Amendment of Articles of Incorporation

Amendment to Articles of Incorporation

The Board of Directors has adopted and is submitting for shareholder approval an amendment to Pacific Enterprises' Articles of Incorporation. If approved by shareholders, the amendment would provide Pacific Enterprises with substantially the maximum authority permissible under applicable law to pay dividends on its Preferred Stock and to pay dividends and make other distributions on its Common Stock. It would do so by eliminating retained earnings restrictions on share distributions.

The Board of Directors Recommends Approval of the Proposed Amendment

Approval of the proposed amendment requires the favorable vote of the holders of a majority of the 75,187,496 outstanding shares of Pacific Enterprises Common Stock and Preferred Stock (exclusive of the 1,500 shares of Remarketed Preferred Stock, Series A), voting together as if a single class. Approval also requires the favorable vote of the holders of a majority of the 1,101,903 outstanding shares of Preferred Stock (including the 1,500 shares of Remarketed Preferred Stock, Series A) voting together as a single class.

The text of the proposed amendment is reprinted as the Appendix to this Proxy Statement.

Retained Earnings Restrictions

Currently, provisions of Pacific Enterprises' Articles of Incorporation and an optional provision of the California General Corporation Law (the "CGCL"), to which Pacific Enterprises is subject, have the effect of limiting dividends on Preferred Stock and dividends and other distributions on Common Stock to the amount of Pacific Enterprises' retained earnings. Retained earnings represent Pacific Enterprises accumulated profits (as reduced by accumulated losses and dividends to shareholders) and do not include the proceeds from the sale of shares.

Pacific Enterprises' retained earnings have declined annually from approximately $770 million ($12 per common share) at December 31, 1988 to approximately $146 million ($2 per common share) at December 31, 1991, primarily as a result of losses incurred in non-utility operations. A long-term strategic plan to dispose of oil and gas and retailing operations (other than Thrifty Drug Stores) has been adopted and dividends on Common Stock have been suspended. It is impossible to accurately estimate when this disposition program will be completed or the amount of funds that it ultimately will produce. Consequently, no assurance can be given that additional losses will not be incurred or that retained earnings will be adequate in the future to permit the continued payment of dividends on Preferred Stock or the resumption of dividends on Common Stock.

Preferred Stock Restrictions

Pacific Enterprises' Articles of Incorporation provide for the payment of dividends on Preferred Stock out of "surplus profits", a term that is not defined by the articles but which Pacific Enterprises believes to be the equivalent of retained earnings. Consequently, in the absence of retained earnings Pacific Enterprises would be prohibited from paying dividends on its Preferred Stock. The proposed amendment would eliminate this retained earnings restriction on preferred dividends by providing that dividends on Preferred Stock may be paid out of any funds legally available therefor.

Common Stock Restrictions

An optional provision of the CGCL also currently has the effect of restricting dividends and other distributions on Common Stock to the amount of retained earnings as long as any Preferred Stock is outstanding. Unless otherwise provided in the articles, CGCL Section 503 prohibits distributions on shares which are junior to other shares as to dividends unless retained earnings exceed the amount of the distribution plus the amount of cumulative dividends in arrears on shares senior as to dividends. The proposed amendment would eliminate this retained earnings restriction on common dividends and distributions by providing that CGCL Section 503 is not applicable to Pacific Enterprises.

Effect of the Amendment

If approved by shareholders, the proposed amendment would permit dividends on Preferred Stock and dividends and other distributions on Common Stock subject only to the general limitations of the CGCL and limitations to protect the dividend and liquidation preferences of Preferred Stock.

Under Section 500 of the CGCL, Pacific Enterprises generally would be permitted to pay dividends and make other distributions to its shareholders if (i) its retained earnings exceed the amount of the distribution or (ii) it satisfies certain financial tests. The financial tests require that, upon giving effect to the proposed distribution, both (i) assets (excluding certain non-tangible assets) would be at least 1-1/4 times liabilities (not including certain deferred items) and (ii) current assets would be at least equal to current liabilities or, if average earnings before taxes on income and before interest expense for the two preceding fiscal years has been less than average interest expense for such fiscal years (as is currently the case for Pacific Enterprises), at least equal to 1-1/4 times current liabilities. For purposes of the current assets calculation, Pacific Enterprises may include, among others, certain amounts (net of related costs) reasonably expected to be received in its public utility operations over the twelvemonth period included in calculating current liabilities.

Accordingly, approval of the proposed amendment would provide Pacific Enterprises with an alternative to retained earnings as a basis for share distributions. However, Pacific Enterprises' ability to satisfy these tests and thus to make such distributions in the event retained earnings were to be exhausted will depend upon its financial position at the time of each proposed distribution.

Under the current retained earnings restrictions, Pacific Enterprises authority at December 31, 1991 to pay dividends on Preferred Stock and to pay dividends and make other distributions on Common Stock was limited to the $146 million amount of its retained earnings. If the proposed amendment had been in effect at that time, the amount that Pacific Enterprises could have distributed for these purposes would have been approximately $250 million.

Pacific Enterprises' ability to pay dividends and make other distributions on both its Preferred Stock and Common Stock will also continue to be subject to the satisfaction of the requirement of CGCL Section 501 which prohibits distributions by a corporation that is, or as a result of a distribution would be, likely to be unable to meet its liabilities (except those whose payment is otherwise adequately provided for) as they mature. In addition, distributions on Common Stock would continue to be subject to the requirement of the Articles of Incorporation for the prior payment of all accumulated dividends on Preferred Stock and to the requirement of CGCL Section 502 that, upon giving effect to the distribution, net worth would equal or exceed the liquidation preferences of Preferred Stock.

Recommendation of the Board of Directors

The Board of Directors believes that it is prudent and in the best interests of shareholders for Pacific Enterprises to have the additional authority for share distributions that would be provided by the proposed amendment. The future payment of dividends and making of other share distributions nonetheless will continue to be subject to Pacific Enterprises' ability to satisfy continuing statutory and articles requirements and the declaration or authorization thereof by the Board of Directors and will depend on the earnings, financial condition and capital requirements of Pacific Enterprises and on business conditions and other factors.

In recommending shareholder approval of the proposed amendment, the Board of Directors recognizes that the payment by Pacific Enterprises of any dividend or other distribution on Common Stock necessarily reduces the corporate resources available for distributions on Preferred Stock. Consequently, the Board also recognizes that the proposed amendment, insofar as it increases Pacific Enterprises' authority for dividends and other distributions on Common Stock, may be viewed by Preferred Shareholders as more beneficial to Common Shareholders than to Preferred Shareholders. However, the proposed amendment would similarly increase Pacific Enterprises' authority for dividends on Preferred Stock and the Board is unwilling to provide increased authority for dividends on Preferred Stock without providing similar increased authority for dividends and other distributions on Common Stock. Moreover, the Board believes the proposed amendment would continue to provide Preferred Shareholders with restrictions on distributions on Common Stock that are customary and appropriate for Preferred Shareholders of a large publicly-held corporation.

Accordingly, the Board of Directors believes that the proposed amendment is in the best interests of both Preferred and Common Shareholders and recommends a vote in favor of approval of the amendment.

Appendix to Proxy Statement

Text of Proposed Amendment

to

Articles of Incorporation

Section 2 of Article Fourth of the Articles of Incorporation would be amended to read in full as set forth below. Additions are indicated by underscoring and deletions are indicated by interlineation.

“2. Dividend Rights. The holders of the shares of the $4.50 Dividend Preferred Stock, the $4.40 Dividend Preferred Stock, the $4.75 Dividend Preferred Stock, the $4.36 Dividend Preferred Stock, the $4.75 Dividend Preferred Stock (convertible on or before October 31, 1966), and the $7.64 Dividend Preferred Stock are entitled to receive, when and as declared by said Board of Directors out of the surplus profits arising from the business of this corporation, any funds legally available therefor, dividends payable quarterly in each year after the issuance thereof on such dates as may be fixed by said Board of Directors at the following rates, and no more:

"$4.50 Dividend Preferred Stock-$4.50 per share per annum;

"$4.40 Preferred Stock-$4.40 per share per annum;

"$4.75 Dividend Preferred Stock-$4.75 per share per annum;

"$4.36 Dividend Preferred Stock-$4.36 per share per annum;

"$4.75 Dividend Preferred Stock (convertible on or before October 31, 1966)-$4.75 per share per annum;

"$7.64 Dividend Preferred Stock-$7.64 per share per annum.

"The holders of the shares of each additional series of Preferred Stock and each series of Class A Preferred Stock shall be entitled to receive, when and as declared by said Board of Directors out of the surplus profits arising from the business of this corporation, any funds legally available therefor, dividends at the respective rate fixed for such series by the Board of Directors in the resolution providing for the issuance of such series, and no more, payable on such dates as may be fixed by said Board of Directors. There shall be no priority of any series of Preferred Stock over any other series of Preferred Stock in the payment of dividends and there shall be no priority of any series of Class A Preferred Stock over any other series of Class A Preferred Stock in the payment of dividends. The dividends on every series of shares of Preferred Stock and of Class A Preferred Stock shall be cumulative from the date of issuance thereof, or from and after the first day of the dividend period in which the shares of the respective series shall be issued, or from such other date, as may be fixed by said Board of Directors prior to the issuance thereof, and all accrued and current dividends on the Preferred Stock of all series shall be paid or declared and set apart before any dividends are paid or set apart on the Class A Preferred Stock or the Common Stock, and before any assets shall be paid or set apart for the purchase of or for distribution with respect to the Class A Preferred Stock or the Common Stock or any other stock of this corporation not ranking prior to the Preferred Stock.