Oregon’s largest natural gas utility and electric power utility have come together with the announcement last week that Northwest Natural Gas will buy Enron Corp.’s subsidiary Portland General Electric (PGE) for $1.875 billion. Under terms of the transaction, expected to close by the fourth quarter of 2002, Natural will pay $1.55 billion in cash, give up $200 billion in preferred stock, $50 million in Natural common stock, and assume Enron’s $75 million balance in customer benefits obligations, stipulated in its 1996 PGE purchase. Natural also will assume almost $1.1 billion in PGE debt and preferred stock.

The transaction creates a Portland-based company with $5 billion in assets and $3.9 billion in enterprise value. The new company will have more than 1.25 million electric and gas customers and will own almost 2,000 MW of generation, 26,000 miles of electric transmission and distribution lines and 12,000 miles of gas mains. The combined company will be one of the largest corporations based in Oregon.

Enron CEO Kenneth L. Lay, who has been instrumental in making his company the leading commodities trader in the world, said the sale was consistent with Enron’s “overall objective of selling assets that are not strategic to our wholesale and retail energy business.” Calling PGE “a solid performer” and “a great addition to the Enron portfolio since 1997,” he said that in the past few years, Enron’s need to own a regional utility “has been diminished by the rapid extension of our third-party supply network.”

The sale of PGE continues Houston-based Enron’s push to divest itself of assets both in the United States and abroad as it attempts to right its ship. Shares of the marketing and trading giant hit three-year lows earlier this year but have slowly been recovering as it rids itself of excess baggage. The company’s stock fell sharply in August after the surprise resignation of CEO Jeffrey Skilling (see NGI, Aug. 20), but it also had come under pressure from a disappointing performance by its young broadband business, a stalled power plant project in India and an overall economic slump, which has led to job cuts both in the United States and Europe.

Enron had been attempting to drop its PGE unit for more than a year to raise cash that it could apply to other business units for a higher return. Even though it was a profitable subsidiary, PGE, bought in 1997 for $2.1 billion, suffered as California’s electricity market fell apart last year. The market problems killed a carefully enacted transaction six months ago between Enron and Sierra Pacific Resources Corp., which had been attempting to buy Portland General (see NGI, April 30).

With overlapping service territories and shared customers, the deal between Natural and PGE will capture significant operating efficiencies in their energy delivery systems, especially in administrative areas, that neither company could accomplish on its own. By combining PGE’s electric generation and Natural’s gas storage assets with both companies’ gas purchasing capability, the deal is also expected to produce synergies and economies of scale that are expected to help hold energy prices for customers of Natural and PGE down over the long run.

“The acquisition makes sense for our customers, our shareholders, our employees and for Oregon,” said Richard G. Reiten, CEO of Natural. Reiten knows the PGE operation well, having had seven years of executive experience at PGE, serving between 1989 and 1996 as president and COO of the company and as a member of its Board. Reiten said the transaction is expected to help Natural “to hold down electric and gas prices over the long run and to deliver more convenient and more comprehensive customer service.”

By picking up $50 million in a common equity stake in Natural, Enron will be entitled to a voting stake of 4.9% in Natural’s total shares of outstanding common stock. Enron also will receive “appropriate representation” on Natural’s board. The Houston-based trader also agreed to hold its securities for a minimum of two-and-a-half years. Credit Suisse First Boston acted as financial adviser, and Vinson & Elkins LLP. acted as legal counsel to Enron.

To complete the acquisition, Natural plans to form a holding company to acquire the common stock of PGE from Enron, resulting in a holding company with two operating utility subsidiaries, Natural and PGE. Existing shareholders of Natural will receive one share of holding company common stock for each share of Natural common stock. Natural will retain its existing preferred and preference shares, and Enron will designate up to two members of the holding company’s board of directors. Natural and PGE are expected to continue to operate under their own names.

The cash portion of the purchase price will be raised through loans to the holding company from commercial banks and institutional lenders arranged by Merrill Lynch and Credit Suisse First Boston. The holding company will issue to Enron $50 million in common stock. In addition, the holding company will issue $200 million in Feline Prides securities to Enron. The securities will consist of four million shares of preferred stock of the holding company with a liquidation value of $50 per share, together with a forward purchase agreement of Enron to purchase additional common stock of the holding company at a price defined in the agreement. Enron’s voting rights on its common stock will be limited to 4.9% of the total number of shares of holding company common stock outstanding.

Natural expects the holding company to maintain its current dividend policy. For 2001, Natural expects to have paid dividends on its common stock of $1.245 a share, making 2001 the 46th consecutive year in which its dividend payments have increased. Reiten noted that the combined company “ultimately will result in reductions in force at both utilities in order to achieve cost savings,” but there were no figures on how many jobs could be cut.

The acquisition is expected to be accretive to Natural’s earnings in the first full year after closing of the transaction, whether evaluated using the accounting rule relating to the treatment of goodwill (i.e., no amortization) or the former rule under which goodwill was amortized to expense. Reiten said the combined companies also are expected to generate strong cash flow. The acquisition has been structured to ensure an investment grade credit rating at the utility level.

The proposed transaction is subject to the receipt of required regulatory approvals, the approval of Natural’s shareholders and closing conditions defined in the purchase and sale agreement. Required regulatory approvals include the Oregon Public Utility Commission, the Washington Utilities and Transportation Commission, the Federal Energy Regulatory Commission, the Nuclear Regulatory Commission and the Securities and Exchange Commission.

In addition to announcing the PGE sale last week, Enron also said its Metals group, based in London, would cut between 250 and 500 European jobs — between 5-10%. Enron declined to comment on the cutbacks, but in a statement, John Sherriff, CEO of Enron Europe, said, “Enron’s business continues to grow in Europe in terms of traded volumes and numbers of transactions, but like any company, we are constantly seeing ways to do more with less in order to maintain earnings growth.” Enron also solid its oil and gas assets off Indian’s west coast to BG Plc earlier this month for $388 million.

Merrill Lynch last week upgraded Enron to “long-term buy” from “accumulate, analyst Donato Eassey noting that some of the marketer’s “clouds have cleared” with its agreements to sell PGE and its Indian assets. He said that Enron was “well on its way to resharpening its focus on more profitable core businesses” while substantially reduces its debt load by the end of 2002. “We still expect more in the way of asset sales such as the (Indian) Dabhol power facility along with smaller international gas assets.”

With Enron’s still sweeping assets across the globe, Eassey said that because of uncertainties with weakening economies in South America and “negative economic sentiment here in the United States,” Merrill Lynch was “cautiously lightening our three-year growth outlook from 20% range to 16-17% per annum.”

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