Commentary: Berkshire’s Patience Rewarded in Oncor

(BRK.A), (BRK.B)

With news that Berkshire Hathaway is acquiring Texas utility Oncor, Warren Buffett has once again shown that he is in the market for big acquisitions that produce solid, dependable revenue.

The all-cash consideration for reorganized EFH is $9 billion implying an equity value of approximately $11.25 billion for 100% of Oncor and is subject to closing conditions, including the receipt of required state, federal and bankruptcy court approvals. The transaction is currently expected to be completed in the fourth quarter of 2017.

Buffett has certainly been patient in pursuing this Texas-sized prize, and if successful, would mean he was able to acquire one of the biggest power-transmission companies in the United States.

Back in September 2014, Berkshire Hathaway Energy and several other energy companies, including NextEra Energy and Hunt Consolidated, signed confidentiality agreements for the purpose of exploring the acquisition of Oncor, which was up for auction due to the April 2014 bankruptcy of electric utility Energy Future Holdings.

Energy Future Holdings went under after being burdened with $40 billion in debt from a 2007 leveraged buyout.

Bankruptcy Drama

Over the past two years, while Oncor went through the bankruptcy process, it repeatedly looked like Berkshire was on the losing end in the pursuit of the utility. It was too bad, as it was the perfect fit for Berkshire, as it continues to build it energy company portfolio.

However, the proposed deal comes because the Public Utility Commission of Texas (PUCT) ended up rejecting NextEra Energy’s deal to buy Oncor, opening the door once again for an offer from Berkshire.

A Texas-Sized Energy Asset

Oncor is a quite a prize. The company is a regulated electric transmission and distribution service provider that serves 10 million customers across Texas. The company has the largest distribution and transmission system in Texas; with approximately 122,000 miles of lines and serving approximately 10 million Texans across the state.

Oncor is an excellent fit for Berkshire Hathaway, and we are pleased to make another long-term investment in Texas – when we invest in Texas, we invest big!” said Warren Buffett, chairman of Berkshire Hathaway. “Oncor is a great company with similar values and outstanding assets.”

Greg Abel, Berkshire Hathaway Energy chairman, president and CEO, said, “This partnership combines the strengths of two companies that share a common goal of providing exceptional customer service and a commitment to invest in critical infrastructure that will make the Texas energy grid even stronger and more reliable.”

“By joining forces with Berkshire Hathaway Energy, we will gain access to additional operational and financial resources as we continue to position Oncor to support the evolving energy needs of our state,” said Bob Shapard, CEO of Oncor. “Being part of Berkshire Hathaway Energy is a great outcome for Oncor. Oncor will remain a locally managed Texas company headquartered in Dallas, committed to the communities we serve, and our customers will continue to receive the safe and reliable service they have come to expect from our dedicated team of employees.”

Effective upon closing of the transaction, Bob Shapard will assume the role of executive chairman of the Oncor Board, and Allen Nye will assume the role of CEO of Oncor. “We are excited to begin the regulatory approval process as this transaction has significant support across our key stakeholders,” Nye said. “The stakeholders are eager to obtain a great outcome for Texas.”

“We are pleased to be working with Texas and stakeholders to ensure Oncor continues to be a strong electric transmission and distribution company. Oncor is an exceptional company with great employees and an excellent management team,” said Abel.

Energy Transmission is Great ROE

Transmission lines have been high on Berkshire Hathaway Energy’s wish list of late because they are a great way to put Berkshire’s huge insurance float to work for a high return with very low risk.

The AltaLink Example

In April 2014, BHE made a $2.9 billion purchase of Canadian company AltaLink from SNC-Lavalin Group Inc. The acquisition got the company the transmission lines for Calgary, Alberta, and gives it an 8.75-percent after-tax return on equity, with consumers picking up 100-percent of the tab for any new transmission lines.

Like AltaLink, the acquisition of Oncor will be a perfect fit for Berkshire Hathaway Energy, and with $935 million in operating revenues and $73 million in net income in the quarter ending March 31, Oncor will put a portion of Berkshire’s over $90 billion in cash to good use.

Growing Berkshire’s Energy Business

Berkshire Hathaway Energy currently has over $70 billion in assets, including one of the largest portfolios of renewable energy in the world.

Energy sector businesses made up 9.5 percent of Berkshire Hathaway’s earnings in 2016.

Now, it looks like Buffett’s patience has been rewarded, and Oncor will help Berkshire pass the $100 billion in energy assets mark.

© 2017 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.