agreed to buy a small Midwestern utility company in 1999, CEO Warren Buffett said it “was right in our sweet spot” and had “good potential for growth.”
Buffett was right on both counts, as the company, MidAmerican Energy, became the nucleus of what is now one of his company’s largest subsidiaries, Berkshire Hathaway Energy, and one of the biggest scorers in Buffett during his 58 years at the helm of Berkshire.
Berkshire Hathaway Energy was recently valued at nearly $90 billion, compared to the $2 billion Berkshire Hathaway (ticker: BRK/A, BRK/B) paid for MidAmerican.
Berkshire Hathaway Energy has large and varied operations. It is one of the largest electric utilities in the country with 5.2 million customers and the second largest owner of renewable energy, mainly wind, behind the industry leader.
(BORN). The company is also a leading gas pipeline operator, owner of a major UK utility, operator of US property brokerage firm HomeServices of America, And the 75% owner of one of the country’s only seven liquefied natural gas, or LNG, facilities with export capabilities.
Berkshire Hathaway Energy raised its stake in this Maryland LNG facility, Cove Point, to 75% earlier this week when it bought a 50% stake for $3.3 billion from
(D), the Mid Atlantic utility.
Berkshire Hathaway Energy also owns Berkshire’s wildly successful investment in Chinese electric vehicle producer BYD, which was worth more than $8 billion at its peak last year, at a cost of around $200 million. Berkshire Hathaway Energy has cut its BYD interest this year.
Want to buy a piece of Berkshire Hathaway Energy? You can not. Berkshire Hathaway owns 92% of the company, and the estate of Walter Scott, an early key investor in MidAmerican Energy and a former Berkshire Hathaway board member, owns the remaining 8%. Scott died in 2021 at the age of 90. Berkshire watchers wonder if any of Scott’s heirs will sell stock this year; none have been sold since his death.
The most recent stock sale was in June 2022 when Greg Abel, the former CEO of Berkshire Hathaway Energy and current head of Berkshire Hathaway’s sprawling non-insurance operations, sold a 1% stake in the company to Berkshire Hathaway Energy for $870 million.
“He’s a nice and steady contributor to Berkshire Hathaway,” said Edward Jones analyst Jim Shanahan. “He now accounts for around 10% of Berkshire’s revenue and profit and could contribute to a percentage of teenagers five years from now.”
Buffett called Berkshire Hathaway Energy one of Berkshire’s four “gems” with its property and casualty insurance business, the Burlington Northern Santa Fe railroad and its stake in
Berkshire Hathaway Energy, like its parent company, has complex finances. Its 10-K annual report is over 500 pages, and a 2022 investor presentation on Berkshire Hathaway’s website contains 85 slides.
Buffett likes the possibility of investing huge sums of money in public service and earning regulated returns of around 10% on invested capital. Berkshire Hathaway Energy has about $47 billion in equity (and more than $50 billion in debt) and earned $4.4 billion last year from its operations. The company has been one of the largest recipients of federal wind power installation tax credits. He had a $1.6 billion tax credit in 2022, largely from the wind credit. Buffett loves tax credits.
Buffett also hates issuing stocks and diluting investors, and said he’d rather prepare for a colonoscopy than issue Berkshire stock. It has taken the same approach to public service with little stock issuance since the purchase over 20 years ago.
Assuming a value of $90 billion, Berkshire Hathaway Energy is worth about 12% of Berkshire’s current market cap of $760 billion. Berkshire’s Class A shares ended up 0.8% on Wednesday at $524,400 apiece and have gained 12% so far this year.
If publicly listed, Berkshire Hathaway Energy would be the nation’s second-largest utility ranked by market value, ahead of No. 2
(SO) and No. Three
(DUK) but behind NextEra Energy.
When Berkshire initially bought MidAmerican, Buffett said “we’re willing to wait longer than some investors for this potential to be realized.” Few efforts exemplify Buffett’s patient approach to wealth building better than Berkshire Hathaway Energy.
The company has grown steadily through acquisitions and internally. Berkshire Hathaway Energy earned $4.4 billion last year, up from about $122 million in 2000, a compound annual growth rate of 18%.
Buffett regularly praises Berkshire Hathaway Energy. “BHE’s record of societal achievements is as remarkable as its financial performance. …, BHE has become a powerhouse (no whining, please) and a leading force in wind, solar and transmission across much of the United States,” he said. wrote in its 2021 letter to shareholders.
Like its parent company, Berkshire Hathaway Energy is opportunistic and highly diversified, and the Cove Point deal exemplifies Buffett’s approach.
Dominion is focused on its core utility business and does not see the LNG business as a core part of its strategy. Berkshire doesn’t see the world that way – it likes to be diverse – and was happy to buy it at a time when many companies don’t want to touch fossil fuel companies.
Berkshire Hathaway Energy secured a half stake in Cove Point at what looks like an attractive price of around 10 times projected 2025 Ebitda, or earnings before interest, tax, depreciation and amortization. The use of 2025 EBITDA reflects non-core operations that will end in 2025.
The owner of the remaining 25% of Cove Point, Brookfield Infrastructure Partners, paid a higher valuation in 2019. UBS Utilities analysts wrote earlier this week that Berkshire got a good price.
One of the great things about Berkshire Hathaway Energy is that it keeps all of its profits, unlike investor-owned utilities that typically pay 65% of their profits in dividends and regularly issue stock and debt to fund development projects. growth.
As the industry embarks on a massive spending boom this decade to build renewable energy to replace coal and fossil fuel power plants and build and upgrade transmission lines, Berkshire Hathaway Energy has an advantage, plus a deep-pocketed parent company that is willing to lend him money if needed.
Berkshire Hathaway Energy has planned capital expenditures of more than $9 billion in 2023 and 2024, of which about $2 billion is earmarked for wind and solar. Berkshire Hathaway Energy is also building an $18 billion electric transmission network in the West to handle growing wind and solar generation.
Buffett loves capital-intensive business, as does Abel, his likely successor, who devotes a good deal of his time to it. With its strong outlook, Berkshire Hathaway Energy could fuel its parent company’s earnings for years to come.
Write to Andrew Bary at email@example.com