SDG&E; Plans Merger With Tucson Electric in Effort to Reduce Rates for Customers

San Diego Gas & Electric, which charges some of the highest residential electric rates in the country, said Monday that it will merge with Tucson Electric Power Co., an Arizona utility known as one of the lowest cost producers of electricity.

The merger, which will involve a stock swap with no money changing hands, will create a new, San Diego-based utility with $5.7 billion in assets.

The proposed deal is one of several steps the giant San Diego utility is taking to reduce rates to its 1 million customers in San Diego and southern Orange counties, SDG&E; Chairman and Chief Executive Tom Page said at a press conference in San Diego. But he declined to say how much rates would go down.

Tucson Electric, which supplies electricity to 254,194 customers in the Tucson area, generates electricity at low-cost, coal-fired plants in Arizona and sells its surplus to other utilities, including SDG&E.;

Analysts who follow the electric utility industry generally applauded the merger as a positive move for both utilities.

“This makes a tremendous amount of sense,” said Edward J. Tirello Jr., a New York-based industry analyst with Shearson Lehman Hutton, “because SDG&E; is short on power while Tucson is long on power.”

Power-rich utilities such as Tucson Electric have been competing fiercely to sell their surplus to California, Tirello said, and now “Tucson won’t have to worry about that competition any more.”

Tirello has been predicting a wave of mergers in the electric utility industry because of the huge investments needed to build or acquire expensive generating capacity to meet expected future demand.

A glut of electricity in the Southwest at present will likely cause other utilities seeking to buy or sell surplus electricity to worry about the antitrust implications of SDG&E;’s proposed merger.

Southern California Edison directed its attorneys Monday to “review carefully . . . (possible) issues of anti-competiveness,” according to spokesman Lou Phelps.

The definitive agreement announced Monday must be approved by shareholders and at least a half dozen federal and state regulatory agencies. In addition to state regulators in California and Arizona, the deal announced will be reviewed by the Federal Energy Regulatory Commission, the Nuclear Regulatory Commission, the Justice Department and the Internal Revenue Service.

That approval process could take as long as a year, according to Page. The agreement includes a clause that permits either company to walk away if the deal is not completed within a year.

California’s Public Utilities Commission will “make sure that the merger will not be financed by customers and that their interests are otherwise protected,” according to PUC Chairman Stanley Hulett.

The PUC would retain regulatory control over the new company’s California operations and the Arizona Corporations Commission would retain regulatory control over the company’s Arizona-based utility business. FERC would control interstate dealings generated if the two companies are joined.

Terms of Transaction

The agreement calls for the as-yet unnamed utility to be based in San Diego, with Page as chairman and Tucson Electric Chairman Einar Greve as president and chief executive. No layoffs are planned because of the merger, according to Page.

After the exchange of shares, current SDG&E; shareholders would own about 56.5% of the new company and current Tucson Electric shareholders would own the rest. SDG&E; shareholders would receive one share in the new company for each share of SDG&E; common stock held. Tucson Electric shareholders would receive 1.725 shares in the new company for each share of Tucson Electric now held. That ratio was determined by Monday’s closing stock prices.

In trading Monday on the New York Stock Exchange, SDG&E; stock closed up 37.5 cents per share at $33, while Tucson Electric closed up 75 cents at $57.50.

“Tucson is putting in 38% of the equity and getting back 43%,” according to Irving Katz, director of research for Thomas Green/San Diego Securities. “SDG&E; is putting in 62% of the equity and getting back 56.5%.”

Despite that apparent imbalance, Page described the proposed merger as “logical” because it further develops SDG&E;’s strategy of becoming an “energy broker,” buying and selling electricity from a variety of sources at the lowest price. SDG&E; now buys rather than generates 40% of the electric power it distributes to its customers.

The company has been criticized for charging the third-highest residential electric rates in the nation, a situation that developed after the company tried and failed to build two large generating plants in the 1970s. SDG&E; also has been saddled with long-term, high-cost oil contracts that remained in effect even after oil prices plummeted in the early 1980s. Thereafter, it began to “broker” electricity rather than build new plants to meet increased demand.

Strategic Consolidation

SDG&E; has purchased electricity from Tucson Electric for nine years. In fact, that relationship led to a lawsuit over terms. That suit is still pending, Page said Monday.

“This is the first merger of strong utility companies in recent times,” Page said. “This is not a consolidation to solve a problem. This is a consolidation for a strategic purpose. If it is concluded, the agreement would extend SDG&E;’s reach into the coal fields of Arizona, Colorado, Utah and New Mexico.”

SDG&E; would be “tying in with a high-voltage transmission system that is almost three times the size of ours.”

Page predicted that access to cheaper coal fuel, improved operating efficiencies and decreased administrative expenses would result in lower-cost electricity for customers in both states.

Analysts suggested that the proposed deal was partially driven by the fact that Tucson Electric is completing construction of a new, 360-megawatt power plant in northern Arizona. That plant will give Tucson Electric an abundant supply of relatively low-cost electricity well into the 1990s, according to industry analysts.

However, Tucson Electric’s return on utility plant investments is “likely to come under increasing pressure” when that new plant comes on line because rate payers will then be forced to pay costs of building that plant, according to the company’s most recent annual report.

Consequently, the company has been counting upon “earnings from investment subsidiaries (to) help compensate for inadequate earnings from investments in utility operating assets,” according to that report.

Will Use Expertise

Tucson Electric has two non-utility subsidiaries that have invested $382 million over the last decade in the shares of banks, savings and loans and automobile finance companies.

That contrasts with SDG&E;, which began only recently to diversify into non-utility businesses. The San Diego firm has bought a handful of small companies in industries from real estate to computers. SDG&E; will utilize Tucson Electric’s expertise to further develop those non-utility businesses, analysts said.

Page said merger talks began in earnest about three weeks ago and were conducted by fewer than a half dozen key officers of both companies.

SDG&E; reported $197 million in net income on $1.9 billion in revenue for 1987. Tucson Electric reported $135 million in net income on $472 million in revenue for 1987. SDG&E; had $3.6 billion in assets at the end of 1987, while Tucson Electric had $2.1 billion.

Times staff writer Paul Richter in New York contributed to this story.

UTILITY MERGER: FACT SHEET

San Diego G&E; Tucson Electric Electric customers 990,400 254,194 Growth in 1987 5.3% 3.7% Service territory 4,100 sq. miles 1,155 sq. miles Employees 4,612 1,069 Transmission lines 625 miles 1,504 miles Sales (kilowatt hours) 12.5 billion 6.4 billion Energy sources Coal 0 94% Natural gas/fuel oil 37% 4% Nuclear 25% 0 Purchased 38% 2% Total assets $3.6 billion $2.1 billion Electric revenue, 1987 $1.26 billion $472 million Gas revenue, 1987 $294 million 0 Net income, 1987 $197 million $135 million Share price, 1987 28 to 37 7/8 49 to 64 Shares outstanding 55.9 million 24.8 million Common shareholders 72,086 37,605

Source: Company reports