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Who really stands to benefit as Stephen Baum leads San Diego’s franchised utility in its courtship of L.A.'s Pacific Enterprises? |
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Steve Cushman still remembers the telephone call he received from Stephen Baum last fall. It was one of several courtesy calls the president and CEO of Enova Corp. made informing local business and political leaders of his company’s proposed merger with Pacific Enterprises of Los Angeles. "It was very nice, very, very nice of him to let me know," recalls Cushman, chairman of the Greater San Diego Chamber of Commerce and a supporter of the proposed Enova marriage with Pacific Enterprises. Mayor Susan Golding also was briefed, and in recent months numerous local business and political leaders have been invited to 101 Ash St. to discuss the companies' plans to create a $5.2 billion market value national energy powerhouse. Call it the goodwill approach. It’s hard to imagine a bigger contrast to Southern California Edison's bid for San Diego Gas & Electric. Nine years ago, Edison's infamous bulldozer tactics failed to dislodge from the county the San Diego consumer, labor and business communities that rallied to halt the loss of jobs and a major corporate citizen. Opponents won in 1991, when the California Public Utilities Com-mission unanimously rejected the proposed corporate coupling. It all began a year ago, on March 1, 1996. This time around, Enova Chairman Tom Page contacted PE Chairman and CEO Willis B. Wood Jr. to begin a friendly exploration of a "merger of equals." Over the course of the next eight months, managers and their consultants molded the deal they jointly announced Oct. 14, one that seems to offer something for everyone from San Diego to Los Angeles, from labor unions to business leaders, and resolves the most contentious aspects of the Edison-SDG&E agreement. Their approach has drawn much praise and little opposition to date. The merged company, which so far is nameless, combines the country's largest distributor of natural gas with California's third largest investor owned gas and electric utility. Its corporate headquarters will be located in the city of San Diego. The two utility companies, Southern California Gas and San Diego Gas & Electric, will continue to operate separately, although some administrative functions will be combined. Los Angeles will house a new regulated subsidiaries headquarters, and, in the meantime, will be the hub of a joint venture exploring a myriad of unregulated gas and electric services and commodity marketing opportunities. With Jan. 1, 1998 targeted as the completion date, the merger will enable the combined companies to cut 862 duplicate positions over six years, but no employees will be laid off (company officers excluded). Jobs will be eliminated through attrition and employee buyouts. Officers promise efficiency savings of $1.2 billion over a decade, savings they propose to divide equally between shareholders and ratepayers. In separate sessions, shareholders of the two companies vote on the deal March 11. Although PE's number two man, Richard D. Farman, starts out in the number-one slot, top executives from both companies will share power in the combined corporation. Farman, PE president and COO, initially will head the company as chairman and CEO. Baum will be company vice chairman, president and COO. Farman's tenure as CEO will run for two years following the merger, or until Sept. 1, 2000, whichever date arrives first. He will retain the chairmanship until Sept. 1, 2000, shortly after his 65th birthday (65 is the mandatory retirement age). Baum will assume both titles upon approval of the board, and, like his colleagues, has an employment agreement that would compensate him handsomely should he be terminated. Farman and Baum will share an Office of the Chairman, which will supervise the presidents of the company’s regulated and unregulated operations. Warren Mitchell, now SoCal Gas president, will head regulated businesses; SDG&E president Donald Felsinger will run the unregulated operations. Al-though Farman is currently based in L.A., his principal office will be located in San Diego at the new company headquarters, and he intends to buy a home here, the company says. Current PE and Enova chairmen Wood and Page will retire before the merger is consummated. Last October, San Diego hummed with the news, envisioning the prestige and ancillary benefits of having a Fortune 500 company headquarters in town. The headquarters will house "their key executives, their key group heads, the key decision makers," says Ron Phillips, senior vice president at San Diego Economic Development Corp. As a result, San Diego ultimately will receive "disproportionate benefits in community support and community benefit," he predicts. SDG&E is immensely important to the San Diego economy. In addition to its 3,900 employees, the company has 750 people working at its headquarters office, making it Downtown’s second largest private sector employer behind Solar Turbines Inc. The company and its employees are among the pillars of support for San Diego’s cultural and charitable institutions. "San Diego Gas & Electric has always been an outstanding corporate citizen," says San Diego City Councilwoman Judy McCarty. "To lose them would just be one other devastating blow. We’ve had so many in the last 11 years. We just couldn’t bear to lose them." So far, Utility Consumers Action Network — the outspoken ratepayer advocacy group — remains skeptical of the promised merger benefits but has taken no official position. "I’m not sure I’m opposed to the merger," explains Michael Shames, UCAN executive director. "I don’t have enough information yet." Shames has raised several red flags, calling Enova's pledges "so ambiguous and so easily backed out of." UCAN is likely to push for additional ratepayers benefits and raise questions about whether the combined company will wield excessive market power, a concern shared by Edison. "We will want guarantees," Shames says. "Behind every pledge we’ve seen thus far, there's nothing more than intent." For example, Shames says the more he finds out about the companies' business plans, the more it appears L.A. will be "where the (business) action is." All of Enova's energy-marketing activities will move to L.A. in a premerger joint venture of competitive market businesses. "There isn’t much left that will stay in San Diego," Shames says. "It’s a shell game, which explains why you've not heard much in the way of protests from L.A. of late." Indeed, Los Angeles Mayor Richard Riordan, who bemoaned the loss of a corporate headquarters last October, declined to comment on the merger for Metropolitan. Jack Kyser, chief economist of the Economic Development Corp. of Los Angeles County, says he is much less worried about the merger than he was initially, even though the loss of a corporate headquarters is "a nick in our status." Kyser predicts SoCal Gas will continue to be active in business and philanthropy in L.A. as promised. "PE has been visible, but actually the gas company has been more visible," Kyser says. "We may not be losing that much. I'd prefer to hang onto the gas company headquarters (because they represent the core of the company)." UCAN's Shames points to the Price Co. Costco union, also billed as a merger three years ago. Today, virtually all corporate offices have been moved to Washington state, Shames complains, despite earlier assurances to the contrary. "Costco got a slight majority of the stock (as will PE shareholders), and three years later Price Club is frozen out; Costco is running the show." The fact that Baum is the heir apparent "assuages some of our concerns," Shames admits. "We’ll see what happens in the next two years. The company will never say what the impacts are going to be. They will try to keep it as flexible and as loose as possible." From a business perspective, Shames claims the plan to keep the utilities separate doesn’t make business sense. "It’s not going to happen," he says. "The economics don’t dictate it, and the shareholders won’t stand for it." Stephen Parla, vice president of First Boston Credit Suisse in New York, agrees that a merger of the two utilities might have made more economic sense, but points to "political and/or regulatory reasons why that is not possible or practical." Calling the merger a "bold" action by the two companies, he says the proposed structure appears to offer benefits for both. "It’s about as close to a merger of equals as I’ve seen," he adds. Baum says both sides agreed it was best to keep the utilities separate. "The financial reasons for combining the utilities were not compelling," he says. "We gain the savings from the merger by eliminating redundant corporate staff and administrative functions without merging the utilities. Another issue is, that because it’s only a two-county utility, SDG&E now has low-cost financing available to it in the form of industrial development bonds. Merging SDG&E and SoCal Gas might jeopardize this benefit." SDG&E's lease of its 337,000 square foot signature building on Ash Street runs through 2005 with 20 years of options. Officials guarantee SDG&E's headquarters will remain Downtown, but make no such promises about where in the city the new $5.2 billion entity will locate. Baum says concentrating top management here was the right thing to do. "Siting the new headquarters in San Diego was a prerequisite to any serious discussions with Pacific Enterprises," he says. "This was a key consideration because Pacific Enterprises felt just as strongly about maintaining a high profile in Los Angeles." Exactly how many employees will work in the San Diego corporate headquarters has not been decided, says Bill Reed, vice president, regulatory affairs for SDG&E and Enova. "It’s undefined (but) it’s more than it otherwise would have been (if the headquarters was elsewhere)." Baum says the new organization's structure is under development now. But there's no question the new headquarters will be substantial. "The corporate executives and staff for a $5.2 billion company will be here," he says. These decision makers "will be the highest paid employees of the corporation so the favorable impact on San Diego will be magnified beyond mere numbers of people." Although the lion's share of both companies' un-regulated energy businesses will be based in a premerger joint venture in L.A., Reed maintains that other new unregulated business units, such as international operations and financial investments, could be based at the San Diego headquarters. "The fact that the central headquarters will be in San Diego suggests that a good part of the new growth would be in San Diego," Reed says. "Depending on what the business is, we'd locate it where it makes the most sense." "Location, location, location" drew the proposed new company to headquarter in San Diego, Reed says. Enova director Thomas C. Stickel takes the subject of location one step further with his dream of making San Diego the center of the new energy commodity business that has begun to explode across the country. "What Hartford, Connecticut, is for the insurance industry, I’m hoping San Diego can be for the utility brokering industry," he says. "It’s an exciting, growing, professional business attracting bright, young innovative executives. I think we in San Diego have a tremendous opportunity to make our community user friendly to this changing world." Before that could happen, however, this merger needs to become reality. Among the potential complications are the two distinct corporate cultures — autonomous business units at PE and a highly centralized structure at Enova. Which company’s style, which managers win out in the internal turf battle could be crucial in determining the role of the San Diego-based headquarters and the priority given San Diego. California's impending electric deregulation — which officially starts for a limited number of large users next January — leaves normal business decisions even more uncertain. Only time will tell where the company’s real employment growth will occur. Former SDG&E Director O. Morris Sievert, who resigned in opposition to the Edison-SDG&E merger, favors the new merger as a "good step" and agrees with Reed that the corporate presence is important to San Diego regardless of the exact number of employees. Still, Sievert urges city officials to keep their case in front of both companies. "The city ought to do whatever it can do in negotiations with Pacific Enterprises and Enova to leave as much of the company in San Diego (as possible)" he says. "I imagine there's such a negotiation either going on now or will take place." Councilwoman McCarty predicts she and her colleagues will watch closely as evidence unfolds. "We need to stay very close to the situation," she says. "I want to make sure we keep the jobs and the headquarters. We’ll work with Enova to make sure it happens." |
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Just how important is SDG&E's role in San Diego? The utility is one of the county's largest private-sector employers with 3,900 workers (a small number of those are based in Orange County but the vast majority are in San Diego), including some 750 Downtown. SDG&E spends about $125 million with San Diego and Orange County companies, with 25 percent of that business going to companies owned by service-disabled veterans, ethnic minorities or women. Tax revenues also are significant. Local governments received some $70 million in property taxes and gas and electric franchise fees from SDG&E last year. Local officials call SDG&E one of the city's leading corporate citizens. Enova donates $1.4 million a year to community organizations, ranging from health and education to arts and culture, and has promised to continue its civic donations and activities. SDG&E employees are among the most active public citizens in the county, donating $750,000 annually and spending time working with community organizations. Enova president Stephen Baum is active in the Greater San Diego Chamber of Commerce (which SDG&E testily rejoined after the failed SCE merger), the Boy Scouts of America, Old Globe Theatre and San Diego Opera. Nearly a third of Enova employees volunteer an average of 19 hours a month helping community organizations, reports the company. Enova is an active participant in Team San Diego, a business attraction and retention effort of the San Diego Economic Development Corp. -Libby Brydolf |
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California Public Utilities Commission PE and Enova must get the nod from the California Public Utilities Commission, the state's utility regulator. Several public hearings will be held in Southern California, including at least two in San Diego. No dates have been set. State Legislature The California Senate Committee on Energy, Utilities and Communications is expected to conduct a hearing on the proposal. Energy consultant John P. Rozsa says the hearing would provide "an opportunity to air publicly the details of the merger and give people who support and oppose an opportunity to make their feelings public." Shareholders Shareholders of both companies are scheduled to vote on the merger in separate meetings March 11. Both must approve for the merger to move forward. No significant opposition is expected. Federal Energy Regulatory Commission FERC also will review the merger for public interest concerns, including whether the merger will adversely affect competition, rates or hinder regulation. PE and Enova believe FERC has no jurisdiction in their case; other parties disagree. City of San Diego The city of San Diego must approve any change of control in the company that holds its electricity and gas franchises. Company executives say SDG&E will remain a separate utility and not raise any franchise issues. However, at least one merger opponent (Edison) claims the merger of the holding companies will create a de facto merger of SoCal Gas and SDG&E. A merger of the two utilities also would invalidate $692 million in tax-free industrial development bonds issued by local cities to SDG&E. Under federal rules, utilities serving up to two counties may use IDBs. SDG&E's Bill Reed says the utility would like to retain its ability to issue those low-cost bonds. The advantages are fewer than they used to be, however. Right now, SDG&E only issues IDBs on the electric side of the business. SDG&E's interest in delivering gas services to Mexico has prompted the utility to replace any IDBs related to gas projects with market-rate bonds. |
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Pacific Enterprises Businesses: Southern California Gas is the country's largest natural-gas distribution utility. Other PE businesses include interstate and offshore natural-gas pipelines, foreign natural-gas distribution systems (Mexico and Argentina) and alternate energy development.
Businesses: San Diego Gas & Electric Co. provides natural gas and electric service throughout San Diego County and electricity in parts of Southern Orange County. Other Enova activities include energy services, from billing to natural gas and electric commodity purchasing, project development in Mexico, affordable-housing investments and advanced communications technology development. |
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Stephen Baum, president and CEO, Enova Corp.; future president, COO of PE-Enova combined company:
If merger is not completed by 1/1/98, a two-year interim salary agreement signed 9/18/96 at a minimum guarantees his current base salary plus executive incentive plan and other bonus and benefits offered by Enova. Post merger: salary $645,000 plus a bonus of 60 to 120 percent of base salary and long-term incentives. When Baum rises to chairman, he is guaranteed additional increases. Donald Felsinger, president and CEO, SDG&E:
If merger is not completed by 1/1/98, a two-year interim salary agreement signed 9/18/96 at a minimum guarantees a $350,000 base salary plus executive incentive plan and other bonus and benefits offered by Enova. Post merger: salary $440,000 + bonus opportunities at least equal to those offered at Enova. Tom Page: Page retires at the end of 1997. He will receive a $880,000 incentive bonus if the merger is completed by 1/1/98. |
