The proposed Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) swoop to take Oncor Energy out of bankruptcy is precisely the kind of deal that makes Warren Buffett, well, Warren Buffett. It’s also why the later Buffett, like the later Bruce Springsteen, is as much The Boss as ever. BRK.B is offering $9 billion in cash for Oncor’s parent, Energy Future Holdings Corp., which has been in bankruptcy for years.
Technically, it’s a bolt-on deal to Berkshire Hathaway Energy, a unit the company has been building through acquisitions since 2000 that is run by Greg Abel, considered a potential heir-apparent to Buffett.
The deal is filled with concessions designed to win quick approval. BRK.B will appoint only two members of the 12-member board, which will have complete control over dividends. Oncor’s debts will be paid, and 90% of those savings will go to customers. Jobs at current wages are promised for two years.
The Energy Opportunity
Buffett is 86, and even if he could find a younger Buffett, that person would not be right for Berkshire’s future, because that future is one of an operating company.
Berkshire Hathaway Energy is one such company. It has 10 subsidiaries already. Some, like Oncor, deliver power to customers. Others produce power or move it around.
Very quietly, BH Energy has become one of the biggest buyers of wind and solar power, and it’s in balancing these power sources, with others, across a national grid that is one of America’s chief challenges today. With Oncor, BH Energy has the scale to tackle it, and profit handsomely as more cars come to depend on the grid.
The problems with the U.S. electrical grid mostly lie in load balancing. Texas wind and California solar power have at times been priced negatively when they were abundant. When those sources are not available, natural gas and even coal may be needed to maintain baseload.
Abel now has enough customers to take power when it’s abundant, and enough back-up fossil fuel capacity to handle his needs when renewables are not abundant. He also has the budget necessary to add storage capacity to his grid, creating mini-grids that are more resilient than the present grid. All this can also be done quietly, out of view of regulators, meaning efficiently, and profitably.
The Many Berkshires
The post-Buffett Berkshire is mostly built around three industries: utilities, insurance and manufacturing.
In insurance, it’s companies like GEICO and General Re. Berkshire is, among other things, the third-largest property insurance company in the U.S., trailing only State Farm and Allstate. It’s also number three in assets, trailing just Metlife Inc (NYSE:MET) and Prudential Financial Inc (NYSE:PRU).
In manufacturing, Berkshire is represented by brands like Fruit of the Loom, Benjamin Moore and Clayton Homes. It also operates HomeServices of America, which sells under 30 brands with over 28,000 salesmen.
Along with the utility group there are also retail units like Dairy Queen and Helzberg Diamonds, and distributor McLane Co., whose customers include Family Dollar.
Succession planning dictates that strong leadership be found within each group, which comes from autonomy and scale. All the operating units within BRK.B are now big enough to be spun-out and run profitably if those successors will it.
Bottom Line on BRK.B
The new deal should go down smoothly. Previous deals like one with the Hunt Brothers and another with NextEra Energy Inc (NYSE:NEE) fell apart over issues the new deal has already promised to address. NextEra stock rose on the news, because a stronger Berkshire Hathaway Energy is a better customer for its own renewable energy projects.
There is always more to do, and if Buffett lived to be 100 he would still be doing it. But Oncor makes BRK.B a stronger operating company, one better able to make it through his inevitable end.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this story.