According to reports, Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) is close to finalizing a deal to purchase Texas-based utility Oncor, one of the largest electric utility companies in the United States. This would be an addition to Berkshire Hathaway Energy, which already owns several major utilities across the U.S. Here's why Berkshire's leader Warren Buffett likes utilities so much -- and why this is a good thing for shareholders.
Berkshire Is About To Acquire An Electric-Utility Giant
The Wall Street Journal reports that Berkshire Hathaway's energy business is close to finalizing a deal to acquire Texas-based electric utility Oncor. This would be an addition to Berkshire's already massive portfolio of utility businesses located throughout the United States.
Berkshire Hathaway Energy, the company's utility-owning subsidiary, had a total of $85 billion in assets as of 2016 and served 11.6 million customers. This includes, just to name a few:
-- PacifiCorp, which serves 1.8 million customers in a 143,000-square mile area of the Western U.S.
-- Rocky Mountain Power, which serves 1.1 million customers in Utah, Wyoming, and Idaho.
-- NV Energy, which serves 1.25 million electric and 162,000 natural gas customers in Nevada.
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Oncor is one of the largest utilities in Texas, and the entire U.S., with about 10 million customers, so this acquisition would nearly double the amount of utility customers served by Berkshire Hathaway's subsidiaries. Oncor isn't a traditional utility in that it owns electrical transmission lines and collects revenue for their use.
The utility has been a target for several potential buyers since Energy Future Holdings Corp, which owns most of Oncor, filed for bankruptcy in 2014. Most recently, NextEra Energy bid $18.7 billion for Oncor, but the deal fell through when Texas regulators determined that the sale was not in the public interest.
Why Does Warren Buffett Like Utilities So Much?
Buffett generally avoids carrying lots of debt and is usually hesitant to invest in businesses that rely on large debt loads to operate. Two major exceptions are transportation businesses, such as Berkshire subsidiary BNSF Railroad, and regulated utilities.
In a nutshell, Buffett doesn't mind the large amounts of debt carried by Berkshire's utilities for two reasons. First, the debt is not guaranteed by Berkshire Hathaway. Second, the reason the debt isn't required to be guaranteed is that Berkshire's utility companies should be able to earn enough to service their debt obligations, even in awful economies.
Utilities have revenue streams that are especially recession-resistant. As Buffett said in his 2015 letter to Berkshire's shareholders, utilities provide an "essential service on an exclusive basis." In other words, during tough times, when people need to cut back, electric and gas services are generally maintained without interruption.
Berkshire has an additional advantage because of Berkshire Hathaway Energy's diverse revenue stream, as well as because of the strength of Berkshire Hathaway itself. These combine to produce a lower borrowing cost, which benefits Berkshire, as well as its utility customers.
Finally, utilities are a "forever" business -- that is, one that will always be needed. Buffett has said repeatedly in recent years that it's a smart idea to bet on America, and investing in utilities, which in turn invest in new energy-delivery technologies, is an excellent example of this.
Should Shareholders Be Happy?
As a Berkshire Hathaway shareholder myself, I'm thrilled to see the company putting some of its massive stockpile of cash to work for investors. Oncor generated $73 million in net income during the most recent quarter, and I'm willing to bet that this is significantly more than Berkshire earned by keeping cash in the bank during the same time period.
This article originally appeared on The Motley Fool.