DCR Reaffirms Rating Watch
9 December 1998
DCR Reaffirms Rating Watch - Uncertain PacifiCorp and PacifiCorp Group Holdings Co. Following PacifiCorp's Merger Announcement with ScottishPower
CHICAGO, Dec. 8 -- Duff & Phelps Credit Rating Co. (DCR) has
reaffirmed Rating Watch--Uncertain the securities of PacifiCorp (PPW) and
PacifiCorp Group Holdings Company (PGHC) following PPW's announcement of its
merger with ScottishPower.
Under the terms of the agreement, each PPW share will be exchanged for
0.58 American Depository Receipts or 2.32 ordinary shares of ScottishPower.
The aggregate value of the transaction totals $12.8 billion, which includes
PPW equity of approximately $7.9 billion plus the assumption of $4.9 billion
of net debt. Management expects the merger to be completed by Autumn 1999,
pending approvals from shareholders of both companies, the Securities and
Exchange Commission, the Federal Energy Regulatory Commission, Australian
regulatory authorities and the state commissions under which PPW operates
(Oregon, Utah, Wyoming, Idaho and Washington).
The acquisition of PPW is in line with ScottishPower's stated strategy of
international expansion, which includes the acquisition and subsequent growth
of U.S. electric utility assets. While ScottishPower is expected to continue
to follow PPW's existing strategy for the most part, it should be able to
further operating performance at PPW by applying its proven skills in
operating electric and multi-utility companies. DCR expects that
ScottishPower will be able to transfer management expertise of operating in
the deregulated UK electric sector to the increasingly deregulated environment
in the N.W. United States.
In October 1998, PPW announced that it would sell its nonregulated
businesses and refocus its efforts on its core electricity business in the
western United States and Powercor, its Australian electricity distribution
business. In addition, PPW announced a cost reduction plan aimed at
increasing operating efficiencies and achieving its authorized rates of
return. ScottishPower will follow this strategy; the acquisition holds the
potential for ScottishPower to accelerate the realization of these previously
announced cost savings.
DCR views the merger and ScottishPower's plans to continue with PPW's
strategic redirection as positive with respect to PPW's credit profile and in
particular for PGHC, as the business risks associated with nonutility
businesses will have been significantly diminished. Separately, PPW's
announcement that it will not pursue the previously announced $750 million
share repurchase program, which was expected to have pressured PPW's credit
protection measures, is viewed positively from a credit perspective.
Nevertheless, in the coming weeks, DCR will examine the combined impact of the
outcome of PPW's general rate case in Utah, PPW's ability to achieve the
announced cost savings, as well as ScottishPower's proposed acquisition
structure and long-run domestic strategy for PPW. DCR's ratings will be
reassessed pending a full analysis of the quantitative and qualitative profile
of PPW and PGHC.
DCR's ratings for PPW are as follows: first mortgage and collateral trust
bonds and medium-term notes `A` (Single-A); quarterly income preferred
securities, quarterly income debt securities, trust preferred securities and
preferred stock `A-` (Single-A-Minus); and commercial paper `D-1` (D-One).
DCR's ratings for PGHC are as follows: senior unsecured notes `BBB+`
(Triple-B-Plus) and commercial paper `D-2` (D-Two).
PPW is an electric utility that conducts retail electric service through
two divisions, Pacific Power & Light and Utah Power & Light, serving portions
of California, Idaho, Montana, Oregon, Utah, Washington and Wyoming. The
company also engages in nonutility operations through its 100-percent interest
in PGHC.
ScottishPower is a multi-utility in the UK serving 5 million electric,
gas, water and telecom users. ScottishPower operates in three distinct
geographic territories across England, Wales and Scotland.