Berkshire Hathaway Energy

[Guest longinvestor]

https://finance.yahoo.com/news/nevada-utility-announces-three-major-175634324.html

 

Utility scale solar with battery storage. 3.5 cents per KWH to produce.

 

I did a search before creating a topic with this title. After all this is where most capital is going to go. As a shareholder my eyes are on this. At the annual meeting there was a question from Greg Warren, I think about the slowdown in the pace of capital projects @ BHE. I had spent a good amount of time at the BHE booth and they were buoyant about this and other topics. Watch BHE.

 

 

[Dynamic]

I think the dollar amount of capital expenditure is likely to decline from the very high rate recently, where the tax deferral advantages had been hugely beneficial, but are soon to diminish from that peak. Nonetheless, I'm sure a lot of capital will still be deployed at attractive rates by BHE, often with attractive tax benefits.

 

It now appears that for NVE, it's the three partner companies that will run these projects and presumably benefit from a long-term contract with NVE, and presumably it is those companies that will raise the capital required.

 

I think BHE has been looking at grid-scale battery storage for quite a while - and their BYD investment many years ago was probably in part linked to the potential of grid scale storage, which was mentioned around the time as items being closely watched, back in David Sokol's day when it was still called MidAmerican Energy.

 

3.5 cents per kWh with storage, seems very attractive. The costs of solar and battery storage are coming down so rapidly (even faster rate of decline than the cost of wind generation, with the cost per kWh of solar alone now roughly at parity with wind alone but declining faster) such that a lot more capacity of generation and storage can be bought for less capital expenditure than just a few years ago, and now cheaper than most other sources of baseload and peak generation, so I'm optimistic that the economics emerging from these price declines will turn these low carbon alternatives into the default no-brainer solutions in the near future, and will increasingly become economically superior to keeping coal-fired power stations going, providing environmental improvements and additional employment that will far outweigh the losses in the coal industry.

 

The Holmesdale South Australia battery plant in a short period has reportedly made a lot of money providing grid stabilisation services with extremely rapid reaction times, for which it's financially well-rewarded by the dynamic pricing system in that jurisdiction, such that I believe it makes more of its money from those functions - rapid-response peak shaving and trough-filling and the time-arbitrage it can offer - than from sustained output functions. Further facilities in the same area would have diminishing returns, but it clearly serves a valuable function and is well rewarded.

[gfp]

https://www.bloomberg.com/news/articles/2019-06-26/buffett-s-nevada-utility-offers-a-customer-millions-just-to-stay?srnd=premium

[Guest longinvestor]

I think the dollar amount of capital expenditure is likely to decline from the very high rate recently, where the tax deferral advantages had been hugely beneficial, but are soon to diminish from that peak. Nonetheless, I'm sure a lot of capital will still be deployed at attractive rates by BHE, often with attractive tax benefits.

 

 

Just curious as to why the rate of capital deployment goes down?

 

It’s my understanding that the appetite only increases yoy because BHE’s tax rebates inure to Berkshire Hathaway. Buffett has repeatedly mentioned this as the reason that they are going pedal to the floor for as far as the eye can see. Any slow down is likely due to getting regulatory approvals. BHE’s countermeasure is to make it all for the consumer. Regulators like that in addition to investment in an otherwise dormant industry. Take Iowa for instance MidAmerican is holding rates steady until 2032. The other Utility in the state is raising rates. As I drive to Omaha from Chicago I see turbines from the Nebraska border and ends abruptly mid state. It’s all because of the 100% retained earnings versus dividending out of cash cow utility companies

 

[gfp]

Just curious as to why the rate of capital deployment goes down?

 

He may just be basing it on BHE's own projections.  Of course, their future plans don't reflect projects that aren't confirmed or opportunities that haven't come up yet.  But as of earlier this year, they expected capital expenditures to decline.  It probably won't actually happen.  Projects are included in the projections as they are committed to.

 

https://www.sec.gov/Archives/edgar/data/71180/000108131619000007/ic2019.htm

 

(several mentions but slide 22 shows it fairly clearly)

[Guest longinvestor]

Just curious as to why the rate of capital deployment goes down?

 

He may just be basing it on BHE's own projections.  Of course, their future plans don't reflect projects that aren't confirmed or opportunities that haven't come up yet.  But as of earlier this year, they expected capital expenditures to decline.  It probably won't actually happen.  Projects are included in the projections as they are committed to.

 

https://www.sec.gov/Archives/edgar/data/71180/000108131619000007/ic2019.htm

 

(several mentions but slide 22 shows it fairly clearly)

 

Lumpiness

[Guest longinvestor]

Just curious as to why the rate of capital deployment goes down?

 

He may just be basing it on BHE's own projections.  Of course, their future plans don't reflect projects that aren't confirmed or opportunities that haven't come up yet.  But as of earlier this year, they expected capital expenditures to decline.  It probably won't actually happen.  Projects are included in the projections as they are committed to.

 

https://www.sec.gov/Archives/edgar/data/71180/000108131619000007/ic2019.htm

 

(several mentions but slide 22 shows it fairly clearly)

 

This from the presentation caught my attention. So, comparable Utility, Duke Energy has a market cap of 63B. Nextera 83B albeit a bigger business. For now

[Guest longinvestor]

Berkshire Hathaway, through BHE, is blowing the covers of the myth surrounding dividends as a long term strategy. That table of comparison with other utilities is perhaps best described as night versus day. The rest of the industry is happy dividending away most of their earnings while Berkshire is happy taking in nothing from BHE year after year. This foregoing of instant gratification is probably worth a lot down the road for me the shareholder. I couldn’t be happier waiting for the balloon payday some day in the future.

[cubsfan]

Berkshire Hathaway, through BHE, is blowing the covers of the myth surrounding dividends as a long term strategy. That table of comparison with other utilities is perhaps best described as night versus day. The rest of the industry is happy dividending away most of their earnings while Berkshire is happy taking in nothing from BHE year after year. This foregoing of instant gratification is probably worth a lot down the road for me the shareholder. I couldn’t be happier waiting for the balloon payday some day in the future.

 

Nice job of providing some great insights (with slides), into the BHE operations. I too, was at the last few meetings, where WEB insists large

capital can still be deployed in this business at great advantage to BH. But you guys in this thread have provided the proof and comps.

 

Thanks much.

[Dynamic]

Just curious as to why the rate of capital deployment goes down?

 

He may just be basing it on BHE's own projections.  Of course, their future plans don't reflect projects that aren't confirmed or opportunities that haven't come up yet.  But as of earlier this year, they expected capital expenditures to decline.  It probably won't actually happen.  Projects are included in the projections as they are committed to.

 

https://www.sec.gov/Archives/edgar/data/71180/000108131619000007/ic2019.htm

 

(several mentions but slide 22 shows it fairly clearly)

 

Yes, their own projections are for a degree of reduction from an admittedly huge rate of capex and I remember seeing something like slide 22 somewhere in the last few months.

 

I'm not sure of the reasons, but I'd imagine slightly reduced cost of capex (meaning they need to spend less to get the same improvements would have some impact, though it looks to be modest) and reduced tax benefits (perhaps influenced by Trump's policies with regard to CO₂ reduction in comparison with Obama's and the expiry of certain schemes put in place some years ago).

 

That slide set is interesting, and I don't think that's the place I originally read about their projections of decline in capex.

 

It's fascinating to see such a huge discrepancy between Net Income Attributable to BHE and Cash Flows from Operations on various slides, with cash flow being consistently far higher since 2001 and also being around 4.5x interest expense.

 

The information on how tax rate reductions are being passed on to customers is also interesting. The settlements on rate reductions seem to be around 3-4% mostly, so as expected BHE will not retain the full benefit of the tax cuts and will share it with customers via rate reductions. Also interesting is certain jurisdictions having ROE limits above which a certain fraction of additional profits are shared with customers (some places it's 50%, some it's 90% that goes to customers).

 

I note that MAE has implemented a 1MW power / 4MWh energy storage (thus 4 hours' supply at full power) battery using Lithium Iron Phosphate tech (sounds like BYD's favoured cell chemistry but not necessarily only theirs) with inverter/transformer in 2018 for $3m as a pilot project mostly used for energy balancing purposes. That's about $750 per kWh all in for a trial site (compare capacity to 40 Tesla Model S/X 100 kWh batteries or 625 first gen Tesla Powerwalls. I imagine the cells would be somewhere in the $150-$300 per kWh range, and the other costs would be for inverter/transformer and the costs of developing and installing the site and designing/running the project.

 

It's also interesting to see MAE's asset profile versus its power profile. First, coal, gas and nuclear have declined substantially in 18-19 years. The Wind generation and other assets are now 87% thanks to huge investment but their power contribution is 59% (on a net MW owned in operation and under-construction basis). Coal 12% and Gas 1% have a much smaller asset base, but can supply 24% and 13% of peak power capacity (with Nuclear and Other providing 4%). But of course, they also consume fuel over their lifetime, which wind doesn't, although it does consume maintenance costs and a few consumables. This is a major shift and should pay off very nicely for MAE and BHE as a whole in the long term as a reward for the enormous capital infusion (funded by retained earnings and relatively cheap debt that is non-recourse to Berkshire Hathaway Inc).

 

Let's hope that regulators and technical innovations allow plenty of scope for more profitable capex in BHE in the future.

[Guest longinvestor]

The slide deck clearly states “capital plan” and not projection. This is a regulatory filing only.

 

It’s up to each of us to read into it beyond what’s published but here’s my take on the very same table.

 

1. As early as the first months of the three year period 2019-2021, they had already revised the plan from “previous “ to the tune of +$1B on 15 B. Don’t know when “previous “was.

2. The plan is clearly front loaded even within the period. So as opposed to them spending less in year three, they want to spend it as fast as possible. Will there be another plan update before 2021? I don’t know but expect it.

3. Through this report they are clearly touting “look we’re investing, the competition is keeping the money” to the regulatory bodies. And touting how their rates are lower than the field.

 

No, there’s no projection at all but the bias is to deploy more and now!

 

 

[Guest longinvestor]

This topic has me riled up so much that I can’t contain my finger twitching so here goes.

 

This year for the first time at the annual meeting that I recall, Buffett thanked Walter Scott for bringing BHE to the fold in 1999. In Cunningham ‘s book, there’s an episode describing Warren being pulled aside by Scott to talk about the energy business and handing him a report of sorts and a few days later MidAmerican was part of Berkshire Hathaway. I want to read that report. In an important way, BHE has paved the pathway for Berkshire beyond Buffett. To me it’s no surprise at all that Greg Abel is perched high up. The promise of 100 B or more into BHE is borne out in the regulatory filing we’re thrashing around.

 

If there’s any obstacle it’s regulatory in nature. The rest of the hurdles are “1 foot”.

[Dynamic]

I think actually (and hopefully it's not wishful thinking), you're probably right to point out that it's very likely that capex will not decline significantly and that these planned expenditures will be increased with additional capex as plans develop further.

 

I suspect the incentives haven't changed too drastically, despite a few of Trump's intentions to boost coal and rein in renewables incentives at the Federal level and all the 'newspeak' recently about 'freedom molecules' and so on is more about messaging to his supporters than policy changes being implemented widely.

 

Certainly the ROE allowances are amenable to incentivizing continued capex for companies as future-oriented as BHE

[Guest longinvestor]

I think actually (and hopefully it's not wishful thinking), you're probably right to point out that it's very likely that capex will not decline significantly and that these planned expenditures will be increased with additional capex as plans develop further.

 

I suspect the incentives haven't changed too drastically, despite a few of Trump's intentions to boost coal and rein in renewables incentives at the Federal level and all the 'newspeak' recently about 'freedom molecules' and so on is more about messaging to his supporters than policy changes being implemented widely.

 

Certainly the ROE allowances are amenable to incentivizing continued capex for companies as future-oriented as BHE

 

I think so too, all this noise gets drowned out by economics of wind and solar energy; At 3.5 cents per kWh and the last hurdle of time shifting of power solved within this cost, any messaging for fossil fuels will be blown away by the wind:-)  We are talking about the grandmother of all commodities, the flow of electrons! I say that renewables get implemented furiously from here on.

[Dynamic]

I agree. I'm optimistic that the economic forces of such inexpensive power (and still declining rapidly in cost) will soon completely undermine any efforts by the fossil fuel lobby and climate change deniers funded by them to prevent the retirement of the most polluting and least efficient fossil fuel generation at first, and almost all of it eventually. I think there need to be a few incentives to encourage such large up-front capex at this point, which will create the demand that will further lower the cost, but it's pretty clear that the cost curve for wind is on a significant decline and for solar the decline is steep almost to the point of precipitous, such that it's now falling below wind on a direct price/kWh basis and is soon likely to be cheaper even when including the cost of storage typically required to time shift supply to meet evening demand. Low interest rate financing certainly helps to fund the capex, and in Berkshire's case, the tax treatment allows these technologies to provide returns above their hurdle rate, encouraging truly huge capital investment while sustaining low power bills for end users. I suspect there may be benefits to the likes of Google, Facebook, Microsoft and Amazon, locating many of their vast data centers close to renewable energy sources, not the least being in term of energy cost savings.

 

It's also clear from many parts of the world, including Norway with it's sparse population and the UK with its large coastline for offshore wind despite its high population density, that a low carbon, high reliability grid is not the problem it is often painted as by the fossil fuel lobby. As a UK resident able to choose my supplier (but paying for the network services indirectly through their billing), my cheapest suppliers (I switch most years) have nearly always been 100% renewable for electricity, with only natural gas (methane) for heating and cooking being fossil based. (There are suppliers working on bringing green methane gas to market too). I believe it's the case that the offshore wind industry has employed a lot of former oil and gas workers whose skills are transferable to that sector after oil prices plummeted, though many helicopter pilots who used to serve Norwegian and British oil and gas rigs are no longer employed in that sector.

 

I suspect that by switching from fuel costs paid to various oil exporting nations to capex and maintenance costs, the costs to build and maintain green energy facilities over time will continue to boost local employment rather than paying oil workers and well owners in other countries. If the costs of renewables continue to get lower, it's likely than maintenance expense per kWh will remain similar, but the capex savings will reach the consumers by way of lower utility bills, and will presumably also boost their spending on goods and services, at least some of which are likely to be spent locally.

 

I think there's a virtuous circle that will probably increase the rate of uptake, and it's not looking like a promising time for new investments into coal technology, though gas peaker plants may have a place for a little while longer, until battery supply completely supplants those with superior response time for frequency stabilisation and peak shaving and at lower cost too. The huge automotive demand for batteries is also an important driver for rapid cost and energy density improvements in battery storage and possibly even power inverters.

[John Hjorth]

https://finance.yahoo.com/news/nevada-utility-announces-three-major-175634324.html

 

Utility scale solar with battery storage. 3.5 cents per KWH to produce.

 

I did a search before creating a topic with this title. After all this is where most capital is going to go. As a shareholder my eyes are on this. At the annual meeting there was a question from Greg Warren, I think about the slowdown in the pace of capital projects @ BHE. I had spent a good amount of time at the BHE booth and they were buoyant about this and other topics. Watch BHE.

 

Thank you for starting this topic, longinvestor,

 

Actually, it's a bit weird, that we haven't really discussed this Berkshire investment in depth earlier. I have started tinkering with numbers for it, to calculate - over the ownership period - how much it has actually contributed to Berkshire group equity. I'm a bit lazy at the moment - I think it's vacation mode that's setting in - so it'll take some time before I post something about it here in this topic - what I already can say is that the numbers, compared to the initial investment - are no less than mind-boggling.

 

- - - o 0 o - - -

 

With regard to capital allocation, we have to remember :

 

1. The "Constellation case" [2008] [No, not CSU.TO, but Constellation Energy!] - It ended up as a no-go [,if one can call "Consists of a breakup fee of USD 175 million and and profit on our investment of USD 917 million" a "no-go"],

2. The "Oncor case" [2017], &

3. Among Danes, there is a saying [in Danish here] : "Alle gode gange tre!". That translates word-by-word to : "All good times three!", meaning : "Third time may the time of luck!". Also in this industry, in future, there will be players, who confuse trading with speculation, and/or who will eventually end with screwing up their balance sheet.

 

I would not be surprised later to observe, that the next large Berkshire acquisition would be related to BHE.

[Guest longinvestor]

https://buffett.cnbc.com/video/2019/05/06/afternoon-session---2019-berkshire-hathaway-annual-meeting.html

 

Since the topic was discussed earlier here, I was able to locate the relevant portion from the agm where Greg Warren asked about the “declining“ capital investment in 2021. Starting at the 49 minute marker. It is clear that he had read the same presentation by BHE that we have also. Greg Abel confirms what we concluded here; that only the committed capital plan was disclosed. He goes on to say that there are phase II and III of capital deployment especially in the Pacificorp sub. They are not approved by the regulators yet.

 

But all of them, Warren Buffett, Charlie Munger and Greg Abel reinforce the pedal to the floor bias @BHE

[Guest longinvestor]

Buffett has often repeated “stay rich versus get rich” with utilities. I did a two column spreadsheet, one with a 10% earning rate for 100 years and the other with a 10% rate but with a recession every 7 years where I assumed a 10% loss during those years. The difference is astronomical in 2119 AD. Especially with a larger starting earning. Any upside because of tax shelters etc. will be huge 100 years from now.

 

No wonder they like it so much.

[redskin]

Berkshire Hathaway Energy is the only subsidiary I know of where you can see the valuation that Buffett places on it.  Since Walter Scott is a minority shareholder and he periodically sells his shares to Berkshire Hathaway Energy, those transactions are reported in the Berkshire Hathaway Energy filings.  Scott's last reported sale was in Q1 2019.  He sold 447,712 shares for $293mm ($654 per share).  This transaction values BHE at approximately $50 billion.

 

Transactions in previous years suggest the following per share values....

2018 $602

2017 $542

2015 $480

2013 $350

2010 $225

2009 $210

 

He purchased MidAmerican for $35/share in 1999.  This equates to an annual rate of return of close to 16%.

 

 

[CorpRaider]

Buffett has often repeated “stay rich versus get rich” with utilities. I did a two column spreadsheet, one with a 10% earning rate for 100 years and the other with a 10% rate but with a recession every 7 years where I assumed a 10% loss during those years. The difference is astronomical in 2119 AD. Especially with a larger starting earning. Any upside because of tax shelters etc. will be huge 100 years from now.

 

No wonder they like it so much.

 

9-10% with lower risk (not zero obviously given what we've seen over the past few years in utes) is not a bad hurdle rate in today's environment is it?

[Cigarbutt]

Berkshire Hathaway Energy is the only subsidiary I know of where you can see the valuation that Buffett places on it.  Since Walter Scott is a minority shareholder and he periodically sells his shares to Berkshire Hathaway Energy, those transactions are reported in the Berkshire Hathaway Energy filings.  Scott's last reported sale was in Q1 2019.  He sold 447,712 shares for $293mm ($654 per share).  This transaction values BHE at approximately $50 billion.

 

Transactions in previous years suggest the following per share values....

2018 $602

2017 $542

2015 $480

2013 $350

2010 $225

2009 $210

 

He purchased MidAmerican for $35/share in 1999.  This equates to an annual rate of return of close to 16%.

Reviewing regulatory filings and the March 2019 fixed income presentation, it seems that the long term growth of earnings and reported equity (which includes goodwill) corresponds to the value-based long term redemption activity revolving around Mr. Scott's declining stake. No activity in Q2 2019 but, in Q1 2019, 447,712 shares were redeemed for $293 million, implying a $654 per share value and a 1.7 ratio to reported book value.

It looks like the future will look like the past. It seems to me that the future of private ownership of energy utilities includes a component of the increasing realization that infrastructure spending can and should be delegated to strong, reliable and private hands. 

BHE has relatively high exposure to Nevada and related wildfire risks but they interestingly note that the $risk is less because of lower concentrations of population in the interface areas.

[Spekulatius]

Berkshire Hathaway Energy is the only subsidiary I know of where you can see the valuation that Buffett places on it.  Since Walter Scott is a minority shareholder and he periodically sells his shares to Berkshire Hathaway Energy, those transactions are reported in the Berkshire Hathaway Energy filings.  Scott's last reported sale was in Q1 2019.  He sold 447,712 shares for $293mm ($654 per share).  This transaction values BHE at approximately $50 billion.

 

Transactions in previous years suggest the following per share values....

2018 $602

2017 $542

2015 $480

2013 $350

2010 $225

2009 $210

 

He purchased MidAmerican for $35/share in 1999.  This equates to an annual rate of return of close to 16%.

Awesome post. It gives us a great idea what BHE is worth right now. 9-10% return forever is a great deal and I think the longevity is what WEB is after in this case. A lot of business die over time or need to reinvent themselves, which sometimes works and something it does not. BHE probably doesn’t need to reinvent itself for the next 50 years.

[Guest longinvestor]

https://www.pacificorp.com/about/newsroom/news-releases/2019-draft-irp-increased-renewables-phased-coal-transition.html

 

October 18 is the date they target releasing the long term plan. Lots of investments.

[Guest longinvestor]

https://finance.yahoo.com/news/california-governor-wants-berkshire-bid-235301474.html

 

Now that the cat’s out of the bag, thought this belongs here as well as on the Investment ideas section. More surely to come. This should be way more interesting than the Oncor deal with the same familiar players squaring off, once again! And boy, this is California and we’re a year from an election. May the fun begin!

[Cigarbutt]

https://finance.yahoo.com/news/california-governor-wants-berkshire-bid-235301474.html

 

Now that the cat’s out of the bag, thought this belongs here as well as on the Investment ideas section. More surely to come. This should be way more interesting than the Oncor deal with the same familiar players squaring off, once again! And boy, this is California and we’re a year from an election. May the fun begin!

In my humble opinion, this is another example of the brilliance displayed by Mr. Buffett and his model. He is in a position to negotiate without having actually entered the negotiation process as (I imagine) he would look for some kind of partnership where the public entity would be responsible for a reinsurance type of excess loss deal on past and future wildfires' damages. I'd say he will pretend to have no real interest but he may have defined the price he's ready to pay and the mantle of protection required already with the potential to close a transaction at a lightning speed.