Saturday, May 9, 2009

Berkshire Hathaway First Quarter 2009 Tidbits (BRK.A)

I'll have some commentary on the quarterly report next week. In the meantime here are some gleanings of climate/energy related businesses. Following the 10Q snips is 24/ Wall Street's take on the results.

From Management's Discussion and Analysis of Financial Condition and Results of Operations:

p. 20 ...The property results in 2009 included $71 million of catastrophe losses primarily from winter storm Klaus in Europe and the Victoria bushfires in Australia. The timing and magnitude of catastrophe and large individual losses produces significant volatility in periodic underwriting results. .... Property results for the first quarter of 2008 included a $32 million loss from winter storm Emma in Germany.

p.23 ...Berkshire currently owns an 89.5% interest in MidAmerican Energy Holdings Company (“MidAmerican”), an international energy company. MidAmerican’s domestic regulated energy interests are comprised of two regulated utility companies and two interstate natural gas pipeline companies with over 17,000 miles of pipeline in operation. In the United Kingdom, electricity distribution subsidiaries serve about 3.8 million electricity end users.

The rates that MidAmerican’s utilities, electricity distribution businesses and natural gas pipelines charge customers for energy and other services are generally subject to regulatory approval. Rates are based in large part on the costs of business operations, including a return on capital. To the extent these operations are not allowed to include such costs in the approved rates, operating results will be adversely affected. In addition, MidAmerican’s other businesses include a diversified portfolio of independent power projects and the second-largest residential real estate brokerage firm in the United States.

First quarter 2009 revenues of MidAmerican Energy Company (“MEC”) declined $240 million (17%) from 2008. In 2009, MEC’s regulated natural gas revenues were $183 million less than 2008, primarily due to lower average per-unit cost of gas sold, which is directly passed through to customers, and to lower sales volume (decreased demand due to warmer temperatures). In addition, MEC’s regulated electricity revenues in 2009 declined $39 million from 2008 primarily due to a 28% decrease in average wholesale prices, reflecting reduced demand. First quarter 2009 earnings before corporate interest and income taxes (“EBIT”) of MEC declined $26 million (19%) from 2008 due primarily to the decline in electricity revenues.

p.24 Utilities and Energy (“MidAmerican”) (Continued)
PacifiCorp’s aggregate revenues in the first quarter of 2009 ($1,131 million) increased slightly ($24 million or 2%) versus 2008 reflecting small increases in retail revenues and small decreases in wholesale revenues. EBIT increased $16 million (10%) compared to 2008, reflecting higher revenues and lower energy costs, partially offset by increased depreciation and interest expense.
Natural gas pipelines revenues and EBIT in 2009 were relatively unchanged from 2008.

U.K. utility revenues in the first quarter of 2009 declined $96 million (33%) versus 2008 principally due to the impact from foreign currency exchange rates as a result of a much stronger U.S. Dollar in 2009 and, to a lesser extent, from lower distribution revenues. EBIT of the U.K. utilities in the first quarter of 2009 decreased $52 million (43%) from 2008, most of which was attributable to foreign currency exchange rate changes.

Real estate brokerage revenues in the first quarter of 2009 declined $67 million (27%) from 2008 due to declines in transaction volume and lower home sales prices, reflecting the continuing weakness in U.S. housing markets. The real estate brokerage business generated a pre-tax loss of $13 million in 2009, a $6 million decrease from the loss in the first quarter of 2008. The impact of the revenue decline was offset by lower commission and other operating expenses.

Other EBIT in the first quarter of 2009 included a $56 million loss associated with the Constellation Energy common stock investment and $125 million in stock-based compensation expense as a result of the purchase of common stock issued by MidAmerican upon the exercise of the last remaining stock options that had been granted to certain members of management at the time of Berkshire’s acquisition of MidAmerican in 2000.

p27 ...Investment losses from other-than-temporary impairments for the first quarter of 2009 predominantly relate to Berkshire’s investment in ConocoPhillips common stock. The market price of ConocoPhillips shares declined sharply over the last half of 2008. In the first quarter of 2009, Berkshire sold approximately 13.7 million shares of ConocoPhillips and sold additional shares in April.

Although Berkshire expects the market price for ConocoPhillips shares to increase over time to levels that exceed original cost, Berkshire may sell some additional shares before the price recovers. Sales in 2009 were or may be in anticipation of other investment opportunities, to increase overall liquidity and to carry back realized capital losses to prior years for income tax purposes. Capital losses can be carried back three years and carried forward five years for federal income tax purposes. Income taxes of approximately $690 million that were paid on capital gains in 2006 will be fully recoverable if capital losses of at least $1.98 billion are generated by the end of 2009.
Since a significant portion of the decline in the market value of Berkshire’s investment in ConocoPhillips occurred during the last half of 2008, a significant portion of the other-than-temporary impairment losses recorded in earnings in the first quarter of 2009 was recognized in other comprehensive income as of December 31, 2008.

From 24/7 Wall Street:

Poor Bets in Oil & Derivatives, Rethinking the Buffett Game (BRK-A, BRK-B, COP, WFC, DOW)

Berkshire Hathaway Inc. (NYSE: BRK-A) (NYSE: BRK-B) may have had the wind behind its back from its annual shareholder meeting, but that wind now may breaking wind. This was Warren Buffett’s first loss for a quarter since 2001. On a net loss basis, Berkshire Hathaway lost roughly $1.5 billion. While some charges and operations were lower, it was the big oil investment in ConocoPhillips (NYSE: COP) which Buffett went on and on about. The huge gains seen inWells Fargo & Co. (NYSE: WFC) and other financial stocks were hardly a footnote throughout the earnings.

The company’s operating earnings were down more than 10% to $1.705 billion, which is close to $1,100.00 per share. That is technically above a consensus estimate of $1,087 from Thomson Reuters. Be advised that “consensus estimates” on Berkshire are nearly immaterial because so few analysts cover it. The reported top line of $22.8 billion was actually down almost 10% from last year’s Q1 period.

To show just how bad his play in oil was, Buffett’s own comments speak clearer than anyone’s: “…We sold 13.7 million shares of ConocoPhillips during the first quarter and additional shares were sold subsequent to the end of the quarter. Although we expect the market price of ConocoPhillips to increase over time to levels that exceed our original cost, we are likely to sell some additional shares prior to that time and generate additional capital losses that we can carry back to prior tax years when we generated net capital gains. In 2006, we paid about $690 million in federal tax on capital gains and that payment can only be fully recovered if capital losses of at least $1.98 billion are taken in 2009.” After looking through Buffett’s Full List of Stocks, he held some 79.896 million at the end of Q4. We noted this was likely lower, and it seems that he is going to use the rest for tax purposes this year. So that is Buffett’s greatest venture in the oil business… a source of tax offsets.

Technically, this was Buffett’s worst quarter since the huge insurance losses after the Sept. 11, 2001 terrorist attacks. There is a silver lining in the report that has gotten very little coverage. His huge investment of roughly 290.4 million shares in Wells Fargo & Co. (NYSE: WFC) is now worth more than $8.1 billion. That is actually DOUBLE of what it was worth at the March 31 date.

The bright spots were the utilities and insurance companies, but other operations were so-so at best. Buffett will tell you even he can’t escape a recession, but he invests with a forever time frame. Well, forever in everything but oil at any rate....MORE

Here's the 10Q. (37 page PDF)