Companies continue to embrace the back-to-basics strategy, and investors seem to think that it is paying off.
The CEO Forum: The Ultimate CEOs: David L. Sokol
Chairman and CEO, MidAmerican Energy Holdings Co.
the Williams Cos.] during the financial meltdown of the industry in March 2002. And one of the critical issues for Kern River was the customers on that pipeline. Both the shippers from the Rocky Mountains and the purchasers of the gas in Utah, Nevada, and California desperately wanted the expansion to go forward. Williams at the time was incapable financially of putting it forward, but it was ready to go in to construction. It was a $1.2 billion project. We agreed to go forward and fund it as soon as we acquired [the pipeline from] Williams.
As part of all of that we had an agreement for a 13.25 percent return on equity. Also, I would point out that the pipeline [expansion] came online early, and actually lowered the basis differential by $1 between California and the Rocky Mountains. So, it was hugely beneficial to the customers—both the shippers and the ultimate users of the gas. It’s that kind of infrastructure that needs to be built, not only in natural gas but also in electricity. One can only look at the administrative law judge’s ruling as a bait-and-switch.
Fortnightly: How is it that your return on equity changed from the earlier agreement?
Sokol: We don’t believe that will be allowed to stand. We think it is absolutely an inaccurate ruling. She also took away the tax provisions, which is absolutely inconsistent with FERC policy. But if you do those two things, and if that is going to be FERC policy going forward, we certainly don’t have any interest in investing in pipelines, or in any other FERC-regulated asset because those rates of return do not allow for a fair return to the investor.
Fortnightly: A recent large debt issuance by MidAmerican Energy Holdings Co. had many speculating that it was for more mergers and acquisitions. What type of companies are you looking at?
Sokol: We have grown the business in two ways over the last 15 years. One is internal development of opportunities, whether it’s expansion of pipelines or power plants or distribution systems, and the second method has been acquisition. So, we would continue to be interested in acquisitions of regulated assets to the extent there is a fair price for a good set of assets and we can maintain our risk diversification profile that we have been working toward over the last 10 years.
Fortnightly: There have been various debates recently on the likelihood of so-called “synergies” being achieved from long-distance or noncontiguous mergers as opposed to contiguous mergers. Do you have a view on whether noncontiguous mergers can really achieve economies of scale or synergy? Is contiguous better?
Sokol: I think typically the word “synergy” is overused. We have two jurisdictions that operate next to each other in the United Kingdom. Certain benefits come with the ability to dispatch across those lines since you own two of those utilities versus just one. There are ways to more effectively use crews and vehicles and things of that nature. But realistically those are relatively minor. There is really no reason we