Buffett sounds wildfire alarm as utilities industry enters new era

Utilities have long been dependable motors of Warren Buffett’s Berkshire Hathaway conglomerate, turning out steady profits at rates of return approved by regulators. But the billionaire is now casting doubt on the business.

The 93-year-old Buffett and his anointed successor Greg Abel have been watching as billions of dollars of liabilities accumulate at Berkshire’s energy division, where its largest electric utility is wrestling with legal proceedings over its alleged role in forest fires that burnt hundreds of thousands of acres and led to deaths in the US Pacific Northwest.

The costs centre on PacifiCorp, a utility that serves six western states including Oregon and California. The company faces a potential $8bn in damages after being accused of contributing to a deadly 2020 deadly blaze by failing to shut off power lines, among other factors. Damages can be doubled or tripled if jurors find the company guilty of gross negligence or recklessness.

“Berkshire can sustain financial surprises but we will not knowingly throw good money after bad,” Buffett wrote in his annual letter to shareholders last week.

PacifiCorp joins other utilities confronting emerging risks from climate change including hotter, drier weather that make wildfires more likely — especially in the US west. An estimated $30bn in fire liabilities forced Pacific Gas & Electric — California’s biggest utility — to file for bankruptcy protection in 2019. Shares of utility company Xcel Energy dropped sharply this week over potential financial exposure to the largest wildfire in Texas history. Xcel Energy lost 5.92 per cent on Friday to finish at $49.57, having lost more than 16 per cent over the week.

With assets worth $134bn, Berkshire Hathaway Energy supplies 12mn electric and gas customers, maintains more than 30,000 megawatts of power generation capacity and owns a 21,000-mile natural gas pipeline network.

The energy division also encompasses HomeServices of America, a real estate brokerage enmeshed in its own litigation. The firm is appealing against a class-action lawsuit that found it and other brokers liable for $1.8bn of damages over an alleged conspiracy to inflate sales commissions.

Buffett’s letter warned of the “spectre of zero profitability or even bankruptcy” across the utility industry, while he hit out at regulators.

“It will be many years until we know the final tally from [Berkshire Hathaway Energy’s] forest-fire losses and can intelligently make decisions about the desirability of future investments in vulnerable western states,” he wrote.

His publicly expressed doubts caught executives of Berkshire’s energy division unaware, according to a person familiar with the matter. Just two years ago Buffett had described the business as one of the company’s “four giants”.

In an annual report filed this week that repeated the word “wildfire” nearly 300 times, Berkshire disclosed that PacifiCorp in 2023 had increased its estimate for probable losses tied to blazes by nearly $2bn to $2.4bn. PacifiCorp has paid out $735mn in settlements already and Berkshire estimates that it will need to spend roughly $1.1bn over the next three years on wildfire mitigation across its utilities, as it insulates wires, buries some power lines and cuts down trees that could come in contact with others. It has spent more than $600mn on those efforts over the past three years already.

Berkshire noted that in January the federal government indicated it intended to sue over unpaid costs incurred by the US Forest Service for fire suppression and emergency response related to a 2020 blaze in California.

Uncertainty around the wildfire liabilities prompted BHE’s auditor Deloitte & Touche to raise a so-called “critical audit matter” with the company’s board of directors, according to the annual report, reflecting the complexity of accounting for wildfire losses.

PacifiCorp has also halted dividend payments to BHE and does not plan to restart them in the coming years, a suspension that the Berkshire division warned could affect its “ability to fund its operations, make interest payments, fund debt maturities and increase BHE’s reliance on debt”. Prospective wildfire payouts prompted S&P Global and Moody’s to downgrade PacifiCorp’s debt ratings last year.

A spokesperson for the energy division said Buffett’s annual letter “emphasised key risks Berkshire Hathaway Energy’s businesses, along with the energy industry more generally, are navigating”.

Rising litigation costs put pressure on a business model long regarded as low risk, where returns are authorised by regulators largely based on how much capital a utility invests over a multi-decade period.

“One read of [Buffett’s] letter is they’re not going to put money into utilities besides the ones they own and potentially cause [PacifiCorp] be turned over to the public or be put into bankruptcy,” one utility industry veteran said, highlighting “a little bit of nastiness underlying the letter”.

The person added: “Part of this letter is a negotiation with regulators and the other stakeholders around wildfire issues, including plaintiff lawyers.”

Buffett highlighted as examples of wildfire liabilities both PG&E and Hawaiian Electric, which has been sued in connection with last year’s devastating Maui inferno.

Abel, who rose through the ranks at Berkshire’s energy division, declined to comment. Buffett did not respond to a request for comment.

Bill Stone, chief investment officer of Glenview Trust, which invests in Berkshire, said the company had a long history of making tough capital allocation decisions. It is one of the reasons Berkshire has survived: the company’s name comes from the struggling textile mill Buffett took control of in 1965 that he ultimately shut down.

“The success of Berkshire is allowing the great businesses to flourish and adding more capital to them and starving the businesses that are not that good,” Stone said. “Those are some of the best decisions they made.”

He added that while the losses were material to Berkshire’s earnings — the energy unit’s operating profits fell 40 per cent last year to $2.3bn — they did not threaten the larger company’s viability.

“There is a tonne of capital that needs to be put into the system and stakeholders need to decide how that will work. Investors will decide whether they’ll finance it,” said George Bilicic, the head of power, energy and infrastructure banking at Lazard.

“How that investment gets implemented isn’t clear yet and that’s the macro point from the Berkshire letter. This is a challenge for everyone in the industry.”

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Letter in response to this article:

Berkshire Hathaway’s risk cannibalism challenge / From Chris Hilson, Professor of Law and Director of the Reading Centre for Climate and Justice, University of Reading, Berkshire, UK