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Scots Invade West with $13 B PacifiCorp Merger

December 14, 1998
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Scots Invade West with $13 B PacifiCorp Merger

While in the longer term PacifiCorp's merger partner has not ruled out possible expansions into natural gas, water and even telecommunications, ScottishPower PLC first plans to follow PacifiCorp's renewed focus on its vertically integrated electricity business in the Western U.S. The $12.8 billion merger, including debt assumption, which was announced early last week, still must pass U.S. state and federal regulators, along with Australian authorities, however.

It was the Portland, OR-based power company's strong vertical integration that attracted the Scots as they scanned the U.S. landscape in search of a good partner for plans to expand internationally, according to PacifiCorp's designated CEO from Scottish Power, Alan Richardson. But PacifiCorp was not its first choice. ScottishPower made a failed attempt to merge with Florida Progress Corp., formerly Cinergy. PacifiCorp also had another merger partner in mind initially. It lost to Texas Utilities in a bid for Britain's The Energy Group Plc earlier this year. The two companies, however, still see significant benefits in a combination. They will form one of the 10 largest regulated utility companies in the world, with about 7 million customers (5 million in the UK, 1.4 million in the U.S. and 550,000 in Australia) and 23,500 employees.

Under terms of the merger, ScottishPower shareholders will own about 64% of the new company and PacifiCorp shareholders will hold the remaining 36%. Based on Dec. 4 closing stock prices for the two companies, PacifiCorp has a value of about $7.9 billion in equity and $4.9 billion in debt that will be assumed as part of the deal. All shareholder and regulatory approvals are expected in the next nine months to nail down a corporate consolidation that admittedly doesn't have the same level of "savings from synergies" as more traditional mergers of two U.S. firms, according to senior executives from the two companies. However, executives are bullish on high shareholder value, low utility customer prices and improved service levels across the board.

A PacifiCorp spokesperson confirmed that the multi-billion-dollar energy company still intends to sell its small electric utility distribution operations in the extreme northern end of California (41,000 customers) and its natural gas processing and storage business based in Houston (TPC Corp.), but there was no indication that potential deals are imminent.

"The business we have merged with basically is the business we want to be in, so things like selling off generation are not in our plans," said Richardson, PacifiCorp's CEO-designate and managing director of ScottishPower's wires business throughout the UK.

"Basically, one of the great attractions for PacifiCorp was that their strategy was similar to our own, which is to stick to a core electricity business. Delivering low cost power and seeking high-quality service is what we strive for. We find that attractive. We have endorsed the plan that PacifiCorp put in place a couple of months ago [cutting back on foreign and some state operations; closing marketing offices in states and concentrating its operations in Portland]. We'll support that and encourage them to do better."

Since PacifiCorp lost its bid to acquire The Energy Group in May, the company has had an increasingly difficult year. Total pretax costs of its failed bid for the British company were $199 million. But that was only the beginning. On Oct. 23, PacifiCorp announced plans to exit its unregulated energy trading business and its other unregulated energy development businesses. It recorded a $151 million loss for these businesses and reported a net $92 million loss for the third quarter. In addition, PacifiCorp announced during the summer it was selling its electric service areas in California and Montana - two of the seven states where it currently operates. The two states account for 76,000, or 5.5%, of PacifiCorp's 1.4 million North American customers. It sold the Montana assets to Flathead Electric Cooperative.

Last month it appointed a new CEO, replacing Fred Buckman with Keith McKennon. PacifiCorp's stock is near a 52-week low. However, it still has a strong asset base that features company-owned coal production, low cost coal-fired and hydroelectric generation, a large transmission grid that connects to more than 50 other utilities and a large wholesale power sales operation.

Since PacifiCorp has a reputation for low-cost power, the two merging companies are likely to be pressed by state regulators to justify the combination as a good deal for electric customers. PacifiCorp's senior vice-president Dennis Steinberg explained it as follows:

"There are several ways the merger benefits customers. (1) First, customers get a quality of service that is unparalleled; (2) then, there are synergies (operating savings)- albeit fairly modest compared to other (mergers) that are more traditional; (3) third, lower cost of service; (4) and, finally, lower prices than what they would get absent the merger."

Richardson added: "From a ScottishPower point of view, we-like PacifiCorp- have some best practices that have been exercised in more of a deregulated environment, and some of them can be exported to the U.S. On the other hand, we think some of PacifiCorp's power plant best practices can be transferred back into the UK to ScottishPower's plants."

Glasgow-based ScottishPower serves about one of five British households through its electric generation, transmission and distribution, natural gas distribution, water and wastewater services and telecommunications. It holds a market capitalization of $13.5 billion.

PacifiCorp operates extensive transmission throughout the West, and has retail customers in Oregon, Utah, Wyoming, Washington, Idaho and California. It has 8,300 MW of generation capacity. In addition, it is the largest investor-owned utility in the wholesale power market in the West, selling bulk power to more than 60 utilities.

ScottishPower CEO Ian Robinson said there would be some downsizing and staff reductions from the deal. PacifiCorp already has reduced domestic staff by 1,000 positions over the past two years, but it has added 1,200 in Australia.

ScottishPower's Murray Stuart will continue to be Chairman of ScottishPower. Robinson will be CEO, and Ian Russell will be deputy chief executive and finance director. Richardson, currently managing director, Power Systems at ScottishPower, will be the new CEO of PacifiCorp. Richard O'Brien will become president and continue as COO of PacifiCorp. McKennon, currently chairman, CEO and president of PacifiCorp, will join the ScottishPower board as deputy chairman, together with two non-executive directors from PacifiCorp. The PacifiCorp board will be reconstituted as an executive only board, chaired by Robinson, with ScottishPower having the majority of seats.

Richard Nemec, Los Angeles; Rocco Canonica

©Copyright 1998 Intelligence Press, Inc. All rights reserved. The preceding news report may not be republished or redistributed in whole or in part without prior written consent of Intelligence Press, Inc.

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