Among the most dependable utility investments are operators of transmission lines. These lines provide communities with massive amounts of reliable energy and displace communities' need to build additional power plants. Unlike most power generators, transmission lines are cost-plus assets, and those assets earn solid returns through good times and bad.
Perhaps this is why Warren Buffett's companies are investing heavily in transmission lines. Berkshire Hathaway (BRK.A) owns MidAmerican Energy Holdings, which in turn owns a number of utilities, including MidAmerican Energy, PacifiCorp and CE Electric (UK). Recently, MidAmerican formed partnerships with American Electric Power (AEP) to buy, build, own and operate a number of transmission lines throughout the central portion of the nation. MidAmerican brings the necessary capital, and AEP brings the critical experience as the nation's largest transmission line operator.
MidAmerican and AEP jointly own Electric Transmission Texas LLC. This partnership was set up to acquire, construct, own and operate transmission facilities within the Electric Reliability Council of Texas (ERCOT), primarily in and around AEP Texas service territories. ETT recently won approval for one of Texas' Competitive Renewable Energy Zone projects and won ERCOT's approval for the new Rio Grande Valley Transmission line. The Rio Grande Valley project will construct about 163 miles of 345-kV transmission lines connecting Laredo with Edinburg. The cost is estimated at about $300 million (ERCOT also approved the replacing and upgrading of two existing 345-kv lines and substation facilities at an additional cost of $225 million).
ETT has a lot of other projects on its agenda. It is working on a number of 138-kilovolt and 345-kilovolt transmission line projects, including Nopalito-Sand Dollar-Las Brisas, Lytle, Barney Davis-Laguna, Uvalde-Castroville and Marfa-Presidio transmission-line projects.
It is not just about wires. ETT invested over $25 million to install a 4-megawatt sodium-sulfur battery system in Presidio, Texas. The entire battery system with line upgrades cost over $70 million. It also installed a 100-megawatt variable frequency transformer (VFT) to help improve reliability in the Laredo area and decreased the need to operate costly "must-run" power generation facilities. The VFT is the second installed in the world and the first in the U.S.
In addition to ETT, MidAmerican and AEP jointly own Electric Transmission America (ETA). This partnership builds and owns electric transmission assets that are outside of ERCOT. Currently, ETA is working on Prairie Wind Transmission in Kansas and Tallgrass Transmission in Oklahoma.
In addition, ETA signed two separate agreements with Exelon (EXC) and MidAmerican Energy (the distribution utility subsidiary) to develop two 765-kilovolt transmission projects in the Midwest. The projects establish part of the infrastructure needed to strengthen the Midwest transmission grid and provide states with access to additional sources of energy, including renewable, non-carbon emitting electricity generation.
AEP and MidAmerican are not the only investors in transmission line projects. Riverstone Holdings' subsidiary, Pattern Energy Group, is developing the Southern Cross project. This project adds a high-voltage direct current transmission line that connects Alabama, Mississippi and Louisiana to ERCOT. Southern Cross will improve the reliability of both the ERCOT and Southeast transmission grids by providing the ability to access each other's diverse generation resources in times of need (and Texas is already short of generation capacity).
For investors seeking a pure play on transmission lines, ITC Holdings (ITC) may be a good candidate. ITC has an enterprise value of about $6.5 billion, it is consistently profitable, and it pays a modest 1.8% dividend. It operates high-voltage transmission systems in Michigan's Lower Peninsula and portions of Iowa, Minnesota, Illinois, Missouri and Kansas. It serves a combined peak load in excess of 25,000 megawatts through its subsidiaries ITC Transmission, Michigan Electric Transmission Company, ITC Midwest and ITC Great Plains. ITC also develops new transmission systems where improvements are needed, through its development subsidiary, ITC Grid Development.
When investing in transmission line companies, it is important to remember that transmission lines are a substitute for distributed generation; they bring power from distant locations to demand centers. Many regions of the country cannot build new power plants, they are faced with declining generating capacity at the local level, and they need reliable sources of energy. These regions are left with limited choices. They either undertake a range energy efficiency measures or build new transmission. Most are electing to do both.
Finally, The Federal Energy Regulatory Commission (FERC) is making the transmission line business more competitive. In July, FERC issued "Order No. 1000 - Transmission Planning and Cost Allocation." This order is intended to promote competition in regional transmission planning and make construction of new interstate transmission easier. Companies such as ITC, MidAmerican and AEP should benefit from this new rule, which is set to take effect about now.