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PacifiCorp May Exit CA, MT To Woo Merger Partner

July 13, 1998
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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 customers.

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 said.

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&ampE Corp.'s Pacific Gas &amp 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 properties.

"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

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