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Tue March 11, 2003 03:16 PM ET

Buffett Keen to Snap Up Cheap Utilities

By Arindam Nag

NEW YORK (Reuters) — Billionaire investor Warren Buffett, who emerged as an unlikely buyer of utilities two years ago, has affirmed his enthusiasm for acquiring more in a sector flooded with assets going at distressed prices.

“Berkshire stands ready to inject massive amounts of money into MEHC (MidAmerican Energy Holdings Corp.),” Buffett, whose Berkshire Hathaway Inc. BRKa.N is the majority owner of MidAmerican Energy Holdings, said in his latest comments to his shareholders over the weekend.

But few expect MidAmerican to make any flamboyant deals and bankers and lawyers familiar with its approach say Buffett’s firm is likely to scour the landscape for assets like pipelines and generators whose rate of returns are stable and regulated.

“He will be looking for assets that may be depressed (in value) but not at the edge in the risk profile,” said Joseph Fichera, founder and chief executive of Saber Partners, a New York merchant banking advisory firm. MidAmerican already owns $18 billion of assets and in 2002 it reported more earnings than any other Berkshire Hathaway business outside its insurance business.

Last year, MidAmerican bought two natural gas pipelines and also made a strategic investment in Williams Cos. Inc. WMB.N , and Wall Street bankers say they bump into Buffett’s advisers often these days whenever a utility asset is being auctioned.

“Anybody who can write a check quickly is always going to be favored in this environment,” Fichera said.

Several utilities, including El Paso Corp. EP.N , AES Corp. AES.N , Allegheny Energy Inc. AYE.N and Dynegy Inc. DYN.N , were hit by bankruptcy of Enron Corp. ENRNQ.PK and the subsequent collapse of U.S. energy trading. This deprived some of these firms from valuable cash flow which would have been used to service their debts.

Wall Street bankers say that on an average around $10 billion of utilities assets are being touted, including gas pipelines, generating assets, power plants and even transmission lines.

“Private equity managers and someone like Warren Buffett like some of these assets because of their stable returns,” said Rick Roberge, transactions partner and energy specialist at PricewaterhouseCoopers.

RISK–AVERSE BUFFETT

Bankers and executives who have worked closely with MidAmerican say its management team led by Chief Executive David Sokol have displayed strong aversion for risk, an inclination to work with state regulators and retain existing teams at operating levels.

This makes Buffett a safe candidate for a role in the consolidation of the industry. His acquisition targets also draw banks to offer attractive loan packages.

“Generally, from the perspective of the regulators and from perspective of (bank) management, he is clean,” said Mark Ammerman, head of U.S. energy financing for Scotia Capital.

Bankers say that Buffett’s deals in the sector so far have been marked by strategies that have held him in good stead over the years: avoiding unnecessary risk and playing it safe.

“He is not looking for a 15–18 percent growth like the old days. He is almost like a pension planner, 10–12 percent pretax growth works for him,” said Ammerman.

What could tempt Buffett to buy more utility assets is a move by the Securities and Exchange Commission (SEC) to repeal a Depression–era law that was designed to curb utility monopoly abuses.

Passed amid a congressional trust–busting push, the law, known as the Public Utility Holding Company Act (PUHCA) of 1935, has been widely criticized as outdated by large utilities and many members of the Congress.

So far the SEC and the Federal Energy Regulatory Committee have told the Senate Energy Committee that they support repealing PUHCA and most expect that to happen sooner rather than later.

Once repealed, it will be easier for buyers like Buffett to make more investments. Currently, PUHCA limits Berkshire Hathaway to just 9.9 percent of voting control at MidAmerican despite owning an equity interest of 80.2 percent.

Last month, commenting on the possibility that PUHCA will be repealed, MidAmerican Chairman David Sokol said: “Retiring PUHCA will permit MidAmerican to fulfill its promise to make significant additional investments in America’s energy future — building on our current investments in traditional and renewable energy generation in the Midwest and elsewhere.”


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