Buffett Unit to Acquire PacifiCorp

By James F. Peltz

May 25, 2005 12 AM PT

Times Staff Writer

Billionaire Warren E. Buffett placed his biggest wager yet on the utility industry Tuesday when his MidAmerican Energy Holdings Co. agreed to buy Western electric-power supplier PacifiCorp for $5.1 billion in cash.

The proposed purchase would be the famed investor’s largest acquisition since 1998, when his investment firm, Berkshire Hathaway Inc., bought reinsurer General Re Corp. for $22 billion. MidAmerican Energy is 80% owned by Omaha-based Berkshire.

The deal came as Buffett was looking for ways to invest Berkshire’s $40-billion cash hoard, as well as opportunities to expand his growing presence in the utility sector.

“We like the business generally,” Buffett said in an interview. “By definition it can’t be a great business because you’re regulated and the return [on investment] you’re allowed is reasonable if not mouthwatering.

“But it’s predictable, and it gives us a chance to deploy large amounts of capital, and that’s important to us,” he said.

PacifiCorp, based in Portland, Ore., provides electricity to 1.6 million customers in six Western states, including about 43,300 in such Northern California cities as Yreka, Crescent City and Mt. Shasta. It is a subsidiary of Glasgow-based Scottish Power.

The acquisition would give MidAmerican Energy, based in Des Moines, about 6.6 million customers worldwide, including 3 million in the United States, and $10 billion in annual revenue.

Berkshire acquired control of MidAmerican Energy for $3.3 billion in two transactions in 2000 and 2002, and it has made some smaller energy-related acquisitions as well. For instance, it acquired Kern River Gas Transmission Co., a pipeline system that brings natural gas to California, Utah and Nevada.

PacifiCorp has ambitious plans to upgrade and expand its system, a project that will cost about $1 billion a year over the next five years. Scottish Power balked at making the investments and agreed to sell PacifiCorp instead, PacifiCorp Chief Executive Judi Johansen said at a news conference.

“What MidAmerican brings to PacifiCorp is a very solid, stable funding base” for that spending, she said.

In the aftermath of Enron Corp.’s demise and the near-collapse of the once-hot energy trading sector, many U.S. utilities have regrouped around their core regulated business of producing and distributing power.

This back-to-basics approach has reduced the companies’ exposure to risky, nonregulated activities such as large-scale trading of electricity and non-energy commodities. But it puts greater emphasis on capital spending and the companies’ ability to win rate increases from regulators, analysts said.

The shift also has led to increased merger activity in recent months. Two weeks ago, for instance, Duke Energy Corp. agreed to buy rival power company Cinergy Corp. in a $9-billion stock deal that would create one of the largest U.S. power generators.

And with demand rising for electricity and natural gas, especially in fast-growing Western states, Buffett sees the utility sector as an attractive target for expanding MidAmerican Energy’s reach.

“Buffett is getting PacifiCorp at a good price,” said Barry Abramson, a utility analyst at Gabelli Asset Management Inc., whose $28 billion of assets include Berkshire shares. PacifiCorp’s power plants also have “very low production costs,” he said.

But PacifiCorp also has struggled in the last 18 months, partly because “unusually dry conditions” have hurt hydroelectric generation, Scottish Power said Tuesday. Power companies throughout the Pacific Northwest have been grappling with a prolonged drought in the region.

Buffett, at 74 one of the world’s richest men with a net worth estimated by Forbes magazine at $44 billion, is famous for his patient approach to investing. He is known for making long-term “value” investments in steady, predictable industries that generate good cash flow and ultimately provide a handsome payoff. The style has earned him the nickname “The Oracle of Omaha.”

Berkshire holds major stakes in such companies as Coca-Cola Co., American Express Co. and Gillette Co., which has agreed to be acquired by Procter & Gamble Co.

Besides General Re, Berkshire also owns Geico insurance, See’s Candies, International Dairy Queen and several other companies.

General Re and Buffett have come under scrutiny this year because of investigations by state and federal officials into a 2000 transaction between General Re and insurer American International Group Inc.

MidAmerican Energy’s purchase of PacifiCorp, which includes the assumption of $4.3 billion in debt, is subject to federal and state regulatory approval. One potential obstacle, the Public Utility Holding Company Act of 1935, places many restrictions on utility acquisitions and the size of investments that can be made by utilities’ parent companies.

MidAmerican Energy and others say the law is outdated at a time when they are planning multibillion-dollar capital projects and are putting pressure on Congress to repeal the law. But some consumer advocates say it prevents unhealthy consolidation in the industry and protects ratepayers.

Buffett said that repeal of the law would mean “less hoops to jump through” but that the law would not prevent the PacifiCorp acquisition, which is expected to be completed next year. “This deal will go through whether the act stays on the books or not,” he said.

Berkshire’s Class A stock, which the company never splits, rose $2,010, or 2.4%, to $85,500 a share Tuesday on the New York Stock Exchange. Scottish Power’s New York-traded shares gained $1.85, or 5.7%, to $34.21.

Reuters was used in compiling this report.

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PacifiCorp at a glance (as of March 2004)

Headquarters: Portland, Ore.

Employees: 6,507

Customers: 1.6 million, 43,297 in California

Created: Formed in 1984 from Pacific Power & Light

CEO: Judi Johansen

Coverage: 136,000 square miles

Service areas: Parts of Oregon, Utah, Wyoming, California, Idaho and Washington

2004 net income: $248 million

Capacity: 8,419.5 megawatts