Warren Buffett’s Berkshire Acquires Dominion Energy Natural Gas in a $10 billion deal

Warren Buffet's Berkshire (BRK.B) has agreed to spend $4 billion to buy the natural gas transmission and storage asset of Dominion Energy (D). Although the deal is expected to close at $10billion, Berkshire would also assume Dominion Energy's debt of $5.7 billion. 

Following the outbreak of the coronavirus pandemic in March and the subsequent market collapse, this is the first major purchase from Berkshire. Also, Berkshire class B stock was selling above $200 per share before the news of the Coronavirus pandemic broke, the stock is now selling for $178.20 per share. The class A stock of Berkshire also took a nose dive due to the pandemic. The 52 weeks price for BRK.A was trading at $347,400.00 per share, it's now trading at $267,500 per share.

In May, during the annual shareholders meeting, Buffet revealed that the conglomerate has built up a record $137 billion cash hoard as the financial market tanked. He added that despite the fall in the market, he is yet to see a favorable deal. “If we really liked what we were seeing, we would do it, and that will happen someday,” Buffett said.

“We have not done anything because we don’t see anything attractive to do.” 

The above statements suggested that the reason for this current deal is because the company considered it favorable. It also implies that the quick actions taken by the Federal Reserves in order to contain the effect of the pandemic on the country's economy meant companies could get more access to financing in the public markets than they could during the financial crisis in 2008 and 2009.

Since Dominion is currently working on transitioning to a pure-play regulated utility company that focuses on clean energy production from wind, solar, and natural gas, this move would aid its target. From the sale, Dominion expects that 90% of its future operating earnings will come from its utility companies that provide energy to more than 7 million customers. The customers cut across states like Ohio, Utah, Virginia, South, and North Carolina.

Based on this, the company would soon be announcing the cancellation of the Atlantic Coast Pipeline project with Duke Energy. However, aside from the move, other reasons behind the cancellation are that the project has faced a series of regulatory scrutiny. Due to this, it has faced delays that have inflated the initial price mapped out for the project and raised doubts about its economic feasibility.

All these triggered the current warning from the company that its operating earning for 2020 would reduce to $3.37 to $3.63 a share as against its $4.25 to $4.60 a share. The company would also be reducing its dividend to 63 cents a share as against the former 94 cents a share.

Although the company is currently paying out 85% of its operating earnings, the company is targeting a post-transaction of 65% operating earning.

For Berkshire, the move would increase its footprint on natural gas in the United States. In fact, the company revealed that this would increase its percentage of all interstate natural gas transmission. The move is expected to trigger the company's current 8% natural gas transmission capacity to 18%.

Based on the terms of the transaction, Berkshire would acquire 100% of Dominion Energy Transmission, Questar Pipeline and Carolina Gas Transmission, and 50% of the Iroquois Gas Transmission System. Berkshire will also acquire 25% of Cove Point LNG, an export, import, and storage facility for liquefied natural gas, one of just six LNG export terminals in the U.S.

Berkshire Energy will pay $4 billion in cash for the assets, and assume $5.7 billion in debt. Dominion plans to use about $3 billion of the after-tax proceeds to buy back its shares later this year. 

The deal is subjected to further regulatory approval and is expected to close in the fourth quarter of this year