If Puget Energy CEO Stephen Reynolds and his Australian-led private investment partners are right, their proposed merger will create a "sustainable model" for the energy industry to allow electric and natural gas utilities to come up with staggering new capital funding levels to meet future infrastructure needs to produce, transport and deliver the nation's home and business energy supplies. The deal, announced late last month, does not require any change in the rates of Puget's Bellevue, WA-based utility, Puget Sound Energy (PSE), according to Reynolds.

The level of investment to meet both reliability and global warming concerns in the energy industry, which is being pushed to higher operating standards by state and federal regulators, is what Reynolds called "unprecedented." Thus, he said, PSE thinks it is time to look at a "new model," and the proposed merger is a "marriage that makes infinite sense."

Reynolds and the head of a private investors' consortium led by Macquarie Infrastructure Partners (MIP), Christopher Leslie, held a conference call to explain and answer questions about their proposed new $7.4 billion merger to take PSE private. A lot of the questions related to future rate increases and the degree of independence the utility will have in its operations. Leslie reiterated that his investors take a "hands-off" approach in regard to the management of the firms they acquire.

With the infusion of $5 billion during the next five years for capital investments, PSE has the ability to focus on developing new low-cost, environmentally friendly power sources, without having to develop new sources of funds. The funds will be there, Reynolds said.

As Reynolds explained it, reliability and response to global warming, combined, require billions of dollars in additional capital investment in generation and transmission infrastructure, and as a publicly held company, Puget Energy was forced to spend too much time making sure quarterly earnings matched investors' expectations. Financial performance and investment concerns take time away from honing the utility operations to meet a new set of customer and regulator expectations, he said.

A private investment partner eliminates uncertainty and time-consuming investment work on capital funds while removing the quarter-to-quarter performance pressures, so PSE's management can concentrate on developing the lowest-cost, cleanest sources of energy, Reynolds said.

Two principal Wall Street credit rating agencies, Standard & Poor's Ratings Services (S&P) and Moody's Investors Service, both reacted negatively to the announcement. S&P gave Puget Energy and PSE its "CreditWatch with negative implications" status, signaling the possibility of a future ratings downgrade. Similarly, Moody's said some of the ratings for both the holding company and utility could be reviewed for possible downgrade, citing the merger causing Puget Energy to borrow an added $1 billion in the future.

The proposed deal also carries a regional element to it, since the principal investors that MIP has pulled together are Canadian-based in neighboring British Columbia and Alberta, from which PSE obtains a lot of its natural gas and power supplies.

"The wonderful thing about this transaction is British Columbia and Alberta are our energy partners," Reynolds said. "We swap energy all the time; we buy from them -- 50% of our natural gas comes from Canada, and a good portion of our electricity at certain times of the year can come from that direction. This deal really builds on that intraregional cooperation that affects us as well as the [federal] Bonneville Power Administration [the Northwest's dominant power marketer/transporter]."

Reynolds sees the new deal as not only a model for the industry, but a means of Puget increasing the growing cross-border, north-south access to energy in the West. He called the overall deal an "extremely exciting day" for the PSE utility.

PSE's "new model" as a utility going private is characterized by being more long-term oriented, allowing the utility to avoid having to go to equity markets every few years, and allowing the utility to find "qualified, extraordinary long-term investors," Reynolds said.

Reynolds called the private investors consortium's $30/share offer for existing Puget shareholders "an incredible reward for the patience of those long-term existing public shareholders," and as the deal moves forward he said the consortium's purchase of 12.5 million shares of new equity in the next few months "will help stabilize our balance sheet" as during the next year Puget completes all necessary regulatory filings for the ownership change.

The new model, as Puget Energy sees it, will be good for the regional economy, creating new jobs through the more assured infrastructure development and helping keep rates down, although Reynolds was candid in not promising lower future rates. He only would reiterate that the proposed merger, itself, would not cause a rate increase.

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