Back in late May, MidAmerican Energy, a subsidiary of Warren Buffet's Berkshire Hathaway (NYSE:BRK-B), made a $5.59 billion offer to buy NV Energy (UNKNOWN:NVE.DL). On the surface, this seems like the prototypical Warren Buffett kind of acquisition. If you dig deeper, though, there is one lesser known area that could make this purchase an even bigger win. Let's take a look at the move and what small element could make this a big win for the Oracle of Omaha.
For Berkshire, boring is beautiful
It can be really hard to get excited about regulated utilities. An industry that has its profit levels regulated by the state doesn't exactly get the heart racing. But these boring, mostly overlooked businesses are right in Warren Buffett's wheelhouse. It's hard to find a larger economic moat than a state-regulated monopoly like NV Energy, which delivers power to 88% of Nevada's population, including those living in America's ode to electricity, Las Vegas.
From a pure numbers standpoint, the acquisition of NV Energy will give the Buffett portfolio about a 25% boost in income to its energy and utility sector. The move will also help to create a much larger exposure to natural gas than in Berkshire's current holdings. Currently, Buffett's utilities generate about 48% of its power from coal and 22% from natural gas. If the NV deal were to go through, it would then generate 42% from coal and 37% from natural gas. This could prove very advantageous if increased regulations on carbon emissions were to pop up in the utility sector in the coming years.
Considering these factors alone, the purchase of NV Energy seems to make pretty good sense. It provides another stable income source, it adds a market that was not previously in the Berkshire holdings, and provides a more balanced generation capacity portfolio. But is that enough to pay a 20% premium on the company's share price when the deal was announced? Possibly not, but there are a couple hidden aspects of NV Energy that could certainly make that purchase price worth its while.
Going for the bigger fish
The biggest upside for the NV Energy lies not in its current customers or its generation capacity, but in the other market that it could serve: California. The Golden State is the nation's second-largest electricity market. In 2011, the state consumed 261 million MW-hours, 7% of the nation's total. To meet that massive need, the state needs to import about 25% of its energy from outside the state. This issue has been compounded even further since Edison Intenational (NYSE:EIX) shut down the SONGS nuclear facility early last year. Total imports of electricity for California are nearly double the entire Nevada electricity market.
What also makes the California situation so intriguing is the state's initiatives to reduce carbon emissions. Even though the state only imports 25% of its electricity needs, those imports represent 50% of the states carbon emissions for electricity generation. So not only does the state look to import massive amounts of electricity, but it also wants to import cleaner sources.
This is where Nevada -- and more specifically NV Energy -- comes into play. Nevada is well positioned to service the California market with alternative energy because of location and the favorable environment for both solar and geothermal energy. While the company may not have large amounts of alternative energy in its current portfolio, there are over 1,000 MW of alternative energy under construction. Also, other companies in the the state combine to have plans to bring on over 5,400 MW of solar power on board in the next several years.
But for all that to be put into use, it will need to go though NV's transmission system, which owns most of the connections between Nevada and California. So the company is in the process of constructing the ON line transmission project, a 500-MW transmission line that will connect the major generation facilities across the state with the trans-border connections near Las Vegas. With wholesale prices for electricity in Southern California reaching $50 per MW-hour, these transmission lines could score a major win for Nevada energy producers, NV Energy, and now Berkshire Hathaway.
What a Fool believes
This isn't the only time a Berkshire purchase unearthed major upside in the energy markets. With the boom in Bakken crude production, Burlington Northern Santa Fe has become a major transportation option for refiners on both the East Coast and West Coast. The company, in a dual-line partnership with CSX (NASDAQ:CSX), is moving 300,000 barrels of oil per day to Albany, N.Y., for transport to refineries in Canada and the U.S. With costs for moving oil to the East Coast in the neighborhood of $13-$15 a barrel, these shipments alone represent $4 million a day in revenue that did not exist only a year ago. Buffett has been doing this for a long time, but he still seems to be a couple steps ahead of the rest of us.
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