Need for cash spurs Puget Energy deal

With plans to spend billions on new power plants and equipment over the coming years, Puget Energy decided it needed a more stable — and more patient — source of new cash than the public stock and debt markets.

That, executives said Friday, was why the parent company of Puget Sound Energy, Washington state's largest electric and gas utility, chose to sell itself to a consortium of private investors for $3.51 billion.

The consortium, led by Australia's Macquarie Infrastructure Partners and three big Canadian pension funds, is paying $30 per share, a 25.3 percent premium over the stock's Thursday close.

As a medium-sized utility with a stagnant share price, Puget likely would have found it difficult to raise enough money in the public markets to fund its ambitious capital-spending plans.

Steve Reynolds, Puget's chief executive officer, has said the company needs to spend $5 billion over the next five years to keep up with demand growth and meet sustainable-energy requirements. Over the next two decades, he said, Puget plans to build 10 wind farms and 10 gas-fired power plants.

"We need reliable access to capital, not just for the next couple of years, but over the long term," Reynolds said in a conference call with analysts.

The consortium, he said, "will have the patience, risk tolerance and sophistication to work with us to provide capital, steward our investments, and spur the innovation necessary to meet our energy challenges now and in the future."

Puget's shares surged Friday, closing at $27.80 for a gain of $3.85 or 16.1 percent. The stock hasn't been that high since December 2000.

Still, the gap between Friday's close and the $30 offered by the Macquarie group may indicate some investor skepticism that the deal will come off precisely as planned.

The complex deal, with a total value of $7.4 billion, will be funded with $3.2 billion in cash and $1.6 billion of new debt. The investment consortium also will take on $2.6 billion of existing debt.

The deal, which requires shareholder and regulatory approval, isn't expected to be completed until the second half of 2008, at the earliest. But before the end of this year, the consortium plans to buy $300 million in newly issued Puget Energy stock, giving the company an immediate cash infusion to move forward with its capital spending plans.

After the takeover is completed, the consortium also will secure new loans totaling at least $2.15 billion to help Puget Energy expand the amount of power it produces and hedge against fluctuations in energy prices.

Since Reynolds took the helm five years ago, Puget has moved away from its 1990s emphasis on unregulated businesses — it sold off its InfrastruX construction subsidiary last year — and toward generating more of its own power.

Over the past five years, the company has raised more than $500 million in three stock offerings and increased its debt load by about $200 million.

The company could have continued going to the public markets, Reynolds said in an interview, but that risked diluting current investors' stakes and putting more pressure on its share price — which has lagged the rest of the utility sector for years.

"If you don't continue to spend, you find yourself in catch-up mode the way we are with roads and bridges," Reynolds said. "We think there's a better model than constantly going back to the capital markets year after year."

Macquarie Infrastructure Partners is a fund set up last year by Australia's Macquarie Group. Earlier this year a different Macquarie-led consortium took control of Pittsburgh's Duquesne Light Holdings; the fund also owns stakes in Aquarion, a New England water utility; a wireless tower operator; two Canadian port terminals; and five U.S. and Canadian toll roads.

The Puget Energy consortium also includes Canada Pension Plan Investment Board, British Columbia Investment Management Corp. and Alberta Investment Management.

Puget Sound Energy has more than 1 million electric customers and just over 721,000 natural-gas customers, primarily in the fast-growing Puget Sound region.

Despite a successful year in 2006 — it earned $219.2 million on $2.9 billion in revenue — Puget Energy has struggled over much of the past five years. The company has earned its authorized return on equity for just three of the past 18 quarters — all last year.

Jim Bellessa, a utility analyst with D.A. Davidson in Great Falls, Mont., faulted state regulators for delays in letting the company recover the costs of new plant and equipment, crimping its overall profit.

"When regulators do not allow a utility to get an adequate return on investment, the capital goes elsewhere," he said.

The company plans to keep its headquarters in Bellevue and retain Reynolds and the rest of its management. It will continue to honor its existing collective-bargaining agreements with three union locals.

The deal already has been approved by Puget Energy's board, but the company's shareholders also must vote to go ahead. It also must be approved by the Federal Energy Regulatory Commission and the state Utilities and Transportation Commission, a process likely to take several months.

The agreement gives Puget Energy until Dec. 10 to solicit better offers, a move intended to protect shareholders. Should another bid emerge, the company would have to pay an unspecified breakup fee to the consortium partners.

While two Northwest utilities, Seattle's Cascade Natural Gas and Portland's PacifiCorp, have changed hands recently, other utility mergers have not gone as smoothly.

In 2005, Oregon regulators vetoed the proposed purchase by Texas Pacific Group of Portland General Electric, at the time owned by the bankrupt Enron. PGE has since become a stand-alone publicly traded company.

And earlier this year, Montana regulators turned down the proposed acquisition of NorthWestern Energy by Babcock & Brown Infrastructure (BBI) — like Macquarie, an Australian investment firm, with a similar focus.

Bellessa said BBI might be interested in making a play for Puget Energy, as might MidAmerican Energy Holdings, the arm of Warren Buffett's Berkshire Hathaway conglomerate that bought PacifiCorp.

But Paul Latta, an analyst with McAdams Wright Ragen in Seattle, put the chances of another bidder emerging at just 5 percent, with an 85 percent chance the deal goes through and a 10 percent chance it falls apart.

Drew DeSilver: 206-464-3145 or ddesilver@seattletimes.com

Seattle Times researcher Gene Balk contributed to this story.