Is the Burlington in better shape than the Rock Island?
Posted on 11/03/2009 9:42:27 AM PST by Second Amendment First
I think the MidAmerican wind deal isn’t going to go anywhere nearly as smoothly as he had hoped. Folks in Iowa are starting to cotton onto MidAmerican’s duplicity and mendacity in how they’re expecting the ratepayers to pony up premium rates to help make the project profitable. BTW - the deal isn’t all that secret. Just talk to some farmers - because they’re who MidAm has to deal with to site the turbines. Iowa doesn’t have much public land, so these turbines will have to be sited on farms and other private land.
But let’s put the future aside and deal with today’s actions for a moment: MidAm is the biggest utility in Iowa. About half of their power base comes from coal. BTW — MidAm owns or operates four (I think, don’t quote me on that, but I’m pretty sure it is four) coal-fired plants here in Wyoming. Big ones, like the Jim Bridger plant. And a couple in Nebraska and Utah as well.
Most of their coal comes from Wyoming (among other places in the west) and it is hauled on BNI trains. I think BRK also owns some plants in UT, and that power might be mine-mouth and not need trains.
The coal component of MidAm in Iowa isn’t going anywhere soon - and they’ll probably need to expand the base load going forward to supplant the wind power when the wind stops, meaning either NG plants or expansion of existing coal plants. Buffett has his finger in both of those pies now, obviously.
As such, I see the wind power games as being either cynical ploys to play the green game or a way to game the regulations for private profit. I see most of the wind power stuff as nonsense, actually. Yet another idiotic fad at the expense of the public. It will just take time to play out, and we who are cynical enough might as well make a buck to replace the bucks picked out of our wallets by Uncle Sugar.
Matter of fact, Berkie’s power utility holdings are some of the most coal intensive of the larger utilities out there. To me, today’s action means that Buffett is really betting on coal, not wind. There’s no need for trains if he were betting on pinwheels and solar panels. He owns utilities with huge coal consumption, he now owns the rail line with a big (25%+) coal revenue stream.
All he needs to do to finish a vertical integration here is buy up an outfit producing low-sulphur coal - pick one of them here in the PRB or Montana. Then he can set his margins and optimize his FCF from start to finish. Utilities, if vertically integrated, would be a great way to simply mint cash with stunning reliability.
As to WPO: I think he’s going to lighten up on it. I could well be wrong, but as I look at their business model, there’s a real need to either break it up and keep the profit-making parts and ditch the parts that don’t (and won’t) make much, or sell out of the position. I’m sure he has massive cap gains liabilities as you point out, but BRK is large enough with enough bright people that I’m sure they’ll engineer a way out of the full brunt of the tax liability.
I agree with you on our discussion of “investing the Buffett way” — true, most people have neither the patience nor the focus to do what Buffett has done. What I object to are these clowns who claim that by tail-ending stock buying in some public company in which Buffett has some interest that you’ll duplicate Buffett’s gains. I think we’d agree that this is not the case - eg, Buffett’s buy of BNI. He might have started with a minority stake, but now he’s buying the whole thing outright, and it fits into what I’m sure we both agree is a MUCH larger picture - eg, the MidAm coal consumption picture, his portfolio of power generation, etc.
I’m certainly not swinging a big enough line to buy both the power company and the train hauling the coal. But Buffett is, and it is now a real possibility that Buffett goes shopping for a coal miner or major NG player next. I dunno whether the government would hit him if he bought a coal outfit, but it would make sense for him to buy one now.
And I hope sincerely that each and every one of them loses their jobs due to "downsizing" and that they are unable to find other work, that their unemployment has run out, and that their spouses (if they have them) cannot find work either.
Then I want to be the "fly on the wall" and listen while the parents try to explain to the kids while they're feeding them baloney and beans for their one meal that day, about how things are really rosy and wonderful!
That sounds exactly like something he'd do.
Charlie Munger once remarked that he thought the perfect solution would be to get Berkshire to generate tens of billions in cash a year and then when both he and Warren died, go into 80%+ dividend payout mode. The move into energy, transportation, etc., would make that far more likely, I'd think. Either way, as a Berkshire stockholder, I'm thrilled with this morning's news. The company really is in a position that if Bufffett were to pass away, it wouldn't miss a beat because of the collection of assets he's put together.
I'm not sure if I like the idea of the Class B stock going from $3,300 to $65 as part of the split or whatever the numbers were, just because I think you're going to get a lot of people who don't understand the company suddenly buging it because it's more affordable.
The railroads don’t make money. They have to be forever subsidized. The crime and dysfunction on the trains promises people won’t use them. We’ve been there, done that.
Passenger trains don’t break even.
Yes, BNSF is in better shape than was the Rock Island. And what remains of the Rock Island (most of its mainlines operated by other railroads) are in good shape as well.
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