Charlie Keating and Gary Driggs have fallen. And in a city edgy about the self-destruction of its icons, a question is being posed: Will Keith Turley, the man who pushed the Arizona Public Service utility into real estate and banking with disastrous results, be next?
A few years ago, the suggestion of Keith Turley as a suntanned Humpty Dumpty would have seemed ludicrous. The man, after all, may be the biggest power broker of them all in a city whose fortunes have long been dictated by the captains of commerce. A native Mesan and original member of the Phoenix 40, he was the top dog at the state's largest utility throughout the boom years of the Seventies and Eighties, a position that, combined with his own driving ambition, made him an irresistible force. He's on a first-name basis with congressmen and world bankers. But Turley's Midas touch may be exhausted, along with the magical, invulnerable air that made him such a Phoenix fixture in the boom years.
Turley's decision to diversify Arizona Public Service in 1985 was controversial from its inception. But it came as no surprise considering the acrobatic efforts of other electric companies. In the easy-come, easy-go Reagan years, utilities across the country were creating shell-like "holding companies." Those paper corporations helped them route profits away from the watchful eye of state regulators, essentially allowing the utilities to escape from the time- honored system whereby the giant companies accepted modest profits in exchange for receiving marketplace monopolies. That's exactly what the fancifully named Pinnacle West Capital Corporation was designed to do for APS. With work winding up on the Palo Verde nuclear plant and no more big construction jobs scheduled for years, APS would soon be flush with cash. "Pinnacle West was nobody," remembers one source familiar with the company's early days. "They had two employees." But that didn't prevent the company from engaging in what Forbes magazine cautioned was "an unprecedented diversification spree."
The five businesses purchased or assembled under the protective wing of Pinnacle West are APS, the giant MeraBank savings and loan, a real estate development arm called SunCor, a uranium mining company called Malapai Resources, and El Dorado Investment Company, a venture capital arm whose assets include a 15 percent chunk of the Phoenix Suns.
The thought of allowing a regulated utility to expand into free markets scared the daylights out of state regulators like John Ahearn, the former chairman of the Residential Utilities Consumer Office who fought against it back in 1985. They realized that the creation of the holding companies had an ominous implication: If a company could figure out a way to bamboozle state regulators, it could start billing utility ratepayers for speculative investments that had nothing to do with electricity. What would happen, they asked, if the company's non-utility subsidiaries started losing money?
Unfortunately for Arizona regulators, that's the exact scenario at which Pinnacle West has arrived. And the fear is that local ratepayers, who were protected under the old system, may be forced to cover the corporate gambling debts of a board of directors gone awry. The Arizona Corporation Commission has vowed to prevent Pinnacle West from bleeding APS customers and has even commissioned an audit of the parent company's books. Pinnacle West swears it has no intention of using APS money to patch up other subsidiaries. But observers wonder: What if a new corporation commission gets elected? What if the state Senate cuts the commission's budget, reducing its ability to keep tabs on possible accounting high jinks? And what if Pinnacle West's problems wind up putting APS in jeopardy? Could the commissioners really allow the state's largest utility to risk its stability? Wouldn't they be forced to grant it relief in the form of rate hikes?
They're questions made all the more pressing by the fact that, four years after its creation, Pinnacle West is dropping like a stone. The Phoenix- based Goliath has slashed dividend payments to shareholders and shows no signs of mounting a recovery. In the past year, it lost six cents per share, compared to earnings of $2.82 the year before. Enraged shareholders have filed suit, alleging fraud. And only one of its subsidiaries is making money: APS is the old reliable. Clucked Forbes in a follow-up piece last January, "Sometimes it's best to leave well enough alone."
What happened? Put simply, Turley and his board of directors put all their eggs in one basket, investing heavily in two companies--MeraBank and the real estate development firm SunCor--whose fortunes are inextricably linked to Southwestern real estate. When real estate values began dropping, both firms got burned badly. MeraBank lost $209 million last year, while SunCor dropped $81 million. Most of those losses came when the firms had to "write down" real estate they bought--in short, they own thousands of acres of land that's worth a lot less now than it was three years ago.
Industry analysts are holding the 65-year-old Turley and his board of directors accountable. Wall Street's all-powerful Standard and Poor's bond- rating firm has lowered its rating on APS's senior secured debt, ignoring Pinnacle West's pleas that the utility is operated independently from its other money-losing subsidiaries. "We determined that the utility can't be insulated from the parent's debt," says Barbara Eiseman, assistant vice president at Standard and Poor's. Only about 10 percent of the country's electrical utilities have senior debt rated lower than APS, says Eiseman.
APS president O. Mark De Michele has a surprisingly cheery view of Standard and Poor's decision. Standard and Poor's had been rating APS bonds one notch higher than other ratings firms anyway, he notes. So it was really the only company that lowered its assessment of APS; Moody's Investors Service and Duff & Phelps, on the other hand, "reaffirmed our ratings."
De Michele's bright-side view of the bond picture may not be shared by original buyers of APS stock. And those people have a new headache: the recent and still-continuing shutdown of Palo Verde, whose latest comedy of errors is costing the utility a reported $100,000 per day. The nuke was unplugged after a scathing Nuclear Regulatory Commission report blasted utility management for valuing corporate "expediency" above public safety.
Still, any problems at APS remain small potatoes compared to the massive hemorrhaging at MeraBank. The latest problem, ironically, could come in the form of the Bush administration's proposed savings and loan bailout package, which is designed to strengthen thrifts by making owners put more of their own money into the institutions. That legislation is currently working its way through the House and is expected to arrive on the President's desk in June.
Pinnacle West is responsible for maintaining minimum capital levels at MeraBank, thanks to an agreement the company signed with federal regulators when it bought the thrift. And Howard Klein, who analyzes MeraBank for Standard and Poor's, says the proposed legislation could force Pinnacle West to dump as much as $369 million in cash into the bleeding subsidiary. That amount could dip by as much as a half or a third once the bill's final language is hammered out, says a House staffer. Either way, it's a certainty that Turley's company will have to pour a massive amount of cash into the thrift.
That kind of outlay would be a blessing for MeraBank, which Klein says already had weak earnings and capital when Turley paid twice book value for it in 1986. But where Pinnacle West would come up with the money is something even chief financial officer Henry Sargent can't answer. "That's a study that we have ongoing," says Sargent, who stresses that the amount of any potential outlay will be impossible to estimate before the legislation is actually passed.
Pinnacle West's dilemma is simple: the corporation commission won't let it take the money from APS, and all of its other subsidiaries are losing money. That means either borrowing the money--which Klein says he doesn't think will be possible, given the company's teetering balance sheet--or trying to sell off assets. Sargent won't comment on whether he thinks Pinnacle West could swing the loan. He does suggest that the sale of assets is a more likely prospect. Remember, he tells a reporter, all of his subsidiaries have assets, despite the fact that they're losing money. But he won't discuss any possible sales in detail. And considering that most of MeraBank's and SunCor's assets consist of Southwestern real estate, it appears that the only way Pinnacle West could raise much money would be through a fire sale.
Klein says he's even skeptical about Pinnacle West's ability to sell MeraBank in its weakened condition.
Turley made his mistake when he bought MeraBank for a whopping $426 million, assuming its anemic earnings would turn around as Sun Belt land boomed off the map. Had he guessed right, says Klein, "he would have been a prince." Instead, Turley bought exactly at the wrong time: the peak of the market. It's been downhill ever since. Today, says Klein, MeraBank actually has "negative tangible capital"--a fancy way of saying that it has been meeting federal minimum capital requirements by using an accounting trick. Many thrifts, including MeraBank, now keep their ledgers in order by including large amounts of non-money "good will" on the books as if it were actual cash. Klein says that in MeraBank's case, "good will"--meaning a company's reputation and good name--represents the excess value Turley paid for the thrift. But that sleight of hand probably won't be allowed under the new legislation, which could result in scores of thrifts being placed under federal control. Instead, Klein expects thrifts to be required to meet minimum capital levels by coming up with "tangible capital"--cash, stocks or property that can actually be converted into cash. That's where Pinnacle West comes in.
And as if the MeraBank crisis wasn't enough to worry about, Turley and other company directors have a class- action lawsuit by shareholders to contend with. That suit claims, among other things, that Turley and others knowingly issued falsely optimistic statements on the company's condition.
MDBO
MDNM Turley refused to speak to New Times for this article. But members of the local power elite are beginning to wonder about a man who has nearly milked dry the state's most dependable cash cow. Even in the rarefied air of the Arizona Club, the private dining room for Phoenix's upper crust that sits like an air-cooled cocoon atop the Phoenix skyline, Turley is no longer regarded as sacrosanct. "I think Turley's finally met his Waterloo," says one observer. "Face it, here's a PR guy who rose to the top of a regulated utility where you couldn't help but make money. Now he's in a league where there's no monopoly, no special regulation that ordains your profit. And he's way out of his league. He's not a true businessman. He's never had to be."
SOME OBSERVERS BELIEVE Turley will be able to ride out the massive problems at Pinnacle West. He's still a man whose name instills fear and respect in the business community, they say, despite the fact that his own business instincts more and more appear to be seriously flawed.
Nonetheless, cracks are beginning to show. And human nature being what it is, notes community leader and Valley homebuilder John F. Long, Turley may be in for a long summer. "When the leader of the wolf pack is wounded," he says, "the pack traditionally attacks the wolf."
One doesn't have to look far to see that Turley's also been having his troubles lately as a civic shaman. His pet project for years has been a downtown domed stadium. But that idea has virtually been shelved by city officials busy working out the details of the new Suns arena. Phoenix Cardinals owner Bill Bidwill hasn't budged from his perch in Tempe, despite Turley's efforts to lure him downtown. Turley recently has talked about putting together a nonprofit group to build a $150 million dome, assuming he can get Bidwill downtown. Given the massive financial crunch faced by his own company, it's a scenario that seems ambitious at best.
"A lot of people have been distancing themselves from him in the last two years," a political consultant says of Turley. "I know for a fact he's sweating big time. He could be the next Charlie Keating."
Firefighters' union leader Pat Cantelme, one of the few labor bosses to crack the circles of the Phoenix high and mighty, says it's still not clear how much power Turley will be able to preserve. "I don't think he has the influence he had, because Pinnacle West has taken some major hits," he says. "Can he put it all back together in a year or two? That's what the jury's out on."
Not everyone is convinced that Turley's losing his grip. "I don't detect a general feeling that Keith Turley is losing his clout or that he's not highly regarded or respected in the business community," says Herman Chanen, Phoenix construction magnate and chairman of the state Board of Regents. "In every aspect of this community that he seemed to be involved in prior to the problems, he appears to still be involved," adds state senator turned lobbyist Alfredo Gutierrez. Rod McMullin, former state senator and head of Salt River Project and an emeritus member of the Phoenix 40, says he's not a critic of Turley's, "just a spectator." Notes the succinct McMullin, "A person's influence rises and falls with the success of their company. Is Keating a popular man in the community?"
The sheer girth of a company like Pinnacle West should work to insulate Turley, says public relations guru Bill Meek, owner of Phoenix's Impact Communications. "My instinct is that those problems haven't affected his political clout very much," says Meek, who worked for Turley at APS in the mid-Seventies. "And I think the reason is that the company and the resources they represent are still as important as any in town, even if they are suffering hard times." Another observer is less delicate in his assessment of Turley's financial ace in the hole: "If Keating had a utility to back his ass up, he wouldn't be bankrupt now."
It's certainly true, as Meek and others point out, that many Valley business people are in the same boat. MeraBank isn't the only local bank being soaked by bad real estate loans, notes Cantelme. But it's also true that Turley has long relished his role as an aircraft carrier among dinghies. A fervent believer in nuclear power, he committed APS not only to building a nuclear plant, but to building the largest nuclear plant in the world at Palo Verde. His 1985 decision to send the state's largest publicly held company cannonballing into Phoenix real estate sent a clear signal to other Valley businesses: Come on in, the water's fine. Now that it's clear Turley guessed wrong, it hardly seems fair to portray him as just another unhappy camper. "He made some mistakes," acknowledges Cantelme. "But when you get paid $600,000, you can't make those mistakes."
And there are inescapable similarities between Turley and Charles Keating. Both invested in troubled thrifts, and both have paid a huge price. The difference is that while federal regulators accuse Keating of using Lincoln Savings to bankroll American Continental Corporation's questionable real estate deals, Turley is in danger of being dragged down by his own S&L. As one local financial consultant points out, both Turley and Keating also bought heavily into west Valley development deals.
Susan Williams, a former RUCO board member, believes Turley's credibility is now being questioned not only by the usual cast of anti-utility activists but by the silk-suit juggernauts who sit with him on various boards of directors. "Their eyebrows have got to be up to their hairlines by now," she says.
Turley is a man who's watching his years of almost unlimited power slowly come to an end, says Renz Jennings, the outspoken chairman of the Arizona Corporation Commission. "He has presided over the destiny of Phoenix so much, in terms of which neighborhoods get freeways, which of the big guys will build the stadium, what art will hang in the galleries and what symphonies will be played.
"This is a monumental ego at work," adds the commissioner. "There's a tendency to view yourself as infallible. The guy's got to be bewildered by what's happened; he's no longer the bon vivant at cocktail parties, I'm sure."
PROFESSIONAL CRITICS like Jennings and Williams aren't the only ones who are questioning Turley's business acumen. Individual Pinnacle West shareholders, stung by a 43 percent cut in their dividends and plummeting stock whose value has been cut by more than half, are calling for Turley's resignation. And they're a sophisticated breed, not just amateur investors who gripe every time a company's stock dips. "They need some new blood in there," says Bob Schafer, who retired in the Valley after working as the head of marketing for Occidental Petroleum's coal subsidiary. Schafer says he's lost $18,000 due to the Pinnacle West stock crash. Turley and his board are "living in an unreal world," says Schafer, who says he depends on dividends and interest to pay living expenses. "I can still live," he says, "but it obviously has a bearing on my standards." Schafer says he has considered running for a seat on the company's board of directors, but so far hasn't gotten up the steam. Dwight Langham, a retired corporate attorney from Tempe who also owns Pinnacle West stock, agrees with Schafer's assertion that Turley has "hidden" behind statements blaming the nose-diving local economy for the company's troubles. "He kind of sets aside responsibility for the problems they're having," complains Langham.
Republican party stalwart Joe Castillo, chairman of the company's official shareholders' association, stops short of demanding Turley's head. In fact, he says Turley is working to put the company "back on the right track." But even Castillo bristles at a management style that has allowed members of the board of directors to finance their homes with cut-rate loans from MeraBank and made it possible for millionaires like Circle K magnate Karl Eller to use Pinnacle West as a private piggy bank.
According to the company's 1989 proxy statement, Pinnacle West has committed nearly $33 million to "venture capital" firms run by Eller, who sits on the board of both APS and Pinnacle West. One and a half million of that came from the APS employees' retirement plan. And a long line of Pinnacle West directors and corporate officers have received home mortgage loans for rates far below market interest rates, some as low as 6.64 percent. "That's less than it cost MeraBank to buy that money," claims Castillo. Eller and construction giant Maurice R. Tanner, another Pinnacle West director, got loans of more than $500,000 at a rate of 6.8 percent. Only after shareholders screamed bloody murder did the company adjust the interest rates upward earlier this year. At the same time, Turley, who had been given a $100,000 line of credit by the bank, canceled the arrangement. Gene Rice, MeraBank's chief executive officer and a member of Pinnacle West's board of directors, defends the past loan practices. "All banks do that," he says. Castillo's wrong when he claims some loans actually cost MeraBank money, says Rice. Actually, the loans were made at cost, says the chairman of the board--the minimum rate allowed under federal rules. Rice says he agreed to lift the interest rates to market levels because shareholders "raised so much static about it." But he continues to assert that lending a man like Karl Eller hundreds of thousands of dollars at rock-bottom interest is just a standard employee discount designed to keep quality people from leaving the company. "People who work at Dillard's don't pay retail for the coats they buy," says Rice.
SIFT THROUGH THE RECORD Keith Leon Turley left growing up in Depression-era Mesa, and there is no hint whatsoever that he'd end up a mogul. A more likely career choice for Turley, who appears in school pictures with a perpetual lopsided grin, would have seemed to be as a humor columnist for Reader's Digest. At Mesa High School, where he graduated in 1941, he played trumpet in the pep band, edited the school newspaper, wrote for the literary magazine and acted in Shakespeare's Taming of the Shrew. Turley cracked up classrooms with his ad-libs, remembers Robert Easley, a childhood friend who's now a family doctor in the Valley. But Keith never ran with the "fast crowd." Raised Baptist in a heavily Mormon enclave, Turley always went to Sunday school and was a "solid citizen."
During his college days at the old Arizona State College in Tempe, Turley was known mostly as a smart-alecky columnist for the State Press, where he wrote sports and news before graduating with a teaching degree in 1948. Turley's journalistic musings included a disapproving column about the local girls dating British fliers being trained at a nearby airfield. "The girls around here are getting to be so inconsiderate of us that they won't even smile at us on the street in broad daylight," wrote the junior wordsmith. "And only because they are afraid that their best Englishman might be in that airplane flying high above with a pair of field glasses."
Turley spent three years in the Navy during World War II, and was honorably discharged as a lieutenant, junior grade. Upon returning to Tempe, he went back to the State Press and started popping off on politics--and with a more liberal slant than might be expected by the activists who've more recently fought him on issues like nuclear power. In his senior year, he lampooned the ultraconservative American Better Citizens Committee for its ranting opposition to an appearance by poet Langston Hughes, who at the time was under fire for his alleged ties to Communist organizations. "Regardless of political affiliations, we would like to hear Langston Hughes, poet," wrote Turley in a column he co-authored with another student. "Besides, we're curious to see if, in place of hands, he actually has `red, bloody claws.'" Added the pundit, "Attention ABC: The arrival of warm weather gives the Arizona State lawns the appearance of a Communist free-love colony."
The pithy Turley wanted to be a journalism teacher when he got out of school, says Easley. He started out as a reporter and typesetter for the Tempe Daily News. But that only lasted a few months. Later in the year he was hired by APS as an assistant editor for the company newspaper, Spark and Flame. Turley briefly left in 1951 to run the in-house newsletter at Oklahoma's Stanolind Oil and Gas Company, but returned to APS a year later and has been there ever since.
Turley's made the most of his background in public relations. Rod McMullin remembers seeing Turley at Kiwanis Club meetings in the late Forties, furiously scribbling down the minutes as part of his volunteer role putting out the club newsletter. Turley received a series of promotions at APS, working as a "training specialist" in the personnel department and climbed his way up to controller in 1963. After a series of executive promotions in the late Sixties, Turley took over day-to-day control of APS in 1972, when he was named general manager. Then came Turley's big moment, and a turning point for APS.
In 1973, a decision had to be made on who would replace elderly chief executive officer Bill Reilly, who was being forced out by mandatory retirement. Turley was one candidate. Another, say sources, was Henry B. Sargent Jr. With a master's degree in finance from the Graduate School of Business at Columbia University, Sargent was seemingly born to run a utility. In fact, to Sargent, APS was essentially the family business. His father, Henry Sr., was a past president of the old Central Arizona Light and Power Company, one of three Arizona utilities that had merged in the Forties to form APS. Henry Sr. was elected president of APS when it was organized, but left in 1955 to assume control of a New York utility. Henry Jr. went to work for Dad's old company two years later, and, like Turley, worked his way up through the ranks.
But Reilly had long been grooming Turley for the position, recalls Rod McMullin. "It was known even to people on the outside that Keith was in on all the conferences and decisions being made in connection with Palo Verde," he says. To nobody's surprise, the board chose Turley, the PR man, over Sargent, the financial whiz. If Sargent had gotten the nod, speculates Susan Williams, APS might have grown into a very different beast. "Sargent is a utility person," she says. "I doubt very much if you'd have seen a diversification like that."
Sargent, now 54, does seem to march to a different drummer than his counterparts in the ether regions of Pinnacle West. He draws high marks from consumer activists like Williams for his straightshooting approach, and is the only Valley resident on the firm's board who doesn't belong to the Phoenix 40. But he's noncommittal when asked whether he would have led APS down a straighter and narrower path. "Diversification itself is something that virtually every industry has done," says Sargent. "It's inevitable. Specific diversification steps, I can't comment on. We'll have to see in the fullness of time which ones are successful and which ones aren't."
And Reilly's endorsement may not have been the only reason for the Turley promotion. The board knew the forthcoming Palo Verde nuclear plant would be controversial, say sources. It wanted a man trained in dealing with the public. (Years later, when Turley was looking for a new person to head up APS, he also seemed to have consumer edification in mind, hiring De Michele, previously in charge of public relations and advertising for a New York utility. "They haven't had a true engineer running APS for forever," notes one observer.)
Rumors of a power struggle between Turley and Sargent have been flowing ever since Turley's elevation to CEO. Bill Meek heard them, but "there was never any evidence when I was there," he says. "Henry always got along well with Keith." If Turley had a power struggle with anyone, says Meek, it was with Reilly, who had been bumped up to the board of directors and was hard- pressed to stop dabbling. Another source says the very real Sargent-Turley feud was simply swept under the rug once the board had made its choice. "They were both so powerful that a compromise was struck and a bloodbath was avoided."
As it turned out, Turley's flair for managing information came in handy when the APS-managed Arizona Nuclear Power Project began buying land for Palo Verde in 1973. Not until 1979, long after the plant could conceivably have been stopped, did the Arizona Republic reveal that almost 75 percent of the desert land the nuke was built on had been purchased from the family of Keith Turley's brother-in-law, B.F. Youngker of Buckeye. The information, coming as it did six years after the fact, didn't pack much of a punch.
Turley, who was APS general manager at the time of the land purchase, told Republic reporters that he stayed out of the site-selection process because of the potential conflict. Yet Turley surely knew about the potential conflict once the sale was completed. And he may never have talked about it if a group of Republic reporters hadn't attended Youngker's funeral on a whim and spotted Turley in the crowd.
The reporters weren't the only ones who'd been kept in the dark about the Turley-Youngker connection. Even board member Karl Eller said he was unaware of it. Karl F. Abel, then president of Salt River Project, and J. Luther Davis, chief of the old Tucson Gas & Electric, told the Republic they also had not been told about the potential conflict. Turley said he had told his staff to make sure and tell the other utilities.
TURLEY'S RISE through the APS ranks was mercurial, and he was careful to mirror his corporate climb with an accompanying interest in civic politics. During the early Seventies, he spent many an afternoon at places like the Westward Ho, regaling Kiwanis Club members with tales of "ecoextremists" whose environmental tunnel vision was making trouble for the nation's energy companies. Over the years, Turley has headed the Sun Angels booster group for ASU football, presided over the Phoenix Chamber of Commerce and seems to have served as the honorary chairman of nearly every charity drive known to the state.
In his early days as APS chief, remembers one source, Turley would go down to the fabled Ivanhoe bar and drink with people like Republic reporter Don Bolles. "He was generally considered to be one of the guys," he says. "Then it all went to his head." Bill Meek remembers working at APS in the oil-embargoed Seventies, at the height of the state's anti-utility fever. "In those days, Turley got as many irate calls from customers as anyone else," recalls Meek. "He was very much hands on. Today, in the holding company atmosphere, I've got to believe it's a lot different. If you go over there and hang out in the halls, it's much quieter, like a bank."
And today Turley can't help coming across like a pampered executive. "He's the kind of guy who looks tanner than he should," notes one Senate staffer in Washington, D.C., who's watched Turley expertly press the flesh with Arizona's congressional delegation.
Turley still drives himself to work each morning in his late-model Cadillac, heading in from his exclusive Solano Drive home at the foot of Camelback Mountain. (Turley and his wife also are listed as the owners of a $450,000 home on Desert Fairways Drive, which runs along the eastern edge of the Paradise Valley Country Club.)
He makes no pretense of copping the earthy style of MeraBank's Gene Rice, a boardroom cowboy who rides in rodeos during his spare time. During the halcyon days of the mid-Eighties, as Phoenix was nearing the peak of its boom cycle, Turley spent many weekday afternoons golfing and playing dominoes at the Paradise Valley Country Club, recalls one source who also attended the club. He's still a firm believer in long lunches and country-club afternoons, say observers. But while Turley may have perfected the social graces of a blue-chip executive, some people are beginning to wonder whether he's got the dealmaker's savvy necessary to complete the role.
Turley likes to think of himself as a "riverboat gambler," says one source. And in fact, the would-be journalism teacher has hinted that he gets a certain thrill out of high-stakes risk-taking. APS "used to be a pretty safe, comfortable place to work," Turley told Forbes in 1987. "That's all changed, and I'm really enjoying it." "When you're on a roll, and the good times are flowing, it looks easy," notes Renz Jennings. "Everybody loves a winner, and people were probably thinking Turley was a hero. Looking back, it looks reckless to me." Jennings' assessment is echoed by the local office manager for a national brokerage firm. "If you and I mismanaged our finances that badly, we'd be out in the street," he says. "Turley's being rewarded with a six-figure salary."
In fact, that salary was cut by the board last year after a flurry of shareholder complaints. Turley made $865,000 in 1987; last year he took home $601,000. If the pay cut was intended as a noble gesture, it seems to have fallen on largely deaf ears. Shareholders need only compare Turley's salary to that of another Southwestern utility mogul whose company got into trouble after diversifying. Jerry Geist, chairman of Public Service Company of New Mexico (PNM), announced in mid-April that he'll work for a salary of $1 this year.
As it turns out, Geist and Turley have a lot in common. Both of their companies took enormous write-downs on plummeting real estate after diversifying. Both laid off almost identical numbers of workers last year--about 800 each. But while Turley has continued to defend his decision to lead a conga line of mom 'n' pop investors into speculative land deals, Geist has cut his losses. The New Mexico utility, which recently announced it would pay no dividends this year, has scrapped diversification projects that lost $53 million and says it's committed to getting "back to basics."
Turley can't have been unaware of the New Mexico company's woes. In fact, back in May 1988, a Pinnacle West spokesman alluded to PNM's woes in the Republic. "It puts a thought in people's minds that our dividend might be in trouble, too," noted the spokesman. "But it's not. Our dividend is safe." Five months later, Pinnacle West announced it was cutting its dividend by 43 percent.
Pinnacle West's repeated expressions of confidence during a year in which its earnings dropped so dramatically have come back to haunt the firm. They're a linchpin in the class-action suit filed last December by a group of shareholders. The plaintiffs in Persky v. Turley claim Turley and other corporate officers and directors conspired to keep stock prices inflated for as long as possible, partly to ensure themselves lucrative bonuses.
Edward M. Gergosian, the lead attorney for the plaintiffs, says the crux of his clients' argument is not that Turley and the others were bad businessmen, although he thinks they were. The problem, he says, is that they lied about the company's condition. That's an important legal distinction, since the officers of a publicly held company can't be held liable simply for making bad business decisions. They are, however, required to be truthful in their public statements about a firm's financial health. "If you look at the period from May to September of 1988, they keep telling the marketplace the same thing over and over again," says Gergosian. "All of a sudden in October they say, oops, we've got to cut the dividend." Gergosian, a class-action specialist who works for the Philadelphia law firm of Barrack, Rodos and Bacine, says he may call securities analysts to testify against Turley. "I have information that on more than one occasion, he spoke with analysts and told them the same thing he was telling the marketplace," Gergosian says.
Turley says through a Pinnacle West spokesman that he and the other defendants deny all the charges. And proving in court that Turley and other Pinnacle West officers intentionally deceived shareholders or analysts is a long shot, according to a prominent Phoenix attorney who specializes in corporate law. Gergosian and the other lawyers for the plaintiffs are leaving no corporate stone unturned in their search for evidence. The case has moved to the pretrial discovery stage, and Pinnacle West "has literally millions of pages" of internal documents to produce, notes Gergosian. Sources say Turley's company has fifteen to twenty employees working full-time just to assemble all the paperwork, which, if made public, could provide a fascinating glimpse into the company's inner sanctum.
The judge in the case is scheduled to rule May 8 on a motion to dismiss filed by Pinnacle West's local law firm, the high-powered Snell & Wilmer. If he allows the case to continue, a ruling on whether to certify the class--in essence, to allow a class-action suit--is expected in mid-June.
AS PINNACLE WEST'S EARNINGS have continued to drop--the company recently announced first-quarter net income of $20.9 million, down from $30.3 million in 1988--it has become increasingly evident that APS is single-handedly keeping the company afloat. Put simply, none of the other subsidiaries made any money. MeraBank lost another $29 million in the first quarter of 1989, raising more questions about its ability to get out from under its millions of dollars in bad loans.
Yet while Mark De Michele, Gene Rice, and Henry Sargent are easily accessible--Sargent even answers his own phone--Turley has become increasingly hard to find. He has emerged mostly at carefully staged ribbon-cutting ceremonies and mandatory shareholder meetings. At the company meetings, he's been routinely savaged by the company's mostly retired investors. "You're not basketball players," one elderly gentleman pointedly informed Turley and his well-paid board last year.
"I'm sure it's hard on him," says Rod McMullin of Turley's predicament. But Turley has shown no outward sign of panic, or, for that matter, remorse. Unlike New Mexico's Jerry Geist, whose exaggerated mea culpa response to his company's woes has made him a pathetic figure, Turley obviously believes he can bull his way through Pinnacle West's crash. "Turley will ride it out to the bitter end," predicts one observer.
Turley could always be voted out by the board of directors. "In the end, businessmen have to vote with their pocket," says one source. "Those guys won't let him drive their stock into the ground." Some might argue that Turley has already done that. Pinnacle West stock has been languishing for weeks at around $14 per share, better than the 93 cents a share recently being paid for crippled locals like Western Savings, but down from a high of $29.25 in 1988. Yet the board that would be asked to determine Turley's fate is the same group that went along with his pie-in-the-sky diversification plan. And given the close-knit make-up of the body--joining Turley are Eller, Rice, Sargent, Tanner, Phoenix attorney Richard Snell, Flagstaff attorney Douglas J. Wall, John R. Norton III (an agribusiness tycoon who served as deputy secretary of agriculture in the Reagan administration), Donald N. Soldwedel (chairman of Yuma's Western Newspapers, Inc.), and former Goldwaters CEO Pamela Grant--any anti-Turley action would represent a radical reversal of the company's long-time power dynamic. Since the board itself serves as a nominating committee for prospective new members, its power base is almost impregnable, says shareholders president Joe Castillo. "You gotta vote the guy out who got you on."
Stockholders could always try to squeeze new members onto the board and influence company policy that way. But "I don't anticipate that happening," says Renz Jennings. "Turley's still got a lot of power and influence," says the commissioner. Besides, most Pinnacle West investors are older people who count on their stock dividends to help pay the bills. The last thing most retired persons want to do with their lives is wage an extended proxy fight against a giant corporation. The question of stamina would certainly become a factor. And if there's an especially sweet sugar daddy out there willing to invest the $50,000 one Phoenix attorney estimates it would take to launch an effective run for the board, he hasn't stepped from the shadows yet.
There's always the possibility Turley's company could become the target of a takeover attempt. The prospect obviously has occurred to the Pinnacle West board, which recently adopted an expensive "poison pill" provision designed to repel any hostile suitors. But analysts point out that the company, with its dwindling profits and shaky subsidiaries, isn't exactly a prize catch. So far, any potential buyers have kept their plans very much to themselves.
Whatever ultimately happens to the company, the question on many minds is whether Turley will be around to see it. One member of Pinnacle West's board of directors notes that, at 65, Turley is ripe for a graceful exit. "He's at that point where a lot of guys think of stepping aside," notes the director. "I think that certainly could happen." Pinnacle West's big guns, though, are dutifully lining up behind Turley. "He's doing fine," says Rice. De Michele insists that Pinnacle West will be able to ride out the current storm without selling off any of its subsidiaries.
Even so, what were supposed to be the cozy golden years of the PR man-turned-corporate leviathan have turned into a struggle for survival. Turley has plenty of supporters, mostly monied interests who associate him with the boom town of years past and believe he'll find a way to land on his feet. But now there are also thousands of stockholders who, accustomed to steady income from their old APS stock, feel angry and betrayed. As he fights to pull Pinnacle West out of its tailspin, Keith Turley may find that, for the first time in his memory, a lot of people in Phoenix are betting against him.
