By Jonathan Stempel
OMAHA, Nebraska (Reuters) – Two years ago, Warren Buffett called Berkshire Hathaway’s energy business one of his conglomerate’s four “giants.” Now he fears his business model could be broken.
Berkshire Hathaway Energy’s PacifiCorp unit faces billions of dollars in potential liabilities stemming from wildfires that have devastated hundreds of thousands of acres in southern Oregon and northern California.
Costs may increase as more fires occur and efforts to prevent them occur. Climate change, reflected in a drier, hotter climate and more combustible vegetation, increases the risks.
“I did not anticipate or even consider the adverse developments in regulatory returns,” Buffett wrote in his annual letter to shareholders in February. “I made a costly mistake by not doing so.”
What remains unclear is the extent to which PacifiCorp’s problems affect the conglomerate’s overall results, with Berkshire’s deep balance sheet and dozens of other operations unable to fully offset it.
Buffett, 93, and his designated successor, Greg Abel, 61, could face questions from shareholders at Berkshire’s annual meeting on May 4 in Omaha, Nebraska, about their concerns about the energy company.
“Wildfires make (utilities) fire insurance companies in addition to being utilities,” said Steven Check, who oversees $1.9 billion in management at Check Capital, including $600 million in Berkshire stock and options. “It’s a material change. Warren Buffett did not see this coming.”
INCREASING COMPLAINTS
Berkshire Hathaway Energy serves approximately 5.3 million electric and gas customers through PacifiCorp, MidAmerican Energy and NV Energy in 11 Western and Midwestern states, and millions more in England and Alberta, Canada.
It owns 36,400 miles (58,580 km) of electrical transmission lines and operates 21,000 miles of pipelines.
For many years, Berkshire Hathaway Energy – which is 92% owned by Berkshire Hathaway – has been a steady profit engine for its parent company, typically generating 10% to 12% of global operating profit.
That number dropped to just 6% in 2023 as the company’s profit fell 40% to $2.33 billion.
PacifiCorp was a big reason why. Jurors found the Portland, Oregon-based utility responsible for several wildfire verdicts in 2020, attributing the losses to its power lines. PacifiCorp denied negligence.
But it ended 2023 with projected losses of $2.4 billion from wildfires and said losses could grow to $8 billion.
This week, a group of 1,000 fire victims said PacifiCorp should pay them $30 billion.
One result: PacifiCorp will not pay dividends to Berkshire Hathaway Energy for several years, which could affect the parent company’s ability to finance operations.
“It is critical for utilities to recover costs and maintain a strong financial profile so they can ensure reliability for customers,” said Travis Miller, equity analyst at Morningstar.
Utilities can reduce the risk of wildfires by insulating wires to reduce the threat of sparks, trimming or felling trees that may come into contact with power equipment, burying transmission lines underground, and temporarily turning off power.
But mitigation can be expensive, and Buffett promised that Berkshire “will not knowingly waste good money after bad.”
Toby Shea, senior director of credit at Moody’s Investors Service, explained: “He’s saying, if we basically have to pay billions and billions of dollars every time there’s a big fire, that’s not a viable model.”
THE LAWYERS’ BLAME This isn’t the first time Berkshire has faced major headwinds in a major deal.
Berkshire spent years cleaning up General Re’s poor underwriting after paying $16 billion for the reinsurer in 1998.
It also overpaid for Precision Castparts, which cost $32.1 billion in 2016, only to see its aircraft parts business collapse during the pandemic. Litigation involving PacifiCorp can drag on for years, and the final cost and timing of payments are uncertain.
In his letter to shareholders, Buffett warned that a “confiscatory resolution” could come to PacifiCorp, but that Berkshire and Berkshire Hathaway Energy were structured to survive it.
Although analysts do not predict a bankruptcy, Berkshire may decide that it may not be worth investing in production and transmission assets if it is forced to shoulder several years of large legal bills.
“Our assumption is that if the damage at PacifiCorp becomes unsustainable in the long term, the company’s support for PacifiCorp may be limited,” said S&P Global analyst Sloan Millman.
Berkshire Hathaway Energy declined to comment for this article.
PacifiCorp said the $30 billion claim shows the need for legal reform, with its ability to serve clients “threatened with excessive wildfire damages pursued by plaintiffs’ lawyers who have a substantial financial stake in those outcomes.”
Some states are addressing the risk of utility companies going bankrupt due to wildfires.
In 2019, California lawmakers created a multibillion-dollar wildfire fund that utility companies could tap to pay for damage caused by their equipment.
And in March 2024, Utah lawmakers allowed large utility companies to charge customers surcharges to establish wildfire funds and limited liability in some claims.
PacifiCorp could benefit if Oregon took similar steps. For now, Berkshire’s size offers protection against big losses.
Paul Lountzis, president of Lountzis Asset Management in Wyomissing, Pennsylvania, which invests 11% of its assets in Berkshire stocks, said diversification “really helps. It’s not like Berkshire is a one-size-fits-all utility.”
(Reporting by Jonathan Stempel in New York; Editing by Ira Iosebashvili and Marguerita Choy)
