Much to the long-term investing community's excitement, Warren Buffett released his annual shareholder letter last week.
In this clip, Sean O'Reilly, Tyler Crowe, and Taylor Muckerman talk about what the billionaire investor had to say about energy. Listen in to hear what trends Buffett sees changing the utilities landscape, why Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) is putting so much of its efforts and cash into renewables, and what it means that its energy segment earnings were less than impressive.
A transcript follows the video.
This podcast was recorded on March 3, 2016.
Sean O'Reilly: Everybody's favorite 80-something-year-old billionaire investor Warren Buffett just came out with his latest annual letter. I know when I was a teenager and first getting exposed to investing, this was like... I don't know, it's kind of like Christmas for long-term investors or something.
Tyler Crowe: He's like the uncle that you want to have advice from, you know what I mean?
O'Reilly: Right, as opposed to the uncle that you avoid at Christmas parties.
Crowe: Yeah, the one that you avoid at Christmas parties and Thanksgiving.
O'Reilly: Not a huge portion of his comments in the letter and everything. He did have a few interesting thoughts on electric utilities. Berkshire Hathaway Energy is obviously a big part of his operations. In fact, I think he says it's the second biggest part, outside of insurance. Correct me if I'm wrong here. He said, I actually wanted to get your thoughts first on this: "In its electric utility business, our Berkshire Hathaway Energy operates within a changing economic model. Historically, the survival of a local electric company did not depend on its sufficiency. In fact, a sloppy operation could do just fine financially," and the reason being basically the local government guaranteed them a certain return on investment. That is changing, and he goes on to note that, "Today, society has decided that federally subsidized wind and solar generation is in our country's long-term interest." He goes on to talk about federal tax credits, the investments they're making to take advantage of these.
Did you guys have any particular thoughts on what might be useful for our Foolish listeners, given Buffett's insights?
Taylor Muckerman: It shows the advantages of running a utility like a business, rather than like a company that's guaranteed income.
Muckerman: All of his utilities that he's picked up and transmission assets that he's picked up have become more profitable, safer, reduced head counts. It's showing that, if utilities do want to get serious about their profitability and the business metrics that investors can focus on, you can change the game.
Then, with renewables, they own an astounding amount of wind and --
O'Reilly: They're the largest.
Muckerman: I think 6x the second competitor in terms of wind and solar power generation, 7% of the U.S.' wind, and 6% of the U.S.' solar electricity generation comes from some Berkshire Hathaway holding, which is pretty impressive and, I think, a little bit under the radar for most people. When you think about Berkshire, you think of the railways, you think about some of the oil services companies that he owns in terms of equipment that they provide, and then obviously the insurance businesses. To be that big of a player in renewable energy kind of under the radar is a big surprise.
O'Reilly: With the amount that he's still plowing into it today.
Muckerman: Oh, it's billions, yeah.
Crowe: Billions of dollars maybe not annually, but pretty darn close to that. When you look at those investments, obviously with those federal tax credits, we don't know how much longer they're going to last. I mean, there are certainly, there's some plans, at least with residential and things like that where we're going to push it out for another five to six years. We could see, certainly, Buffett making large investments over the next four or five years because it is such a lucrative investment with tax credits.
O'Reilly: It's kind of a sure thing.
Crowe: Right. With the amount of cash that Berkshire Hathaway is generating today, it's a pretty lucrative investment.
In an interview that he actually did following up the shareholder letter, they kind of got into the argument that they've been having lately because one of his utilities, NV Energy, which is part of that utility group is in a bit of a spat with --
O'Reilly: This is in Nevada, of course.
Crowe: In Nevada, with SolarCity (NASDAQ:SCTY) and other residentials, basically on the premise of net metering and who gets to sell back and forth. You can kind of go both ways with it. From the individual standpoint, it's like, "I have to buy energy at 10.8 cents per kilowatt hour. Why can't I sell it back at the exact same price?" On the utility side, it says, "Well, why do we have to buy energy back at the utility price when we have to transmit it, we have to basically upkeep everything, when we basically get zero profit on anything that happens there?"
I haven't quite found my final verdict on this yet. Being both a Berkshire Hathaway and a SolarCity investor, I kind of have conflicting interests on this one.
O'Reilly: You've got the devil on one shoulder and the angel on the other shoulder.
Crowe: Exactly. They both make very valid points, and it's certainly something I'm going to be digging into over the next several months trying to figure out how to get my head around it.
O'Reilly: Taylor, before we move on here, I did want to get your thoughts. Berkshire Hathaway's energies, the energy segment, its earnings weren't up a lot. In 2014, it generated just under $2.1 billion in net earnings, and this past year, they generated $2.37 billion, so just over a $270 million increase, but $170 million of it came from a Canadian transmission utility that they bought in late 2014, so not much of an increase. One, why aren't their earnings going up much, and two, what the heck is this Canadian transmission utility?
Muckerman: Basically, AltaLink is the name of the company that they purchased, it still remains under that name. Big player in Alberta. They've been completing some transmission lines to bring wind energy to greater areas of Canada, so you're seeing that renewable energy portfolio carry over to this company as well. Several billion dollars in assets, looks like almost $6 billion at the end of 2013. Berkshire paid almost $3 billion for it. A little bit of a discount to what their assets were worth then. You're looking at this company continuing to grow and pour back into the business and its transmission. They're not generating anything, so it's just moving power from area to area. I wouldn't be surprised to see them get into the power generation game, given their assets.