Berkshire Wastes No Time Wooing Texas to Close Oncor Deal

  • Berkshire promises independent board, ring-fencing measures
  • Texas last week rejected NextEra’s $18.4 billion bid for Oncor

Berkshire After Buffett

Warren Buffett’s Berkshire Hathaway Inc. is wasting no time trying to win over Texas regulators in its bid for Oncor Electric Delivery Co., the state’s largest electric-transmission operator.

Berkshire announced Friday that it’ll buy Oncor in a deal said to be valued at about $17.5 billion. And the company is already promising measures that’ll shield Oncor from potential bankruptcy at other units and an independent board with sole authority over dividends, an emailed document from Oncor shows.

Winning over Texas is crucial for closing the merger. Berkshire is about to become the third company to come before state regulators seeking permission to buy a utility that they’ve so far highly guarded. Just a week ago, the Texas Public Utility Commission rejected NextEra Energy Inc.’s third request to buy Oncor and quashed repeated attempts by Hunt Consolidated Inc. last year.

But personnel changes at the commission could complicate Berkshire’s plans, according to Paul Patterson, an analyst at Glenrock Associates LLC. One commissioner recently left the agency and another’s term ends in August. Any deal must also be approved by the court overseeing Energy Future’s bankruptcy.

Meanwhile, Elliott Management Corp. may try to block Berkshire in favor of its own reorganization plan for Energy Future, Reuters reported Friday. The Paul Singer-led hedge fund asked U.S. Bankruptcy Judge Christopher Sontchi in May to let it propose alternatives to the NextEra deal, which it said was unlikely to close.

Largest Creditor

Elliott claims to be Oncor’s largest creditor after buying large chunks of the company’s debt over the past few months. It may use its rights as a creditor to block approval in bankruptcy court, Reuters reported, citing people familiar with the matter. Stephen Spruiell, an Elliott spokesman, didn’t immediately return a call seeking comment. Elliott didn’t immediately respond to a request for comment.

“You never know, but I got to say Warren Buffett’s track record is pretty strong in utility commission approval," Patterson said in a phone interview Friday.

See Also: Buffett Will Likely Hear From Elliott About Oncor Terms: Gadfly

The takeover is key to ending the bankruptcy of Energy Future, formed by KKR & Co., TPG Capital and Goldman Sachs Capital Partners as part of the biggest leveraged buyout in history.

Just hours after Berkshire had announced the deal, Brian Lloyd, the executive director of the Texas Public Utility Commission, issued a statement applauding Berkshire’s “productive efforts.” He said the companies have already made assurances to the agency regarding Oncor’s independence, financial integrity and investments in infrastructure and security.

In fact, by the time NextEra’s bid had fallen apart, Berkshire had already held informal talks with state utility regulators about what they’d be comfortable approving, people with knowledge of the situation said. They discussed key concessions, including the independent Oncor board and ring-fencing measures that NextEra had refused.

The companies worked through the holiday weekend to come to an agreement on the terms of the merger, said the people, asking not to be identified because the information isn’t public.

Including debt, Berkshire’s offer appears to be worth about $1 billion less than the $18.4 billion bid NextEra Energy Inc. made earlier this year, according to people familiar with the situation who also asked not to be identified because the estimate hasn’t been publicly disclosed.

Signing Groups

Lloyd said the utility commission’s staff, the state’s advocate for utility customers, a steering committee of cities served by Oncor, and a group of industrial customers helped develop the terms that Berkshire’s agreeing to. They all signed the document laying out the conditions and supporting approval of the deal.

Berkshire’s energy unit said by email that the company and Oncor worked together to come up with a deal that “fortifies the successful ring-fence protections” the state had ordered for the utility years ago. Oncor spokesman Geoff Bailey declined to comment on the discussions but said in an earlier phone interview that Berkshire’s commitments would be filed Friday with the court overseeing Energy Future’s bankruptcy.

Berkshire would be accepting limits on its control of Oncor’s board and dividends that NextEra had previously rejected. Texas had demanded that NextEra give up control over who would be on Oncor’s board and how much money, if any, NextEra could extract from the company. 

Paying Dividends

It helps that Berkshire doesn’t need Oncor dividends, Jaimin Patel, a Princeton, New Jersey-based analyst for Bloomberg Intelligence, said by phone Friday.

The company “has other subsidiaries,” Patel said. “NextEra Energy had only one regulated subsidiary, its Florida utility, so it would have needed the dividends from Oncor Electric much more than Berkshire would in order to service debt.”

Texas regulators may also find a deal with Berkshire more attractive given its reputation, said Ehud I. Ronn, a professor of finance at the University of Texas at Austin.

“Berkshire Hathaway is not going to walk away with this and leave them holding an empty shell,” Ronn said. “It’s just not how they operate.”

Breakup Fees

If the merger is terminated and Oncor is sold to someone else, Energy Future Holdings would be required, subject to conditions, to pay Berkshire a $270 million fee, Berkshire said in a filing with the Securities and Exchange Commission. Under the terms of its bid for Oncor, NextEra is set to collect a breakup of $275 million, unless Energy Future or its creditors can convince the bankruptcy judge overseeing the bankruptcy case to throw out the fee.

— With assistance by Steven Church, and Noah Buhayar

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