The new chief executive at PacifiCorp decided the cure for thecompany’s sickly earnings is a strategy successfully attempted byother utility companies that found themselves in trouble: get backto basics.

The company renewed its focus on its electricity business in theWest, put its gas marketing and storage business, TPC Corp., up forsale, and is abandoning eastern U.S. power marketing activities. Asource told NGI last week that TPC was in the process of laying offabout 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’tthink we need to be transformed.” McKennon, chairman ofPacifiCorp’s board since 1994, took the helm as CEO in Augustfollowing the resignation of former CEO Fred Buckman, whosedeparture the company attributed in part to “disappointingshareholder return.”

PacifiCorp also announced a $750 million program to buy backabout 13% of its shares over the next 12 months. In addition to theshare buyback, PacifiCorp Group Holdings, the company’s unregulatedholding company, will make a capital contribution of $500 millionto PacifiCorp, the regulated parent company, to repay debt.PacifiCorp also will begin a cost reduction program aimed atachieving annual pre-tax savings of $30 million from its continuingbusiness. McKennon said cost reduction is essential.

“We have the opportunity to grow both regulated and unregulatedenergy businesses in the West. Success in the West will be theplatform for building shareholder value,” McKennon said. “Byrefocusing on the business we know best, I believe we can achieveour five-year target of five percent average annual growth inearnings per share, starting in the year 2000.”

Besides TPC Corp., PacifiCorp intends to sell over the next 12months the eastern U.S. electricity trading business of PacifiCorpPower Marketing; EnergyWorks, the company’s joint venture withBechtel Enterprises; energy development activities in Turkey andthe Philippines; and its investment in the Hazelwood power stationin Australia. The company will retain its Australian electricitydistribution business, Powercor. PacifiCorp acquired TPC in April1997 for $288 million (See NGI April 21, 1997).

Edward Jones analyst Robin Diedrich said she and others had beenexpecting some major changes at PacifiCorp. “There are quite a fewways they could have gone, but this [asset sale] is certainly onethey were looking at and had alluded to.” She said other utilitycompanies that have lost their way in the past have been successfulimplementing a “back to basics” strategy. “It certainly is onethat’s been used before in this industry.” Diedrich said she didn’tknow what the market would be like for PacifiCorp’s assets. EdwardJones has a “hold” rating on PacifiCorp stock.

Shareholders didn’t applaud PacifiCorp’s news, and there are tworeasons for that, according to Diedrich. One is the company’songoing Utah rate case, which could cut the company’s Utah Powerrates by $57.5 million a year or more. “It can be a completelydifferent 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 onlytargets 13% of the company’s shares when there is money on thebalance sheet to acquire more. Diedrich said she was looking for anumber around 20% and speculated the buyback could grow in size. “Ithink a lot of it may depend on whether they are able to sell theseassets and what kind of cash they get.” PacifiCorp spokesman DavidKvamme said the $750 million represents about half of what thecompany set aside for its failed attempt to acquire Britain’s TheEnergy Group. He refused to comment on whether the share buybackwould grow.

PacifiCorp will record charges in the fourth quarter associatedwith its cost reduction efforts. The company recorded chargestotaling $230 million pre-tax in its third quarter results forexpected losses from the business divestitures.

The company estimates next year’s earnings per share will beabout $1.20, before any share repurchases. The company’s estimateof 1999 earnings per share also does not include the financialimpact of the outcome of its general rate case in Utah. Hearingsfor the rate case are currently in process and a final order isexpected from the Utah Public Service Commission by year-end. Theshortfall in anticipated earnings level for 1999 relative to pastperformance and market expectations is primarily attributable tohigher cost of operations, increased depreciation of capitalexpenditures and anticipated lower margins on wholesale energycontracts, PacifiCorp said. “We are not pleased with this projected1999 performance,” McKennon said. “But we have disappointedinvestors in the past, and I believe in promising less anddelivering more.”

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

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

Joe Fisher, Houston

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