2020: How does capex compare to economic and GAAP depreciation at Berkshire Hathaway Energy?

BECKY QUICK: Greg, let me ask you one of these capital allocation questions. This one comes from Matt Libel, and he says, “Berkshire directed 46 percent of capital expenditure in 2019 to Berkshire Hathaway Energy. Can you walk us through, with round numbers, how you think differences in capex spending versus economic depreciation versus GAAP depreciation, and help explain the timeframe over which we should recognize the contract — the contractive return on equity from these large investments, as we are shareholders in — as we, as shareholders, are making in Berkshire Hathaway Energy.”

GREG ABEL: So, when we look at Berkshire Hathaway Energy and their capital programs, we try to really look at — look at it as it was highlighted, really, in a couple different packages.

One, what does it actually require to maintain the existing assets for the next 10-20-30 years? I.e., it’s not incremental, it’s effectively maintaining the asset, the reflection of depreciation. And our goal is always to clearly understand, across our businesses, do we have businesses that require more than our depreciation, or equal, or less.

And, happy to say, with the assets we have in place and how we’ve maintained the energy assets, we generally look at our depreciation as being more than adequate, if we deploy it back into capital to maintain the asset.

Now, the unique thing in the lion’s share of our energy businesses that are regulated — and that exceeds 85 percent of them — 83 percent of them — we still earn on that capital we deploy back into that business. So, it’s not a traditional model where you’re putting it in, but you’re effectively putting it in to maintain your existing earnings stream. So, it’s not drastically different, but we do earn on that capital.

But what we do spend a lot of time, and that’s what, when Warren and I think about the substantial amounts of opportunities, that’s incremental capital that is truly needed within new opportunities.

So, it’s built — it’s to build incremental wind, incremental transmission, that services the wind or other types of renewable solar. That’s all incremental to the business and drives incremental growth in the business. It does require capital, but it does drive growth within the energy business.

So, there’s really the two buckets. I think we would use a number a little bit lower than the depreciation we’re comfortable the business can be maintained at that level. And as we deploy amounts above that, we really do view that as, quote, incremental or growth capex.

WARREN BUFFETT: Yeah, we have what — what — 40 billion or something of — what do we have in, sort of, kind of, in the works?

GREG ABEL: Oh, yeah. So, we have basically, as Warren’s highlighting, 40 billion in the works of capital, that’s over the next, effectively, nine years, 10-year period. A little — approximately half of that, we would view as maintaining our assets. More — a little more than half of it is truly incremental, but — and that are known — those are known projects we’re going to move forward with.

And I would be happy to report, we probably have another 30 million — 30 billion — that aren’t far off of becoming real opportunities in that business.

Now, as Warren said, that takes a lot of time. It’s a lot of work. The transmission projects, for example, we’re finishing in 2020 were initiated in 2008 when we bought PacifiCorp. I remember working on that transmission plan, putting it together, thinking six to eight years from now, we’ll have them in operation.

Twelve years later, and over that period of time, we earned on that capital we have invested, and then when it comes into service, we earn on the whole amount.

So, we’re very pleased with the opportunity, but it — we plant a lot of seeds, put it that way.

WARREN BUFFETT: Yeah. And these are not — it’s not like they’re super-high return thing. But they’re decent returns over time. And we’re almost uniquely situated to deploy the capital, as opposed — I mean, you could have government entities do it too —but in terms of a private enterprise — and they take a long time. They earn decent returns.

I’ve always said about the energy business, it’s not a way to get real rich, but it’s a way to stay real rich, and —

We will deploy a lot — a lot of money at decent returns — not super returns, you shouldn’t earn super returns on that sort of thing, I mean — it does — you are getting rights to do certain things that governmental authorities are authorizing. And they should protect consumers and — but they also should protect people that put up the capital. And —

You know, it’s worked now for 20 years, and it’s got a long runway ahead.