BNSF and MidAmerican

[JBird]

Thanks. That sounds like a synonym for opportunity cost. If that's true, surely Charlie and Warren know roughly what the figure is?

[redskin]

Isn't the idea of WEB buying capital intensive businesses that they earn a return on capital on the marginal dollar of capital invested that's higher than the cost of capital.

Hence, each dollar invested will be worth more in the future than it is today.

That way, these businesses can absorb the billions flowing into BRK, without him needed to continuously find new investments. Also, there's probably few attractive non-capital intensive businesses at that scale for WEB to invest in.

Several posts have discussed an aim of achieving returns higher than their cost of capital. How do you calculate Berkshire's cost of capital? I'm curious after reading Buffett's 2003 comment, "Charlie and I have not the faintest idea what our cost of capital is and we think the whole concept is fairly crazy, frankly."

Warren and Charlie dismiss any calculation that involves using beta like a cost of capital calculation.

[twacowfca]

Isn't the idea of WEB buying capital intensive businesses that they earn a return on capital on the marginal dollar of capital invested that's higher than the cost of capital.

Hence, each dollar invested will be worth more in the future than it is today.

That way, these businesses can absorb the billions flowing into BRK, without him needed to continuously find new investments. Also, there's probably few attractive non-capital intensive businesses at that scale for WEB to invest in.

Several posts have discussed an aim of achieving returns higher than their cost of capital. How do you calculate Berkshire's cost of capital? I'm curious after reading Buffett's 2003 comment, "Charlie and I have not the faintest idea what our cost of capital is and we think the whole concept is fairly crazy, frankly."

Warren and Charlie dismiss any calculation that involves using beta like a cost of capital calculation.

Yup. CoC calculations often use CAPM, and that is deeply flawed., But the idea of thinking of  CoC as an opportunity cost isn't necessarily something they would reject. Using an index as a benchmark or, so to speak, as a proxy for their CoC is an idea  they have embraced.  CoC is a useful concept although problematic to calculate precisely. It's interesting to keep the idea of CoC, broadly defined, in mind, not unlike that other useful concept, intrinsic value. 

[jay21]

Plan tweeted this link, which I thought was really good:  https://www.aar.org/keyissues/Documents/Background-Papers/A-Short-History-of-US-Freight.pdf

"Between 1970 and 1979, the rail industry’s return on investment never exceeded 2.9 percent and averaged just 2.0 percent. The rate of return had been falling for decades: it averaged 4.1 percent in the 1940s, 3.7 percent in the 1950s, and 2.8 percent in the 1960s."

"Railroads are stronger financially. Return on net investment, which had been falling for decades, rose to 4.4 percent in the 1980s, 7.0 percent in the 1990s, and 8.5 percent from 2000 to 2011. Improved rail earnings are a positive development because they allow railroads to more readily justify and afford the massive investments needed to keep their track and equipment in top condition, improve service, and add the new rail capacity that America will need in the years ahead."

I think I have seen some railroads like UNP and CNI say their ROICs are in excess of 10%.  Now that ROICs are much higher than previously we are seeing record capital invested (as opposed to no capital invested) and a much better rail system.

[fareastwarriors]

http://www.bloomberg.com/news/2013-07-25/berkshire-s-bnsf-allowed-to-count-purchase-costs-in-rates.html


Berkshire’s BNSF Allowed to Count Purchase Costs in Rates

[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