In a recent letter to shareholders, Warren Buffett wrote: "We will keep our foot to the floor and will almost certainly set still another record for capital expenditures in 2013. Opportunities abound in America." The legendary investor was largely referring to Berkshire Hathaway's (NYSE: BRK-A) tradition of using profits to drive growth through the acquisition of additional assets or profitable businesses. Over the past few weeks, several environmentally friendly developments have had an impact on two of Buffett's most critical businesses: Burlington Northern Santa Fe and MidAmerican Energy Holdings.
The railroad announced a pilot program that will investigate the use of natural-gas-powered locomotives, while energy efficiency improvements are expected to outpace organic rises in demand. BNSF is the second-largest consumer of diesel fuel in the U.S., second only to the Navy, meaning that the potential cost savings are significant. On the electricity side, weakening demand means that the company can target its own efficiency for growth and respond to actual customer needs.
The potential of LNG
To stress the importance of shifting locomotives from diesel to liquefied natural gas, or LNG: In 2012 the average price for a gallon of fuel was $3.97 relative to less than $0.50 for a comparable quantity of LNG. The cost of converting a single engine to use LNG is estimated at $1 million dollar, although the company hopes to achieve some economies of scale when it looks to convert the bulk of its 6900 locomotives. The upfront cost of such an undertaking is significant, but the ultimate savings potential is dramatic.
Companies like Clean Energy (CLNE 2.02%) are already working hard to make LNG available across the U.S. for a number of consumer and industrial uses. In a recent press release, the company estimated that LNG reduces greenhouse gas emission between 23% and 30%, depending on vehicle type; the U.S. Department of Energy, or DOE, estimates that as much as 98% of LNG consumption is sourced in North America. The overall stability offered by LNG is significant.
The electrical shakeup
PacifiCorp's Rocky Mountain Power projects a 0.6% decline in energy demand this year. Power companies including American Electric Power (AEP +0.45%) and Xcel Energy (XEL +0.34%) have seen similar pressure on sales as a result of efficiency improvements to everything from appliances to light bulbs. Xcel, which carries a dividend yield of 3.6%, recently touched a new 52-week high; despite the sales pressure, the stock has been strong. American Electric is behaving similarly and showing few signs of slowing. The DOE expects only a 0.4% increase in electricity usage for the year, also driven by improving efficiency. These types of improvements are behind the expectation for MidAmerican that capital spending will end up being $2.4 billion less by 2021 than had been expected.
The combined impact
Last year, these two businesses accounted for $9.8 billion of capital spending by Berkshire, making them the two largest uses of capital in Buffett's empire. Where PacifiCorp is expected to slow spending, MidAmerican is expected to accelerate before it too slows spending. As an indicator for investors, contracting spending can be seen as a mark of the company's discipline and solid position in the market. If the BNSF pilot is successful, the railroad will need to undertake a major spending glut, but the long-term benefit could drive growth for years.
Buffett's ability to navigate complex markets in essentially "dirty" industries, while maintaining a green spin on each, is a further testament to the genius of the Oracle of Omaha and those who work with him. From an investment perspective, Berkshire continues to provide shareholders with growth and stability.
