GENERATING SPIN

[January 12th, 2005] The buyout firm Texas Pacific Group has been scrambling since WW released confidential documents last week.

The internal documents contradicted the firm's public version of its plans for Portland General Electric, which it is seeking to buy (see "The PGE Papers," WW, Jan 5. 2005).

Specifically, the confidential documents talk about big layoffs, cuts in maintenance spending and the sale of the utility in five years to another utility for a profit that could easily exceed $1 billion.

Texas Pacific responded by releasing some of the confidential documents to The Oregonian. And since Texas Pacific couldn't really deny that there are significant discrepancies between its private analysis and public pronouncements, it chose a different tack--maintaining that the private analysis shouldn't be taken too seriously.

In a press release it issued the eve before the publication of WW's story, Texas Pacific stated, "These reports were never intended to be, and will not be, relied upon for the formulation of any operating plans at PGE. ... The due diligence analyses were conducted from an external vantage point and only with limited information."

In truth, however, the confidential documents represent the work of a small army of experts that Texas Pacific hired or already employed. According to the documents themselves, those who helped the firm analyze PGE included four law firms and three individual lawyers with specific expertise, two consulting firms, the accounting firm Deloitte & Touche and the investment bank Credit Suisse First Boston, in addition to three Texas Pacific partners and numerous number crunchers.

And those experts had more of a bird's-eye view than "an external vantage point." According to the documents--which describe the proposed acquisition of PGE as "Project Tahoe"--Texas Pacific's team "undertook extensive peer benchmarking, management interviews and physical plant reviews."

The team grilled "business unit officers" and reviewed a "very detailed set of four year projections," the documents say.

The investigation turned up an extraordinary level of detail, including such minutiae as the largest credit exposures of PGE's trading desk (at the time, a total of $31 million owed by Mirant and Morgan Stanley).

The confidential documents also show that the Tahoe team compared PGE with other utilities to reach its conclusion that the local utility is overstaffed. For instance, charts show that of 105 utilities, PGE ranks 77th in customer-service costs per customer. The evaluation was so detailed that the Tahoe documents contain such specific recommendations as the reassignment of the Environmental Services group from Human Resources to Steve Quennoz, head of the Production Business group.

While Texas Pacific has subsequently tried to distance itself from such numbers, it's clear they are based on hard data, not guesses. For example, the firm examined the effectiveness of cost-cutting attempts in 16 other utility takeovers, in addition to analyzing the last 13 utility rate-setting cases in the Northwest and the last 51 nationwide.

And Texas Pacific was sure enough of its research to dispute the utility's own projections for growth in electricity demand.

Even Texas Pacific partner Kelvin Davis, who since last week has been downplaying the significance of the confidential documents, had earlier this year implied how seriously his firm took its due diligence. In July, Davis came to Oregon and told interested parties that Texas Pacific had spent "more than seven million dollars" assembling what he termed a "massive amount of information" about a "host of operational, financial and legal questions surrounding Portland General."

Texas Pacific declined to answer questions submitted in writing, but its motivation for minimizing the results of its homework is easy to understand. The Oregon Public Utility Commission, which must approve the acquisition, requires that such a change of control include a "net benefit" for ratepayers. Texas Pacific initially proposed not giving any rate reduction, but later offered a total of $43 million over five years. The last thing Texas Pacific wants the public to know is that it has done its homework and feels that it can walk away from PGE in five years with a profit of $1 billion.

By claiming that its due diligence is essentially meaningless, Texas Pacific may persuade ratepayers and regulators. But it runs the risk of alienating its biggest investor, the Oregon Investment Council, which has given the firm more than $900 million over the past decade, including $300 million approved last October.

Mark Gardiner, one of the five members of the OIC, which oversees the investment of more than $56 billion in public funds, was puzzled by Texas Pacific's downplaying of the documents. "They've said this [the documents] isn't a plan. Are they really entering into an investment of this size without a plan? If so, how do they know it is an investment worth making?"