(Excerpt from University of Berkshire Hathaway by Daniel Pecaut and Corey Wrenn)
Buffett said this is the number one question he would ask of himself: why is Berkshire investing in capital-intensive businesses? Berkshire’s hallmark has been to find companies that gushed cash and required little or no capital reinvestment – companies like See’s Candy. As that cash flow got funneled to Omaha, it was then Buffett’s job to reinvest in the next cash machine. However, as Berkshire grew, Buffett found it more and more difficult to put those billions of dollars of cash flow to work. So Buffett shifted gears. Starting with MidAmerican Energy in 1999, Buffett saw the appeal of companies that could reinvest all the cash they generated, assuming they could do so at decent returns. Owning a utility like MEC fit the bill. MEC has invested every dime of its cash generation back into its utility businesses, mostly at regulated rates of return in the 11%-12% range. Not brilliant, but the investment has worked out very decently.