Ken Silverstein EnergyBiz Insider Editor-in-Chief

In the late 1990s, many cash-starved companies sought to go public. Today, some are reversing that trend and seeking to go private, or at least selling specific assets to private investors. Most businesses need access to the capital markets where they can obtain the funds to do research and development, buy equipment and hire workers. But the pressures associated with quarterly reporting, new accounting and corporate governance rules are often intense. Enter private investors, who if they have deep pockets and a commitment to the business, can make a real difference.

Capital has been difficult to win in the utility sector because of credit quality, banker reluctance and general market conditions. But, that's changing. Now, private equity investors as well as hedge funds have money and they like such things as power plants and natural gas pipelines that Kinder Morgan owns. While that deal would be a buy-out by management, takeover artists Warren Buffett and Carl Icahn smell opportunity.

A lot of money is expected to flow into utility-related assets given that regulatory barriers have lifted and money is relatively cheap. Private equity firms have capital that's been sitting on the sidelines and waiting for a place to go.

In the case of Kinder Morgan, it operates about 40,000 miles of natural gas pipeline as well as 150 terminals. CEO Richard Kinder said that the top brass there as well as certain board members and a consortium of private equity firms are offering $100 a share to shareholders -- an 18.5 percent premium over the current stock price. Goldman Sachs Capital Partners, American International Group and the Carlyle Group are among the equity firms participating.

Kinder Morgan has already sold a majority of its utility infrastructure solutions company, Terasen Water and Utility Services, to CAI Capital Partners and British Columbia Investment Management Group.

Premium Investors

Warren Buffett's buyout of MidAmerican Energy Holdings may provide some answers. MidAmerican considered its stock to be undervalued during the "good" times and it had begun to weigh its options. In an uncommon step, the company entered into discussions with Buffett's Berkshire Hathaway to go private -- an intelligent move if a stock is idling and if the buyer has the capital to invest. The deal closed in March 2000. Since then, Buffet made another intrepid move this year by acquiring PacifiCorp from Scottish Power in a $9.4 billion deal.

"We are excited to be making this long-term investment, through MidAmerican, in the premier energy company in the West," says Buffett, in a statement. "PacifiCorp is a great company with outstanding assets." Berkshire Hathaway also owns two natural gas pipelines, which it bought from Dynegy.

Meantime, Kolhberg Kravis Roberts & Co. and Miller & McConville are private investors that are showing further interest in utility assets. Similarly, investment firm Goldman Sachs bought 26 power plants from Cogentrix Energy and another from El Paso for $456 million while GE Structured Finance acquired 60 percent of a Calpine facility.

At the same time, Carl Icahn and Dallas-based Panda Energy International, which builds unregulated power plants, signed a joint venture agreement to co-fund Panda Acquisitions Group, which will actively seek to purchase U.S. energy assets and related infrastructure. The acquisitions group is reported to have set aside "several billion dollars" to buy assets from those entities that are desperate to sell.

"We have been seeking a vehicle to help us secure a strong position in the energy sector and with Panda's track record within the industry we expect to make a significant contribution to our portfolio," says Icahn, who Fortune says is worth $5.8 billion.

Indeed, private capital is finding its way to utility assets. Sometimes the deals are welcome such as that of Berkshire Hathaway and MidAmerican. And sometimes the deals are associated with distressed assets, or those in which the original sponsor has defaulted on its debt. Either way, private equity investors don't always have the expertise that is required to manage energy industry assets.

Take the failed attempt by a group of private investors to purchase UniSource: The Saguaro Utility Group, which includes JP Morgan Partners, Wachovia and Kohlberg Kravis & Roberts, offered nearly $3 billion and promised that $1.5 billion would be pumped into the Tucson-based utility and other subsidiaries for operating, maintenance and capital improvements through 2008.

But, the deal fell through because regulators were unconvinced that customers would benefit. They were furthermore concerned that the new directors lacked utility experience and that the owners would milk the business and then sell it five years later.

The Risks

If Berkshire Hathaway is any indication, communities don't have much to fear from being owned by those who live outside state lines and particularly if they have deep pockets and excellent reputations. In the case of the Berkshire-MidAmerican deal, Buffet is plowing capital into infrastructure projects and giving MidAmerican's management team lots of leeway -- and a 25-percent ownership stake.

"It's easier to grow as a private company because unlike public companies, we don't have quarterly reporting issues to worry about," says David Sokol, MidAmerican CEO, in an earlier interview with this writer.

Capitalism is all about risk. The pay-off for smart investing can be enormous but any failures can be costly. The Kinder Morgan proposal is less risky because the current management would remain in place. But, it's not known whether other private investors seeking ownership of utilities or specific assets will have the same assurances. Certainly, the due diligence must be done and the odds calculated. But, only time will tell if private investors can produce superior results for consumers and investors and still be active in the local communities that they serve.

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