Investors Warming to Growth Utilities
Want to know where you might invest these days? Just follow the electrons.
Two of the most sophisticated investment firms in America announced deals within the last month to buy electric power companies. Other savvy investors, including Warren E. Buffett, also are interested in
expanding their holdings in the electric utility industry.
What should that tell you?
After all the failure of recent years -- from the Enron Corp. scandal to the California energy crisis to the colossal power blackout in the Northeast last summer -- the electric industry is suddenly being seen as a safe place to put capital.
That’s why Kohlberg Kravis Roberts & Co., the renowned New York-based leveraged-buyout firm, agreed with others last month to buy UniSource Energy Corp., the holding company for Tucson Electric. The price tag: about $3 billion.
Earlier in November, Texas Pacific Group -- a private-equity fund that once saved Continental Airlines -- agreed to snap up Portland General Electric Co. from the bankrupt remains of Enron for $2.35 billion, including debt.
In both cases, the buyers were investing for pension funds and other institutions that recognize how a traditional, regulated utility can be a more stable investment than either the stock or bond markets. In fact, the Dow Jones utilities index -- which is made up of 15 stocks -- has increased 26% in the last year. That compares with an 11% rise for the Dow Jones industrial average.
“Regulators are being careful to allow utilities a decent profit these days,” notes Edward Muller, a Santa Monica energy investor. Their aim is to help ensure that the companies have the wherewithal to invest in equipment and avoid future blackouts.
But it is more than just the prospect of ample earnings that seems, well, so electrifying to big-time investors. What’s also attracting the smart money is the potential for a new round of utility mergers.
The Public Utility Holding Company Act of 1935, or PUHCA, was enacted during the Depression to break up giant electric firms that had come unhinged, causing widespread investor losses at that time. For almost 70 years, the law has prohibited multistate mergers of utilities and imposed other restrictions.
Now, though, there is widespread support for repeal of PUHCA, particularly after the blackout last summer. The thinking in the White House and many quarters of Congress is that repealing the law would encourage the creation of larger companies and fresh investment to upgrade electric transmission and distribution networks.
PUHCA’s repeal was part of the energy bill that died in Congress last month. Repeal is certain to be part of the legislation when it is brought up again in January. If the measure passes, as many expect, the industry is bound to experience a wave of consolidation. Buffett’s MidAmerican Energy Holdings Co., which owns an electric utility in Iowa and gas pipelines in California and elsewhere in the West, has indicated that it would pour $10 billion into the utility industry if PUHCA were nixed.
“Big utilities from Germany and Spain, looking for growth, will want to invest” in the U.S., as well, if PUHCA is repealed, says Mark Williams, a risk-management expert for several energy companies who teaches finance at Boston University.
Attracting the bulk of the investment dollars would likely be “growth utilities” -- a term that, on its face, sounds like an oxymoron but which actually refers to electric companies serving areas with rapidly expanding populations. The quintessential example: FPL Group Inc.’s Florida Power & Light.
Another growth utility is Tucson Electric. When its buyout is completed next year, KKR plans to sell off the nonregulated holdings of UniSource, including a power plant in Mexico and a maker of utility poles. What’s left will be a strongly capitalized electric company -- one likely to attract a takeover bid from a larger utility in a post-PUHCA world.
That would give investors just the kind of jolt they’re looking for.
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James Flanigan can be reached at jim.flanigan @latimes.com.
