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The CEO Forum: The Ultimate CEOs: David L. Sokol

Chairman and CEO, MidAmerican Energy Holdings Co.

Fortnightly Magazine - June 2006

and you currently manage a privately held utility. What are the advantages and disadvantages of being private?

Sokol: Private is much better for this industry for two reasons. Number one, this is a long-term industry. You constantly have to be looking 10 to 20 years down the road, at the least, because every investment we make, whether it’s a transmission system or power plant, these assets have useful lives of a minimum of 20 years and many cases 50 years. And they are very capital intensive. So, we always have to be looking down the line a long ways where the public markets don’t reward that much.

That was probably my biggest frustration of running an energy company in the public markets. Few people have the opportunity, if you will, to have a Berkshire Hathaway ownership, where capital availability is not an issue. So, the public markets for many utilities do provide access to capital, but from my perspective this is 10 times better than being public. The other thing is it allows us to not be driven by short-term thinking in a broad array of arenas and to really sit down with customers, regulators, and political bodies, and find the answers that work the best for those customers, that community, or that state. It might not necessarily have the best short-term pre-tax impact on something. But on an economic basis, it’s better for everyone that we go in a certain direction and being private gives you flexibility to craft the best solution for your jurisdiction or your customers and not have to worry about the public market saying, “Oh well, gee, that’s really going to benefit you in three years. That’s not soon enough and therefore, we are going to punish you.” I think being private is enormously positive.

Fortnightly: Berkshire Hathaway is famous in having the lowest cost of capital in the world when making acquisitions, as the capital is derived from the insurance sector. What is your view of the use of leverage by private-equity firms to take utilities private?

Sokol: I think there are two problems with private equity in the utility space or the regulated utility industry. Excess leverage is negative, and the fact equity funds typically want to cash out of their investments in three years, or no more than five years, is a problem. These are essential assets in the community and [represent] economic growth customers rely on. If they get over-levered and there is a recession or a problem, who ultimately bears that pain? It’s going to be the customers.

Regulators and customers like to know who is going to own these assets. Are they going to be consistently managed in a way that is protective of their interests, or are they going to change hands constantly and use the next financial gimmick to try to benefit a shareholder, but perhaps put the customer or the regulator at risk?

This is an essential industry [where] the lights have to come on and the price has to be reasonable. I’m not sure the essential nature