Berkshire Hathaway (NYSE:BRK-B) is sitting on a record cash pile, $55 billion, and I recently wrote about why the Oracle of Omaha's next purchase might be designed to take advantage of America's historic energy boom.
Specifically, I focused on how Buffett stated on May 3 that Berkshire Hathaway Energy (the recently renamed Mid-American Energy) might be willing to use debt and $35 billion of its cash hoard to execute a $50 billion acquisition.
This article highlights one of Buffett's favorite industries and why his next major purchase may include utilities such as CenterPoint Energy (NYSE:CNP), Dominion Resources (NYSE:D), or NextEra Energy (NYSE:NEE).
Buffett's big utility bet
Back in 1999, Berkshire Hathaway began building its energy empire with its $9 billion (cash and debt) purchase of utility Mid-American Energy. Since that time, Berkshire has followed up with several major utility acquisitions:
- Its 2006 purchase of Oregon based Pacificorp, which had a customer base of 3 million, for $9.4 billion.
- The $10.1 billion purchase of Nevada utility NV Energy in 2013, which expanded Mid-American's utility customer base by over 1 million.
- A $2.9 billion acquisition of Altalink, which transmits power to 3 million customers in Alberta.
All told, Berkshire Hathaway Energy now owns $73 billion in assets and serves 8.4 million utility customers around the world.
Warren's not done yet
As my Motley Fool colleague Patrick Morris recently pointed out, Buffett has "poured billions and billions and billions of dollars" into his energy business and said "we're going to keep doing that as far as the eye can see."
Noted Buffett scholar Robert Miles has explained the appeal of Utilities to Berkshire's growing energy empire. "Utilities offer a durable competitive advantage -- energy is not likely to be disrupted by the Internet... utilities are capital intensive and Berkshire has plenty of it, with $2 billion in monthly cash flow for Buffett and his subsidiary managers to reallocate."
Furthermore, Berkshire's insurance companies offer it substantial access to very cheap capital, "at a lower rate than the U.S. government," according to Mr. Miles.
Another reason Berkshire likes this industry is because most publicly traded utilities are regulated monopolies that pay out a majority (63% in 2012, the last year data was available from SNL Financial) as dividends. When Berkshire buys a utility, all of that stable, consistent cash flow can be redirected to grow other Berkshire businesses.
Why Berkshire might buy these three utilities
Bloomberg analysts believe that CenterPoint Energy, Dominion Resources, and NextEra Energy meet Berkshire's strict purchase criteria, which includes solid management (that's expected to remain in place), and return on equity (ROE) above 10%.
|Utility||Enterprise Value||Customers||Annual Revenues (2015)||Earnings (TTM)||Return on Equity||Operating Annual Cash Flow|
|CenterPoint Energy||$18.17 billion||5.7 million||$8.6 billion||$347 million||12.91%||$1.54 billion|
|Dominion Resources||$65.12 billion||6 million||$13.87 billion||$1.59 billion||13.96%||$3.09 billion|
|NextEra Energy||$72.29 billion||4.7 million||$16.93 billion||$2.1 billion||11.36%||$5.3 billion|
|Berkshire Hathaway Energy||8.4 million||$12.6 billion||$1.676 billion|
As this table shows, an acquisition of either of these utilities would be a game-changer in terms of expanding Berkshire Hathaway Energy. Revenue would grow between 68% and 134%, while earnings would soar 20%-125%, respectively.
Serving 5.7 million and electricity and gas customers primarily in the midwest and south, CenterPoint Energy could be acquired by Berkshire without having to take on any debt. It also offers Berkshire additional exposure to natural gas pipelines through its 58.3% stake in Enable Midstream Partners (NYSE:ENBL) which operates 21,100 miles of natural gas pipelines mainly in the Arkansas, Lousiana, and Texas basin.
Enable Midstream pays CenterPoint Energy $252 million annually in distributions, which analysts expect to grow at 9.7% over the next decade.
With an enterprise value (market capitalization plus net debt) of $65 billion, Dominion Resources does not currently fit in Berkshire's $50 billion acquisition envelope, but there are two reasons Buffett might want to either take on additional debt to make this purchase, or continue hoarding cash until he can.
First, Dominion Resources has plans to invest $14 billion to increase and upgrade its energy infrastructure over the next five years. Thus, the utility could greatly benefit from Berkshire's access to vast amounts of cheap capital.
Second, Dominion is currently investing $3.8 billion into the Cove Point LNG (liquefied natural gas) export terminal, which is scheduled to start operating in 2017.
Once done, the terminal will be capable of exporting 1.8 billion cubic feet per day, worth $2.6 billion at today's prices.
Better yet, for long-term cash-flow-loving Berkshire, is the fact that this facility is already 100% booked under 20-year contracts to Japan's Sumitomo Corporation and GAIL, India's state-run gas company.
NextEra Energy represents the largest utility Bloomberg analysts believe Berkshire is considering acquiring, but there are two excellent reasons for this.
First, the scale of this acquisition would move the needle for Berkshire, increasing its revenues by 8.8% and operating cash flows by 19%, respectively.
Second, NextEra Energy is the nation's largest operator of renewable energy, with 11 GW of solar and wind-generating capacity. In fact, NextEra operates 17%, and 14%, respectively, of America's utility scale wind and solar power.
NextEra is planning on adding 2.44 GW of solar and wind capacity by 2016,which makes this company a tempting target for Buffett, who is has invested $15 billion in renewable power and expressed a desire to invest $15 billion more.
Warren Buffett isn't done buying utilities, and CenterPoint Energy, Dominion Resources, and NextEra Energy are three great ways for Berkshire Hathaway Energy to grow its empire and potentially tap into major energy megatrends (LNG exports and growth in renewable energy).
Adam Galas has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway and Dominion Resources. The Motley Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.