect to have the non-cash Severance Payments reduced
(or eliminated) prior to any reduction of the cash
Severance Payments.
(B) For purposes of this limitation, (i) no
portion of the Total Payments the receipt or enjoyment
of which the Executive shall have waived at such time
and in such manner as not to constitute a "payment"
within the meaning of section 280G(b) of the Code shall
be taken into account, (ii) no portion of the Total
Payments shall be taken into account which, in the
opinion of tax counsel ("Tax Counsel") reasonably
acceptable to the Executive and selected by the
accounting firm which was, immediately prior to the
Section 280G Event, PE's independent auditor (the
"Auditor"), does not constitute a "parachute payment"
within the meaning of section 280G(b)(2) of the Code,
including by reason of section 280G(b)(4)(A) of the
Code, (iii) the Severance Payments shall be reduced
only to the extent necessary so that the Total
Payments (other than those referred to in clause
(i) or (ii)) in their entirety constitute reasonable
compensation for services actually rendered within the
meaning of section 280G(b)(4)(B) of the Code or are
otherwise not subject to disallowance as deductions by
reason of section 280G of the Code, in the opinion of
Tax Counsel, and (iv) the value of any noncash benefit
or any deferred payment or benefit included in the
Total Payments shall be determined by the Auditor in
accordance with the principles of sections 280G(d)(3)
and (4) of the Code.
(C) If it is established pursuant to a final
determination of a court or an Internal Revenue Service
proceeding that, notwithstanding the good faith of the
Executive, PE and the Employer in applying the terms of
this Section 3.2, the Total Payments paid to or for the
Executive's benefit are in an amount that would result
in any portion of such Total Payments being subject to
any excise tax imposed under Section 4999 of the Code
(the "Excise Tax"), then, if such repayment would
result in (x) no portion of the remaining Total
Payments being
5
subject to the Excise Tax and (y) a dollar-for-dollar
reduction in the Executive's taxable income and wages
for purposes of federal, state and local income and
employment taxes, the Executive shall have an
obligation to pay the Employer upon demand an amount
equal to the sum of (i) the excess of the Total
Payments paid to or for the Executive's benefit
over the Total Payments that could have been paid to
or for the Executive's benefit without any portion of
such Total Payments being subject to the Excise Tax;
and (ii) interest on the amount set forth in clause
(i) of this sentence at the rate provided in section
1274(b)(2)(B) of the Code from the date of the
Executive's receipt of such excess until the date of
such payment.
3.3 TIMING OF PAYMENTS. Subject to Section 3.5, the
payments provided in subsections (A) and (G) of Section 3.1 shall be made not
later than the fifth business day following the later of (i) the Date of
Termination and (ii) the date the release referenced in Section 3.5 becomes
irrevocable; PROVIDED, HOWEVER, that if the amounts of such payments, and the
limitation on such payments set forth in Section 3.2, cannot be finally
determined on or before such day, the Employer shall pay to the Executive on
such day an estimate, as determined in good faith by the Employer, of the
minimum amount of such payments to which the Executive is clearly entitled
and shall pay the remainder of such payments (together with interest on the
unpaid remainder (or on all such payments to the extent, the Employer fails
to make such payments when due) at 120% of the rate provided in section
1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined
but in no event later than the thirtieth (30th) day after the Date of
Termination. In the event that the amount of the estimated payments exceeds
the amount subsequently determined to have been due, such excess shall
constitute a loan by the Employer to the Executive, payable on the fifth
(5th) business day after demand by the Employer (together with interest at
120% of the rate provided in section 1274(b)(2)(B) of the Code). At the time
that payments are made under this Agreement, the Employer shall provide the
Executive with a written statement setting forth the manner in which such
payments were calculated and the basis for such calculations including,
without limitation, any opinions or other advice the Employer has received
from Tax Counsel, the Auditor or other advisors or consultants (and any such
opinions or advice which are in writing shall be attached to the statement).
3.4 LEGAL FEES. The Employer shall pay to the Executive
all legal fees and expenses (including but not limited to fees and expenses
in connection with any arbitration) incurred by the Executive in disputing in
good
6
faith any issue arising under this Agreement relating to the termination of
the Executive's employment or in seeking in good faith to obtain or enforce
any benefit or right provided by this Agreement, but in each case only to the
extent Executive shall prevail as to the material issues raised in any such
dispute.
3.5 RELEASE. Notwithstanding anything herein to the contrary,
the Employer's obligation to make the payments provided for in this Section 3
is expressly made subject to and conditioned upon (i) Executive's prior
execution of a release substantially in the form attached hereto as Exhibit A
within 45 days after the applicable Date of Termination and (ii) Executive's
non-revocation of such release in accordance with the terms thereof.
4. TERMINATION PROCEDURES.
4.1 NOTICE OF TERMINATION. During the Term, any purported
termination of the Executive's employment (other than by reason of death)
shall be communicated by written Notice of Termination from the Employer to
the Executive (or vice versa) in accordance with Section 8. For purposes of
this Agreement, a "Notice of Termination" shall mean a notice which shall
indicate the specific termination provision in this Agreement relied upon, if
any, and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's employment
under the provision so indicated. Further, a Notice of Termination for Cause
is required to include a copy of a resolution duly adopted by the affirmative
vote of not less than three-quarters (3/4) of the entire membership of the
Board of Directors of PE at a meeting of such board called and held for the
purpose of considering such termination (after reasonable notice to the
Executive and an opportunity for the Executive, together with the Executive's
counsel, to be heard before such board) finding that, in the good faith
opinion of such board, the Executive was guilty of conduct set forth in
clause (i) or (ii) of the definition of Cause herein, and specifying the
particulars thereof in detail.
4.2 DATE OF TERMINATION. "Date of Termination," with respect
to any purported termination of the Executive's employment during the Term,
shall mean the date specified in the Notice of Termination (which, in the case
of a termination by the Employer, shall not be less than thirty (30) days
(except in the case of a termination for Cause) and, in the case of a
termination by the Executive, shall not be less than fifteen (15) days nor
more than sixty (60) days, respectively, from the date such Notice of
Termination is given).
7
5. NO MITIGATION. In the event of the termination of Executive's
employment during the Term, the Executive shall not be required to seek other
employment or to attempt in any way to reduce any amounts payable to the
Executive by the Employer pursuant to Section 3. Further, the amount of any
payment or benefit provided for in this Agreement (other than under Section
3.1(B)) shall not be reduced by any compensation earned by the Executive as
the result of employment by another employer, by retirement benefits, by
offset against any amount claimed to be owed by the Executive to the
Employer, or otherwise.
6. PERFORMANCE; ASSUMPTION OF AGREEMENT.
6.1 In the event that, during the Term, Executive shall be
transferred to any Employer other than PE, PE shall take any and all action
as may be necessary to cause such Employer to assume all of the duties,
obligations and liabilities of the Employer hereunder.
6.2 In the event that, during the Term, (i) the Employer shall
cease to be a member of the PE Group, or (ii) the PE Group undergoes a
reorganization or other corporate restructuring such that it is then no
longer appropriate, consistent with the intent of this Agreement, for PE to
continue to discharge its duties, obligations and liabilities hereunder, PE
shall, prior to the effectiveness of such event, take all such action as may
be necessary to provide that the Employer or any parent of the Employer, as
appropriate consistent with the intent of this Agreement (the "New Parent
Entity"), shall assume all of the rights, duties, obligations and
liabilities of "PE" hereunder, and in such event all references herein to the
"PE Group" shall be deemed to include reference to the group consisting of
such New Parent Entity and its then subsidiaries and affiliates. In this
regard, it is the intent of this Agreement that, to the extent reasonably
practicable, any entity responsible for discharging the duties, obligations
and liabilities of "PE" hereunder should have a Board of Directors consisting
of a majority of outside directors.
6.3 In addition to any obligations imposed by law upon any
successor to the Employer, the Employer shall require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all
or substantially all of the business and/or assets of the Employer to
expressly assume and agree to perform this Agreement in the same manner and
to the same extent that the Employer would be required to perform it if no
such succession had
8
taken place, and the Employer shall obtain such assumption and agreement
prior to the effectiveness of any such succession.
6.4 The failure of PE or the Employer, as applicable, to
perform its respective obligations under Sections 6.1, 6.2 and 6.3, shall be a
breach of this Agreement and shall entitle the Executive to compensation from
the Employer in the same amount and on the same terms as the Executive would
be entitled to hereunder if the Executive were to terminate the Executive's
employment with the Employer for Good Reason, except that, for purposes of
implementing the foregoing, the date on which the applicable event or
succession becomes effective shall be deemed the Date of Termination.
7. SUCCESSORS. This Agreement shall inure to the benefit of and
be enforceable by the Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If the Executive shall die while any amount would still be payable
to the Executive hereunder (other than payments which, by their terms,
terminate upon the death of the Executive) if the Executive had continued to
live, all such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to the executors, personal
representatives or administrators of the Executive's estate.
8. NOTICES. For the purpose of this Agreement, notices and all
other communications provided for in the Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by United
States registered mail, return receipt requested, postage prepaid, addressed,
if to the Executive, to the address inserted below the Executive's signature
on the final page hereof and, if to PE, to the address set forth below, or to
such other address as either party may have furnished to the other in
writing in accordance herewith, except that notice of change of address shall
be effective only upon actual receipt:
To Pacific Enterprises:
555 W. 5th Street
Los Angeles, CA 90013-1011
P.O. Box 3249
Los Angeles, CA 90051-1249
Attention: Chief Executive Officer
9
9. CONFIDENTIALITY; NON-SOLICITATION.
9.1 CONFIDENTIALITY. Executive acknowledges that in the course
of his or her employment within the PE Group, he or she has acquired
non-public privileged or confidential information and trade secrets
concerning the operations, future plans and methods of doing business
("Proprietary Information") of the PE Group; and Executive agrees that it
would be extremely damaging to the PE Group, if such Proprietary Information
were disclosed to a competitor of the PE Group or to any other person or
corporation. Executive understands and agrees that all Proprietary Information
has been divulged to Executive in confidence and further understands and
agrees to keep all Proprietary Information secret and confidential without
limitation in time. In view of the nature of Executive's employment and the
Proprietary Information Executive has acquired during the course of such
employment, Executive likewise agrees that the PE Group would be irreparably
harmed by any disclosure of Proprietary Information in violation of the terms
of this paragraph and that any member of the PE Group shall therefore be
entitled to preliminary and/or permanent injunctive relief prohibiting
Executive from engaging in any activity or threatened activity in violation
of the terms of this paragraph and to any other judicial relief available to
them. Inquiries regarding whether specific information constitutes
Proprietary Information shall be directed to PE's Senior Vice President,
Public Policy (or, if such position is vacant, PE's Chief Executive Officer);
provided, that PE shall not unreasonably classify information as Proprietary
Information.
9.2 NON-SOLICITATION OF EMPLOYEES. Executive recognizes that
he or she possesses and will possess confidential information about other
employees of the PE Group, including the Employer, relating to their
education, experience, skills, abilities, compensation and benefits, and
interpersonal relationships with customers of the PE Group. Executive
recognizes that the information he or she possesses and will possess about
these other employees is not generally known, is of substantial value to the
PE Group in developing their business and in securing and retaining
customers, and has been and will be acquired by him or her because of his or
her business position within the PE Group. Executive agrees that, during the
Term of this Agreement and for a period of one(1) year thereafter, he or she
will not, directly or indirectly, solicit or recruit any employee of any
member of the PE Group for the purpose of being employed by him or her or by
any competitor of any member of the PE Group on whose behalf he or she is
acting as an agent, representative or employee and that he or she will not
convey any such confidential information or trade secrets about other
employees of any member of the PE Group to any other person; provided,
however, that it
10
shall not constitute a solicitation or recruitment of employment in violation
of this paragraph to discuss employment opportunities with any employee of
any member of the PE Group who has either first contacted Executive or
regarding whose employment Executive has discussed with and received the
written approval of PE's Vice President, Human Resources (or, if such
position is vacant, PE's Chief Executive Officer), prior to making such
solicitation or recruitment. In view of the nature of Executive's employment
with the PE Group, Executive likewise agrees that the members of the PE Group
would be irreparably harmed by any solicitation or recruitment in violation
of the terms of this paragraph and that any such member shall therefore be
entitled to preliminary and/or permanent injunctive relief prohibiting
Executive from engaging in any activity or threatened activity in violation
of the terms of this paragraph and to any other judicial relief available to
them.
9.3 SURVIVAL OF PROVISIONS. The obligations contained in this
Section 9 shall survive the termination or expiration of Executive's
employment within the PE Group and shall be fully enforceable thereafter. If
it is determined by a court of competent jurisdiction in any state that any
restriction in this Section 9 is excessive in duration or scope or is
unreasonable or unenforceable under the laws of that state, it is the
intention of the parties that such restriction may be modified or amended by
the court to render it enforceable to the maximum extent permitted by the law
of that state.
10. MISCELLANEOUS. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed
to in writing and signed by the Executive and such officer of PE or the
Employer as may be specifically designated by its Board of Directors. No
waiver by either party hereto at any time of any breach by the other party
hereto of, or of any lack of compliance with, any condition or provision of
this Agreement to be performed by such other party shall be deemed a waiver
of similar or dissimilar provisions or conditions at the same or at any prior
or subsequent time. This Agreement supersedes any other agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof which have been made by either party. The validity,
interpretation, construction and performance of this Agreement shall be
governed by the laws of the State of California. All references to sections
of the Code shall be deemed also to refer to any successor provisions to such
sections. Any payments provided for hereunder shall be paid net of any
applicable withholding required under federal, state or local law and any
additional withholding to which the Executive has agreed. The obligations of
the Executive, the Employer and PE under this
11
Agreement which by their nature may require either partial or total
performance after the expiration of the Term (including, without limitation,
those under Sections 2, 3 and 9 hereof) shall survive such expiration.
11. VALIDITY. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any
other provision of this Agreement, which shall remain in full force and
effect.
12. POOLING. In the event that the ultimate parent entity of the
PE Group becomes party to a business combination transaction which is
intended to qualify for "pooling of interests" accounting treatment and, but
for one or more provisions of this Agreement, would so qualify, then (A) this
Agreement shall, to the extent practicable, be interpreted so as to permit
such accounting treatment, and (B) to the extent that the application of
clause (A) of this Section 12 does not preserve the availability of such
accounting treatment, then, to the extent that any provision of the Agreement
would disqualify such business combination transaction as a "pooling"
transaction (including, if applicable, the entire Agreement), such provision
shall be null and void as of the Effective Date. All determinations under
this Section 12 shall be made by the accounting firm whose opinion with
respect to "pooling of interests" treatment is required as a condition to the
consummation of such business combination transaction.
13. NO CONTRACT OF EMPLOYMENT. This Agreement shall not be
construed as creating an express or implied contract of employment and,
except as otherwise agreed in writing, the Executive shall not have any right
to be retained in the employ of any member of the PE Group.
14. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of
which together shall constitute one and the same instrument.
15. SETTLEMENT OF DISPUTES.
15.1 CLAIMS REVIEW PROCEDURES. All claims by the Executive
for benefits under this Agreement shall be directed to and determined by the
Board of Directors of PE and shall be in writing. Any denial by such board of
a claim for benefits under this Agreement shall be delivered to the Executive
in writing and shall set forth the specific reasons for the denial and the
specific provisions of this Agreement relied upon. Such board shall afford a
reasonable opportunity to the Executive for a review of the decision denying a
12
claim and shall further allow the Executive to appeal to such board a
decision of such board within sixty (60) days after notification by such
board that the Executive's claim has been denied.
15.2 ARBITRATION. Except as provided in Section 9, any
further dispute about the validity, interpretation, effect or alleged
violation of this Agreement (an "arbitrable dispute") must be submitted to
arbitration in Los Angeles, California. Arbitration shall take place before
an experienced employment arbitrator licensed to practice law in such state
and selected in accordance with the Model Employment Arbitration Procedures
of the American Arbitration Association. Arbitration shall be the exclusive
remedy for any arbitrable dispute. The arbitrator in any arbitrable dispute
shall not have authority to modify or change the Agreement in any respect.
Should any party to this Agreement pursue any arbitrable dispute by any
method other than arbitration, the prevailing party shall be entitled to
recover from the party initiating the use of such method all damages, costs,
expenses and attorneys' fees incurred as a result of the use of such method.
The arbitrator's decision and/or award shall be fully enforceable and subject
to an entry of judgment by the Superior Court of the State of California for
the County of Los Angeles.
16. INDEMNIFICATION. Each Employer shall indemnify and hold
Executive harmless for acts and omissions in his or her capacity as an
officer, director, agent or employee of such Employer to the maximum extent
permitted under applicable law, and shall maintain Executive as a covered
insured under any Director and Officer liability insurance policies following
employment until the expiration of any applicable statutes of limitations.
17. DEFINITIONS. For purposes of this Agreement, the
following terms shall have the meanings indicated below:
(A) "Cause" for termination by the Employer of the
Executive's employment shall mean (i) the willful and continued failure by
the Executive to substantially perform the Executive's duties with the
Employer (other than any such failure resulting from the Executive's
incapacity due to physical or mental illness or any such actual or
anticipated failure after the issuance of a Notice of Termination for Good
Reason by the Executive pursuant to Section 4.1) after a written demand for
substantial performance is delivered to the Executive by the Board of
Directors of PE, which demand specifically identifies the manner in which
such board believes that the Executive has not substantially performed the
Executive's duties, or (ii) Executive's commission of one or
13
more acts of dishonesty or moral turpitude (including but not limited to
conviction of a felony). For purpose of clause (i) of this definition, no act,
or failure to act, on the Executive's part shall be deemed "willful" unless
done, or omitted to be done, by the Executive not in good faith and without
reasonable belief that the Executive's act, or failure to act, was in the
best interest of the PE Group.
(B) "Good Reason" for termination by the Executive of the
Executive's employment shall mean the occurrence, without the written consent
of the Executive, of any one of the following acts by the Employer, or
failures by the Employer to act, unless, in the case of any act or failure to
act described in paragraph (I), (II), (III.B) or (VI) below, such act or
failure to act is corrected prior to the Date of Termination specified in the
Notice of Termination given in respect thereof:
(I) the assignment to the Executive of any duties
materially inconsistent with the range of duties and responsibilities
appropriate to a senior executive/officer/key employee within the PE
Group (such range determined by reference to past, current and
reasonably foreseeable practices within the PE Group);
(II) a material reduction in the Executive's overall
standing and responsibilities within the PE Group, but not including (i)
a mere change in title or (ii) a transfer to another member of the PE
Group that in either such case does not adversely affect the Executive's
overall status within the PE Group.
(III) a reduction by the Employer in (A) the Executive's
annual base salary as in effect on the date hereof or as the same may be
increased from time to time or (B) Executive's aggregate compensation
and benefits opportunities, in each case except for across-the-board
reductions (or modifications of benefit plans) similarly affecting all
similarly situated executives/officers/key employees (both of the PE
Group and of any Person then in control of PE) of comparable rank with
the Executive;
(IV) the relocation of the Executive's principal place of
employment to a location outside the Southern California area; the
Employer's requiring the Executive to be based anywhere other than such
principal place of employment (or permitted relocation thereof); or a
substantial increase in Executive's business travel obligations outside
of
14
the Southern California area as of the Effective Date, other than such
an increase that (i) arises in connection with extraordinary business
activities of the Employer and (ii) is understood not to be a part of
Executive's regular duties with the Employer;
(V) the failure by the Employer to pay to the Executive
any portion of the Executive's current compensation or to pay the
Executive any portion of an installment of deferred compensation under
any deferred compensation program of the Employer within thirty (30)
days of the date such compensation is due;
(VI) any purported termination of the Executive's
employment which is not effected pursuant to a Notice of Termination
satisfying the requirements of Section 4.1; for purposes of this
Agreement, no such purported termination shall be effective.
The Executive's right to terminate the Executive's employment
for Good Reason shall not be affected by the Executive's incapacity due
to physical or mental illness. The Executive's continued employment
shall not constitute consent to, or a waiver of rights with respect to, any
act or failure to act constituting Good Reason hereunder.
(C) "Person" shall have the meaning given in
Section 3(a)(9) of the Securities Exchange Act of 1934, as amended, as
modified and used in Sections 13(d) and 14(d) thereof or any successor
provisions.
15
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year first written above.
PACIFIC ENTERPRISES
By:
-----------------------------
Name:
Title:
--------------------------------
EXECUTIVE
Address:
--------------------------------
--------------------------------
--------------------------------
(Please print carefully)
16
EXHIBIT 10.19
INCENTIVE/RETENTION BONUS AGREEMENT
THIS AGREEMENT, dated ; (the "Effective Date"), is made by
and between Pacific Enterprises, a California corporation ("PE"), and
(the "Participant").
WHEREAS, PE has entered into an agreement of merger (the "Merger")
with San Diego Gas and Electric Company which, if consummated, would constitute
a Business Combination (as hereinafter defined); and
WHEREAS, the Board of Directors of PE has determined that it is
essential to the best interests of PE and its subsidiaries and affiliates (PE
and its subsidiaries and affiliates at any given time being referred to herein
collectively as the "PE Group") to foster the continued employment of key
management personnel pending consummation of the Merger or any other Proposed
Business Combination transaction; and
WHEREAS, the Participant is currently employed by PE and may from time
to time during the term of this Agreement be employed by one or more other
members of the PE Group (Executive's then PE Group employer hereinafter referred
to as the "Employer"); and
WHEREAS, the Board of Directors of PE has determined that it is in the
best interests of PE to institute an incentive bonus arrangement (the "Incentive
Bonus") for certain of its executives, officers and key employees, including the
Participant, to provide for their continued employment with PE and other members
of the PE Group and to compensate them for the performance of additional
services during the period prior to and following consummation of the Merger or
any other Proposed Business Combination transaction.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, PE and the Participant hereby agree as follows:
1. DEFINED TERMS. The definitions of certain capitalized terms used
in this Agreement are provided in the last Section hereof.
2. TERM OF AGREEMENT. Subject to the provisions of Section 14
hereof, the Term of this Agreement shall commence on the Effective Date and
shall terminate on the first to occur of (i) the date that is 6 months
following the date the Merger is consummated or (ii) the date that is 6
months following the date the Merger is formally abandoned; PROVIDED,
HOWEVER, that if, prior to or within six months after the date the Merger is
formally abandoned, another Proposed Business Combination is publicly
announced, the Term of this Agreement shall be extended until the first to
occur of (x) the date that is 6 months after the Merger or any other Proposed
Business Combination is consummated or (y) the Merger and each other Proposed
Business Combination is formally abandoned.
3. PAYMENT EVENTS. The Incentive Bonus shall become payable upon
the first to occur of any of the following events during the Term of this
Agreement (each such event, a "Payment Event"):
(A) A Business Combination is consummated within the Term of
this Agreement and the Participant continues or transitions to employment
with the Employer and remains employed with one or more members of the PE
Group for a period of 6 months following the date of closing (the "Closing
Date") of such Business Combination; or
(B) A Business Combination is consummated within the Term of
this Agreement and the Participant's employment with the Employer is
terminated prior to the expiration of 6 months following the Closing Date
(x) by the Employer without Cause or (y) by the Participant for Good
Reason, provided, that for purposes of this Agreement, the transfer of
Executive's employment from the Employer to another member of the PE Group
shall not alone be deemed to constitute a termination of Executive's
employment; or
(C) Within the Term of this Agreement and prior to the
consummation of a Business Combination, the Participant's employment with
the Employer is terminated (x) by the Employer without Cause or (y) by the
Participant for Good Reason, and a Business Combination is subsequently
consummated within the Term of this Agreement.
If a Payment Event occurs, the Incentive Bonus shall be payable by the Employer
to the Participant on the date that is 6 months following the Closing Date of
such Business Combination; provided, however, that in the event the payment of
the Incentive Bonus or any portion thereof in any fiscal year of the Employer
would
2
otherwise fail to be deductible by the Employer in such fiscal year by reason of
section 162(m) of the Code, the payment of the Incentive Bonus or such
nondeductible portion thereof shall be deferred (with accrued interest at the 90
day Treasury Bill rate in effect from time to time) until the earliest such
fiscal year or years in which the payment of the amounts so deferred (including
interest) would not fail to be so deductible as determined by the Employer; and
provided, further, that the Participant shall at all times be 100% vested in any
amounts so deferred (including interest), but shall have no greater interest in
any such amounts than that of any unsecured general creditor of the Employer.
No Incentive Bonus shall be paid in the event the Participant's employment with
the Employer is terminated prior to the occurrence of a Payment Event (x) by the
Employer for Cause, (y) by the Participant without Good Reason or (z) by reason
of the Participant's death or disability, or in the event no Business
Combination is consummated within the Term of this Agreement.
4. AMOUNT OF INCENTIVE BONUS. Upon the occurrence of a Payment
Event, the amount of the Incentive Bonus payable to the Participant hereunder
shall be equal to times the sum of the Participant's base salary plus
annual target bonus as in effect as of the Effective Date or the Closing Date,
whichever such sum is greater.
5. SECTION 280G LIMITATION ON BENEFITS.
(A) Notwithstanding any other provisions of this Agreement,
in the event that any payment or benefit received or to be received by the
Participant (whether pursuant to the terms of this Agreement or any other
plan, arrangement or agreement with (i) any member of the PE Group, (ii)
any Person whose actions result in a change in the ownership or effective
control of any member of the PE Group or a substantial portion of its
assets (a "Section 280G Event") or (iii) any Person affiliated with such
Person) (all such payments and benefits, including the Severance Payments,
being hereinafter called "Total Payments") would not be deductible (in
whole or part), by any member of the PE Group or a Person making such
payment or providing such benefit as a result of section 280G of the Code,
then, to the extent necessary to make such portion of the Total Payments
deductible (and after taking into account any reduction in the Total
Payments provided by reason of section 280G of the Code in such other plan,
arrangement or agreement), the Incentive Bonus shall be reduced (if
necessary, to zero).
3
(B) For purposes of this limitation, (i) no portion of the
Total Payments the receipt or enjoyment of which the Participant shall have
waived at such time and in such manner as not to constitute a "payment"
within the meaning of section 280G(b) of the Code shall be taken into
account, (ii) no portion of the Total Payments shall be taken into account
which, in the opinion of tax counsel ("Tax Counsel") reasonably acceptable
to the Participant and selected by the accounting firm which was,
immediately prior to the Section 280G Event, PE's independent auditor (the
"Auditor"), does not constitute a "parachute payment" within the meaning of
section 280G(b)(2) of the Code, including by reason of section
280G(b)(4)(A) of the Code, (iii) the Severance Payments shall be reduced
only to the extent necessary so that the Total Payments (other than those
referred to in clauses (i) or (ii)) in their entirety constitute reasonable
compensation for services actually rendered within the meaning of section
280G(b)(4)(B) of the Code or are otherwise not subject to disallowance as
deductions by reason of section 280G of the Code, in the opinion of Tax
Counsel, and (iv) the value of any noncash benefit or any deferred payment
or benefit included in the Total Payments shall be determined by the
Auditor in accordance with the principles of sections 280G(d)(3) and (4) of
the Code.
(C) If it is established pursuant to a final
determination of a court or an Internal Revenue Service proceeding that,
notwithstanding the good faith of the Participant, PE and the Employer
in applying the terms of this Section 5, the Total Payments paid to or
for the Participant's benefit are in an amount that would result in any
portion of such Total Payments being subject to any excise tax imposed
under Section 4999 of the Code (the "Excise Tax"), then, if such
repayment would result in (x) no portion of the remaining Total Payments
being subject to the Excise Tax and (y) a dollar-for-dollar reduction in
the Participant's taxable income and wages for purposes of federal,
state and local income and employment taxes, the Participant shall have
an obligation to pay the Employer upon demand an amount equal to the sum
of (i) the excess of the Total Payments paid to or for the Participant's
benefit over the Total Payments that could have been paid to or for the
Participant's benefit without any portion of such Total Payments being
subject to the Excise Tax; and (ii) interest on the amount set forth in
clause (i) of this sentence at the rate provided in section
1274(b)(2)(B) of the Code from the date of the Participant's receipt of
such excess until the date of such payment.
4
6. LEGAL FEES. The Employer shall pay to the Participant all legal
fees and expenses (including but not limited to fees and expenses in connection
with any arbitration) incurred by the Participant in disputing in good faith any
issue arising under this Agreement relating to the termination of the
Participant's employment or in seeking in good faith to obtain or enforce any
benefit or right provided by this Agreement, but in each case only to the extent
the Participant shall prevail as to the material issues raised in any such
dispute.
7. NOTICE OF TERMINATION. During the Term, any purported
termination of the Participant's employment (other than by reason of death)
shall be communicated by written Notice of Termination from the Employer to the
Executive (or vice versa) in accordance with Section 10. For purposes of this
Agreement, a "Notice of Termination" shall mean a notice which shall indicate
the specific termination provision in this Agreement relied upon, if any, and
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Participant's employment under the
provision so indicated. Further, a Notice of Termination for Cause is required
to include a copy of a resolution duly adopted by the affirmative vote of not
less than three-quarters (3/4) of the entire membership of the Board of
Directors of PE at a meeting of such board called and held for the purpose of
considering such termination (after reasonable notice to the Participant and an
opportunity for the Participant, together with the Participant's counsel, to be
heard before such board) finding that, in the good faith opinion of such board,
the Participant was guilty of conduct set forth in clause (i) or (ii) of the
definition of Cause herein, and specifying the particulars thereof in detail.
8. PERFORMANCE: ASSUMPTION OF AGREEMENT.
8.1 In the event that, during the Term, Executive shall be
transferred to any Employer other than PE, PE shall take any and all action as
may be necessary to cause such Employer to assume all of the duties, obligations
and liabilities of the Employer hereunder.
8.2 In the event that, during the Term, (i) the Employer shall
cease to be a member of the PE Group, or (ii) the PE Group undergoes a
reorganization or other corporate restructuring such that it is then no longer
appropriate, consistent with the intent of this Agreement, for PE to continue to
discharge its duties, obligations and liabilities hereunder, PE shall, prior to
the effectiveness of such event, take all such action as may be necessary to
provide that the Employer or any parent of the Employer, as appropriate
consistent with the intent of this Agreement (the "New Parent Entity"), shall
assume all of the rights, duties, obligations
5
and liabilities of "PE" hereunder, and in such event all references herein to
the "PE Group" shall be deemed to include reference to the group consisting of
such New Parent Entity and its then subsidiaries and affiliates. In this
regard, it is the intent of this Agreement that the entity from time to time
responsible for discharging the duties, obligations and liabilities of "PE"
hereunder should have a Board of Directors consisting of a majority of outside
directors.
8.3 In addition to any obligations imposed by law upon any
successor to the Employer, the Employer shall require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Employer to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Employer would be required to perform it if no such succession
had taken place, and the Employer shall obtain such assumption and agreement
prior to the effectiveness of any such succession.
8.4 The failure of PE or the Employer, as applicable, to perform
its respective obligations under Sections 8.1, 8.2 and 8.3, shall be a breach of
this Agreement and shall be deemed to constitute a termination of Executive's
employment without Cause for purposes of determining whether a Payment Event has
occurred under Section 3.
9. SUCCESSORS. This Agreement shall inure to the benefit of and
be enforceable by the Participant's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If the Participant shall die while any amount would still be
payable to the Participant hereunder, if the Participant had continued to
live, all such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to the executors, personal
representatives or administrators of the Participant's estate.
10. NOTICES. For the purpose of this Agreement, notices and all
other communications provided for in the Agreement shall be in writing and shall
be deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed, if to the
Participant, to the address inserted below the Participant's signature on the
final page hereof and, if to PE, to the address set forth below, or to such
other address as either party may have furnished to the other in writing in
accordance herewith, except that notice of change of address shall be effective
only upon actual receipt:
6
To Pacific Enterprises:
555 W. 5th Street
Los Angeles, CA 90013-1011
P.O. Box 3249
Los Angeles, CA 90051-1249
Attention: Chief Executive Officer
11. CONFIDENTIALITY: NON-SOLICITATION.
11.1 CONFIDENTIALITY. The Participant acknowledges that in
the course of his or her employment within the PE Group, he or she has
acquired non-public privileged or confidential information and trade secrets
concerning the operations, future plans and methods of doing business
("Proprietary Information") of the PE Group; and the Participant agrees that
it would be extremely damaging to the PE Group if such Proprietary
Information were disclosed to a competitor of the PE Group or to any other
person or corporation. The Participant understands and agrees that all
Proprietary Information has been divulged to the Participant in confidence
and further understands and agrees to keep all Proprietary Information secret
and confidential without limitation in time. In view of the nature of the
Particpant's employment and the Proprietary Information the Participant has
acquired during the course of such employment, the Participant likewise
agrees that the PE Group would be irreparably harmed by any disclosure of
Proprietary Information in violation of the terms of this paragraph and that
any member of the PE Group shall therefore be entitled to preliminary and/or
permanent injunctive relief prohibiting the Participant from engaging in any
activity or threatened activity in violation of the terms of this paragraph
and to any other judicial relief available to them. Inquiries regarding
whether specific information constitutes Proprietary Information shall be
directed to the PE's Senior Vice President, Public Policy (or, if such
position is vacant, PE's Chief Executive Officer); provided, that PE shall
not unreasonably classify information as Proprietary Information.
11.2 NON-SOLICITATION OF EMPLOYEES. The Participant recognizes
that he or she possesses and will possess confidential information about other
employees of the PE Group, including the Employer, relating to their education,
experience, skills, abilities, compensation and benefits, and interpersonal
relationships with customers of the PE Group. The Participant recognizes that
the informa-
7
tion he or she possesses and will possess about these other employees is not
generally known, is of substantial value to the PE Group in developing their
business and in securing and retaining customers, and has been and will be
acquired by him or her because of his or her business position within the PE
Group. The Participant agrees that, during the Term of this Agreement and
for a period of one (1) year thereafter, he or she will not, directly or
indirectly, solicit or recruit any employee of any member of the PE Group for
the purpose of being employed by him or her or by any competitor of any
member of the PE Group on whose behalf he or she is acting as an agent,
representative or employee and that he or she will not convey any such
confidential information or trade secrets about other employees of any member
of the PE Group to any other person; provided, however, that it shall not
constitute a solicitation or recruitment of employment in violation of this
paragraph to discuss employment opportunities with any employee of any member
of the PE Group who has either first contacted the Participant or regarding
whose employment the Participant has discussed with and received the written
approval of PE's Vice President, Human Resources (or if such position is
vacant, PE's Chief Executive Officer), prior to making such solicitation or
recruitment. In view of the nature of the Participant's employment within the
PE Group, the Participant likewise agrees that the members of the PE Group
would be irreparably harmed by any solicitation or recruitment in violation
of the terms of this paragraph and that any such member shall therefore be
entitled to preliminary and/or permanent injunctive relief prohibiting the
Participant from engaging in any activity or threatened activity in violation
of the terms of this paragraph and to any other judicial relief available to
them.
11.3 SURVIVAL OF PROVISIONS. The obligations contained in this
Section 11 shall survive the termination or expiration of the Participant's
employment within the PE Group and shall be fully enforceable thereafter. If it
is determined by a court of competent jurisdiction in any state that any
restriction in this Section 11 is excessive in duration or scope or is
unreasonable or unenforceable under the laws of that state, it is the intention
of the parties that such restriction may be modified or amended by the court to
render it enforceable to the maximum extent permitted by the law of that state.
12. MISCELLANEOUS. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by the Participant and such officer of PE or the Employer
as may be specifically designated by its Board of Directors. No waiver by
either party hereto at any time of any breach by the other party hereto of, or
of any lack of compliance with, any condition or provision of this Agreement to
be performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or
8
conditions at the same or at any prior or subsequent time. This Agreement
supersedes any other agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof which have been
made by either party. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California. All references to sections of the Exchange Act of the Code shall
be deemed also to refer to any successor provisions to such sections. Any
payments provided for hereunder shall be paid net of any applicable
withholding required under federal, state or local law and any additional
withholding to which the Participant has agreed. The obligations of the
Participant, the Employer and PE under this Agreement which by their nature
may require either partial or total performance after the expiration of the
Term shall survive such expiration.
13. VALIDITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
14. POOLING. In the event that the ultimate parent entity of the PE
Group becomes party to a business combination transaction which is intended to
qualify for "pooling of interests" accounting treatment and, but for one or more
provisions of this Agreement, would so qualify, then (A) this Agreement shall,
to the extent practicable, be interpreted so as to permit such accounting
treatment, and (B) to the extent that the application of clause (A) of this
Section 14 does not preserve the availability of such accounting treatment,
then, to the extent that any provision of the Agreement would disqualify such
business combination transaction as a "pooling" transaction (including, if
applicable, the entire Agreement), such provision shall be null and void as of
the Effective Date. All determinations under this Section 14 shall be made by
the accounting firm whose opinion with respect to "pooling of interests"
treatment is required as a condition to the consummation of such business
combination transaction.
15. NO CONTRACT OF EMPLOYMENT. This Agreement shall not be construed
as creating an express or implied contract of employment and, except as
otherwise agreed in writing, the Participant shall not have any right to be
retained in the employ of any member of the PE Group.
16. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
9
17. SETTLEMENT OF DISPUTES.
17.1 CLAIMS REVIEW PROCEDURES. All claims by the Participant
for benefits under this Agreement shall be directed to and determined by the
Board of Directors of PE and shall be in writing. Any denial by such board
of a claim for benefits under this Agreement shall be delivered to the
Participant in writing and shall set forth the specific reasons for the
denial and the specific provisions of this Agreement relied upon. Such board
shall afford a reasonable opportunity to the Participant for a review of the
decision denying a claim and shall further allow the Participant to appeal to
such board a decision of such board within sixty (60) days after notification
by such board that the Participant's claim has been denied.
17.2 ARBITRATION. Except as provided in Section 11, any
further dispute about the validity, interpretation, effect or alleged
violation of this Agreement (an "arbitrable dispute") must be submitted to
arbitration in Los Angeles, California. Arbitration shall take place before
an experienced employment arbitrator licensed to practice law in such state
and selected in accordance with the Model Employment Arbitration Procedures
of the American Arbitration Association. Arbitration shall be the exclusive
remedy for any arbitrable dispute. The arbitrator in any arbitrable dispute
shall not have authority to modify or change the Agreement in any
respect. Should any party to this Agreement pursue any arbitrable dispute by
any method other than arbitration, the prevailing party shall be entitled to
recover from the party initiating the use of such method all damages, costs,
expenses and attorneys' fees incurred as a result of the use of such method.
The arbitrator's decision and/or award shall be fully enforceable and subject
to an entry of judgment by the Superior Court of the State of California for
the County of Los Angeles.
18. DEFINITIONS. For purposes of this Agreement, the following
terms shall have the meanings indicated below:
(A) "Affiliate" shall have the meaning set forth in Rule
12b-2 promulgated under Section 12 of the Exchange Act.
(B) "Beneficial Owner" shall have the meaning set forth in
Rule 13d-3 under the Exchange Act.
(C) "Business Combination" shall mean the occurrence of any
of the following events:
10
(1) Any Person is or becomes the Beneficial Owner,
directly or indirectly, of securities of PE (not including in the
securities beneficially owned by such Person any securities acquired
directly from PE or its Affiliates other than in connection with the
acquisition by PE or its Affiliates of a business) representing 20% or
more of the combined voting power of PE's then outstanding securities;
or
(II) The following individuals cease for any reason to
constitute a majority of the number of directors then serving:
individuals who, on the date hereof, constitute the Board of Directors
of PE and any new director (other than a director whose initial
assumption of office is in connection with an actual or threatened
election contest, including but not limited to a consent solicitation,
relating to the election of directors of PE) whose appointment or
election by the Board of Directors of PE or nomination for election by
PE's shareholders was approved or recommended by a vote of at least
two-thirds (2/3) of the directors then still in office who either were
directors on the date hereof or whose appointment, election or
nomination for election was previously so approved or recommended; or
(III) There is consummated a merger or consolidation of PE
or any direct or indirect subsidiary of PE with any other corporation,
other than (i) a merger or consolidation which would result in the
voting of securities of PE outstanding immediately prior to such
merger or consolidation continuing to represent (either by remaining
outstanding or by being converted into voting securities of the
surviving entity or any parent thereof), in combination with the
ownership of any trustee or other fiduciary holding securities under
an employee benefit plan of any member of the PE Group, at least 60%
of the combined voting power of the securities of PE or such surviving
entity or any parent thereof outstanding immediately after such merger
or consolidation, or (ii) a merger or consolidation effected to
implement a recapitalization of PE (or similar transaction) in which
no Person is or becomes the Beneficial Owner, directly or indirectly,
of securities of PE (not including the securities Beneficially Owned
by such Person any securities acquired directly from PE or its
Affiliates other than in connection with the acquisition by PE or its
Affiliates of a business) representing 20% or more of the combined
voting power of PE's then outstanding securities; or
11
(IV) The shareholders of PE approve a plan of complete
liquidation or dissolution of PE or there is consummated an agreement
for the sale or disposition by PE of all or substantially all of PE's
assets, other than a sale or disposition by PE of all or substantially
all of PE's assets to an entity, at least 60% of the combined voting
power of the voting securities of which are owned by shareholders of
PE in substantially the same proportions as their ownership of PE
immediately prior to such sale.
Notwithstanding the foregoing, any event or transaction which would
otherwise constitute a Business Combination (a "Transaction") shall not
constitute a Business Combination for purposes of this Agreement if, in
connection with the Transaction, the Participant participates as an equity
investor in the acquiring entity or any of its affiliates (the "Acquiror"). For
purposes of the preceding sentence, the Participant shall not be deemed to have
participated as an equity investor in the Acquiror by virtue of (i) obtaining
beneficial ownership of any equity interest in the Acquiror as a result of the
grant to the Participant of an incentive compensation award under one or more
incentive plans of the Acquiror (including, but not limited to, the conversion
in connection with the Transaction of incentive compensation awards of any
member of the PE Group into incentive compensation awards of the Acquiror), on
terms and conditions substantially equivalent to those applicable to other
executives of the PE Group immediately prior to the Transaction, after taking
into account normal differences attributable to job responsibilities, title and
the like, (ii) obtaining beneficial ownership of any equity interest in the
Acquiror on terms and conditions substantially equivalent to those obtained in
the Transaction by all other shareholders of PE, or (iii) having previously
obtained beneficial ownership of any equity interest in the Acquiror in a manner
unrelated to a Transaction.
(D) "Cause" for termination by the Employer of the Participant's
employment shall mean (i) the willful and continued failure by the Participant
to substantially perform the Participant's duties with the Employer (other than
any such failure resulting from the Participant's incapacity due to physical or
mental illness or any such actual or anticipated failure after the issuance of a
Notice of Termination for Good Reason by the Participant pursuant to Section 7)
after a written demand for substantial performance is delivered to the
Participant by the Board of Directors of PE, which demand specifically
identifies the manner in which such board believes that the Participant has not
substantially performed the Participant's duties, or (ii) the Participant's
commission of one or more acts of dishonesty or moral turpitude (including but
not limited to conviction of a felony). For purposes of clause (i) of this
definition, no act, or failure to act, on the Participant's part shall be deemed
12
"willful" unless done, or omitted to be done, by the Participant not in good
faith and without reasonable belief that the Participant's act, or failure to
act, was in the best interest of the PE Group.
(E) "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time.
(F) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended from time to time.
(G) "Good Reason" for termination by the Participant of the
Participant's employment shall mean the occurrence, without the written consent
of the Participant, of any one of the following acts by the Employer, or
failures by the Employer to act, unless, in the case of any act or failure to
act described in paragraph (I), (II), (III.B) or (VI) below, such act or failure
to act is corrected prior to the Date of Termination specified in the Notice of
Termination given in respect thereof:
(I) the assignment of the Participant of any duties
materially inconsistent with the range of duties and responsibilities
appropriate to a senior executive within the PE Group (such range
determined by reference to past, current and reasonably foreseeable
practices within the PE Group);
(II) a material reduction in the Participant's overall
standing and responsibilities within the PE Group, but not including (i) a
mere change in title or (ii) a transfer to another member of the PE Group
that in either such case does not adversely affect the Participant's
overall status within the PE Group;
(III) a reduction by the Employer in (A) the Participant's
annual base salary as in effect on the date hereof or as the same may be
increased from time to time or (B) the Participant's aggregate compensation
and benefits opportunities, in each case except for across-the-board
reductions (or modifications to benefit plans) similarly affecting all
similarly situated executives (both of the PE Group and of any Person then
in control of PE) of comparable rank with the Participant;
(IV) the relocation of the Participant's principal place of
employment to a location outside the Southern California area; the
Employer's requiring the Participant to be based anywhere other than such
principal place
13
of employment (or permitted relocation thereof): or a substantial increase
in the Participant's business travel obligations outside of the Southern
California area as of the Effective Date, other than such an increase that
(i) arises in connection with extraordinary business activities of the
Employer and (ii) is understood not to be part of the Participant's regular
duties with the Employer;
(V) the failure by the Employer to pay to the Participant
any portion of the Participant's current compensation or to pay to the
Participant any portion of an installment of deferred compensation under
any deferred compensation program of the Employer within thirty (30) days
of the date such compensation is due;
(VI) any purported termination of the Participant's
employment which is not effected pursuant to a Notice of Termination
satisfying the requirements of Section 7; for purposes of this Agreement,
no such purported termination shall be effective.
The Participant's right to terminate the Participant's employment for
Good Reason shall not be affected by the Participant's incapacity due to
physical or mental illness. The Participant's continued employment shall not
constitute consent to, or a waiver of rights with respect to, any act or failure
to act constituting Good Reason hereunder.
(H) "Person" shall have the meaning given in Section 3(a)(9) of
the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof,
except that such term shall not include (i) any member of the PE Group, (ii) a
trustee or other fiduciary holding securities under an employee benefit plan of
any member of the PE Group, (iii) an underwriter temporarily holding securities
pursuant to an offering of such securities, (iv) a corporation owned, directly
or indirectly, by the shareholders of PE in substantially the same proportions
as their ownership of stock of PE, or (V) a person or group as used in
Rule 13d-1(b) under the Exchange Act.
(I) "Proposed Business Combination" shall mean any publicly
announced transaction which, if consummated, would constitute a Business
Combination.
14
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year first written above.
PACIFIC ENTERPRISES
By:
----------------------------------------
Name: Willis B. Wood, Jr.
Title: Chairman and Chief Executive
Officer
---------------------------------------------
Participant
Address:
---------------------------------------------
---------------------------------------------
---------------------------------------------
(Please print carefully)
15
Exhibit A
GENERAL RELEASE
This GENERAL RELEASE (the "Agreement"), dated __________, is made by
and between ____________________, a California corporation (the "Company")
and ___________________ ("you" or "your").
WHEREAS, you and the Company have previously entered into that
certain Severance Agreement dated __________________, 1996 (the "Severance
Agreement"); and
WHEREAS, Section 3 of the Severence Agreement provides for the
payment of severence benefits in the event of the termination of your
employment under certain circumstances, subject to and conditioned upon your
execution and non-revocation of a general release of claims by you against
the Company and its subsidiaries and affiliates.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, you and the Company hereby agree as follows:
ONE: Your signing of this Agreement confirms that your employment
with the Company shall terminate at the close of business on ____________, or
earlier upon our mutual agreement.
TWO: As a material inducement for the payment of benefits under
Section 3 of that certain Severance Agreement between you and the Company,
and except as otherwise provided in this Agreement, you and the Company
hereby irrevocably and unconditionally release, acquit and forever discharge
the other from any and all Claims either may have against the other. For
purposes of this Agreement and the preceding sentence, the words "Releasee"
or "Releasees" and "Claim" or "Claims," shall have the meanings set forth
below:
(a) The words "Releasee" or "Releasees" shall refer to the you
and to the Company and each of the Company's owners, stockholders,
predecessors, successors, assigns, agents, directors, officers, employees,
representatives, attorneys, advisors, parent companies, divisions,
subsidiaries, affiliates (and agents, directors, officers, employees,
representatives, attorneys and
advisors of such parent companies, divisions, subsidiaries and affiliates).
and all persons acting by, through, under or in concert with any of them.
(b) The words "Claim" or "Claims" shall refer to any charges,
complaints, claims, liabilities, obligations, promises, agreements,
controversies, damages, actions, causes of action, suits, rights, demands,
costs, losses, debts and expenses (including attorneys' fees and costs
actually incurred) of any nature whatsoever, known or unknown, suspected or
unsuspected, which you or the Company now, in the past or, except as limited
by law or regulation such as the Age Discrimination in Employment Act (ADEA),
in the future may have, own or hold against any of the Releasees; provided,
however, that the word "Claim" or "Claims" shall not refer to any charges,
complaints, claims, liabilities, obligations, promises, agreements,
controversies, damages, actions, causes of action, suits, rights, demands,
costs, losses, debts and expenses (including attorneys' fees and costs
actually incurred) arising under [identify severance, employee benefits,
stock option and other agreements containing duties, rights obligations etc.
of either party that are to remain operative]. Claims released pursuant to
this Agreement by you and the Company include, but are not limited to, rights
arising out of alleged violations of any contracts, express or implied, any
tort, any claim that you failed to perform or negligently performed or
breached your duties during employment at the Company, any legal restrictions
on the Company's right to terminate employees or any federal, state or other
governmental statute, regulation, or ordinance, including, without
limitation: (1) Title VII of the Civil Rights Act of 1964 (race, color,
religion, sex and national origin discrimination); (2) 42 U.S.C. section 1981
(discrimination); (3) 29 U.S.C. sections 621-634 (age discrimination); (4) 29
U.S.C. section 206(d)(1) (equal pay); (5) 42 U.S.C. sections 12101, et seq.
(disability); (6) the California Constitution, Article I, Section 8
(discrimination); (7) the California Fair Employment and Housing Act
(discrimination, including race, color, national origin, ancestry, physical
handicap, medical condition, marital status, religion, sex or age); (8)
California Labor Code Section 1102.1 (sexual orientation discrimination); (9)
Executive Order 11246 (race, color, religion, sex and national origin
discrimination); (10) Executive Order 11141 (age discrimination); (11)
sections 503 and 504 of the Rehabilitation Act of 1973 (handicap
discrimination); (12) The Worker Adjustment and Retraining Act (WARN Act);
(13) the California Labor Code (wages, hours, working conditions, benefits
and other matters); (14) the Fair Labor Standards Act (wages, hours, working
conditions and other matters); the Federal Employee Polygraph Protection Act
(prohibits employer from requiring employee to take polygraph test as
condition of employment); and (15) any federal, state or other governmen-
2
tal statute, regulation or ordinance which is similar to any of the statutes
described in clauses (1) through (14).
THREE: You and the Company expressly waive and relinquish all
rights and benefits afforded by any statute (including but not limited to
Section 1542 of the Civil Code of the State of California) which limits the
effect of a release with respect to unknown claims. You and the Company do
so understanding and acknowledging the significance of the release of unknown
claims and the waiver of statutory protection against a release of unknown
claims (including but not limited to Section 1542). Section 1542 of the
Civil Code of the State of California states as follows:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR
AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN
BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH
THE DEBTOR."
Thus, not withstanding the provisions of Section 1542 or of any similar
statute, and for the purpose of implementing a full and complete release and
discharge of the Releasees, you and the Company expressly acknowledge that
this Agreement is intended to include in its effect, without limitation, all
Claims which are known and all Claims which you or the Company do not know or
suspect to exist in your or the Company's favor at the time of execution of
this Agreement and that this Agreement contemplates the extinguishment of all
such Claims.
FOUR: The parties acknowledge that they might hereafter discover
facts different from, or in addition to, those they now know or believe to be
true with respect to a Claim or Claims released herein, and they expressly
agree to assume the risk of possible discovery of additional or different
facts, and agree that this Agreement shall be and remain effective, in all
respects, regardless of such additional or different discovered facts.
FIVE: You hereby represent and acknowledge that you have not filed
any Claim of any kind against the Company or others released in this
Agreement. You further hereby expressly agree never to initiate against the
Company or others released in this Agreement any administrative proceeding,
3
lawsuit or any other legal or equitable proceeding of any kind asserting any
Claims that are released in this Agreement.
The Company hereby represents and acknowledges that it has not filed
any Claim of any kind against you or others released in this Agreement. The
Company further hereby expressly agrees never to initiate against you or
others released in this Agreement any administrative proceeding, lawsuit or
any other legal or equitable proceeding of any kind asserting any Claims that
are released in this Agreement.
SIX: You hereby represent and agree that you have not assigned or
transferred, or attempted to have assigned or transfer, to any person or
entity, any of the Claims that you are releasing in this Agreement.
The Company hereby represents and agrees that you have not assigned
or transferred, or attempted to have assigned or transfer, to any person or
entity, any of the Claims that it is releasing in this Agreement.
SEVEN: As a further material inducement to the Company to enter
into this Agreement, you hereby agree to indemnify and hold each of the
Releasees harmless from all loss, costs, damages, or expenses, including
without limitation, attorneys' fees incurred by Releasees, arising out of any
breach of this Agreement by you or the fact that any representation made in
this Agreement by you was false when made.
EIGHT: You and the Company represent and acknowledge that, in
executing this Agreement, neither is relying upon any representation or
statement not set forth in this Agreement or the Severance Agreement.
NINE:
(a) This Agreement shall not in any way be construed as an
admission by the Company that it has acted wrongfully with respect to you or
any other person, or that you have any rights whatsoever against the Company,
and the Company specifically disclaims any liability to or wrongful acts
against you or any other person, on the part of itself, its employees or its
agents. This Agreement shall not in any way be construed as an admission by
you that you have acted wrongfully with respect to the Company, or that you
failed to perform you duties or negligently performed or breached your
duties, or that the Company had good cause to terminate your employment.
4
(b) If you are a party or are threatened to be made a party to
any proceeding by reason of the fact that you were an officer [or director]
of the Company, the Company shall indemnify you against any expenses
(including reasonable attorney fees provided that counsel has been approved
by the Company prior to retention), judgments, fines, settlements, and other
amounts actually or reasonably incurred by you in connection with that
proceeding, provided that you acted in good faith and in a manner you
reasonably believed to be in the best interest of the Company. The
limitations of California Corporations Code Section 317 shall apply to this
assurance of indemnification.
(c) You agree to cooperate with the Company and its designated
attorneys, representatives and agents in connection with any actual or
threatened judicial, administrative or other legal or equitable proceeding in
which the Company is or may be become involved. Upon reasonable notice, you
agree to meet with and provide to the Company or its designated attorneys,
representatives or agents all information and knowledge you have relating to
the subject matter of any such proceeding.
TEN: This Agreement is made and entered into in California. This
Agreement shall in all respects be interpreted, enforced and governed by and
under the laws of the State of California. Any dispute about the validity,
interpretation, effect or alleged violation of this Agreement (an "arbitrable
dispute") must be submitted to arbitration in Los Angeles, California.
Arbitration shall take place before an experienced employment arbitrator
licensed to practice law in such state and selected in accordance with the
Model Employment Arbitration Procedures of the American Arbitration
Association. Arbitration shall be the exclusive remedy for any arbitrable
dispute. The arbitrator in any arbitrable dispute shall not have authority
to modify or change the Agreement in any respect. You and the Company shall
each be responsible for payment of one-half the amount of the arbitrator's
fee(s). Should any party to this Agreement institute any legal action or
administrative proceeding against the other with respect to any Claim waived
by the Agreement or pursue any arbitrable dispute by any method other than
arbitration, the prevailing party shall be entitled to recover from the
initiating party all damages, costs, expenses and attorneys' fees incurred as
a result of that action. The arbitrator's decision and/or award shall be
fully enforceable and subject to an entry of judgment by the Superior Court
of the State of California for the County of Los Angeles.
ELEVEN: Both you and the Company understand that this Agreement is
final and binding eight days after its execution and return. Should you
5
nevertheless attempt to challenge the enforceability of this Agreement as
provided in Paragraph TEN or, in violation of that Paragraph, through
litigation, as a further limitation on any right to make such a challenge,
you shall initially tender to the Company, by certified check delivered to
the Company, all monies received pursuant to Section 3 of the Severance
Agreement, plus interest, and invite the Company to retain such monies and
agree with you to cancel this Agreement. In the event the Company accepts
this offer, the Company shall retain such monies and this Agreement shall be
canceled. In the event the Company does not accept such offer, the Company
shall so notify you, and shall place such monies in an interest-bearing
escrow account pending resolution of the dispute between you and the Company
as to whether or not this Agreement shall be set aside and/or otherwise
rendered voidable or unenforceable. Additionally, any consulting agreement
then in effect between you and the Company shall be immediately rescinded
with no requirement of notice.
TWELVE: Any notices required to be given under this Agreement shall
be delivered either personally or by first class United States mail, postage
prepaid, addressed to the respective parties as follows:
To Company: Pacific Enterprises/Southern California Gas Company
c/o Pacific Enterprises
555 West Fifth Street
Los Angeles, CA 90013-1011
Attn: Joyce Rowland
To You:
----------------------------
----------------------------
----------------------------
THIRTEEN: You understand and acknowledge that you have been given
a period of 45 days to review and consider this Agreement (as well as
statistical data on the persons eligible for similar benefits) before signing
it and may use as much of this 45-day period as you wish prior to signing. You
are encouraged, at your personal expense, to consult with an attorney before
signing this Agreement. You understand and acknowledge that whether or not
you do so is your decision. You may revoke this Agreement within seven days of
signing it. If you wish to revoke, Pacific Enterprises' Vice President, Human
Resources must receive written notice from you no later than the close of
business on the seventh day after you have signed the Agreement. If revoked,
this Agreement
-6-
shall not be effective and enforceable and you will not receive payments or
benefits under Section 3 of the Severance Agreement.
FOURTEEN: This Agreement constitutes the entire Agreement of the
parties hereto and supersedes any and all other Agreements (except the
Severance Agreement) with respect to the subject matter of this Agreement,
whether written or oral, between you and Company. All modifications and
amendments to this Agreement must be in writing and signed by the parties.
FIFTEEN: Each party agrees, without further consideration, to
sign or cause to be signed, and to deliver to the other party, any other
documents and to take any other action as may be necessary to fulfill the
obligations under this Agreement.
SIXTEEN: If any provision of this Agreement or the application
thereof is held invalid, the invalidity shall not affect other provisions or
applications of the Agreement which can be given effect without the invalid
provisions or application; and to this end the provisions of this Agreement
are declared to be severable.
SEVENTEEN: This Agreement may be executed in counterparts.
I have read the foregoing General Release and I accept and agree to the
provisions it contains and hereby execute it voluntarily and with full
understanding of its consequences. I am aware it includes a release of all
known or unknown claims.
DATED:
-----------------
---------------------------------------
DATED:
-----------------
---------------------------------------
-7-
You acknowledge that you first received this Agreement on [date].
------------------------------
-8-
1996 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
INTRODUCTION
This section includes management's analysis of Pacific Enterprises' (the
Company or Parent) operating results for the years 1994 through 1996, as
well as its capital resources, liquidity and financial position. This
section also focuses on the major factors expected to influence future
operating results and discusses future investment and financing plans.
Management's discussion and analysis should be read in conjunction with the
Consolidated Financial Statements.
Pacific Enterprises is a Los Angeles based utility holding company
whose primary subsidiary is Southern California Gas Company (SoCalGas), the
nation's largest natural gas distribution utility, serving 4.8 million
meters throughout most of southern and part of central California. SoCalGas
delivers natural gas and related services to residential and small
commercial and industrial customers and stores and transports natural gas
for electric generation and wholesale customers. The Company's Energy
Management Services (EMS) business unit is engaged in interstate and
offshore natural gas transmission to serve its utility operations,
alternate energy development, centralized heating and cooling for large
building complexes and energy management services. Through Pacific
Enterprises International (PEI), the Company invests in international
energy utility operations.
During 1996, the Company announced an agreement to combine its
operations with Enova Corporation (Enova), the parent company of San Diego
Gas and Electric Company. This strategic merger of equals will be a
tax-free transaction accounted for as a pooling of interests. The
combination was approved by the shareholders of both Companies on March 11,
1997. Completion of the combination remains subject to approval by
regulatory and governmental agencies including the California Public
Utilities Commission. To pursue opportunities in unregulated energy markets
pending the completion of the combination, the Company and Enova have
formed a joint venture to market energy products. For further discussion
see Note 1 of Notes to Consolidated Financial Statements.
CAPITAL RESOURCES AND LIQUIDITY
The Company's primary sources and uses of cash during the last three years
are summarized in the following condensed statement of cash flows:
SOURCES AND (USES) OF CASH
Year Ended December 31
------------------------------------------
(Dollars in millions) 1996 1995 1994
------------------------------------------------------------------------
Operating Activities $ 608 $ 698 $ 255
Capital Expenditures (204) (240) (249)
Foreign Investments (50)
Financing Activities:
Long-Term Debt (97) (207) 226
Short-Term Debt 29 (44) 11
Sale of
Common Stock 8 6 7
Repurchase of
Common Stock (24)
Redemption of
Preferred Stock (210) (30) (40)
Common and
Preferred
Dividends (123) (121) (116)
------------------------------------------
Total Financing
Activities (417) (396) 88
Other (32) 2 41
------------------------------------------
Increase (Decrease)
in Cash and Cash
Equivalents $ (95) $ 64 $ 135
------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
The decrease in cash provided from operating activities to $608 million in
1996 from $698 million in 1995 is primarily due to lower noncore revenues
and lower amounts received from undercollected regulatory balancing
accounts, partially offset by favorable settlements as described in SoCalGas
operations below.
The increase in cash provided from operating activities of $443
million in 1995 from 1994 is primarily due to a payment of $391 million for
the settlement of gas contract issues made in 1994 and increased earnings of
SoCalGas as described later.
24
CAPITAL EXPENDITURES
Capital expenditures primarily represent rate base investment at SoCalGas.
The table below summarizes capital expenditures by utility plant
classification:
[GRAPH]
Year Ended December 31
------------------------------------------
(Dollars in millions) 1996 1995 1994
------------------------------------------------------------------------
SoCalGas:
Distribution $ 124 $ 126 $ 129
Transmission 24 19 24
Storage 5 19 22
Other 44 67 70
------------------------------------------
Total SoCalGas 197 231 245
Other 7 9 4
------------------------------------------
Total $ 204 $ 240 $ 249
------------------------------------------------------------------------
Capital expenditures for 1996 are $36 million lower than 1995,
primarily due to the completion in early 1996 of a new customer information
system which increased SoCalGas' responsiveness to customer needs and
reduced operating costs, and less capital required for storage due to
completion of repairs from the 1994 Northridge earthquake.
The decrease in expenditures of $9 million in 1995 was due primarily
to a reduction in the investment requirements for connecting new customers.
Capital expenditures are estimated to be $210 million in 1997.
FOREIGN INVESTMENTS
Foreign investments include an acquisition by PEI of a 12.5% interest in two
utility holding companies that control natural gas distribution utilities in
Argentina, and an investment in the Mexicali natural gas distribution
system. The acquisition price of the Argentina investment was $48.5 million,
and funds invested in the Mexicali project totaled $1 million through the
end of 1996.
LONG-TERM DEBT
In 1996, cash was used for a $67 million redemption of the Swiss Franc
Bonds, and repayment of $79 million of debt issued to finance the
Comprehensive Settlement (see Note 4 of Notes to Consolidated Financial
Statements). This was partially offset by cash provided from the issuance of
$75 million in Medium Term Notes.
Cash was used in 1995 primarily for the repayment of short- and
long-term debt, including $65 million of debt related to the Comprehensive
Settlement.
Cash was provided in 1994 from the issuance of long-term debt for
financing the Comprehensive Settlement.
STOCK REDEMPTION
The Company and SoCalGas redeemed $110 million and $100 million,
respectively of variable dividend rate preferred stocks in 1996. The
Company recorded a $2.4 million nonrecurring reduction to consolidated
earnings to reflect the write-off of the original issuance underwriting
discount related to this preferred stock. In 1995 and 1994, $30 million and
$40 million, respectively, of preferred stock of the Company was redeemed.
In 1996, the Board of Directors authorized a common share repurchase
program of up to 4.25 million shares of the Company's common stock,
representing approximately 5% of the then outstanding shares. As of
December 31, 1996, the Company repurchased 816,000 shares under this
program. An additional 74,000 shares were repurchased in January 1997.
The Company has temporarily suspended the repurchase program during
the solicitation of approval by shareholders of the combination with Enova
and expects to resume the program in 1997. Prior to the completion of the
combination, the repurchase program will be terminated.
DIVIDENDS
In 1996, the Company paid dividends of $118 million on common stock and $5
million on preferred stock for a total of $123 million. This compares to
$121 million in 1995 and $116 million in 1994. The increase in 1996 was due
to the increase in the weighted average of common shares outstanding during
the year, and the increase in the quarterly common stock dividend rate in
the second quarter of 1996 partially offset by lower preferred dividends.
The quarterly dividend rate for common stock was increased from $.30
per share to $.32 per share in the second quarter of 1994, to $.34 per
share in the second quarter of 1995, and to $.36 per share in the second
quarter of 1996.
PACIFIC ENTERPRISES 25
CAPITALIZATION
As of the end of 1996, the debt to capitalization ratio had increased to
52% from 50% in 1995. The increase is due to a reduction in equity from the
redemption of the preferred stock and repurchases of common stock,
partially offset by the repayment of debt.
By the close of 1995, the debt to capitalization ratio had decreased
to 50% from 55% in 1994 primarily due to increases in common equity from
1995 income and the repayment of debt.
During 1993, the Company completed the sale of discontinued operations
and issued 8 million shares of common stock. The proceeds from the asset
sales, including tax benefits, together with cash provided by continuing
operations, were used to repay essentially all of the Parent Company's bank
debt. As a result, the debt to capitalization ratio improved to 54% at the
end of 1993 from 67% in 1992.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents were $256 million at December 31, 1996, of which
$234 million is at the Parent. This cash is available for investment in new
energy-related domestic and international projects, repurchase of common
and preferred stock, the retirement of debt and other corporate purposes.
The Company anticipates that cash required in 1997 for capital
expenditures, dividends, debt payments and merger related costs will be
provided by cash generated from operating activities and existing cash
balances.
In addition to cash from ongoing operations, the Parent and SoCalGas
have available multi-year credit agreements. The SoCalGas agreements provide
backing for its commercial paper program. At December 31, 1996, all bank
lines of credit were unused (see Note 8 of Notes to Consolidated Financial
Statements).
RESULTS OF CONSOLIDATED OPERATIONS
The following table is presented to enhance understanding of the reported
results:
[GRAPH]
Year Ended December 31
------------------------------------------
(Dollars in millions) 1996 1995 1994
------------------------------------------------------------------------
Reported earnings
per share $ 2.37 $ 2.12 $ 1.95
Nonrecurring events:
Contract
settlement
charges .05
Litigation
settlement
benefits (.19)
Merger related
expenses .05
Unamortized
discount .03
------------------------------------------
Normalized
earnings per share $ 2.26 $ 2.17 $ 1.95
------------------------------------------------------------------------
1996 COMPARED TO 1995
Net income for 1996 increased to $203 million, or $2.37 per share of common
stock, compared to net income of $185 million, or $2.12 per share in 1995.
Net income for 1996 includes net benefits of $12.1 million from
nonrecurring items. Nonrecurring events in 1996 include favorable
litigation settlements totaling $16.1 million, after-tax, or $.19 per
share. One settlement is from gas producers for $5.6 million, after-tax,
for damages to SoCalGas and customer equipment as a result of impure gas
supplies delivered to SoCalGas and the other reflects the resolution of
environmental insurance claims which benefited earnings by $10.5 million,
after-tax. These were partially offset by merger related expenses of $4
million, after tax. Also having a nonrecurring impact was a $2.4 million
reduction to earnings per share to reflect original issuance underwriting
discounts on redeemed preferred stock.
Net income was also favorably impacted by lower operating and
maintenance expenses at SoCalGas due to continued efforts to reduce costs
of utility service and a reduction in interest expense. Interest expense
was reduced from its 1995 level as a result of the lower long-term debt
26
balance maintained throughout the year and the redemption of $67 million of
Swiss Franc bonds. This was partially offset by higher general and
administrative expenses at PEI and EMS, as well as a reduction in the
authorized return on equity for SoCalGas to 11.6% from 12% and lower noncore
revenues as a result of decreased UEG transportation volumes.
Additionally, 1995 results included a nonrecurring charge of $3.8
million, after-tax, for the resolution of certain power sales contract
issues at EMS.
[GRAPH]
1995 COMPARED TO 1994
Net income for 1995 increased to $185 million, or $2.12 per share, from
$172 million, or $1.95 per share, in 1994. The increase of $13 million
during 1995 is due primarily to the increase in the authorized rate of
return on common equity at SoCalGas from 11% in 1994 to 12% in 1995 and
lower operating expenses, which reflect savings from the Company's
reduction in staffing levels and other expense reductions.
SOCALGAS OPERATIONS
To fully understand the operations and financial results of SoCalGas it is
important to understand the ratemaking procedures that SoCalGas is required
to follow.
RATEMAKING PROCEDURES
SoCalGas is regulated by the California Public Utilities Commission (CPUC).
It is the responsibility of the CPUC to determine that utilities operate in
the best interest of the customer with the opportunity to earn a reasonable
return on investment.
In a general rate case, the CPUC establishes a base margin, which is
the amount of revenue authorized to be collected from customers to recover
authorized operating expenses (other than the cost of gas), depreciation,
interest, taxes and return on rate base. General rate cases are typically
filed every three years. On June 1, 1995, SoCalGas filed a "Performance
Based Regulation" (PBR) application with the CPUC which would replace the
general rate case and certain other regulatory proceedings. If approved,
PBR would be implemented during the last half of 1997. For a further
discussion of PBR, see Factors Influencing Future Performance-Performance
Based Regulation.
The CPUC annually adjusts rates for years between general rate cases
to reflect the changes in rate base and the effects of inflation as
adjusted by a productivity improvement factor. No adjustment for inflation
was made to rates in 1997 pending the CPUC's ruling on SoCalGas' PBR
application. Current rates will remain in effect at SoCalGas until PBR is
implemented. Separate proceedings are held annually to review SoCalGas'
cost of capital, including return on common equity, interest costs and
changes in capital structure.
Biennial cost allocation proceedings (BCAP) adjust rates to reflect
variances in the cost of gas and core customer demand from estimates
adopted in a general rate case. The mechanism substantially eliminates the
effect on core income of variances in core market demand and gas costs
subject to the limitations of the Gas Cost Incentive Mechanism (GCIM) and
the Comprehensive Settlement (see Note 4 of Notes to Consolidated Financial
Statements).
GCIM is a pilot program, which compares SoCalGas' cost of gas with the
average market price of 30-day firm spot supplies delivered to the SoCalGas
service area and permits full recovery of all costs within a tolerance band
above that average. The cost of purchases above the tolerance band or
savings from purchases below the average market price are shared equally
between customers and shareholders.
In the first year of the GCIM (April 1994-March 1995), SoCalGas' cost
of gas was within the tolerance band and all gas costs were passed on to
the customer.
In the second year of the GCIM (April 1995-March 1996), the cost of
gas was below the average market price. A filing has been made with the
CPUC requesting a reward to shareholders which will be recognized in income
when a final CPUC decision is issued.
SoCalGas is currently in discussions with the CPUC to extend GCIM
beyond its third year (see Note 4 of Notes to Consolidated Financial
Statements).
27
MARKETS
SoCalGas markets are comprised of core customers and noncore customers.
Core customers consist of approximately 4.8 million meters (4.6 million
residential and 200,000 small commercial and industrial meters). The
noncore market consists of approximately 1,600 meters which includes nine
utility electric generation (UEG), three wholesale, and the remainder are
large commercial and industrial customers. Most noncore customers procure
their own gas supply (which is delivered through the SoCalGas distribution
system) rather than purchase gas from SoCalGas. Although the revenues from
transportation throughput are less than for gas sales, SoCalGas generally
earns the same margin whether it buys the gas and sells it to the customer
or transports gas already owned by the customer. For 1997, approximately
89% of the total margin authorized is contributed by the core market, with
11% contributed by the noncore market.
Under current utility ratemaking policies, the return that SoCalGas is
authorized to earn is the product of an authorized rate of return on rate
base and the amount of rate base. Rate base consists primarily of net
investment in utility plant. Thus, SoCalGas' earnings are affected by
changes in the authorized rate of return on rate base, the change in the
authorized rate base and by SoCalGas' ability to control expenses and
investment in rate base within the amounts authorized by the CPUC in
setting rates. SoCalGas refunds or collects in the future the amounts by
which certain defined costs vary from the amounts authorized by the CPUC in
the rate case or other regulatory proceedings. Also, variations in core
revenues from estimates adopted by the CPUC in establishing rates are
refunded or collected through a balancing account mechanism. Through
balancing account treatment, SoCalGas is allowed to fully recover amounts
recorded as core deferred costs or core revenue shortfalls currently or in
the future. Under terms of the Comprehensive Settlement, SoCalGas is at
risk for deliveries to the noncore market.
1994-1996 RESULTS
Key financial and operating data for SoCalGas are highlighted in the
following table.
[GRAPH]
Year Ended December 31
------------------------------------------
(Dollars in millions) 1996 1995 1994
-------------------------------------------------------------------------
Operating revenues $ 2,422 $ 2,279 $ 2,587
Cost of gas $ 923 $ 737 $ 992
Operating expenses $ 725 $ 760 $ 827
Income from
operations before
interest and taxes $ 431 $ 451 $ 424
Net income
(after preferred
dividends) $ 193 $ 203 $ 180
Authorized return
on rate base 9.42% 9.67% 9.22%
Authorized return
on common
equity 11.60% 12.00% 11.00%
Weighted average
rate base $ 2,777 $ 2,766 $ 2,862
Growth (decline)
in weighted
average rate base
over prior period .4% (3.4)% 3.4%
-------------------------------------------------------------------------
- - 1996 COMPARED TO 1995 SoCalGas' operating revenues increased $143 million
in 1996 compared to 1995. The increase is primarily due to an increase in
the average unit cost of gas in 1996 compared to 1995. Since this cost is
recoverable in rates (subject to GCIM), it is also recorded as revenues,
and resulted in increased revenues in 1996 (see Note 2 of Notes to
Consolidated Financial Statements for a discussion of related accounting
policies).
The increase in revenue was also generated by demand from refinery
customers who required 21 Bcf more gas in 1996 than 1995. The increase in
revenue was partially offset by a decrease in UEG revenues due to a
reduction in volumes transported for UEG's as a result of an abundance of
less expensive hydro-electricity resulting from high levels of rain and
snowfall last winter.
SoCalGas' cost of gas distributed increased $186 million in 1996
compared to 1995 due primarily to an increase in the average unit cost of
gas. The average commodity cost of gas purchased by SoCalGas, excluding
fixed charges for 1996, was $1.88 per thousand cubic feet, compared to
$1.42 per thousand cubic feet in 1995.
28
[GRAPH]
SoCalGas' operating expenses decreased $35 million in 1996 compared to
1995. The decrease is primarily due to the nonrecurring favorable
settlements from gas producers and environmental insurance claims totaling
$28 million and reflects savings as a result of SoCalGas' continued
improvements in efficiency and management's close control of expenses.
Net income after preferred dividends was $193 million in 1996 compared
to $203 million in 1995. The decline in earnings at SoCalGas was primarily
due to a nonrecurring non-cash charge of $26.6 million resulting from
continuing developments in the CPUC's restructuring of the electric utility
industry. The charge was needed because SoCalGas anticipates throughput to
noncore UEG customers will be below the levels projected in 1993 at the
time of the Comprehensive Settlement (see Note 4 of Notes to Consolidated
Financial Statements). Consequently, SoCalGas believes it will not realize
the remaining revenue enhancements that were applied to offset the costs of
the Comprehensive Settlement. In connection with the 1992
quasi-reorganization, the Company established a reserve for this issue and
therefore this charge had no effect on consolidated net income. The decline
in 1996 earnings was partially offset by the effects of the nonrecurring
favorable settlements and lower operating costs.
- 1995 COMPARED TO 1994 The decrease in operating revenue of $308 million
in 1995 reflects a reduction in the average unit cost of gas and a decrease
in noncore volumes transported. SoCalGas cost of gas distributed decreased
$255 million in 1995. The average commodity cost of gas purchased by
SoCalGas, excluding fixed charges, for 1995 was $1.42 per thousand cubic
feet, compared to $1.68 per thousand cubic feet in 1994.
SoCalGas' operating expenses decreased $67 million in 1995. The
decrease primarily reflects savings from cost reduction efforts in 1995 and
nonrecurring expenses in 1994. Operating costs for 1994 included expenses
resulting from the January 1994 earthquake and expenses related to a
discontinued capital project.
Net income after preferred dividends increased to $203 million in 1995
from $180 million in 1994. The increase was primarily due to the increase
in the authorized return on equity to 12% from 11% in 1994 and lower
operating expenses from cost reduction efforts.
- ACHIEVED AND AUTHORIZED RATE OF RETURN SoCalGas has achieved or exceeded
the rate of return on rate base authorized by the CPUC for 14 consecutive
years. In 1996, SoCalGas achieved a 10.31% return on rate base compared to
a 9.42% authorized return and a 13.59% return on equity compared to a 11.6%
authorized return. The improved returns were primarily due to lower
operating costs as a result of increased operating efficiencies and the
favorable settlements.
In 1995, SoCalGas achieved a 10.84% return on rate base compared to a
9.67% authorized return and a 13.89% return on equity compared to an 12%
authorized return. The improved returns were primarily due to lower
operating costs as a result of reduced staffing levels and other cost
reduction efforts.
In 1997, SoCalGas is authorized to earn a 9.49% return on rate base
and 11.6% on equity. Rate base is expected to remain at approximately the
same level as 1996.
OPERATING RESULTS
The table on the following page summarizes the components of SoCalGas'
throughput and rates charged to customers for the past three years. Rates
include the customer portion of the Comprehensive Settlement (see Note 4 of
Notes to Consolidated Financial Statements). The amount included in rates
for 1996, 1995, and 1994 was $90 million, $84 million, and $119 million,
respectively.
Throughput, the total gas sales and transportation volumes moved
through SoCalGas' system, decreased in 1996 as a result of lower demands,
primarily by UEG customers. This was as a result of an abundance of
inexpensive hydro-electricity resulting from high levels of precipitation
last winter reducing the gas demands of UEG's. The decrease in throughput
in 1995 from 1994 levels was also the result of lower demands, primarily by
UEG customers. As previously described under ratemaking procedures,
SoCalGas is not at risk for variances in volumes delivered to the core
market. Variances in volumes delivered to the noncore market directly
impact the company's results of operations.
29
[GRAPH]
(Dollars in millions, Gas Sales Transportation & Exchange Total
---------------------- ------------------------- ----------------------
volume in billion cubic feet) Throughput Revenue Throughput Revenue Throughput Revenue
------------------------------------------------------------------------------------------------------------
1996:
Residential 233 $ 1,603 3 $ 10 236 $ 1,613
Commercial/Industrial 82 473 297 236 379 709
Utility Electric Generation 139 70 139 70
Wholesale 130 70 130 70
--------------------------------------------------------------------------
Total in Rates 315 $ 2,076 569 $ 386 884 2,462
-----------
Balancing and Other (40)
--------------------------------------------------------------------------
Total Operating Revenues $ 2,422
------------------------------------------------------------------------------------------------------------
1995:
Residential 237 $ 1,547 2 $ 7 239 $ 1,554
Commercial/Industrial 97 546 267 206 364 752
Utility Electric Generation 205 104 205 104
Wholesale 4 7 125 55 129 62
--------------------------------------------------------------------------
Total in Rates 338 $ 2,100 599 $ 372 937 2,472
-----------
Balancing and Other (193)
-------------------------------------------------------------------------
Total Operating Revenues $ 2,279
------------------------------------------------------------------------------------------------------------
1994:
Residential 254 $ 1,704 2 $ 9 256 $ 1,713
Commercial/Industrial 100 592 258 207 358 799
Utility Electric Generation 260 118 260 118
Wholesale 8 21 138 77 146 98
-------------------------------------------------------------------------
Total in Rates 362 $ 2,317 658 $ 411 1,020 2,728
Balancing and Other (141)
-----------
Total Operating Revenues $ 2,587
------------------------------------------------------------------------------------------------------------
FACTORS INFLUENCING FUTURE PERFORMANCE
Performance of the Company in the near future will primarily depend on the
results of SoCalGas. Because of the ratemaking and regulatory process as
well as the changing energy marketplace, there are several factors that
will influence future financial performance. These factors are summarized
below.
- ALLOWED RATE OF RETURN For 1997, SoCalGas is authorized to earn a rate of
return on rate base of 9.49% and a rate of return on common equity of
11.6%, compared to 9.42% and 11.6%, respectively, in 1996. The CPUC also
authorized an increase in the common equity component of SoCalGas capital
structure to 48.0% in 1997 from 47.4% in 1996. The 60 basis point increase
in the equity component could potentially add $2 million to earnings in
1997. Rate base is expected to remain at approximately the same level as in
1996.
- PERFORMANCE BASED REGULATION Under current ratemaking policies, SoCalGas
net income and cash flow will be determined primarily by the allowed rate
of return on common equity, changes to authorized rate base, noncore market
pricing, the variance in gas volumes delivered to noncore customers from
CPUC-adopted forecast deliveries and the ability of management to control
expenses and investment in line with the amounts authorized by the CPUC to
be collected in rates.
SoCalGas has filed a PBR application with the CPUC to replace the
general rate case and certain other traditional regulatory proceedings.
PBR, if approved, would allow SoCalGas to be more responsive to consumer
interests and compete more effectively in contestable markets. Key elements
of this proposal included a permanent reduction in base rates of $62
million. As a result of discussions in late 1996, SoCalGas has agreed with
the staff of the CPUC to a rate reduction of $110 million. Other elements
of PBR include an indexing mechanism that would limit future rate increases
to the inflation rate less a productivity factor and rate refunds to
customers if service
30
quality were to deteriorate. This new approach would maintain cost based
rates but would link financial performance with changes in productivity.
Although PBR in the near term could result in increased earnings
volatility, SoCalGas would have the opportunity to improve financial
performance over the long-term to the extent it is able to reduce expenses,
increase gas deliveries and generate profits from new products and
services.
Under the PBR proposal, SoCalGas would be at risk for certain changes
in interest rates and cost of capital, variances in core volumes not caused
by weather, and achievement of productivity improvements. SoCalGas believes
PBR will permit the continued applicability of Statement of Financial
Accounting Standards No. 71 "Accounting for the Effects of Certain Types of
Regulation" (SFAS 71) to account for SoCalGas' operations. However, the
terms of PBR ultimately authorized by the CPUC may contain elements that
could result in SoCalGas not meeting all the criteria for continued
application of SFAS 71 (see Note 2 of Notes to Consolidated Financial
Statements).
- MANAGEMENT CONTROL OF EXPENSES AND INVESTMENT Over the past 14 years,
management has been able to control operating expenses and investment
within the amounts authorized to be collected in rates and intends to
continue to do so.
- ELECTRIC INDUSTRY RESTRUCTURING Demand for natural gas by UEG customers
is sensitive to the price and availability of electric power generated in
areas outside SoCalGas' service territory and available for purchase by
customers.
On December 20, 1995, the CPUC issued a final decision to restructure
California electric utility regulation effective January 1, 1998. On
September 23, 1996, California Assembly Bill 1890, a comprehensive bill
regarding the electric restructuring, was signed into law. Implementation
of portions of the plan are expected to need federal administrative
approval. Future volumes of natural gas SoCalGas transports for electric
utilities may be adversely affected by increased use of electricity
generated by producers outside SoCalGas' service territory. The electric
industry restructuring may also result in a reduction of electric rates to
core customers, but it is unlikely to overcome the entire cost advantage of
natural gas for existing uses.
The Company has adopted Statement of Financial Accounting Standards,
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" (SFAS 121) and evaluated its impact,
including the potential effect of the electric industry restructuring.
Although the Company believes that the volume of gas transported by
SoCalGas may be adversely impacted by the electric industry restructuring,
it is not anticipated that it would result in an impairment of assets as
defined in SFAS 121 because the expected undiscounted future cash flows
from SoCalGas' investment in its gas transportation infrastructure is
greater than its carrying amount.
- NONCORE BYPASS SoCalGas' throughput to enhanced oil recovery (EOR)
customers in the Kern County area decreased significantly since 1992
because of the bypass of SoCalGas' system by competing interstate
pipelines. The decrease in revenues from EOR customers is subject to full
balancing account treatment, except for a 5% incentive to SoCalGas, and
therefore, does not have a material impact on SoCalGas' earnings.
Bypass of other markets may also occur, and SoCalGas is fully at risk
for reduction in non-EOR, noncore volumes due to bypass. However,
significant additional bypass would require construction of additional
facilities by competing pipelines. SoCalGas is continuing to reduce its
costs to maintain competitive rates to transportation customers.
- NONCORE THROUGHPUT SoCalGas' earnings from noncore markets may be
adversely impacted if gas throughput to its noncore customers varies from
estimates adopted by the CPUC in establishing rates. There is a continuing
risk that an unfavorable variance in noncore volumes can result from
external factors such as weather, electric restructuring, the increased use
of hydro-electric power, competing pipeline bypass of SoCalGas' system and
a downturn in general economic conditions. In addition, many noncore
customers are especially sensitive to the price relationship between
natural gas and alternate fuels, as they are capable of readily switching
from one fuel to another, subject to air quality regulations. SoCalGas is
at risk for the lost revenue.
Through July 31, 1999, any favorable earnings effect of higher
revenues resulting from higher throughput to noncore customers has been
eliminated as a result of the Comprehensive Settlement (see Note 4 of Notes
to Consolidated Financial Statements).
31
- EXCESS INTERSTATE PIPELINE CAPACITY SoCalGas has exercised its step-down
option on both the El Paso and Transwestern Interstate Pipeline Systems by
300 million cubic feet per day and 450 million cubic feet per day,
respectively, thereby reducing its firm interstate capacity obligation to
1.45 Bcf per day. SoCalGas' requirements to meet the demand of the core
market is approximately 1.05 Bcf per day, or 400 MMcf per day below its
capacity obligation. SoCalGas has entered into a FERC approved settlement
with Transwestern, and an El Paso settlement is currently pending before
the FERC. Both settlements define the amount of the unsubscribed capacity
costs that is to be recovered from SoCalGas and other remaining firm
service customers, thus reducing SoCalGas exposure to higher annual
reservation charges. Under existing regulation in California, unsubscribed
capacity costs are included in customer rates.
The Company believes that these settlements will not have a
significant impact on liquidity or on results of operations as a result of
the requirement to subsidize unsubscribed pipeline costs. The settlements
result in a reduction in the costs that SoCalGas could possibly have had to
pay in the future as a result of unsubscribed pipeline capacity. The
inclusion of the unsubscribed pipeline cost in rates may impact SoCalGas'
ability to compete in highly contested markets. However, SoCalGas does not
believe it will have a significant impact on volumes transported.
- ENVIRONMENTAL MATTERS SoCalGas' operations and those of its customers are
affected by a growing number of environmental laws and regulations. These
laws and regulations affect current operations as well as future expansion.
Increasingly complex administrative and reporting requirements of
environmental agencies applicable to commercial and industrial customers
utilizing natural gas are not generally required by those using
electricity. However, anticipated advancement in natural gas technologies
should enable gas equipment to remain competitive with alternate energy
sources. Environmental laws also require clean up of facilities no longer
in use. Because of current and expected rate recovery, SoCalGas believes
that compliance with these laws will not have a significant impact on the
Company's consolidated results of operations or financial position (see
Note 6 of Notes to Consolidated Financial Statements).
- CALIFORNIA ECONOMY Growth in SoCalGas markets is largely dependent on the
health and expansion of the California economy. SoCalGas added
approximately 44,000 new meters in 1996. This represents a growth rate of
approximately 1%, which is expected to continue for 1997.
ENERGY MANAGEMENT SERVICES
EMS, consists of a number of operations including an interstate pipeline
subsidiary, a subsidiary which operates and develops alternate energy
facilities as well as centralized heating and cooling plants, an
unregulated subsidiary which markets natural gas, and a subsidiary which
provides energy products and services.
Key financial data for the EMS business unit are highlighted in the
following table.
Year Ended December 31
------------------------------------------
(Dollars in millions) 1996 1995 1994
------------------------------------------------------------------------
Operating revenue $ 291 $ 212 $ 463
Operating expenses $ 292 $ 213 $ 452
Income (loss) from
operations before
interest and taxes $ (1) $ (1) $ 11
Net income $ 6 $ 8 $ 10
------------------------------------------------------------------------
Pacific Energy (PEn) develops and operates alternate energy facilities
including geothermal, hydro-power, biogas, and woodburning plants. It also
operates centralized heating and cooling plants for large building
complexes.
Ensource, which was established in 1996, buys and arranges
transportation, storage and delivery of natural gas for large-volume
customers.
Pacific Enterprises Energy Services (PEES), which also was established
in 1996, provides energy related products and services to both commercial
and residential customers. The New Product Development (NPD) group was
consolidated into EMS in 1996 to support design and launch of new products.
Five new residential consumer products were launched in 1996 as well as
four commercial customer services.
Pacific Interstate Company (PIC), which is regulated by the FERC,
purchases gas from producers in Canada and from federal waters offshore
California and transports it for sale to SoCalGas and others. Of gas
purchased by PIC in 1996, 96% was sold to SoCalGas. These deliveries
accounted for approximately 30% of the total volume of gas purchased by
SoCalGas and approximately 11% of SoCalGas' throughput.
32
Operating revenues increased to $291 million in 1996 from $212 million
in 1995 due primarily from revenues of Ensource, the Company's subsidiary
which markets natural gas. Ensource began operations in 1996 and had
revenues of $48 million. The net margin after operating expenses from gas
marketing operations is not significant. Revenues also increased due to the
higher commodity cost for gas delivered by PIC to SoCalGas. Partially
offsetting the increase were lower revenues from power sales as some
contracts converted from fixed rates to market-based rates. Operating
revenues declined in 1995 by $251 million primarily due to Comprehensive
Settlement payments received by PIC in 1994 of $210 million, lower
commodity cost for gas delivered to SoCalGas and decreased revenues from
alternate energy facilities due to lower amounts paid for electric
generation according to the terms of the contracts.
Operating expenses increased to $292 million in 1996 from $213 million
in 1995 due to operating expenses of Ensource, higher gas commodity costs
at PIC and start up costs incurred by PEES. In 1995 operating expenses
decreased by $239 million from the 1994 level due primarily from the costs
incurred by PIC in 1994 for the Comprehensive Settlement partially offset
by a $7 million nonrecurring charge for certain power sales contract
restructuring issues.
Operating income declined by $12 million in 1995 primarily due to
lower revenue from power sales contracts and the $7 million nonrecurring
charge.
The primary difference between net income and income (loss) from
operations before interest and taxes consists of intercompany interest
income which is eliminated in the consolidated financial statements of the
Company.
EMS owns indirect interests in several small electric generation
facilities which are "qualifying facilities" under the Public Utility
Regulatory Policies Act.
Qualifying facilities are entitled to a mandatory purchase obligation
and exemption from regulation in connection with their sale of electricity.
Qualifying facility status is not available to any facilities that are more
than 50% owned by an electric utility or an electric utility holding
company.
Upon the completion of the proposed business combination of Pacific
Enterprises and Enova (see Note 1 of Notes to Consolidated Financial
Statements), the new holding company by reason of its indirect ownership of
SDG&E will become an electric utility holding company. Consequently, in
order to avoid the loss of qualifying facility status the Company must
cause its ownership in these facilities to be not more than 50% prior to
the completion of the business combination. The Company is considering
several alternatives to accomplish this result including the sale of all or
part of these facilities. Income before interest and taxes earned from
these assets was $1 million for the year ended December 31, 1996. The
Company does not expect that the sale of these facilities will have a
material adverse effect on its consolidated results of operations or
financial position.
PACIFIC ENTERPRISES INTERNATIONAL
PEI was established in late 1994 to participate in the international
natural gas infrastructure market and began operations in March 1995.
Net loss was $4.6 million in 1996 compared to $2.1 million in 1995.
The increase in net loss was primarily the result of higher general and
administrative expenses from a full year of operations in 1996 compared to
a partial year in 1995. The increase in general and administrative expenses
was partially offset by a $2.1 million, pre-tax, cash dividend received
from its investment in two Argentine holding companies. A second dividend
of $2.5 million, pre-tax, was received in January 1997.
On April 10, 1996, PEI completed an acquisition of a 12.5% interest in
two utility holding companies that control natural gas distribution
utilities in Argentina. The acquisition price was $48.5 million. These
utilities in central and southern Argentina deliver about 625 million cubic
feet of gas per day to 1.1 million customers. PEI has a role in actively
managing the utility operations by providing expertise in areas such as
underground storage, marketing gas usage, and technology applications.
On August 12, 1996, PEI, and two partners were awarded Mexico's first
privatization license allowing the consortium to build and operate a
natural gas distribution system in Mexicali, Baja California. The franchise
was awarded to
33
Distribuidora de Gas Natural de Mexicali S. de R.L. de C.V. (DGN), a
Mexican company formed by PEI, Enova International and Proxima Gas. DGN of
which PEI has a 30% interest, will invest approximately $20 million to $25
million during an initial five-year period to provide service to more than
25,000 commercial, industrial and residential users. PEI invested
approximately $1 million in the Mexicali project during 1996.
Other international projects are currently under evaluation.
OTHER INCOME, INTEREST EXPENSE AND INCOME TAXES
OTHER INCOME
Other income, which primarily consists of interest income from short-term
investments and interest income on regulatory accounts receivable balances,
decreased in 1996 to $25 million from $34 million in 1995.
The decrease in 1996 is primarily due to a decrease in investment
income from lower investment balances caused by unusually high short-term
investments in 1995 as a result of overcollected gas costs that were
refunded to customers in the fourth quarter of 1995 and cash used to redeem
$210 million of preferred stock in 1996. The decrease was also due to cash
outflows for the $48.5 million investment by PEI.
Other income decreased slightly to $34 million in 1995 from $38
million in 1994.
INTEREST EXPENSE
Interest expense for 1996 decreased to $97 million from $108 million in
1995. Interest expense was reduced from its 1995 level as a result of the
lower long-term debt balance maintained throughout the year and the
redemption of $67 million of Swiss Franc bonds.
Interest expense for 1995 decreased to $108 million from $128 million
in 1994. Interest expense was reduced in 1995 as a result of the repayment
of nonutility debt and refinancing of SoCalGas' debt at lower interest
rates. The Company had two interest rate swap agreements which effectively
set $200 million of variable rate debt to fixed rates. The swap agreements
expired in September 1995 (see Note 9 of Notes to Consolidated Financial
Statements).
INCOME TAXES
Income taxes for 1996 increased to $151 million from $129 million in 1995.
The increase of $22 million is primarily due to an increase in earnings
before taxes to $354 million in 1996 from $314 million in 1995 (see Note 5
of Notes to Consolidated Financial Statements).
Income taxes for 1995 decreased to $129 million from $139 million in
1994. The decrease of $10 million in 1995 was primarily due to capitalized
information systems costs which are deductible for tax purposes.
INFORMATION REGARDING FORWARD LOOKING STATEMENTS
This Annual Report contains forward-looking statements with respect to
matters inherently involving numerous risks and uncertainties. These
statements are identified by the words "estimates", "expects",
"anticipates", "plans", "believes", and similar expressions.
The analysis employed to develop these statements are necessarily
based upon various assumptions involving judgments with respect to the
future including, among other factors, national, regional, and local
economic, competitive and regulatory conditions, legislative developments,
technological developments, inflation rates, weather conditions, financial
market conditions, future business decisions, 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 upon which the forward-looking statements are based, are
reasonable for purposes of making these statements, there can be no
assurance that these assumptions will approximate actual experience, or
that the expectations set forth in the forward-looking statements derived
from these assumptions will be realized.
34
CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31
----------------------------------------
(Dollars in millions, except per share amounts) 1996 1995 1994
-----------------------------------------------------------------------------------------------
REVENUES AND OTHER INCOME
Operating Revenues $ 2,563 $ 2,343 $ 2,664
Other 25 34 38
----------------------------------------
Total 2,588 2,377 2,702
----------------------------------------
EXPENSES
Cost of Gas Distributed 866 682 924
Operating Expenses 910 920 977
Depreciation and Amortization 255 243 239
Franchise Payments and Other Taxes 98 98 113
Preferred Dividends of a Subsidiary 8 12 10
----------------------------------------
Total 2,137 1,955 2,263
----------------------------------------
Income from Operations Before
Interest and Income Taxes 451 422 439
Interest 97 108 128
----------------------------------------
Income from Operations Before Income Taxes 354 314 311
Income Taxes 151 129 139
----------------------------------------
Net Income 203 185 172
Dividends on Preferred Stock 5 10 12
Preferred Stock Original Issue Discount 2
----------------------------------------
Net Income Applicable to Common Stock $ 196 $ 175 $ 160
----------------------------------------
----------------------------------------
Net Income Per Share of Common Stock $ 2.37 $ 2.12 $ 1.95
----------------------------------------
----------------------------------------
Common Dividends Declared Per Share $ 1.42 $ 1.34 $ 1.26
----------------------------------------
----------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK
OUTSTANDING (IN THOUSANDS) 82,626 82,265 81,939
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
35
CONSOLIDATED BALANCE SHEET
December 31
-------------------------
(Dollars in millions) 1996 1995
--------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 256 $ 351
Accounts receivable--trade
(less allowance for doubtful receivables
of $19 in 1996 and $16 in 1995) 401 356
Accounts and notes receivable--other 80 67
Income taxes receivable 58 18
Deferred income taxes 9 17
Gas in storage 28 55
Other inventories 22 22
Regulatory accounts receivable--net 285 246
Prepaid expenses 22 38
-------------------------
Total current assets 1,161 1,170
-------------------------
Investments and Other Assets:
Other investments 115 53
Other receivables 16 18
Regulatory assets 552 645
Other assets 105 91
-------------------------
Total investments and other assets 788 807
-------------------------
Property, Plant and Equipment 6,080 5,909
Less accumulated depreciation and amortization 2,843 2,627
-------------------------
Total property, plant and equipment--net 3,237 3,282
-------------------------
Total assets $ 5,186 $ 5,259
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
36
CONSOLIDATED BALANCE SHEET
December 31
---------------------------
(Dollars in millions) 1996 1995
----------------------------------------------------------------------------------
LIABILITIES
Current Liabilities:
Short-term debt $ 262 $ 234
Accounts payable--trade 241 177
Accounts payable--other 336 299
Other taxes payable 29 47
Long-term debt due within one year 149 100
Accrued interest 41 44
Other 80 64
---------------------------
Total current liabilities 1,138 965
---------------------------
Long-Term Debt:
Long-term debt 1,095 1,241
Debt of Employee Stock Ownership Plan 130 130
---------------------------
Total long-term debt 1,225 1,371
---------------------------
Deferred Credits and Other Liabilities:
Long-term liabilities 166 232
Customer advances for construction 42 47
Postretirement benefits other than pensions 224 235
Deferred income taxes 321 246
Deferred investment tax credits 64 67
Other deferred credits 471 418
Commitments and Contingent Liabilities
---------------------------
Total deferred credits and other liabilities 1,288 1,245
---------------------------
Preferred Stocks of a Subsidiary 95 195
---------------------------
SHAREHOLDERS' EQUITY
Capital Stock:
Remarketed Preferred, Series A 108
Preferred 80 80
Common 1,095 1,111
---------------------------
Total capital stock 1,175 1,299
Retained Earnings, after elimination of
accumulated deficit of $452 against
common stock at December 31, 1992 as part
of the quasi-reorganization 314 236
Less deferred compensation relating to
Employee Stock Ownership Plan (49) (52)
---------------------------
Total shareholders' equity 1,440 1,483
---------------------------
Total liabilities and shareholders' equity $ 5,186 $ 5,259
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
37
STATEMENT OF CONSOLIDATED CASH FLOWS
Year Ended December 31
------------------------------------------
(Dollars in millions) 1996 1995 1994
-------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 203 $ 185 $ 172
Adjustments to Reconcile Net Income to
Net Cash Provided by (Used in)
Operating Activities:
Depreciation and amortization 255 243 239
Deferred income taxes 33 71 (37)
Other--net 13 (3) (31)
Net change in other working
capital components 104 202 (153)
Changes in operating assets and liabilities
of discontinued operations 65
------------------------------------------
Net cash provided by operating activities 608 698 255
------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for Property, Plant and Equipment (204) (240) (249)
Increase in Foreign Investments (50)
Increase in Other Investments (12) (2)
Proceeds from Disposition of Properties 2 1
(Increase) Decrease in Other Receivables,
Regulatory Assets and Other Assets (20) 2 40
------------------------------------------
Net cash used in investing activities (286) (238) (208)
------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of Common Stock 8 6 7
Repurchase of Common Stock (24)
Redemption of Preferred Stock (110) (30) (40)
Redemption of Preferred Stock of a Subsidiary (100)
Increase in Long-Term Debt 75 246
Decrease in Long-Term Debt (172) (207) (20)
Increase (Decrease) in Short-Term Debt 29 (44) 11
Common and Preferred Dividends (123) (121) (116)
------------------------------------------
Net cash provided by (used in)
financing activities (417) (396) 88
------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents (95) 64 135
Cash and Cash Equivalents, January 1 351 287 152
------------------------------------------
Cash and Cash Equivalents, December 31 $ 256 $ 351 $ 287
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
38
STATEMENT OF CONSOLIDATED CASH FLOWS
Year Ended December 31
-----------------------------------------
(Dollars in millions) 1996 1995 1994
------------------------------------------------------------------------------------------------
CHANGES IN OTHER WORKING CAPITAL COMPONENTS
(Excluding cash and cash equivalents, short-term
debt and long-term debt due within one year)
Current Assets:
Receivables $ (58) $ 114 $ (18)
Income taxes receivable 12 (30) 32
Inventories 27 22 (13)
Regulatory accounts receivable-net 46 198 237
Deferred income taxes 11
Other 16 2 (10)
-----------------------------------------
Total 54 306 228
-----------------------------------------
Current Liabilities:
Accounts payable 53 7 (454)
Deferred income taxes (42) 46
Other taxes payable (18) (6) 1
Other 15 (63) 26
-----------------------------------------
Total 50 (104) (381)
-----------------------------------------
Net change in other working
capital components $ 104 $ 202 $ (153)
-----------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Paid During the Year for:
Interest (net of amount capitalized) $ 100 $ 101 $ 130
Income taxes $ 92 $ 129 $ 98
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
39
STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
Deferred
Preferred Stock Common Stock Compensation
----------------- -------------------- Relating to Total
Years Ended December 31, 1996, 1995, and 1994 Number of No par Number of No par Retained Employee Stock Shareholders'
(Dollars in millions, except share amounts) shares value shares value Earnings Ownership Plan Equity
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1993 1,101,853 $258 84,194,215 $1,048 $116 $(138) $1,284
Net Income 172 172
Cash Dividends Declared:
Preferred stock (12) (12)
Common stock (104) (104)
Common Stock Sold 337,577 7 7
Quasi-Reorganization
Adjustment 37 77 114
Redemption of
Preferred Stock (400) (40) (40)
Adoption of SOP 93-6 (2,575,690)
Common Stock Released from ESOP 155,161 7 7
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1994 1,101,453 218 82,111,263 1,092 172 (54) 1,428
Net Income 185 185
Cash Dividends Declared:
Preferred stock (10) (10)
Common stock (111) (111)
Common Stock Sold 232,310 6 6
Quasi-Reorganization
Adjustment 13 13
Redemption of Preferred Stock (300,100) (30) (30)
Common Stock Released from ESOP 103,098 2 2
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1995 801,353 188 82,446,671 1,111 236 (52) 1,483
Net Income 203 203
Cash Dividends Declared:
Preferred stock (5) (5)
Common stock (118) (118)
Common Stock Sold 292,108 8 8
Common Stock Repurchased (816,000) (24) (24)
Redemption of Preferred Stock (1,100) (108) (2) (110)
Common Stock Released from ESOP 90,690 3 3
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1996 800,253 $ 80 82,013,469 $1,095 $314 $(49) $1,440
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
THE NUMBER OF SHARES OF COMMON STOCK AUTHORIZED AT DECEMBER 31, 1996 AND
1995 IS 600,000,000. THE NUMBER OF SHARES OF PREFERRED STOCK AND CLASS A
PREFERRED STOCK AUTHORIZED AND OUTSTANDING AT DECEMBER 31, 1996 AND 1995 IS
SET FORTH IN NOTE 12 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. MERGER AGREEMENT WITH ENOVA CORPORATION
On October 14, 1996, Pacific Enterprises (the Company) and Enova
Corporation (Enova), the parent company of San Diego Gas and Electric
Company (SDG&E), announced an agreement, which both Boards of Directors
unanimously approved, for the combination of the two companies, tax-free,
in a strategic merger of equals to be accounted for as a pooling of
interests. The combination was approved by the shareholders of both
companies on March 11, 1997. Completion of the combination remains subject
to approval by regulatory and governmental agencies.
As a result of the combination, the Company and Enova will become
subsidiaries of a new holding company and their common shareholders will
become common shareholders of the new holding company. Pacific Enterprises'
common shareholders will receive 1.5038 shares of the new holding company's
common stock for each of their shares of the Company's common stock, and
Enova common shareholders will receive one share of the new holding
company's common stock for each of their shares of Enova common stock.
Preferred stock of Pacific Enterprises, Southern California Gas Company
(SoCalGas), and SDG&E will remain outstanding.
The new holding company will be incorporated in California and will be
exempt from the Public Utility Holding Company Act as an intrastate holding
company.
The merger is subject to approval by certain regulatory and
governmental agencies including the California Public Utilities Commission
(CPUC), the Securities and Exchange Commission, and the Department of
Justice. In addition, approval or a disclaimer of jurisdiction by the
Federal Energy Regulatory Commission is required. Required approvals of the
merger are expected to occur in late 1997. In the interim, the Company and
Enova have formed a joint venture to provide integrated energy and energy
related products and services.
The Company owns indirect interests in several small electric
generation facilities which are "qualifying facilities" under the Public
Utility Regulatory Policies Act. Qualifying facility status is not
available to any facilities that are more than 50% owned by an electric
utility or an electric utility holding company.
Upon the completion of the proposed business combination, the new
holding company will become an electric utility holding company.
Consequently, in order to avoid the loss of qualifying facility status the
Company must cause its ownership in these facilities to be not more than
50% prior to the completion of the business combination. The Company is
considering several alternatives to accomplish this result including the
sale of all or part of these facilities and the Company believes a sale or
other disposition will not have a material adverse effect on the Company's
consolidated results of operations or financial position.
In connection with the merger, $7 million of merger costs and expenses
($4 million, after-tax, or $.05 per share) were incurred and have been
charged to expense in the fourth quarter of 1996. These costs consisted of
legal, accounting, and investment banking fees.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of all
subsidiaries of Pacific Enterprises. Investments in 50%-or-less owned joint
ventures and partnerships are accounted for by the equity method or cost
method, as appropriate.
RECLASSIFICATIONS
Certain changes in account classification have been made in the prior
years' consolidated financial statements to conform to the 1996 financial
statement presentation.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
REGULATION
In conformity with generally accepted accounting principles, SoCalGas'
accounting policies reflect the financial effects of rate regulation
authorized by the CPUC, and interstate natural gas transmission
subsidiaries follow accounting policies authorized by the Federal Energy
Regulatory Commission.
The regulated subsidiaries apply the provisions of Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects of
Certain Types of Regulation" (SFAS 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.
The Company records Regulatory Assets which represent assets which are
being recovered through customer rates or are probable of being recovered
through customer rates. As of December 31, 1996, the Company had $552
million of regulatory assets which included the following: costs of
reacquiring debt--$47 million; postretirement benefit costs (see Note
13)--$206 million; Comprehensive Settlement costs (see Note 4)--$101
million; deferred income taxes--$93 million (see Note 5); and other costs--
$105 million.
Maintenance of the regulatory accounts and regulatory accounts
receivable represent the only difference in the application of generally
accepted accounting principles for the utility versus non-regulated
entities.
REGULATORY ACCOUNTS RECEIVABLE--NET
Authorized regulatory balancing accounts are maintained to accumulate
undercollections and overcollections from the revenue and cost estimates
adopted by the CPUC in setting rates. SoCalGas makes periodic filings with
the CPUC to adjust future gas rates to account for such variances.
INVENTORIES
Gas in storage inventory is stated at last-in, first-out (LIFO) cost. As a
result of a regulatory accounting procedure, the pricing of gas in storage
does not have any effect on net income. If the first-in, first-out (FIFO)
method of accounting for gas in storage inventory had been used by
SoCalGas, inventory would have been higher than reported at December 31,
1996 and 1995 by $43 million and $21 million, respectively. Other
inventories are generally stated at the lower of cost, determined on an
average cost basis, or market.
PROPERTY, PLANT AND EQUIPMENT
The costs of additions, renewals and improvements to utility plant are
charged to the appropriate plant accounts. These costs include labor,
material, other direct costs, indirect charges, and an allowance for funds
used during construction. The cost of utility plant retired or otherwise
disposed of, plus removal costs and less salvage, is charged to accumulated
depreciation. Depreciation is recorded on the straight-line remaining-life
basis. The depreciation methods are consistent with those used by
non-regulated entities.
ALLOWANCE FOR FUNDS USED DURING
CONSTRUCTION (AFUDC)
AFUDC represents the cost of funds used to finance the construction of
utility plant and is added to its cost. Interest expense of $6 million in
1996, $9 million in 1995, and $4 million in 1994 was capitalized.
42
OTHER
Cash equivalents include short-term investments purchased with maturities
of less than 90 days.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
3. DISCONTINUED OPERATIONS AND QUASI-REORGANIZATION
During 1993, the Company completed a strategic plan to refocus on its
natural gas utility and related businesses. The strategy included the
divestiture of its retailing operations and substantially all of its oil
and gas exploration and production business. In connection with the
divestitures, the Company effected a quasi-reorganization for financial
reporting purposes, effective December 31, 1992. Fair value adjustments
charged to common stock totaled $190 million. Additionally, the accumulated
deficit in retained earnings of $452 million at December 31, 1992 was
eliminated by a reduction in the common stock account.
In connection with the sale of its retailing operations, the Company
assumed the retailing group's Employee Stock Ownership Plan (ESOP) and
related indebtedness (see Notes 9 and 13). In addition, the retailing
group's buyer agreed to reimburse the Company for a portion of the ESOP
quarterly debt service. In April 1994, the Company received a $65 million
payment from the buyer. This payment primarily reflected the settlement of
the buyer's remaining debt service obligation. It also canceled a warrant
granted to the Company in connection with the sale of retailing operations
to purchase approximately 10% of the buyer's common stock. Since the sale
of the retailing operations was recorded prior to the quasi-reorganization,
the settlement and resolution of other contingencies related to the ESOP
resulted in a $114 million increase to shareholders' equity, of which $37
million was to common stock.
The receipt of $65 million is reflected in changes in operating assets
and liabilities from discontinued operations in the consolidated statement
of cash flows.
Certain of the liabilities established in connection with discontinued
operations and the quasi-reorganization were favorably resolved in 1995,
including the sale of ownership in the Company's headquarters building and
settlement of certain lawsuits remaining from the oil and gas operations.
Excess liabilities of $13 million resulting from the favorable resolution
of these issues were added to shareholders' equity. Other liabilities will
be resolved in future years. As of December 31, 1996, the provisions for
these matters are adequate.
4. REGULATORY MATTERS
RESTRUCTURING OF GAS SUPPLY CONTRACTS
In 1993, SoCalGas and the Company's gas supply subsidiaries restructured
long-term gas supply contracts with suppliers of California offshore and
Canadian gas. In the past, SoCalGas' cost of these supplies had been
substantially in excess of its average delivered cost of gas for all gas
supplies.
The restructured contracts substantially reduced the ongoing delivered
costs of these gas supplies and provided lump sum payments totaling $391
million to the suppliers. The expiration date for the Canadian gas supply
contract was shortened from 2012 to 2003.
COMPREHENSIVE SETTLEMENT OF REGULATORY ISSUES
On July 20, 1994, the CPUC approved a comprehensive settlement
(Comprehensive Settlement) of a number of pending regulatory issues
including rate recovery of a significant portion of the
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
restructuring costs associated with long-term gas supply contracts
discussed above. The Comprehensive Settlement permits SoCalGas to recover
in utility rates approximately 80% of the contract restructuring costs of
$391 million and accelerated amortization of related pipeline assets of
approximately $140 million, together with interest, over a period of
approximately five years. In addition to the gas supply issues, the
Comprehensive Settlement addresses certain of the following
regulatory issues:
- NONCORE CUSTOMER RATES The Comprehensive Settlement changed the
procedures for determining noncore rates to be charged by SoCalGas to its
customers for the five-year period commencing August 1, 1994. Rates charged
to the customers are established based upon SoCalGas' recorded throughput
to these customers for 1991. SoCalGas will bear the full risk of any
declines in noncore deliveries from 1991 levels. Any revenue enhancement
from deliveries in excess of 1991 levels will be limited by a crediting
account mechanism that will require a credit to customers of 87.5% of
revenues in excess of certain limits. These annual limits above which the
credit is applicable increase from $11 million to $19 million over the
five-year period from August 1, 1994 through July 31, 1999. The Company's
ability to report as earnings the results from revenues in excess of
SoCalGas' authorized levels from noncore customers due to volume increases
has been eliminated for the five years beginning August 1, 1994 as a
consequence of the Comprehensive Settlement.
- REASONABLENESS REVIEWS The Comprehensive Settlement includes settlement
of all pending reasonableness reviews with respect to SoCalGas' gas
purchases from April, 1989 through March, 1992, as well as certain other
future reasonableness review issues.
- GAS COST INCENTIVE MECHANISM In 1994, the CPUC approved a new process for
evaluating SoCalGas' gas purchases, substantially replacing the previous
process of reasonableness reviews. The Gas Cost Incentive Mechanism (GCIM)
is a three-year pilot program which began April 1, 1994. The GCIM
essentially compares SoCalGas' cost of gas with a benchmark level, which is
the average price of 30-day firm spot supplies delivered to the SoCalGas
market area.
SoCalGas can recover costs of gas purchased in excess of the benchmark
to the extent they fall within a tolerance band, which extends to 4% above
the benchmark. If SoCalGas' cost of gas exceeds the tolerance level, then
the excess cost will be shared equally between customers and shareholders.
All savings from gas purchased below the benchmark are shared equally
between customers and shareholders.
SoCalGas is currently in discussion with the CPUC to determine the
amount of gas purchases for the second year of the program which were below
the benchmark and to extend GCIM beyond its third year.
- ATTRITION ALLOWANCES The Comprehensive Settlement authorized SoCalGas an
annual allowance for increases in operating and maintenance expenses for
1996 to the extent that the projected annual inflation rate exceeded 3%. In
1995 attrition was calculated on the inflation rate in excess of 2%. The
rate base attrition was based upon a three-year rolling average of recorded
net utility plant additions. This was a departure from past regulatory
practice of allowing recovery in rates of the full effect of inflation on
operating and maintenance expenses. SoCalGas intends to continue to attempt
to control operating expenses and investment to amounts authorized in rates
to
44
offset the effect of this regulatory change. The most recent decision
issued by the CPUC in December 1995, authorized SoCalGas to collect $12
million in rates for the 1996 attrition allowance. Under an agreement
reached as part of the Performance Based Regulation (PBR) application, no
attrition adjustment was authorized for 1997. The attrition allowance
mechanism will be superceded by PBR.
The Company recorded the impact of the Comprehensive Settlement in
1993 and, upon giving effect to liabilities previously recognized at the
Company and SoCalGas, the costs of the Comprehensive Settlement, including
the restructuring of gas supply contracts, did not result in any additional
charge to the Company's consolidated earnings.
Regulatory Accounts Receivable and Regulatory Assets include a total
of approximately $191 million and $259 million at December 31, 1996 and
1995, respectively, for the recovery of costs as provided in the
Comprehensive Settlement. The CPUC authorized the borrowing of $425 million
primarily to provide for funds needed under the Comprehensive Settlement.
As of December 31, 1996, SoCalGas has $186 million in commercial paper
remaining outstanding related to the Comprehensive Settlement (see Note 8).
PERFORMANCE BASED REGULATION
SoCalGas has filed a PBR application with the CPUC which would maintain
cost based rates and link financial performance with productivity. The
company believes PBR will permit the continued applicability of SFAS 71 to
account for SoCalGas' operations. However, the terms of PBR ultimately
authorized by the CPUC may contain elements that could result in SoCalGas
not meeting all the criteria for continued application of SFAS 71 (see Note
2).
5. INCOME TAXES
A reconciliation of the difference between computed statutory federal
income tax expense and actual income tax expense for operations is as
follows:
Year Ended December 31
------------------------------------------
(Dollars in millions) 1996 1995 1994
------------------------------------------------------------------------
Computed statutory
federal income tax
expense $ 124 $ 110 $ 109
Increases (reductions)
resulting from:
Depreciation and
other items not
deferred
--SoCalGas 23 20 17
Capitalized expenses
not deferred
--SoCalGas (11) (10) (6)
State income taxes
--net of federal
income tax benefit 20 20 17
Investment tax credits (3) (3) (3)
Other--net (2) (8) 5
----------------------------------------
Income tax expense
from operations $ 151 $ 129 $ 139
------------------------------------------------------------------------
------------------------------------------------------------------------
The components of income tax expense for operations are as follows:
Year Ended December 31
----------------------------------------
(Dollars in millions) 1996 1995 1994
------------------------------------------------------------------------
Federal
Current $ 68 $ 70 $ 79
Deferred 51 28 34
----------------------------------------
119 98 113
----------------------------------------
State
Current 25 32 26
Deferred 7 (1)
----------------------------------------
32 31 26
----------------------------------------
Total
Current 93 102 105
Deferred 58 27 34
----------------------------------------
$ 151 $ 129 $ 139
------------------------------------------------------------------------
------------------------------------------------------------------------
45
The principal components of net deferred tax liabilities are as
follows:
December 31, 1996
--------------------------------------------
(Dollars in millions) Assets Liabilities Total
--------------------------------------------------------------------------
Accelerated depreciation
for tax purposes $ (541) $ (541)
Comprehensive
Settlement $ 137 (47) 90
Regulatory accounts
receivable (132) (132)
Postretirement benefits 87 87
Restructuring costs
deferred for tax
purposes 46 46
Deferred investment
tax credits 28 28
Partnership income (35) (35)
Customer advances
for construction 20 20
Regulatory asset (109) (109)
Other regulatory 143 (50) 93
AMT carryforward 24 24
Other 123 (6) 117
--------------------------------------------
Total deferred income
tax assets (liabilities) $ 608 $ (920) $ (312)
--------------------------------------------------------------------------
December 31, 1995
------------------------------------------
(Dollars in millions) Assets Liabilities Total
------------------------------------------------------------------------
Accelerated depreciation
for tax purposes $ (489) $ (489)
Comprehensive
Settlement $ 159 (77) 82
Regulatory accounts
receivable (104) (104)
Postretirement benefits 90 90
Restructuring
costs deferred
for tax purposes 58 58
Deferred investment
tax credits 30 30
Partnership income (45) (45)
Customer advances
for construction 21 21
Regulatory asset (120) (120)
Other regulatory 119 (46) 73
AMT carryforward 74 74
Other 134 (33) 101
------------------------------------------
Total deferred income
tax assets (liabilities) $ 685 $ (914) $ (229)
------------------------------------------------------------------------
Income tax expense recognized for a period is the amount of tax
currently payable adjusted by the change in aggregate deferred tax assets
and liabilities. Deferred taxes are recorded to recognize the future tax
consequences of events that have been recognized in the financial
statements or tax returns. No valuation allowance has been provided for
deferred tax assets since they are expected to be realized through either
reversal of existing temporary differences or future taxable income.
SoCalGas generally provides for income taxes on the basis of amounts
expected to be paid currently, except for the provision for deferred taxes
46
on regulatory accounts, customer advances for construction and accelerated
depreciation of property placed in service after 1980. In addition,
SoCalGas recognizes certain other deferred tax liabilities (primarily
accelerated depreciation of property placed in service prior to 1981 and
deferred investment tax credits) which are expected to be recovered through
future rates. At December 31, 1996 and 1995, $93 million and $109 million,
respectively, of deferred income taxes have been offset by an equivalent
amount in regulatory assets.
6. COMMITMENTS AND CONTINGENT LIABILITIES
ENVIRONMENTAL OBLIGATIONS
SoCalGas has identified and reported to California environmental
authorities 42 former manufactured gas plant sites for which it (together
with other utilities as to 21 of these sites) may have remedial obligations
under environmental laws. As of December 31, 1996, ten of these sites have
been remediated, of which six have received certification from the
California Environmental Protection Agency. One site remedy is in process.
Preliminary investigations, at a minimum, have been completed on 39 of the
gas plant sites, including those sites at which the remediations described
above have been completed. In addition, the Company and its subsidiaries
have been named as potentially responsible parties for two landfill sites
and three industrial waste disposal sites.
In 1994, the CPUC approved a collaborative settlement which provides
for rate recovery of 90% of environmental investigation and remediation
costs without reasonableness review. In addition, SoCalGas has the
opportunity to retain a percentage of any insurance recoveries to offset
the 10% of costs not recovered in rates.
At December 31, 1996, SoCalGas' estimated remaining investigation and
remediation liability was $77 million, of which 90% is authorized to be
recovered through the mechanism discussed above. The Company believes that
any costs not ultimately recovered through rates, insurance or other means,
upon giving effect to previously established liabilities, will not have a
material adverse effect on the Company's consolidated results of operations
or financial position.
Estimated liabilities for environmental remediation are recorded when
amounts are probable and estimable. Amounts authorized to be recovered in
rates under the mechanism described above are recorded as a regulatory
asset. Possible recoveries of environmental remediation liabilities from
third parties are not deducted from the liability.
LITIGATION
The Company is a defendant in various lawsuits arising in the normal course
of business. The Company believes that the resolution of these pending
claims and legal proceedings will not have a material adverse effect on the
Company's consolidated results of operations or financial position.
OBLIGATIONS UNDER FIRM COMMITMENTS
The Company has commitments for firm pipeline capacity under contracts with
pipeline companies that expire at various dates through the year 2006.
These agreements provide for payments of an annual reservation charge. The
Company recovers such fixed charges in rates. Estimated minimum commitments
as of December 31, 1996 are as follows: 1997 - $214 million, 1998 - $209
million, 1999 - $174 million, 2000 - $176 million, 2001 - $176 million,
after 2001 - $815 million.
47
OTHER COMMITMENTS AND CONTINGENCIES
At December 31, 1996 commitments for capital expenditures were
approximately $30 million.
7. LEASES
The Company and its subsidiaries have leases on real and personal property
expiring at various dates from 1997 to 2011. The rentals payable under
these leases are determined on both fixed and percentage bases and most
leases contain options to extend which are exercisable by the Company or
the subsidiaries.
Rental expense under space operating leases was $58 million, $66
million and $63 million in 1996, 1995 and 1994, respectively.
The following is a schedule of future minimum operating lease
commitments as of December 31, 1996:
Future Minimum
(Dollars in millions) Lease Payments
----------------------------------------------------------------------
Year Ended December 31:
1997 $ 38
1998 35
1999 35
2000 35
2001 35
Later years 260
--------
Total $ 438
----------------------------------------------------------------------
In connection with the quasi-reorganization and loss on disposal of
discontinued operations (see Note 3), the Company established reserves of
$102 million to fair value operating leases related to its headquarters and
other leases at December 31, 1992. The remaining amount of these reserves
was $82 million at December 31, 1996.
8. COMPENSATING BALANCES AND SHORT-TERM BORROWING ARRANGEMENTS
The Company has a $300 million multi-year credit agreement requiring annual
fees of .07%. SoCalGas has an additional $650 million multi-year credit
agreement requiring annual fees of .07%. The interest rates on these lines
vary and are derived from formulas based on market rates and the companies'
credit ratings. The multi-year credit agreements expire in February 2001.
At December 31, 1996 all bank lines of credit were unused. SoCalGas' lines
of credit provide backing for its commercial paper program.
At December 31, 1996 and 1995, SoCalGas had $358 million and $415
million, respectively, of commercial paper obligations outstanding. A
portion of the outstanding commercial paper relates to the restructuring
costs associated with certain long-term gas supply contracts under the
Comprehensive Settlement (see Note 4). The weighted average annual interest
rate of commercial paper obligations outstanding was 5.36% and 5.66% at
December 31, 1996 and 1995, respectively.
At December 31, 1996, the Company has classified $96 million of the
commercial paper as long-term debt since it is the Company's intent to
continue to refinance that portion of the debt on a long-term basis. The
Company intends to utilize the SoCalGas $650 million multi-year credit
agreement to refinance the debt on a long-term basis if short-term
financing is not available.
48
9. LONG-TERM DEBT
December 31
--------------------------
(Dollars in millions) 1996 1995
-----------------------------------------------------------------------
SOUTHERN CALIFORNIA GAS COMPANY
First Mortgage Bonds:
6 1/2% December 15, 1997 $ 125 $ 125
5 1/4% March 1, 1998 100 100
6 7/8% August 15, 2002 100 100
5 3/4% November 15, 2003 100 100
8 3/4% October 1, 2021 150 150
7 3/8% March 1, 2023 100 100
7 1/2% June 15, 2023 125 125
6 7/8% November 1, 2025 175 175
Other Long-Term Debt:
5.98% Notes, August 28, 1997 22 22
6.21% Notes, November 7, 1999 75
8 3/4% Notes, July 6, 2000 30 30
SFr. 150,000,000 7 1/2%
Foreign Interest Payment
Securities, May 14, 1996 75
SFr. 15,695,000, 6 3/8%
Foreign Interest Payment
Securities, May 14, 2006 8
SFr. 100,000,000 5 1/8% Bonds,
February 6, 1998 (Foreign
currency exposure hedged
through currency swap at an
interest rate of 9.725%) 47 47
5.33% Commercial Paper,
February 8, 2001 96 181
--------------------------
1,253 1,330
OTHER
8% - 9.5% 1997-2001 7 26
--------------------------
Total 1,260 1,356
--------------------------
Less:
Long-term debt due within
one year 149 100
Unamortized debt discount
less premium 16 15
--------------------------
165 115
--------------------------
Long-Term Debt $ 1,095 $ 1,241
-----------------------------------------------------------------------
The annual principal payment requirements of long-term debt, including
debt of the ESOP, for the years 1997 through 2001 are $149 million, $149
million, $207 million, $31 million, and $97 million, respectively.
Substantially all of utility plant serves as collateral for the First
Mortgage Bonds, and certain assets of the nonutility subsidiaries are
pledged as collateral for their obligations.
DEBT OF EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST (TRUST) (SEE NOTE 13)
The TRUST covers substantially all employees and is used to partially fund
the Company's retirement savings program. It has an ESOP feature and holds
approximately 2.2 million shares of common stock of the Company. The
variable rate ESOP debt held by the TRUST bears interest at a rate
necessary to place or remarket the notes at par. Principal is due on
November 30, 1999 and interest is payable monthly through 1999. The Company
is obligated to make contributions to the TRUST sufficient to satisfy debt
service requirements. As the Company makes contributions to the TRUST,
these contributions, plus any dividends paid on the unallocated shares of
the Company's common stock held by the TRUST, will be used to repay the
debt. As dividends are increased or decreased, required contributions are
reduced or increased, respectively. Interest on ESOP debt amounted to $6
million in 1996, $7 million in 1995, and $5 million in 1994. Dividends used
for debt service amounted to $3 million, in each of the years 1996, 1995
and 1994, respectively, and are deductible for federal income tax purposes.
49
CURRENCY RATE SWAPS
In February 1986, SoCalGas issued SFr. 100 million of 5 1/8% bonds which
will mature on February 6, 1998. SoCalGas has entered into a swap
transaction with a major international bank to hedge the currency exposure.
Under the agreement with the bank, the bond issue, interest payments, and
other ongoing costs were swapped for fixed annual payments. The terms of the
swap result in a U.S. dollar liability of $47 million at an interest rate of
9.725%.
In May 1986, SoCalGas issued SFr. 150 million of 7 1/2% Foreign
Interest Payment Securities which are renewable at 10-year intervals at
reset interest rates. Interest is payable in U.S. dollars. The principal was
exchanged into $75 million at an exchange rate of 1.9925, which is also the
minimum rate of exchange for determining the amount of principal repayable
in Swiss francs.
On April 30, 1996 investors put back $67 million (90%) of the $75
million Foreign Interest Payment Securities outstanding. The next available
put date for the outstanding balance is in the year 2006. The interest rate
on the remaining balance was reset to 6 3/8%.
10. FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing
parties, other than in a forced sale or liquidation. The amounts disclosed
represent management's best estimates of fair value.
The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable, accounts payable and short term debt
approximated fair value as of December 31, 1996 and 1995 because of the
relatively short maturity of these instruments. The debt of the ESOP
approximated fair market value as of December 31, 1996 and 1995, based upon
quoted market prices currently available to the Company for debt with
similar terms and maturity.
The fair value of SoCalGas' long-term debt, 6% preferred, and 7 3/4%
preferred stock is estimated based on the quoted market prices for the same
or similar issues or on the current rates offered to SoCalGas for debt of
similar remaining maturities. The fair value of these financial instruments
is different from the carrying amount.
50
The following financial instruments have a fair value which is
different from the carrying amount as of December 31.
Carrying Fair
(Dollars in millions) Amount Value
----------------------------------------------------------------------
1996:
Long-Term Debt of SoCalGas $ 1,237 $ 1,248
Preferred Stocks of SoCalGas $ 95 $ 92
1995:
Long-Term Debt of SoCalGas $ 1,315 $ 1,278
Preferred Stocks of SoCalGas $ 95 $ 92
----------------------------------------------------------------------
As a result of the GCIM (See Note 4), SoCalGas enters into a certain
amount of gas futures contracts in the open market with the intent of
reducing gas costs within the GCIM tolerance band. SoCalGas' policy is to
use gas futures contracts to mitigate risk and better manage gas costs. The
CPUC has approved the use of gas futures for managing risk associated with
the GCIM. For the year ended December 31, 1996, gains or losses from gas
futures contracts are not material to the Company's consolidated results of
operations or financial position.
In 1996, the Company launched Ensource, an energy marketing subsidiary
that buys and arranges transportation, storage and delivery of natural gas
for large-volume customers. SoCalGas is a customer of Ensource.
Ensource utilizes a number of derivative financial instruments to
reduce its exposure to market risks from changes in commodity prices. Its
strategies include price hedging programs which include the use of natural
gas futures, forwards, and swaps, all of which are over-the-counter
instruments and involve little complexity. The Company does not hold
financial instruments for speculative trading purposes. For the year ended
December 31, 1996, realized and unrealized gains and losses from these
derivative instruments are not material to the Company's consolidated
results of operations or financial position.
11. PREFERRED STOCKS OF A SUBSIDIARY
The amount of preferred stocks of SoCalGas outstanding at December 31 is as
follows:
Number Millions
of Shares of Dollars
----------------------------------------------------------------------
1996:
6%, $25 par value 29,361 $ 1
6% Series A, $25 par value 783,032 19
Series Preferred, no par value
7 3/4%, $25 Stated Value 3,000,000 75
----------
$ 95
----------
1995:
6%, $25 par value 29,507 $ 1
6% Series A, $25 par value 783,032 19
Series Preferred, no par value
Flexible Auction, Series A 500 50
Flexible Auction, Series C 500 50
7 3/4%, $25 Stated Value 3,000,000 75
----------
$ 195
----------------------------------------------------------------------
In 1996, SoCalGas redeemed $50 million of the Flexible Auction Series
A, and $50 million of the Flexible Auction Series C preferred stock.
51
12. PREFERRED STOCK
At December 31, 1995, the Company had 1,100 shares of Remarketed Preferred,
Series A Stock (RP) outstanding with a liquidation preference of $100,000
per share. In April 1996, the Company exercised its option to redeem the RP
shares, in whole, at $100,000 per share plus accumulated dividends. In
connection with the redemption of the RP, the Company recorded a $2.4
million nonrecurring deduction to income applicable to common stock to
reflect the write-off of the original issuance underwriting discount.
All or any part of every series of presently outstanding preferred
stock is subject to redemption at the Company's option at any time upon not
less than 30 days notice, at the applicable redemption prices for each
series, together with the accrued and accumulated dividends to the date of
redemption. None of the outstanding issues of preferred stock has any
conversion rights. The weighted average dividend rates were 4.5% in 1996,
and 4.9% in 1995.
The number of shares of preferred stock and class A preferred stock
authorized and outstanding is as follows:
December 31, 1996 December 31, 1995
Redemption ------------------------- --------------------------
Price Shares Shares Shares Shares
Per Share Authorized Outstanding Authorized Outstanding
-----------------------------------------------------------------------------------------------------------------------------
Preferred stock-cumulative, no par value:
Remarketed, Series A $100,000.00 0 0 1,500 1,100
$7.64 Dividend 101.00 0 0 300,000 0
$4.75 Dividend 100.00 200,000 200,000 200,000 200,000
$4.50 Dividend 100.00 300,000 300,000 300,000 300,000
$4.40 Dividend 101.50 100,000 100,000 100,000 100,000
$4.36 Dividend 101.00 200,000 200,000 200,000 200,000
$4.75 Dividend 101.00 253 253 353 253
Unclassified 9,199,147 8,898,147
-------------------------------------------------------
Total 10,000,000 800,253 10,000,000 801,353
------------------------- -------------------------
Class A preferred stock-cumulative,
no par value 5,000,000 0 5,000,000 0
-----------------------------------------------------------------------------------------------------------------------------
52
13. PENSION, POSTRETIREMENT AND OTHER EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company and certain subsidiaries have noncontributory defined benefit
pension plans covering substantially all of their employees. Over 90% of
the employees covered by the plans are employed by SoCalGas. Benefits are
based on an employee's years of service and compensation during his or her
last years of employment. The Company's policy is to fund the plans
annually at a level which is fully deductible for federal income tax
purposes and as necessary on an actuarial basis to provide assets
sufficient to meet the benefits to be paid to plan members.
Pension expense was as follows:
Year Ended December 31
------------------------------------------
(Dollars in millions) 1996 1995 1994
------------------------------------------------------------------------
Service cost-benefits
earned during
the period $ 39 $ 27 $ 36
Interest cost on
projected
benefit obligation 103 91 87
Actual return on
plan assets (220) (333) (1)
Net amortization
and deferral 107 223 (102)
------------------------------------------
Net periodic
pension cost 29 8 20
Special early
retirement
program 18 12
Regulatory
adjustment 3 2 (3)
------------------------------------------
Total pension
expense $ 32 $ 28 $ 29
------------------------------------------------------------------------
A reconciliation of the plans' funded status to the pension liability
recognized in the Consolidated Balance Sheet is as follows:
December 31
--------------------------
(Dollars in millions) 1996 1995
-----------------------------------------------------------------------
Actuarial present value of
pension benefit obligations:
Accumulated benefit obligation,
including $1,168 and $1,060 in
vested benefits at December 31,
1996 and 1995, respectively $ 1,205 $ 1,195
Effect of future salary increases 231 298
--------------------------
Projected benefit obligation 1,436 1,493
Less: Plan assets at fair value,
primarily publicly traded
common stocks
and pooled equity funds (1,774) (1,603)
Unrecognized net gain 415 191
Unrecognized prior service cost (35) (44)
Unrecognized transition
obligation (5) (5)
--------------------------
Accrued pension liability
included in
the Consolidated
Balance Sheet $ 37 $ 32
-----------------------------------------------------------------------
The plans' major actuarial assumptions include:
Weighted average discount rate 7.50% 6.85%
Rate of increase in future
compensation levels 5.00% 5.00%
Expected long-term rate of
return on plan assets 8.00% 8.00%
-----------------------------------------------------------------------
POSTRETIREMENT BENEFIT PLAN
The Company's postretirement benefit plan currently provides medical and
life insurance benefits to qualified retirees. In the past, employee
cost-sharing provisions have been implemented to control the increasing
costs of these benefits. Other changes could occur in the future. The
Company's policy is to fund these benefits at a level which is fully
deductible for federal income tax purposes,
53
not to exceed amounts recoverable in rates for regulated companies, and as
necessary on an actuarial basis to provide assets sufficient to be paid to
plan participants.
The net periodic postretirement benefit expense was as follows:
Year Ended December 31
-----------------------------------------
(Dollars in millions) 1996 1995 1994
-----------------------------------------------------------------------
Service cost-benefits
earned during the
period $ 17 $ 13 $ 14
Interest cost on
projected benefit
obligation 33 31 28
Actual return on
plan assets (32) (37) (1)
Net amortization
and deferral 13 23 (10)
-----------------------------------------
Net periodic
postretirement
benefit cost 31 30 31
Regulatory adjustment 13 13 13
-----------------------------------------
Net postretirement
benefit expense $ 44 $ 43 $ 44
-----------------------------------------------------------------------
A reconciliation of the plan's funded status to the postretirement
liability recognized in the Consolidated Balance Sheet is as follows:
December 31
--------------------------
(Dollars in millions) 1996 1995
-----------------------------------------------------------------------
Accumulated postretirement
benefit obligation:
Retirees $ 209 $ 193
Fully eligible active plan
participants 171 255
Other active plan
participants 21 24
--------------------------
401 472
Less: Plan assets at fair
value, primarily
publicly traded common
stocks and pooled equity
funds (274) (217)
Unrecognized prior
service cost 78 15
Unrecognized net
gain/(loss) 19 (35)
--------------------------
Net postretirement
benefit liability included in
the Consolidated
Balance Sheet $ 224 $ 235
-----------------------------------------------------------------------
The plan's major actuarial assumptions include:
Health care cost trend rate 7.00% 7.50%
Weighted average discount rate 7.50% 6.85%
Rate of increase in future
compensation levels 5.00% 5.00%
Expected long-term rate of return
on plan assets 8.00% 8.00%
-----------------------------------------------------------------------
The assumed health care cost trend rate is 7.0% for 1997. The trend
rate is expected to decrease from 1997 to 1998 with a 6.5% ultimate trend
rate thereafter. The effect of a one-percentage-point increase in the
assumed health care cost trend rate for each future year is $10.9 million
on the aggregate of the service and interest cost components of net
periodic postretirement cost for 1996 and $86.3 million on the accumulated
postretirement
54
benefit obligation at December 31, 1996. The estimated income tax rate used
in the return on plan assets is zero since the assets are invested in tax
exempt funds.
POSTEMPLOYMENT BENEFITS
The Company accrues its obligation to provide benefits to former or
inactive employees after employment but before retirement. There was no
impact on earnings since these costs are currently recovered in rates as
paid, and as such, have been reflected as a regulatory asset. At December
31, 1996 and 1995 the liability was $41 million and $45 million,
respectively, and represents primarily workers compensation and disability
benefits.
RETIREMENT SAVINGS PLAN
Upon completion of one year of service, all employees of the Company and
certain subsidiaries are eligible to participate in the Company's
retirement savings plan administered by bank trustees. Employees may
contribute from 1% to 14% of their regular earnings. The Company generally
contributes an amount of cash or a number of shares of the Company's common
stock of equivalent fair market value which, when added to prior
forfeitures, will equal 50% of the first 6% of eligible base salary
contributed by employees. The employees' contributions, at the direction of
the employees, are primarily invested in the Company's common stock, mutual
funds or guaranteed investment contracts. In 1994, 1995 and 1996 the
Company's contributions were partially funded by the Pacific Enterprises
Employee Stock Ownership Plan and Trust. The Company's compensation expense
was $8 million in 1996 and 1995, and $9 million in 1994.
EMPLOYEE STOCK OWNERSHIP PLAN
The Company retained Pacific Enterprises Employee Stock Ownership Plan and
Trust (TRUST) subsequent to the sale of the retailing operations in 1992
(See Notes 3 and 9). The TRUST covers substantially all employees and is
used to partially fund the Company's retirement savings plan program. All
contributions to the TRUST are made by the Company, and there are no
contributions by the participants. As the Company makes contributions to
the ESOP, the ESOP debt service is paid and shares are released
proportionately to the total expected debt service.
Compensation expense is charged and equity is credited for the market
value of the shares released. However, tax deductions are allowed based on
the cost of the shares. Dividends on unallocated shares are used to pay
debt service and are charged against liabilities. The TRUST held 2.2
million and 2.3 million shares of common stock with fair values of $67.6
million and $65.5 million at December 31, 1996 and 1995, respectively.
14. STOCK BASED COMPENSATION
The Company accounts for stock options issued to employees under the
provisions described in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25). In October 1995,
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation" (SFAS 123) was issued. This statement establishes a
fair-value-based method of accounting for employee stock options or
similar equity instruments and encourages, but does not require, all
companies to adopt that method of accounting for all of their employee
stock compensation plans.
55
SFAS 123 allows companies to continue to measure compensation cost for
employee stock options or similar equity instruments using the intrinsic
value method of accounting described in APB 25. The Company has elected to
remain with this method and is required to make pro forma disclosures of
net income and earnings per share as if SFAS 123 accounting had been
applied.
The Company's Employee Stock Option Plan provides for the granting of
stock options to officers and other employees of the Company and its
affiliated subsidiaries. The option price is equal to the market price of
the Company's stock at the date of grant. The stock options expire in ten
years from the date of grant, and options vest annually over a service
period ranging from three to five years. In 1994, the number of shares
authorized for grants of options was 830,000. The authorized number of
options granted each year subsequent to 1994 is 1% of the outstanding
common stock at the beginning of the year.
The plan allows for the granting of dividend equivalents based upon
performance goals. This feature provides grantees, upon exercise of the
option, with the opportunity to receive all or a portion of the cash
dividends that would have been paid on the shares if the shares had been
outstanding since the grant date. Dividend equivalents are not payable if
the Company does not meet the established performance goal, or if the
exercise price exceeds the market value of the shares purchased. The
percentage of dividends paid as dividend equivalents will depend upon the
extent to which the performance goals are met.
Stock option activity for the years ended December 31, 1994, 1995, and
1996 is summarized in the following tables:
OPTIONS WITH PERFORMANCE BASED DIVIDEND EQUIVALENTS
Shares Wtd. Avg Exercisable
Under Exercise at
Option Prices Year-End
---------------------------------------------------------------------------
December 31, 1993 906,020 $27.94
Granted 160,000 21.50
Exercised (2,000) 19.25
Canceled (61,960) 33.37
---------------------------------------------------------------------------
December 31, 1994 1,002,060 $26.59 412,160
Granted 562,700 24.40
Exercised (227,400) 20.21
Canceled (66,560) 41.51
---------------------------------------------------------------------------
December 31, 1995 1,270,800 $25.98 366,900
Granted 685,200 27.00
Exercised (62,500) 21.46
Canceled (51,400) 39.46
---------------------------------------------------------------------------
December 31, 1996 1,842,100 $26.14 588,067
---------------------------------------------------------------------------
OPTIONS WITHOUT DIVIDEND EQUIVALENTS
Shares Wtd. Avg Exercisable
Under Exercise at
Option Prices Year-End
---------------------------------------------------------------------------
December 31, 1993 875,270 $29.40
Granted 376,500 21.50
Exercised (4,600) 8.14
Canceled (144,620) 30.55
---------------------------------------------------------------------------
December 31, 1994 1,102,550 $26.64 413,950
Granted 0 0.00
Exercised (160,080) 22.49
Canceled (119,770) 27.63
---------------------------------------------------------------------------
December 31, 1995 822,700 $27.30 431,200
Granted 0 0.00
Exercised (140,000) 23.04
Canceled (32,000) 38.72
---------------------------------------------------------------------------
December 31, 1996 650,700 $27.66 395,940
---------------------------------------------------------------------------
56
Information on options outstanding and
exercisable at December 31, 1996 is as follows:
OUTSTANDING OPTIONS
Wtd. Wtd.
Range of Number Average Average
Exercise of Remaining Exercise
Prices Shares Life Price
---------------------------------------------------------------------------
$ 19.25-27.00 2,153,400 7.67 $ 24.10
$ 36.25-53.00 339,400 3.20 $ 41.99
---------
2,492,800 7.06 $ 26.53
- -------------------------------------------------------------------------------
EXERCISABLE OPTIONS
Range of Number Wtd Average
Exercise Prices of Shares Exercise Price
---------------------------------------------------------------------------
$ 19.25-27.00 644,607 $ 22.75
$ 36.25-53.00 339,400 $ 41.99
-------
984,007 $ 29.39
---------------------------------------------------------------------------
Under terms of the plan, all outstanding options granted became
immediately exercisable upon approval of the business combination with
Enova by the Company's shareholders.
The fair value of each option grant (including the dividend
equivalent) was estimated on the date of grant using the Black-Scholes
option-pricing model. Weighted average fair values for options granted in
1996 and 1995 were $7.52 and $7.32, respectively.
The assumptions that were used to determine these fair values are as
follows:
Year Ended December 31
-----------------------------------
1996 1995
---------------------------------------------------------------------------
Stock price volatility 19% 19%
Risk-free rate of return 6.1% 7.1%
Annual dividend yield 0% 0%
Expected life 4.3 years 4.3 years
---------------------------------------------------------------------------
No compensation expense has been recognized for the Company's stock
based compensation plans except for the performance based options. The
Company recorded compensation expense of $5.5 million and $3.4 million in
1996 and 1995, respectively.
If compensation expense for the Company's stock based compensation
plans had been determined based on the fair value of the stock options at
the grant dates consistent with the method outlined in SFAS 123, net income
and earnings per share would have been adjusted to the pro forma amounts
indicated below:
Year Ended December 31
(Dollars in millions, -----------------------------------
except per share amounts) 1996 1995
---------------------------------------------------------------------------
Net income:
As reported $ 203 $ 185
Pro forma $ 203 $ 185
Earnings per share:
As reported $ 2.37 $ 2.12
Pro forma $ 2.38 $ 2.13
---------------------------------------------------------------------------
57
STATEMENT OF MANAGEMENT RESPONSIBILITY FOR
CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements have been prepared by management. The
integrity and objectivity of these financial statements and the other
financial information in the Annual Report, including the estimates and
judgments on which they are based, are the responsibility of management.
The financial statements have been audited by Deloitte & Touche, LLP,
independent certified public accountants, appointed by the Board of
Directors. Their report is shown on page 59. Management has made available
to Deloitte & Touche, LLP all of the Company's financial records and
related data, as well as the minutes of shareholders' and directors'
meetings.
Management maintains a system of internal accounting control which it
believes is adequate to provide reasonable, but not absolute, assurance
that assets are properly safeguarded and accounted for, that transactions
are executed in accordance with management's authorization and are properly
recorded and reported, and for the prevention and detection of fraudulent
financial reporting. Management monitors the system of internal control for
compliance through its own review and a strong internal auditing program
which also independently assesses the effectiveness of the internal
controls. In establishing and maintaining internal controls, the Company
must exercise judgment in determining whether the benefits derived justify
the costs of such controls.
Management acknowledges its responsibility to provide financial
information (both audited and unaudited) that is representative of the
Company's operations, reliable on a consistent basis, and relevant for a
meaningful financial assessment of the Company. Management believes that
the control process enables them to meet this responsibility.
Management also recognizes its responsibility for fostering a strong
ethical climate so that the Company's affairs are conducted according to
the highest standards of personal and corporate conduct. This
responsibility is characterized and reflected in the Company's code of
corporate conduct, which is publicized throughout the Company. The Company
maintains a systematic program to assess compliance with this policy.
The Board of Directors has an Audit Committee composed solely of
directors who are not officers or employees. The Committee recommends for
approval by the full Board the appointment of the independent auditors. The
Committee meets regularly with management, with the Company's internal
auditors, and with the independent auditors. The independent auditors and
the internal auditors periodically meet alone with the Audit Committee and
have free access to the Audit Committee at any time.
Willis B. Wood, Jr.
Chairman and Chief Executive Officer
Larry J. Dagley
Senior Vice President and Chief Financial Officer
58
INDEPENDENT AUDITORS' REPORT
PACIFIC ENTERPRISES:
We have audited the consolidated financial statements of Pacific
Enterprises and subsidiaries (pages 35 to 57) as of December 31, 1996 and
1995, and for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Pacific Enterprises and subsidiaries as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
Los Angeles, California
January 28, 1997
59
SELECTED FINANCIAL DATA AND COMPARATIVE STATISTICS 1986-1996
(Dollars in millions, except per share amounts) 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
CONSOLIDATED:
Operating revenues from continuing operations $ 2,563 $ 2,343 $ 2,664 $ 2,899
--------------------------------------------------------
Income from continuing operations $ 203 $ 185 $ 172 $ 181
Income (loss) from discontinued operations
--------------------------------------------------------
Net income (loss) 203 185 172 181
Dividends on preferred stock 5 10 12 15
Preferred stock original issue discount 2
--------------------------------------------------------
Net income (loss) applicable to common stock $ 196 $ 175 $ 160 $ 166
--------------------------------------------------------
Net income (loss) per share of common stock:
Continuing operations $ 2.37 $ 2.12 $ 1.95 $ 2.06
Discontinued operations
--------------------------------------------------------
$ 2.37 $ 2.12 $ 1.95 $ 2.06
--------------------------------------------------------
Cash dividends per share of common stock $ 1.42 $ 1.34 $ 1.26 $ .60
Book value per share $ 16.58 $ 15.71 $ 14.74 $ 12.19
Capital expenditures of continuing operations $ 204 $ 240 $ 249 $ 331
Total assets $ 5,186 $ 5,259 $ 5,445 $ 5,596
Capitalization:
Short-term debt $ 262 $ 234 $ 278 $ 267
Long-term debt due within one year 149 100 128 58
Long-term debt 1,095 1,241 1,420 1,262
Long-term debt of esop 130 130 130 132
Obligations under capital leases
Preferred stocks of a subsidiary:
Redeemable
Nonredeemable 95 195 195 195
Preferred stock 80 188 218 258
Common stock 1,095 1,111 1,092 1,048
Retained earnings 314 236 172 116
Less deferred compensation relating to ESOP (49) (52) (54) (138)
--------------------------------------------------------
Total capitalization $ 3,171 $ 3,383 $ 3,579 $ 3,198
--------------------------------------------------------
Number of employees 7,643 7,860 8,484 9,200
SOCALGAS:
Gas revenues:
Residential $ 1,613 $ 1,554 $ 1,713 $ 1,653
Commercial/industrial 708 751 798 853
Utility electric generation 70 104 118 147
Wholesale 70 62 98 117
Exchange 1 1 1 4
--------------------------------------------------------
Gas revenues in rates 2,462 2,472 2,728 2,774
Regulatory balancing accounts and other (40) (193) (141) 37
--------------------------------------------------------
Total operating revenue $ 2,422 $ 2,279 $ 2,587 $ 2,811
--------------------------------------------------------
Gas volumes delivered (billion cubic feet):
Residential 236 239 256 248
Commercial/industrial 374 351 348 339
Utility electric generation 139 205 260 213
Wholesale 130 129 146 148
Exchange 5 13 10 17
--------------------------------------------------------
Total 884 937 1,020 965
--------------------------------------------------------
Core 314 325 341 339
Noncore 570 612 679 626
--------------------------------------------------------
Total 884 937 1,020 965
--------------------------------------------------------
Gas volumes sold 315 338 362 352
Gas volumes transported or exchanged 569 599 658 613
--------------------------------------------------------
Total 884 937 1,020 965
--------------------------------------------------------
Number of customers:
Residential 4,582,553 4,526,150 4,483,324 4,459,250
Commercial 184,425 184,470 187,518 187,602
Industrial 22,952 22,976 23,505 23,924
Utility electric generation/wholesale 12 11 11 11
--------------------------------------------------------
Total number of customers 4,789,942 4,733,607 4,694,358 4,670,787
--------------------------------------------------------
Gas purchased (billion cubic feet):
Market gas:
30-day 153 133 98 85
Other 73 73 149 159
--------------------------------------------------------
Total market gas purchased 226 206 247 244
Affiliates 96 99 101 97
Other long-term supplies 12 29 36 28
--------------------------------------------------------
Total gas purchased 334 334 384 369
--------------------------------------------------------
Average cost of gas purchased excluding fixed costs
(per thousand cubic feet) $ 1.88 $ 1.42 $ 1.68 $ 2.21
Weighted average rate base $ 2,777 $ 2,766 $ 2,862 $ 2,769
Authorized rate of return on:
Rate base 9.42% 9.67% 9.22% 9.99%
Common equity 11.60% 12.00% 11.00% 11.90%
Degree days 1,178 1,241 1,459 1,203
60
(Dollars in millions, except per share amounts) 1992 1991 1990 1989
- ---------------------------------------------------------------------------------------------------------------
CONSOLIDATED:
Operating revenues from continuing operations $ 2,900 $ 3,007 $ 3,376 $ 3,344
-------------------------------------------------------
Income from continuing operations $ 136 $ 167 $ 142 $ 142
Income (loss) from discontinued operations (686) (255) (201) 64
-------------------------------------------------------
Net income (loss) (550) (88) (59) 206
Dividends on preferred stock 16 16 17 13
Preferred stock original issue discount
-------------------------------------------------------
Net income (loss) applicable to common stock $ (566) $ (104) $ (76) $ 193
-------------------------------------------------------
Net income (loss) per share of common stock:
Continuing operations $ 1.60 $ 2.09 $ 1.78 $ 1.98
Discontinued operations (9.17) (3.54) (2.87) .99
-------------------------------------------------------
$ (7.57) $ (1.45) $ (1.09) $ 2.97
-------------------------------------------------------
Cash dividends per share of common stock $ .44 $ 2.62 $ 3.48 $ 3.48
Book value per share $ 9.44 $ 19.74 $ 23.07 $ 27.10
Capital expenditures of continuing operations $ 329 $ 335 $ 386 $ 340
Total assets $ 5,414 $ 5,462 $ 5,702 $ 5,874
Capitalization:
Short-term debt $ 215 $ 123 $ 491 $ 637
Long-term debt due within one year 217 25 30 30
Long-term debt 1,774 1,776 1,161 1,045
Long-term debt of ESOP 141 149 163 173
Obligations under capital leases
Preferred stocks of a subsidiary:
Redeemable 60
Nonredeemable 195 195 145 70
Preferred stock 258 258 258 258
Common stock 859 1,458 1,385 1,331
Retained earnings 146 419 738
Less deferred compensation relating to ESOP (148) (163) (173) (189)
-------------------------------------------------------
Total capitalization $ 3,511 $ 3,967 $ 3,879 $ 4,153
-------------------------------------------------------
Number of employees 9,884 40,953 42,370 43,891
SOCALGAS:
Gas revenues:
Residential $ 1,484 $ 1,674 $ 1,548 $ 1,484
Commercial/industrial 836 977 1,057 1,016
Utility electric generation 195 149 235 483
Wholesale 129 145 165 192
Exchange 6 7 8 8
-------------------------------------------------------
Gas revenues in rates 2,650 2,952 3,013 3,183
Regulatory balancing accounts and other 190 (22) 200 92
-------------------------------------------------------
Total operating revenue $ 2,840 $ 2,930 $ 3,213 $ 3,275
-------------------------------------------------------
Gas volumes delivered (billion cubic feet):
Residential 244 249 262 255
Commercial/industrial 363 460 436 400
Utility electric generation 221 170 159 202
Wholesale 149 142 139 146
Exchange 24 26 30 30
-------------------------------------------------------
Total 1,001 1,047 1,026 1,033
-------------------------------------------------------
Core 335 351 372 364
Noncore 666 696 654 669
-------------------------------------------------------
Total 1,001 1,047 1,026 1,033
-------------------------------------------------------
Gas volumes sold 355 411 515 594
Gas volumes transported or exchanged 646 636 511 439
-------------------------------------------------------
Total 1,001 1,047 1,026 1,033
--------------------------------------------------------
Number of customers:
Residential 4,445,500 4,429,896 4,381,563 4,295,838
Commercial 189,364 193,051 193,409 192,269
Industrial 24,419 25,642 26,530 26,957
Utility electric generation/wholesale 10 10 10 9
-------------------------------------------------------
Total number of customers 4,659,293 4,648,599 4,601,512 4,515,073
------------------------------------------------------
Gas purchased (billion cubic feet):
Market gas:
30-day 21 140 149 202
Other 198 168 226 161
------------------------------------------------------
Total market gas purchased 219 308 375 363
Affiliates 99 99 103 104
Other long-term supplies 42 39 53 149
------------------------------------------------------
Total gas purchased 360 446 531 616
------------------------------------------------------
Average cost of gas purchased excluding fixed costs
(per thousand cubic feet) $ 2.24 $ 2.40 $ 2.59 $ 2.46
Weighted average rate base $ 2,720 $ 2,663 $ 2,549 $ 2,386
Authorized rate of return on:
Rate base 10.49% 10.79% 10.75% 10.96%
Common equity 12.65% 13.00% 13.00% 13.00%
Degree days 1,258 1,409 1,432 1,344
(Dollars in millions, except per share amounts) 1988 1987 1986
- -----------------------------------------------------------------------------------------------------
CONSOLIDATED:
Operating revenues from continuing operations $ 3,301 $ 3,385 $ 3,691
-------------------------------------------
Income from continuing operations $ 142 $ 148 $ 138
Income (loss) from discontinued operations 75 101 (56)
-------------------------------------------
Net income (loss) 217 249 82
Dividends on preferred stock 6 6 6
Preferred stock original issue discount
-------------------------------------------
Net income (loss) applicable to common stock $ 211 $ 243 $ 76
-------------------------------------------
Net income (loss) per share of common stock:
Continuing operations $ 2.20 $ 2.40 $ 2.27
Discontinued operations 1.23 1.70 (.96)
-------------------------------------------
$ 3.43 $ 4.10 $ 1.31
-------------------------------------------
Cash dividends per share of common stock $ 3.48 $ 3.48 $ 3.48
Book value per share $ 28.26 $ 27.05 $ 26.21
Capital expenditures of continuing operations $ 351 $ 328 $ 332
Total assets $ 5,496 $ 4,374 $ 4,584
Capitalization:
Short-term debt $ 572 $ 128 $ 469
Long-term debt due within one year 65 72 16
Long-term debt 1,220 1,067 1,194
Long-term debt of ESOP 31 38 44
Obligations under capital leases 25 26 27
Preferred stocks of a subsidiary:
Redeemable 60 60 60
Nonredeemable 20 20 20
Preferred stock 110 110 110
Common stock 1,066 875 855
Retained earnings 770 771 734
Less deferred compensation relating to ESOP (31) (38) (44)
-------------------------------------------
Total capitalization $ 3,908 $ 3,129 $ 3,485
-------------------------------------------
Number of employees 40,538 27,928 26,571
SOCALGAS:
Gas revenues:
Residential $ 1,482 $ 1,496 $ 1,275
Commercial/industrial 1,008 1,059 1,068
Utility electric generation 554 662 610
Wholesale 252 302 362
Exchange 12 18 19
-------------------------------------------
Gas revenues in rates 3,308 3,537 3,334
Regulatory balancing accounts and other (86) (225) 274
-------------------------------------------
Total operating revenue $ 3,222 $ 3,312 $ 3,608
-------------------------------------------
Gas volumes delivered (billion cubic feet):
Residential 253 259 234
Commercial/industrial 344 269 223
Utility electric generation 199 309 225
Wholesale 144 159 124
Exchange 39 55 55
-------------------------------------------
Total 979 1,051 861
-------------------------------------------
Core n/a n/a n/a
Noncore n/a n/a n/a
-------------------------------------------
Total 979 1,051 861
-------------------------------------------
Gas volumes sold 654 759 767
Gas volumes transported or exchanged 325 292 94
-------------------------------------------
Total 979 1,051 861
-------------------------------------------
Number of customers:
Residential 4,196,010 4,086,365 3,969,671
Commercial 190,908 189,611 186,773
Industrial 27,133 27,227 27,942
Utility electric generation/wholesale 9 8 8
-------------------------------------------
Total number of customers 4,414,060 4,303,211 4,184,394
-------------------------------------------
Gas purchased (billion cubic feet):
Market gas:
30-day 219 271 242
Other 87 48
-------------------------------------------
Total market gas purchased 306 319 242
Affiliates 118 113 113
Other long-term supplies 247 343 421
-------------------------------------------
Total gas purchased 671 775 776
-------------------------------------------
Average cost of gas purchased excluding fixed costs
(per thousand cubic feet) $ 2.39 $ 2.20 $ 2.52
Weighted average rate base $ 2,268 $ 2,167 $ 2,092
Authorized rate of return on:
Rate base 10.93% 11.51% 12.74%
Common equity 12.75% 13.90% 14.60%
Degree days 1,354 1,498 1,058
61
EXHIBIT 21.01
-------------
LIST OF SUBSIDIARIES
OF PACIFIC ENTERPRISES
----------------------
Burney Mountain Power
Central Plants, Inc.
EcoTrans OEM Corporation
Energy Alliance I
Ensource
FTM Sports Corporation
Landfill Control Technologies
Mammoth Geothermal Company
Mammoth Power Company
Mt. Lassen Power
Pacific Enerchange
Pacific Energy
Pacific Energy Leasing
Pacific Energy Resources Incorporated
Pacific Enterprises
Pacific Enterprises ABC Corporation
Pacific Enterprises Commercial Loans, Inc.
Pacific Enterprises Energy Management Services
Pacific Enterprises Energy Services
Pacific Enterprises International
Pacific Enterprises International (Cayman I)
Pacific Enterprises International (Cayman II)
Pacific Enterprises International Argentina I
Pacific Enterprises International Argentina II
Pacific Enterprises International Holdings I
Pacific Enterprises International Holdings II
Pacific Enterprises International Indonesia
Pacific Enterprises International Latin America
Pacific Enterprises International Mexico I
Pacific Enterprises International Mexico II
Pacific Enterprises International Mexico III
Pacific Enterprises Leasing Company
Pacific Enterprises LNG Company
Pacific Enterprises Oil Company
Pacific Enterprises Oil Company (Canada)
Pacific Enterprises Oil Company (USA)
Pacific Enterprises Oil Company (Western)
Pacific Gas Gathering Company
Pacific Geothermal Company
Pacific Hydropower Company
Pacific Interstate Company
Pacific Interstate Mojave Company
Pacific Interstate Offshore Company
Pacific Interstate Transmission Company
Pacific Interstate Transmission Company (Arctic)
Pacific Library Tower
Pacific Lighting Corporation
Pacific Lighting Gas Development Company
Pacific Lighting Land Company
Pacific Lighting Real Estate Group
Pacific Offshore Pipeline Company
Pacific Oroville Power, Inc.
Pacific Penobscot Power Company
Pacific Power Plant Operations
Pacific Recovery Corporation
Pacific Synthetic Fuel Company
Pacific Western Resources Company
Pacific Wood Fuels Company
Pacific Wood Services Company
Pay'n Save Drug Stores, Incorporated
PEI Mexico Service Corporation
Penstock Power Company
Presley RAC Finance Co., Inc.
Presley-Home Mac Finance Co., Inc.
Southern California Gas Company
Southern California Gas Tower
8309 Tujunga Avenue Corp.
EXHIBIT 23.01
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
2-96782, 33-26357, 2-66833, 2-96781, 33-21908 and 33-54055 of Pacific
Enterprises on Forms S-8 and Registration Statement Nos. 33-24830 and
33-44338 of Pacific Enterprises on Forms S-3 of our reports dated January 28,
1996, appearing in and incorporated by reference in this Annual Report on
form 10-K of Pacific Enterprises for the year ended December 31, 1996.
DELOITTE & TOUCHE LLP
Los Angeles, California
March 26, 1997
UT
0000075527
PACIFIC ENTERPRISES
1,000,000
12-MOS
DEC-31-1995
DEC-31-1996
PER-BOOK
3,167
185
1161
552
121
5,186
1,095
0
314
1,360
0
80
1,095
262
0
0
149
0
0
0
2,240
5,186
2,503
151
0
1,955
422
25
422
97
203
7
196
118
0
608
2.37
2.37