In fight to buy power line giant, Texans should cheer for Buffett
Texas electricity consumers should be rooting for Warren Buffett to buy Oncor, the North Texas transmission line giant, because it will bring stability to our utility bills.
Buffett’s Berkshire Hathaway is offering $9 billion in cash for Energy Future Holdings, the bankrupt parent of Oncor Energy Delivery Corp. When debt is included, the bid values Energy Future at $18 billion.
Oncor is one of the largest transmission and delivery companies in the nation, serving 10 million Texans and generating $431 million in revenue last year. It’s Energy Future Holdings’ most valuable property, and its sale is necessary to close out bankruptcy proceedings.
Berkshire’s bid is the third for Energy Future and the lowest so far. That’s disappointing for Energy Future’s biggest creditor, Elliott Management, which wants at least $500 million more.
Billionaire Paul Singer, who leads Elliott, has been buying up Energy Futures debt for pennies
on the dollar in expectation of a settlement. Under Buffett’s offer, he would lose money, which is why he’s trying to raise funds to make an $18.5 million bid of his own.
They key player in all of this is the Public Utilities Commission of Texas, whose job is to protect consumers by guaranteeing reliable utilities at reasonable rates. Transmission and distribution is the only part of the electric system that is still tightly regulated by state officials.
The PUC must OK any deal that affects a public utility, and it rejected the earlier bids for Oncor in a what has been a laudable defense of consumer interests.
Dallas-based Hunt Consolidated tried to buy Energy Future for $19 billion and turn Oncor into a real estate investment trust, a tax-advantaged structure. The PUC insisted that Hunt would have to share its tax advantages with ratepayers because profits at regulated utilities are limited.
Hunt said no deal and walked away.
Next came Florida-based NextEra energy with a deal valuing the company at $18.7 billion. The PUC told NextEra that Oncor needed to maintain an independent board of directors and keep Oncor’s bond rating separate from NextEra’s. The PUC also wanted more benefits for ratepayers.
NextEra dropped the bid.
Now comes Buffett, whose Berkshire Hathaway has slowly built up an energy division that generates 12 percent of the company’s revenue. The big problem with his $18 billion bid is that Singer and other creditors will lose some of their investment made on pure speculation.
Buffett’s deal, though, should make the PUC happy. Berkshire is extremely well-capitalized, and Buffett allows his companies significant operating independence.
Both of those things are important because on the rare occasion that a regulated utility gets into trouble, ratepayers have to bail it out by paying higher fees on their electric bills. Also, if the PUC didn’t insist on traditional, conservative business practices, other utilities would want to take more risks, too.
Taking wild risks, after all, is what got got Oncor into this mess. Investment firms Kohlberg Kravis Roberts, Texas Pacific Group and Goldman Sachs Capital Partners created Energy Future Holdings through a $45 billion leveraged buyout in 2007.
The firms piled on the debt and bet big on skyrocketing natural gas prices.
For those who don’t remember, 2007 was the cusp of the hydraulic fracturing revolution in gas drilling, which shaved 50 percent off the price of natural gas.
Elliott Management has a few weeks to raise the funds to buy Oncor at an $18.3 million valuation. But even if it does, the PUC should reject the bid outright and go with Buffett.
A public utility like Oncor needs sound financial backing, and right now, Berkshire Hathaway is the best bet for the future of the company and consumers’ pocketbooks.