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Last year, the local utility in the spotlight was PGE, as the electric company was purchased by Texas-based Enron. A number of observers worried about the deal's impact on rates and service. In fact, the Public Utility Commission actually delayed the transaction until it received assurances--and money--for PGE's nearly 700,000 Oregon rate payers. 1998 may bring a takeover far larger and potentially much riskier for the other major Oregon electric utility, PacifiCorp. The local giant has bid nearly $11 billion for a British utility called the Energy Group, in a deal almost four times as large as last year's takeover--Enron paid $3 billion for PGE. The currently proposed transaction, which has led to a bidding war for the British company, is a natural consequence of utility deregulation. In today's environment, companies feel that they must eat or be eaten. "The deal is driven by our stated strategy of becoming a global energy company," says Scott Hibbs, a company spokesman. Not surprisingly, Wall Street analysts have applauded the proposed takeover, as they have every other big-ticket transaction in history. Nonetheless, the picture isn't so clear. If the deal goes through, it will transform a stodgy utility into a highly leveraged commodity trading company, shifting risks squarely onto rate payers and shareholders. There are two causes for concern about the proposed takeover. First is simply the deal's size. PacifiCorp's buying TEG is a little like the bait eating the fish: PacifiCorp's 1996 revenues were $4.3 billion, while TEG's were $7.3 billion. The relationship was radically different when Enron, with revenues of more than $13 billion, bought PGE, whose revenues were only $1.1 billion. To buy TEG, PacifiCorp will have to go into serious debt. The company plans to borrow $9 billion of the $11 billion price tag. Traditionally, utilities have tried to keep their debt roughly equal to their equity capital; PacifiCorp's stated goal is to keep debt at 48 to 54 percent of total capitalization. If the deal gets done, PacifiCorp's borrowings would rise to greater than 70 percent of capital. Rating agencies have already warned PacifiCorp that such a high level of debt would cause its credit-worthiness to be downgraded, making borrowing more expensive. The other danger of the proposed takeover is that PacifiCorp might be putting too many eggs in one basket. Among TEG's assets is Peabody Holding Co., the world's biggest private coal producer. PacifiCorp already mines coal--it was the nation's 14th-largest producer last year--and generates most of its electricity from burning the mineral. Coal is and will be a major target of environmental regulation. An even more immediate concern is that coal supply far outstrips demand, raising the question of whether PacifiCorp is betting too much on one commodity. Although the fuel accounts for 55 percent of U.S. electricity generation, says Art Sanda, editor of Coal Age, current reserves are equivalent to a 275 year supply. "The price of coal," Sanda says, "is absolutely stagnant." Should the burden of debt or the over-reliance on coal create tough times for PacifiCorp, shareholders would suffer, but so might PacifiCorp's 1.4 million rate payers, 457,000 of whom are Oregonians. Although Oregon's Public Utility Commission won't allow PacifiCorp to hike rates to pay interest costs, Phil Nygard, who is responsible for financial analysis at the PUC, worries that the additional debt could reduce maintenance and service. Nygard compares the situation to U.S. West plunging into cable television and Asian investments while local customers suffered. "Let's face it," Nygard says, "if this deal goes through, [Oregon's] going to be a tiny piece of the pie." For those reasons, says Nygard, "My preference is the deal not be done." Nygard's preferences aside, the PUC will have no veto power over this proposed merger, unlike with Enron-PGE. The PUC only has jurisdiction when Oregon utilities are being bought--not when they are buying. PacifiCorp has made other acquisitions in the past; most recently it spent $1.5 billion on an Australian utility in 1995. The company remains confident that it can pay down debt without raising rates and that it can use Peabody's massive customer list to expand its energy-marketing efforts nationwide. "You're more likely to be a winner in a competitive market if you have a portfolio of businesses," says Hibbs. How the deal plays out for rate payers and investors remains to be seen. In the latest round of what has become a heated bidding war, Texas Utilities topped PacifiCorp's most recent bid last week. Nobody who has watched PacifiCorp's pursuit of TEG--now in its ninth month--thinks the deal is finished yet. The question is, if PacifiCorp wins, who loses? |
