|
|
Enron Mail |
-----Original Message----- From: firstcall.notes@tfn.com [mailto:firstcall.notes@tfn.com] Sent: Tuesday, October 09, 2001 1:27 PM To: Koenig, Mark Subject: ENE: A Happy Landing For PGE FIRST CALL RESEARCH NETWORK 09:30am EST 09-Oct-01 Sanders Morris Harris (Research Department 800-423-9656) ENE: A Happy Landing For PGE Enron Corp (ENE/NYSE): A Happy Landing For PGE. John E. Olson, CFA (713) 220-5151; john.olson@smhhou.com October 8, 2001 Industry: Energy Recommendation: Strong Buy ------------------------------------------------------------------------------- Price: $33.54 Price Target: $42.00 Type: Company Update ------------------------------------------------------------------------------- Estimates (Dec.) 2000A 2001E 2002E Curr Prior Curr Prior Curr Prior Investment Profile: ---- ----- ---- ----- ---- ----- -------------------------- EPS (Diluted) 1.47 1.85 2.15 Share Base (MM): 890 P/E: 22.8x 18.2x 15.6x Market Value ($B): $29.9 CFPS (Diluted) 1.34 2.42 3.25 Cash ($B): $1.1 P/CF: 25.0x 13.9x 10.3x Lg Term Debt ($B): $12.8 Div. Rate: 0.50 0.50 0.50 Preferred ($B): $4.4 Div. Yld.: 1.58% 1.58% 1.58% Ent. Value ($B): $44.3 % Leverage: 61.9% Inst'l Ownership: 67.3% Dly Trading Vol.: 5.9 mm Price Range (52-week): $87-$24 Erngs./Share 2000A Prior 2001E Prior 2002E Prior ----- ----- ----- ----- ----- ----- Q1 0.40 0.47 0.54 Q2 0.34 0.45 0.52 Q3 0.34 0.43 0.53 Q4 0.41 0.49 0.56 ------------------------------------------------------------------------------- KEY POINTS: The Second Time Around Still Looks Good. * ENE has cut another deal on Portland General Electric (PGE), this time with Northwest Natural Gas (NWN: $23.04: $1.26 Div-5.46% yield). The deal size is $2.955 billion. The original deal, in November 1999, was for $3.1 billion with Sierra Pacific Resources (SRP: $15.12: $0.80 Div: 5.29% yield). This was $300 mm better than we expected in our September 28 report, which upgraded ENE to a Strong Buy. * This deal has very few externalities, and should close twelve months hence. Both companies are Oregon-based, and should get a better regulatory break than ENE did when it bought PGE in July 1997. * The impact on ENE? (1) Very little gain or loss on sale of the assets; (2) Interest expense reductions should largely offset expected $140 mm (after tax) annual PGE earnings contribution; (3) A better balance sheet, with total leverage dropping from 61.9% to 57.3% if done today. * This is a step in the right direction. PG&E will be in much better hands to pursue its Oregon agenda, and ENE will look better without PGE's presence. We continue to rate ENE a Strong Buy up to $36; it becomes a Buy from $36 to $40. Our 12-month price target is $42-$44. Current Events: The deal is straightforward. NWN will raise $1.55 billion in cash, $200 mm in Feline Prides, and will issue $50 mm in NWN stock to Enron. NWN will assume the residual $75 mm obligation inflicted on ENE by the Oregon PUC as the price of regulatory peace (i.e., ransom demands) at the time of the original acquisition. This brings the total purchase price to $1.87 billion for PGE's $1.118 billion of common equity. NWN will assume $1.05 billion of total debt and $29 mm of straight preferreds. The price-to-book is 167%. PGE has been earning in the $125 mm-$140 mm after-tax area, although the numbers may work higher this year ($150 mm) because of FASB 133 (mark-to-market) profits on longer-dated power trading of $16 mm being realized (so far). The approximate P/E is about 12.5x forecasts. The electric group is now trading at 11.5x 01Es and 10.9x 02Es. The regulatory due process should take about 12 months. There are no looming rate cases, ROE or capital structure issues. The OPUC ranks very low among state PUCs in terms of providing fair or competitive ROEs for investors. We were pleased to learn that the OPUC has finally ditched the CAPM (capital asset pricing model) as a worthless relic for determining costs of capital and has embraced discounted cash flow methodology. The bad news was that this still didn't prevent the OPUC from rolling over PGE in its August 1 rate case settlement, dropping the allowed ROE from 11.6% to 10.5%. The annualized earnings impact looks like $8-$9 mm after-tax. Given the very parochial nature of the Oregon retail energy market, there is no question in our mind that this should be a worthwhile deal for NWN and a win for ENE, as well. If the deal were closed today, ENE would deleverage to the tune of the $2.95 billion proceeds, or from 61.9% to 57.3% total leverage. It would also trade up ENE's unnecessarily low composite ROE from the 12.5% area to something better. PGE's secular growth rate is 3%-4% annually in rate base terms, and its EBIT contribution would run only 8%-9% of ENE's totals in 2002-2003. There would be very little book gain or loss on the sale, and the $1.4 billion of underlying goodwill on the PGE assets will disappear. ENE had to reincorporate in Oregon at the time of the PGE purchase. Chances are that it will be a Delaware corporation by this time next year. On the other hand, NWN has seized a very good, but highly leveraged opportunity. Both managements are largely in sync, covering much of the same ground already. The synergies can be meaningful. NWN's asset base would more than triple, from $1.29 billion to about $5.65 billion. In essence, NWN's $840 mm rate base will be joined with PGE's rate base of $1.65 billion, and NWN would have tripled its rate base to $2.49 billion. About $780 mm of goodwill will be created in the process. NWN is funding the deal 98% with debt and a mandatory convertible preferred, and 2% with common equity. It will set up a new upstream corporation, and presumably do a Section 351 acquisition. The two subsidiaries will then be merged into "NewCo", and that name will be changed back to NWN. NWN's total capital structure at midyear ran 47.9%-3.6%-48.6% (total debt-preferreds-common equity). The pro forma structure should run 79.7%-6.9%-13.4%. If short-term debt is excluded, the structure becomes 77.9%-7.5%-14.6%. Each subsidiary of NewCo will continue with about 48%-52% leverage, but the parent will look more like an LBO. Is this bad? We don't think so, because: (1) NWN is buying $140+ mm of earnings and may pay out about $85 mm-$90 mm in after-tax interest expense, and thanks to FASB 140-142, there would be no goodwill amortization; (2) Newco will have almost entirely regulated assets; and (3) the synergies in both G&A and O&M expenses should be noticeable. The surplus CFFO/ Profitability of (say) $50-$70 mm can be used to pay down the acquisition debt. The good news is that NWN's earnings should be ramped up significantly as a result of this deal. The trade-off may be that this is a one-time event, and NewCO will still be subject to the whims of the OPUC. This should not be underestimated. NWN's realized ROEs have been about 10.0%-10.5% recently, and PGE's have been in the 12.0%-12.5% realized range. NWN is expected to grow at 5%-6% annually, and PGE should do 3%-4% annually. We like the deal fit, the people fit, and the collateral benefits to ENE. Copyright 2001 Sanders Morris Harris Group. The study herein is not a complete analysis of every material fact respecting any company, industry, or security. The opinions expressed here reflect the judgement of the author at this date and are subject to change. Facts have been obtained from sources considered to be reliable, but are not guaranteed. Sanders Morris Harris, its officers, directors, and/or employees may have an interest in the securities of the issue(s) described herein and may purchase, sell, trade or act as market maker while this report is in circulation. 600 Travis Suite 3100 Houston, Texas 77002 (713)250-4263 First Call Corporation, a Thomson Financial company. All rights reserved. 888.558.2500 Note ID: 402373 ------------------------------------------------------------------------------ To update your order or to receive research on other companies, please call your Account Manager at (800) 262-6000. ------------------------------------------------------------------------------ Thomson Financial Investor Relations TEL: 800-262-6000 75 Wall Street, 18th Floor FAX: 212-363-3971 New York, NY 10005 EMAIL: firstcall.notes@tfn.com First Call is a registered trademark of the First Call Corporation
|