pls print for me.  thanks  df  
---------------------- Forwarded by Drew Fossum/ET&S/Enron on 03/08/2001 02:32 PM ---------------------------


"SCIENTECH IssueAlert" <IssueAlert@scientech.com> on 03/08/2001 04:57:43 AM
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Subject:	Problems Mount for Sierra Pacific Resources, Acquisition of Portland General Appears Uncertain






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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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