Andrew Bary

Beneath Warren Buffett's amiable Midwestern demeanor lies a tough negotiator.

He is known for not budging on price as was the case with Berkshire Hathaway's purchase of Alleghany in 2022. And he is generally loath to issue Berkshire stock, preferring to pay in cash.

The family of Walter Scott, a longtime Berkshire director and Berkshire business partner who died in 2021 at 90, seems to have gotten the Buffett treatment.

Buffett noted in his recently released annual shareholder letter that Berkshire had boosted its stake in Berkshire Hathaway Energy, its large utility unit, to 100% from 92% during 2024. That occurred when Berkshire repurchased the Scott estate's 8% stake for $3.9 billion in cash and Berkshire stock -- mostly cash.

BHE stock wasn't traded publicly when Berkshire held a 92% interest. Scott invested alongside Berkshire in BHE when Berkshire bought a Midwestern utility that became the nucleus of BHE 25 years ago.

Buffett didn't elaborate on the Scott purchase in his letter but it looks like Berkshire got a steal. Berkshire effectively bought the Scott stake at a BHE valuation of about $49 billion.

That is about 55% of the valuation that the company paid in mid-2022 for a 1% stake it bought from Greg Abel, Berkshire Hathaway's current vice chairman and the likely successor to Buffett. Abel had led the utility unit before moving to the parent company. The Abel sale valued BHE at $87 billion.

That $87 billion price is in line with a recent estimate of BHE's value from veteran Berkshire watcher and investor Chris Bloomstran, the chief investment officer of Semper Augustus Investments Group. He put BHE's value in the $86 billion to $91 billion range in a recent report. Brian Meredith, the UBS analyst, valued BHE at $99 billion in a recent Berkshire note based on a multiple of 19 on projected 2026 after-tax earnings of the unit of about $5 billion.

Barron's reached out to both Berkshire Hathaway and the Suzanne and Walter Scott Foundation for comment but didn't hear back.

Barron's wrote about the transaction when it was initially disclosed around Oct. 1, 2024.

BHE is one of the largest diversified utility companies in the country with a handful of regulated utilities in the West and Midwest. It also holds one of the country's largest natural-gas pipeline networks carrying 15% of U.S. gas, and what may be the biggest installed base of renewable power in the country, mostly wind. Cumulative renewable power investments are about $40 billion.

There is considerable detail on BHE's business and financials in a presentation on the Berkshire Hathaway website. BHE also owns Berkshire's real estate brokerage business, Home Services of America.

One of BHE's advantages relative to public peers is that it retains all its earnings to fund hefty capital expenditures which could total $10 billion this year.

Investor-owned utilities generally pay out more than 50% of their earnings in dividends, forcing them to issue stock or bonds to fund growth. Over the past 20 years, BHE has invested $100 billion in capital expenditures, according to Bloomstran.

BHE earned $3.7 billion after taxes during 2024, which included nearly $2 billion of tax credits, mostly federal credits for the installation of wind turbines.

The price paid by Berkshire to the Scott estate and heirs works out to about 13 times 2024 earnings and roughly equal to BHE's book value on Sept. 30 of $49 billion.

By contrast, big public electric utilities like Duke, Southern Co. and NextEra Energy are valued at about 20 times trailing earnings and two to three times book value.

Why was the price so low? It could reflect BHE's liabilities for wildfires in its Western service during 2020. It is hard to assess that risk but BHE has reserved over $2 billion for those fires. But analysts appear to reflect that risk in their higher valuation of BHE.

Buffett wrote in his annual shareholder letter last year that Berkshire had made a "best estimate" of the wildfire losses and lamented the difficult regulatory environment in which some of Berkshire's utilities operate.

"I did not anticipate or even consider the adverse developments in regulatory returns and, along with Berkshire's two partners at BHE, I made a costly mistake in not doing so," Buffett wrote, referring to Scott and Abel as his partners.

Based on the Berkshire 2023 proxy statement, the Scott family could have gotten an independent appraisal if it disagreed with Berkshire about the BHE price, but there is no indication that happened. Buffett likely negotiated the Scott deal, or at least signed off on it.

The Scott family also could have sold to an outsider if the Berkshire offer was inadequate. It is unclear whether any overture was made to one of many private utility and infrastructure funds. BHE's huge renewables portfolio could have been a draw.

So either BHE is worth a lot less than what many Berkshire observers have assumed or Berkshire got a great price.

Our bet is that Berkshire got a good deal. Buffett is a hard negotiator, and it appears he did so with the estate of a longtime friend and business partner.

Write to Andrew Bary at andrew.bary@barrons.com

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February 26, 2025 02:30 ET (07:30 GMT)

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