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The Portland Tribune
Date: 11/21/2003

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

The Tribune

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 region's 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 former 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 million 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 its 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 in 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 time, 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 stability."

"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 January 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 can outbid Texas Pacific.

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 money from 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.


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