PacifiCorp May Exit CA, MT To Woo Merger Partner
In a move that could pave the way for a merger or sale,
PacifiCorp said last week it wouldn't mind unloading its service
areas in California and Montana. The two states represent about
76,000, or 5.5%, of PacifiCorp's 1.4 million North American
The company said the regulatory process of restructuring in the
two states has created a drag on corporate resources better
deployed in the other five states where PacifiCorp does more
business. However, the company insisted it wouldn't let the service
areas go for "fire sale" prices.
PacifiCorp has been hit hard in recent weeks, taking losses in
the volatile Midwestern power market and from its failed bid for
British utility giant The Energy Group. Some observers see this
latest move as positioning for potential sale of the company.
Robin Diedrich, Edward Jones senior utility analyst, was privy
to a PacifiCorp conference call last week in which executives
talked about the Portland, OR-based company's future options. "One
of those options seemed to be merger or acquisition where they
would consider being on either side of the table," Diedrich said.
"One thing that's always kept PacifiCorp out of peoples' minds as a
merger partner or a takeover target is the fact that they have
seven states they are regulated in. I think it definitely makes
them more approachable by others, and I think they're leaving their
options open at this point."
PacifiCorp spokesman Scott Hibbs said PacifiCorp itself is not
for sale, "but if somebody were to come to us with a good offer, we
most certainly would consider it." He conceded sale of the
California and Montana service areas could be construed as making
the company more attractive for merger or takeover, but that's not
the motivation for the solicitation.
PacifiCorp said the evolving regulatory environment makes it
increasingly complex to do business in seven states where each
state is expected to develop its own rules and standards for
electric restructuring. California opened its retail electricity
market in March. Montana is expected to begin phasing in
competition this summer. "In this newly competitive environment, it
is vital for PacifiCorp's regulated business to focus on those
states where we have a larger customer base and more significant
investment in assets," said CEO Fred Buckman.
In California, the company serves the far northern portion of
the state, including the communities of Crescent City, Yreka, Mt.
Shasta, Weed, Dunsmuir, Fort Jones, Alturas, Dorris and Tulelake.
That amounts to 41,262 customers, or about 0.3% of the state's
total customer base. In Montana, the company serves primarily in
and around Kalispell, Whitefish, Columbia Falls, Big Fork and
Libby. It has 34,528 customers, or about 7% of the state's total
customer base. California and Montana customers are served under
the Pacific Power brand name.
"We feel we've been pretty hamstrung, quite frankly, by
California's approach [to restructuring]," said PacifiCorp
spokeswoman Anita Marks. "As an incumbent provider, we are not
allowed to compete in the state. However, energy service providers
are allowed to compete in our service territory." She said the
company has had to commit a large amount of corporate resources to
the restructuring taking place in California and Montana while it
holds a very small stake in either state. "We are concerned whether
we have enough influence to really have a bearing on how those
[restructuring] processes work in those states." Attention paid to
California and Montana detracts from efforts in other states, she
Marks wouldn't say whether PacifiCorp was making a profit from
its California and Montana operations. "I don't think we want to
talk about numbers at all." She also was reluctant to speculate on
who might be interested in buying the territories but did say the
company was approached by a prospective buyer last year.
"People have different reasons for wanting to buy. Perhaps
they're already in the state and they want to consolidate. It might
be somebody who simply wants to get into that state. We're pretty
well open in terms of the who. Our primary concern is we get what
we consider is a fair price for those properties. And, frankly, we
intend to carefully vet any potential buyers to make sure they are
financially viable because we want to make sure those customers and
employees are taken care of."
Neighboring utilities would be among potential acquirers.
PacifiCorp's California territory is adjacent to PG&E Corp.'s
Pacific Gas & Electric Co., Sierra Pacific Resources, and public
utility Surprise Valley. Neighboring utilities in Montana are
Washington Water Power, Montana Power, and Flathead Electric
Cooperative. Withdrawal from California and Montana would leave
PacifiCorp with operations in Oregon, Washington, Idaho, Wyoming,
and Utah, as well as Australia.
PacifiCorp's second quarter earnings won't meet analysts'
earlier expectations, the company has said, due to losses from
eastern U.S. power trading operations, as well as losses from
unregulated energy development activities. The company said
earnings could fall short of the FIRST CALL analysts' consensus of
$0.30 per share by about 30%. The loss from the energy trading
business stems from extreme price volatility in eastern power
markets. Demand increases caused by unseasonably hot weather
combined with an unusual level of plant outages caused power prices
in the eastern U.S. to rise dramatically in certain periods during
the quarter. The price spikes caused a number of the company's
short positions to be significantly below market prices. The second
quarter earnings report is expected next week.
In the first quarter, PacifiCorp took a charge of $54 million,
or $0.18 per share, for its long-fought but unsuccessful battle to
acquire Britain's The Energy Group. Texas Utilities was the
successful bidder for Energy Group. Hibbs said there was no
connection between the company's trading losses and failed Energy
Group bid and the decision to sell the California and Montana
"These are sound service areas which would represent a real
added value for a number of potential purchasers," said Buckman.
"However, we believe these are valuable properties and if we do not
receive credible offers, we will continue our ownership."
PacifiCorp plans to begin accepting bids this summer. If a sale
develops, the company expects to complete the transaction by the
end of the year.
Joe Fisher, Houston