Why Berkshire Hathaway’s Utility Business Is a Crown Jewel

Buffett has talked favorably about the unit in previous letters, calling it and the Burlington Northern Santa Fe railroad the “two lead dogs” of Berkshire’s sprawling non-insurance operations.

Berkshire Hathaway stock (ticker BRK.A and BRK.B) has been strong this year and over the past 12 months, helped by a revival in value stocks and the advance in

Apple

(AAPL), the company’s largest equity investment. The class A shares are up 33%, to $473,364 in the past year, against 16% for the S&P 500 index. Berkshire’s class B stock finished Friday at $314.99. Berkshire is now valued at over $700 billion.

Berkshire Hathaway Energy earned $3.8 billion in the 12 months ending Sept. 30, 2021, helped by over $1 billion in tax credits largely related to federal credits for wind power. Instead of paying income taxes in recent years, Berkshire Hathaway Energy has taken advantage of federal tax incentives and received sizable credits tied to wind power installations.

The company has utility subsidiaries on the West Coast, the Midwest, and the U.K. It also operates natural gas pipelines that transport 15% of the country’s gas and has a large real estate brokerage business.

In the 2020 annual letter, Buffett said:

“[BHE] pays no dividends on its common stock, a highly unusual practice in the electric-utility industry. That Spartan policy has been the case throughout our 21 years of ownership. Unlike railroads, our country’s electric utilities need a massive makeover in which the ultimate costs will be staggering. 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.”

The lack of a dividend enables BHE to invest heavily without accessing capital markets as much as investor-owned utilities that typically pay out more than half their earnings in dividends.

Berkshire Hathaway Energy has invested $35.5 billion in renewable power sources mostly wind and gets 44% of its generating capacity from renewables. It plans to spend another $4.9 billion on new renewables capacity by 2023 as the company expands one of the largest green portfolios in the world. Total capital expenditures are projected at $24 billion from 2021 to 2023. Among its big projects are a huge transmission network in the western U.S. that will help carry renewable power.

 Berkshire Hathaway Energy stock doesn’t trade publicly. It is 91% owned by Berkshire. Walter Scott, who died in September 2021, owned 8% and that stake is now controlled by his estate. Greg Abel, a Berkshire vice chairman and former Berkshire Hathaway Energy CEO, owns 1%. Scott was a member of Buffett’s inner circle and a Berkshire Hathaway board member from 1988 until his death. Scott was a large shareholder in MidAmerican Energy, the platform on which Berkshire has built its utility empire, when Berkshire bought the Midwestern utility in 2000.

The last reported transaction involving BHE Stock of which Barron’s is aware was a sale in early 2020 by Scott that valued the company at about $53 billion. Scott sold 180,000 shares of the company back to Berkshire Hathaway Energy for $126 million. BHE has about 76 million shares outstanding.

With Scott’s death, there could be more sales by his estate either for cash or for Berkshire Hathaway stock. It’s also possible that Abel, who owns about $500 million in BHE stock, could swap it for Berkshire Hathaway stock given that he is in line to succeed the 91-year-old Buffett as CEO. Share ownership is part of the Berkshire executive culture with Buffett holding a controlling stake of roughly 16%.

BHE is probably worth more now than in early 2020 given the strength in shares of many publicly traded utilities and the company’s growth. Berkshire built the business from a single electric utility, MidAmerican Energy, which was purchased by Berkshire for under $3 billion in 2000. Shares of the company are up 20-fold since then, making it one of Berkshire’s best investments.

BHE is a Buffett favorite, with the CEO writing about the huge investments that the company is making in renewable power and transmission lines to transport wind and solar energy, especially on the West Coast. BHE is one of the more valuable single businesses within Berkshire, behind just Burlington Northern, which is probably worth about $150 billion based on the value of rival

Union Pacific

(UNP).

BHE has significant shareholder equity of $43 billion, but also a sizable debt of about $52 billion. It has single-A credit ratings.

BHE also holds Berkshire’s 8% stake in

BYD
,
(BYDDY) the Chinese battery company, that is worth about $8 billion, more than 30 times its cost.

BHE has reduced its coal-fired generating capacity like other utilities, but still gets 24% of its power from coal, with 33% coming from wind and 32% from natural gas. It plans to phase out its coal plants by 2050.

On its green initiatives, here’s what the company says in the presentation: “We are striving to achieve net zero greenhouse gas emissions in a manner our customers can afford, our regulators will allow and technology advances support.”

 The company’s 5.2 million U.S. customers pay below-average rates for electricity, which BHE highlighted in the presentation. Its U.S. customers pay less than 10 cents per kilowatt/hour, about half that in high-cost states like Massachusetts and Connecticut.

Barron’s has urged Berkshire to hold an investor day to highlight Burlington Northern, Geico, and its many industrial businesses so that investors can better understand the complex company.

The BHE presentation is a model for the rest of Berkshire.

Write to Andrew Bary at [email protected]