In a move that could pave the way for a merger or sale,PacifiCorp said last week it wouldn’t mind unloading its serviceareas in California and Montana. The two states represent about76,000, or 5.5%, of PacifiCorp’s 1.4 million North Americancustomers.

The company said the regulatory process of restructuring in thetwo states has created a drag on corporate resources betterdeployed in the other five states where PacifiCorp does morebusiness. However, the company insisted it wouldn’t let the serviceareas go for “fire sale” prices.

PacifiCorp has been hit hard in recent weeks, taking losses inthe volatile Midwestern power market and from its failed bid forBritish utility giant The Energy Group. Some observers see thislatest move as positioning for potential sale of the company.

Robin Diedrich, Edward Jones senior utility analyst, was privyto a PacifiCorp conference call last week in which executivestalked about the Portland, OR-based company’s future options. “Oneof those options seemed to be merger or acquisition where theywould consider being on either side of the table,” Diedrich said.”One thing that’s always kept PacifiCorp out of peoples’ minds as amerger partner or a takeover target is the fact that they haveseven states they are regulated in. I think it definitely makesthem more approachable by others, and I think they’re leaving theiroptions open at this point.”

PacifiCorp spokesman Scott Hibbs said PacifiCorp itself is notfor sale, “but if somebody were to come to us with a good offer, wemost certainly would consider it.” He conceded sale of theCalifornia and Montana service areas could be construed as makingthe company more attractive for merger or takeover, but that’s notthe motivation for the solicitation.

PacifiCorp said the evolving regulatory environment makes itincreasingly complex to do business in seven states where eachstate is expected to develop its own rules and standards forelectric restructuring. California opened its retail electricitymarket in March. Montana is expected to begin phasing incompetition this summer. “In this newly competitive environment, itis vital for PacifiCorp’s regulated business to focus on thosestates where we have a larger customer base and more significantinvestment in assets,” said CEO Fred Buckman.

In California, the company serves the far northern portion ofthe 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’stotal customer base. In Montana, the company serves primarily inand around Kalispell, Whitefish, Columbia Falls, Big Fork andLibby. It has 34,528 customers, or about 7% of the state’s totalcustomer base. California and Montana customers are served underthe Pacific Power brand name.

“We feel we’ve been pretty hamstrung, quite frankly, byCalifornia’s approach [to restructuring],” said PacifiCorpspokeswoman Anita Marks. “As an incumbent provider, we are notallowed to compete in the state. However, energy service providersare allowed to compete in our service territory.” She said thecompany has had to commit a large amount of corporate resources tothe restructuring taking place in California and Montana while itholds a very small stake in either state. “We are concerned whetherwe have enough influence to really have a bearing on how those[restructuring] processes work in those states.” Attention paid toCalifornia and Montana detracts from efforts in other states, shesaid.

Marks wouldn’t say whether PacifiCorp was making a profit fromits California and Montana operations. “I don’t think we want totalk about numbers at all.” She also was reluctant to speculate onwho might be interested in buying the territories but did say thecompany was approached by a prospective buyer last year.

“People have different reasons for wanting to buy. Perhapsthey’re already in the state and they want to consolidate. It mightbe somebody who simply wants to get into that state. We’re prettywell open in terms of the who. Our primary concern is we get whatwe consider is a fair price for those properties. And, frankly, weintend to carefully vet any potential buyers to make sure they arefinancially viable because we want to make sure those customers andemployees are taken care of.”

Neighboring utilities would be among potential acquirers.PacifiCorp’s California territory is adjacent to PG&ampE Corp.’sPacific Gas &amp Electric Co., Sierra Pacific Resources, and publicutility Surprise Valley. Neighboring utilities in Montana areWashington Water Power, Montana Power, and Flathead ElectricCooperative. Withdrawal from California and Montana would leavePacifiCorp 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 fromeastern U.S. power trading operations, as well as losses fromunregulated energy development activities. The company saidearnings could fall short of the FIRST CALL analysts’ consensus of$0.30 per share by about 30%. The loss from the energy tradingbusiness stems from extreme price volatility in eastern powermarkets. Demand increases caused by unseasonably hot weathercombined with an unusual level of plant outages caused power pricesin the eastern U.S. to rise dramatically in certain periods duringthe quarter. The price spikes caused a number of the company’sshort positions to be significantly below market prices. The secondquarter 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 toacquire Britain’s The Energy Group. Texas Utilities was thesuccessful bidder for Energy Group. Hibbs said there was noconnection between the company’s trading losses and failed EnergyGroup bid and the decision to sell the California and Montanaproperties.

“These are sound service areas which would represent a realadded value for a number of potential purchasers,” said Buckman.”However, we believe these are valuable properties and if we do notreceive credible offers, we will continue our ownership.”PacifiCorp plans to begin accepting bids this summer. If a saledevelops, the company expects to complete the transaction by theend of the year.

Joe Fisher, Houston

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