What could go wrong with Warren Buffet and BNSF?

1. He dies and the BNSF railroad is lost among his other investments and the railroads profits are siphoned to hold up the other investments. Look what  happened when Ilinoise Central became ICG they were into everything like making B movies and all sorts of stuff and Penn Central was more intrested in shady real estate deals.

2.The East Coast railroads send more of there bridge traffic to UP and thumb there noses up at Warren Buffets "sugestions".

3. China and Japans Demand For US grain shifts elsewere---As it stands now we send grain west to asia and they send us toys east to us via conatainers...Weak Doller could be good or bad.

4.Customer Service continues to decline and more railroad custumers walk away in frustration even if BNSF has good custumer service he is at the hands of the other 500 short lines in the US who are short staffed in this department

5. Western Coal prices drop and Applacian Clean Coal comes back....The Eastern Coal has a higher BTU and it takes more Powder River Coal to create the same amount of BTU. Newer Grid  and Generating systems and suplimenting with local wind and hydro power means that Eastern Citys can use less and local coal..

18 Replies

  • Good heavens; the sky might be falling.  Let's start with a few things that are not arguable.  Warren Buffett, 79, is going to die - later, hopefully, rather than sooner.  Bad things could happen after he is gone, but there certainly is no guarantee of coming disaster.  The IC-ICG analogy just doesn't hold up.  IC created ICG as a means of separating the non-rail profitable assets from the railroad, which was headed for disaster along with many other railroads, all of which formed holding companies for the same purpose.  This was during a period when the future for railroads looked grim - and was - and boards of directors were performing their fiduciary duties by protecting the interests of the company's shareholders.  Buffett bought BNSF not because the future was grim, but because the future for railroads now is bright.  Aside from the fact that Buffett, in his annual report letter, has said BNSF's profits will probably be left with the company to invest, BNSF has been paying out roughly $300 million a year in dividends.  Berkshire Hathaway could upstream that amount as a dividend to the holding company and not hurt BNSF by one cent.  Free cash flow of the railroad is around $1 billion annually, and that sure does fund a lot of capex.  In the case of IC/ICG, the railroad did not produce much cash at all.  In the current case, BNSF is quite profitable, which poses the question: Why on earth would BH, having already spent $44 billion to acquire the railroad, do anything to hurt it?

  • Face it, HoboDave, coal is no longer the growth driver that it once was.  It will be a good solid business for the railroads for many years to come, but it won't grow the way people were forecasting not so many years ago.  Coal-burning generating stations have an average lifetime something north of 50 years.  It will be a long time before UP and BNSF lose their coal business, and by that time, there's every likelihood that some kid not even in college yet will have figured out how to burn coal cleanly.  PRB coal is so clean (1/2% sufur) that even at 3 tons to 2 for BTUs, it's cheaper to burn PRB coal than eastern coal.  Utilities don't burn PRB coal because they particularly like BNSF or UP; they burn it because it's in their self interest to do so. 

    Grain:  and where is the somewhere else that China and Japan will go for their grain?  The world's population is growing, and it is growing particularly in China and India.  No one grows it as efficiently as the U.S. and efficient translates into less expensive. 

    East Coast railroads interline to UP/  Thumb their noses at Warren?  Come on, time to get real.  Traffic flows are west to east, not east to west.  It is unlikely that NS or CSX will be in a position to affect much interline traffic at all.  And to the degree that there is east-west interline volume, remember, the shipper gets to specify the routing, not the carrier.

    BNSF get lost among other Berkshire Hathaway investments?  Really?  BNSF is the largest single investment Buffett ever has made.  It's just large enough that it isn't ever likely to "get lost" among other companies.

    Recommendation: take two aspirin and get a good night's sleep.  You might feel better about the world in the morning.

  • In reply to Larry Kaufman:

    I agree, Larry.  BNSF was an excellent investment for BH and Buffet had to convince his Board to do this.  BH is not a one-man show.  Now, where did I put those aspirins!!

  • I don't see many of these scenarios happening.  The issues I see are no different than those facing UP and the rest of the industry:

    1. Reregulation of rates.  This will hit to the gut of railroad profitability in things like Coal and Chemicals. 
    2. If you look at the explosive growth in intermodal volumes you know railroads have to be taking market share from trucks.  So trucks have responded by asking for heavier weight limits as they always do.  But, if they don't get that expect to see them join up with Sen. Rockefeller and shippers and begin to ask for rate regulation.
    3. Cap and trade emissions restrictions could dampen coal demand quite quickly

    In my opinion these are the three big things that could most hurt not just BNSF, but the entire industry.

  • In reply to Jason_Kuehn:

    I agree with your three scenarios, Jason, though do not believe any of the three will happen.  I believe a Congress that meddles with American business is coming to an end.  I am impressed with the Clean Coal ads on TV and can tell you from my experience, this could have been happening with the electric utilities 30-years ago and did not because of cost and issues with the various State PUC's on rates and values.  Having priced carload freight and negotiating rates with customers, a customer and I am one today, will always cry that they are being overcharged.  I had a chemical customer literally brag about the substantially increased profitability her company experienced with some products we were moving in their CHC's, and then she asked me for a reduction in our rates.  I told her that after her great story, I should be raising the rates 5% or more instead of even wanting to listen to a plea for a rate drop.

  • In reply to marc6850:

    Maybe I should cry to Uncle Sam that grocery stores and gas stations should be regulated.  I want to see the old Webster Dictionary thick rate book the railroads used to have showing me what everyone in the country pays for a loaf of bread or gallon of gas.  I know I'm being goofy...but the shipping public "i'm being overcharged."  Sh** - aren't we all getting overcharged in everyday life?

    How about some regulation in the housing market?

  • In reply to marc6850:

    I agree with Jason's analysis and with Marc's view that it won't come to pass.  First, having spent many an hour at hotel bars playing the old game of "name the 10 worst (or best) railroad CEOs of the 20th Century" I know that most were better than those of us at the bar thought they were.  Most railroads that failed did so not because they had bad executives (some did, truth be known), but because they had more plant and property than they had business to provide the revenue needed to maintain the plant and property.  Some of the "dumbest" things were the result of desperation, not simple stupidity.  Anyone think that the PRR and NYC managements didn't know they both were in desperate trouble?  That ill-begotten merger was one that neither side would have entered if they hadn't been desperate for revenue.  That government prevented the merged property from shedding enough assets just might have played a part in the ultimate disaster.

    I don't believe Rockefeller's disgusting legislation will become law for two reasons.  One, this Congress is rapidly running out of time to pass any meaningful legislation; and two, the utilities, chemical companies and grain dealers supporting Rockefeller and CURE are really just a minority of those playing in the game.  Just as with Staggers 30 years ago, rail labor will side with the railroads because they don't want to have to negotiate contracts with Congress or DOT; Wall Street will support the railroads because they have nice little cottage industry of funding rail capital programs; the vast majority of rail customers will support railroads because they like the quality of service they get for the price they pay, and they know they can always switch to the highway and pay more.  So, the sky is not falling. 

    Buffet is 80.  He won't be around forever.  Neither will Matt Rose.  While they may be just the right pair to be running BNSF today, there is no certainty that BNSF won't have good management going forward.  Other than to take up some time on blogs, this is a topic that features no substance but still is interesting as long as you don't take it too seriously.

  • In reply to Larry Kaufman:

    Wall Street would not back re-regulation if only for the uncertainty of the renaissance that has taken place as of late.  I'm sure many of those on the Street weren't around pre-1980...but if regulation came back we'd have to find the opposite term for renaissance.

    May I offer Deterioration or Degression.  Oh but the overcharged shippers would be happy.

  • In reply to BacktotheFuture:

    Considering that the vast majority of rate cases filed at the ICC and more recently the STB, have been resolved by a negotiated settlement between the carrier and shipper or by a decision in favor of the shipper, I question whether there are any overcharged shippers.

  • In reply to Larry Kaufman:

    Since WB is a significant fundraiser for high-profile Democrats, expected something of a buffer, no pun, between the industry and the government.  There's legislative movement on a couple of fronts, one you inferred.  By this point it appears the November ideology shift will have more impact in that respect than WB.

  • In reply to Mazzuchelli:

    I may simply be uninformed, but I've not thought of Warren Buffet as being a Democrat, certainly not a die-hard Dem.  Except for the ideologues like the Koch brothers, you'll find that most wealthy people who contribute to politicians spread their money around and support candidates of both parties.  I know the old BN PAC spread its money that way.  You support those who are believed to be good for you or your business, leaving ideology to others.  I certainly don't see any connection between the last election and Buffett's ownership of BNSF.  Railroads, like it or not, are deeply involved with government.  You're undoubtedly right that the election will have more effect on rail/government relationships than Buffett's ownership.  You want particulars?  Well, Rockefeller and Kohl in the Senate still are trying to muck about and effectively bring the railroads back under regulation.  The Republicans now control the House and we've already seen John Mica, chairman of the Transportation and Infrastructure Committee telling Elliott and the STB not to do anything that will inhibit the industry's ability to obtain capital and expand to meet the needs of the economy.  Actually, the best thing politicians could do for railroads is to leave them alone.

  • In reply to Larry Kaufman:

    Larry Kaufman
    I may simply be uninformed, but I've not thought of Warren Buffet as being a Democrat, certainly not a die-hard Dem.  Except for the ideologues like the Koch brothers, you'll find that most wealthy people who contribute to politicians spread their money around and support candidates of both parties.

    Also worth remembering that savvy donors often prefer making new allies over fighting within their own camp, especially in the primary season, where the money goes a lot farther.  A donor whose natural allies are Demublican might find that either candidate they offer would work with him, while only some of the potential Republocrat candidates would.  At the primary stage, too, choosing sides among your friends is downright dangerous.

  • In reply to anmccaff:

    Good observations, anmccaff.  Back when I was VP-PA of a certain large Class 1 some 30 years ago, we had what we called an "entry PAC."  That is, we had enough money, if carefully spent, to get a phone call returned and an appointment with a congressional staff person, and not much more than that.  Our "rules" for distributing our largesse was as follows: We restricted our contributions to members of Congress from districts where our railroad did business AND to members outside our territory who served on committees that had jurisdiction over issues we considered important.  We subscribed to the view that early money beats later money and was more appreciated by recipients, so we tried to allocate our contributions early in each election cycle.  As a policy, we did not choose sides within a party, although we acknowledged that our early money policy frequently helped a would-be candidate decide not to file because he/she realized that money would not be forthcoming.  We were apolitical in that we simply were non-partisan, supporting members who we were satisfied would take positions on legislation that we wanted and that we thought were importang to the company.  We supported Clean Air Act amendments, for example, that encouraged utilities to burn low sulfur Powder River Basin coal rather than go to the expense of installing scrubbers and burning Appalachian coal.  As you can imagine, we moved western coal and not Appalachian coal.  I've been gone a goodly number of years and don't know if those policies still are followed or not, but this at least gives you a view of how it once was done by one railroad.  I like to think we operated at all times within the law and honorably.  There are many, some who participate here, who cynically believe we and others "buy" their way to political influence.  Would that that were true.  We never had enough money to do that and any member of Congress who could be bought for the money we had available wasn't worth having in the first place.  By the way, our best lobbyist, and one who didn't have to make contributions to get a member's attention, was our CEO.  When a corporate CEO flies halfway across the country to lobby a bill or an issue, even a dumb member of Congress is smart enough to at least listen to the pitch for a few minutes - especially if the company and its lobbyist were big employers in that member's district or state.


  • In reply to anmccaff:

    I haven't seen his voter registration card but he's never done a fundraiser for any Republican during either of my stints in the Omaha area.  He has held fundraisers for Hilary and Obama both here and in New York.  He also has a major, well, it's not a charity but an organization he funds that supports population control.  That's not typically a conservative value.  So, he may not be a Democrat but he sure isn't a Republican.

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