Author Topic: Berkshire Hathaway Energy  (Read 11634 times)

Cigarbutt

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Re: Berkshire Hathaway Energy
« Reply #30 on: October 27, 2019, 08:33:59 PM »
^Your point is well taken but it all comes down to the definition of a whiff (how to deal with negatives).

People celebrate the Geico investment as a two-part slam dunk now but the second part was met with skepticism (valuation) and the first part was met with disbelief. In 1975, Geico reported an underwriting loss of 190M with 25M (not a typo) left in capital. Mr. Buffett saw moat in the mess and was reassured by the oncoming Mr. Jack Byrne but the company was very close to bankruptcy. In fact, from the regulatory standpoint, the capital deficiency was severe and compatible with a runoff order. Geico was desperate for cash and it was felt (Mr. Buffett himself and the regulators) that the company was significantly under-reserved. Stock price went from 61$ to 2$. Does that meet the definition of a whiff? The company survived, among other reasons than perfect execution from Mr. Byrne, because regulators critically allowed to bypass capital requirements (amounts and deadlines) for quite some time and granted permissions for very significant premiums rate increases.

Also, many investments made in 2008-9 were based on the underlying premise that government officials would "do the right thing". Was that a proposition free of uncertainty?

Mr. Buffett has the luxury to wait for the assets to be served on a silver platter but the return of a cheery consensus is possible in the next few months as the entity will likely come out of bankruptcy next year and the climatic situation may have reached its climactic point for some time.


Spekulatius

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Re: Berkshire Hathaway Energy
« Reply #31 on: October 28, 2019, 04:08:02 AM »
Itís also notable that with a regulated industry, it really cannot be correct that only PCG is too blame. Capex and operational expenses need to go through the regulator. I donít think if PG&E had asked for $10B to harden the grid in 2015 because of inherent fire danger, they would not have gotten approval to do so. Same with tree trimming to some extend.

The ball is really in the Californians government court to change the rules. I am pretty sure that BHE would be interested to invest, given the right framework and some cap and liabilities.

Note that PCG actually produced pretty good numbers before the first  disaster in 2017, due to expanding rate bases from the switch to renewables, which also raised electricity bills for customers quite a bit. I think there is way more to come of the latter. The best action may be for the CA  government to take control of PCG and then work on creating a framework that makes the utility investible for the private sector again.
« Last Edit: October 28, 2019, 05:47:58 PM by Spekulatius »
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longinvestor

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Re: Berkshire Hathaway Energy
« Reply #32 on: October 28, 2019, 04:40:57 AM »
Iím willing to bet that the preferred play here for BHE is to get long term PPAís to supply CA from Oregon, Idaho, Arizona and Nevada. This was the intention anyway with the CAISO. Even if only meeting a portion of CA load. Currently. The Midwest has a functioning ISO. BHE has been an enthusiastic participant in the CAISO. Surely PG&E was not too thrilled  with BHEís participation in it. If BHE can sell power for less than the 20 cents per KWH, CA would be foolish not to allow it.

longinvestor

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Re: Berkshire Hathaway Energy
« Reply #33 on: October 28, 2019, 04:49:41 AM »
Iím more excited that this issue is going to shine a bright spotlight on the two kinds of ownership models of utilities. BHE versus virtually every other publicly owned utility. Retained earnings versus dividends to be specific. Delayed gratification is very hard for Wall Street

Dynamic

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Re: Berkshire Hathaway Energy
« Reply #34 on: October 28, 2019, 04:55:20 AM »
I think you're right, Spekulatius, that Berkshire has the will to invest in the right circumstances, and can put a compelling case that they'd be a highly responsible and cost-efficient operator, willing to invest substantial sums and to reinvest profits and additional capital too right back into grid improvements, renewables and much more beneficial in California as they are in other states, given the right regulatory environment that would not leave them on the hook for the sorts of liabilities that brought down PG&E.

This might be enough to persuade California to amend its constitution, or perhaps to invent some form of structure where the state in some way relieves Berkshire/BHE of this liability or compensates Berkshire/BHE adequately for taking it on.

I imagine there could be many ways to do it, with varying difficulty in getting them done, if the trade-off seems favorable over the alternatives including:
  • amending the state constitution to remove or modify the inverse condemnation doctrine, at least in circumstances relevant to a utility company (I guess this needs a public vote, but the PG&E bankruptcy might provide the impetus to get it passed even if it's a lengthy, difficult process),
  • forming some form of partnership between a state-owned entity that somehow takes on the excess liability and BHE to run the operations and reinvest at a reasonable return on equity, or
  • with Berkshire's risk-appetite as an insurer (and its ability to pay enormous claims), to come up with a price regulation method that effectively pays a sufficient insurance premium for Berkshire to accept the liability caused by the inverse condemnation doctrine.

I think Berkshire's flexibility over innovative deal structures and in insuring unusual risks would allow it to act decisively and to take on more risk than anyone else, but only if properly compensated. And they're also willing to accept enormously lumpy returns if the overall return is sufficient, and to reinvest enormous amounts of capital if the regulated return is adequate. This could be a win-win-win for California, Berkshire and the utility customers.

But, I'm very confident that Berkshire will only take this on if the compensation arrangements are adequate. They're not THAT desperate to find a place to invest enormous amounts of capital that they would ever lower the bar on adequate compensation.

I don't think there is any other entity to match Berkshire in these respects.

longinvestor

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Re: Berkshire Hathaway Energy
« Reply #35 on: October 28, 2019, 05:21:12 AM »
https://www.pacificorp.com/content/dam/pcorp/documents/en/pacificorp/PacifiCorp_Story10_02_2019.pdf

This, from the BHE website laying out the vision for the ďWestĒ.
« Last Edit: October 28, 2019, 05:23:48 AM by longinvestor »

DooDiligence

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Re: Berkshire Hathaway Energy
« Reply #36 on: October 28, 2019, 06:24:43 AM »
Thanks to cigarbutt for bringing up this completely counterintuitive idea.

Scenarios like this, even if they don't happen, can teach how to use 2nd level thinking.

Wouldn't it be a stroke if they did this & got the Applied Underwriters deal OK'd in the process?
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Cigarbutt

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Re: Berkshire Hathaway Energy
« Reply #37 on: October 28, 2019, 08:38:38 PM »
..this completely counterintuitive idea.
Why counterintuitive?
I would say California has its own specific idiosyncrasies but, on its own, would rank as the fifth economic power in the world and will be at the forefront of the evolving dynamics between centralized and distributed energy. PG&E has a long history, is a major player and is running into difficulties that could be considered temporary and fixable with an outcome that can be influenced by a credible partner with a long term view and deep pockets.
Longinvestor and wabuffo (in another thread today) rightly suggested that bankruptcy proceedings are not a natural fit and the Oncor experience was likely a learning experience: after tracing a road map and a valuation baseline, a 'winner' comes from nowhere near the finish line and the breakup fee evaporates. Perhaps a way to win the race here is to make a surprise attack and create a winning gap by proposing (somehow) a solution that the California Public Utility Commission determines to be the only acceptable option (some kind of pre-packaged overall deal), making the emergence decision easier.
https://www.caiso.com/Documents/StudyBenefits-PacifiCorp-ISOIntegration.pdf
https://www.dallasnews.com/business/energy/2017/08/24/warren-buffett-not-only-was-outbid-for-oncor-but-also-lost-270-million-breakup-fee/
« Last Edit: October 28, 2019, 08:40:34 PM by Cigarbutt »

longinvestor

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Re: Berkshire Hathaway Energy
« Reply #38 on: October 29, 2019, 03:54:25 AM »
Itís interesting but not surprising that PG&E is not an independent CAISO member in their own name. Most of the members are non-CA utilities. PacifiCorp is among the largest entities. Followed by NVE. California was importing 33% of their energy needs as of 2015. Last year, thereís been reports of excess renewable energy being produced and not enough demand for. Everything is mired in intrastate parochial interests but if market forces are allowed full expression, CA will end up importing ever more energy from neighboring states. Costs and therefore prices are dropping elsewhere. It just costs too much in CA. Just like about anything else, which is why cost sensitive businesses leave CA. Energy is no exception. BHE has been prepared for this for a long time. My guess is Berkshire doesnít have to buy any entity in CA, perhaps some piece of PG&E, like transmission.
« Last Edit: October 29, 2019, 03:58:09 AM by longinvestor »

DooDiligence

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Re: Berkshire Hathaway Energy
« Reply #39 on: October 29, 2019, 04:50:04 AM »
..this completely counterintuitive idea.
Why counterintuitive?
I would say California has its own specific idiosyncrasies but, on its own, would rank as the fifth economic power in the world and will be at the forefront of the evolving dynamics between centralized and distributed energy. PG&E has a long history, is a major player and is running into difficulties that could be considered temporary and fixable with an outcome that can be influenced by a credible partner with a long term view and deep pockets.
Longinvestor and wabuffo (in another thread today) rightly suggested that bankruptcy proceedings are not a natural fit and the Oncor experience was likely a learning experience: after tracing a road map and a valuation baseline, a 'winner' comes from nowhere near the finish line and the breakup fee evaporates. Perhaps a way to win the race here is to make a surprise attack and create a winning gap by proposing (somehow) a solution that the California Public Utility Commission determines to be the only acceptable option (some kind of pre-packaged overall deal), making the emergence decision easier.
https://www.caiso.com/Documents/StudyBenefits-PacifiCorp-ISOIntegration.pdf
https://www.dallasnews.com/business/energy/2017/08/24/warren-buffett-not-only-was-outbid-for-oncor-but-also-lost-270-million-breakup-fee/

By counterintuitive, I mean, not a business I believe BRK would be interested in because it looks so ugly.

What I call intuition is probably just a cognitive bias of some sort.

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« Last Edit: October 29, 2019, 04:52:34 AM by DooDiligence »
BRK.B - 24.9% // Healthcare 22.5% - EW NVO // Auto's & Oil 18.4% - CLB GPC PSX VDE

Banking 9.4% - WFC // Entertainment 4.7% - DIS // Drinkers & Smokers 6.4% - MO

Retail 7.0% - ULTA VLGEA

---

%'s held @ MV 2/19/2020 minus 6.7% investable cash

i trumpet my ignorance

https://twitter.com/tunawish