Enron’s decision last week to sell Portland General Electric toSierra Pacific Resources for a small gain after only two years ofownership was partly a result of the rapid growth of its powertrading arm and its merchant generation holdings, as well asadverse regulatory changes in California and Oregon.

Under terms of the deal, which had been expected for severalmonths, Enron will sell PGE to Reno, NV-based Sierra Pacific for$2.1 billion, including $2.02 billion in cash and the assumption ofEnron’s $80 million PGE merger payment obligation. Sierra Pacificalso 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 originalpurchase price of $2.962 billion in July 1997, according toPaineWebber analyst Ronald J. Barone. The proposed transaction,which is subject to customary regulatory approvals, is expected toclose in the second half of 2000.

“We have been very pleased with the performance of PortlandGeneral,” said Kenneth L. Lay, Enron’s chairman and chief executiveofficer. “However, the rapidly evolving competitive electricitymarket allows us to deliver commodity services and risk managementproducts to our customers without requiring the ownership of aregulated electric utility.”

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

But as PaineWebber’s Barone noted, “with PGE Enron was getting alow return on capital, and it is a fairly capital intensivebusiness so I think it’s prudent that they cash in. I guarantee[PGE] provides the lowest return of [Enron’s] major operatingunits.

“I think the plan is to get out and redeploy that capital intofaster-growing, higher-return businesses, such as wholesalemarketing and trading, Enron Energy Services, telecommunications.These are fast growing business, and they need capital, so why stayin this regulated business when Enron has been doing everythingthey can to get out of the regulated end of the business.”

“The reason we bought Portland General,” Palmer said, “wasbecause we needed credibility and expertise as the market wasopening up and now the market has opened so much faster than weexpected. We have so much more contractual access to assets thatit’s less important for us to own big assets to deliver ourproducts and services…”

Oregon regulators, however, have been tough on Enron from thebeginning. And in January the company suffered a significantsetback when regulators told Enron-PGE they weren’t going to beallowed 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 theborder into California and become a dominant competitive force butlegislators and regulators placed huge restrictions on thecompetitive market. Observers note the evidence supports the theorythat 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 tolarge customers all around the country,” than inside the regulatedservice territory of a Pacific Northwest utility. “Sierra Pacific,on the other hand, is making a very strong regional play in thePacific Northwest.”

Sierra Pacific Resources just completed its merger with LasVegas-based Nevada Power on July 28. The combined companies intendto play a major role in the deregulation of the electric industryin Nevada, which is slated to commence in early 2000. SierraPacific subsidiaries include Sierra Pacific Power and Nevada Power,which combined serve 843,000 electric customers in Nevada and theLake Tahoe area of California, along with 105,000 natural gas and67,000 water customers in Reno and Sparks, NV. PGE will bring inanother 700,000 retail customers in northwest Oregon. The combinedcompany of Sierra and PGE will have a total of more than $9 billionin assets and serve more than 1.7 million customers in threestates.

“We’re excited about this opportunity to transform our companyby significantly expanding our scale and scope in this combinationwith PGE,” said Michael Niggli, Sierra Pacific Resources’ chairmanand CEO. “Portland General is one of the premier electric utilitiesin the West and this transaction is an important step in fulfillingour previously stated goal of expanding our regulated utilitybusinesses. We are looking forward to using our regulated industryexpertise to enhance the value of PGE’s businesses while continuingto provide safe, reliable electric service to customers. Moreover,the transaction will enable us to reinvest the proceeds from theplanned divestiture of our Nevada generating assets.”

Niggli will remain chairman and CEO of Sierra Pacific. Atclosing, Ken Harrison will resign as CEO of PGE but will continueas chairman of Enron Communications and as a member of Enron’sboard of directors.

Enron plans to use the proceeds from the sale for “generalcorporate purposes and to pay down debt. This was not a fundingtransaction to fund any particular business,” said Palmer. “It is astrategic decision to exit a business that doesn’t really suit ourbusiness model any more.”

Rocco Canonica

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