Monthly Archives: October 2014

BNSF Railway Adds $1,000 Surcharge to Older Oil Tank Cars

(BRK.A), (BRK.B)

As a common carrier, Berkshire Hathaway’s BNSF Railway can’t refuse under most circumstances to carry cargo, despite the potential loss or damage presented by the cargo. And, while BNSF’s growing role as a mobile crude oil pipeline has meant billions in new revenue, it also has presented new risks in regards to fire in the event of derailment, collision, or other accidents.

Now, BNSF has stepped up its efforts to ameliorate the financial cost of that risk through a $1,000 surcharge for each older crude oil tank car it transports.

BNSF, which this past February issued an RFP for 5,000 tank cars that meet higher fire and crash standards, will put the surcharge on older DOT-111 tank cars. Each tank car can hold up to 34,500 US gallons, so the charge adds just under 3 cents per gallon, or $1.26 a barrel.

BNSF’s crude oil trains can exceed 100 tank cars and a mile in length, giving the railroad potentially as much as an extra $100,000 in revenue per trainload.

With the Bakken oil boom, the railroad has become the largest transporter of crude oil in North America. The company recently celebrated its 1,000th crude-oil unit train at the COLT rail hub in Epping, North Dakota, which only opened in June 2012.

However, according to the Wall Street Journal, the oil derived from North Dakota’s Bakken shale has an 8 pounds per square inch Reid Vapor Pressure in warmer weather and 12.5 in colder weather. This is significantly higher than oil derived from the Eagle Ford Shale in Texas, and makes safety concerns in regards to older tank cars all the more important.

In addition to transitioning to safer tank cars, BNSF has boosted training for both its crews and emergency responders in communities along its routes. In August, BNSF gave emergency responders from 12 states specialized training focused on managing incidents related to crude oil trains.

© 2014 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Berkshire Continues to be Bullish on Wind Power

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Berkshire Hathaway’s MidAmerican Energy Company, a subsidiary of Berkshire Hathaway Energy, will develop a new wind farm site in Adams County, Iowa, and expand a second site in O’Brien County, Iowa, in 2015.

The $280 million project will include the installation of up to 67 wind turbines and will add up to 162 megawatts of additional wind generation capacity in Iowa.

The new project comes just 16 months after MidAmerican Energy launched a $1.9 billion investment to add up to 1,050 megawatts of wind generation in Iowa by year-end 2015.

A Leader in Wind-Generated Power

MidAmerican Energy first began installing wind turbines in 2004, and is first among U.S. rate-regulated utility in wind-powered generation capacity.

The aggressive strategy has MidAmerican Energy on track to reach 3,500 megawatts of wind generation capability in Iowa by the end of 2015.

William J. Fehrman, president and CEO of MidAmerican Energy, stated that “With this proposed expansion, beginning in 2016, MidAmerican Energy’s wind resources are expected to produce an amount of energy equivalent to approximately 50 percent of the retail energy customers are expected to need.”

MidAmerican Energy’s goal is to provide renewable energy for the equivalent of approximately 1.05 million average Iowa households.

Wind’s Growing Role in Meeting Energy Needs

Wind energy is playing an increasing role in the US’s energy needs with a total installed wind capacity in the U.S. of 61,327 megawatts through first quarter of 2014. Total wind generated energy is enough to power 15.5 million homes.

On the commercial side, wind energy has found demand from companies such as Google, which in April 2014, signed an agreement with MidAmerican Energy to supply Google’s data center in Council Bluffs, Iowa, with up to 407 megawatts of wind-sourced energy.

As the cost of wind energy continues to drop, consideration also needs to be given to “hidden costs” inherent in other forms of energy production. The National Research Council identified these costs and noted that “pollutants from the burning of fossil fuels have effects on human health, grain crops, timber yields, building materials, recreation, and outdoor vistas.”

These hidden cost costs are often overlooked when calculating the cost of power generation, and make wind power all the more attractive.

© 2014 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Van Tuyl Group Acquisition Brings More Insurance Float

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Is there anything Warren Buffett likes more than insurance float? Probably not, if you look at the more than $100 billion in insurance float generated by Berkshire Hathaway’s GEICO and its other insurance companies.

Now there’s more float on the way with Berkshire Hathaway’s recently announced $4.1 billion acquisition of auto dealership group Van Tuyl Group.

The float comes because Van Tuyl Group owns Old United Casualty Company, which provides extended warranty services and other automotive protection plans to 1.6 million customers.

In addition, Van Tuyl Group also owns Old United Life Insurance Company, which sells credit Life, credit Accident and Health policies through the Van Tuyl Group’s automobile dealerships and other outside dealerships.

New Units Will Join Berkshire’s Existing Insurance Companies

Both the Old United Casualty Company, and the Old United Life Insurance Company, will be split off from the Van Tuyl Group, and will become part of Berkshire’s wholly-owned National Indemnity Company.

The Van Tuyl Group will be rechristened Berkshire Hathaway Automotive.

The Van Tuyl Group is the number one privately-held auto dealership group and is fifth nationally among total dealership groups. The company also serves as a management consulting company that recruits on behalf of a large number of independently owned automotive dealerships.

2013 revenues were nearly $9 billion from 78 independently operated dealerships with over 100 franchises covering Arizona, California, Florida, Georgia, Illinois, Indiana, Missouri, Nebraska, New Mexico and Texas.

The Van Tuyl Group was founded in 1955 by Cecil Van Tuyl with a single Kansas Chevrolet dealership. Joined by his son Larry in 1971, the company is now headed by Larry Van Tuyl, as the current Chief Executive Officer, and Jeff Rachor.

Rachor, who previously headed Fortune 500 auto dealer group Sonic Automotive, and did a stint as the head of auto parts retailer Pep Boys, will take over as Chief Executive Officer for Berkshire Hathaway Automotive. Larry Van Tuyl will continue to manage the company as chairman.

The acquisition is expected to close in the first quarter of 2015, after clearing regulatory hurdles and gaining approvals from auto manufactures.

© 2014 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Berkshire Adds $1 Billion in Earning Power With Van Tuyl Group Acquisition

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Berkshire Hathaway is getting in the thick of the auto retail business with the acquisition of the Van Tuyl Group. The soon to be rechristened Berkshire Hathaway Automotive will add over a billion dollars in gross profits annually to Berkshire’s bottom line.

Berkshire Hathaway agreed to acquire the auto dealership group for $4.1 billion after company CEO Larry Van Tuyl approached Berkshire and proposed the acquisition.

The Van Tuyl Group is the number one privately-held auto dealership group and is fifth nationally among total dealership groups. The company also serves as a management consulting company that recruits on behalf of a large number of independently owned automotive dealerships.

2013 revenues were nearly $9 billion from 78 independently operated dealerships with over 100 franchises covering Arizona, California, Florida, Georgia, Illinois, Indiana, Missouri, Nebraska, New Mexico and Texas.

The Van Tuyl Group was founded in 1955 by Cecil Van Tuyl with a single Kansas Chevrolet dealership. Joined by his son Larry in 1971, the company is now headed by Larry Van Tuyl, as the current Chief Executive Officer, and Jeff Rachor.

Rachor, who previously headed Fortune 500 auto dealer group Sonic Automotive, and did a stint as the head of auto parts retailer Pep Boys, will take over as Chief Executive Officer for Berkshire Hathaway Automotive. Larry Van Tuyl will continue to manage the company as chairman.

Billions in profit potential

Annual gross profits across the sector in 2013 averaged 15.5%. As a private company, the Van Tuyl Group does not release its annual profits, but they should be around $1.25 billion.

Adding a billion dollars annually to the Berkshire bottom line is only the beginning, as Warren Buffett has already announced that under Berkshire the company will continue to acquire dealerships as it participates in an industry-wide consolidation that has AutoNation and Penske Automotive Group as the sector leaders.

A successful management style

The Van Tuyl Group has incentivized their dealership general managers by making them minority owners of the dealerships. Berkshire is expected to continue this strategy.

One-stop shopping?

Berkshire Hathaway Automotive will likely open up new opportunities for Berkshire to have one-stop shopping for cars, financing and auto insurance.

The acquisition is expected to close in the first quarter of 2015, after clearing regulatory hurdles and gaining approvals from auto manufactures.

(Portions of this article have been updated with new information.)

© 2014 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.