Enron Parts with PGE in $2.1B Sale to Sierra Pacific

Enron's decision last week to sell Portland General Electric to Sierra Pacific Resources for a small gain after only two years of ownership was partly a result of the rapid growth of its power trading arm and its merchant generation holdings, as well as adverse regulatory changes in California and Oregon.

Under terms of the deal, which had been expected for several months, Enron will sell PGE to Reno, NV-based Sierra Pacific for $2.1 billion, including $2.02 billion in cash and the assumption of Enron's $80 million PGE merger payment obligation. Sierra Pacific also will assume $1 billion in PGE debt and preferred stock.

The sale price, if the deal goes through as currently expected, would give Enron a $137 million gain compared to the original purchase price of $2.962 billion in July 1997, according to PaineWebber analyst Ronald J. Barone. The proposed transaction, which is subject to customary regulatory approvals, is expected to close in the second half of 2000.

"We have been very pleased with the performance of Portland General," said Kenneth L. Lay, Enron's chairman and chief executive officer. "However, the rapidly evolving competitive electricity market allows us to deliver commodity services and risk management products to our customers without requiring the ownership of a regulated electric utility."

Enron spokesman Mark Palmer stressed the decision was not the result of PGE's financial performance. "The expectations were that [Portland General] would provide us some credibility and some regulated utility expertise. It's still a very well-performing utility, and I'm sure it will continue to be," he said. "Customer rates have gone down 3-4%. Service reliability has gone up, and the market is growing. Their rate of return is regulated and so the growth in income comes as a result of growth in the market and that market has been growing at about 3-4%/year."

But as PaineWebber's Barone noted, "with PGE Enron was getting a low return on capital, and it is a fairly capital intensive business so I think it's prudent that they cash in. I guarantee [PGE] provides the lowest return of [Enron's] major operating units.

"I think the plan is to get out and redeploy that capital into faster-growing, higher-return businesses, such as wholesale marketing and trading, Enron Energy Services, telecommunications. These are fast growing business, and they need capital, so why stay in this regulated business when Enron has been doing everything they can to get out of the regulated end of the business."

"The reason we bought Portland General," Palmer said, "was because we needed credibility and expertise as the market was opening up and now the market has opened so much faster than we expected. We have so much more contractual access to assets that it's less important for us to own big assets to deliver our products and services..."

Oregon regulators, however, have been tough on Enron from the beginning. And in January the company suffered a significant setback when regulators told Enron-PGE they weren't going to be allowed to spin off or spin down 2,000 MW of power generation.

Regulatory changes in California also have not gone Enron's way. Enron had hoped to take PGE's retail electric expertise across the border into California and become a dominant competitive force but legislators and regulators placed huge restrictions on the competitive market. Observers note the evidence supports the theory that Enron never really got what it hoped for with PGE.

Its revised business model, said Palmer, is "more about selling [wholesale] commodity services and risk management products to large customers all around the country," than inside the regulated service territory of a Pacific Northwest utility. "Sierra Pacific, on the other hand, is making a very strong regional play in the Pacific Northwest."

Sierra Pacific Resources just completed its merger with Las Vegas-based Nevada Power on July 28. The combined companies intend to play a major role in the deregulation of the electric industry in Nevada, which is slated to commence in early 2000. Sierra Pacific subsidiaries include Sierra Pacific Power and Nevada Power, which combined serve 843,000 electric customers in Nevada and the Lake Tahoe area of California, along with 105,000 natural gas and 67,000 water customers in Reno and Sparks, NV. PGE will bring in another 700,000 retail customers in northwest Oregon. The combined company of Sierra and PGE will have a total of more than $9 billion in assets and serve more than 1.7 million customers in three states.

"We're excited about this opportunity to transform our company by significantly expanding our scale and scope in this combination with PGE," said Michael Niggli, Sierra Pacific Resources' chairman and CEO. "Portland General is one of the premier electric utilities in the West and this transaction is an important step in fulfilling our previously stated goal of expanding our regulated utility businesses. We are looking forward to using our regulated industry expertise to enhance the value of PGE's businesses while continuing to provide safe, reliable electric service to customers. Moreover, the transaction will enable us to reinvest the proceeds from the planned divestiture of our Nevada generating assets."

Niggli will remain chairman and CEO of Sierra Pacific. At closing, Ken Harrison will resign as CEO of PGE but will continue as chairman of Enron Communications and as a member of Enron's board of directors.

Enron plans to use the proceeds from the sale for "general corporate purposes and to pay down debt. This was not a funding transaction to fund any particular business," said Palmer. "It is a strategic decision to exit a business that doesn't really suit our business model any more."

Rocco Canonica

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