Utilities Thankful for Mergers

Major utility assets -- and even entire utilities -- have become hot items this holiday season.

In recent weeks, buyers have begun aggressively shopping for bargains in a utility sector that only last year resembled the land of misfit toys. They have spent billions of dollars -- and intend to spend billions more -- on big-ticket items that once seemed destined for the lowly discount bin.

In mid-November, private investors backed by Texas Pacific Group agreed to pay $2.35 billion for a struggling Portland utility owned by bankrupt Enron. Then, less than two weeks later, a second investor group led by Kohlberg Kravis Roberts stepped up with a generous bid on a utility that's already on the mend. KKR offered $3 billion -- or a 30% premium -- for UniSource Energy (UNS), a small-cap utility that was flirting with bankruptcy a decade ago.

In the meantime, big value investor Warren Buffett has promised to spend up to $15 billion to expand his firm's utility holdings if lawmakers pass an energy bill that allows more consolidation in the industry. The proposed repeal of the Public Utility Holding Company Act, or PUHCA, is viewed by some as the biggest, although least contested, component of a sweeping energy bill that is currently stalled in Congress.

"As long as PUHCA remains on the books, a single fund can likely purchase only one" utility, Power Insights analyst Maurice May explained this month. "But there are many funds. ... As a result of two deals in two weeks, we believe a trend may be emerging -- with or without PUHCA repeal -- for investor groups to acquire utilities."

Damaged Goods

Private investors are paying about $1 billion less than Enron ponied up for Portland General Electric (PGB) seven years ago. But they're also getting damaged merchandise.

Portland Electric last year posted a "miserable" 5.9% return on equity, May pointed out. And the utility -- which serves nearly half of Oregon's population -- still faces big challenges.

"New management will have its work cut out for it to rebuild relationships with regulators and customers and restore the company to normal profitability," May wrote.