When Berkshire Hathaway bought MidAmerican Energy in 1999, did they know the impact they would have on the power industry?
If you’ve followed Warren Buffett, the answer should be “yes.”
In Fall 2019, a restaurant owner was starting a new location in Bensonhurst, Brooklyn. All work came to a halt when he was told he’d need to wait months to get gas service turned on. Without gas service, and $400,000 invested, his project was in jeopardy.
Natural gas can be transported in just a few ways. The most efficient path to move natural gas is through a pipeline. And the United States has spider webs of pipes moving natural gas from coast to coast. Pipelines can move large quantities around the clock. Building new pipelines can take years and lots of capital. New pipelines also need approval from everyone in their way. That means residents, businesses, land owners, environmentalists all get involved.
Believe it or not, that is the most efficient way to move natural gas from point to point.
Natural gas can also be transported by rail car. A National Grid pipeline serving the greater NYC area moves 2.8 billion cubic feet of gas a day. A Liquefied Natural Gas (LNG) rail car can hold 30,000 gallons. To move the same amount of natural gas using rail cars, instead of the National Grid pipeline into the NYC area, you would need 698,181 rail cars.*
That is roughly 700,000 rail cars of natural gas. Per day.
Even with all that natural gas flowing into the NYC area by pipeline, customers are still hearing it will take months upon months to get gas service.
You can also read more about that here.
But who could serve an “alternative to National Grid as a franchisee”?
Perhaps Warren Buffett?
When most folks think of Berkshire Hathaway and Warren Buffett, they think of names they have owned forever. Companies like GEICO, Fruit of the Loom, Dairy Queen, NetJets, Duracell. Many think of companies where Berkshire owns a large percentage of the stock. Names like American Express, Coca Cola, Kraft-Heinz, Moody’s.
Did you know Berkshire Hathaway now owns nearly 20% of the gas pipelines in the United States?
Berkshire Hathaway Energy is a holding company, 90% owned by Berkshire Hathaway. The company used to be called MidAmerican Energy Holdings. The energy subsidiary owns a lot of assets in power generation. And they’re busy moving into renewable powers sources (wind, solar).
One of Buffett’s themes when investing is strong cash flow. Think of every power supply customer in your area sending in checks every month. The cash flow can be pretty handsome. But the industry is burdened by high amounts of debt due to building more and more power projects.
For that reason, most folks would consider energy a slow growth kind of business. Energy and power generating companies can be boring, slow growing entities. But generating billions of dollars in cash flow per year.
Right up Berkshire Hathaway’s alley.
Last week, Berkshire Hathaway announced they were buying natural gas storage and transmission assets from Dominion Power. This was a $9.7 billion deal. But Berkshire, as usual, crafted a very sweet deal. They would hand over just $4 billion in cash, and would assume $5.7 billion in debt.
Berkshire Hathaway Energy will acquire 100% of Dominion Energy Transmission, Questar Pipeline and Carolina Gas Transmission. The company will also acquire 50% of Iroquois Gas Transmission System.
Even though Dominion is based in Virgina, this should be of interest if you live in New York metro area.
Berkshire was “johnny-on-the-spot” too, in cutting this deal on July 5th. Dominion and Duke Energy had just announced they were scrapping a large deal to build the Atlantic Coast pipeline. We’ll cover the Atlantic Coast pipeline project in another post soon.
In the deal, Berkshire picks up 50% of the Iroquois pipeline.
Where does that line run, you may ask?
The Iroquois Gas pipeline begins at the St. Lawrence in upstate New York. Beginning in Waddington, the pipeline picks up gas from Canada and transports it down through Croghan and Canajoharie. Then the line travels through Albany and down to Pleasant Valley NY. That’s where it turns and runs into New Milford CT. Eventually the pipeline delivers gas all the way down to Devon CT.
Then the line crosses the Long Island Sound.
The Iroquois pipeline terminates in three places: Northport and Commack in Suffolk County and Hunts Point in the Bronx. From there, National Grid picks up the delivery through out much of NYC.
Could Iroquois, now 50% owned by Berkshire Hathaway Energy, become an “alternative to National Grid” in the area?
And if you live along the Jersey Shore, you might be asking “what does this have to do with us?”
Pre-COVID, New York and New Jersey denied approvals for Williams Cos. to expand any further in the metropolitan area. Through its Transco pipeline, Williams provides much of the natural gas in New Jersey. It also provides gas to New York City and to Long Island.
If you google “Williams pipeline” you can get up to speed on the effort to stop Williams from building an additional pipeline. This line would run through the center of New Jersey. The pipe would go through Mercer County and Middlesex County, straight out through Raritan Bay and connect with an already existing Transco line in New York bay.
Both New York and New Jersey rejected this pipeline project.
National Grid gets their gas through the Williams and Iroquois pipelines. National Grid needs this pipeline expansion to boost gas capacity. Without it, National Grid and ConEdison have been turning down thousands of applications for gas service, like the restaurant owner in Bensonhurst.
Natural Gas is sometimes described as a “bridge fuel.” Search google for “bridge fuel natural gas.” Supporters and dissenters are fairly split down the middle. The intention behind the phrase is natural gas is cleaner than oil and coal. And it could become a “bridge” to renewable sources of power like wind and solar. Renewable sources are still years away from being workable solutions.
In the meantime, natural gas can fill the void.
Are there alternatives to moving gas through pipes? Berkshire Hathaway also owns a company called Marmon. Marmon is one of the largest manufacturers of tank cars. These tank cars travel on freight trains.
It’s also worth noting Berkshire also owns Burlington Northern Santa Fe (BNSF), the largest freight railroad carrier in North America. Warren is getting the game all sewn up.
Here’s another interesting piece from Lindsay Schneider at RBN Energy regarding the Iroquois Pipeline and it’s reliance on Canadian sources, not the Marcellus Shale here in the US.
*In case you were wondering, an LNG Tanker truck can typically hold just 13,000 gallons.