Utility, investors seek to sweeten the deal

Puget Energy Inc. and the investors seeking to buy the Bellevue-based utility have offered a package of sweeteners and incentives, including rate credits for customers, in hopes of dampening criticism and winning regulatory approval of the deal.

In testimony filed Wednesday with the state Utilities and Transportation Commission, Puget and representatives of the Australian-Canadian investment consortium said they would offer $100 million in rate credits to the utility's customers over 10 years.

They also said they'll agree to increased quality-of-service requirements and greater commitments to renewable energy, conservation and low-income assistance programs, as well as take steps to reduce risk and increase the financial stability of the utility that serves more than a million electric and about 735,000 natural-gas customers in Western Washington.

Beyond those specifics, they also sought to make the case that leaving Puget as an independent, publicly traded company is riskier than selling it to the consortium, which can provide the capital Puget needs in coming years to keep up with customer growth, maintain its pipes and wires, and line up new sources of energy.

"Turning to the capital markets repeatedly, while continuing on the status quo route, would expose the company's continued financial well-being to very real risks," said Phyllis Campbell, Puget's lead independent director, in her testimony to the UTC. "And a financially weak utility is not to the customer's benefit."

In making that argument, Puget and the consortium hope to counter the opinion of the UTC staff and the Attorney General's Office of public counsel that commissioners should reject the proposed buyout because it imposes greater risk to customers while providing no offsetting benefit.

How far Puget's revised proposal (the original was filed in December) goes toward answering those criticisms could become evident beginning Tuesday, when all parties get together for negotiations not only on the buyout, but also the electricity and natural gas rate-increase proposals the utility also has pending before the UTC.

Eric Markell, Puget's chief financial officer, said those discussions will cover such topics as combining the cases and seeing if separate settlements or a comprehensive agreement can be worked out to present to the UTC. Those talks are scheduled to run through the following week.

"We think we've got a comprehensive program here that addresses the issues raised by the parties that in many cases goes beyond what was suggested or was asked for," Markell said.

The three-member commission is scheduled to begin formal hearings July 28. While Puget is hoping for a decision by early September, the commission isn't under any legal deadline to render a verdict.

"I think the process is going the way I expected it would," said Andrew Chapman, managing director of Macquarie Capital Funds Inc.

Macquarie and other subsidiaries of Australia-based Macquarie Group are among the participants in the consortium seeking to buy Puget. Three Canadian pension funds also are investing.

The consortium proposes to buy Puget's stock at $30 a share.

Intervenors in the case have objected to how much debt the new Puget will take on.

Markell said Puget is going to have to incur more debt whether it's sold or remains independent because of expected growth in its service territory.

"There's adequate cushion between the cash flows available to pay debt and what the interest payments are on the debt," Chapman added. "We're very confident about that." Puget and the investors say they will restrict payments from the operating utility, Puget Sound Energy, to its holding-company parent, Puget Energy, and on to investors, if specific financial targets aren't met.

Chapman also said taking Puget private will make it more financially stable by substituting patient capital for the stock market. "The price of the stock of Puget Energy is significantly affected by quarter-to-quarter and year-to-year developments in the business," he said. Short-term pressures can influence capital expenditures, maintenance spending and service levels. "That's the nature of a public company; you watch your stock price."

The rate credits will come from two sources: $88 million, or $8.8 million a year for 10 years, from the investors accepting a lower rate of return, and $12 million, or $1.2 million a year, reflecting the reduced costs from Puget no longer being a publicly traded company. Details on the credits remain to be worked out. Puget's annual revenue is about $3.2 billion.

The credits were proposed because "there seems to be a unanimous call for an additional quantifiable customer benefit associated with the proposed transaction," said Christopher Leslie, chief executive of Macquarie Infrastructure Partners, in his prepared testimony.

Among other components of Puget's proposals:

Because earlier references to keeping Puget's headquarters in Bellevue for five years left the impression the company might move after that, the company has changed that to "indefinitely," and no move would be made without UTC approval.

Puget said it will add a billing timeliness and accuracy component to the service quality indicators on which its performance is measured and increase the total penalties it can be assessed for not meeting those indicators.

Puget said it will serve 10 percent of its electrical load with renewable sources by 2013 and reach "carbon neutral" status by 2050.