updated 5/24/2005 5:21:31 PM ET 2005-05-24T21:21:31

Striking the second biggest deal of his career and making a major move in the energy industry, billionaire investor Warren Buffett agreed Tuesday to pay $5.1 billion in cash to acquire Western states electric utility PacifiCorp.

Only a $16 billion stock purchase of reinsurance giant General Re in 1998 outranks the latest buy for Buffett’s investment vehicle, Berkshire Hathaway Inc., which holds a majority interest in PacifiCorp’s buyer, Iowa-based MidAmerican Energy Holdings Co.

“The energy sector has long interested us, and this is the right fit,” Buffett said.

MidAmerican will purchase Portland, Ore.-based PacifiCorp from ScottishPower PLC, which acquired the utility in 1999. In addition to the cash payment, MidAmerican will assume $4.3 billion in PacificCorp debt and preferred stock.

The transaction, the third major acquisition in the U.S. energy industry in the last year, is expected to close in 2006. “It’s going to be one of the bigger energy companies in the country,” said Tim Winter, an analyst at A.G. Edwards & Sons.

MidAmerican, based in Des Moines, Iowa, said the deal will create an energy holding company serving approximately 3 million electric and natural gas customers in 10 states and would have 6.6 million customers worldwide. PacifiCorp will continue to be based in Portland and will retain its name. It also will continue operating as Pacific Power in Oregon, Wyoming, Washington state and northern California, and as Utah Power in Utah and Idaho.

The combined MidAmerican-PacifiCorp will have assets of more than $32 billion, including $25.3 billion in the United States. MidAmerican will have approximately $10 billion in annual revenues internationally, including $8.5 billion from the United States, the company said.

Relations between Utah Power and the state’s regulatory commission became strained after a heavy, wet snow storm downed power lines during Christmas 2003, leaving about 100,000 Utah customers in the dark for days. At the time, state officials and citizen watchdog groups questioned whether Utah Power could draw on sufficient crews for major emergencies, claims that were rejected by company officials.

The deal follows Chicago-based Exelon Corp.’s December announcement that it would acquire Newark, Newark, N.J.-based Public Service Enterprise Group Inc. for $12 billion in stock, creating the country’s biggest utility. On May 9, Charlotte, N.C.-based Duke Energy said it had agreed to buy Cincinnati-based Cinergy Corp. in a stock deal worth $9 billion.

Deregulation in the 1990s fueled a series of utility mergers and acquisitions, then activity slowed. But Winter said more deals could be coming, particularly as foreign firms sell pieces of U.S. energy companies they have found less profitable than they had hoped.

ScottishPower, for example, may not have been getting the return it wanted from PacifiCorp and put it up for sale to please stockholders, Winter said. ScottishPower Chief Executive Ian Russell said in a news release that the company intends to return about $4.5 billion of the proceeds from the sale to shareholders.

Buffett is known for buying companies and holding on to them for long-term returns. Berkshire first bought into MidAmerican Energy in 2000 for $1.24 billion, acquiring about 76 percent of the company. It has increased its stake to 80.5 percent, investing a total of about $3.3 billion.

The remaining 19.5 percent of MidAmerican is owned by Buffett partners David Sokol, chairman and CEO of MidAmerican, Greg Abel, president of MidAmerican, and Walter Scott, a longtime friend of Buffett’s who is on Berkshire’s board.

Buffett has called Sokol, Abel and MidAmerican a key part of Berkshire, which also owns or has holdings in a wide range of businesses, including insurance, soft drink, candy, furniture, restaurant and carpet firms.

“Berkshire stands ready to inject massive amounts of money into MECH — and it will be fun to watch how far Dave and Greg can take the business,” Buffett said in his 2002 annual report.

Just one month ago, Buffett lamented at Berkshire’s annual meeting that he had about $45 billion in cash and no major acquisitions in sight.

“We’d love to have one in the $5 billion to $10 billion range,” Buffett said at the meeting.

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