Energy Future drops Oncor deal in favor of Sempra bid

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Warren Buffett takes pride in naming his price to buy a company, and not paying a nickel more. But he took a rare blow Sunday after Energy Future dropped Oncor deal with him in favor of a 9.45 billion US dollars bid from Sempra.

Bankrupt Texas utility Energy Future Holdings is abandoning a deal to sell power transmission company Oncor to Warren Buffett's Berkshire Hathaway Inc. for 9 billion US dollars and will instead accept a 9.45 billion US dollars bid from Sempra Energy, people familiar with the matter said.

Buffett, who avoids bidding wars for companies, had swooped in two months ago to buy Oncor after two previous attempts by Energy Future to sell it was blocked by Texas regulators.

It is also a defeat for Greg Abel, the 55-year-old chief executive of Berkshire's energy unit who many investors consider a top candidate to eventually succeed Buffett, 86, at the Omaha, Nebraska-based parent company's helm.

Greg Abel, chairman and chief executive officer of Berkshire Hathaway Energy Co., center, speaks with attendees before the start of the Berkshire Hathaway Inc. annual meeting in Omaha, Nebraska, US, on Saturday, May 6, 2017. /VCG Photo

Energy Future's board decided to make the switch on Sunday after Sempra also offered assurances it could get its acquisition of Oncor approved by the Public Utility Commission of Texas (PUCT), as well as a US bankruptcy judge, the sources said.

Berkshire had issued a statement last week to say it would not be raising its offer for Oncor. However, in response to Sempra's bid, Berkshire offered to allow Energy Future to keep an Oncor dividend, but that proposal was not enough to bridge the gap in price, the sources added.

The sources asked not to be identified because the decision has not yet been officially announced. Sempra and Berkshire did not immediately respond to requests for comment. Oncor and Energy Future also declined to comment.

The bidding war for Oncor underscores how power generation is becoming more commoditized and less lucrative in the eyes of utilities, which have become wary of their exposure to volatile energy prices. Instead, many utilities are now hungry for electricity distribution assets with a growing demographic base and stable cash flows.

Dallas-based Oncor delivers power to more than 3.4 million homes and businesses through roughly 196,000 kilometers transmission and distribution lines.

Hedge fund Elliott Management Corp, which is Energy Future's biggest creditor, had opposed the sale to Berkshire, arguing it undervalued Oncor and threatened to veto the deal. Elliott had also been trying to put together its own bid for 9.3 billion US dollars to buy Oncor.

Sempra decided to make an offer for Oncor in the last three weeks, after seeing the opposition that Berkshire faced from Elliott as an opportunity to interlope, according to the sources.

The Sempra Energy building is pictured in San Diego, California March 10, 2015. /Reuters Photo

Elliott has now indicated it will support Oncor's sale to Sempra, one of the sources said. Elliott did not immediately respond to a request for comment.

Berkshire had told the PUCT it would accept "ring-fencing" on its acquisition of Oncor, restricting its ability to extract cash from the company or add more debt to it. Sempra has now indicated it that will make similar concessions on ring-fencing, according to the sources.

Based in San Diego, Sempra owns and operates electric and gas utilities in the United States and South America, including San Diego Gas & Electric and SoCalGas in California, Luz del Sur in Peru, and Chilquinta Energía in Chile. It has a market capitalization of 29.2 billion US dollars.

Sempra is no stranger to Texas. Earlier this year, it signed a memorandum of understanding with Korea Gas Corp for the development of a liquefied natural gas liquefaction project in Port Arthur, Texas.

Previous Oncor deals shot down

Earlier this year, the PUCT shot down the sale of Oncor to NextEra Energy Inc. because it considered the proposed financial structure too risky for ratepayers.

A separate plan to sell Oncor to a group of creditors and investors led by privately held Hunt Consolidated Inc. of Texas collapsed in 2016, after hitting obstacles at the regulator.

As a result, Energy Future has been stuck in bankruptcy since it filed for Chapter 11 protection in 2014, as plans to sell Oncor, repay creditors and fund its exit collapsed under regulatory scrutiny.

Buyout firms KKR & Co LP, TPG Capital LP and Goldman Sachs Group Inc's private equity arm took Energy Future private in 2007, in the biggest ever leveraged buyout with a deal size of 44 billion dollars, including debt.

But the debt pile placed on the company proved unsustainable, as Energy Future was hit by a steep decline in natural gas prices that in turn led to depressed power prices.

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Source(s): Reuters