Back in late May, MidAmerican Energy, a subsidiary of Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A), made a $5.59 billion offer to buy NV Energy, Inc. (NYSE:NVE). On the surface, this seems like the prototypical Warren Buffett kind of acquisition. If you dig deeper, though, there is one lesser known area that could make this purchase an even bigger win. Let’s take a look at the move and what small element could make this a big win for the Oracle of Omaha.
For Berkshire, boring is beautiful
It can be really hard to get excited about regulated utilities. An industry that has its profit levels regulated by the state doesn’t exactly get the heart racing. But these boring, mostly overlooked businesses are right in Warren Buffett’s wheelhouse. It’s hard to find a larger economic moat than a state-regulated monopoly like NV Energy, Inc. (NYSE:NVE), which delivers power to 88% of Nevada’s population, including those living in America’s ode to electricity, Las Vegas.
From a pure numbers standpoint, the acquisition of NV Energy, Inc. (NYSE:NVE) will give the Buffett portfolio about a 25% boost in income to its energy and utility sector. The move will also help to create a much larger exposure to natural gas than in Berkshire Hathaway Inc. (NYSE:BRK.A)’s current holdings. Currently, Buffett’s utilities generate about 48% of its power from coal and 22% from natural gas. If the NV deal were to go through, it would then generate 42% from coal and 37% from natural gas. This could prove very advantageous if increased regulations on carbon emissions were to pop up in the utility sector in the coming years.
Considering these factors alone, the purchase of NV Energy, Inc. (NYSE:NVE) seems to make pretty good sense. It provides another stable income source, it adds a market that was not previously in the Berkshire Hathaway Inc. (NYSE:BRK.A) holdings, and provides a more balanced generation capacity portfolio. But is that enough to pay a 20% premium on the company’s share price when the deal was announced? Possibly not, but there are a couple hidden aspects of NV Energy, Inc. (NYSE:NVE) that could certainly make that purchase price worth its while.
Going for the bigger fish
The biggest upside for the NV Energy, Inc. (NYSE:NVE) lies not in its current customers or its generation capacity, but in the other market that it could serve: California. The Golden State is the nation’s second-largest electricity market. In 2011, the state consumed 261 million MW-hours, 7% of the nation’s total. To meet that massive need, the state needs to import about 25% of its energy from outside the state. This issue has been compounded even further since Edison International (NYSE:EIX) shut down the SONGS nuclear facility early last year. Total imports of electricity for California are nearly double the entire Nevada electricity market.
What also makes the California situation so intriguing is the state’s initiatives to reduce carbon emissions. Even though the state only imports 25% of its electricity needs, those imports represent 50% of the states carbon emissions for electricity generation. So not only does the state look to import massive amounts of electricity, but it also wants to import cleaner sources.