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IssueAlert for  March 8, 2001 

Problems Mount for Sierra Pacific Resources,
Acquisition of Portland General Appears Uncertain

by Will McNamara 
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 filing 
with the Securities and Exchange Commission (SEC) on Feb. 27 that the sale of 
Portland General had been delayed because of "recent events" in California 
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. 

Analysis: Yesterday I wrote about the apparent collapse of the merger between 
Consolidated Edison and Northeast Utilities (NU). Now, another high-profile 
merger appears to be unraveling. As with the Con Edison / NU deal, the 
problem facing Sierra Pacific Resources' pending purchase of Portland General 
from Enron is based in economics. Namely, it appears that Sierra Pacific 
Resources' recent financial problems have cast doubt on the company's ability 
to complete its purchase of Portland General. This is not a good development 
for Sierra Pacific Resources, as the financial and legal implications of this 
potentially dead acquisition could exacerbate the company's current financial 
problems.  

First, let me provide some background on this deal. The origin of Sierra 
Pacific Resources' attempt to acquire Portland General date back to November 
1999. Enron had purchased the company in 1997 as a strategic move to 
facilitate its intent to play a major role in the retail markets of 
California and the Pacific Northwest. At the time, Enron saw itself as a 
prototype for the future of the energy industry, adding transmission and 
distribution capabilities as well as more diversified fuel resources to its 
already successful wholesale marketing core. Stymied by the slow start of 
competition in California and Oregon, Enron underwent a transformation in its 
corporate philosophy. Under the growing direction of Jeffrey Skilling, Enron 
no longer believed that it needed to own hard assets to retain its place in 
the top tier of energy companies. That philosophy has served Enron well, as 
its success in nearly all of its business sectors has been well documented. 

Yet, Enron's transformation opened the door for Sierra Pacific Resources, a 
relatively small and regionally based holding company, to move in for a 
purchase of Portland General. Owning Portland General made more sense for 
Sierra Pacific Resources than it did for Enron. Portland General, which 
provides electric service to over 700,000 customers in the Portland-Salem 
area, was viewed as a good acquisition target as it would help Sierra Pacific 
Resources to gain scale and a foothold in two fast-growing states (Nevada and 
Oregon). Sierra Pacific Resources agreed to pay Enron $2.1 billion for 
Portland General, which included $2.02 billion in cash and assumption of 
Enron's $80 million merger payment obligation. In addition, Sierra Pacific 
Resources 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 own core business "delivering safe and reliable power with a customer 
service focus" was more in line with Sierra Pacific Resources.  

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 
soaring costs of power in the western United States. The company incurred 
losses as a direct result of "the growing and unrecovered cost of purchased 
power in the volatile wholesale market." As a result, Sierra Pacific 
Resources filed with state regulators for an emergency rate increase. 
"Without some 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 chief financial officer. The company attributed the latest 
quarter's loss to nearly $258 million of unanticipated fuel and purchased 
power costs. 

Specifically, Sierra Pacific Resources reported a 4Q 2000 loss of $18.2 
million, 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. 

In addition, the company's stock has fallen steadily over the last few weeks 
(at one point, dropping 11.8 percent to $10.80 on the New York Stock Exchange 
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 
difficult for Sierra Pacific Resources to secure the financing necessary to 
complete the purchase of Portland General. 

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, which 
created the holding company Sierra Pacific Resources. Toward that end, the 
holding company and its wholly owned utility subsidiaries commenced a public 
auction of approximately 2,900 MW of power generation facilities. Of Sierra 
Pacific Resources' nine power plants, which are mostly fired by natural 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.   

However, over the last few weeks, there has been growing concern that Nevada 
regulators would not approve pending sales or authorize the sale of 
additional power plants by Sierra Pacific Resources, thus preventing the 
company from using the proceeds to pay for the acquisition of Portland 
General. Perhaps out of fears about depleting the Nevada's power supply, the 
Attorney General's Bureau of Consumer Protection, the Southern Nevada Water 
Authority and the AFL-CIO have urged that the sale of the plants be delayed 
or canceled. Further, Nevada Governor Kenny Guinn has called on the PUCN to 
reconsider the 1999 order that required Sierra Pacific Resources to sell the 
plants owned by its two utilities, Nevada Power and Sierra Pacific Power. Any 
available cash that Sierra Pacific Resources was planning to use from the 
power plant sales to support its acquisition of Portland General may not 
materialize if the sales agreements are delayed or terminated. 

Ironically, Nevada Power and Sierra Pacific Power Co. just received approval 
from the PUCN to secure $1.4 billion in bank loans, bond financing and 
preferred securities. However, due to agreements that the utilities 
previously made, none of the borrowed money may be used, directly or 
indirectly, to financially support its parent's acquisition of Portland 
General.  

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 
would appear that Sierra Pacific Resources will have difficulty financing the 
purchase of Portland General due to the combination of its significant 
financial losses, plunging stock prices and possible restrictions against the 
sale of its power plants. Presumably, these are the "recent events" to which 
Enron referred in its SEC filing.  

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 
growth. What remains in question, however, is what will happen if Sierra 
Pacific Resources' pending acquisition is not completed by the May 1 
deadline, thus terminating the sales agreement. The problems associated with 
the Con Edison / NU merger are leading to litigation. One can't help but 
think that lawsuits would be inevitable in the Enron / Portland General / 
Sierra Pacific Resources case as well, as Enron presumably would seek to be 
compensated in some way for the $3.1 billion that the deal includes.  

Further complicating matters for Sierra Pacific Resources is a growing 
movement to municipalize the electric markets in Las Vegas and Henderson, 
Nev. On Jan. 11, the Southern Nevada Water Authority suggested that the 
agency could become a public power authority. Pat Mulroy, general manager of 
the water authority, recommended that the agency buy power on wholesale 
markets and possibly generate electricity from some of its own power plants 
to serve cities in the area. Efforts to municipalize electric systems in the 
southern half of the state could potentially gain momentum if Sierra Pacific 
Resources' financial problems worsen.  

An archive list of previous IssueAlerts is available at
www.ConsultRCI.com


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