BRK-B

Berkshire Hathaway Inc. 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2006. A significant accounting change occurred on February 9, 2006, when Berkshire converted its investment in MidAmerican Energy Holdings Company into voting common stock, resulting in the full consolidation of MidAmerican's financials starting January 1, 2006. This consolidation significantly impacts the comparability of 2006 results versus 2005, particularly in the Utilities and Energy segment.

Key Financial Metrics (First Six Months 2006)

Note: Debt includes $16.1 billion in Utilities/Energy borrowings, $10.8 billion in Finance/Financial Products, and $3.6 billion in Insurance/Other.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 31.3% to $46.9 billion from $35.8 billion in the first six months of 2005. This growth is largely driven by the consolidation of MidAmerican and the acquisition of PacifiCorp.
• Profitability: Net earnings rose 65.7% to $4.66 billion from $2.81 billion. Pre-tax earnings before minority interests increased to $7.2 billion from $4.1 billion.
• Investment Gains: Investment and derivative gains/losses swung from a loss of $365 million in 2005 to a gain of $1.26 billion in 2006, primarily due to favorable foreign currency movements and life settlement contract dispositions.
• Insurance Underwriting: Pre-tax underwriting gains remained relatively flat at $1.09 billion (6 months 2006) compared to $1.07 billion (6 months 2005), despite higher premiums earned.
• Utilities & Energy: Revenues for this segment were $4.88 billion in 2006 versus $0 in 2005 (as it was previously equity-method accounted). Pre-tax earnings were $696 million.

Guidance, Outlook, and Risks

Management Commentary: Management emphasizes that interim results are not necessarily indicative of full-year results due to the volatility of catastrophe losses and investment gains. The cost of float (insurance liabilities) remained negative (a benefit) as underwriting gains were generated.

Acquisitions: Significant cash outflows occurred for the acquisition of PacifiCorp ($5.1 billion), Iscar Metalworking Companies ($4.0 billion), and Russell Corporation ($0.6 billion). Berkshire utilized existing cash balances to fund these transactions.

Risks and Contingencies:

• Legal Proceedings: General Re and Berkshire are involved in ongoing investigations by the DOJ, SEC, and NYAG regarding "non-traditional products" and the AIG transaction. Three former General Re executives were indicted in February 2006. Berkshire cannot estimate the potential loss.
• Regulatory Risks: Utilities and energy businesses face risks related to environmental regulations (emissions), rate-making, and the potential for regulatory asset write-offs if cost-based regulation ends.
• Market Risks: Exposure to commodity prices (electricity, natural gas, oil) and foreign currency fluctuations. The notional value of open foreign currency contracts declined to $1.2 billion by June 30, 2006.

Investor Verification Checklist

• MidAmerican Consolidation: Verify the impact of the full consolidation of MidAmerican on debt levels and capital expenditure forecasts compared to the prior equity-method reporting.
• Insurance Reserve Adequacy: Review the $47.7 billion in unpaid loss reserves; a 1% change in estimates would impact pre-tax earnings by approximately $450 million.
• Legal Exposure: Monitor the status of the DOJ/SEC investigations into General Re's "non-traditional products" and the AIG transaction, as potential fines or settlements are currently unquantifiable.
• Cash Deployment: Confirm the use of the $42 billion cash balance for future acquisitions versus potential share buybacks or dividends (though Berkshire historically does not pay dividends).
• Derivative Run-off: Track the reduction of General Re's derivative positions, which have decreased from over 23,000 open trades in 2002 to 317 as of June 30, 2006.