Monthly Archives: February 2016

Commentary: Never Mind the Stock Price, Berkshire’s Booming!

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With Berkshire Hathaway’s stock price down roughly -12% in 2015, you would think that the conglomerate was suffering a series of major setbacks. Nothing could be further from the truth, as Berkshire just reported record year that brought a 6.4% gain in book value, and saw profits skyrocket 32% in the fourth quarter.

Earnings per share in Q4 were $3,333 (up from $2,529 for the same period in 2014), which beat Wall Street estimates by a hair.

Nervous shareholders may be feeling a little bit better these days, as Berkshire’s stock price year-to-date has been steady (if flat) while the S&P 500 is down -4.59%, and they should rest assured that better days are ahead.

You want to be nervous? Just look at Chesapeake Energy (CHK), and its plunging stock price in 2015, if you want to see a stock really worth panicking about. Chesapeake saw its stock down a precipitous -77.5%, which was related to a very real drop in energy prices that is bringing bankruptcies to a number of players in the sector.

Berkshire on the other hand is flourishing, and it’s only getting stronger with the newly completed acquisitions of aerospace manufacturer Precision Castparts, and battery-maker Duracell.

The stock market is just that, a market, and it is not always logical—at least not in the short term.

While the disconnect between Berkshire’s profits and its languishing stock price draws lots of sniping from pundits, it should be remembered that a stock can’t wander too far from its fundamentals forever. Eventually, it’s going to move up or down based on the actual value of the company.

As Benjamin Graham famously said, “’In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

© 2016 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.

Berkadia Continues to Rise as Freddie Mac and Fannie Mae Lender

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In 2015, Berkadia, Berkshire Hathaway’s joint venture with Leukadia, was the second largest Freddie Mac Program Plus lender and the third largest Fannie Mae DUS lender for multifamily loans.

Berkadia arranged $6.35 billion with Freddie Mac in 2015, up from $4.4 billion the year prior, which was the fourth consecutive year that the company has been named the second largest lender.

Berkadia was also in the number one spot as the top DUS Producer for seniors housing in 2015 by Fannie Mae, up from second in 2014, as well as the top Program Plus Seller in the Western Region by Freddie Mac for the second year in a row.

“Berkadia’s rankings speak volumes to our teams’ deep expertise and dedication to delivering the best financing across the country,” said Berkadia CEO Justin Wheeler. “We are extremely proud of our continued performance and strong record as a top Fannie Mae and Freddie Mac lender, and we look forward to building upon our momentum in 2016.”

In 2015, Freddie Mac provided nearly $47 billion in multifamily loans, accounting for 650,000 units. Fannie Mae settled $42.3 billion in financing for the multifamily market, comprising 569,000 multifamily units.

© 2016 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.

“Outlook Stable” as Fitch Affirms Solar Star’s Senior Notes at ‘BBB-‘

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Fitch Ratings has affirmed the ‘BBB-‘ rating on Solar Star Funding, LLC’s (Solar Star) $1.325 billion senior secured notes due June 2035, and describes the rating outlook as “Stable.”

Owned by Berkshire Hathaway Energy, Solar Star is a portfolio of two adjacent crystalline, single-axis tracking photovoltaic plants totaling 586 net MW at the point of interconnection. Solar Star 1 and Solar Star 2 represent 310 net MW capacity and 276 net MW capacity, respectively.

According to Fitch, the rating affirmation is based upon the project’s completion within budget and ahead of schedule with stable operating performance to date. The rating is supported by stable cash flows anchored by contracted long-term revenues with an investment grade counterparty, conventional technology and expected financial performance consistent with an investment grade rating.

KEY RATING DRIVERS

Revenue Risk – Price: Midrange

Stable Contracted Revenues: Revenue risk is low with annually escalating, fixed-price, 20-year power purchase agreements (PPA) with Southern California Edison (SCE, rated ‘A-‘/Outlook Stable by Fitch). The energy production requirement is consistent with the project’s capabilities, and PPA termination risk is low.

Revenue Risk – Volume: Midrange

Sufficient Solar Resource: Total generation output in Fitch’s rating case is based on a one-year P90 estimate of electric generation to mitigate the potential for lower-than-expected solar resource. The project can meet debt obligations under a one-year P99 generation scenario.

Operation Risk: Midrange

Proven Technology and Experienced Operator: Crystalline technology has a long operating history, which mitigates plant performance risks. SunPower, as the plant operator, has a track record of high plant availability. Long-term agreements support routine and major maintenance needs. Fitch’s financial analysis incorporates operating cost increases to mitigate unforeseen events including contractor replacement risks.

Debt Structure: Midrange

Conventional Debt Structure: The debt structure is typical for project financings with fully amortizing fixed-rate debt, a standard equity distribution test, and additional leverage controls.

Stable Initial Financial Performance

Base case debt service coverage ratios (DSCR) average 1.51x with a minimum of 1.44x. Fitch’s rating case includes increased expenses and reduced energy output, resulting in an average DSCR of 1.32x with a minimum of 1.31x, metrics that are supportive of the rating.

Peer Comparison: Solar Star’s projected rating case financial profile is consistent with Fitch’s minimum investment grade criteria but lower than Topaz Solar Farms (‘BBB’/Outlook Stable), which has an average rating case DSCR of 1.58x.

RATING SENSITIVITIES

Negative – Inadequate Operating Results: Energy production persistently underperforming original projections or expenses persistently higher than the forecast that result in DSCRs below 1.30x would result in a downgrade.

Positive – Demonstrated stable operating and financial performance consistently above base case expectations may result in a rating upgrade.

CREDIT UPDATE

Completion risk has been removed as a key rating driver for Solar Star due to the fully operational nature of the project following early completion under the PPA. The project reached commercial operation (COD) on July 1, 2015, approximately four months ahead of scheduled completion, and total construction costs remained approximately $60 million under budget. The completed project’s capacity totals 586 MW of capacity, providing an additional 7 MW of capacity compared to design specifications. Solar Star is permitted to sell the additional capacity under the two PPAs and large-generator interconnection agreements.

Operating performance was strong in 2015 with plant availability at or above 99% every month since COD. Energy production for the six months following COD has exceeded Fitch’s base case and rating projections by 5% and 12%, respectively. Actual monthly generation in 2015 since COD was above Fitch’s base case forecast every month except for the month of October as a result of inclement weather conditions. Higher energy production compared to Fitch’s projections is largely due to the project’s early commercial operation.

Fitch maintains its original base and rating case forecasts, which projects metrics supportive of the current rating, due to the project’s short operating history. Fitch will assess whether changes to financial stresses are warranted based on a more extensive history of actual energy production and operating costs. The additional 7 MW or 1.2% of capacity is not factored into Fitch’s financial analysis since the debt was sized to original design specifications, but this increased capacity could contribute modestly to additional cash flow for the project. Fitch’s rating case financial analysis includes a combination of one-year P90 electric generation, a 10% increase in costs, reduced output, and accelerated panel degradation resulting in an average DSCR profile of 1.32x and a minimum of 1.31x.

The project’s cash flow remains resilient to potential cost stresses as a 10% increase reduces the average DSCR by only two basis points and the project could withstand a 205% increase in costs and still meet debt obligations, as reflected in a breakeven DSCR of 1x. Cash flow is more sensitive to, yet remains resilient to, reductions in generation output. A 1% reduction to total electric generation output reduces the average DSCR by two basis points and the project could withstand an output reduction of 29.5% and still achieve breakeven DSCRs.

© 2016 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 Earmarks $130 million for Minnesota Upgrades

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BNSF Railway has budgeted $130 million for Minnesota in 2016. The money will be used for replacing and upgrading rail, rail ties and ballast. BNSF has already spent $550 million in Minnesota over the last three years.

In 2015, BNSF spent $326 million in Minnesota, which included 13 miles of new double tracks in the Staples area, new track in the Twin Cities, and upgrading a connection with another railroad in the Twin Cities.

With a slowdown in shipping revenues, last year’s record $6 billion in capital spending by BNSF will be cut 26% to $4.3 billion for 2016, which represents the first reduction in spending in six years.

Heavy spending in 2015 helped resolve shipping bottlenecks that outraged grain producers when their shipments experienced extensive delays in 2014. The investment included 82 miles of new double track on the northern tier.

“Each year, our capital plan works to balance our near term need to regularly maintain a vast network that is always in motion with the longer term demand outlook of our customers,”said Carl Ice, BNSF president and chief executive officer. “While our customers’ demand outlook has softened in a number of sectors, regular maintenance of our network continues to drive the majority of our annual investments and helps ensure we continuously operate a safe and reliable network.”

© 2016 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.

GEICO Makes Ridesharing Coverage Available to South Carolina drivers

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South Carolina drivers that have been approved to drive for Uber (UberX and UberXL), Lyft, Sidecar and other on-demand services, now can get ridesharing coverage through GEICO.

GEICO first entered the ridesharing market in February of 2015 in Virginia, and has been selling a ridesharing product in Connecticut, Georgia, Maryland, Ohio, Pennsylvania, Texas, Virginia and Washington, D.C. The company is now expanding its ridesharing offering to drivers in South Carolina

“In a short time span, ridesharing has turned into a staple of everyday life,” said Othello Powell, director of GEICO commercial lines. “Whether you have that entrepreneurial spirit or are just making a few extra dollars, GEICO’s ridesharing product delivers a complete insurance solution to drivers in South Carolina at an affordable price.”

Powell noted that ridesharing comes with a unique set of insurance needs that go well beyond a traditional auto insurance policy. He points out that most personal auto policies exclude any commercial (driver for hire) use.

In addition, GEICO points out that having two policies for one vehicle can become confusing and costly.

GEICO’s hybrid ridesharing product replaces the driver’s personal auto policy and provides coverage for personal, ridesharing and other on-demand services whether the rideshare app is on or off, and with or without passengers in the vehicle or even if you’re working for multiple services.

GEICO offers the product through GEICO Commercial at a price significantly lower than taxi and traditional commercial rates.

© 2016 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.

Heavyweights Agree with Berkshire on Kinder Morgan

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George Soros’s Soros Fund Management has moved into Kinder Morgan, as other heavyweight investors seem to see the opportunity in the pipeline company that Berkshire Hathaway does.

Berkshire Hathaway recently reported that it had acquired 26.53 million shares of Kinder Morgan in the fourth quarter of 2015, with a market value of roughly $456 million.

In the fourth quarter of 2015, Soros Fund Management purchased 50,700 shares of Kinder Morgan, and hedge fund manager David Tepper of Appaloosa Management acquired 9,445,321 shares of the company.

As with many of Berkshire’s stock holdings in recent years, it’s not known whether the purchase was made my Warren Buffet, or his lieutenants Todd Combs and Ted Wechsler.

While global oil prices have tumbled, they haven’t kept Berkshire from investing in Kinder Morgan and refiner Phillips 66.

Berkshire recently raised its Phillips 66 stake to 72,293,310 shares. The new purchases bring Berkshire’s stake in the refiner to roughly 13.7%. In contrast, its stake in Kinder Morgan is only 1.2% of the company.

Kinder Morgan owns an interest in or operate approximately 84,000 miles of pipelines and approximately 180 terminals. Its stock price has dropped by two-thirds in a year.

Apparently, now is the time to buy.

© 2016 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.

Thorco Closes Plant as Online Retail Reduces Demand for Store Fixtures

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Berkshire Hathaway’s Thorco Industries, which the conglomerate owns as a part of its Marmon Group of manufacturers, is shuttering its Lamar, Missouri manufacturing plant and laying off 93 employees.

The closing will take place this spring.

The company designs and manufactures custom point-of-purchase merchandisers and store fixtures from wire, sheet metal and tubing for the retail industry.

General Manager Debra Probert noted that “retail industry changes, including the growth of e-commerce and the opening of fewer brick-and-mortar stores, has resulted in a continued decline in demand for store fixtures, such as the wire-based merchandising displays and accessories produced by Thorco.”

Thorco Industries has been in Lamar for almost 117 years, with its origins as a manufacturer of wire potato scoopers. The company was founded in 1899 by F.M. Thorpe.

© 2016 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.

Kraft Heinz Pushes for $55 Million in Infrastructure Improvements for NY Plant

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Village officials in Lowville, New York are hoping that their push for $55 million in state-funded infrastructure improvements will lead to 150 new jobs at an expanded Kraft Heinz string cheese plant in the town.

County and village officials are seeking $17.7 million to upgrade five main streets and make improvements to the water and sewer systems. They are also seeking $37 million for a new sewage treatment system featuring four anaerobic digesters.

Part of the funding will come from a $17.7 million 30-year, no-interest loan from the state Environmental Facilities Corporation.

If approved, Kraft Heinz will build a 67,756-square-foot string cheese addition in the rear of its Utica Boulevard manufacturing plant. It will also add a 5,923-square-foot receiving bay addition on the north side and a 2,169-square-foot two-pack addition on the front.

The daily milk usage at the plant will grow from 1 million to 3 million pounds, and the four new anaerobic digesters will be needed to handle increases in the whey waste byproduct.

Up to 150 additional employees could work at the expanded facility.

“We’re heading in the right direction,” said County Manager Elizabeth Swearingin, who was hired by Lewis County’s legislators in 2014. At a joint meeting to update county legislators and village trustees on the project, Swearingin emphasized the uniqueness of the opportunity. “We’re not going to have another opportunity like this in our lifetime.”

New York State Saves Kraft Heinz Plants

Under an agreement spearheaded by U.S. Senator Charles Schumer and Governor Andrew Cuomo, $20 million in state funds has been committed to keep open Kraft Heinz’s plants in Walton, Avon and Lowville.

Kraft-Heinz was initially planning to close the Avon facility and layoff all 405 employees, and the agreement also reversed the planned closure of the Walton facility.

An agreement was reached between New York State and Kraft-Heinz to save three of their facilities in Upstate New York, including the Walton facility in Delaware County that was initially slated for closure, as well as add additional jobs in Lowville.

© 2016 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.

NetJets Becomes Private Aviation Partner for PowerShares Series Tennis

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In January, Berkshire Hathaway’s NetJets signed tennis superstar Maria Sharapova as a “brand ambassador.” Now, the leader in fractional jet ownership has signed on as the official private aviation partner of PowerShares Series Tennis for the 2016 season.

As part of the deal, NetJets will receive increased advertising throughout the series, branded features during broadcasts, and hospitality for select events.

Jon Venison, president of InsideOut Sports and Entertainment, the operator of the PowerShares Series, stated that the series is “thrilled and honored to be associated with such a prestigious company.”

The PowerShares Series is a competitive tennis circuit featuring legendary tennis icons and world-renowned champions Andre Agassi, Pete Sampras, Andy Roddick, John McEnroe, Jim Courier, Michael Chang, James Blake, Mark Philippoussis, and Mardy Fish. Each tournament features 4 Champions paired off in one set semi-finals and culminates with the winners meeting in a one-set championship match.

The series begins on April 8th in Chicago, the first of five events in April, before three more events in July and August, culminating with two events in each November and December.

In her role as a NetJets brand ambassador, Maria Sharapova will work with NetJets’ marketing, with a particular focus on social media. She will also provide exclusive experiences for NetJets owners throughout the partnership.

“I have been a long time owner of NetJets, since 2004, and now to become an Ambassador for this quintessential lifestyle company is very exciting,” said Sharapova.

Forbes ranks Sharapova as the highest paid female athlete for the past nine years.

© 2016 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.

Idled Locomotives Tells the Tale of BNSF Shipping Woes

Some 150 BNSF Railway locomotives are sitting idle on tracks between Rozet and Gillette, Wyoming, as BNSF’s 2016 shipping slump continues to worsen.

The locomotives, which are lined up in an almost endless train, are just one physical manifestation of a dramatic drop in demand for coal, petroleum, and metals.

For the year to date, total carloads are down a whopping 15.6-percent.

Coal shipments, which last year at this time had reached 233,205 carloads, are only at 165,689 carloads through February 7, 2016. The change represents a 28.95% decrease.

BNSF spokesman Matt Rose noted that the drop in carloads was not just due to coal, but cut across a number of sectors.

As he noted, it’s not just coal shipments that are lagging, as shipments of metal ores are down 35%, and shipments of iron and steel scrap are down 25.65%

With global oil prices in the doldrums, shipments of petroleum are down a dramatic 24.63%.

BNSF is not waiting for further poor results to trim its costs, and has already announced a 26% cutback in capital spending.

So far, it’s a hard winter for BNSF.

© 2016 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.