Ken Silverstein
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Private equity investors are riding to the rescue. A consortium led by Macquarie Infrastructure Partners has agreed to acquire to Washington State-based Puget Energy for $3.5 billion.

It's the latest case in which private investors have bid on publicly-held companies and specifically investor-owned utilities. 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.

Private equity firms say that their activities are intrinsic to American enterprise. The transactions in which they get involved range from taking public businesses private to providing the capital necessary to take companies to the next level. Managers of private capital firms argue that they can take the long view and therefore make the necessary investments to grow companies for the future. That's compared to those who run public companies and may be more concerned about the results of their quarterly filings.

As for Puget, it says that its territory is growing rapidly and it must attract $5 billion over the next five years to upgrade its infrastructure. The consortium has the deep pockets necessary while its investors like the fact that the company earns dependable revenues that can pay down the huge debt.

"Like many other utilities, Puget Sound Energy faces significant future capital requirements to meet the growing energy needs of our customers, while continuing to provide safe and reliable service to this dynamic region," says Stephen Reynolds, Puget Energy's chief executive, in a statement.

Puget's shareholders will receive $30 a share, which represents a 25 percent premium over the $24 stock price on the day the deal was recently announced. The consortium will also assume $3.2 billion debt. Besides Macquarie, investors also include the Canada Pension Plan Investment Board and the British Columbia Investment Management Corporation, as well as Alberta Investment Management. The acquisition is expected to win final approval in the second half of 2008.

Macquarie, which is the largest investment bank in Australia, is not new to the utility sector. It bought Pittsburgh-based Duquesne Light Holdings this year for $1.6 billion. The fund, along with General Electric, has also been reported to be interested in TXU's wires business. Macquarie, which has earned a good reputation among state regulators, calls the Puget deal a "long-term" proposition.

Thrash-and-Burn

Private equity is now active in the utility sphere. Kohlberg, Kravis Roberts (KKR) and TPG have just closed their $45 billion purchase of Dallas-based TXU in what has been the largest private transaction to date. Another private consortium, meantime, just closed on Kinder Morgan. Goldman Sachs Capital Partners, American International Group and the Carlyle Group paid a 27 percent premium over $84.41, the closing price of Kinder's stock when the deal was first announced stock May 26, 2006.

Also, Warren Buffett's Berkshire Hathaway acquired last year PacifiCorp from ScottishPower for $9.4 billion. The same group in 2000 purchased MidAmerican Energy Holdings, in what was at the time an anomaly.

Private equity firms can range from hedge funds and venture capital firms that may seek minority interests to those that have majority stakes and that actively participate in the operations of businesses. By the end of the first quarter 2007, such firms entered into $197 billion in mergers and in the last five years, the value of those deals grew 600 percent from $42 billion to $500 billion, according to congressional records.

It's all about the need to attract capital. Utilities, in particular, must build expensive power plants and transmission lines. In the last three years, the cost of those investments has risen by 50 percent, says Standard & Poor's. In the last year, utilities have anted up $6 billion toward infrastructure -- an amount that is expected to keep climbing as the demand for electricity increases and necessitates more generators and wires.

By going private, utilities are be able to avoid quarterly reporting pressures while having potentially quick access to parents flush with cash. But skeptics question the benefits of such arrangements and ask whether private investors are dedicated to the businesses or whether they are more concerned with getting quick returns. Among the most common complaints with private owners is that workers get fired to help pay for the purchases while assets are flipped before promises are fulfilled.

At a recent meeting of the Texas Public Utility Commission, KKR and TPG were warned by one commissioner there to tread lightly. KKR is still smarting from when Arizona regulators rejected its bid to buy UniSource Energy a few years ago. Regulators said they feared that the KKR-led consortium would churn the asset and that it had no utility experience.

The private equity industry, conversely, says that it does not have a history of thrash and burn and in fact, seeks to expand opportunities -- something that can only be attained by making smart investments in those businesses. It says that when it participates, it is able to revamp companies by creating new efficiencies. That, in turn, makes businesses strong so that they can thrive and continue to provide jobs and pay taxes.

Consider KKR's acquisition of ITC Holdings, an electric transmission company in Michigan. When KKR bought the company, ITC had a budget of $10 million and employed 28 people. Now, though, ITC has a budget of $200 million and employs 230 people, and millions have been invested in upgrading the transmission system.

Attracting capital is no small task. As such, utilities have to consider all options - including those beyond the traditional debt and equity markets. Private equity firms are good prospects: They have the cash and they seek productive assets. Utilities, meantime, are short generation and transmission and need solid partners. The two have met and time will tell how they do together. The TXU and Puget Energy deals will be good test cases.

 

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