Enron’s days as an electric utility are coming to an end. Afteronly two years of owning Oregon-based Portland General Electric(PGE), Enron has decided to part with the company for a small gainthrough a sale to fellow western utility Sierra Pacific Resources.

Under terms of the agreement, which was announced yesterday buthad been expected since the summer, Enron will sell PGE to Reno,NV-based Sierra Pacific Resources for $2.1 billion, including $2.02billion in cash and the assumption of Enron’s $80 million PGEmerger payment obligation. Sierra Pacific also will assume $1billion 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 poor performance nor was it a reaction to therejection by regulators earlier this year of PGE’s request todivest its 2,000 MW of power generation assets. “The expectationswere that [Portland General] would provide us some credibility andsome regulated utility expertise. It’s still a very well-performingutility, and I’m sure it will continue to be,” said Palmer.”Customer rates have gone down 3-4%. Service reliability has goneup, and the market is growing. Their rate of return is regulatedand so the growth in income comes as a result of growth in themarket and that market has been growing at about 3-4%/year.”

He said it has become less important for Enron to own aregulated utility in order to deliver its products and services.”We’re selling more and more electricity on an annual basis, and wedon’t need a regulated utility to do that. The reason we boughtPortland General was because we needed credibility and expertise asthe market was opening up and now the market has opened so muchfaster than we expected. We have so much more contractual access toassets that it’s less important for us to own big assets to deliverour products and services…”

PaineWebber’s Barone also noted that “with PGE, Enron wasgetting a low return on capital, and it is a fairly capitalintensive business so I think it’s prudent that they cash in. Iguarantee [PGE] provides the lowest return of [Enron’s] majoroperating units. I think the plan is to get out and redeploy thatcapital into faster-growing, higher-return businesses, such aswholesale marketing and trading, Enron Energy Services,telecommunications. These are fast growing business, and they needcapital, so why stay in this regulated business when Enron has beendoing everything they can to get out of the regulated end of thebusiness.”

Palmer also noted Enron’s revised business model is “more aboutselling commodity services and risk management products to largecustomers 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 subsidiaries include Sierra Pacific Power andNevada Power. Combined, the two utilities serve 843,000 electriccustomers in Nevada and the Lake Tahoe area of California, alongwith 105,000 natural gas and 67,000 water customers in Reno andSparks, NV. PGE serves 700,000 retail customers in northwestOregon. The combined company of Sierra and PGE will have a total ofmore than $9 billion in assets and serve more than 1.7 millioncustomers in three states.

“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 chief executive officer. “Portland General is one of thepremier electric utilities in the West and this transaction is animportant step in fulfilling our previously stated goal ofexpanding our regulated utility businesses. We are looking forwardto using our regulated industry expertise to enhance the value ofPGE’s businesses while continuing to provide safe, reliableelectric service to customers. Moreover, the transaction willenable us to reinvest the proceeds from the planned divestiture ofour Nevada generating assets.”

Michael Niggli will remain chairman and chief executive officerof Sierra Pacific Resources. At closing, Ken Harrison will resignas CEO of PGE, but will continue as chairman of EnronCommunications and as a member of Enron’s board 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. It is a strategicdecision to exit a business that doesn’t really suit our businessmodel any more.”

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