Tucson Electric Power Company

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Tucson Electric Power Company

220 West Sixth St.
P.O. Box 711
Tucson, Arizona 85702
U.S.A.
(602) 622-6661
Fax: (602) 884-3934

Public Company
Incorporated: 1902 as Tucson Gas, Electric Light & Power Company
Employees: 1,043
Sales: $499 million
Stock Exchanges: New York Pacific

Tucson Electric Power Company (TEP) is a publicly held utility engaged in the generation, purchase, transmission, distribution, and sale of electricity to customers in Tucson, Arizona, and the surrounding area. The company also provides wholesale electricity to other utilities. For years TEP was a stable, conservative power company that invested in plant and equipment upgrades as required by its service area. In the late 1970s and 1980s TEP had a period of exceptional growth, eventually diversifying from power generation alone into investing. By the late 1980s, however, TEP had experienced a series of adverse conditions that put its future in jeopardy. In 1991 the company was struggling to remain in operation after several successive years of operating losses and negative cash flow.

Tucson Electric Light & Power Company—TEP’s predecessor—was incorporated in 1892 as the successor to two separate firms, one that offered manufactured gas to Tucson residents beginning in 1882 and another that provided electric power beginning in 1883, but went out of business in 1885. The reincorporated electric firm purchased the Tucson Gas Company in 1896 and became the Tucson Gas, Electric Light & Power Company (TGEL&PCo.).

In 1901 TGEL&PCo. served just 225 electric customers and 175 gas customers among Tucson’s 13,000 residents. The following year the U.S. Light & Traction Company of Denver purchased the utility. It was sold again in 1910 to Federal Light & Traction Company of New York, which retained ownership until 1946, when TGEL&PCo. stock was offered to the public for the first time.

By 1931 the utility’s customers numbered 10,000. TGEL&PCo. began purchasing gas from Western Gas Company of El Paso, Texas, in 1933. That same year the city’s 15,000 gas appliances were converted to burn natural gas instead of manufactured fuel. Seven years later more than 18,000 electric customers were served by TGEL&PCo.

To meet increasing demand, the company began building the 100 megawatt (MW) DeMoss Petrie Generating Station and the four-unit, 425 MW Irvington Generating Station in 1955. That year J. Luther Davis joined the company as assistant to the president and went on to serve as president from 1959 until 1976 and chairman of the board from 1967 until 1988.

Irvington’s fourth steam unit was completed in 1967. At that time inexpensive natural gas was the company’s sole source of energy. Tucson’s population exceeded 319,000 and electric customers numbered more than 100,000.

In 1966 the company became known as Tucson Gas & Electric (TGE) and joined six other utilities in an agreement with the U.S. Department of the Interior to build two 1.5 million kilowatt coal-fired, steam generating plants and nearly 2,000 miles of transmission lines across New Mexico, Texas, California, and Arizona. This arrangement—the first of its kind—allowed for the utilization of Native American-owned coal deposits and transmission right-of-ways across federal and Native American lands. The two plants, located in the southern tip of Nevada and the northwest corner of New Mexico, helped establish industry criteria for water and air pollution control devices in exchange for the use of federal resources. Other utilities participating in the agreement included Southern California Edison Co., Arizona Public Service Corp., Nevada Power Co., El Paso Gas & Electric Co., New Mexico Public Service Corp., and the Salt River Project. Together they operated under the name Western Energy Supply & Transmission Associates.

In the late 1960s and early 1970s, TGE found it hard to keep up with the increasing demand generated by Tucson’s rapidly growing population. The city of Tucson was expected to continue to expand faster than the national average, with boosts in tourism, new residents, and industrialization. At the same time, TGE sought to reduce its dependence on oil and natural gas, both more expensive forms of fuel than readily available coal. In 1965 one hundred percent of TGE’s power was generated by gas; in 1980, 69 percent was generated by coal, 20 percent by gas, and 11 percent by oil. In its 1979 annual report the company estimated that by 1990 none of its power would be generated by gas, just 3 percent by oil, and fully 97 percent by coal. Financing the conversion to coal would drive most of the utility’s decisions in the years to follow.

TGE was also experiencing very rapid growth. In the five-year period from 1968 to 1972, TGE boasted a 9.3 percent rate of profit gain. The utility’s customer base expanded by 31 percent between 1970 and 1973, when TGE enter into an agreement with Arizona Public Service Co., El Paso Electric Co., Public Service Co. of New Mexico, and the Salt River Project to build three 1,300 MW nuclear steam supply systems. Construction was to begin in 1976, and the three units, known as the Arizona Nuclear Project, were to begin operations in 1981. Also in 1973, when the Environmental Protection Agency overrode state air pollution regulations it felt were too lenient, TGE was ordered to reduce sulphur oxide fumes from one of its coal-fired plants by 70 percent in three years. The San Juan power plant, located in New Mexico and jointly owned by TGE and Public Service Co. of New Mexico, was among four plants in the Southwest affected by the order.

In 1974 a combination of inflation and growth put TGE’s financial future in jeopardy. The company requested a $27 million rate increase to offset the costs of pollution control measures at the San Juan plant and the skyrocketing price of oil and natural gas. A $36 million increase—divided into a permanent increase of $18.2 million and an emergency increase of $17.8 million—was granted eight months later in recognition of TGE’s financial situation. The combined increases equaled an 11 percent annual jump in rates.

Also in 1974 Theodore M. (Ted) Welp, a graduate of Santa Clara University, became senior vice president of finance and a member of TGE’s board of directors. He had worked for General Electric, then moved to Pacific Gas & Electric (P G&E), where he served for fourteen years. In 1974 Welp moved from an assured future with PG&E, where he was treasurer, to the challenge of reorganizing TGE’s finances. Figuring prominently in both TGE’s remarkable successes in the 1980s and its subsequent failures into the 1990s, Welp was often described as a financial genius.

In 1975 Einar Greve joined TGE as senior vice president. The following year Ted Welp was named president of the utility and Greve became executive vice president and a member of the board of directors. The two men were described as a team: Welp concentrated on financing the utility’s growth and Greve oversaw operations. Former TGE President J. Luther Davis took over the position of chairman of the board.

Also in 1975 the company announced a long-range construction program, which was intended to mitigate dependence on oil and gas fuel supplies in favor of coal. The project consisted of several components: the construction of Springerville Generating Station, the conversion of Irvington Generating Station to a multifuel use facility, the installation of pollution control devices, and the construction of transmission lines necessary to assure a constant source of power to Tucson. To finance initial construction, TGE sold nearly $36 million in securities in late 1976. Welp announced that gains from common stock equity, increased electricity, sales, and better use of the company’s power plants would preclude the need for any rate increase through 1980.

In 1976 TGE moved toward total reliance on coal, selling its 15.4 percent interest in the proposed Palo Verde Nuclear Generating Station to Southern California Edison. A TGE spokesperson commented that the sale was carried out because estimated construction costs for completion had nearly doubled from the date of the project’s initiation and that TGE customers would not need the plant’s output at the time of the scheduled start-up.

TGE’s commitment to coal was reaffirmed with the sale of its gas service area. On March 31, 1979, the company sold its gas division to Southwest Gas Corporation, a Las Vegas-based utility, for $39 million. By that time only four percent of the company’s income was contributed by the gas operation. On May 10, 1979, the company’s name changed to its current name, Tucson Electric Power Company (TEP). For the first time since 1896 Tucson’s gas and electric services originated from different companies.

TEP saw its financial condition improve dramatically under Ted Welp, with a period of prosperity in the early 1980s that other utilities longed to emulate. In 1981 Welp found that by selling its properties in one of the three counties in which it did business, TEP was eligible to issue $289 million in tax-exempt debt at rates three to five percent below that on conventional bonds. Utilities were lining up to purchase power from TEP, which had moved its headquarters to Irvington Road in Tucson, at one to two cents per kilowatt hour less than the cost at which they could produce it themselves.

In addition, Western Coal—a subsidiary of TEP responsible for mining coal at the San Juan station—was liquidated on November 30, 1981. TEP transferred its coal-processing equipment and subleases on 70 million tons of coal to Utah International, a subsidiary of General Electric. Welp then sold the leases on 40 percent of the coal for $19 million and anticipated selling more for an additional $30 million. Welp felt TEP could buy the coal back as needed at a ten percent savings over the cost of producing it themselves. Wholly owned subsidiaries were formed to invest the proceeds of the sales. These maneuvers put TEP in an enviable position. Forbes commented in its October 1982 issue that TEP was “showing the world how to expand, raise capital and still keep both regulators and shareholders happy.” The company enjoyed a 20 percent net profit margin on 1981 revenues and increased its quarterly common stock dividend from 38 cents per share to 43 cents per share. Its executives were rewarded with stock options. TEP stock tripled in value between 1981 and 1984, while rates were among the lowest in the West.

In November 1981 TEP announced the sale to a public power agency of an option to purchase a 28.8 percent interest in San Juan Generating Station. In return, the company received an interest-bearing note due in 1991 that increased common equity by $112 million. According to TEP’s 1980 annual report, “The gain from the sale, together with retained earnings and reinvested dividends, will satisfy equity capital requirements for the remainder of this decade.” The note was sold in 1983, and proceeds were invested in Springerville.

Welp sold securities to finance the conversion of the Irvington Generating Station from an oil- and natural gas-fired plant to a coal-fired facility. The conversion, to be completed by 1986, was effected to reduce TEP’s dependence on costly fuels and in response to a U.S. Department of Energy proposal mandating such a change.

In April 1981 construction commenced on the coal-fired Springerville Generating Station, located approximately two hours north of Tucson in the desert near Springerville, Arizona. The plant was just 11 miles from TGE’s main transmission lines between Tucson and the coal-fired plants in New Mexico. The facility’s three planned 350-kilowatt units were scheduled for commercial operation in 1985, 1987, and 1991. The power generated by Springerville Unit 1 was intended from the start to be sold to other utilities until such time as it was needed in Tucson. This option allowed construction to be initiated years in advance of anticipated need. Early in 1982 TEP signed an operating lease with Security Pacific during the construction period. TEP acted as general contractor with an option to either lease or buy the plant upon completion.

TEP’s sales to other utilities made significant contributions to company revenues in the early 1980s. A ten-year power sale agreement with San Diego Gas & Electric Company began in April of 1979. That contract was the first multiyear, multiphase agreement for power sales between utilities to be approved by the Federal Energy Regulatory Commission (FERC). Similarly, the sale of San Juan Unit 3’s output to other utilities allowed that facility to operate at no cost to Tucson ratepayers. In 1979 sales increased 14 percent over 1978 and earnings rose 49 percent over 1978; in 1982 wholesale power transactions represented one-third of TEP’s total sales. Tucson attorney Hugh Holub, who represented consumers in TEP rate cases during Ted Welp’s presidency, credited Welp in the Arizona Daily Star with “inventing the wholesale electricity business in this country.”

With TEP secure financially, the Springerville Unit 1 on the way, and Irvington’s refurbishing progressing, TEP went before the Arizona Corporation Commission (ACC), its regulatory body, in November 1983 and committed not to request any rate increase that would become effective before 1987. At the same meeting, the ACC approved the spinoff of TEP’s assets to its Alamito subsidiary. In December 1984 TEP’s board approved the distribution of all of Alamito Company common stock to its shareholders as a dividend to wholesale customers. TEP would continue to generate, transmit, and distribute power to its retail customers and signed a contract to purchase 93 percent of Alamito’s output through 1996. Ted Welp became chairman and chief executive officer of Alamito, where he remained until 1989.

Welp recommended Einer Greve as his successor at TEP. Greve, a native of Norway, became president and chief executive officer on January 4, 1985. Previously, he had studied electrical engineering at Massachusetts Institute of Technology and spent 22 years with Charles T. Mann, a Boston engineering firm.

Alamito is considered the turning point in TEP’s fortunes. ACC Chair at the time of the move, Diane McCarthy, was quoted by the Arizona Daily Star as saying, “Alamito looked like a footnote [to the rate increase stay].” With the approval of the ACC, TEP assigned its assets to the subsidiary, making Alamito an independent wholesale power company no longer under ACC jurisdiction.

In February 1985 Welp retained a consultant on leveraged buyouts. The following month Welp’s group outfitted itself with generous employment contracts in the event of a leveraged buyout. In a bidding war begun in November 1985, Welp’s group lost Alamito to Catalyst Energy Development Corporation. Even though terms of their employment contracts were challenged by TEP shareholders, Welp and two of his top associates made about $30 million. Selling Springerville in December 1986 for more than $700 million, Catalyst was later absorbed in a leveraged buyout by a group of investors headed by Tom Pickens.

Soon after assuming the presidency of TEP, Einar Greve worked to amend the original contract with Alamito. In its 1986 annual report TEP described this altered agreement, which included lower purchased power costs, the elimination of TEP’s obligation to purchase power from San Juan Unit 3 after 1989, and the extension of power purchase obligations from Springerville Unit 1 through the year 2014. That is, TEP’s contract to buy all of the power from a plant it built was to run until October of 2014. Forbes reported in June of 1986 that Einar Greve was the highest paid utility industry chief executive; by 1989 he was earning $964,000 a year.

TEP’s investment earnings grew within a year from $21 million to $35 million. Expecting investments to contribute substantially to its bottom line in the coming years, TEP formed Sierrita Resources, Inc. (SRI) to handle its investments. In 1987 TEP entered the savings and loan business by securing 14.9 percent of Citadel Holding Company and acquired a stake in Foothill Group Inc., a commercial lending and equipment leasing company. By December 31, 1988, TEP’s investments accounted for 40 percent of the company’s assets.

Two subsidiaries were formed to separate TEP financial and investment personnel from its corporate personnel. Tucsonel Inc. consisted of chief executive officer Einar Greve, chief financial officer Kenneth L. Saul, controller Gary L. Ellerd, and general counsel Steven M. Banzhaf. TEP’s directors served in the same capacity for Tucsonel. All financial management personnel were transferred to Tucson Resources Inc. (TRI), which provided financial services and managed investment assets. Joe G. Coykendall was named president of TRI and SRI.

In January 1986 TEP decided to delay Irvington’s conversion to a coal-fired plant. Less expensive sources of oil were cited as the reason for the postponement. In 1987 the company negotiated an option to postpone the completion of Springerville Unit 2 until 1990. Financial analysts still felt TEP was a good investment, since its stock was trading at up to $65 per share during 1986.

In June 1988 TEP agreed to merge with San Diego Gas & Electric Company (SDGE), its top wholesale power customer for the preceding decade. SDGE planned to merge with TEP to assure access to cheaper power. TEP would have a power surplus upon completion of Springerville. The combined company would serve 1.3 million customers. One month later Southern California Edison’s parent company, SCEcorp, made an offer for SDGE. That merger would create the world’s largest power company, amounting to a buyout of SDGE. In November 1988 TEP and SDGE agreed to call off their merger when a resolution of the situation with SCEcorp was rendered impossible, and two years later TEP filed suit against SCEcorp for interfering in its proposed merger.

Also in November 1988 TEP filed with the ACC for a two-part retail rate increase. This was the first such request since Welp pledged not to seek rate relief in return for agreement on the Alamito deal in 1983. The ACC allowed only a $43.2 million increase, instead of the $102 million requested.

TEP’s 1989 annual report described a company in turmoil; it lost $82.1 million in 1989. For the first time since 1946, TEP eliminated the common stock dividend. In May 1989 TEP’s ten-year power sale agreement with SDGE expired. Springerville Unit 2 came on-line at the same time, creating excess capacity the company could not wholesale. In addition to incurring a $41 million loss on its investment operations, TEP said it expected to operate at a loss and to have negative cash flow until new wholesale customers were lined up and higher residential rates were instituted.

On July 17, 1989, Einar Greve resigned after it was learned that he had sold all of his 34,000 shares of TEP stock for approximately $1 million on June 28 and July 6. Greve apparently learned of the severity of TEP’s financial problems from a report he commissioned from Goldman Sachs, TEP’s investment bankers. On July 27 the Securities and Exchange Commission announced an investigation into insider trading allegations against Greve and other company officials.

John P. Schaefer, member of the board since 1982, was elected the new chairman of the board, and Thomas C. Weir, who had been a member of the board of directors since 1981, became president and chief executive officer. A new board of outside directors was subsequently formed. In December of 1989, Charles E. Bayless of Public Service of New Hampshire (PSNH) came to TEP as senior vice president and chief financial officer. Bayless, who joined PSNH in 1981 and led the utility through bankruptcy proceedings, replaced Joe G. Coykendall. PSNH was the first major utility in 50 years to file for Chapter 11 bankruptcy. Bayless was named president on July 1, 1990.

In early 1990 TEP’s previously arranged sale-leaseback arrangement for Springerville Unit 2 was canceled when Moody’s Investment Service downgraded TEP debt to below investment level. The sale-leaseback arrangement would have provided TEP with $760 million in working capital. Instead, TEP lost $387 million in 1990.

On January 31, 1991, TEP defaulted on a $70 million credit line, withholding payments on a number of other obligations. By June none of its creditors had forced the company into Chapter 11 bankruptcy. TEP was actively working to brighten its financial picture, and Bayless was predicting that there would be some improvement.