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Zacks Industry Outlook Highlights: Berkshire Hathaway and NV Energy

Zacks Equity Research

For Immediate Release

Chicago, IL – June 19, 2013 – Today, Zacks Equity Research discusses the U.S. Utilities, including Berkshire Hathaway Inc. (BRK.B-Free Report) and NV Energy (NVE-Free Report).

Industry: Utilities

Link http://www.zacks.com/commentary/27757/utility-industry-stock-outlook-june-2013

The biggest positive for the utilities is that there is hardly any viable substitute for utility services. This is the most fundamental strength of the industry. Moreover, increasing demand drives this industry forward.

As per the EIA, energy usage in the U.S. industrial sector will increase from 24.0 quadrillion British thermal units (Btu) in 2011 to 28.7 quadrillion Btu in 2040. In the commercial sector, consumption will increase from 8.6 quadrillion Btu in 2011 to 10.2 quadrillion Btu in 2040. In the transportation sector, demand will hover around 27.1 quadrillion Btu from 2011 through 2040.

The utility operators in North America often resort to merger and acquisitions or enter into partnerships, which lead to cost synergies and better utilization of resources. As per a report from PricewaterhouseCoopers, utility M&A deals valued at more than $50 million added up to $2.99 billion in the first quarter of 2013.

A recent announcement from MidAmerican Energy Holdings Company, a subsidiary of Berkshire Hathaway Inc. (BRK.B-Free Report), to acquire NV Energy (NVE-Free Report) in a way exceeded the combined value of all merger deals announced in the first quarter of 2013. The transaction, which has been unanimously approved by the board of directors of both companies, has an enterprise value of approximately $10 billion. The deal is expected to close in the first quarter of 2014, subject to regulatory approvals and approval of shareholders of NV Energy.

We believe the synergies of merger and decline in overlapping overhead operating expenses could allow the companies to concentrate more on the development and maintenance of infrastructure.

Another inherent advantage of these utilities is their size and the requirement of huge initial capital outlay.  For this reason, we generally do not find many new entrants in the market. Also, stringent government regulations and the hard toil for new entrants to establish a loyal consumer base put existing players in an advantageous position.

Finally, utilities have been known to pay dividends consistently, thereby retaining investor confidence. This was evident during the economic crisis of 2008-2009 when these operators continued to pay out dividends without fail.

The Future of Utilities

Undoubtedly, the focus and emphasis to generate power from renewable sources have increased. But will this pose a threat to the more traditional power producers using fossil fuels? The answer is largely "no," at least for now.

Having said that, the gap between these two groups of power generators will continue to shrink as we move forward. Eventually, renewable power producers may overtake traditional electric utilities in due course.

The Middle East has the largest volume of fossil fuel reserves. Even there we are noticing a large number of solar power projects coming up in the region. An EIA report suggests that by 2040 nearly 20% of the total power produced will come from renewable sources. Solar generation capacity is expected to increase by a whopping 1000% to 46 GW in 2040 from 2011 levels.

We are all aware of the pitfalls of greenhouse gas emissions and the limited life of fossil fuel. In addition, the increasing conversion rate of solar cells makes it cheaper and cost effective in comparison to conventional sources. Renewables can thus be the final answer for the inevitable exhaustion of fossil fuel reserves.

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