Berkshire Hathaway 2017 Annual Meeting Audience Question # 54

Berkshire will own more utility systems by 2027

Warren Buffett:

OK. Gregg?

Gregg Warren:

Thank you, Warren.

As you look forward, in taking into consideration some of the headwinds faced in the U.S.- based utilities, including weaker electricity demand growth as increasing energy efficiency impacts demand, distributed generation, which hits vertically integrated utilities doubly hard as they face both declining energy sales revenue and increased network cost to support reliable delivery and, third, higher interest rates, which would increase borrowing costs, what are the key attributes that Berkshire Energy would be looking for in future acquisition candidates? In…

Warren Buffett:

Yeah. Oh, excuse me. I’m sorry.

Gregg Warren:

I’m sorry. In particular, are there advantages or disadvantages attached to, say, transmission assets relative to generation assets that would make you favor one over the other?

Warren Buffett:

Yeah. Well, generation assets, you can say, have inherently more risk because that… some of them are going to…

Charlie Munger:

Be stranded.

Warren Buffett:

… stranded, yeah, and obsoleted. Now the question is how they treat stranded and all of that sort of thing.

We… on the other hand, more of the capital investment is in the generating assets. So that tends to be where a good bit of the capital base is.

We like the utility business OK. I mean… electric… electricity demand is not increasing like it was, as you point out. They’re going to be stranded assets. They…

If they’re stranded because of rank foolishness, you know, they will probably be less inclined… or the utility commissions… will be less inclined to let you figure that in your rate base as you go forward as opposed to things that are… where societal demands are just changing.

But we still think the utility business is a very decent asset. The prices are very high, but that’s what happens in a low interest rate environment. I would be…

I’d be surprised if 10 years from now, we don’t have significantly more money in not only wind and solar, but probably… we’ll probably own more utility systems than we own now.

We’re a buyer of choice with many utility commissions. In fact, if we can put up the slide, there’s a slide which shows something about our pricing compared to other utilities.

And Greg Abel and his group have done an extraordinary job. They’ve done it in safety. They’ve done it in reliability. They’ve done it in price. They’ve done it in renewables. It’s hard to imagine a better run operation than exists at MidAmerican Energy.

And people want us… with that record… people want us to come to their state in many cases.

But when prices get to the level they have, I mean, some utilities have sold at extraordinary prices. And we can’t pay them and have it make sense for Berkshire shareholders.

But just because we can’t do it this year doesn’t mean it won’t happen next year or the year after. So I think we’ll get a chance.

Charlie Munger:

And our utilities are not normal. The way Greg has run those things, they’re so much better run in every way than normal utilities. They’re better regarded by the paying customers. They’re better regarded by the regulators. They have better safety records. They charge…

It’s just everything about it is way the hell better. And it’s a pleasure to be associated with people like that and to have assets of that quality.

And it’s a lot safer. If somebody asked Berkshire to build a $50 billion nuclear plant, we wouldn’t do it.

Warren Buffett:

Yeah. And we have public power here in Nebraska. I mean, it’s been sort of the pride of Nebraska for many decades. It’s all… there are no privately-held utility systems, and totally public power. And, you know, those utilities have no requirements for earnings on equity. They have…

They can borrow at tax-exempt rates. We have to borrow at taxable rates. And Nebraska… you know, the wind… it’s not that much different than Iowa. And we’re selling electricity across the river, a few miles from here, you know, at lower prices than exist in Nebraska. So it’s an extraordinary utility.

And it was lucky when we got involved in it. I thank Walter Scott, our director, for introducing me to it almost 17 or 18 years ago or so. And…

But I don’t think the utility business, as such… I mean, if I were putting together a portfolio of stocks, I don’t think there would be any utilities in that group now. But I love the fact we own Berkshire Hathaway Energy.

Charlie Munger:

But it’s different…

Warren Buffett:

Yeah.

Charlie Munger:

… radically different…

Warren Buffett:

A lot… and better.

A lot better, actually.

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