Gas Utility’s Gamble With Diversification Misfires : Business: Consumer advocates worry that ratepayers will wind up bearing some of costs of debacle.

The costs of Pacific Enterprises’ ill-fated gamble to diversify out of the gas utility business go beyond the $250 million in losses that the parent of Southern California Gas Co. took this week in announcing plans to sell five money-losing retailers and its loss-plagued energy exploration company.

For the first time in 75 years, this “widows and orphans” stock is omitting its dividend, endangering the income of thousands of small, individual investors who have traditionally depended on safe but predictable utility stocks. A substantial number are gas company retirees.

And while Pacific Enterprises insists that the gas company was protected from its misadventures, some ratepayer advocates remain convinced that consumers will end up bearing at least part of the cost.

Belatedly, according to analysts, Pacific Enterprises is confronting a question that other utilities have already put behind them: Should a public utility ever have ranged so far from its basic business?

One day after the company announced its retrenchment, Pacific Enterprises’ stock price plummeted. In trading on the New York Stock Exchange, its shares plunged 24%, falling $6 to $18.875. The stock is trading at its lowest level since 1980.

Many large investment funds with internal rules banning investment in stocks that do not issue dividends are expected to sell their shares, potentially driving the stock down further. Meanwhile, Standard & Poor’s on Wednesday lowered its ratings on Pacific Enterprises’ preferred stock to double-B-plus from triple-B, and commercial paper to A-3 from A-2.

Even as Pacific Enterprises searches for buyers for its sporting goods units and most of its drugstores--and tries to bolster Thrifty Drug for probable sale down the road--the California Public Utilities Commission is exploring what harm the diversification might have done to the gas company.

For other utilities, the verdict already is clear. Throughout the Southwest, more than elsewhere in the country, the track record of utility diversification is a sorry one, with utilities struggling to dump investments in everything from car-financing companies to sick savings and loans.

Pacific Enterprises’ stockholders will soon share that pain.

“For years this was a safe, secure income stock,” said Edward J. Tirello Jr., a veteran utility analyst. “All of a sudden everything’s gone wrong. (Pacific Enterprises) will get back to basics, but Mrs. Jones has lost her dividend in the process.”

The company acknowledges its misjudgments but insists that only such drastic moves will get it back on its feet.

“I’m a shareholder and I’m concerned,” said Willis B. Wood Jr., president and chief executive of Pacific Enterprises. “It wouldn’t have been done if we didn’t think it would improve our flexibility and financial strength so we can go through this direction change.”

Union and ratepayer critics of the failed expansion program remain anxious, however.

“Since the start of diversification we’ve been critical,” said Ernesto Vega of the Utility Workers Union of America. “As you can see over the past five years, they know nothing about retail.”

Vega, secretary treasurer of Local 132, which represents 5,000 of the 6,000 union members working for the utility, notes that several thousand former gas company employees bought stock for years through the company retirement program.

“It’s devastating,” Vega said. “We have thousands of retirees out there who depend on that dividend check to survive.”

Utility ratepayer advocates also remained unconvinced by the assertions of Pacific Enterprises, as well as many analysts, that ratepayers will be unaffected by the retrenchment.

“This sounds like a recipe for disaster,” said Audrey Krause of Toward Utility Rate Normalization (TURN), a consumer advocacy group in San Francisco. “It probably means that they will have to continue to try to raise gas rates from their monopoly customers in order to make up losses from a failing business enterprise.”

PUC spokesmen say they so far have found no evidence of such an impact on consumers. The regulators are midway through an audit that includes a close look at Pacific Enterprises’ relations with its subsidiaries.

But regulators have other concerns--including whether the course change will affect the gas company’s ability to raise investment funds.

“I think we will look with interest at the suspension of the dividend,” said Paul W. Fassinger of the PUC’s advisory and compliance division. “We’re always concerned with their ability to attract appropriate amounts of capital investment.”

Utilities have a special place in the corporate pantheon. As monopolies, they are tightly regulated. Investors have therefore expected them to be conservative; hence their appeal to small investors--those so-called widows and orphans.

Nonetheless, Pacific Enterprises is hardly the only utility that flung its traditional reserve aside in the 1980s.

“What’s in the air in the Southwest that’s produced these results?” mused Tirello. “It seems that the bigger problems are there.”

Tucson Electric Power Co., which expanded beyond the utility business to buy the Warner Center Hilton Hotel in Woodland Hills, an auto-leasing finance company and a variety of real estate--found those investments were all losing money by 1990. It is still trying to sell the hotel.

Pinnacle West Capital Corp., parent of the largest electric utility in Arizona, bought a savings and loan shortly before the emergence of that industry’s debacle and then went on to buy sick Texas thrifts. The parent of Arizona Public Service Co. bought commercial real estate, a venture capital firm and a uranium plant--ending up with a total loss of almost $1 billion.

Pacific Enterprises saw diversification as a means to expand its market presence and hedge against recessionary cycles when it began buying non-utility businesses in the mid-1980s.

But even the chief executive to whom the expansion move is most attributed, James R. Ukropina, admitted shortly before his resignation in December that the company “didn’t purport to come into retailing with retail experience.”

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