Warren Buffett Puts Wind in Berkshire’s Sails

Source: By ANUPREETA DAS, Wall Street Journal • Posted: Friday, October 24, 2014

Billionaire Investor Doubles Down on Renewables in Energy Strategy

Greg Abel has spearheaded Berkshire Hathaway Energy’s push into renewables.
Greg Abel has spearheaded Berkshire Hathaway Energy’s push into renewables.

Warren Buffett is synonymous with his hometown of Omaha, Neb., but for a glimpse into the future of his investment empire, look east…to Iowa.

In the neighboring Hawkeye State, the Berkshire Hathaway Inc. chairman has sunk billions into wind-farm projects, part of a big gambit on renewable energy by a utility company he acquired in 2000 and has built into one of the country’s largest power suppliers.

Through a majority-owned subsidiary, Berkshire Hathaway Energy, Mr. Buffett plans to double the $15 billion already committed to renewable-energy projects through early this year, and he is on the hunt for more utility acquisitions.

Charles T. Munger , Mr. Buffett’s longtime business partner and Berkshire’s vice chairman, last month predicted that the company would be “the biggest utilities business in the United States” in a few years.

The energy unit is key to Berkshire’s future—it generates more than 7% of the conglomerate’s earnings, and is likely to climb—while also providing Mr. Buffett a way to invest Berkshire’s ever-growing cash pile.

“Charlie and I for decades said that the best businesses don’t need capital and that’s still the case,” Mr. Buffett said in an interview. “But we’ve reached a point in Berkshire’s life where we also are quite satisfied with businesses that require capital as long as they provide a decent rate of return.”

Berkshire Hathaway Inc. had $55.5 billion of cash as of June 30.

Another reason many Buffett watchers are paying attention: Berkshire Hathaway Energy is run by Greg Abel, a 52-year-old Canadian who is among the younger executives seen by analysts as possibly succeeding the 84-year-old billionaire as CEO.

For Mr. Buffett, who entered the energy industry in 2000 with Berkshire’s $2 billion purchase of what was then called MidAmerican Energy Holdings Co., the bet is straightforward: People will always need power, come boom or bust. As he likes to quip, owning a utility isn’t a way to get rich, but to stay rich.

Berkshire Hathaway Energy—as MidAmerican Energy Holdings was renamed this April—supplies electricity to more than 8 million customers globally. That number will likely swell to 11 million if Berkshire closes its $3 billion acquisition of a Canadian power transmission company later this year as expected.

In addition to the renewable-energy projects, Berkshire has spent roughly $15 billion on acquisitions that have diversified the energy company’s sources of revenue. Last year, it bought Nevada’s largest utility, NV Energy, for $5.6 billion. Mr. Buffett said in his last letter to shareholders that will “not be [the] last major acquisition in Energy.” Soon after, Berkshire announced plans to buy Alberta-based AltaLink.

Berkshire Hathaway Energy has bet big on wind power, in Iowa, in particular.
Berkshire Hathaway Energy has bet big on wind power, in Iowa, in particular.BLOOMBERG NEWS

Mr. Buffett praised Mr. Abel for shepherding the utility through multiple acquisitions and a big commitment to renewable energy. “It is quite a story,” Mr. Buffett said.

Although many analysts consider utilities a lackluster investment as traditional sources of energy lose favor and distribution models change, they contend that Berkshire’s early focus on renewables will help it manage the transition better.

“Electricity is pretty fundamental, but the means of producing it will shift gradually over time,” Mr. Buffett said.

Messrs. Buffett and Abel don’t make a secret of the fact that their renewable-energy investments have been driven in large part by tax credits, which the U.S. government has for years offered to offset the costs of building wind and solar farms.

With the tax credit for wind power having expired and another for solar set to expire in 2016, Mr. Abel, who oversaw Berkshire’s purchase of one of the world’s largest solar farms in California, said he was expecting a “significant impact” to the economics of investing in renewable power.

Mr. Abel said “2016 in our minds is still a long way off.” He added that he expects the cost of deploying alternative technologies to come down over time, but that Berkshire Hathaway Energy would “encourage the federal government” to continue evaluating the impact of such policies.

Utilities require heavy investments to maintain and upgrade grids. Regulated utilities, such as the ones Berkshire owns, are allowed to operate monopolies in exchange for keeping their prices low, with rates of return being set by regulators. Many of Berkshire’s customers pay lower rates than the national average.

That doesn’t allow much wriggle room. However, Berkshire has managed to find returns of at least 12% on its invested capital, according to analysts. That is partly because Berkshire Hathaway Energy doesn’t pay any dividends to its shareholders, including its 89.8% owner Berkshire Hathaway (Berkshire board member Walter Scott and his family and Mr. Abel own the rest). Instead, it reinvests its earnings into the business, which regulators encourage.

Warren Buffett’s bet on energy is fairly straightforward: People will always need power, come boom or bust.
Warren Buffett’s bet on energy is fairly straightforward: People will always need power, come boom or bust. BLOOMBERG NEWS

In a note last year, Andrew Bischof, an equities analyst at Morningstar Inc., called Berkshire Hathaway Energy “one of the largest, top-performing utilities of the last half-decade” by return on capital, a trend he said has continued in 2014. He values the company at about $31 billion.

A utilities lifer who grants few interviews, Mr. Abel has headed Berkshire’s energy business since 2008 when the Des Moines-based arm’s former CEO David Sokol took on a bigger role at the conglomerate. Mr. Sokol left Berkshire in 2011.

Mr. Abel has built a reputation as an astute deal maker, with an easygoing manner similar to other senior Berkshire executives.

Since 2004, Berkshire has invested $5.8 billion into wind projects in Iowa, Mr. Abel said. The Iowa utility, still called MidAmerican under the Berkshire Hathaway Energy banner, has built more than 3,300 megawatts, or 64% of Iowa’s wind-generation capacity, compared with about 100 megawatts it had built there by 2000.

Iowa driver’s licenses now have wind turbines in the background, said Mr. Abel: “That’s how proud we are.”