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$7.4B Deal to Privatize Puget Sound Energy Gets Final OK

A $7.4 billion deal by a consortium of private investors to acquire Bellevue, WA-based Puget Sound Energy (PSE) and take it private cleared a final regulatory hurdle last Tuesday when the Washington Utilities and Transportation Commission (WUTC) on a split 2-1 vote gave a heavily conditioned approval. WUTC approved a multi-party settlement from last summer that included its own staff.

Commissioner Philip Jones opposed approval of the sale, and filed a separate dissent, contending "the settlement agreement in its current form creates too much risk and potential harm for ratepayers and stakeholders."

PSE issued no immediate written reaction, and a spokesperson said last Wednesday it will not make any public comments until after it has fully reviewed the commission order, which added at least 15 conditions to the many others included in the settlement. At this point, there is a 30-day period during which appeals or requests for rehearing on the decision can be made, and PSE has no target closing date at this time for the merger transaction.

In July last year, PSE's holding company, Puget Energy, and the investor consortium's holding company, Puget Holdings LLC, reached a settlement they told the state regulatory commission would "resolve all issues with several of the parties" involved in the merger proceeding at the WUTC. On Dec. 30, the majority of the three state regulators decided the deal was "consistent with the public interest and [would] not harm ratepayers, or the legal standard for approval of such sales."

The WUTC majority said it arrived "at the same conclusion reached by those parties representing environmental interests, low-income customers, industrial and large commercial customers, and the commission's independent staff."

In the interim five months since the settlement was filed with the state regulators, opposition grew among some consumer and public power groups. The utility's parent reported an $8.2 million net loss in the third quarter, and PSE reached a $179 million settlement in its ongoing general rate case at the WUTC. PSE and its acquiring private equity investors pushed aside any criticism of the merger being against the public interest and/or uneconomic for ratepayers as "flawed."

Tuesday's split approval carries 78 commitments and conditions the regulators said were to protect utility consumers and the public interest, with WUTC Chairman Mark Sidran and the other supporter, Commissioner Patrick Oshie, emphasizing that the state panel will continue to regulate PSE's natural gas and electric rates, services, facilities and practices as it does now.

The WUTC said that the 78 conditions/commitments detailed in its order "protect customer service, safety, reliability and resource adequacy, including energy efficiency and conservation, support for low-income customers and environmental stewardship [by PSE]." The protections include mandating no rate increases and providing $10 million in rate credits annually during the next 10 years.

There are also required protections against the PSE utility being dragged into other, more risky financial ventures by the private-equity consortium that is led by a North American unit of Australia's Macquarie Capital Group. Another Macquarie-led consortium in mid-2006 purchased another North American utility, Pittsburgh, PA-based Duquesne Light.

The merger consortium is led by a New York City-based unit of the Australian investment firm Macquarie Infrastructure Partners, and includes Macquarie Capital Group, the Canada Pension Plan's CPP Investment Board, British Columbia Investment Management Corp., Alberta Investment Management Corp., and Macquarie-FSS Infrastructure Trust. Collectively, they make up Puget Holdings, the acquiring company.

WUTC's action emphasized that overall the two majority commissioners concluded "the nature and quality of these investors, their multi-billion-dollar equity stake in Puget Energy, their deep pockets, and their commitment to fund PSE's ongoing capital needs all are factors that suggest improved access to capital relative to the status quo [emphasis added by the regulators]."

There was no mention by the state regulators of the current global credit crisis and what, if any, impact it had on their thinking as they weighed filings in this case. The merger already had gained all other major regulatory approvals that it needed: the Federal Energy Regulatory Commission, Federal Communication Commission, U.S. Justice Department, Federal Trade Commission, U.S. Committee on Foreign Investments, and the board of directors and shareholders of Puget Energy.

Local control of PSE will remain under the WUTC regulatory oversight and the commitment of maintaining the local headquarters and management for PSE. A minimum number of local resident's on the Puget Energy utility's board is required in the state regulators' approval.

Among the dissenters,Washington's state Public Counsel filed Aug. 5, 2008 with Washington regulators contending that the proposed settlement does not adequately answer all public interest concerns. Meanwhile, the WUTC held hearings on the question of whether the proposed merger would cause utility consumers harm. Final briefs in the case were filed in September last year.

Puget Energy said in a Securities and Exchange Commission filing Dec. 11 that its consortium of long-term infrastructure investors, Public Holdings LLC, has committed equity and debt financing in place to complete the merger and to provide "significant capital" for PSE's future needs, although at the time it gave the impression it did not expect the state regulatory decision until 2009.

Parties to the now-approved settlement in addition to the WUTC staff, include the Industrial Customers of Northwest Utilities, Northwest Industrial Gas Users, the Energy Project, the Northwest Energy Coalition and the Kroger Co. In addition, the Cogeneration Coalition agreed not to oppose the deal.

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