Berkshire Hathaway’s investor letter this year should be a warning to electric utility investors.
Every year investors anxiously await the arrival of Warren Buffett’s annual letter to Berkshire Hathaway shareholders.
In this year’s letter, after discussing his favorite companies such as Coke, Apple, and Western oil, Buffett turned to two disappointing sectors, railroad and utilities. But there was one key difference.
As an investor, he was disappointed with the performance of the BNSF rail lines but recognized the industry’s significant economic potential, and its centrality to the U.S. economy, and remained committed to it as a long-term holder. A completely different sentiment, however, for his investments in electric industries.
A theme of Buffett’s letter this year was to explain why, as an investor with a balance sheet of about $1 trillion in assets, he can’t commit more capital to certain businesses he likes. On utilities, he writes: “It will be many years before we know the final balance of BHE’s wildfire losses and can make intelligent decisions about whether to make future investments in vulnerable Western states. It remains to be seen whether the regulatory environment will change elsewhere.” If there was any doubt, he meant a change for the worse, and let’s explore why.
Buffett discusses two reasons why he appears to have become pessimistic about the business prospects of regulated electric utilities in the United States:
1) Continued business disruption due to increased bushfire risk due to climate change, which has already led to two bankruptcies. He writes: “Other electric utilities may face survival problems similar to those of Pacific Gas & Electric and Hawaiian Electric.” Among its three electric utilities, PacifiCorp’s heavily forested service area most resembles wildfire-prone Northern California;
2) The erosion of fee-based regulatory rules and rate of return at the state level to the detriment of capital providers such as Berkshire Hathaway. One reason he initially found utilities attractive was their ability to earn more than the cost of capital, a venture with a high return and relatively low business risk. But now, with climate change and wildfires already causing two utility bankruptcies, business risks have increased while the financial returns granted by regulators are decreasing.
Throughout his letter, Buffett talks about the desire to invest capital domestically.
He recognizes that the U.S. electric utility industry needs new investment, but at the same time, a deteriorating investment climate prevents him from committing incremental sums. When he mentions future capital expenditures by utilities, he cites the potential of burying transmission lines in response to wildfire risk and the significant costs of doing so.
Berkshire Hathaway’s investor letter this year should be a warning to investors of U.S. electric utilities. Forest fires caused by climate change led to the bankruptcy of Pacific Gas & Electric. Meanwhile, returns on equity are getting slim. And finally, the specter of public ownership looms over the industry.
Original article published on Money.it Italy 2024-03-04 07:10:00. Original title: Perché Warren Buffett è pessimista sul futuro delle utility elettriche?
