Investors’ Buyout of Puget Faces Hurdle

NEW YORK – An agreement by a group of private investors to acquire utility company Puget Energy Inc. would be a boon for shareholders and should not harm ratepayers, although regulatory approval of the deal remains uncertain, analysts said.

Puget Energy, based in Bellevue, Wash., agreed on Friday to be taken private for $3.5 billion by a group of investment firms led by Macquarie Infrastructure Partners, a New York-based affiliate of Sydney’s Macquarie Infrastructure Group; the Canada Pension Plan Investment Board; and British Columbia Investment Management Corp.

Puget expects the deal, which has already won board approval, to close in the second half of next year.

Attempted buyouts of U.S. utilities by pension funds and Australian infrastructure funds have become more common as the funds grow in size and seek assets with stable, long-term returns.

Macquarie’s acquisition of Puget Energy would improve the company’s ability to expand its power-generation portfolio and would represent a significant premium for shareholders, analysts said. But it remains to be seen whether the deal will win approval from Washington regulators, who can reject the agreement if they believe customers of Puget Energy’s utility, Puget Sound Energy, will be worse off.

An acquisition by Macquarie would give Puget Energy better access to capital, allowing the company to fund power-generation projects without issuing as much debt. Puget Energy will need to spend about $5 billion over the next five years to meet growing electricity needs in the company’s service territory, Chief Executive Stephen Reynolds has said.

“Management will be able to focus more on executing long-term strategy than dancing to the tunes of Wall Street,” said James Bellessa, an analyst with D.A. Davidson & Co. in Great Falls, Mont. “They may not have to go to the capital markets as often.”

Puget Energy has scrambled to acquire power projects in recent years as electricity demand in the Pacific Northwest rises. The company sold much of its power generation in the late 1990s, following a business model that positioned the company as a wires-only utility that would own transmission and distribution infrastructure but not power plants.

In May 2006, Puget Energy sold its InfrastruX Group Inc. division to Tenaska Power Fund LP, an Omaha, Neb.-based private-equity fund, for $275 million. InfrastruX is a provider of infrastructure construction services to the utility industry.

During the California energy crisis, Puget faced unprecedented wholesale energy costs amid droughts in the Northwest that curbed hydropower supplies, prompting the company to begin building up its power-generation portfolio again.

The utility, which has more than 1 million electric customers and more than 700,000 natural gas customers, “has a substantial amount of capital needs in the next five to 10 years,” said David Parker, an analyst with Robert W. Baird & Co. in Tampa, Fla. “They’ve been short electric-generating capacity for a long time.”

In February, Puget Energy purchased a $120 million, gas-fired power plant from San Jose, Calif., utility Calpine Corp., which is in bankruptcy proceedings. Puget has also spent $600 million in the last two years acquiring wind farms.

The proposed Macquarie deal “will keep us from going to the equity markets every two years,” Reynolds said in a conference call after the agreement was announced. “A lot of the access to capital questions will be gone. These are buyers who want to invest capital on our behalf.”

Regulators tend to look more favorably on infrastructure funds like Macquarie than on other private investors because infrastructure funds are long-term investors that typically keep holdings for 20 years or longer. Infrastructure funds mostly invest in assets such as utilities, toll roads and airports, which generate relatively low but stable returns.

“Macquarie would be viewed positively by regulators because it has a very long-term time horizon,” Parker said.

Regulatory approval of the deal is more likely than not, analysts say, given the Washington Utilities and Transportation Commission’s sanction of another utility merger in June. The commission approved Bismarck, N.D., utility holding company MDU Resources Group Inc.’s acquisition of Seattle-based natural gas distributor Cascade Natural Gas Corp. for $475 million after a yearlong review.

Macquarie’s offer of $30 a share for Puget Energy – about a 25 percent premium to where the stock was trading before the buyout agreement was announced – is also good deal for shareholders, analysts said.

“The proposed above-average valuation for the group is a positive for shareholders,” Bellessa said.

Puget shares rose 4 cents to $28.25 Wednesday.

A favorable regulatory environment doesn’t mean the Macquarie deal is a foregone conclusion, however. The agreement allows Puget Energy to solicit competing merger offers until Dec. 10.

Potential suitors could include Australian infrastructure fund Babcock & Brown Ltd., a Macquarie rival that failed in its attempt to buy Sioux Falls, S.D., utility company Northwestern Corp. in May after Montana regulators denied the deal, and Des Moines, Iowa-based Berkshire Hathaway Inc. company MidAmerican Energy, which has utilities stretching from Illinois to Oregon and may look to extend its reach to Washington, analysts said.

“There’s about a 5 percent to 10 percent chance that somebody else might come out of the woodwork,” Bellessa said.