5. Perform an analysis of Berkshire's return on investment of MidAmerican using data in the case and case Exhibit 6. Beginning in 2000, Berkshire Hathaway made an outlay of $1.642 billion for an eventual 80.5% economic interest in MidAmerican Berkshire's economic interest in MidAmerican was composed of both equity and debt investments such that the cash flows to Berkshire included interest payments, common dividends, and preferred dividends. Therefore, Berkshire's return on investment can be approximated by computing Berkshire's share of MidAmerican's free cash flows, the cash flows available to all debt and equity claims. The income statement and balance sheet data in case Exhibit 6 may help to derive Berkshire's share of MidAmerican's free cash flows from 2001 to 2004 EXHIBIT 6 MidAmerican Energy Holdings Co.: Condensed Consolidated Financial Part One Setting Some Themes Statements (dollars in millions) 2003 2000 2004 2001 2002 Balance sheets Assets: Properties, plants, and equipment, net Goodwill Other assets $ 5,349 3,673 2,659 $11.681 $ 6,537 3.639 2,450 $12.626 $10,285 4,258 3,892 $18,435 $11,181 4,306 3,658 $19,145 $11,607 4,307 3,990 $19.904 Liabilities and shareholders' equity: Debt, except debt owed to Berkshire Debt owed to Berkshire Other liabilities and minority interest $ 5,919 1,032 3,154 10,105 1,576 $11,681 $ 7,163 455 3,300 10,918 1,708 $12.626 $10.286 1.728 4,127 16,141 2,294 $18,435 $10,296 1,578 4,500 16,374 2,771 $19,145 $10,528 1.478 4,927 16,933 2,971 $19,904 Shareholders' equity $ 4,013 $ 4.973 $ 4,903 $ 6,143 $ 6,727 Income statements Operating revenue and other income Costs and expenses: Cost of sales and operating expenses Depreciation and amortization Interest expense - debt held by Berkshire Other interest expense 3,522 539 50 443 3,913 603 184 716 3.100 383 40 336 3,859 154 73 81 4,390 638 170 713 4,554 419 5,416 3,092 530 118 640 4,380 523 126 397 (17) $ 380 5,911 Earnings before taxes Income taxes and minority interests Earnings from continuing operations Loss on discontinued operations Net earnings 276 727 284 143 816 278 538 (368) 170 $ 81 $ 443 (27) 416 143 Source of data: Berkshire Hathaway regulatory filings $ $ Berkshire acquired 900.942 shares of common stock and 34,563,395 shares of convertible preferred stock stock of the issuer. The terms of the convertible preferred stated the price at which common shares could be acquired in exchange for the principal value of the convertible preferred stock. Berkshire Hathaway Inc., 1999 Annual Report, 11. SC MidAmerican Energy Holdings Company MidAmerican Energy Holdings Company, a subsidiary of Berkshire Hathaway Inc., was a leader in the production of energy from diversified sources, including geothermal natural gas, hydroelectric, nuclear power, and coal. Based in Des Moines, Iowa, the company was a major supplier and distributor of energy to over 5 million customers in the United States and Great Britain. Through its Home Services of America division, MidAmerican also owned the second-largest full-service independent real-estate bro- kerage in the United States. Exhibit 6 provides condensed, consolidated financial statements for MidAmerican for the years 2000 through 2004. Berkshire Hathaway took a major stake in MidAmerican on March 14, 2000, with a $1.24 billion investment in common stock and a nondividend-paying convert ible preferred stock. This investment gave Berkshire about a 9.7% voting interest and a 76% economic interest in MidAmerican. "Though there are many regulatory constraints in the utility industry, it's possible that we will make additional commit- ments in the field," Buffett said, at the time. "If we do, the amounts could be large.' Subsequently, in March 2002, Berkshire acquired another 6.7 million shares of MidAmerican's convertible stock for $402 million, giving Berkshire a 9.9% voting interest and an 83.7% economic interest in the equity of MidAmerican (80.5% on a 229 diluted basis). At the time of Berkshire's initial investment in MidAmerican, Buffett explained that acquisitions in the electric utility industry were complicated by a variety of reg- ulations, including the Public Utility Holding Company Act of 1935 (PUHCA), which was intended to prevent conglomerates from owning utilities and to impede the for- mation of massive national utilities that regulators could not control. This regulation made it necessary for Berkshire to structure its investment in MidAmerican such that it would not have voting control. Buffett had said he was eager to have PUHCA scaled back, and that if it were repealed he would invest $10 billion to $15 billion in the electric utility industry. PacifiCorp For the past several years, Berkshire Hathaway had been unsuccessful in identifying attractive acquisition opportunities. In 2001, Buffett addressed the issue head-on in his annual letter to shareholders: Some years back, a good $10 million idea could do wonders for us (witness our investment in the Washington Post in 1973 or GEICO in 1976). Today, the combination of ten such of MidAmerican Converble preferred stock was preferred stock that carried the right to be exchanged by the restor for common stock. The exchange, or conversion, right was like a call option on the common "Rebecca Smith and Karen Richard 5. Perform an analysis of Berkshire's return on investment of MidAmerican using data in the case and case Exhibit 6. Beginning in 2000, Berkshire Hathaway made an outlay of $1.642 billion for an eventual 80.5% economic interest in MidAmerican Berkshire's economic interest in MidAmerican was composed of both equity and debt investments such that the cash flows to Berkshire included interest payments, common dividends, and preferred dividends. Therefore, Berkshire's return on investment can be approximated by computing Berkshire's share of MidAmerican's free cash flows, the cash flows available to all debt and equity claims. The income statement and balance sheet data in case Exhibit 6 may help to derive Berkshire's share of MidAmerican's free cash flows from 2001 to 2004 EXHIBIT 6 MidAmerican Energy Holdings Co.: Condensed Consolidated Financial Part One Setting Some Themes Statements (dollars in millions) 2003 2000 2004 2001 2002 Balance sheets Assets: Properties, plants, and equipment, net Goodwill Other assets $ 5,349 3,673 2,659 $11.681 $ 6,537 3.639 2,450 $12.626 $10,285 4,258 3,892 $18,435 $11,181 4,306 3,658 $19,145 $11,607 4,307 3,990 $19.904 Liabilities and shareholders' equity: Debt, except debt owed to Berkshire Debt owed to Berkshire Other liabilities and minority interest $ 5,919 1,032 3,154 10,105 1,576 $11,681 $ 7,163 455 3,300 10,918 1,708 $12.626 $10.286 1.728 4,127 16,141 2,294 $18,435 $10,296 1,578 4,500 16,374 2,771 $19,145 $10,528 1.478 4,927 16,933 2,971 $19,904 Shareholders' equity $ 4,013 $ 4.973 $ 4,903 $ 6,143 $ 6,727 Income statements Operating revenue and other income Costs and expenses: Cost of sales and operating expenses Depreciation and amortization Interest expense - debt held by Berkshire Other interest expense 3,522 539 50 443 3,913 603 184 716 3.100 383 40 336 3,859 154 73 81 4,390 638 170 713 4,554 419 5,416 3,092 530 118 640 4,380 523 126 397 (17) $ 380 5,911 Earnings before taxes Income taxes and minority interests Earnings from continuing operations Loss on discontinued operations Net earnings 276 727 284 143 816 278 538 (368) 170 $ 81 $ 443 (27) 416 143 Source of data: Berkshire Hathaway regulatory filings $ $ Berkshire acquired 900.942 shares of common stock and 34,563,395 shares of convertible preferred stock stock of the issuer. The terms of the convertible preferred stated the price at which common shares could be acquired in exchange for the principal value of the convertible preferred stock. Berkshire Hathaway Inc., 1999 Annual Report, 11. SC MidAmerican Energy Holdings Company MidAmerican Energy Holdings Company, a subsidiary of Berkshire Hathaway Inc., was a leader in the production of energy from diversified sources, including geothermal natural gas, hydroelectric, nuclear power, and coal. Based in Des Moines, Iowa, the company was a major supplier and distributor of energy to over 5 million customers in the United States and Great Britain. Through its Home Services of America division, MidAmerican also owned the second-largest full-service independent real-estate bro- kerage in the United States. Exhibit 6 provides condensed, consolidated financial statements for MidAmerican for the years 2000 through 2004. Berkshire Hathaway took a major stake in MidAmerican on March 14, 2000, with a $1.24 billion investment in common stock and a nondividend-paying convert ible preferred stock. This investment gave Berkshire about a 9.7% voting interest and a 76% economic interest in MidAmerican. "Though there are many regulatory constraints in the utility industry, it's possible that we will make additional commit- ments in the field," Buffett said, at the time. "If we do, the amounts could be large.' Subsequently, in March 2002, Berkshire acquired another 6.7 million shares of MidAmerican's convertible stock for $402 million, giving Berkshire a 9.9% voting interest and an 83.7% economic interest in the equity of MidAmerican (80.5% on a 229 diluted basis). At the time of Berkshire's initial investment in MidAmerican, Buffett explained that acquisitions in the electric utility industry were complicated by a variety of reg- ulations, including the Public Utility Holding Company Act of 1935 (PUHCA), which was intended to prevent conglomerates from owning utilities and to impede the for- mation of massive national utilities that regulators could not control. This regulation made it necessary for Berkshire to structure its investment in MidAmerican such that it would not have voting control. Buffett had said he was eager to have PUHCA scaled back, and that if it were repealed he would invest $10 billion to $15 billion in the electric utility industry. PacifiCorp For the past several years, Berkshire Hathaway had been unsuccessful in identifying attractive acquisition opportunities. In 2001, Buffett addressed the issue head-on in his annual letter to shareholders: Some years back, a good $10 million idea could do wonders for us (witness our investment in the Washington Post in 1973 or GEICO in 1976). Today, the combination of ten such of MidAmerican Converble preferred stock was preferred stock that carried the right to be exchanged by the restor for common stock. The exchange, or conversion, right was like a call option on the common "Rebecca Smith and Karen Richard
