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PacifiCorp Back to Basics Move Not Unique

PacifiCorp Back to Basics Move Not Unique

The new chief executive at PacifiCorp decided the cure for the company's sickly earnings is a strategy successfully attempted by other utility companies that found themselves in trouble: get back to basics.

The company renewed its focus on its electricity business in the West, put its gas marketing and storage business, TPC Corp., up for sale, and is abandoning eastern U.S. power marketing activities. A source told NGI last week that TPC was in the process of laying off about half of its employees and trading operations would end.

"PacifiCorp is returning to its roots," said CEO Keith McKennon. "We've spent a lot of time and money trying to 'transform' ourselves into a global energy company without success. I don't think we need to be transformed." McKennon, chairman of PacifiCorp's board since 1994, took the helm as CEO in August following the resignation of former CEO Fred Buckman, whose departure the company attributed in part to "disappointing shareholder return."

PacifiCorp also announced a $750 million program to buy back about 13% of its shares over the next 12 months. In addition to the share buyback, PacifiCorp Group Holdings, the company's unregulated holding company, will make a capital contribution of $500 million to PacifiCorp, the regulated parent company, to repay debt. PacifiCorp also will begin a cost reduction program aimed at achieving annual pre-tax savings of $30 million from its continuing business. McKennon said cost reduction is essential.

"We have the opportunity to grow both regulated and unregulated energy businesses in the West. Success in the West will be the platform for building shareholder value," McKennon said. "By refocusing on the business we know best, I believe we can achieve our five-year target of five percent average annual growth in earnings per share, starting in the year 2000."

Besides TPC Corp., PacifiCorp intends to sell over the next 12 months the eastern U.S. electricity trading business of PacifiCorp Power Marketing; EnergyWorks, the company's joint venture with Bechtel Enterprises; energy development activities in Turkey and the Philippines; and its investment in the Hazelwood power station in Australia. The company will retain its Australian electricity distribution business, Powercor. PacifiCorp acquired TPC in April 1997 for $288 million (See NGI April 21, 1997).

Edward Jones analyst Robin Diedrich said she and others had been expecting some major changes at PacifiCorp. "There are quite a few ways they could have gone, but this [asset sale] is certainly one they were looking at and had alluded to." She said other utility companies that have lost their way in the past have been successful implementing a "back to basics" strategy. "It certainly is one that's been used before in this industry." Diedrich said she didn't know what the market would be like for PacifiCorp's assets. Edward Jones has a "hold" rating on PacifiCorp stock.

Shareholders didn't applaud PacifiCorp's news, and there are two reasons for that, according to Diedrich. One is the company's ongoing Utah rate case, which could cut the company's Utah Power rates by $57.5 million a year or more. "It can be a completely different number once the final numbers come out," Diedrich noted. It probably won't be worse than that number."

Diedrich also said PacifiCorp's $750 million share buyback only targets 13% of the company's shares when there is money on the balance sheet to acquire more. Diedrich said she was looking for a number around 20% and speculated the buyback could grow in size. "I think a lot of it may depend on whether they are able to sell these assets and what kind of cash they get." PacifiCorp spokesman David Kvamme said the $750 million represents about half of what the company set aside for its failed attempt to acquire Britain's The Energy Group. He refused to comment on whether the share buyback would grow.

PacifiCorp will record charges in the fourth quarter associated with its cost reduction efforts. The company recorded charges totaling $230 million pre-tax in its third quarter results for expected losses from the business divestitures.

The company estimates next year's earnings per share will be about $1.20, before any share repurchases. The company's estimate of 1999 earnings per share also does not include the financial impact of the outcome of its general rate case in Utah. Hearings for the rate case are currently in process and a final order is expected from the Utah Public Service Commission by year-end. The shortfall in anticipated earnings level for 1999 relative to past performance and market expectations is primarily attributable to higher cost of operations, increased depreciation of capital expenditures and anticipated lower margins on wholesale energy contracts, PacifiCorp said. "We are not pleased with this projected 1999 performance," McKennon said. "But we have disappointed investors in the past, and I believe in promising less and delivering more."

PacifiCorp reported losses in the third quarter of $92 million, 31 cents/share, including $151 million in losses related to the unregulated energy businesses the company is exiting.

PacifiCorp is one of the lowest-cost electricity producers in the United States with more than 10,000 MW of generation and 1.4 million electric customers in the western United States and 550,000 customers in Australia.

Joe Fisher, Houston

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