[TCDPCO] FW: Puget Energy's path to going private

[Pickett]

I'd be interested in your thoughts on this matter. Paul

Seattle Times, May 4

Puget Energy's path to going private

By Ángel González

Seattle Times business reporter

When Puget Energy shareholders met — perhaps for the last time — at the
company's Bellevue headquarters in mid-April, they overwhelmingly approved
the sale of the company to a group of Australian and Canadian investors for
$30 a share.

After counting the votes, top managers beamed, calling the $7.4 billion
transaction a necessary step to infuse the parent company of Puget Sound
Energy with money to grow. But some stockholders remained reluctant.

"We should not have sold it," said an elderly shareholder after the tally
was announced. The room, packed with many longtime owners of the local
utility's shares, erupted in applause.

The proposed sale of the state's largest energy company, which provides
natural gas to Seattle and electricity as well as gas to much of the
Eastside, has some stockholders or customers worrying that new owners will
jack up rates and wondering what it will mean to have foreigners control
what seemed like a local asset.

Of course, Puget Energy has been a "public company" only in the sense that
the public could buy shares. It currently is owned by investors (unlike
Seattle City Light), and the proposed deal simply will swap one set of
shareholders for another, more private set.

Public meetings beginning May 15 will let customers and other stakeholders
voice their opinion as the Washington Utilities and Transportation
Commission (WUTC) decides over the coming months whether to approve the
takeover.

Other stakeholders who will chime in on the process range from the Attorney
General's Public Counsel, which represents ordinary ratepayers, to
theIndustrial Customers of Northwest Utilities, which represents large
corporate users like Microsoft and Boeing.

The WUTC has the ultimate word: Its mission is to make sure that Puget
Energy's passing into new hands does not harm customers. At the same time,
the commission will consider the utility's petition for a November rate
increase.

Most stakeholders haven't stated their position yet. For Ronald Roseman, of
The Energy Project, a local nonprofit group that represents low-income
people, the question is whether his constituency on the Eastside "can
continue to receive electrical service, at a price they can afford." The
group has hired an expert to study the question.

But others have already identified potential red flags. For one, the buyers
are borrowing $4.2 billion to help pay for the transaction.

Simon ffitch, who represents consumers as the Public Counsel chief in the
state Attorney General's Office, wonders whether this could saddle Puget
Energy with debt, sapping its financial standing and creating pressure in
the future to raise rates.

"We want to make sure this critical company is not put at risk," he said.
His office hasn't yet stated a formal position on the sale, though.

ffitch and other stakeholders also worry that the transaction may draw a
veil over Puget Energy's finances.

Those fears are downplayed by the buyers, a group of pension and
infrastructure funds led by the Macquarie investment bank, which is
Australia's equivalent to Goldman Sachs.

"We don't think the financial structure will impose any additional costs
over and above what the company presently has," said Chris Leslie, chief
executive of Macquarie Infrastructure Partners.

Puget Energy and Macquarie executives said that the company will continue to
publish financial statements after it goes private because it will still
have publicly traded debt. The buyers plan to recoup their investment
slowly, over decades, rather than seek a quick profit, the executives said.
The Federal Energy Regulatory Commission gave its go-ahead to the deal last
month. Other federal players — the Department of Justice, the Federal Trade
Commission, the Committee on Foreign Investment in the U.S., and the Federal
Communications Commission — are also poised to review the deal. Macquarie
and Puget Energy executives don't think there will be any roadblocks.

The deal is likely to go forward, said Paul Latta, an analyst at McAdams
Wright Ragen, and having the company go private could benefit both Puget
Energy and its customers.

To raise money for its growth, Puget Energy now has to cater to two
different audiences: the capital markets and the WUTC, which grants rate
increases. When it asks for a rate increase, it must pull out its pockets in
front of the state authority and plead poverty. Conversely, when the
company's managers tap Wall Street for capital or report to shareholders,
they must convey an image of success.

"Look poor, look poor, look rich, look rich — it's a horrible existence,"
Latta said. "It's better to take it off the public market."

By going private, the pleading is done behind closed doors — with owners who
say that they understand the industry's capital-intensive, long-term nature.

Capital needs

To keep up with population growth and environmental mandates, Puget Energy
says it must add enough power by 2025 to fuel two cities the size of
Seattle.

It plans to build natural-gas-fired plants, wind farms and transmission
infrastructure at a cost of some $5.7 billion over the next five years — an
amount larger than what the entire company was worth last October, before
the merger's announcement.

The company's "capital need is exceptionally large relative to its size,"
said Chief Financial Officer Eric Markell in testimony filed with the WUTC.

Part of the reason is the utility's need for more independent generation
capacity. The California energy crisis in 2000 and 2001 made it clear to the
company that buying power from others was risky.

"Ever since, Puget has been on a huge spending spree," said Latta.

A takeover by Macquarie will help by allowing the utility to reinvest its
earnings without worrying about the short-term capriciousness of the capital
markets, said Puget Energy's chief executive, Steve Reynolds.

"We as a management team won't have to be as focused on the next quarter,"
he said.

The acquirers have committed to fund the company's spending plan over the
next five years, Reynolds said.

But some utility watchers fear the loans taken by the acquirers to buy Puget
Energy might overstretch the utility's credit.

Credit-ratings firm Standard & Poor's estimates the company's consolidated
debt will increase after the acquisition by about $1 billion; its credit
rating could suffer if the WUTC, in order to approve the merger, imposes
conditions that end up restricting cash flow, S&P analyst Antonio Bettinelli
said in a report. That could make it more expensive to borrow money at a
time when the lending industry is roiling.

"Does this transaction increase the cost of capital for Puget Sound Energy?"
asks Melinda Davidson, a Portland-based attorney representing the Industrial
Customers of Northwest Utilities. "There's been some indication that it very
well could."

Macquarie's Leslie said that despite the current financial crisis, the
credit lines the consortium secured to invest in the utility's capital
program remain open, their terms mostly unchanged. "Basically we don't see
the change in shareholding and slight changes in financing structure making
any difference to the cost," he said.

Public reporting

The proposal to transform Puget Energy, a publicly traded utility, into a
privately held firm is a "new kind of animal" for Washington state
regulators, said Public Counsel ffitch.

As a public company, Puget Energy has strict reporting requirements with the
Securities and Exchange Commission (SEC) and other regulators; as a private
firm, its disclosure obligations "would be very limited compared to what is
required right now," ffitch said.

Puget's Reynolds said the availability of information will not be any
different.

"We're a regulated utility, there's nothing to hide," he said. The company
will likely have tradable debt, which requires it to file financial reports
with the SEC. "There are no secrets in our business and we don't expect that
is going to change," he said.

While many shareholders and customers fret about foreign ownership, most
stakeholders say it's more important to know how the company's day-to-day
operations will be run. The Macquarie-led consortium has said that the
current leaders, including Reynolds, will stay in place.

"We don't propose to meddle in the business," Leslie said.

Recouping the investment

Even though the Macquarie-led consortium is portraying itself as a
benevolent, hands-off landlord, some are concerned that new owners might try
to quickly recoup their investment by bleeding customers with high rates.
After all, the buyers are paying a 25 percent premium above what Puget
Energy's market value was.

The concern is heightened by the fact that shortly after the acquisition was
announced, the utility requested the commission's OK to raise its rates by
an average of 12 percent for electric-residential customers and 6 percent
for residential gas users.

Part of the increase is to allow the company a higher profit rate — a return
on equity of 10.8 percent, up from the current 10.4 percent.

"Customers are finding it very difficult to separate the two [issues]," said
ffitch.

But the state has tight rules on rates. Utilities can only change them after
a long and detailed process, making their case to the WUTC on the cost of
infrastructure investment and operations.

Reynolds said that even if there were no merger pending, the company would
have pushed for higher rates needed to pay for past capital expenses and
rising power-supply costs.

The request for higher profit margins is similar to what other utilities are
asking, he added. Spokane-based Avista, the state's second-largest
investor-owned utility, is also asking for a 10.8 percent return on equity.

The rate case and the merger are "essentially independent items," Reynolds
said.

Puget Energy and the Macquarie-led consortium have committed not to seek
higher returns than the company would have had without the takeover.

The hopeful buyers said they are confident that even with such restrictions,
they will recoup their investment over time.

Said Lincoln Webb, vice president for private placements at British Columbia
Investment Corp., which is investing about $500 million in the deal: "We
want to hold this company for 10, 20 years."

Copyright © 2008 The Seattle Times Company




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