Microsoft's Gates Looks to Energy

Bill Gates, top right, founder of Microsoft Corp, built his fortune on company stock, but his holdings now include the Four Seasons luxury hotel chain, above left, and Six Flags amusement parks. The Six Flags outside Dallas features a ride called The Flashback, above.
Bill Gates, top right, founder of Microsoft Corp, built his fortune on company stock, but his holdings now include the Four Seasons luxury hotel chain, above left, and Six Flags amusement parks. The Six Flags outside Dallas features a ride called The Flashback, above. (Six Flags Over Texas Via Associated Press)
By Steven Mufson
Washington Post Staff Writer
Saturday, November 4, 2006

Investing billions of dollars for Bill Gates without attracting a lot of attention is a bit like tiptoeing an elephant through a crowded office, but Cascade Investments LLC has managed to go little noticed in recent years while channeling investments for the Microsoft Corp. chairman.

The most unwelcome attention it has received was for trying to avoid attention -- in 2004 Gates paid the government a $800,000 penalty to settle charges for neglecting to report investment holdings that had crossed the Securities and Exchange Commission threshold for disclosure.

News leaked out yesterday that Gates's personal investment firm had agreed to stick a toe a bit further into the energy business. Though Cascade did not return phone calls, PNM Resources Inc., a New Mexico utility, revealed that the two had agreed to become equal partners in a new unregulated electric power-generation joint venture.

In a conference call yesterday, PNM chief executive Jeff Sterba said his company would transfer some or all of its unregulated power plants into a new venture called EnergyCo Ltd. and that Cascade would provide matching values of cash. Neither Cascade nor PNM said how much money would be involved, but PNM's unregulated power plants are worth $700 million or more, judging from the cost of building or acquiring them.

"The purpose of the joint venture is to accelerate the growth of our unregulated operations," Sterba said. "The challenge will be how does that cash get put to work."

It's a long way from the software business, and that's part of the idea. Gates built his fortune, and the fortune he gave to the Bill and Melinda Gates Foundation, on Microsoft stock. Cascade's job has been to diversify those holdings.

Earlier this year, Cascade paid $84 million for preferred convertible shares of Pacific Ethanol Inc., a publicly traded ethanol producer. That is a fast-growing industry and it has captured the imagination of many West Coast high-technology financiers.

According to SEC documents, at the end of June, Cascade's biggest positions included $1.35 billion worth of Canadian National Railway Co., $731.3 million worth of solid-waste management firm Republic Services Inc., $375.4 million worth of Grupo Televisa SA and $371.2 million worth of Berkshire Hathaway Inc., which is run by Gates's close friend Warren Buffett.

Cascade has stakes in PNM Resources, broadcaster Fisher Communications Inc., Four Seasons Hotel Inc., diversified utility firm Otter Tail Corp. and theme-park operator Six Flags Inc. In most of those companies, Cascade is the largest or second-largest shareholder. It may have invested in other stocks, but if those holdings amount to less than 5 percent of a company's outstanding shares Cascade does not need to disclose them.

Investment bankers who have worked with Cascade say that part of the appeal of working with the managers of Gates's money is that Gates is looking for long-term investments. That makes them different from many private equity firms, which look for big returns and early exits.

"They have a longer-term horizon than many other investors in private equity space," said one investment banker.

The manager of Cascade is Michael Larson, who did not return a phone call yesterday. (The person who answers the phone at Cascade does not identify the firm; she simply says "investments.") Larson also helps manage the portfolio of the Bill and Melinda Gates Foundation.

Larson has worked for Gates since 1994. According to a Fortune magazine article, he is the son of an industrial engineer who grew up in North Dakota and Albuquerque, where PNM has it headquarters. He went to Claremont College in California and got an MBA from the University of Chicago at age 21, the magazine said in a 1999 piece. He worked for Arco and then for Putnam Investments in Boston.

His investing style is not flashy. He negotiated personally with PNM Resources, and he does everything from pick investment opportunities to vote Cascade shares.

He has been buying shares of electric utilities for more than two years. Cascade owns 6.5 million shares, or 9.4 percent, of the outstanding shares of PNM Resources. Its stake is worth about $188 million.

The new venture with PNM should be able to take advantage of the deregulation of the utility industry. Depression-era legislation had placed restrictions on utility ownership and for decades it was a dull but dependable business. State regulatory commissions set rates of return on their investments to moderate the bills for homeowners and businesses.

But in the 1990s and in 2005, new legislation and regulatory rulings made it easier for investors in power generating plants to sell power into regional grids for the highest possible price.

Unlike a regulated utility, which needs the approval of state regulators to raise fuel or transmission rates, the new joint venture will have no guaranteed rate of return but will be able to sell electricity to industries, commercial customers or utilities at whatever price the market will bear.

PNM has regulated-utility customers in New Mexico and Texas. In New Mexico, regulators have insisted that PNM maintain enough of its own generating capacity to supply customers.

But PNM has interests in other plants and it sells their output. Those interests include one-third of a natural-gas-fired plant in Luna, N.M.; 100 percent of a small gas-fired plant in Lordsburg, N.M.; a large coal-fired plant in Twin Oaks, Tex., that it bought for $480 million; and a 10 percent stake in a three-unit nuclear plant in Palo Verde, Ariz. Altogether, PNM's interests in those plants amount to 695 megawatts of output.

But PNM, like many utilities, has limited financial ability to expand.

That's where Cascade came in. Last year, it invested $100 million in PNM Resources equity-linked securities to help fund the acquisition of TNP Enterprises of Fort Worth. And it was ready to do more.

PNM chief executive Sterba said, "The rate at which this [venture] unfolds solely depends on the kinds of transactions we find in the market." He added, "the financial flexibility of this venture is broader than what you typically see."

But then, the typical venture doesn't have Bill Gates as a partner.

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