The Oregonian

Critics Censure Planned PGE Deal

02/2/02

GAIL KINSEY HILL and JEFF MANNING

Northwest Natural Gas Co.'s plan to buy Portland General Electric for $2.98 billion has come under heavy criticism from consumer and business advocacy groups who say the deal is burdened with debt and topped off with tax breaks and executive bonuses.

Critics say the transaction, which would create one of the largest natural gas and electricity utilities in the Northwest, would benefit shareholders far more than ratepayers.

Even so, they worry that if they object too strenuously and scotch the deal, the alternatives could be even worse.

Looming over the transaction is the Enron bankruptcy, which threatens to suck Enron subsidiary PGE into the largest corporate restructuring in U.S. history and wrest control from local interests.

"We're between a rock and a hard place," said Bob Jenks, director of the Citizens' Utility Board, a consumer advocacy group.

NW Natural officials say the deal, involving the takeover of a much larger company, has been structured carefully to both finance the debt and channel savings through to ratepayers.

"It is certainly not our intent to leverage this on the backs of customers," said Mark Dodson, president and chief operating officer of NW Natural.

The transaction has drawn attention not only because it involves large utilities serving hundreds of thousands of Oregon customers but also because it is transpiring at the very time bankruptcy judges, creditors and regulators are sorting through the complex remains of the battered Enron.

NW Natural officials, confident of approval, expect the deal to close in the third or final quarter of the year.

Enron's bankruptcy, however, has made everyone nervous.

"I'd be less than honest if I didn't say the bankruptcy complicates the process," Dodson said.

State regulators, who must approve the PGE sale, have just begun their review. They expect to reach a decision by May 28. A host of federal regulatory agencies also must sign off on the transaction.

Marc Hellman, administrator and finance policy analyst with the Oregon Public Utility Commission, said the debt is a concern, but the deal appears solid overall.

"Our initial review was that there's enough value on the table that the various parties should be able to negotiate conditions to allow it to go forward," Hellman said.

Oregon Department of Justice attorneys on Monday will privately brief state regulators on the status of the restructuring proceedings and on the various ways the bankruptcy might affect PGE and the sale to NW Natural.

Kevin Neely, a Justice Department spokesman, said the agency has hired an attorney in New York to monitor the bankruptcy and, if necessary, intervene on behalf of PGE and Oregon ratepayers. He discounted the possibility that the bankruptcy judge could decide to cancel the sale agreement and sell off PGE assets of power plants and transmission lines piecemeal.

"The likelihood of that is very low," Neely said.

Enron has said it plans to go ahead with the sale agreement, forged with NW Natural on Oct. 5. PGE, an independent subsidiary, is not part of the formal bankruptcy filing.

The PUC must approve any sale of an investor-owned utility valued at more than $100,000, another safeguard against unwanted actions by the bankruptcy court, Neely said.

Yet the bankruptcy is so complex, the list of creditors so long and the intentions of Enron interim chief executive Steve Cooper so nascent that state regulators and utility officials admit they're not sure what might happen.

"There's a level of uncertainty we're trying to deal with," said Public Utility Commissioner Joan Smith.

Of immediate concern to Smith and fellow regulators is the composition of the NW Natural proposal and whether the merged company creates a net benefit for ratepayers -- a legal requirement.

"What are the net benefits?" Smith said. "As far as I can tell, they don't appear until 2009," after the debt is paid off.

The criticism focuses on the $1.4 billion in debt NW Natural has secured to finance the deal. The company would issue another $150 million in common stock for the $1.55 billion cash portion of the deal.

Under the agreement, the bulk of the savings from the combined operation -- an estimated $30 million a year -- would be used to finance debt.

Portions of PGE's rates, which recently took 30 percent to 50 percent jumps, would be frozen to ensure an adequate flow of cash.

"This is like a leveraged buyout where customers take all the risks and all the benefits go to shareholders," said Ken Canon, director of Industrial Customers for Northwest Utilities.

In addition, the transaction involves $250 million in seller financing. The package of common and preferred stock would give Enron a 4.9 percent stake in the newly combined company and two seats on the board.

Given the bankruptcy, Dodson said the securities likely would be sold to another entity, such as an insurance company or group of investors.

"Enron never intended on holding it anyway," he said.

Spots on the board aren't necessarily transferable, Dodson said.

Finally, NW Natural would assume $1.1 billion in PGE debt and forgive another $75 million that Enron owes PGE. That brings the total value of the transaction to $2.98 billion.

The Citizens' Utilities Board's Jenks said he wants NW Natural to come up with another financing plan, one that would bring significant and immediate reductions to ratepayers. He also wants the state to secure assurances from the bankruptcy court that PGE would be kept intact.

"Then we can deal with the merger on its merits," Jenks said.

Dodson said NW Natural is willing to look at other ways to channel benefits of the merger to ratepayers. Under the current proposal, $30.1 million would be credited to ratepayers of both utilities over a six-year period, a scant $8 a year for a combined gas and electricity customer, critics say.

NW Natural officials said they were open to alternative ways to deal with customer credits or benefits.

"Maybe we need to look at it another way," Dodson said. "I'm perfectly willing to do that."

Another item that rankles consumer groups is a $188 million tax benefit that would go to the holding company created for the merger over a six-year period.

The tax break is known as a "phantom tax." Customers would continue to pay rates that are set to cover taxes based on pre-merger debt levels. However, the holding company, with more debt to write off for tax deductions, would pay a lower tax.

Edward Finklea, a Portland lawyer representing Northwest Industrial Gas, said ratepayers won't see any benefit from the holding company's savings.

PGE officials confirm that the holding company would enjoy a $188 million tax benefit.

But Pam Lesh, PGE vice president for public policy and regulatory affairs, said under accepted utility rate-making policy, the tax consequences for the holding company are irrelevant to setting rates for its utility subsidiaries.

"We calculate rates on a stand-alone basis," Lesh said. "I don't know of any commission anywhere that imports the holding company's financial results."

The holding company will use the $188 million in tax benefits to help pay down the debt, PGE and NW Natural officials said.

"And that will be good for ratepayers ultimately," said Steve Sechrist, a NW Natural spokesman.

Lesh also quarreled with the critics' characterization of the deal as a leveraged buyout. NW Natural is not putting up its assets as collateral for the debt. Rather, it is putting up its stock as collateral.

"Customers are not on the hook for this debt," she said.

Lesh confirmed that a number of PGE executives and key employees will receive hefty bonuses if the merger is consummated. Several top PGE officials as well as a handful of the company's best electricity traders are slated to receive them.

Lesh refused to disclose the amounts. PGE divulged the bonus details to business customer groups who demanded the information as part of the PUC's review of the proposed deal. They had to agree to confidentiality.

"That's private, personal and commercial information," Lesh said.

The bonuses apparently exceed $2 million, judging from comments by a utility lawyer representing industrial power users at a PUC meeting this week.

"For the first year of the merger, PGE executives are likely to make more in bonuses than all of the NW Natural's 1.2 million customers will receive in merger-related credits," Portland attorney Melinda Davison said.

Customers are scheduled to receive $2 million in credits in the first year.

Davison declined to comment to The Oregonian, citing the confidentiality order.

It's uncertain whether the executives will ever receive the bonuses because they are coming not from NW Natural, but from the bankrupt Enron. Executive retention bonuses typically come from the acquiring company, which is eager to hold on to the top talent.

PGE spokesman Scott Simms said Enron agreed to the bonuses three years ago when it decided to sell PGE. It may fall to the bankruptcy judge to decide whether Enron should be allowed to make the payments.