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BNSF

BNSF Coal Shipments Defy Prognosticators

(BRK.A), (BRK.B)

The new climate change agreement signed in Paris may mark the long term death of coal as a primary energy source, but in the short term, coal shipments have stayed surprisingly strong.

BNSF Railway, which is one of the nation’s largest coal shippers, has seen its year-to-date coal shipping actually rise not drop.

The rise is surprising, as coal plants have been closing, as the need to meet costly tougher emissions standards makes them uncompetitive, especially with a flood of cheap natural gas, and the ever dropping price of solar and wind generation.

Millions of Car Loads

BNSF’s total car loads of coal through December 12, 2015, were at 2,127,879, as compared to 2,177,183 car loads for the same period in 2014. The 2015 number represents a solid 2.3% increase over 2014.

There’s no doubt that as more coal fired generating plants close around the world, coal will become a fuel of the past, but for now, it’s still a key part of BNSF’s freight hauling revenues, and there’s no lump of coal in BNSF’s Christmas stocking.

© 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.

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Dairy Queen

Dairy Queen Makes Progress on Year-Round Customers

(BRK.A), (BRK.B)

When your softball team wins the July tournament where do you go to celebrate? Everyone knows you get ice cream at Dairy Queen. The problem has been that when your hockey team wins in the middle of February, you don’t go there.

It’s a battle that Dairy Queen has been fighting to prove it’s not just summer treats that are the focus of its business.

For decades, some of the oldest Dairy Queen franchises were seasonal and shuttered for the winter, but the modern DQ Grill & Chill is a full-service restaurant that need year-round business.

Dairy Queen’s corporate strategy in recent years has been to boost the quality and advertising for its food items. It’s not just a soft-serve ice cream stand. Look at the DQ Bakes sandwiches to see its efforts to expand its menu items.

DQ’s Efforts are Paying Off

It looks like Dairy Queen’s efforts are paying off. YouGov.com, an internet-based marketing firm that polls thousands of members on a wide variety of issues, is reporting that its YouGov BrandIndex is showing positive news for Dairy Queen.

The BrandIndex is billed as a key measurement of potential revenue, and it’s showing an uptick in interest in eating at Dairy Queen for the month of December 2015, as compared to December 2014.

According to their polling,  in 2014 “31% of adults 18 and over who were aware of the brand considered Dairy Queen when making their next fast food purchase. The percentage is now up to 33%.”

The 6% increase in shows that the company is making progress, and what’s more, the 33% is a healthy one, with the “average Purchase Consideration score for the fast food dining sector overall is 22%.”

DQ a Winner for Berkshire

Dairy Queen, which has 6,400+ locations worldwide, may be smaller than McDonald’s or Burger King, but to its advantage it has only three company owned stores. The cost of the bricks and mortar are born by the franchisees, and Dairy Queen makes its money from franchise fees and a percentage of the sales.

Each franchise pays a $35,000 franchise fee, a royalty fee of 4%, and a marketing fee of 5% – 6%.

In the aggregate the franchises net Berkshire Hathaway hundreds of millions a year on its investment of only $585 million, and more and more its making that money year-round.

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.

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NetJets

NetJets Pilots Get Their Long-Awaited Raises

(BRK.A), (BRK.B)

It’s going to be a merry Christmas for NetJets’ pilots!

The approximately 2,700 pilots that fly for Berkshire Hathaway’s fractional jet ownership company have agreed to raises that will bring them $575 million spread over five years.

The new deal maintains company-funded medical insurance, offers enhanced scheduling options, expands scope protections and seniority rights, pays out a signing bonus and increases wages an average of 28 percent.

According to the certified election results, 96 percent of the pilot group participated in the referendum with 75.43 percent casting a vote in favor of ratification.

The pilots, who are all members of the NetJets Association of Shared Aircraft Pilots (NJASAP), will split a one-time bonus of $70 million.

The raises mean that a captain with ten-years-experience will earn $143,105. The salary represents a 20-percent increase over previous salary levels.

NetJets is the world-leader fractional jet ownership, with 60-percent of the market, but the move is unlikely to leave it at a competitive disadvantage with its smaller competitors.

In mid-December, Flexjet and Flight Options pilots voted in favor of joining NJASAP, and the salaries negotiated with NetJets will surely be the basis for NJASAP’s negotiations with other fractional jet companies.

The new NetJets pilots’ agreement came after a contentious labor dispute that led to NetJets’ pilots picketing Berkshire’s annual meeting in Omaha, Nebraska, and in September, the pilots began picketing at a number of airports.

Change in Leadership Led to Breakthrough

On June 1, 2015, Berkshire Hathaway, the owner of NetJets, dismissed NetJets CEO and chairman Jordan Hansell, replacing him with Adam Johnson, who had spent 22 years at NetJets. The change led to a new contract with its flight attendants in October, and then an agreement with the pilots in November.

Berkshire Hathaway purchased NetJets, the leader in fractional jet ownership, in 1998 for $725 million.

© 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.

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Marmon Group

Special Report: Dairyvative Gets $2.5 Million Investment in New Milk Technology

(BRK.A), (BRK.B)

Dairyvative Technologies, a Wisconsin-based developer of a patented process that allows pasteurized milk to be concentrated to a liquid that has one seventh of its original volume, has received a major new round of funding.

Dairyvative received a $2.5 million investment from two undisclosed Wisconsin dairies, and from the BrightStar Wisconsin Foundation.

The money will be used to enable the company to expand its staffing and boost production for more commercial trials.

What’s that have to do with Berkshire Hathaway?

Berkshire’s Cornelius, Inc. and Dairyvative are looking to change the way milk is shipped, stored, and dispensed.

In August 2015, Cornelius signed a strategic partnership agreement with Dairyvative that makes Cornelius the exclusive provider of equipment to hold and dispense the concentrated milk provided by dairies using Dairyvative’s patented SEVENx technology.

One of the newer members of the Berkshire Hathaway family, Cornelius was acquired for $1.1 billion on January 2, 2014, by Berkshire’s wholly owned Marmon Group.

With 4,500 employees, and manufacturing facilities in seven countries, spanning North America, Europe, and China, Cornelius provides beverage dispensing technology to leading food service and retail companies, including PepsiCo, Coca Cola, McDonald’s, Yum, Starbucks, and Burger King.

All of these companies and more are potential customers for Dairyvative’s new technology.

A Whole New Way to Store Milk

Dairyvative claims its SEVENx technology “allows pasteurized milk to be concentrated to a liquid that has one seventh of its original volume. The lactose-free end product is shelf-stable without refrigeration for up to 6 months. The process also keeps milk proteins intact, maintaining nutrient and flavor profiles.”

Unlike milk treated with Ultra-high temperature processing (UHT), SEVENx technology has relatively minimal thermal treatment by comparison.

“I have been working on this process for 28 years,” said Dr. Charles E. Sizer, founder and CEO of Dairyvative Technologies. “There have been a lot of hurdles in maintaining the functionality and freshness of the product.”

One of the first markets for the SEVENx technology will be in quick service restaurants, where using Cornelius’s dispensing technology, the new dispenser will allow individual consumers the choice of adding several different flavors to the milk. Cornelius’ technology also enables the milk to be carbonated during dispensing.

Looking for a World Leader

“We knew Cornelius is the leader in dispensing products, so we approached them and signed an exclusive deal,” Dr. Sizer explained.

While Dairyvative touts the concentrated milk as having the “natural fresh taste of milk,” it does note that it is slightly sweeter due to the conversion of lactose into the sugars glucose and galactose.

Dairyvative also says that the cost for dairy processors to produce the concentrated milk is low, as much of the equipment that processors need is already in place. They also note that the long shelf-life means less spoilage and returns, lower transportation costs, and environmental benefits such as less electricity needed for milk storage.

Reducing the Carbon Footprint

Reducing the carbon footprint is very important to Dr. Sizer. He notes that currently it takes 2.05 kilos of carbon to bring 1 kilo (1 liter) of milk to the consumer.

“We can reduce that by 20%-30% right out of the gate,” Dr. Sizer said. “And by locating in close proximity to the dairy, we can reduce it even further.”

Expect to see the U.S. rollout of the new milk product in 2016, and Dairyvative is already in discussion with multi-national dairies for international markets.

© 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.

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Berkadia

Berkadia Negotiates Sale of $16.8 Million Multifamily Property in Tempe, Arizona

(BRK.A), (BRK.B)

Berkadia has announced the $16.8 million sale of a multifamily property and development parcel known as The Mark, in Tempe, Arizona.

Located at 1115 E. Lemon Street, near Loops 101 and 202, the community is within walking distance from Arizona State University (ASU), and caters to student renters.

The buyer, Nelson-Brothers of Aliso Viejo, California, is a national student housing firm that looks to acquire assets at major universities and saw the opportunity to further enhance the community and build its brand near ASU. The seller, Sundance Bay of Salt Lake City, had previously purchased the property as a distressed asset and completed a full renovation and rebranding.

Berkadia’s Vice President Dan Cheyne, Senior Managing Director Mark Forrester and Managing Director Ric Holway of the Phoenix office, as well as Managing Director – Student Housing Kevin Larimer of the Detroit office, closed the sale on November 23.

The Mark features 161 units with studio, one- and two-bedroom floor plans. Built in 1970, the property is currently 98 percent occupied and master-metered for HVAC. The Mark offers unique, renovated and retro style apartment homes featuring polished concrete floors, quartz countertops and fully renovated kitchens and baths. Community amenities include a swimming pool, sundeck, student lounge, fitness center, courtyard with barbecue grills and elevator access.

“Nelson-Brothers was attracted to the area’s rent-growth potential, as well as the asset’s strong location near ASU and directly on the Valley Metro Light Rail,” said Cheyne. “Nelson-Brothers plans to strengthen the student housing community by upgrading amenities and eventually developing and expanding onto the vacant one-acre lot that was included in the sale.”

“At a per-unit price of $104,280, the deal sets the high-water mark this year for sales of master-metered properties,” added Cheyne.

The Mark is situated near downtown Tempe and Tempe Town Lake. The top employers in the immediate area include Arizona State University, State Farm, Wells Fargo and United States Postal Service.

Vacancy in the Phoenix metro area was 5.6 percent at the end of the third quarter, 60 basis points less than last year. Average asking rents were $903 per month in September, a year-over-year increase of 6 percent.

© 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.

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Acquisitions BNSF

Berkshire Open to Merging BNSF with Norfolk Southern or CSX

(BRK.A), (BRK.B)

With Norfolk Southern the subject of repeated bids from Canadian Pacific, Berkshire Hathaway is considering jumping into the bidding too. And, while everyone has been focusing on Norfolk Southern, BNSF has interest in CSX as well.

“CSX would be at an enormous (competitive) disadvantage and so there would be another step towards consolidation,” Matt Rose explained to Reuters.

As for Norfolk Southern, the railroad rejected Canadian Pacific’s initial offer in early November and its most recent offer last week. There are significant questions on whether regulators would approve the deal, even if the price was right.

Grossly Inadequate

“Canadian Pacific’s revised, reduced proposal is not only less than what the Norfolk Southern board has already found to be grossly inadequate, it is even more uncertain and risky given the decrease in the cash consideration,” said Chairman, President and CEO James A. Squires in a statement released by the railroad. “In addition to being grossly inadequate, the proposal is based on a voting trust structure that we reviewed and do not believe would be approved by the STB. Yesterday we released a white paper by two former STB chairmen who believe that the STB would not approve any voting trust structure because there is no basis to determine that it would be in the public interest.”

STB Approval?

Norfolk Southern’s white paper by former Surface Transportation Board commissioners Francis Mulvey and Charles Nottingham concluded that, “As simple background, rail carriers cannot assume control of another carrier without prior STB approval. The STB’s approval process can last between 19 and 22 months. Current STB regulations, adopted in 2001, set a high bar for approval of a proposed major merger and related voting trust based on an untested public interest standard. In our expert opinions, the STB is not likely to approve CP’s proposed voting trust or the CP+NS merger.”

BNSF Jumps Onboard

BNSF Railway chairman Matt Rose has indicated that BNSF is interested in either Norfolk Southern or CSX depending on the outcome of Norfolk Southern’s status.

“I’ve had general conversations with both of them and told them that we’re going to watch this with interest,” Rose told Bloomberg News.

While the path to North American railroad consolidation is a bit murky, What is clear is that BNSF is unwilling to have the current balance of power in North American freight hauling shift too heavily to any one railroad.

As for a potential price, anything in the $27-$40 billion range is within Berkshire’s means with its cash on hand and strong financing ability. The company is is still in the middle of its $32 billion acquisition of aerospace manufacturer Precision Castparts, but sometimes there is a parade of elephants.

(This article contains updated information from when it was first published.)

© 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.

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Berkshire Hathaway Energy Special Report

Special Report: Is Berkshire Hathaway About to Strike it Rich in Natural Gas?

(BRK.A), (BRK.B)

With natural gas prices tumbling to prices not seen since January of 2002, a big natural gas field would not seem to be the hottest news, but Berkshire Hathaway’s success has often been based on running counter to the herd. They are patient enough to know that energy prices will be higher in the future, and they have the money to drill now when others are strapped for cash.

In mid-November, Berkshire Hathaway Energy’s Australian subsidiary, CalEnergy Resources,  drilled a test well in Western Australia for what could be what the company is calling modestly a “significant gas field.”

How Significant?

Four trillion cubic feet of gas-in-place significant.

Exploration permit EP 408 is located approximately 280 kilometers south of Perth, and covers both the Whicher Range and Wonnerup gas fields.

The gas fields were first discovered in 1968 and 1971, respectively, and are located in ancient sandstone reservoirs nearly four kilometers underground.

The fields contain an estimated four trillion cubic feet gas-in-place, and Berkshire’s share currently stands at approximately 84%. Other partners include Which Range Energy.

CalEnergy Resources is the operator, with Farley Riggs, Australia’s largest well testing and data acquisition service provider, running the testing program.

Currently, down hole gauges are being used on Whicher Range-1 and Whicher Range-4/ST1 to test the interconnectivity of the reservoir before a three-month well test commences, The test will hopefully demonstrate flow rates in excess of four million cubic feet per day.

Not About Fracking

While the excitement in the oil and gas business in recent years has been all about fracking, the tumble in energy prices has hurt the fracking business due to its relatively high cost of energy recovery.

Fortunately, the Whicher Range and Wonnerup gas fields are conventional gas fields, and are neither shale gas nor coal seam gas. The cost of recovery should be much lower than gas produced by fracking.

Natural Gas for Western Australia

The natural gas will support the growing energy needs of Perth’s 1.8 million people. The fields are located on the southern edge of the State’s current gas pipeline network, and are roughly 20 kilometers south of Busselton. The cost of connecting to the pipeline is estimated to be in the range of $10 million Australian dollars.

Berkshire Hathaway and Energy Exploration

While Berkshire has built up one of the largest renewable energy portfolios in the world, with solar and wind power leading the way, it’s not a company people think of when it comes to fossil fuel exploration.

As always, Berkshire is full of surprises.

(This article has been updated since it was first published.)

© 2015-2016 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.

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Berkshire Hathaway Reinsurance Group Charlie Munger Insurance Minority Stock Positions Stock Portfolio

Berkshire Cuts Munich Re Stake, Again

(BRK.A), (BRK.B)

Berkshire Hathaway continues to see the reinsurance business as a low return business and is pulling back from the sector in its own underwriting and in its ownership stake in other underwriters.

Berkshire has again cut its stake in Munich, Germany-based reinsurer Munich Re, this time from 9.7 percent to 4.6 percent. It previously cut its stake from 12 percent to just over 9 percent earlier in 2015.

Berkshire’s own reinsurance business has been less than stellar this year with Berkshire reporting$155 million in losses from storm damage on Australia’s east coast in the 2nd quarter of 2015.

Charlie Says

“The reinsurance business not as good as it once was and is unlikely to get better,” Charlie Munger said at the 2015 Berkshire Hathaway annual meeting. “Money has come in, not because they want to be in reinsurance, but because it’s an uncorrelated asset class. We’re in it for the long haul.”

Uncorrelated (also called non-correlated) asset classes are assets that move in the opposite direction of a particular asset class, thus helping investors reduce risk in exchange for lower upside performance.

Munger’s words were echoed by Ajit Jain, who is the head of Berkshire Hathaway Reinsurance. “What was a very lucrative business is no longer a very lucrative business going forward” Jain was quoted in The Wall Street Journal.

© 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.

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Lubrizol

Lubrizol LifeSciences Makes $15 Million Investment in Vesta

(BRK.A), (BRK.B)

Berkshire Hathaway’s Lubrizol Corporation is investing $15 million in its LifeSciences’ Vesta business to expand its global manufacturing facilities.

The goal is to better position LifeSciences to serve the growing market for medical device contract manufacturing.

Lubrizol has been investing heavily in LifeSciences, and in August 2015, acquired Particle Sciences, a global leader in complex formulations including drug eluting device product development.

Since 2014, Lubrizol LifeSciences has solidified its presence in the life sciences market by introducing new products and making strategic acquisitions. This capital investment will expand multiple facilities and increase Lubrizol LifeSciences’ in-house engineering capacity for both silicone and thermoplastic products.

“We have significantly enhanced our capabilities through the combination of strong polymer technology, application know-how and world-class component manufacturing,” states Deb Langer, vice president and general manager, Lubrizol LifeSciences. “As healthcare companies look for total solution providers, we continue to invest in the right areas to provide valuable offerings to our customers.”

Vesta, Inc. was acquired by Lubrizol in August of 2014 and is a leading contract manufacturer for the global medical device industry. With the addition of Vesta, Lubrizol LifeSciences now offers disposable and implantable silicone medical components and assemblies across a wide product portfolio, as well as precision thermoplastic extruded tubing.

According to Lubrizol, the recent acquisition of Particle Sciences, Inc. has positioned Lubrizol LifeSciences as one of the most comprehensive drug delivery device solution providers, offering end-to-end solutions in the healthcare market.

“When customers partner with Lubrizol LifeSciences, they benefit from working with us at every stage in their development process,” states Robert Miller, global business director, medical devices. “With a long history of polymer expertise and significant investment, Lubrizol LifeSciences is positioned to offer full-service development for next generation medical and pharmaceutical innovations.”

About Lubrizol

Based in Wickliffe, Ohio, Lubrizol owns and operates manufacturing facilities in 17 countries, as well as sales and technical offices around the world. Founded in 1928, Lubrizol has approximately 7,500 employees worldwide. It sells its specialty chemical products in over 100 countries.

Berkshire Hathaway acquired Lubrizol in 2011 for $9 billion in cash.

© 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.

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Berkshire Hathaway Specialty Insurance Insurance

Berkshire Hathaway Specialty Insurance Enters Surety Market in Asia

(BRK.A), (BRK.B)

Berkshire Hathaway Specialty Insurance Company (BHSI) is entering the surety market in Asia, and has appointed Andrew Ho as Vice President, Head of Surety, Asia. Ho will be based out of BHSI’s Singapore office.

“Our expansion into surety is indicative of our strategy to commit where our deep expertise and top-rated financial strength will create value for our customers,” said Marc Breuil, President of Asia, BHSI. “We are pleased to have Andrew leading our newest business segment, providing quality surety underwriting and responsive local service.”

BHSI is initially focusing its surety efforts in Asia on civil contractors, general builders, engineering firms, equipment manufacturers and suppliers, and fabrication firms.

“A strong surety offering is a welcome addition to the marketplace and rounds out our broad range of coverages for construction and commercial customers in Asia,” said Marcus Portbury, Senior Vice President and Regional Head of Third Party Lines, Asia, BHSI. “We look forward to working with Andrew and our BHSI colleagues worldwide to provide local and global surety solutions, tailored to individual needs.”

Andrew joins BHSI from Standard Chartered Bank where he was Director, Trade Programmes & Credit Insurance. Prior to that, Andrew worked for more than 17 years in surety and trade credit roles at QBE, including Regional Underwriting Manager – Credit & Surety, Client Accounts

© 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.