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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
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pls print for me.  thanks  df =20
---------------------- Forwarded by Drew Fossum/ET&S/Enron on 03/08/2001 02=
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"SCIENTECH IssueAlert" <IssueAlert@scientech.com> 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






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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



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