154 THE WARREN BUFFETT WAY
secured by almost all the oil and gas assets of Barrett Resources, which
Williams originally acquired for about $2.8 billion. It was reported that
Buffett’s loan was part of a $3.4 billion package of cash and credit that
Williams, still an investment-grade company, needed to stave off bank-
ruptcy. The terms of the deal were tough and laden with conditions and
fees that reportedly could have put the interest rate on the deal at 34
percent. Still, it can be argued that not only was Buffett helping an
investment-grade company out of a tight spot but also protecting him-
self against the high risk of the situation.
Although MidAmerican was not Buffett’s only foray into the then-
beleaguered energy industry, it def initely was a complex, multifaceted
investment. Buffett believed that the company was worth more than its
then-current value in the market. He knew that the management, in-
cluding Walter Scott and David Sokol, operated with great credibility,
integrity, and intelligence. Finally, the energy industry can be a stable
business, and Buffett was hoping it would become even more stable and
prof itable.
In MidAmerican, Buffett bought a f ixed-income investment with
an equity potential. As with all his other investments, he took a charac-
teristic ownership approach and committed himself to the company’s
growth. He made some money off the Williams f ixed-income instru-
ments while protecting himself with covenants, high rates, and assets
( Barrett Resources). As it turned out, by October 2003, MidAmerican
had grown into the third largest distributor of electricity in the United
Kingdom and was providing electricity to 689,000 people in Iowa,
while the Kern River and Northern Natural pipelines carried about 7.8
percent of the natural gas in the United States. In total, the company had
about $19 billion of assets and $6 billion in annual revenues from 25
states and several other countries, and was yielding Berkshire Hathaway
about $300 million per year.
It is important to remember that Buffett thinks of convertible preferred
stocks f irst as f ixed-income securities and second as vehicles for appre-
ciation. Hence the value of Berkshire’s preferred stocks cannot be any
less than the value of a similar nonconvertible preferred and, because of
conversion rights, is probably more.