Buffett’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.

MidAmerican Energy Holdings Co.’s purchase of Las Vegas-based NV Energy Inc. (NVE), announced yesterday, would make it the largest U.S. utility owner with 8.4 million customers, according to data compiled by Bloomberg. The Berkshire Hathaway Inc. (BRK/A) unit agreed to pay $23.75 a share, 23 percent more than NV Energy’s $19.28 closing price yesterday, the companies said in a statement.

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 $49.1 billion in cash 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,” MidAmerican CEO Greg Abel said yesterday in an interview. “We see, fundamentally, there will be underlying economic growth in Nevada.”

More Deals

MidAmerican’s move came after a month long decline in utility stocks. After climbing to a five-year high in April, the Standard and Poor’s 500 Utilities Index has dropped 9 percent this month on investor concerns that rising interest rates will make their dividends less attractive.

NV Energy rose 23 percent to $23.62 at the close in New York, the most in 10 years. The company had gained 12 percent in the past year through yesterday, trailing the 20 percent increase for the Standard & Poor’s Midcap Utilities Index. Berkshire rose 1.7 percent to close at a record $172,200.

The deal “could serve to remind investors of the attractive fundamentals underlying the regulated electric utilities,” Sarah Akers, Neil Kalton, Jonathan Reeder and Glen Pruitt, analysts for Wells Fargo & Co. (WFC), wrote in a note to clients today.

The purchase is the largest announced acquisition of a U.S. power company since Duke Energy Corp. (DUK) bought Progress Energy Inc. for $17.8 billion last July. Takeovers paused in the past year as valuations rose and regulators stepped up scrutiny of deals.

“As valuations come off, you might see a little bit more merger and acquisition activity,” Andrew Bischof, a Chicago-based analyst for Morningstar Inc. (MORN), said in an interview yesterday.

Desirable Target

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

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 after reaching a 52-week high of $21.63 on April 30, Paul Patterson, a New York City-based utilities analyst with Glenrock Associates, said in a phone interview yesterday.

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.”

Michael W. Yackira, NV Energy’s CEO, has improved state regulatory relationships and significantly increased free cash flow for shareholders, attributes that probably appealed to Buffett, Bischof said.

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 natural gas-fired plants and transmission lines that will boost cash flow, Bischof said.

MidAmerican’s “renewable energy expertise coupled with their desire to invest capital could be a boon to renewable energy in our state,” Yackira said in a telephone interview.

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

Good Deal

With the deal, the Des Moines, Iowa-based power company gains $875 million in cash flow from NV Energy’s operations and $322 million in annual net income, of which only $151 million was paid in dividends in 2012, Michael Granowski, principal with Bridge Strategy Group, a Chicago-based management consulting firm, said in an e-mail.

“Combine this with the prospect for potentially significant tax benefits from repowering some of their coal facilities with renewables, and it looks like a pretty good deal,” Granowski said.

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.

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.

State Approval

State regulators may seek concessions on job safety and rates and insist merger savings be shared with customers, Shahriar Pourreza, a New York-based Citigroup Inc. analyst, wrote in a note to clients yesterday.

MidAmerican’s cheaper credit and Berkshire’s willingness to pay cash with no financing complications will make the deal “an easier sell” than usual for regulated transactions, Pourreza wrote.

Yackira said he expects that MidAmerican will keep NV Energy’s management team intact and the Nevada utility will be given the autonomy to shape strategic and investment decisions. The company’s headquarters will remain in Las Vegas.

“It has not been the M.O. of MidAmerican to come in and clean house and have layoffs,” he said. “In fact the opposite is true.”

PacifiCorp Purchase

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.

MidAmerican also delivers electricity to 3.8 million homes and businesses in the U.K., according to its website.

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.

Lazard Ltd. (LAZ) 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.

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

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

To contact the editors responsible for this story: Dan Kraut at dkraut2@bloomberg.net; Susan Warren at susanwarren@bloomberg.net

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