While in the longer term PacifiCorp’s merger partner has notruled out possible expansions into natural gas, water and eventelecommunications, ScottishPower PLC first plans to followPacifiCorp’s renewed focus on its vertically integrated electricitybusiness in the Western U.S. The $12.8 billion merger, includingdebt assumption, which was announced early last week, still mustpass U.S. state and federal regulators, along with Australianauthorities, however.

It was the Portland, OR-based power company’s strong verticalintegration that attracted the Scots as they scanned the U.S.landscape in search of a good partner for plans to expandinternationally, according to PacifiCorp’s designated CEO fromScottish Power, Alan Richardson. But PacifiCorp was not its firstchoice. ScottishPower made a failed attempt to merge with FloridaProgress Corp., formerly Cinergy. PacifiCorp also had anothermerger partner in mind initially. It lost to Texas Utilities in abid for Britain’s The Energy Group Plc earlier this year. The twocompanies, however, still see significant benefits in acombination. They will form one of the 10 largest regulated utilitycompanies in the world, with about 7 million customers (5 millionin the UK, 1.4 million in the U.S. and 550,000 in Australia) and23,500 employees.

Under terms of the merger, ScottishPower shareholders will ownabout 64% of the new company and PacifiCorp shareholders will holdthe remaining 36%. Based on Dec. 4 closing stock prices for the twocompanies, PacifiCorp has a value of about $7.9 billion in equityand $4.9 billion in debt that will be assumed as part of the deal.All shareholder and regulatory approvals are expected in the nextnine months to nail down a corporate consolidation that admittedlydoesn’t have the same level of “savings from synergies” as moretraditional mergers of two U.S. firms, according to seniorexecutives from the two companies. However, executives are bullishon high shareholder value, low utility customer prices and improvedservice levels across the board.

A PacifiCorp spokesperson confirmed that themulti-billion-dollar energy company still intends to sell its smallelectric utility distribution operations in the extreme northernend of California (41,000 customers) and its natural gas processingand storage business based in Houston (TPC Corp.), but there was noindication that potential deals are imminent.

“The business we have merged with basically is the business wewant to be in, so things like selling off generation are not in ourplans,” said Richardson, PacifiCorp’s CEO-designate and managingdirector of ScottishPower’s wires business throughout the UK.

“Basically, one of the great attractions for PacifiCorp was thattheir strategy was similar to our own, which is to stick to a coreelectricity business. Delivering low cost power and seekinghigh-quality service is what we strive for. We find thatattractive. We have endorsed the plan that PacifiCorp put in placea couple of months ago [cutting back on foreign and some stateoperations; closing marketing offices in states and concentratingits operations in Portland]. We’ll support that and encourage themto do better.”

Since PacifiCorp lost its bid to acquire The Energy Group inMay, the company has had an increasingly difficult year. Totalpretax costs of its failed bid for the British company were $199million. But that was only the beginning. On Oct. 23, PacifiCorpannounced plans to exit its unregulated energy trading business andits other unregulated energy development businesses. It recorded a$151 million loss for these businesses and reported a net $92million loss for the third quarter. In addition, PacifiCorpannounced during the summer it was selling its electric serviceareas in California and Montana – two of the seven states where itcurrently operates. The two states account for 76,000, or 5.5%, ofPacifiCorp’s 1.4 million North American customers. It sold theMontana assets to Flathead Electric Cooperative.

Last month it appointed a new CEO, replacing Fred Buckman withKeith McKennon. PacifiCorp’s stock is near a 52-week low. However,it still has a strong asset base that features company-owned coalproduction, low cost coal-fired and hydroelectric generation, alarge transmission grid that connects to more than 50 otherutilities and a large wholesale power sales operation.

Since PacifiCorp has a reputation for low-cost power, the twomerging companies are likely to be pressed by state regulators tojustify the combination as a good deal for electric customers.PacifiCorp’s senior vice-president Dennis Steinberg explained it asfollows:

“There are several ways the merger benefits customers. (1)First, customers get a quality of service that is unparalleled; (2)then, there are synergies (operating savings)- albeit fairly modestcompared to other (mergers) that are more traditional; (3) third,lower cost of service; (4) and, finally, lower prices than whatthey would get absent the merger.”

Richardson added: “From a ScottishPower point of view, we-likePacifiCorp- have some best practices that have been exercised inmore of a deregulated environment, and some of them can be exportedto the U.S. On the other hand, we think some of PacifiCorp’s powerplant best practices can be transferred back into the UK toScottishPower’s plants.”

Glasgow-based ScottishPower serves about one of five Britishhouseholds through its electric generation, transmission anddistribution, natural gas distribution, water and wastewaterservices and telecommunications. It holds a market capitalizationof $13.5 billion.

PacifiCorp operates extensive transmission throughout the West,and has retail customers in Oregon, Utah, Wyoming, Washington,Idaho and California. It has 8,300 MW of generation capacity. Inaddition, it is the largest investor-owned utility in the wholesalepower market in the West, selling bulk power to more than 60utilities.

ScottishPower CEO Ian Robinson said there would be somedownsizing and staff reductions from the deal. PacifiCorp alreadyhas reduced domestic staff by 1,000 positions over the past twoyears, but it has added 1,200 in Australia.

ScottishPower’s Murray Stuart will continue to be Chairman ofScottishPower. Robinson will be CEO, and Ian Russell will be deputychief executive and finance director. Richardson, currentlymanaging director, Power Systems at ScottishPower, will be the newCEO of PacifiCorp. Richard O’Brien will become president andcontinue as COO of PacifiCorp. McKennon, currently chairman, CEOand president of PacifiCorp, will join the ScottishPower board asdeputy chairman, together with two non-executive directors fromPacifiCorp. The PacifiCorp board will be reconstituted as anexecutive only board, chaired by Robinson, with ScottishPowerhaving the majority of seats.

Richard Nemec, Los Angeles; Rocco Canonica

©Copyright 1998 Intelligence Press, Inc. All rightsreserved. The preceding news report may not be republished orredistributed in whole or in part without prior written consent ofIntelligence Press, Inc.