High Noon At Tucson Electricby
The news came over a pay phone at Los Angeles International Airport on July 16--and it wasn't good. Tucson Electric Power Co.'s general counsel, Dennis R. Nelson, along with other executives, had just come winging in from Tucson to meet with the utility's bankers at the L. A. Hilton. But the meeting was not to be. After checking in for messages, Nelson was informed that five of the utility's big creditors had just filed a petition to push the debt-deluged utility into bankruptcy. As Nelson hung up, it looked as if a seven-month-long high-wire act to keep the ailing utility upright had just crashed.
Now, the stage is set for what could become the largest utility-company bankruptcy in U. S. history. Even if Tucson manages to slip the noose this time--and that's unlikely--it will require a massive restructuring. That will be quite a jolt to Tucson's investors, creditors--and Arizona ratepayers. Already, some of Corporate America's biggest names--Ford, IBM, and Philip Morris--have lost millions thanks to this little-known utility tucked away in the Arizona desert.
Not that Tucson executives haven't tried to avoid this predicament: They have alternately cajoled and arm-twisted lenders and vendors. They have pleaded their case before defiant state regulators. "This turned out to be one of the most complex workouts that was probably ever attempted," says Tucson Electric President and Chief Executive Officer Charles E. Bayless, who came on last year to save the company. "We were always walking on a tightrope."
That rope may have finally snapped. But it started to fray in 1985, when Tucson Electric, like other newly deregulated utilities, sought growth in bold diversification moves. Then-CEO Einar Greve, an engineer, spent $350 million on acquisitions that took the utility into new fields such as banking, car leasing, and real estate in Phoenix. But a plan to expand Tucson's core business fell through, thanks to an aborted merger with San Diego Gas & Electric in 1988.
Greve's investments started to sour by the late 1980s and eventually cost the company $83 million in losses during 1989 and 1990. By the end of 1990, the utility labored under a staggering $2 billion debt load--or 90% of total capital. Its cash had dwindled to just $3.7 million at the end of 1990, from $21.5 million in 1988. Tucson posted a $387 million loss in 1990--on $499 million in sales.
TARNISHED IMAGE. A whiff of scandal has also surrounded the utility. In 1989, the Securities & Exchange Commission launched an insider-trading probe into why Greve had sold $1 million worth of stock just before Tucson's ills became public. Greve also drew harsh publicity when, at 61, he married a 25-year-old former topless dancer. The SEC investigation, still ongoing, cost Greve his job in late 1989, when Tucson's board gave him the heave-ho. Greve is cooperating with the feds and denies the charges, according to his lawyer, Theodore Sonde.
Into this quagmire stepped Charles Bayless, a onetime power-line worker and former chief financial officer of Public Service Company of New Hampshire--a utility that emerged from bankruptcy court itself in May. Since taking over as CEO last year, the burly Bayless has worked to clean up Tucson's sooty image by courting investors and the press. He also hired L. A. bankruptcy attorney Richard B. Levin to orchestrate a complex legal strategy.
Last year, Tucson took a cataclysmic step for a utility: It omitted its dividend. But even that didn't conserve enough cash to cover the company's debt service. By early this year, more than $70 million in bank lines were coming due that the company couldn't pay, raising the specter of bankruptcy--and a new danger. Should the utility be forced to renegotiate its more than $650 million in tax-free bonds--issued for power plant construction--future tax-exempt issues might be off-limits. And they are the financial lifeblood of any utility.
In January, Bayless called some 60 creditors to the Doubletree Hotel in Tucson. There, he delivered the bad news: The company was declaring a moratorium on debt payments and other bills. Says one Los Angeles banker, whose bank holds about $75 million of Tucson Electric debt: "We all knew about the company's problems, but it still hit hard."
Three months later, Tucson handed out its restructuring plan. By then, the utility had suspended nearly $200 million in various payments to its banks, vendors, and other creditors. With unpaid interest being added to the principal on this $200 million, Tucson's $5 million in monthly suspended-debt payments had escalated to $7 million.
The company's 40-page plan contained more than a few bombshells. The utility's 46 banks, holding more than $1 billion in various pieces of debt, were asked to extend maturity dates on lines of credit and revolving funds. Interest rates, some as high as 12.2%, were to be slashed. Coal contracts were to be renegotiated, with prices cut by as much as 25%.
NEW FORECAST. The real linchpin, though, was getting a rate boost from the regulators, namely the Arizona Corporation Commission (ACC). What was needed? A 10.5% hike in rates for the coming year that would generate $51 million annually starting on June 1.
Shuttling between Los Angeles, New York, and Tucson, Chief Financial Officer Ira R. Adler began talks with the banks and other lenders. But the bankers were skeptical and hired Price Waterhouse to work up its own revenue forecasts for Tucson. These were more gloomy.
The ACC also questioned Tucson's numbers, rejecting 25% of the $706 million in costs for building a plant that came on-line last June--costs the utility hoped to recover. Then, the ACC cut Tucson's 10.5% rate request to 4.5%. That meant it would get $20 million in added yearly revenue, not $51 million. Says ACC Utilities Div. Staff Director Gary Yaquinto: "We told them, `We're not going to save you guys at the expense of our ratepayers.' "
Ford Motor Credit Co. also dug in its heels. Back in the mid-1980s, Tucson sold off several power plants to corporate investors such as IBM, Ford, and Philip Morris. It then paid them a lease roughly equal to the mortgage payments due on the plant assets. But any appreciation on the property would go to the investor-owners. Ford's credit unit had invested $38 million to be part owner of the company's Irvington power plant, but Bayless wanted to suspend lease payments.
When Tucson withheld funds starting in February, Ford had to fork over nearly $3 million in mortgage payments to Morgan Guaranty Trust Co. without collecting offsetting lease payments from the utility. Tucson refused to reimburse the auto maker. Ford Credit filed a lawsuit in state court in mid-April demanding the money. Ford hasn't commented on the matter.
Tucson managed to get Ford's claim thrown out of state court, arguing that the company's banks, not Ford, were the real creditors. Even so, Tucson faced objections from other investors, including IBM Credit Financing Corp. Corp. and Philip Morris Capital Corp. Tucson revised its restructuring plan to offer 60% of its stock in exchange for much of its debt. But it was too late. By mid-July, though talks were continuing with other creditors, the investor-owners petitioned the court to place Tucson into involuntary bankruptcy.
Will Tucson wiggle free? Perhaps. The utility is pressing the petitioners to drop the suit. But given the depths of its woes, it looks as if the lights are still flickering at Tucson.
THE TRAVAILS OF TUCSON ELECTRIC
1985 Executive Vice-President Einar Greve, an engineer by training, is named chief executive
1986 Greve diversifies beyond the utility business, investing more than $350 million in real estate, car leasing, and other businesses
1988 With investments souring and unused capacity dragging down earnings, Tucson fails to pull off merger with San Diego Gas & Electric
1989 Tucson's board of directors fires Greve, who is the target of an insider-trading investigation by the Securities & Exchange Commission. Company posts first loss in more than 20 years
1990 Tucson hires Charles Bayless as chief financial officer from bankrupt Public Service of New Hampshire. Six months later, he becomes CEO. Tucson shocks investors by omitting dividend
JANUARY, 1991 With its cash dwindling and $70 million in bank debt coming due, Tucson asks creditors and lenders to accept moratorium on payments
MARCH, 1991 Utility proposes dramatic restructuring plan, asking creditors to rewrite contracts and lenders to accept reduced payments. Company subsequently amends plan to substitute 60% of utility's common stock for much of its debt
JULY 16, 1991 Ford, Philip Morris, IBM, and other creditors petition the U.S. Bankruptcy Court in Phoenix to force Tucson into involuntary bankruptcy