Warren Buffett outbid in race to buy big piece of Texas electric grid

_{Editor's Note: This story has been updated throughout.}

Billionaire Warren Buffett has been outbid in his effort to buy Texas’ largest transmission utility.

San Diego-based Sempra Energy announced early Monday that it had swooped in with a roughly $18.8 billion deal to purchase Oncor, whose roughly 120,000 miles of transmission and distribution lines deliver power to more than 3 million homes and businesses in North and West Texas. 

The announcement signaled that Oncor’s parent company had abandoned the $18 billion deal that Berkshire Hathaway, Buffett’s multinational conglomerate, unveiled six weeks ago to much fanfare.

“We are disappointed our agreement to acquire Oncor has been terminated," Greg Abel, president and CEO of Berkshire Hathaway, said in a statement Monday. “We are extremely grateful for the strong support and extraordinary backing from all of the stakeholders in Texas." 

If approved, Sempra Energy’s deal could help deliver Energy Future Holdings, Oncor’s parent and Texas’ largest power conglomerate, from one of the largest corporate bankruptcies in American history. The conglomerate, which filed for Chapter 11 bankruptcy in 2014, is saddled with about $50 billion in debt.

“Both Sempra Energy and Oncor share more than 100 years of experience operating utilities that deliver safe, reliable energy to millions of customers,” Debra L. Reed, chairman, president and CEO of Sempra Energy, said in a statement. “We believe our agreement with Energy Future will help ensure that Texas utility customers continue to receive the outstanding electric service they have come to expect from Oncor and provide stability to Oncor’s nearly 4,000 employees.”

Sempra Energy, a Fortune 500 conglomerate, runs utilities and invests in energy infrastructure. Its companies include: San Diego Gas & Electric, Southern California Gas Co., Sempra South American Utilities, Sempra Mexico, Sempra Renewables and Sempra LNG & Midstream — the latter of which is building a liquefied natural gas export terminal in Port Arthur, Texas.

The conglomerate also formerly owned and operated 10 power plants in Texas’ electric market.

The proposed merger would need the sign-off of the Delaware judge overseeing Energy Future Holdings’ bankruptcy, along with approvals from the Public Utility Commission of Texas and federal regulators.

Sempra Energy would pay $9.45 billion in cash for Dallas-based Oncor and assume its debt, making the deal worth about $18.8 billion. The company said it would own about 60 percent of Oncor under the deal, which would include financing from megabanks RBC Capital Markets and Morgan Stanley.

Sempra Energy's Oncor offer bested the $9 billion in cash Berkshire Hathaway put forward before facing resistance from creditors in bankruptcy court. Buffett is known for avoiding bidding wars.

Sempra Energy is venturing where other companies have stumbled. Over the past two years, the Ray L. Hunt family of Dallas and Florida-based NextEra Energy have separately tried to buy Oncor, Energy Future’s most coveted asset. Both saw pushback from consumer advocates — those concerned about the deals’ impact on Oncor’s financial health, independence and rates it charges — and failed to gain full approval from the state’s Public Utility Commission.

Oncor currently charges the lowest rates among its peers in Texas. 

In July, Buffett’s company had suggested its now-scuttled deal would fare better. It had announced rare support from the utility commission and consumer groups, and it circulated a document with 44 regulatory commitments that it said parties that might intervene at the utility commission had agreed to.

Sempra Energy’s announcement Monday was more muted, but the company said Oncor under the deal would stay in Dallas under local management and keep its independent board of directors, which would insulate it from the financial ups and downs of its parent company.

When Energy Future was formed 10 years ago, utility commissioners insisted on a financial and corporate ring fence around Oncor to keep bankruptcy from dragging it down. It worked, keeping Oncor financially healthy even as Energy Future sank.

If Sempra Energy closes the deal, Bob Shapard, Oncor’s CEO, would become executive chairman of Oncor’s board of directors. Allen Nye, currently Oncor’s general counsel, would be named the utility’s CEO, according to a press release.

Sempra Energy said it would also commit $7.5 billion over five years to expand and reinforce Oncor’s transmission and distribution network.

In an interview Tuesday, Reed, the CEO, said Sempra Energy's deal came together in just a week, and the company feels confident it will get buy-in from state officials and consumer groups.  

"Berkshire did a great job synthesizing some of the stakeholder input, and we learned from the prior deals — what worked and what didn’t work," Reed said. “We really tried hard to listen to what was important to the regulators and all of the stakeholders and incorporate that in our offer.”

Disclosure: Energy Future Holdings and Oncor have been financial supporters of The Texas Tribune. A complete list of Tribune donors and sponsors can be viewed here.