Analysis: Buffett utility deal may signal big push to invest cash

MidAmerican Energy Holdings Co, a core part of Warren Buffett's sprawling business empire, is becoming a favorite way for the "Oracle of Omaha" to invest the billions of dollars of cash on Berkshire Hathaway Inc's balance sheet.

The unit's $5.6 billion acquisition of Nevada's NV Energy , announced last week, vaulted MidAmerican to ninth place in terms of U.S. electric utility customers from fourteenth, according to data compiled by Reuters, and fits right into Buffett's strategy of owning businesses with large, predictable cash flows.

But some on Wall Street say there is another, less obvious reason for such a deal: The 82-year-old Buffett is beginning to tie up the nearly $50 billion of cash on Berkshire's balance sheet to assuage concerns about a leadership transition when he dies or becomes too infirm to run the conglomerate.

Though investors trust that Buffett will put an appropriate successor in place, they acknowledge that, as the world's most successful value investor, he is a special case.

Berkshire Vice Chairman Charles Munger last year said MidAmerican could deploy as much as $100 billion over the next 10 to 15 years.

"The energy sector looks to be a pathway for (Buffett) to invest a lot of money," said David Rolfe, chief investment officer of St. Louis-based Wedgewood Partners, which has about $300 million invested in Berkshire Hathaway stock. "There is a very good chance that 10 years from now it's the largest part of Berkshire, easily."

Including the NV Energy deal, which is the largest in the global energy and power sector so far this year, MidAmerican makes up only about 10 percent of Berkshire's pre-tax earnings, dwarfed by the company's vast insurance holdings. But that is expected to change.

"What (MidAmerican and railroad Burlington Northern Santa Fe) have done is guaranteed the cash flows get reinvested back into those businesses," said Morningstar analyst Greggory Warren. "It eliminates some of the risk to whoever succeeds him of having too much cash on the balance sheet and not enough good ideas."

BNSF has been investing in the expansion of rail infrastructure in the United States and in new technologies such as powering locomotives with natural gas in a bid to increase profitability.

MidAmerican, which will own two Western utilities after the NV Energy deal, could seek out other power companies in that region, though analysts said the company would be more driven by valuation than geography.

"AN ESSENTIAL SERVICE"

In his most recent letter to shareholders, Buffett called MidAmerican's earnings "recession-resistant" because the company offers "an essential service."

Once the NV Energy deal closes, MidAmerican will have $66 billion in assets. Those include the Kern River natural gas pipeline, a newly formed renewables division that oversees unregulated solar, wind, hydropower and geothermal projects, and even a real estate brokerage firm, HomeServices of America.

Buffett has also figured out how to generate stable returns in renewable energy by investing in projects that come with long-term contracts to sell their output to utilities.

The regulated utilities are MidAmerican's primary focus, however, and include Oregon-based PacifiCorp, Iowa's MidAmerican Energy Co and Northern Powergrid in England. Together, those utilities will serve 8.4 million customers once NV Energy is folded into the mix.

In MidAmerican's leadership, Buffett also has one of his most trusted lieutenants: Greg Abel, the unit's chief executive.

Abel, who has been instrumental in MidAmerican's many acquisitions over the last decade, is widely considered to be among the internal candidates that could succeed Buffett, who has sung Abel's praises repeatedly over the years.

Abel declined an interview request.

Berkshire has long exerted little day-to-day influence over its subsidiaries, and thus Abel operates MidAmerican - and overseas acquisitions - with a lot of freedom.

MidAmerican's former chairman and one-time Buffett heir apparent, David Sokol, resigned after trading stock in a company Berkshire was trying to buy.

That scandal enveloped Berkshire two years ago. Since then Abel and other internal candidates, including Ajit Jain, Buffett's top insurance executive and Matthew Rose of BNSF, have emerged as possible future chief executives.

Deals like NV Energy allow Berkshire to deploy capital into riskier ventures, such as his rescue investment in Goldman Sachs at the height of the credit crisis in 2008, said Michael Yoshikami, CEO of Destination Wealth Management in Walnut Creek, California.

For his next mega-deal, many on Wall Street suspect Buffett may look to the industrial sector, where valuations are low compared with utilities.

But once utility valuations pull back a bit, Yoshikami said, "he will be all over it."

(Reporting by Nichola Groom in Los Angeles; Additional reporting by Scott DiSavino in New York; Editing by Patricia Kranz and Tim Dobbyn)