Berkshire Hathaway’s Energy Business Became a $90B Win for Warren Buffett

Berkshire Hathaway Energy was most recently valued at close to $90 billion, up from the $2 billion that Berkshire Hathaway (ticker: BRK/A, BRK/B) paid for MidAmerican.

Berkshire Hathaway Energy has vast and varied operations. It’s one of the largest electric utilities in the country with 5.2 million customers and is the No. two owner of renewable energy—mostly wind—behind industry leader

NextEra Energy

(NEE). The company is also a leading natural-gas pipeline operator, the owner of a large U.K. utility, the operator of the U.S. real estate brokerage business HomeServices of America, and the 75% owner of one of only seven liquefied natural gas facilities, or LNG, in the country with export capabilities.

Berkshire Hathaway Energy lifted its stake in that Maryland LNG facility, Cove Point, to 75% earlier this week when it purchased a 50% interest for $3.3 billion from

Dominion Energy

(D), the Mid Atlantic utility. 

Berkshire Hathaway Energy also holds Berkshire’s hugely successful investment in Chinese electric vehicle producer BYD, which was worth over $8 billion at its peak last year, up from a cost of about $200 million. Berkshire Hathaway Energy has been reducing its BYD interest this year.

Want to buy a piece of Berkshire Hathaway Energy? You can’t. 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 died in 2021 at age 90. Berkshire watchers are wondering whether any of Scott’s heirs will sell stock this year; none has been sold since his death.

The most recent stock sale came in June 2022 when Greg Abel, the former CEO of Berkshire Hathaway Energy and the current head of Berkshire Hathaway’s sprawling non-insurance operations, sold a 1% stake in the business back to Berkshire Hathaway Energy for $870 million.

“It’s a nice and stable contributor to Berkshire Hathaway,” says Jim Shanahan, an Edward Jones analyst. “It now accounts for about 10% of revenues and earnings at Berkshire and could contribute a mid-teens percentage in 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 stake in

Apple

(AAPL).

Berkshire Hathaway Energy, like its parent, has complex financials. Its annual 10-K report runs over 500 pages and an 2022 investor presentation on the Berkshire Hathaway website contains 85 slides.  

Buffett likes the ability to invest huge amounts of money at the utility and earn regulated returns of about 10% on capital invested. Berkshire Hathaway Energy has about $47 billion in shareholder equity (and more than $50 billion of debt) and earned $4.4 billion last year from operations. The company has been one of the biggest beneficiaries of federal tax credits for installing wind power. It had a tax credit of $1.6 billion in 2022, largely due to wind credit. Buffett loves tax credits.

Buffett also hates issuing equity and diluting investors, and has said he’d rather prep for a colonoscopy than issue Berkshire stock. He has taken the same approach at the utility with little equity issuance since the purchase more than 20 years ago.

Assuming a value of $90 billion, Berkshire Hathaway Energy is worth about 12% of Berkshire’s current market capitalization of $760 billion. Berkshire’s Class A shares finished up 0.8% Wednesday at $524,400 each, and have gained 12% so far this year.

If it were publicly traded, Berkshire Hathaway Energy would be the second largest utility in the country ranked by market value—ahead of No. 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 more 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, an 18% compound annual growth rate.

Buffett regularly praises Berkshire Hathaway Energy. “BHE’s record of societal accomplishment is as remarkable as its financial performance. …, BHE has become a utility powerhouse (no groaning, please) and a leading force in wind, solar and transmission throughout much of the United States,” he wrote in his 2021 letter to shareholders.

LIke its parent, Berkshire Hathaway Energy is opportunistic and highly diversified and the Cove Point deal illustrates the Buffett approach.

Dominion is focusing on its core utility business and didn’t 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 touch fossil-fuels businesses.

Berkshire Hathaway Energy got the half interest in Cove Point at what looks like an attractive price of about 10 times projected 2025 Ebitda, or earnings before interest, taxes, 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 utility analysts wrote earlier this week that Berkshire got a good price.

One of Berkshire Hathaway Energy’s big advantages is that it retains all its earnings, a contrast with investor-owned utilities which typically pay out 65% of their profits in dividends and regularly issue equity and debt to fund growth projects.

With the industry embarking on a massive spending boom this decade to build renewable power to replace coal and fossil-fuel plants and construct and upgrade transmission lines, Berkshire Hathaway Energy has an edge—plus a deep-pocketed parent that stands ready to lend it money if needed.

Berkshire Hathaway Energy has projected capital spending of more than $9 billion in both 2023 and 2024, with about $2 billion of that earmarked for wind and solar. Berkshire Hathaway Energy also is constructing an $18 billion electric transmission network in the West to handle growing wind and solar generation.

Buffett loves the capital-intensive business as does Abel, his likely successor, who spends a good portion of his time focused on it. With its robust outlook, Berkshire Hathaway Energy could be powering its parent’s profits for years to come.

Write to Andrew Bary at [email protected]