@Copyright Parish & Company, January 29, 2005.

Note that journalists are free to use this material provided that attribution is made and the website referenced as  www.billparish.com so that interested readers can examine the source document if of interest. Please also note that given the detailed financial nature of this analysis, an opportunity to proof any quotes or data would be appreciated.

Summary: Overall, as identified in these tables and notes, it is clear that TPG has structured an executive compensation bonanza for a few insiders as the expense of ratepayers and the long term health of our regions most important economic asset, Portland General Electric. For Neil Goldschmidt this would have resulted in a gain of at least $10.4 million over the next three years, prior to considering expense reimbursements and other perks.

Membership Interests In Oregon Electric Utility Company (PGE) Prior to Considering Equity Option Provided to Management ($M Millions, $B Billions)
 

Three Types of Membership Interests	OR Electric (Kohler/Other)	TPG	Gates & Oakmark	Total
1) Voting Interests - Percent	95%	5%	0%	100%
$ Investment in Voting Interests	$2,500,000	$131,578	$0	$2,631,578
2) Voting Class A Interest - Percent	0%	100%	0%	100%
$ Investment In Voting Class A Interest	0	$419.5M	0	$419.5M
3) NonVoting Class B Interests- Percent	0%	0%	100%	100%
$ Invested NonVoting Class B Interests	0	0	$103M	$103M
Total $ Invested Sum of all three interests	$2.5M	$419.632M	$103M	$525.132M

Source: UM1121 Exhibit 10 Term Sheet, pages 1 and 2.
 

Summary of Voting and Economic Interests In Oregon Electric Utility Company

Source for Total Member $ Invested Percent; UM1221 Exhibit 9, Ownership Structure, Page 1.
Note that these percents are the sum of the membership interest dollars invested identified in the first table divided by the $525 million. For example, in Oregon Electric's case $2.5M divided by $525.132M is approximately .5 percent. Overall, one can see that this is a highly leveraged buyout in which only 21 percent of outside equity is being provided to purchase PGE, the rest being debt and creative accounting; as well denoted by TPG claiming that $239M of its offer is existing cash on PGE's balance sheet.

Even more surprising is the ruse of local control to a group that only has a .1 percent economic stake, per TPG's own documentation, while maintaining 95 percent of the voting rights. Clearly, the Oregon Public Utility Commission needs to engage the services of an accountant rather than simply economists in order to get to the bottom of this. This proposal is looking more and more like something Ken Lay, a PHD economist himself, might have concocted.

Source for Total Economic Interest  TPG's stock purchase agreement, page 286.
Note that the management committee, Oregon Electric, is clearly listed as having .1 percent of the total economic interest, implying a total economic interest of $2.5 billion since Oregon Electric has invested $2.5 million.

Reconciling to "Total Economic Interest" Total economic interest is not the purchase price but rather the sum of the transaction sources; per UM1121 Exhibit 20 page 3, plus the assumed debt, this total being approximately $2.5B. Total sources include a PGE dividend of $239M, Oregon Electric Debt of $707M and Oregon Electric Equity of $525M for a total of $1,471M. Add this amount to the assumed debt to get total economic interest of approximately $2.5 billion based upon the investment of $2.5 million.

This same schedule notes that the transaction fee assumed by TPG will be $70 million, not including the additional approximately $30 million Credit Suisse, its selling group and brokers will earn in commissions issuing $700 million in bonds. Generally these combined bond commissions are roughly 5 percent.

Also noteworthy is that in the real world of finance, terms like "equity" are used rather than economic interest.  It's as if TPG is attempting to deceive the analysts at the Oregon Public Utility Commission and its commissioners with language that prevents them and the public from clearly seeing what is going on here, that being a highly leveraged buyout predicated upon, as documented in TPG's own due dilligence work, massive job cuts, piling on debt and fleecing PGE and related ratepayers of between $800M and $1.2B.

Sumary of Oregon Electric Local Ownership - "Before" and "After" Equity Option.
 

	OR Electric (Kohler/Other)	TPG	Gates & Oakmark	Total
Voting Interests (Before) - Percent	95%	5%	0%	100%
$ Investment in Voting Interests (Prior)	$2,500,000	$131,578	$0	$2,631,578
Voting Interests (After) - Percent	98%	2%	0%	100%
$ Investment in Voting Interests (Prior)	$5,438,500	$131,578	$0	$5,570,078

Source for Total Voting Interests After Equity Option: See page 286 of 305 in stock purchase agreement, Exhibit A, noting the managmeent member committee (OEUC) would hold approximately 98 percent of the voting interests. Clearly, this assumes management will purchase the option. Do also note that this same chart on page 286 does not update the total economic interest from .1 percent to 2.1 percent, thereby reflecting the increased local ownership, because this option will not vest immediately but rather over a three year period, as per the term sheet in the Goldschmidt's contract.

What is perhaps most surprising about this term sheet for the option is that is vests over a three year period. One might ask, what kind of long term incentive is that, 3 years? Also noteworthy is that Peter Kohler has publicly stated he would borrow the funds for his equity contribution. This is a common practice with respect to these options, that is to lend executives the purchase price, so that they don't have to put anything up front and, if indeed, as identified in TPG's own due dilligence report, they plan on earning roughly $1B or approximately 200 percent on its total equity investment, that would imply that Neil Goldschmidt stood to earn almost $8M on his stock and option alone, see reconciling math noting that his total investment of $3,938,500 would indeed generate almost $8 million in gains if TPG does indeed earn roughly $1 billion off its $525 million investment.

Of course Goldschmidt was also slated to earn $200K per year in directors fees in addition to his consulting firm earning $600K a year in consulting fees. What this means is that over the next three years he stood to earn $8M in stock and options gains, $600K in director's fees and $1.8M in consulting fees for Imeson/Carter for a grand total of approximately at least $10.4 million. The obvious question becomes, why isn't this a very big news story when the information is all now public.

Since Goldschmidt's original investment was $1M and he was given the option to purchase .75 percent of the "total economic interest: in Oregon Electric (source is term sheet for Neil Goldschmidt) that would imply he could own $525.132M times .75 percent or $3,938,500 in stock. Since he started with $1M this would imply an additional investment of $2,938,500. Add this amount to the $2.5M collectively for Grinstein, Walsh and Goldschmidt(now Kohler) and the total local investment becomes $5,438,500. This effectively raises their share of the voting rights from 95 to 98 percent as reflected in the new total investment in voting rights of $5,438,500 plus TPG's original $131,578 for a total of $5,570,078. Divide $5,438,500 by $5,570,078 and one gets approximately 98 percent voting rights for Oregon Electric.

It should be noted that Neil Goldschmidt's term sheet states he could purchase .75 percent of the total outstanding economic interests in OEUC as of the Closing.  This would clearly imply .75 percent of $2.5B since $2.5B is referenced in TPG's own documents as the total economic interest. This analysis did however use the total member interest, which totals $525.132 million, as identified in the first table, recognizing that this was clearly an error by Ater Wynne, the law firm that drafted the terms. Making this assumption of an error on Ater Wynne's part allows the rest of the parameters to reconcile, most importantly the adjusted 98 percent voting rights.

Other Items of Interest:

1)  Partial Sale of PGE by TPG: According to Exhibit 10, page 6 of 12 in TPG's stock purchase terms sheet,  TPG could do a partial sale of PGE and "such sale may be subject to OPUC approval."  The distinction is this case between "may" and "will" is significant given the expected repeal of the Public Utility Holding Company Act (PUHCA). This is important because such a partial sale could pre-empt the city or another buyer's efforts.

2)  TPG's Mix of Investors in TPG III and TPG IV: See exhibit 12, page 1 of PUC filing 1121.

Commentary: Note that TPG's primary source of funding is tax exempt public pensions, endowments and corporate pension plans.  Also notworthy is the significant component of non-US Investors in TPG IV, investors TPG has not dislcosed.

3)  Selected TPG's List of Affiliates:  Source exhibit 15, page 1, PUC filing 1121

Quintiles - Large national database of patient health care records with TPG emphasizing its "partnering solutions to the pharmaceutical, biotechnology and healthcare industries."

Given TPG's well integrated approach to earning a good profit off health care, as indictaed above, one might suggest that choosing Oregon Health Sciences University President Peter Kohler to run PGE was an inappropriate choice given the other internal opportunities he might have at TPG regarding the generation and provision of health care.

Remaining Unresolved Questions


1)  Registration Rights:  Exhibit 10 page 4 in UM 1121 states theat TPG will maintain 5 registration rights.  It is not clear from the filing exactly what these rights are.

2)  Transaction fees and expenses:  Exhibit 20 page 3 in UM 1121 indicates that $70 million worth of transaction fees and expenses will be paid upon closing. It is not clear how much if any of this $70 million TPG or its affiliates will pocket. Page 2 of the same Exhibit 20 indicates that shareholders equity will increase from $525 to $550M over the 12 months post closing, specifically stating "shareholders equity at closing unadjusted for transaction fees and expenses."  The question becomes, will equity be reduced due to TPG pocketing these fees or will it be increased or credited as investors divide part of the transaction fees, after paying outside legal, etc.

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