EXHIBIT 8
February 17, 1995
San Diego Gas & Electric Company
101 Ash Street
San Diego, CA 92101
Ladies and Gentlemen:
You have asked for our opinion as to certain federal income tax
consequences of a proposed transaction that would result in the creation
of a holding company structure for San Diego Gas & Electric Company
("SDG&E") and its subsidiaries. The proposed transaction is set forth in
the Agreement of Merger (the "Agreement") among SDG&E, SDO Parent Co.
("ParentCo") and San Diego Merger Company ("MergeCo") set forth as Exhibit
A to the Proxy Statement/Prospectus of ParentCo included in ParentCo's
Registration Statement on Form S-4 filed with the Securities and Exchange
Commission on December 22, 1994 (the "Registration Statement"). We
understand, and the opinions rendered herein assume, that the facts
surrounding the proposed transaction are as follows.
SDG&E, a California corporation, is engaged in the sale of natural
gas and electricity. SDG&E has authorized capital of: (i) 255 million
shares of no par value common stock ("Common Stock"); (ii) 1.375 million
shares of $20 par value cumulative voting preferred stock ("Preferred
Stock"); and (iii) 10 million shares of no par value cumulative nonvoting
preference stock ("Preference Stock"). As of September 30, 1994, SDG&E
had the following outstanding shares of stock: (i) 116,475,955 shares of
Common Stock; (ii) four different series of Preferred Stock aggregating
1,374,650 shares; and (iii) four different series of Preference Stock
aggregating 3,190,000 shares. The SDG&E Common Stock is widely held and
publicly traded on the New York and Pacific Stock Exchanges. The SDG&E
Preferred and Preference series are publicly traded on the American and
Pacific Stock Exchanges, except for the 4.6% Series of SDG&E Preferred
Stock and the $1.70 and $1.7625 Series of SDG&E Preference Stock, which
are traded over the counter.
Califia Company ("Califia"), a California corporation, is engaged in
the business of leasing computer equipment. Califia has outstanding
27,249 shares of no par value voting common stock, 25,000 shares of Series
A $9.25 no par value nonvoting preferred stock and
San Diego Gas & Electric Company
February 17, 1995
Page 2
36,500 shares of Series B $8.75 no par value nonvoting preferred stock.
SDG&E owns all of the outstanding common stock, 21,350 shares (85.4%) of
the Series A preferred stock and 31,000 shares (84.9%) of the Series B
preferred stock. The remaining outstanding preferred stock is held by CMA
Leasing Associates, an unrelated entity.
Enova Corporation ("Enova"), a California corporation, is a wholly
owned subsidiary of SDG&E which invests in affordable housing projects
through multiple limited partnership interests.
Pacific Diversified Capital Company ("PDCC"), a California
corporation, is a wholly owned subsidiary of SDG&E which acts as a holding
company. PDCC owns all of the stock of Phase One Development, Inc.
("Phase One") and 81 percent of the stock of Wahlco Environmental Systems,
Inc. ("WESI"). The remaining 19 percent of the stock of WESI is publicly
owned.
Phase One is a California corporation engaged in the business of real
estate development.
WESI, a Delaware corporation, is a holding company which owns Wahlco,
Inc. and several other subsidiaries engaged in the air pollution control
business.
Enova Energy Management, Inc. ("EEMI"), a California corporation, is
a wholly owned subsidiary of SDG&E engaged in the business of energy
procurement consulting services.
ParentCo, a California corporation, was formed for the purpose of
engaging in business as a holding company. ParentCo has authorized
capital consisting of 300 million shares of common stock and 30 million
shares of preferred stock, none of which have been issued.
MergeCo, a California corporation, was formed solely for the purpose
of consummating the proposed transaction. MergeCo has authorized capital
consisting of 1000 shares of common stock, none of which have been issued.
The management of SDG&E has determined that the proposed transaction
would be in the best interests of SDG&E, Califia, Enova, PDCC, EEMI and
the SDG&E stockholders. The management of SDG&E believes that a holding
company structure would facilitate the acquisition and integration of
other energy related operations by providing a more clearly defined
separation of utility and non-utility operations and would permit the use
of financing techniques that are more directly suited to the particular
requirements, characteristics and risks of non-utility operations with
substantially less impact on the capital structure or credit of SDG&E,
thereby increasing and improving SDG&E's financial flexibility.
San Diego Gas & Electric Company
February 17, 1995
Page 3
Accordingly, the following steps have occurred:
Step 1 On December 20, 1994, ParentCo was incorporated; and
Step 2 On January 6, 1995, MergeCo was incorporated.
Following the receipt of certain regulatory approvals, the following
steps will occur:
Step 3 100 shares of common stock of ParentCo will be issued to
SDG&E; and
Step 4 100 shares of common stock of MergeCo will be issued to
ParentCo.
Pursuant to authority conferred on December 19, 1994 by the board of
directors of SDG&E and anticipated to be conferred on February 27, 1995 by
the board of directors of ParentCo and on April 25, 1995 by the
shareholders of SDG&E, and upon satisfaction of certain regulatory
conditions, the following steps will occur in the following sequence:
Step 5 MergeCo will merge with and into SDG&E according to
applicable state law; and
Step 6 SDG&E will distribute all of its stock of Califia, Enova,
PDCC and EEMI to ParentCo.
Under the merger described in Step 5, SDG&E will be the surviving
corporation and each outstanding share of SDG&E common stock will be
automatically converted into one share of common stock of ParentCo, except
that, to the extent that state law provides rights to dissenting
shareholders, those SDG&E shareholders who exercise dissenters' rights in
the statutorily prescribed manner ("Dissenters") will be paid by SDG&E an
amount equal to the fair market value of their shares at the time
immediately preceding the announcement of the merger or value as
determined by judicial proceedings, if the parties disagree. The 100
shares of MergeCo common stock issued to ParentCo will automatically be
converted into all of the issued and outstanding common stock of SDG&E.
The 100 shares of ParentCo common stock issued to SDG&E will be canceled
in the merger. The shares of Preferred Stock and Preference Stock issued
and outstanding immediately before the merger will not be affected by the
merger, but will remain issued and outstanding shares of SDG&E preferred
stock entitled to the same respective relative rights and preferences as
presently provided.
As a result of Steps 5 and 6, the SDG&E common shareholders other
than Dissenters (the "Transferors") will own all of the outstanding stock
of ParentCo and ParentCo will directly own all of the outstanding common
stock of SDG&E, Califia, Enova, PDCC and EEMI and all of the outstanding
preferred stock of Califia presently owned by SDG&E.
San Diego Gas & Electric Company
February 17, 1995
Page 4
We understand and assume the following:
(a) No stock or securities will be issued for services rendered to
or for the benefit of ParentCo in connection with the proposed
transaction, and no stock or securities will be issued for indebtedness of
ParentCo.
(b) The transfer is not the result of the solicitation by a
promoter, broker, or investment house.
(c) The Transferors will not retain any rights in the property
transferred to ParentCo.
(d) ParentCo will not assume any liabilities of the Transferors and
the stock being transferred is not subject to any liabilities.
(e) There is no indebtedness between ParentCo and any Transferor and
there will be no indebtedness created in favor of any Transferor as a
result of the transaction.
(f) The transfers and exchanges will occur under a plan agreed upon
before the transaction in which the rights of the parties are defined.
(g) All exchanges will occur on approximately the same date.
(h) With the exception of incorporation shares issued to SDG&E which
will be canceled upon consummation of the transaction, there is no plan or
intention on the part of ParentCo to redeem or otherwise reacquire any
stock or indebtedness to be issued in the proposed transaction.
(i) There is no plan or intention for ParentCo to issue additional
shares of ParentCo stock, except pursuant to the Common Stock Investment
Plan (the "CSIP") and various employee benefit plans presently maintained
by SDG&E. In the past, such issuances have in the aggregate amounted
annually to less than one percent of the outstanding shares of SDG&E
Common Stock. There is no plan or intent for future issuances pursuant to
the CSIP and the employee benefit plans to exceed historical levels and it
is not anticipated that such issuances will exceed historical levels.
(j) To the best knowledge of management, there is no plan or
intention on the part of the Transferors to sell, exchange, transfer by
gift, or otherwise dispose of any of the stock of ParentCo to be received
in the exchange.
(k) Each Transferor will receive ParentCo common stock approximately
equal to the fair market value of the SDG&E common stock transferred to
ParentCo.
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February 17, 1995
Page 5
(l) ParentCo will remain in existence as a holding company, as
described above.
(m) There is no plan or intention by ParentCo to dispose of any
SDG&E stock, or any assets of SDG&E whose value exceeds in the aggregate
five percent of the shareholders' equity in SDG&E, other than in the
normal course of business operations. No such asset sale is being
considered as part of the proposed transaction. The proceeds from any such
sale would not be distributed to the shareholders of either ParentCo or
SDG&E (other than ParentCo).
(n) Each of the parties to the transaction will pay their own
expenses, if any, incurred in connection with the proposed transaction.
(o) ParentCo will not be a regulated investment company (a "RIC") or
a real estate investment trust (a "REIT"), and ParentCo will not hold
readily marketable stocks or securities for investment or interests in
RICs or REITs the value of which in the aggregate exceeds 80 percent of
the value of ParentCo's assets.
(p) To the best knowledge of management, no Transferor is under the
jurisdiction of a court in a title 11 or similar case (within the meaning
of section 368(a)(3)(A)) and the stock or securities received in the
exchange will not be used to satisfy the indebtedness of such debtor,
except that Dr. Ralph R. Ocampo, a director who holds 13,128 shares
jointly with spouse/children, petitioned for protection under Chapter 11
of the Federal Bankruptcy Code in March 1993.
Additionally, we assume (1) the accuracy of the Agreement; and (2)
the accuracy of all factual statements and representations made in our
December 19, 1994 IRS private letter ruling request and any supplements
thereto. Finally, we assume, and this opinion is conditioned on, the
receipt by SDG&E of a private letter ruling from the IRS ruling that the
formation of MergeCo and its merger with and into SDG&E will be
disregarded for federal income tax purposes, and the transaction will be
treated as a transfer by the Transferors of their SDG&E common stock to
ParentCo solely in exchange for an equal number of shares of common stock
of ParentCo.
In light of the foregoing, and based solely on the information,
understandings and assumptions described herein, and assuming no material
changes in such information, understandings and assumptions nor in the
applicable law prior to consummation of the proposed transaction, our
opinion is as follows with respect to Step 5:
(i) No gain or loss will be recognized to the Transferors upon the
transfer of their SDG&E common stock to ParentCo solely in
exchange for shares of ParentCo common stock (section 351(a)).
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February 17, 1995
Page 6
(ii) No gain or loss will be recognized by ParentCo upon the receipt
of the SDG&E common stock solely in exchange for shares of
ParentCo common stock (section 1032(a)).
(iii) The basis of the ParentCo common stock to be received by the
Transferors in the transaction will be the same as the basis of
the SDG&E common stock surrendered in exchange therefor
(section 358(a)(1)).
(iv) The holding period of the ParentCo common stock to be received
by the Transferors will include the period during which the
SDG&E common stock was held, provided that the SDG&E common
stock was held as a capital asset on the date of the exchange
(section 1223(1)).
(v) The basis of the SDG&E common stock to be received by ParentCo
will be the same as the basis of the stock in the hands of the
exchanging Transferors (section 362(a)).
(vi) The holding period of the SDG&E common stock to be received by
ParentCo will include the period during which such stock was
held by the Transferors (section 1223(2)).
No opinion is expressed about the tax treatment of the transactions
described in Steps 1, 2, 3, 4 and 6. Further, no opinion is expressed
about the tax treatment of the transaction under other provisions of the
Internal Revenue Code and implementing regulations or about the tax
treatment of any conditions existing at the time of, or effects resulting
from, the transaction that are not specifically covered by the above
opinions.
The opinions rendered herein are based on provisions of the Internal
Revenue Code of 1986, as amended as of the date hereof, regulations
promulgated pursuant thereto, reported judicial decisions and published
administrative rulings. Judicial, legislative or administrative changes
may be forthcoming that would require modification of some or all of the
conclusions reached in those opinions and you should be aware that any
such changes may be applicable retroactively.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption
"Formation of a Holding Company - Federal Income Tax Consequences of the
Merger" in the Registration Statement.
Very truly yours,
/s/ Pillsbury Madison & Sutro