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Alberta's Sovereign Fund Party to U.S. Utility Buyout

With a vow to make the most of natural gas wealth before depletion dries up the gravy train, the Alberta government is emerging as an international private equity investor with a taste for energy niches.

The province's fledgling sovereign fund, Alberta Investment Management Corp., has rapidly spread its wings to the Pacific Coast of the United States by participating in a US$7.4 billion takeover of Washington state's principal power and gas utility.

The Crown corporation, known as AIMCo, partnered with federal, British Columbia and private counterparts on an offer that shareholders of Puget Energy voted to accept earlier this month (see NGI, April 21). The Alberta operation is still too young to have a chief executive but already follows standard private equity practice of only disclosing as much about its practices as publicly traded entities involved in deals are compelled to reveal.

"There really isn't a lot of political involvement in the transaction," Alberta Treasury spokesman Mike Berezowsky said after the deal was made with no announcements or other fanfare by the Edmonton-based Crown corporation or the provincial cabinet.

The size of AIMCo's commitment and ownership share in Puget were not disclosed. The Washington takeover syndicate also included Australian investment bank Macquarie Capital Group, the Canada Pension Plan Investment Board and B.C. Investment Management Corp.

The Puget deal was AIMCo's first entry into the United States but its third move into energy concerns. Barely more than three months after officially opening for business, AIMCo has also scooped up ownership interests in Edmonton-based oilsands earth mover KMC Mining Corp. and Calgary waste management firm CCS Energy Services.

As in the Washington case, secretive private equity syndicates made the Alberta investments. AIMCo has only acknowledged participation with Internet postings of announcements by acquisition partners or targets.

KMC, a mainstay contractor with thousands of employees in bitumen mining north of Fort McMurray, AB, is a private Edmonton family firm and kept confidential the value and ownership changes of a March deal involving four investment houses, including the Alberta Crown corporation.

CCS, operator of a 3,000-employee gas- and oilfield waste disposal network, was converted from an income trust into a private firm in a C$3.5 billion (US$3.4 billion) takeover. AIMCo and its BC counterpart were among seven financial organizations in on the Calgary deal.

The private equity houses disclose even less about plans for the future of acquisitions than the deals. But AIMCo's chairman, retired Toronto-Dominion Bank chief executive Charles Baillie, has signaled that the Alberta operation will follow the field's standard pattern: buy industrial enterprises for bargain prices at low points in market cycles, as "alternative assets" to conventional government deposits in shares, bonds and real estate; run and expand the acquisitions profitably; then sell for capital gains as going concerns or in pieces during economic highs.

At a rare public appearance to introduce AIMCo to Calgary business leaders, Baillie declared that the international credit crisis left by the collapse of the U.S. housing bubble has made financial markets ripe for the Alberta operation's C$70 billion (US$69 billion) in various provincial government accounts. The financial resources include the Alberta Heritage Fund for gas and oil revenue surpluses. "As long as you have the gumption, this is an ideal time to be going into solid projects where there are fewer buyers than there were before," the Crown corporation chairman said. "I would hope in five years from now you would see that we have a much higher content in alternative assets."

The financial syndicate drove a hard bargain in the Puget takeover, the Washington utility told its shareholders in a proxy circular. After initially offering up to US$33/share, the Australian and Canadian private equity syndicate cut the price by 9% to $30 as the financial crisis spread and other potential buyers dropped out of the bidding, the report disclosed.

Puget, a 2,600-employee utility based in the Seattle suburb of Bellevue, WA, emerged as a potential takeover target in mid-2007 by seeking financial backers for about US$6.4 billion in planned expansions of power and gas services for a customer list 1.8 million names long and growing. The gas and power distributor's franchise area features U.S. business stars such as Boeing, Microsoft, Costco, Starbucks and

Puget's annual net income could nearly double to US$324 million by 2013 -- but only if the utility can fund added gas and power services for projected population and industrial growth in its 6,000-square-mile service territory, said the proxy voting report to shareholders.

AIMCo participates in private equity takeovers at arm's length from the government but is accountable for its results, Berezowsky said. Supervision includes investment guidelines, access to the books for the provincial auditor-general and performance reviews by the legislature's Heritage Fund committee, the Alberta Treasury spokesman said.

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