BNSF and MidAmerican

[jay21]

"WB: Greg hit on point – we have distinct competitive advantage in that we pay lots of federal income tax. There are programs that involve tax credits. We get 1:1 benefit. I don’t have figures, but I would guess 80% of utilities can’t reap tax benefits because they don’t have federal income tax. They wipe out

taxable income on bonus depreciation. So they can’t have appetite for projects with tax credits. By being part of BK, a huge taxpayer, Mid-American has extra abilities to do projects without worrying about exhausting tax capacity."

 

"WB: Cash intensive businesses are unattractive unless the cash consumed earns an attractive return.Utilities are 12%. Not as good as 20% growth with no capital. Same with railroad, we will spend way more than depreciation. We’ll earn reasonable returns. We would be in terrible situation if we were spending a lot just to stay alive. If you go back to world of 20% ROE, hard…., and we can’t earn 20%, and so we have to like the returns we have."

 

http://www.scribd.com/doc/92763946/Berkshire-Hathaway-Annual-Meeting-2012

[Kiltacular]

http://www.bloomberg.com/news/2014-01-31/bnsf-wins-appeal-of-u-s-rule-lowering-coal-rail-rates-1-.html

 

 

[fareastwarriors]

All Aboard: Why America's Second Rail Boom Has Plenty Of Room To Run

 

http://www.forbes.com/sites/joannmuller/2014/01/22/americas-second-rail-boom/

[Grenville]

BNSF Announces $5 Billion Capital Commitment Program

http://www.bnsf.com/media/news-releases/2014/february/2014-02-04a.html

 

BNSF Announces $5 Billion Capital Commitment Program

 

FORT WORTH, TEXAS, Feb. 4, 2014:

 

BNSF Railway Company (BNSF) today announced a new single-year record capital commitment plan of approximately $5 billion for 2014, approximately a $1 billion increase over its 2013 capital spend.

 

The largest component of the capital plan is spending $2.3 billion on BNSF’s core network and related assets. BNSF also plans to spend approximately $1.6 billion on locomotive, freight car and other equipment acquisitions. In addition, the program includes about $200 million for continued installation of positive train control (PTC) and approximately $900 million for terminal, line and intermodal expansion and efficiency projects.

 

BNSF handled more than 50 percent of the volume increases for the rail industry in 2013. The growth was led by an 8 percent increase in domestic intermodal units, an 11 percent increase in Industrial Products volumes led by crude-by-rail related traffic, a 3 percent increase in coal volumes and a fourth quarter surge in agricultural products. This growth is on top of a 2012 BNSF total volume base of more than 9.6 million units. Much of the capacity expansion in the 2014 capital plan is for infrastructure investment on BNSF’s Northern Corridor to put the company in position to meet all customer service expectations, including Amtrak.

 

BNSF’s expansion and efficiency projects will be primarily focused on line capacity improvements to accommodate growth in agricultural products, intermodal, automotive, and industrial products volumes related to crude oil production, and other terminal improvements to enhance productivity and velocity. More than $900 million of the capital plan is for expansion and maintenance in the Northern Corridor.

 

"Our capital plan continues to focus on improving our ability to meet our customers’ service expectations, increasing our capacity where there is growth, and strengthening our railroad to help ensure it remains the safest means of ground transportation for freight," said Carl Ice, president and chief executive officer of BNSF Railway. "BNSF’s capital investments are an integral part of making sure our network is well prepared for the demand for freight rail service in the U.S. and helps ensure the continued integrity and reliability of our network."

[fareastwarriors]

BNSF to take bids to buy up to 5,000 safer oil railcars

 

 

http://www.cnbc.com/id/101432146

[JBird]

My initial analysis did not include a breakout of the deferred taxes (BRK reports one deferred tax line item as opposed to by operating segment).

 

You can find the growth / change in deferred taxes for BNSF using their filings. 

 

I've found that many people quickly grasp how Berkshire's deferred taxes on its stock holdings represent an interest free loan from the gov't.  They see that the present value of this deferral is unknowable because we don't know when the underlying stock holdings will be sold.  Still, they see that this deferral has significant value at Berkshire because many of the stock holdings which represent the bulk of the unrealized gains have been held for a very long time -- especially Coke and AXP and to a lesser extent Wells Fargo.

 

However, when it comes to discussing the deferred taxes for BNSF, they don't seem to see the value.  These deferred taxes -- as I read it -- are even MORE valuable than those generated by the stock holdings because they are likely to be permanent.

 

I mean, Buffett has made it clear that they plan to hold BNSF "for 100 years", etc.  Second, it is clear to me that because of inflation, the total amount invested in PP&E at BNSF is likely to grow and, as well, Buffett has made it clear that BNSF is spending well above depreciation in any case.  So, therefore, as long as the total invested in PP&E doesn't shrink AND the rules regarding BNSF's benefit from accelerated depreciation don't change, this deferral is effectively permanent and the cash it currently provides BNSF in excess of reported earnings is a substantial number.

 

Because of the regulated return on capital nature of BNSF, I don't think Buffett will go to pain to highlight this situation if it is correct.

 

The filings for BNSF can be confusing.  They keep two current with the SEC: "BNSF Railway Co" and "Burlington Northern Santa Fe, LLC"

 

I believe the second one, the "LLC", is the one you want to use.  It shows, for example, the distributions to Berkshire while the former one doesn't.

 

Using the second filing, we can see that in 2012, deferred income taxes went from $15,637 to $16,319 for an increase of $682 million in 2012 alone.

 

The cash represented by this increase is not reported in earnings but, I'm arguing, it is real cash flow for BNSF (as long as the requirements I described above are met -- I think they are and they will be indefinitely, and that's key).

 

If that's correct the deferred tax liability is not a liability, it's an asset. If that's the case why not adjust the balance sheet (for our purposes only) to reflect the economic reality?

 

We want to know what BNSF is earning on tangible equity. Ok, so drop the goodwill altogether. Now move the deferred tax liability to the asset side. We get $54 billion.

 

Last year it earned $5.9 billion pre-tax. Recorded $2.1 billion in income tax expense, less deferred income tax of $583 million, and therefore paid $1.5 billion in tax.

 

So it therefore earned $4.4 billion after-tax on $54 billion, an 8% RoE.

 

Thoughts?

 

 

[jay21]

Your 54b number is wrong. Their book equity is 34,612 and goodwill of 14.8b.  A ROE of ~12% and a ROTE of ~20%.

 

A few pages back, I finally stumbled into this and the acquisition finally looks genius.  I believe I have seen ROICs listed as approaching 10%.  Any amount of leverage will turn this into a very attractive return.

[JBird]

Your 54b number is wrong. Their book equity is 34,612 and goodwill of 14.8b.  A ROE of ~12% and a ROTE of ~20%.

 

A few pages back, I finally stumbled into this and the acquisition finally looks genius.  I believe I have seen ROICs listed as approaching 10%.  Any amount of leverage will turn this into a very attractive return.

 

I must have been unclear. I know their equity isn't actually $54 billion. My point was, if the deferred tax liability is actually an asset-- then move it to the asset side of the balance sheet to get a better idea of what they're earning on assets.

 

Thinking about it a bit more--- there is already a corresponding dollar of assets for every dollar of recorded tax liability. If the recorded tax liability is actually an asset-- it should just be dropped from the liability side.

 

I think the same would go for insurance float. Every dollar of reserves has a corresponding dollar of assets earned through premiums. If the reserves are an economic asset, and you want to illustrate that on the balance sheet, they should just be dropped as a liability rather than added to assets.

 

I may just be talking nonsense.

[fareastwarriors]

Berkshire Hathaway Energy Purchases SNC-Lavalin's Equity in AltaLink

 

http://www.menafn.com/00dbedf6-7da7-4a98-acea-3283bf21edf4/Berkshire-Hathaway-Energy-Purchases-SNCLavalins-Equity-in-AltaLink?src=main

 

 

 

 

http://www.bloomberg.com/news/2014-05-01/berkshire-to-buy-snc-s-altalink-in-buffett-energy-wager.html

 

Berkshire Hathaway Inc. (BRK/A) agreed to buy SNC-Lavalin Group Inc. (SNC)’s AltaLink, the operator of electric transmission lines in Canada, as Warren Buffett’s company expands its investment in energy.

 

Gross proceeds to SNC-Lavalin from the sale will be about C$3.24 billion ($2.96 billion), the Montreal-based seller said today in a statement.

[xo 1]

Any one have any insight on the valuation?  The Globe and Mail report on the transaction included SNC CEO Robert Card's characterization of the bidding process as "highly competitive" with interest from a "large quantity of very well-heeled people."  That may be puffery but it doesn't sound like a typical BRK transaction.  As an aside, I am also surprised that Brookfield Infrastructure didn't scoop up AltaLink.  Perhaps the US$3 billion purchase price was too large for its appetite.

 

Here is a link to a short article that has some additional color on AltaLink:

http://www.bidnessetc.com/21718-berkshire-hathaway-inc-nyse-brk-a-nyse-brk-b-news-analysis-acquires-snc-lavalin-group-incs-altalink-for-2-9-billion/

[peter1234]

They also talked about building out further power infrastructure together. This would be important to SNC as it provides them with more business in the future from a very dependable and forward thinking partner (MidAMerican).

 

:)

[jay21]

From Morningstar's live blog:

 

"Buffett has clearly considered buying Kansas City Southern but "the math doesn't make sense." But BNSF is "constantly thinking about Mexico""

[twacowfca]

Any one have any insight on the valuation?  The Globe and Mail report on the transaction included SNC CEO Robert Card's characterization of the bidding process as "highly competitive" with interest from a "large quantity of very well-heeled people."  That may be puffery but it doesn't sound like a typical BRK transaction.  As an aside, I am also surprised that Brookfield Infrastructure didn't scoop up AltaLink.  Perhaps the US$3 billion purchase price was too large for its appetite.

 

Here is a link to a short article that has some additional color on AltaLink:

http://www.bidnessetc.com/21718-berkshire-hathaway-inc-nyse-brk-a-nyse-brk-b-news-analysis-acquires-snc-lavalin-group-incs-altalink-for-2-9-billion/

 

According to Warren, acquisitions make sense for Mid American at prices that don't make sense for pure utility holding companies.  It seems that utilities often have so many tax breaks that they don't have enough profits to offset against the breaks. Therefore, there is no value in the tax breaks that come with the acquisition of another utility co.  However, BRK has other profitable assets in Mid. American than merely the utilities they own.  Therefore, extra tax breaks from Mid American's acquisitions of utility companies can be put to use by  BRK, but not by other utility companies.

[xo 1]

Thanks.  Interesting nuance.  As much as WEB has written about the regulated utilities, there are angles such as this one that I am missing. 

[jay21]

Thanks.  Interesting nuance.  As much as WEB has written about the regulated utilities, I feel like their angles such as this one that I am missing.

 

I posted this quote up above that twacowfca was alluding to:

 

"WB: Greg hit on point – we have distinct competitive advantage in that we pay lots of federal income tax. There are programs that involve tax credits. We get 1:1 benefit. I don’t have figures, but I would guess 80% of utilities can’t reap tax benefits because they don’t have federal income tax. They wipe out

taxable income on bonus depreciation. So they can’t have appetite for projects with tax credits. By being part of BK, a huge taxpayer, Mid-American has extra abilities to do projects without worrying about exhausting tax capacity."

 

"WB: Cash intensive businesses are unattractive unless the cash consumed earns an attractive return.Utilities are 12%. Not as good as 20% growth with no capital. Same with railroad, we will spend way more than depreciation. We’ll earn reasonable returns. We would be in terrible situation if we were spending a lot just to stay alive. If you go back to world of 20% ROE, hard…., and we can’t earn 20%, and so we have to like the returns we have."

 

http://www.scribd.com/doc/92763946/Berkshire-Hathaway-Annual-Meeting-2012

 

I don't think that these deals are that attractive on a stand alone basis.  I am not entirely sure what the effect is once the assets are part of BRK, in terms of taxes, regulations on capital structure, capital allocation, etc.

 

I think that best case these assets earn 12% ROE then you get some extra return from lower taxes, then you have the ability to lever the holding co, and finally it allows your insurance cos to hold more equities and less fixed income.  The net effect might make these investments really attractive for BRK, but tbh it's the deals I like the least because I know it makes 20% ROEs unattainable.  Nothing wrong with a safe low teen number though.

[dcollon]

WSJ: Farmers Grow Worried

 

The coldest, snowiest winter in years bogged down the rail system, the chief means of transporting crops

when rivers freeze across the northern U.S. Plunging temperatures forced BNSF Railway Co., Canadian

Pacific Railway Ltd. and other railroads to run shorter trains, increasing traffic on tracks spanning the

Midwest.

Farmers_Grow_Worried.pdf

[fareastwarriors]

http://www.bloomberg.com/news/2014-06-09/buffett-to-expand-energy-wager-as-far-as-the-eye-can-see.html

 

 

Buffett to Expand Energy Wager ‘As Far as the Eye Can See'

[Guest longinvestor]

http://www.bloomberg.com/news/2014-06-09/buffett-to-expand-energy-wager-as-far-as-the-eye-can-see.html

 

 

Buffett to Expand Energy Wager ‘As Far as the Eye Can See'

 

The deregulated energy market and the sporadic nature of green energy are leading a massive shift in the energy business. 

 

California ISO (Independent System Operator) manages the supply-and-demand of energy as an independent entity. They are kinda like the Air traffic controllers. They act as the facilitator of market forces in energy. They came into existence due to the energy policy act of 1992.

 

In October 2014, both NV energy and PacifiCorp will join the California ISO. NV Energy: http://www.elp.com/articles/2014/04/nv-energy-files-to-be-in-california-iso-energy-imbalance-market.html; PacifiCorp: See attachment. Basically, this opens up much of the Western US market to Berkshire's energy production and helps them with the fundamental imbalance issue. When and where the wind blows or the Sun shines does not match where people live and when they consume energy. 

 

Then we have Alberta's grid operator, AltaLink which will become part of Berkshire Energy in December.

Also, Berkshire and Transalta, another Alberta producer have partnerships in place to build natural gas fired plants, the first on which will be completed this year!

 

The geographical adjacency is hard to miss! Looks like the "investment as far as the eye can see",  will happen in the western USA (Canada, like in Alberta?). That is one hell of a big place. Moving power over those kind of distances is probably why they bought AltaLink.

 

And with so much of the capital going into energy, Abel looks more and more to be our man.

 

 

 

6709-49_PC_EIM_Handout_8.5x11_r7.pdf

[original mungerville]

What type of impact does this have on profits? Any idea?

[Guest longinvestor]

What type of impact does this have on profits? Any idea?

 

Much has been discussed about Berkshire Energy's "Utility-like" return of ~ 12%. Plus the uncapped capacity to receive investment tax credits. At the Berkshire level, is it 12.1% or much more? That number is unknown as yet.

 

What is sinking in for me is that at 10x today's size,how big the tax credits could be? And also how easy the incremental capital allocation becomes with such a large, contiguous territory which has everything covered. Oil, natural gas, coal, sun, geothermal, BNSF ...lots of 1 foot hurdles. A big elephant, only happens over a long time.