Daily Management Review

With $9 Billion Oncor Deal, Buffett Bets Big On Power


07/08/2017




With $9 Billion Oncor Deal, Buffett Bets Big On Power
Stepping up its pursuit of steady profits from utilities and infrastructure deals, Warren Buffett's Berkshire Hathaway Inc said it has agreed to buy the parent of Texas power transmission company Oncor Electric Delivery Co. for $9 billion.
 
Buffett's Berkshire Hathaway Energy unit will assume control of one of the largest U.S. electricity transmission companies, if the all-cash purchase wins approval from federal and state regulators and a bankruptcy judge.
 
"Buffett views infrastructure bets as a good long-term investment," said Steven Check, president of Check Capital Management Inc in Costa Mesa, California, which invests $300 million of the $1.4 billion it oversees in Berkshire.
 
"With the relatively limited opportunities available to a company of Berkshire's size, investments such as Oncor that are likely to yield 8 to 10 percent annually are acceptable," Check added.
 
The growing prominence of Greg Abel, 55, Berkshire Hathaway Energy's chief executive is highlighted by the acquisition.
 
At the Omaha, Nebraska-based parent company's helm, investors consider him a top candidate to succeed Buffett, 86.
 
Through a network of roughly 122,000 miles (196,000 km) of transmission and distribution lines, Dallas-based Oncor delivers power to more than 3.4 million homes and businesses.
 
Energy Future Holdings Corp, the company Berkshire has agreed to buy out of bankruptcy, owns 80 percent of the company.
 
$431 million of profit in 2016 was posted by Oncor.
 
Because they offer an "essential service" that generates "remarkably steady" demand, utilities generate "recession-resistant" earnings and hence Buffett values such consistency, he told Berkshire shareholders in February.
 
The companies "share a common goal of providing exceptional customer service and a commitment to invest in critical infrastructure," Abel said in a statement.
 
Including wind, generating tax credits that bolster Berkshire's balance sheet, Abel has also been deepening his commitment to renewable energy. HomeServices of America, a big residential real estate brokerage, is also owned by his unit.
 
Contributing $2.29 billion to an overall $24.07 billion in 2016, Berkshire Hathaway Energy typically generates nearly 10 percent of its parent's profit.
 
"Buffett has always had a lot of confidence in Greg Abel, and wouldn't mind putting a nearly unlimited number of businesses under his watch," Check said.
 
Takeover bids by privately held Hunt Consolidated Inc and NextEra Energy Inc. were scuttled in 2016 by the Public Utility Commission of Texas (PUCT), and the Oncor purchase requires approval by the PUCT.
 
In order that it would not assume excess debt from any acquirer, and also not pay out too much cash as dividends, regulators had asked for Oncor to be "ringfenced".
 
Cowen & Co analyst Amer Tiwana wrote in a research report that the approval process is made "a little less cumbersome," because unlike NextEra, "Berkshire might be more willing to leave the ringfence in place and allow restriction on dividends.
 
Because it operates safely and efficiently and has "unlimited capital to fund whatever projects make sense," without the need to pay dividends to its parent, regulators like Berkshire Hathaway Energy, Buffett wrote last year.
 
The Oncor purchase is expected to be closed by Berkshire in the fourth quarter.
 
An equity value of about $11.25 billion for Oncor is implied by the transaction, it said. The transaction's enterprise value was about $18.1 billion, said Kirkland & Ellis, a law firm representing Energy Future.
 
(Source:www.reuters.com) 






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