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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, 1994
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Commission file number 1-40
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Pacific Enterprises
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(Exact name of registrant as specified in its charter)
California 94-0743670
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
633 West Fifth Street, Los Angeles, California 90071-2006
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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)
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
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The number of shares of common stock outstanding on April 29, 1994 was
81,976,897.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
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PACIFIC ENTERPRISES AND SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED INCOME
(Dollars are in Millions
except per share amounts)
Three Months Ended
March 31
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1994 1993
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(Unaudited)
Revenues and Other Income:
Operating revenues $ 705 $ 773
Other 6 6
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Total 711 779
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Expenses:
Cost of gas distributed 332 355
Operating expenses 186 219
Depreciation and amortization 61 59
Franchise payments and other taxes 32 35
Preferred dividends of a subsidiary 2 2
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Total 613 670
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Income from Operations
Before Interest and Taxes 98 109
Interest 31 38
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Income from Operations
Before Income Taxes 67 71
Income Taxes 29 33
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Net Income 38 38
Dividends on Preferred Stock 3 4
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Net Income Applicable to
Common Stock $ 35 $ 34
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Net Income per Share of Common Stock $ .43 $ .45
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Dividends Declared per Share of Common Stock $ .30
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Weighted Average Number of Shares of
Common Stock Outstanding (in thousands) 81,717 75,367
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See Notes to Condensed Consolidated Financial Statements.
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PACIFIC ENTERPRISES AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
(Millions of Dollars)
March 31 December 31
1994 1993
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(Unaudited)
Property, Plant and Equipment $5,797 $5,763
Less Accumulated Depreciation and
Amortization 2,531 2,476
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Total property, plant and
equipment-net 3,266 3,287
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Current Assets:
Cash and cash equivalents 144 152
Accounts receivable (less allowance
for doubtful receivables of
$20 million at March 31, 1994 and
$19 million at December 31, 1993) 512 519
Income taxes receivable 20
Deferred income taxes 8
Gas in storage 3 53
Other inventories 36 33
Regulatory accounts receivable 303 449
Prepaid expenses 26 30
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Total current assets 1,024 1,264
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Other Investments 51 51
Other Receivables 31 31
Regulatory Assets 910 918
Other Assets 76 45
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Total $5,358 $5,596
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See Notes to Condensed Consolidated Financial Statements.
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PACIFIC ENTERPRISES AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEET
CAPITALIZATION AND LIABILITIES
(Millions of Dollars)
March 31 December 31
1994 1993
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(Unaudited)
Capitalization:
Shareholders' equity:
Capital stock
Remarketed preferred $ 148 $ 148
Preferred 110 110
Common 1,089 1,048
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Total capital stock 1,347 1,306
Retained earnings, after elimination
of accumulated deficit of
$452 million against common stock
at December 31, 1992 as part of
quasi-reorganization 126 116
Deferred compensation relating to
Employee Stock Ownership Plan (54) (138)
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Total shareholders' equity 1,419 1,284
Preferred stocks of a subsidiary 195 195
Long-term debt 1,262 1,262
Debt of Employee Stock Ownership Plan 130 132
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Total capitalization 3,006 2,873
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Current Liabilities:
Short-term debt 178 267
Accounts payable 696 940
Accrued income taxes 1
Deferred income taxes 4
Other taxes payable 57 52
Long-term debt due within one year 56 58
Accrued interest 66 62
Other 101 84
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Total current liabilities 1,159 1,463
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Long-Term Liabilities 250 251
Customer Advances for Construction 45 45
Postretirement Benefits Other than Pensions 252 255
Deferred Income Taxes 170 181
Deferred Investment Tax Credits 72 73
Other Deferred Credits 404 455
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Total $5,358 $5,596
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See Notes to Condensed Consolidated Financial Statements.
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PACIFIC ENTERPRISES AND SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
(Millions of Dollars)
Three Months Ended
March 31
1994 1993
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(Unaudited)
Cash Flows from Operating Activities:
Net Income $ 38 $ 38
Adjustments to reconcile net income
to net cash provided by continuing
operations:
Depreciation and amortization 61 59
Deferred income taxes 61 (2)
Other (7) (15)
Net change in other working capital
components 17 307
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Total from continuing operations 170 387
Changes in operating assets and
liabilities of discontinued
operations 106
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Net cash provided by operating
activities 170 493
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Cash Flows from Investing Activities:
Expenditures for property, plant and
equipment (40) (49)
Increase in other receivables, regulatory
assets and other assets (21) (13)
Net investing activities relating to
discontinued operations 102
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Net cash provided by (used in)
investing activities (61) 40
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See Notes to Condensed Consolidated Financial Statements.
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PACIFIC ENTERPRISES AND SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS (CONTINUED)
(Millions of Dollars)
Three Months Ended
March 31
1994 1993
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(Unaudited)
Cash Flows from Financing Activities:
Sale of common stock 4 2
Sale of preferred stock of a subsidiary 75
Redemption of preferred stock of a
subsidiary (75)
Increase in long-term debt 500
Decrease in long-term debt (4) (828)
Decrease in short-term debt (89) (215)
Common dividends paid (25)
Preferred dividends paid (3) (4)
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Net cash used in
financing activities (117) (545)
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Decrease in cash and cash equivalents (8) (12)
Cash and cash equivalents, January 1 152 432
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Cash and cash equivalents, March 31 $ 144 $ 420
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Supplemental Disclosure of Cash Flow
Information:
Cash paid (refunded) during the
period for:
Interest (net of amount capitalized) $ 27 $ 38
Income taxes $(106)
See Notes to Condensed Consolidated Financial Statements.
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PACIFIC ENTERPRISES AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF ACCOUNTING POLICIES
The accompanying condensed consolidated financial statements have been
prepared in accordance with the interim period reporting requirements of Form
10-Q. Reference is made to the Form 10-K for the year ended December 31,
1993 for additional information.
Results of operations for interim periods are not necessarily indicative of
results for the entire year. In order to match revenues and costs for
interim reporting purposes, the Southern California Gas Company (SoCalGas or
Utility) defers revenues related to costs which are expected to be incurred
later in the year. In the opinion of management, the accompanying statements
reflect all adjustments which are necessary for a fair presentation. These
adjustments are of a normal recurring nature. Certain changes in account
classification have been made in the prior years' consolidated financial
statements to conform to the 1994 financial statement presentation.
2. DISCONTINUED OPERATIONS AND QUASI-REORGANIZATION
During 1993, Pacific Enterprises (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 shareholders' equity 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.
The Company resumed its dividend at a $1.20 per common share annual rate in
the third quarter of 1993 after having suspended the regular quarterly
dividend in the second quarter of 1992. In April 1994, the Company increased
the regular quarterly dividend from 30 cents to 32 cents per share. The
increased dividend is payable on May 16, 1994 to holders of common stock of
record at the close of business on April 20, 1994.
In connection with the sale of retailing, the Company assumed Thrifty's
Employee Stock Ownership Plan (ESOP) and related indebtedness, and Thrifty'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 primarily reflecting the settlement of the buyer's remaining debt
service obligation and cancellation of a warrant granted to the Company in
connection with the Thrifty sale to purchase approximately 10% of the buyer's
common stock. Since the sale of retailing 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
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which $37 million was to common stock.
3. ACCOUNTING FOR EMPLOYEE STOCK OWNERSHIP PLAN
At January 1, 1994, the Company adopted the provisions of the American
Institute of Certified Public Accountants Statement of Position No. 93-6,
Employers' Accounting for Employee Stock Ownership Plans (SOP 93-6). The SOP
93-6 reduces the weighted average shares of common stock outstanding by the
number of unallocated shares in the ESOP (2.5 million shares) and thus
increased earnings per share by $.01 per share for the first quarter of 1994.
4. RESTRUCTURING OF GAS SUPPLY CONTRACTS AND COMPREHENSIVE SETTLEMENT OF
REGULATORY ISSUES
RESTRUCTURING OF GAS SUPPLY CONTRACTS. The Company and its gas supply
affiliates have reached agreements with suppliers of California offshore and
Canadian natural gas for a restructuring of long-term gas supply contracts.
The cost of these supplies to SoCalGas had been substantially in excess of
SoCalGas' average delivered cost of gas. During 1993, these excess costs
totaled approximately $125 million.
The agreements substantially reduce the ongoing delivered costs of these gas
supplies and provide lump sum settlement payments of $375 million to the
suppliers. The expiration date for the Canadian gas supply contract has been
shortened from 2012 to 2003, and the supplier of California offshore gas
continues to have an option to purchase related gas treatment and pipeline
facilities owned by the Company's gas supply affiliate. The agreement with
the suppliers of Canadian gas is subject to certain Canadian regulatory and
other approvals.
COMPREHENSIVE SETTLEMENT OF REGULATORY ISSUES. The Utility and a number of
interested parties (including the Division of Ratepayer Advocates (DRA) of
the CPUC, large noncore customers and ratepayer groups) proposed for CPUC
approval a comprehensive settlement (Comprehensive Settlement) of a number of
pending regulatory issues including partial rate recovery of restructuring
costs associated with the gas supply contracts discussed above. The
Comprehensive Settlement, upon approval by the CPUC, would permit the Company
to recover in utility rates approximately 80 percent of the contract
restructuring costs of $375 million and accelerated amortization of related
pipeline assets of its gas supply affiliates of approximately $130 million,
together with interest, over a period of approximately five years. In
addition to the gas supply issues, the Comprehensive Settlement addresses
noncore customer rates, reasonableness reviews, a gas cost incentive
mechanism and attrition. The Company reflected the impact of the
Comprehensive Settlement in its financial statements in 1993. SoCalGas has
filed a financing application with the CPUC primarily for the borrowing of
$425 million to provide for funds needed under the Comprehensive Settlement.
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On April 20, 1994, the CPUC approved the Comprehensive Settlement, subject to
certain conditions. The Company is evaluating these conditions, but does not
currently believe they will have a material impact on the financial
statements of the Company.
5. GAS COST INCENTIVE MECHANISM
On March 16, 1994, the CPUC approved a new process for evaluating SoCalGas'
purchases, replacing the previous process of reasonableness reviews. The new
gas cost incentive mechanism (GCIM) is a three-year pilot program beginning
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.
If SoCalGas' cost of gas exceeds the benchmark level by a tolerance band,
then the excess costs will be shared equally between ratepayers and
shareholders. Savings from gas purchased below the benchmark level will also
be shared equally between ratepayers and shareholders. For the first year of
the program, the GCIM provides a 4.5 percent tolerance band. For the second
and third years of the program, the tolerance band decreases to 4.0 percent.
6. COMMITMENTS AND CONTINGENT LIABILITIES
The Gas Company 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. In addition, the Company is one of a large number of
major corporations that have been named by federal authorities as potentially
responsible parties for environmental remediation of two other industrial
sites and a landfill site. These 45 sites are in various stages of
investigation or remediation. It is anticipated that the investigation, and
if necessary, remediation of these sites will be completed over a period of
from 10 years to 20 years.
In November 1993, a collaborative settlement agreement between the Utility
and other California energy utilities and the DRA was submitted to the CPUC
for approval. The settlement recommended a ratemaking mechanism that would
provide recovery of 90 percent of environmental investigation and remediation
costs without reasonableness review. In addition, the utilities would have
the opportunity to retain a percentage of any insurance recoveries to offset
the 10 percent of costs not recovered in rates. On May 4, 1994, the CPUC
adopted the cost sharing mechanism discussed above.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Pacific Enterprises (Company) is a public utility holding company and parent
of Southern California Gas Company (SoCalGas or Utility). The Utility owns
and operates a natural gas transmission, storage and distribution system that
serves almost 16 million persons through approximately 4.7 million meters in
535 cities and communities throughout most of southern California and parts
of central California, a service area of 23,000 square miles. The Utility is
dedicated to providing high quality gas service to residential, commercial,
industrial, utility electric generation (UEG) and wholesale customers. The
Utility is subject to regulation by the California Public Utilities
Commission (CPUC) which, among other things, establishes rates charged for
the gas service, including an authorized rate of return on investment.
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Condensed Consolidated
Financial Statements and the Company's Annual Report on Form 10-K.
CONSOLIDATED
Net income for the three months ended March 31, 1994 was $38 million, or $.43
per common share, compared to $38 million, or $.45 per common share, in 1993.
The weighted average number of shares of common stock outstanding in the
first quarter of 1994 increased 8 percent from the first quarter of 1993 to
81.7 million shares. The increase was due primarily to 8 million shares
issued in the May 1993 public offering partially offset by the effects of the
adoption of SOP 93-6 in 1994 (See Note 3 of Notes to Condensed Consolidated
Financial Statements).
As discussed in Note 2 of Notes to Condensed Consolidated Financial
Statements, the Company completed sales of its retailing and oil and gas
operations, and is focusing primarily on its natural gas utility and related
businesses. In 1992, the Company recorded losses on disposal of these
operations and effected a quasi-reorganization for financial reporting
purposes.
At March 31, 1994, the Company adjusted common stock and other Employee Stock
Ownership Plan (ESOP) related accounts on the balance sheet for the
settlement of certain ESOP issues which had been provided for in the loss on
sale of retailing in 1992 (See Note 2 of Notes to Condensed Consolidated
Financial Statements).
UTILITY AND RELATED OPERATIONS
Net income includes income of the Utility for the first quarter of 1994 of
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$42 million, compared to $44 million for the same period in 1993. Utility
earnings declined primarily due to the reduction in the authorized rate of
return on common equity from 11.9 percent in 1993 to 11.0 percent in 1994
partially offset by the growth in rate base.
SoCalGas' operating revenues and cost of gas distributed for the three months
ended March 31, 1994 decreased $70 million and $26 million, respectively,
compared to the same period in 1993. The decreases reflect lower volumes of
gas sold to core customers as a result of warmer weather in 1994 and
decreases in authorized gas margin and the average unit cost of gas.
RECENT CPUC REGULATORY ACTIVITY. The Utility and a number of interested
parties (including the Division of Ratepayer Advocates of the CPUC, large
noncore customers and ratepayer groups) have proposed for CPUC approval a
comprehensive settlement (Comprehensive Settlement) of a number of pending
regulatory issues including partial rate recovery of restructuring costs
associated with gas supply contracts (See Note 4 of Notes to Condensed
Consolidated Financials Statements). The Comprehensive Settlement, upon
approval by the CPUC, would permit the Utility to recover in rates
approximately 80 percent of its contract restructuring cost of $375 million
and accelerated depreciation of related pipeline assets of approximately $130
million, together with interest, over a period of approximately five years.
The Utility has filed a financing application with the CPUC primarily for the
borrowing of $425 million to provide for funds needed under the Comprehensive
Settlement. On April 20, 1994, the CPUC announced it would approve the
Comprehensive Settlement provided certain conditions are accepted by the
Utility. The Utility is currently evaluating the effects of the conditions
on the proposed Comprehensive Settlement. For further discussion, see Note 4
of Notes to Condensed Consolidated Financial Statements.
In August 1993, the Utility filed for a $134 million rate increase with the
CPUC. Included in this BCAP filing is a rate structure designed to further
reduce subsidies by nonresidential core customers to residential customers by
better aligning residential rates with the cost of providing residential
service. The CPUC, in an interim decision, granted the Utility a $121
million revenue increase effective January 1, 1994. A final CPUC decision is
expected in late 1994.
FACTORS INFLUENCING FUTURE PERFORMANCE. Based on existing ratemaking
policies, future Utility earnings and cash flow will be determined primarily
by the allowed rate of return on common equity, the growth in rate base,
noncore pricing and the variance in gas volumes delivered to these customers
versus CPUC-adopted forecast deliveries, the recovery of gas and contract
restructuring costs if the Comprehensive Settlement is not implemented and
the ability of management to control expenses and investment in line with the
amounts authorized by the CPUC to be collected in rates. Also, the Company's
ability to earn revenues in excess of SoCalGas' authorized return from
noncore customers due to volume increases will be eliminated for the five
years of the Comprehensive Settlement described above. This is because
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forecasted deliveries in excess of the 1991 throughput levels used to
establish rates were contemplated in estimating the costs of the
Comprehensive Settlement at December 31, 1993. The impact of any future
regulatory restructuring and increased competitiveness in the industry,
including the continuing threat of customers bypassing SoCalGas' system and
obtaining service directly from interstate pipelines, could also affect
SoCalGas' future performance.
The Utility's earnings for 1994 will be affected by the reduction in the
authorized rate of return on common equity, reflecting the overall decline in
cost of capital, offset by higher rate base growth than in 1993. For 1994,
the Utility is authorized to earn a rate of return on rate base of 9.22
percent and an 11.00 percent rate of return on common equity compared to 9.99
percent and 11.90 percent, respectively, in 1993. Rate base is expected to
increase by approximately 4 percent to 5 percent in 1994. At 1994 authorized
levels, a 1 percent change in weighted average rate base changes earnings by
approximately $.02 per share. A change in the authorized return on common
equity of 1 percent changes earnings by approximately $.17 per share.
The Utility's operations are affected by a growing number of environmental
laws and regulations. These laws and regulations affect current operations
as well as future expansion and also require clean-up of facilities no longer
in use. Because of expected regulatory treatment, the Utility believes that
compliance with these laws will not have a significant impact on its
financial statements. For further discussion of regulatory and environmental
matters, see Notes 4, 5 and 6 of Notes to Condensed Consolidated Financial
Statements.
On January 17, 1994, SoCalGas' service area was struck by a major earthquake.
The result was a temporary disruption to approximately 150,000 of its
customers and damage to some facilities. The financial impact of the damages
related to the earthquake not recovered by insurance is expected to be
recovered in rates under an existing balancing account mechanism, and should
have no impact on the Company's financial statements.
PARENT COMPANY
Parent company expenses after taxes were $2 million for the first quarter of
both 1994 and 1993.
CAPITAL EXPENDITURES
Capital expenditures from continuing operations were $40 million and $49
million for the first three months of 1994 and 1993, respectively. Capital
expenditures are estimated to be $350 million in 1994, and will be financed
primarily by internally generated funds and by issuance of long-term debt.
Capital expenditures primarily represent investment in Utility operations.
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LIQUIDITY AND DIVIDENDS
The payment of future dividends will depend upon the existence of funds
legally available for dividends (primarily retained earnings), the prior
payment of dividends on Preferred Stock and Class A Preferred Stock, the
Company's then existing and anticipated financial condition and results of
operations, then existing and anticipated business conditions, capital
requirements, opportunities and prospects and such other factors as the Board
of Directors may from time to time deem relevant.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(b) Reports on Form 8-K filed during the quarter ended March 31, 1994 were
as follows:
Item 5 - Other Events - January 3, 1994
SIGNATURE
Pursuant to the requirements 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
(Registrant)
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Lloyd A. Levitin
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Lloyd A. Levitin
Executive Vice President and
Chief Financial Officer
(Chief Accounting Officer
and duly authorized signatory)
Date: May 16, 1994
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