With its latest $5.59 billion acquisition of Las Vegas-based NV Energy Inc., announced last week, Berkshire Hathaway Inc.’s MidAmerican Energy Holdings Co. would be a $66 billion natural gas and electric utility serving more than eight million customers globally, with a line-up that includes two major U.S. interstate natural gas pipelines, a renewable energy portfolio, as well as international grid and generation businesses.
The all-cash transaction is expected to be completed by early 2014, pending various approvals from shareholders, state and federal regulators and the Department of Justice.
NV Energy today is engaged in a high-profile public policy battle over its utility transformation from relying on a lot of coal-based supplies to one focused on renewables and gas-fired generation. The current debate is ongoing in the Nevada legislature and among some of the its largest customers in the gambling and hospitality industry (see NGI, May 27).
MidAmerican, the energy division of Warren Buffett’s Berkshire Hathaway empire, has been less dramatic in terms of its leadership or in the direction of the companies it has required, including Portland, OR-based PacifiCorp, Salt Lake City-based Kern River Pipeline and Omaha-based Northern Natural Gas. PacifiCorp continues to serve parts of California, Oregon and Washington state with its Pacific Power unit; and Idaho, Utah and Wyoming with its Rocky Mountain Power operations. Kern River continues to operate an interstate gas transmission system from the oil/gas fields of southwest Wyoming to California’s central valley. Northern Natural still serves eight Midwestern states.
CEO Greg Abel, who has overseen all of MidAmerican’s acquisitions since Berkshire Hathaway entered the utility business in 2000 with the purchase of the Des Moines, IA-based company, helmed the purchases of Kern River and Dynegy Inc.’s Northern Natural Gas two years later (see NGI, Aug. 5, 2002).
NV Energy is to operate under a similar game plan. It would keep its name and be a subsidiary of MidAmerican, still based in Las Vegas. MidAmerican has a reputation for keeping a “hands-off from headquarters” policy. Buffett has been quoted as saying he buys good companies with good people and lets them maintain their independent operations.
NV Energy emerged over the past decade by merging separate northern and southern Nevada utilities under struggling holding company Sierra Pacific Resources, which was headquartered in Reno, NV. Michael Yackira joined the holding company as executive vice president for strategy and policy, following a turn as a senior executive with FPL Energy in Florida and in the telecommunications business. Yackira, 61, was named CEO in 2007, and he was mentioned by Abel as one of the reasons the Buffett financial empire was attracted to the utility.
“One area where MidAmerican will add immediate value is in our work with public policy leaders and regulators to help reshape Nevada’s energy future for the benefit of customers and the state,” Yackira said in a website post to the 2.4 million citizens the utility serves in Nevada. MidAmerican’s expertise in renewable energy is a good match for Nevada’s renewable resources as his utility seeks to develop new zero- and low-carbon generation options, including more natural gas plants under its “NVision” proposal, he said. NV Energy currently operates 10 generation plants in Nevada, seven of which are gas-fired.
Not surprisingly, Buffett lauded the acquisition, calling it “a long-term investment in Nevada’s economy.” The utility has “similar values, outstanding assets and a superb management team.” An analyst with Motley Fool agreed with Buffett’s characterization and called NV Energy “a great fit” but noted that “it is hard to argue that Buffett is overpaying for his latest prize.”
Moody’s Investors Service and Standard & Poor’s Ratings Services (S&P) both regard the acquisition positively. Moody’s said there would be no impact on MidAmerican ratings, which are generally higher than NV Energy, and S&P placed NV Energy ratings on “CreditWatch with positive implications.” Said Moody’s, “NV Energy’s service territories are logical extensions of those in adjacent states owned by MidAmerican’s PacifiCorp subsidiary.” S&P said that NV Energy management was deemed “credit supportive” due to its recent efforts in “improving regulatory relationships and key credit measures.”
Early reactions from the investment community and consumer sector were mixed, according to reports. “Anytime we get someone like Warren Buffett to acquire a Nevada company and not get rid of management, it raises the level of perceived sophistication that there are well-managed companies here,” said investment brokerage managing director Robert Lind, who was quoted in the Las Vegas Review-Journal. “This will shine a flashlight on Nevada for sure.”
Nevada consumer advocate Eric Witkoski, a NV Energy critic, said he sees room for improvement by utility management, and is hoping that MidAmerican can accelerate the changes needed.
Yackira told reporters that after NV Energy is a unit of MidAmerican, dividends would remain local and be reinvested. He also held out the possibility that there might be more capital available for future projects.
An analyst with the Financial Times‘ daily financial commentary, Lex, suggested that NV Energy shareholders should hold out for a higher price, reasoning that in other Berkshire Hathaway acquisitions, Buffett has paid a more handsome price, and in one case — Heinz — exceeded the all-time high stock price. “Buffett says ‘be greedy when everyone else is fearful,'” said the analyst, noting it was therefore no surprise he went after NV Energy in a lean mergers/acquisition market. “But when looking at the purchase price, investors in NV Energy must wonder why its management did not bargain harder to match Mr. Buffett’s avarice.”
About 25 large institutional investors hold 60% of NV Energy’s shares; the rest are held by small investors. They all get the 23% premium, or $23.75/share of common stock, in the purchase offer by MidAmerican.
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