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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 June 30, 1994, or
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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 incorporation (I.R.S. Employer
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 July 29, 1994 was
84,434,616.
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 Six Months Ended
June 30 June 30
------------------ ----------------
1994 1993 1994 1993
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(Unaudited)
Revenues and Other Income:
Operating revenues $651 $652 $1,356 $1,425
Other 5 7 11 13
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Total 656 659 1,367 1,438
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Expenses:
Cost of gas distributed 228 213 560 568
Operating expenses 232 249 418 468
Depreciation and amortization 62 61 123 120
Franchise payments and other taxes 28 26 60 61
Preferred dividends of a subsidiary 3 3 5 5
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Total 553 552 1,166 1,222
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Income from Operations
Before Interest and Taxes 103 107 201 216
Interest 29 29 60 67
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Income from Operations
Before Income Taxes 74 78 141 149
Income Taxes 32 36 61 69
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Net Income 42 42 80 80
Dividends on Preferred Stock 3 4 6 8
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Net Income Applicable to
Common Stock $ 39 $ 38 $ 74 $ 72
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Net Income per Share of Common Stock $.47 $.49 $.90 $.94
==== ==== ==== ====
Dividends Declared per Share of
Common Stock $.64 $.30 $.94 $.30
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Weighted Average Number of Shares of
Common Stock Outstanding (000) 81,937 78,673 81,843 77,029
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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)
June 30 December 31
1994 1993
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(Unaudited)
Property, Plant and Equipment $5,842 $5,763
Less Accumulated Depreciation and
Amortization 2,578 2,476
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Total property, plant and
equipment-net 3,264 3,287
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Current Assets:
Cash and cash equivalents 187 152
Accounts receivable (less allowance
for doubtful receivables of
$21 million at June 30, 1994 and
$19 million at December 31, 1993) 337 519
Income taxes receivable 20
Deferred income taxes 31 8
Gas in storage 11 53
Other inventories 35 33
Regulatory accounts receivable 385 449
Prepaid expenses 24 30
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Total current assets 1,010 1,264
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Other Investments 52 51
Other Receivables 31 31
Regulatory Assets 906 918
Other Assets 77 45
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Total $5,340 $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)
June 30 December 31
1994 1993
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(Unaudited)
Capitalization:
Shareholders' equity:
Capital stock
Remarketed preferred $ 128 $ 148
Preferred 110 110
Common 1,089 1,048
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Total capital stock 1,327 1,306
Retained earnings, after elimination
of accumulated deficit of
$452 million against common stock
at December 31, 1992 as part of
quasi-reorganization 112 116
Deferred compensation relating to
Employee Stock Ownership Plan (52) (138)
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Total shareholders' equity 1,387 1,284
Preferred stocks of a subsidiary 195 195
Long-term debt 1,231 1,262
Debt of Employee Stock Ownership Plan 130 132
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Total capitalization 2,943 2,873
Current Liabilities:
Short-term debt 180 267
Accounts payable 714 940
Accrued income taxes 68
Other taxes payable 17 52
Long-term debt due within one year 87 58
Accrued interest 61 62
Other 110 84
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Total current liabilities 1,237 1,463
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Long-Term Liabilities 222 251
Customer Advances for Construction 46 45
Postretirement Benefits Other than Pensions 249 255
Deferred Income Taxes 151 181
Deferred Investment Tax Credits 71 73
Other Deferred Credits 421 455
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Total $5,340 $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)
Six Months Ended
June 30
1994 1993
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(Unaudited)
Cash Flows from Operating Activities:
Net Income $ 80 $ 80
Adjustments to reconcile net income
to net cash provided by continuing
operations:
Depreciation and amortization 123 120
Deferred income taxes 40 37
Other (5) (23)
Net change in other working capital
components 83 165
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Net cash provided by continuing
operation 321 379
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Changes in operating assets and
liabilities of discontinued
operations 106
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Net cash provided by operating
activities 321 485
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Cash Flows from Investing Activities:
Expenditures for property, plant and
equipment (100) (117)
Increase in other investments (1) (3)
Increase in other receivables, regulatory
assets and other assets (20) (23)
Net investing activities relating to
discontinued operations 102
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Net cash used in investing
activities (121) (41)
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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)
Six Months Ended
June 30
1994 1993
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(Unaudited)
Cash Flows from Financing Activities:
Sale of common stock 4 173
Redemption of remarketed preferred stock (20)
Sale of preferred stock of a subsidiary 75
Redemption of preferred stock of a
subsidiary (75)
Increase in long-term debt 656
Decrease in long-term debt (5) (1,366)
Decrease in short-term debt (87) (188)
Common dividends paid (51)
Preferred dividends paid (6) (8)
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Net cash used in
financing activities (165) (733)
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Increase in cash and cash equivalents 35 (289)
Cash and cash equivalents, January 1 152 432
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Cash and cash equivalents, June 30 $ 187 $ 143
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Supplemental Disclosure of Cash Flow
Information:
Cash paid (refunded) during the
period for:
Interest (net of amount capitalized) $61 $80
Income taxes $20 $(53)
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, 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 common 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 quarterly dividend to $.32 per share. Two common dividends of
$.32 per share were declared in the second quarter, payable in the second and
third quarters of 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
which $37 million was to common stock.
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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). 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 for the three and six
months ended June 30, 1994) and thus increased earnings per share by $.01 and
$.03 for the three and six months ended June 30, 1994, respectively.
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
approvals.
COMPREHENSIVE SETTLEMENT OF REGULATORY ISSUES. The Utility and a number of
interested parties (including the Division of Ratepayer Advocates (DRA) of
the California Public Utilities Commission (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 was approved by the
CPUC on July 20, 1994 and will 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 obtained authorization from the CPUC for the borrowing of
up to $425 million primarily to provide for funds needed under the
Comprehensive Settlement.
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5. GAS COST INCENTIVE MECHANISM
On March 16, 1994, the CPUC approved a new process for evaluating SoCalGas'
gas 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. As of June 30, 1994, five gas manufacturing sites
had been remediated and certified by California environmental authorities.
One industrial site had also been removed from the list of environmental
liabilities through settlement and subsequent release by the committee of
responsible parties and federal authorities. There are 37 gas manufacturing
sites which remain to be investigated or remediated, in addition to one
landfill site and one industrial disposal site. 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
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 quarter ended June 30, 1994 was $42 million, or $.47 per
common share, compared to $42 million, or $.49 per common share, in 1993.
Net income for the six months ended June 30, 1994 was $80 million, or $.90
per common share, compared to $80 million, or $.94 per common share in 1993.
The weighted average number of shares of common stock outstanding in the
second quarter of 1994 increased 4 percent from the second quarter of 1993 to
82 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).
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UTILITY AND RELATED OPERATIONS
Net income includes income of the Utility for the second quarter of 1994 of
$43 million, compared to $45 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 and higher earnings from the
noncore market.
Net income includes income of the Utility for the six months ended June 30,
1994 and 1993 of $ 85 million and $89 million, respectively. The reduction
in the authorized rate of return on common equity was partially offset by the
growth in rate base.
SoCalGas' operating revenues and cost of gas distributed for the six months
ended June 30, 1994 decreased $73 million and $12 million, respectively,
compared to the same period in 1993. The decreases reflect lower volumes of
gas sold to core customers 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) 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 was
approved by the CPUC on July 20, 1994 and will 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 obtained authorization from the
CPUC for the borrowing of up to $425 million primarily to provide for funds
needed under the Comprehensive Settlement.
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 ability of management to control expenses and
investment in line with the amounts authorized by the CPUC to be collected in
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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 beginning August 1, 1994 per the Comprehensive
Settlement described above. This is because 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.
In April, the CPUC announced it will review the structure of California's
electric utility service, a review that could lead to significant changes in
the way California's investor-owned electric utilities do business. The
CPUC's proposal has no immediate effect on the Utility's operations, although
future volumes of natural gas the Utility transports for electric utilities
could be affected. The Utility is closely monitoring the process and has
taken an active role in the proceedings because of its considerable
experience with natural gas deregulation and because the treatment of some
electric utility regulatory issues could have indirect implications for the
Utility.
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.
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PARENT COMPANY
Parent company expenses after taxes were $2 million for the three months
ended June 30, 1994 and 1993, and $4 million for the six months ended June
30, 1994 and 1993.
CAPITAL EXPENDITURES
Capital expenditures were $100 million and $117 million for the first six
months of 1994 and 1993, respectively. Capital expenditures are estimated to
be approximately $300 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.
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.
On June 1, 1994 the Company redeemed $20 million of remarketed preferred
stock and may redeem or repurchase additional shares of remarketed preferred
stock in the future.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(b) There were no reports on Form 8-K filed during the quarter ended June 30,
1994.
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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
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(Registrant)
/s/ 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: August 12,1994
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