SDG&E;, Tucson Electric Merger Plan Is Outlined

San Diego Gas & Electric submitted a 176-page filing to the Securities and Exchange Commission Wednesday that offers a detailed look at how the utility hopes to conclude its proposed merger with Tucson Electric Power.

If completed, the merger, announced on Monday, would create a new, San Diego-based company with $5.7 billion in assets. Shareholders of the two utilities will be mailed proxy materials in the near future.

The document contains a fairly loose agreement that covers how the two utilities will run their businesses while the merger is being completed.

Both utilities will refrain from adding electrical generating capacity that is not already under construction or on the drawing boards, according to the Form 8-K that SDG&E; filed on Wednesday.

The document suggests that the two utilities will place limits on how much power they will buy from other companies.

And it indicates that SDG&E; and Tucson Electric will consult with each other before allowing other utilities to use their transmission lines. The utilities own or have access to more than 2,000 miles of high-voltage transmission lines in the Southwest and California.

In one paragraph, the document implies that SDG&E; might somehow restructure its natural gas distribution business. That paragraph indicates that the as-yet unnamed company created by the merger might operate the gas business as a “direct or indirect subsidiary.”

However, the document does not detail how the gas operation might change. An SDG&E; spokesman was not available for comment late Thursday.

The SEC filing also contains safeguards that would take effect if another party were to dash the proposed deal by buying a significant number of shares in SDG&E; or Tucson Electric before the utilities make their agreement final.

For example, if a third party were to acquire all of Tucson Electric, the Arizona utility apparently would have to pay SDG&E; $25 million.

Employees Would Remain

The document evidently prohibits either utility from amending employment contracts, or creating new bonus and profit-sharing packages for employees--except as required by law. It also directs each utility to “use its best efforts” to ensure that officers and key employees remain in place while the merger moves toward completion.

The document orders officers and employees “not to initiate, solicit or encourage” offers to buy all or part of either company. It does, however, direct officers of both utilities to respond to any bona fide acquisition or merger offers.

New York-based Salomon Brothers Inc. is handling investment banking for SDG&E; and Morgan Stanley & Co. is acting as Tucson Electric’s investment banker.

SDG&E; has hired a prominent New York law firm, Skadden, Arps, Slate, Meagher & Flom, to handle its legal work. Tucson Electric hired Leboeuf, Lamb, Leiby & MacRae.