Author Topic: BNSF and MidAmerican  (Read 38149 times)

jay21

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Re: BNSF and MidAmerican
« Reply #50 on: March 14, 2013, 08:01:58 AM »
Kiltacular, yes, agreed.  You can look at the difference between the GAAP tax expense and the taxes paid for cash disclosure to see how big of difference this can make.

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).

When looking at MidAmerican's filing: http://www.midamerican.com/include/pdf/sec/20121231_99_mehc_annual.pdf

We get a much better understanding of the ROE:  15,910 equity and 5,120 of goodwill. Much better than the ROE I was showing before.

The deferred taxes of BNSF equals 16,319 and Mid-American is 7,903 so that should help us better understand the capital that we should allocate to the Regulated Business segment of BRK.

Thanks for doing this, I've been very curious.  As I'm being lazy today, what did the return on newly invested capital (or return on tangible equity) get to on MidAmerican with the adjustments you just mention?

It's in the 10% to 15% range, which seems like the target return Buffet would want to see for this type of business.  I plan on reading the filings for BNSF and Mid American in the near future and may give a more detailed answer later if I find something interesting.
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racemize

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Re: BNSF and MidAmerican
« Reply #51 on: March 14, 2013, 08:11:45 AM »
It's in the 10% to 15% range, which seems like the target return Buffet would want to see for this type of business.  I plan on reading the filings for BNSF and Mid American in the near future and may give a more detailed answer later if I find something interesting.

Please do!

jay21

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Re: BNSF and MidAmerican
« Reply #52 on: March 15, 2013, 10:21:06 AM »
It's in the 10% to 15% range, which seems like the target return Buffet would want to see for this type of business.  I plan on reading the filings for BNSF and Mid American in the near future and may give a more detailed answer later if I find something interesting.

Please do!

I'm reading MidAmerican's annual report and it will take me awhile to get through.  A few interesting things so far.  Should I post them as I come across them or should I wait until I get through the whole thing?
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jay21

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Re: BNSF and MidAmerican
« Reply #53 on: March 18, 2013, 06:29:38 AM »
I went through Mid-American primarily to look at what the ROE of the business is.  Most people are probably already aware that utilities' profits are regulated as either cost plus or on the ROE.  Here are the mentions of ROE I found in the report:

Pursuant to ratemaking principles approved by the UB, all of MidAmerican Energy's wind-powered generating facilities in service at December 31, 2012 are authorized to earn a fixed rate of return on equity over their useful lives ranging from 11.7% to 12.2% in any future Iowa rate proceeding.

The Company indirectly owns a 50% interest in ETT, along with subsidiaries of American Electric Power Company, Inc. ("AEP"). ETT owns and operates electric transmission assets in the ERCOT and, as of December 31, 2012, had total assets of $2.0 billion. ETT is regulated by the Public Utility Commission of Texas, which has approved rates based on a 9.96% after tax rate of return on equity and a debt to equity capital structure of 60:40.

Electric Transmission America, LLC ("ETA") is a company owned equally with subsidiaries of AEP to pursue transmission opportunities outside of ERCOT. ETA has a 50:50 joint venture with Westar Energy, Inc. to build transmission assets in Kansas. Construction began in 2012 and has received the necessary approvals from the FERC, including a return on equity, inclusive of incentives, of 12.8%. The project is expected to cost approximately $180 million and be in service on or before December 31, 2014

As of December 31, 2012, $3.7 billion, or 43%, of MidAmerican Energy's property, plant and equipment, net, was subject to these ratemaking principles at a weighted average return on equity of 12.0%.


So it looks like the ROE should fall between 10% and 12%.  Also, it should be worth noting that MidAmerican is a holding company and there is some debt at the HoldCo level.  I am trying to get some clarity on the HoldCo balance sheet, but can't seem to find much.  We know there is ~4.6b of debt there.  My point is the ROE is not solely based on the OpCos but also the amount and cost of debt at the HoldCo level.
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xo 1

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Re: BNSF and MidAmerican
« Reply #54 on: March 20, 2013, 09:26:25 AM »
Thanks, Jay21.  Interesting notes.  Can you explain in more detail what you meant in your last paragraph with respect to needing to understand the HoldCo debt to understand the ROE, please?  Again, many thanks for sharing your good work.

jay21

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Re: BNSF and MidAmerican
« Reply #55 on: March 20, 2013, 12:45:18 PM »
Thanks, Jay21.  Interesting notes.  Can you explain in more detail what you meant in your last paragraph with respect to needing to understand the HoldCo debt to understand the ROE, please?  Again, many thanks for sharing your good work.

Sure can.

Note that the HoldCo owns stakes in all those companies were I was pointing out the ROE.  The ROE is based upon the entity's/investee company's balance sheet.  So that ETA project has a specified debt to equity ratio with an ROE of 9.96%.  The HoldCo accounts for the equity as an investment on their balance sheet, which may look something like this.

Assets:  20b of equity investments in the investee utilities.
Liabilities: 4b of debt
Equity: 16b

In the example, the 20b equity investments have a regulated ROE of 10% to 12%.  Using 10% as a base, the assets earn $2b.  The HoldCo gets the $2b and pays $200m in interest (based on a hypo after tax borrowing of 5%).  That leaves the HoldCo with $1.8b of earnings on $16b of equity for an ROE of 11.25%.  Even though the regulated business earned 10% ROE, the HoldCo could lever that return into a higher ROE.
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xo 1

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Re: BNSF and MidAmerican
« Reply #56 on: March 21, 2013, 10:01:31 AM »
Thanks.  That was very clear and helpful.

racemize

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Re: BNSF and MidAmerican
« Reply #57 on: March 21, 2013, 10:05:34 AM »
Thanks.  That was very clear and helpful.

Yes, this thread essentially answered my question to Buffett from the other thread.  Very helpful!

jay21

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Re: BNSF and MidAmerican
« Reply #58 on: March 25, 2013, 07:32:38 AM »
Other things I thought were interesting were the cash vs. GAAP taxes.  Here are the last 3 years expenses:  148, 294, and 198
Here are the effective tax rates:  9%, 18%, 14%.  However,  the supplemental disclosure shows the company is actually receiving income taxes every year:  1,341, 575, and 305.

Also, MidAmerican owns ~600m stake in BYD.  So even if the company can't dividend up money to BRK, they can still purchase securities and the money doesn't have to constantly be reinvested in utilities.
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MVP444300

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Re: BNSF and MidAmerican
« Reply #59 on: March 26, 2013, 09:12:32 PM »
http://online.wsj.com/article/SB10001424127887324034804578348214242291132.html

Quote
Welcome to the revival of the Railroad Age. North America's major freight railroads are in the midst of a building boom unlike anything since the industry's Gilded Age heyday in the 19th century—this year pouring $14 billion into rail yards, refueling stations, additional track. With enhanced speed and efficiency, rail is fast becoming a dominant player in the nation's commercial transport system and a vital cog in its economic recovery.


This time around, though, the expansion isn't so much geographic—it is about a race to make existing rail lines more efficient and able to haul more and different types of freight. Some of the railroads are building massive new terminals that resemble inland ports. They are turning their networks into double-lane steel freeways to capture as much as they can get of U.S. freight demand that is projected to grow by half, to $27.5 billion by 2040, according to the U.S. Department of Transportation. In some cases, rail lines are increasing the heights of mountain tunnels and raising bridges to accommodate stacked containers. All told, 2013 stands to be the industry's third year in a row of record capital spending—more than double the yearly outlays of $5.9 billion a decade ago.