The Rise and Fall of Pacific Enterprises : Corporate strategy: Despite criticism over ‘extravagances,’ new leaders of Southern California Gas Co.’s parent have faith in the future.
When executives of Pacific Enterprises moved their headquarters in 1990, they went first-class.
They chose the new Library Tower, then the most expensive--and still the tallest--office building in downtown Los Angeles.
To furnish the new offices, they installed custom wood paneling from Africa, a dramatic circular stairway to connect eight of the 12 floors and a $3-million art collection. Boardroom chairs for 16 directors cost $8,000 each.
Chief Executive James R. Ukropina reserved for himself a 3,000-square-foot office complex with more than $300,000 in furnishings. As soon as he took over, in 1989, the company leased a $10-million, top-of-the-line corporate jet.
“Where did he need to fly?,” asked a fellow utility executive, “San Diego?”
But Ukropina and his colleagues had dreams beyond life as the drowsy parent company of Southern California Gas Co., a giant, conservative, regional utility. Since 1986, they had aggressively pushed Pacific Enterprises into oil and gas exploration, drugstores and sporting goods retailing.
Now, the best of the paintings are for sale. Ukropina has resigned for undisclosed health reasons. The corporate jet is on the block. And a new chief executive is working to sell off the retail and exploration businesses.
Investors are angry. For the first time in 75 years, they will get no dividends until Pacific Enterprises’ fortunes turn around. The company’s stock price has fallen 25%, from $24.75 on Feb. 4 when its restructuring was announced to $18.50 on Friday.
Some shareholders already have filed lawsuits against the board and top officers.
“You tell me why a corporate director needs to be surrounded by an art collection like that to make good decisions,” demands William S. Lerach,a San Diego attorney representing shareholders in two suits filed earlier this month.
Meanwhile, several Southland cities, along with the gas company’s biggest labor union, are angry at what they consider efforts to get ratepayers to shoulder the cost of extravagances at the gas company itself--even as the utility has scaled back some of its services.
Pacific Enterprises executives declined to elaborate on the company’s new headquarters and other issues involved in pending lawsuits. But, spokesman Tom Sanger noted that, “When the (office) space was being planned five years ago, the world looked like a very different place.”
Willis B. Wood Jr., Pacific Enterprises’ new chief executive, has faith in the “new strategy” he has adopted for the company. “In my discussions with people in the financial community and our shareholders, people feel we are on the right course,” Wood said Thursday.
Executives vow to shrink the company’s operations; in the process, they may even move from Library Tower, formally the First Interstate World Center. Particularly in light of the economy’s malaise, they point out, the moves of many U.S. companies look far different in hindsight.
The state Public Utilities Commission, which regulates the gas company, believes that ratepayers are shielded from its parent company’s misadventures. But many observers maintain that utilities, as publicly regulated monopolies, ought to meet a higher standard than other corporations.
“The fact is, such crucial decisions as . . . the rate of return are set in a political arena,” said Robert G. Harris, a specialist in regulated industries at UC Berkeley’s Haas School of Business. “Even the hint of perceived excesses, or any kind of behavior that’s considered inappropriate, can be an important factor in the decisions regulators make.”
Adding insult to shareholders’ injury, critics say, the executives most blamed for the failed strategies at Pacific Enterprises and its retail subsidiary, Thrifty Corp., are still receiving compensation from the company.
Ukropina, despite his December resignation, will stay on until June as a consultant at $30,000 to $35,000 a month. He also receives about $400,000 as part of his departure agreement with Pacific Enterprises. Leonard H. Straus, retired CEO of Thrifty and still a director of Pacific Enterprises, has a two-year consultant’s contract with the parent company--at $30,000 a month for the first year and $15,000 a month for the second, ending in May, 1993, the company said.
Company officials defend the payments as standard arrangements with departing chief executives. Still, such dealings are the inflammatory symbols of an ill-starred diversification that now is being challenged in court.
One shareholder suit filed by Lerach in Los Angeles Superior Court charges breach of fiduciary duties, mismanagement and a waste of corporate assets both from the diversification program--which it terms “horribly ill-advised”--and the move to expensive new offices.
Lerach also filed a class-action suit in U.S. District Court in Los Angeles alleging securities violations that, it says, artificially inflated Pacific Enterprises’ stock price between June, 1991, and the suspension of the dividend last week.
Though the company’s about-face last week has lent a crisis air to the debate over its practices, tales of extravagance at Pacific Enterprises have circulated for years.
In moving its headquarters, Pacific Enterprises bought a 50% interest, and took 225,000 square feet of offices, in the skyscraper. The 3,000-square-foot CEO’s suite--which includes a personal office, conference room, and secretarial and filing areas--easily eclipses the work areas of other utility chiefs.
John E. Bryson, chairman and chief executive of SCE Corp., parent of Southern California Edison Co., gets by with 600 square feet; Daniel W. Waters, general manager and chief engineer of the Los Angeles Department of Water and Power, rules from 928 square feet.
One expert familiar with the new Pacific Enterprises offices described them as “opulent.” The wood paneling, in particular, became something of a sensation in corporate circles. Though several sources say the lumber took a meandering tour of as many as seven U.S. and international stops as it was processed into final form, Pacific Enterprises will confirm only that it was originally purchased in Africa.
“Talking to the architects and designers,” said Patrick Garner, Pacific Enterprises vice president for public affairs, “we said we were going for a certain look, and however they came up with that was up to the experts in paneling.”
The company also bought $3 million worth of paintings and other fine art for the offices, including two rocking chairs by artist Sam Maloof at $15,000 each.
The art “was purchased with the thought of enhancing the space that employees work in,” said Sanger, “but also as an investment.” Bought for $3 million beginning in 1988, the collection was appraised in 1990 at $5.5 million, according to Sanger. Pacific Enterprises now hopes to sell a third of the collection--those works that have appreciated the most.
Even before its recent change of direction, Pacific Enterprises had sold an undisclosed chunk of its half-ownership in the headquarters building, getting “well in excess of our original investment” in the 1989 deal, a spokesman said.
Now, the company may move out of the building altogether. “We’re taking a new strategic direction, and part of that is cost-cutting,” said Sanger. “We’re not married to this space, and obviously we have to make some changes.”
For shareholders, beyond the millions spent on the trappings of corporate grandeur are more fundamental questions about the cost of Pacific Enterprises’ misadventures.
Pacific Enterprises’ operating profits, in earnings per share, have dropped steadily from a high of $5.32 in 1985 to $1.95 in 1991, the lowest in 15 years. Book value per share during the same period fell from a high of $35.52 in 1985 to $23.50, another 15-year-low, in 1991. Stockholder dividends shriveled from $3.48 a share in recent years to $2.62 in 1991--and now to nothing.
Regulators so far see no evidence that any mistakes committed by Pacific Enterprises have harmed the gas company, according to Frank R. Crua, project manager of a PUC audit of the utility.
And Standard & Poor’s Corp. downgraded its rating of the parent company’s stock and commercial paper on Feb. 5, the rating agency recently reaffirmed its judgment that the utility itself was financially “stable”--due, said S&P;, to “the rigid financial separation between the utility and its parent.”
Yet some critics remain unconvinced.
“They still scream that there is no connection between the gas company and such companies as Thrifty,” said Maureen Lynch, president of the Utility Workers Union of America, Local 132, which represents most gas company workers.
“Nevertheless, since 1986, we’ve seen a deterioration at the gas company on virtually every level possible,” Lynch said, citing what she termed service and staffing cutbacks.
It was in 1986 that Pacific Lighting Corp.--renamed Pacific Enterprises during the diversification--bought Thrifty Corp., owner of Thrifty Drug Stores and Big 5 Sporting Goods. The parent company will hold on to Thrifty Drug for now, but is seeking buyers for Big 5 and four other retail chains, as well as its oil and gas exploration unit.
Two cases assessing gas company service and other questions are currently before an administrative law judge of the PUC.
The first, brought by the union and the cities of Corona, Bellflower and Banning, charges that the utility is cutting service, specifically in the closing of 11 payment offices in Southern California. The utility contends that adequate substitutes are in place for the little-used offices, adding that other services have been enhanced.
A second case before the PUC raises the question of whether some of the parent company’s extravagance rubbed off on its utility subsidiary. Union critics are questioning a rate-increase request by the gas company to help pay for its move to the new Gas Company Tower, a sleek 52-story building just down 5th Street from Pacific Enterprises’ headquarters.
The request, filed in 1990, asked that ratepayers pay an average of 8 cents per month for the lease, improvements, operating costs and furnishings that include a $1-million corporate art collection. The utility now says that shareholders, instead of ratepayers, will pick up the tab for the artworks.
Meanwhile, the PUC will continue to monitor the gas company’s relationship with Pacific Enterprises--through the ongoing management audit and at its next rate-base hearings in 1993. As the parent company wrestles with restructuring, the worry for regulators is what could happen if the sale of its retailing units does not go well.
Pacific Enterprises has about $1.7 billion of common equity--the equivalent to shareholders of the equity in a house--of which $1.35 billion is in SoCal Gas.
That leaves only $350 million of equity in the parent’s non-utility operations. Should that figure fall even more--if the units are sold at large losses--the PUC would look hard at whether the utility itself had been subtly damaged, particularly in its ability to attract capital.
Pacific Enterprises CEO Wood has personally assured Daniel W. Fessler, president of the PUC, that the units on the block can be sold at prices that will preserve Pacific Enterprises’ equity.
“Even if the assets of Pacific Enterprises go to zero, we have several options we could take, and these would absolutely preserve the wall we’ve built around the utility,” spokesman Sanger added.
