An energy giant feels the winds of change

WHILE it didn't exactly become a nightmare, it was the American dream that latterly began to cause some restless nights.

ScottishPower's decision to offload its Oregon-based PacifiCorp arm was not taken lightly, given that the US division earned the company just over half its 6.85 billion sales last year.

But faced with slipping profitability and an initial plan that failed to materialise, Ian Russell, chief executive at Britain's fifth-biggest power group, felt the time was right to sell its biggest earner.

Mr Russell says 2004 had proved to be "a difficult year for PacifiCorp" and the interests of the group were best served by cutting its ties and flogging the unit. It was sold for 5.1bn to Iowa-based MidAmerican Energy, a subsidiary of Warren Buffet's Berkshire Hathaway group, marking the biggest investment by the billionaire since 1998.

The sale - which has still to be approved by investors - allows ScottishPower to focus the bulk of its future efforts in Britain, namely its UK Division and Infrastructure Division, as well as its PPM Energy arm, which focuses on clean energy generation in the US. Charles Berry, the executive director in charge of ScottishPower's UK Division, which is responsible for the customer side of the business including generation and supply, says the purchase of PacifiCorp for around 5.5bn in 1999 was the right thing at the time.

"When we acquired PacifiCorp, the energy market in the US was going to liberalise," says Mr Berry.

However, a power crisis in California in 2001, which led to rival Pacific Gas & Electric filing for bankruptcy and a state of emergency being declared in America's wealthiest state, led to a suspension of the liberalisation process.

"So the benefits of the purchase did not fully come to pass," says Mr Berry.

He points out, though, that at the time of the purchase, PacifiCorp's profits were around the 275m level. Now they are closer to 495m. And he remains philosophical.

"Although we virtually doubled the bottom line, it's best to look forward and concentrate on the other three businesses. They've all been offsetting the ongoing pressure on PacifiCorp."

Fraser McLaren, an analyst at ING, said the market would "react positively" to the sale of PacifiCorp, as it would bring to an end "persistent uncertainty".

Fellow analyst Angelos Anastasiou said that while the move was "good for sentiment", the price achieved was "disappointing".

And analysts at Barclays also welcomed the sale of PacifiCorp - even though it meant the group was "essentially selling 60 per cent of its revenues and 50 per cent of its operating profits".

With the world's drive towards finding cleaner sources of power, ScottishPower created PPM Energy to develop wind and thermal energy facilities. This year PPM, which has grown from scratch to profits of more than 50m in four years, will build three new windfarms in the US.

Glasgow-based ScottishPower has also been turning its attentions to greener energy on the home front, an area Mr Berry sees great opportunity in. ScottishPower currently produces 158 megawatts (MW) of power from UK windfarms, a market it first entered in 1993. It now has more than 12 such sites of varying capacity.

Another 142MW of capacity is under construction, much of that coming from the half-completed 100MW Blacklaw project, near the village of Forth, which is the biggest wind farm so far given the go-ahead in the UK.

With 60 turbines when complete, Blacklaw will have about ten per cent of a total of more that 600 turbines currently in Scotland, according to pressure group the Scottish Wind Assessment Project.

Mr Berry says that a further 3000MW is in the pipeline, with 1000MW to be delivered by 2010. The investment in its windfarm projects currently works out at about 1m per MW of capacity.

But even bigger projects are planned, he says, namely Whitelea, near Glasgow, which at just over 300MW, will make it the biggest windfarm in Europe. Despite Scotland being the windiest country in Europe - average wind speed of more than 7.5 metres per second at 50 metres altitude - we lag behind countries like Spain and Germany in wind energy generation.

Denmark, a country with a largely equal population to Scotland, currently generates around 2000MW of wind energy capacity, mostly onshore, and has recently begun work to add a further 4000 MW.

The UK's target by 2010 is for ten per cent of all power to be achieved through renewable energy. Scotland's target is 18 per cent. By 2020, the UK is looking at 20 per cent, with Scotland aiming for 40 per cent.

"It's going to be stretching it, but is doable," insists Mr Berry. "Scotland has a good record in hydro electricity, so it's starting from a higher point. But there's a lot to be done to get towards the targets."

Mr Berry says climate change is one of the most pressing issues the energy industry has to wrestle with, much of it's caused by the burning of fossil fuels in power stations.

According to the World Health Organisation, more than 100,000 people die each year as a result of climate change with that figure put at around 300,000 by 2030. Further, the insurance industry forecast global costs from climate change will exceed 78bn a year within a decade.

The Thames flood barrier, when it was first built, was seen being used once every three years. Now it is used five or six times a year. "That's entirely down to climate change," says Mr Berry. "There's a pressing need for the UK to replace coal-fired stations with gas-fired stations and renewables."

ScottishPower has just announced a ten per cent jump in annual profit of 1.01bn. The figure outraged consumer groups, as ScottishPower increased prices last year for domestic customers by 16 per cent for gas and 13 per cent for electricity. Yet despite that, the firm added 865,000 UK customers.

But as far as the company is concerned it is in business to make money and while the sale of PacifiCorp will knock headline earnings, Mr Berry says "the growth rate from the three businesses that will remain will be higher".

In terms of UK customers, ScottishPower still lags behind rival Scottish & Southern Energy (SSE), which added only 850,000 customers last year but has a total of 6.1 million and is also working on a 120MW windfarm in Ayrshire.

But ScottishPower has also invested in buying UK power stations, including the Damhead Creek station in Kent for 317m in June 2004. That helped boost operating profits in the UK by 79m to 180m, including a 23m improvement at its infrastructure division to 416m.

Mr Berry says that going forward, ScottishPower's growth approach would be largely organic, with opportunities not only in its traditional power generation business, but also from forthcoming developments in off-shore wind farms and wave energy.

Currently, the UK Division turns over about 3bn, roughly half of ScottishPower's annual sales.

According to some City sources, the trimmed-down ScottishPower could have inadvertently made itself a possible takeover target. Brokers at Cazenove see it as "an attractive takeover target for its larger UK competitors", such as Centrica, EdF, SSE, or German group E.ON, which has recently said it is generally interested in acquisitions.

And Mr Buffet might also be interested, as he has another 22bn burning a hole in his pocket.

THE FACTS

What's ScottishPower all about? The Glasgow-based firm is an international energy company, comprising two regulated (Infrastructure Division & PacifiCorp) and two competitive businesses (UK Division and PPM Energy).

How many people does it employ? More than 14,000.

What is the company worth? About 8.2 billion. The firm is Scotland's largest industrial company.

Profitable? Yes, it's just booked a profit for the past year of 1.01bn.

Where are its shares listed? On both the London and New York stock exchanges.

How many customers does it have? In total, about 6.7 million: 5.1 million in the UK and 1.6 million in the United States.

What's happening at PacifiCorp? An agreement has been reached to sell it to Iowa-based MidAmerican Energy for 5.1bn. But it needs to be agreed by regulators and backed by investors.

So everyone's happy? No, consumer group energywatch Scotland has been trying to persuade energy consumers to dump ScottishPower, claiming it is doing little to help people like pensioners meet escalating bills.