business

Warren Buffett's Current Passion

The acquisition of PacifiCorp may well signal the Oracle of Omaha's growing interest in power outfits. Strong growth potential explains why

By Adrienne Carter

Warren Buffett and his buddies at Berkshire Hathaway (BRK.A ) have finally found a use for that $43 billion in cash they've been hoarding. On May 24, MidAmerican Energy Holdings -- in which Berkshire has an 80.5% stake -- announced it would buy gas-and-electricity company PacifiCorp from ScottishPower (SPI ) for $9.4 billion.

The deal, expected to close in the next year or so, will add 1.6 million customers to the Des Moines-based MidAmerican, bringing annual revenues to $10 billion. MidAmerican will pony up $5.1 billion in cash $4.3 billion in debt and preferred stock to pay for PacifiCorp.

Back in 1999, ScottishPower paid $11.8 billion for the company. "This is a good long-term business for us to be in," MidAmerican CEO David Sokol said in a conference call. "We will be the last owners of PacifiCorp, and we don't have any intention of getting out of these businesses."

CRACKLING ENERGY.

  At his annual confab on Apr. 30, Buffett lamented a lack of investment ideas to shareholders. But in recent months, he seems to have found a number of opportunities. Anheuser-Busch (BUD ) revealed on Apr. 21 that Berkshire was a significant shareholder. Then in early May, Berkshire's National Indemnity said it would buy Medical Protective from General Electric (GE ) for $825 million.

The latest acquisition of the Portland (Ore.)-based PacifiCorp is Buffett's largest since he picked up General Re back in 1998. And Buffett indicated he is sniffing around the energy sector for other opportunities.

In the wake of deregulation, power companies have experienced a wave of consolidation. And the trend has picked up speed lately, given the volatility of energy prices. In December, Exelon (EXC ) said it would merge with Public Service Enterprise Group, forming an outfit with $27 billion in revenue. Cinergy (CIN ) and Duke Energy (DUK ) announced a similar deal early this month.

"Large companies can better handle the ups and downs of the markets," says Daniele Seitz, an analyst with Maxcor Financial. "It is likely there will be just a small group of major generators in the future."

GOLDEN WATERS.

  PacifiCorp's appeal is obvious. It's a major player in the quickly expanding western region, particularly Utah, one of the fastest-growing states. Utah's rising population is boosting power demand by 4% a year. That's a huge growth opportunity for MidAmerican.

What's more, many of the markets in which PacifiCorp operates remain largely unregulated, which helps make operating income more predictable. Plus, PacifiCorp is one of the industry's low-cost energy providers, boasting significant hydro assets. Some 15% of its capacity comes from hydroelectric sources -- considered some of the cheapest and most environmentally friendly means of generating power. That's an especially good business to be in today, given rising energy costs.

Still, dependence on hydroelectric sources also caused problems for PacifiCorp in recent years. Weak precipitation and snowpack in the Northwest has forced PacifiCorp to buy energy on the wholesale market rather than rely only on its supply, says Morningstar stock analyst Paul Justice. That's costly and has hampered earnings. PacifiCorp's return on equity of 8% is significantly below the 10.5% or so regulators have established it can return. In the latest year, profits at the company fell about 12%.

HAPPY RETURNS?

  Enter Buffett, whose war chest should serve as a major boon for the company as it launches a massive capital investment effort. The utility needs billions to upgrade facilities and build new ones.

"We've embarked on a program to enhance reliability and stability," Judi Johansen, PacifiCorp's president and CEO, said in a conference call. "We are a very capital-intensive company and, obviously, what MidAmerican brings to PacifiCorp is a solid, stable funding base to move forward on this capital-investment plan."

If PacifiCorp fits the pattern of Buffett's other acquisitions, he's likely to see a nice return on this investment.

Carter is a correspondent for BusinessWeek in Chicago

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