Monthly Archives: June 2016

Cost of Positive Train Control Still Looms Over BNSF Even as Accident Proves Need

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A head-on collision between two BNSF freight trains on Tuesday in the Texas Panhandle highlights the need for Positive Train Control technology. The collision, which killed three crew members and left one injured, also left box cars blazing and torrents of heavy smoke that could be seen for miles.

Each train had two crew members, and one crew member jumped to safety just before the trains collided.

According to BNSF, the remains of two BNSF employees have been recovered, while the third missing employee is still unaccounted for. The fourth employee remains in stable condition at a local hospital.

The investigation is now being overseen by the National Transportation Safety Board (NTSB).

Bad Timing

Coal shipments are down, oil shipments are down, metal ore shipments are down, in fact, BNSF Railway’s total carloads including intermodal freight are down a dramatic 8.45-percent year-to-date as compared to 2015.

The one thing that is up is the cost of installing Positive Train Control (PTC), the federally mandated safety system that was supposed to be on all Class 1 railroad trains by December 31, 2015.

When the railroads couldn’t meet Congress’s deadline, it was pushed back to 2018, giving the railroads a breather.

What BNSF didn’t get a breather from is the $200-$300 million annual cost of installing the system. The cost is huge, and Warren Buffett reiterated that figure at the 2016 Berkshire Hathaway annual meeting.

What is Positive Train Control?

PTC is a communication-based/processor-based train control technology designed to automatically stop a train in order to prevent accidents.

Calls for improved safety systems, including PTC have only gotten louder since high profile accidents such as Amtrak’s May 12, 2015 derailment in Philadelphia, Pennsylvania. That accident, which was caused by a passenger train going 102 mph in a 50 mph zone, and had 8 fatalities and over 200 injured, was thought to have been avoidable if the train had PTC.

The High Cost of Safety

In a September 9, 2015, letter from Carl R. Ice, BNSF’s President & CEO, to U.S. Senator John Thule, the Chairman of the Committee on Commerce, Science and Transportation, BNSF noted that the total cost for deploying PTC would exceed $2 billion.

“PTC deployment is an unprecedented technical and operational challenge that requires the entire U.S. railroad network to develop, test and implement this new safety system, and avoid impacts to network capacity and fluidity as we do,” Ice explained.

A Tough Time for BNSF

Just a year ago, BNSF’s business was booming with its mobile pipeline oil trains carrying records amounts of crude oil from the Bakken Formation. Now, the cost of PTC comes as BNSF is slashing expenses. The railroad has mothballed hundreds of locomotives, initiated selective employee buyouts, and laid off 4,600 employees, which represent a full 10% of its workforce.

Those layoffs include 62 management positions that come as a result of a realignment that has the Class 1 freight railroad consolidating its operations organization from three regions down to two.

The new era of Positive Train Control is coming. It is necessary to bring a much needed new level of safety to America’s rail system, but for America’s Class 1 railroads (several of which are already pushing to extend the deadline to 2020) it’s also bringing lots of pain at a time when they can least afford it.

© 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.

Berkshire Hathaway Energy Powering Up for Another Run at Oncor

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After looking all but out, Berkshire Hathaway Energy is back in the running for Oncor Electric Delivery Company, a regulated electric transmission and distribution service provider that serves 10 million customers across Texas.

Oncor has been in and out of auction ever since the April 2014 bankruptcy of its biggest shareholder, Energy Future Holdings. The company went under after being burdened with $40 billion in debt from a 2007 leveraged buyout.

A Texas-Sized Asset

Oncor is a quite a prize. The company has the largest distribution and transmission system in Texas; with approximately 119,000 miles of lines and more than 3 million meters across the state.

The End of a Long Waiting Game

After originally pushing back the auction of Oncor from November 2014 to March 2015, it looked like no auction would ever happen. Instead, the creditors in the holding companies Energy Future Intermediate Holdings and Energy Future Holdings were expected to take ownership of Oncor.

Then, in September 2015, U.S. Bankruptcy Judge Christopher Sontchi agreed to a plan by Hunt Consolidated that would have allowed the company to take ownership with Oncor’s current management remaining in place. When this deal fell apart over the terms set by the Public Utility Commission of Texas, Oncor came back into play.

Energy Transmission is Great ROE

Back in June 2014, Warren Buffett proclaimed he was ready to put at least $15 billion into energy generation and transmission assets, and Oncor, with a value of roughly $17.5 billion looked like a good fit.

Transmission lines have been high on Berkshire Hathaway Energy’s wish list of late because they are a great way to put Berkshire’s insurance float to work for a high return with very low risk.

In April 2014, BHE made a $2.9 billion purchase of Canadian company AltaLink from SNC-Lavalin Group Inc. The acquisition got the company the transmission lines for Calgary, Alberta, and gives it an 8.75-percent after-tax return on equity, with consumers picking up 100-percent of the tab for any new transmission lines.

It’s money that like the electricity keeps flowing day and night.

The Key Bidders for Oncor

NextEra Energy Inc. has already made an offer to acquire Oncor and is reportedly the closest of any of the seven interested companies, which includes BHE and Edison International.

The acquisition of Oncor would be a perfect fit for Berkshire Hathaway Energy, which currently has $70 billion in assets, including one of the largest portfolios of renewable energy in the world.

© 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.

Russell Athletic Looks to Get Smart with Smart Basketball Technology

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Berkshire Hathaway’s wholly-owned Russell Athletic is looking to become the leader in smart basketball technology, and the deal looks even smarter.

What’s a smart basketball?

It’s a basketball with a microchip in it that communicates with your smartphone.

Developed by InfoMotion Sports Technologies Inc., the smart basketball enables the player or coach to capture a wide variety of data, including dribble speed and intensity, shooting arc, shot backspin, and shot release speed.

It doesn’t take a genius that this makes for a very smart product.

An Even Smarter Deal

As good as the product looks to be the deal looks even better.

Due to InfoMotion Sports Technologies Inc.’s March 1 bankruptcy, Russell Athletic is hoping to grab the technology out of bankruptcy for only $1.5 million.

It’s the perfect product for Russell Athletic, which owns sports equipment maker Spaulding, and itself is a division of Berkshire’s Fruit of the Loom, Inc. Russell Athletic (formerly Russell Corporation) was acquired by Berkshire Hathaway in 2006 for roughly $598 million.

It’s clearly an exciting technology, and for every steal on the court that comes from the 94Fifty Smart Sensor Basketball, Berkshire’s hoping it rings up profits due to a steal in the U.S. Bankruptcy Court.

The offer is awaiting the judge’s approval.

© 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.

Commentary: Elon Musk Pushes Tesla Towards BYD’s Playbook

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News that Elon Musk wants Tesla to acquire green energy company SolarCity for $2.7 billion in stock was not exactly well received by Tesla investors, with Tesla stock swooning on the announcement. Some accused it of being a bailout of Musk’s SolarCity, which has a need to borrow heavily to fund its rooftop solar panel business.

However, Musk cited the synergies between the companies, which both exploit the move away from fossil fuels.

Whatever you might think of the deal, the one thing worth noting is it would bring Musk’s two companies squarely in line with Chinese vehicle and battery maker BYD Co. Ltd.

BYD is 9% owned by Berkshire Hathaway, and Berkshire has seen the value of its investment skyrocket as BYD becomes a world leader in the same areas that Musk is pursuing.

What are those areas?

BYD is number one globally in EV vehicles. The company vaulted to the number one spot in 2015 from only being number ranked seventh a year earlier.

BYD is the number one maker of rechargeable batteries, and like Tesla even has rechargeable battery home storage already on the market.

BYD is number one in pure electric buses that come in a variety of sizes. From commuter buses to buses for long distance travel, BYD has been quietly conquering the world, and frankly right now has no major competitors. In April 2016, BYD achieved a major milestone, the production of its 10,000th pure electric bus.

BYD’s also rapidly growing a host of other products that include LED lighting, photovoltaic panels for solar farms, and other electric vehicles such as forklifts.

As for solar panels, in the U.S., BYD’s already has a total 109MW using its 270,000 PV modules being developed in California. It also has other projects using its modules, including a 65MW plant in Utah, and a 28MW plant in Arizona.

Perhaps you haven’t heard of BYD, but they are no fly-by-night company. BYD has nearly 180,000 employees working in 22 industrial parks across the globe.

BYD and Berkshire Hathaway

In 2008, Berkshire Hathaway bet on BYD’s potential, purchasing 225 million shares, and today owns roughly 9.1% of the company.

It’s an investment that has paid off handsomely. Berkshire’s original investment of $230 million is now worth roughly $1.77 billion.

Unlike Tesla and SolarCity, BYD is profitable, and it has become profitable using a playbook that is an even bigger version of what Musk is hoping for with his proposed merger.

I don’t know if that playbook will work for Tesla and SolarCity, but it sure seems to be working for BYD.

For More on BYD, read the Special Report: BYD, Berkshire’s Tesla.

© 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.

NV Energy Moves Away From Coal

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Plunging coal shipping volumes have sent BNSF Railway’s shipping volumes to numbers not seen since the 2007 Great Recession, and Berkshire’s own energy companies are partly responsible as they aggressively drop coal generation for cleaner forms of energy.

The numbers are stark. BNSF Railway’s year-to-date coal shipments are down 35.45% from 2015 levels.

Berkshire’s NV Energy plans to eliminate all of its coal-fired generation fleet in Nevada and will eliminate our coal resources in Southern Nevada by 2017 and in Northern Nevada by 2025.

Here Comes the Sun

The company cites the less than 4 cents a kilowatt-hour for large-scale solar contracts as the reason for the rapid pace.

NV Energy notes that it is creating a less carbon-intense energy supply for its customers, and is achieving that goal without raising the prices that its customers pay.

© 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.

Denmark’s Vestas to Supply 1,000 Turbines for Berkshire’s Iowa Wind Farm

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Vestas, the only global energy company dedicated exclusively to wind energy, will supply up to 1,000 V110-2.0 MW wind turbines for MidAmerican Energy’s new Iowa 2 GW Wind XI farm.

The deal is pending the project’s anticipated approval by the Iowa Utilities Board, and when completed would mean that 85% of the state’s power comes from wind generation.

MidAmerican’s eventual goal is to be the first utility to provide its customers with 100% renewable energy generation.

The turbines will be installed between 2016 and 2019, and Vestas will also receive a five-year Active Output Management 4000 service agreement that includes extension options for up to 10 years.

Headquartered in Denmark, Vestas has already installed 55,000 wind turbines in more than 70 countries across six continents. The company has four manufacturing plants in Colorado.

© 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.

Berkshire Hathaway Specialty Insurance Opens German Office

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Berkshire Hathaway Specialty Insurance Company (BHSI) in coordination with its affiliate Berkshire Hathaway International Insurance Limited (BHIIL), has established an office in Düsseldorf, Germany, and filled key executive roles in Northern Europe.

“We are laying the foundation to provide customers throughout Europe with a full line of specialty insurance solutions, backed by BHSI’s industry-leading financial strength and underwriting and claims expertise,” said Gregor Koehler, President, Northern Europe, BHSI. “This is the beginning of our exciting journey to provide long term solutions for customers throughout the region.”

BHSI appointed the following executives to key posts in the Düsseldorf office:

• Jörg Bechert, SVP, Head of Executive and Professional Lines, Northern Europe. He was most recently Head of Strategy and Innovation at AON Germany and has almost 30 years of experience in the insurance industry.

• Ulrich Kütter, SVP, Head of Marine, Northern Europe. He joins BHSI with almost 25 years of insurance industry experience and was most recently Head of Marine, Central and Eastern Europe at Allianz Global Corporate & Specialty SE.

• Leander Metzger, SVP, Head of Property, Northern Europe. He joins BHSI with more than 20 years of insurance industry experience. Most recently he was Director, AFM at FM Insurance Company Limited’s Central European Operation. Leander is a Fellow of the Chartered Insurance Institute.

• Robert Scherf, VP, Head of Human Resources, Northern Europe. He was most recently Head of Human Resources at Catlin Europe, and brings nearly 30 years of experience to the role.

In addition, BHSI named Ute Huhmann as Executive Assistant, Northern Europe.

“This latest strategic expansion reflects BHSI’s commitment to growing both our global footprint and our worldwide capabilities,” said Peter Eastwood, President and CEO, BHSI. “We look forward to delivering sound insurance solutions for companies throughout the UK and Europe, while continuing to deepen our global team of individuals with standout capabilities and character.”

In March, BHSI announced its intention to offer a specialty insurance solution in Europe, pending regulatory approval. It named Gregor Koehler to lead the company’s efforts in Northern Europe, and Tom Bolt as President, UK and Southern Europe, BHSI.

© 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.

Buffett Warm, Munger Cool on Initiating a Stock Buyback

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At the 2016 Berkshire Hathaway Annual Meeting in April, Warren Buffett expressed enthusiasm for a potential stock buyback of Berkshire stock if the share price fell below 120% of book value. He noted that the company would repurchase “a lot” of stock, especially if the amount of cash the company generates “burns a hole in your pocket” and grows to levels over $100-$120 million with no good candidates for acquisition.

In the past, Buffett has been skeptical of shareholder demands for stock buybacks, noting that it’s foolish if the price is too high. All the way back in 2000, Buffett addressed the logic of stock buybacks, noting:

“There is only one combination of facts that makes it advisable for a company to repurchase its shares: First, the company has available funds — cash plus sensible borrowing capacity — beyond the near-term needs of the business and, second, finds its stock selling in the market below its intrinsic value, conservatively calculated.”

However, also at the 2016 Annual Meeting, vice chairman of Berkshire Hathaway Charlie Munger still seemed less than convinced.

“These buyback plans got a life of their own, Munger noted. “It’s gotten quite common to buy back stock at very high prices that really don’t do the shareholders any good at all. I don’t know why people exactly are doing it and I think it gets to be fashionable.

We’re always behaving a lot like what some might call the Episcopal Prayer. We prayerfully thank the Lord that we’re not like these other religions who are inferior and I’m afraid there’s probably too much of that in Berkshire but we can’t help it.”

© 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.

Dairy Queen Plans Major Chicago Expansion

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Dairy Queen is planning to add 30-35 new locations in Chicago. The exact locations are still to be determined and will be built over the next five years.

The Chicago stores will be in Chicago and in Lake and Cook counties. Dairy Queen currently has 269 stores in Illinois with 20 in the Chicago area.

A company spokesman cited the popularity of Dairy Queen and that the company just needed to make it more convenient for people to find a nearby store.

The Berkshire Hathaway-owned company has already announced aggressive expansion plans that will see it opening hundreds of new locations in California, Louisiana, Massachusetts and South Carolina.

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

© 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 to Benefit From Strong Auto Insurance Growth Through 2020

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While some people are already worrying about what the self-driving car will do to auto insurers over the long term, the global motor vehicle insurance market is looking forward to robust growth for at least the next five years.

This growth will benefit auto insurers, including Berkshire Hathaway’s GEICO.

In Research and Markets most recent edition of the “Global Motor Vehicle Insurance Market 2016-2020” report the company is forecasting that the global motor vehicle insurance market will grow at a compound annual growth rate of 5.91% during the period 2016-2020.

The report covers the present scenario and the growth prospects of the global motor vehicle insurance market for 2016-2020. To calculate the market size, the report considers two types of end users:

• Personal insurance premiums
• Commercial insurance premiums

According to the report, a trend that is already impacting the market is the implementation of advanced analytics tools to reduce fraudulent claims. According to the National Insurance Crime Bureau (NICB), insurance fraud is the second biggest white-collar crime in the US after tax evasion. Advanced tools, such as big data analytics and geospatial analysis, are making it easier for insurance companies to reduce losses stemming from fraud claim.

The report also notes that a key growth driver is the mandate to buy insurance policies. A motor vehicle insurance covers any financial risk that can crop up while driving the vehicle. In other words, an insurance company will cover losses arising from theft, damages, or accidents – if such incidents are covered under the policy.

© 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.