by When
Berkshire Hathaway
When he agreed to buy a small Midwestern utility company in 1999, CEO Warren Buffett said it was “right in our sweet spot” and offered “good growth potential.”
Buffett was right on both counts, as the company, MidAmerican Energy, became the core of what is now one of his company’s major subsidiaries, Berkshire Hathaway Energy, and one of Buffett’s biggest scores in his 58 years at the helm of Berkshire.
Berkshire Hathaway Energy was recently valued at nearly $90 billion, up from the $2 billion Berkshire Hathaway (ticker: BRK/A, BRK/B) paid for MidAmerican.
Berkshire Hathaway Energy has extensive and varied operations. It is one of the largest electricity companies in the country with 5.2 million customers and is the number two owner of renewable energy, mainly wind, behind market leader
NextEra Energy
(NO). The company is also a leading natural gas pipeline operator, the owner of a major UK utility company, the operator of US brokerage firm HomeServices of America, And the 75% owner of one of only seven liquefied natural gas, or LNG, facilities in the country with export capabilities.
Berkshire Hathaway Energy earlier this week increased its stake in that Maryland LNG facility, Cove Point, to 75% when it bought a 50% stake for $3.3 billion from
Dominion Energy
(D), the Mid-Atlantic utility.
Berkshire Hathaway Energy also owns Berkshire’s hugely successful investment in Chinese electric vehicle maker BYD, which was worth more than $8 billion at its peak last year at a cost of about $200 million. Berkshire Hathaway Energy reduced its BYD stake this year.
Want to buy a piece of Berkshire Hathaway Energy? That is not possible. Berkshire Hathaway owns 92% of the company and the estate of Walter Scott – a key early investor in MidAmerican Energy and former Berkshire Hathaway board member – owns the other 8%. Scott passed away in 2021 at the age of 90. Berkshire viewers are wondering if any of Scott’s heirs will be selling stock this year; nothing has been sold since his death.
The most recent share sale occurred in June 2022 when Greg Abel, the former CEO of Berkshire Hathaway Energy and current head of Berkshire Hathaway’s sprawling non-insurance business, sold a 1% stake in the company back to Berkshire Hathaway Energy for $870 million.
“It’s a nice and stable contributor to Berkshire Hathaway,” said Jim Shanahan, an Edward Jones analyst. “It now accounts for about 10% of revenue and earnings at Berkshire and could contribute a percentage of mid-teens within five years.”
Buffett has called Berkshire Hathaway Energy one of Berkshire’s four “jewels,” along with its property and casualty insurance business, the Burlington Northern Santa Fe railroad, and its equity interest in
Apple
(AAPL).
Berkshire Hathaway Energy, like its parent company, has complex financials. The annual 10-K report is over 500 pages, and a 2022 investor presentation on Berkshire Hathaway’s website has 85 slides.
Buffett likes the opportunity to invest huge amounts of money with the utility company and earn a regulated return of about 10% on invested capital. Berkshire Hathaway Energy has about $47 billion in equity (and more than $50 billion in debt) and made $4.4 billion from operations last year. The company is one of the largest beneficiaries of federal tax credits for installing wind energy. It had a $1.6 billion tax credit in 2022, thanks in large part to wind credit. Buffett likes tax cuts.
Buffett also hates issuing stocks and diluting investors, and has said he would rather prepare for a colonoscopy than issue Berkshire stock. He’s taken the same approach at the low-equity utility company since its purchase more than 20 years ago.
Assuming a $90 billion valuation, Berkshire Hathaway Energy is worth about 12% of Berkshire’s current $760 billion market cap. Berkshire’s Class A shares ended up 0.8% on Wednesday at $524,400 each and have gained 12% year-to-date.
If traded on the stock exchange, Berkshire Hathaway Energy would be the second-largest utility in the country, ranked by market capitalization, ahead of number two
southern co
(SO) and No. Three
Duke energy
(DUK) but behind NextEra Energy.
When Berkshire initially bought MidAmerican, Buffett said, “We’re willing to wait longer than some investors for that potential to be realized.” Few endeavors illustrate Buffett’s patient approach to wealth creation better than Berkshire Hathaway Energy.
The company has grown steadily through acquisitions and internally. Berkshire Hathaway Energy earned $4.4 billion last year, compared to about $122 million in 2000, a compound annual growth rate of 18%.
Buffett regularly praises Berkshire Hathaway Energy. “BHE’s track record in social performance is as remarkable as its financial performance. …, BHE has become a utility powerhouse (no moans, please) and a leading wind, solar and transmission force in much of the United States,” he wrote in his 2021 letter to shareholders.
Like its parent company, Berkshire Hathaway Energy is opportunistic and highly diversified, and the Cove Point deal exemplifies the Buffett approach.
Dominion focuses on its core utilities business and did not view the LNG business as central to its strategy. Berkshire doesn’t see the world that way — it likes to be diversified — and was happy to buy it at a time when many companies don’t want to get involved with fossil fuel companies.
Berkshire Hathaway Energy acquired half of the stake in Cove Point at what appears to be an attractive price of about 10 times projected 2025 Ebitda, or earnings before interest, taxes, depreciation and amortization. The 2025 Ebitda usage reflects non-core activities that will end in 2025.
The owner of the remaining 25% of Cove Point, Brookfield Infrastructure Partners, paid a higher valuation in 2019. UBS utility analysts wrote earlier this week that Berkshire got a good price.
One of the great benefits of Berkshire Hathaway Energy is that it retains all of its revenue, unlike investor-owned utilities that typically pay out 65% of their earnings in dividends and regularly issue stocks and debt to fund growth projects.
As the industry embarks on a massive spending boom this decade to build renewable energy to replace coal and fossil fuel plants and build and upgrade transmission lines, Berkshire Hathaway Energy has a head start – plus a big-socked parent company ready to take the cash. to borrow if necessary.
Berkshire Hathaway Energy expects capital expenditures of more than $9 billion in both 2023 and 2024, of which approximately $2 billion will be for wind and solar energy. Berkshire Hathaway Energy is also building an $18 billion electrical transmission network in the West to handle growing wind and solar generation.
Buffett likes capital-intensive businesses, as does Abel, his likely successor, who devotes much of his time to it. With its robust outlook, Berkshire Hathaway Energy could drive its parent’s earnings for years to come.
Write to Andrew Bary at andrew.bary@barrons.com
