zzBuffett’s MidAmerican Expands West With $5.6 Billion Deal

Warren Buffett’s energy unit will consolidate a western expansion begun in 2005 with its planned $5.6 billion acquisition of Nevada’s largest utility, potentially reigniting takeovers in the sector.

The MidAmerican Energy Holdings Co. subsidiary of Buffett’s Berkshire Hathaway Inc. (BRK/A) will become the largest U.S. utility owner based on customer accounts that will swell to 8.4 million with its purchase of Las Vegas-based NV Energy Inc. (NVE), according to data compiled by Bloomberg. The Berkshire unit will pay $23.75 per share, 23 percent more than NV Energy’s $19.28 closing price yesterday, the companies said in a statement.

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Berkshire Hathaway Chairman Warren Buffett

Daniel Acker/Bloomberg

Berkshire Hathaway Inc. Chairman Warren Buffett has been boosting investments in capital-intensive businesses as he seeks to allocate funds at his Omaha, Nebraska-based company, which had a cash pile of $49.1 billion as of March 31.

Berkshire Hathaway Inc. Chairman Warren Buffett has been boosting investments in capital-intensive businesses as he seeks to allocate funds at his Omaha, Nebraska-based company, which had a cash pile of $49.1 billion as of March 31. Photographer: Daniel Acker/Bloomberg

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May 29 (Bloomberg) -- MidAmerican Energy Holdings Co., the power-production unit at Warren Buffett’s Berkshire Hathaway Inc., agreed to buy NV Energy Inc. for about $5.6 billion in cash to expand in Nevada. (Source: Bloomberg)

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Buffett, Berkshire’s chief executive officer and chairman, has been boosting investments in capital-intensive businesses as he seeks to allocate funds at his Omaha, Nebraska-based company, which had a cash pile of $49.1 billion as of March 31. MidAmerican will have assets of about $66 billion after the completion of the deal, which is expected in the first quarter of next year, according to the statement.

“We’re investing in a management team we believe in, we’re investing in quality assets,” said MidAmerican CEO Greg Abel.

“We see, fundamentally, there will be underlying economic growth in Nevada,” he said.

NV Energy CEO Michael W. Yackira has improved state regulatory relationships and significantly increased free cash flow for shareholders, Andrew Bischof, a Chicago-based analyst for Morningstar Inc., said in an interview.

More Deals

MidAmerican’s move came after a month-long decline in utility stocks that continued yesterday, pulling NV Energy shares down 2.4% at the close in New York.

“As valuations come off, you might see a little bit more merger and acquisition activity,” Bischof said.

Since climbing to a five-year high, Standard and Poor’s utility stocks have fallen almost 10 percent this month on investor concerns that rising interest rates will make their dividends less attractive.

The purchase is the largest announced acquisition of a U.S. regulated electricity company since Duke Energy Corp. (DUK) bought Progress Energy Inc. for $17.8 billion last July. The industry earlier saw a wave of consolidation as investors anticipated $1.5 trillion to be spent on infrastructure upgrades from 2010 through 2030 as generation shifts from coal power to cleaner natural gas and renewable energy. Transactions paused in the past year as valuations rose and regulators stepped up scrutiny of deals such as Duke’s on behalf of consumers.

Desirable Targets

MidAmerican’s transaction “has the potential to revive interest in the utility group when a Berkshire-affiliated entity is looking to make a deal,” Paul Patterson, a New York City-based utilities analyst with Glenrock Associates, said in a phone interview.

The Berkshire unit had targeted renewable energy deals after deeming utility valuations too high, Chief Financial Officer Patrick Goodman said in a Nov. 13 interview. “As a cash buyer, we will be looking at utilities if pricing comes in a bit,” he said.

NV Energy may have become a more desirable target as its shares declined 11 percent after reaching a high this year of $21.63 on April 30, Patterson said.

“The utility industry has been relatively overvalued, so there has been a little bit of a correction,” said Morningstar’s Bischof.

Earlier this week, Teco Energy Inc. (TE), a Tampa, Florida-based utility, said it agreed to buy New Mexico Gas Co. from Continental Energy Systems LLC for $950 million.

Morningstar has viewed MidAmerican as a potential acquirer because Buffett has a favorable view of the industry, Bischof said.

Staying Rich

Buffett, 82, has said that businesses like utilities have earnings power even under adverse economic conditions and can provide fair returns on capital as long as they make investments in infrastructure to meet customer needs. Owning utilities is “not a way to get rich,” he said at a meeting of U.S. state regulators in 2006. “It’s a way to stay rich.”

MidAmerican reported net income of $444 million in the first quarter, 17 percent more than a year earlier.

NV Energy has been boosting its purchases of electricity from solar plants and wind farms to meet a state requirement to get one-fourth of its power from renewable sources by 2025. The company also has been investing in building gas-fired plants and transmission lines that will boost cash flow, Bischof said.

Rebounding Economy

Nevada’s economy has shown signs of a rebound after a six-year slump. Residential construction permits rose 47 percent last year after declining since 2005. NV Energy said earlier this month first-quarter net income rose 76 percent to $21.5 million compared with a year ago.

“Buffett was looking for a strong regulated utility with a strong cash flow and NV Energy fits the bill for that,” Bischof said.

The purchase will need the approval of the Public Utilities Commission of Nevada and the Federal Energy Regulatory Commission, as well as NV Energy shareholders, according to a regulatory filing. It’s not likely to face an extended review because NV Energy operates in only one state, Glenrock’s Patterson said.

When the NV transaction is completed, “We will have the opportunity to combine MidAmerican’s expertise in renewable energy with Nevada’s vast renewable resources for the benefit of our customers and our state,” Yackira, NV Energy’s CEO, said in yesterday’s statement.

Western Expansion

Berkshire agreed in 2005 to acquire PacifiCorp, which provides electricity and gas to 1.8 million homes and businesses in four states bordering Nevada: California, Oregon, Idaho and Utah, as well as Wyoming and Washington. Its MidAmerican Energy utility has electricity and gas customers in Iowa, Illinois, Nebraska and South Dakota.

Duke Energy, based in Charlotte, North Carolina, is currently the largest U.S. utility owner with about 7.8 million customers.

NV Energy, with 1.3 million electric and gas customers, was formed in 1999 by the merger of Nevada Power and Sierra Pacific Resources. The company traces its roots back to 1906, when a predecessor was the first to provide electricity to Las Vegas and the first to distribute power from the Hoover Dam.

The company has gained 12 percent in the past year, trailing the 20 percent climb for the Standard & Poor’s Midcap Utilities Index. The announcement was made after the market close. NV Energy shares rose 23 percent in after-hours trading.

Lazard Ltd. provided financial advice to NV Energy and Sidley Austin LLP, Woodburn and Wedge, and Hogan Lovells were its legal advisers. Gibson, Dunn & Crutcher LLP provided legal advice to MidAmerican.

To contact the reporters on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net; Mark Chediak in San Francisco at mchediak@bloomberg.net; Julie Johnsson in Chicago at jjohnsson@bloomberg.net