SEC Filing | Sempra

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 -------------------------------------- Commission file number 1-40 ---------------------------------------------- PACIFIC ENTERPRISES ---------------------------------------------------------- (Exact name of registrant as specified in its charter) California 94-0743670 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 555 West Fifth Street, Los Angeles, California 90013-1011 - -------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (213) 244-1200 ---------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Common stock outstanding: Wholly owned by Sempra Energy ITEM 1. FINANCIAL STATEMENTS. PACIFIC ENTERPRISES AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME (Unaudited) (Dollars in millions) Three Months Ended March 31, ------------------ 1999 1998 ------ ------ Revenues and Other Income: Operating revenues $614 $669 Other 5 9 ---- ---- Total 619 678 ---- ---- Expenses: Cost of natural gas distributed 256 290 Operating expenses 162 197 Depreciation and amortization 65 64 Franchise payments and other taxes 25 29 Preferred dividends of subsidiaries -- 1 ---- ---- Total 508 581 ---- ---- Income Before Interest and Income Taxes 111 97 Interest 23 19 ---- ---- Income Before Income Taxes 88 78 Income Taxes 40 38 ---- ---- Net Income 48 40 Preferred Dividend Requirements 1 1 ---- ---- Earnings Applicable to Common Shares $ 47 $ 39 ==== ==== See notes to Consolidated Financial Statements. PACIFIC ENTERPRISES AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in millions) Balance at ------------------------ March 31, December 31, 1999 1998 (Unaudited) ---------- ----------- ASSETS Current Assets: Cash and cash equivalents $ 311 $ 27 Accounts and notes receivable - trade 370 444 Accounts and notes receivable - other 28 18 Due from affiliates 127 119 Income taxes receivable 6 22 Deferred income taxes 167 130 Natural gas in storage 4 49 Materials and supplies 13 16 Prepaid expenses 27 19 ------ ------ Total current assets 1,053 844 ------ ------ Property, plant and equipment 6,157 6,152 Less accumulated depreciation and amortization (3,207) (3,149) ------ ------ Total property, plant and equipment - net 2,950 3,003 ------ ------ Investments and other assets: Regulatory assets 347 351 Other receivables 129 130 Investments 7 209 Other assets 60 61 ------ ------ Total investments and other assets 543 751 ------ ------ Total $4,546 $4,598 ====== ====== See notes to Consolidated Financial Statements. PACIFIC ENTERPRISES AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in millions) Balance at ------------------------- March 31, December 31, 1999 1998 (Unaudited) --------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Short-term debt $ -- $ 43 Long-term debt due within one year 208 206 Accounts payable - trade 118 163 Accounts payable - other 234 245 Regulatory balancing accounts overcollected - net 392 129 Interest accrued 49 47 Dividends payable 101 -- Other taxes payable 46 32 Other 94 149 ------ ------ Total current liabilities 1,242 1,014 ------ ------ Long-term Debt 970 985 ------ ------ Deferred credits and other liabilities: Post-retirement benefits other than pensions 190 210 Deferred income taxes - net 257 220 Deferred investment tax credits 57 58 Other deferred credits and other liabilities 553 544 ------ ------ Total deferred credits and other liabilities 1,057 1,032 ------ ------ Preferred stock of subsidiary 20 20 ------ ------ Commitments and contingent liabilities (Note 3) Shareholders' equity: Capital stock: Preferred 80 80 Common 1,134 1,117 ------ ------ Total capital stock 1,214 1,197 Retained earnings 88 395 Deferred compensation relating to Employee Stock Ownership Plan (45) (45) ------ ------ Total shareholders' equity 1,257 1,547 ------ ------ Total $4,546 $4,598 ====== ====== See notes to Consolidated Financial Statements. PACIFIC ENTERPRISES AND SUBSIDIARIES CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (Unaudited) (Dollars in millions) Three Months Ended March 31, ------------------ 1999 1998 ------ ----- Cash Flows from Operating Activities: Net Income $ 48 $ 40 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 65 64 Deferred income taxes 36 5 Other - net (36) (1) Net change in other working capital components 205 423 ----- ----- Net cash provided by operating activities 318 531 ----- ----- Cash Flows from Investing Activities: Expenditures for property, plant and equipment (33) (31) (Increase) decrease in other investments 19 (70) (Increase) decrease in other receivables, regulatory assets and other assets 6 (2) ----- ----- Net cash used in investing activities (8) (103) ----- ----- Cash Flows from Financing Activities: Capital contributions from parent 17 9 Repurchase of preferred stock of a subsidiary -- (75) Issuance of long-term debt -- 75 Payment on long-term debt -- (151) Decrease in short-term debt (43) (272) Common dividends paid -- (31) Preferred dividends paid -- (1) ----- ----- Net cash used in financing activities (26) (446) ----- ----- Increase (Decrease) in Cash and Cash Equivalents 284 (18) Cash and Cash Equivalents, January 1 27 153 ----- ----- Cash and Cash Equivalents, March 31 $ 311 $ 135 ===== ===== Supplemental Disclosure of Cash Flow Information: Interest payments (net of amount capitalized) $ 21 $ 20 ===== ===== Income tax payments $ 53 $ 20 ===== ===== See notes to Consolidated Financial Statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. GENERAL This Quarterly Report on Form 10-Q is that of Pacific Enterprises (PE or the Company), the parent company of Southern California Gas Company (SoCalGas). The Company is a subsidiary of Sempra Energy, a California-based Fortune 500 energy services company. The financial statements herein are the Consolidated Financial Statements of PE and its subsidiaries. The accompanying Consolidated Financial Statements have been prepared in accordance with the interim-period-reporting requirements of Form 10-Q. Results of operations for interim periods are not necessarily indicative of results for the entire year. In the opinion of management, the accompanying statements reflect all adjustments necessary for a fair presentation. These adjustments are of a normal recurring nature. Certain changes in classification have been made to prior presentations to conform to the current financial statement presentation. The Company's significant accounting policies, as well as those of its subsidiaries, are described in the notes to Consolidated Financial Statements in the Company's 1998 Annual Report. The same accounting policies are followed for interim reporting purposes. This Quarterly Report should be read in conjunction with the Company's 1998 Annual Report, which includes the Consolidated Financial Statements and notes thereto, and the annual "Management's Discussion & Analysis of Financial Condition and Results of Operations." In conformity with generally accepted accounting principles, SoCalGas' accounting policies reflect the financial effects of rate regulation authorized by the California Public Utilities Commission (CPUC). SoCalGas applies the provisions of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71). This statement requires cost- based rate-regulated entities that meet certain criteria to reflect the authorized recovery of costs due to regulatory decisions in their financial statements. SoCalGas continues to meet the criteria of SFAS No. 71 in accounting for its regulated operations. 2. BUSINESS COMBINATIONS PE/Enova On June 26, 1998 (pursuant to an October 1996 agreement) Enova and PE completed a business combination in which the two companies became subsidiaries of a new company named Sempra Energy. As a result of the combination, (i) each outstanding share of common stock of Enova was converted into one share of common stock of Sempra Energy, (ii) each outstanding share of common stock of PE was converted into 1.5038 shares of common stock of Sempra Energy and (iii) the preferred stock and/or preference stock of SDG&E, PE and SoCalGas remain outstanding. Additional information on the business combination is discussed in the Company's 1998 Annual Report. Expenses incurred in connection with the business combination were $0.3 million, after tax, and $0.5 million, after tax, for the three- month periods ended March 31, 1999 and 1998, respectively. These costs consisted primarily of employee-related costs, and investment banking, legal, regulatory and consulting fees. As a result of the business combination, PE dividended certain nonutility subsidiaries to Sempra Energy during 1998. In March 1999, Pacific Enterprises International (PEI) was dividended to Sempra Energy. PE transferred its ownership interest in Sempra Energy Solutions to Sempra Energy effective January 1999 and its ownership interest in Sempra Energy Trading to Sempra Energy effective April 1999. At the end of April 1999, SoCalGas remains as the sole subsidiary of PE. KN Energy On February 22, 1999, Sempra Energy and KN Energy, Inc. (KN Energy) announced that their respective boards of directors had approved Sempra Energy's acquisition of KN Energy, subject to approval by the shareholders of both companies and by various federal and state regulatory agencies. If the transaction is approved, holders of KN Energy common stock will receive 1.115 shares of Sempra Energy common stock or $25 in cash, or some combination thereof, for each share of KN Energy common stock. In the aggregate, the cash portion of the transaction will constitute not more than 30 percent of the total consideration. The transaction will be treated as a purchase for accounting purposes. On March 30, 1999, Sempra Energy was notified that the U.S. Federal Trade Commission had granted the Company's request for early clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, with respect to the proposed merger. 3. MATERIAL CONTINGENCIES NATURAL GAS INDUSTRY RESTRUCTURING The natural gas industry experienced an initial phase of restructuring during the 1980s by deregulating natural gas sales to noncore customers. On January 21, 1998, the CPUC released a staff report initiating a project to assess the current market and regulatory framework for California's natural gas industry. The general goals of the plan are to consider reforms to the current regulatory framework emphasizing market-oriented policies benefiting California's natural gas consumers. In August 1998, California enacted a law prohibiting the CPUC from enacting any natural gas industry restructuring decision for core customers prior to January 1, 2000; the CPUC continues to study the issue. During the implementation moratorium, the CPUC will hold hearings throughout the state and intends to give the legislature a draft ruling before adopting a final market-structure policy. SDG&E and SoCalGas will actively participate in this effort. QUASI-REORGANIZATION In 1993, PE completed a strategic plan to refocus on its natural gas utility and related businesses. The strategy included the divestiture of its merchandising operations and all of its oil and natural gas exploration and production business. In connection with the divestitures, PE effected a quasi-reorganization for financial reporting purposes, effective December 31, 1992. Certain of the liabilities established in connection with discontinued operations and the quasi-reorganization will be resolved in future years. Management believes the provisions previously established for these matters are adequate. 4. COMPREHENSIVE INCOME In conformity with generally accepted accounting principles, the Company has adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." Comprehensive income for the three-month periods ended March 31, 1999 and 1998 was equal to net income. 5. SEGMENT INFORMATION The Company has two separately managed reportable segments: SoCalGas and Sempra Energy Trading (SET). However, see Note 2 regarding PE's dividend of its SET holdings to Sempra Energy in April 1999. SoCalGas is a natural gas distribution utility, serving customers throughout most of southern California and part of central California. SET is based in Stamford, Connecticut, and is engaged in the nationwide wholesale trading and marketing of natural gas, power and petroleum. The Company has a 50-percent ownership interest in SET, and accounts for this investment on the equity method of accounting. However, for segment reporting, items of income and assets for SET are reported at 100 percent. A corresponding adjustment is made to reconcile the amounts to those that were reported by the Company under the equity method. The accounting policies of the segments are the same as those described in the notes to Consolidated Financial Statements in the Company's 1998 Annual Report, and segment performance is evaluated by management based on reported net income. Intersegment transactions are generally recorded the same as sales or transactions with third parties. Utility transactions are primarily based on rates set by the CPUC. There were no significant changes in segment assets during the three months ended March 31, 1999. Segment information of SoCalGas is provided in the company's Quarterly Report on Form 10-Q for the three-month period ended March 31, 1999. - ------------------------------------------------------------------ Three months ended March 31, ----------------------------- (Dollars in millions) 1999 1998 - ------------------------------------------------------------------ Revenues and Other Income: Southern California Gas $ 607 $ 664 Sempra Energy Trading 73 9 Sempra Energy Trading adjustment (73) (9) All other 12 14 ---------------------- Total $ 619 $ 678 ---------------------- Net Income: Southern California Gas* $ 47 $ 47 Sempra Energy Trading 1 (8) Sempra Energy Trading adjustment (1) 4 All other 1 (3) ---------------------- Total $ 48 $ 40 ---------------------- * after preferred dividends ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the financial statements contained in this Form 10-Q and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's 1998 Annual Report. INFORMATION REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words "estimates," "believes," "expects," "anticipates," "plans" and "intends," variations of such words, and similar expressions are intended to identify forward-looking statements that involve risks and uncertainties which could cause actual results to differ materially from those anticipated. These statements are necessarily based upon various assumptions involving judgments with respect to the future including, among others, local, regional, national and international economic, competitive, political and regulatory conditions and developments; technological developments; capital market conditions; inflation rates; interest rates; energy markets; weather conditions; business, regulatory or legal decisions; the pace of deregulation of retail natural gas and electricity industries; the timing and success of business development efforts; and other uncertainties, all of which are difficult to predict and many of which are beyond the control of the Company. Accordingly, while the Company believes that the assumptions are reasonable, there can be no assurance that they will approximate actual experience, or that the expectations will be realized. Readers are urged to review and consider carefully the risks, uncertainties and other factors which affect the Company's business described in this quarterly report and other reports filed by the Company from time to time with the Securities and Exchange Commission. Readers are cautioned not to put undue reliance on any forward-looking statements. For those statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. BUSINESS COMBINATIONS See Note 2 of the notes to Consolidated Financial Statements regarding the PE/Enova business combination and the KN Energy proposed merger. CAPITAL RESOURCES AND LIQUIDITY The Company's utility operations continue to be a major source of liquidity. In addition, working capital requirements are met through the issuance of short-term and long-term debt. These capital resources are expected to remain available. Cash requirements primarily include utility capital expenditures and repayments and retirements of long-term debt. Major changes in cash flows not described elsewhere are described below. Cash and cash equivalents at March 31, 1999 are available for investment in utility plant, the retirement of debt, and other corporate purposes. CASH FLOWS FROM OPERATING ACTIVITIES Cash flows from operations decreased primarily due to payments on behalf of affiliated companies and a decrease in collections on regulatory balancing accounts compared to 1998. Overcollected balancing accounts payable increased in 1999 and undercollected balancing accounts receivable decreased in 1998 due to actual natural gas costs' being lower than amounts collected in rates for both periods. CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures for property, plant and equipment are estimated to be $180 million for the full year 1999 and will be financed primarily by internally generated funds and will largely represent investment in utility operations. Construction, investment and financing programs are continuously reviewed and revised in response to changes in competition, customer growth, inflation, customer rates, the cost of capital, and environmental and regulatory requirements. In January 1998 PE and Enova jointly acquired CES/Way International, Inc. for a total of $79 million. CES/Way provides energy-efficiency services, including energy audits, engineering design, project management, construction, financing and contract maintenance. Effective January 1999, PE transferred its ownership interest in CES/Way to Sempra Energy. In March 1998 PE increased its existing investment in two Argentine natural gas utility holding companies from 12.5 percent to 21.5 percent by purchasing an additional interest for $40 million. In March 1999 Pacific Enterprises International (PEI) was dividended to Sempra Energy. CASH FLOWS FROM FINANCING ACTIVITIES Net cash used in financing activities decreased due to greater long- term and short-term debt repayments, the redemption of SoCalGas' preferred stock and the payment of dividends on common stock. On February 2, 1998, SoCalGas redeemed all outstanding shares of 7-3/4% Series Preferred Stock for a total cost of $75 million, including unpaid dividends. RESULTS OF OPERATIONS Consolidated earnings consist primarily of the results from SoCalGas. SoCalGas' net income for the three-month period ended March 31, 1999 was consistent with net income for the same period in 1998. The increase in net income was due to the improved results of Sempra Energy Trading (SET) due to higher trading gains. UTILITY OPERATIONS The table below summarizes the components of natural gas volumes and revenues by customer class for the three months ended March 31, 1999 and 1998. Gas Sales, Transportation & Exchange (Dollars in millions, volumes in billion cubic feet)

Utility natural gas revenues decreased 9 percent for the three-month period ended March 31, 1999, compared to the same period in 1998. The decrease was primarily due to a decrease in the average cost of natural gas and lower utility electric generating sales, partially offset by a slight increase in sales to residential customers due to customer growth and colder weather in 1999. Cost of natural gas distributed decreased 15 percent for the three- month period ended March 31, 1999 compared to the same period in 1998. The decrease was primarily due to a decrease in the average cost of natural gas purchased and lower utility electric generating sales. Under the current regulatory framework, changes in revenue resulting from core market changes in volumes and the cost of natural gas do not affect net income. Operating expenses decreased 6 percent for the three-month period ended March 31, 1999 compared to the same period in 1998 due to a continuing emphasis on reducing operating costs to remain competitive in the marketplace. YEAR 2000 ISSUES Most companies are affected by the inability of many automated systems and applications to process the year 2000 and beyond. The Year 2000 issues are the result of computer programs and other automated processes using two digits to identify a year, rather than four digits. Any of the Company's computer programs that include date-sensitive software may recognize a date using "00" as representing the year 1900, instead of the year 2000, or "01" as 1901, etc., which could lead to system malfunctions. The Year 2000 issue impacts both Information Technology ("IT") systems and also non-IT systems, including systems incorporating embedded processors. To address this problem, in 1996, both Pacific Enterprises and Enova Corporation established company-wide Year 2000 programs. These programs have now been consolidated into Sempra Energy's overall Year 2000 readiness effort. Sempra Energy has established a central Year 2000 Program Office, which reports to the Company's Chief Information Technology Officer and reports periodically to the audit committee of the Board of Directors. The Company's State of Readiness Sempra Energy has identified all IT and non-IT systems (including embedded systems) that might not be Year 2000 ready and categorizing them in the following areas: IT applications, computer hardware and software infrastructure, telecommunications, embedded systems, and third parties. The Company evaluated its exposure in all of these areas. These systems and applications are being tracked and measured through four key phases: inventory, assessment, remediation/testing, and Year 2000 readiness. The Company has prioritized so that, when possible, critical systems are being assessed and modified/replaced first. Critical systems are those applications and systems, including embedded processor technology, which, if not appropriately remediated, may have a significant impact on energy delivery, revenue collection or the safety of personnel, customers or facilities. The Company's Year 2000 testing effort includes functional testing of Year 2000 dates and validating that changes have not altered existing functionality. The Company uses an independent, internal review process to verify that the appropriate testing has occurred. The Company's Year 2000 project is currently on schedule and the company estimates that all critical systems will be Year 2000 Ready by June 30, 1999. The Company defines "Year 2000 Ready" as suitable for continued use into the year 2000 with no significant operational problems. Sempra Energy's current schedule for Year 2000 testing, readiness and development of contingency plans is subject to change depending upon the remediation and testing phases of the Company's compliance effort and upon developments that may arise as the Company continues to assess its computer-based systems and operations. In addition, this schedule is dependent upon the efforts of third parties, such as suppliers (including energy producers) and customers. Accordingly, delays by third parties may cause the Company's schedule to change. The Costs to Address the Company's Year 2000 Issues Sempra Energy's budget for the Year 2000 program is $48 million, of which $40 million has been spent. As the Company continues to assess its systems and as the remediation and testing efforts progress, cost estimates may change. The Company's Year 2000 readiness effort is being funded entirely by operating cash flows. The Risks of the Company's Year 2000 Issues Based upon its current assessment and testing of the Year 2000 issue, the Company believes the reasonably likely worst case Year 2000 scenarios to have the following impacts upon Sempra Energy and its operations. With respect to the Company's ability to provide energy to its domestic utility customers, the Company believes that the reasonably likely worst case scenario is for small, localized interruptions of utility service which are restored in a time frame that is within normal service levels. With respect to services that are essential to Sempra Energy's operations, such as customer service, business operations, supplies and emergency response capabilities, the scenario is for minor disruptions of essential services with rapid recovery and all essential information and processes ultimately recovered. To assist in preparing for and mitigating these possible scenarios, Sempra Energy is a member of several industry-wide efforts established to deal with Year 2000 problems affecting embedded systems and equipment used by the nation's natural gas and electric power companies. Under these efforts, participating utilities are working together to assess specific vendors' system problems and to test plans. These assessments will be shared by the industry as a whole to facilitate Year 2000 problem solving. A portion of this risk is due to the various Year 2000 Ready schedules of critical third party suppliers and customers. The Company continues to contact its critical suppliers and customers to survey their Year 2000 remediation programs. While risks related to the lack of Year 2000 readiness by third parties could materially and adversely affect the Company's business, results of operations and financial condition, the Company expects its Year 2000 readiness efforts to reduce significantly the Company's level of uncertainty about the impact of third party Year 2000 issues on both its IT systems and its non-IT systems. The Company's Contingency Plans Sempra Energy's contingency plans for Year-2000-related interruptions are being incorporated in the Company's existing overall emergency preparedness plans. To the extent appropriate, such plans will include emergency backup and recovery procedures, remediation of existing systems parallel with installation of new systems, replacing electronic applications with manual processes, identification of alternate suppliers and increasing inventory levels. These contingency plans are well underway and the Company plans to be completed by June 30, 1999. Due to the speculative and uncertain nature of contingency planning, there can be no assurances that such plans actually will be sufficient to reduce the risk of material impacts on the Company's operations due to Year 2000 issues. FACTORS INFLUENCING FUTURE PERFORMANCE The Company's performance in the near future will primarily depend on the results of SoCalGas. Because of the ratemaking and regulatory process, electric and natural gas industry restructuring, and the changing energy marketplace, there are several factors that will influence the Company's future financial performance. These factors are discussed in this section and in "Other Operations" and "International Operations" below. KN Energy Acquisition See discussion of the KN Energy acquisition in Note 2 of the notes to Consolidated Financial Statements. Industry Restructuring See discussion of industry restructuring in Note 3 of the notes to Consolidated Financial Statements. Performance-Based Regulation (PBR) To promote efficient operations and improved productivity and to move away from reasonableness reviews and disallowances, the CPUC has been directing utilities to use PBR. PBR has replaced the general rate case and certain other regulatory proceedings for both SoCalGas and SDG&E. Under PBR, regulators require future income potential to be tied to achieving or exceeding specific performance and productivity goals, as well as cost reductions, rather than relying solely on expanding utility rate base in a market where a utility already has a highly developed infrastructure. SoCalGas' PBR is in effect through December 31, 2002; however, the CPUC decision allows for the possibility that changes to the PBR mechanism could be adopted in a decision to be issued in SoCalGas' 1999 Biennial Cost Allocation Proceeding (BCAP) application which is anticipated to become effective at year-end 1999. Cost of Capital Under PBR, annual Cost of Capital proceedings were replaced by an automatic adjustment mechanism if changes in certain indices exceed established tolerances. For 1999, SoCalGas is authorized to earn a rate of return on common equity (ROE) of 11.6 percent and a 9.49 percent return on rate base (ROR), unchanged from 1998. Annual Earnings Assessment Proceeding An application was filed in May 1999 to recover shareholder rewards for the Demand Side Management (DSM) programs and incentives earned for its energy-efficiency and low-income programs totaling $5 million. The revenue requirement increase is proposed to become effective on January 1, 2000. The DSM rewards and low-income program incentives will be collected and recorded in earnings over ten years. The energy-efficiency program incentives are recovered in one year. Rewards and incentives for these programs are subject to CPUC approval. The CPUC has extended interim utility administration of energy- efficiency and low-income programs through December 31, 2001. OTHER OPERATIONS Sempra Energy Solutions (Solutions), formed in 1997 as a joint venture of PE and Enova, incorporates several existing unregulated businesses from each of PE and Enova. Effective January 1999, PE transferred its ownership interest in Solutions to Sempra Energy. Sempra Energy Trading Corp. (SET), a leading natural-gas power marketing firm headquartered in Stamford, Connecticut, was jointly acquired by PE and Enova on December 31, 1997. For the three-month period ended March 31, 1999, SET recorded after-tax income of $1 million, compared to a net loss of $7 million in the first quarter of 1998. The increase in income was primarily due to SET's acquisition of CNG Energy Services Corporation, a subsidiary of Pittsburgh-based Consolidated Natural Gas Company, in July 1998. Effective April 1999, PE transferred its ownership interest in SET to Sempra Energy. INTERNATIONAL OPERATIONS In conjunction with the PE/Enova business combination, in March 1999, Enova's and PE's ownership interests in international subsidiaries were transferred to Sempra Energy at book value. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Except for the matters referred to in the Company's 1998 Annual Report or referred to elsewhere in this Quarterly Report on Form 10-Q for the three months ended March 31, 1999, neither the Company nor any of its affiliates is a party to, nor is its property the subject of, any material pending legal proceedings other than routine litigation incidental to its businesses. ITEM 4. SUBMISSION OF MATTERS TO VOTE At the annual meeting on May 11, 1999, the Company's shareholders elected 16 directors to hold office until the next annual meeting and until their successors have been elected and qualified. The name of each nominee and the number of shares voted for or withheld were as follows: Nominees Votes For Votes Withheld - ------------------------------------------------------------------- Stephen L. Baum 83,917,664 -- Hyla H. Bertea 83,917,664 -- Ann L. Burr 83,917,664 -- Herbert L. Carter 83,917,664 -- Richard A. Collato 83,917,664 -- Daniel W. Derbes 83,917,664 -- Richard D. Farman 83,917,664 -- Wilford D. Godbold, Jr. 83,917,664 -- Robert H. Goldsmith 83,917,664 -- William D. Jones 83,917,664 -- Ignacio E. Lozano, Jr. 83,917,664 -- Ralph R. Ocampo 83,917,664 -- William G. Ouchi 83,917,664 -- Richard J. Stegemeier 83,917,664 -- Thomas C. Stickel 83,917,664 -- Diana L. Walker 83,917,664 -- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 10 - Material Contracts - Compensation 10.1 Form of Sempra Energy Severance Pay Agreement Exhibit 27 - Financial Data Schedules 27.1 Financial Data Schedule for the three months ended March 31, 1999. (b) Reports on Form 8-K None. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly cause this report to be signed on its behalf by the undersigned thereunto duly authorized. PACIFIC ENTERPRISES ------------------- (Registrant) Date: May 14, 1999 By: /s/ F. H. Ault ---------------------------- F. H. Ault Vice President and Controller 14 17

UT THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF CONSOLIDATED INCOME, BALANCE SHEET, AND CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000075527 PACIFIC ENTERPRISES 1,000,000 3-MOS DEC-31-1999 MAR-31-1999 PER-BOOK 2,919 47 1,053 347 180 4,546 1,089 0 88 1,177 0 80 970 0 0 0 208 0 0 0 2,111 4,546 614 40 508 548 66 5 71 23 48 1 47 100 0 318 0 0

EXHIBIT 10.1 SEMPRA ENERGY SEVERANCE PAY AGREEMENT THIS AGREEMENT (this "Agreement"), dated as of December 1, 1998 (the "Effective Date") is made by and between SEMPRA ENERGY, a California corporation, and __________________ (the "Executive"). WHEREAS, the Executive is currently employed by Sempra Energy or a subsidiary of Sempra Energy (Sempra Energy and its subsidiaries are hereinafter collectively referred to as the "Company") as ______ (Title); and WHEREAS, the Board of Directors of Sempra Energy (the "Board") has determined that it is in the best interests of the Company to institute formalized severance arrangements for certain of the executives of the Company, including the Executive. NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, the Company and the Executive hereby agree as follows: Section 1. Definitions. For purposes of this Agreement, the following capitalized terms have the meanings set forth below: "Affiliate" has the meaning ascribed to such term in Rule 12b-2 promulgated under the Exchange Act. "Beneficial Owner" has the meaning set forth in Rule 13d-3 under the Exchange Act. "Cause" means (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company (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 2 hereof), or (ii) the Executive's commission of one or more acts of moral turpitude that constitute a violation of applicable law (including but not limited to a felony) which have or result in an adverse effect on the Company, monetarily or otherwise, or one or more significant acts of dishonesty. For purposes 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 interests of the Company. Notwithstanding the foregoing, the Executive shall not be deemed terminated for Cause pursuant to clause (i) of this definition unless and until the Executive shall have been provided with reasonable notice of and, if possible, a reasonable opportunity to cure the facts and circumstances claimed to provide a basis for termination of the Executive's employment for Cause. A "Change in Control" of Sempra Energy shall be deemed to have occurred when: (a) Any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of Sempra Energy representing twenty percent (20%) or more of the combined voting power of Sempra Energy's then outstanding securities; or (b) The following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the Effective Date, constitute the Board 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 Sempra Energy) whose appointment or election by the Board or nomination for election by Sempra Energy'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 (c) There is consummated a merger or consolidation of Sempra Energy or any direct or indirect subsidiary of Sempra Energy with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of Sempra Energy 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 Sempra Energy or any subsidiary of Sempra Energy, at least sixty percent (60%) of the combined voting power of the securities of Sempra Energy 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 Sempra Energy (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of Sempra Energy (not including in the securities beneficially owned by such Person any securities acquired directly from Sempra Energy or its affiliates other than in connection with the acquisition by Sempra Energy or its affiliates of a business) representing twenty percent (20%) or more of the combined voting power of Sempra Energy's then outstanding securities; or (d) The shareholders of Sempra Energy approve a plan of complete liquidation or dissolution of Sempra Energy or there is consummated an agreement for the sale or disposition by Sempra Energy of all or substantially all of Sempra Energy's assets, other than a sale or disposition by Sempra Energy of all or substantially all of Sempra Energy's assets to an entity, at least sixty percent (60%) of the combined voting power of the voting securities of which are owned by shareholders of Sempra Energy in substantially the same proportions as their ownership of Sempra Energy immediately prior to such sale. "Change in Control Date" means the date on which a Change in Control occurs. "Code" means the Internal Revenue Code of 1986, as amended. "Date of Termination" has the meaning assigned thereto in Section 2 hereof. "Disability" has the meaning set forth in the SERP (as defined below), as in effect from time to time; provided, however, that in no event shall the Executive be deemed to have incurred a Disability hereunder if there exists a reasonable expectation that the Executive will return to work on a full-time basis within ninety (90) days of the events giving rise to the Disability. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the applicable rulings and regulations thereunder. "Good Reason" means: (a) Prior to a Change in Control, the occurrence of any of the following without the prior written consent of the Executive, unless such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination (as discussed in Section 2 below): (I) the assignment to the Executive of any duties materially inconsistent with the range of duties and responsibilities appropriate to a senior executive within the Company (such range determined by reference to past, current and reasonable practices within the Company); (ii) a material reduction in the Executive's overall standing and responsibilities within the Company, but not including (A) a mere change in title, or (B) a transfer within Company, which, in the case of both (A) and (B), does not adversely affect the Executive's overall status within the Company; (iii) a material reduction by the Company in the Executive's aggregate annualized compensation and benefits opportunities, except for across-the-board reductions (or modifications of benefit plans) similarly affecting all similarly situated executives (both of the Company and of any Person then in control of the Company) of comparable rank with the Executive; (iv) the failure by the Company to pay to the Executive any portion of the Executive's current compensation and benefits or any portion of an installment of deferred compensation under any deferred compensation program of the Company within thirty (30) days of the date such compensation is due; (v) any purported termination of the Executive's employment that is not effected pursuant to a Notice of Termination satisfying the requirements of Section 2 hereof; for purposes of this Agreement, no such purported termination shall be effective; (vi) the failure by the Company to obtain a satisfactory agreement from any successor of the Company requiring such successor to assume and agree to perform the Company's obligations under this Agreement, as contemplated in Section 8(a) hereof; or (vii) the failure by the Company to comply with any material provision of this Agreement. (b) From and after a Change in Control, the occurrence of any of the following without the prior written consent of the Executive, unless such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination (as discussed in Section 2 below): (I) an adverse change in the Executive's title, authority, duties, responsibilities or reporting lines as in effect immediately prior to the Change in Control; (ii) a reduction of ten percent (10%) or more by the Company in the Executive's aggregate annualized compensation and benefits opportunities, except for across-the-board reductions (or modifications of benefit plans) of less than ten percent (10%) similarly affecting all similarly situated executives (both of the Company and of any Person then in control of the Company) of comparable rank with the Executive; (iii) the relocation of the Executive's principal place of employment immediately prior to the Change in Control Date (the "Principal Location") to a location which is both further away from Executive's residence and more than thirty (30) miles from such Principal Location, or the Company's requiring the Executive to be based anywhere other than such Principal Location (or permitted relocation thereof), or a substantial increase in the Executive's business travel obligations outside of the Southern California area as of the Effective Date other than any such increase that (A) arises in connection with extraordinary business activities of the Company and (B) is understood not to be part of the Executive's regular duties with the Company; (iv) the failure by the Company to pay to the Executive any portion of the Executive's current compensation and benefits or any portion of an installment of deferred compensation under any deferred compensation program of the Company within thirty (30) days of the date such compensation is due; (v) any purported termination of the Executive's employment that is not effected pursuant to a Notice of Termination satisfying the requirements of Section 2 hereof; for purposes of this Agreement, no such purported termination shall be effective; (vi) the failure by the Company to obtain a satisfactory agreement from any successor of the Company requiring such successor to assume and agree to perform the Company's obligations under this Agreement, as contemplated in Section 8(a) hereof; or (vii) the failure by the Company to comply with any material provision of this Agreement. From and after a Change in Control, the Executive's determination that an act or failure to act constitutes Good Reason shall be presumed to be valid unless such determination is deemed to be unreasonable by an arbitrator. 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. "Involuntary Termination" means (a) a termination of employment by the Company other than for Cause, death, or Disability, or (b) the Executive's resignation of employment with the Company for Good Reason; provided, however, that, except as provided in the last paragraph of Section 4, a termination of the Executive's employment by reason of his or her retirement prior to a Change in Control shall not constitute an Involuntary Termination hereunder. "Notice of Termination" has the meaning assigned thereto in Section 2 hereof. "Person" means any person, entity or "group" within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act, except that such term shall not include (i) the Company or any of its Affiliates, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, (iv) a corporation owned, directly or indirectly, by the shareholders of Sempra Energy in substantially the same proportions as their ownership of stock of Sempra Energy, or (v) a person or group as used in Rule 13d-1(b) under the Exchange Act. Section 2. Date and Notice of Termination. Any termination of the Executive's employment by the Company or by the Executive shall be communicated by a written notice of termination to the other party (the "Notice of Termination"). Where applicable, the Notice of Termination shall indicate the specific termination provision in this Agreement relied upon 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. The date of the Executive's termination of employment with the Company (the "Date of Termination") shall be determined as follows: (i) if the Executive's employment is terminated by the Company, either with or without Cause, the Date of Termination shall be the date specified in the Notice of Termination (which, in the case of a termination by the Company other than for Cause, shall not be less than two (2) weeks from the date such Notice of Termination is given unless the Company elects to pay the Executive, in addition to any other amounts payable hereunder, an amount equal to two (2) weeks of the Executive's base salary in effect on the Date of Termination), and (ii) if the basis for the Executive's Involuntary Termination is his or her resignation for Good Reason, the Date of Termination shall be determined by the Company, but shall not in any event be less than fifteen (15) days nor more than sixty (60) days from the date such Notice of Termination is given. Unless the Board determines otherwise, notice by Executive of his or her resignation for Good Reason must be made within 180 days of the act or failure to act the Executive alleges to constitute Good Reason. Section 3. Severance Benefits Prior to Change in Control. Except as provided in Section 4 and Section 12(g) hereof, in the event of the Involuntary Termination of the Executive, the Company shall pay the Executive, in one lump sum cash payment as soon as practicable following such Involuntary Termination, (A) the full amount of any earned but unpaid base salary through the Date of Termination at the rate in effect on such date, plus (B) an amount (the "Severance Payment") equal to the sum of (X) the Executive's annual base salary as in effect on the Date of Termination and (Y) his or her average annual bonus payment for the two years immediately preceding the Date of Termination (or in the event that the Executive has not been employed for two years, then his target bonus for the year in which the termination occurs). In addition to the Severance Payment, the Executive shall be entitled to the following additional benefits: (I) Equity Based Compensation. The Executive shall retain all rights to any equity-based compensation awards to the extent set forth in the applicable plan and/or award agreement. (ii) Welfare Benefits. Subject to Section 6 below, for a period of ______ following the Date of Termination, the Executive and his or her dependents shall be provided with health insurance benefits substantially similar to those provided to the Executive and his or her dependents immediately prior to the Date of Termination; provided, however, that such benefits shall be provided on substantially the same terms and conditions and at the same cost to the Executive as in effect immediately prior to the Date of Termination. (iii) Outplacement Services. The Executive shall receive outplacement services suitable to his or her position for a period of eighteen (18) months following the Date of Termination, or if earlier, until the first acceptance of an offer of employment with a subsequent employer, in an aggregate amount not to exceed $50,000. (iv) Financial Planning Services. The Executive shall receive financial planning services for a period of eighteen (18) months following the Date of Termination at a level consistent with the benefits provided under the Company's financial planning program for the Executive, as in effect immediately prior to the Date of Termination. Section 4. Severance Benefits in Connection with and After Change in Control. Notwithstanding the provisions of Section 3 above, in the event of the Involuntary Termination of the Executive within two years following a Change in Control, in lieu of the payments described in Section 3 above, the Company shall pay the Executive, in one lump sum cash payment as soon as practicable following such Involuntary Termination, (A) the full amount of any earned but unpaid base salary through the Date of Termination at the rate in effect on such date, plus (B) an amount (the "Change in Control Severance Payment") equal to ____ the sum of (X) the Executive's annual base salary as in effect immediately prior to the Change in Control or the Date of Termination, whichever is greater, and (Y) his or her average annual bonus payment for the two years immediately preceding the Change in Control Date or the Date of Termination, whichever is greater (or in the event that the Executive has not been employed for two years, then his target bonus for the year in which the Change in Control or in which the termination occurs, whichever is greater). In addition to the Change in Control Severance Payment, the Executive shall be entitled to the following additional benefits: (I) Equity-Based Compensation. Notwithstanding the provisions of any applicable equity-compensation plan or award agreement to the contrary, all equity-based incentive compensation awards (including, without limitation, stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance share awards, section 162(m) awards, and dividend equivalents) held by the Executive under any annual incentive compensation plan or long-term incentive compensation plan maintained by the Company shall immediately vest and become exercisable or payable, as the case may be, as of the Date of Termination, to be exercised or paid, as the case may be, in accordance with the terms of the applicable plan and award agreement, and any restrictions on any such awards shall automatically lapse; provided, however, that any such awards granted on or after the Effective Date shall remain outstanding and exercisable until the earlier of (A) eighteen (18) months following the Date of Termination or (B) the expiration of the original term of such award (it being understood that all awards granted prior to the Effective Date shall remain outstanding and exercisable for a period that is no less than that provided for in the applicable agreement in effect as of the date of grant). (ii) SERP. The Executive shall receive a lump sum cash payment representing the present value as of the Date of Termination of his or her Supplemental Executive Retirement Plan ("SERP") benefits, to be calculated as if the Executive had reached age 62 (or his or her actual age if older) for service and vesting purposes, and applying either the applicable early retirement factors under the Company's tax-qualified retirement plan, if the Executive is less than age 62 but at least 55, or actuarially determined early retirement factors if the Executive is less than age 55 and the applicable lump-sum factors under the Company's tax-qualified retirement plan. (iii) Welfare Benefits. Subject to Section 6 below, for a period of _____ months following the Date of Termination, the Executive and his or her dependents shall be provided with life, disability, 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 the Change in Control Date, whichever is more favorable to the Executive; provided, however, that such benefits shall be provided on substantially the same terms and conditions and at the same cost to the Executive as in effect immediately prior to the Date of Termination or the Change in Control Date, whichever is more favorable to the Executive. (iv) Outplacement Services. The Executive shall receive outplacement services suitable to his or her position for a period of eighteen (18) months following the Date of Termination, or if earlier, until the first acceptance of an offer of employment with a subsequent employer, in an aggregate amount not to exceed $50,000. (v) Financial Planning Services. The Executive shall receive financial planning services for a period of eighteen (18) months following the Date of Termination at a level consistent with the benefits provided under the Company's financial planning program for the Executive, as in effect immediately prior to the Date of Termination or the Change in Control Date, whichever is more favorable to the Executive. (vi) Deferred Compensation. Notwithstanding any election heretofore or hereafter made by the Executive under any deferred compensation plan of the Company, the Executive shall receive a lump sum cash payment in an amount equal to any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) under any deferred compensation plan of the Company. Notwithstanding anything contained herein, if a Change in Control occurs and the Executive's employment with the Company is terminated by reason of an Involuntary Termination prior to the Change in Control Date, and if such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect the Change in Control or (ii) otherwise arose in connection with or in anticipation of the Change in Control, then the Executive shall, in lieu of the payments described in Section 3 above, be entitled to the Change in Control Severance Payment and the additional benefits described in this Section 4 as if such Involuntary Termination had occurred within two years following the Change in Control. Section 5. Release. Notwithstanding anything herein to the contrary, the Company's obligation to make the payments provided for in this Agreement is expressly made subject to and conditioned upon (i) the Executive's prior execution of a release substantially in the form attached hereto as Exhibit A within forty-five (45) days after the applicable Date of Termination and (ii) the Executive's non- revocation of such release in accordance with the terms thereof. Section 6. No Mitigation or Offset. (a) No Mitigation by Executive. Except as otherwise expressly provided herein, the Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for herein be reduced by any compensation earned by the Executive as the result of employment by another employer; provided, however, that if the Executive becomes employed with another employer and is eligible to receive life, disability, accident and health insurance benefits under another employer-provided plan, the Executive's continued plan coverage as set forth in Section 3(ii) or 4(iii) hereof, as the case may be, shall be secondary to the coverage provided under such other plan(s) during such applicable period of eligibility. (b) No Offset by Company. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others, provided that nothing herein shall preclude the Company from separately pursuing recovery from the Executive based on any such claim. Section 7. Section 280G (a) Gross-Up. 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 (A) the Company, (B) any Person whose actions result in a Change in Control or (C) any Person affiliated with the Company or such Person) (all such payments and benefits, including the Change in Control Severance Payments, being hereinafter called the "Total Payments") would be subject (in whole or part) to the tax (the "Excise Tax") imposed under section 4999 of the Code, the Company shall pay to the Executive such additional amounts (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the date on which the Gross-Up Payment is calculated for purposes of this section, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder, the Executive shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the Gross-Up Payment being repaid by the Executive to the extent that such repayment results in a reduction in Excise Tax and/or a federal, state or local income tax deduction) plus interest on the amount of such repayment at the rate provided in section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess) at the time that the amount of such excess is finally determined. The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. (b) Accounting Firm. All determinations to be made with respect to this Section 7 shall be made by the Company's independent accounting firm (or, in the case of a payment following a Change in Control, the accounting firm that was, immediately prior to the Change in Control, the Company's independent auditor). The accounting firm shall be paid by the Company for its services performed hereunder. Section 8. Successors; Binding Agreement. (a) Assumption by Successor. Sempra Energy will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of Sempra Energy expressly to assume and to agree to perform its obligations under this Agreement in the same manner and to the same extent that Sempra Energy would be required to perform such obligations if no such succession had taken place; provided, however, that no such assumption shall relieve Sempra Energy of its obligations hereunder. As used herein, the "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid that assumes and agrees to perform its obligations by operation of law or otherwise. (b) Enforceability; Beneficiaries. This Agreement shall be binding upon and inure to the benefit of the Executive (and the Executive's personal representatives and heirs) and the Company and any organization which succeeds to substantially all of the business or assets of Sempra Energy, whether by means of merger, consolidation, acquisition of all or substantially all of the assets of Sempra Energy or otherwise, including, without limitation, as a result of a Change in Control or by operation of law. 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 should die while any amount would still be payable to such Executive hereunder if he or she had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to his or her devisee, legatee or other designee or, if there is no such designee, to his or her estate. Section 9. Confidentiality; Non Solicitation. (a) Confidentiality. The Executive acknowledges that in the course of his or her employment within the Company, 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 Company; and the Executive agrees that it would be extremely damaging to the Company if such Proprietary Information were disclosed to a competitor of the Company or to any other person or corporation. The Executive understands and agrees that all Proprietary Information the Executive has acquired during the course of such employment has been divulged to the Executive in confidence and further understands and agrees to keep all Proprietary Information secret and confidential (except for such information which is or becomes publicly available other than as a result of a breach by the Executive of this provision) without limitation in time. In view of the nature of the Executive's employment and the Proprietary Information the Executive has acquired during the course of such employment, the Executive likewise agrees that the Company would be irreparably harmed by any disclosure of Proprietary Information in violation of the terms of this paragraph and that the Company shall therefore be entitled to preliminary and/or permanent injunctive relief prohibiting the 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 it. Inquiries regarding whether specific information constitutes Proprietary Information shall be directed to the Company's General Counsel (or, if such position is vacant, the Company's Chief Executive Officer); provided, however, that the Company shall not unreasonably classify information as Proprietary Information. (b) Non-Solicitation of Employees. The Executive recognizes that he or she possesses and will possess confidential information about other employees of the Company, relating to their education, experience, skills, abilities, compensation and benefits, and interpersonal relationships with customers of the Company. The 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 Company 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 Company. The Executive agrees that for a period of one (1) year following the Date of Termination, he or she will not, directly or indirectly, solicit or recruit any employee of the Company for the purpose of being employed by him or her or by any other competitor of the Company 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 the Company 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 the Company who has either first contacted the Executive or regarding whose employment the Executive has discussed with and received written approval of the Company's Senior Vice President, Human Resources (or, if such position is vacant, the Company's Chief Executive Officer), prior to making such solicitation or recruitment. In view of the nature of the Executive's employment with the Company, the Executive likewise agrees that the Company would be irreparably harmed by any solicitation or recruitment in violation of the terms of this paragraph and that the Company shall therefore be entitled to preliminary and/or permanent injunctive relief prohibiting the 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 it. (c) Survival of Provisions. The obligations contained in this Section 9 shall survive the termination or expiration of the Executive's employment within the Company 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. Section 10. Notices. For the purpose of this Agreement, notices and all other communications provided for in this 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 to Sempra Energy, 101 Ash Street, San Diego, CA 92101, Attn: Human Resources Administrator, or to the Executive at the address in the records of the Company, 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 receipt. Section 11. Administration Prior to Change in Control. Prior to a Change in Control, the compensation committee of the Board (the "Compensation Committee") shall have full and complete authority to construe and interpret the provisions of this Agreement, to determine an individual's entitlement to benefits under this Agreement, to make in its sole and absolute discretion all determinations contemplated under this Agreement, to investigate and make factual determinations necessary or advisable to administer or implement this Agreement, and to adopt such rules and procedures as it deems necessary or advisable for the administration or implementation of this Agreement. All determinations made under this Agreement by the Compensation Committee shall be final and binding on all interested persons. Prior to a Change in Control, the Compensation Committee may delegate responsibilities for the operation and administration of this Agreement to one or more officers or employees of the Company. The provisions of this Section 11 shall terminate and be of no further force and effect upon the occurrence of a Change in Control. Section 12. Miscellaneous. (a) No Right of Employment. Nothing in this Agreement shall be construed as giving the Executive any right to be retained in the employ of the Company or shall interfere in any way with the right of the Company to terminate the Executive's employment at any time, with or without Cause. (b) Unfunded Obligation. The obligations under this Agreement shall be unfunded. Benefits payable under this Agreement shall be paid from the general assets of the Company. The Company shall have no obligation to establish any fund or to set aside any assets to provide benefits under this Agreement. (c) Rules of Construction. As used herein, the masculine gender shall be deemed to include the feminine and the singular form shall be deemed to encompass the plural, unless the context requires otherwise. Headings of sections (other than the definitions) are included solely for convenience of reference and shall not govern or control the meaning of the text of this Agreement. 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. (d) Tax Withholding. All amounts paid under this Agreement shall be subject to all applicable federal, state and local wage and employment tax withholding. (e) Exclusive Benefit. The Severance Payment, the Change in Control Severance Payment and all other benefits provided hereunder shall be in lieu of any other severance payments to which the Executive is entitled under any other severance plan or arrangement sponsored by the Company, as well as pursuant to any individual employment or severance agreement that was entered by the Executive and the Company, and, upon the Effective Date of this Agreement, all such plans, programs, agreements and arrangements are hereby automatically superseded and terminated. (f) Dispute Resolution. Any disagreement, dispute, controversy or claim arising out of or relating to this Agreement or the interpretation of this Agreement or any arrangements relating to this Agreement or contemplated in this Agreement or the breach, termination or invalidity thereof shall be settled by final and binding arbitration administered by JAMS/Endispute in San Diego, California in accordance with the then existing JAMS/Endispute Arbitration Rules and Procedures for Employment Disputes. In the event of such an arbitration proceeding, the Executive and the Company shall select a mutually acceptable neutral arbitrator from among the JAMS/Endispute panel of arbitrators. In the event the Executive and the Company cannot agree on an arbitrator, the Administrator of JAMS/Endispute will appoint an arbitrator. Neither the Executive nor the Company nor the arbitrator shall disclose the existence, content, or results of any arbitration hereunder without the prior written consent of all parties. Except as provided herein, the Federal Arbitration Act shall govern the interpretation, enforcement and all proceedings. The arbitrator shall apply the substantive law (and the law of remedies, if applicable) of the state of California, or federal law, or both, as applicable and the arbitrator is without jurisdiction to apply any different substantive law. The arbitrator shall have the authority to entertain a motion to dismiss and/or a motion for summary judgment by any party and shall apply the standards governing such motions under the Federal Rules of Civil Procedure. The arbitrator shall render an award and a written, reasoned opinion in support thereof. Judgment upon the award may be entered in any court having jurisdiction thereof. The Executive and the Company shall generally each be responsible for payment of one-half the amount of the arbitrator's fee; provided, however, that the Company 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 faith any issue arising under this Agreement relating to the termination of the Executive's employment in connection with a Change in Control or in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement on account of a Change in Control unless the arbitrator or court determines that the Executive had no reasonable basis for such claim. (g) Amendment and Termination. No provision of this Agreement may be amended or terminated unless it is agreed to in writing and signed by both parties hereto. Notwithstanding anything contained herein, this Agreement shall automatically terminate and be of no further force and effect and no benefits shall be payable hereunder in the event that the Company sells or otherwise disposes of any part of the business or assets of Sempra Energy or a subsidiary of Sempra Energy (other than such a sale or disposition which is part of a transaction or series of transactions which would result in a Change in Control) and as a result of such transaction, the Executive is no longer employed by the Company or any of its Affiliates. (h) 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. (I) Governing Law. This Agreement shall be governed by the laws of the State of California, without giving effect to conflicts of laws principles thereof. (j) Nonexclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, plan, program, policy or practice provided by the Company and for which the Executive may qualify (except with respect to any benefit to which the Executive has waived his rights in writing), nor shall anything herein limit or otherwise affect such rights as the Executive may have under any other contract or agreement entered into after the Effective Date with the Company. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any benefit, plan, policy, practice or program of, or any contract or agreement entered into with, the Company shall be payable in accordance with such benefit, plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. SEMPRA ENERGY By: ________________________ Richard D. Farman Chairman & Chief Executive Officer EXECUTIVE ________________________ ________________________