Monthly Archives: May 2015

Missouri Basin Power Project Settles Dispute with BNSF

(BRK.A), (BRK.B)

A decade long dispute between the Missouri Basin Power Project and BNSF Railway over coal transportation rates has finally been settled. The dispute predated Berkshire’s Hathaway’s ownership of BNSF.

The lawsuit was originally filed in 2004 by coal suppliers Basin Electric and Western Fuels Association Inc., complaining that BNSF (at that time still known as Burlington Northern Santa Fe) had doubled the shipping rates for coal transported to the Laramie River Station located near Wheatland, Wyoming.

BNSF hauls 8 million tons of coal each year from mines in Wyoming’s Powder River Basin.

The members of the Missouri Basin Power Project are Basin Electric, Lincoln Electric System, Tri-State Generation & Transmission Association Inc., Western Minnesota Municipal Power Agency, Heartland Consumers Power District, and the Wyoming Municipal Power Agency.

In 2009, the Surface Transportation Board (STB) concluded that BNSF’s coal transportation rates were “unlawfully high” at roughly six times the cost of providing the transportation. The STB ordered $345 million in reparations and rate reductions from the railroad. Under the ruling, BNSF was obligated to reimburse the Utilities for roughly $100 million in overcharges from 2004 through 2008 based on the volume of coal transported from the various PRB mines between 2004 and 2008.

The award was the single largest award to a captive shipper (a shipper with no alternative carrier) ever made by the STB.

The STB noted that “customers have been bearing the burden of these unreasonably high transportation rates in their monthly electric bills, a burden they should no longer be forced to bear.” The award was the single largest award to a captive shipper (a shipper with no alternative carrier) ever made by the STB.

BNSF appealed the ruling, spending the next six years in the appeals process, and the negotiated settlement came as a result of the STB’s order for both parties to “confer and resolve the precise amount of damages due the Utilities.”

The exact terms of the settlement between BNSF and the Missouri Basin Power Project have not been released, but BNSF spokeswoman Roxanne Butler said that “both parties are satisfied with the outcome.”

© 2015 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 Hathaway Benefits From Cable TV Frenzy

(BRK.A), (BRK.B)

Charter Communications’ agreement to acquire cable operator Time Warner Cable has the cash register ringing at Berkshire Hathaway as well.

Shares of cable operator Liberty Global PLC, with annual revenues of $18.2 billion, has soared as the quickly consolidating cable industry has drawn interest from large Wall Street hedge funds.

Berkshire’s not sitting on the sidelines, as its stake in Liberty Global stood at 10,342,793 shares as of March 31, 2015, making Berkshire the 5th largest institutional holder of the company.

As the battle for Time Warner Cable has heated up over the last year, Liberty Global stock has risen a dramatic 29% over the past 12 months, and 16.2% year-to-date.

Berkshire first disclosed a stake in the international cable TV operator in December 2014, when it announced it owned 2.95 million shares of the company. As of March 31, 2015, Berkshire has trimmed its position by some 473,531 shares.

An International Cable TV Power House Eying Acquisitions

Helmed by cable TV mogul John C. Malone, Liberty Global is the largest international cable company and serves 14 countries, including 12 in Europe, and it’s clearly looking for even more customers and reach.

Malone, who is also the Chairman of Liberty Media Corporation and Liberty Interactive Corporation, and a member of the Board of Directors of Charter Communications, is known as one of the most aggressive dealmakers in a field known for deal making. Malone holds a 26% in Charter Communications through Liberty Broadband.

Is Vodafone Next?

Recently, Malone has expressed interest in British telecommunications company Vodafone Group, suggesting it would be a “good fit” with Liberty Global. As cable operators seek to expand their spheres of operation in the face of growing competition from non-cable Internet services, such as Netflix and Hulu, Malone just might be right that Vodafone’s 400 million customers across the globe are just what Liberty Global needs, and Berkshire could be along for a nice ride.

© 2015 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.

Acquisition of Geronimo Energy Projects Power Berkshire’s Midwest Energy Expansion

(BRK.A), (BRK.B)

Edina, Minnesota-based Geronimo Energy, LLC, has announced the sale of a portfolio of Midwest renewable energy projects to Berkshire Hathaway Energy’s subsidiary BHE Renewables, LLC.

The projects include the soon to be developed Grande Prairie Wind Farm in Holt County, Nebraska; the soon to be developed Walnut Ridge Wind Farm in Bureau County, Illinois; and a portfolio of future Minnesota solar projects.

About Grand Prairie

Scheduled for completion in 2016, Grand Prairie Wind Farm will produce 400 megawatts of power, and will cover approximately 54,250 acres of land in portions of Willowdale, Antelope, Grattan, Iowa, Scott, and Steel Creek Townships. The wind farm will have up to 266 wind turbines with capacities ranging for 1.5 to 3 megawatts a piece. Grand Prairie will be the largest wind energy project in the state of Nebraska, and will up the state’s wind energy capacity by approximately 50 percent.

About Walnut Ridge

Other projects acquired from Geronimo Energy include the Walnut Ridge Wind Farm, a 123-turbine 225 megawatt wind farm development to be located in north central Illinois that was originally a joint venture between Geronimo Wind Energy and the Mesa Grande Band of Mission Indians of California. The Federal Government’s General Services Administration has already entered into a Power Purchase Agreement for 140 megawatts of Walnut Ridge’s capacity. The facility is scheduled to be constructed in 2016, pending the resolution of a lawsuit brought by area property owners over the visual impact of the wind farm.

Solar Portfolio

An additional Solar Portfolio made up of Minnesota solar projects was also acquired by BHE Renewables. The portfolio includes seven solar developments throughout the state of Minnesota, which are part of Xcel Energy’s Community Solar Garden Program.

Construction of the Solar Portfolio is scheduled for 2016. It is being marketed towards Xcel Energy’s Solar Rewards Community Program. Current subscribers to the Solar Portfolio include, but are not limited to, St. Paul Public Housing Agency, St. Olaf College and District Cooling St. Paul (an affiliate of District Energy St. Paul).

© 2015 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 Hathaway Energy Takes Stake in eVolution Networks

(BRK.A), (BRK.B)

Warren Buffett has always been tech averse, proclaiming that he doesn’t understand technology companies, so he has no basis to make an investment. But, that doesn’t mean that Berkshire Hathaway avoids tech companies. In addition to its ownership of 79,565,115 shares of IBM, Berkshire through its subsidiaries takes stakes in tech companies that relate to its various businesses.

IES Holding, a subsidiary of Berkshire Hathaway Energy, has taken a stake in eVolution Networks, an innovator in energy savings solutions for Mobile Network Operators (MNOs).

Based in Israel, the company bills itself as the first company to provide operators with a purely software-based solution that slashes energy consumption on the base station level.

IES Holding’s $22.5 million investment was done jointly with GE Ventures.

According to eVolution Networks, the company plans to expand its worldwide presence and promote its solutions to new industries, such as data center energy management.

“Energy costs are a huge problem for mobile operators,” said Roy Morad, CEO of eVolution Networks. “Operators are constantly forced to expand their network to support the growing data demand from subscribers and the Internet of Things (IOT). However, the way networks are designed today doesn’t allow operators to wisely “right size” their energy use according to live traffic demand. eVolution Networks’ Smart Energy Solution eliminates this problem.”

eVolution Networks’ Smart Energy Solution is a software-based solution that analyzes the mobile network’s traffic needs and adjusts the use of the network’s resources based on real-time demand from subscribers. This adaptive and unique approach to managing the network’s resources has been deployed by Tier-1 operators such as Telefonica Group and has proven to save millions of dollars annually on energy bills.

“This team’s management experience and strong technical background have helped establish eVolution Networks as a leader in the telecommunications energy efficiency market. eVolution Networks is poised for tremendous growth as more customers and business partners realize the benefits provided by the technology,” said Bill Fehrman, president of Berkshire Hathaway Energy subsidiary IES Holding. “This funding will be used to capitalize on this potential, boost the company’s growth worldwide and establish eVolution Networks products and technology as an industry standard.”

eVolution Networks notes that worldwide figures show the telecommunications industry is responsible for 3 percent of the global energy consumption. This translates to an estimated $20 billion spent yearly by mobile network operators. Smart Energy Solution offers an answer by making the networks as efficient as possible through data analysis and advanced load management.

According to the company, eVolution Networks’ Smart Energy Solution reduces up to 35% of the annual energy consumption of mobile operators by analyzing the network’s needs in real time and managing the network resources accordingly from the base station to the data center.

Already in Action

The company’s Smart Energy Solution has already been successfully deployed by tier-1 operators such as Telefonica group.

“Given that energy costs are the largest portion of operating expenses for telecom operators, a 35 percent reduction in energy usage with Smart Energy Solution will have a significant impact on profitability,” said Jonathan Pulitzer, Senior Director at GE Ventures. “GE Ventures is investing in eVolution Networks because of this potential for savings and the positive impact on global energy consumption.”

About IES

Berkshire Hathaway Energy’s IES Holding is an operating subsidiary that integrates, aggregates and manages residential and commercial load, generation and storage assets and related technologies in concert with economic or market based constructs to reduce overall energy system costs and improve grid reliability.

© 2015 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.

Dairy Queen Moves To Healthier Kids’ Meals

(BRK.A), (BRK.B)

Warren Buffett may love Coca-Cola (he’s 1/4 Coke by his own admission), but Berkshire Hathaway’s Dairy Queen is no longer a lover of carbonated beverages for their kids’ meals.

The franchisor has set a date of September for getting soda out of its children’s menu, which already offers a choice of a carbonated beverage, Arctic Rush slushy drink, or milk.

The move comes as quick-serve restaurants are under increasing pressure to reduce the fat and sugar content of menu items marketed to children.

On the plus side (not the plus size), Dairy Queen already offers the choice of a banana or applesauce in place of French fries, and it already markets a Kids Live Well Menu that features a chicken wrap, a banana, and a bottle of water. The meal omits a frozen dessert.

An Industry-Wide Move Towards Healthier Eating For Children

The Kids Live Well program is an initiative of the Nation Restaurant Association, and is a voluntary industry program that now has over 42,000 participating restaurant locations committed to “providing families with a growing selection of healthful children’s menu choices when dining out.”

For more information, read a Mazor’sEdge special report on Dairy Queen.

© 2015 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.

BNSF Nixes Building 5,000 Tank Cars

(BRK.A), (BRK.B)

Just 14 months after announcing ambitious plans to build 5,000 Next Generation tank cars, BNSF Railway has dropped its plan to both build and lease tank cars. The plan for the railroad to build tank cars was unusual, as tank cars are usually owned either by leasing companies, or directly by the crude oil or chemicals suppliers.

The move comes just as the U.S. Department of Transportation (DOT) released its new tank car rule. Among the things the new rule will do is require “a new, enhanced tank car standard and an aggressive, risk-based retrofitting schedule for older tank cars carrying crude oil and ethanol.”

Increased Safety Standards for Tank Cars New and Old

“Enhanced Standards for New and Existing Tank Cars for use in an HHFT—New tank cars constructed after October 1, 2015, are required to meet the new DOT Specification 117 design or performance criteria. The prescribed car has a 9/16 inch tank shell, 11 gauge jacket, 1/2 inch full-height head shield, thermal protection, and improved pressure relief valves and bottom outlet valves. Existing tank cars must be retrofitted with the same key components based on a prescriptive, risk-based retrofit schedule. As a result of the aggressive, risk-based approach, the final rule will require replacing the entire fleet of DOT-111 tank cars for Packing Group I, which covers most crude shipped by rail, within three years and all non-jacketed CPC-1232s, in the same service, within approximately five years.”

Why the Change of Heart for BNSF?

BNSF cited customer concerns as its primary reason for dropping its move into the leasing business.

“BNSF owning or leasing tank cars was not viewed as useful,” the railroad detailed in a letter to customers.

But Not So Quick

BNSF may have dropped its plan to build tank cars, but that doesn’t mean Berkshire Hathaway will not be in the tank car business. Berkshire already builds and leases tank cars through its UTLX Union Tank Car, a subsidiary of Berkshire’s Marmon Group, and the new rule will bring lots of new business for UTLX, as the company not only builds 6,000 new tank cars per year, but retrofits thousands of old ones as well.

© 2015 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.

The Hidden Float Within Van Tuyl Group

(BRK.A), (BRK.B)

There’s nothing Warren Buffet loves more than float! The huge float from Berkshire Hathaway’s insurance businesses has helped the company build an equity portfolio of over $100 billion.

Here Comes More Float!

With the completion of Berkshire Hathaway’s $4.1 billion acquisition of the Van Tuyl Group (the largest privately owned auto dealership group in the U.S.), Berkshire gets an added kicker, more float.

The float comes because Van Tuyl Group (rechristened Berkshire Hathaway Automotive) owns Old United Casualty Company, which provides extended warranty services and other automotive protection plans to 1.6 million customers. And Van Tuyl also has a life insurance company, Old United Life Insurance Company.

Both companies are now owned by Berkshire Hathaway and will be split off from Berkshire Hathaway Automotive to become part of Berkshire’s wholly-owned National Indemnity Company.

While Van Tuyl has been based in Texas, Old United Casualty Company and Old United Life Insurance Company are both based in Shawnee Mission, Kansas.

Financial Strength Anybody?

There’s nothing like being owned by Berkshire to add to your financial strength, and A.M. Best Company, which issues insurance ratings, has just affirmed the financial strength ratings of A (Excellent) and the issuer credit ratings of “a+” for Old United Casualty Company and Old United Life Insurance Company. It notes that “the outlook for all ratings is stable.”

A.M. Best also noted that it “believes OUL is well-positioned at its current rating level, positive rating action could occur if potential synergies or expansion of its business profile are realized through its affiliation with Berkshire.”

How Much Float?

With 1.6 million cars protected under the extended warranty plans, and additional customers having life insurance, it’s not unreasonable to assume that the Berkshire’s $4.1 billion acquisition actually came with around a billion in insurance float.

Not a bad kicker!

© 2015 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.

Warren Buffett’s Scolding of BNSF Brings Results

(BRK.A), (BRK.B)

“Praise by name and criticize by category,” Warren Buffett is famed for saying, and it was the rare exception when Buffett called out BNSF Railway for its delivery delays over the past year.

“BNSF disappointed many of its customers,” Buffett wrote in his annual letter to shareholders.

BNSF didn’t just disappoint customers, in some cases it lost them to rivals such as Union Pacific, as record crop numbers put the agricultural needs of Midwest farmers on a collision course with crude producers in the Bakken formation.

It’s no small matter, as last year BNSF moved nearly 1 million carloads of grain and other agricultural products.

With the latest over all year-to-date carload numbers showing a very positive 4.39-percent increase, BNSF has clearly taken Buffett’s marching orders seriously. The railroad’s $5.5 billion in infrastructure investments that it made in 2014 has started to pay off. The improvements included $400 million of track improvements in North Dakota alone.

Improvements By the Numbers

It’s in the grain carloads where there is particularly good news. Year-to-date carloads rose 14.8-percent to 191,060 from 166,425 in the 2nd quarter of 2014.

Last week, the news continues to improve, and there were only 144 outstanding grain carloads from May 9-12 in North Dakota versus 7,200 outstanding grain cars during the same period last year.

“We have substantially better AG shuttle turns per month as compared to last year,” a BNSF official told me at the Berkshire Hathaway annual meeting. “Last year we were below 2 turns per month, and now we are over 2.5 turns per month.”

BNSF is continuing to improve its operations, committing a record $6 billion to its Capital Plan for 2015. The amount is the most ever spent by a railroad in a given year.

© 2015 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.

Special Report: Is the Tesla Battery a Threat to Berkshire Hathaway?

(BRK.A), (BRK.B)

Elon Musk’s recent announcement of Tesla’s new home and industry battery business, which will enable the storage of solar and wind energy, would seem to directly threaten Berkshire Hathaway Energy’s role as one of the world’s largest energy producers.

But not so fast.

Let’s Look at the Big Picture

First, Tesla’s leading-edge automobiles have done a lot to popularize plug-in electric vehicles. These vehicles draw their power primarily from electric utilities, and as the technology takes hold with more mainstream automobile producers, such as Toyota, GM, and Ford, the total demand for electric power will skyrocket. Sure, some of the power may come from home-based electric generation through solar panels, but the total demand for electric power will rise as consumers switch from gas and diesel powered vehicles.

Secondly, for home and industry battery applications, Berkshire may benefit in multiple ways. Its minority ownership in Chinese battery maker BYD Co Ltd could prove a very wise investment, as the company adds 6 gigawatts per year of battery production capability over the next 3 years.

The End of the Utility?

Will solar panels linked to a Tesla Powerwall mean that the centralized distribution offered by utilities will be irrelevant? Maybe for someone living in the backwoods, or far out in the desert, but not for anyone still hooked up to the grid.

Net metering, which feeds excess electricity consumers produce back into the grid, and creates a billing mechanism that credits consumers, makes the batteries irrelevant, as they produce no cost-saving or other advantage.

Berkshire Hathaway Energy’s CEO Greg Abel thinks that Tesla’s storage technology would have to drop greatly in price for it to be applicable to BHE’s transmission business.

Abel called the technology, “not game-changing, and it’s because of the cost structure,” during a panel discussion put on by the Calgary Chamber of Commerce. “Is there an opportunity to now implement that into our systems, into our transmission and distribution systems? Absolutely. And is it completely cost-effective, no. It’s got to get cheaper.”

Don’t Forget Duracell

Berkshire’s acquisition of P&G’s Duracell unit, may shake things up if it can get Duracell to transition from the alkaline battery business to newer battery technologies, the company might be in just the right place to market products similar to Tesla. It certainly has the resources to do it, as the P&G deal includes $1.8 billion in cash.

Lastly, large-scale battery storage is just what Berkshire Hathaway Energy’s solar and wind farms need, be it the 550-megawatt photovoltaic Topaz Solar Farm in San Luis Obispo County, California, or the just announced 400-megawatt Grande Prairie Wind Farm in Holt County, Nebraska. The ability to store energy for the times that the sun isn’t shining and the wind isn’t blowing is just what utilities need to fully pull away from fossil fuel based energy generation.

In summary, new home and industry storage battery technology will give Berkshire Hathaway new competition for its existing companies, but it will also bring new opportunities.

(This article contains updated information)

© 2015 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.

No Threat of Activist Investors Attacking Berkshire

(BRK.A), (BRK.B)

Activist investors have been giving companies a hard time lately, accumulating large blocks of stock as a way of forcing their way onto corporate boards, and often forcing companies to “raise shareholder value” through spin-offs and special dividends as their price to go away. Just this week, DuPont defeated activist investor Nelson Peltz, and his Trian Fund Management, L.P.

Some consultants even advise corporations to settle with activist investors early, rather than trying to fight them.

Is Berkshire Hathaway vulnerable to what used to be called “greenmail”?

Not according to Warren Buffett and Charlie Munger. They both scoffed at the idea while answering questions at the Berkshire Hathaway annual meeting on May 2, 2015.

As Buffett sees it, at a valuation of over a third of a trillion dollars, Berkshire is too big to be threatened by activist investors.

“The market value of Berkshire is going to be so great that, even if all the activists got together, they couldn’t do much about it,” Buffett explained. He added that he would invite them in, as their attempts to attack Berkshire would merely drive up the stock price.

“We should be a place where people dump their activists, because there not going to get anywhere,” Buffett said wryly.

While activist investors bill themselves as needed financial warriors that shake up hidebound companies to unlock value for all shareholders, Charlie Munger wasn’t having any of it.

“I don’t think it’s a great age, this age of activism,” Munger said. “It’s hard for me to think of many activists I want to marry into the family.”

© 2015 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.