Berkshire Hathaway (BRK.B) (BRK.A) surprised investors in 2000 by acquiring MidAmerican Energy Holdings Company. We were surprised because MidAmerican Energy is a utility company. Although utilities typically have a monopoly with regards to producing and or distributing energy services within a specific territory, the companies are heavily regulated by the state and local governments and these firms require significant capital expenditures well in excess of depreciation and amortization accruals. However, Berkshire's investment in MidAmerican has been successful for Berkshire due to utility deregulation, consolidation and lower interest rates helping to electrify the division's bottom line. This even prompted it to acquire a number of natural gas pipelines through the years as well as PacifiCorp in 2006 and it recently announced a deal to acquire NV Energy (NVE) for $5.6B. Here is our analysis and evaluation of Mid American's most recent performance.
MidAmerican Energy Holdings Company
Berkshire owns an 89.8% ownership interest in MidAmerican Energy Holdings Company. MidAmerican's revenues (7.7%) and operating income (10.4%) enjoyed solid growth year-over-year in Q1 2013. Real estate brokerage revenues are also included in this segment as its HomeServices of America subsidiary was previously owned by MidAmerican Energy Holdings and saw strong 33% revenue growth due to a 9% increase in sales transactions closed, 7% increase in average home sale prices and the inclusion of newly acquired businesses. Berkshire's HomeServices of America subsidiary had acquired the Prudential and Real Living real estate brokerage franchises from Brookfield Asset Management (BAM) last year.
Source: Berkshire Q1 2013 10-Q
MidAmerican Energy Company's revenue grew by 6% ($50M) and also saw a similar trend of higher regulated electric and natural gas revenues, partially offset by lower non-regulated and other revenues. MEC's EBIT of $76 million increased $20 million (36%) over the first quarter of 2012, due primarily to a $15 million increase in regulated natural gas operating earnings and as a result of lower interest expenses and higher allowances for equity funds used during construction of energy generation assets. The increase in regulated natural gas operating earnings was attributable to higher volumes from the colder temperatures in 2013.
Revenue growth at the PacifiCorp utility operations grew by 3% ($40M) year-over-year as higher retail revenue of $77M was partially offset by a decrease in wholesale and other revenue. PacifiCorp enjoyed positive operating leverage and its operating income grew by 9% ($20M). Natural gas pipeline revenues and EBIT in the first quarter of 2013 were relatively unchanged compared to 2012. Northern Powergrid's revenues increased $37 million (14%) in the first quarter of 2013 compared to the first quarter of 2012, primarily due to higher distribution revenue. EBIT of Northern Powergrid in the first quarter of 2013 was $145 million, an increase of $21 million (17%) over 2012. The increase was mainly due to the higher operating revenue, partially offset by higher distribution operating expenses.
Source: U.S. Census 2010
We can see why Berkshire bought PacifiCorp from Scottish Power in 2006 as all the states it operates in have population growth rates over the last decade which exceeded the US average national population growth rate over that time period. Berkshire's MidAmerican subsidiary recently announced it was acquiring Nevada's leading utility NV Energy for $5.6B. The good news about this deal is that Nevada's population growth has exploded from 1940-2010. The bad news is that Nevada's demographics have rapidly changed since 1970 and we have concerns that Nevada will be able to repeat this rapid population growth over the next 70 years. It remains to be seen how Nevada's SB123 bill will impact NV Energy's profits going forward. NV Energy sponsored it because it was hoping to transition itself away from coal fired power plants and have the ratepayers pay for the costs associated with this program. Although the bill guarantees NV Energy a 10.5% ROE during this program, it may cause the electric bills of Nevada residents to spiral out of control and make it difficult for NV Energy to achieve the 10.5% guaranteed ROE.
Source: U.S. Census Department
In conclusion we are satisfied with the performance from Berkshire Hathaway. We see our investment in the company as a diversification away from stocks and bonds as well as accessing a well-regarded money manager. Although our favorite pure-play utility company is Wisconsin Energy Corporation (WEC), we believe that Berkshire Hathaway's MidAmerican Energy Holding Company has been providing a strong jolt of power to Berkshire Hathaway's bottom line.