Message-ID: <2528157.1075863330810.JavaMail.evans@thyme> Date: Thu, 8 Mar 2001 17:32:00 -0800 (PST) From: drew.fossum@enron.com To: denise.lagesse@enron.com Subject: Problems Mount for Sierra Pacific Resources, Acquisition of Portland General Appears Uncertain Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: quoted-printable X-From: Drew Fossum X-To: Denise LaGesse X-cc: X-bcc: X-Folder: \DFOSSUM (Non-Privileged)\Fossum, Drew\'Sent Mail X-Origin: Fossum-D X-FileName: DFOSSUM (Non-Privileged).pst pls print for me. thanks df =20 ---------------------- Forwarded by Drew Fossum/ET&S/Enron on 03/08/2001 02= :32 PM --------------------------- "SCIENTECH IssueAlert" on 03/08/2001 04:57:43 AM To:=09 cc:=09=20 Subject:=09Problems Mount for Sierra Pacific Resources, Acquisition of Port= land General Appears Uncertain Today's IssueAlert Sponsors: [IMAGE] The CIS Conference provides utility management personnel unequaled insight and current inform= ation on Customer Relationship Management (CRM), E-Commerce, Technologies a= nd Marketing. Fifty-four sessions conducted by utility industry representat= ives will focus on issues facing the industry. Over 100 companies will exhi= bit the latest technologies and services. Former President George Bush is= our Honored Keynote Speaker www.cisconference.org =09 Identify and discuss current issues confronting the energy and telecommuni= cations industries at the Center for Public Utilities' annual spring confer= ence. How should these problems be resolved? What tradeoffs are made with e= ach solution? Join panel discussions led by utility executives and PUC comm= issioners in Santa Fe, NM, March 25-28th, at "Current Issues Challenging th= e Utility Industry." To register, or for more information, contact Jeanette= Walter , Associate Director, at 505-646-3242 or 505-646-4876. The Center = for Public Utilities is part of New Mexico State University, presenting pro= grams sanctioned by the National Association of Regulatory Commissioners (N= ARUC). =09 For advertising information, email Nancy Spring , or call (505)244-7613. = =09 =09 [IMAGE] IssueAlert for March 8, 2001=20 Problems Mount for Sierra Pacific Resources, Acquisition of Portland General Appears Uncertain by Will McNamara=20 Director, Electric Industry Analysis The probability appears to be getting smaller that Sierra Pacific Resources= (NYSE: SRP) will complete its $3.1 billion acquisition of Portland General= Electric (NYSE: PGB) from Enron (NYSE: ENE). Enron disclosed in an 8K fili= ng with the Securities and Exchange Commission (SEC) on Feb. 27 that the sa= le of Portland General had been delayed because of "recent events" in Calif= ornia and Nevada that affected Sierra Pacific. Walt Higgins, chair and CEO = of Sierra Pacific Resources, told Wall Street analysts that the acquisition= agreement will terminate if it has not closed by May 1.=20 Analysis: Yesterday I wrote about the apparent collapse of the merger betwe= en Consolidated Edison and Northeast Utilities (NU). Now, another high-prof= ile merger appears to be unraveling. As with the Con Edison / NU deal, the = problem facing Sierra Pacific Resources' pending purchase of Portland Gener= al from Enron is based in economics. Namely, it appears that Sierra Pacific= Resources' recent financial problems have cast doubt on the company's abil= ity to complete its purchase of Portland General. This is not a good develo= pment for Sierra Pacific Resources, as the financial and legal implications= of this potentially dead acquisition could exacerbate the company's curren= t financial problems. =20 First, let me provide some background on this deal. The origin of Sierra Pa= cific Resources' attempt to acquire Portland General date back to November = 1999. Enron had purchased the company in 1997 as a strategic move to facili= tate its intent to play a major role in the retail markets of California an= d the Pacific Northwest. At the time, Enron saw itself as a prototype for t= he future of the energy industry, adding transmission and distribution capa= bilities as well as more diversified fuel resources to its already successf= ul wholesale marketing core. Stymied by the slow start of competition in Ca= lifornia and Oregon, Enron underwent a transformation in its corporate phil= osophy. Under the growing direction of Jeffrey Skilling, Enron no longer be= lieved that it needed to own hard assets to retain its place in the top tie= r of energy companies. That philosophy has served Enron well, as its succes= s in nearly all of its business sectors has been well documented.=20 Yet, Enron's transformation opened the door for Sierra Pacific Resources, a= relatively small and regionally based holding company, to move in for a pu= rchase of Portland General. Owning Portland General made more sense for Sie= rra Pacific Resources than it did for Enron. Portland General, which provid= es electric service to over 700,000 customers in the Portland-Salem area, w= as viewed as a good acquisition target as it would help Sierra Pacific Reso= urces to gain scale and a foothold in two fast-growing states (Nevada and O= regon). Sierra Pacific Resources agreed to pay Enron $2.1 billion for Portl= and General, which included $2.02 billion in cash and assumption of Enron's= $80 million merger payment obligation. In addition, Sierra Pacific Resourc= es agreed to assume $1 billion in Portland General debt and preferred stock= , taking the total value of the purchase to $3.1 billion. Portland General = appeared happy with the scheduled sale from Enron, acknowledging that its o= wn core business "delivering safe and reliable power with a customer servic= e focus" was more in line with Sierra Pacific Resources. =20 However, a number of economic factors on Sierra Pacific Resources' side of = the table seem to be thwarting this acquisition. As I discussed in the Feb.= 22 IssueAlert (available at www.consultrci.com), Sierra Pacific Resources = reported a significant fourth-quarter loss ($18.2 million) as a result of s= oaring costs of power in the western United States. The company incurred lo= sses as a direct result of "the growing and unrecovered cost of purchased p= ower in the volatile wholesale market." As a result, Sierra Pacific Resourc= es filed with state regulators for an emergency rate increase. "Without som= e rate relief, the cost of fuel and power is close to crippling our ability= to serve the needs of our customers," said Mark Ruelle, the company's chie= f financial officer. The company attributed the latest quarter's loss to ne= arly $258 million of unanticipated fuel and purchased power costs.=20 Specifically, Sierra Pacific Resources reported a 4Q 2000 loss of $18.2 mil= lion, or 23 cents a share. This compared with a profit of $26.8 million, or= 39 cents a share, excluding a $56 million deferred energy write-off a year= ago. Including the write-off, the company reported a loss of $29.2 million= , or 42 cents a share, in 4Q 1999. For year-end 2000, the company reported = a net loss of $39.8 million or 51 cents per share, a 177-percent drop from = 1999.=20 In addition, the company's stock has fallen steadily over the last few week= s (at one point, dropping 11.8 percent to $10.80 on the New York Stock Exch= ange Feb. 7). At the close of trading on March 7, shares of Sierra Pacific = Resources were priced at $13.80, which is still down from its 52-week high = of $19.43 and book value of $17.82. The drop in stock price could make it d= ifficult for Sierra Pacific Resources to secure the financing necessary to = complete the purchase of Portland General.=20 Meanwhile, Sierra Pacific Resources' available cash flow could be impacted = by possible restrictions placed on the sale of its power plants. The Public= Utility Commission of Nevada (PUCN) mandated divestiture as a condition of= the 1999 merger between Nevada Power Co. and Sierra Pacific Power Co, whic= h created the holding company Sierra Pacific Resources. Toward that end, th= e holding company and its wholly owned utility subsidiaries commenced a pub= lic auction of approximately 2,900 MW of power generation facilities. Of Si= erra Pacific Resources' nine power plants, which are mostly fired by natura= l gas and coal, seven have been entered into sales agreements to companies = such as Dynegy and NRG and will be sold upon final regulatory approval. = =20 However, over the last few weeks, there has been growing concern that Nevad= a regulators would not approve pending sales or authorize the sale of addit= ional power plants by Sierra Pacific Resources, thus preventing the company= from using the proceeds to pay for the acquisition of Portland General. Pe= rhaps out of fears about depleting the Nevada's power supply, the Attorney = General's Bureau of Consumer Protection, the Southern Nevada Water Authorit= y and the AFL-CIO have urged that the sale of the plants be delayed or canc= eled. Further, Nevada Governor Kenny Guinn has called on the PUCN to recons= ider the 1999 order that required Sierra Pacific Resources to sell the plan= ts owned by its two utilities, Nevada Power and Sierra Pacific Power. Any a= vailable cash that Sierra Pacific Resources was planning to use from the po= wer plant sales to support its acquisition of Portland General may not mate= rialize if the sales agreements are delayed or terminated.=20 Ironically, Nevada Power and Sierra Pacific Power Co. just received approva= l from the PUCN to secure $1.4 billion in bank loans, bond financing and pr= eferred securities. However, due to agreements that the utilities previousl= y made, none of the borrowed money may be used, directly or indirectly, to = financially support its parent's acquisition of Portland General. =20 Thus, Sierra Pacific Resources seems to be between a rock and a hard place = regarding this purchase, which it apparently still wants to complete. It wo= uld appear that Sierra Pacific Resources will have difficulty financing the= purchase of Portland General due to the combination of its significant fin= ancial losses, plunging stock prices and possible restrictions against the = sale of its power plants. Presumably, these are the "recent events" to whic= h Enron referred in its SEC filing. =20 It is fairly clear that Enron no longer wishes to own Portland General and = believes that the company does not fit into its strategy for continuing gro= wth. What remains in question, however, is what will happen if Sierra Pacif= ic Resources' pending acquisition is not completed by the May 1 deadline, t= hus terminating the sales agreement. The problems associated with the Con E= dison / NU merger are leading to litigation. One can't help but think that = lawsuits would be inevitable in the Enron / Portland General / Sierra Pacif= ic Resources case as well, as Enron presumably would seek to be compensated= in some way for the $3.1 billion that the deal includes. =20 Further complicating matters for Sierra Pacific Resources is a growing move= ment to municipalize the electric markets in Las Vegas and Henderson, Nev. = On Jan. 11, the Southern Nevada Water Authority suggested that the agency c= ould become a public power authority. Pat Mulroy, general manager of the wa= ter authority, recommended that the agency buy power on wholesale markets a= nd possibly generate electricity from some of its own power plants to serve= cities in the area. Efforts to municipalize electric systems in the southe= rn half of the state could potentially gain momentum if Sierra Pacific Reso= urces' financial problems worsen. =20 An archive list of previous IssueAlerts is available at www.ConsultRCI.com=20 [IMAGE] The most comprehensive, up-to-date map of the North American Power= System by RDI/FT Energy is now available from SCIENTECH. =09 Reach thousands of utility analysts and decision makers every day. Your com= pany can schedule a sponsorship of IssueAlert by contacting Nancy Spring = via e-mail or calling (505)244-7613. Advertising opportunities are also ava= ilable on our website. =09 SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let = us know if we can help you with in-depth analyses or any other SCIENTECH i= nformation products. If you would like to refer a colleague to receive our= free, daily IssueAlerts, please reply to this email and include their fu= ll name and email address or register directly on our site. If you no lo= nger wish to receive this daily email, send a message to IssueAlert , and i= nclude the word "delete" in the subject line. =09 SCIENTECH's IssueAlerts(SM) are compiled based on the independent analysis= of SCIENTECH consultants. The opinions expressed in SCIENTECH's IssueAler= ts are not intended to predict financial performance of companies discusse= d, or to be the basis for investment decisions of any kind. SCIENTECH's so= le purpose in publishing its IssueAlerts is to offer an independent perspe= ctive regarding the key events occurring in the energy industry, based on = its long-standing reputation as an expert on energy issues. Copyright = 2001. SCIENTECH, Inc. All rights reserved.=09