big utility business have risen more than 30-fold since Warren Buffett bought the core of that operation 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 U.S. in terms of market value. Two decades of reinvesting its earnings, rather than paying them out to shareholders, have transformed a modestly sized Iowa utility into a vast company 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 upon its association with Berkshire Hathaway,” Jim Shanahan, an analyst at Edward Jones. wrote in an email to Barron’s. “Most pure utilities target a (dividend) payout ratio of 60-70% of earnings. There is no such payout target for BHE, which enables the company to focus on utilizing available cash for investments in property, plant and equipment and for acquisitions.”
BHE retains all its earnings.
Berkshire Hathaway (ticker: BRK/A, BRK/B) initially invested about $2 billion to purchase MidAmerican Energy, the Iowa utility that is the nucleus of the company. Since then, Berkshire Hathaway Energy’s after-tax earnings have risen to $4 billion from $122 million.
Berkshire Hathaway Energy isn’t publicly traded, but its value was highlighted in June, when it bought back a 1% stake in the business from Greg Abel, a Berkshire executive who is seen as likely to succeed 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.
That values the company at $87 billion, more than
(SO), the No. 2 and No. 3 electric utilities in the country by market value. Only
(NEE) is worth more in the stock market.
Buffett himself likely set that $870 million price. The CEO said at Berkshire’s annual meeting in April that it would easier to do a deal addressing Abel’s stake while he is still “alive and around,” noting the board gives him great latitude.
“If I’m not around the pressures are on the directors to do whatever the lawyers tell them to do and the lawyers tell them to do this and that, and then they want to bring in investment bankers to make a value,” Buffett said. “And the whole thing is a game from that point forward.”
The price seems fair at roughly 22 times BHE’s net income last year, in line with other big utilities.
BHE’s value is up substantially from about $53 billion in early 2020, when BHE repurchased some stock from Walter Scott, a Berkshire director who died last year. Berkshire now owns 92% of BHE and Scott’s estate holds the remaining 8%. There is speculation that the Scott estate may be looking to sell that interest this year.
BHE is a sprawling company that owns the electric utilities in the Midwest and West Coast, one of the largest portfolios of wind and other renewable power in the country, and a handful of natural-gas pipelines that transport 15% of U.S. gas. It also has a big real-estate brokerage operation, a U.K. utility business, and a valuable 8% stake in BYD, the Chinese automotive and battery company.
The BYD stake is worth almost $8 billion. BHE paid just $232 million in 2008 for the BYD interest, an idea championed by Berkshire vice chairman Charlie Munger.
“BHE has become a utility powerhouse (no groaning, please) and a leading force in wind, solar and transmission throughout much of the United States,” Buffett wrote in his shareholder letter earlier this year.
The utility business has grown steadily as it, like Berkshire, has retained earnings for expansion, allowing it to bulk up without requiring much capital from the parent company. This contrasts with investor-owned companies that often pay out 60% or more of their earnings in dividends. BHE also has accumulated significant debt, which it can service because most of its utilities are subject to regulations that more or less guarantee reliable profits.
“Unlike railroads, our country’s electric utilities need a massive makeover in which the ultimate costs will be staggering,” Buffett wrote in his 2020 shareholder letter. “The effort will absorb all of BHE’s earnings for decades to come. We welcome the challenge and believe the added investment will be appropriately rewarded.”
Utilities often can earn a roughly 10% return on their equity. Berkshire didn’t 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 tax advantage and at largely regulated, predictable and acceptable to attractive returns,” says Chris Bloomstran, chief investment officer at Semper Augustus Investment Group in St. Louis, a Berkshire holder.
Berkshire’s success with BHE is right up there with other Buffett coups. These include the
(AAPL) equity stake now worth over $150 billion and the 2010 purchase of the Burlington Northern Santa Fe railroad, a business now worth about $150 billion.
Then there was the well-timed purchase of
(KO) stock, now worth more than $25 billion, in the late 1980s, and the acquisition of National Indemnity, an insurer that is the nucleus of Berkshire’s vast insurance business, in the late 1960s. Berkshire’s market value is about $650 billion.
In an 82-page investor presentation in September 2021, BHE went through its business and financials. Its U.S. utilities serve 5.2 million customers and it has invested $35.5 billion in renewables, mostly wind power, and had plans to spend another $4.9 billion by 2023 on renewables.
Total capital expenditures, including major electric-grid investments, were projected to average $8 billion annually from 2021 through 2023. The company has taken advantage of the tax code and had income-tax credits of about $1 billion in both 2021 and 2020 related to wind power.
Abel, who heads Berkshire’s huge noninsurance operations, was CEO of BHE from 2008 to 2018, when he moved to his current job at the parent company. He had been BHE president from 1998 to 2008, compiling a record that likely was critical in positioning him as the successor to Buffett, who turns 92 on Aug. 30.
He got his 1% stake while an executive at MidAmerican, mostly through option grants. Although BHE isn’t publicly traded, the price BHE paid for the Abel stake implies that the value of a share is up more than 30-fold since Berkshire bought the company in 2000. Reflecting Buffett’s aversion to issuing stock, the share count at BHE has risen only modestly since then.
Write to Andrew Bary at [email protected]