ScottishPower received the final regulatory approval required for its merger with Pacificorp of the USA. As the first British utility to succeed in acquiring a US utility, Siân Green examines the drivers behind the deal, and finds out what ScottishPower has planned for the latest addition to its ‘multi-utility’ stable.
ScottishPower has successfully completed its merger with Pacificorp of the USA less than a year after the deal was originally announced. The two companies received the final regulatory clearance needed on 24 November.
In the first UK-US utility merger deal of its kind, each Pacificorp share has been exchanged for 2.32 ordinary ScottishPower shares. This values Pacificorp at approximately $6.5bn.
The combined group will be known as ScottishPower and will be headquartered in Glasgow, with US headquarters in Portland, Oregon. Ian Robinson will continue as CEO of ScottishPower while Alan Richardson, formerly managing director of Power Systems at ScottishPower, has been named CEO of Pacificorp.
The enlarged ScottishPower will be one of the top ten global electricity companies with a market capitalization of $17bn and some 7.5m customers in the USA, Europe and Australia. It will have 24 000 employees and generate over £6.5bn ($10.4bn) in turnover from business units ranging from electricity, gas, water and waste water, telecoms and internet services.
Pacificorp is therefore another string to the diversified bow of ScottishPower, and one which extends the geographical base of the UK utility’s core business of electricity generation and supply. Since privatization of the UK electricity market in 1991, ScottishPower has seen steady growth and diversification via a combination of organic growth and acquisitions.
This growth has been based on a strategy that the company believes builds shareholder value: using existing skills and assets to provide leverage into new markets. From a core business of power generation and supply in 1991, it moved quickly into telecoms before making acquisitions in the English and Welsh electricity and water markets with the purchase of Manweb and Southern Water. It owns Demon internet and has already captured five per cent of the gas retail market since it opened to competition.
In Scotland, ScottishPower generates, transmits and supplies electricity to around 1.9m customers. Through Manweb, an electricity distribution and supply company that it acquired in 1995, it serves 1.3m customers. Southern Water supplies water to more than 1m customers and waste water services to 1.7m homes and businesses in the south of England. ScottishPower also recently floated its telecom arm, Thus, with a market capitalization of £2.6bn. Thus provides data and telecommunication services to blue chip companies and is the fifth largest call centre supplier in the UK.
Breaking into overseas markets seemed the next natural step for ScottishPower, according to Robinson, who said at a recent conference in London that he believes UK utilities have much to offer the USA in terms of their experience in deregulated markets. Prior to announcing the Pacificorp deal, ScottishPower held and broke off talks with both Florida Light and Power and Cinergy.
ScottishPower describes Pacificorp as “an ideal partner” in terms of its low-cost asset base, customer profile and scope for future growth and financial performance. The vertically integrated utility is one of the USA’s lowest-cost electricity producers serving almost 1.5m residential, commercial and industrial electricity consumers in six states. It owns more than 8700 MW of generation capacity and employs around 8000 people in the US.
In California, Oregon, Washington and Wyoming, Pacificorp operates as Pacific Power, operating over 4000 MW of thermal capacity and 1400 MW of hydropower plant. It owns coal mine operations and is the tenth largest coal producer in the US. In Utah and Idaho, it operates as Utah Power, serving 650 000 customers and operating 2348 MW, including a 26 MW geothermal plant.
In addition, Pacificorp operates the most extensive transmission network in the USA, spanning 15 000 miles (24 135 km) of line and nearly 150 points of interconnection.
Through the merger, ScottishPower has also absorbed Powercor Australia Ltd., an electricity distribution company serving over 560 000 customers in the states of Victoria and New South Wales.
In spite of its low-cost asset base, Pacificorp has experienced a period of financial underperformance, particularly following its failed takeover bid for the Energy Group. Because of this, analysts have commented that the $6.5bn valuation of the company is inflated.
However, ScottishPower has set its sights on justifying this premium and says that it is committed to driving the combined group forward and delivering shareholder value. It hopes to achieve this by transferring to Pacificorp its skills in improving cost efficiency and customer service that it carried out at Manweb and Southern Water. Operating costs at Manweb have fallen by 50 per cent since it was bought by ScottishPower, and at Southern Water, it expects to have cut
ScottishPower will also support Pacificorp’s plans to enhance its financial performance that it implemented in 1998. These plans include refocussing on its core US electricity operations, a cost reduction programme and attaining its authorised rate of return which it has failed to reach in recent years. It wants Pacificorp to be in the top ten US utilities in terms of efficiency by 2004. In addition, ScottishPower has said that it will invest $55m in the business over the next four years.
The deregulation and the convergence of the electricity and gas markets in the US will present opportunities for ScottishPower, particularly given its experience of the UK market and ability to exploit new opportunities. While it has stated that it will focus strongly on turning Pacificorp around and will not be making further acquisitions in the US in the near future, it will probably find organic growth opportunities difficult to resist.