A Closer Look at the NV Energy, Inc. (NVE) Merger Deal

When Berkshire Hathaway Inc. (NYSE:BRK.B) makes an acquisition, the global investment community takes notice. Recently, Berkshire Hathaway’s MidAmerican Energy announced that it would acquire NV Energy, Inc. (NYSE:NVE) for around $23.75 per share in cash, with a total transaction value of around $10 billion, including debt. Since 2009, NV Energy has experienced a consistent rise in its stock price, from only $8.20 to around $23.50 per share at the time of writing. Let’s dig deeper to see why MidAmerican Energy likes NV Energy.

Growing operating income and operating cash flow

NV Energy, Inc. (NYSE:NVE)NV Energy, Inc. (NYSE:NVE), incorporated in 1983, operates four subsidiaries: Nevada Power Company (NPC), Sierra Pacific Power Company (SPPC), NVE Insurance and Lands of Sierra. NV Energy delivered electric and natural gas to around 1.3 million customers in Nevada. Most of its revenue, $2.14 billion, or 71.8% of the total 2012 revenue, was generated from NPC Electric, while the SPPC generated nearly $834 million in revenue. NPC Electric was also the biggest operating income contributor, with nearly $602.3 million in operating income, while SPPC generated more than $188.1 million in profits in 2012.

NV Energy, Inc. (NYSE:NVE) seems to operate quite efficiently, with consistent increasing operating income. While the revenue did not move much, from $2.79 billion in 2003 to nearly $3 billion in 2012, the operating income advanced significantly, from $132 million to $785 million during the same period. The operating cash flow also followed the same trend, rising more than three times from $269 million to $875 million in the past three years. With the stable business, NV Energy could comfortably employ quite some debt in its operations. As of March 2013, it had $3.54 billion in equity, $251 million in cash and more than $5 billion in debt.

A reasonable valuation

With around $10 billion in total enterprise value, NV Energy, Inc. (NYSE:NVE) is worth around 8.5 times EV/EBITDA. Compared to its peers such as Avista Corp (NYSE:AVA) and Sempra Energy (NYSE:SRE), it seems like NV Energy got a fair deal. At $26.70 per share, Avista is worth around $1.6 billion. Avista got the similar EV multiple to NV Energy, Inc. (NYSE:NVE), at 8.6. Avista is the retail electric and retail natural gas services for more than 318,000 residential customers, and around 40,000 commercial customers in the U.S. Income investors might be quite familiar with the company due to its consistently increasing dividends. Since 2003, Avista’s dividend has increased from $0.49 per share to $1.16 per share. At the current trading price, Avista Corp (NYSE:AVA) pays a juicy dividend at 4.4% to investors. At the end of March, the company received the approval from the Idaho Public Utilities Commission on the natural gas base rates increase of 4.9%, or $3.1 million. According to the company, the agreement set a 50% equity layer and a ROE at 9.8%. The increase in base retail rates would be in effect from the beginning of 2015.