Will new owners revive PGE or direct 'Enron, Part II'?
Local partners say it's time to get past 'righteous anger'; others still worry about rates
By HARRY LENHART AND KRISTINA
Two largely unanswerable questions hung in the air at week's end in the
wake of the surprise announcement Tuesday that Enron Corp. had agreed to
sell its Portland General Electric subsidiary to a newly formed company
headed by former Gov. Neil Goldschmidt.
Is the Texas Pacific
Group, which structured the proposed $2.35 billion deal and is putting
up 90 percent to 95 percent of the money for the acquisition, setting up Portland General
Electric for another fall, as some consumer groups fear?
Or do the principals of the Texas-based equity investment firm, which specializes in buying
distressed companies, have a visionary plan -- abetted by Goldschmidt's luminous presence
as its public face -- to restore local control and put the utility back on its perch as the
most influential corporate citizen?
The quality, certainty and redundancy of the power supply, Goldschmidt repeated in a variety
of settings this week, are critical factors in business siting decisions.
"There is almost
no weapon more significant than having an electric utility that can be a serious partner," in the quest to attract new businesses and jobs to Oregon, Goldschmidt
told the Tribune.
"We are in a state that needs jobs badly and needs these people (PGE) back at the starting
line willing and able to make commitments, and being believed," Goldschmidt said. "That's
one of the reasons I'm here."
Goldschmidt, a principal in Goldschmidt Imeson Carter, a Portland consulting firm, is one
of three general partners of the Oregon Electric Utility Co., the new holding company created
by Texas Pacific for the sole purpose of buying PGE. The other general partners are Tom Walsh,
former general manager of TriMet, and Gerald Grinstein, a Seattle venture capitalist and
chairman and chief executive officer of Burlington Northern Inc. and Western Airlines Inc.
Oregon Electric will be controlled by the three general partners "subject to consent rights," which
are held by Texas Pacific. That means, joked David Bonderman, Texas Pacific's founder and principal,
if Goldschmidt and his partners "screw up" he'll take away the keys.
Company was looking for utility
Texas Pacific -- which manages approximately $13 billion in assets and has invested in more
than 50 companies, including Ducati Motorcycles, J. Crew and Burger King -- has been looking
for utility investments for some time, Bonderman said. It's the firm's fifth-largest deal
out of the 50 it has put together in its decade of existence. Texas Pacific is putting $525
of its own money into the deal; another $700 million is borrowed from other investment groups.
"There's been a major meltdown in the utility business, kind of like what happened to
the telcos (telecommunication companies), but a little more quietly," which has left many
companies undervalued, Bonderman said.
The firm's formula, said spokesman Owen Blicksilver, is to invest a significant amount in
a company and ensure that it has access to the expertise and brain power needed to improve
performance. Often, it replaces the management team with its own professionals, as it did
in the case of Continental Airlines. The original managers of the bankrupt airline were left
place for a year and a half after its purchase. But when Continental's fortunes didn't turn
around, they were replaced, Blicksilver said.
"But there are numerous deals where they stayed with current managers," Blicksilver
said. "The difference here is the parent company is troubled, not the subsidiary. This
is not a turnaround."
PGE's woes, he said, have been inflicted on it in part by Enron's bankruptcy and in part
by Oregon's severe economic downturn.
Although final approval of the acquisition could be as much as a year off, Bonderman and
his partners have some strong opinions about how PGE should be managed.
He asserted that PGE has "significantly under-earned" the 10.5 percent annual rate
of return permitted by the Oregon Public Utility Commission. "Over time we hope to provide
a more stable generating base, the right administrative base and earn what (the company is)
entitled to under OPUC regulations," he told the Tribune.
"We think one of the major business issues this company needs to address in the interest
of its consumers and all constituents is the question of long-term resource planning," added
Kelvin Davis, the Texas Pacific partner who first proposed the PGE deal and handled details
of the acquisition.
Walsh call surprises Sten
In a succession of meetings this week with city officials, including Mayor Vera Katz and
Commissioner Erik Sten, who has been spearheading the city's effort to buy PGE, Goldschmidt,
Walsh and Bonderman
sought to sell them on the idea that the Texas Pacific deal would be good for the city.
"There's some real bad feelings that have developed between the city government and PGE," Goldschmidt
said. "We need to get past this."
Walsh was an early player in an informal 2002 round table organized by Sten to consider future
options for PGE. As both a private consultant and public transportation executive, Walsh
was able to provide insight into the pros and cons of both types of utility ownership. Over
his advisory role diminished as the city moved forward to buy PGE.
Walsh called Sten on Monday night to tell him he had joined a different team. He said he
doesn't think Sten felt hurt or betrayed by his decision. "There's frustration over this," Walsh
said, "because Enron didn't want to negotiate with the city. It was clearly a fact."
Sten said Walsh's call "did surprise me. I had had my own work group, and he was advising
me. I wasn't upset. He was trying to do what was right for Portland. Tom is an upstanding citizen."
While the Texas Pacific deal "is way better" than the reorganization plan Enron proposed
for PGE, Sten said he's still worried about the new buyer's commitment to Portland. He also
said it was clear the new PGE owners wouldn't cut electricity rates.
The city is pondering whether or not to outbid Texas Pacific's offer.
Sten said he does think Oregon Electric "will bring stability back to PGE, but the value
lost will eventually be regained -- by Texas Pacific, not ratepayers. A public purchase was
a chance to get that back. In this case, Texas Pacific is going to recapture that value."
Bonderman would hardly have offered a sympathetic ear. He believes that "governments,
by and large, make horrendous owners of businesses."
Will Texas Pacific hang on?
Industrial electricity users and consumer groups are less sanguine about the potential benefits
of a Texas Pacific acquisition of PGE than Goldschmidt, Walsh and Bonderman are.
"How long do they plan to own PGE?" asked Ken Canon, director of Industrial Customers
of Northwest Utilities, which represents major corporate electricity users such as Intel Corp. "Are
they buying it to flip it? What all this boils down to for my members is what do the new owners
plan to do as far as getting PGE's rates down. Their rates are uncompetitive, and it's impacting
the service territory."
The problem with investment firms such as Texas Pacific, said Lynn Hargis, an attorney for
Public Citizen, the consumer advocacy group in Washington, D.C., founded by Ralph Nader,
is that if they decide they don't like a company, they just move on.
"Texas Pacific is in it to make money, and they want high returns," she said, "and
the quickest way to get that is by selling off assets and getting out."
If Texas Pacific only plans to stay in for two or three years and sell for a higher price,
said Bob Jenks, executive director of the Citizens Utility Board of Oregon, "that's not
"The reason we have regulated utilities is to make investments in power supply over 30
to 40 years, and a utility that is constantly changing owners and doesn't know its direction
can't function in that long-term way," he said.
Texas Pacific's Davis said, "We consider ourselves long-term investors, and unlike public
companies, Texas Pacific is "not driven by profit. Our interest is in building value over
time. We're not expecting current dividends or current profits."
"They're not riverboat gamblers," Walsh said. "They're in it for the long haul."
Claims against Enron a challenge
Texas Pacific is proposing to pay $1.25 billion in cash, $1.1 billion in debt costs, and
an estimated $180 million payment to Enron that hinges on PGE's financial performance from
2003 to the projected close of the deal at the end of 2004, said Mark Palmer, Enron spokesman.
The biggest stumbling block, Bonderman said, in reaching a final agreement was the mountain
of legal claims against Enron and PGE. The roadblock was cleared by separating the liabilities
into three "buckets": claims stemming from losses in employees' 401(k) accounts heavily
invested in Enron stock, which will stay with Enron; liabilities such as those related to the
decommissioning of the Trojan nuclear plant, which belong to PGE; and claims growing out of
energy trading schemes involving both PGE and Enron.
Enron will put up a "notional $125 million cash reserve" to cover liabilities, Bonderman
said. If the claims exceed that amount, PGE will be liable.
Goldschmidt and his firm, Goldschmidt Imeson Carter, are being paid an unspecified consulting
fee for their participation in the deal, Blicksilver said.
The deal still must pass muster with state regulators and the U.S. Bankruptcy Court for the
Southern District of New York, which is expected to consider the PGE sale in the next two
weeks. And under federal bankruptcy law, there is a 60-day period in which another buyer
Other bidders are more likely to come forward if Congress passes the comprehensive energy
bill, which would repeal the Public Utility Holding Company Act that restricts utility ownership
by out-of-state, nonenergy owners.
Sales can go through bankruptcy court relatively quickly," said Frank Oswald, an attorney
at Togut Segal & Segal law firm in New York City, who represents Enron creditors. "Theoretically,
it could be approved in a day."
U.S. Bankruptcy Judge Arthur Gonzalez is still trying to sort out the impact of Enron's collapse
on its partners and subsidiaries. A lawyer representing JP Morgan Securities stood at the
microphone Monday in Gonzalez's New York City courtroom, protesting Enron's effort to recover
its once-favored investment firm.
"Given the set of investigations being conducted, it is difficult to get to the bottom
of everything," Gonzalez told attorney Mark Bane, who represents JP Morgan.
As one of Enron's largest creditors, JP Morgan will have a major say in the PGE sale. Bane
said he'd heard about the sale but referred questions to Enron's six lawyers standing at
the defense table.
Enron counsel Scott Winn said both debtors and creditors support the PGE sale to Texas Pacific
and predicted it would go through the regulatory approval process "relatively easily."
"This is clearly a big sale and maximizes the recovery for the creditors," he said.