Berkshire Hathaway Inc. 10-Q Summary: Q1 2006
Business Context and Reporting Period
This Quarterly Report on Form 10-Q covers the period ended March 31, 2006. A significant accounting change occurred during this period: Berkshire Hathaway converted its non-voting preferred stock in MidAmerican Energy Holdings Company into voting common stock on February 9, 2006. Consequently, MidAmerican is now consolidated into Berkshire's financial statements, whereas it was previously accounted for under the equity method. This consolidation significantly impacts the comparability of balance sheet and income statement figures with the prior year.
Key Financial Metrics
| Metric | Q1 2006 | Q1 2005 |
|---|---|---|
| Total Revenues | $22,763 million | $17,634 million |
| Net Earnings | $2,313 million | $1,363 million |
| Net Earnings Per Share (Class A equiv.) | $1,501 | $886 |
| Operating Cash Flow | $2,359 million | $1,359 million |
| Cash and Cash Equivalents | $42,858 million | $46,709 million |
| Total Assets | $230,206 million | $198,325 million |
| Total Liabilities | $133,118 million | $106,025 million |
| Shareholders' Equity | $95,349 million | $91,484 million |
Material Changes vs. Prior Period
- Consolidation of MidAmerican: The primary driver of balance sheet growth is the consolidation of MidAmerican Energy Holdings Company. This added approximately $34.9 billion in assets and $23.0 billion in liabilities (primarily debt) to the consolidated balance sheet.
- Revenue Growth: Total revenues increased by $5.1 billion (29%). This includes $2.2 billion in new revenues from the consolidated utilities and energy segment, which had no comparable revenue in Q1 2005.
- Investment Gains: Investment and derivative gains/losses swung from a loss of $120 million in Q1 2005 to a gain of $805 million in Q1 2006. This was largely due to a $354 million gain on derivative contracts (foreign currency) compared to a $377 million loss in the prior year.
- Acquisitions: Berkshire completed the acquisition of PacifiCorp (a regulated electric utility) for approximately $5.1 billion on March 21, 2006, and BusinessWire on February 28, 2006.
- Insurance Underwriting: Pre-tax underwriting gains were $511 million in Q1 2006 compared to $492 million in Q1 2005. GEICO maintained a pre-tax underwriting gain of $311 million.
Outlook, Risks, and Contingencies
- Legal Proceedings (General Re): Berkshire's subsidiary General Re is involved in significant legal matters. Three former executives were indicted by a federal grand jury in February 2006 regarding the "AIG Transaction" (charges include securities fraud and conspiracy). The SEC has also filed an enforcement action. Additionally, General Re faces civil litigation related to Reciprocal of America (ROA) and antitrust allegations in the insurance brokerage industry. Berkshire states it cannot estimate the range of possible loss.
- Regulatory Risks (Utilities): The newly consolidated utilities and energy businesses are subject to extensive federal and state regulation regarding rates, environmental compliance (e.g., Clean Air Act), and safety. Changes in regulations or the inability to recover costs through rates pose significant risks.
- Capital Commitments: Berkshire has committed to provide up to $3.5 billion of capital to MidAmerican until 2011 to pay debt obligations or fund investments. Berkshire does not guarantee MidAmerican's debt.
- Accounting Changes: Berkshire adopted FASB Staff Position No. FTB 85-4-1 regarding life settlement contracts, resulting in a $180 million after-tax increase to retained earnings at the beginning of 2006.
Investor Verification Checklist
- MidAmerican Consolidation Impact: Verify the specific contribution of MidAmerican to the Q1 2006 revenue and earnings figures to isolate organic growth from accounting changes.
- General Re Litigation Exposure: Monitor the status of the criminal indictments against former General Re executives and the civil lawsuits regarding the AIG Transaction and ROA, as potential liabilities are currently unquantifiable.
- Derivative Volatility: Review the notional value of open foreign currency forward contracts ($5.4 billion at March 31, 2006) and assess the sensitivity of earnings to currency fluctuations.
- Insurance Reserve Adequacy: Examine the $47.6 billion in estimated liabilities for unpaid losses; a 1% change in these estimates would impact pre-tax earnings by approximately $500 million.
- Debt Maturities: Review the contractual obligations table for the utilities and energy segment, noting $1.45 billion in debt payments due in 2006.