Berkshire Hathaway Energy

[Jurgis]

... close a transaction at a lightning speed.

 

;D

 

Keep those zingers coming.

[Spekulatius]

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.

 

PG&E could be a great deal for BRK, because Berkshire has both utility management, insurance capacity and expertise and the ability to write a Check worth tens of billions of $. There is really no competition out there who can even Doo all three.

[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!

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.

 

PG&E could be a great deal for BRK, because Berkshire has both utility management, insurance capacity and expertise and the ability to write a Check worth tens of billions of $. There is really no competition out there who can even Doo all three.

 

For sure, BHE stands uniquely positioned .

 

My question is, how does BHE deal with next years’ fires? Is BHE setting up 10 foot hurdles for themselves? Was PG&E that negligent or blamed for an act of God type event? This opens up the Pandora’s box wide open when it comes to regulated utilities, roles, shareholders etc.

 

[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!

PG&E could be a great deal for BRK, because Berkshire has both utility management, insurance capacity and expertise and the ability to write a Check worth tens of billions of $. There is really no competition out there who can even Doo all three.

For sure, BHE stands uniquely positioned .

 

My question is, how does BHE deal with next years’ fires? Is BHE setting up 10 foot hurdles for themselves? Was PG&E that negligent or blamed for an act of God type event? This opens up the Pandora’s box wide open when it comes to regulated utilities, roles, shareholders etc.

This may appear simplistic to you but here's an attempt at an answer. There is also a bankrupt thread on PG&E.

The situation in California is contaminated by the inverse condemnation doctrine which is enshrined in their Constitution and stuck in political inertia. The doctrine (quite a unique situation in the US) means that the utility will be considered responsible for damages whether it was negligent or not!

https://www.insurancejournal.com/news/west/2019/01/15/514846.htm

 

What's nice (for an opportunistic white knight) is that the Pandora's box has been wide opened and bad spirits have hit the high winds down to Sacramento and people from diverse camps have been looking at stop loss options (really attachment points in reinsurance contract parlance), a situation simply and literally unthinkable just a short while ago. There are many alternative scenarios that imply skin in the game for the utility with rate-based and a government-sponsored options.

https://www.reuters.com/article/us-california-wildfire-fund-idUSKCN1TM2JX

 

Now longinvestor, note that the bankruptcy judge has to choose between a wounded and bad corporate citizen, and a vulture group with questionable intents to unite conditions leading to some kind of phoenix entity with a viable future. Isn't there a potential opportunity to get to swing at this amazingly slow pitch right in the middle of the plate and with even the umpire on your side?

 

[Guest longinvestor]

Buffett is wired to look down before looking up. If there’s a whiff of permanent loss, he’ll pass.

[Cigarbutt]

^Your point is well taken but it all comes down to the definition of a whiff (how to deal with negatives).

 

People celebrate the Geico investment as a two-part slam dunk now but the second part was met with skepticism (valuation) and the first part was met with disbelief. In 1975, Geico reported an underwriting loss of 190M with 25M (not a typo) left in capital. Mr. Buffett saw moat in the mess and was reassured by the oncoming Mr. Jack Byrne but the company was very close to bankruptcy. In fact, from the regulatory standpoint, the capital deficiency was severe and compatible with a runoff order. Geico was desperate for cash and it was felt (Mr. Buffett himself and the regulators) that the company was significantly under-reserved. Stock price went from 61$ to 2$. Does that meet the definition of a whiff? The company survived, among other reasons than perfect execution from Mr. Byrne, because regulators critically allowed to bypass capital requirements (amounts and deadlines) for quite some time and granted permissions for very significant premiums rate increases.

 

Also, many investments made in 2008-9 were based on the underlying premise that government officials would "do the right thing". Was that a proposition free of uncertainty?

 

Mr. Buffett has the luxury to wait for the assets to be served on a silver platter but the return of a cheery consensus is possible in the next few months as the entity will likely come out of bankruptcy next year and the climatic situation may have reached its climactic point for some time.

[Spekulatius]

It’s also notable that with a regulated industry, it really cannot be correct that only PCG is too blame. Capex and operational expenses need to go through the regulator. I don’t think if PG&E had asked for $10B to harden the grid in 2015 because of inherent fire danger, they would not have gotten approval to do so. Same with tree trimming to some extend.

 

The ball is really in the Californians government court to change the rules. I am pretty sure that BHE would be interested to invest, given the right framework and some cap and liabilities.

 

Note that PCG actually produced pretty good numbers before the first  disaster in 2017, due to expanding rate bases from the switch to renewables, which also raised electricity bills for customers quite a bit. I think there is way more to come of the latter. The best action may be for the CA  government to take control of PCG and then work on creating a framework that makes the utility investible for the private sector again.

[Guest longinvestor]

I’m willing to bet that the preferred play here for BHE is to get long term PPA’s to supply CA from Oregon, Idaho, Arizona and Nevada. This was the intention anyway with the CAISO. Even if only meeting a portion of CA load. Currently. The Midwest has a functioning ISO. BHE has been an enthusiastic participant in the CAISO. Surely PG&E was not too thrilled  with BHE’s participation in it. If BHE can sell power for less than the 20 cents per KWH, CA would be foolish not to allow it.

[Guest longinvestor]

I’m more excited that this issue is going to shine a bright spotlight on the two kinds of ownership models of utilities. BHE versus virtually every other publicly owned utility. Retained earnings versus dividends to be specific. Delayed gratification is very hard for Wall Street

[Dynamic]

I think you're right, Spekulatius, that Berkshire has the will to invest in the right circumstances, and can put a compelling case that they'd be a highly responsible and cost-efficient operator, willing to invest substantial sums and to reinvest profits and additional capital too right back into grid improvements, renewables and much more beneficial in California as they are in other states, given the right regulatory environment that would not leave them on the hook for the sorts of liabilities that brought down PG&E.

 

This might be enough to persuade California to amend its constitution, or perhaps to invent some form of structure where the state in some way relieves Berkshire/BHE of this liability or compensates Berkshire/BHE adequately for taking it on.

 

I imagine there could be many ways to do it, with varying difficulty in getting them done, if the trade-off seems favorable over the alternatives including:

[*]amending the state constitution to remove or modify the inverse condemnation doctrine, at least in circumstances relevant to a utility company (I guess this needs a public vote, but the PG&E bankruptcy might provide the impetus to get it passed even if it's a lengthy, difficult process),

[*]forming some form of partnership between a state-owned entity that somehow takes on the excess liability and BHE to run the operations and reinvest at a reasonable return on equity, or

[*]with Berkshire's risk-appetite as an insurer (and its ability to pay enormous claims), to come up with a price regulation method that effectively pays a sufficient insurance premium for Berkshire to accept the liability caused by the inverse condemnation doctrine.

 

I think Berkshire's flexibility over innovative deal structures and in insuring unusual risks would allow it to act decisively and to take on more risk than anyone else, but only if properly compensated. And they're also willing to accept enormously lumpy returns if the overall return is sufficient, and to reinvest enormous amounts of capital if the regulated return is adequate. This could be a win-win-win for California, Berkshire and the utility customers.

 

But, I'm very confident that Berkshire will only take this on if the compensation arrangements are adequate. They're not THAT desperate to find a place to invest enormous amounts of capital that they would ever lower the bar on adequate compensation.

 

I don't think there is any other entity to match Berkshire in these respects.

[Guest longinvestor]

https://www.pacificorp.com/content/dam/pcorp/documents/en/pacificorp/PacifiCorp_Story10_02_2019.pdf

 

This, from the BHE website laying out the vision for the “West”.

[DooDiligence]

Thanks to cigarbutt for bringing up this completely counterintuitive idea.

 

Scenarios like this, even if they don't happen, can teach how to use 2nd level thinking.

 

Wouldn't it be a stroke if they did this & got the Applied Underwriters deal OK'd in the process?

[Cigarbutt]

..this completely counterintuitive idea.

Why counterintuitive?

I would say California has its own specific idiosyncrasies but, on its own, would rank as the fifth economic power in the world and will be at the forefront of the evolving dynamics between centralized and distributed energy. PG&E has a long history, is a major player and is running into difficulties that could be considered temporary and fixable with an outcome that can be influenced by a credible partner with a long term view and deep pockets.

Longinvestor and wabuffo (in another thread today) rightly suggested that bankruptcy proceedings are not a natural fit and the Oncor experience was likely a learning experience: after tracing a road map and a valuation baseline, a 'winner' comes from nowhere near the finish line and the breakup fee evaporates. Perhaps a way to win the race here is to make a surprise attack and create a winning gap by proposing (somehow) a solution that the California Public Utility Commission determines to be the only acceptable option (some kind of pre-packaged overall deal), making the emergence decision easier.

https://www.caiso.com/Documents/StudyBenefits-PacifiCorp-ISOIntegration.pdf

https://www.dallasnews.com/business/energy/2017/08/24/warren-buffett-not-only-was-outbid-for-oncor-but-also-lost-270-million-breakup-fee/

[Guest longinvestor]

It’s interesting but not surprising that PG&E is not an independent CAISO member in their own name. Most of the members are non-CA utilities. PacifiCorp is among the largest entities. Followed by NVE. California was importing 33% of their energy needs as of 2015. Last year, there’s been reports of excess renewable energy being produced and not enough demand for. Everything is mired in intrastate parochial interests but if market forces are allowed full expression, CA will end up importing ever more energy from neighboring states. Costs and therefore prices are dropping elsewhere. It just costs too much in CA. Just like about anything else, which is why cost sensitive businesses leave CA. Energy is no exception. BHE has been prepared for this for a long time. My guess is Berkshire doesn’t have to buy any entity in CA, perhaps some piece of PG&E, like transmission.

[DooDiligence]

..this completely counterintuitive idea.

Why counterintuitive?

I would say California has its own specific idiosyncrasies but, on its own, would rank as the fifth economic power in the world and will be at the forefront of the evolving dynamics between centralized and distributed energy. PG&E has a long history, is a major player and is running into difficulties that could be considered temporary and fixable with an outcome that can be influenced by a credible partner with a long term view and deep pockets.

Longinvestor and wabuffo (in another thread today) rightly suggested that bankruptcy proceedings are not a natural fit and the Oncor experience was likely a learning experience: after tracing a road map and a valuation baseline, a 'winner' comes from nowhere near the finish line and the breakup fee evaporates. Perhaps a way to win the race here is to make a surprise attack and create a winning gap by proposing (somehow) a solution that the California Public Utility Commission determines to be the only acceptable option (some kind of pre-packaged overall deal), making the emergence decision easier.

https://www.caiso.com/Documents/StudyBenefits-PacifiCorp-ISOIntegration.pdf

https://www.dallasnews.com/business/energy/2017/08/24/warren-buffett-not-only-was-outbid-for-oncor-but-also-lost-270-million-breakup-fee/

 

By counterintuitive, I mean, not a business I believe BRK would be interested in because it looks so ugly.

 

What I call intuition is probably just a cognitive bias of some sort.

 

---

 

edit: a little Zen can go a long ways towards improving quality of life & investment results.

[rogermunibond]

My guess is that in the end Buffett and Munger want no part of PCG.

 

The raisins and turds story sums up the situation nicely.

[Guest longinvestor]

My guess is that in the end Buffett and Munger want no part of PCG.

 

The raisins and turds story sums up the situation nicely.

 

I think so too. And lightning speed is not one working day for the Omaha boyz

[longterminvestor]

IMO, this would be Greg Abel's call rather than boys in Omaha to do some deal in form/fashion on the assets of PG&E.  Whatever is decided - it will show what kind of deal making/risk tolerance the new guard has versus the old. 

 

Wonder who calls who?  Does Warren call Greg or does Greg call Warren?  Maybe Greg calls Ajit and they conference in Warren........These are the fun things I think about when bird dogging a nice sized deal with some hair on it. 

[wabuffo]

Buffett doesn't like buying assets out of a bankruptcy proceeding.  In the past, courts/judges have imposed deal termination fees are that are sometimes too low for him.

 

wabuffo

[Guest longinvestor]

We're all reacting to the headline of this past weekend. PCG has been in play for a while. It is inconceivable that BHE has not looked at this a while back!

[Guest longinvestor]

I went back and listened to the Governor’s and PG&E’s press conferences to get it straight from the donkey’s mouths. My takeaway is that PG&E is full of shit because of what the other utilities in the state have already done; invest in a smart grid to allow them to turn rooms off versus the entire town! San Diego was mentioned.

 

 

[Cigarbutt]

I went back and listened to the Governor’s and PG&E’s press conferences to get it straight from the donkey’s mouths. My takeaway is that PG&E is full of shit because of what the other utilities in the state have already done; invest in a smart grid to allow them to turn rooms off versus the entire town! San Diego was mentioned.

 

 

Your inputs and others help define entry and exit points in PG&E but I'm still confused as to why the entity would be uninvestable.

Putting aside the nationalization risk for a minute.

Because of:

1-the bankruptcy process?

2-the fact that PG&E would require new top management?

3-the fact that the bad culture is too deeply ingrained?

4-the fact that assets are of poor quality and not adapted?

 

I see these challenges as potential opportunities. The governor conveniently omits to mention that various levels of the public jurisdictions failed to appreciate the new normal related to climate change and, in fact, encouraged value at risk that is now being 'discovered'. The Oncor bid in Texas indicated that there was value in critical assets in a state where electricity demand is expected to rise significantly over the long term. The bankrupt Oncor had more to do with capital structure deficiencies than operational or cultural issues and Oncor had already discovered the value of cooperation with public boards concerning investment in the grid and safety concerns. However, the PG&E situation may just be a revelation that its infrastructure is in a significant need for further investments which, if negotiated properly, would not be seen as a drag on capital invested but as large investments guaranteed by a reasonable rate of return. The public authorities, seemingly, would only take over the ownership as a default solution and really IMO are in a relatively poor position to massively invest in the new paradigm that involves the transition to distributed energy at the same time as safety concerns need to be massively addressed and accounted for. The public authorities are now explicitly stating that they are looking for a private partner in order to carry out the transition and it seems to me that BRK is bound to at least consider the alternative. PG&E has very valuable assets and we can argue that the challenge is, in fact, a potential opportunity. Another consideration is that the State (and CPUC) seem to be ready to guarantee an access (various ways to do that) to bond markets for the wall of investments that will be necessary to achieve the planned transition which, added to a Berkshire endorsement, would contribute to a very low cost of capital while moderating rate increases for the customer. I would not underestimate the value of an option allowing you "to get out of this mess".

 

Edit (potentially useful and relevant references):

https://www.dallasnews.com/business/energy/2017/07/14/if-warren-buffett-s-billions-meet-oncor-s-wish-list-here-s-how-texas-stands-to-gain/

https://www.cpuc.ca.gov/uploadedFiles/CPUC_Public_Website/Content/About_Us/Organization/Divisions/Office_of_Governmental_Affairs/Smart%20Grid%20Annual%20Report%202017.pdf

 

[petec]

Couple of questions for those who know more than me (i.e. most):

 

1) BHE doesn't may dividends, and I can see that's a huge differentiator. But do the subs pay dividends to BHE? In other words, could profits from one area be invested in another? If so, I would have thought a regulator would view BHE's dividend policy as the same as anybody else's in terms of its impact on investment locally. If not, doesn't that restrict BHE's capital allocation?

 

2) Is BHE likely to go international? I know they have the UK business (at least until Corbyn nationalises it) but this is a business that could scale in an epic way if they're prepared to go global. For example Brazil is privatising a huge slug of electric assets under an attractive regulatory regime that's been in place for 20 years.

 

Thanks

 

Pete

[gfp]

Here is the recent 10-Q

https://www.sec.gov/Archives/edgar/data/71180/000108131619000017/bhe93019form10-q.htm

 

BHE can and does move cash between subsidiaries.  The pay no dividends thing is mostly true but BHE actually does do a few hundred million dollars worth of share repurchases from Walter Scott's family each year.  Instead of Berkshire Hathaway buying the Scott shares, they have chosen to do it by BHE repurchasing the Scott shares - equivalent to a dividend.  I had also wondered how the minority shareholders (Scott family & Greg Abel) were coming up with their share of tax payments but I see that there actually are cash distributions to minority interests occasionally - just not to Berkshire.  And of course BHE operates in a tax efficient manner and files a consolidated tax return with Berkshire Hathaway.

 

The distributions and share repurchases are small in comparison to the net capital contributions from Berkshire Hathaway that have funded some of the larger deals.  Overall, the balance is a lot more capital in than capital out.  They seem to really cultivate their positive reputation with the various regulators.  They are not trying to squeeze the last dollar out of any of their customers in the pursuit of a longer term successful platform.

 

As for international, I am sure BHE would be interested in international energy assets they could understand the long term regulatory situation & economics of.  Sokol was much more international when it was just called Cal Energy and he did a project in the Philippines that I think I remember kind of burned him in the end.  Obviously they own the UK transmission assets and did a decent sized deal for AltaLink in Canada.  They will continue to invest as much as they can figure out in Canada for sure.  The stake in BYD is also in there.  I wouldn't be surprised to see big deals in countries like Brazil, Australia, something in Europe.  Sort of depends on what becomes available.

 

I do think they would buy more pipelines if they came on the market for attractive prices.  Warren hasn't been a fan of the MLP accounting / valuations and has mostly skipped those.  You could see his giggles when someone asked him about Kinder Morgan popping up in the BRK portfolio some time ago and he said it wasn't him and he was surprised to see it too.  It left the portfolio shortly after

 

 

 

Couple of questions for those who know more than me (i.e. most):

 

1) BHE doesn't may dividends, and I can see that's a huge differentiator. But do the subs pay dividends to BHE? In other words, could profits from one area be invested in another? If so, I would have thought a regulator would view BHE's dividend policy as the same as anybody else's in terms of its impact on investment locally. If not, doesn't that restrict BHE's capital allocation?

 

2) Is BHE likely to go international? I know they have the UK business (at least until Corbyn nationalises it) but this is a business that could scale in an epic way if they're prepared to go global. For example Brazil is privatising a huge slug of electric assets under an attractive regulatory regime that's been in place for 20 years.

 

Thanks

 

Pete

[Cigarbutt]

Here is the recent 10-Q

https://www.sec.gov/Archives/edgar/data/71180/000108131619000017/bhe93019form10-q.htm

 

BHE can and does move cash between subsidiaries.  The pay no dividends thing is mostly true but BHE actually does do a few hundred million dollars worth of share repurchases from Walter Scott's family each year.  Instead of Berkshire Hathaway buying the Scott shares, they have chosen to do it by BHE repurchasing the Scott shares - equivalent to a dividend.  I had also wondered how the minority shareholders (Scott family & Greg Abel) were coming up with their share of tax payments but I see that there actually are cash distributions to minority interests occasionally - just not to Berkshire.  And of course BHE operates in a tax efficient manner and files a consolidated tax return with Berkshire Hathaway.

 

The distributions and share repurchases are small in comparison to the net capital contributions from Berkshire Hathaway that have funded some of the larger deals.  Overall, the balance is a lot more capital in than capital out.  They seem to really cultivate their positive reputation with the various regulators.  They are not trying to squeeze the last dollar out of any of their customers in the pursuit of a longer term successful platform.

 

As for international, I am sure BHE would be interested in international energy assets they could understand the long term regulatory situation & economics of.  Sokol was much more international when it was just called Cal Energy and he did a project in the Philippines that I think I remember kind of burned him in the end.  Obviously they own the UK transmission assets and did a decent sized deal for AltaLink in Canada.  They will continue to invest as much as they can figure out in Canada for sure.  The stake in BYD is also in there.  I wouldn't be surprised to see big deals in countries like Brazil, Australia, something in Europe.  Sort of depends on what becomes available.

 

I do think they would buy more pipelines if they came on the market for attractive prices.  Warren hasn't been a fan of the MLP accounting / valuations and has mostly skipped those.  You could see his giggles when someone asked him about Kinder Morgan popping up in the BRK portfolio some time ago and he said it wasn't him and he was surprised to see it too.  It left the portfolio shortly after

Couple of questions for those who know more than me (i.e. most):

 

1) BHE doesn't may dividends, and I can see that's a huge differentiator. But do the subs pay dividends to BHE? In other words, could profits from one area be invested in another? If so, I would have thought a regulator would view BHE's dividend policy as the same as anybody else's in terms of its impact on investment locally. If not, doesn't that restrict BHE's capital allocation?

 

2) Is BHE likely to go international? I know they have the UK business (at least until Corbyn nationalises it) but this is a business that could scale in an epic way if they're prepared to go global. For example Brazil is privatising a huge slug of electric assets under an attractive regulatory regime that's been in place for 20 years.

 

Thanks

Pete

I like gfp's answer and here's a slight addition.

When determining the rate of return, the bottom line for regulators is to satisfactorily meet capital requirements and investment commitments. Once these hurdles are met, on a basic and first level analysis, regulators should be quite indifferent (but they are obviously not completely impermeable to softer inputs such as the strongly implicit support from a fortress balance sheet) as to how the return is retained or distributed and utilities have historically maintained high payout ratios. BRK has entered the area opportunistically (think the Williams (post Enron) and PacifiCorp capital commitments) and, so far, the investments have occurred in selected geographical areas (expected regulatory compatibility) and in specific troubled assets available at good prices or, at least, in assets available at fair prices. But it seems to me that the comparative advantage related to the soft inputs (flexible capital allocation and parental support) may become more significant in the future and may allow much larger opportunities as 1-a lot of data shows that the electric infrastructure is aging and becoming in an ever larger need for reinvestments with capex not meeting adequate maintenance for some time and 2-technology advances, new sources of energy (intermittent nature), new forms of distribution and safety concerns combine in a way to potentially disrupt the industry in a way perhaps larger than when deregulation attempts were carried out some years ago. If you're the regulator, who are you likely to turn to then, at a time when market perception of uncertainty will result in higher discount rates for motivated or forced sellers?

 

Mr. Buffett has sometimes compared the regulated utilities to insurance which, in fact, has also been heavily regulated (state level), a fact that did not prevent some insurance subs from growing profitably over time. I think he sees regulators as a nagging constraint, limiting what he could accomplish, but also recognizes that regulators tend to prevent excessive incompetency which is a way to maximize the NPV under human circumstances.

 

From the international perspective, I wonder if Mr. Buffett (or his legacy) won't be extra selective as there may be enough investment opportunities in the US and because regulated utility investments are based on the premise that 'society' will treat the private capital providers fairly, a premise that is far from guaranteed, even under the best of circumstances. I don't think that Mr. Buffett uses the CAPM as a tool to calculate the value of an opportunity but regulators do. When dealing with 'international' ventures, regulators add a risk spread related to specific countries and I would doubt that those spreads (countries ranking lower in the institutional grade scale) reach a level which would make Mr. Buffett comfortable in making a large investment.