Regulated,Capital-Intensive Businesses We have two major operations,BNSF and Berkshire Hathaway Energy("BHE"),that share important not needed because each company has eaming power that even under terribendin will farxceed year,fo ed.) The first is essential se esevice on an exclusive basis.The second is enjoyed by few other utilities rom be by any s enty,we have furthe serving 85%of Alberta's population.This multitude of profit streams.supplemented by the inherent advantage of Every day,our two subsidiaries power the American economy in major ways: BNSF carries about 15%(me sured by ton-miles)of all inter-city freight,whether it is transported by e.Ind d,we move more ton s of goods tha n anyone clse,a fac est a to the same job guzzle about four times as much fuel. BHE's utilities serve regulated retail customers in eleven states.No utility c ny stretches further in addition,we are a leader in renewables:Fro BHEountry's nding start ten years ao BHE now: counts for 6%of on capa my.Beyon nhe beat goes n Welonime to buyad buld utlity pertionsthrouhout the electric businesse s in the U.K.and 证mmw-除山二o pletes certain renewables projects that are underway,the company's renew will ha avecost $15 billion.in ad diton,we have conventional projects in the we and,on th amount of trust in future regulation. nbottanporaion s iustified both by wledge that will f need massive investment terest of will ensure t continuea ow project t our operation a way e approv rregulators ar
Regulated, Capital-Intensive Businesses We have two major operations, BNSF and Berkshire Hathaway Energy (“BHE”), that share important characteristics distinguishing them from our other businesses. Consequently, we assign them their own section in this letter and split out their combined financial statistics in our GAAP balance sheet and income statement. A key characteristic of both companies is their huge investment in very long-lived, regulated assets, with these partially funded by large amounts of long-term debt that is not guaranteed by Berkshire. Our credit is in fact not needed because each company has earning power that even under terrible economic conditions will far exceed its interest requirements. Last year, for example, BNSF’s interest coverage was more than 8:1. (Our definition of coverage is pre-tax earnings/interest, not EBITDA/interest, a commonly used measure we view as seriously flawed.) At BHE, meanwhile, two factors ensure the company’s ability to service its debt under all circumstances. The first is common to all utilities: recession-resistant earnings, which result from these companies offering an essential service on an exclusive basis. The second is enjoyed by few other utilities: a great diversity of earnings streams, which shield us from being seriously harmed by any single regulatory body. Recently, we have further broadened that base through our $3 billion (Canadian) acquisition of AltaLink, an electric transmission system serving 85% of Alberta’s population. This multitude of profit streams, supplemented by the inherent advantage of being owned by a strong parent, has enabled BHE and its utility subsidiaries to significantly lower their cost of debt. This economic fact benefits both us and our customers. Every day, our two subsidiaries power the American economy in major ways: • BNSF carries about 15% (measured by ton-miles) of all inter-city freight, whether it is transported by truck, rail, water, air, or pipeline. Indeed, we move more ton-miles of goods than anyone else, a fact establishing BNSF as the most important artery in our economy’s circulatory system. BNSF, like all railroads, also moves its cargo in an extraordinarily fuel-efficient and environmentally friendly way, carrying a ton of freight about 500 miles on a single gallon of diesel fuel. Trucks taking on the same job guzzle about four times as much fuel. • BHE’s utilities serve regulated retail customers in eleven states. No utility company stretches further. In addition, we are a leader in renewables: From a standing start ten years ago, BHE now accounts for 6% of the country’s wind generation capacity and 7% of its solar generation capacity. Beyond these businesses, BHE owns two large pipelines that deliver 8% of our country’s natural gas consumption; the recentlypurchased electric transmission operation in Canada; and major electric businesses in the U.K. and Philippines. And the beat goes on: We will continue to buy and build utility operations throughout the world for decades to come. BHE can make these investments because it retains all of its earnings. In fact, last year the company retained more dollars of earnings – by far – than any other American electric utility. We and our regulators see this 100% retention policy as an important advantage – one almost certain to distinguish BHE from other utilities for many years to come. When BHE completes certain renewables projects that are underway, the company’s renewables portfolio will have cost $15 billion. In addition, we have conventional projects in the works that will also cost many billions. We relish making such commitments as long as they promise reasonable returns – and, on that front, we put a large amount of trust in future regulation. Our confidence is justified both by our past experience and by the knowledge that society will forever need massive investments in both transportation and energy. It is in the self-interest of governments to treat capital providers in a manner that will ensure the continued flow of funds to essential projects. It is concomitantly in our self-interest to conduct our operations in a way that earns the approval of our regulators and the people they represent. 12
disappointed many of its customers.This problem occurred despite the record capital expenditures that BNSF has made in recent years,with those having far exceeded the outlays made by Union Pacific.our principal competitor. The two railroads are of roughly equal size measured by revenues,though we carry considerably more either by carl lems e nion Pa cific' as a Iesu work to do svstem with ore eater capacity and much better service.Imp ed profits should follow. Here are the key figures for Berkshire Hathaway Energy and BNSF Berkshire Hathaway Energy(89.9%owned) Earnings (in millions) 2014 2013 2012 U.K.utilities S527 362 s429 lowa utility 298 230 236 Nevada utilities ,01 Gas Pir River) HomeServices 13g 13g Other (net).. 236 4 91 Operating earnings before corporate interest and taxes 3138 2102 427 296 Income taxes. 616 170 172 Net earnings S2,095 1,636 1,472 Earnings applicable to Berkshire S1,882 s1,470 s1,323 BNSF Earnings (in millions) 2014 2013 2012 Revenues S22, Operating expense 35 Operating earnings before interest and taxes.......... 7,002 6.6517 2.300 2155 Net earnings ..... S3.869 $3,793 S3,372
Last year we fully met this objective at BHE, just as we have in every year of our ownership. Our rates remain low, our customer satisfaction is high and our record for employee safety is among the best in the industry. The story at BNSF, however – as I noted earlier – was not good in 2014, a year in which the railroad disappointed many of its customers. This problem occurred despite the record capital expenditures that BNSF has made in recent years, with those having far exceeded the outlays made by Union Pacific, our principal competitor. The two railroads are of roughly equal size measured by revenues, though we carry considerably more freight (measured either by carloads or ton-miles). But our service problems exceeded Union Pacific’s last year, and we lost market share as a result. Moreover, U.P.’s earnings beat ours by a record amount. Clearly, we have a lot of work to do. We are wasting no time: As I also mentioned earlier, we will spend $6 billion in 2015 on improving our railroad’s operation. That will amount to about 26% of estimated revenues (a calculation that serves as the industry’s yardstick). Outlays of this magnitude are largely unheard of among railroads. For us, this percentage compares to our average of 18% in 2009-2013 and to U.P.’s projection for the near future of 16-17%. Our huge investments will soon lead to a system with greater capacity and much better service. Improved profits should follow. Here are the key figures for Berkshire Hathaway Energy and BNSF: Berkshire Hathaway Energy (89.9% owned) Earnings (in millions) 2014 2013 2012 U.K. utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 527 $ 362 $ 429 Iowa utility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 298 230 236 Nevada utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 549 — — PacifiCorp (primarily Oregon and Utah) ..................................... 1,010 982 737 Gas Pipelines (Northern Natural and Kern River) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 379 385 383 HomeServices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 139 82 Other (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236 4 91 Operating earnings before corporate interest and taxes ....................... 3,138 2,102 1,958 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 427 296 314 Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 616 170 172 Net earnings ................................................................ $ 2,095 $ 1,636 $ 1,472 Earnings applicable to Berkshire ............................................ $ 1,882 $ 1,470 $ 1,323 BNSF Earnings (in millions) 2014 2013 2012 Revenues ................................................................... $23,239 $22,014 $20,835 Operating expenses ......................................................... 16,237 15,357 14,835 Operating earnings before interest and taxes ................................. 7,002 6,657 6,000 Interest (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 833 729 623 Income taxes................................................................ 2,300 2,135 2,005 Net earnings ................................................................ $ 3,869 $ 3,793 $ 3,372 13
Manufacturing,Service and Retailing Operations Our activities in this part of Berkshire cover the waterfront.Let's look,though,at a summary balance sheet and eamings statement for theentire group. Balance Sheet 12/31/14 (in millions) Assets Liabilities and Equity Cash and equivalents s5,765 Notes payable S965 Accounts and notes receivable............. 8.264 Other current liabilities... 9.734 Inventory.... 10236 Total current liabilities ................. 10.699 Other current assets 1.117 Total current assets 25.382 Deferred taxes 3.801 Goodwill and other intangibles..... 28107 Term debt and other liabilities... 4,269 9 S71,088 S71,088 Earnings Statement (in millions) 2014 2013 2012* Revenues $97.689 S93.472 S81,432 Operating expenses....... 90,788 87.208 75,734 Interest expense.......................................................... 104 112 Pre-tax earnings. 6.79 6,160 5,586 Income taxes and non-controlling interests ............................... 2.324 2.283 2,229 Net earnings. s4.468 S3.877 S3,357 Our inc and data onforming to gaap is on 49.n data in this manner r bec I won't evnlain all ofthe adi the disparate nature of intangible as oftware,as a big example,amortizatior arges are very real The of making charges agains rules and learly does not reflect reality.GAAP accounting draws no distinction between the two types of charge
Manufacturing, Service and Retailing Operations Our activities in this part of Berkshire cover the waterfront. Let’s look, though, at a summary balance sheet and earnings statement for the entire group. Balance Sheet 12/31/14 (in millions) Assets Liabilities and Equity Cash and equivalents ...................... $ 5,765 Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 965 Accounts and notes receivable ............. 8,264 Other current liabilities ................. 9,734 Inventory .................................. 10,236 Total current liabilities .................. 10,699 Other current assets ....................... 1,117 Total current assets ........................ 25,382 Deferred taxes .......................... 3,801 Goodwill and other intangibles ............ 28,107 Term debt and other liabilities........... 4,269 Fixed assets ............................... 13,806 Non-controlling interests . . . . . . . . . . . . . . . . 492 Other assets ............................... 3,793 Berkshire equity ........................ 51,827 $71,088 $71,088 Earnings Statement (in millions) 2014 2013* 2012* Revenues .................................................................. $97,689 $93,472 $81,432 Operating expenses ........................................................ 90,788 87,208 75,734 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 104 112 Pre-tax earnings............................................................ 6,792 6,160 5,586 Income taxes and non-controlling interests ................................. 2,324 2,283 2,229 Net earnings ............................................................... $ 4,468 $ 3,877 $ 3,357 *Earnings for 2012 and 2013 have been restated to exclude Marmon’s leasing operations, which are now included in the Finance and Financial Products section. Our income and expense data conforming to GAAP is on page 49. In contrast, the operating expense figures above are non-GAAP and exclude some purchase-accounting items (primarily the amortization of certain intangible assets). We present the data in this manner because Charlie and I believe the adjusted numbers more accurately reflect the true economic expenses and profits of the businesses aggregated in the table than do GAAP figures. I won’t explain all of the adjustments – some are tiny and arcane – but serious investors should understand the disparate nature of intangible assets. Some truly deplete over time, while others in no way lose value. For software, as a big example, amortization charges are very real expenses. The concept of making charges against other intangibles, such as the amortization of customer relationships, however, arises through purchase-accounting rules and clearly does not reflect reality. GAAP accounting draws no distinction between the two types of charges. Both, that is, are recorded as expenses when earnings are calculated – even though from an investor’s viewpoint they could not be more different. 14
al"cha haamost ertainly rise further as we acqure more compns you the current sta tus of our intangible assets.We now have e ne ry dollar ofn costs be sentirely ch ed off.Whe n that ha s in true eamings are flat Depreciation charges,we want to emphasize,are different:Every dime of depreciation expense we report To get back to our many manufacturing. service and retailing operations,they sell products ranging from returns in the area of 12% 1o20% poor returns,the result of some serious mistakes e company or the on.I wa simply was wrong in my evaluation of the economic atively small either businesses or stocks.Not everything works out as planned Viewed as a single entity the comnanies in this grour are an excellent husiness the ploved an average of $24 billion of net tangible assets during 201 and,despite their holding large quantities of excesscash and using ittle leverage,earned 18.7%after-tax on that capita ave paee cponme can eaitor Po rice.We prem al we have der ed this sector.Furthermore,the intrinsic value of these busi in aggregate,exceeds their arry ing value by a good the difter carrying value in ry segments is far greate epetowobohmtoaor ose what is required.You can find a good bit of detail about many of our operations 5
In the GAAP-compliant figures we show on page 49, amortization charges of $1.15 billion have been deducted as expenses. We would call about 20% of these “real,” the rest not. The “non-real” charges, once nonexistent at Berkshire, have become significant because of the many acquisitions we have made. Non-real amortization charges will almost certainly rise further as we acquire more companies. The GAAP-compliant table on page 67 gives you the current status of our intangible assets. We now have $7.4 billion left to amortize, of which $4.1 billion will be charged over the next five years. Eventually, of course, every dollar of non-real costs becomes entirely charged off. When that happens, reported earnings increase even if true earnings are flat. Depreciation charges, we want to emphasize, are different: Every dime of depreciation expense we report is a real cost. That’s true, moreover, at most other companies. When CEOs tout EBITDA as a valuation guide, wire them up for a polygraph test. Our public reports of earnings will, of course, continue to conform to GAAP. To embrace reality, however, you should remember to add back most of the amortization charges we report. ************ To get back to our many manufacturing, service and retailing operations, they sell products ranging from lollipops to jet airplanes. Some of this sector’s businesses, measured by earnings on unleveraged net tangible assets, enjoy terrific economics, producing profits that run from 25% after-tax to far more than 100%. Others generate good returns in the area of 12% to 20%. A few, however, have very poor returns, the result of some serious mistakes I made in my job of capital allocation. I was not misled: I simply was wrong in my evaluation of the economic dynamics of the company or the industry in which it operates. Fortunately, my blunders normally involved relatively small acquisitions. Our large buys have generally worked out well and, in a few cases, more than well. I have not, nonetheless, made my last mistake in purchasing either businesses or stocks. Not everything works out as planned. Viewed as a single entity, the companies in this group are an excellent business. They employed an average of $24 billion of net tangible assets during 2014 and, despite their holding large quantities of excess cash and using little leverage, earned 18.7% after-tax on that capital. Of course, a business with terrific economics can be a bad investment if it is bought for too high a price. We have paid substantial premiums to net tangible assets for most of our businesses, a cost that is reflected in the large figure we show for goodwill. Overall, however, we are getting a decent return on the capital we have deployed in this sector. Furthermore, the intrinsic value of these businesses, in aggregate, exceeds their carrying value by a good margin, and that premium is likely to widen. Even so, the difference between intrinsic value and carrying value in both the insurance and regulated-industry segments is far greater. It is there that the truly big winners reside. ************ We have far too many companies in this group to comment on them individually. Moreover, their competitors – both current and potential – read this report. In a few of our businesses we might be disadvantaged if others knew our numbers. In some of our operations that are not of a size material to an evaluation of Berkshire, therefore, we only disclose what is required. You can find a good bit of detail about many of our operations, however, on pages 97-100. 15