Warren Buffett’s MidAmerican Energy Holdings Co. on Tuesday said it reached a definitive agreement with United Kingdom-based ScottishPower to buy electric affiliate PacifiCorp for $5.1 billion in cash, plus the assumption of $4.3 billion of debt. MidAmerican already has two major interstate natural gas pipelines in addition to its midwestern utility operations.

ScottishPower, which cited high capital requirements and low returns for the utility business, is holding on to its U.S.-based merchant unit, PPM Energy, where it expects robust growth in both its growing wind energy business and in natural gas storage operations.

The transaction will create an energy holding company serving three million electric and natural gas customers in 10 contiguous states in the western United States and 6.6 million energy customers worldwide, according to Des Moines, IA-based MidAmerican Energy, an electric and gas utility which was purchased in October 1999 by an investor group led by Berkshire Hathaway, of which Buffett is chairman (see Daily GPI, Oct. 26, 1999).

The utilities are subject to the Public Utility Holding Company Act (PUHCA) which restricts mergers in different geographic regions. The repeal of PUHCA, an action the Congress currently is considering as part of the energy bill, would clear the way for the merger.

This is Buffet’s fourth foray into the regulated energy business. MidAmerican picked up two interstate pipelines, Kern River Gas Transmission and Northern Natural Gas, from Williams and Dynegy respectively when their trading businesses crashed in 2002 (see Daily GPI, March 28, 2002; Aug. 19, 2002).

PacifiCorp, an electric utility serving 1.6 million customers in California, Idaho, Oregon, Utah, Washington and Wyoming, was formed in 1984. It merged with Utah Power and Light, after which it did business as two utilities — Pacific Power in Oregon, Washington, Wyoming and California, and as Utah Power in Utah and Idaho. In November 1999, PacifiCorp merged with ScottishPower.

The acquisition, which has been approved unanimously by both companies’ boards of directors, will result in a company with assets totaling more than $32 billion internationally, of which $25.3 billion are located in the U.S.

MidAmerican Energy Holdings will purchase all of the outstanding shares of PacifiCorp common stock for $5.1 billion in cash, plus acquire about $4.3 billion in net debt and preferred stock. In addition to shareholder approvals, the transaction will have to be cleared by various state regulators and the Federal Energy Regulatory Commission and Securities and Exchange Commission. The deal is expected to be completed sometime in 2006, the company said; ScottishPower estimated 12-18 months.

Following the close of the acquisition, MidAmerican Energy will have an estimated $10 billion in annual revenues internationally, with $8.5 billion coming from the U.S. It will own, operate and have under construction or in advanced development more than 16,000 MW of electric generation in the U.S.

“This acquisition advances our strategy of owning and operating a portfolio of high-quality energy business,” said MidAmerican Energy Chairman David L. Sokol. The company also currently owns CalEnergy and CE Electric UK. The company’s assets provide natural gas and electric service to five million customers worldwide.

PacifiCorp is “the premier energy company in the West” and has “outstanding assets,” said Berkshire Hathaway’s Buffett. “The energy sector has long interested us, and this is the right fit.”

In the end, ScottishPower’s strategic analysis concluded that the regulated U.S.-based utility business in the Pacific Northwest does not hold big enough potential returns in the face of increasing capital requirements, according to the holding company’s CEO Ian Russell, who conducted an earnings conference call from London Tuesday. Russell said the “scale and timing” of capital investment needs for the six-state utility company were estimated to be $1 billion annually for the next few years, and that was more than the holding company wanted to invest, given its projections for mostly flat growth in returns.

Ultimately, Russell said, ScottishPower intends to return 90% of the net proceeds of the sale to its shareholders, and that should total about $4.5 billion.

In announcing it would retain its merchant unit, ScottishPower pointed out PPM is now the leading wind energy developer in the United States and its merchant natural gas storage operations are the third largest in the nation. The holding company carved out PPM from PacifiCorp after it acquired the Portland, OR-based utility six years ago.

PacifiCorp will keep its existing name and headquarters in Portland, OR. The company also will continue operating as Pacific Power in Oregon, Wyoming, Washington and Northern California, and as Utah Power in Utah and Idaho.

The financial advisor for MidAmerican Energy was Houlihan Lokey Howard & Zukin, while financial advisors for ScottishPower were UBS and Morgan Stanley.

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