In his 2019 letter to shareholders of Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial), the Oracle of Omaha, Warren Buffett (Trades, Portfolio), called the group's energy business one of its "lead dogs."
This business is often overlooked by investors and analysts that review Berkshire because it's nowhere near as flashy as the group's equity portfolio. However, over the past decade or so, it has become a wealth-creating powerhouse for the business.
Berkshire Hathaway Energy
Berkshire Hathaway Energy's (BHE) roots can be traced back to 2000, when the business that we know today first came into existence. Over the years, the team running the business has reinvested group profits to drive growth without borrowing significant amounts of money or making large acquisitions, which may or may not end up destroying shared equity.
Interestingly, the parent company does not own all of BHE. At the end of 2019, it only owned 91%, with managers Walter Scott Jr. and Greg Abel owning the remainder.
BHE has been an enormous success for Berkshire, Buffett and the business's customers over the past two decades. As Buffett noted in his 2019 letter to investors, "prices for residential customers have since risen less than 1% a year," since 2000, and the business has promised its customers there will be no increase in rates through 2028. In comparison, BHE's closest competitor in Iowa has had to increase its rates charged to residential customers by 70% due to its less profitable business model.
BHE has been able to accomplish this feat by retaining and reinvesting earnings rather than paying out profits as dividends, like almost all other utility businesses are legally required to do. As Buffett described in his 2019 letter:
"BHE has never paid Berkshire Hathaway a dividend since our purchase and has, as the years have passed, retained $28 billion of earnings. That pattern is an outlier in the world of utilities, whose companies customarily pay big dividends – sometimes reaching, or even exceeding, 80% of earnings. Our view: The more we can invest, the more we like it. Today, BHE has the operating talent and experience to manage truly huge utility projects – requiring investments of $100 billion or more – that could support infrastructure benefitting our country, our communities and our shareholders. We stand ready, willing and able to take on such opportunities."
Managing a network of utility assets isn't the most exciting business in the world. You are also unlikely to see the sort of returns achievable in other areas of the investment universe, but that's not the point. Berkshire has tens of billions of dollars in capital to deploy, and Buffett wants to be sure that when he makes a significant investment, he's going to see a suitable return.
That's where BHE excels. As Buffett said earlier this year, the energy business is "not a way to get real rich," but it is "a way to stay real rich."
This is why Berkshire's latest deal to acquire the gas distribution assets of Dominion (D, Financial) makes a lot of sense. This is an excellent opportunity for Buffett and his managers to deploy a significant amount of cash in assets that will generate predictable returns on fixed long-term contracts. Few assets fall into this bracket. Even less are available for acquisition at a reasonable price.
The deal fits into Buffett's framework to protect and grow the net worth of Berkshire and its shareholders over the long-run without taking on too much risk or investing in businesses he does not understand. That's the primary takeaway from this deal. When viewed as part of the BHE package and Berkshire's long-term goals, it's clear why Buffett jumped at the chance to buy the assets.
Disclosure: The author owns shares in Berkshire Hathaway.
Read more here:
- Buffett's Latest $10 Billion Deal Looks Great for Berkshire
- What Is Often Forgotten About the Superinvestors
- Warren Buffett on His Lack of Insight into Real Estate
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