After selling its upstream oil and gas unit in July, Enron Corp. has made another portfolio-focusing move, this time selling off its only regulated electric utility company, Portland General Electric Co. (PGE).
Houston-based Enron has entered into a purchase and sale agreement with Sierra Pacific Resources, Reno, to divest PGE for about $2.1 billion, comprising $2.02 billion in cash and the assumption of Enron's $80 million merger payment obligations. Sierra Pacific will also assume $1 billion in PGE debt and preferred stock.
The deal is expected to close in the second half of 2000.
The divestment comes only about 3 years after Enron acquired the power utility (OGJ, July 29, 1996, Newsletter).
Enron says it was not dissatisfied with the performance of the utility. Chairman and CEO Kenneth L. Lay explained: "ellipseThe rapidly evolving, competitive electricity market allows us to deliver commodity services and risk management products to our customers without requiring the ownership of a regulated electric utility."
Sierra Pacific sees the asset as a much better fit with its portfolio.
Labeling PGE as one of the "premier" electric utilities in the US West, Sierra Pacific Chairman and CEO Michael R. Nigg* said the transaction is a key step in expanding Sierra Pacific's regulated utility businesses: "We're excited about this opportunity to transform our company by significantly expanding our scale and scope in this combination with PGE."
Sierra Pacific says the deal will increase its asset value to more than $9 billion; the company will now serve 1.7 million customers in California, Nevada, and Oregon.
After close of the transaction, PGE will become a wholly owned subsidiary of Sierra Pacific.
The deal-although awaiting approval from the US Securities and Exchange Commission, the US Federal Energy Regulatory Commission, the US Nuclear Regulatory Commission, and the Oregon Public Utility Commission-does not require approval from either firm's shareholders.
Boon for Enron
The various credit reporting agencies are viewing the PGE sale as generally positive for Enron and neutral to negative for Sierra Pacific.
"Although [Sierra Pacific's] management plans to ultimately fund the acquisition with proceeds from the planned sale of Nevada-based generation assets-as well as from issuance of debt, equity, and internal cash flow-[we are] concerned about the extent to which additional debt leverage at Sierra Pacific might place increased demands on cash flows from the regulated utility subsidiaries," said Moody's Investors Service, New York.
The agencies are looking favorably upon Enron's exit from the regulated utility business, however.
"It is important to note that Enron's post-sale cash flow mix will be substantially derived from its wholesale operations," says Duff & Phelps Credit Rating Co. "The company's proven track record of consistently growing cash flows from this segment lends considerable comfort that Enron will continue to perform and generate cash flow in a manner that is at least in line with its current rating category."
Fitch IBCA said, "The PGE sale is consistent with Enron's overall business strategy to reduce the amount of capital employed and transform itself into a more flexible and less asset-intensive company. US domestic energy markets have developed to the state where Enron is able to deliver energy products and services without direct ownership of the underlying infrastructure."
And Moody's said its positive outlook for Enron reflects "the favorable impact of potential debt reduction to be realized from the sale and the overall benefit of increased financial flexibility and capital access for Enron."
Investment analyst Jefferies & Co., meanwhile, upgraded its rating of Enron's stock. Although the change was not solely linked to the sale of PGE, "the divestiture of the electric utility, following the exit from the North American E&P business, reflects the company's repositioning towards a more dominated, higher-growth wholesale business model."
