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
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
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
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
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