Select Summary of Berkshire Hathaway Annual Reports

Berkshire Hathaway uses debt quite sparingly. Even when it does borrow, the company tries to structure its loans on a long-term fixed-rate basis. Adopting a conservative approach, the company will rather reject interesting opportunities than over-leverage its balance sheet. While this policy may have moderated the profits over the years it is the most prudent option. This is so because, the company cannot afford to forsake its fiduciary obligations to stakeholders who are heavily invested in it. (2012, p.98)

Compared to most other investment firms, Berkshire has access to two sources of low-cost, non-perilous leverage options – deferred taxes and ‘float’. These allow the company ownership of far more assets than its total equity capital would permit. As of 2012 these funding sources have grown to an impressive $117 billion. (2012, p.98)

Berkshire has long invested in derivatives contracts which are found to be mispriced, just as the company invests in mispriced stocks and bonds. One of the dangers posed by derivatives is when contracts are leveraged and counterpart risk is heightened. But through prudent and conservative leadership, Berkshire has avoided such problems so far. Both Charlie Munger and Warren Buffett own responsibility for such risks. They initiate and monitor every derivatives contract on the books, with the exception of operations-related contracts. (p.16, 2009)

Berkshire’s competitors, though proclaiming to eschew the high risk LBO (Leveraged Buyout Operators) strategy, are actually continuing the practice under another name. (p.7, 2008) Under the label of ‘private equity’, a purchase of a business invariably leads to drastic reduction in the equity portion of the acquiree’s capital structure. This puts many of these acquirees in serious danger because of the magnitude of debt imposed on them by the buyers. Hence the offers made by ‘private equity’ firms should be considered with caution. (p.7, 2008)

Berkshire adopts a cautious attitude towards derivatives contracts, which can often go unsettled for several years with counterparties accruing substantial claims against one another. ‘Paper’ assets, which are often difficult to quantify, become integral to financial statements even when they are not validated. Berkshire is also cautious of the dangerous nexus of dependence that develops among large financial institutions. Hereby, receivables and payables get accumulated to large sums in the control of a few privileged dealers who indulge in over-leveraging. (p.17, 2008)

The two companies BNSF and MidAmerican share the same characteristic of being heavily invested in long-lived, regulated assets. Some of these are funded through long-term debt which is not guaranteed by Berkshire. Both these companies have the business models and revenue generating capacity to cover their interest requirements. The stability and diversity of earnings shield the companies from the actions of regulatory agencies. (p.10, 2011)

Berkshire’s railroad, energy and utilities businesses maintain big investments in capital assets, including plant, equipment and property. The capital expenditure for MidAmerican in 2011 was nearly $2.7 billion, not including the non-cash property of $750 million and other equipment additions accounted through debt and liabilities. (p.10, 2011)