After more than 18 months of negotiating, proposing, planning, promising, traveling and testifying, the real work of merging begins this week between Utah Power & Light Co. and its new owner, PacifiCorp.
Following the formal announcement Monday that the marriage has taken place, management from both utilities will begin the mammoth task of living up to promises of lower rates for customers and higher returns for shareholders as a result of the $2 billion merger.But combining physical facilities and operations is one thing. Management teams from both utilities have been working on that for months already.
The intangible transition - and probably the most challenging - will be successfully merging two corporate cultures and philosophies.
PacifiCorp will be faced with assimilating a 75-year-old utility with a centralized management structure that has believed providing electric service to Utah is its right.
Meanwhile, UP&L must deal with becoming part of a diversified, decentralized operation that markets itself as an "energy services company" and has long approached its utility business as a privilege not to be taken for granted.
"Anytime you merge you do have a conflict of management styles, but over time our style and philosophy will come into play and be adopted," predicts A.M. Gleason, PacifiCorp's president and chief executive officer.
It's not as though UP&L is entirely unlike its newly adopted parent or indifferent to the importance of cutting costs and rates to stay in business. Beginning in 1987, under the direction of new president and chief executive Frank N. Davis, the utility embarked on an unprecedented cost-cutting program, patched up differences with regulators, sought a merger partner and made concessions with competitors. All with an eye toward helping UP&L remain a viable business in the future.
"It was imperative for us to lower costs and rates or else lose customers," Davis told Utah regulators when queried about the merger and why the longtime Utah company needed to make such a drastic change.
So, while merging will be new to UP&L, the motive to do so isn't.
Mergers, however, are nothing new to PacifiCorp. The $5 billion diversified utility got where it is today by merging and acquiring. The trend started in 1954 when Pacific Power & Light acquired Mountain States Power Co., and later merged with the California-Oregon Power Co. in 1961.
Those moves turned Pacific Power into a six-state electric utility giant with sister telecommunications and mining companies throughout the country. The numerous evolving businesses unrelated to electric power prompted the corporation to change its name to PacifiCorp in 1984 to better reflect its diversification.
Having unrelated operations far from corporate headquarters in Portland forced PacifiCorp to adopt a decentralized approach to management, Gleason said. Presidents and chief executives of PacifiCorp's four main businesses, Pacific Power, NERCO, Pacific Telecom and Pacific Financial Services, say decentralization is the secret of their success. They say each can operate independently and vigorously while trying to outperform the other.
Such a system could bode well for those both in and out of UP&L, who fear Utah's electric utility will be controlled by executives almost 1,000 miles away. But, a decentralized management approach won't result in UP&L being ignored either.
Although PacifiCorp is Oregon's largest publicly-owned company, the merger will make Utah its largest service area and concentration of customers. "Utah will become an immediate focus of attention," Gleason said. "Over 60 percent of our business will be in Utah and the Rocky Mountain region, so this will clearly dictate where things will happen."
Initially, three UP&L board members will sit on PacifiCorp's board and more will be added in the future.
While some of the utility operations for both companies will be based in Utah, the merger could also make inroads for other PacifiCorp interests, Gleason said. "It's hard to forecast how our other businesses will be represented in Utah. But it's not inconsistent for other units to follow into new areas."
The electric utility had always been PacifiCorp's primary business until corporate heads decided in 1983 that the regulated utility business didn't hold much promise for growth and more attention should be paid the parent company's other business holdings.
But Pacific Power president David F. Bolender wasn't resigned to the utility's no-growth prediction and he embarked on a cost-cutting and market expansion program that has culminated in the merger with UP&L.
"The merger is consistent with how we are organized and it was the natural thing for Dave (Bolender) to do," said Gleason. "We wanted Pacific Power to grow. We were a little surprised at the size" of the proposed merger.
The merger will create the third largest utility in the West - serving 1.2 million customers in seven Western states. It will secure Pacific Power's position as top dog among the four subsidiaries at PacifiCorp in terms of revenues and earnings. The newly merged divisions of Pacific Power and UP&L are expected to contribute 75 percent of the parent company's profits.
According to Bolender and UP&L president Frank N. Davis, the marriage of their two companies was made in heaven. When both executives met in May 1987 to discuss merging, they were seeking a partner as a way to secure their companies' future. UP&L wanted a low-cost power source, such as Pacific Power's hydro generators, to enable the utility to lower rates. Meanwhile, Bolender was seeking an expanded customer base to spread out costs and provide future growth. Both companies wanted future capacity without building new plants.
Other aspects that make it a good fit are the alternating peak load seasons of both companies - UP&L peaks in the summer and Pacific Power in the winter - which will provide for more efficient year-round operations. The interstate transmission of both companies, stretching from the Pacific coast to Montana, then south to the Utah-Nevada line, will position them as key brokers of surplus power in the west.
The combination is expected to postpone investment by either company in new plants for at least 10 years, Bolender said. Both companies anticipate savings of almost $500 million during the first five years of the merger as they combine transmission, distribution and generating operations. Such savings have enabled UP&L to guarantee rate decreases of 5 percent within five years, while Pacific Power plans to keep its rates stable.
1987 revenue: $632 million
Contributions to earnings: $54 million
Of all PacifiCorp businesses, NERCO, the corporation's 90-percent-owned mining and resource development subsidiary, has set the pace in following the corporate mandate of being a low-cost producer.
Trying to survive in the boom and bust business of mining, NERCO has spent this most recent bust period of the 1980s slashing costs, renegotiating contracts and diversifying from coal. The result has been increased earnings of between $65 million and $70 million in 1988, compared to $54 million the year before.
"We are no different from any other business in the industry, but we probably are more aggressive out of the family (PacifiCorp) in cutting costs," said Gerard K. Drummond, NERCO's chairman and chief executive.
Founded in 1977 as a coal mining concern, NERCO has grown into one of North America's top coal, gold and silver producers. The company also produces natural gas from properties in the Gulf of Mexico and is involved in mining exotic minerals and production.
Its coal mining operations are based in St. Louis, Mo., with mines and offices in Montana, Wyoming, Colorado, Indiana and Tennessee. Unlike UP&L, whose coal mining operations are union operated, NERCO runs a mostly non-union mining company.
But union miners employed by UP&L can breath a collective sigh of relief. Drummond said NERCO stands apart from PacifiCorp's electric utility operations - although it does produce and supply coal adjacent to Pacific Power's Wyoming generating plants - and will not be involved in UP&L's coal operations.
NERCO has shored up decreased demand in its main business of coal with sales of precious metals. Headquartered in Vancouver, Wash., NERCO Minerals Co. has six gold and silver mining operations in North America and development projects in Alaska and Spain.
The company dissolved oil and gas exploration when prices plummeted in 1986, but it recently acquired about $300 million in producing natural gas properties in the Gulf Coast region - primarily to supply a former coal customer and keep its production end of that business active.
Hoping for future profits in advanced minerals, NERCO has become the top producer in North America, and No. 3 producer in the world, of gallium arsenide - predicted to become a future alternative to silicon in manufacturing electronics.
The project is still in the research and development stage, but the commercial market for gallium arsenide has also been slow to develop. When it does, Drummond said, NERCO will be well positioned to take advantage of the anticipated demand.
1987 revenue: $525 million
Contributions to earnings: $37 million Employees: 3,681
Telephone operations weren't much to speak of at PacifiCorp until the 1970s, when the electric utility embarked on a program that has turned two small rural phone companies - inherited from the 1954 Mountain States Power Co. merger - into a $1 billion domestic and international long distance and local service carrier.
An 87-percent-owned subsidiary of PacifiCorp, Pacific Telecom's principal holdings include Alascom (one of two long-distance carriers for Alaska and the sole in-state long distance telephone service operator) and local phone service for some 200 rural communities spread across nine states.
The company enjoyed being the sole long-distance carrier to Alaska for several years, but competition has recently put pressure on prices. A lawsuit between Alascom and its competitors was settled last year to resolve some of the competitive conflicts and the company is now awaiting a decision by Alaskan regulators to allow another in-state carrier to also service the market.
Although resources are spent to maintain its regulated phone operations in business, growth for the immediate future lies in unregulated telecommunications, the company said.
In its unregulated telecommunications businesses, Pacific Telecom offers private-line services for business, including a digital microwave network in the San Francisco Bay area, and a satellite-based cellular telephone system in the Gulf of Mexico.
Moving into the international arena, Pacific Telecom has made acquisitions that position it as a telecommunications service provider with access into several foreign countries. In one of its major endeavors, the company is in the process of firming up contracts to build the first trans-Pacific fiber optics line from Japan to the United States in a joint venture with Britain's Cable and Wireless Plc. and International Digital Communications Inc. The 5,200 mile cable should be operational in 1990.
The company has found some success diversifying outside of telecommunications, although it has stubbed its toes at times, said vice president Brian Wirkkala.
The company has unloaded some of its bad investments, but has held on to interests in high-tech manufacturers of electronic aircraft guidance, security and other information processing systems.
1987 revenue: $117 million
Contributions to earnings: $9 million
PacifiCorp Financial Services is the smallest and newest PacifiCorp business.
But despite being the new kid on the block, the company has already made it known to other corporate divisions that it plans to play a major role in PacifiCorp's future.
"PacifiCorp (directors) are gaining more comfort in what we do," says Gayle L. Veber, chairman and chief executive officer of PacifiCorp Financial Services. "They didn't think we could do so much so quickly."
In three years, the wholly-owned financial services subsidiary has amassed $2 billion in assets through leasing, commercial lending and asset management. Its contribution to PacifiCorp's earnings tripled from 1986 to 1987. Net income for 1988 is estimated at $25 million, compared to $19.2 million the year before.
The company has become a leading leasing firm for commercial aircraft, which now makes up more than 25 percent of its portfolio. Computer equipment leasing and distribution financing for large equipment manufacturers are other areas that contribute significantly to the company's bottom line.
Veber said that although lending and asset management may appear far removed from regulated utilities and mining, it actually grew out of the other businesses.
"PacifiCorp Financial was a natural evolution from our experience in raising capital for our utility operations," Gleason said.
It was back in 1984 that consultants reviewed PacifiCorp's businesses and recommended they place more emphasis on financial services as another potential source of revenue - especially with growth in mining and utilities appearing to be limited at the time.
PacifiCorp Financial Services Inc. was born in 1987 as an umbrella over the leasing, lending and development operations. The financial services' mandate is to seek out "niches" in markets where above-average returns can still be made, Veber said.
In that quest, PacifiCorp Financial Services is presently looking at acquiring a medical equipment leasing company that will fit into its stable 23 leasing and financing companies in computers, aviation, utilities, franchising, broadcasting and government, to name a few.
The most recent major development was the acquisition of a 50 percent share of Equitec Financial Group Inc. - a $4 billion asset management firm based in Oakland, Calif., that deals in investment products and real estate.
Veber said he is comfortable with the business' growth and is confident that continued solid performance will foster continued support from the parent company and its shareholders.
Indeed, in terms of priorities, Gleason said that maximizing opportunities in the financial services business is second only to merging UP&L into Pacific Power.