By Dana Mattioli, Nicole Friedman and Peg Brickley
Warren Buffett's Berkshire Hathaway Inc. struck a deal to buy
one of the country's biggest power-transmission companies,
cementing electricity as one of the conglomerate's largest
businesses.
Berkshire said it will buy bankrupt Energy Future Holdings Corp.
for $9 billion in cash, giving Mr. Buffett its Texas-based Oncor.
Including debt, the deal has an enterprise value of about $18
billion, according to a person familiar with the matter.
The acquisition, which The Wall Street Journal had reported was
imminent on Thursday, would be one of Berkshire's largest ever and
its biggest since the $32 billion purchase of Precision Castparts
Corp. in 2016.
As part of Berkshire, Oncor would expand the portfolio of Greg
Abel, the 55-year-old chief executive of Berkshire Hathaway Energy.
Mr. Abel is considered a leading candidate to succeed Mr. Buffett
as CEO of Berkshire.
Oncor is owned by Energy Future, formerly TXU, which was the
subject of the biggest leveraged buyout on record in 2007. Laden
with debt, Energy Future filed for bankruptcy protection in
2014.
Oncor would mesh well with Mr. Buffett's energy ambitions.
Berkshire Hathaway Energy, formerly known as MidAmerican Energy
Holdings Co., contributed about 9.5% of Berkshire Hathaway's
earnings of $24.07 billion last year. Berkshire Hathaway Energy
said it is the second-biggest utility in the U.S. by 2016 net
income, serving customers in 18 western and Midwestern states as
well as in the U.K. and Canada.
Mr. Buffett has lauded his utilities businesses as investments
that require routine reinvestment but also generate consistent
returns. In addition to utilities, Berkshire's businesses include
insurers and a railroad, and it also makes large stock
investments.
Utilities are also considered safe investments by ratings firms,
helping support Berkshire's overall credit rating. And the energy
unit receives tax credits for its investments in renewable energy
that it can apply to the conglomerate's massive balance sheet.
"We will continue to buy and build utility operations throughout
the world for decades to come," Mr. Buffett wrote in his 2014
letter to shareholders.
Oncor is an electricity mover, transmitting power over 121,000
miles of lines across the largest electrical-distribution network
in Texas, according to the company.
Energy Future has spent the past three-plus years in one of the
largest-ever bankruptcy proceedings. KKR & Co., TPG and Goldman
Sachs Group Inc.'s private-equity arm led the $32 billion takeover
of TXU, which became Energy Future. When the deal was announced in
2007, the buyers were betting that natural-gas prices would rise,
but they tumbled instead amid a boom in shale-gas production.
The drop in natural gas caused electricity prices to fall in
Texas, resulting in billions of dollars of losses for Energy Future
after it took on massive debt in the buyout.
Texas regulators, worried about what would become of part of the
state's electricity backbone in the hands of private-equity owners,
had insisted on shielding Oncor from the financial trouble that was
to push Energy Future into chapter 11 bankruptcy protection.
Mr. Buffett has dealt with Energy Future before, but his past
experience with the company wasn't a success. Berkshire spent $2.1
billion in 2007 on high-yielding Energy Future Holdings bonds. It
sold the bonds in 2013 and lost $873 million pretax on the
investment, Mr. Buffett said in his 2013 letter to
shareholders.
"Most of you have never heard of Energy Future Holdings.
Consider yourselves lucky; I certainly wish I hadn't," Mr. Buffett
wrote in the letter. In a prior letter, he said he had "totally
miscalculated the gain/loss probabilities when I purchased the
bonds."
An Oncor purchase would be the acquisition of a business rather
than a financial investment.
Energy Future has been trying to sell its 80% stake in Oncor,
but Texas regulators have stymied attempts at deals by Hunt
Consolidated Inc. of Texas and Florida's NextEra Energy Inc.,
leaving the company mired in bankruptcy. Berkshire was also a
contender.
Texas regulators said the Hunt-led deal included too much
financial engineering to suit them, while NextEra was rejected for
insisting on overriding much of the protections that prevented
Energy Future from imposing excessive debt on Oncor, and guaranteed
the unit kept a separate board of directors.
CreditSights analyst Greg Jones said the restrictions were
unlikely to be an issue with Berskshire. "Berkshire will likely go
to the regulators hat in hand and say, 'What can we do for you to
make this happen,' rather than other utilities that were trying to
say, 'It's our way or the highway,'" he said.
Berkshire Hathaway Energy doesn't pay dividends to investors,
which makes it popular with state regulators, Mr. Buffett has said
in shareholder letters.
Terry Hadley, spokesman for the Public Utility Commission of
Texas, which was instrumental in blocking the two prior deals for
Oncor, declined to comment on the regulatory prospects.
Last year, Mr. Buffett closed his largest deal ever when
Berkshire bought industrial company Precision Castparts. The
billionaire investor also has joined forces with Brazilian
private-equity firm 3G Capital Partners LP to help create a global
food empire, merging Kraft and Heinz and making an unsuccessful
attempt to buy consumer goods giant Unilever PLC.
An Oncor deal would still leave Berkshire with plenty of cash to
spend. The conglomerate held $96.5 billion in cash as of March 31.
Mr. Buffett has said he likes to keep a minimum of $20 billion on
hand in case of unexpected insurance losses.
Last month, Berkshire made two smaller investments, rescuing
struggling Canadian mortgage lender Home Capital Group Inc. and
buying a stake in real-estate investment trust Store Capital
Corp.
Write to Dana Mattioli at dana.mattioli@wsj.com, Nicole Friedman
at nicole.friedman@wsj.com and Peg Brickley at
peg.brickley@wsj.com
(END) Dow Jones Newswires
July 07, 2017 01:00 ET (05:00 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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