MidAmerican Energy Holdings Co, which owns Mid-American Energy, has renamed itself Berkshire Hathaway Energy, saying the new name “more accurately reflects our growing, diversified mix of businesses and the customers they serve.”
Mid-American is owned by Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) conglomerate.
The newly renamed Berkshire Hathaway Energy announced earlier today that it had acquired 100% of an Alberta-based power transmission unit, AltaLink, from the SNC-Lavalin Group Inc, a Canadian construction giant, for C$ 3.2 billion, or approximately US$ 2.92 billion.
AltaLink is a regulated transmission business
“The acquisition of AltaLink represents a great long-term opportunity to invest in Alberta’s critical transmission infrastructure and in Canada,” said Greg Abel, chairman, president and chief executive of Berkshire Hathaway Energy.
According to the joint press release, Altalink had assets of C$5.9 billion as of December 31, 2013, and earned C$161.6 million on 2013 revenues of C$534.1 million. It owns about 12,000 km of transmission lines as well as 280 substations and serves 3 million Albertans.
According to a Bloomberg report, which quoted Paul Patterson, an analyst at Glenrock Associates LLC, the transaction was a natural fallout of Berkshire’s sustained interest in the acquisition of regulated utility platforms. Last year, Berkshire Hathaway Energy purchased Nevada’s largest electricity utility, NV Energy, for $5.6 billion.
The acquisition has been announced on the eve of Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B)’s widely anticipated and heavily attended shareholders’ meeting at Omaha, Nebraska on May 3, and makes good on Buffett’s promise that the NV Energy Inc (NYSE:NVE) purchase by MidAmerican would not be its last.
Barclays on Berkshire Hathaway
“We view Berkshire’s intrinsic value as being meaningfully above book value as well as the current share price,” say Barclays analysts Jay Gelb, Sarah DeWitt, Jessica Idiculla, John O’Brien and Adam Frank in their April 28, 2014 research note on Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B), the conglomerate and ultimate owner of Berkshire Hathaway Energy. “Berkshire Hathaway has substantial leverage to an improving economy including the housing market with its non-insurance business accounting for two-thirds of operating earnings,” they add.
The analysts have an Overweight rating on the company and a price target of $223,500.
MidAmerican (since renamed Berkshire Hathaway Energy) would contribute approximately 10% of 2014 estimated pre-tax operating earnings of Berkshire Hathaway Inc.(NYSE:BRK.A).
Berkshire Hathaway Energy is cash-rich and tax-smart
“An important differentiating factor for MidAmerican is it retains all of its earnings – it has not paid a cash dividend since 2000, when Berkshire acquired an ownership interest; other utilities have high pay-out ratios to shareholders,” observes Barclays.
As a result, MidAmerican’s cash strength allows it to make substantial investments in new energy fields such as wind and solar generation, not to mention acquisitions such as AltaLink today.
Another factor that sets it apart from other utilities is the fact that Berkshire is able to set off the tax credits received on MidAmerican’s wind and solar investments from its own taxable income.
“This situation is in contrast to most utilities, which cannot fully benefit from wind and solar projects because they do not generate enough taxable income to benefit from the tax credits,” say the analysts.
Berkshire Hathaway Energy is a defensive play
Here is an excerpt from Buffett’s 2013 letter to investors:
“At MidAmerican, meanwhile, two factors ensure the company’s ability to service its debt under all circumstances. The first is common to all utilities: recession-resistant earnings, which result from these companies exclusively offering an essential service.
The second is enjoyed by few other utilities: a great diversity of earnings streams, which shield us from being seriously harmed by any single regulatory body. Now, with the acquisition of NV Energy, MidAmerican’s earnings base has further broadened.
This particular strength, supplemented by Berkshire’s ownership, has enabled MidAmerican and its utility subsidiaries to significantly lower their cost of debt. This advantage benefits both us and our customers.”
Berkshire Hathaway Energy’s portfolio
The unit owns a broad wealth of assets such as electric and gas utilities, interstate natural gas pipelines, electric distribution companies in the UK, interest in electrical transmission and various independent power projects.
It also owns second-biggest residential real estate brokerage firm in the United States.
Today’s AltaLink acquisition is a natural fit in Berkshire Hathaway Energy’s business portfolio.
Berkshire Hathaway Energy (earlier MEHC) segmental information
“MEHC revenues in 2013 were $12.6bn, leading to $1.8 billion in pre-tax earnings and $1.5 billion in net earnings attributable to Berkshire,” reports Barclays. “This represents about an 11% increase in net earnings versus 2012.”
Favourable economic return environment
Electric utilities are granted an economic return on their capital investment by regulatory authorities, while they are able to recoup variable operating costs as well as capital expenses at actuals.
Utilities often apply for increase in the billing rate to compensate for a rise in operating expenses, taxes, interest and D&A costs, and of course, the return on capital employed.
“We think it is worth pointing out that the economic return to utilities is very constructive. The cost of funds has dropped at an even faster pace than allowed ROEs, allowing utilities to average an approximate 700 bp spread over the 30-year Treasury in the last 2-3 years,” observes Barclays. “This spread has remained stable, and we expect this situation to remain constructive as long as the dormant period of fuel price inflation persists.”
Outlook
Overall, Barclays expects that Berkshire Hathaway Energy could clock organic earnings growth of over 6% in the coming few years, which could be boosted by strategic acquisitions in the utility as well as the real estate businesses.
