Replies to post #3 on The Global Demographic Tailwind

[DewDiligence]

UNP 2Q09 Profit falls 12% But Beats Expectations

[UNP is the other of the two major US railroads operating west of Chicago. The rationale for investing is exactly the same as for BNI.]

http://finance.yahoo.com/news/UP-2Q-profit-falls-12-pct-but-apf-50871121.html?x=0&.v=8

›By Josh Funk
Thursday July 23, 2009, 6:19 pm EDT

OMAHA, Neb. (AP) -- Union Pacific Corp. reported a 12 percent drop in its second-quarter net income Thursday as shipping demand remained weak, but the railroad beat expectations by keeping expenses 30 percent lower and selling some land in Colorado.

The Omaha-based railroad reported $468 million, or 92 cents per share, net income in the quarter that ended June 30. That's down from $531 million, or $1.02 per share, a year ago. The company's earnings include a land sale that added $72 million net income, or 14 cents per share.

Operating revenue fell 28 percent to $3.3 billion.

Thomson Reuters said the analysts it surveyed expected Union Pacific to report earnings per share of 76 cents on $3.51 billion revenue. Analyst estimates typically exclude one-time items.

Union Pacific reported sharply lower costs in the quarter, with fuel costs decreasing the most, to $370 million from $1.2 billion.

Union Pacific hasn't offered a prediction for 2009 earnings because of the uncertain economy. Chairman and CEO Jim Young said Thursday that demand may have leveled off because the railroad has been shipping an average of 140,000 to 150,000 carloads a week for several months. But Young said there's not much reason to be optimistic yet.

"I just don't see anything out there that says you're going to jump back to a strong economy here in the next six months," Young said in an interview. "We've got a long ways to go before you can declare the recession's over."

Union Pacific's results are watched closely, because railroads are considered gauges of the nation's economic health. Railroads carry cars, chemicals, crops, containers of imported goods and lumber across the nation, so railroad profits are tied to the health of those industries.

Young said the economy has a long way to go until he feels good about it, and the railroad hasn't yet seen the federal stimulus package boost the need for construction materials much.

"I think most people were maybe overly optimistic on its effect," Young said during a conference call. "What we see with some of our local groups we work with, most of them aren't going to see real dollars spent until the later part of the year."

Union Pacific reported a 22 percent drop in the number of carloads it carried during the second quarter, and freight revenues were down across all six of the railroad's main business segments.

The biggest drop in freight revenue came in the automotive sector, which fell 54 percent to $163 million. Industrial products revenue fell 39 percent to $531 million.

Chemical shipping revenue fell 24 percent, intermodal revenue fell 23 percent, energy revenue fell 22 percent and agricultural revenue fell 21 percent.

Randy Cousins, an analyst with BMO Capital Markets in Toronto, said Union Pacific's earnings offer another reminder that the economy is still not in great shape. But he said the railroad has done an admirable job of controlling its costs during the recession.

Cousins said UP's results likely won't improve significantly until the overall economy begins to improve.

Over the past year, the railroad has been cutting its work force and parking thousands of railcars and locomotives to deal with the reduced demand. That continued in the second quarter.

Union Pacific said it currently has about 4,400 employees furloughed, and it has parked 60,000 railcars and 1,900 locomotives. Young said the railroad will be ready to quickly recall furloughed employees and resume using stored equipment when shipping demand increases.

The railroad also had about $1.7 billion on hand at the end of the quarter, up from $611 million a year ago. Young said the railroad plans to continue holding cash until the economy starts to improve.

Union Pacific also improved its productivity during the second quarter on a couple key measures. The railroad said its average train speed increased 20 percent to 27.4 mph in the second quarter.

Furthermore, the railroad reduced the amount of fuel it consumed by 27 percent to 229 million gallons as volume decreased.

Union Pacific operates 32,400 miles of track in 23 states from the Midwest to the West and Gulf coasts.

Through the first half of 2009, Union Pacific reported $830 million net income, or $1.64 per share, on $6.4 billion revenue. That's down from a year ago when the railroad reported $974 million net income, or $1.87 per share, on $8.4 billion revenue.‹

[DewDiligence]

Regional Rail Operator Plans $350M IPO

[I consider BNI and UNP—the two trunk railroads in the Western US—to be participants in The Global Demographic Tailwind for the reason mentioned in the prologue of #msg-39888049. RailAmerica, the pending IPO, operates “short line” tracks that feed the trunk lines, and I don’t know anything about it beyond what’s mentioned in this write-up. I generally avoid IPO’s, regardless of the business, and this one will be no exception.]

http://online.wsj.com/article/SB125530184574579091.html

›RailAmerica IPO Calls the 'All Aboard'

By LYNN COWAN
OCTOBER 12, 2009

The economy hasn't been kind to railroads in the past year, but RailAmerica Inc. is chugging full steam ahead this week with an IPO that is riding on investors' outlook for better times ahead.

The company, which operates regional and short-line tracks -- smaller rail lines that haul individual suppliers and manufacturers' freight to major railways -- has been hit by slower traffic from its customers. Carload volumes fell in 2009 as the economy sputtered, and RailAmerica's revenue declined by 19% in the first half of the year.

Despite the dropping demand, RailAmerica, like many of its larger cousins, has been able to negotiate rate increases; rail transport is still seen as the cheapest way to move heavy materials across long distances. The company has also had success cutting costs and managed to raise its operating income in the first half of the year by 10%.

Investors and industry analysts are looking ahead to modest improvements in railway traffic if the economy strengthens, which could help keep RailAmerica's $357 million IPO on track. The deal is expected to trade Tuesday on the New York Stock Exchange under the symbol RA.

"Moving forward, if we slowly start emerging from the recession, railroads should benefit. A year from now, looking back, railroads will have gained ground," says Ken Kremar, a freight transportation analyst at IHS Global Insight, who forecasts that ton miles should increase by 2.5% in 2010 after losing 12% to 13% in 2009. "But they're climbing out of a very deep hole, and will still have a ways to go to get back to good levels of activity."

An improved outlook for railroads seems to be reflected in the sector's stocks; every major U.S. railway, from CSX Corp. to Union Pacific Corp., has seen its stock gain more than 50% off March lows, though they remain below 2008 peaks. Short-line railway Genesee & Wyoming Inc. closed Friday up 94% from its March low of $16.74.

With 40 different rail lines operating across the U.S. and three Canadian provinces, RailAmerica has operations in every region of America. Its customer base, and by extension, its freight mix, is similarly diverse: agricultural, chemicals, metals, and pulp and paper products together make up about half its freight revenue, with each contributing nearly equal amounts.

Based in Jacksonville, Fla., RailAmerica is reappearing on the market 2½ years after private-equity firm Fortress Investment Group LLC took it private in a $1.1 billion deal. Half of the shares in the offering will be sold by Fortress, so those proceeds won't benefit the railroad; the half that the company sells will be used to pay down debt and for possible investments of acquisitions.‹

[DewDiligence]

Berkshire Hathaway to Acquire Burlington Northern Santa Fe Corporation for $100 Per Share in Cash and Stock

[BNI and UNP are in the portfolio of the foundation I advise (see #msg-39888049 for the rationale), but I never thought either was a likely buyout candidate. Indeed, an acquisition by another transportation company would have been all but impossible for antitrust reasons. Buffett aside, the only way BNI could have been bought was through a 1980’s-style LBO and you don’t see many of those kinds of deals these days.

BNI closed Tuesday at $97, which is only a 3% discount to the $100 buyout price and implies that investors think the deal is rock solid. BNI shareholders in tax-exempt accounts might as well sell now and take the $97 insofar as the deal closing is several months away. However, shareholders in taxable accounts may do better by accepting Berkshire shares in lieu of cash, which will defer capital-gains taxes.]

http://online.wsj.com/article/SB20001424052748703294004574511602782800232.html

›7:30 am EST, NOVEMBER 3, 2009

BNSF will continue to operate from its Fort Worth, TX headquarters and will become a wholly owned subsidiary of Berkshire Hathaway

FORT WORTH, Texas & OMAHA, Neb. -- November 03, 2009-- The boards of directors of Berkshire Hathaway Inc. (NYSE: BRK.A; BRK.B) and Burlington Northern Santa Fe Corporation (BNSF; NYSE: BNI) today announced a definitive agreement for Berkshire Hathaway to acquire for $100 per share in cash and stock the remaining 77.4% of outstanding BNI shares not currently owned to increase its holdings to 100%. Based on the number of outstanding BNI shares (including shares currently owned by Berkshire) on Nov. 2, 2009, the transaction is valued at approximately $44 billion, including $10 billion of outstanding BNSF debt, making it the largest acquisition in Berkshire Hathaway history.

"Our country's future prosperity depends on its having an efficient and well-maintained rail system," said Warren E. Buffett, Berkshire Hathaway chairman and chief executive officer. "Conversely, America must grow and prosper for railroads to do well. Berkshire's $34 billion investment in BNSF is a huge bet on that company, CEO Matt Rose and his team, and the railroad industry.

"Most important of all, however, it's an all-in wager on the economic future of the United States," said Mr. Buffett. "I love these bets."

"We are thrilled to have the opportunity to become a part of the Berkshire Hathaway family," said Matthew K. Rose, Burlington Northern Santa Fe chairman, president and chief executive officer. "We admire Warren's leadership philosophy supporting long-term investment that will allow BNSF to focus on future needs of our railroad, our customers and the U.S. transportation infrastructure. This transaction offers compelling value to our shareholders and is in the best interests of all of our constituents including our customers and employees."

Terms of the Transaction

The definitive agreement provides that each share of BNI common stock will at the election of the shareholder be converted into the right to receive either (i) a cash payment of $100.00 or (ii) a variable number of shares of Berkshire Hathaway Class A or Class B common stock, subject to proration if the elections do not equal approximately 60% in cash and 40% in stock. The stock component of the consideration is subject to a "collar" whereby the value of each Berkshire Hathaway share received is fixed at $100.00 if the price of Berkshire Hathaway Class A stock at closing is between approximately $80,000.00 and approximately $125,000.00 per share. If the value of Berkshire Hathaway Class A stock is outside of this collar range at closing, then the number of shares received of Berkshire Hathaway Class A stock will be fixed at either 0.001253489 per BNI share for values below the collar range, or 0.000802233 per BNI share for values above the collar range. The shareholder may receive Class A or, in lieu of fractional Class A shares, equivalent economic value of Class B Berkshire Hathaway shares, subject to certain limitations as described in the definitive agreement.

The transaction requires approval by holders of two-thirds of BNI's outstanding shares (other than shares held by Berkshire Hathaway), and customary closing conditions, including Department of Justice review. Closing is expected to occur during the first quarter of 2010.

BNSF Railway Company will continue to focus on providing outstanding service to its customers from its Fort Worth, TX headquarters. Included in the transaction are all assets and subsidiaries of BNSF.

Goldman, Sachs & Co. and Evercore Partners, Inc. acted as financial advisors to BNSF and the company's legal counsel is Cravath Swaine & Moore LLP. Berkshire Hathaway's transaction counsel is Munger, Tolles & Olson LLP.

At 8:30 a.m. eastern, BNSF executive management will conduct a briefing for investors and other interested parties. The briefing will be Web cast and available via the investor relations section of www.bnsf.com. The call in number is [phone] and the replay number is (USA) [phone], (International) [phone], and access code 122409. The briefing will not include a question and answer session.

BNSF is a holding company and through its principal operating subsidiary BNSF Railway Company, BNSF owns and manages one of the largest railroad systems in North America.

Berkshire Hathaway Inc. is a holding company owning subsidiaries engaged in a number of diverse business activities including property and casualty insurance and reinsurance, utilities and energy, manufacturing, retailing and services.‹