November 1, 2007 in Business

Bert Caldwell; Cross-border investing a smart move

Bert Caldwell The Spokesman-Review
 

Puget Sound Energy, which pioneered development of hydropower in the Northwest, has harnessed another resource: loonie-power. Might other utilities in the region, regulators and shareholders permitting, succumb to the now-potent Canadian dollar, or offers of any kind funded by the great store of overseas capital?

At least one respected observer predicts Idaho Power Co. will go soon. Avista, though less attractive, still has some of the characteristics of a potential acquisition target.

Utilities have become fashionable as takeover plays. Last month, private investors led by Kohlberg Kravis Roberts & Co. bought the largest utility in Texas, TXU, for $32 billion. The Washington State Investment Board contributed to the KKR fund that participated in the deal.

Puget, Washington’s largest utility, will go for $7.4 billion, a little less than one-half that to stockholders who will be cashed out for $30 per share.

The buyer is a group of private investors led by Macquarie Infrastructure Partners and funded in part by three Canadian pension funds. Macquarie’s headquarters are in New York, but its parent is based in Australia.

Puget officials say the deal will not increase rates or affect employee compensation. But they warned that rates will go up as the new owners commit $5 billion over the next five years to electricity generation, transmission and distribution system upgrades in a 6,000-square-mile service territory that envelops Puget Sound. The utility also sells natural gas.

Puget will need $14.4 billion to handle demand by the one million new residents expected in the area by 2025.

That growth was a powerful incentive for Macquarie, says Jim Lazar, an analyst who has worked for numerous utilities and government agencies, including the Washington attorney general’s office. Puget is financially strong, the stock relatively cheap, and increasingly controversial coal plants provide only about one-third the utility’s power; nuclear, none.

Puget officers, he adds, “have been looking to peddle the company.”

Puget earns 10.4 percent on investment, appealing to pension funds that prize secure, double-digit returns.

Lazar says Puget could have raised the capital it needs in the credit markets, but not as cheaply or as expeditiously as it can by tapping huge pension fund reserves. With the greenback in a tailspin, U.S. assets are a particular bargain for foreign investors.

“I think Idaho Power is the next takeover candidate,” he says, because is has the same strengths as Puget. Slower-growing Avista, still recovering from the energy crisis of a few years ago, is less attractive.

Which is fine with Avista.

Spokeswoman Jessie Wuerst says the Spokane utility has the generating resources it needs and has budgeted $200 million a year over the next three years to overhaul its transmission and distribution systems. Some of that capital will come from the sale of Avista Energy, the corporation’s former energy-trading subsidiary, and cash flow, which will be augmented by pending electricity and natural gas rate increases.

After ventures in telecommunications, trading and other non-utility operations, officers are focusing on the “mother ship,” Avista Utilities, Wuerst says.

Large utilities like Puget, she adds, face tremendous financial challenges.

Macquarie, which has stakes in other U.S. utilities, may be just what the doctor ordered for Puget, but it will have to prove it to the Washington Utilities and Transportation Commission. The buyers, who will keep Puget based in Bellevue, must show a purchase is in the public interest, and will do not harm to customers.

Lazar says Macquarie will likely be a long-time owner, not one that just tries to flip Puget to new investors at a profit. If so, it should be a model for other investors eyeing dollar-discounted U.S. assets, utilities or otherwise. Americans are going to have to get comfortable with the idea of foreign entities holding more than $2 trillion in reserves will be putting that money to work nearby.

Blocking those investments would be truly loony.


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