Berkshire Puts More Money to Work With Bid for Oncor

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We remain cautious on the deal, though, as Oncor has faced a lengthy regulatory battle to emerge from the cloud of Energy Future Holdings' bankruptcy. Berkshire Hathaway Energy is the third suitor to bid for Oncor. Most recently, Texas regulators rejected NextEra Energy's $18.4 billion bid based on concerns about board independence, ring-fencing, and parent leverage. We think BHE has a greater chance at regulatory approval but expect the process to be challenging. We assign a 75% probability to the deal closing, believing that BHE will be able to appease regulators' concerns, particularly about leverage and parent dividend restrictions. NextEra could also continue to pursue Oncor.

We think Oncor offers numerous strategic benefits for BHE and would support the subsidiary's narrow moat rating as well as Berkshire Hathaway's own wide moat. BHE has long demonstrated an interest in infrastructure assets, and Oncor would pair nicely with its 2014 AltaLink purchase. We believe Oncor offers plentiful opportunities for capital investment and earnings growth, given electric transmission and distribution needs in Texas related to renewable energy development. BHE's strong balance sheet should provide meaningful interest savings and provide cheaper capital necessary to complete Oncor's investment plan. We also consider Texas a highly constructive regulatory jurisdiction, which should enhance cash flow recovery of new investment.

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