Berkshire Hathaway’s Utility Business Highlights Warren Buffett’s Magic

Earnings at

Berkshire Hathaway
‘small

The big utility has grown more than 30-fold since Warren Buffett bought the core of that business in 2000, illustrating the power of the CEO’s patient approach to building businesses and wealth for shareholders.

If the business, Berkshire Hathaway Energy, were publicly traded, it would be the second largest in the US by market value. Two decades of reinvesting its profits instead of paying them out to shareholders have turned a modest Iowa utility into a behemoth that ranks among Buffett’s biggest successes in his 57 years at the helm.

“BHE has been able to grow significantly faster than peers based primarily on its relationship with Berkshire Hathaway,” said Jim Shanahan, an analyst at Edward Jones. wrote in an email to Barron’s. “Most pure utilities target a payout (dividend) ratio of 60-70% of earnings. There is no such payout target for BHE, allowing the company to focus on using available cash for property, plant and equipment investments and acquisitions.”

BHE retains all of its profits.

Berkshire Hathaway (ie: BRK/A, BRK/B) initially invested about $2 billion to buy MidAmerican Energy, the Iowa utility that is the company’s core. Since then, Berkshire Hathaway Energy’s after-tax profit has risen to $4 billion from $122 million.

Berkshire Hathaway Energy is not publicly traded, but its value was highlighted in June when it bought a 1% stake in the business from Greg Abel, a Berkshire executive considered a likely successor to Buffett as CEO. BHE paid $870 million for that 1% interest, according to Berkshire’s second-quarter 10-Q filing, which was released earlier in August.

This values ​​the company at $87 billion, more than

Duke Energy

(DUK) and

Southern Co
.

(SO), the No. 2 and No. 3 electric utilities in the country by market value. Only

NextEra Energy

(NEE) is worth more in the stock market.

Buffett himself probably set that $870 million price tag. The CEO told Berkshire’s annual meeting in April that it would be easier to do a deal for Abel’s stake while he is still “alive and around,” noting that the board gives him a lot of leeway.

“If I’m not around, the pressures are on the managers to do what the lawyers tell them and the lawyers to do this and that, and then they want to bring in investment bankers to do a valuation,” Buffett said. . “And the whole thing is a game from that point on.”

The price looks fair, about 22 times BHE’s net income last year, in line with other big utilities.

BHE’s value rose significantly from about $53 billion in early 2020, when BHE bought back some shares from Walter Scott, a Berkshire executive who died last year. Berkshire now owns 92% of BHE and Scott’s estate owns the remaining 8%. There is speculation that the Scott estate may want to sell that interest this year.

BHE is a large company that owns electric utilities in the Midwest and West Coast, one of the largest wind and other renewable energy portfolios in the country, and a handful of natural gas pipelines that carry 15% of U.S. natural gas . It also owns a major property brokerage, a UK utility and a valuable 8% stake in BYD, the Chinese car and battery company.

BYD’s stake is worth nearly $8 billion. BHE paid just $232 million in 2008 for the BYD interest, an idea supported by Berkshire vice chairman Charlie Munger.

“BHE has become a powerhouse (no whining, please) and a leader in wind, solar and transmission across much of the United States,” Buffett wrote in a shareholder letter earlier this year.

The utility has grown steadily because, like Berkshire, it has retained earnings for expansion, allowing it to grow in bulk without requiring large amounts of capital from its parent company. This contrasts with investor-owned companies that often pay out 60% or more of their earnings in dividends. BHE has also accumulated significant debt, which it can service because most of the utilities are subject to regulations that more or less guarantee reliable earnings.

“Unlike the railroads, our nation’s electric utilities need a massive overhaul in which the ultimate cost will be staggering,” Buffett wrote in his 2020 shareholder letter. “The effort will absorb all of BHE’s profits for in the coming decades. We welcome the challenge and believe the additional investment will be well rewarded.”

Utilities can often earn around a 10% return on their equity. Berkshire did not respond to a request for comment on BHE.

“BHE is so valuable to Berkshire because it can absorb large amounts of new and reinvested capital with a tax advantage and with highly regulated, predictable and acceptable to attractive returns,” says Chris Bloomstran, chief investment officer at Semper Augustus Investment Group in St. , owner of Berkshire.

Berkshire’s success with BHE is right up there with other Buffett coups. These include the

apple

Equity stake (AAPL) now worth more than $150 billion and the 2010 purchase of the Burlington Northern Santa Fe Railroad, a business valued at about $150 billion.

Then there was his timely purchase

Coca Cola

(KO) shares, now worth more than $25 billion, in the late 1980s, and the acquisition of National Indemnity, an insurance company at the core of Berkshire’s vast insurance business, in the late 1960s. value of Berkshire is about 650 billion dollars.

In an 82-page investor presentation in September 2021, BHE presented its business and financial statements. The U.S. utility serves 5.2 million customers and has invested $35.5 billion in renewable energy, mostly wind, and had plans to spend another $4.9 billion through 2023 on renewable energy.

Total capital spending, including major power grid investments, is projected to average $8 billion annually from 2021 to 2023. The company took advantage of the tax code and had about $1 billion in income tax credits in both 2021 and and 2020 related to wind energy power.

Abel, who heads Berkshire’s massive non-insurance business, was BHE’s CEO from 2008 to 2018, when he moved to his current job at the parent company. He was chairman of BHE from 1998 to 2008, compiling a record that was likely crucial in positioning him as the successor to Buffett, who turns 92 on August 30.

He got his 1% stake while an executive at MidAmerican, mostly through option grants. Although BHE is not publicly traded, the price BHE paid for Abel’s stake implies that the value of a share is more than 30 times greater since Berkshire bought the company in 2000. Reflecting Buffett’s aversion to issuing shares, the number of shares in BHE has risen only modestly since then.

Write to Andrew Bary at andrew.bary@barrons.com

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