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Berkshire Hathaway's Next Elephant Acquisition

NEW YORK (TheStreet) -- Berkshire Hathaway's (BRK.A) next elephant deal could come in the utilities sector after MidAmerican Energy acquired of NV Energy in 2013 and stated a plan to invest as much as $100 billion in the sector over the next 10 to 15 years. In fact, Berkshire's annual letter to shareholders, released on Saturday, read like pitch to investors and regulators for another transaction.

Berkshire's 2013 letter to investors generally was a little light on newsworthy developments. Language CEO Warren Buffett used to describe major acquisitions, or so-called "elephant deals," was weaker than in recent letters. Little new was said about Berkshire's succession plans and the conglomerate also appeared to have pushed off concerns about its performance for another year.

In 2012, Berkshire Hathaway projected that if markets rose last year, it would be the first five-year stretch when the company's book value per share didn't grow faster than the S&P 500 index. That prediction proved to be true, as Berkshire's book value growth underperformed the S&P in 2013. Buffett, however, didn't discuss five-year performance.

"Over the stock market cycle between yearends 2007 and 2013, we over-performed the S&P," Buffett said. Investors can decide whether that represents a slight change of Berkshire's yardstick, something Buffett vowed not to do in 2012.

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Utilities, Utilities, Utilities

Discussion about Berkshire's MidAmerican Energy utilities division was chock full of new information. The "Oracle of Omaha" also directly said MidAmerican will continue to make large acquisitions.

MidAmerican purchased Nevada-based utility NV Energy for $5.6 billion in 2013, in a deal that, Buffett said, "fits nicely into our existing electric-utility operation and offers many possibilities for large investments in renewable energy."

"NV Energy will not be MidAmerican's last major acquisition," Buffett added.

Berkshire said in its 2013 shareholder letter that MidAmerican's renewable energy investment will hit $15 billion, up from last year's total of $13 billion. The $2 billion increase in renewable investment likely is due, in part, to Berkshire's acquisition of NV Energy, announced last May.

"We relish making such commitments as long as they promise reasonable returns," Buffett said. "And, on that front, we put a large amount of trust in future regulation" he said of Berkshire's renewable energy investment, echoing a similar refrain from 2012. MidAmerican's utilities serve regulated retail customers in 11 states and the company is the industry's leader in renewable power generation.

Berkshire may be bracing for rising renewable energy investment and another deal, given that Buffet certainly took more time in his shareholder letter to pitch such a maneuver. Buffett even explained why he believes MidAmerican is seen by regulators as operating at an advantage versus peers.

MidAmerican can handle its debts in "all circumstances" according to Buffett. Meanwhile, he said MidAmerican leads the industry in retained earnings.

"At MidAmerican, 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 exclusively offering an essential service. 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," Buffett said.

From a standing start nine years ago, Buffett said MidAmerican now accounts for 7% of the country's wind generation capacity and an even greater share of solar energy generation when a handful of in-construction plants are completed.

"MidAmerican can make these investments because it retains all of its earnings. Here's a little known fact: Last year MidAmerican retained more dollars of earnings -- by far -- than any other American electric utility. We and our regulators see this as an important advantage -- one almost certain to exist five, ten and twenty years from now," Buffett said.

Berkshire also spent time in its letter trying to show that its acquisitions in the utilities sector have benefited customers. MidAmerican ranked No. 1  in a customer satisfaction survey across the electric utility industry, Berkshire noted in its letter.

"All three of our companies were ranked far lower by this measure before they were acquired by MidAmerican. The extraordinary customer satisfaction we have achieved is of great importance as we expand: Regulators in states we hope to enter are glad to see us, knowing we will be responsible operators," Berkshire said.

Evidence of Utilities Focus

Put those statements together, it's hard to read Berkshire's letter and not wonder whether Buffett preparing for another utilities deal.

After all, many of the advantages that Buffett sought to explain about MidAmerican underscore weaknesses in the industry. Publicly traded utilities are generally high dividend payers, meaning they retain only a portion of their earnings. In some cases, dividend payments appear to more important to management and investors than capital investment.

As a result, many publicly traded utilities are behind the curve in investing in renewable energy. Capital expenditure across the regulated utility industry is also forecast by Moody's to fall in coming years.

Berkshire's MidAmerican Energy unit, by contrast, could be a source of investment for the industry.

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