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what's buffet doing?

  1. Jrad

    56 posts.
    Buffett sets his sights on a bundle of energy

    By MATTHEW C. QUINN
    Atlanta Journal-Constitution Staff Writer
    19/12/02

    Warren Buffett became the country's second-richest man by sticking to an investment strategy that is as fundamental as they come.

    Find a business that makes something everyone uses, make sure it is both profitable and dominant, wait until the firm is undervalued, then buy it for a fraction of its worth.

    The companies Buffett buys almost always lack glamour. Berkshire Hathaway, his investment vehicle, is primarily an insurance company with subsidiaries that manufacture boring stuff like bricks, underwear, carpet and paint.

    Now the low-key billionaire from Omaha, Neb., has his sights set on what might be his biggest -- and most undervalued -- target of them all.

    Energy.

    Buffett has watched the energy sector swoon following the Enron Corp. bankruptcy and revelations about shady accounting practices.

    Once highflying energy companies like Atlanta-based Mirant Corp., Dynegy of Houston and Williams Cos. of Tulsa, Okla., are selling billions of dollars in assets in a desperate effort to stay afloat.

    And Buffett is buying.

    "He's doing math. He's realizing there is a certain value in these assets," says New York money manager Henry Asher, president of North Star Group.

    Wall Street watchers have always enjoyed keeping tabs on the self-effacing, grandfatherly Buffett. But now that he's gobbling up assets that are vital to the national interest, the Buffett watch is intensifying. The mere mention that Buffett may be interested in a distressed energy supplier can move stock prices.

    But, as usual, the 72-year-old investing legend is staying away from the "sexy" energy assets. He appears to be steering clear of power plants and trading floors.

    What Buffett wants is beneath the ground.

    He's gobbling up interstate natural gas pipelines, which carry 25 percent of the nation's energy supplies. In just six months, Buffett has paid some $2.8 billion in cash and assumed debt for pipelines acquired from distressed energy companies.

    Pipelines are at their lowest valuations in a decade at a time when the nation's appetite for natural gas is projected to grow by 30 percent over the next decade. Natural gas is increasingly the fuel of choice for electric power plants.

    "If the past is any indication, there's certainly method to Buffett's madness," says Barry Borak of the David L. Babson investment company.

    What Buffett brings to the table is cash -- lots of it -- and the ability to buy in a hurry. The recent pipeline deals were closed "within weeks," notes J.P. Morgan analyst Anatol Feygin.

    Buffett is personally worth $36 billion, second only to Microsoft's Bill Gates, according to the latest Forbes survey of the wealthiest Americans.

    Berkshire Hathaway's main business is insurance, including No. 6 U.S. auto insurer Geico Corp. Cash generated from the "float" between when premiums are collected and claims are paid has helped Buffett build a huge and diverse investment conglomerate.

    Berkshire's subsidiaries include Acme Brick Co.; Shaw Industries, the Georgia-based carpet maker; Fruit of the Loom underwear; Benjamin Moore, the paint company; and other distinctly non-sexy outfits. It also holds minority stakes in industry leaders such as Coca-Cola and American Express, which produce millions of dollars in dividends for Buffett's empire.

    An open 'secret'

    Buffett declined to be interviewed for this article, but it's no secret in energy circles that he's been eyeing a number of pipelines on the market.

    That, Borak says, fits his "professed notion of the ideal investment: buying more of what you already like and have because the price is right."

    Buffett said in April he was prepared to invest $10 billion in energy if Congress repeals the 1935 Public Utility Holding Company Act, which restricts interstate utility investments. A joint conference committee is considering a repeal.

    Buffett made his first move into the energy sector three years ago when Berkshire Hathaway bought control of Des Moines-based MidAmerican Holdings, parent of Iowa's largest electric-and-gas utility, for $9 billion in cash and assumed debt.

    With the deal came David Sokol, an industry leader who remained as chief executive and became Buffett's point man for the current flurry of deals. When the bottom fell out of the independent energy sector following Enron's collapse in December, Buffett and Sokol were ready, checkbook in hand.

    First came Kern River Gas Transmission, purchased by MidAmerican from troubled Williams Cos. in March for $960 million in cash and assumed debt. The 926-mile natural gas pipeline stretches from California through the Rocky Mountain natural gas reserves to Utah and Nevada. It generated $195 million in revenue last year.

    MidAmerican then stepped in to save financially strapped Dynegy Inc. from bankruptcy by acquiring Northern Natural Gas for $930 million -- a discount from the $1.5 billion Dynegy paid Enron for the 16,600-mile Midwestern pipeline when a merger between the two companies collapsed. The deal included $950 million in assumed debt.

    Berkshire Hathaway has also joined with Lehman Brothers in a lifesaving $900 million loan to Williams that expires next July. The interest rate is an eye-popping 30 percent, and the collateral is Williams' gas-producing properties in the Rockies.

    There are 180,000 miles of interstate pipeline snaking across the United States.

    The pipes are 20 to 42 inches in diameter and carry the invisible gas from wells in places like the Gulf of Mexico, Canada and the Texas oil patch to distribution systems operated by local utilities.

    It's a good business: The demand is reliable, the earnings are steady and the headaches are few.

    Maintenance of the pipelines is relatively easy. Political controversies -- like the California deregulation mess that has ensnarled many energy companies -- are minimal. Most of the customers are local utilities and large industrial gas users that generally pay on time and don't need much hand-holding.

    Interstate pipelines usually provide a rate of return on equity of between 12.5 percent and 13.5 percent under rates regulated by the Federal Energy Regulatory Commission. That's somewhat higher than the returns generally authorized for local utilities.

    That steady income stream in a sharply devalued industry is what attracted Buffett. And although he has the money to quickly become a major player in a crucial industry, consumers are unlikely to notice the changes. "He's not going to be able to charge any rate other than the FERC rate," said Kevin Madden, a former general counsel at the regulatory agency who is now executive vice president of distribution and pipeline operations at Atlanta Gas Light Co.'s parent, AGL Resources.

    Buffett is unlikely to face regulatory roadblocks unless he tries to buy more than one pipeline serving a major market. And he's a long way from that.

    Although distressed energy companies are holding fire sales, many of the usual suspects for pipeline acquisitions -- other utility and pipeline concerns -- are themselves financially troubled and in no position to make deals.

    Possible rivals

    But that doesn't mean Buffett has the field to himself. Industry survivors such as Duke Energy of North Carolina and American Electric Power of Ohio are said to be eyeing assets that are up for grabs in the massive sell-off.

    To satisfy creditors, Enron is selling Portland General, an electric utility in Oregon, and three interstate natural gas pipelines. Analyst Feygin said Buffett is a prime candidate to buy Enron's 2,600-mile TransÂwestern Pipeline that runs from West Texas to California and would complement MidAmerican's two other Western pipelines.

    "That would create a Texas-to-California triangle," Feygin says.

    Another possibility for Buffett is Gas Transmission Northwest, a 600-mile Canada-to-California pipeline reportedly for sale by PG&E National Energy Group, which has had its credit downgraded to "junk" status last month by two major ratings agencies. Pacific Gas & Electric, another PG&E subsidiary, filed for Chapter 11 last year.

    Others pipelines on the market include Citrus Corp., the holding company for Florida Gas Transmission, a 5,000-mile pipeline co-owned by Enron and El Paso Energy. El Paso is considered the favorite to buy Enron's stake.

    Pipelines like the two major arteries bringing natural gas to Georgia from the Gulf of Mexico are not expected to be sold because El Paso's Southern Natural Gas pipeline and Williams' Transcontinental pipeline are essential to the parent companies, analysts say.

    Mirant, which is in the midst of more than $2 billion in asset sales, declined to comment on whether there had been any contact with Buffett or his subsidiaries.

    But the company has no pipelines to sell. Mirant has sold some of its power plants and is seeking a "strategic partner" for its energy trading business. Those assets are probably too speculative for Buffett's tastes, analysts say.

    Buffett may have been saying as much in his annual letter to Berkshire Hathaway shareholders last May:

    "A line from a country song expresses our feeling about new ventures, turnarounds or auctionlike sales: 'When the phone don't ring, you'll know it's me.' "

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