Buffett Foot-to-Floor Plan Stalls at PacifiCorp Unit

MidAmerican Energy Holdings Co., one of the Berkshire Hathaway Inc. (BRK/A) units that billionaire Chairman Warren Buffett relies on to deploy profits, is scaling back its targets for capital spending.

The electric utility and operator of natural gas pipelines projected that expenditures would be $2.4 billion less than previously planned through 2021 amid flat or declining demand at its PacifiCorp unit, according to slides being presented today at a fixed-income conference in New York.

Homes and businesses have been installing energy-saving gadgets and appliances to curb electricity use. The gains in efficiency have begun to pressure sales at U.S. utility owners such as Akron, Ohio-based FirstEnergy Corp. and Minneapolis- based Xcel Energy Inc. (XEL) even as the economy expands after the biggest slump since the Great Depression.

“A large amount of utility growth is predicated on people using increasing amounts of electricity,” Paul Patterson, a New York-based analyst with Glenrock Associates LLC, said in a phone interview today. “If that doesn’t materialize, then the need for some these projects becomes questionable.”

PacifiCorp’s Rocky Mountain Power, which serves customers in Utah, Idaho and Wyoming, projected that demand will contract 0.6 percent this year as energy efficiency improvements eclipse gains expected from new commercial and residential customers. Sales to industrial clients are projected to fall as more generate power themselves.

Photographer: Kostas Tsironis/Bloomberg

Electricity use in the U.S. is expected to rise 0.4 percent this year, according to Energy Department data, as consumers buy light bulbs that burn 25 percent fewer watts and install technology that turns off appliances during hot summer days and other periods when the power grid is strained. Close

Electricity use in the U.S. is expected to rise 0.4 percent this year, according to... Read More

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Photographer: Kostas Tsironis/Bloomberg

Electricity use in the U.S. is expected to rise 0.4 percent this year, according to Energy Department data, as consumers buy light bulbs that burn 25 percent fewer watts and install technology that turns off appliances during hot summer days and other periods when the power grid is strained.

‘No Recovery’

The Pacific Power utility that sells electricity in Oregon, Washington and Northern California signaled that there would be “no recovery” in demand in 2013 after five straight years of weather-normalized declines.

Both units of PacifiCorp projected that capital spending over the next decade would be 13 percent less than previously planned, the slides show. Rocky Mountain and Pacific Power plan to boost efficiency and cut costs as demand flattens, including revising design and construction standards, the presentation shows.

“Our plans are based on customer needs,” said Tina Potthoff, a spokeswoman for Des Moines, Iowa-based MidAmerican. She said the company doesn’t speak for Buffett, who is also chief executive officer of Berkshire. Buffett didn’t return a message left with an assistant seeking comment.

Electricity use in the U.S. is expected to rise 0.4 percent this year, according to Energy Department data, as consumers buy light bulbs that burn 25 percent fewer watts and install technology that turns off appliances during hot summer days and other periods when the power grid is strained.

Electricity Sales

“Flat to declining electricity sales volumes will force many utilities to re-examine their business models, and transition from simply delivering volumes of electricity,” Sam Brothwell, senior utilities analyst with Bloomberg Industries, wrote in an April 1 research note.

Buffett, 82, has highlighted how MidAmerican and railroad Burlington Northern Santa Fe provide an attractive way for Berkshire to spend its mounting profits because they require lots of capital and can generate decent returns. The two businesses were the biggest drivers of the Omaha, Nebraska-based company’s $9.8 billion in capital expenditures last year and Berkshire will probably spend more this year, Buffett wrote in a letter to shareholders last month.

“We will keep our foot to the floor and will almost certainly set still another record for capital expenditures in 2013,” he wrote. “Opportunities abound in America.”

Retained Profits

The billionaire built Berkshire over the last four decades by using profits and other funds from units to buy stocks, take over more businesses and reinvest in operations with the potential to expand. Buffett’s company had about $47 billion in cash at the end of 2012.

MidAmerican differs from other Berkshire units because it retains its profits, rather than sending them to Buffett to allocate. The energy company plans to accelerate capital expenditures during the next three years, spending a total of about $11.8 billion through 2015, according to today’s presentation. After that, spending is projected to slow.

Capital expenditures at the PacifiCorp unit are projected to be less than previously planned this year through 2021, according to a bar chart in the presentation that doesn’t list exact totals.

The reductions should please investors because it signals that the company’s leaders are being thoughtful about spending, said James Armstrong, president of Henry H. Armstrong Associates, a Pittsburgh-based investment manager that oversees about $400 million, including Berkshire shares. The projections will probably change over the next several years, because MidAmerican has a track record of being an opportunistic acquirer of energy assets and utilities, he said.

‘Not Starving’

“They’re not starving the business,” Armstrong said in a phone interview today. “I’d be concerned if they were indifferent to an efficient match” between spending and customer demand, he said. “As a shareholder, what I don’t want to see is what you do see in some other companies, which is growth at all costs.”

A renewable energy unit that the company formed last year is expected to account for about $4.3 billion in spending over the next three years, the company said. MidAmerican has invested in solar power projects in California and Arizona and wind farms in Illinois.

Renewable Energy

MidAmerican Chief Financial Officer Patrick Goodman said in November that the company was targeting renewable energy deals, in part, because utility valuations were high. Berkshire’s taxable income from other operations create an “economic advantage” for the renewables unit, according to today’s presentation.

The energy unit may also get a boost from its Iowa utility, which is projecting an increase in demand through 2014. MidAmerican’s net income climbed to $1.47 billion last year from $1.33 billion in 2011.

The company’s $550 million of 5.95 percent notes due in 2037 advanced 0.5 percent to $124.14 as of 8:52 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt, which isn’t backed by Berkshire, has climbed from $120.73 in April 2012.

To contact the reporters on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net; Julie Johnsson in Chicago at jjohnsson@bloomberg.net

To contact the editors responsible for this story: Dan Kraut at dkraut2@bloomberg.net; Susan Warren at susanwarren@bloomberg.net

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