ScottishPower takes £1bn hit on PacifiCorp sale to Buffett

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The Independent Online

ScottishPower drew a line under its ill-fated purchase of the US energy company PacifiCorp yesterday, selling the business to the legendary American investor Warren Buffett and taking a charge of nearly £1bn in the process.

ScottishPower drew a line under its ill-fated purchase of the US energy company PacifiCorp yesterday, selling the business to the legendary American investor Warren Buffett and taking a charge of nearly £1bn in the process.

Mr Buffett's existing US electricity company, MidAmerican, is buying PacifiCorp for $9.4bn (£5.1bn). That compares with the $10.3bn which ScottishPower paid for the West Coast-based utility in 1998. By the time the deal closes in the next 12-18 months, ScottishPower expects to have invested a further $300m in PacifiCorp, reducing the sale proceeds to $9.1bn.

The sale, after six troubled years of ownership, has resulted in an impairment charge of £927m in ScottishPower's results for 2004-05, plunging the company into a £29m pre-tax loss for the year. But the company said the loss on the sale of PacifiCorp would be offset by £485m of foreign exchange gains.

ScottishPower intends to return $4.5bn of the sale proceeds to shareholders, although it said it had not decided on the precise mechanism for doing this. The net proceeds from the sale will be $5.1bn. MidAmerican is assuming a further $4.3bn in PacifiCorp debt. ScottishPower shares rose 6 per cent to 469.75p yesterday.

The sale of PacifiCorp represents the second major setback for ScottishPower's diversification strategy under its chief executive Ian Russell. Three years ago the group was forced to write off £1.1bn after selling Southern Water for £2.1bn. The company was bought in 1996 in the mistaken belief that it would enable ScottishPower to cross-sell electricity to water customers.

Mr Russell denied the sale of PacifCorp amounted to an admission of failure or that it had paid too much in the first place, arguing that under ScottishPower's ownership, profits had nearly doubled. He also said it had enabled the group to build up its successful US wind power, energy trading and gas storage division PPM Energy, now valued at about $1.5bn.

"I think we have transformed PacifiCorp from when we bought it," he said. "The question is, have we transformed it enough? The strategy has delivered well but as we pause at the end of six years it is the right moment to sell the business and return capital to shareholders."

ScottishPower launched a strategic review of PacifiCorp in November. Mr Russell approached Mr Buffett about two months ago offering to sell the business after deciding it could not justify investing a further $5bn in PacifiCorp over the next five years, based on returns it would achieve.

Mr Buffett, by contrast, said PacifiCorp fitted its portfolio perfectly, being an energy business which required high levels of investment. Neither his holding company, Berkshire Hathaway, nor MidAmerican, have ever paid a dividend, preferring to invest long term in businesses which offer capital growth, whereas ScottishPower's shareholders were driven more by short-term yields.

Mr Buffett said Berkshire Hathaway had $40bn of surplus cash looking for a home, adding he was interested in buying more utility companies, including UK water and electricity companies. He already owns Northern Electric. "There is no limit to the funds we have available for the right acquisition. The bigger the better," he said. "If you have a big one out there, try us out."

MidAmerican's acquisition of PacifiCorp will have to gain approval from the US Securities and Exchange Commission, the Justice Department, the Federal Energy Regulatory Commission and local regulators in each of the six West Coast states where PacifiCorp operates. But David Sokol, the chairman and chief executive of MidAmerican, said that he was "highly confident" of completing the deal within 12 months.

Burnt in the USA

* Midland Bank bought into the Californian bank Crocker National in 1981, but Latin American debts and hefty write-offs on property loans meant the hoped for profits never rolled in. The UK bank lost more than £1bn on Crocker before selling the business to the US financial group Wells Fargo in 1986.

* Lord Simpson paid $6bn for two US telecoms groups, Reltec and Fore Systems, in 1999 but wrote off the assets in 2001. In 2003 Marconi shareholders were all but wiped out in a $4bn debt restructuring, although its US operations did return to profit last year.

* Stagecoach bought the American bus operator Coach USA for $1.7bn in 1999, only to sell off two-thirds of the business and book a $900m charge in 2002 after being hit by the tourist downturn after 11 September 2001.

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