I found this section somewhat interesting and sparking deeper thoughts on the sector, reminding us (er, me) that proper due diligence and analysis always is required. Speaking of which, I wonder what Giroux' take on them would be since last I saw he remained bullish on utes....
Our second and even more severe earnings disappointment last year occurred at BHE. Most of its large electric-utility businesses, as well as its extensive gas pipelines, performed about as expected. But the regulatory climate in a few states has raised the specter of zero profitability or even bankruptcy (an actual outcome at California’s largest utility and a current threat in Hawaii). In such jurisdictions, it is difficult to project both earnings and asset values in what was once regarded as among the most stable industries in America.
For more than a century, electric utilities raised huge sums to finance their growth through a state-by-state promise of a fixed return on equity (sometimes with a small bonus for superior performance). With this approach, massive investments were made for capacity that would likely be required a few years down the road. That forward-looking regulation reflected the reality that utilities build generating and transmission assets that often take many years to construct. BHE’s extensive multi-state transmission project in the West was initiated in 2006 and remains some years from completion. Eventually, it will serve 10 states comprising 30% of the acreage in the continental United States.
With this model employed by both private and public-power systems, the lights stayed on, even if population growth or industrial demand exceeded expectations. The “margin of safety” approach seemed sensible to regulators, investors and the public. Now, the fixed-but-satisfactory- return pact has been broken in a few states, and investors are becoming apprehensive that such ruptures may spread. Climate change adds to their worries. Underground transmission may be required but who, a few decades ago, wanted to pay the staggering costs for such construction?
At Berkshire, we have made a best estimate for the amount of losses that have occurred. These costs arose from forest fires, whose frequency and intensity have increased – and will likely continue to increase – if convective storms become more frequent.
It will be many years until we know the final tally from BHE’s forest-fire losses and can intelligently make decisions about the desirability of future investments in vulnerable western states. It remains to be seen whether the regulatory environment will change elsewhere.
Other electric utilities may face survival problems resembling those of Pacific Gas and Electric and Hawaiian Electric. A confiscatory resolution of our present problems would obviously be a negative for BHE, but both that company and Berkshire itself are structured to survive negative surprises. We regularly get these in our insurance business, where our basic product is risk assumption, and they will occur elsewhere. Berkshire can sustain financial surprises but we will not knowingly throw good money after bad.
Whatever the case at Berkshire, the final result for the utility industry may be ominous: Certain utilities might no longer attract the savings of American citizens and will be forced to adopt the public-power model. Nebraska made this choice in the 1930s and there are many public-power operations throughout the country. Eventually, voters, taxpayers and users will decide which model they prefer.
When the dust settles, America’s power needs and the consequent capital expenditure will be staggering. 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.
Comments
I recall that just a few years ago, it didn't care about that and ignored complaints. We were not so much concerned about forest fires in Chicago (although there are rumors that a cow many moons ago burned the whole city down), but were concerned about power lines swaying badly in high winds (this is the Windy City after all).
About once a year, some poor squirrel climbs the utility pole and touches the exposed breaker-lever. After a bright flash and loud explosion, the squirrel goes to squirrel-heaven but the neighborhood is out of power for up to 2 hours. I have watched ComEd trucks fixing those after pointing out to the crew the pole from which the flash and loud explosion came from. All they do is use a 1-crew powered-lift, and a long pole to just flip the breaker-lever on, and the power for the neighborhood is back on. One would think that in this high tech age, some plastic mesh can be put around the exposed breaker-lever to avoid this. But it's easier to take care of few outages than to fix this problem. Only if there were some lawyers for squirrels demanding millions for dead squirrels, this problem would be fixed right away.
While regulators and courts may have gone overboard with new regulations and fines, it is also true that common sense maintenance was overlooked in favor corporate margins and profits.
But then there were also weather related utility disasters in PR, TX, etc, and what has been the solution for those?
Hawaii Electric knew what could happen but didn't turn off the power either. The fire that burned Maui was small and "contained" initially.
PCG may even be a good bet now as it has already been bankrupt once, although their are still large class action suits pending
Another thing to think about is to sell shovels. invest in companies modernizing the grid.
Look at GRID. IT is a little far out ( 3% NVDA some ORCL etc but mostly industrials)
Much smoother ride than TAN or Clean Energy funds and just as important; if you can't get the power to the customers what good is it?
there are many individual stocks involved but it takes some work to identify the best
https://regreenspringfield.org/snowtober-surprise-springfield-in-natures-crosshairs-once-again/
Then came, from the "conservative" political forces, demands to "free" the utilities from the "artificial regulatory burdens" and allow them to "compete" in a free-for-all environment that would "unlock" their potential for greatly increased profits. The Berkshire report very conveniently "forgets" how PG&E and other utilities were raped by entities like Enron in this new era of "regulatory freedom".
PG&E management, it turned out, were sheep who after years of cozy and protective regulation, were completely unsuited to life in the wild, and were duly herded into the corral and slaughtered. Bankruptcy followed in 2001, with of course, "new management" following.
The new management cut back severely on any equipment purchases or upgrades, and their maintenance forces were left to wither. Their once new and shiny service vehicle fleet became more of a traveling junkyard of faded-paint and obviously over-used equipment. Maintenance support personnel were cut back to the point where even the office support staffs had no resources to document what little construction or repair work was being done.
This resulted in the first of a long line of subsequent safety-failure episodes: in 2010 a massive explosion and eight-alarm fire in a major natural gas line just to the south of San Francisco killed eight and destroyed or severely damaged some forty homes. The US Geological Survey registered the explosion and resulting shock wave as a magnitude 1.1 earthquake.*
PG&E's service resources were so depleted that it took them over an hour just to determine what had happened, and to respond. The fire was only fifty percent contained after four hours, and continued to burn for another 12 hours.* It later was found that that section of gas pipe was fabricated of scrap piping material, incorrectly welded during installation, and incorrectly documented in PG&E records.
This disaster was followed by a long series of major fires caused by faulty or aged PG&E electrical equipment, leading eventually to a second bankruptcy in 2020. We PG&E customers now have the dubious honor of having the highest electrical rates in the entire United States, as PG&E attempts to rebuild what they neglected for so many years.
And Berkshire now has the temerity to complain about "profits". Right.
* per Wickipedia
I'm personally not in favor of complete privatization of electricity but other states have made it work.
Buffet has sounded the warning bell -- I would expect Berkshire to start dumping utility assets if things don't improve on the regulatory side.
Perhaps I didn't make the connection between deregulation, disaster, and bankruptcy sufficiently clear. So now all of a sudden it's a problem because of "the regulatory climate" ?? Really?
Because of the effects of deregulation of poorly managed utilities we have death, destruction, and now the highest rates in the US. By all means, let's just "regulate" better.
PG&E has shown itself, over way too long a period of time, to be a hot mess, an unethical scum-sucking disaster of an entity. Highest yoot rates? Let's say 1st or 2nd highest. I have to deal with HE over here in Hawaii.
@Crash- I think that puts us as #! again. Yay!! We're #1 !!
Of course we can always make Berkshire happy by a few more increases like that. I'm sure that they can use some extra cash to add to their pile that's already so big that they don't quite know what to do with it.
PGE history of mis-management stretches many decades, way before PacifiCorp became a subsidiary of Berkshire. In 2019, CA asked Berkshire to purchase PGE which Berkshire refused.
I would hope that Berkshire has no investment in PG&E, nor should they at this point. But certainly not for the reasons that they have chosen to proclaim. PG&E is in this mess not because of the "regulatory climate", but because of deregulation, and the desire to abandon a regulatory system that worked just fine in favor of a "fast buck" in supposed deregulated profits. At least Berkshire could have been honest about that.
Yessir, OJ.
discount and a sell off day and wait for the
monthly dividends.
ET as of 2/23
Next Dividend Payment $0.121
Next Pay Date February 29, 2024
Previous Ex-Date February 14, 2024
Frequency Monthly
Distribution Rate 6.98%
SEC Yield30 Day --
Option-income funds designate much of their distributions as a "return of capital," a phrase that suggests you're not getting a true dividend. But just as there is good cholesterol and bad cholesterol, there are good and bad returns of capital. Cash inflows from option sales are repeatable and sustainable. So, unless an options-based fund is mismanaged, it shouldn't suffer the long-term erosion of NAV that plagues CEFs that regularly liquidate assets to maintain high payouts.
(src: https://www.kiplinger.com/article/investing/t052-c003-s001-option-income-cefs-may-be-a-smarter-choice.html0
@MikeM: Maybe a typo there?
ET just paid, on 20th Feb. The very healthy dividend was .315 cents/share.
...You must be quoting me info re: BUI. I don't prefer ETFs. But I'm always acting against my own dictates. The latest illustration of that is FALN. (And I've been wanting to add a Yoot. This one might fit the bill.)
BUI is a CEF Utility fund and not an ETF. Apologies if you knew that.
https://opb.org/article/2024/02/27/us-government-may-sue-pacificorp-a-warren-buffett-utility-for-nearly-1b-in-wildfire-costs/#:~:text=The%20U.S.%20government%20is%20threatening,trying%20to%20negotiate%20a%20settlement.