AltaLink Acquisition

[bizaro86]

Although the acquisition is not really material to BRK, I though some of you might be interested in a bit of an analysis. Because AltaLink is a regulated transmission provider in Alberta, they publish financials. You can find them here

 

http://www.altalink.ca/files/pdf/news/financial/quarterly/2013%20Q4%20ALP%20FS%20and%20Notes.pdf

 

Equity at the end of the year was $1.8 billion, so BRK paid nearly 1.8X book value, and roughly 20X last year's earnings. Operating cash flow is higher due to depreciation, but depreciation is truly economic in this case, as it reduces the capital base they get to charge a return on. So the price paid was pretty high based on current economics.

 

However, the company has huge growth potential. Last year they spent $1.7 billion in capital spending, which puts a significant amount of additional equity to work. The company is the exclusive transmission line provider for areas including much of the oilsands, the industrial heartland near edmonton, Alberta's largest cities of Calgary and Edmonton, and the southern part of the province where there are significant wind generation projects going in.  All of these lead to large expansions of the transmission grid.

 

The companies return is regulated as follows:

 

WHEREAS, by Decision 2013‐459, the Commission approved, on an interim basis, a Generic Return on

Equity for all utilities subject to Decision 2011‐474 of 8.75%, commencing December 19, 2013 and

continuing thereafter until otherwise directed by the Commission; and

 

So BRK will earn 8.75% on the equity it paid well over book for, and then 8.75% going forward on all new equity it puts into the business, which has the potential to be significant. Alberta regulators have a long history of adjusting this return based on current market cost of capital conditions, so they will be treated fairly if interest rates rise.

 

As they have the potential to put huge amounts of capital to work relative to the purchase price, BRKs return on equity from this investment should approach 8.75% within a few years.

 

Not a blockbuster investment, but a pretty good bond alternative in a low interest rate world. I was disappointed when BRK bought it, I was hoping for a spin-off.

[bizaro86]

Should also add there doesn't seem to be any restriction on them funding "equity" at the AltaLink level with debt from MidAmerican. So if they borrow cheap and invest at AltaLink for 8%, they could materially improve the long run ROE.

 

Obviously this isn't material to BRK, but I thought it was interesting as a case study on how the utility acquisitions work.